Tony Launi, Manager
MCBR FCU
1355 Piccard Drive
Rockville, MD 20849-1573

Dear Mr. Launi:

You asked for our opinion regarding a proposed agreement between MCBR FCU and a third party vendor to provide mortgage loans to MCBR FCU members. As explained below, the proposed agreement is impermissible.

Your federal credit union (FCU) proposes offering first mortgages to its members through a local broker. As part of the program, the FCU's manager would process the mortgages. Both the FCU and the manager would be compensated by the local broker. The FCU Act does not authorize FCUs to establish and offer mortgage referral services. An FCU that wishes to offer these services may engage in either of the following: (1) offer the services of an independent vendor to its members pursuant to 12 C.F.R. Part 721; or (2) provide these services by investing in a credit union service organization (CUSO) pursuant to 12 C.F.R. Section 701.27.

Part 721 authorizes FCUs to make available to their members group purchasing activities, including third party mortgage lenders. The FCU may perform administrative functions on behalf of the vendor and have the vendor reimburse the FCU (not its employees) for its cost. Section 721.2(b)(3) limits reimbursement "to an amount not exceeding the cost amount." "Cost amount" is defined as "the total of the direct and the indirect costs to the Federal credit union of any administrative functions performed on behalf of the vendor. The Federal credit union must be able to justify this amount using standard accounting procedures." See Section 721.2(a)(2). In addition, Section 721.2(c) provides that no official or senior management employee of an FCU may receive compensation in conjunction with any group purchasing activity. Your proposal that the FCU's manager be compensated is impermissible.

Pursuant to Section 701.27(d)(5)(i), an FCU may invest in a CUSO that provides consumer mortgage origination. However, there is a requirement that a CUSO primarily serve credit unions and/or the members of affiliated credit unions. See Section 701.27(d)(4). Further, Section 701.27(d)(6) provides that no official or senior management employee may receive compensation from the CUSO.

I hope that we have been of assistance.

Sincerely,

Michael J. McKenna
Acting Associate General Counsel

GC/MFR:bhs
SSIC 3501
97-0141