[Federal Register Volume 66, Number 150 (Friday, August 3, 2001)]
[Rules and Regulations]
[Pages 40575-40578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19106]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 712


Credit Union Service Organizations (CUSOs)

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: 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

[[Page 40576]]

the 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.

DATES: This rule is effective September 4, 2001.

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

SUPPLEMENTARY INFORMATION:

Background

    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 Sec. 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 Sec. 1757(17) of the Federal Credit 
Union Act (Act) and CUSO activities are governed by Sec. 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.
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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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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

[[Page 40577]]

unions.'' 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 Sec. 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

[[Page 40578]]

Treasury 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.

List of Subjects in 12 CFR Part 712

    Administrative practices and procedure, Credit, Credit unions, 
Investments, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on July 26, 
2001.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR part 712 as follows:

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)

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

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

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


Sec. 712.3  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. * * *
* * * * *
    4. Amend Sec. 712.5 by revising the second sentence and adding a 
third sentence to the introductory paragraph to read as follows:


Sec. 712.5  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.
* * * * *

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


Sec. 712.7  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.

[FR Doc. 01-19106 Filed 8-2-01; 8:45 am]
BILLING CODE 7535-01-U