[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Proposed Rules]
[Pages 66413-66415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30695]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 721


Federal Credit Union Insurance and Group Purchasing Activities

AGENCY: National Credit Union Administration (NCUA).

ACTION: Request for comment.

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SUMMARY: Under National Credit Union Administration's regulations, a 
federal credit union is allowed to offer group purchasing activities, 
including insurance plans, to its members. For group purchasing plans 
other than insurance, a federal credit union is limited to 
reimbursement up to its cost amount. NCUA is soliciting public comment 
on, among other things, whether NCUA should amend this regulation to 
set forth credit union's incidental powers that would not have a limit 
on reimbursement. Information from interested parties will assist NCUA 
in determining whether to issue a proposed rule on incidental 
authorities and group purchasing.

DATES: The NCUA must receive comments on or before February 24, 2000.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments 
to (703) 518-6319. Please send comments by one method only. 

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney or Chrisanthy J. Loizos, Staff Attorney, Division of 
Operations, Office of General Counsel, at the above address or 
telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    Currently, Part 721 sets forth the rules governing federal credit 
union (FCU) group purchasing activities, including insurance plans. 
Group purchasing activities are generally understood to mean FCUs 
making the products or services of third-party vendors available to 
their members. FCUs may provide an endorsement and perform 
administrative functions on behalf of the vendors. 12 CFR 721.1.
    Part 721 was originally issued as a way to foster the educational 
role of credit unions.
    The regulation evolved into a method for credit unions to provide 
information, products and services to their members through outside 
vendors. For group purchasing plans other than insurance, a federal 
credit union is limited to reimbursement up to its ``cost amount.'' 12 
C.F.R. 721.2(a)(2) For insurance products, except as otherwise provided 
by state law, compensation is unlimited with respect to insurance 
sales, by the credit union or its employees, which are directly related 
to an extension of credit by the credit union or directly related to 
the opening or maintenance of a share, share draft or share account at 
the credit union.
    The legal authority for the activities covered by Part 721 is the 
incidental powers provision of the Federal Credit Union Act. That 
provision states that a federal credit union may ``exercise such 
incidental powers as shall be necessary or requisite to enable it to 
carry on effectively the business for which it is incorporated.'' 12 
U.S.C. 1757(17). NCUA's current test of what is an incidental power is 
whether the activity is convenient or useful to the credit union's 
business as expressly authorized by the Federal Credit Union Act. 
NCUA's position on incidental

[[Page 66414]]

powers has been based on Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st 
Cir. 1972). This case established a test for determining the incidental 
powers of national banks. Recent case law has broadened the analysis of 
incidental powers for banks, and we believe that it is time to revisit 
the scope of that authority for credit unions.
    In Arnold Tours, the court derived incidental powers solely from 
the express powers enumerated in the National Bank Act. The court 
examined whether a national bank was exercising an incidental power by 
operating a full-scale travel agency. National banks may exercise ``all 
such incidental powers as shall be necessary to carry on the business 
of banking.'' 12 U.S.C. 24 (Seventh). The court found that ``[t]he most 
reliable guides as to what is encompassed in the term `the business of 
banking' are the express powers of national banks.'' 472 F.2d at 431. 
In determining that banks could not operate travel agencies, the court 
held:

    [A] national bank's activity is authorized as an incidental 
power, ``necessary to carry on the business of banking'' . . . if it 
is convenient or useful in connection with the performance of one of 
the bank's established activities pursuant to its express powers 
under the National Bank Act. If this connection between an 
incidental activity and an express power does not exist, the 
activity is not authorized as an incidental power.

Id. at 432.
    The court's incidental powers test looked to whether the activity 
was convenient or useful to the express power authorized by the law.
    However, recent case law has broadened the ``business of banking'' 
analysis and expanded the incidental powers of national banks. In an 
appellate case where a bank wanted to establish a subsidiary to offer 
municipal bond insurance, the court held that insuring such bonds was 
functionally equivalent to the issuance of stand-by letters of credit, 
a product permitted within the business of banking. American Insurance 
Association v. Clarke, 865 F.2d 278 (D.C. Cir. 1988). Expanding the 
test of Arnold Tours, the court explained:

    Appellant argues that a bank may engage only in those activities 
specifically mentioned and others incident (i.e. convenient or 
useful) to the expressly authorized activities. We agree with the 
district court, however, that this reflects ``a narrow and 
artificially rigid view of both the business of banking and the 
National Bank Act.'' 656 F.Supp at 408. Rather than attempt to 
correlate municipal bond insurance to a specific power mentioned in 
section 24(Seventh), the Comptroller focused on the essence of [the 
subsidiary's] service: the provision of credit.

Id. at 281.
    Another court found that national banks were permitted to offer 
debt cancellation contracts. ``The `incidental powers'' of national 
banks are not limited to activities that are deemed essential to the 
exercise of express powers. Rather, courts have analyzed the issue by 
asking whether the activity is closely related to an express power and 
is useful in carrying out the business of banking.'' First National 
Bank of Eastern Arkansas v. Taylor, 907 F.2d 775, 778 (8th Cir. 1990). 
The court found that debt cancellation contracts were directly related 
to the bank's lending activities. The court also found that these 
contracts were a convenient method of extinguishing debt to avoid the 
costs of collection efforts.
    The U.S. Supreme Court continued this trend in Nationsbank of North 
Carolina v. Variable Annuity Life Insurance Co. (VALIC), 513 U.S. 251 
(1995). In VALIC, the Court examined whether a national bank's 
subsidiary could act as an agent in the sale of annuities. The Court 
agreed with the Comptroller that the business of banking includes the 
brokerage of financial investment instruments. As such, national banks 
may ``serve as agents for their customers in the purchase and sale of 
various financial investment instruments * * * and annuities are widely 
recognized as just such investment products.'' Id. at 259. In 
evaluating the case, the unanimous Court stated:

    We expressly hold that the ``business of banking'' is not 
limited to the enumerated powers in section 24 Seventh and that the 
Comptroller therefore has discretion to authorize activities beyond 
those specifically enumerated. The exercise of the Comptroller's 
discretion, however, must be kept within reasonable bounds. Ventures 
distant from dealing in financial investment instruments--for 
example, operating a general travel agency--may exceed those bounds.

Id. at 259, n. 2.
    Subsequent case law has applied this less restrictive analysis. An 
appellate court found that a division of a national bank could enter 
into engagement contracts as a broker. The court gave deference to the 
OCC's finding that ``allowing banks to use their expertise as an 
intermediary effectuating transactions between parties facilitates the 
flow of money and credit through the economy'' and therefore falls 
within the bank's incidental powers necessary to carry on the business 
of banking. Norwest Bank Minnesota, N.A. v. Sween Corporation, 118 F.3d 
1255, 1260 (8th Cir. 1997).
    Recent OCC opinions exemplify that agency's approach to the 
incidental powers question. In one instance, the OCC found a bank 
subsidiary was permitted to underwrite credit related insurance for 
credit cards and safe deposit box liability insurance. OCC Corporate 
Decision #97-92, November 1997. The OCC first considered whether the 
activity was viewed as part of the ``business of banking,'' and then to 
whether the activity was incidental to the business of banking. Based 
on a string of judicial decisions, the OCC uses the following three 
principles to determine whether an activity is within the scope of the 
``business of banking'': (1) Is the activity functionally equivalent to 
or a logical outgrowth of a recognized banking activity; (2) would the 
activity respond to customer needs or otherwise benefit the bank or its 
customers; and (3) does the activity involve risks similar in nature to 
those already assumed by banks.'' Id. at 3.
    The NCUA Board believes that recent case law allows the agency to 
adopt a more expansive view of a credit union's incidental power 
authority. In addition, the NCUA Board has found the OCC's analysis 
persuasive and is requesting comment on whether NCUA should adopt a 
similar position.

B. How the Regulation Should Be Amended

    The NCUA Board is considering retitling the regulation, 
``Incidental Powers and Group Purchasing Activities,'' and 
restructuring it into four distinct sections. As discussed above, the 
NCUA Board is considering expanding its view of the incidental powers 
of an FCU.
    The NCUA Board is considering and seeking specific comment on the 
structure of the first section regarding incidental powers. This 
section would list activities, or categories of activities, considered 
to be within the incidental powers of a federal credit union. At this 
time, descriptions of what specific activities are permissible as an 
exercise of an FCU's incidental powers are found in legal opinions 
issued by the Office of General Counsel. For example, among other 
activities, NCUA opinion letters have stated that electronic tax 
filing, raffles to encourage member voting, and check clearing services 
for a sponsor/member are all permissible incidental powers activities. 
The preamble to this section would list those activities or categories 
of activities currently permitted and specify that the list is 
illustrative but not exclusive. The NCUA Board believes it may be 
helpful

[[Page 66415]]

for credit unions if the agency listed, in addition to the approved 
activities, or categories of activities, a process for a credit union 
to request additional activities that may be within the credit union's 
incidental authority. The NCUA Board would specify the manner in which 
credit unions could apply for confirmation that an incidental power is 
permissible. The NCUA Board further requests that commenters suggest 
standards to be considered when analyzing the permissibility of an 
activity, or a category of activities as an incidental power. The Board 
is also interested in receiving comments on examples of activities and 
categories of activities which could be considered as incidental to the 
business of credit unions.
    Some credit unions may not realize they may earn money from their 
incidental power activities. Therefore, staff is considering whether 
the revised regulation should explicitly state that FCUs are not 
limited in the amount they may earn from incidental powers activities 
to clear up any lingering confusion.
    The second section would authorize group purchasing activities and 
limit compensation to the credit union's cost amount. Generally, this 
section would track the current regulation. The NCUA Board believes it 
may be helpful to include a fuller description of what a group 
purchasing plan is and clarify ``cost amount.'' The NCUA Board is also 
considering including in the regulation a provision regarding the sale 
of mailing lists. The provision would likely incorporate NCUA's long-
standing position that an FCU may sell mailing lists as a means of 
facilitating group purchasing for members but that, as for all group 
purchasing activities, an FCU's compensation is limited. In connection 
with a provision on mailing lists, the NCUA Board intends to 
incorporate its longstanding view that no information about the member 
other than a member's name and address, such as personal information 
about the member's business with the credit union, can be included in 
the sale of the mailing list. This view is consistent with NCUA's 
longstanding interpretation of the confidentiality provision contained 
in the standard FCU Bylaws. The NCUA Board is also requesting comment 
on whether a member should have the option to elect to have their name 
deleted from any mailing list provided to a third party.
    The NCUA Board is seeking comment on the limit of compensation to 
the credit union's cost amount, whether any limit is appropriate, and 
should reasonable value be added to the credit union's cost when 
applying the compensatory limit. The NCUA Board is also requesting 
comment on how the term ``reasonable value'' should be defined.
    The third section would focus on insurance products activities as a 
longstanding incidental authority. This section would track the current 
regulation and state that an FCU may receive unlimited compensation 
with respect to the sale of insurance products that are directly 
related to a credit union loan or the opening and maintenance of any 
type of share account. In addition, the term ``insurance products'' 
would be defined for purposes of this regulation.
    The fourth section would set forth the current conflict of interest 
provision applicable to group purchasing activities, including 
insurance activities. The regulation currently states that ``[n]o 
director, committee member, or senior management employee of a Federal 
credit union or any immediate family member of any such individual may 
receive any compensation or benefit, directly or indirectly, in 
conjunction with any activity under this Part.'' The current section 
defines ``immediate family member'' and ``senior management employee,'' 
but the meaning of the phrase ``in conjunction with any activity'' has 
been the cause of some confusion. Thus, the NCUA Board believes it 
would be helpful to clarify how this phrase should be applied.

    By the National Credit Union Administration Board on November 
18, 1999.
Becky Baker,
Secretary of the Board.
[FR Doc. 99-30695 Filed 11-24-99; 8:45 am]
BILLING CODE 7535-01-U