Washington State Department of Financial Institutions

DIVISION OF CREDIT UNIONS

OPINION LETTERS 2001

 

DCU Opinion Number 01-1

Date: January 16, 2001

From: Parker Cann, Director

Subject: State Credit Unions May Issue Shares to and Receive Deposits from Members in the Form of Revocable Living Trust Accounts

Issue

The question has arisen whether Washington state chartered credit unions (state credit union) may issue shares to and receive deposits from members in the form of “revocable living trust accounts.”

Analysis

We understand that a revocable living trust account typically involves the same individuals as grantors and trustees, with third parties as beneficiaries.  We assume for the purpose of this opinion that the grantors/trustees and the beneficiaries are all members of the credit union.

The Washington Credit Union Act, Chapter 31.12, and the Financial Institution Individual Account Deposit Act, Chapter 30.22, authorize state credit unions to issue shares to and receive deposits from members in the form of a trust account.  RCW 31.12.402(1); RCW 31.12.416(1); RCW 30.22.050(5).

In addition, state credit unions may exercise any power or authority conferred as of December 31, 1993 on a federal credit union. RCW 31.12.404.  Federal credit unions may accept shares/deposits in the form of revocable trust accounts, termed “testamentary accounts,” or any similar account which evidences an intention that the funds shall pass on the death of the owner of the funds to a named beneficiary.  12 C.F.R. 745.4 (1993). 

Share/deposit insurance

Recent news articles have made living trusts hugely popular.  However, insurance coverage on them is not well understood.  For additional guidance on deposit insurance of revocable living trust accounts, see NCUA legal opinion letters, available on the NCUA website at www.ncua.gov.  From the NCUA website, go to reference information, then legal opinion letters; then click “search” and type in “living trusts” or “revocable trusts”.

For your quick reference, I have provided three examples of NCUA legal opinion letters on revocable trusts.  NCUA’s opinion letter 99-0208 answers insurance coverage questions about a hypothetical revocable living trust account for husband and wife as co-grantors and co-trustees.  NCUA’s opinion letter 97-0539 explains insurance coverage if the credit union knows the beneficiary’s names and degree of kinship to the member, and goes on to suggest credit unions require sufficient documentation as to who can withdraw and pledge funds in the account, the credit union’s need to know of any changes to the requested account information, and a legal opinion from the drafting attorney of the trust that the trust is revocable under state law.  In addition, NCUA’s opinion letter 00-0943 provides guidance on share insurance coverage if the living trust includes a defeating contingency that is related to the beneficiary’s interest in the trust assets.

Conclusion

We conclude that a state credit union may issue shares to and receive deposits from members in the form of a revocable living trust account.

However, we strongly encourage credit unions to seek the advice of knowledgeable counsel regarding the form of the contract of deposit as well as any tax or trust issues.


DCU Opinion Number 01-2

Date: February 13, 2001

From: Parker Cann, Director

Subject: A State Credit Union May Accept Federal Public Funds, But May Not Accept State Public Funds

Issue

The question has arisen whether Washington State-chartered credit unions (state credit unions) may accept federal and state public funds.

Analysis

Federal Public Funds

We have concluded previously that state credit unions may serve as US Treasury tax and loan depositories and depositories of federal taxes under 31 C.F.R. Section 203.3(b) and applicable Treasury Department regulations.  See our Opinion O-96-11.

We will next address the acceptance of other federal public funds.  Washington State-chartered credit unions operate under Chapter 31.12 of the Revised Code of Washington (RCW), and the Division of Credit Union's (DCU’s) implementing rules set forth in the Washington Administrative Code (WAC).  Chapter 31.12 RCW and DCU’s WACs do not specifically authorize state credit unions to accept federal (or state) public funds.

However, state credit unions have, among other powers, all the powers and authorities possessed by federal credit unions (FCUs) as of December 31, 1993.  RCW 31.12.404(1).  By rule, the Division may grant state credit unions the powers and authorities granted to federal credit unions after that date.  RCW 31.12.404(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 year-end 1993 FCU powers are written into Chapter 31.12 RCW.

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.  RCW 31.12.404.  These FCU restrictions only apply by virtue of the parity provision if the state credit union is exercising the FCU power.

Consequently, in our analysis of this issue, we must look to the Federal Credit Union Act (FCUA) and NCUA’s rules applicable to FCUs.  FCUs may receive payments on shares from federal public units and federal political subdivisions.  The maximum amount of all federal public funds plus any nonmember shares is limited to 20% of the total shares of the FCU’s or $1.5 million, whichever is greater.  “Shares” are defined as regular shares, share certificates, and share draft accounts.  12 U.S.C. 1757(6) (FCUA) and 12 C.F.R. 701.32 (NCUA’s rules).  For purposes of a state credit union exercising this parity power, “shares” would also include deposits.

Before accepting any public funds or nonmember shares in excess of 20% of total shares, the FCU board must adopt a specific written plan and submit a request to the NCUA in accordance with 12 C.F.R. 701.32(2) and (3).

Therefore, we conclude that state credit unions may receive deposits or payments on shares from federal public units and federal political subdivisions up to the limit of 20% of total shares and deposits.  A state credit union desiring to exceed that level may not do so without DCU’s prior written approval.

State Public Funds

Chapter 39.58 RCW is the statutory scheme for the deposit of state or local public funds.  Such funds must be deposited in public depositaries.  RCW 39.58.080.  Credit unions are excluded from the definition of “public depositary.”  RCW 39.58.010(2). 

Therefore, we conclude that state credit unions may not receive deposits or payments on shares from state or local government agencies.

Conclusion

We conclude that a state credit union may receive deposits and payment on shares from federal public units and federal political subdivisions up to the limit of 20% of total shares.

We conclude that a state credit union may NOT may receive deposits and payment on shares from state or local government agencies.


DCU Opinion Number 01-3

Date: February 22, 2001

From: Parker Cann, Director of Credit Unions

Subject: Summary of Major Differences Between Washington’s MBL Rule (As Approved by NCUA Board) and NCUA’s MBL Rule

1. Definition of MBL clarified
Section 208-460-010(1)

One of the key components of an MBL has been slightly changed here - from how the borrower “uses” the proceeds for specified purposes to how the borrower “intends to use” the proceeds for such purposes.  I expect that this more closely reflects reality - that most credit unions actually look at what the borrower says he/she/it intends to do with the proceeds rather than monitoring the use of proceeds to determine after the fact whether they were actually used for business purposes.

2. Exemption from MBL definition clarified
Section 208-460-010(2)

The exemptions here should apply only to loans for commercial, corporate, etc. purposes (what the rule refers to as “business purpose” loans).  Otherwise the loans would not need an exemption.  Wording has been added to (2) to clarify this issue.  “Business purpose” is defined in the definitional section at the end.

In addition, the changes make it clearer that a credit union must aggregate all business purpose loans to member A with any individual business purpose loans to other members who are associated with member A in order to determine if the business purpose loans exceed the $49,999 threshold.

In some places, the NCUA MBL rule refers to the “outstanding balance” of an MBL and in some places it refers to the “outstanding balance including unfunded commitments.”  In order to clarify this issue, the rule identifies the outstanding balance and unfunded commitments as the “amount” of an MBL, to distinguish it from the “outstanding balance” of an MBL.  A definition has been added in the definitional section for the “amount” of an MBL.  In the context of this section - exemptions from the definition of MBL – it is appropriate to use the “amount” concept, and the changes so provide.

The sentence added at the end of paragraph (2)(c) incorporates an NCUA interpretation.

3. Restrictions on MBL to directors expanded
Section 208-460-020(3)

It is more appropriate for these requirements to apply to MBL to all directors, not just MBL to compensated directors, and the changes reflect this.  Consequently, the Washington rule is more restrictive in this respect than the NCUA rule.

4. Regulatory decision-maker on waivers changed
Section 208-460-030(1)

DFI’s Director is named in the rule as the decision-making regulator on MBL waivers, instead of NCUA’s Regional Director. (As you know, the DFI Director has delegated such authority to the Director of Credit Unions.)  The one exception here is on waivers of the NCUA’s appraisal requirements in 722.3 – the decision-maker remains NCUA’s Regional Director.  Consequently, except for an appraisal waiver request, all requests will be approved/disapproved by the Division after consulting with NCUA’s Region VI on the request.  See also 208-460-090 and -100.

In regard to existing waivers, the Division has determined to grandfather MBL waivers previously granted by the NCUA, to the extent that they are still operative.  Some may not be operative, in whole or in part, because the Division’s MBL rule is less restrictive in certain respects than the NCUA’s MBL rule.

5. Required equity on development/construction loans decreased; required experience increased
Section 208-460-030(2), (4)

The rule reduces the minimum required equity from 35% to 30% for land development loans and from 35% to 25% for construction or combination development/construction loans.  We view these equity requirements as LTV requirements.

As an offset to these changes, the rule increases the experience requirement from 2 to 5 years of direct experience with development/construction lending, for credit unions that do this type of lending.  Consequently, the Washington rule is more restrictive in this respect than the NCUA rule. 

6. Requirement for individual with direct experience on MBL clarified
Section 208-460-040

The rule has been changed to reflect that the MBL-experienced person is working for the credit union, not necessarily the Board of Directors. 

The exception added at the end of the second sentence refers to the requirement in the prior section that if the credit union does development and construction lending, it must utilize a person with more than 5 years direct experience in this type of lending. 

7. Reference to “category or type” of MBL clarified
Section 208-460-050

In some places the NCUA rule uses “category or type” and in some places it uses one word, either “category” or “type.”  To avoid confusion, the rule uses “type” in these situations throughout the rule.

8. Requirement for MBL policies clarified
Section 208-460-050(14)

This subsection was added to require credit unions to adopt policies on MBL participations if they engage in that activity.  In addition, a sentence was added at the end of the section as a regulatory recognition that every provision of the policy may not apply to every MBL. 

9. New type of unsecured MBL allowed
Section 208-460-060(1)(b)

A new exception was added in paragraph (1)(b) to allow unsecured loans that individually do not exceed $100,000 and that in the aggregate do not exceed 10% of net worth.  The credit union cannot make such loans if its net worth is below 7%.  Credit unions making this type of MBL (referred to below as (1)(b) loans) must file supplemental reports with their 5300s to demonstrate compliance with the requirements of (1)(b).

The supplemental reports should include relevant figures for (1)(b) loans, including, as of the end of the reporting period:

  1. The number of these loans outstanding
  2. The aggregate commitment amount for these loans
  3. B/A
  4. PCA net worth
  5. B/D expressed as a percentage
  6. Delinquency on these loans
  7. Charge-offs YTD on these loans

The reports will be due with 5300s, starting with the 5300 for the second quarter of 2001.  Credit unions do not need to file the reports if they do not have any (1)(b) loans outstanding.  The reports may be in a letter format.

The first exception in 208-460-060(1)(a) is merely a restatement of the existing exception for credit card LOCs in the NCUA rule.

10. Minimum LTV ratios clarified
Section 208-460-060(2), (3), (4)

The NCUA rule uses a matrix to set forth loan-to-value requirements.  I felt that the matrix was confusing and have restated the LTV requirements of the matrix in the narrative in subsections (2), (3) and (4).  I did not intend to change the effect of these LTV requirements – only to restate them in more understandable form.

Subsection (2) deals with a first lien only situation; (3) deals with a second (or lesser) priority lien only situation; (4) deals with multiple priority liens on the same collateral.

11. Personal guarantee requirement eliminated
Section 208-460-060

The personal guarantee requirement has been deleted in its entirety.

12. The term “associated members” clarified
Section 208-460-070

Use of the term “group of associated members” was somewhat confusing in the NCUA’s MBL rule.  It appears that the purpose of the NCUA provision is to apply the MBL-to-one-borrower limit to the aggregate of a member’s MBL and any MBL to individuals who are associated with the member.  I believe it is clearer to refer to MBL to “associated members” rather than MBL to a “group of associated members” in this respect and the rule has been so changed.  The latter wording implies that only MBL to the group or entity of associated members would be aggregated with the member’s MBL.

13. Aggregate state MBL limit added
Section 208-460-140(2)

Wording was added to establish a state MBL limit - 3 times net worth - for those credit unions excepted from CUMAA’s aggregate MBL limits.  Such a restriction does not exist in the NCUA’s MBL rule.  Consequently, the Washington MBL rule is more restrictive in this respect than the NCUA rule.

14. Aggregate limit exception for LICUs and CDCUs made automatic
Section 208-460-150(1)

The exception for LICUs and Community Development Credit Unions is automatic with notice to DFI’s Director.

15. Definitions added, clarified
Section 208-460-170

New definitions were added to:


DCU Opinion Number 01-4

Date: May 24, 2001

From: Parker Cann, Director of Credit Unions

Subject:  Credit Unions May Use Electronic Voting Methods To Elect Directors and Supervisory Committee Members, As Permitted By Their Bylaws

Issues  

Can Washington State-chartered credit unions (credit unions) use electronic devices (i.e., the telephone and internet) to conduct member voting to elect directors and supervisory committee members?  If so, when may the election results be announced?

Analysis

The Washington State Credit Union Act (CU Act) requires credit union members to elect directors and supervisory committee members at the annual membership meeting.  RCW 31.12.225(2) and RCW 31.12.326.  Although the CU Act is silent on the use of electronic voting methods, it does provide: 

Members may vote, as prescribed in the credit union's bylaws, by mail ballot, absentee ballot, or other method.  However, no member may vote by proxy.

RCW 31.12.386(2).  Clearly, the CU Act contemplates that credit unions may use a variety of voting methods, as prescribed in their bylaws.  The outside limitation is that members may not vote by proxy.  We believe that electronic voting is clearly one of the methods of voting permitted by the CU Act.

I understand that federally-chartered credit unions may adopt electronic member voting.  See Option A4 to Article V of the NCUA’s model Federal Credit Union Bylaws.  These Bylaws can be found on the NCUA web site at www.ncua.gov.  From the NCUA homepage, select “Reference Information” and then “Federal Credit Union Bylaws.”

Sections 1 and 2 of Option A4 contain very specific procedures on how the electronic voting must be conducted.  Credit unions wishing to use electronic voting should adopt detailed voting procedures in their bylaws.  RCW 31.12.185(1).  We strongly recommend that such credit unions follow the procedures specified in Sections 1 and 2 of Option A4.

If a credit union uses electronic voting, when may the results of the election be announced?  Because of the requirement in the CU Act that members elect directors and supervisory committee members at the annual membership meeting, we believe that the results of the voting must be verified and announced at the annual meeting, and no sooner.

Conclusion

A credit union may use electronic voting methods to elect directors and supervisory committee members, as specified in its bylaws.  The results of the voting must be verified and announced at the annual membership meeting, and no sooner.


DCU Opinion Number 01-5

Date: June 4, 2001

From: Parker Cann, Director of Credit Unions

Subject:  Bond Coverage Which Meets Minimums Established in NCUA Rules Is Generally Adequate Under Washington State Credit Union Act

Issues

How much bond coverage is required for Washington State-chartered credit unions (credit unions)?

Analysis

The Washington State Credit Union Act (CU Act) requires credit unions to be adequately insured against risk, and requires each director, officer, committee member, and employee of a credit union to be adequately bonded.  RCW 31.12.367(1).  In addition, credit unions must also satisfy minimum bond and insurance coverage provisions in Part 713 of NCUA rules.  See NCUA rules at Section 741.201.  For example, Part 713 requires at least $5 million in bond coverage for credit unions with total assets over $295 million.  In general, we view bond and insurance coverage in compliance with the NCUA rules to be adequate under the CU Act.

However, each credit union should determine whether the required minimum bond and insurance coverage is sufficient to adequately insure against the risk in its operations.

The Division of Credit Unions (Division) may as a matter of safety and soundness require additional bond or insurance coverage when the Division determines that a credit union’s current coverage is inadequate.  For example, the Division may require a credit union with significant weaknesses in compliance with consumer protection laws to purchase an endorsement for coverage in this area.

Conclusion

Credit unions must have as a minimum the bond and insurance coverage set forth in Part 713 of NCUA’s rules.  However, a credit union should determine what amount of bond and insurance coverage is adequate to cover its risk.


DCU Opinion Number 01-06

Date:  August 3, 2001

From:  Parker Cann, Director of Credit Unions

Subjects: #1 Non-US Citizens In A Credit Union’s Field of Membership May Join The Credit Union
#2 Credit Union CUSOs May Serve Non-Member IRnet Customers, Subject to RCW 31.12.436(8)

Issue #1

Can an “undocumented” individual who is within the field of membership (FOM) of a Washington State-chartered credit union (credit union) join the credit union?

Analysis

Chapter 31.12 RCW and the Division’s rules set forth in Title 208 WAC do not specifically address this issue.  However, RCW 31.12.404 grants credit unions all the powers and authorities that federally-chartered credit unions (FCUs) had on December 31, 1993, or on a subsequent date no later than July 22, 2001.

By letter dated December 17, 1988, the Office of General Counsel confirmed that a non-citizen who is within an FCU’s FOM may be a member of the FCU.  I understand that the NCUA reaffirmed this opinion in February 2001.  See “Guidance On Serving Undocumented Individuals,” dated April 2001, by the World Council of Credit Unions (WOCCU).  I have assumed that a non-US citizen is the same as an undocumented individual.

Conclusion

Yes, non-US citizens within a credit union’s FOM may join the credit union.

Issue #2

Can a credit union service organization (CUSO) serve non-member IRnet customers?

Analysis

I understand that IRnet, or International Remittance Network, was set up by WOCCU in order to provide a safe and inexpensive method for consumers to send money to family members

Under RCW 31.12.436(8), a credit union may invest certain amounts in a CUSO whose primary purpose is to strengthen, advance, or provide services to:

  1. The credit union industry; or
  2. Credit union members.

We have determined that the term “primary,” as used in RCW 31.12.436(8), has the same meaning as the term “primarily” is defined in RCW 31.12.005(20).  Consequently, we have determined that the term “primary” means over one-half.

Serving non-members may not satisfy the primary purpose test (strengthening, advancing, providing service to the industry or members).  However, as long as over half of the CUSO’s overall activity satisfies this test, the CUSO may engage in other activities, such as serving non-members through IRnet.

Conclusion

Yes, a credit union’s CUSO may serve non-member IRnet customers as long as the CUSOs activities overall comply with the investment limits and satisfy the “primary purpose” requirements of RCW 31.12.436(8).


DCU Opinion Number 01-7

Date: September 19, 2001

Prepared by: Parker Cann, Director

Subject:

DCU Summary of
HB 1366 (Chapter 83, Laws of 2001), amending
Washington State Credit Union Act,
Chapter 31.12 RCW,
and
Washington State Corporate Credit Union Act,
Chapter 31.13 RCW

Effective July 22, 2001

Table of Contents

Definitions

Branch……………………………………………………4

Business loan…………………………………………….5

Capital Consumer loan CUSO Membership share Net worth Operating officer Out-of-state credit union Senior operating officer (new term) Small credit unions (new term)..…………………….6

Corporate Governance

Bylaw requirements…...……………………………..7

Articles of incorporation of new credit union

Amendments to Articles

Amendments to Bylaws

Board vacancies

Regular board meetings

Automatic termination of director for absence

Notice of automatic termination of director

Operating officers and employees on board…………………..….8

Board duties – deletion of unnecessary wording

Board duties - budgets

Board duties – delegation of duties

Fiduciary duties of officers

Automatic termination of Supervisory Committee members for absence

Notice of automatic termination of Supervisory Committee member

Qualifications for Supervisory Committee members

Supervisory Committee chair

Vacancies on Supervisory Committee…………………………...…….9

Frequency of Supervisory Committee meetings

Supervisory Committee duties

Director compensation

Loans to Supervisory and Credit Committee members

Bond and insurance requirements

Powers of Credit Unions

Power of credit unions to sell insurance……………………………10

Dormant account determination

Parity powers

Low-income credit unions

Loans

Loan rules……………………………….……………………11

Preference for consumer loans

Loans-to-one-borrower limit

Investments

Limit on investments-to funds in excess of loans….…..12

CUSO investments/loans

Mergers, Conversions, and Voluntary Liquidations

Discharge of debts in a merger of Washington Credit Unions      13

Effective date of mergers of Washington Credit Unions

Mergers of Washington credit unions into federal, out-of-state or foreign credit unions

Mergers of out-of-state, federal or foreign credit unions into Washington credit unions 

Foreign and out-of-state credit unions operating a branch in Washington

Requirements for foreign and out-of-state credit unions to operate a branch in

Washington

FOM and deposit insurance requirements for foreign and out-of-state credit unions

operating a branch in Washington

Fee authority for out-of-state and foreign credit unions     14

Member approval of voluntary liquidation

Examination and Supervision

WCUSGA references    15

Director’s authority to require compliance

Regulatory relief for small credit unions

Requirements for non-federally insured credit unions

Fee authority

Director’s access to records and authority to revalue investments

Director’s authority to require reserves or require charge-offs

Director’s authority to examine and investigate certain parties

Director’s access to books and records of out-of-state and foreign credit unions, and

certain other parties

Director’s authority to administer oaths and issue subpoenas    16

Reports

Compliance with GAAP

Notice of intent to operate branch

Director’s removal authority

Enforcement hearings

Cease and desist (C&D) orders

Temporary C&D orders

Notice of permanent order

Credit union action to enjoin temporary order

Director action to enjoin violation of temporary order    17

Application of APA

Other

Corporate credit unions    18

Repealers

Decodification of RCW 31.13.900    19

Severability provision


DCU Summary of HB 1366 (Chapter 83, Laws of 2001)

Effective July 22, 2001

DCU’s 2001 Departmental Request bill, HB 1366, took effect on July 22, 2001.  The following is a summary of the significant revisions of the bill, identified by page and line number.  A copy of the bill is also enclosed for your convenience.
Please note that the bill did not revise every section of the Credit Union Act, Chapter 31.12 RCW. 
If you have questions about the provisions of the bill, please feel free to contact Parker Cann at the Division, at (360) 902-8778 or pcann@dfi.wa.gov.

Summary

Definitions

Page 2; lines 1-17:  The definition of “branch.”

We intended the changes to clarify, rather than change, the definition of “branch.”  A credit union’s facility is not a branch unless it meets all three criteria set forth in subsection (3)(a), (b) and (c). 

For example, an office or facility of Credit Union A is not a “branch” of Credit Union A unless all three of the following criteria are satisfied:

  1. The facility is a staffed, physical facility.  This rules out the Internet, the mail and the phone system as somehow constituting a branch.  However, this criterion is satisfied whether or not the staff at the facility is staff of Credit Union A.
  2. The facility is owned or leased in whole or in part by Credit Union A or its CUSO.  An accommodation arrangement or other sharing arrangement between Credit Union A and another credit union to take deposits or allow withdrawals for Credit Union A’s members at the other credit union’s office or facility does not satisfy this criterion, unless Credit Union A or its CUSO leases the facility, in whole or in part.
  3. Deposits and withdrawals may be made to/from Credit Union A, or shares purchased from Credit Union A, through staff at the facility.  This rules out ATMs and other facilities where loans are originated but no deposit or share business is done in person.  However, this criterion is satisfied whether or not the staff at the facility is staff of Credit Union A. 

Page 2; lines 18-19:  The definition of “business loan.”

The definition is no longer needed – the term is defined by Division rules.  See WAC 208-460-010 (revised effective June 1, 2001).

Page 2; lines 21-23:  The definition of “capital.”

The allowance is actually for loan and lease losses, and the changes reflect this fact. 

The definition of capital has been amended to include other Director-approved forms of capital.  However, until the National Credit Union Administration (NCUA) amends its Prompt Corrective Action (PCA) rules to include other forms of capital in the definition of net worth, such other forms of capital will not count as net worth for PCA purposes.

Page 2; lines 24-25:  The definition of “consumer loan.”

The definition is no longer needed because the term has been deleted from Chapter 31.12 by the bill.

Page 2; line 31:  The definition of “CUSO.”

For completeness, the changes add credit union service organizations (CUSOs) of foreign credit unions to the definition of a CUSO.

Page 3; lines 30-31:  The definition of “membership share.”

The changes clarify the definition to reflect that credit union members are not required by statute to purchase a membership share.

Page 3; line 33:  The definition of “net worth.”

The changes conform to the term used in the Federal Credit Union Act (FCUA) – “net worth.”

Page 3; lines 35-36:  The definition of “operating officer.”

The changes clarify the definition of “operating officer.”

Page 4; line 6:  The definition of “out-of-state credit union.”

The changes clarify the definition to include credit unions operating under the laws of US possessions.

Page 4; lines 11-13:  A new defined term - “senior operating officer.”

The changes add this new definition.  The fiduciary duties of senior operating officers are recognized by Section 9 of the bill.

Page 4; lines 14-15:  A new defined term – “small credit unions.”

As defined, “small credit unions” are those with up to $10 million in assets.  Section 26(3) of the bill allows the Director to provide appropriate regulatory relief for small credit unions.

Corporate Governance

Page 5; line 11:  Bylaw requirements.

The changes delete the requirement that the bylaws address duties of board officers.  There is no compelling regulatory reason for such a requirement.  Credit unions may decide in their discretion whether to spell out such duties in their bylaws.  Of course, board officers will have duties normally associated with their office if they are not detailed in the bylaws.

Page 6; lines 6-9:  Articles of incorporation of new credit union.

The changes give the Director greater discretion to give start-up credit unions extensions of time to begin conducting business.

Page 6; lines 15-22:  Amendments to Articles.

The changes improve the organization of the section by moving a sentence up from the second subsection, and clarify that articles amendments take effect on filing by the secretary of state.

Page 6; lines 29-33:  Amendments to Bylaws.

The changes clarify the wording in regard to board approval of bylaw amendments other than field of membership amendments, consistent with the section on articles amendments (see Section 4 of the bill).

Page 7; lines 13-17:  Board vacancies.

The changes:

Page 7; lines 20-21:  Regular board meetings.

The changes clarify the meaning of the term “regular board meetings.”

Page 7; lines 27-32:  Automatic termination of director for absence.

The changes clarify the provision for automatic termination of a director.  Unless excused, a director shall no longer serve if he or she misses 4 regular meetings in a 12 month period during the director’s term, consistent with Division interpretation.  The changes are consistent with the section on supervisory committees (see Section 10 of the bill).

Page 7; lines 33-36:  Notice of automatic termination of director.

The changes provide that the board secretary is responsible to provide notice to a director whose term is automatically terminated because of absence.  The failure to provide notice does not affect termination.  The changes are consistent with the supervisory committee provision in Section 10 of the bill.

Page 8; lines 4-7:  Operating officers and employees on board.

The changes clarify that operating officers and employees cannot form a majority of the board, consistent with Division interpretation.

Page 8; lines 22-23:  Board duties – deletion of unnecessary wording.

The changes delete unnecessary wording about automated loan approval programs.  Of course, credit unions may still utilize automated loan approval programs.

Page 8; line 28:  Board duties - budgets.

The two terms used in the prior wording of the section, “budget” and “financial plan,” were intended to encompass the same thing.  “Budget” is the recognized term and should be used here.  The Division appreciates that adequate budgets may vary in complexity, depending on the nature of a credit union’s operation.

Page 8; line 34:  Board duties – delegation of duties.

The changes confirm that the board must carry out the duties listed in subsection (2) unless it has delegated them.

Page 9; lines 13 and 19:  Fiduciary duties of officers.

The changes provide that senior operating officers, not just board officers, have fiduciary responsibilities, consistent with the common law and Division interpretation.

Page 9; lines 30-34:  Automatic termination of Supervisory Committee members for absence.

The changes provide that supervisory committee members that miss over 1/3 of the committee meetings in a 12 month period during their term without being excused shall no longer serve on the committee.  This is an automatic termination, consistent with the section on director absences (see Section 7 of the bill). 

Page 9/lines 35-36 and page 10/lines 1-2:  Notice of automatic termination of Supervisory Committee member.

The supervisory committee is responsible to provide notice to a committee member whose term is terminated because of absence.  The failure to provide notice does not affect termination.  This is consistent with the section on director absences (see Section 7 of the bill).

Page 10; lines 3-6:  Qualifications for Supervisory Committee members.

The changes require supervisory committee members to be natural persons and members of the credit union, consistent with the section on directors (see Section 7 of the bill).

Page 10; lines 7-8:  Supervisory Committee chair.

The changes provide that the chair of the supervisory committee cannot serve as an officer of the board, in order to eliminate this type of conflict of interest.

Page 10; lines 11-13:  Vacancies on Supervisory Committee.

The changes provide that interim supervisory committee members appointed to fill a vacancy created by expansion of the committee may serve until the next annual meeting, consistent with the section on director vacancies (see Section 6 of the bill).

Page 10; line 28:  Frequency of Supervisory Committee meetings.

The changes delete unnecessary wording that the supervisory committee will meet as often as necessary.

Page 10; lines 31-34:  Supervisory Committee duties.

The changes make the section consistent with preemptive NCUA rules on supervisory committee duties.

Page 11; line 9-11:  Director compensation.

The changes improve the organization of the section and confirm Division interpretation that credit unions may provide insurance coverage for directors if the coverage is available to employees generally. 

Page 11; line 16:  Loans to Supervisory and Credit Committee members.

The changes limit the reach of these conflict of interest provisions, requiring loans to directors and supervisory and credit committee members to be on no more favorable terms and conditions than loans to members generally, consistent with Division rules at WAC 208-444-030.

Page 11; lines 21-29:  Bond and insurance requirements.

The changes make the section consistent with preemptive NCUA insurance rules on bond coverage.

Powers of Credit Unions

Page 13; lines 1-8:  Power of credit unions to sell insurance.

The changes allow credit unions to sell additional types of insurance to their members, if other state-chartered institutions can do so, subject to the same regulatory requirements.  For example, see FDIC rules at 12 C.F.R. Part 343.

Page 13; line 11:  Dormant account determination.

The changes eliminate the requirement that the board make the dormancy determination.  There is no compelling regulatory reason for such a requirement.  Credit union boards may decide in their discretion whether the board or an officer or employee should set policy on dormancy. 

Page 13; lines 34-37 and page 14/lines1-19:  Parity powers.

The changes:

Page 14/lines 29-37 and page 15/lines 1-19:  Low-income credit unions.

This new section 16 provides for the designation of low-income credit unions, subject to rules of the Director.  The Section 16 criteria for such designation are less onerous than the NCUA criteria for such designation.  Section 16 provides incentives for credit unions to seek such a designation – the ability to issue secondary capital, for example.

Loans

Page 15; line 26:  Loan rules.

The changes make it clear that all loans, whether consumer or business loans, may be subject to rules of the Director.  At the present time, the Director has adopted rules on member business loans (see Chapter 208-460 WAC), but has not adopted rules generally on other types of loans.

Page 15; lines 31-34:  Preference for consumer loans.

The changes eliminate the preference for consumer loans and small consumer loans.  It was not clear how the preference should be applied.

Page 16; lines 2-3:  Loans-to-one-borrower limit.

The changes clarify the wording of the section – the loans-to-one-borrower limit applies to all types of loans.

Investments

Page 16; line 11:  Limit on investments-to funds in excess of loans.

The changes eliminate ambiguous wording that limits investments to funds “in excess of loans.”  It was not clear how the quoted phrase should be applied.

Page 17; lines 7-25:  CUSO investments/loans.

The changes:

  • Clarify that the investment/loan limit applies to the aggregate of investments in/loans to all CUSOs by a credit union.
  • Clarify that the primary purpose of a CUSO must be to serve the CU industry or CU members.

Mergers, Conversions, and Voluntary Liquidations

Page 19; lines 5-7  Discharge of debts in a merger of Washington credit unions.

The changes clarify the discharge of debts in a merger of Washington credit unions.

Page 19; lines 11-15:  Effective date of mergers of Washington credit unions.

Consistent with Division interpretation, the changes establish that when two Washington credit unions merge, the merger will be considered legally effective when:

Similar effective date provisions were added to Sections 22 and 23 of the bill, regarding:

Page 19; lines 18-35:  Mergers of Washington credit unions into federal, out-of-state, or foreign credit unions.

The changes expand the section to cover Washington credit union mergers into federal, out-of-state, or foreign credit unions.  The changes require the board secretary, rather than the board itself, to certify member approval of the transaction.

 Page 20; lines 14-19:  Mergers of out-of-state, federal or foreign credit unions into Washington credit unions.   

The changes expand the section to cover mergers where an out-of-state, federal or foreign credit union is merging into a Washington credit union. 

Page 21; lines 5-6:  Foreign and out-of-state credit unions operating a branch in Washington.

The changes eliminate confusion between a foreign or out-of-state credit union “doing business” and “operating a branch” here and make it clear that the trigger for requiring prior Director approval is “operating a branch” in Washington.

Page 21; lines 9-37:  Requirements for foreign and out-of-state credit unions to operate a branch in Washington.

The changes delete “applicant” and substitute “credit union,” because some of the requirements apply on an ongoing basis, not just at the time of application.

Page 21; lines 26-30:  FOM and deposit insurance requirements for foreign and out-of-state credit unions operating a branch in Washington.

The changes confirm that out-of-state and foreign credit unions that operate a branch here are subject to:

Page 22; lines 32-34:  Fee authority for out-of-state and foreign credit unions.

The wording is deleted because all of the Director’s fee authority is consolidated in Section 26 of the bill.

Page 22; line 37:  Member approval of voluntary liquidation.

The changes correct the error – the reference should be to a member meeting, not a board meeting.

 

Examination and Supervision

Page 24; lines 2, 12, 21 and 30:  WCUSGA references.

The changes delete reference to Chapter 31.12A, the WCUSGA Chapter that was repealed on December 31, 2000.

Page 24; lines 4-7:  Director’s authority to require compliance.

The changes eliminate the mandate that the Director require credit unions to comply with applicable laws outside Chapter 31.12.

Page 24; lines 15-18:  Regulatory relief for small credit unions.

The changes allow the Director to provide regulatory relief for small credit unions.

Page 24; lines 23-27:  Requirements for non-federally insured credit unions.

The changes require nonfederally insured credit unions to comply with safety and soundness requirements of the Director.

Page 24; lines 29-31:  Fee authority.

The changes clarify that the Director may charge fees to persons that may be examined or investigated by the Division (which includes EDP providers), and to parties that the Division contracts its services to (such as other Divisions or other agencies).

Page 25; lines 5-10:  Director’s access to records and authority to revalue investments.

The changes allow the Director access to credit unions’ records, and allow the Director to revalue a credit union’s investments.  These changes are consistent with the state thrift and bank statutes.

Page 25; lines 11-12:  Director’s authority to require reserves or require charge-offs.

The changes authorize the Director to require credit unions to charge off or set up a special reserve for loans and investments.  The wording is brought over from RCW 31.12.448 (repealed by Section 38 of the bill).

Note:  The Division does not view this Section as an exhaustive list of the Director’s powers to appraise or revalue, or require write-offs or reserves for, assets. 

Page 25; lines 13-30:  Director’s authority to examine and investigate certain parties.

The changes allow the Director to examine and investigate certain credit union-affiliated parties, including EDP providers, as well as out-of-state and foreign credit unions permitted to operate a branch here.

Page 25; lines 31-33:  Director’s access to books and records of out-of-state and foreign credit unions, and certain other parties.

The changes allow the Director access to the records of out-of-state and foreign credit unions, and certain credit union-affiliated parties.

 

Page 25; lines 34-38 and page 26/lines 1-4:  Director’s authority to administer oaths and issue subpoenas.

The changes allow the Director to administer oaths, issue subpoenas, and require the production of documents.  The changes are consistent with the state thrift and bank statutes. 

Page 28; lines 16-24:  Reports.

The changes conform with practice – credit unions must file NCUA-required call reports with the Division.

Page 28; line 28:  Compliance with GAAP.

The changes conform to the law - preemptive federal law requires credit unions with at least $10 million in assets to comply with GAAP requirements.

Page 28; lines 35-36:  Notice of intent to operate branch.

The changes limit the branch notice requirement to instances where the credit union intends to operate a branch in another state or foreign jurisdiction.

Page 29; lines 5-9:  Director’s removal authority.

The changes clarify that the Director may remove an officer or employee from employment, and allow the Director to prohibit a person from participating in the affairs of any credit union.  This enforcement authority is consistent with authority of other state and federal regulators.  See, e.g., 12 U.S.C. 1786(g) (NCUA authority). 

Page 29; lines 20-38 and page 30/lines 1-2:  Enforcement hearings.

Certain subsections have been deleted in this and following sections to avoid inconsistency with the State Administrative Procedure Act, Chapter 34.05 RCW (APA).  See page 30, lines 11-34; page 31, lines 16-21; page 32, lines 8-39; and page 33, lines 1-7.  Another section of the bill (Section 35) makes it clear that the agency’s enforcement hearings are governed by the APA. 

Page 30; lines 34-38:  Cease and desist (C&D) orders.

The new wording is brought over from the last sentence of the deleted subsection (2) of this section.

Page 31; lines 5-11:  Temporary C&D orders.

The changes clarify the nature of a temporary cease and desist order – that an order may require a credit union to do or not do something.

Page 31; lines 12-14:  Notice of permanent order.

The changes clarify that the agency will serve notice of charges for a permanent cease and desist order at the same time it serves a temporary order.

Page 31; lines 23-28:  Credit union action to enjoin temporary order.

The new wording is brought over from RCW 31.12.605 (repealed by Section 38 of the bill).

Page 31; lines 29-34:  Director action to enjoin violation of temporary order.

The new wording is brought over from RCW 31.12.615 (repealed by Section 38 of the bill).

Page 31/lines 37-38 and page 32/lines 1-5:  Application of APA.

The changes clarify that the agency’s enforcement hearings are governed by the APA, except to the extent that Chapter 31.12 provides otherwise.

Other

Page 33/lines 10-37 and page 34/lines 1-31:  Corporate credit unions.

Chapter 31.13 RCW governs Washington State-chartered corporate credit unions.  There are currently no Washington State-chartered corporate credit unions.

Chapter 31.13 is very outdated.  Sections 36 and 37 of the bill extensively revise two sections of the corporate Chapter.  As amended, these sections permit the organization of a Washington corporate with the same powers as federal corporates and Kansas State corporates.  The largest corporate in the nation is chartered by the State of Kansas, and Kansas State law provides detailed corporate credit union regulation.  Section 39 of the bill repeals the remaining three sections of the Corporate Chapter.

Page 34; lines 34-35:  Repeal of RCW 31.12.275.

RCW 31.12.275 provides that the board may remove board officers and committee members (other than supervisory committee members) only for cause.  Because these officers and committee members are appointed by the board without a member vote, the “for cause” requirement is not appropriate.  With the repeal, boards can make the determination to remove such officers and committee members as they see fit.

Page 34; lines 36-37:  Repeal of RCW 31.12.407.

RCW 31.12.407 (Chapter 5, Section 5, Laws of 1996) requires credit unions to have federal insurance before December 31, 1998.  After December 31, 1998, credit unions were required to have federal insurance or alternative insurance approved by the Director.  See RCW 31.12.408.  Consequently, RCW 31.12.407 is no longer effective and is repealed.

Page 35; lines 1-2:  Repeal of RCW 31.12.445.

RCW 31.12.445 is deleted because the concept is addressed in Section 26 of the bill.

Page 35; lines 3-4:  Repeal of RCW 31.12.448.

RCW 31.12.448 is repealed because:

Page 35; lines 5-6:  Repeal of RCW 31.12.555.

RCW 31.12.555 is repealed because the substance of the section is moved to Section 27(3) of the bill. 

Page 35; lines 7-9:  Repeal of RCW 31.12.605.

RCW 31.12.605 is repealed because the wording of the section is moved to Section 34(4) of the bill.

Page 35; lines 10-11:  Repeal of RCW 31.12.615.

RCW 31.12.615 is repealed because the wording of the section is moved to Section 34(5) of the bill.

Page 35; lines 12-13:  Repeal of RCW 31.12.627.

RCW 31.12.627 is repealed to make it clear that these matters are governed by the APA.

Page 35; lines 16-20:  Repeal of RCW 31.13.030, .040, .050.

These three outdated corporate credit union sections are repealed.

Page 35; line 21:  Decodification of RCW 31.13.900.

RCW 31.13.900 is a severability provision from a 1977 bill, and is decodified.

Page 35; lines 22-25:  Severability provision.

Standard severability provision.

 

Opinion index heading:  Miscellaneous

Opinion index and list descriptor:  Summary of HB 1366 (Chapter 83, Laws of 2001), Effective July 22, 2001


DCU Opinion Number 01-8

Date: November 8, 2001

From: Parker Cann, Director

Subject:

Credit Unions Possess Incidental Powers through Two Sources -

  1. The State Parity Provision (RCW 31.12.404); and
  2. The State Incidental Powers Provision (RCW 31.12.402(23))

 By: Parker Cann, Director of Credit Unions


Issue: State Parity Provision

The Washington State Credit Union Act (WSCUA) grants Washington State-chartered credit unions (WaSCUs) the powers and authorities (powers) that federally-chartered credit unions (FCUs) possessed on December 31, 1993 or a subsequent date not later than July 22, 2001.  RCW 31.12.404 (state parity provision).  In addition, the Director of the Department of Financial Institutions (DFI) may grant WaSCUs the powers and authorities that FCUs have subsequent to July 22, 2001

… if the director finds that the exercise of the power and authority serves the convenience and advantage of members of credit unions, and maintains the fairness of competition and parity between credit unions and federal or out-of-state credit unions.

RCW 31.12.404(2).  The Director’s power to reach such a finding and to interpret Chapter 31.12 RCW generally has been delegated to the Director of the Division of Credit Unions.  Of course, in exercising an FCU power, WaSCUs must comply with any restrictions or limitations on the specific exercise of the power under NCUA statutes or rules.  RCW 31.12.404(3).

The Federal Credit Union Act (FCUA) provides that a FCU has the power to exercise such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated.

12 U.S.C. Section 1757(17).  On September 5, 2001, the National Credit Union Administration (NCUA) amended its rules to grant FCUs broader incidental powers under the FCUA.  12 C.F.R. Part 721; see also 66 Federal Register 40845 – 40859 (August 6, 2001) (NCUA’s amended IP rule).

In part, the NCUA’s amended IP rule also outlined a three-part test to determine what activities fall within the purview of incidental powers.  See 12 C.F.R. Section 721.2 of the rule.  The test was derived from the U.S. Supreme Court decision in Nationsbank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995) (VALIC).  

The Washington Credit Union League (WCUL) has inquired whether WaSCUs enjoy the same incidental powers that were granted to FCUs by the NCUA’s amended IP rule.

Analysis – State Parity Provision

As noted above, WaSCUs are granted FCU powers in effect on December 31, 1993, or a subsequent date no later than July 22, 2001.  RCW 31.12.404(1).  A finding by the Director is not required to grant WaSCUs any FCU power unless it took effect after July 22, 2001.

In regard to interpretation of the state parity provision, the Division continues to take the position that the effective date of a power derived from the FCUA is based on the enactment of the FCUA provision, even though the power is not recognized or acknowledged by NCUA rule or interpretation until later.  Such is the case in this instance. 

The NCUA’s amended IP rule took effect on September 5, 2001.  However, the incidental powers provision in the FCUA was in effect on July 22, 2001.  Consequently, the state parity provision does grant the incidental powers recognized in the NCUA’s amended IP rule, without the need for a finding by the Director under RCW 31.12.404(2).

Conclusion – State Parity Provision

We conclude that WaSCUs possess the powers granted to FCUs by the NCUA’s amended IP rule.  This includes incidental powers and authorities granted to a FCU in the future through application to the NCUA or opinion of its General Counsel.  As is the case with the exercise of any parity power, a credit union should:

  1. Consider whether Board of Directors’ approval of the exercise is necessary;
  2. Maintain legal citations and other documentation evidencing the FCU power and the restrictions and limitations on the power; and
  3. Comply with the NCUA restrictions and limitations on the power.

State Incidental Powers Provision

The WSCUA also grants WaSCUs certain incidental powers.  A WaSCU may:

exercise such incidental powers as are necessary or convenient to enable it to conduct the business of a credit union.

RCW 31.12.402(23) (state incidental powers provision).  Although we have not been asked to opine on this provision, we feel that it would be helpful to WaSCUs to explain the application of this provision in the context of this opinion. 

We believe that WaSCUs may possess incidental powers under the incidental powers provision that are different than the incidental powers they possess under the state parity provision, as determined above in this opinion.  In addition, we would like to note that we intend to use the test outlined in VALIC as a test for determining what is an incidental power for WaSCUs under RCW 31.12.402(23).
 

Exercising Incidental Powers

A WaSCU should obtain the Division’s written approval before undertaking any new activity in exercise of its incidental powers under either the state parity provision or the state incidental powers provision, unless:

  1. The activity is within a category that has been preapproved by the NCUA under 12 C.F.R. Section 721.3;
  2. The activity has been approved by the NCUA in writing or has been determined to be an incidental power of FCUs by written opinion of the NCUA’s General Counsel; or
  3. The activity has been approved by the Division in writing or has been determined to be an incidental power of WaSCUs by written opinion of the Division.

We strongly encourage credit unions, when applying to the Division for approval of the exercise of an incidental power, to submit a written opinion of knowledgeable counsel that addresses:

WaSCUs using the exceptions in 1, 2 or 3 above should maintain documentation demonstrating compliance with the exception.

Of course, credit unions must use caution in undertaking any new activity to ensure that all related risks are appropriately assessed and mitigated and that the activity is conducted in a safe and sound manner.  For the sake of convenience, we have reprinted below the NCUA’s discussion of safety and soundness considerations from its amended IP rule.

Opinion index heading:  Powers (including parity …)

Opinion index and list descriptor:  Credit Unions May Possess Incidental Powers through Two Sources -

  1. The State Parity Provision (RCW 31.12.404); and
  2. The State Incidental Powers Provision (RCW 31.12.402(23))

NCUA Discussion of Safety and Soundness Considerations

The NCUA Board wants to emphasize that, while the incidental powers rule identifies categories of activities the Board has identified as within a federal credit union’s (FCU’s) incidental powers under the Federal Credit union Act (FCU Act), an FCU must comply with all applicable legal requirements and give due consideration to safety and soundness concerns before engaging in an incidental powers activity.

To carry out its responsibilities, FCU management must consider whether its policies for new activities are realistic and carefully designed to enable the FCU to serve the interests and needs of the membership.  In addition to meeting various legal requirements, many incidental powers activities require management to provide direction and instruction for officers, employees, and committees delegated the responsibility for implementing new activities.

FCU management is responsible for developing proper internal safeguards such as management oversight, internal controls and quality control.  FCUs must examine the strategic risk, reputation risk, transaction risk and compliance risk before engaging in a new activity.  In addition, management must exercise due diligence before devoting resources to a new activity or entering into any arrangements with third parties.  Activities that involve the use of new technologies must rely on acceptable information systems and operations architecture.  FCUs capable of providing advanced technological services must employ appropriate internal controls to minimize technological and legal risk and to address safety and soundness considerations.  FCUs must also adjust their risk management process and insurance coverage to correlate with additional risk taken on by engaging in new activities.

NCUA has published guidance papers to assist FCUs in evaluating the risks and understanding the legal requirements involved in some of these activities.  This guidance includes: 

NCUA’s published guidance, along with NCUA’s regulations, are available from the agency’s website at www.ncua.gov.  The Board also recommends that FCUs review interpretive letters and guidance issued by other federal financial institution regulators for assistance in understanding an activity’s risks, for example, OCC Bulletin 2001-12 on bank-provided account aggregation services and OCC Advisory Letter 2000-9 on third-party risk.  Depending on the activities an FCU undertakes, it may also need to consult with its own legal counsel and other professional advisers.