TWO NCUA OPINION LETTERS OF SOME NOTE WERE ISSUED IN THE PAST TWO WEEKS
Monday, July 13, 2020
There were two opinion letters issued by the NCUA Office of General Counsel that, while not earth shaking, are significant in that they indicate some movement at the agency away from long held interpretations that credit unions felt were overly restrictive.
While we hope that these two are among the first of many that shake NCUA loose from some of their historical tendency toward over regulating in these specific areas, the proof will be in the pudding if the agency continues to be willing to actually review its earlier interpretations or simply makes a perfunctory review that ultimately upholds the way NCUA has always interpreted things.
From these two opinions, the early indications are positive that the total review of all existing opinion letters and guidance (announced by Chairman Hood earlier this year in his remarks at the CUNA GAC) is indeed taking place with a serious eye toward modernization of long standing restrictive NCUA interpretations.
We are hopeful that this review process continues and moves into even more far reaching areas such as the definition of service facility and what constitutes a legitimate association for field of membership purposes.
The two issues that were addressed in the recent opinion letters dealt with what constitutes reasonable proximity for SEG access to a service facility and whether a member service representative is barred from inputting data into a credit union’s automated loan underwriting system (ALUS) and then disbursing the loan proceeds as long as the ALUS – not the member service representative – approves the loan.
Both interpretations were changed to reflect changes in technology that have made reasonable proximity more accessible from outside the long held regulatory preference of 25 miles and have automated loan approvals much more so than it was in the 1990s when the earlier opinions on loan approval and disbursal were written.
REASONABLE PROXIMITY
Although it is written nowhere in either the law or regulation, NCUA has for decades interpreted “reasonable proximity” between a SEGs location and a service facility of a credit union in order to approve the SEG for service by the credit union to be within 25 miles of each other.
Without a doubt, this arbitrary number – that harkens back to a brick-and-mortar era in which members actually went to the branch to conduct all of their credit union business -has resulted in many SEG-based credit unions being disapproved for both employer groups and associations because the credit union did not have a branch within 25 miles of the employer or association seeking to become affiliated with the credit union as a SEG.
Despite this issue having been brought to the agency’s attention for years as an anachronistic provision that does not reflect today’s service delivery realities and has no basis in law or regulation, NCUA has steadfastly stuck to its unwritten 25-mile reasonable proximity interpretation in practice.
In this legal opinion, NCUA attorneys have clearly stated that there is no set geographic component to define reasonable proximity between a credit union service facility and an employer or association the credit union seeks to serve.
They did not throw out reasonable proximity, because the law does require the agency to consider “reasonable proximity” to a service facility when it comes to extending credit union services to a new employer or association. But reasonable proximity never had to be defined so unreasonably as to limit it to within a hard and fast 25-mile limit.
While not as far reaching as it could have been, this legal opinion is a movement toward what actually needs to happen. And that is NCUA beginning to define service facility much more broadly and reflective of today’s digital era of providing credit union services. For example, if no-cost ATMs with their expanded capabilities today or even handheld devices where a growing number of members are accessing financial services today could be defined by NCUA as service facilities, the opportunities for expanded service abound for credit unions to bring into their fold countless SEGs and associations if there is no arbitrary 25-mile limit from a nearby brick and mortar branch.
It would bring credit union service at least into the 2000s, if not the 2020s. Previously, with a 25-mile limit on reasonable proximity, credit unions were operating on a 1980s interpretation that was unduly restrictive.
A link to this NCUA General Counsel opinion is provided below.
https://www.ncua.gov/regulation-supervision/legal-opinions/2020/reasonable-proximity-analysis
MEMBER SERVICE REPS AND DATA INPUT
The second opinion letter is much more operational in nature. However, it is a recognition of the changes technology have brought to the lending program of credit unions and how NCUA’s outdated legal opinions were hamstringing the effectiveness and efficiency of automated lending underwriting systems (ALUS).
In this opinion, NCUA has rightly come to the realization that it is not a violation of the prohibition of a member service representative entering the data and ultimately disbursing a loan if that individual is not approving the loan.
If the loan underwriting decision is being made by automation from criteria already built into the system consistent with the credit union’s lending policies, there is no prohibition of a member service representative both entering the data into the system and then disbursing the funds when the ALUS approves the loan.
While most credit unions using an ALUS have been working around this antiquated interpretation that said the same individual inputting data cannot disburse the fund, it is a sign that NCUA is recognizing the need for modernization of their opinions and interpretations when they recognize that technology is being utilized to approve most credit union loans today.
The focus and attention of loan officers should be on those that the ALUS does not approve, rather than pulling them away to disburse funds that the member service representatives could have disbursed following the ALUS approval of a loan that fits nicely within the qualification box for underwriting.
A copy of the NCUA General Counsel opinion on this matter is provided below
We will continue to monitor developments at NCUA on your behalf. As you can see from these interpretative changes reflected in the agency’s General Counsel opinions, there are times when actions outside the NCUA Board meetings have significance as well.
Until next time. Stay safe.