Mr. Martin Serna, Chairman of the Board
New Mexico Educators Federal Credit Union
P.O. Box 8530
Albuquerque, New Mexico 87198
We have been asked by Region V Director Phillip R. Crider to provide
a legal opinion on two issues related to the credit union service
organization (CUSO), Credit Union Mortgage Service Limited Partnership
(CUMS). As explained below, CUMS' structure is impermissible
and it is engaging in an unauthorized CUSO activity.
CUMS is set up as a limited partnership. The general partner
is a CUSO, REFC-NM, and the limited partner is New Mexico Educators
Federal Credit Union, the FCU. REFC-NM is the wholly-owned CUSO
of New Mexico Educators Service Corporation, a CUSO wholly-owned
by the FCU. As explained in the attached letter from Richard
S. Schulman to Guy A. Messick, dated September 26, 1994, an FCU
may only act as a limited partner in a CUSO and "may not
charter a corporation to participate as a CUSO as the general
partner of a limited partnership CUSO." The preamble to
the proposal of the recently revised CUSO rule clarifies this
point. 62 Fed. Reg. 111779, 11781 (March 13, 1997). "[A]
CUSO will not be permitted to evade the limited liability insulation
of the limited partnership format by forming a corporation CUSO
to be a general partner of a limited partnership CUSO."
Id. The FCU formed the CUSO, New Mexico Educators Service
Corporation, which in turn formed the CUSO, REFC-NM, which in
turn is acting as the general partner of the CUSO, CUMS. The
regulation prohibits an FCU from investing in a CUSO structured
in this way.
CUMS is making nonmember business loans. FCUs are only permitted
to invest in CUSOs engaging in certain preapproved activities
and services. 12 C.F.R. §712.5. With respect to lending,
the preapproved services only include "consumer mortgage
loan origination," "loan support services," and
"student loan origination." 12 C.F.R. §712.5(c),
(i) and (m). As part of loan support services, which is an authorized
activity, a CUSO can provide underwriting and processing services
in connection with business loans for credit union members. However,
making business loans is not a permissible CUSO activity.
Your attorney states that there have been only a few business loans to nonmembers. The issue in this case is not whether the level of activity is such that the CUSO is failing primarily to serve credit unions or credit union members
Mr. Martin Serna
July 21, 1998
Page Two
as required by NCUA regulation. 12 C.F.R. §712.3(b). The
threshold issue, as noted above, is whether the activity, itself,
is permissible, not to whom the loans are made.
Your attorney contends that the CUSO's structure and activities
are permissible under state law. We do not dispute his contention.
The issue is not whether the CUSO is complying with state law,
but rather, whether it is a permissible investment for an FCU.
As explained above, it is not.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3501
98-0502
Enclosure
cc: Region V