2012 -- S 2435

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LC01748

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2012

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A N A C T

RELATING TO FINANCIAL INSTITUTIONS - CREDIT UNIONS

     Introduced By: Senator Michael J. McCaffrey

     Date Introduced: February 16, 2012

     Referred To: Senate Corporations

It is enacted by the General Assembly as follows:

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     SECTION 1. Section 19-5-15.1 of the General Laws in Chapter 19-5 entitled "Credit

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Unions" is hereby amended to read as follows:

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     19-5-15.1. Purchase, sale and pledge of eligible obligations and assets. -- (a) For

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purposes of this section:

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      (1) "Eligible Obligation" means a loan or group or portfolio of loans and includes a

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participation interest in a loan or group or portfolio of loans.

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      (2) “Participation Interest” means a loan where one or more federally-insured financial

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institutions or federally-insured credit unions participate pursuant to a written agreement with the

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originating lender.

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     (2)(3) "Student loan" means a loan granted to finance the borrower's attendance at an

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institution of higher education or at a vocational school, which is secured by and on which

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payment of the outstanding principal and interest has been deferred in accordance with the

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insurance or guarantee of the federal government, of a state government, or any agency of either.

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      (b) Purchase.

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      (1) A credit union may purchase, in whole or in part, within the limitations of the board

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of directors' written purchase policies:

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      (i) Eligible obligations of its members, from any source, if either:

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      (A) They are loans it is empowered to grant; or

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      (B) They are refinanced with the consent of the borrowers, within sixty (60) days after

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they are purchased, so that they are loans it is empowered to grant;

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      (ii) Eligible obligations of a liquidating credit union's individual members, from the

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liquidating credit union;

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      (iii) Student loans, from any source, if the purchaser is granting student loans on an

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ongoing basis and if the purchase will facilitate the purchasing credit union's packaging of a pool

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of such loans to be sold or pledged on the secondary market;

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      (iv) Real estate-secured loans, from any source, if the purchaser is granting real estate-

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secured loans on an ongoing basis and if the purchase will facilitate the purchasing credit union's

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packaging of a pool of such loans to be sold or pledged on the secondary mortgage market. A

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pool must include a substantial portion of the credit union's members' loans and must be sold

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promptly; and

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     (v) Participation interests in loans made by federally-insured financial institutions or

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federally-insured credit unions; and

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      (v)(vi) An indirect lending or indirect leasing arrangement shall be classified as a loan

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and is not the purchase of an eligible obligation because the credit union makes the final

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underwriting decision and the sales or lease contract is assigned to the credit union very soon

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after it is signed by the member and the dealer or leasing company.

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      (2) A credit union may make purchases in accordance with this section (b), provided:

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      (i) The board of directors approves the purchase;

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      (ii) A written agreement and schedule of the eligible obligations covered by the

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agreement are retained in the purchaser's office; and

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      (iii) For purchases under paragraph (b)(1)(ii) of this section, any advance written

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approval required by the national National Credit Union Association Administration is obtained

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before consummation of such purchase.; and

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     (iv) For purchases under paragraph (b)(1)(v) of this section, fifteen (15) business days

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prior written notice is given to the director or the director’s designee. Such notice shall set forth

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such information as the director or the director’s designee shall from time to time require. In the

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event the director or the director’s designee fails to object to the proposed purchase within the

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fifteen (15) business day notice period, the purchase shall be deemed approved.

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      (3) The aggregate of the unpaid balance of eligible obligations purchased under

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paragraph (b) of this section shall not exceed five percent (5%) of the unimpaired capital and

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surplus of the purchaser. The following may be excluded in calculating this five percent (5%)

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limitation:

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      (i) Student loans purchased in accordance with paragraph (b)(1)(iii) of this section;

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      (ii) Real estate loans purchased in accordance with paragraph (b)(1)(iv) of this section;

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and

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      (iii) Eligible obligations purchased in accordance with paragraph (b)(1)(i) of this section

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that are refinanced by the purchaser so that it is a loan it is empowered to grant;

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      (c) Sale. - A credit union may sell, in whole or in part, to any source, eligible obligations

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of its members, eligible obligations purchased in accordance with paragraph (b)(1)(ii) of this

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section, student loans purchased in accordance with paragraph (b)(1)(iii) of this section, and real

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estate loans purchased in accordance with paragraph (b)(1)(iv) of this section, within the

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limitations of the board of directors' written sale policies, provided:

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      (1) The board of directors approves the sale; and

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      (2) A written agreement and a schedule of the eligible obligations covered by the

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agreement are retained in the seller's office.

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      (d) Pledge.

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      (1) A credit union may pledge, in whole or in part, to any source, eligible obligations of

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its members, eligible obligations purchased in accordance with paragraph (b)(1)(ii) of this

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section, student loans purchased in accordance with paragraph (b)(1)(iii) of this section, and real

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estate loans purchased in accordance with paragraph (b)(1)(iv) of this section, within the

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limitations of the board of directors' written pledge policies, provided:

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      (i) The board of directors approves the pledge;

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      (ii) Copies of the original loan documents are retained; and

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      (iii) A written agreement covering the pledging arrangement is retained in the office of

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the credit union that pledges the eligible obligations.

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      (2) The pledge agreement shall identify the eligible obligations covered by the

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agreement.

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      (e) Servicing. - A credit union may agree to service any eligible obligation it purchases

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or sells in whole or in part.

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      (f) Ten percent (10%) limitation. - The total indebtedness owing to any credit union by

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any person, inclusive of retained and reacquired interests, shall not exceed ten percent (10%) of

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its impaired capital and surplus.

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      (g) Conflicts of Interest.

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      (1) No credit union official, employee, or their immediate family member may receive,

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directly or indirectly, any compensation in connection with that credit union's purchase, sale, or

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pledge of an eligible obligation under the provisions of this section.

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      (2) Permissible payments. - This section does not prohibit:

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      (i) A credit union's payment of salary to employees;

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      (ii) A credit union's payment of an incentive or bonus to an employee based on the credit

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union's overall financial performance;

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      (iii) A credit union's payment of an incentive or bonus to an employee, other than a

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senior management employee, in connection with that credit union's purchase, sale or pledge of

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an eligible obligation. This payment is permissible if the board of directors establishes a written

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policy and internal controls for the incentive or bonus program and monitors compliance with the

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policy and controls at least annually; and

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      (iv) Payment by a person other than the credit union of compensation to a volunteer

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official, non-senior management, employee, or their immediate family member, for a service or

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activity performed outside the credit union provided that the credit union, the official, employee,

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or their immediate family member has not made a referral.

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      (3) Business associates and family members. - All transactions under this section with

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business associates or family members not specifically prohibited by subdivision (g)(1) of this

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section must be conducted at arm's length and in the interest of the credit union.

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      (4) Definitions.

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

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      (ii) "Immediate family member" means a spouse or other family member living in the

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same household.

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      (iii) "Official" means any member of the board of directors or a volunteer committee.

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      (iv) "Person" means an individual or an organization.

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      (v) "Senior management employee" means the credit union's chief executive officer

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(typically, this individual holds the title of President or Treasurer/Manager), any assistant chief

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executive officers (e.g., Assistant President, Vice President, or Assistant Treasurer/Manager), and

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the chief financial officer (Comptroller).

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      (vi) "Volunteer official" means an official of a credit union who does not receive

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compensation from the credit union solely for his or her service as an official.

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     SECTION 2. This act shall take effect upon passage.

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LC01748

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO FINANCIAL INSTITUTIONS - CREDIT UNIONS

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     This act would allow credit unions to purchase participation interest loans.

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     This act would take effect upon passage.

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LC01748

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