ALEXANDRIA, Va. — The instances when a federal credit union can issue member business loans to CEOs, assistant chief executive officers, chief financial officers, and any "immediate family members" of these officials was recently clarified by NCUA.
In a Jan. 23 opinion letter, NCUA responded to a query from an FCU seeking guidance on whether it might issue a line of credit to a law firm in which the CEO's husband is a partner. The law firm in question is organized as a professional law corporation (PLC) under Louisiana law, which establishes it as a separate entity from its partners, thus the loan is permissible, NCUA Associate General Counsel Sheila Albin wrote.
The prohibition on making member business loans to immediate family members of senior credit union officials is designed to avoid conflicts of interest in lending decisions, Albin reminded. Accordingly, NCUA considered whether issuing a line of credit to the law firm where the CEO's husband is a partner is likely to create a conflict between the CEO's personal financial interest and her responsibility to the credit union. "As presumably a portion of the CEO's family income is tied to her husband's earnings from the law firm, the potential for a conflict of interest exists," she pointed out.
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"Although the law firm's structure creates a legal entity separate from the individual partners who are the owners, the credit union must insure the CEO does not use her position to influence the credit union's decision to grant the line of credit because of the potential for conflict," Albin said. "The credit union must apply its member business loan policy, procedures and underwriting guidelines as usual."
The CU's loan officers and the credit committee, if applicable, should be informed the CEO may not influence the decision to grant the line of credit, Albin said. The member business regulation requires principals of a business to give their personal guarantee to be liable for the debt, unless the NCUA regional director grants a waiver or the CU is a RegFlex CU. If the CU is not a RegFlex CU, the regulation requires the personal guarantee of all 22 partners in the firm or a waiver from the regional director to grant the loan.
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