August 6, 1997
Linda J. Lehnertz, Associate General Counsel
P.O. Box 391
5910 Mineral Point Rd.
Madison, WI 53701-0391
Dear Ms. Lehnertz:
You have asked whether a federal credit union's (FCU's) actions
under CUNA Mutual's point of purchase lending (POPLS) program
constitute making loans or purchasing eligible obligations. Based
on your description, an FCU's actions under the POPLS program
constitute making loans.
FCUs may participate in indirect lending arrangements under the
authority to make loans to members, 12 U.S.C. �7(5); 12
C.F.R. �1.21, rather than the authority to purchase eligible
obligations, 12 U.S.C. �7(13); 12 C.F.R. �1.23,
as long as two conditions are met. First, the FCU must make the
final underwriting decision. That is, before the retailer and
the member complete the loan or sales contract, the FCU must review
the application and determine that the transaction conforms to
its lending policies. This is because an FCU may not delegate
its lending authority to a third party. Second, the retailer
must assign the loan or sales contract to the FCU very soon after
it is completed. Assignment close in time to the making of the
loan allows the retailer to function as the facilitator of the
loan while the FCU remains the true lender. As the time between
completion and assignment of the loan lengthens, the FCU's payment
to the retailer becomes the purchase of the loan rather than part
of the processing of the loan.
Under the POPLS program, a retailer enters a credit union member's
loan application information into its computer and transmits the
information to CUNA Mutual's data processor for automated credit
scoring. The application receives a credit score that is based
on the credit union's lending criteria. The retailer is informed,
via computer, whether the member qualifies for a loan. If the
member qualifies, the retailer makes a loan and assigns it to
the credit union within one business day. Upon assignment, a
credit union employee conducts an administrative review of the
loan documents. If they are in order, the credit union accepts
assignment, pays the retailer the loan amount, and enters the
loan on its books.
An FCU's use of a credit scoring system does not constitute the
delegation of lending authority as long as the "score"
obtained from the system is the sole determinant for granting
credit. When an FCU board establishes the qualifying score for
an extension of credit, it effectively is making an advance decision
on a particular application. As long as the individual entering
the member's application information does not exercise any judgment
regarding that information, the score generated will reflect the
FCU's lending policies. Therefore, the POPLS program meets the
requirement that the FCU make the underwriting decision. The
POPLS program also meets the timing requirement, as assignment
within one business day is soon enough for the retailer to function
as the facilitator of the loan.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/LH:bhs
SSIC 4650
97-0546