October 2, 1997
Paula Walpole-Moehrig, President
Texas Associations of Professionals
Federal Credit Union
9110 I.H. 10 West
San Antonio, Texas 78230-3112
Dear Ms. Walpole-Moehrig:
You have asked whether an arrangement that Texas Associations
of Professionals Federal Credit Union (TAP FCU) has with Megamerica
Mortgage for real estate loan services presents a conflict of
interest in violation of NCUA regulations or the Federal Credit
Union Bylaws. The issue arises because Megamerica is owned by
TAP FCU's Chairman. You note that a recent examination cited
the arrangement as potentially in violation of �1.21(8)(i)
of the NCUA regulations, which addresses prohibited fees in connection
with loans, and Article XIX, Section IV of the FCU bylaws, which
deals with disqualification of officials from determining matters
in which they have a pecuniary interest.
Based upon the information provided, it is our opinion that the
arrangment does not violate either of the above provisions but
it does run afoul of NCUA's group purchasing regulation, which
also includes a conflict of interest provision. 12 C.F.R. Part
721
BACKGROUND
TAP FCU does not make real estate loans but has entered into an
arrangement with Megamerica Mortgage to provide its membership
with access to real estate loan services. Under this arrangement,
TAP FCU is responsible for taking loan applications, gathering
documentation, counseling members, and ordering credit reports
and appraisals. The real estate loans are closed at a title company
and funded by a lender, other than TAP FCU, arranged through Megamerica
Mortgage. TAP FCU receives a fee from Megamerica Mortgage for
performing the above administrative functions as well as any profits
received by Megamerica Mortgage on the real estate loans for TAP
FCU members, less $300 for Megamerica Mortgage's direct expenses.
TAP FCU's chairman of the board owns Megamerica Mortgage.
In a recent NCUA examination, the examiner cited a possible conflict of interest problem as a result of the arrangement with Megamerica Mortgage. The examiner noted that the arrangement may violate Section 701.21(c)(8)(i), prohibited fees on loans, and Article XIX, Section 4 of the bylaws.
ANALYSIS
Section 701.21(c)(8)(i) of NCUA regulations provides:
[N]o official or employee of a Federal credit union, or immediate
family member of an official or employee of a Federal credit union,
may receive, directly or indirectly, any commission, fee, or other
compensation in connection with any loan made by the credit
union. (Emphasis added).
Assuming the facts are as provided, the arrangement between TAP
FCU and Megamerica Mortgage would not create a conflict of interest
in violation of �1.21(c)(8) because TAP FCU is not making
the loans. The loans are funded by a lender arranged through
Megamerica Mortgage. Any compensation received by an official
of the credit union would not be considered in connection with
a loan made by TAP FCU.
Article XIX, Section 4 of NCUA FCU Bylaws provides:
No director . . . shall in any manner, directly or indirectly,
participate in the deliberation upon or the determination of any
question affecting his pecuniary interest or the pecuniary interest
of any corporation, partnership, or association (other than this
credit union) in which he is directly or indirectly interested.
As long as the chairman of the board does not participate in any
"deliberation" or "determination" related
to the arrangement with Megamerica Mortgage, TAP FCU should be
in compliance with this bylaw.
TAP FCU's arrangement with Megamerica Mortgage is subject to Part
721 of NCUA Rules and Regulations concerning group purchasing
activities and appears to violate the restriction on the amount
of reimbursement for an FCU and the conflict of interest provision
in this regulation. Part 721 permits an FCU to make the services
of a third-party vendor, such as Megamerica Mortgage, available
to its members, perform administrative functions on behalf of
the vendor, and have the vendor reimburse or compensate the FCU
for performing such services.
An FCU, however, cannot make a profit for providing group purchasing activities to its membership. Any reimbursement or compensation received by the credit union from a vendor cannot exceed the "cost amount" of providing such services. 12 C.F.R.
�1.2(b)(3). The "cost amount" is defined as
the "total of the direct and indirect costs
to the Federal credit union of any administrative functions performed
on behalf of the vendor," 12 C.F.R. �1.2(a)(2), and
must be justified using standard accounting procedures. 12 C.F.R.
�1.2(b)(3). TAP FCU would be in violation of Part 721
for receiving profits on the real estate loans made to its members
through Megamerica Mortgage.
In addition, �1.2(c) provides that "[n]o director
. . . of a Federal credit union . . . may receive any compensation
or benefit, directly or indirectly, in conjunction with any activity
under this Part." 12 C.F.R. �1.2(c). As owner of
Megamerica Mortgage, TAP FCU's chairman would be considered the
recipient of any compensation or benefit received by Megamerica
Mortgage from the real estate loans made to TAP FCU members.
Since Megamerica Mortgage profits from the real estate loans made
to TAP FCU members and these profits cannot be passed to the credit
union, they would be a direct benefit to Megamerica Mortgage.
As a benefit to Megamerica Mortgage, the profits would be considered
a benefit to TAP FCU's chairman of the board, as owner of the
company. Accordingly, the chairman of the board would be receiving
compensation or a benefit in conjunction with a group purchasing
activity provided by the credit union which is a violation of
�1.2(c). Accordingly, TAP FCU's chairman of the board
either will have to resign from the board or the credit union
will have to cease doing business with Megamerica Mortgage.
From your conversation with Staff Attorney, Nicole Williams, it
is clear that TAP FCU's chairman of the board is a valued volunteer
and that he and his family have contributed much to the credit
union since its inception. Unfortunately, the �1.2(c)
prohibition is clear and does not provide for an exception.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/NSW:bhs
SSIC 3500
97-0811
cc: Tracy Bombarger, Region V