February 1, 1999
Mr. Art Corey
Connecticut Credit Union League
110 South Turnpike Road
P.O. Box 5001
Wallingford, Connecticut 06492-7501
You have asked whether a Connecticut state law limiting finance
charges on the retail installment sales of cars is enforceable
against a federal credit union (FCU) that is the indirect lender
in an indirect dealer financing program. No, the FCU is not subject
to the state law in question.
In the indirect dealer financing program, a car dealer submits
the retail installment sales loan application of a buyer (an FCU
member) to the FCU. After the FCU approves the loan, the dealer
enters into a retail installment sales contract with the buyer
and then, usually on the same day, assigns the contract to the
FCU.
An FCU may enter into indirect dealer financing programs under the authority to purchase eligible obligations, 12 U.S.C. §1757(13), 12 C.F.R. §701.23 , or under the authority to make loans to members, 12 U.S.C. §1757(5), 12 C.F.R. §701.21. NCUA regulations limit the amount of interest rates and finance charges the FCU may charge to the member regardless of whether the lending program is direct or indirect. An FCU "may extend credit to its members at rates not to exceed 18 percent per year on the unpaid balance inclusive of all finance charges."
12 C.F.R. §701.21(c)(7)(ii)(B).
FCUs must comply with a state law unless the FCU Act or NCUA regulations
preempt the state law. Pursuant to the FCU Act, the NCUA Board
has promulgated NCUA regulations that specifically preempt state
laws "purporting to limit or affect" interest rates
and amounts of finance charges on loans to FCU members. 12 C.F.R.
§701.21(b)(1)(i)(A). Therefore, the FCU may set its interest
rates and finance charges on loans to members regardless of the
Connecticut law limiting the rates. We offer no opinion on the
legality of the car dealer's role in the program under the Connecticut
law.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/RMM:bhs
SSIC 3320
98-0961