December 9, 1997
Michele M. Notaro, Vice President/Lending
Alcoa Tenn Federal Credit Union
P.O. Box 9001
Alcoa, TN 37701-9001
Dear Ms. Notaro:
You have asked whether a federal credit union (FCU) can engage
in a proposed loan referral program and, if so, whether there
are restrictions or guidelines the FCU must follow. As you have
described the program, it is not permissible because it would
require an FCU to make impermissible loans. If an FCU participates
in a permissible loan referral program, any loan referral fees
are subject to the requirements of NCUA's group purchasing rules.
12 C.F.R. Part 721.
Background
The proposed loan referral program you described involves an FCU
referring a member's rejected loan application for vehicle financing
to a third-party vendor. The vendor would underwrite the proposed
loan according to its own policies. If the vendor approves the
loan, the FCU would close the loan using its own promissory note
but using the vendor's interest rate and terms. The vendor would
wire or send a payoff for the loan and the FCU would forward the
promissory note and vehicle title to the vendor. The vendor would
then notify the member about where to send payments. The vendor
would pay the FCU a flat fee per loan and any interim interest
if there is a delay in receiving the payoff.
Discussion
An FCU is authorized to make loans in compliance with the lending
policies of its board of directors, which must be consistent with
the relevant provisions of the FCU Act, NCUA's regulations, and
other applicable laws and regulations. 12 U.S.C. �57(5)(A);12
C.F.R. �1.21(c)(2). If a member's loan application does
not meet the FCU's lending policies, then the FCU cannot make
the loan.
The proposed referral program would require the FCU to lend to
a member who does not qualify under the FCU's lending policies.
Even though the loan would be paid off and sold to the Vendor
quickly after the loan closing, this program requires an FCU to
make impermissible loans.
We also believe that it is improper for an FCU to allow a third-party
vendor to use FCU loan forms in these circumstances. Although
you indicate that the member would not be mislead into thinking
it is the FCU that is making the loan, we think that the fact
that FCU personnel are closing the loan using FCU loan forms certainly
would lead a member to think that the loan is between the member
and the FCU.
An FCU can participate in a loan referral program and accept fee
income from the other lender subject to certain limitations on
the amount of the compensation as provided in Part 721 of NCUA's
Rules and Regulations. 12 C.F.R. �1. I am enclosing two
letters that will provide some additional discussion of these
limitations. Letter from me to Christopher Turner, dated August
27, 1996; and Letter from Richard S. Schulman to Laurie M. Judd,
dated August 1, 1995.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/SAA/MSC:sg
SSIC 3501
97-0842
Enclosures
cc: Region III