CUNA Comment Letter

Real Estate Brokerage Permissibility

August 19, 1999

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Dear Ms. Baker:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on an interim final rule that would liberalize a general prohibition restricting all Credit Union Service Organizations (CUSOs) from providing real estate brokerage services. This rule allows those CUSOs that provided real estate brokerage services prior to April 1 1998, to continue to do so. This grandfather exemption was published in a Federal Register (Notice) that requested comments on the grandfather exemption and on whether real estate brokerage services should be reinstated as a permissible CUSO. Previously, the National Credit Union Administration (NCUA) had removed real estate brokerage services from the list of permissible activities for CUSOs.

CUNA believes that real estate brokerage services should be reinstated as a permissible CUSO activity because there is no safety and soundness justification for curtailing these activities. NCUA itself states that "the existing real estate brokerage CUSOs do not appear to present a safety and soundness risk." In fact, CUNA believes that in general a CUSO poses a very limited risk to a federal credit union (FCU). NCUA requires that before an FCU invests in a CUSO, the FCU obtain a legal opinion that its exposure will be limited to the loss of funds that were invested in, or lent to, the CUSO. See 12 C.F.R. § 712.5. Moreover, if a CUSO's real estate brokerage activities do present a safety and soundness risk, then other regulations would give NCUA adequate authority to address that risk. According to these regulations, NCUA may discontinue a CUSO's service if NCUA has supervisory, legal, or safety and soundness concerns. See 12 C.F.R. § 712.5. NCUA also states in the Notice that if a conflict between a real estate brokerage CUSO and a FCU loan program arises, then NCUA may order the FCU to divest its investment in the CUSO. The ability of NCUA to manage any future risk that should arise with a particular CUSO in conjunction with the lack of any current safety and soundness risk make a general prohibition unnecessary and overly inclusive.

More specifically, the actual and perceived conflicts between a real estate brokerage CUSO and a FCU's loan department are minimal and adequately managed by other existing laws. There is little actual conflict between a real estate brokerage CUSO and a FCU because credit unions are not required to finance the real estate transactions formed by a CUSO. Indeed, a FCU and a CUSO are required to remain as separate corporate entities with separate procedures. See 12 C.F.R. §712.4. Thus, a CUSO could not affect the loan procedures of its affiliated FCU, under NCUA's regulations. In addition, the perception of conflict has been minimized because NCUA regulations require a CUSO and an affiliated FCU to hold themselves out to the public as separate enterprises.

See 12 C.F.R. § 712.4. The real estate brokerage activities of CUSOs also are monitored by state licensing authorities and the Code of Ethics and Standards of Practice imposed by the National Association of Realtors. These regulations from NCUA and other bodies effectively control the actual and perceived conflicts between real estate brokerage CUSOs and affiliated FCUs.

CUNA believes that prohibiting CUSOs that are not grandfathered from starting real estate brokerage services may limit the ability of credit unions to effectively compete with other real estate lenders and limit credit union effectiveness in serving their members. The ability to invest in a real estate brokerage CUSO allows FCUs to structure themselves to meet the financial needs of their members, and gives members another option for financing a major purchase. CUNA believes that providing real estate brokerage services is consistent with the other activities conducted by CUSOs and that CUSOs should provide a service, such as this, which complements FCU mortgage lending.

In conclusion, CUNA believes that real estate brokerage should be reinstated as a permissible activity for all CUSOs, and therefore, the grandfather exemption should be eliminated. CUNA believes, as stated above, that the NCUA already has in place regulations that more effectively monitor the safety and soundness of the relationship between CUSOs and FCU's. These make a general prohibition, even one that is limited by a grandfather exemption, unnecessary.

Michelle Q. Profit
Assistant General Counsel