CUNA Comment Letter
Incidental Powers For Federal Credit Unions
February 23, 2000
Ms. Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Via Fax: 703-518-6540
Dear Ms. Baker:
The Credit union National Association is pleased to respond to the agency’s Request for Comments on incidental powers for federal credit unions, which appeared in the Federal Register November 26, 1999. NCUA’s review of federal credit union incidental powers is a very important undertaking that is long overdue, and we commend the agency for initiating this process.
Summary of CUNA’s Recommendations
- CUNA strongly supports expanded incidental powers for federal credit unions, consistent with the Supreme Court’s analysis in NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995), (VALIC).
- CUNA supports the use of the principles developed by the Office of the Comptroller of the Currency to determine if a power is incidental.
- CUNA recommends that under the new regulation, if an activity meets the OCC’s test and is therefore incidental, compensation to the credit union from that activity should be limited only by the business decisions and practices of the credit union and not by federal regulation.
- CUNA also recommends that the Board consider whether it is necessary to continue the concept of "group purchasing." If the proposal were revised to reflect that permissible activities are allowed either under express powers provided in the Federal Credit Union Act or as incidental powers, it may not be necessary to retain the group purchasing concept and specific regulatory provisions on group purchasing.
- CUNA supports the continuation of the conflict of interest provisions.
Background
Incidental powers of federal credit unions are regulated under 12 CFR 721, which addresses group purchasing activities. Under such activities, federal credit unions may make products or services of third party vendors available to their members. Except for insurance, a federal credit union is generally limited to reimbursement only for its costs associated with making products available through group purchasing plans.
NCUA’s interpretations regarding incidental powers are currently based on whether such activities meet the test established in the 1972 case, Arnold Tours, Inc. v. Camp, which articulated the standards for national bank incidental powers.
However, more recent cases have expanded the concept of what is an acceptable incidental power for national banks. The U.S. Supreme Court continued this trend in VALIC in 1992 and held:
The "business of banking" is not limited to the enumerated powers in §24...and...the Comptroller therefore has discretion to authorize activities beyond those specifically enumerated. Id. at 259, n.2.
Recent OCC opinions regarding the permissibility of an activity as an incidental power have relied on three principles to make that determination:
- whether it is the functional equivalent or logical outgrowth of a recognized banking activity;
- whether the activity meets customer needs or otherwise benefits the bank or its customers; and
- whether the activity involves risks similar to those already assumed by the bank.
NCUA’s Proposal
NCUA is proposing to amend its incidental powers and group purchasing regulations, which would have four components:
- Incidental powers—this section would enumerate activities in which credit unions could engage without limits on compensation. The list would be illustrative only and would include examples such as electronic tax filing, raffles, and check clearing services for a sponsor or member. This section would also indicate how a credit union could apply for approval of an activity as an incidental power.
- Group purchasing activities—this section would limit compensation for group purchasing activities to the credit union’s costs, as the current regulation provides.
- Insurance products—this section would address insurance products that are permissible as incidental powers.
- Conflict of interest—this section would restate the current conflict of interest restrictions that no director, senior management official or immediate family member of such an individual may receive any compensation or benefit in conjunction with activities permissible as group purchasing activities.
CUNA’s Recommendations
- CUNA strongly supports expanded incidental powers for federal credit unions, consistent with the
Supreme Court’s analysis in VALIC.
The legal standard for permissible incidental powers used by NCUA is outdated, not only in terms of recent case law and the Office of the Comptroller of the Currency’s interpretations for national banks, but also in relation to the capabilities of credit unions to utilize technology to develop new products and services for their members.
While we urge expanded capabilities for federal credit unions, consistent with the Federal Credit Union Act and reasonable notions of safety and soundness, we do not think NCUA should attempt to develop a list of approved incidental powers for federal credit unions that it would have to amend, as the concept of incidental powers undoubtedly will continue to evolve.
Rather, we believe the regulation should articulate a clear standard for determining incidental powers on which both credit unions and examiners could rely in assessing the legality of an incidental power for a federal credit union. Further, we do not think credit unions should be required to seek preapproval of new activities, although they would be free to seek a determination from NCUA as to whether a particular activity is permissible as an incidental power. - CUNA supports the use of the principles developed by the Office of the Comptroller of the Currency
as the standard to determine if a power is incidental.
We believe that the test developed by the Office of the Comptroller of the Currency is appropriate for credit unions and we urge the agency to adopt it or one that is no less expansive for federal credit unions. The OCC’s principles are fully consistent with banking statutes, with the case law and more importantly with the Federal Credit Union Act. Further, the OCC’s approach facilitates the development of new incidental activities by establishing a clear standard that can accommodate innovative products and services, within the constraints of the Act. - CUNA recommends that the Board consider whether it is necessary to continue the concept of "group
purchasing." CUNA also recommends that under the new regulation, if an activity meets the OCC’s
test and is therefore incidental, compensation should be limited only by the business decisions and
practices of the credit union and not by federal regulation.
We believe the regulation of incidental powers and group purchasing could be streamlined even further than NCUA is proposing. One approach would be to allow activities either as an express power or an incidental power under the Federal Credit Union Act. Thus, the notion of "group purchasing activities" may not be necessary because an activity would be permissible only as an express or incidental power, or it would be impermissible. The kinds of activities that credit unions engage in as group purchasing we believe should be permissible as incidental powers under the OCC’s standards.
For any activity that is permissible, there should be no regulatory limits on the amount of compensation that could be attained. Further, the issue of whether compensation is appropriate and to what extent we believe is more appropriately determined by the credit union’s management, rather than by federal regulation. - CUNA supports the continuation of the conflict of interest provisions.
We feel these provisions are reasonable and consistent with credit union traditions.
Thank you for the opportunity to comment on this critical regulatory issue for federal credit unions. CUNA urges NCUA to revise its approach on incidental powers as addressed above and to develop a proposed regulation designed to facilitate, rather than limit, the ability of federal credit unions to offer competitive and innovative products to their members.
Sincerely,
Mary Mitchell Dunn
Associate General Counsel
and Senior Vice President
