August 18, 1997
Susan Brandon, President/Mgr.
Members First Federal Credit Union
10832 E. 31st Street
Tulsa, OK 74146-2050
Dear Ms. Brandon:
Members First Federal Credit Union (the FCU) would like to market
a mechanical breakdown service agreement to its members. You
have asked whether the FCU may add $125 to the cost of each agreement
and, from that amount, retain $100 for the FCU and pay $25 as
an incentive to the loan department employee who sold the agreement.
You correctly noted in your letter that the answer depends on
whether the agreement is insurance or a group purchasing plan.
If the Oklahoma Insurance Department classifies the agreement
as insurance and the FCU sells an agreement in conjunction
with financing the vehicle covered by the agreement, the FCU may
add $125 to the cost of the agreement. The FCU may pay the selling
employee $25 per agreement as an incentive, subject to certain
conditions discussed below.
Analysis
Part 721 of National Credit Union Administration (NCUA) Rules
and Regulations authorizes FCUs to make insurance and group purchasing
plans involving outside vendors available to their members, to
perform administrative functions on behalf of the vendors, and
to be reimbursed by the vendors for those functions. The amount
of reimbursement or compensation the FCU may receive depends on
whether the agreement is considered insurance and whether it is
sold in conjunction with an extension of credit.
As long as the state where a mechanical breakdown service agreement
is sold classifies the agreement as insurance, and the agreement
is sold at the time the vehicle covered by the agreement is financed,
the FCU is not limited in the reimbursement or compensation it
can receive. Thus, if Oklahoma classifies the agreement as insurance,
and an agreement is sold in conjunction with financing the vehicle
covered by the agreement, the FCU may add $125 to the cost of
each agreement.
If Oklahoma classifies the agreement as insurance, but the FCU
does not sell it in conjunction with financing the covered vehicle,
the FCU may receive an amount not exceeding the greater of the
"dollar amount" or the "cost amount." Part
721 provides that the "dollar amount" is: $4 per single
payment policy; $6 per combination policy; and $4 per annum for
any other type of policy. "Cost amount" means the total
of the direct and indirect costs to the FCU of any administrative
functions performed on behalf of the vendor. The FCU must be
able to justify that amount using standard accounting procedures.
Since $125 exceeds the dollar amount, the FCU could add $125
only if that is what it spends to market each agreement.
If Oklahoma does not classify the agreement as insurance, the
FCU would be limited to receiving the cost amount for marketing
the agreement.
You included with your letter a letter to you from Old Republic
Minnehoma Insurance Company. The letter indicates that "the
specific agreement forms and rates" in the program you are
considering have been submitted and approved by the Oklahoma Insurance
Department but it is not clear whether Oklahoma regards the service
agreement itself as insurance. Rather than rely solely on the
insurance company, we think you should obtain an opinion on whether
the service agreement is regarded as insurance from the Oklahoma
Insurance Department or from an attorney of your own who is familiar
with Oklahoma law. The FCU must assure itself of the correct classification
of the agreement before determining how much it may retain for
selling the agreement.
On the question of the FCU paying $25 to an employee as an incentive
for selling an agreement, there are two NCUA regulations that
apply. Section 721.2 prohibits FCU directors, committee members,
senior management employees, and other employees who are directly
involved in an insurance or group purchasing activity from receiving
any compensation, other than salary, in conjunction with the activity.
However, employees who are directly involved in an insurance
or group purchasing activity may receive compensation if the FCU
board determines that the employee's involvement does not present
a conflict of interest. Section 701.21(c)(8) prohibits FCU employees
from receiving compensation, other than salary, in connection
with a loan made by the FCU, with certain exceptions. There is
an exception pertinent to your inquiry that allows an employee,
other than a senior management employee, to receive an incentive
in connection with a loan made by the FCU as long as the board
has established written policies and internal controls regarding
the incentive and monitors compliance with them at least annually.
The loan department employees selling the service agreements are
directly involved in an insurance or group purchasing activity.
In addition, if they are selling the agreements in conjunction
with financing the covered vehicle, any incentive compensation
they receive would be in connection with a loan made by the FCU.
Therefore, if Oklahoma classifies the agreement as insurance,
and the FCU sells an agreement in conjunction with financing the
vehicle covered by the agreement, the FCU may pay the selling
employee $25 under the following conditions: 1) the employee
is not a senior management employee; 2) the board determines that
the payment does not present a conflict of interest; and 3) the
board has established written policies and internal controls regarding
the payment and monitors them at least annually.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/LH:bhs
SSIC 3501
97-0541