Washington State Department of Financial Institutions

DIVISION OF CREDIT UNIONS

OPINION LETTERS 1997

 

REDACTED OPINION NUMBER 97-2

February 21, 1997

To: Opinion File

From: J. Parker Cann, Assistant Director

Subject: Incidental powers of credit unions with regard to charitable or community contributions

Credit unions enjoy incidental powers under RCW 31.12.125(14). The courts have typically stated that incidental powers include those which are "convenient or useful" in connection with the performance of the institution's established activities pursuant to its express powers. Incidental powers have also been described by the courts as such powers as are necessary or usual and convenient for the attainment of purposes of the creation of the institution. See Washington Bankers Ass'n v. Washington Mutual Savings Bank, 92 Wn. 2d 453 (1979).

A strong argument could be made that it is convenient and useful for credit unions to make contributions for charitable or community purposes, whether or not the recipient was a tax-exempt organization. It certainly assists a credit union in establishing its good corporate citizenship, and in furthering its marketing efforts and presence in the community in which it does business. It appears that we have not objected to these types of contributions in the past.

My recent discussions with credit union attorneys lead me to believe that these types of contributions would not jeopardize the tax-exempt status of credit unions.

Consequently, I have concluded that credit unions may make charitable or community contributions, whether or not the recipient is a tax-exempt organization, under credit unions' incidental powers. However, such contributions must be approved by a credit union's Board of Directors, and must be at prudent levels considering the financial condition of the credit union.


REDACTED OPINION NUMBER 97-3

March 11, 1997

"A"
"B" Credit Union

Subjects:

  1. Federal Parity for State Credit Unions
  2. NCUA Part 741 - NCUA Rules Applicable to FISCUs
  3. State/NCUA Law Applicable to FISCU Supervisory Committees and Member Business Loans

Dear A:

I apologize for the delay in getting back to you on these issues. I've attempted below to answer some of the common questions and answers about differences between Washington state law and NCUA regulations. Before I get to the questions, however, let me provide some background on the relevant concepts here.

Parity

Washington State-chartered credit unions operate under Chapter 31.12 of the Revised Code of Washington (RCW), and the Division of Credit Union's implementing rules set forth in the Washington Administrative Code (WAC).

The Washington legislature has granted state credit unions, among other powers, all the powers and authorities possessed by federal credit unions (FCU powers) as of December 31, 1993. RCW 31.12.136(1). By rule, the Division may grant state credit unions the powers and authorities granted to federal credit unions after that date. RCW 31.12.136(2). The Division does not currently have any rules adopting more recent federal powers.

In general, a state credit union may exercise FCU powers as of December 31, 1993, even if other provisions of state law (e.g., other sections of Chapter 31.12 RCW) provide to the contrary. The effect here is as if the FCU powers are written into Chapter 31.12.

When exercising a FCU power, a state credit union must also comply with the restrictions under NCUA’s FCU rules that specifically apply to the exercise of that power. These FCU restrictions only apply by virtue of the parity provision if the state credit union is exercising the FCU power. Consequently, if a state credit union intends to use a FCU power, it should understand the restrictions that go with it. I have to acknowledge that in some cases it is not clear which FCU restrictions may apply to the exercise of a FCU power. If you are not able to sort this out in a given instance, feel free to ask for our opinion on the issue.

We tell our examiners to look first to state law to determine if a credit union has authority to conduct an activity. If not, then the examiner should ask the credit union what FCU power that it is using as authority. It is incumbent on the credit union to know what FCU authority it is relying on, and the restrictions in NCUA’s FCU rules that apply to the exercise of the power.

NCUA Part 741

For Washington State-chartered credit unions, the Division is the credit union's primary regulator. However, federally-insured state credit unions (FISCUs) are also subject to certain NCUA requirements. These are set forth in Part 741 of the NCUA's rules. Part 741 requires FISCUs, in part, to comply with specified NCUA FCU rules set forth outside of Part 741.

For your convenience, the NCUA rules applicable to FISCUs are set forth on the enclosed list. Although the list is a long one, you will note that many of the listed FCU rules do not apply to the day-to-day operations of natural person credit unions.

Because FISCUs must comply with Part 741, they should make every effort to familiarize themselves with it and to keep up-to-date on any changes.

Common Questions

  1. Why is federal parity limited to powers and authorities as of a certain date?

Washington courts have held that it is an unconstitutional delegation of state legislative power for the legislature to adopt a statute which in effect automatically adopts future federal statutes and rules as part of state law. See, e.g., Diversified Investment Partnership v. Department of Social and Health Services, 113 Wn. 2d 19, 775 P. 2d 947 (1989). If enacted without a date, the credit union parity provision could be subject to constitutional challenge.

  1. What statutes and regulations should FISCUs in Washington know?

Washington State Law - enabling Act and Division rules
Statute: Washington State Credit Union Act - Chapter 31.12 RCW.
Division Rules: WAC Chapters 208-418, -436, -440, -444, -464, and -472.
Informal Division pronouncements: opinions, guidelines, etc. The Division distributes a list of its new opinions semi-annually. Enclosed is the most recently issued list of Division opinions.

Other Washington Law
Uniform Commercial Code, Financial Institution Individual Account Deposit Act, etc. A good listing of these laws is contained in the Washington Credit Union League’s Compliance Manual.

Federal Law- NCUA
Statute: Federal Credit Union Act, Title II, Sections 1781 - 1790c.
NCUA Rules: Parts 741 and other NCUA rules referred to in 741. Enclosed is a complete list of all the NCUA rules applicable to FISCUs.
Informal NCUA pronouncements: IRPS, manuals, opinions, etc.

Other Federal Law
Federal consumer compliance laws, etc. A good listing of these laws is contained in the Washington Credit Union League’s Compliance Manual.

  1. What should a FISCU do if a requirement in Part 741 is in conflict with a Washington State law?

We are not aware of any true conflict between the NCUA and Washington law, where compliance with one makes it literally impossible to comply with the other. Typically, Part 741 is more restrictive than state law.

If any of the Part 741 provisions on the activity are more restrictive than the state law provisions on the activity, the FISCU must comply with the more restrictive Part 741 provisions.

If, however, the Part 741 provisions are more favorable than the state law provisions on the activity, and FCUs possessed authority as of December 31, 1993 to conduct the activity, the FISCU can choose to use such authority under the parity provision.

  1. Please advise on how the state law and Part 741 requirements sort out for Supervisory Committees and member business loans.

Without going through the legal rationale, our conclusions are as follows:

  1. Supervisory Committee. FISCUs must comply with NCUA rules 701.12 and .13 on supervisory committees and outside audits. See NCUA rule 741.202.

Because of the parity provision, FISCUs that comply with NCUA rule 701.12 and .13 do not need to comply with RCW 31.12.335.

  1. Member business loans. FISCUs must comply with NCUA rule 701.21(h) on member business loans. See NCUA rule 741.203(a).

Because of the parity provision, FISCUs that comply with NCUA rule 701.21(h) do not need to comply with WAC Chapter 208-464 (WAC Sections 208-464-010 through -090).

  1. If a FISCU is uncertain as to differences between the Washington State Credit Union Act and NCUA Part 741, what steps should it take?

Initially, the credit union should identify the exact nature of the difference. If it is not able to sort out the issue, then the credit union may wish to:


REDACTED OPINION NUMBER 97-4

March 24, 1997

"A" Credit Union

Subject: Authority of "A" Credit Union to conduct business at United States Army and Air Force Installations in Italy

Dear "C":

This letter is in response to your memo dated February 27, 1997, inquiring whether a Washington state-chartered credit union (Washington credit union) may conduct business at United States Army and Air Force installations in Italy. You have indicated that "A" has been conducting business for over twenty-seven years at such installations, and is currently conducting business at installations in Aviano (Aviano Air Base), Vicenza (Camp Ederle), and Pisa (Camp Darby), Italy.

Conclusion

As explained in greater detail below, I have concluded that "A" Credit Union, as a Washington credit union, may continue conducting business at United States military installations in Italy, and may continue serving groups there in its field of membership.

Background

I understand that "A" was organized as a federal credit union ("FCU") in 1954. It was examined and supervised by the National Credit Union Administration (NCUA), pursuant to the Federal Credit Union Act, 12 U.S.C. 1751 et seq. A federal credit union must specify in its charter the groups that are within its field of membership, and may not add groups to its field of membership without the approval of the NCUA.

I also understand that in February 1969, the "FCU" received NCUA approval to serve "Military and United States national, civilian personnel of the United States Army or Air Force who work at, or are attached to an installation in Italy."

On February 14, 1997, the "FCU" converted to a Washington credit union under Chapter 31.12 of the Revised Code of Washington (RCW). Its members’ shares and deposits continue to be federally-insured by the National Credit Union Share Insurance Fund (NCUSIF), as approved by the NCUA, the administrator of the NCUSIF, and to that extent "A" remains subject to the rules and regulations promulgated by the NCUA. Washington statute requires that "A" maintain its federal (NCUSIF) share and deposit insurance.

General regulation of Washington credit unions

Washington credit unions, such as "A", operate under Chapter 31.12 RCW. This Chapter is administered by the Director of the Washington State Department of Financial Institutions (DFI), who has in large part delegated his authority in regard to the regulation of credit unions to the Assistant Director of DFI’s Division of Credit Unions (Division). Among other duties, the Division examines and supervises Washington credit unions, processes applications for federally-chartered credit unions to convert to a Washington charter, and issues interpretations, including questions respecting field of membership. RCW 31.12.715, .516.

Powers of Washington credit unions

Notwithstanding any other provision of law, Washington credit unions may exercise any of the powers and authorities possessed by federally-chartered credit unions as of December 31, 1993. RCW 31.12.136. This provision is commonly referred to as the federal parity provision.

As noted above, the "FCU" was authorized by the NCUA well before 1993 to serve groups at the United States military installations in Italy noted above. "A" has continued to conduct business and serve groups at these installations up to the present time. It is apparent that federal credit unions possessed the power and authority to conduct business at United States military installations in Italy, as of December 31, 1993.

Consequently, I have concluded that, by virtue of the federal parity provision in Washington statute, "A" continues to possess, as a Washington credit union, the power and authority to conduct business at United States military installations in Italy and to serve those groups there within its field of membership.

State approval of continuation of field of membership

A Washington credit union must specify in its bylaws the groups that are within its field of membership, and may not add groups to its field of membership without the approval of the Division.

In approving the "FCU’s" conversion, the Division approved the continuation of its field of membership. Consequently, "A" may continue to serve those groups at the United States military installations in Italy. Moreover, those persons who were shareholders and members of the "FCU" immediately prior to the conversion continued to be shareholders and members of "A" after the conversion. RCW 31.12.715.

I hope this letter provides clarification on "A’s" continuing authority for its operations at military installations in Italy. If other interested parties have further questions on this issue, please encourage them to contact me at (360) 902-8778.


REDACTED OPINION NUMBER 97-5

January 30, 1997

"A"
"B" Credit Union

Subject: Federal Home Loan Bank bonds

Dear "A":

Thank you for your letter dated January 22, 1997 describing an investment option with callable Federal Home Loan Bank (FHLB) bonds.

FHLB bonds are authorized investments under RCW 31.12.425 (c) and Section 9101 of Title 31 U.S.C. Your plan to invest in callable FHLB bonds using cash and borrowings must be done in a safe and sound manner.

To determine if the activities are being conducted in a safe and sound manner, we will look at the following factors at the next regulatory examination:

Are the credit union’s investment policies and procedures adequate for investing in callable FHLB bonds, arbitrage activities, and for managing the associated risks?

  1. Does credit union staff and the Board of Directors possess sufficient investment expertise to manage callable FHLB bonds, particularly as to managing arbitrage?
  2. Has the credit union established and is the credit union in compliance with policies regarding a reasonable maximum limit on the total amount and bond structure for the investment in callable FHLB bonds? These limits should be based on a percentage or dollar amount of capital, and are intended to minimize capital losses.
  3. Is the monitoring of interest rate risk by the credit union staff and the Board of Directors adequate to determine, on a periodic basis, that the level of risk to the credit union is within board-approved guidelines under a variety of possible adverse interest rate projections?
  4. Does the credit union staff have an adequate liquidity plan in the event that the borrowing side of the arbitrage position must be closed unexpectedly?
  5. Has the credit union staff and Board of Directors correctly determined what is the impact, if any, for compliance with NCUA Rule 741.3 (3) and Rule 703?
  6. Is the credit union in compliance with adequate internal controls pertaining to investments and arbitrage activities?
  7. Due to the callable feature and the possibility of early termination of the arbitrage plan before the FHLB bonds' maturity date, has the investment been categorized as available for sale under FASB 115?

OPINION NUMBER 97-6

April 11, 1997

To: Opinion File

From: J. Parker Cann, Assistant Director

Subject: Compensation for retiring directors and supervisory committee members

Under RCW 31.12.365, directors and members of committees shall not receive compensation for their services, except to the extent that an officer serving as principal operating officer may receive compensation for such service.

The question has been raised whether a supervisory committee member retiring from the committee and the board may receive a gift certificate for $150 from their credit union. Such a gift would violate RCW 31.12.365.

It should be noted, however, that under the credit union bill (SSB 5563) now pending in the state legislature, credit unions may provide gifts of minimal value to their directors and supervisory committee members. Such gifts may not exceed $50 in value per person, per year.


OPINION NUMBER 97-7

April 14, 1997

To: Opinion File

From: J. Parker Cann, Assistant Director

Subject: Political Contributions

Federal statute prohibits state credit unions from making political contributions to candidates for federal office, but does not prohibit them from making contributions to candidates for state or local office. As a point of information, this federal statute also prohibits federal credit unions from making contributions to candidates for any federal, state, or local office. See Title 2 of the United States Code, Section 441b(a).

It should be noted that in many cases, companies form political action committees (PACs) to solicit donations from individuals (directors, employees, etc.). Because a PAC is working with individuals' money and not corporate money, a PAC is not subject to the federal prohibitions noted above.


OPINION NUMBER 97-8

This opinion has been canceled.


REDACTED OPINION NUMBER 97-9

May 27, 1997

"A"
"B" Credit Union

Subject: Maintenance of WCUSGA Reserves By "B" Credit Union (NSUSIF insured) after Merger of "C" Credit Union (WCUSGA guaranteed) into "B" Credit Union

Dear "A":

In our recent conversation, you inquired what level of WCUSGA reserves must be maintained by "B" as the continuing credit union after the merger of "C" with "B." I understand that the merger should be completed this year.

The issue here is what is the appropriate share/deposit basis for calculating the amount of the WCUSGA reserves which must be maintained by "B" after the merger.

My conclusion, as discussed in more detail below, is that "B" must maintain WCUSGA contingency and capital reserves until year-end 1998, based on the amount of "C" WCUSGA-guaranteed shares and deposits as of the year-end prior to the merger. The amount of shares and deposits at "B" over and above this amount are disregarded for the purpose of calculating the amount of WCUSGA reserves which must be maintained by "B".

Background

I understand that "B" and "C" have entered into a merger agreement whereby "C" will merge into "B", with "B" as the continuing credit union. The shares and deposits at "B" are federally insured, by the National Credit Union Share Insurance Fund (NCUSIF). The shares and deposits at "C" are guaranteed by the Washington Credit Union Share Guaranty Association (WCUSGA), pursuant to Chapter 31.12A RCW (the Act).

The Act was amended in 1996 to provide for the phase out of WCUSGA coverage, by year-end 1998. Chapter 5, Laws of 1996. During Legislative discussions, it was apparent that legislators were concerned that WCUSGA credit unions might wait until later in the transition period to apply to convert. The legislators believed that it is in the best interests of WCUSGA credit unions, and their members, for the credit unions to convert to NCUSIF early on in the period. Among other provisions in Chapter 5, WCUSGA credit unions were required to file an application for conversion by September 1 or December 1, 1996, depending on their CAMEL rating. In general, the 1996 amendments took effect on March 6, 1996.

As amended, the Act specifies that WCUSGA member credit unions that merge into credit unions insured by NCUSIF:

  1. Must maintain WCUSGA contingency reserves in accordance with RCW 31.12A.050 and capital reserves required by WCUSGA, and
  2. Are subject to WCUSGA assessments under RCW 31.12A.090.

These requirements continue in effect until year-end 1998. RCW 31.12A.007(5). By operation of law, the continuing NCUSIF-insured credit union is responsible to maintain WCUSGA reserves pursuant to this Section.

In general, the Act requires WCUSGA credit unions to maintain and adjust their contingency reserves based on the amount of the shares/deposits as of the prior year-end. RCW 31.12A.050(1)(b) and (c). Pursuant to these provisions, prior to the merger of a WCUSGA member into a NCUSIF credit union, the WCUSGA credit union will be carrying WCUSGA reserves based on the amount of its shares/deposits as of the prior year-end. There is no express mechanism in the Act for the level of these reserves to be adjusted based on changes in shares/deposits as of the date of the merger.

Discussion

There appear to be two sub-issues here:

  1. Whether WCUSGA reserves should be based on the amount of shares/deposits of the disappearing credit union as of the prior year-end, or as of the merger date.

In a related context, the Act provides that when a nonmember merges into a WCUSGA member, with the member as the continuing credit union, the continuing WCUSGA credit union must increase its contingency reserve based on the disappearing credit union’s shares/deposits as of the date of the merger. RCW 31.12A.050(1)(a) and (c)(iii). It is clear from the wording of this Section, however, that it was not intended to apply to the situation where a NCUSIF credit union is the continuing credit union in the merger.

In the 1996 amendments, the Legislature could easily have inserted new wording in the Act to require continuing NCUSIF credit unions to adjust the reserves of the disappearing credit union based on shares/deposits as of the merger date, similar to the provision noted above in RCW 31.12A.050(1). Because the Legislature did not insert such wording, it is doubtful that it intended such a result.

Weakened credit unions that require a merger with a stronger credit union may actually be suffering a downward trend in shares/deposits. Application of the statute to require an adjustment of reserves to the merger date may tend to cause NCUSIF credit unions to postpone acquiring weaker WCUSGA credit unions until later in the phase-out period, to diminish their exposure to WCUSGA assessments. This would be inconsistent with Legislative intent behind Chapter 5.

In the absence of explicit statutory direction, I believe that the continuing NCUSIF credit union should base its WCUSGA contingency and capital reserves on the amount of the disappearing WCUSGA credit union’s shares/deposits as of the year-end prior to the merger. This arrangement is consistent with other provisions of the Act, and will best further the statutory scheme for the phase-out of WCUSGA.

  1. Whether the continuing credit union’s shares/deposits, in addition to those attributable to the disappearing credit union, are subject to WCUSGA reserve calculations.

RCW 31.12A.007(5) states:

Members that … merge with a credit union insured under the federal share insurance program shall continue to maintain their contingency reserve … and capital reserve … . (emphasis supplied)

This subsection makes it clear that the reserves must be maintained only in regard to the disappearing credit union. Accordingly, the continuing NCUSIF credit union should base its WCUSGA contingency and capital reserves solely on the amount of the disappearing WCUSGA credit union’s shares/deposits. The reserve calculation should disregard shares/deposits at the continuing credit union over and above this amount.


REDACTED OPINION NUMBER 97-10

June 17, 1997

"A"
"B"

Subject: Response to Your Letter

Dear "A":

By letter, you requested our opinion regarding WCUSGA reserve requirements for WCUSGA credit unions that have converted to NCUSIF or that have merged into NCUSIF credit unions. I addressed the latter issue in regard to merged credit unions by letter, to "C" Credit Union. A copy of that letter is enclosed for your convenience.

Based on your letter and our subsequent conversations, I believe that the remaining issue here is what is the appropriate share/deposit basis for calculating the amount of the WCUSGA reserves which must be maintained by former WCUSGA-guaranteed credit unions that convert after March 6, 1996 to NCUSIF insurance.

My conclusion, as discussed in more detail below, is that credit unions that have converted to NCUSIF after March 6, 1996 (converted credit unions) must maintain WCSUGA contingency and capital reserves until year-end 1998, based on the amount of their shares/deposits as of the year-end immediately prior to their conversion. The reserve calculations should disregard changes in the amount of the credit union’s shares/deposits after the year-end date.

DISCUSSION

Background

The Washington Credit Union Share Guaranty Association Act, Chapter 31.12A RCW (the Act), was amended in 1996 to provide for the phase out of WCUSGA coverage by year-end 1998. Chapter 5, Laws of 1996. During legislative discussions on the bill, it was apparent that legislators were concerned that WCUSGA credit unions may wait until later in the transition period to apply to convert. The legislators believed that the interests of WCUSGA credit unions and their members would be served best if the credit unions converted to NCUSIF early on in the period. Among other provisions in Chapter 5, WCUSGA credit unions were required to file an application for conversion by September 1 or December 1, 1996, depending on their CAMEL rating. In general, the 1996 amendments took effect on March 6, 1996.

As amended, the Act specifies that converted credit unions:

  1. Must maintain WCUSGA contingency reserves in accordance with RCW 31.12A.050 and capital reserves required by WCUSGA, and
  2. Are subject to WCUSGA assessments under RCW 31.12A.090.

These requirements continue in effect until year-end 1998. RCW 31.12A.007(5). The purpose of these requirements is to maintain a sound financial base for WCUSGA as credit unions are converting over to NCUSIF insurance.

However, the cited Section dealing with WCUSGA contingency reserves, RCW 31.12A.050, does not specifically address the share/deposit basis for calculating the WCUSGA contingency reserve of the converted credit union.

In general, the Act requires WCUSGA credit unions to maintain and adjust their contingency reserves based on the amount of the shares/deposits as of the prior year-end. RCW 31.12A.050(1)(a) and (c)(ii). In accordance with these provisions, at the time of conversion to NCUSIF, the WCUSGA credit union will be carrying WCUSGA reserves based on the amount of its shares/deposits as of the prior year-end.

Converted Credit Unions

In the abstract, converted credit unions could be required to:

  1. Adjust their WCUSGA reserves after each year-end, based on year-end shares/deposits.
  2. Maintain their WCUSGA reserves based on their shares/deposits as of the date of conversion.
  3. Maintain their WCUSGA reserves based on their shares/deposits as of the year-end prior to the conversion.

Prior to March 6, 1996, WCUSGA members converting to NCUSIF insurance were required to give one year’s prior notice before withdrawing from WCUSGA. See Chapter 92, Section 227, Laws of 1994. During the notice period, these members were required by WCUSGA to continue to adjust their contingency reserve levels for year-end variations in their share/deposit levels, in accordance with RCW 31.12A.050. In the 1996 amendments, however, the Legislature repealed the pre-existing wording dealing with conversions. The Legislature could easily have inserted new wording in the Act to require converted credit unions to adjust their reserves each year based on shares/deposits at year-end. Because the Legislature did not, it is doubtful that the Legislature intended such a result.

Moreover, in most cases, credit union shares/deposits are increasing over time; adjusting the converted credit union’s reserve levels based on changes in the amount of its shares/deposits, as of the date of conversion, would require them to absorb a larger pro rata portion of any assessments by WCUSGA than would otherwise be the case if reserves were based on shares/deposits as of year-end. Application of the statute in this fashion will tend to cause NCUSIF credit unions to postpone their conversion until immediately after year-end, when all WCUSGA members have their reserve balances adjusted based on year-end shares/deposits. This result would be inconsistent with Legislative intent behind Chapter 5.

In the absence of statutory direction otherwise, I believe that converted credit unions should base their WCSUGA contingency and capital reserves on the amount of their shares/deposits as of the year-end prior to the conversion. The reserve calculation should disregard any changes in the amount of the credit union’s shares/deposits after the year-end date. This interpretation is consistent with the Act, and will best further the statutory scheme for the phase out of WCUSGA.


OPINION NUMBER 97-11

This opinion has been canceled.


REDACTED OPINION NUMBER 97-12

June 4, 1997

"A"
"B" Credit Union

Subject: Disqualification of Director for Absence

Dear "A":

You have inquired about the application of RCW 31.12.235(2). This subsection provides:

(2) Unless reasonably excused by the board, a director shall no longer serve as director if the director in any twelve-month period is absent from more than thirty-three percent of the regular board meetings required by this chapter.

I understand that the board of "B" has from time to time excused the absence of a director. The board has acted to excuse a director’s absence during the meeting that the director missed.

Directors have a fiduciary duty to be familiar with the laws applicable to credit unions, including the laws on board attendance. In most cases, directors should know in advance when they will be unable to attend a regular board meeting and should make a request prior to the meeting to be excused from the meeting. Except in very unusual circumstances, a director’s absence may be excused only at the meeting that the director missed.

You have explained that one of your directors missed four, or 33.3 percent, of the regular board meetings during a twelve month period, without being excused by the board for the absences. Consequently, he may no longer serve as a director of "B." The provisions of RCW 31.12.235(2) are automatic and take no further action by the board or this office to take effect.


OPINION NUMBER 97-13

February 16, 1999

To: Opinion file

From: J. Parker Cann, Assistant Director

Subject: Voting Rights of the Chair

Standard rules of order indicate that the chair of the board of directors, if he or she is a member of the board, has the same voting rights as any other director. The chair protects impartiality by exercising voting rights only when his or her vote would affect the outcome. In such cases the chair can either vote and thereby change the result, or can abstain. If the chair abstains, he/she announces the result of the vote with no mention of his/her own vote.

The outcome of any motion requiring a majority vote will be determined by the chair’s action in cases in which, without his/her vote, there is either a tie vote or one more vote in the affirmative than in the negative. Because a majority of affirmative votes is necessary to adopt a motion, a tie vote rejects the motion. If there is a tie without the chair’s vote, the chair can vote in the affirmative, thereby creating a majority for the motion. If the chair abstains from voting in such a case, however, the motion is lost (because it did not receive a majority).

If there is one more affirmative vote than negative votes without the chair’s vote, the motion is adopted if the chair abstains. If he/she votes in the negative, however, the result is a tie and the motion is therefore lost.

In short, the chair can vote either to break or to cause a tie or, when a two-thirds vote is required, can vote either to cause or to block the attainment of the necessary two-thirds.


REDACTED OPINION NUMBER 97-14

August 11, 1997

"A"

Subject: Charge-offs of Losses

Dear "A":

Thank you for your phone call of July 24 requesting an opinion on two specific areas of charge-offs. Below I have paraphrased your questions followed by our response.

Question #1. Can the board of directors delegate authority to approve the charge-off of credit union losses? What we are talking about is a procedure where the collection officer approves a list of loans for charge-off, the list is charged off against the allowance for loan loss account or regular reserves, and the charge-off list is sent to the next regular monthly board meeting for reporting.

Answer #1. No, charge-off of credit union losses cannot be delegated until after January 1, 1998.

RCW 31.12.255 (12) requires the board of directors to approve the charge-off of credit union losses. This provision remains effective until January 1, 1998.

January 1, 1998 is the effective date of the credit union modernization act passed by the 1997 session of the state legislature (Chapter 397, Laws of 1997). Section 17 of this Chapter amends RCW 31.12.255 by allowing certain board powers or duties, as listed in subsection 2 of section 17, to be delegated, with appropriate reporting to the board. One of those duties that can be delegated, with appropriate reporting to the board, is the charge-off of credit union losses under RCW 31.12.255 (2) (g).

Question #2. Does the board of directors have to approve charge-offs of operational losses?

Answer #2. Yes, the board of directors is required to approve any charge-off of credit union losses, whether loan or operational, until January 1, 1998 [RCW 31.12.255 (12)]. After January 1, 1998, approval of charge-offs can be delegated. (See Answer #1 above for further discussion).

However, if operational losses are being expensed rather than charged off, the board of directors does not need to approve the expense. The credit union is required to be in compliance with adequate policies and procedures, including appropriate internal controls.


REDACTED OPINION NUMBER 97-15

"A"

Subject: Credit Union Service Organization (CUSO) Investment - Changes in Ownership and Purpose

Dear "A":

Thank you for your phone call of July 22 requesting an opinion on a CUSO investment. Below I have provided a statement of the issues and paraphrased your question followed by my response.

Statement of issues: A credit union has invested in a CUSO. After the investment was made, the ownership of the CUSO changed so that it was no longer owned primarily by credit unions. As a result of the ownership change, the CUSO will no longer primarily serve credit unions and their members. At the time of the ownership change, the credit union’s total investment in the CUSO (equities and loans) amounted to less than 1/10th of 1% of the credit union’s net capital.

RCW 31.12.425(h) provides in pertinent part that a credit union may invest in a CUSO if:

  1. Membership or ownership of the CUSO "is confined primarily to credit unions"; and
  2. The CUSO’s purpose "is to strengthen, advance, or provide services to the credit union industry."

Question: May the credit union keep the investment in the CUSO even though it no longer satisfies the provisions of RCW 31.12.425(h) noted above?

Response: No, the credit union may not keep a CUSO investment that no longer satisfies these provisions, unless:

  1. approved by Division of Credit Unions (Division). The credit union has applied for and received approval from the Division to keep the investment or make additional investments in the CUSO, under RCW 31.12.425(j) and Chapter 208-436 WAC. These applications will not be granted as a matter of course, but only on a case-by-case basis; or
  2. investment is de minimis in amount and risk. The amount of the investment is de minimis and the risk to the credit union is not material to the credit union’s financial condition. Certainly an investment of less than 1/10th of 1% of the net capital of the credit union is de minimis in amount.

Unless the credit union has received Division approval or the investment is de minimis, as discussed above, the credit union must promptly adopt a reasonable plan to divest the investment or to bring it into conformance with the provisions of RCW 31.12.425(h).

*****

It should be noted that this issue takes on a different light after January 1, 1998, the effective date of the credit union modernization act passed by the 1997 session of the state legislature (Chapter 397, Laws of 1997). Section 36 of Chapter 397 amends RCW 31.12.425(h) by deleting the ownership requirement described in 1 above. However, the CUSO investment is allowable only if the primary purpose of the CUSO "is to strengthen, advance, or provide services to the credit union industry and credit union members."

Summary

According to the above opinion, "A" would be allowed to keep the CUSO investment, if "A" can show that the investment is de minimis in amount and risk, or "A" has obtained the Division’s approval of the investment.


REDACTED OPINION NUMBER 97-16

September 5, 1997

"A"

Subject: Transfer of WCUSGA contingency reserve as of December 31, 1998

Dear "A":

You have inquired as to what capital account the WCUSGA contingency reserve can be transferred to after December 31, 1998.

After December 31, 1998, the WCUSGA contingency reserve should be transferred into the regular reserve.

The following factors were considered:

  1. RCW 31.12A.007(5) requires that WCUSGA members, who obtain NCUSIF share insurance, continue to maintain their WCUSGA contingency reserve until December 31, 1998.
  2. RCW 31.12A.050(1)(a) provides that the WCUSGA contingency reserve was originally funded from the guaranty fund (also known as the regular reserve) and RCW 31.12A.050(1)(b) requires that subsequent adjustments of the WCUSGA contingency fund are also from or to the regular reserve.
  3. RCW 31.12.445 is the regular reserve requirement for WCUSGA member credit unions. The Division has taken the position that the WCUSGA contingency reserve is added to the regular reserve when calculating whether a credit union is required to transfer a portion of gross income into the regular reserves.
  4. If the WCUSGA contingency reserve was not transferred into the regular reserve, credit unions would be under-reserved in comparison to prior periods.

OPINION NUMBER 97-17

September 10, 1997

To: Opinion file

From: J. Parker Cann, Assistant Director

Subject: Effective date of merger of state credit unions or merger of federal into state credit union

If the surviving credit union in a merger is a Washington State-chartered credit union, when does the merger become legally effective? We have observed that in many cases the books of the credit unions are merged before the credit unions have submitted their merger agreement to the Division for filing with the Secretary of State.

The Washington State Credit Union Act (CU Act) addresses certain aspects of mergers. RCW 31.12.461, .464(4), 467(3). However, the CU Act does not specify when a credit union merger becomes effective.

In analyzing this issue, I reviewed the analogous provisions under the Washington Business Corporation Act (Business Corporation Act). The Business Corporation Act provides that a merger becomes effective when articles of merger are filed with the Washington Secretary of State, or at a later date as specified in the articles. RCW 23B.11.050, 23B.01.230. Although these sections of the Business Corporation Act are not applicable to credit unions, they do establish legislative policy on this issue in the context of general business corporations.

The Business Corporation Act policy is a reasonable one which would provide certainty if adopted in the credit union context. There do not appear to be any reasons why this policy should not be adopted by the Division for credit unions.

In the absence of direction in the CU Act, the Division has determined to adopt the reasoning of the Business Corporation Act on the effective date of credit union mergers. Accordingly, credit union mergers will become legally effective on the date the Division files the merger agreement with the Secretary of State, or a later date as specified in the filed agreement itself. The best practice, therefore, is for the credit unions to merge their books on the legal effective date of the merger.