Authority of FCU Board of Directors to Approve Loans

Robert Teachworth, President and CEO
Denali Alaskan Federal Credit Union
3400 Latouche
Anchorage, Alaska 99508

Re: Authority of FCU Board of Directors to Approve Loans.

Dear Mr. Teachworth:

You asked about the authority of a federal credit union’s (FCU’s) board of directors to approve loans and when and how the board could approve loans that are outside the loan approval authority delegated to the FCU’s loan officers or credit committee. Our thoughts, including some options available to the board, follow.

The FCU Act states that “loans must be approved by the credit committee or a loan officer . . . . ” 12 U.S.C. §1757(x). Generally, if a credit committee or a loan officer does not consider a loan application first, an FCU’s board of directors may approve a loan only if the FCU Act provides specific authority for the board to act on that type of loan. For example, an FCU’s board must approve loans to directors or supervisory or credit committee members exceeding $20,000 plus pledged shares. 12 U.S.C. §1757(iv).

We understand that an FCU’s board may not want to delegate the authority to approve every type of loan or may want to be involved in the decision-making on some loans, such as loans that are part of a new area of lending for the FCU or particularly large loans. An FCU may, consistent with the FCU Act, restructure its lending processes in various ways to increase its board’s involvement. For example, if its bylaws provide for a credit committee, an FCU board could appoint itself or some of its members to serve as the FCU’s credit committee. FCU Bylaws (10/99), Article VIII, Option 1. Alternatively, an FCU could modify its lending policies to create two levels of review and approval for certain loans: first, by a loan officer or credit committee, and, second, by the board of directors or a committee consisting of directors.

We caution that FCUs must comply with the various statutory and regulatory requirements for lending, including the experience requirements placed on member business lending. 12 C.F.R. §723.5(a). We also caution that FCUs may only make loans as provided in their written lending policies. Id.; 12 C.F.R. §701.21(c)(2). An FCU that provides an expanded role for its board in the lending process must ensure that the authority of all persons involved in lending, including the board or a committee of board members, is described in those policies and that the FCU maintains proper segregation of duties. Lending policies must also be designed and implemented to ensure that an FCU does not make loans on an ad hoc basis or in an arbitrary fashion, but in accordance with the limits and criteria of its written lending policies.