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ALEXANDRIA, Va. – A federal credit union may provide no-interest loans as charitable contributions under the incidental powers rule, NCUA ruled recently. One credit union recently asked NCUA for its opinion on a program with Home HeadQuarters, Inc., which makes prime-rate loans averaging $10,000 for seven years for home repairs. HH performs all the approvals, paperwork, collects payments and follows delinquencies. The loan program is capitalized by funds from several sources including the NYS Home Program, the Neighborhood Reinvestment Corporation, the US Treasury Department (CDFI Core Fund) and the Affordable Housing Corporation. According to the NCUA legal opinion letter (04-0139), the federal credit union wants to “lend” HH $125,000 unsecured, at no interest, and with HH only repaying 95%. “In effect, the FCUs are donating 5% of the “loans” and the use of their funds for a period of seven years,” NCUA Associate General Counsel Sheila Albin wrote. “We believe an FCU of sufficient size and in good financial condition can make an interest-free loan to an appropriate recipient as a charitable contribution under NCUA’s charitable donations rule. 12 C.F.R 701.25,” NCUA’s legal opinion letter read. “An FCU’s board of directors is in the best position to decide if it is reasonable and in the best interests of the FCU to donate money to a nonprofit organization in its community. We believe that, if an FCU can donate money to its community’s nonprofits, it can lend money as described above without such donations being classified as loans.” The letter continued, “Under the incidental powers analysis, an FCU may donate the use of funds over time to an appropriate recipient as a permissible incidental powers activity. 12 C.F.R. 721.2. These donations are useful in carrying out the mission of credit unions because this type of charitable giving can promote name recognition and generate goodwill in the FCU’s community. As the functional equivalent of direct contributions to community nonprofits, these donations pose the same risks to an FCU based on the appropriateness of the donation for the donor.” Because the funds are recognized as a charitable contribution, they do not count as a loan and it does not matter if the organization is a member of the credit union. The letter cautioned that federal credit unions may not use this opinion to get around loan limits to members in the Federal Credit Union Act or NCUA’s regulations. -

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