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Residential Mortgage Processing and Servicing as an Incidental Power

December 9, 2009

Donovan, William J.  Esq.
Venable LLP

575 7th Street, N.W., Washington, D.C. 20004-1601​

RE: Residential Mortgage Processing and Servicing as an Incidental Power


 Dear Mr. Donovan:

 You have asked if a federal credit union (FCU) can provide residential mortgage loan processing
and servicing to credit unions as a correspondent service under the incidental powers rule where
the credit union receiving the service would fund the loan and the loan would close in the funding
credit union’s name. 12 C.F.R. §721.3(b). We conclude this would be permissible as a correspondent service and note, as required for all incidental powers activities, FCUs must
comply with any applicable NCUA regulations, policies, and legal opinions, as well as
state and federal law applicable to the activity. 12 C.F.R. §721.5.

Your inquiry concerns a large FCU that would like to enter into agreements with smaller state and
federal credit unions to process and underwrite residential loans to members of those smaller
credit unions. You state the loans would be in compliance with Freddie Mac and any applicable
mortgage insurer guidelines. Also, you state the smaller credit unions would fund the loans for
their members, and the loans would close in the name of the smaller credit unions. The agreement
would also provide that, upon a loan closing, the FCU would purchase the loan from the smaller
credit union and sell it to Freddie Mac with the FCU retaining the servicing rights.

Under NCUA’s incidental powers rule, correspondent services are a preapproved incidental
powers activity and include loan processing and loan servicing. 12 C.F.R. §721.3(b). Generally,
correspondent services are those services that an FCU is authorized to perform for its members
or as a part of its operation and that an FCU may provide to other credit unions. Activities
preapproved under Part 721 must also comply with any applicable NCUA regulations, policies,
and legal opinions, as well as, any applicable state and federal law. 12 C.F.R. §721.5. We have
previously issued a legal opinion concluding the use of correspondent service agreements to
facilitate an FCU providing mortgage processing services to aid smaller credit unions is
permissible. See Legal Op. 95-0805 (Aug. 9, 1995). Key to our conclusion is the fact that,
while the FCU will provide processing and servicing, the smaller credit unions will fund
the loans and the loans will close in their names.
Regarding the FCU’s intention to purchase the loans from the smaller credit unions for sale in
the secondary market, we note the eligible obligations rule generally regulates an FCU’s purchase
of eligible obligations. 12 C.F.R. §701.23. This rule authorizes an FCU to purchase its members’
obligations from any source but also allows an FCU to purchase nonmember, real estate secured
loans from any source if certain criteria are met. The FCU must be granting real estate secured
loans on an ongoing basis and the purchase of the nonmember loans is undertaken to facilitate
the packaging of loan pools for sale in the secondary mortgage market. Further, a pool must
include a substantial portion of the FCU’s loans to its own members and must be sold promptly.
12 C.F.R. §701.23(b)(1)(iv).

If you have any questions, please contact Staff Attorney Linda Dent or me. 

Sheila A. Albin
Associate General Counsel