City Mortgage Corporation
P.O. Box 92810
Anchorage, AL 99509-2810
Re: Credit Union Service Organization ("CUSO") (Your Letter of December 3, 1996)
Dear Mr. Aldrich:
Many of the concerns raised in your letter have already been addressed by NCUA Regional Office correspondence and correspondence from the federal credit union ("FCU") in question. See Letters from Daniel Murphy, NCUA Region VI Director, to you, dated November 22, 1996, and Letter from FCU to you, dated December 6, 1996. This letter will address the legal issues raised in your letter.
You requested the legal basis of §701.27(d)(4) of NCUA's rules, which is the customer base requirement for CUSOs. 12 C.F.R. §701.27(d)(4) ("A [FCU] may invest in or loan to a [CUSO] only if the [CUSO] primarily serves credit unions and/or the membership of affiliated credit unions..."). The statutory bases of that subsection are §107(5)(D) and (7)(I) of the Federal Credit Union Act ("FCU Act"). 12 U.S.C. §§1757(5)(D) and (7)(I). The authority of the NCUA Board to make rules implementing and interpreting the FCU Act is in §120(a) of the FCU Act. 12 U.S.C. §1766(a). The current CUSO rule was adopted by the NCUA Board in 1986 after a notice and comment process complying with the Administrative Procedures Act. See the enclosed Notice of Proposed Rulemaking, 50 Fed.Reg. 4698 (February 1, 1985); Proposed Rule, 50 Fed.Reg. 36998 (September 11, 1985); and Final Rule, 51 Fed.Reg. 10353 (March 26, 1986).
You also requested information regarding the test to define the term "primarily." In the preamble to the 1986 Final Rule, the NCUA Board states:
In light of the comments, the Board again considered providing a definition of the term "primarily." As it had concluded in the proposed rule, the Board believes that defining the term as a percentage of business or percentage of customers served would be arbitrary. The lack of a definition is not deemed critical since the wording in §701.27(d)(4) reiterates the statutory requirement and will provide the Board with a sufficient basis to deal with any clear abuses.
50 Fed.Reg. at 10355. Although the Region correctly informed you that "50% or greater" is often used as a rough indicator of "primarily," you neglect to mention that the Region also stated that "50% or greater" is not the only definition of "primarily." In the past the definition of the term "primarily" has depended upon several variables, such as: type of business(es) provided; number of affiliated members served; gross or net revenues derived from affiliated members; amount of affiliated members assets under management; number of policies sold to affiliated members; number of services provided to affiliated members; and availability/access of services to affiliated members. In any event, the FCU informed you in a letter dated December 6, 1996, "69.24% of the loans originated by the CUSO [in question] have been made to members of [the FCU in question]." The Regional Office has not cited the FCU for any violations of §701.27(d)(4), but will continue to monitor this situation. The Region also asked that you provide "specific evidence and documentation in support of your concern that [the FCU in question is not in compliance with §701.27(d)(4)]". (Letter of November 22, 1996, p. 2). To date, you have not responded to this request. If you have information regarding a regulatory violation, we strongly suggest that you send it to the Region for investigation. If you have any other questions, please contact Larry Torres, Supervision Analyst, Region VI, at (510) 825-6125.
Michael J. McKenna
Acting Associate General Counsel
cc: Daniel Murphy
Region VI Director