CUNA Regulatory Comment Call
November 17, 2000
NCUA PROPOSES NEW INCIDENTAL POWERS RULEMAJOR PROPOSAL FOR FEDERAL CREDIT UNIONS
The National Credit Union Administration Board is seeking comments on a new proposal that significantly expands the so- called incidental powers for federal credit unions. Click here for a copy of the proposal.
The proposal was approved for comments by all three Board members. A chief proponent of the proposal was Board Member Dennis Dollar, with strong support from Board Member Yolanda Wheat. CUNA, which has advocated comprehensive changes in the incidental powers rule to NCUA, commended the agency for developing a regulatory framework that will enable federal credit unions to offer a much wider range of services to their members. CUNAs comments on the proposal will be developed by our Federal Credit Union Subcommittee, chaired by Lockheed Georgia Employees FCU CEO Edwin Collins. For more information about this proposal, please feel free to contact CUNAs Associate General Counsel Mary Dunn at firstname.lastname@example.org, or Assistant General Counsel Michelle Profit at email@example.com.
The new proposal would establish 11 categories of activities that would be preapproved as incidental powers and from which a federal credit union could obtain income. Federal credit unions could apply to NCUA for approval for activities that are not on the list. Approved activities include certification services; correspondent services; electronic financial services; excess capacity; financial counseling services; finder activities; marketing; monetary instruments; operational programs; stored value products; and trustee or custodial services. Comments will be due to NCUA by February 22, 2001. Currently, NCUAs regulations limit the income a federal credit union can receive from services offered to members by third party vendors, except for insurance, to the credit unions costs.
Highlights Of The Proposal
I. Incidental Powers Authority
The Federal Credit Union Act states that a federal credit union may exercise such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated. Until now, NCUA has interpreted that authority very narrowly, relying on court interpretations rendered more than 25 years ago. More recent court rulings and interpretations from banking regulators have expanded the definition of incidental powers for banks and thrifts. These interpretations have helped persuade NCUA that a more modern, flexible analysis is appropriate regarding incidental powers.
Under the proposal, a federal credit union may derive income from any activity authorized under the incidental powers authority. In determining whether an activity is appropriate as an incidental power, NCUA has established a three-part test to consider:
- Whether the activity is convenient or useful in carrying out the mission or business of credit unions consistent with the FCU Act;
- Whether the activity is the functional equivalent or logical outgrowth of activities that are part of the mission or business of credit unions; and
- Whether the activity involves risks similar in nature to those already assumed as part of the business of credit unions.
These standards are substantially similar to the ones utilized by the Office of the Comptroller of the Current for commercial banks. However, NCUA notes that such criteria will be applied in the unique context of credit unions and that it may arrive at a conclusion that differs from the one reached by the OCC regarding a particular activity.
NCUA also notes that some of the activities that would be permissible under the incidental powers proposal have in the past been performed traditionally by credit union service organizations, such as income tax preparation.
II. Categories of Preapproved Activities
Under the proposal, NCUA has established 11 categories of preauthorized activities and programs that a federal credit union is permitted to engage in and obtain income from. These are:
A. Certification Services
Certification services such as the following would be permissible:
- Notary services;
- Electronic signature authentications; and
- Signature guarantees.
B. Correspondent Services
These services would include:
- Services that a credit union may perform for its members may be performed for another credit union, such as loan processing.
C. Electronic Financial Services
Federal credit unions may offer through electronic means any activity function, product or service that they are otherwise authorized to provide, including:
- Web sites to promote services and conduct transactions such as electronic bill payment, bill presentment, account inquiries and transfers.
D. Excess Capacity
NCUA states that Federal credit unions should be able to sell their excess capacity as a matter of good business practice. This could involve:
- Leasing excess office space;
- Sharing employees; and
- Using data processing systems to process information for third parties.
The sale of excess capacity will be permissible under two conditions: (1) the credit union established the service or made the investment tin good faith with the intent of serving its members; and (2) the credit union reasonably anticipates that the excess capacity will be taken up by future expansion of services to its members.
E. Financial Counseling Services
The proposal states that the Board believes it is part of the business of federal credit unions to provide financial counseling services to their members, which could include:
- Estate planning;
- Income tax preparation and filing;
- Investment counseling; and
- Retirement counseling.
F. Finder Activities
This is the introduction of products and services to members that are offered by outside vendors. As a finder, the proposal would allow a FCU to introduce or otherwise bring together outside vendors with its members to negotiate and provide services. The proposal points out that the credit union does not act as a broker but may negotiate with vendors for group discounts or benefits for its members.
Finder activities could include:
- Offering third-party products and services to members through the sale to vendors of advertisements in the credit unions newsletter, on the credit unions website or as a link to the vendors web site on the credit unions home page; and
- Offering insurance products or agreements that cover credit disability, life savings, mechanical breakdown, debt cancellation debt suspension or loan protection.
This includes activities used by the credit union to promote products and services provided by third party vendors. NCUA seems to be distinguishing finder activities from marketing activities on the basis that as finders, credit unions would be promoting new services, whereas marketing encompasses new and existing services. Permissible marketing activities could include:
- Advertising and other promotional activities such as:
- Membership referral drives; and
- The purchase or use of advertising.
H. Monetary Instrument Services
These are services that enable members to purchase, sell or change various currencies. Such services include:
- Sale and exchange of foreign currency and U.S. commemorative coins;
- Use of accounts the credit union has in foreign banks to facilitate members transfer; and negotiation of checks denominated in foreign currency.
I. Operational Programs
Programs established to deliver products that enhance members services and promote safe and sound operation. Such programs may include:
- Electronic fund transfers;
- Remote tellers;
- Letters of credit;
- Debit cards;
- Payroll deduction;
- Preauthorized member transactions;
- Check clearing;
- Safe deposit boxes;
- Loan collections; and
- Service fees and collateral protection programs.
J. Stored Value Products
These products are payment devices that are an alternative to currency. With these products, monetary value is transferred to an access device and a medium of exchange is created. Examples include:
- Stored value cards;
- Public transportation tickets;
- Gift certificates;
- Prepaid phone cards;
- Postage stamps;
- Electronic benefits transfer script; and
- Similar media.
K. Trustee or Custodial Services
These are services in which the credit union acts under a written trust instrument or custodian agreement created or organized in the United States and which forms part of a pension or profit-sharing plan, authorized under the Internal Revenue Code. Such services may include:
- Acting as a trustee or custodian for member retirement or education accounts.
III. Credit Unions May Apply for Approval for Activities Not Already on The List
In addition to the extensive list of powers NCUA has provided under the preapproved list, it would establish a procedure under which a federal credit union may apply to undertake an activity that is not already on the list.
A. Filing the Application
Here are the proposed steps for making such an application:
- Submit an application by certified mail to the NCUA Board Secretary.
- The application must describe:
- the activity, including the credit unions proposed investment;
- the financial and operational impact of the activity on the credit union;
- an explanation of how the activity meets NCUAs definition of an incidental power activity;
- the plan for implementing the activity;
- state licenses that might be required; and
- other information necessary to describe the activity.
B. Processing the Application
- NCUA will review the application and determine whether it falls within one of the preapproved categories. If not, NCUA will still consider whether it is legal as an incidental power.
- If NCUA staff recommend that the activity is within the incidental power provision, the NCUA Board may seek to amend the regulation and request public comment on the new category.
- If the application does not meet these criteria, NCUA will notify the credit union within a reasonable period of time.
C. Deciding the Application
This section provides that NCUA must make its determination based on a three-part test (listed on page 2).
A. The proposal continues prohibitions on conflicts of interest for officials and senior management employees when the credit union undertakes incidental powers activities. These requirements are:
- No senior management officials, employee or immediate family member may receive compensation or benefits, directly or indirectly, in connection with the credit unions engagement in an incidental power activity;
- No employee not otherwise covered in the prohibition above may receive a commission, fee or other compensation directly related to the sale of group purchasing or insurance products to members, unless the credit unions board determines that a conflict of interest does not exist and the credit union complies with written policy and internal control requirements (addressed more fully below under permissible payments);
- All transactions with business associates or immediate family members not prohibited as a conflict of interest must be conducted at arms length and in the interest of the credit union.
B. The proposal would allow the following payments:
- Salaries to any employees;
- Incentives or a bonus to an employee based on the credit unions overall financial performance; and
- Payment of an incentive or bonus to an employee, other than a senior management employee or paid official, in connection with an incidental power authority, as long as the credit unions board establishes written policies and internal controls for the incentive program and monitors compliance at least annually.
Senior management employee would be defined as the:
- CEO (treasurer manager/president);
- assistant CEO (assistant president, vice president or assistant treasurer/manager); and
- the CFO (comptroller).
Official is any member of the credit unions board, credit committee or supervisory committee.
Immediate family member is a spouse or other family member living in the same household.
QUESTIONS TO CONSIDER
- Do you agree with NCUAs basic new approach on incidental powers? That is, do you support broader powers for federal credit
unions to obtain income by providing third party services to their members?
- If not, how would you change the basic approach?
- Do you agree that there should be a preapproved list of incidental powers and that credit unions be required to apply
to NCUA for additional activities not on the list?
- If not, how would you change that process?
- Do you agree with NCUAs definition of incidental power authority as articulated in the three-part test?
- If not, how would you define a federal credit unions incidental powers?
- Do you agree with NCUAs categories of incidental powers?
- If you do not agree, what categories should be added or removed?
- Do you support the conflict of interest provisions?
- Do you agree with NCUAs procedures for processing applications for additional powers?
- If you do not, what changes would you suggest?
This proposal is a very important one for federal credit unions and if adopted, will significantly expand the incidental powers of federal credit unions and their ability to obtain income from such activities.
CUNA urges all leagues and federal credit unions to comment on this major proposal. We will publicize the comment date as soon as it is available. For more information or if you have questions, please contact firstname.lastname@example.org.
Eric Richard General Counsel (202) 508-6742 email@example.com |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 firstname.lastname@example.org
Jeffrey Bloch Assistant General Counsel (202) 508-6732 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org