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CUNA Regulatory Comment Call

November 19, 1999

Incidental Powers Of Federal Credit Unions

(NOT A MAJOR RULE)

EXECUTIVE SUMMARY

• The National Credit Union Administration Board is seeking comments on changes to its regulations regarding the incidental powers of federal credit unions.
• Comments are due to NCUA by February 24, 2000.
• Recent court cases involving the incidental powers of national banks have expanded the permissible activities of these institutions. NCUA has issued an advance notice of proposed rulemaking to solicit comments on how federal credit unions' incidental powers might be expanded in light of the court cases and subsequent interpretations from the Comptroller of the Currency.

For more information about the advance notice, feel free to contact CUNA Associate General Counsel Mary Dunn at mdunn@cuna.com or Assistant General Counsel Michelle Profit at mprofit@cuna.com. A copy of the published proposal will be attached to this document as soon as it is available from NCUA.

Details of the Proposal

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 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 case, Arnold Tours, Inc. v. Camp, which articulated the standards for national bank incidental powers. However, several more recent cases have expanded the concept of what is an acceptable incidental power for national banks.

NCUA's review of this area is long overdue as some of the cases expanding incidental powers for banks are more than 10 years old. Also, the Office of the Comptroller of the Currency, which supervises national banks, developed a broader definition of incidental powers in November 1997. The OCC uses the following criteria to determine whether an activity is permissible as an incidental power:

• 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.

In light of the court cases and OCC's view, NCUA is considering restructuring its regulations into four sections:

• 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.

Questions to Consider

• Do you agree NCUA should amend its group purchasing regulations?




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• Do you agree with OCC's approach? If not, what other standard should be used to determine if an activity is permissible as an incidental power?




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• Do you think a list of examples of permissible activities is useful? If yes, what activities would you suggest NCUA include?




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• Should the revised regulation explicitly state that federal credit unions are not limited in the amount they may earn from activities related to incidental powers?




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• Should there be compensation limits on group purchasing activities? For example, NCUA says it plans to address the sale of mailing lists under group purchasing and limit a federal credit union's compensation in the sale of mailing lists. Is such a limit appropriate?




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• Regarding mailing list sales, NCUA is also seeking comments in the context of this rule whether members should have the option to have their names deleted from such lists. Would this issue more appropriately be addressed in the context of the new privacy regulation NCUA is be required to develop under the financial modernization legislation?




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• The conflict of interest provisions prohibit compensation for senior management or immediate family members that is "in conjunction with" group purchasing activities. NCUA has said this provision has created some confusion. Do you feel this should be clarified and if yes, how would you clarify it?




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