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Credit Union Service Organizations (CUSOs)

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National Credit Union Administration (NCUA).


Final rule.


NCUA is revising its rule concerning federal credit union (FCU) investments in and loans to credit union service organizations (CUSOs). The first change clarifies that the list of permissible activities in the CUSO regulation is intended to establish broad categories of permissible activities. The listing of particular activities under these categories is for illustrative purposes and not exhaustive of activities that may be permissible. In conjunction with this change, the provision for adding new activities to the regulation is amended to encourage FCUs to seek an advisory opinion from Start Printed Page 40576the Office of General Counsel on whether a proposed activity falls within one of the authorized categories before requesting a regulatory amendment. The final change adds a federally-chartered corporation to the category of permissible structures for CUSOs.


This rule is effective September 4, 2001.

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Mary Rupp, Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314-3428 or telephone (703) 518-6540.

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On February 15, 2001, the NCUA Board requested comment on proposed changes to part 712 of its regulations. 66 FR 11125 (February 22, 2001). Part 712 sets forth the requirements for FCUs investing or lending to CUSOs. The first proposed amendment was a clarification of an existing authority and the second proposed amendment was an expansion of an existing authority.

Summary of Comments

The NCUA Board received 26 comments on the proposal: 16 from credit unions; one from a CUSO; two from credit union trade groups; one from a CUSO trade group; five from credit union leagues; and one from a bank trade group. Below is a summary of the comments.

Clarification That the List of Permissible Activities Establishes Broad Categories and the Particular Activities Under These Broad Categories are for Illustrative Purposes

The first proposed change clarified that the list of permissible activities in § 712.5 is intended to establish broad categories of permissible activities and that the listing of particular activities under these broad categories is for illustrative purposes and not meant to be exhaustive. Nineteen commenters fully supported the proposed change; five commenters objected because they thought the change should be more expansive; and one commenter, the bank trade group, objected to the expansion. The commenters in support of the proposal noted that the amendment would allow the rule to accommodate technological advances and a broader scope of business practices, as well as allow CUSOs to offer a variety of new and innovative products that will fit within the general categories. One of those commenters noted that the proposal provides an adequate illustration of the types of activities that are permissible without the loss of flexibility that would result from a list of specific activities. One commenter noted that the approved list of activities is only the beginning of what a CUSO can do and with the test of “relate to the routine daily operations” there is sufficient guidance.

Some of the commenters in support of further expansion suggested using the same approach as the approach taken in the incidental powers proposal. This amendment, in fact, is modeled after the incidental powers proposal. One commenter suggested using the same test for permissibility of a CUSO activity as is used to determine permissibility of an incidental powers activity. This commenter fails to recognize that the legal authority for an incidental powers activity is different from the legal authority for a CUSO activity. Incidental powers activities are governed by § 1757(17) of the Federal Credit Union Act (Act) and CUSO activities are governed by § 1757(5)(D) and (7)(I) of the Act. The statute is clear that an activity that is necessary for a credit union to carry on effectively the business for which it is incorporated is a permissible incidental powers activity. This is different than the statutory standard for a permissible CUSO activity, which is limited to activities that relate to the routine daily operations of credit unions.

A few commenters suggested the list is too restrictive, should include more examples, and should be an appendix to the rule, rather than in the rule. When the Board revised the list of permissible CUSO activities in its 1998 overhaul of the CUSO rule, an effort was made to include all permissible activities relating to the routine operations of credit unions. 63 FR 10743 (March 5, 1998). The Board is not aware of any activities relating to the routine operations of credit unions that were not either, considered and rejected, or included at that time and so, it will not be revising the list.

One commenter suggested adding business loan origination and consumer loan origination to the list of permissible activities. The Board specifically addressed both business and consumer loan origination in its 1998 revisions to the CUSO regulation and has not changed its view as to the proper role of CUSOs in this area.[1] As it noted then, the Board believes that, while CUSOs are not authorized to originate consumer loans, other than mortgage loans, or business loans, they may provide support services to credit unions for both types of loan.

Suggestion To Seek an Advisory Opinion From the Office of General Counsel (OGC)

Fifteen of the 20 commenters that responded to this issue supported the proposal. One of those commenters noted that this provision is especially helpful because it does not require an opinion if the credit union believes the activity is within the stated categories and can justify it if challenged.

Only one of the five negative commenters, the bank trade group, objected to this provision because it is too permissive. Some of the negative commenters suggested that the decision of whether an activity falls within a broad category should be made by the credit unions and their attorneys, not NCUA. The Board agrees and states that the rule does not require a credit union to come to OGC for an opinion every time a CUSO wants to engage in an activity not specifically listed as an example under a broad category. An opinion from OGC is recommended if there is doubt as to whether a specific activity falls within one of the broad categories or a new broad category is being proposed. In those situations, an FCU that doesn't consult with OGC runs the risk of engaging in an impermissible activity and being subject to supervisory action.

One commenter suggested that if an activity is “convenient and useful” the credit union's attorney should decide if it is permissible. As noted above, the test for CUSOs is not the “convenient and useful” test associated with incidental powers activities. The test for CUSOs, as stated in the rule and the Act, is that the activity must relate to the “routine, daily operations of credit Start Printed Page 40577unions.” 12 U.S.C. 1757(7)(I); 12 CFR 712.5.

Addition of a Federally-Chartered Corporation as a Permissible CUSO Structure

The 21 commenters that responded to this issue agreed with allowing a federally-chartered corporation as a permissible CUSO structure. A few of those commenters suggested that the Board define “depository institution” in the CUSO rule so as to exclude from the definition an institution principally engaged in the business of providing trust services that holds only such deposits as are required to qualify for FDIC insurance. The commenters requested this definition so that a CUSO could obtain a trust charter from the Office of Thrift Supervision (OTS).

While the Act prohibits an FCU from acquiring control directly or indirectly of a financial institution, trust services have been identified as a permissible activity for CUSOs for almost twenty years. 12 U.S.C. 1757(7)(I); 47 FR 30462 (July 14, 1982). The NCUA's long-standing interpretation of financial institution has been that it means a deposit taking institution. 51 FR 10353, 10354 (March 26, 1986). The CUSO regulation reflects this policy and states that FCUs may not acquire control of “another depository financial institution.” 12 CFR 712.6. Thus, NCUA has viewed trust companies as permissible CUSOs as long as they were not deposit taking organizations.

The OTS requires Federal Deposit Insurance Corporation (FDIC) insurance for all institutions it charters. 12 CFR 543.2. Under the Federal Deposit Insurance Act (FDI Act), an applicant for insurance must be “engaged in the business of receiving deposits other than trust funds.” 12 U.S.C. 1815(a)(1). In March 2000, the FDIC interpreted this requirement in General Counsel Opinion No. 12, stating that this requirement can be satisfied if an institution maintains one or more non-trust deposit accounts in the aggregate amount of $500,000. 66 FR 20102, Appendix (April 19, 2001). The opinion was intended to clarify the meaning of the requirement, particularly in the context of the FDIC's long-standing interpretation of non-traditional depositories such as trust companies.

Recently, the FDIC issued a proposed rule that would incorporate its General Counsel Opinion No. 12. 66 FR 20102. The proposed rule contains an extensive discussion of the ambiguity of the FDI Act and various factors that led to issuance of the legal opinion. The impetus for the proposed rule is a recent federal court decision, discussed in the preamble to the proposed rule, in which the court disagreed with the FDIC's interpretation of this requirement. The FDIC states that the inconsistency between its interpretation and that of the court could have harmful results and has determined to address the issue in a rulemaking. Id. at 20105.

While the Board agrees with the commenters that “depository financial institution”, as used in 12 CFR 712.6, should not include a financial institution principally engaged in the business of providing trust services, and which holds only such deposit as is required for FDIC insurance, the Board is not inclined to include a definition in the regulation at this time. A regulatory definition adopted now might not adequately address issues that will be considered in the FDIC's rulemaking or in the pending litigation. Further, the Board does not believe it is necessary to include a definition as part of the regulation but, as necessary, NCUA's Office of General Counsel may provide further interpretation, in addition to that stated in this preamble.

One commenter suggested an FCU's trust powers be expanded in NCUA's incidental powers rule and that the Act be amended to allow NCUA to charter trust companies. Another commenter suggested adding a new structure that would allow a CUSO to be established under foreign law so that it could serve foreign nationals. These suggestions are outside the scope of this rulemaking process.

Final Amendments

Section 712.3(a)

The Board is revising this provision to include federally-chartered corporations as a permissible CUSO structure.

Section 712.5

The Board is adding a sentence to this section to state plainly that the listings under the broad categories are for illustrative purposes and not intended to be an exclusive or exhaustive list of permissible activities.

Section 712.7

The Board is amending the provision for adding new activities to the regulation to advise FCUs to seek an advisory opinion from OGC as to whether a proposed activity fits into one of the authorized categories before requesting a regulatory change to add a new activity. An FCU is not required to seek an advisory opinion if a proposed activity, not listed as an example, clearly falls within one of the broad categories approved by the Board.

This amendment in conjunction with the change to § 712.5 will reduce regulatory burden by allowing the rule to expand as technology expands.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small entities (primarily those under 1 million in assets). The amendments will not have a significant economic impact on a substantial number of small credit unions and, therefore, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

NCUA has determined that this final rule does not increase paperwork requirements under the Paperwork Reduction Act of 1995 and regulations of the Office of Management and Budget.

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1966 (SBREFA) (Pub. L. 104-121) provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by Section 551 of the Administrative Procedures Act. 5 U.S.C. 551. The Office of Management and Budget is reviewing this rule to determine if it is a major rule for purposes of SBREFA.

Executive Order 13132

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. In adherence to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. This rule will apply only to federally-chartered credit unions. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined that this proposal does not constitute a policy that has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999—Assessment of Federal Regulations and Policies on Families

The NCUA has determined that this rule will not affect family well-being within the meaning of section 654 of the Start Printed Page 40578Treasury and General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 (1998).

Agency Regulatory Goal

NCUA's goal is to promulgate clear and understandable regulations that impose minimal regulatory burden. We requested comments on whether the proposed rules were understandable and minimally intrusive if implemented as proposed. We received three comments on this issue. Two commenters did not address the proposal, but rather stated that the question and answer format of the CUSO rule is confusing. One commenter stated that the proposal does meet the agency's regulatory goal.

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List of Subjects in 12 CFR Part 712

  • Administrative practices and procedure
  • Credit
  • Credit unions
  • Investments
  • Reporting and recordkeeping requirements
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By the National Credit Union Administration Board on July 26, 2001.

Becky Baker,

Secretary of the Board.

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Accordingly, NCUA amends 12 CFR part 712 as follows:

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1. The authority citation for part 712 continues to read as follows:

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Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 1784, 1785 and 1786.

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2. Amend § 712.3 by revising the third sentence of paragraph (a) to read as follows:

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What are the characteristics of and what requirements apply to CUSOs?

(a) Structure. * * * For purposes of this part, “corporation” means a legally incorporated corporation as established and maintained under relevant federal or state law. * * *

* * * * *
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4. Amend § 712.5 by revising the second sentence and adding a third sentence to the introductory paragraph to read as follows:

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What activities and services are preapproved for CUSOs?

* * * Otherwise, an FCU may invest in, loan to, and/or contract with only those CUSOs that are sufficiently bonded or insured for their specific operations and engaged in the preapproved activities and services related to the routine daily operations of credit unions. The specific activities listed within each preapproved category are provided in this section as illustrations of activities permissible under the particular category, not as an exclusive or exhaustive list.

* * * * *
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5. Add a sentence to the end of § 712.7 to read as follows:

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What must an FCU do to add activities or services that are not preapproved?

* * * Before you engage in the petition process, you should seek an advisory opinion from NCUA's Office of General Counsel as to whether a proposed activity is already covered by one of the authorized categories without filing a petition to amend the regulation.

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1.  Regarding consumer and business loan origination as a CUSO activity, the Board stated:

After due consideration of the comments, NCUA remains opposed to this addition [consumer loan origination]. Unlike consumer mortgage loan origination, which requires a specialized lending staff, must follow strict secondary mortgage market rules, and requires economies of scale in order to be viable, consumer loans are relatively easy to offer and process. In addition, NCUA is apprehensive in granting CUSOs the authority to provide consumer loans to the general public, as it may be perceived as a dilution of the common bond by Congress and the public.

* * * [W]hile CUSOs can only approve and fund consumer mortgages and student loans, CUSOs can engage in many back office aspects of lending * * *. In essence, CUSOs can provide back office underwriting, processing and servicing functions to enable a credit union to offer loans * * *. In other words, FCUs are permitted to leverage their member business loan expertise with CUSO business loan personnel. This clarification is made to assist FCUs in expanding the number and type of business loans made to its members in conjunction with the member business loan amendments proposed in 62 FR 41313 (August 1, 1997).

Id. at 10752.

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[FR Doc. 01-19106 Filed 8-2-01; 8:45 am]