September 8, 1997
Hans R. Ganz, President/CEO
Pacific Trust Federal Credit Union
P.O. Box 5227
Chula Vista, California 91912-5227
You have requested a legal opinion on whether three individuals who received loans
from a federal credit union and who are joint
owners of a property management company that manages their individually
owned properties, are "associated members" under NCUA's
member business loan rule, Section 701.21(h) of NCUA's Regulations.
Under the facts presented, these individuals are "associated
members" under the rule.
BACKGROUND
Pacific Trust Federal Credit Union (FCU) has
made 10 loans, secured by non-owner occupied real property, to
three members for a total of $2.75 million. The FCU's loan to
one borrower limit is $2.1 million. The FCU calculated the loans
to one borrower amount by adding all loans per the recorded ownership
of the security to determine if a group of borrowers should be
considered "associated members" pursuant to NCUA's member
business loan rule. If two of the borrowers are joint owners
of a business or property which was not financed by the FCU, the
FCU did not consider them "associated members" for the
purposes of the member business loan rule.
During a recent exam, the NCUA examiner concluded
the three borrowers are "associated members" because
all three borrowers are joint owners of a property management
company that manages the borrowers' individually-owned properties.
These properties are security for individual loans the FCU made
to the three borrowers. It is our understanding that the FCU
has not made any loans to the property management company. The
examiner concluded that, if all three borrowers were "associated
members," then the FCU had violated the loans to one borrower
limitation of the member business rule.
ANALYSIS
Section 701.21(h)(2)(iii)(A) states in part
that:
Unless a greater amount is approved by the
NCUA regional director, the aggregate amount of outstanding member
business loans to any one member or group of associated members
shall not exceed 15% of the credit union's reserves (less the
allowance for Loan Losses account), or $75,000, whichever is higher.
An "associated member" is defined
as "any member with a shared ownership, investment or other
pecuniary interest in a business or commercial endeavor with the
borrower." 12 C.F.R. ยง701.21(h)(1)(iii). When the
NCUA Board proposed the term "associated member" in
1986, it stated that the term describes:
a member who, along with other members, borrows
funds from a FICU [federally insured credit union] where each
member has a common ownership, investment, or other pecuniary
interest in a business or commercial endeavor. In singling out
these members, the Board is attempting to properly ascribe the
ultimate beneficiary (e.g. the common business enterprise) of
the loans obtained from the credit union and sufficiently allocate
the total exposure that a FICU may have when making loans to one
or more associated members. It is not uncommon to see members
individually obtain loans for the same business venture, with
each member assigning (transferring, investing etc.) the proceeds
of the loan to the business. In almost all instances, repayment
is directly tied to the success of the business and its ability
to repay the loan(s). In order to properly aggregate the total
exposure that a group of such loans poses to a FICU . . . the
Board has created and defined the term "associated member."
Proposed Rule, 51 Fed. Reg. 23234, 23235 (June
26, 1986).
You state in your letter that:
Just because the same management company is
employed to manage the underlying properties does not affect the
economic viability of the underlying assets since it is not uncommon
that real estate investors change management companies without
affecting the economic viability of the underlying security.
We disagree. First, we think it is unlikely
that a real estate investor is going to change from a management
company in which that investor has an ownership interest. Second,
the economic viability of the property underlying the loan, to
a large degree, is dependent on the efforts and success of the
management company.
You state that, when analyzing whether borrowers
are "associated members," the analysis is limited to
shared interests, investments or other pecuniary interests involving
loans from the credit union in question. We agree. In further
support of your position, you quote and rely on an earlier legal
opinion from this office that dealt with loans to a group of members,
all of whose loans were secured by corporate stock that the members
had in the same corporation. In that case, we focused particularly
on the fact that the failure of the underlying security for one
loan, namely the corporate stock, would be linked to the failure
of the security for all the other loans, which was also stock
in the same corporation. Even without a direct link between the
underlying collateral on the loans to be aggregated, however,
borrowers may be considered associated members if they otherwise
fall within the definition of the associated member definition.
In your case, the individual borrowers are
within the scope of the "associated member" definition
since they have a "shared ownership, investment or other
pecuniary interest in a business or commercial endeavor with the
borrower," namely, the management company. The repayment
of the loans granted by the FCU is dependent on the ultimate success
of the management company in running the properties. Under the
facts presented, the borrowers are "associated members"
under NCUA's member business loan rule, and the FCU has violated
the loan to one borrower limitation.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MJMcK:bhs
SSIC 3501
97-0407
cc: Region VI