April 13, 1999
George Trosper, President
Amoco Production Federal Credit Union
P.O. Box 1033
Ulysses, Kansas 67880
You have asked for a legal opinion on two separate issues concerning
loan processing on behalf of a third party lender.
First, you ask whether it is permissible for a federal credit
union (FCU) and its manager to be paid a fee for processing loan
applications for a third party mortgage company. The FCU does
not itself offer real estate loans and regards this as a service
to its members. The third party mortgage company pays a fee that
is split between the FCU and the manager, respectively 75% and
25%. As explained in the attached letter from Michael J. McKenna
to Tony Launi, dated February 6, 1997, an FCU is not authorized
to engage in mortgage referral services such as you have described.
This letter also explains that an FCU that wants to provide a
mortgage referral service can offer its members the services of
an independent vendor but payment to the FCU is limited to the
"cost amount". "Cost amount" is "the
total of the direct and indirect costs" for any administrative
functions. 12 C.F.R. §721.2(a)(2).
Second, you ask whether it is a potential conflict of interest
for an FCU manager to lease space from the FCU to operate her
own business processing nonmember loans for a third party mortgage
company. The manager would conduct this business at times when
the FCU is not open for business. If the business is limited
to nonmembers and the lease is an arm's length agreement, NCUA
regulations and the Federal Credit Union Act would not prohibit
such an arrangement.
You questioned whether there was a potential conflict because
the manager receives more money for loans she processes through
her own business than she does for loans processed through the
FCU. Your question assumed that the mortgage referral services
performed by the manager for credit union members was permissible.
As discussed above, because we conclude that neither the FCU
nor the manager can be compensated directly for a mortgage referral
Mr. George Trosper
Page Two
service, we do not believe there is an actual conflict of interest
if the manager were to operate her own mortgage referral business
during off hours.
You have asked for our opinion on the FCU's potential liability
as a result of a leasing arrangement with the manager. You noted
particularly the potential problem that, in these circumstances,
customers of the manager's mortgage referral business might have
the perception that the loan processing was being conducted through
the FCU. We believe there is a significant, potential problem
in these circumstances. The FCU should seek legal advice from
its own legal counsel as to how to limit its liability through,
for example, requiring specific disclosures to customers, an indemnification
from the manager, and assuring itself that the manager's business
would be adequately insured or bonded to address potential claims.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3501
98-1147
Enclosure
cc: Tracy Bombarger, Region V