ALEXANDRIA, Va. - A federal credit union may provide no-interestloans as charitable contributions under the incidental powers rule,NCUA ruled recently. One credit union recently asked NCUA for itsopinion on a program with Home HeadQuarters, Inc., which makesprime-rate loans averaging $10,000 for seven years for homerepairs. HH performs all the approvals, paperwork, collectspayments and follows delinquencies. The loan program is capitalizedby funds from several sources including the NYS Home Program, theNeighborhood Reinvestment Corporation, the US Treasury Department(CDFI Core Fund) and the Affordable Housing Corporation. Accordingto the NCUA legal opinion letter (04-0139), the federal creditunion wants to "lend" HH $125,000 unsecured, at no interest, andwith HH only repaying 95%. "In effect, the FCUs are donating 5% ofthe "loans" and the use of their funds for a period of sevenyears," NCUA Associate General Counsel Sheila Albin wrote. "Webelieve an FCU of sufficient size and in good financial conditioncan make an interest-free loan to an appropriate recipient as acharitable contribution under NCUA's charitable donations rule. 12C.F.R 701.25," NCUA's legal opinion letter read. "An FCU's board ofdirectors is in the best position to decide if it is reasonable andin the best interests of the FCU to donate money to a nonprofitorganization in its community. We believe that, if an FCU candonate money to its community's nonprofits, it can lend money asdescribed above without such donations being classified as loans."The letter continued, "Under the incidental powers analysis, an FCUmay donate the use of funds over time to an appropriate recipientas a permissible incidental powers activity. 12 C.F.R. 721.2. Thesedonations are useful in carrying out the mission of credit unionsbecause this type of charitable giving can promote name recognitionand generate goodwill in the FCU's community. As the functionalequivalent of direct contributions to community nonprofits, thesedonations pose the same risks to an FCU based on theappropriateness of the donation for the donor." Because the fundsare recognized as a charitable contribution, they do not count as aloan and it does not matter if the organization is a member of thecredit union. The letter cautioned that federal credit unions maynot use this opinion to get around loan limits to members in theFederal Credit Union Act or NCUA's regulations. -

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