January 27, 1999
David C. Woodburn, CUSO Director
Endicott/Owego Member Services Corp.
24 McKinley Avenue
Endicott, New York 13760
Dear Mr. Woodburn:
You have asked whether providing marketing services for a real
estate broker is a permissible activity for a credit union service
organization (CUSO). As explained below, the answer is no.
We have reviewed the agreement you provided between a federal
credit union's (FCU's) wholly owned CUSO and a real estate brokerage
company (broker) to market and promote the broker to the FCU's
members. In exchange for promoting and endorsing the broker,
the CUSO receives 3% of all net commissions earned by the broker
if an FCU member uses the broker. The FCU member will receive
an unspecified discount. For the CUSO to receive a commission,
and the member a discount, members must identify themselves as
FCU members and request the discount. The agreement does not
require the CUSO to undertake any particular activity to promote
the broker. It provides that the CUSO "may prepare and provide
at its expense and option" advertising material to credit
union members. The broker will also pay a monthly fee for use
of office space at the FCU and for certain administrative services.
The agreement states that the CUSO must have a state real estate
broker's license. Our understanding is that this is to enable
the CUSO to receive a portion of the commission. The agreement
provides that the CUSO will maintain a real estate broker's license
by having the individual who is the licensed broker for the brokerage
company also serve as an officer of the CUSO.
Our view is that, under this arrangement, the CUSO is, in effect,
engaging in real estate brokerage activity. The agreement does
not require the CUSO to do any advertising or marketing and the
CUSO's income is a percentage of brokerage commissions, requiring
that a licensed real estate broker be an employee of the CUSO.
Real estate brokerage services previously were a permissible
CUSO activity, but the amendment of the CUSO rule early last year
removed it from the list of preapproved activities. 63 Fed.Reg.
10743, 10752 (March 5, 1998). The new CUSO regulation, however,
provides a three-year period for FCUs to come into compliance.
12 C.F.R. §712.9. Credit unions may continue
David C. Woodburn
Page Two
investments and loans in CUSOs existing before April 1, 1998,
until April 1, 2001.
You contend that the activity described in the agreement between
the CUSO and the broker should be characterized as providing "marketing
services," which is a permitted CUSO activity. 12 C.F.R.
§712.5(b)(8). In support of your view, you contend that
the permissibility of this activity as "marketing" is
analogous to auto buying services. You are correct that, in prior
legal opinions, we determined that an auto buying service is a
permissible marketing activity for CUSOs. Letter from Hattie
M. Ulan to Guy A. Messick, dated January 5, 1993; Letter from
Richard S. Schulman to C.O. Padgett, dated July 11, 1994. We
disagree that the activity you propose is analogous.
Our prior opinions regarding auto buying services are specific
about the activities CUSO employees may perform in facilitating
the purchase of an automobile by a member who will be obtaining
a loan from the FCU. Without reiterating here the description
of the various steps involved in an auto buying service, we concluded
that marketing services, in that context, "are limited to
such activities as distributing advertisements, promoting the
sale of a product, and arranging with dealers to negotiate prices
and to encourage sales." Messick letter. It is important
to keep in mind that the main issue in that earlier opinion was
whether the CUSO could take delivery of automobiles from dealers.
Our conclusion was that, while our regulation permits CUSOs to
sell repossessed collateral, which may include used cars, the
regulation does not permit CUSOs to operate as a used car dealer
or to buy and sell new automobiles.
To be a permissible CUSO activity, marketing services must involve
the promotion of credit union operations, products or services.
Auto buying services facilitate the issuance of loans by the
credit union and the income from that marketing service is related
to the issuance of a loan. In your proposal -- the marketing
of real estate brokerage services -- the income to the CUSO comes
from the commission paid by the seller of the real estate. There
is no connection between the selection of the broker, which is
the goal of the proposed marketing service, and the issuance of
a loan by an FCU to a buyer. There is no connection between the
marketing service and a buyer's selection of a lender. For that
reason, even if this arrangement were viewed as "marketing,"
it does not involve promoting the operations of the credit union
and, therefore, is not a permissible CUSO activity.
David C. Woodburn
Page Three
Finally, we note that our office has reviewed the letter, dated August 31, 1998, from Mr. Charles J. Bender of Visions FCU, which owns your CUSO, to the
NCUA Board on this subject. In that letter, he comments that
the proposed regulation did not note a prohibition of the "marketing
arrangement" your CUSO has had with a real estate brokerage
agency. The proposed CUSO regulation specifically called for
comment on the removal of real estate brokerage services as a
permissible CUSO activity because the "NCUA has been troubled
by cases involving conflicts and the appearance of conflicts between
real estate brokerage CUSOs and the credit unions such CUSOs serve."
62 Fed.Reg. 11779, 11785 (March 13, 1997). As discussed above,
our view is that your CUSO's activity is, in fact, real estate
brokerage services, not marketing. Further, as noted above, even
if your CUSO's activity is arguably a marketing arrangement, it
would not have been a permissible CUSO "marketing service"
under previous regulations because it does not relate to marketing
the credit union's services; it markets the third party broker's
service.
In Mr. Bender's letter to the Board, he also requested that the
Board grant an approval, as provided in 12 C.F.R. §712.9,
so that the credit union can continue its investment in this activity.
The CUSO regulation provides that investments in CUSOs in existence
prior to April 1, 1998, must conform with the regulation by April
1, 2001 "unless the Board grants prior approval to continue
such investment for a stated period." 12 C.F.R. §712.9(a).
The regulation contemplates that the Board may grant an approval
to continue the investment for a stated period, but it is not
a mechanism for approving an activity that is no longer permissible
under the regulation for an indefinite period.
If you have any questions or believe it would be helpful to discuss
this matter, please feel free to call me at (703) 518-6540.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/SAA:bhs
SSIC 3501
98-0524A