FCU Handbook

Federal Credit Union

Handbook









National Credit Union Administration

National Credit Union Administration









Federal Credit Union

Handbook









Prepared by the

Office of Examination and Insurance







NCUA-8055 (Rev 2006) M-4035









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Table of Contents







Foreword 4

Preface 5

Part I Federal Credit Unions 7

Part II Organizational Structure and Control 13

Part III Member Services 21

Part IV Operational Requirements 27

Part V Management 31

Part VI NCUA Funds and Programs 45

Part VII Other Laws Affecting Federal Credit Unions 49

Part VIII Conflict of Interest 61

Part IX Other Procedures and Supplemental Information 65









3

Foreword



The Federal Credit Union Handbook was created to assist the board

of directors in conducting the credit union’s affairs. The Handbook

covers a wide range of subjects and is intended as a general refer-

ence. However, the contents should prove useful to credit union offi-

cials and employees in carrying out their duties and responsibilities.



We encourage credit union officials to become familiar with other Na-

tional Credit Union Administration publications, laws, and regulations.









4

Preface



In the early twentieth century, credit needs of the urban working

classes in the United States were largely neglected by established

financial institutions. For the most part, the average worker had no-

where to turn except to the usurious money lenders of the day. This

growing dependency complicated the economic life of the average

consumer and gave rise to the development and formation of a coop-

erative credit system in the United States, an idea originating in Eu-

rope and imported to North America in 1900. In 1908, the first legally

chartered cooperative credit society was established in Manchester,

New Hampshire by a special act of the state’s legislature. The follow-

ing year, the first complete credit union act, the Massachusetts Credit

Union Act, became law in Massachusetts. By 1933, enactment of

state laws permitting formation of credit unions had been largely ac-

complished. In 1934, the Federal Credit Union Act was signed into

law, giving further impetus to the movement.



The post World War II era gave rise to an enormous appetite for

consumer goods and an attendant need for consumer credit. Credit

unions met this need to an increasing extent and expanded rapidly.

The credit union system became a recognized social and economic

force in the United States. By the end of 2003, over 82.4 million peo-

ple were members of credit unions.



Credit unions differ from other financial institutions in that they are

cooperative associations organized to serve members with a com-

mon bond of employment, association, or residence. Another char-

acteristic that sets them apart is volunteerism. The founders of the

movement believed volunteers should direct the organization and

operation of credit unions.



Credit unions are organized under a dual-chartering system of federal

and state laws. Federal and state chartered credit unions purposes

include promoting thrift among their members and creating a source

of credit at reasonable interest rates.







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Part I

Federal Credit Unions



A federal credit union is a not- power: The power to accept share

for-profit financial institution co- deposits, the power to make loans

operative organized to provide to members, and the power to bor-

its members with a place to save row funds.

and a source of loans at reason-

able rates. It is a corporation Section 107 of the Federal Credit

chartered under the Federal Credit Union Act also grants indirect (in-

Union Act to serve groups having cidental) powers to a federal credit

a common bond of occupation union. These powers are necessary

or association, or groups within a to enable a federal credit union to

well-defined, local neighborhood, carry out the business for which it

community, or rural district. More was chartered. Since the Federal

information about federal credit Credit Union Act does not specifi-

union organization and the charter- cally define incidental powers, the

ing policies of the National Credit board of directors should ensure

Union Administration (NCUA) may any activity not specifically au-

be obtained from NCUA’s regional thorized by the Act or by Part 721

offices. of NCUA Rules and Regulations,

is clearly within the credit union’s

The Federal Credit indirect powers. If the board of

Union Act directors has any questions with

respect to the proposed activity,

The Federal Credit Union Act pro-

it should seek an advisory opinion

vides for the chartering and super-

from NCUA General Counsel or

vising of federal credit unions by

consult with the appropriate NCUA

NCUA and the insuring of member

Regional Director.

accounts of federal and state-

chartered credit unions through the

Since 1934, various amendments

National Credit Union Share Insur-

to the Federal Credit Union Act

ance Fund (NCUSIF).

have greatly expanded the ability of

federal credit unions to meet their

Section 107 of the Federal Credit

members’ financial needs; howev-

Union Act specifically defines a

er, the basic purposes of a federal

federal credit union’s direct (ex-

credit union, as stated in the Act,

press) powers. The following

remain unchanged.

provides three examples of direct



7

National Credit Union and cooperative credit union

Administration (NCUA) system. NCUA’s four objectives

consist of the following:

The National Credit Union Ad-

ministration is in the Executive • To ensure the safety and

Branch of the Federal Govern- soundness of the credit

ment. NCUA receives no ap- union system.

propriations and operates solely • To foster cooperation be-

from monies received from in- tween credit unions and

sured credit unions. NCUA is NCUA (the regulator/ in-

headquartered in Alexandria, surer).

Virginia, but it operates on a • To improve the efficiency

decentralized basis through and the effectiveness of

five regional offices which are NCUA’s supervision includ-

located in Albany, New York; ing reducing the regulatory

Alexandria, Virginia; Atlanta, burden.

Georgia; Austin, Texas; and • To ensure fair and equal ac-

Tempe, Arizona. More than 80 cess of financial services for

percent of the Agency’s employ- all Americans.

ees are assigned to the regions.

Each regional office is managed NCUA Rules and Regulations

by a regional director who re-

ports to the Executive Director. Under authority of the Federal

The NCUA Board consists of a Credit Union Act, NCUA pre-

Chairman and two Board Mem- scribes rules and regulations for

bers, each appointed by the the organization and operation

President and confirmed by the of federal credit unions. All rules

Senate. The NCUA Board and and regulations are published

its headquarters staff provide in the National Credit Union

policy, direction, and administra- Administration Rules and Regu-

tive support to the regional of- lations.

fices.

It is NCUA’s policy to ensure its

NCUA Objectives regulations impose only mini-

mal burdens on credit unions,

NCUA’s activities are predicated consumers, and the public. No

on four objectives which support major regulatory changes are

the mission to ensure a stable made without first affording





8

federally insured credit unions charter amendment procedures,

and other interested persons the please contact the appropri-

opportunity to comment. Credit ate regional offices or refer to

union officials are encouraged to NCUA’s Chartering and Field

participate in the regulatory pro- of Membership Manual (NCUA

cess and submit their comments 8007).

to NCUA. For further information

about the Agency’s policies for Bylaws

the promulgation of rules, refer

NCUA prescribes standard Fed-

to NCUA Interpretive Ruling and

eral Credit Union Bylaws (NCUA

Policy Statement (IRPS) No. 03-

8001) for adoption upon charter-

02 dated May 29, 2003.

ing. Once adopted by the board

of directors, the standard By-

Charter

laws become the official Bylaws

After an organization certificate, of the credit union.

filed by the subscribers of a

proposed federal credit union, is Standard bylaw amendments

approved by NCUA; the docu- may be adopted by the board of

ment becomes the credit union’s directors without further NCUA

official charter. Among other approval. Applications for ap-

things, the charter includes the proval of non-standard amend-

credit union’s official name and ments should be forwarded to

also defines the field of mem- the appropriate regional director

bership. for consideration. For further

information, refer to the Federal

From time to time, a federal Credit Union Standard Bylaws

credit union may find it neces- (NCUA 8001A).

sary to make changes to its

name or field of membership, NCUA Letters, Regulatory

this action requires an applica- Alerts, Interpretive Rulings, and

tion requesting an amendment Accounting Bulletins

to the charter. Applications for

NCUA publishes numbered

amendments should be made

Letters to Credit Unions, Opin-

to the regional director via the

ion Letters, Regulatory Alerts,

US Mail or the Internet. For ad-

Interpretive Rulings and Policy

ditional information pertaining to

Statements, and Accounting







9

Bulletins. These documents The examiner prepares and pro-

discuss a variety of topics of vides the officials with a written

interest and should be retained report highlighting the results of

in the permanent files for ready the examination. To derive the

reference. greatest benefit from the ex-

amination, the board of directors

Examinations and committee members should

review the report carefully. The

The principal method by which board is responsible for taking

NCUA carries out its supervi- necessary corrective actions,

sory responsibility is through and the supervisory committee

on-site risk-focused examina- has the duty to ensure the board

tions. These examinations are corrects identified problems.

designed to determine the risk

to the NCUA Share Insurance The examiner will discuss prob-

Fund. The examiner’s review lems and/or conditions which

focuses on management’s abil- impair or may impair the safety

ity to identify, measure, monitor, and soundness of the credit

and control risk. union with the appropriate offi-

cials and employees. The exam-

Throughout the exam, it is es- iner will also assist the officials

sential for credit union officials with developing plans designed

and employees to cooperate to overcome underlying causes

fully. This includes making the of current or potential problems.

credit union’s books and records Through conferences with the

readily available to the examiner. officials, the examiner will en-

To facilitate an understanding of sure they understand what must

the areas reviewed during the be done to improve operations.

exam process, best practices, Officials can request a confer-

and regulatory requirements; ence with the examiner in cases

exam questionnaires have been where the examination did not

posted on NCUA’s website. With identify problems.

full cooperation, the examination

will be completed more quickly It is important to understand

and keep disruption of the credit risk-focused examinations are

union’s normal office routine to a not audits. The risk-focused ex-

minimum. amination objectives include de-







10

termining whether a credit union eral Credit Union Act places the

is financially sound and whether responsibility for auditing the

operations are conducted in credit union on the supervisory

compliance with applicable committee.

laws and regulations. The Fed-









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12

Part II

Organizational Structure and Control





Membership Regular and special meetings

of the members are held in ac-

Eligibility for membership in a

cordance with Sections 110 and

federal credit union is limited to

118 of the Federal Credit Union

the persons and organizations

Act and Articles IV, V, and X of

sharing the common bond de-

the Bylaws.

scribed in the credit union’s field

of membership, as set forth in

A member may be expelled from

Section 5 of its charter. A per-

membership by action of the

son becomes a member upon

members or the board of direc-

approval of an application for

tors as described in Section 118

membership, subscription of at

of the Act and Article XIV of the

least one share and payment of

Bylaws.

the initial installment thereon,

and if required by the board of

directors an entrance fee.

Board of Directors

The board of directors is elected

The members exercise demo- by the members from the mem-

cratic control of the credit union bership. They provide gen-

by attending and participating eral direction and control of the

in regular and special member- credit union, and must meet at

ship meetings, and by elect- least once a month. The Act and

ing the board of directors (and Bylaws require the board to con-

credit committee, if the Bylaws sist of an odd number of credit

so provide). Each member is en- union members, not fewer than

titled to not more than one vote 5 nor more than 15. No member

irrespective of the number of of the board may, as such, be

shares owned; and no member compensated.

may vote by proxy, but a mem-

ber other than a natural person The board elects the credit

may vote through a designated union’s officers, one of whom

agent. may be compensated, from its







13

own number. These officers, the compensation of any other

whose titles are determined by employees they deem necessary

the board, are the chair, one or to carry out the credit union’s

more vice chairs, a financial of- operations.

ficer, and a secretary. The board

may employ one or more as- The board may also establish

sistant financial officers, none of committees from among the

whom may serve as chair or vice members to assist in the man-

chair; and one or more assistant agement of the credit union.

secretaries, none of whom may Some committee examples

serve as chair, vice chair, or fi- include a budget committee,

nancial officer. personnel policies committee,

education committee, and delin-

The board of directors appoints quent loan committee.

the credit union’s supervisory

committee and, if the Bylaws For a full discussion of the

provide, a credit committee or board’s responsibility for provid-

loan officers. The board may ing sound and effective man-

also appoint an executive com- agement of the credit union’s

mittee, of not less than three operations, refer to Part V, Man-

directors, to act on behalf of the agement, of this Handbook.

board and to carry out specific

functions. No member of the Sections 111, 112, and 113 of

supervisory, credit, or executive the Federal Credit Union Act and

committees may be compen- Articles VI and VII of the Bylaws

sated as such. describe the duties and powers

of the directors, board officers,

The board may appoint a man- and employees.

agement official and one or

more assistant management Credit Committee

officials, none of whom may be

members of the board, unless In accordance with the credit

a standard bylaw amendment union’s Bylaws, the Federal

is adopted. These employees Credit Union Act permits either

serve under the supervision of the members of the credit union

the board or financial officer or the board of directors to ap-

and may be compensated. The point the credit committee. The

directors may employ and fix committee must be comprised





14

of an odd number of credit union Supervisory Committee

members, not less than 3 nor

more than 7. The committee is The Federal Credit Union Act

required to meet at least once a and the Federal Credit Union

month. Bylaws stipulate the board of

directors will appoint a supervi-

The credit committee has the sory committee consisting of not

authority to appoint one or more less than 3 and no more than 5

loan officers, not more than one credit union members. One of

may serve on the committee. the members of the committee

The committee may selectively may be a director, other than

delegate its powers to a loan the financial officer of the board;

officer and set the limits of the however, no credit committee

delegation. Applications or re- member or credit union em-

quests not approved by a loan ployee may be a member of the

officer must be acted upon by committee.

the credit committee.

The supervisory committee is

If the Bylaws do not require a an essential part of the credit

credit committee, the board of union’s management. Under the

directors will appoint one or Act and Bylaws, the supervisory

more loan officers and authorize committee’s major responsibili-

them to assume the powers of ties include:

a credit committee. A member

may appeal to the board any ap- 1. Make an audit at least

plication or request denied by a annually.

loan officer. Loan officers may 2. Verify the accounts of the

be compensated to the extent members at least once

authorized by the board. The every 2 years. (Maintain

duties and powers of the credit record of account

committee and loan officers are verifications)

discussed in Section 114 of the

Act and Article VIII of the By- The committee is also respon-

laws. Refer to Credit Services, in sible for reviewing the per-

Part III, of this Handbook for ad- formance of the officials and

ditional discussion. employees, and makes recom-

mendations to the board of di-







15

rectors for improving operations ing the supervisory committee,

within the credit union. but only the committee has the

authority to select, prescribe the

In order to carry out its respon- duties of, and remove such indi-

sibilities, but dependent on viduals. Refer to Part 715 of the

charter type and asset size, the NCUA Rules and Regulations for

supervisory committee may specific requirements.

employ certified public ac-

countants, public accountants, The members of the supervisory

and/or other independent quali- committee are urged to study

fied persons to perform auditing, the Supervisory Committee

account verification, and cleri- Guide for Federal Credit Unions

cal work under its supervision. (NCUA 8023) for assistance

The board of directors provides in carrying out their important

compensation to persons assist- function.









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17

Federal Credit Union Organization Chart

Members

Responsibilities:

1. Elect board of directors and credit committee.

2. Participate in membership meetings.

3. Promote participation in and use of credit

union services.

4. Repay loans as agreed.









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5. Remove any official for cause.

6. Expel members for cause.







Credit Committee Board of Directors Supervisory Committee

Responsibilities: Responsibilities: Responsibilities:



1. Meet at least monthly and maintain 1. Maintain general direction and control. 1. Make or cause to be made audits at

minutes. 2. Meet at least monthly and maintain least annually.

2. Appoint loan officer(s) as needed minutes. 2. Submit audit reports to the board of

and delegate authority. 3. Establish operating policies and procedures. directors and summaries to members

3. Counsel members in wise use of 4. Elect board officers and fix compensation at annual meetings.

credit. of specified officer. 3. Verify with members their account

4. Maintain confidential relations with 5. If bylaws provide, appoint credit committee balances at least once every 2 years.

members. or loan officer(s). 4. Maintain confidential relations with

5. Act on applications for loans and 6. Appoint supervisory committee. members.

lines of credit. 7. Appoint membership officer, executive 5. Suspend directors, officers, or credit

and other committees. committee members for cause.

6. Act on requests for release of

collateral. 8. Hire, fix duties and compensation of 6. Call special membership meetings

7. Act on requests for extensions and employees and set personnel policies. for cause.

refinancing of loans. 9. Maintain confidential relations with 7. Maintain committee's records.

members. 8. Request board approval for

8. Act on requests denied by loan 10. Act on membership applications. compensation of clerical and

officer(s). 11. Determine classes of accounts and fix auditing assistance.

9. Make annual report to members. maximum individual share limit, when

appropriate.

12. Fix loan policies regarding loan

maximums, interest rate, maturity, and

security.

13. Establish collection policies and procedures

and fix late charges.

14. Designate depository for funds.

15. Authorize investments and borrowing.

16. Declare dividends and interest refunds.

17. Determine surety bond needs at least

annually.









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18. Authorize necessary insurance.

19. Provide necessary service facilities.

20. Act on loans to directors, credit and

supervisory committee members in

excess of $20,000.

21. Appoint a security officer and supervise

security program.

22. Establish a records preservation program.

23. Request approval of charter and non-

standard bylaw amendments.

24. Plan and hold annual meeting, report to

members, and maintain minutes.

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20

Part III

Member Services





Thrift Services Credit Services

The promotion of thrift is one Loans to members represent a

of a federal credit union’s basic federal credit union’s major in-

purposes, and can lead to im- vestment. The board of directors

provement of the economic and has the responsibility for setting

social conditions of the mem- written loan policies and is af-

bers. forded considerable flexibility

by Section 107(5) of the Federal

In encouraging the members Credit Union Act and Section

to save, a credit union may of- 701.21 of NCUA Rules and

fer various share products, Regulations on matters such as

such as: Regular shares, share loan maturity, rate of interest,

draft, share certificate, money and security.

market, and retirement plan ac-

counts. Other less commonly The provisions of the Act and

used accounts include escrow, the regulations, as well as of

nonmember, and public unit ac- consumer laws and regulations,

counts. A federal credit union should be understood and fol-

must offer its members a regular lowed by the board and credit

share account, either as a sepa- committee/loan officers in their

rate account or in combination respective policymaking and

with any of the other available credit approval roles. (Refer to

accounts. Part VII for a discussion of con-

sumer laws and regulations.)

Share accounts and share cer-

tificate accounts are the credit The granting of loans by the

union’s primary source of funds. credit committee and loan of-

A discussion of the different ficers involves the three “C’s” of

types of share accounts and credit. The three “C’s” relate to

applicable requirements can Character, Capacity, and Collat-

be found in Section 701.35 of eral and are described below:

NCUA Rules and Regulations.





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• A determination of character A federal credit union may grant

involves the development of unsecured and secured loans.

information relating to the Unsecured loans are consumer-

applicant’s credit history. This type loans, usually relatively

may be obtained from other small, traditionally offered for

financial institutions and various purposes incidental to

grantors of credit and from the members’ needs. Secured

credit bureaus. The appli- loans extend credit with a se-

cant’s record of repayment of curity interest in personal or

previous loans from the credit real property of tangible value.

union is also relevant. The security may also be an

endorsement by another person

• In determining an applicant’s who agrees to repay if the bor-

capacity to repay, the credit rower defaults. Co-maker loans,

committee or loan officer share-secured loans, and auto-

should carefully examine in- mobile loans are common types

come, debts, debt payments, of secured loans. The following

and living expenses. After represent other types of secured

debt payments and living loans:

expenses are taken into ac-

count, the applicant’s income Home Equity Loans: A home

should be adequate to retire equity loan is designed to permit

the loan in accordance with a borrower to make use of eq-

the agreed upon terms. uity in the member’s residence

to increase borrowing capacity.

• Collateral is pledged secu- It is usually secured by either a

rity to which the credit union first or second mortgage on the

can turn for collection if the residence. The maturity of a sec-

borrower defaults. The re- ond mortgage loan is limited to

payment schedule should 20 years.

provide that the loan balance

is reduced more quickly than Residential Real Estate Loans:

the collateral depreciates. A federal credit union may grant

The collateral should be a residential real estate loan for

readily convertible to cash. a one-to-four-family dwelling, in-

If the security is a co-maker, cluding an individual cooperative

that individual should have unit, that is or will be the prin-

the ability to repay in the cipal residence of the borrower.

case of default.

22

Maturity is limited to 40 years or cies required by the regulation

longer as permitted by NCUA on and address the considerations

a case-by-case basis. The loan discussed therein. Because

must be secured by a perfected of the risks and complexities

first lien on the dwelling or a involved, management should

perfected first security interest in control the program carefully.

a residential cooperative unit in The board of directors should

favor of the credit union. determine the credit union’s staff

has the necessary credentials

A sound lending policy stipu- and qualifications, as outlined

lates written appraisals will be in Section 723, to grant such

accomplished by independent, loans.

qualified appraisers be obtained

on all loans secured by real Lines of Credit and Open-End

property. Appraisal requirements Loans: A line of credit is a

are set forth in Part 722 of the fixed amount of credit agreed

NCUA Rules and Regulations. to by the borrower and the

credit union. The amount may

Member Business Loans: Sec- be drawn upon in increments

tion 723 of NCUA Rules and or as a total. Repayment terms

Regulations defines a member are contractually agreed upon

business loan as a loan which and replenished amounts can

will be used for a commercial, again be withdrawn until the end

corporate, business, or agricul- of the contractual period. The

tural purpose. However, the reg- line of credit may be secured or

ulation exempts certain business unsecured. Some credit unions

loans from the member business fashion lines of credit in combi-

loan definition. For example, a nation with home equity loans.

loan when added to other loans Access to the line of credit

to a borrower or associated may be permitted by different

member (one with a common methods, such as checks or

pecuniary interest in a business cash disbursements, automatic

or commercial endeavor) totals teller machines, loan drafts, and

less than $50,000. plastic credit cards. Because

advances are pre-approved and

A credit union wishing to grant readily accessible, line of credit

business loans must adopt and borrowing is preferred by many

implement the written loan poli- consumers.





23

An open-end loan is similar to a quality of life and has contrib-

line of credit plan. The primary uted to today’s high standard of

difference is advances are pre- living; however, if used unwisely,

approved under the latter, while it can lead to impulse buying

each open-end loan advance and overextension of credit.

must be approved by a loan of-

ficer or the credit committee. Federal credit unions provide

financial counseling services to

Guaranteed and Insured Loans: assist members in managing

Federal credit unions may be- their financial affairs effectively.

come qualified lenders under The counseling program is usu-

regulations established by vari- ally under the stewardship of

ous federal and state agencies. the credit committee or a loan

The agencies will either insure or officer. However, anyone hav-

guarantee loans made to credit ing face-to-face contact with

union members for purposes members, such as the financial

provided for in the insuring or officer or manager, may also be

guaranteeing programs. The involved. Some credit unions

following list provides the most engage professional consultants

common guarantee or insured for this purpose.

loan types: Real estate loans

insured by the Federal Hous- Other Services

ing Administration (FHA), those

guaranteed by the Veterans Federal credit unions provide

Administration (VA), student other services for their members

loans insured under the Federal incidental to the basic purposes

Insured Student Loan Program, of promoting thrift and provid-

and business loan guaranteed ing a source of credit. The ability

by the Small Business Adminis- of a credit union to offer such

tration (SBA). services depends on its exper-

tise and its resources. Included

among the services are the fol-

Financial Counseling

lowing:

In today’s complicated and com-

petitive lending market, people • Electronic financial services

are frequently tempted by eas- • Check cashing

ily obtainable credit. If credit is • Sale of credit union checks,

used wisely, it can enhance the





24

traveler’s checks, and mon- Refer to NCUA Rules and

ey orders Regulations Part 721- Incidental

• Trustee or custodial services Powers, for additional services

• Direct deposit of federal re- with respect to pre-approved

curring payments activities permitted to carry out

• Automated teller machines a credit union’s business pur-

• Sale and redemption of U. pose.

S. Savings Bonds

• Safe deposit box leasing









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26

Part IV

Operational Requirements





Service Facilities The purchase of land and

building(s) is subject to the re-

It is essential for credit unions to quirements and limitations set

establish an office readily acces- forth in Section 701.36 of NCUA

sible to its members. If space is Rules and Regulations. However,

not provided by the sponsor, the qualifying credit unions under

board of directors should obtain the Regulatory Flexibility Pro-

conveniently located space at gram (RegFlex) are exempt from

a cost within the credit union’s regulation 701.36 (a), (b) and (c)

ability to pay. The board should of this requirement. (Refer to

also provide for the necessary NCUA Rules and Regulations,

office furniture and equipment. Part 742-RegFlex)



Land and Building Branch Offices

A federal credit union has the The board of directors may

power to acquire land and a establish one or more branch

building necessary and inciden- offices in order to serve outly-

tal to its operations. Before mak- ing members more effectively.

ing a major investment of this Prior to establishing branch op-

nature, the board of directors erations, the credit union must

must develop a strategic plan ascertain the additional cost is

outlining the need for the prop- part of its strategic plan and is

erty and its effect on the credit affordable. Other operational

union’s earnings and overall fi- details include: Implementing

nancial condition. If real property strong internal controls, cen-

is purchased for future expan- tralizing recordkeeping, and

sion; it must be partially utilized establishing and maintaining a

within a reasonable period which communication system between

shall not exceed 3 years, unless the branch and main office.

authorized by NCUA.









27

Office Facilities on ments produced by the system

Military Installations are used by management to ac-

count to the members, creditors,

A federal credit union with an and NCUA.

office on a Department of De-

fense installation may have the Credit unions under $10

option of using available space Million in assets can use the

or constructing its own facilities. Accounting Manual for Federal

Authority for this activity is set Credit Unions for information,

out in Department of Defense guidelines, and recommended

Directive 1000.11, dated June procedures and practices.

11, 2000. Section 2000 of The Accounting

Manual illustrates the prescribed

Credit Union accounting principles and

Service Contracts standards which federal credit

A federal credit union may unions with under $10 Million in

enter into a contract with one assets should follow if not using

or more credit unions or other generally accepted accounting

organizations for the purpose of principles (GAAP).

jointly owning, sharing, buying,

selling, renting, or leasing fixed In accordance with the Credit

assets or engaging in credit Union Membership Access Act

union services or other activities. (CUMAA), credit unions with

For requirements concerning the $10 Million or more in assets

terms of the contract, refer to must follow generally accepted

Section 701.26 of NCUA Rules accounting principles (GAAP)

and Regulations. in the call reports they file

with NCUA. Therefore, they

Accounting System should seek the advice of an

independent accountant for

The essential purpose of an ac- guidance on full implementation.

counting system is to provide a

federal credit union’s manage- Adherence to appropriate

ment with complete and ac- accounting principles and

curate financial information it standards assures compliance

needs to make sound business with full and fair disclosure

decisions and conduct effective provisions of Section 702.402 of

operations. The financial state- NCUA Rules and Regulations.





28

Employee Taxes Surety Bond and

A federal credit union that pays

Insurance Coverage

salaries to one or more employ- A federal credit union is required

ees is subject to the provisions to obtain adequate surety bond

of law relating to withholding, coverage to protect it from direct

remitting, and paying federal, losses resulting from dishonest

state, and local taxes. For ex- and fraudulent acts of officials

ample: and employees and from losses

due to theft or robbery. Part 713

a. Federal income tax. of NCUA Rules and Regulations

b. State and local income prescribes the required minimum

taxes. bond coverage. The regulation

c. Social Security tax. also directs the board of direc-

d. Federal unemployment tors to review and determine the

compensation tax. adequacy of the credit union’s

e. State unemployment com- bond protection at least annu-

pensation tax. ally.



The Internal Revenue Service’s The board of directors also has

Circular E - Employer’s Tax the responsibility of securing

Guide, obtainable from the local other insurance to protect the

district director, will be of par- credit union’s interest including

ticular assistance. fire, comprehensive, liability, and

automobile insurance.

Worker’s Compensation

Many states require employers Records Preservation

to carry worker’s compensation Program

insurance covering employees A federal credit union is required

against loss of earnings if injured to establish a records preser-

on the job. The credit union vation program for the off-site

should contact the appropriate storage of duplicate vital records

state agency for information and which can be used for recon-

instructions. struction purposes in the event

of a catastrophe. The minimum

requirements are prescribed in

Part 749 of NCUA Rules and

Regulations.



29

Security Program and Regulations to protect the

credit union from robberies,

Each federal credit union is burglaries, larcenies, and em-

required to institute a written bezzlements and to assist in the

security program in accordance identification of persons who

with Part 748 of NCUA Rules commit such crimes.









30

Part V

Management





The board of directors has re- tions, The Federal Credit

sponsibility for directing and Union Bylaws, and other

controlling the affairs of the applicable laws and regula-

credit union and providing effec- tions

tive and efficient management 4) Based on sound and pru-

of the credit union’s operations. dent business practices

Accordingly, officials should de-

velop a strategic plan. Policy-making is a continuing

responsibility; therefore, policies

Policies and Procedures and procedures should be re-

viewed, evaluated, and adjusted

To carry out its responsibili- at least annually. Any policy

ties, the board should develop changes should be reflected in

policies and procedures; and the board minutes. The board

carefully design them to enable should maintain a “Policy Con-

the credit union to function in a trol Record Book” with a copy

way to best serve the interests of each policy and showing the

and needs of the membership. date of adoption and/or revision.

Comprehensive policies and

procedures provide direction

Program Management

and instruction for officers, em-

ployees, and committees. Once policies and procedures

are established, the board of

Written policies and procedures, directors is responsible for their

at a minimum, should be: implementation. To ensure prop-

er implementation, the board

1) Firm and clear in purpose should determine the following:

2) Consistent with the credit

union’s goals and objec- 1) The person(s) responsible

tives for carrying out the policies

3) In compliance with the and procedures is aware of

Federal Credit Union Act, their intent and the expected

NCUA Rules and Regula- results.



31

2) Each policy statement in- d) Who will monitor and report

cludes a periodic reporting the progress of the plan?

or follow-up system so that e) Is the plan affordable?

the board can evaluate its ef-

fectiveness and amend the Organizing

policy and/or procedure to

Organizing is the grouping of

achieve the intended results.

activities and individuals to ef-

3) Coordination exists among

fectively and efficiently accom-

the individuals assigned to

plish the strategic plan. After

implement the applicable

the planning process has been

policies and procedures.

established, the board of direc-

tors should mobilize, organize,

To achieve the desired results in

and direct the staff and mem-

directing the credit union’s pro-

bers who will implement the

gram, the board should practice

plans. The board should keep all

three basic principles of good

involved individuals informed of

management: Planning, Orga-

the strategic plan’s status.

nizing, and Controlling.

Controlling

Planning

The board should control the

Planning is the systematic ar-

activities and special assign-

rangement of all the factors re-

ments given, so it may readily

quired to achieve the goals and

determine if the strategic plan

objectives of the credit union’s

is being followed in accordance

strategic plan. During the plan-

with established policies and

ning phase, the board should, at

procedures. Effective and con-

a minimum, answer the following

tinual program control by the

questions:

board helps to:

a) What are the plan’s goals

• Prevent unauthorized ac-

and objectives?

tions that can hinder the

b) When will the plan begin

financial growth and opera-

and end?

tions of the credit union.

c) Who will implement the

• Keep members informed of

plan?

the credit union’s progress.









32

• Predict trends and forecast duplicating work already

results. performed.

• Make information available (3) Providing physical facilities

for evaluating staff perfor- that support the maximum

mances. level of accuracy and work

• Provide data for consider- output.

ing new programs.

• Assess the effectiveness To assure sound personnel and

of programs to attain the operational management, the

credit union’s objectives. board should establish the fol-

lowing:

Administrative Management

• Personnel policies and pro-

Administrative management pro- cedures

vides the internal controls nec- • Position descriptions for all

essary for operating the credit employees

union’s business effectively. It • Performance evaluations

also detects and prevents illegal at least annually for all em-

and unauthorized acts against ployees (including top man-

the credit union. Internal controls agement)

are checks and balances built • Training programs for offi-

into policies and procedures. cials and employees

Many internal controls are devel- • A screening process for

oped out of daily experience and new employees

sound business practices.

Establishment and maintenance

Internal controls as prescribed of internal controls in a federal

by law, regulation, or sound credit union are the responsi-

business practice include: bility of the board of directors.

(1) Dividing duties so that no However, the supervisory com-

one person has sole control mittee should review the credit

over any transaction and its union’s internal control structure

recording. at least annually. The committee

(2) Establishing the flow of should report all weaknesses

work so one employee, discovered to the board and

acting independently, au- then follow up to ensure identi-

tomatically verifies the fied weaknesses were corrected.

work of another without





33

At least five types of internal conducted completely in-

controls should be utilized by dependent of any official or

the board of directors to as- employee.

sure maximum levels of service, • Segregate the maintenance

growth, and protection for the of opening and closing ac-

members. They are organization, counts from those who han-

budgetary, accounting, methods dle the accounting records.

and procedures, and auditing.

The Bylaws and the Supervisory

Organization Committee Guide for Federal

Credit Unions contain informa-

Effective organization provides tion concerning organizational

for the logical delegation of du- structure and internal controls.

ties, responsibilities, and au-

thority, and should be adapted

Budgetary

according to the size of the staff.

The Federal Credit Union Act Planning is an essential part of

and the Bylaws establish the the budgetary process. Manage-

basic organization pattern for ment should review economic

federal credit unions. As a credit conditions and all phases of

union grows in size, further divi- the credit union’s operations

sions of duties and responsibili- and should set long range ob-

ties become necessary. jectives and short-term goals.

Prior to implementing any new

A credit union’s organizational program(s) or project(s), man-

structure and procedures should agement is encouraged to per-

provide strong internal controls, form cost/benefit analysis and

such as: include all approved projected

costs in the credit union’s

• Separate the duties of the budget.

loan approval process from

loan disbursements. The final and most important

• Assign the countersigning steps are measuring the results

of checks and notes to a against the budget, seeking ex-

person other than a dis- planations and understanding

bursing officer. the reasons for variance, and

• Ensure supervisory com- making any necessary adjust-

mittee internal audits are ments when warranted.





34

Accounting Methods and Procedures

A properly designed accounting To assure the business of the

system achieves sound internal credit union is carried out order-

controls and provides the board ly the board of directors should

with reliable financial data. The establish methods and proce-

actual results of operations dures. When establishing meth-

should reflect whether a credit ods and procedural controls, the

union is managed effectively and board should apply the following

complies with board established principles:

policies and procedures.

1) Set fixed responsibilities.

Accounting control requires fo- 2) Segregate duties so no one

cus on the daily functions and person handles a transac-

operational aspects of the credit tion from beginning to end.

union, such as: 1. The proper 3) Do not permit employees

methods for handling members’ who receive and disburse

transactions and recording them cash to post to the mem-

on the books and records. 2. bers’ ledgers. Also, do not

The receipt and disbursement of permit them to reconcile

funds. 3. The preparation of fi- the bank statement with

nancial statements which reflect the cash account.

the full and fair disclosure of the 4) Establish and use control

credit union’s financial position devices on office equip-

and the results of operation. ment.



Accounting procedures will de- Require all employees, including

pend on the credit union’s as- the financial officer or manage-

set size. Credit unions with less ment official, to take a vacation

than $10 Million in assets should at least once each year and for

follow the Accounting Manual, an extended period of time not

Section 2. Federal Credit Unions less than one full week.

with more than $10 Million in

assets must follow GAAP when A small credit union with only

filing their call reports. one or two experienced employ-

ees may face difficulty in fol-

lowing principles (2) and (3). To







35

satisfy the checks and controls count verification procedures.

over daily work, the board must The board of directors or the

become involved. However, if supervisory committee may not

this arrangement is not feasible, reduce the minimum standards

the internal auditing function of set forth in the guide. However,

the supervisory committee be- they can expand the scope, the

comes especially important. number of audits, and the sup-

The supervisory committee plemental procedures.

should consider expanding

the scope of its internal audit The supervisory committee must

program to quarterly on-site submit all audit and account

reviews. An alert credit union verification reports to the board.

management team continually These reports assist the board in

studies its methods and proce- evaluating whether the officials

dures in an effort to make them and the employees are function-

more efficient, economical, and ing in the manner prescribed by

effective in helping to reach its the organizational, accounting,

strategic goals. budgetary, and method and pro-

cedure controls.

Internal Auditing

By properly carrying out its re-

Internal auditing is the fifth type sponsibilities, the supervisory

of internal control. As required committee will help deter fraud,

by law, the supervisory commit- error, careless action, and willful

tee functions as the internal au- violation of law, regulations, and

diting body of the credit union. policy. Although all fraud and er-

ror cannot be prevented, early

Each year the supervisory com- detection can minimize reputa-

mittee must perform or cause to tion risk among the membership

perform a comprehensive annual and the general public. Also, the

audit. In addition, the committee financial officer or management

is responsible for the members’ official and the employees will

account verification which must normally make a greater effort to

be performed not less frequently keep the records in proper order

than once every 2 years. The if they know the super-

Supervisory Committee Guide visory committee will quickly de-

for Federal Credit Unions tect careless action.

discusses the auditing and ac-





36

Financial Management short-term loans comprise most

of the credit union’s assets, the

Effective financial management officials might offer only regular

is the basis for meeting sound share accounts and short-term

financial objectives. In addition, share certificates.

effective management also bal-

ances the extension of credit The board must establish real-

union services with the achieve- istic dividend policies and rates.

ment of safe and sound opera- When setting dividend rates, the

tions by properly utilizing credit board should carefully consider

union resources. The members the credit union’s funding needs

receive a fair return in the form and the current market condi-

of well-designed services and tions. In the interest of sound

reasonable dividends. financial management, the board

should avoid paying above mar-

Financial management em- ket dividend rates just to achieve

braces a number of credit union rapid share growth. Rapid share

programs. The following reflects growth results in excess liquidity

significant credit union pro- which in turn can adversely af-

grams: fect earnings if the excess funds

cannot be loaned out in a safe

Share Program: Share and and sound manner.

share certificate accounts are

the primary source of credit At a minimum, the board’s writ-

union funds. Meeting the mem- ten share policies should estab-

bers’ thrift needs is a major lish the dividend periods, the

consideration when establish- dates the share deposits begin

ing share policies. However, the earning dividends, applicable

officials must also weigh the withdrawal penalties, and estab-

cost of funds and match shares lish the dividend computation

with assets of similar maturi- methods.

ties. For example, if long-term

loans comprise most of a credit Lending Program: A sound

union’s assets, share policies lending program is essential to

should strive to offer share ac- the financial future of a credit

counts and share certificate union. The officials must strike

accounts with extended matu- a balance between meeting the

rity and restricted withdrawal members’ needs and meeting

features. On the other hand, if the needs of the credit union’s

37

financial objectives and resourc- • Proper maintenance of col-

es. The lending program should lection records.

consider the credit union’s share

structure and funds flow, its While loan collections may be

short- and long-range goals and delegated to a committee or

objectives, and local economic staff member(s), the board has

conditions. At a minimum, lend- the responsibility of exercising

ing policies should clearly reflect close control over the program.

maximum limits on loans; limita-

tions on loan maturities and re- Investment Program: A credit

payment terms; and acceptable union may at times have funds

collateral. in excess of its needs. The

Federal Credit Union Act and

Loan Collections: Effective NCUA Rules and Regula-

loan collection contributes to a tions, Part 703 – Investment

credit union’s ability to sustain and Deposit Activities, provide

loan services and to maintain a guidance concerning investing

sound financial position; there- activities. The board of directors

fore, strong collection policies is responsible to implement and

and procedures remain a vital monitor a sound investment pro-

part of the lending program. The gram for their credit union. The

board of directors should estab- scope of the program depends

lish collection policies designed largely on the credit union’s

to keep loan delinquency to a size, extent of its surplus funds,

minimum. Policies may differ and management’s expertise. A

from one credit union to another; credit union’s Investment Poli-

however, a credit union’s col- cies and Procedures should ad-

lection policies and procedures dress the following:

should at a minimum include the

following: 1) Legality: The board of direc-

tors is responsible to ensure

• Follow-up actions for all all investments comply with

delinquent loans. Sections 107(7), (8), and (15)

• Accurate delinquent loan of the Act and NCUA Rules

reporting to the board. and Regulations, Part 703.

• Utilization of outside collec-

tion sources when internal 2) Safety, Liquidity, and Yield:

efforts fail to produce re- Sound investment policies

sults. assume a conservative ap-

38

proach in balancing safety, board remains solely respon-

liquidity, and yield. In this sible for controlling the over-

context, liquidity means the all investment program.

ability to respond quickly to

anticipated and unanticipat- 5) FAS 115 - Classification of

ed shifts in the credit union’s Securities: This accounting

flow of funds. Very often in- standard requires a federal

vestments with greater risks credit union to classify its

command greater yields. securities holdings (debt and

Safety and yield should be equity securities) in one of

carefully weighed prior to un- three categories after assess-

dertaking any investment that ing its intent and ability with

could result in a loss to the regard to those holdings. The

credit union. classification categories are:

(1) Held-to-Maturity (2) Avail-

3) Diversification: Credit unions able-for-Sale (3) Trading. The

can employ a diversification related fair value of those

policy to minimize potential securities classified as either

investment losses. Diversi- Available-for-Sale or Trading

fication of investments can must be assessed at least at

minimize potential invest- the end of each dividend pe-

ment losses. Such a policy is riod (e.g., monthly, quarterly,

particularly useful for credit semiannually, or annually).

unions that invest in market- Sales and transfers out of the

able securities. The board’s Held-to-Maturity category

policies should clearly ad- should be rare and any such

dress diversification and spe- transaction may raise ques-

cifically note any limitations tions about the appropriate-

it may place on the types of ness of the designation as

investments, quantities, and Held-to-Maturity.

maturities to be purchased.

If the board employs a broker-

4) Accountability: While the age firm or other investment

board may delegate specific professional, the board must

investment authority to an satisfy itself as to the reliability

executive committee, an and financial soundness of the

investment committee, or firm and the individual. Also,

a management official; the the credit union must retain dis-





39

cretionary control over the pur- investments under the adviser’s

chase and sale of investments. control and their performance.

However, the regulation permits

delegation of discretionary con- NCUA Interpretive Ruling and

trol provided the person is an in- Policy Statement (IRPS) No. 98-

vestment adviser registered with 2, dated April 1998, provides

the Securities and Exchange guidance for managing invest-

Commission (SEC), under the ment risks including market,

Investment Advisers Act of credit, liquidity, operational, and

1940. At the time of delegation, legal risks. It also provides guid-

the amount delegated can not ance on oversight of investment

exceed, in the aggregate, 100 activities and describes, in gen-

percent of its net worth. Annu- eral terms, the risk management

ally, the board must review the process.

delegation authority.

Additional information about

To determine whether to trans- federal credit union investments

act business with an investment and related accounting proce-

adviser the board must analyze dures may be found in NCUA

his or her background and infor- Letters to Credit Unions. Current

mation available from state or investment information may also

federal securities regulators, in- be obtained by using NCUA’s

cluding any enforcement actions Investment Hotline toll free at

taken against the adviser or the (800) 755-5999.

associated personnel.

Borrowing: Borrowing is a

The board may not compensate means by which a credit union

an investment adviser who has obtains additional funds on a

discretionary control over the temporary basis. If properly

purchase and sale of invest- planned, borrowing can stimu-

ments on a per transaction ba- late growth, help meet financial

sis or based on capital gains, objectives through a period of

capital appreciation, net income, tight money, and satisfy sea-

performance relative to an index, sonal or other temporary needs.

or any other incentive basis. Borrowing should not be a sub-

The board must obtain a report stitute for an effective thrift pro-

from its investment adviser at motion program or a stop-gap

least monthly. The report should attempt to replenish funds.

provide details concerning all

40

The board may delegate bor- lations, Part 742; for a complete

rowing authority to the execu- list of exemptions. RegFlex eligi-

tive committee, financial officer, bility is earned by credit unions

or general manager. However, who meet the following param-

the board remains ultimately eters:

responsible for all borrowing

by the credit union. The board 1. CAMEL Composite of 1 or 2,

should establish borrowing poli- for the past two consecu-

cies to include the following: tive exams;

2. and a net worth ratio of 9

1) The conditions under which percent or greater (or if a

borrowing may occur credit union is subject to

2) The amount that may be a risk-based net worth re-

borrowed under each con- quirement, net worth must

dition be 200 basis points over its

3) The interest which may risked based net worth level

be paid on the borrowed or nine percent, whichever

funds. is higher)

4) The applicable repayment

terms. The RegFlex exemption is usu-

ally automatic for those credit

The board should coordinate unions meeting both criteria.

borrowing and repayment plans However, if a credit union meets

with all other aspects of their only one criterion; management

financial management. For legal can apply to their applicable Re-

limitations on borrowing activity gional Director for the RegFlex

by a federal credit union, refer designation.

to Section 107(9) of the Act and

Section 701.38 of NCUA Rules A credit union can lose their

and Regulations. RegFlex eligibility if, at any time,

the credit union no longer meets

Regulatory Flexibility Program the criteria for the RegFlex des-

(RegFlex) ignation. NCUA will notify credit

unions if their eligibility has

RegFlex allows eligible credit

been rescinded. In addition, the

unions to be exempted from all

NCUA Regional Director may

or part of specific regulations.

revoke a credit union’s RegFlex

Refer to NCUA Rules and Regu-

designation for substantive and





41

documented safety and sound- run adjustments of assets and

ness issues. liabilities to compensate for vari-

ations in the flow of funds. In the

Prompt Corrective long run, a credit union’s suc-

Action / Net Worth cess depends on reconciling the

different elements involved in

The NCUA Board prescribes to obtaining and using funds. Since

a system of prompt corrective a credit union must have suf-

action (PCA) to resolve the prob- ficient liquid assets to meet loan

lems of insured credit unions. demand and share withdrawals,

Complex credit unions are also funds management policies and

subject to risk-based net worth procedures are vital irrespective

requirements. NCUA Rules and of the credit union’s size.

Regulations, Part 702, defines

net worth categories for pur- The basis for applying funds

poses of PCA. The net worth management strategy is a thor-

categories include: Well Capi- ough knowledge of the makeup

talized, Adequately Capitalized, of a credit union’s field of mem-

Undercapitalized, Significantly bership; the nature of its assets

Undercapitalized, and Critically and liabilities; and the economic

Undercapitalized. The credit and competitive environment in

union’s net worth should be which it operates. Funds man-

sufficient to meet competitive agement techniques should be

pressure and adverse economic applied with a full understand-

conditions as they arise, and ing of the characteristics of

should enhance the safety of the the individual credit union. The

members’ shares and keep pace following are considered es-

with asset growth. sential elements of an effective

funds management program: (1)

Funds Management Regular evaluation of the credit

Funds management, also known union’s asset and liability struc-

as Asset/Liability Management, ture (2) Regular assessment of

is the continuing arrangement asset yields and liability costs (3)

and rearrangement of both sides Adequate planning for current

of a credit union’s balance sheet and future liquidity needs (4) An

to obtain reasonable profits and on-going determination that pol-

provide for adequate liquidity icies are sufficient to efficiently

and safety. It focuses on short- structure assets and liabilities





42

in order to meet changing eco- Financial Performance

nomic conditions. Report (FPR)



A necessary ingredient for sound The FPR year-to-date data is

financial management is a work- derived from the credit union’s

able management information quarterly Call Report (NCUA

system. Reports containing ba- 5300). In addition to the year-to-

sic financial information should date information, the FPR also

be prepared and reviewed on presents the previous 5 years’ fi-

a regular basis. Report formats nancial performance in the form

and content will vary from one of ratios, statistics, and dollar

credit union to another, depend- amounts. FPRs also portray the

ing on the characteristics of credit union in relation to a credit

each and its funds management union peer group of similar as-

methods. set size. This is accomplished

through utilization of peer aver-

The reports should, however, ages and percentile rankings.

contain at least the following in-

formation: NCUA’s Financial Performance

Report (FPR) provides a long-

1) Budgetary projections of in- term picture of the credit union’s

come, expenses, and profit- financial trends and operating

ability. results. The board of direc-

2) Asset yields and liability tors should use the FPR data

costs. to identify key trends, analyze

3) Liquidity needs and sources past performance, and set future

of funds available to meet goals. A more detailed discus-

those needs, including the sion of the FPR can be found

remaining maturities of all in the User’s Guide for NCUA’s

assets and liability accounts. Financial Performance Report

4) Economic and competi- (NCUA 8008).

tive conditions in the credit

union’s market area.









43

This page

intentionally

left blank







44

Part VI

NCUA Funds and Programs





National Credit Union Share cluding additional coverage of

Insurance Fund up to $250,000 for certain retire-

ment accounts. NCUA Publica-

The National Credit Union Share tion 8046, Your Insured Funds,

Insurance Fund (NCUSIF) was explains the various types of

established by Congress in Oc- member accounts and the insur-

tober 1970 for the purpose of in- ance coverage afforded on each

suring share deposits in member account, and answers questions

credit unions. Unlike the Federal most frequently asked about the

Deposit Insurance Corpora- Fund.

tion (FDIC), the NCUSIF was

launched without the benefit of Credit unions which are insured

appropriated or taxpayer mon- by the NCUSIF are required to

ies. The Fund, an arm of NCUA, display the official NCUA insur-

is managed under the direc- ance sign at the teller windows.

tion of the three-person NCUA All federal credit unions must

Board, and is audited annually be insured by the NCUSIF. No

by an independent accounting federally insured credit union

firm. may terminate its insurance

without the written approval of

Share deposits in federally the NCUA Board and an affir-

insured credit unions are in- mative vote by a majority of the

sured up to the standard maxi- members. Sections 205 and 206

mum share insurance amount of the Federal Credit Union Act

(SMSIA), which is presently and Part 708b of NCUA Rules

$100,000, an amount equal to and Regulations spell out the

the insurance protection offered exact steps to be taken.

by the FDIC. Generally, if a credit

union member has more than The NCUSIF is funded through

one account in the same insured its member credit unions. Fed-

credit union, those accounts are erally insured credit unions are

added together and insured up required to maintain in the Fund

to the SMSIA. However, there a deposit equal to 1% of their

are exceptions to this rule in-

45

insured shares. This deposit is Central Liquidity Facility

carried as an asset on the credit

union’s financial statements and The Central Liquidity Facility

may earn a dividend if the Fund (CLF) was created by Congress

exceeds its normal operating in 1979 because credit unions

level ratio of 1.30% during the needed their own source of

insurance year. In addition to funds to meet their liquidity

the deposit, an annual insurance needs in the same way that

premium equal to 1/12th of 1% the Federal Reserve System

may be assessed. Monies col- “discount window” provided

lected from credit unions are access to loans for banks. Bar-

primarily invested in U S. Trea- riers to last-resort liquidity have

sury securities; and the income changed favorably over time

earned is used to offset all ad- (e.g., credit unions who qualify

ministrative and insurance costs may now borrow from the Fed-

of the Fund. Any remaining eral Reserve discount window)

income after payment of these but the CLF continues to be an

costs is allocated to Fund equity important major back-up source

to maintain the operating level of liquidity for both Federal and

ratio at or close to the 1.30% state-chartered credit unions.

range.

The CLF is a “mixed owner-

The Federal Credit Union Act ship government corporation”

also authorizes the NCUSIF to within the National Credit Union

grant assistance to problem Administration. It is an instru-

credit unions in order to avoid mentality of the Federal Gov-

involuntary liquidation. Under ernment owned by its member

Section 208 of the Act, the credit unions and managed

NCUSIF may make loans to, by the NCUA Board. The pur-

purchase assets of, or establish pose of the CLF is to improve

accounts in such insured credit the general financial stability

unions. of credit unions by providing

loans to meet unexpected share

For further information about the outflows, seasonal needs, and

NCUSIF, refer to Title II of the needs arising from emergencies

Act, Parts 740, 741, and 745 of such as strikes, plant closings,

NCUA Rules and Regulations. and local or national economic

difficulties, when funds may not

be available from other sources.



46

The CLF is designed to provide es to its members. Credit unions

funds for liquidity purposes only, can apply by submitting a com-

not to expand lending. pleted application to NCUA.



Membership is voluntary and The Community Development

open to all credit unions that Revolving Loan Program con-

purchase a prescribed amount tains a matching component.

of CLF stock. Additional infor- Generally, the credit union must

mation about the CLF may be increase its share deposits in an

found in Title III of the Federal amount equal to the loan. This

Credit Union Act and Part 725 requirement occurs within 1 year

of NCUA Rules and Regula- of the loan disbursement and

tions. A credit union may also the credit union must maintain

call the CLF at (703) 518-6620 the share deposit increase for

with questions regarding loans the duration of the loan. Refer to

and membership. NCUA Rules and Regulations,

Part 705, for additional guid-

Community Development ance.

Revolving Loan Program for

Credit Unions Ombudsman Program

The Community Develop- The duties and responsibili-

ment Revolving Loan Program ties of the Ombudsman (NCUA

for Credit Unions (Part 705 of employee appointed by the

NCUA Rules and Regulations) Chairman and not in a program

enables both federal and state- position) are to receive, review,

chartered credit unions meeting and investigate external com-

certain qualifications to apply plaints of a regulatory nature

for and receive loans of up to unresolved at the operational

$300,000, in the aggregate, at level. Solutions are recom-

a low fixed interest rate. The mended since the Ombudsman

amount of the loan is based does not have independent de-

on funds availability, the credit cision-making authority. Corre-

worthiness of the participating spondence should be addressed

credit union, financial need, and to the Ombudsman, National

a demonstrated capability of a Credit Union Administration,

participating credit union to pro- 1775 Duke Street, Alexandria,

vide financial and related servic- VA 22314-3428.





47

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left blank







48

Part VII

Other Laws Affecting Federal Credit Unions





This part of the Handbook briefly This Act requires all credit

discusses the laws and regula- unions to clearly and conspicu-

tions, other than the Federal ously disclose fees, dividend

Credit Union Act and NCUA (or interest, if applicable) rates

Rules and Regulations, which and other terms concerning ac-

contain requirements which may counts to members or potential

affect the day-to-day operations members before they open ac-

of federal credit unions. The of- counts. The law also requires

ficials of a federal credit union periodic statements be provided

have the responsibility of being to members and include infor-

aware of the provisions of these mation about fees imposed,

laws and regulations and ensur- dividends (or interest, where

ing the credit union complies. applicable) earned, and the an-

nual percentage yield earned

Consumer Laws and on those accounts. Limitations

Regulations on the methods used by credit

unions to determine the bal-

Truth in Savings Act ance on which dividends are

The purpose of the Truth in Sav- calculated, and rules dealing

ings Act (TISA), 12 U.S.C. 4301 with subsequent disclosure,

et seq., is to assist consumers in electronic communication, and

comparing deposit accounts of- advertisements for accounts are

fered by depository institutions, also included in the law.

principally through the disclo-

sure of fees, the annual percent- Truth in Lending Act,

age yield (APY), the interest rate, Regulation Z

and other account terms. The The purpose of this regulation

act and regulation require de- is to promote the informed use

pository institutions to provide a of consumer credit by requiring

consumer with disclosures upon disclosures about its terms and

request and before an account conditions. The regulation re-

is opened. quires very specific information



49

to be disclosed for both open- Electronic Fund Transfer Act,

end and closed-end loan plans. Regulation E

Credit unions that do not comply

may be subject to civil liability This regulation affords protec-

as provided for by Section 130 tion to members whose share

of the Truth in Lending Act. This accounts may be accessed

regulation is applicable only to through the use of an electronic

extensions of consumer credit, terminal, telephone, or computer

i.e., credit offered primarily for or magnetic tape, without the

personal, family, or household use of any paper instrument

purposes. to initiate the transaction. The

regulation requires disclosure of

Equal Credit Opportunity fees, terms and conditions appli-

cable to such activity as well as

Act, Regulation B

documentation of such transfers

Under this regulation, no creditor and procedures for resolving er-

may discriminate on a prohibited rors within a specific time frame.

basis in any aspect of a credit

transaction. The prohibited Preservation of Consumers’

bases are: race, color, religion, Claims and Defenses Rule

national origin, sex, marital sta-

tus, age, receipt of income from This Federal Trade Commis-

any public assistance program, sion rule, better known as the

or good faith exercise of rights “Holder in Due Course” rule, is

under the Consumer Credit intended to prevent sellers and

Protection Act. The regulation creditors from unjustly separat-

addresses what information may ing the consumer’s responsibility

be requested on loan applica- to pay for goods and services

tions, how it may be consid- from the seller’s obligation to

ered, and the content of notices deliver marketable goods or oth-

required to be given following erwise perform its obligations.

the action taken on loan ap- It applies when the credit union

plications. As with the Truth in is both the seller and the lender,

Lending Act, the Equal Credit as in the case of repossessed

Opportunity Act contains a civil property sold to a member and

liability provision to protect the financed by the credit union, as

consumer against noncompli- well as when the credit union

ance by the credit union. has a formal or informal busi-





50

ness arrangement with the seller Home Ownership and Equity

to offer the financing on its mer- Protection Act (HOEPA)

chandise.

This Act places restrictions on

Fair Credit Reporting Act and requires disclosures regard-

ing certain high-cost mortgage

Credit unions are subject to the loans. It broadens the scope

requirements of this Act when of mortgage loans subject to

information obtained from a HOEPA by adjusting the price

consumer reporting agency triggers used to determine cov-

contributes to the denial of the erage. It also restricts certain

applicant’s loan request. The acts and practices in connection

name and address of the report- with HOEPA loans over a short

ing agency must be disclosed. period of time when the transac-

When information obtained from tions are not in the borrower’s

a source other than a consumer interest. Finally, it strengthens

reporting agency is used, the HOEPA’s prohibition against ex-

applicant must be told of the tending credit without regard to

right to request, in writing, the consumer’s repayment ability.

nature of the information.

Homeowners Protection

Real Estate Settlement Act of 1998

Procedures Act (RESPA),

This Homeowners Protection

Regulation X

Act is also known as the “PMI

To protect consumers, this regu- Cancellation Act.” The Act ad-

lation requires home buyers be dresses the difficulties hom-

provided documentation relat- eowners have experienced in

ing to financing and settlement canceling private mortgage in-

costs of residential real estate surance (PMI). It also establishes

transactions within 3 business provisions for the cancellation

days of submitting a mortgage and termination of PMI and re-

loan application and at the time quires certain disclosure and

of settlement. notification requirements, plus

requires the return of unearned

premiums.









51

Fair Debt Collection Right to Financial

Practices Act Privacy Act

A credit union is subject to this The Right to Financial Privacy

Act only if it regularly collects Act protects the personal fi-

consumer debts on behalf of nancial privacy of federal credit

another party, with some ex- union members by restricting

ceptions. Various collection access to a credit union’s fi-

practices are prohibited such nancial records concerning its

as harassment, intimidation, members.

threats, and humiliation. If a

credit union merely collects its The Act sets forth the condi-

own debts, compliance with this tions a credit union must meet

Act is not required; however, before granting access to or

we recommend the credit union before providing copies of fi-

avoid those practices prohibited nancial records of a member to

under the Fair Debt Collection a government authority. In most

Practices Act. cases, the credit union must

obtain authorization from the

Home Mortgage Disclosure member or secure from the gov-

Act, Regulation C ernment authority a subpoena

or summons, a search warrant,

This Act requires credit unions a judicial subpoena, or a formal

to disclose publicly where their written request.

mortgage loans have been

granted. The purpose is to pre- Under the Act, a credit union

vent lenders from ruling out or may disclose, to a government

“redlining” certain residential authority, the information it has

areas of a city as ineligible for relevant to a possible violation of

mortgage credit. The Act does any statute or regulation. Credit

not prohibit the creditor from de- unions may give only identify-

termining the value of the collat- ing information and the nature

eral in relationship to the amount of any suspected illegal activ-

of credit requested. ity. The Act provides the credit

union or any official, employee,

or agent is not liable to the

member for making such disclo-

sure or failing to notify the mem-

ber thereof.



52

Soldiers’ and Sailors’ Fair Housing Act

Civil Relief Act The Fair Housing Act prohibits

Since persons entering military a credit union from denying a

service sometimes do so at mortgage or home improvement

greatly reduced income, they loan to any member for reasons

may be unable to meet the of race, color, national origin,

terms of obligations they made religion, sex, handicap, or famil-

while in civilian life. The Sol- ial status (having children under

diers’ and Sailors’ Civil Relief the age of 18). Requirements

Act provides protection during and guidelines are set forth in

the period of reduced income. Part 701.31 of NCUA Rules and

The Act does not cancel obliga- Regulations.

tions but merely gives to those

in military service who are finan- Privacy Act

cially unable to pay, protection

The Privacy Act protects indi-

against legal action to repossess

vidual privacy. The Act applies

collateral or force payment of an

to the Federal Government’s

obligation.

collection, maintenance, and

use of information about indi-

The Act applies only to loans

viduals.

made prior to entering the ser-

vice. It does not prevent a credit

The Privacy Act may affect

union from accepting loan pay-

those federal credit unions

ments or from continuing loan

whose sponsors are federal

collection efforts short of legal

agencies or instrumentalities,

steps.

but only in a limited way. While a

federal agency (with the excep-

The Act should be consulted for

tion of agencies like the CIA)

its application to the operation

may routinely release the name,

of a credit union. If any legal ac-

position, title, base pay, GS

tion against a borrower in mili-

level, and duty station of an em-

tary service is felt justified and

ployee, the federal credit union

necessary, the advice of local

may need to obtain its member’s

counsel should be obtained.

consent if it wants to secure









53

additional information from the written policies and procedures

agency, for example, in con- designed to detect and prevent

nection with determining a loan money laundering activities.

applicant’s creditworthiness. Failure to comply with the re-

quirements of BSA and its

Other Laws and Regulations implementing regulations can

result in both civil and criminal

Bank Secrecy Act (BSA) penalties.

The Bank Secrecy Act in-

cludes several related Acts In its Letter to Credit Unions

enacted by Congress, such 03-CU-16, dated October 2003,

as: the Anti-Drug Abuse Act, NCUA provides guidelines to

the Money Laundering and assist credit unions in complying

Control Act, the Currency and with the BSA regulation. The let-

Foreign Transactions Act, and ter also summarizes the record-

the USA Patriot Act. The pri- keeping and reporting

mary objective of the BSA and requirements of the Treasury

its implementing regulation (31 regulation.

CFR 103) is to provide a paper

trail of financial transactions to Office of Foreign Asset

help detect and prevent money Control Act (OFAC)

laundering connected with drug

The OFAC Act requires credit

trafficking, terrorism, and other

unions to maintain a current list

criminal activities.

of prohibited individuals and

countries. Also, the Act requires

Credit unions must establish and

credit unions to compare their

maintain a written compliance

members, new members, and

program for fulfilling the require-

account transactions against

ments of the BSA that includes

the list, blocking all accounts

at least: (1) a system of internal

and transactions with prohibited

controls; (2) designation of an

entities ongoing. To comply with

individual to coordinate/monitor

OFAC, credit unions must:

BSA compliance; (3) indepen-

dent testing; and (4) training of

• Understand the various

appropriate personnel. In addi-

laws, regulations and pen-

tion, an effective BSA compli-

alties for non-compliance

ance program should include

with OFAC.





54

• Establish effective OFAC the identity of any customer who

policies and procedures. opens an account. The written

• Maintain a current list of customer identification program

prohibited countries, orga- (CIP) must be a part of the credit

nizations, and individuals. union’s anti-money launder-

• Ensure the designated ing program, approved by the

person compares and board and should be tailored to

maintains the current list of the credit union’s size, location,

prohibited countries, organi- and type of business. Custom-

zations, and individuals with ers must be provided notice that

members’ transactions. the credit union is verifying their

identity and why. The CIP must,

USA Patriot Act at a minimum, provide for:

The USA Patriot Act permits • Obtainment of certain basic

credit unions, upon provid- identifying data;

ing notice to the United States • Verification of the identity of

Department of the Treasury, to each customer to the extent

share information with one an- reasonable and practicable;

other and other financial insti- • Maintenance of records

tutions in order to identify and of the information used to

report to the federal government verify the identity; and

activities which may involve • Determination of whether

money laundering or terrorist ac- the customer appears on

tivity. Credit unions must ensure any lists of suspected terror-

they maintain adequate policies ists provided by the Federal

and procedures to protect the government.

security and confidentiality of

such information. Also, credit The CIP must also address:

unions may not use the shared

information for any purpose oth- • How to handle discrepan-

er than what was authorized. cies in identifying informa-

tion received;

Section 326 of the USA Patriot

• Terms under which a cus-

Act sets forth minimum stan-

tomer can conduct transac-

dards for financial institutions,

tions while the identity is

including credit unions, for the

being verified; and

identification and verification of





55

• What to do if the credit passport number, etc.) must be

union cannot form a rea- maintained for five years after

sonable belief that the true the record was made.

identity of the customer is

known. Gramm-Leach-Bliley Act



At a minimum the credit union This Act requires credit unions

must obtain the following infor- to provide privacy notices to

mation prior to opening or add- their members either at the initial

ing a signatory to an account: time of establishing a customer

relationship or on an annual

• Name; basis for continuing custom-

• Date of birth (for individuals); ers. The privacy notice must be

• Residential or business clear, conspicuous, and provide

street address, APO or FPO an accurate statement of the

or address of next of kin, credit union’s privacy practices.

(individual) or principal place Furthermore, the notice should

of business, local office or explicitly state the information

other physical location (cor- a credit union collects about its

poration, partnership, etc.); customers, with whom it shares

and the information, and how it pro-

• Taxpayer identification num- tects or safeguards the infor-

ber (U.S. person) or pass- mation. The Act also provides

port number and country of consumers an opportunity to

issuance, alien identification “opt-out” of sharing their non-

card number, or other gov- public personal information with

ernment issued document nonaffiliated third parties. (Sub-

bearing a photo or similar ject to certain limited excep-

safeguard (non-U.S. per- tions) Refer to NCUA Rules and

son). Regulations, Part 716 for more

information.

The credit union must retain re-

cords of the identifying informa- Flood Disaster Protection

tion (name, date of birth, etc.) Act (FDPA)

for five years after the account The Flood Disaster Protection

is closed. A description of the Act of 1973 (FDPA) and Part 760

information used to verify the of NCUA Rules and Regulations

identity (driver’s license number, prohibits federally insured credit



56

unions from making, increasing, intent of the Act, to proscribe

extending, or renewing any loan corrupt activity in credit unions,

secured by improved real estate the guidelines prohibit any em-

or a manufactured home if: ployee, officer, director, commit-

tee member, agent, or attorney

a) The property securing from:

the loan is located in an

area having special flood, a) Soliciting for themselves

mudslide or flood-erosion or a third party (other than

areas, as identified by the the credit union) anything

Federal Emergency Man- of value from anyone in

agement Agency (FEMA) return for any business,

b) The community is par- service, or confidential

ticipating in the National information of the credit

Flood Insurance Program union.

(NFIP) b) Accepting anything of val-

c) Insurance is not purchased ue (other than bona fide

for the property securing salaries and fees) from

the loan. anyone in connection with

the business of the credit

The principal objectives of the union either before or

FDPA are to ensure that flood after a transaction is dis-

insurance is available at reason- cussed or consummated.

able cost, to reduce or avoid fu-

ture flood losses, and provide a The guidelines encourage all

preventive alternative to massive federally insured credit unions to

doses of federal disaster relief adopt written codes of conduct

funds normally made available or policies explaining the prohi-

to flood stricken areas. bitions in the law. These codes

or policies can desirably be in-

Bank Bribery cluded with those dealing with

Amendments Act other areas of conduct such as

conflicts of interest, discussed in

As required by the Bank Bribery

Part VIII. Credit unions are urged

Amendments Act, NCUA has

to review NCUA Interpretative

established guidelines to assist

Ruling and Policy Statement No.

the officials of federally insured

87-1, dated October 15, 1987,

credit unions in complying with

for a full discussion of the prohi-

that law. Consistent with the

bitions and guidelines.

57

Government Securities Federal Election

Act of 1986 Campaign Act



The Government Securities Act The Federal Election Campaign

and its implementing regulations Act prohibits federally chartered

pertain to the following activities corporations (including federal

and duties of brokers and deal- credit unions) from contributing

ers in government securities: fi- to political campaigns. However,

nancial responsibility, protection the Federal Election Commis-

of investor securities and funds, sion Rules and Regulations per-

recordkeeping, reporting, and mit a trade association to solicit

audit. The regulations also apply from a credit union’s members if:

to the custody of government

securities held by depository a) The credit union has sepa-

institutions. The Act does not rately and specifically ap-

significantly affect credit unions. proved the solicitation; and

However, credit unions who: (1) b) The credit union has not

engage in reverse repurchase approved a solicitation by

transactions in which they retain any other trade association

custody of securities subject to during the calendar year.

the repurchase transaction, or

(2) offer members self-directed If these conditions are met, a

IRA plans in which the credit federal credit union may dis-

union will hold any securities seminate to its members po-

purchased by the member, litical information prepared by

should consult the applicable the trade association. Federal

provisions of the implementing credit unions may not make

regulations. share withdrawals for members

for payments to a third party as

Abandoned Property Laws political contributions. Doing so

would constitute a donation of

Many states have laws requiring time and resources by the credit

the transfer of inactive deposit union and is prohibited.

accounts to the respective state.

The credit union should consult Management Official Interlocks

the appropriate state agency

regarding requirements and pro- Under the Depository Institu-

cedures. tion Management Interlocks

Act, a management official of





58

a depository institution or de- and return policies on check-

pository holding company is ing, share draft, and other

prohibited from also serving as a transaction accounts. It also

management official of another establishes the date on which

depository institution or deposi- dividend credit must be given

tory holding company if the two on a deposit item. Credit unions

organizations are not affiliated offering transaction accounts to

and are very large or located in members must fix and disclose

the same local area. Part 711 of their funds availability policies.

NCUA Rules and Regulations The regulation provides specific

discusses the prohibitions as timetables within which funds

they apply to federally insured deposited in the credit union

credit unions. must be made available. All

checks and share drafts must

Expedited Funds Availability also adhere to a closely de-

Act, Regulation CC fined endorsement method. The

placement and content of the

Regulation CC regulates funds endorsement are defined spe-

availability policies, endorse- cifically in the regulation.

ment standards, and collection









59

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left blank





60

Part VIII

Conflict of Interest





Federal credit union officials and way act on any matter affecting

employees have an obligation to that person’s monetary interest

the credit union which extends or that of an entity in which she

beyond assuring that their ac- or he is interested.

tions do not violate any statute

or regulation. Credit union offi- NCUA Rules and Regulations

cials and employees have a fidu- prescribe the following prohibi-

ciary responsibility to the credit tions with respect to conflicts of

union members to act in good interest.

faith in the performance of their

duties. Section 701.21(c)(8)–

Organization and Operations of

In accepting a position as an Federal Credit Unions

official or employee of a federal

credit union, an individual should A loan may not be made or

recognize the interests of the line of credit extended if, either

credit union and its members directly or indirectly, any com-

have priority over any personal mission, fee, or other compen-

interest that individual may have. sation is to be received by an

The position should not be used official, employee, or any im-

to gain personal profit or ad- mediate family member of such

vantage. Acceptance of a posi- individual, in connection with

tion involves the assumption of underwriting, insuring, servicing,

fiduciary responsibilities, some or collecting the loan or line of

of which are set forth in the Fed- credit.

eral Credit Union Act, NCUA

Rules and Regulations, Federal Section 701.21(d)(5)–

Credit Union Bylaws, and state

Organization and Operations

laws.

of Federal Credit Unions

Article XVI, Section 4 of the By- An official, immediate family

laws provides that no official, member, or other person having

employee, or agent may in any a common ownership, invest-



61

ment, or other pecuniary interest

in a business enterprise with Section 703.120 – Investment

an official or immediate family and Deposit Activities

member may not obtain a loan

or line of credit with preferential A federal credit union’s officials,

rates, terms, or conditions, or senior management employees,

act as guarantor or endorser or their immediate family mem-

thereon. bers may not receive anything

of value in connection with the

Section 701.36(e)– credit union’s investment trans-

actions.

Organization and Operations

of Federal Credit Unions

Section 712.8(a)– Credit

A federal credit union may not Union Service Organizations

buy or lease premises (with the (CUSOs)

exception of an informal lease

maturing in less than a year) When a federal credit union has

from any of the following with- invested in or made loans to a

out the prior written approval of credit union service organiza-

NCUA: tion, the credit union’s officials,

senior management employees,

or their immediate family mem-

a) An official or senior man- bers may not receive any salary,

agement employee or im- commission, investment income,

mediate family member of or other compensation from the

such person. organization either directly or

b) A corporation in which any indirectly, or from any person

of the above-named per- being served through the orga-

sons is an officer or direc- nization. The official or senior

tor or has a stock interest management employee may as-

of 10 percent or more. sist in operating the organization

c) A partnership in which any if compensation is not involved;

of the above-named per- the organization may, however,

sons is a general partner reimburse the credit union for

or a limited partner with an services provided by the indi-

interest of 10 percent or vidual.

more.









62

Section 721.7 – Incidental • Any assistant chief execu-

Powers tive officer (e.g., Assistant

President, Vice President,

No official, employee, or their or Assistant Treasurer/Man-

immediate family member may ager)

receive any direct or indirect • Chief financial officer

compensation or benefit in con- (comptroller)

nection with the credit union’s • Any associated member or

engagement in any activity au- immediate family member of

thorized under the Incidental anyone listed above

Powers regulation. The pro-

hibitions in Sections 712.8(a), Other

701.36(e), 703.120, and 721.7

apply to any employee not oth- A number of federal criminal

erwise covered in the regulations statutes apply to federally in-

unless the board of directors de- sured credit unions. Federal

termines that no conflict of inter- credit union officials and em-

est is involved in the respective ployees have the responsibility

cases. Where prohibitions are to report suspected criminal

not specifically stated regard- activities to the appropriate law

ing transactions with business enforcement agencies on NCUA

associates or family members, Form 2362 (Suspicious Activities

officials should exercise care Report). Refer to Section 748.1

to ensure such transactions are of NCUA Rules and Regulations

conducted at arm’s length and for additional guidance.

in the best interest of the credit

union. The Federal Credit Union Act

gives the board of directors

Section 723.2(a) – Member responsibility for the general di-

Business Loans rection and control of the credit

union. The board thus has the

A federal credit union may not task of establishing policies

grant member business loans to and procedures for the conduct

the following: of the credit union’s affairs, in-

cluding the establishment and

• Chief executive officer (typi- monitoring of investment and

cally President or Treasurer/ lending policies and appropriate

Manager) dividend rates.





63

The board of directors should responsibility for determining

select competent manage- that management practices are

ment to carry out policies and protecting the members’ assets;

procedures and monitor its that the board’s policies and

performance. The board should procedures are being adminis-

strive to retain the best qualified tered properly; and that safe-

personnel at rates most favor- guards exist against fraud and

able to the credit union. While conflict of interest.

the salary and benefits offered

to secure competent manage- NCUA encourages boards of

ment will vary in each case, the directors of federal credit unions

directors should avoid contracts to establish codes of conduct to

which might threaten the safety guide officials and employees in

and soundness of the institution. avoiding conflicts of interest. All

Bonuses tied to increases in as- should shun actions from which

set growth or income could have they would derive personal gain

such an effect. They create an from the business of the credit

incentive for management to act union, other than normal sala-

in its own interests rather than ries, benefits, and permissible

those of the credit union. non-preferential loans.



The supervisory committee

shares the board of directors’









64

Part IX

Other Procedures and Supplemental Information





Mergers Conversions

Mergers of credit unions are A federal credit union may con-

usually effected for the purpose vert to a state-chartered credit

of continuing or improving ser- union under the provisions of

vice to members. Section 125 of the Federal

Credit Union Act. If the conver-

A federally insured credit sion involves termination of fed-

union may merge with one or eral insurance or a change from

more credit unions provided federal insurance to non-federal

they comply with the require- insurance, the requirements

ments set forth in Part 708b of outlined in Part 708b of NCUA

NCUA Rules and Regulations Rules and Regulations must be

and secure the prior approval met.

of NCUA. If one of the credit

unions is state-chartered, the The Act also provides for con-

merger must also be authorized version of a state-chartered

by the state supervisory author- credit union to a federal credit

ity or permitted by state law. union and recites the relevant

The regulation prescribes the requirements. As pointed out in

procedures to be followed if the Act, the conditions set forth

termination of federal insurance in state law and by the state

or conversion of federal insur- supervisor must be met in either

ance to nonfederal insurance is type of conversion.

involved.

Liquidation-Voluntary and

NCUA publication Credit Union Involuntary

Merger Manual (NCUA 8056),

provides required information Should it become necessary

and detailed instructions. for a federal credit union to

liquidate, the liquidation is con-

ducted in accordance with either







65

the requirements of Part 709 supervised by NCUA and the

(involuntary liquidation) or Part members’ shares are paid di-

710 (voluntary liquidation) of the rectly from the National Credit

NCUA Rules and Regulations. Union Share Insurance Fund up

to the insured limit. Except in

The major responsibility of the unusual cases, payout from the

board is to conduct the liquida- Fund is begun promptly follow-

tion in such a manner which ing commencement of involun-

protects the interests of the tary liquidation.

members, the insurance fund,

and the creditors of the credit Credit Union Trade

union. If the board anticipates Associations

selling the credit union’s loans

but the bids of prospective Local, state, and national trade

purchasers will not provide suf- associations promote the inter-

ficient funds to pay off share- ests of the credit union industry.

holders at par, no sale may be They offer a variety of services

consummated without written to their members, pursue the

approval from NCUA. If the enactment and promulgation of,

credit union becomes insolvent and changes in legislation and

during liquidation, the NCUA regulations, and represent credit

Board may either provide as- union interests before NCUA,

sistance under Section 208 of state legislatures, and the United

The Federal Credit Union Act States Congress.

and restore solvency or place

the credit union into involun- The decision to join a trade as-

tary liquidation and pay out the sociation and approve expenses

members, depending on the incidental to membership and

circumstances. The same alter- participation rests with a federal

natives apply when an operating credit union’s board of directors.

credit union becomes insolvent.

Corporate Credit Unions

Whereas a voluntary liquidation The Federal Credit Union Act

is conducted by a federal credit authorizes federal credit unions

union’s board of directors and to invest in shares, deposits, and

shares are paid to members certificates of corporate credit

from the credit union’s resourc- unions, federally or state-char-

es, an involuntary liquidation is tered. A corporate federal credit



66

union is defined in Part 704 of kinds of services they may offer

NCUA Rules and Regulations are specified in Section 712.5 of

as one that operates primarily NCUA Rules and Regulations.

to serve other credit unions and Examples are credit card ser-

limits natural person members to vices, automated teller machine

the minimum required by state services, and debt collection

or federal law to charter and op- services.

erate the credit union.

A federal credit union may, by

Corporate credit unions offer itself or with other credit unions

daily-balance share accounts form, invest in, or make loans to

which can earn dividends com- one or more CUSOs. Investment

parable to market rates offered is limited to a total of 1 percent

by other financial institutions. of the credit union’s paid-in and

Corporate credit unions also of- unimpaired capital and surplus

fer a variety of other investment in the shares, stock, or obliga-

accounts. In addition, many tion of the organization(s). Loans

corporate credit unions offer ac- may not exceed 1 percent of

counts for clearing share drafts the credit union’s paid-in and

and credit card activity. unimpaired capital and surplus

(independent of the 1 percent

Credit Union Service investment limit).

Organizations

A CUSO must be structured as

Credit union service organiza- either a corporation or a limited

tions (CUSOs) are organizations partnership. A credit union must

that provide operational and obtain written legal advice as

financial services primarily to to whether the CUSO is set up

credit unions and the member- in a manner that will limit the

ship of affiliated credit unions. credit union’s potential expo-

sure to no more than the loss

The CUSOs in which federal of funds invested in or loaned

credit unions may invest or to to the CUSO. The credit union

which they may make loans are must, in addition, secure written

limited by the Federal Credit agreements that the organization

Union Act to providing services will follow generally accepted

associated with the routine op- accounting principles; render

erations of credit unions. The





67

financial statements and obtain the credit union or ascertain

a certified public accounting the manner in which the credit

audit annually; and provide union’s business is being con-

NCUA with complete access to ducted. Before making minutes

the CUSO’s records as deemed and records available, however,

necessary by the NCUA Board the credit union must delete

in carrying out its responsibilities any confidential material that

under the Federal Credit Union identifies the transactions of or

Act. personal information about other

members.

Part 712 of NCUA Rules and

Regulations should be reviewed National Credit Union

in detail before a federal credit Administration Publications

union invests in or lends to a

CUSO. The NCUA publications referred

to in this Handbook and other

Member’s Right to Inspect NCUA publications may be

purchased from NCUA’s Ad-

Credit Union Record

ministrative Office at 1775 Duke

A member has the right to in- Street, Alexandria, VA 22314-

spect a federal credit union’s 3428. The cost of a publication

books and records, including and a copy of a price list may be

the board of directors’ minutes. obtained by writing that office or

The inspection must be made calling (703) 518-6340. Many of

in good faith and for a proper NCUA’s publications are on their

purpose. It cannot be to satisfy Internet Web Site at http://www.

mere curiosity or for vexatious ncua.gov.

purposes.

Single copies of new publica-

A proper purpose exists where tions and changes are forwarded

a member is trying to deter- to all federally insured credit

mine the financial condition of unions.









68

National Credit Union Administration

Central Office

1775 Duke Street

Alexandria, VA 22314-3428

703-518-6300

www.ncua.gov



Regional Offices

REGION I (ALBANY) REGION IV (AUSTlN)

Regional Director Regional Director

National Credit Union Administration National Credit Union Administration

9 Washington Square 4807 Spicewood Springs Rd.

Washington Avenue Extension Suite 5200

Albany, NY 12205 Austin, Texas 78759-8490

(518) 862-7400 (512) 342-5600



Connecticut New Hampshire Arkansas Nebraska

Maine New York Illinois North Dakota

Massachusetts Rhode Island Iowa Oklahoma

Michigan Vermont Kansas South Dakota

Louisiana Texas

Minnesota Wisconsin

Missouri

REGION II (CAPITAL)

Regional Director

National Credit Union Administration REGION V (TEMPE)

1775 Duke Street Regional Director

Suite 4206 National Credit Union Administration

Alexandria, VA 22314-3437 1230 West Washington Street

(703) 519-4600 Suite 301

Tempe, AZ 85072

Delaware New Jersey (602) 302-6000

District of Pennsylvania

Columbia Virginia Alaska Nevada

Maryland West Virginia Arizona New Mexico

California Oregon

Colorado Utah

REGION III (ATLANTA) Guam Washington

Regional Director Hawaii Wyoming

National Credit Union Administration Idaho Montana

7000 Central Parkway

Suite 1600

Atlanta, GA 30328

(678) 443-3000



Alabama North Carolina

Florida Ohio

Georgia Puerto Rico

Kentucky South Carolina

Indiana Tennessee

Mississippi U. S. Virgin Is-

lands







69

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intentionally

left blank





70

Index





A Conflict of Interest 61

Consumer Laws and Regulations 49

Abandoned Property Laws 59 Controlling Credit Union Activities 32

Accounting Bulletins 9 Conversions 65

Accounting Control 35 Corporate Credit Unions 66

Accounting Manual for Federal Credit Committee 14

Credit Union, discussion of 28 Credit Services 21

Accounting System 28, 35 Credit Union Service Contracts 28

Administrative Management 33 Credit Union Service

Application for Membership 13 Organizations 62, 67

Audits, Supervisory Committee 15 Credit Union Trade Associations 66

Credit Worthiness 22

B Currency and Foreign

Transactions Act 54

Bank Bribery Amendments Act 57

Bank Secrecy Act (BSA) 54 D

Board of Directors - Powers 31

Responsibilities Dividend Policy 37

Board of Directors Election Directors, Of- Dividends 67

ficers, and Credit Committee 13

Board of Directors Meetings 13 E

Board of Directors 13

Borrowing by Credit Unions 40 Election of Directors, Officers, and

Branch Offices 27 Credit Committee Members 13

Brokerage Firm 39 Electronic Fund Transfer Act -

Budgetary Program 34 Regulation E 50

Business Loans 23, 63 Employee Taxes 29

Bylaw Amendments 9 Examinations 10

Bylaws, Discussion of 9 Expedited Funds Availability Act 59

Expelled From Membership 13

C

F

Central Liquidity Facility 46

Charter, Federal Credit Union 9 Fair Credit Reporting Act 51

Committees, Appointment of 13 Fair Debt Collection Practices Act 52

Community Development Fair Housing Act 53

Revolving Loan Program FCU Act 7

(CDRL) for Credit Unions 47 FCU, Definition 7

Compensation of Directors, FCU, Discussion Of 7

Officers, Committee members, FCU Bylaws 9

and Employees 13 Federal Election Campaign Act 58





71

Financial Accounting L

Standard - 115 39

Financial Counseling 24 Land and Building 27

Financial Management 37 Lending Program 37

Financial Performance Letters to Credit Unions 40

Report (FPR) 43 Line of Credit 23

Flood Disaster Protection Act 56 Liquidation-Voluntary

Funds Management 42 and Involuntary 65

Loan Collections 38

G Loan Officers 15

Loans to Members 21

Government Securities Act of 1986 58

Gramm-Leach-Bliley Act 56 M

Guaranteed and Insured Loans 24

Management Official Interlocks 58

H Management Officials 14

Management 33

Home Equity Loans 22 Meetings 13

Home Mortgage Disclosure Act - Member Business Loans 23

Regulation C 52 Member Services 21

Home Ownership and Equity Member’s Right to Inspect

Protection Act (HOEPA) 51 Credit Union Record 68

Homeowners Protection Membership 13

Act of 1998 51 Mergers 65

Methods and Procedures 35

I Military Installations 28

Incidental Powers 63

Insurance Coverage 29 N

Insured Funds 45

Insured Loans 24 National Credit Union

Internal Auditing 36 Administration (NCUA) 7

Internal Controls 32 National Credit Union

Investement Diversification 39 Share Insurance Fund 45

Investment Accountability 39 NCUA Funds and Program 46

investment Adviser 40 NCUA Letters, Regulatory Alerts,

Investment Policies 38 Interpretive Rulings, and

Investment Program 38 Accounting Bulletins 9

Involuntary Liquidation 65 NCUA Objectives 8

NCUA Interpretive Ruling and Policy NCUA Rules and Regulations 8

Statement (IRPS) No. 98-2 40 Net Worth 42







72

O Regulation B, Equal Credit

Opportunity Act 50

Office Facilities on Military Regulation C, Home Mortgage

Installations 28 Disclosure Act 52

Office of Foreign Asset Regulation CC, Expedited Funds

Control Act (OFAC) 54 Availability Act 59

Officers, Election and Regulation E, Electronic Fund

Compensation of 13 Transfer Act 50

Ombudsman Program 47 Regulation X, Real Estate Settlement Pro-

Open-End Loans 23 cedures Act (RESPA) 51

Operational Requirements 27 Regulation Z, Truth-in-Lending Act 49

Organization 34 Regulatory Alerts 9

Organizational Structure Regulatory Flexibility Program

and Control 13 (RegFlex) 41

Organizing 32 Residential Real Estate Loans 22

Other Credit Union Services 24 Right to Financial Privacy 52

Other Laws Affecting Federal

Credit Unions 49 S

Other Procedures and

Supplemental Information 65 Secured Loans 22

Other statutes 54 Security Program 30

Service Facilities 27

P Share Policies 37

Share Program 37

Patriot Act 55 Soldiers’ and Sailors’ Civil

Personnel Policies and Procedures 33 Relief Act 53

Planning 34

Policies and Procedures 31 T

Preservation of Consumers’ Thrift Services 21

Claims and Defenses Rule 50 Truth in Savings Act 49

Privacy Act 53

Program Management 31 W

Prompt Corrective Action /

Net Worth 42 Worker’s Compensation 29

Publications - NCUA 68



R



Records Preservation Program 29

Regional Offices 69







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