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WSR 97-19-006

EXPEDITED ADOPTION

DEPARTMENT OF

FINANCIAL INSTITUTIONS

[Filed September 4, 1997, 1:25 p.m.]

Title of Rule: Rules on prohibited fees and nonpreferential loans.

Purpose: To adopt state rules substantially equivalent to rules of the National Credit Union Administration (NCUA) at:

12 CFR Section 701.21 (c)(8) concerning prohibited fees.

12 CFR Section 701.21 (d)(5) concerning nonpreferential loans.

Statutory Authority for Adoption: RCW 31.12.535, 43.320.040.

Statute Being Implemented: RCW 31.12.015, [31.12].225, [31.12].365.

Summary: The rules will be substantially equivalent to the following NCUA rules:

12 CFR Section 701.21 (c)(8), restricting credit union officials and employees from receiving any compensation in connection with any loan by the credit union.

12 CFR Section 701.21 (d)(5), prohibiting credit union officials and their immediate families and business associates from receiving loans from the credit union on preferential terms.

Reasons Supporting Proposal: Federal share and deposit insurance is available to state-chartered credit unions through the NCUA. The NCUA has adopted rules to ensure the safety and soundness of these federally-insured state credit unions (FISCUs). These rules are outlined in 12 CFR Part 741. Among other requirements, Part 741 requires FISCUs to comply with:

12 CFR Section 701.21 (c)(8) concerning prohibited fees.

12 CFR Section 701.21 (d)(5) concerning nonpreferential loans.

12 CFR Section 701.21(h) concerning member business loans (MBL).

See 12 CFR 741.203(a). These rules currently apply to Washington FISCUs, about seventy-five credit unions in number.

The remaining Washington credit unions, about thirty in number, are not federally insured (non-FISCUs) and are therefore not currently subject to these NCUA rules. The shares and deposits of these credit unions are guaranteed by the Washington Credit Union Share Guaranty Association (WCUSGA). However, the WCUSGA credit unions are required to convert to federal insurance by year-end 1998. As these credit unions convert, they too will become subject to the NCUA rules cited above. The Department of Financial Institutions (DFI) anticipates that all but a handful of the remaining WCUSGA credit unions will be converted to federal insurance by February 1, 1998.

However, FISCUs will be exempt from these NCUA rules if their state rules are determined by the NCUA board to be "substantially equivalent" to the NCUA rules. In order to take advantage of this exemption, the DFI intends to adopt rules which are substantially equivalent to the NCUA rules cited above.

The DFI intends in this rule-making proceeding to adopt rules which are substantially equivalent to the NCUA rules on prohibited fees and nonpreferential loans, Sections 701.21 (c)(8) and (d)(5), respectively. These DFI rules will apply to Washington FISCUs and non-FISCUs alike. Compliance with the new rule on preferential loans will satisfy the last sentence of RCW 31.12.365, which is substantially the same. The proposed DFI rules are set forth on Appendix A.

However, because the NCUA's MBL rules in Section 701.21(h) are currently under revision by the NCUA, the DFI intends to wait until the NCUA has completed the revision of its MBL rules before it adopts substantially equivalent rules.

To avoid overlapping federal and DFI rules on these subjects, the DFI's rules will not take effect by their terms until the NCUA board has determined that they are substantially equivalent. Promptly after adoption of the rules, the DFI will submit them to the NCUA board for a determination.

Under the state Administrative Procedure Act, proposed state rules which adopt federal rules without material change may be adopted through the expedited process prescribed in RCW 34.05.230, as amended by section 202, chapter 409, Laws of 1997. The DFI has proposed to use the expedited process for adoption of these rules for the following reasons:

a. The proposed rules will adopt the NCUA rules at 12 CFR Section 701.21 (c)(8) concerning prohibited fees and 12 CFR Section 701.21 (d)(5) concerning nonpreferential loans, without material change; and

b. Washington FISCUs are currently subject to these NCUA rules; and most remaining Washington non-FISCUs will become subject to the NCUA rules in the next few months.

Name of Agency Personnel Responsible for Drafting, Implementation and Enforcement: J. Parker Cann, P.O. Box 41200, Olympia, WA 98504-1200, (360) 902-8778.

Name of Proponent: Department of Financial Institutions, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: The rules will be substantially equivalent to the following NCUA rules:

12 CFR Section 701.21 (c)(8), restricting credit union officials and employees from receiving any compensation in connection with any loan by the credit union.

12 CFR Section 701.21 (d)(5), prohibiting credit union officials and their immediate families and business associates from receiving loans from the credit union on preferential terms.

These NCUA rules currently apply to FISCUs. All Washington credit unions are currently subject to, or will shortly be subject to, these NCUA rules. By enacting these state rules, Washington credit unions will be exempt from the NCUA rules.

Proposal does not change existing rules.

NOTICE

THIS RULE IS BEING PROPOSED TO BE ADOPTED USING AN EXPEDITED RULE-MAKING PROCESS THAT WILL ELIMINATE THE NEED FOR THE AGENCY TO HOLD PUBLIC HEARINGS, PREPARE A SMALL BUSINESS ECONOMIC IMPACT STATEMENT, OR PROVIDE RESPONSES TO THE CRITERIA FOR A SIGNIFICANT LEGISLATIVE RULE. IF YOU OBJECT TO THIS RULE BEING ADOPTED USING THE EXPEDITED RULE-MAKING PROCESS, YOU MUST EXPRESS YOUR OBJECTIONS IN WRITING AND THEY MUST BE SENT TO J. Parker Cann, Division of Credit Unions, Department of Financial Institutions, P.O. Box 41200, Olympia, WA 98504-1200, phone (360) 902-8778, FAX (360) 902-8800, AND RECEIVED BY November 18, 1997.

September 2, 1997

John L. Bley

Director

Chapter 208-444 WAC

MISCELLANEOUS CREDIT UNION RULES

NEW SECTION

WAC 208-444-020 Prohibited fees. (1) Except as otherwise provided herein, no official or employee of a credit union, or immediate family member of an official or employee of a credit union, may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union.

(2) This section does not prohibit:

(a) Payment, by a credit union, of salary to employees;

(b) Payment, by a credit union, of an incentive or bonus to an employee based on the credit union's overall financial performance;

(c) Payment, by a credit union, of an incentive or bonus to an employee, other than a senior management employee, in connection with a loan or loans made by the credit union, provided that the board of directors of the credit union establishes written policies and internal controls in connection with such incentive or bonus and monitors compliance with such policies and controls at least annually.

(d) Receipt of compensation from a person outside a credit union by a volunteer official or nonsenior management employee of the credit union, or an immediate family member of a volunteer official or employee of the credit union, for a service or activity performed outside the credit union, provided that no referral has been made by the credit union or the official, employee, or family member.

(3) For purposes of this section, "official" means any member of the board of directors or a volunteer committee.

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NEW SECTION

WAC 208-444-030 Nonpreferential loans. (1) The rates, terms and conditions on any loan either made to, or endorsed or guaranteed by

(a) an official

(b) an immediate family member of an official, or

(c) any individual having a common ownership, investment or other pecuniary interest in a business enterprise with an official or with an immediate family member of an official shall not be more favorable than the rates, terms and conditions for comparable loans to other credit union members.

(2) For purposes of this section, "official" means any member of the board of directors, credit committee or supervisory committee.

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NEW SECTION

WAC 208-444-040 Definitions. Unless the context clearly requires otherwise, as used in this Chapter:

(1) "Compensation" includes non-monetary items, except those of nominal value.

(2) "Immediate family member" means a spouse or other family member living in the same household.

(3) "Loan" includes line of credit.

(4) "Person" means a natural person or an organization.

(5) "Senior management employee" means the credit union's chief executive officer (typically, this individual holds the title of President or Treasurer/Manager), any assistant chief executive officers (e.g., Assistant President, Vice President, or Assistant Treasurer/Manager), and the chief financial officer (Comptroller).

(6) "Volunteer official" means an official of a credit union who does not receive compensation from the credit union solely for his or her service as an official.

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NEW SECTION

WAC 208-444-050 Effective date. Sections 208-444-020, -030, and -040 will take effect on the date that these rules are determined by the Board of the National Credit Union Administration (NCUA) to be substantially equivalent to NCUA rules.

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