November 4, 1998
Ms. Mary Isaacs
Trane Federal Credit Union
Post Office Box 443
LaCrosse, Wisconsin 54602
Dear Ms. Isaacs:
Trane Federal Credit Union (Trane FCU) wants to offer mechanical
breakdown insurance contracts to its members and provide cash
incentives to its loan officers and possibly insurance staff for
selling such contracts. One insurance vendor has offered to pay
the cash incentives directly to the credit union's employees and
handle all the tax requirements. You have asked whether a third
party insurance vendor can pay incentives to a federal credit
union's (FCU's) loan officers and insurance staff for selling
mechanical breakdown insurance contracts if such contacts are
considered insurance.
If the contracts are sold to insure vehicles financed by an FCU,
such incentives are not permitted. Otherwise, employees, who
are not directors, committee members, or senior employees, can
receive third party incentives if an FCU's board determines that
the employees' involvement does not create a conflict.
NCUA regulations permit FCUs to make insurance and group purchasing
plans involving outside vendors available to their members and
to perform administrative functions on behalf of the vendors.
12 C.F.R. §721.1. FCUs may be reimbursed or compensated
by the vendors for performing such functions. The amount of reimbursement
or compensation depends on whether the product is considered insurance
and is directly related to an extension of credit. 12 C.F.R.
§721.2(b)(1).
NCUA's group purchasing regulation and a conflict of interest provision in our lending regulation limit the compensation an FCU employee can receive in these circumstances. 12 C.F.R. §721.2(c), (d); §701.21(c)(8)(i). Under the group purchasing regulation, directors, committee members, and senior employees cannot receive any compensation or benefit, directly or indirectly, in conjunction with any insurance or group purchasing activity. 12 C.F.R. §721.2(c). However, FCU employees directly involved in insurance or group purchasing activities can receive compensation or benefit, as a result of group purchasing sales, if the FCU's board of directors determines that the employees' involvement does not present a conflict of interest. 12 C.F.R. §721.2(d)
Ms. Mary Isaacs
Page Two
Under NCUA's lending regulation, FCU employees cannot receive,
directly or indirectly, any commission, fee, or other compensation
in connection with a loan made by the FCU unless one of the exceptions
in the regulation applies. 12 C.F.R. §701(c)(8). None of
the exceptions, however, allow a third party to provide compensation
to an FCU's employees for performing credit union activities.
12 C.F.R. §701(c)(8)(iii).
Here, the Trane FCU loan officers and insurance staff selling
mechanical breakdown insurance contracts would be directly involved
in an insurance or group purchasing activity. If the credit union's
board of directors determined that the employees' involvement
did not constitute a conflict, they could receive third party
incentives for selling mechanical breakdown insurance contracts
under the group purchasing regulation. However, if the mechanical
breakdown insurance contracts are sold to insure vehicles financed
by the credit union, our view is that, under the lending regulation,
the sale of such contracts would be in connection with a loan.
None of the exceptions in the lending regulation would apply
to permit the incentives.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/NSW:bhs
SSIC 3500
98-0708