Banking Interpretations

NYSBL 470,472 and 473

December 2, 2004

Re: Banking Law Section 470(2)

Dear [                    ]:

Your letter of November 22, 2004, to Examiner Aloysius, has been referred to me for reply. In your letter our raise two questions with respect to the operations of[                                                             ] The first relates to your eligibility-to serve on [              ] board of directors. The second relates to whether there is any provision of the Banking Law that would prohibit [           ] employees from joining the [                                                          ] in order to take advantage of the favorable health insurance premiums available to Union members.

  1. Disqualification of Directors.

As we understand it, you are the manager of [             ] and serve as treasurer of [                         ] board of directors, and your wife is [           ] loan officer. Banking Law Section 470(2) provides that:

"No person shall be eligible for election as a director of a credit union if such person's spouse is a director or one of the five highest paid salaried officers of the credit union, if such person or such person's spouse is the grandparent, parent, child, grandchild, brother, sister, uncle, nephew, or niece of a director or one of the five highest paid salaried officer of the credit union, or if a director or one of the five highest paid salaried officers of the credit union is the spouse of such person's child, grandchild, brother or sister."

You raise many arguments as to why you should not be subject to the prohibition set forth in Banking Law Section 470(2) which, in essence, are that the functions of a salaried officer's position in a credit union, not his or her job title, should be determinative as to whether the officer's spouse is prohibited from serving on a credit union's board of directors. We note that the Banking Law does not define what functions constitute one being deemed an officer of a credit union. Accordingly, whether or not one is deemed an officer is often a subjective test.

Based on the fact that you, as manager, and your wife, as loan officer, are the only officers of [                 ], she is deemed one of the five highest paid salaried officers of the credit union. Accordingly, based on her status within [         ]" it is clear that you would be prohibited from serving on [          ] board of directors.

Article XI of the Banking Law sets forth particular duties that are imposed on directors and loan officers of credit unions. We refer you to Banking Law Section 470(1), which sets forth the powers and duties of directors of credit unions, Banking Law Section 472, which sets forth the special duties of directors, and Banking Law Section 473, which sets forth the duties imposed by loan officers and credit committees. These sections of the Banking Law make clear that the objective of prohibiting one spouse from serving on a credit union's board of directors when the other spouse is an officer is to achieve sound internal control within the credit union by avoiding conflicts of interests which could arise if the decisions made by the loan officer/spouse responsible for reviewing and affirming extensions of credit are monitored by his or her spouse as opposed to an independent board of directors.

Since [                      ] is insured by the NCUA, it is also subject to the laws and regulations applicable to federally-insured credit unions. Appendix 4A to the NCUA Examination Manual sets forth a list of relationships which are prohibited by principles of sound internal control. Among those deemed conflicting are where one individual holds the position of manager and the other is either (i) a relative of any official of the credit union or (ii) a member of the credit committee. Thus, the fact that you [                      ] manager and your wife is an official with [                        ] is a prohibited relationship as defined by the NCUA.

Accordingly, we conclude that your wife, in her capacity as [                     ] loan officer, is an officer, as such term is contemplated by Banking Law Section 470(2). As such you are in violation of Banking Law 470(2) by serving as a director of [                    ].

You ask, if our conclusion would be different if your wife's title was changed to Senior Loan Processor, even if her job function did not change. Since your wife is the only person in a position of reviewing and affirming all extensions of credit, our conclusion would remain the same. We understand, however, that the credit union has recently changed Ms. [                 ] job description so that she no longer has the authority to approve loans. Instead, an independent officer or loan committee has final loan approval. Provided that you are not among those individuals with such loan approval authority, then we conclude that it would be possible for you to continue to serve on [                  ] board of directors.

  1. Eligibility of [                         ] employees for union membership.

You have asked whether there is any provision of the Banking Law that would prohibit employees of [                  ] from joining the Union in order to enable them to purchase their health" insurance at the more favorable rates available to Union members. Presumably the eligibility for Union membership is addressed in the Union's by-laws. With respect to the Banking Law, there is no provision thereunder which would prohibit this.

I trust the foregoing is responsive to your inquiry. Should you have additional questions, please feel free to call me at (212) 709-1663.

Sincerely yours,

Jay Kane
Assistant Counsel

cc: Deputy Superintendent Calabrese