[Federal Register Volume 66, Number 151 (Monday, August 6, 2001)]
[Rules and Regulations]
[Pages 40845-40859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19103]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 721


Federal Credit Union Incidental Powers Activities

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: The National Credit Union Administration (NCUA) is issuing a 
final rule that revises a regulation by categorizing activities deemed 
to be within the incidental powers of a federal credit union (FCU). The 
final rule also describes how interested parties may request a legal 
opinion on whether an activity is within an FCU's incidental powers or 
apply to add new activities or categories to the regulation. The rule 
also clarifies the conflict of interest provisions applicable to 
activities authorized by this regulation.

DATES: The rule is effective September 5, 2001.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney, or Chrisanthy J. Loizos, Staff Attorney, Office of General 
Counsel at the National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428 or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background
B. Overview of Regulation
C. Safety and Soundness Considerations
D. Comments
    1. General
    2. Other Suggestions
E. Section-by-Section Analysis
F. Regulatory Procedures

A. Background

    On November 18, 1999, the NCUA Board (the Board) issued a request 
for comments in an Advance Notice of Proposed Rulemaking (ANPR) on 
whether the Board should restructure part 721 of NCUA's regulations and 
adopt provisions regarding incidental powers within the regulation. 64 
FR 66413 (November 26, 1999). At the time, the Board envisioned that it 
would create four sections within part 721 and expand its test for 
analyzing the incidental powers of FCUs. After receiving the public's 
comments on the ANPR, the Board issued a Notice of Proposed Rulemaking 
on November 16, 2000. 65 FR 70526 (November 24, 2000).
    In the proposed rule, the Board restructured part 721 into seven 
sections. The proposed rule established a definition for an incidental 
powers activity by using a three-prong test. The proposed rule also set 
out categories determined to be within an FCU's incidental powers. A 
majority of the proposed categories are activities NCUA has previously 
established as within the incidental powers of FCUs in legal opinions. 
The proposed rule identified the following twelve categories: 
Certification services, correspondent services, electronic financial 
services, excess capacity, financial counseling services, finder 
activities, marketing activities, monetary instrument services, 
operational programs, stored value products, and trustee or custodial 
services. Each category in the proposed rule contained examples of 
incidental powers activities.
    The proposed rule provided that FCUs could seek advisory opinions 
from NCUA's General Counsel as to whether a proposed activity fits into 
one of the authorized categories or is otherwise an incidental powers 
activity. It also established a process for FCUs to petition NCUA to 
approve new activities or categories of activities. The proposed rule 
also allowed FCUs to receive compensation from any activity determined 
to be within their incidental powers. Finally, the proposed rule 
amended the conflicts of interest provision in part 721, to conform to 
similar conflict provisions in NCUA's regulations.

B. Overview of Regulation

Incidental Powers Authority

    The legal authority for the expanded activities authorized by the 
final rule is the incidental powers provision of the Federal Credit 
Union Act (FCU Act), 12 U.S.C. 1757(17). The FCU Act expressly grants 
FCUs the power to, among other activities, purchase, hold and dispose 
of property; make loans to members; make certain investments; accept 
share, share draft and share certificate accounts; and sell and cash 
negotiable instruments. 12

[[Page 40846]]

U.S.C. 1757(4)-(7), (12), (15). The accompanying incidental powers 
provision states that an FCU 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).
    1. Arnold Tours Standard. To determine whether an activity is 
authorized under the incidental powers provision, NCUA has looked to 
whether the activity is convenient or useful in connection with the 
performance of an FCU's established activities pursuant to its express 
powers granted by the FCU Act. This standard was established in Arnold 
Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972), for determining the 
incidental powers of national banks. Accord Independent Insurance 
Agents of America, Inc. v. Hawke, 211 F. 3d 638, 640 (D.C. Cir. 2000) 
(``Whether a particular banking device's nomenclature harkens to 
traditional banking activities is not dispositive''); First National 
Bank of Eastern Arkansas v. Taylor, 907 F.2d 775, 778 (8th Cir.), cert. 
denied, 498 U.S. 972 (1990) (``Incidental powers are not confined to 
activities considered essential to the exercise of express powers''); 
M&M Leasing Corp. v. Seattle First National Bank, 563F.2d 1377, 1382 
(9th Cir. 1977), cert. denied, 436 U.S. 956 (1978) (``powers of 
national banks must be construed so as to permit the use of new ways of 
conducting the very old business of banking''). In addition, Arnold 
Tours recognized certain ``agency or informational services'' that, 
although not necessarily rooted in an incidental power, represent a 
permissible ``goodwill'' service to customers when provided on a 
limited and largely uncompensated basis. 472 F.2d at 432.
    The convenient or useful standard adopted in Arnold Tours has been 
acknowledged as proper for analyzing the incidental powers provision of 
the FCU Act. American Bankers Association v. Connell, 447 F. Supp. 296, 
298 (D.D.C. 1978), rev'd, 595 F.2d 887 (D.C. Cir.), cert. denied, 444 
U.S. 920 (1979). Relaxing that standard, a subsequent court pronounced 
it ``narrow and artificially rigid,'' preferring instead to focus on 
the ``essence'' of the service being provided and its functional 
equivalency to a permitted activity. American Insurance Association v. 
Clarke, 865 F.2d 278, 281, 284 (D.C. Cir. 1988).
    For many years, NCUA has followed the reasoning of Arnold Tours in 
recognizing various activities either as incidental to an FCU's 
exercise of its express powers or simply as a permissible ``goodwill'' 
service to members. Upon a finding that an activity is either 
convenient or useful in connection with performance of an expressly 
granted power, NCUA has authorized FCUs to engage in a broad range of 
activities, including the authority to: Engage in marketing and 
promotional activities on behalf of the FCU, provide a variety of loan-
related products, perform various payment and money exchange functions 
for members, make charitable donations and contributions, provide 
correspondent services, engage in consumer leasing, establish numerous 
products and services derived from share accounts, and perform various 
financial functions to assist member business transactions. In 
addition, NCUA has allowed FCUs to implement new operational programs 
so that FCUs and their members benefit from technological advancements 
in the financial services industry, such as: Electronic fund transfers, 
automated teller machines, payroll deduction and direct deposit 
services, debit cards, and wire transfer services. Further, NCUA has 
permitted various activities as informational or goodwill services for 
members, including promoting the products and services of third parties 
and permitting FCU endorsement, on a cost reimbursement basis. 50 FR 
16462, 16463 (April 26, 1985) (final rule addressing insurance and 
group purchasing activities).
    As shown in the Section-by-Section Analysis below, much of the 
final rule simply codifies the practices NCUA has approved through 
legal opinions over the years as incidental powers under Arnold Tours. 
Further relying on Arnold Tours, the final rule introduces a number of 
activities that, as explained below, similarly qualify as incidental 
powers because they are ``convenient or useful'' in performing an 
activity established under an express power.
    2. VALIC Standard. The U.S. Supreme Court has broadened the 
standard for considering an expansion of the incidental powers of 
national banks. In Nationsbank of North Carolina v. Variable Annuity 
Life Insurance Co. (VALIC), 513 U.S. 251 (1995), the Court stated that 
the authorization of ``incidental powers * * * necessary to carry on 
the business of banking'' is an independent grant of authority, id. at 
258, separate from the five activities specifically enumerated in the 
National Banking Act, 12 U.S.C 24(Seventh). Accord Independent 
Insurance Agents, 211 F. 3d at 640 (``enumeration of powers is only 
illustrative and Comptroller may authorize additional activities if 
encompassed by a reasonable interpretation''); Norwest Bank Minnesota, 
N.A. v. Sween Corp., 118 F.3d 1255, 1259 (8th Cir. 1997) (analyzing 
whether activity is closely related to an express power and useful in 
carrying out business of banks). The Court rejected the argument that 
the powers of national banks are limited to the five specifically 
enumerated activities, regarding those activities as ``exemplary, not 
exclusive.'' 513U.S. at 258. The Court held 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,'' provided 
that discretion is ``kept within reasonable bounds.'' Id. at 259 n.2.
    Applying the reasoning of VALIC to sec. 1757, ``the business for 
which [a credit union] is incorporated'' is not limited to the express 
powers in that section. Rather than linking incidental powers to 
express powers, VALIC has provided the framework for the Board to adopt 
a broader and more flexible analysis, giving it discretion to authorize 
FCUs to engage in activities beyond those specifically enumerated in 
sec. 1757. Thus, activities may fall within an FCU's incidental powers 
if they qualify as either ``convenient or useful'' in connection with 
an express power or otherwise fall within the scope of ``the business 
for which [a credit union] is incorporated.''
    NCUA has relied on the VALIC analysis in recent opinions. For 
example, a 1999 Office of General Counsel legal opinion authorized FCUs 
to maintain foreign currency accounts to facilitate member 
transactions. NCUA reasoned that, by maintaining a foreign bank account 
to facilitate member transactions, an FCU can: (1) Provide basic credit 
union services such as lending and deposit taking to members who, due 
to their residence in a foreign country, are unable to obtain these 
services from the FCU's domestic offices; and (2) benefit members by 
providing these services conveniently and at minimal cost in comparison 
to currency conversion expenses. A deposit account in a foreign bank, 
which is established for foreign currency exchanges and to facilitate 
basic services for members located in foreign countries, is closely 
related to an FCU's deposit taking and lending authority and is useful 
in carrying out the business of credit unions.
    As Congress reiterated most recently in 1998, the FCU Act defines 
the business for which credit unions are incorporated--to promote 
thrift among members and to create sources of credit for provident or 
productive purposes. 12

[[Page 40847]]

U.S.C. 1752(1); Public Law No. 105-219, 112 Stat. 913, Sec. 2 (1998). 
``Thrift'' refers to ``wise economy in the management of money and 
other resources.'' American Heritage Dictionary of the English Language 
(4th ed. 2000) at 1802. A purpose is ``provident'' if it anticipates 
``providing for future needs or events,'' id. at 1411; it is 
``productive'' if it involves ``the creation of goods or services to 
produce wealth or value.'' Id. at 1399. NCUA has consistently construed 
the authority of FCUs broadly to afford them maximum flexibility in 
providing services to their members. 50 FR 16462, 16463 (April 26, 
1985). In this instance, Congress's record of steadily expanding the 
range of expressly granted powers, combined with the legislative 
history encouraging NCUA to meet the needs of FCUs and their members, 
justify, if not require, a broad and ambulatory view of the business 
for which FCUs are incorporated.
    A congressional priority in enacting the FCU Act in 1934 was to 
``ensure that [credit unions] would remain responsive to members'' 
needs.'' First National Bank & Trust Co. v. NCUA, 988 F.2d 1272,1274 
(D.C. Cir. 1993). To that end, Congress has since amended the FCU Act, 
steadily expanding the powers of FCUs, to ensure that they keep pace 
with changes and developments in the financial services marketplace. 
The power to make loans was expanded seven times between 1949 and 1987. 
12 U.S.C. 1757(5). These amendments included: Raising the maximum 
maturities limits; extending the range of permissible loan types and 
purposes, such as loans to credit union service organizations (CUSOs) 
and participation loans; and even abandoning the limitation that loans 
be made for ``provident and productive purposes.'' The power to receive 
payments on shares, sec. 1757(6), was expanded five times between 1970 
and 1980 and included amendments permitting FCUs to offer share 
certificates and share draft accounts, to accept certain types of 
nonmember deposits, and to receive payments on shares from the Central 
Liquidity Facility. The power to invest funds, sec. 1757(7) and (15), 
has been expanded nine times between 1937 and 1984, extending the list 
of permissible government guaranteed obligations and entities and 
allowing FCUs to invest in CUSOs, secondary market instruments, and 
mortgage-backed securities. The express power to sell and cash checks 
and money orders for a fee was added in 1959, and, in 1982, it was 
extended to ``similar money transfer instruments,'' allowing FCUs to 
charge a fee in excess of direct costs. 12 U.S.C. 1757(12).
    In the course of expanding the powers of FCUs, Congress has 
repeatedly taken the opportunity to encourage NCUA to be flexible, 
innovative and responsive in meeting the needs of FCUs and their 
members. When Congress created NCUA in 1970, the same year that share 
insurance was introduced, it recognized that ``credit unions have 
become such a significant component of our society that they need and 
deserve a more responsive and independent regulatory agency.'' S. Rep. 
91-518 at 2 (1970), reprinted in 1970 U.S.C.C.A.N. 2479, 2480. Further, 
Congress envisioned that NCUA would have ``a great responsibility and 
an opportunity to make real and substantial contributions to our 
society,'' and ``would be able to be more responsive to the needs of 
credit unions and to provide more flexible and innovative regulation.'' 
Id. at 2481.
    When Congress amended the FCU Act in 1977 to add an extensive array 
of savings, lending and investment powers, it intended to ``allow 
credit unions to continue to attract and retain the savings of their 
members by providing essential and contemporary services,'' and 
acknowledged that credit unions are entitled to ``updated and more 
flexible authority granting them the opportunity to better serve their 
members in a highly-competitive and ever-changing financial 
environment.'' H.R. Rep. 95-23 at 7 (1977), reprinted in 1977 
U.S.C.C.A.N. 105, 110. Congress acknowledged the difficulty in 
``regulating contemporary financial institutions within the framework 
of an Act that has on a continuing basis required major updating by 
means of regulation.'' Id.
    When Congress enacted the Garn-St. Germain Depository Institutions 
Act in 1982, which among other things, extended FCU real estate lending 
and investment powers, it noted that credit unions ``continue to face 
increasing competition from both within and outside of the financial 
system * * * as they prepare themselves for a future certain to contain 
a more rapidly changing financial marketplace than ever previously 
expected.'' S. Rep. No. 97-356 at 34 (1982), reprinted in 1982 
U.S.C.C.A.N. 3054, 3088. The purpose of the legislation, said Congress, 
is ``to help credit unions meet the challenges of today's rapidly 
changing and fiercely competitive financial market and to enhance 
NCUA's ability to more fairly and effectively carry out its 
responsibilities.'' Id. at 3089.
    Following the example and encouragement of Congress to be flexible, 
innovative and responsive, the Board recognizes that the business of 
promoting thrift and providing access to credit for provident and 
productive purposes has witnessed a dramatic shift from the Depression-
era economy of 1934, to a post-War, industrial boom economy, to the 
present information age economy. During this evolution, financial 
services and products have emerged and matured. Advances in technology 
and communications have improved, and will continue to improve, the 
delivery of financial services. The marketplace for financial services 
has expanded and diversified, and competition has intensified. It is, 
therefore, a reasonable exercise of discretion for the Board to expand 
the range of incidental powers accordingly to fit the contemporary 
business of credit unions. This will equip FCUs to deliver products and 
services that facilitate the modern day practice of thrift and the 
provident and productive use of credit.
    For these reasons, the final rule authorizes as incidental powers 
under sec. 1757(17) certain activities that, even if not linked to an 
expressly granted power, nonetheless are convenient or useful in 
carrying out ``the business for which [credit unions] are 
incorporated,'' as that business has evolved since 1934; are a 
functional equivalent or logical outgrowth of activities within that 
business; and involve risks similar in nature to those already assumed 
as part of that business.

C. Safety and Soundness Considerations

    The Board wants to emphasize that, while the final rule identifies 
categories of activities the Board has identified as within an FCU's 
incidental powers under the FCU Act, an FCU must comply with all 
applicable legal requirements and give due consideration to safety and 
soundness concerns before engaging in an incidental powers activity.\1\ 
To carry out

[[Page 40848]]

its responsibilities, FCU management must consider whether its policies 
for new activities are realistic and carefully designed to enable the 
FCU to serve the interests and needs of the membership. In addition to 
meeting various legal requirements, many incidental powers activities 
require management to provide direction and instruction for officers, 
employees, and committees delegated the responsibility for implementing 
new activities and services.
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    \1\ In addition to the FCU Act and NCUA's regulations, FCUs are 
subject to numerous other laws and regulations, including: Truth in 
Savings Act, Truth in Lending Act and Regulation Z, Equal Credit 
Opportunity Act and Regulation B, Electronic Funds Transfer Act and 
Regulation E, Preservation of Consumer's Claims and Defenses Rule, 
Fair Credit Reporting Act, Real Estate Settlement Procedures Act and 
Regulation X, Fair Debt Collection Practices Act, Home Mortgage 
Disclosure Act and Regulation C, Currency and Foreign Transactions 
Act, Flood Disaster Protection Act, Right to Financial Privacy Act, 
Soldier's and Sailor's Civil Relief Act, Fair Housing Act, 
Government Securities Act of 1986, Regulation G, Expedited Funds 
Availability Act and Regulation CC. FCUs are also subject to various 
state laws, such as commercial codes, abandoned property laws, and 
privacy laws.
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    FCU management is responsible for developing proper internal 
safeguards such as management oversight, internal controls and quality 
control. FCUs must examine the strategic risk, reputation risk, 
transaction risk and compliance risk before engaging in a new activity. 
In addition, management must exercise due diligence before devoting 
resources to a new activity or entering into any arrangements with 
third parties. Activities that involve the use of new technologies must 
rely on acceptable information systems and operations architecture. 
FCUs capable of providing advanced technological services must employ 
appropriate internal controls to minimize technological and legal risk 
and to address safety and soundness considerations. FCUs must also 
adjust their risk management process and insurance coverage to 
correlate with additional risk taken on by engaging in new activities.
    NCUA has published guidance papers to assist FCUs in evaluating the 
risks and understanding the legal requirements involved in some of 
these activities. This guidance includes: (1) NCUA Letter to Credit 
Unions No. 01-CU-02 (February 2001), offering guidance on the privacy 
of consumer financial information; (2) NCUA Letter to Credit Unions No. 
109 (September 1, 1989), discussing risks associated with certain 
computer operations; (3) NCUA Letter to Credit Unions No. 97-CU-5, 
addressing electronic financial services, (4) NCUA Letter to Credit 
Unions No. 00-CU-11, regarding risk management of outsourced technology 
services, and (5) NCUA Interpretive Ruling and Policy Statement 85-1, 
covering trustees and custodians of pension plans. NCUA's published 
guidance, along with NCUA's regulations, are available from the 
agency's website at www.ncua.gov. The Board also recommends that FCUs 
review interpretive letters and guidance issued by other federal 
financial institution regulators for assistance in understanding an 
activity's risks, for example, OCC Bulletin 2001-12 on bank-provided 
account aggregation services and OCC Advisory Letter 2000-9 on third-
party risk. Depending on the activities an FCU undertakes, it may also 
need to consult with its own legal counsel and other professional 
advisers.

D. Comments

1. General

    In response to the proposed rule, the Board received comments on 
the following issues: the appropriateness of its incidental powers 
test, the proposed categories, suggested additions for the proposed 
rule, the application process for expanding the categories, the 
compensation provision, and the conflict of interest prohibitions. 
Although the Board actually received over three hundred comment letters 
or e-mail messages, NCUA staff has credited multiple comment letters 
from the same credit union as one comment, for a total of two hundred 
and seventy-two comment letters.
    Two hundred and sixty commenters supported the proposed rule or 
expanding the incidental powers of FCUs in some manner. These 
commenters commended the Board for its review of the incidental powers 
of FCUs. Generally, the commenters noted that the proposal gives FCUs 
the ability to respond to growing member needs. A majority of these 
commenters supported the proposed rule because it removes regulatory 
uncertainty, allows FCUs to offer more services, provides income 
opportunities and allows FCUs to compete with other financial service 
providers. Several commenters noted that the regulation allows smaller 
credit unions that cannot afford to invest in credit union service 
organizations to offer expanded services to their members.
    Three banking trade groups and two credit unions opposed the 
proposed regulation. Two banking trade groups requested that the 
proposed rule be withdrawn, arguing that NCUA lacks authority to 
interpret incidental powers in the manner proposed. These commenters 
stated that the incidental powers of FCUs must be incidental to the 
promotion of thrift or creating a source of credit. One commenter 
stated that FCU incidental powers must be directly tied to an expressly 
authorized activity. Another stated that FCUs have a limited mission in 
exchange for tax-exempt status. Two credit unions generally opposed the 
rule because it expands income generating opportunities.

2. Other Suggestions

    NCUA received many comment letters from state-chartered credit 
unions fully supporting adoption of the proposed rule. Several of these 
commenters stated they will benefit from the expansion of FCU 
incidental powers because their state laws give state-chartered credit 
unions parity with FCUs operating in their states. Thirteen commenters 
asked for a ``wildcard'' or parity provision for FCUs whereby an FCU 
could engage in the same activities permitted for state-charters in the 
state in which the FCU is located. The FCU Act does not contemplate a 
parity provision as suggested by the commenters. In determining whether 
an FCU may engage in an activity under its incidental powers, an 
analysis under the FCU Act is required.
    Four commenters asked that the rule also permit FCUs to engage in 
all of the activities permitted for CUSOs. The Board acknowledges that 
the final rule permits FCUs to engage in some activities traditionally 
performed by CUSOs. For example, both FCUs and CUSOs may offer income 
tax preparation. The authority of FCUs and CUSOs, however, is 
interpreted under separate provisions of the FCU Act. A CUSO is ``any 
organization as determined by the Board, which is established primarily 
to serve the needs of its member credit unions, and whose business 
relates to the daily operations of the credit unions they serve.'' 12 
U.S.C. 1757(5)(D). Based on this statutory definition of a CUSO, the 
Board establishes the parameters for CUSOs in part 712. TheBoard 
evaluates the incidental powers of FCUs, however, based strictly on its 
interpretation of sec. 1757(17).
    The Board presented the proposed rule in a plain English, question-
and-answer format. Only two commenters disapproved of the question-and-
answer format, stating it makes the rule awkward to read and difficult 
to understand and suggesting it is suitable only for appendices. The 
goal of plain language drafting is to minimize confusion, inadvertent 
errors and the amount of time interested parties must devote to 
understanding the rule. The Board believes, for many regulations 
including this one, it promotes regulatory comprehension, compliance 
and administrative efficiency.

E. Section-by-Section Analysis

Section 721.1  What Does This Part Cover?

    This section describes the scope of part 721. The final rule covers 
the incidental powers of federally-

[[Page 40849]]

chartered, natural-person credit unions under 12 U.S.C. 1757(17).
    Two commenters asked if the rule allows FCUs to provide expanded 
services to member business accounts or restricts these new powers to 
services for natural person members. An FCU may provide the activities 
and services authorized under part 721 to all of its members.
    Several commenters raised questions about the application of part 
721 to corporate credit unions. The Board generally interprets the 
powers of corporate credit unions in part 704 and does not intend part 
721 to apply to corporate credit unions.

Section 721.2  What is an Incidental Powers Activity?

    Following the reasoning of VALIC discussed in section C.1. supra, 
the Board believes that it is no longer necessary to link an incidental 
power directly to an express power granted in the FCU Act. Instead, an 
activity may generally be considered to fall within an FCU's incidental 
powers if it is ``necessary or requisite to enable it to carry on 
effectively the business for which it is incorporated.'' 12 U.S.C. 
1757(17). For the reasons discussed above, the Board believes that the 
business of FCUs is to provide financial services to their members 
that, as contemplated by the FCU Act, facilitate the practice of thrift 
and the provident and productive use of credit.
    Reflecting this view, the final rule retains the three-prong test, 
set forth in the proposed rule, to determine whether an activity is 
authorized as an appropriate exercise of an FCU's incidental powers: 
(1) Whether the activity is convenient or useful in carrying out the 
mission or business of credit unions consistent with the FCU Act; (2) 
whether the activity is the functional equivalent or logical outgrowth 
of activities that are part of the mission or business of credit 
unions; and (3) whether the activity involves risks similar in nature 
to those already assumed as part of the business of credit unions. An 
activity must meet all three criteria to qualify as an incidental 
power. The criteria are substantially similar to those used by the 
Office of the Comptroller of the Currency (OCC); however, for purposes 
of identifying the incidental powers of FCUs, they will be applied so 
as to take into account the distinctive features and functions of 
credit unions in the context of the business for which they are 
incorporated, as that business has evolved since 1934. Thus, while the 
Board may look to other laws and precedents in the financial services 
industry for guidance in applying these criteria, its analysis may 
produce a different result than in the case of other types of financial 
institutions.
    Seventy-six commenters specifically supported the proposed three-
prong test. Many of these commenters asked that the Board read the test 
broadly. Several of the commenters noted the similarity between the 
proposed criteria and the standard used by the OCC when authorizing 
activities for banks. These commenters found the test appropriate when 
considering the similarity of financial services offered by credit 
unions and other financial service providers.
    One commenter suggested that, when NCUA analyzes the business of 
credit unions, it should defer to the marketplace as experienced by 
credit unions and their members. One commenter advocated changing the 
first prong of the test to replace the business of credit unions with 
an analysis of whether the activity is convenient and useful in meeting 
the economic and social well-being of members consistent with the FCU 
Act. Four other commenters suggested amending the third prong of the 
test. One recommended that NCUA look at whether the risks involved in a 
proposed activity exceed those already assumed as part of the business 
of credit unions. Another stated that the third prong of the test 
should require NCUA to analyze the way an FCU manages the risk 
associated with the proposed activity through a cost/benefit analysis. 
The Board believes that, after evaluating Arnold Tours, VALIC and the 
opinions of the OCC, the three-prong test adopted in the final rule is 
an appropriate method for determining whether an activity is a 
permissible exercise of an FCU's incidental powers.

Section 721.3  What Categories of Activities Are Preapproved as 
Incidental Powers Necessary or Requisite To Carry on a Credit Union's 
Business?

    Section 721.3 establishes categories of activities the Board has 
determined to be within an FCU's incidental powers. The final rule also 
provides a mechanism for approving additional activities in 
Sec. 721.04.
    Eighty commenters supported including categories of approved 
activities as examples of incidental powers activities within the rule. 
Those commenters supporting a list generally approved of the identified 
categories and asked that the activities named within each category 
remain illustrative of permitted activities and not exclusive. One 
commenter suggested the rule clarify that FCUs have the authority to 
determine whether a proposed activity, not specifically given as an 
example in the rule, fits into one of the preapproved categories. 
Another commenter asked that the rule state that an activity is 
permitted unless it is expressly prohibited.
    An FCU may only engage in activities that are either expressly 
authorized by statute or within the FCU's incidental powers. The final 
rule permits FCUs to analyze for themselves whether a particular 
activity, not provided as an example in one of the broad categories, 
falls into one of the preapproved categories. The analysis an FCU 
should follow in determining whether an activity is permissible is 
discussed below in the section-by-section analysis of Sec. 721.4.
    One commenter recommended that the rule require NCUA to review the 
list of categories biannually to determine if the agency should add new 
categories to the list, while two others asked for a periodic or annual 
review of the categories. The Board believes a periodic review 
requirement in the rule, itself, is unnecessary. The final rule 
establishes a procedure for FCUs to request amendments when they have 
identified activities that they contend are necessary or requisite to 
carry on their business. In addition, NCUA has a process for 
periodically updating, clarifying and simplifying all existing 
regulations. NCUA Interpretive Ruling and Policy Statement Number 87-2 
(September 1987), 52 FR 35231 (September 18, 1987).
    Ten commenters opposed using a list of categories within the 
regulation, stating that the use of list, although drafted with the 
intent of being illustrative, may be construed as precedent or 
exclusive over time. These commenters suggested that, instead of a 
list, NCUA should place the categories in a commentary or appendix to 
the regulation as examples of permitted activities. Forty-nine 
commenters disapproved of the use of categories in the rule and 
recommended that NCUA allow FCUs to determine on their own whether an 
activity is within their incidental powers. These commenters stated 
that the list of categories is restrictive and will become outdated. 
They also stated the process for expanding the list is cumbersome and 
time-consuming. Many suggested that the Board set a clear standard so 
that FCUs could determine their own incidental powers.
    As discussed further below in connection with Sec. 721.4, the final 
rule provides for regulatory approval to identify additional incidental 
powers activities, recognizing the deference to

[[Page 40850]]

which the NCUA as regulator is entitled in making this determination. 
The Board believes that regulatory identification of permissible 
activities, provided in the rule's list of categories or as approved 
through an application process, provides assurance to FCUs that the 
activities in which they engage are legal.
    Some of the commenters asked that NCUA expand the list of 
categories identified; however, they did not suggest particular 
activities or categories. Several commenters specifically requested 
that NCUA add particular categories or additional activities within the 
existing categories. These comments are reflected below in the 
discussion of each category.
Certification Services
    The Board has identified various certification services, such as 
notary services, electronic signature authentications and signature 
guarantees, as within the incidental powers of an FCU.
    The provision of notary services has been an exercise of an FCU's 
incidental powers for many years. A notary administers oaths, verifies 
the identity of a signer, attests to the verification, records 
signatures, and authenticates commercial transactions. By providing 
notary services to members, an FCU facilitates transactions for its 
members that require the certification of signatures. This service 
allows for timely processing of credit union transactions as compared 
with sending members elsewhere for notarizations. Therefore, this 
service is convenient and useful in carrying out an FCU's business by 
allowing it to operate efficiently and effectively.
    Similarly, the Board has determined that the authentication of 
electronic signatures is analogous to notarization. Like a notary, a 
certification authority (CA) verifies the identity of the signer and 
authenticates the signature or electronic equivalent in accordance with 
contractually agreed upon standards. Like the OCC, the Board finds that 
the CA activity is the functional equivalent of notary and other 
authentication services provided by credit unions, and a logical 
outgrowth of identification and verification methods. See OCC 
Conditional Approval No. 267 (January 1998). The risks borne by an FCU 
acting as a CA are similar to a notary's risk of improper verification 
and are similar to those risks inherent in providing electronic 
services.
    FCUs, as eligible guarantor institutions, are permitted to issue 
signature guarantees for the transfer of securities. 17 CFR 240.17Ad-
15. A signature guarantor warrants the authority of the signer as well 
as the genuineness of the signature. FCUs may offer signature 
guarantees for stock transfers and U.S. Treasury transactions, as 
provided by law, under their incidental powers because this type of 
identity verification is the functional equivalent or logical outgrowth 
to the provision of notarial services. Like notary services, this 
activity conveniently facilitates members' financial transactions. The 
final rule also includes share draft certifications as an example of a 
permissible certification service. NCUA's longstanding position has 
been that the certification of share drafts is convenient and useful to 
an FCU in carrying out its express authority to offer share draft 
accounts to its members.
Correspondent Services
    Correspondent services have been an exercise of an FCU's incidental 
powers for many years. Correspondent services are services or functions 
provided by an FCU to another credit union that the FCU is authorized 
to perform for its own members or as part of its operation. Parties to 
a correspondent credit union arrangement must establish a written 
agreement addressing the credit unions' responsibilities under the 
service arrangement. Correspondent services may include receiving share 
and loan payments, disbursing share withdrawals and loan proceeds, 
cashing share drafts, cashing and selling money orders, processing 
loans, and performing other back office operations or member services 
for another credit union. An FCU, however, cannot be in the business of 
managing other credit unions. One commenter suggested that the category 
of correspondent services include loan servicing, escrow services and 
internal audits. The Board agrees that these are additional examples of 
correspondent services and has added them to the rule.
    A correspondent service is offered in the same manner it is 
performed within the FCU's operation and entails the same risks as 
those assumed by the FCU for its operation. Correspondent service 
agreements enable credit unions to extend a greater array of services 
to their members. This activity is convenient and useful to a recipient 
of a correspondent service in carrying out many of its express powers 
when the credit union may have difficulty in performing the service on 
its own. Often, correspondent service programs are implemented when 
distance prevents members' ready access to their own credit union's 
place of business. Correspondent relationships also allow credit unions 
to assist other credit unions that lack resources or expertise.
    One commenter noted that the proposed rule and preamble did not 
address the interplay of the proposed rule with 12 CFR 701.26, Credit 
Union Service Contracts. This commenter stated that the proposed rule 
either conflicts with Sec. 701.26 or works to negate it. The Board 
wishes to clarify any perceived inconsistencies on this issue. The rule 
governing credit union service contracts covers contracts between FCUs 
and third party vendors or other organizations for assets or services 
related to an FCU's daily operations. It also allows an FCU to 
represent another credit union in contractual arrangements with 
vendors, but Sec. 701.26 does not give FCUs the authority to provide 
services, like data processing, directly to other credit unions. 54 FR 
48110 (November 21, 1989). FCUs are authorized to provide their 
services directly to other credit unions under various express powers 
and the incidental powers clause of the FCU Act, as discussed above. 
Therefore, the Board does not believe that a conflict exists between 
the correspondent services permitted under the final rule and 
Sec. 701.26 because these rules govern two different types of 
activities.
Electronic Financial Services
    The final rule provides that FCUs may offer, through electronic 
means and facilities, any activity, function, product or service they 
are otherwise authorized to provide under their express or incidental 
powers. FCUs may establish their own web sites to promote credit union 
services and effect member transactions, such as electronic bill 
payment, bill presentment, account aggregation, account inquiries and 
transfers. Web sites have become the electronic equivalent of 
newsletters, office signs and teller services. They provide a 
convenient and useful means for FCUs to carry out their business.
    Through a transactional web site, an FCU may advertise and 
communicate with its members and others within its field of membership. 
Features, such as electronic bill payment and bill presentment, allow 
members to schedule payments and complete transactions without 
handwritten drafts or visits to a brick and mortar facility. As noted 
by the OCC, the risks confronted in providing financial services over 
the Internet are similar to the risks associated with the permissible 
activities of providing these services via electronic means generally. 
OCC

[[Page 40851]]

Interpretive Letter No. 742 (August 1996).
    As part of the electronic delivery of traditional products or 
services, the Board believes FCUs have the authority under their 
incidental powers to engage in new activities or services due to the 
changing commercial environment, such as Internet access. By providing 
Internet access services to its members, an FCU offers its members a 
device to receive electronic products and services from the FCU. It 
also assures the FCU that members will access the FCU's home page when 
they initially connect to the Internet, positioning the FCU to market 
its products successfully. Members using the FCU's Internet access and 
transactional web site can retrieve account information and process 
transactions just as they would through tellers, automated teller 
machines or telephone response systems.
    Similarly, account aggregation services over the Internet enable 
FCUs to serve as their members' primary financial institution. In 
providing this service, an FCU may gather a member's publicly available 
and personal account information from a variety of sources on the Web, 
allowing convenient access to the member's information. Members grant 
FCUs access to their information because they view their FCU as a 
trusted financial intermediary. Account aggregation services are 
convenient and useful to an FCU's offering of loans, share drafts and 
share certificates, all expressly granted powers. With access to their 
consolidated financial portfolio, members have the opportunity to 
evaluate and compare similar products sold by the FCU. The FCU may also 
offer members the ability to initiate transactions or obtain financial 
advice as a result of this service.
    One commenter suggested that the electronic financial services 
category include automated teller machines. Four commenters suggested 
that the rule place account aggregation services within the category of 
electronic services. The Board agrees with both of these suggestions 
and has included these services as examples in the rule.
Excess Capacity
    The Board recognizes that, in planning for future expansion and 
offering new products and services to their members, FCUs should be 
able to sell their excess capacity as a matter of good business 
practice. The sale of excess capacity offers FCUs the opportunity to 
provide financial services to its members, even though member demand 
for the services does not initially meet the FCU's capacity. The 
opportunity to sell excess capacity may involve leasing excess office 
space, sharing employees, or using data processing systems to process 
information for third parties. As the business of FCUs is to provide 
financial services to their members, the Board believes that the sale 
of excess capacity is within an FCU's incidental powers under two 
conditions: (1) The FCU properly established the service or made the 
investment with the good faith intent of serving its members; and (2) 
the FCU reasonably anticipates that the excess capacity will be taken 
up by the future expansion of services to its members.
    Two commenters suggested that NCUA allow low-income credit unions 
and credit unions serving the underserved to build or acquire real 
property without a plan for the FCU's future use in order to facilitate 
the services to others within the low-income community. The Board does 
not find legal justification for establishing a different analysis of 
the incidental powers of FCUs that relies on the field of membership of 
an FCU. FCUs, including low-income credit unions and credit unions 
serving the underserved, may sell a service or the use of an asset in 
excess of the FCU's needs only under the conditions identified in this 
rule.
    Four commenters asked for a liberalization of the concept of excess 
capacity. These commenters stated that an FCU should not need to 
anticipate that its members will eventually use any excess capacity; 
they should be allowed simply to take advantage of economies of scale 
that result from, for example, processing larger volumes of daily 
transactions or purchasing technology. The Board does not agree with 
these commenters. NCUA has consistently held the position that an FCU 
has limited authority in the leasing of fixed assets and the sale of 
excess data processing capacity. FCUs are not in the business of 
providing others with data processing capacity or any other service 
that is not within their express or incidental powers; rather, they are 
cooperative financial institutions organized to provide financial 
services to their members.
    Another commenter stated that the regulatory text does not include 
the two-prong analysis for excess capacity as discussed in the proposed 
rule's preamble. The absence of this language, the commenter stated, 
allows for an interpretation that is broader than suggested by the 
preamble's discussion. The Board agrees that clarification of the 
definition of excess capacity is necessary and has inserted the excess 
capacity analysis into the final rule.
Financial Counseling Services
    The Board believes that, as part of providing credit and saving 
opportunities for their members, FCUs have the responsibility of 
promoting provident planning through consumer education and responsible 
investment. Educating and counseling members in financial matters is 
convenient and useful to an FCU in exercising its express powers of 
lending and receiving shares. Members who are well-informed and 
educated in financial matters tend to be prudent and responsible when 
obtaining financial products and repaying debt, which in turn reduces 
losses at an FCU. The Board believes it is part of the business of FCUs 
to provide financial counseling services to their members including 
estate planning, income tax preparation and filing, and investment and 
retirement counseling. One commenter recommended that this category 
include debt and budget counseling. The Board has added this example to 
the final rule.
    One commenter supported the ability of FCUs to offer financial 
counseling, but asked NCUA to provide guidance regarding registration 
requirements and cross-jurisdictional issues that may arise between 
NCUA and other regulators, such as the Securities and Exchange 
Commission. As discussed further in the analysis of Sec. 721.5, the 
final rule identifies activities that are within the incidental powers 
of FCUs, but an FCU must still comply with other legal requirements 
pertaining to an identified activity. Depending on the particular 
activity, an FCU may be subject to other federal, state or local law. 
Some of these legal requirements may be extensive and it would be 
impossible to incorporate them completely within this rule. Just as an 
FCU is responsible for making its own determination regarding the 
safety and soundness of a particular activity, it is incumbent on an 
FCU to apprise itself of any legal requirements associated with the 
activity.
    Two commenters asked that the final rule permit financial planning 
under the category of financial counseling. Five commenters suggested 
that the final rule include brokerage services in a category, such as 
financial counseling. One commenter supported the proposed rule's 
description of financial counseling but believed that the proposed rule 
conflicted with NCUA Letter to Credit Unions No. 150 (Letter 150), 
which governs sales of nondeposit investment products through third 
parties. This commenter asked that NCUA discuss the interplay between 
Letter 150 and this category.

[[Page 40852]]

    The final rule defines financial counseling services as advice, 
guidance or services that an FCU offers to its members to promote 
thrift or to otherwise assist members in financial matters. Under this 
activity, FCUs may counsel members about financial matters, such as 
setting budgets, establishing financial goals, and managing tax 
liabilities. Other examples within this category may include counseling 
members on money management, paying down debt, saving for the future, 
types of investments, and diversification principles. This category 
applies only to financial counseling provided by an FCU to its members 
and does not encompass activities that require SEC registration as a 
broker, dealer or investment adviser.
    Letter 150 provides guidance for third party sales of securities to 
FCU members, a finder activity. Third party sales of securities entail 
an FCU introducing its members to vendors who engage in the sale of 
nondeposit investment products. This differs from an FCU directly 
providing financial counseling, as defined above, to its members. 
Therefore, as a result of the final rule, Letter 150 remains unchanged 
with the exception of the Letter's paragraph f. Paragraph f of Letter 
150 limits reimbursement to an FCU from a third party vendor at the 
total direct and indirect costs of any administrative functions the FCU 
performed for the vendor. As addressed in detail in the following 
category and in the discussion regarding Sec. 721.6, the final rule 
removes compensation restrictions on finder activities as contemplated 
in Letter 150. FCUs, should note however, that they may be subject to 
other regulatory restrictions regarding commissions or fees paid to an 
FCU in conjunction with the sale of mutual funds or nondeposit 
investment products.
Finder Activities
    The final rule allows FCUs to engage in finder activities through 
their role as financial service providers and intermediaries of 
financial services. The rule authorizes an FCU to introduce or 
otherwise bring together outside vendors with its members for the 
negotiation and consummation of transactions. Another fundamental 
aspect to finder activities is providing information to members about 
the products or services of third parties.
    The Board believes that finder activities are member services that 
are necessary or requisite to enable FCUs to carry on their business 
effectively. FCUs can serve as their members' primary financial 
institution by bringing members together with providers of services and 
products. Although the FCU does not act as a broker, the FCU may 
negotiate group discounts or benefits on behalf of its membership with 
vendors. Additionally, these referrals enhance the quality of service 
FCUs offer their members and afford the FCU the opportunity to promote 
its own products as well. Examples of finder activities include placing 
third party vendor advertisements in the FCU's account statements, 
newsletters or as a link to the vendor's web site on the FCU's home 
page.
    One commenter requested that NCUA offer guidance that distinguishes 
finder activities from marketing activities. Under the category of 
finder activities, FCUs are authorized to act as an intermediary 
between their members and outside parties for the sole purpose of 
bringing the parties together. Although this activity may subject an 
FCU to reputation risk by identifying particular vendors to its 
membership, an FCU does not represent the vendor or the member when the 
two parties negotiate or enter into a transaction. Finder activities 
differ from the category of marketing activities because, as the 
``finder,'' an FCU simply identifies an outside party with a product or 
service the FCU believes its members would be interested in obtaining. 
The category of marketing activities consists of an FCU's promotion or 
marketing of its own products and operation.
    One commenter asked that the finder activities category include the 
finding of real estate brokers and agents, but that NCUA warn FCUs to 
comply with other applicable laws, such as the Real Estate Settlement 
Procedures Act. Similarly, another commenter suggested that the rule 
authorize FCUs to offer real-estate services under their finder 
authority, including assistance to members in finding a home mortgage 
loan, real estate broker or real estate agent. One commenter asked that 
NCUA allow debt and budget counseling to members through third-party 
arrangements. An FCU may act as a finder for a variety of products or 
services that it finds suitable to introduce to its members. An FCU may 
find real estate brokers or insurance companies, among the numerous 
possibilities. Therefore, the Board, has removed any reference to a 
particular product or service in the final rule. This category simply 
provides examples of types of finder activities.
    The proposed rule specifically noted that the offering of a third 
party's insurance products as an example in the category of finder 
activities. One commenter found that the insurance products or 
activities listed in the category could be construed to limit an FCU's 
offering of insurance products to only those listed, all of which are 
related to the share or loan products. One commenter stated that the 
activities listed in the rule should include property and casualty 
insurance products. Another commenter requested that this category also 
include long-term care insurance products. One commenter found the 
regulatory text unclear as to whether FCUs could offer automobile, term 
and whole life, homeowner's liability, and healthcare insurance 
products. As mentioned above, the Board recognized from the comment 
letters that, for clarity, the rule should avoid references to 
particular products offered by third party vendors. Therefore, while 
insurance products from third party insurers are examples within the 
category of finder activities, the Board has removed this reference 
from the regulatory text. FCUs are not limited in the types of products 
they may introduce to their members. Rather, an FCU must exercise 
judgment and due diligence when choosing to introduce or bring together 
an outside vendor with its members.
    The Board notes that the final rule describes finder activities to 
include the sale of statistical information about an FCU's membership 
and consumer financial information to outside vendors to facilitate the 
sale of their products to members. The Board reminds FCUs that, as 
discussed throughout the preamble, although an activity is authorized 
as within an FCU's incidental powers, an FCU must comply with all 
applicable laws prior to engaging in the activity. FCUs must comply 
with NCUA's privacy of consumer financial information regulation (12 
CFR part 716), the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) 
and any applicable state laws before selling or otherwise communicating 
consumer information to third parties.
Loan-Related Products
    This category recognizes the ability of FCUs to engage in credit-
related activities to protect the FCU against credit-related risks. The 
FCU Act grants FCUs the express authority to lend. 12 U.S.C. 1757(5) In 
a lending transaction, the terms of a loan include interest rates, 
payment dates, and the consequences of default, such as repossession. 
This category provides examples of activities, services, or products an 
FCU may negotiate and provide to its members that are incidental to the 
exercise of an FCU's express power to lend. The Board notes, however, 
that FCUs must ensure that members receive all of the necessary 
consumer protections provided in

[[Page 40853]]

applicable laws and regulations, such as the Truth in Lending Act, 15 
U.S.C. 1601 et seq., and Regulation Z, 12 CFR part 226, so that members 
make informed choices about whether to purchase these ancillary 
products or services.
    In the proposed rule, the Board identified debt cancellation and 
debt suspension agreements as permissible activities within the 
incidental powers of FCUs. The proposed rule, however, placed these 
activities within the category of finder activities. Three commenters 
asked that the final rule create an additional category for certain 
two-party agreements such as debt cancellation, payment suspension and 
waiver products. The Board agrees that these two-party agreements 
between an FCU and its member are not finder activities but activities 
engaged in directly by the FCU with its member to mitigate loan loss.
    Both debt cancellation and debt suspension agreements provide a 
convenient and useful way for an FCU and its members to manage the risk 
of nonpayment due to financial hardship. FCUs receive compensation for 
assuming the risk of nonpayment and the additional cost of foregoing 
the collection of principal or interest. These agreements are 
appropriate financial tools for FCUs and their members. They provide a 
source of compensation to the FCU for the credit risk implicit in a 
lending transaction, and they protect the member from credit damage 
during a period of financial hardship. Similarly, FCUs may negotiate 
compensation for uninsured physical damage loss to repossessed property 
used in a lending transaction.
    To clarify the extent of this category further, the Board also has 
identified two, additional products that NCUA has long considered to be 
within the incidental powers of FCUs: Leases and letters of credit. The 
preamble of the Board's recent final leasing regulation contains a 
discussion regarding an FCU's authority to engage in direct or indirect 
leasing. 65 FR 34581 (May 31, 2000). A letter of credit is a commitment 
on the part of the issuing FCU that it will pay a draft presented to it 
under the terms of credit. If the obligation is to be discharged by the 
payment of money into a share account, the letter of credit is 
incidental to the creation of the account. If the obligation is to be 
discharged by a loan to the member, then the letter of credit is 
incidental to the FCU's loan commitment under its lending authority. In 
either case, the letter of credit is incidental to an expressly granted 
power.
Marketing
    This section states that credit union management may use its 
longstanding incidental power to advertise and market its services in 
any legally permissible manner. The Board received no comments on this 
category and has adopted it in the final rule as proposed. The Board 
has added language to the final rule to clarify that an FCU may market 
membership in the credit union, as well as the products and services 
offered to members.
Monetary Instruments
    This section allows an FCU to provide monetary instrument services 
to its members. This section derives from and expands on the express 
authority of an FCU ``to sell to members negotiable checks (including 
travelers checks), money orders and other similar money transfer 
instruments; and to cash checks and money orders for members, for a 
fee. * * *'' 12 U.S.C. 1757(12).
    The section allows an FCU to maintain deposits in foreign financial 
institutions to facilitate member transactions. The provision does not, 
however, allow an FCU to maintain foreign accounts for speculative 
purposes.
    Two commenters requested that this provision include check-cashing 
authority for nonmembers. As noted above however, this section of the 
rule is based on expressed statutory authority that is limited to 
members. Also, one commenter requested the authority to offer 
international monetary transfer services to both members and 
nonmembers. International monetary transfers for members are included 
as a permissible service in this section.
    There may be circumstances where it would permissible to provide a 
monetary service to a nonmember, for example cashing paychecks issued 
by the credit union's sponsor company. Any other circumstance that 
might warrant the provision of monetary services to certain nonmembers 
would necessarily be addressed on a separate basis, outside the scope 
of this section.
    One credit union commenter requested authority to provide services 
under this category to an underserved community. As stated in the 
excess capacity discussion, the Board does not find legal justification 
for establishing a different analysis of the incidental powers of FCUs 
based upon an FCU's field of membership. The Board notes, however, that 
there are two other ways in which low-income individuals may receive 
FCU services. First, FCUs may apply to add underserved areas to their 
fields of membership without regard to the location of the underserved 
area. The requirements and process for adding an underserved area are 
set out in the NCUA Field of Membership and Chartering Manual (NCUA 
Chartering Manual). NCUA Chartering Manual, Chapter 3, Section III. 
Once added, anyone in the underserved area is eligible to join the 
credit union. Second, an FCU with a low-income designation may open 
share accounts, including regular share, share certificate and share 
draft accounts, for nonmembers. 12 U.S.C. 1757(6); 12 CFR 701.32. 
701.34; NCUA Chartering and Field of Membership Manual (Chartering 
Manual), Chapter 3, Section II.B.
Operational Programs
    The final rule identifies certain operational programs as within an 
FCU's incidental powers. Operational programs are programs that an FCU 
establishes within its business to establish or deliver products and 
services that enhance member service and promote safe and sound 
operation. One commenter asked NCUA to expand the operational programs 
category to include the following activities: Money orders, remote cash 
dispensing, savings bond purchases and redemptions, drafts (vehicle and 
sight), collections, traveler's checks, cashier's checks, tax payment 
services, treasury security redemptions, and wire transfers. Another 
commenter suggested that the category of operational programs include, 
in addition to safe deposit boxes, other repositories for items of 
value. The Board has included several of these suggestions in the final 
rule. The Board excluded the remaining suggested programs because they 
are already within an FCU's express powers, within another incidental 
powers activity category such as monetary instruments, or substantially 
similar to examples in this category.
Stored Value Products
    This category in the final rule identifies stored value products or 
alternate media as within an FCU's incidental powers. As noted in an 
OCC decision, these products represent a member's prepayment for a 
merchant's goods or services and are, therefore, a form of bill 
payment. OCC Interpretive Letter No. 718 (April 1996). An FCU simply 
transfers funds from a member's share account to a merchant's account. 
The FCU acts as an intermediary by transferring funds from a member to 
a merchant, a traditional role for FCUs. Therefore, the activity poses 
no more additional risk than that already assumed by credit unions.

[[Page 40854]]

    Two commenters suggested that the definition of stored value 
products should include products to which an FCU transfers non-monetary 
information of value to members. These commenters did not elaborate on 
the type of information or product they envisioned. The Board has 
determined to leave this category unchanged from the proposed but 
recognizes that developing technology may affect future interpretation 
of this category.
Trustee or Custodial Services
    Although FCUs do not have express trust powers under the FCU Act, 
they have long served as trustees and custodians where that authority 
has been granted under other provisions of law such as the Internal 
Revenue Code. Under this authority, FCUs are able to provide individual 
retirement accounts (IRA), education saving accounts such as the Roth 
IRA, and other savings opportunities that are of importance to modest 
savers. The ability of FCUs to provide these saving opportunities to 
their members fits within the historic role of FCUs in encouraging 
thrift among their members and creating a source of credit for 
provident purposes.
    Four commenters suggested that NCUA authorize FCUs to offer full 
trust company services to members. The Board disagrees. Under the 
National Bank Act, the OCC is authorized to ``grant by special permit 
to national banks * * * the right to act as trustee, executor, 
administrator * * * or in any other fiduciary capacity in which State 
banks, trust companies, or other corporations * * * are permitted to 
act'' in the state in which the bank is located. 12 U.S.C. 92a. The FCU 
Act does not provide equivalent authority for FCUs to act in a 
fiduciary capacity for its members.
    Two commenters suggested that this category include medical savings 
accounts. Likewise, one of these commenters recommended that the 
category of trustee or custodial services include special accounts for 
first-time homebuyers or other similar accounts authorized under state 
law. The Board will not include the accounts suggested by the commenter 
at this time. The Board is considering an amendment to part 724 to 
authorize FCUs to serve as trustees for tax-deferred medical savings 
accounts but has not yet made a determination. See 64 FR 55871, 55872 
(October 15, 1999). As for those accounts created under state law, NCUA 
evaluates each statute to ascertain whether an FCU has only limited 
custodial responsibilities under the governing law.

Section 721.4  How May a Credit Union Apply To Engage in an Activity 
That Is Not Preapproved as Within a Credit Union's Incidental Powers?

    This section allows FCUs to seek approval from NCUA to engage in an 
activity that is not within the ambit of the broad categories in the 
rule. It provides that an application for a new activity is treated as 
an application to amend the regulation. It does not set time frames in 
which NCUA must respond to a request for a new activity or category 
although the preamble to the proposed rule states that ``NCUA will 
endeavor to respond * * * within 60 days as to whether it will propose 
an amendment.'' 65 FR 70526, 70531 (November 24, 2000). This section 
also permits FCUs to seek an advisory opinion from NCUA's Office of 
General Counsel before engaging in the petition process to determine 
whether a proposed activity fits into one of the authorized categories 
or is otherwise within an FCU's incidental powers. Thirty-three 
commenters supported the proposed application process. Seven commenters 
approved of an application process but suggested that NCUA amend the 
process. One commenter supported the voluntary nature of the process 
and agrees that FCUs will rarely need to use the process.
    Nine commenters asked that the proposed rule place a time 
limitation on NCUA to respond to an applicant seeking approval of an 
activity or category not previously approved as within the incidental 
powers authority. These commenters suggested various time frames. The 
Board believes that setting a time frame to act on an application could 
result in less activities being approved. These activities may involve 
complex issues that require not only a thorough legal analysis but an 
assessment of risk. The Board's experience in dealing with the issue of 
incidental powers leads it to believe that maximum flexibility is 
necessary when reviewing these applications. Although the applicant may 
want an expeditious decision, most importantly, it wants a correct 
decision. This decision is not only important for the applicant but 
also for the agency and the National Credit Union Share Insurance Fund. 
The Board, therefore, is not setting a definitive time frame for 
rendering a decision, but will attempt to notify an applicant anytime a 
decision cannot be reached within 60 days. The Board is cognizant of 
the need for an applicant to receive a decision as soon as reasonably 
possible. Accordingly, every effort will be made to process and 
consider all applications expeditiously for approval of an activity or 
category not previously approved as within the broad incidental power 
categories.
    One commenter supported the NCUA's Office of General Counsel's 
authority to determine whether an activity not found within the list of 
categories is permissible under the incidental powers of an FCU. One 
commenter disagreed with this approach. One commenter requested that 
the final rule clarify that an FCU need only seek an advisory opinion 
from the Office of General Counsel if a proposed activity clearly fails 
to fall within one of the preapproved categories. This commenter is 
correct. If a proposed activity does not appear to fall within one of 
the preapproved categories, FCUs may seek an advisory opinion from the 
Office of General Counsel as to whether the activity fits within a 
category or is otherwise an incidental powers activity.
    A number of commenters misconstrued the Board's description of the 
review and approval process for activities that are not provided as 
examples within the preapproved categories. In general, these 
commenters were confused about when the General Counsel advisory 
opinion process is used and when it would be necessary to apply to the 
Board to amend the regulation. Forty-nine commenters generally opposed 
the use of categories and the application process. Many of these 
commenters found the application process burdensome and recommended a 
more streamlined process or no application process at all. Again, the 
Board believes some of these commenters misconstrued how the Board 
intends the process to work.
    The Board wishes to clarify how it intends the process to work and 
the analytic steps an FCU should follow in determining if an activity 
is permissible. The activities listed under the broad categories are 
intended as illustrations, not an exhaustive list of what is 
permissible under the categories set out in the rule. Therefore, the 
first step, if an FCU does not find an activity identified in the rule, 
is to consider whether, although not listed as a specific example, it 
is within the ambit of one of the broad categories in the rule. If an 
FCU concludes that it is within the ambit of one of the broad 
categories of the rule, an FCU need not contact NCUA for a legal 
opinion or apply for an amendment of the rule. FCUs are encouraged to 
consult with their own legal counsel in making this determination.
    Second, if an FCU is not sure if an activity fits within a 
preapproved category, it may request a legal opinion

[[Page 40855]]

or consult informally with NCUA's Office of General Counsel. AnFCU is 
not required to obtain an opinion from NCUA's Office of General 
Counsel, however, there are several advantages in doing so. If it is 
unclear whether an activity is permissible, an FCU runs the risk of 
engaging in an impermissible activity and being subject to supervisory 
action. NCUA, not FCUs, has the discretion to determine if an activity 
is within an FCU's incidental powers. The Office of General Counsel, 
which is specifically authorized to provide the public with legal 
interpretations of the FCU Act andNCUA regulations, 12 CFR 790.2(b)(8), 
may determine that an activity is already covered by one of the rule's 
broad categories although not specifically identified. The Office of 
General Counsel may also, as it has done in the past, render a legal 
opinion that an activity is a permissible exercise of an FCU's 
incidental powers even though the activity is not covered by the broad 
categories in the rule. The Board contemplates that new activities 
identified by the Office of General Counsel will be routinely added to 
the rule as part of the Office of General Counsel's ongoing regulatory 
review process.
    Third, an FCU may go through the application process set out in the 
rule. The Board wants to reiterate that it believes the application 
process will rarely be necessary because of the manner in which the 
categories are set out in Sec. 721.3.
    One commenter stated that the rule should require an FCU applicant 
to include only a description of the proposed activity, an explanation 
of how the activity qualifies as an incidental power and any other 
information as necessary to describe the activity. This commenter noted 
that the rule should not require the applicant to provide any business 
considerations in the application. Two commenters stated that NCUA's 
determination to approve an activity should not be based on whether it 
is a good business decision for the particular applicant but whether 
the activity is within the incidental powers of all FCUs. In general, 
the Board agrees that business considerations should not be part of the 
decision on whether an activity is deemed incidental and has modified 
the rule accordingly. Three commenters requested that the final rule 
clarify that an activity approved for one applicant is permissible for 
all FCUs. The Board agrees with this comment and is clarifying that 
once an activity is approved for one credit union it is legally 
permissible for all FCUs to engage in this activity.
    Finally, most of the commenters who objected to the application 
process favored a flexible approach that they contend is similar to the 
OCC's. They advocated an incidental powers analysis whereby NCUA 
establishes broad parameters of what constitutes a permissible activity 
so that FCUs could determine whether an activity falls within their 
incidental powers. These commenters requested that the final rule grant 
FCU boards of directors or their private attorneys the ability to 
assess whether an activity is legal without seeking approval from the 
NCUA. Many commenters also objected to the statement in the proposed 
rule's preamble that indicates NCUA may reach a different conclusion in 
its analysis of incidental powers than the OCC. Two commenters 
suggested that NCUA should routinely review the powers granted to banks 
and conclude that these activities are permissible for FCUs unless they 
pose safety and soundness concerns or are contrary to the FCU Act. 
These commenters apparently misunderstand the OCC's approach.
    Banks and their operating subsidiaries may engage in activities the 
OCC has authorized through regulations as within the powers of a bank. 
In addition, the OCC determines whether a novel activity is within the 
business of banking or incidental thereto, through interpretive letters 
that rely on the facts presented by the applicant. As explained 
earlier, NCUA has the authority and responsibility to determine whether 
an activity is incidental. The Board believes it cannot and should not 
delegate that authority and responsibility. The Board is concerned 
about potential safety and soundness concerns as well as the problems 
that could ensue if an FCU invested a significant amount of personnel 
and dollars in an activity that was later determined to be 
impermissible. Finally, an FCU's incidental authority is different than 
the incidental authority of a bank and, therefore, requires a distinct 
and separate analysis.

Section 721.5  What Limitations Apply to a Credit Union Engaging in 
Activities Approved Under This Part as Within a Credit Union's 
Incidental Powers?

    This section acknowledges the distinction between an FCU's 
authority to engage in an activity deemed to be within its incidental 
powers and the requirement that an FCU comply with any conditions or 
regulations that apply to the activity. When engaging in an authorized 
activity, FCUs must comply with conditions or constraints on the 
activity established in applicable federal and state law, NCUA 
regulations, and legal opinions. For example, FCUs are responsible for 
ensuring their compliance with applicable state licensing laws relating 
to insurance sales. Another example is the use of raffles in 
promotional activities that may be regulated or prohibited under local 
law. The regulation does not preempt FCUs from compliance with these 
laws.
    One commenter suggested that the Board remove this section as 
unnecessary because FCUs are already obligated to obey such laws. The 
Board disagrees. The Board believes that including this provision 
enhances awareness of the compliance risk involved in new activities. 
Before engaging in any of the activities identified in the final rule, 
FCUs must ascertain whether they need to obtain licenses or meet other 
legal requirements before engaging in an activity.

Section 721.6  May a Credit Union Derive Income From Activities 
Approved Under This Part?

    The proposed rule provided that an FCU may receive unlimited 
compensation from its incidental powers activities. For finder 
activities, the proposed rule would allow FCUs to charge third parties 
that solicit members through the FCU.
    One hundred and forty-one commenters agreed that compensation 
should be unlimited. Although FCUs are currently authorized to conduct 
administrative work in connection with a group purchasing activity and 
receive reimbursement of their cost amount for extending group 
purchasing plans, many commenters supported the proposal because they 
stated a need to increase income due to decreasing operating and 
interest rate margins. Those in support of this provision uniformly 
stated that only the business decisions of FCU directors should limit 
the amount of income an FCU receives when engaging in incidental powers 
activities. Two credit union commenters objected to the ability of FCUs 
to obtain unlimited compensation from their incidental powers. In light 
of the overwhelming number of comments in favor of proposed Sec. 721.6 
and the fact that this derivation of income is simply an extension of 
fees the FCU already has received in connection with the current group 
purchasing authority, the Board is adopting this section in the final 
rule as proposed.

[[Page 40856]]

Section 721.7  What Are the Potential Conflicts of Interest for 
Officials and Employees When Credit Unions Engage in Activities 
Approved Under This Part?

    This section prohibits senior management employees, officials, and 
their immediate family members from receiving any compensation or 
benefit, directly or indirectly, from activities covered in the 
regulation. Of the twenty-four commenters that expressed an opinion on 
the conflicts of interest provision, fourteen stated that the provision 
is adequate. One stated that the provision prevents the 
misappropriation of funds and is in the best interests of an FCU's 
membership. Nine commenters suggested several amendments to this 
section. One commenter suggested that the reference to ``indirectly 
receiving'' requires clarification because it could be subject to wide 
interpretation. The preamble to the proposed rule stated that this 
section only prohibits compensation that is linked to products or 
services provided by third party vendors. In addition, the NCUA Board 
provided an example of compensation that is not prohibited. 65 FR 
70526, 70531 (November 24, 2000).
    One commenter requested that the final rule clarify proposed 
Sec. 721.7(a). Two commenters believed that the reference to 
compensation received ``directly or indirectly'' could disallow 
salaries for senior management. The Board is clarifying that this 
conflicts of interest section does not prohibit salaries for senior 
management.
    Four commenters stated that the rule should allow senior management 
to receive bonuses or incentives for finder activities or other 
incidental powers activities. The Board disagrees. As with other 
activities that can lead to significant abuse, the Board believes 
senior management should be primarily concerned with the financial 
health of the institution and be free from the undue influences of 
third party vendors. Such a prohibition is a good policy for the FCU, 
its members and ultimately senior management officials. Avoiding the 
appearance of a conflict of interest will insulate senior management 
from charges that their business decisions are based on their own 
pecuniary interest. This type of conflict of interest provision adopted 
in the final rule has worked extremely well in the context of other 
NCUA regulations and the Board believes such a provision is necessary 
in the context of expanded incidental powers activities.
    One commenter asked that the rule establish an exception allowing 
an official to receive dividends from publicly traded corporations if 
the official does not have a material ownership interest in the 
corporation. The Board wishes to clarify that the conflict of interest 
provision does not apply to the situation presented by this commenter.
    One commenter stated that Sec. 721.7(b) is inconsistent with the 
conflicts provision of NCUA's lending regulation, which governs 
compensation in connection with any loan made by an FCU. 12 CFR 
701.21(c)(8). This commenter asserted that many third party loan-
related products and services will be offered under part 721 and that 
compensation arrangements related to these products and services will 
be subject to different requirements under the two rules. The Board 
appreciates the need to provide further guidance regarding the final 
rule's conflict of interest provision and has amended the language in 
the final rule to simplify this provision consistent with the Board's 
intent and other conflict of interest provisions throughout NCUA's 
regulations.
    As noted above, the final rule prohibits compensation to a senior 
management employee, official, or his or her immediate family member 
that is received directly or indirectly by such individual as a result 
of third-party products or services. The Board does not prohibit 
compensation to these individuals, however, if the compensation is: (1) 
Fixed in amount; (2) not related to the amount of products sold or 
services used; and (3) received by no more than one director or 
official of the credit union, who is recused from the credit union 
decision concerning its business with the third party vendor. The Board 
again provides the following example of permissible compensation:

    An FCU official, Ms. Smith, is also on the board of directors of 
Company DMH, which sells phone cards. Ms. Smith is paid $5,000 a 
year by Company DMH for her services as a director. The FCU 
contracts with Company DMH to provide prepaid phone cards to its 
members. Ms. Smith is not involved in the decision making process, 
and her compensation from the DMH Company is not linked to the FCU's 
phone card sales.

    The rule also prohibits compensation to non-senior management 
employees or their immediate family members that is received directly 
or indirectly by such individual as a result of third-party products or 
services, unless the FCU's board of directors has established written 
policies regarding third-party compensation and has determined that no 
conflict of interest exists. This provision allows employees to receive 
compensation from persons other than the FCU provided that the 
employee's relationship with the third-party does not conflict with the 
interests of the FCU or its members.
    Under this exception, an employee may not receive a commission or 
other compensation from a third-party for referring members to the 
third-party because an inherent conflict exists in the employee's 
promotion of a particular third-party product or service for the 
employee's pecuniary interest. If the employee's motivation is purely 
self-interest, this incentive works to the detriment of the FCU or its 
members. The final rule, however, allows the FCU to pay incentives to 
non-senior management employees in connection with incidental powers 
activities when an FCU's board of directors determines that an 
incentive or bonus is an appropriate means to promote its business as 
an FCU. In addition, the final rule permits employees to receive 
compensation from a third-party when no conflict of interest exists, 
such as in a dual employment scenario when the employee's position 
outside of the FCU does not affect the FCU.
    These restrictions are consistent with the intent of NCUA's other 
conflicts of interest provisions. The Board, however, maintains that 
conflicts of interest provisions tailored to particular activities are 
still necessary. Therefore, individuals affiliated with FCUs are still 
required to comply with conflicts of interest provisions within other 
sections of NCUA's regulations. The final rule provides that where a 
specific conflicts of interest provision applies to a particular 
activity, that provision controls the conduct of the parties. For 
example, the conflicts of interest provision in the lending regulation 
was adopted to ``ensure that lending decisions are made in the best 
interests of the credit union and its members, and not in the personal 
interests of individual officials or employees.'' 48 FR 52475 (November 
18, 1983). The Board continues to believe that this provision in the 
lending regulation is necessary to promote the safety and soundness of 
FCUs. Therefore, individuals subject to the conflicts of interest 
provision in the lending rule remain subject to this provision when 
offering loan-related products, an activity authorized under part 721.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any regulation may have on 
a substantial number of small entities. For purposes of this analysis, 
credit unions

[[Page 40857]]

under $1 million in assets will be considered small entities.
    The Board has determined and certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities. This rule identifies activities that FCUs are authorized to 
engage in under their incidental powers without imposing any additional 
regulatory burden or expense to credit unions. Accordingly, NCUA has 
determined that a Regulatory Flexibility Analysis is not required.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(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 has 
determined that this is not a major rule.

Paperwork Reduction Act

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

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory 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 applies 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 the rule 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

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

List of Subjects in 12 CFR Part 721

    Credit unions.

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

    For the reasons stated above, NCUA amends 12 CFR Chapter VII by 
revising part 721 to read as follows:

PART 721--INCIDENTAL POWERS

Sec.
721.1  What does this part cover?
721.2  What is an incidental powers activity?
721.3  What categories of activities are preapproved as incidental 
powers necessary or requisite to carry on a credit union's business?
721.4  How may a credit union apply to engage in an activity that is 
not preapproved as within a credit union's incidental powers?
721.5  What limitations apply to a credit union engaging in 
activities approved under this part?
721.6  May a credit union derive income from activities approved 
under this part?
721.7  What are the potential conflicts of interest for officials 
and employees when credit unions engage in activities approved under 
this part?

    Authority: 12 U.S.C. 1757(17), 1766 and 1789.


Sec. 721.1  What does this part cover?

    This part authorizes a federal credit union (you) to engage in 
activities incidental to your business as set out in this part. This 
part also describes how interested parties may request a legal opinion 
on whether an activity is within a federal credit union's incidental 
powers or apply to add new activities or categories to the regulation. 
An activity approved in a legal opinion to an interested party or as a 
result of an application by an interested party to add new activities 
or categories is recognized as an incidental powers activity for all 
federal credit unions. This part does not apply to the activities of 
corporate credit unions.


Sec. 721.2  What is an incidental powers activity?

    An incidental powers activity is one that is necessary or requisite 
to enable you to carry on effectively the business for which you are 
incorporated. An activity meets the definition of an incidental power 
activity if the activity:
    (a) Is convenient or useful in carrying out the mission or business 
of credit unions consistent with the Federal Credit Union Act;
    (b) Is the functional equivalent or logical outgrowth of activities 
that are part of the mission or business of credit unions; and
    (c) Involves risks similar in nature to those already assumed as 
part of the business of credit unions.


Sec. 721.3  What categories of activities are preapproved as incidental 
powers necessary or requisite to carry on a credit union's business?

    The categories of activities in this section are preapproved as 
incidental to carrying on your business under Sec. 721.2. The examples 
of incidental powers activities within each category are provided in 
this section as illustrations of activities permissible under the 
particular category, not as an exclusive or exhaustive list.
    (a) Certification services. Certification services are services 
whereby you attest or authenticate a fact for your members' use. 
Certification services may include such services as notary services, 
signature guarantees, certification of electronic signatures, and share 
draft certifications.
    (b) Correspondent services. Correspondent services are services you 
provide to other credit unions that you are authorized to perform for 
your members or as part of your operation. These services may include 
loan processing, loan servicing, member check cashing services, 
disbursing share withdrawals and loan proceeds, cashing and selling 
money orders, performing internal audits, and automated teller machine 
deposit services.
    (c) Electronic financial services. Electronic financial services 
are any services, products, functions, or activities that you are 
otherwise authorized to perform, provide, or deliver to your members 
but performed through electronic means. Electronic services may include 
automated teller machines, electronic fund transfers, online 
transaction processing through a web site, web site hosting services, 
account aggregation services, and Internet access services to perform 
or deliver products or services to members.
    (d) Excess capacity. Excess capacity is the excess use or capacity 
remaining in facilities, equipment, or services that: You properly 
invested in or established, in good faith, with the intent of serving 
your members; and you reasonably anticipate will be taken up by the 
future expansion of services to your members. You may sell or lease the 
excess capacity in facilities, equipment or services such as office 
space, employees and data processing.
    (e) Financial counseling services. Financial counseling services 
means advice, guidance or services that you offer to your members to 
promote thrift or to otherwise assist members on financial matters. 
Financial counseling

[[Page 40858]]

services may include income tax preparation service, electronic tax 
filing for your members, counseling regarding estate and retirement 
planning, investment counseling, and debt and budget counseling.
    (f) Finder activities. Finder activities are activities in which 
you introduce or otherwise bring together outside vendors with your 
members so that the two parties may negotiate and consummate 
transactions. Finder activities may include offering third party 
products and services to members through the sale of advertising space 
on your web site, account statements and receipts, or selling 
statistical or consumer financial information to outside vendors to 
facilitate the sale of their products to your members.
    (g) Loan-related products. Loan-related products are the products, 
activities or services you provide to your members in a lending 
transaction that protect you against credit-related risks or are 
otherwise incidental to your lending authority. These products or 
activities may include debt cancellation agreements, debt suspension 
agreements, letters of credit and leases.
    (h) Marketing activities. Marketing activities are the activities 
or means you use to promote membership in your credit union and the 
products and services you offer to your members. Marketing activities 
may include advertising and other promotional activities such as 
raffles, membership referral drives, and the purchase or use of 
advertising.
    (i) Monetary instrument services. Monetary instrument services are 
services that enable your members to purchase, sell, or exchange 
various currencies. These services may include the sale and exchange of 
foreign currency and U.S. commemorative coins. You may also use 
accounts you have in foreign financial institutions to facilitate your 
members' transfer and negotiation of checks denominated in foreign 
currency or engage in monetary transfer services for your members.
    (j) Operational programs. Operational programs are programs that 
you establish within your business to establish or deliver products and 
services that enhance member service and promote safe and sound 
operation. Operational programs may include electronic funds transfers, 
remote tellers, point of purchase terminals, debit cards, payroll 
deduction, pre-authorized member transactions, direct deposit, check 
clearing services, savings bond purchases and redemptions, tax payment 
services, wire transfers, safe deposit boxes, loan collection services, 
and service fees.
    (k) Stored value products. Stored value products are alternate 
media to currency in which you transfer monetary value to the product 
and create a medium of exchange for your members' use. Examples of 
stored value products include stored value cards, public transportation 
tickets, event and attraction tickets, gift certificates, prepaid phone 
cards, postage stamps, electronic benefits transfer script, and similar 
media.
    (l) Trustee or custodial services. Trustee or custodial services 
are services in which you are authorized to act under any written trust 
instrument or custodial agreement created or organized in the United 
States and forming part of a pension or profit-sharing plan, as 
authorized under the Internal Revenue Code. These services may include 
acting as a trustee or custodian for member retirement and education 
accounts.


Sec. 721.4  How may a credit union apply to engage in an activity that 
is not preapproved as within a credit union's incidental powers?

    (a) Application contents. To engage in an activity that may be 
within an FCU's incidental powers but that does not fall within a 
preapproved category listed in Sec. 721.3, you may submit an 
application by certified mail, return receipt requested, to the 
NCUABoard. Your application must describe the activity, your 
explanation, consistent with the test provided in paragraph (c) of this 
section, of why this activity is within your incidental powers, your 
plan for implementing the proposed activity, any state licenses you 
must obtain to conduct the activity, and any other information 
necessary to describe the proposed activity adequately. 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 
fits into one of the authorized categories or is otherwise within your 
incidental powers without filing a petition to amend the regulation.
    (b) Processing of application. Your application must be filed with 
the Secretary of the NCUA Board. NCUA will review your application for 
completeness and will notify you whether additional information is 
required or whether the activity requested is permissible under one of 
the categories listed in Sec. 721.3. If the activity falls within a 
category provided in Sec. 721.3, NCUA will notify you that the activity 
is permissible and treat the application as withdrawn. If the activity 
does not fall within a category provided in Sec. 721.3, NCUA staff will 
consider whether the proposed activity is legally permissible. Upon a 
recommendation by NCUA staff that the activity is within a credit 
union's incidental powers, the NCUA Board may amend Sec. 721.3 and will 
request public comment on the establishment of a new category of 
activities within Sec. 721.3. If the activity proposed in your 
application fails to meet the criteria established in paragraph (c) of 
this section, NCUA will notify you within a reasonable period of time.
    (c) Decision on application. In determining whether an activity is 
authorized as an appropriate exercise of a federal credit union's 
incidental powers, the Board will consider:
    (1) Whether the activity is convenient or useful in carrying out 
the mission or business of credit unions consistent with the Act;
    (2) Whether the activity is the functional equivalent or logical 
outgrowth of activities that are part of the mission or business of 
credit unions; and
    (3) Whether the activity involves risks similar in nature to those 
already assumed as part of the business of credit unions.


Sec. 721.5  What limitations apply to a credit union engaging in 
activities approved under this part?

    You must comply with any applicable NCUA regulations, policies, and 
legal opinions, as well as applicable state and federal law, if an 
activity authorized under this part is otherwise regulated or 
conditioned.


Sec. 721.6  May a credit union derive income from activities approved 
under this part?

    You may earn income for those activities determined to be 
incidental to your business.


Sec. 721.7  What are the potential conflicts of interest for officials 
and employees when credit unions engage in activities approved under 
this part?

    (a) Conflicts. No official, employee, or their immediate family 
member may receive any compensation or benefit, directly or indirectly, 
in connection with your engagement in an activity authorized under this 
part, except as otherwise provided in paragraph (b) of this section. 
This section does not apply if a conflicts of interest provision within 
another section of this chapter applies to a particular activity; in 
such case, the more specific conflicts of interest provision controls. 
For example: An official or employee that refers loan-related products 
offered by a third-party to a member, in connection with a loan made by 
you, is subject to the conflicts

[[Page 40859]]

of interest provision in Sec. 701.21(c)(8) of this chapter.
    (b) Permissible payments. This section does not prohibit:
    (1) Payment, by you, of salary to your employees;
    (2) Payment, by you, of an incentive or bonus to an employee based 
on your overall financial performance;
    (3) Payment, by you, of an incentive or bonus to an employee, other 
than a senior management employee or paid official, in connection with 
an activity authorized by this part, provided that your board of 
directors establishes written policies and internal controls for the 
incentive program and monitors compliance with such policies and 
controls at least annually; and
    (4) Payment, by a person other than you, of any compensation or 
benefit to an employee, other than a senior management employee or paid 
official, in connection with an activity authorized by this part, 
provided that your board of directors establishes written policies and 
internal controls regarding third-party compensation and determines 
that the employee's involvement does not present a conflict of 
interest.
    (c) Business associates and family members. All transactions with 
business associates or family members not specifically prohibited by 
paragraph (a) of this section must be conducted at arm's length and in 
the interest of the credit union.
    (d) Definitions. For purposes of this part, the following 
definitions apply.
    (1) Senior management employee means your chief executive officer 
(typically, this individual holds the title of President or Treasurer/
Manager), any assistant chief executive officers (e.g. Assistant 
President, Vice President, or Assistant Treasurer/Manager), and the 
chief financial officer (Comptroller).
    (2) Official means any member of your board of directors, credit 
committee or supervisory committee.
    (3) Immediate family member means a spouse or other family member 
living in the same household.

[FR Doc. 01-19103 Filed 8-3-01; 8:45 am]
BILLING CODE 7535-01-U