March 29, 1999
Christopher Turner, Corporate Counsel
Southwest Corporate Federal Credit Union
7920 Belt Line, LB-109
Dallas, Texas 75240
Dear Mr. Turner:
The Office of Corporate Credit Unions referred your October 15,
1998, letter to this office for a response. You have asked whether
a corporate credit union may lend to a natural person credit union
service organization (CUSO) that would be engaged in indirect
lending services. This raises two, separate issues. The first
issue is the authority of a corporate credit union to lend to
a credit union service organization (CUSO). As explained below,
a corporate credit union may lend to a corporate CUSO under its
CUSO lending authority and, under its general lending authority,
may lend to either a natural person CUSO or a corporate CUSO if
they are members of the corporate credit union. The second issue
is whether the proposed indirect lending activity, that involves
the purchase and pooling of nonmember loans, is a permissible
CUSO service. As explained below, the answer is no.
The CUSO provision of our corporate rule states explicitly that
a corporate credit union may only lend to a corporate CUSO and
is not authorized to lend to a natural person CUSO under Part
712. 12 C.F.R. §704.11(e). You cite certain language in
the preamble to the final corporate rule as authority for your
position that a corporate may make loans to a natural person CUSO.
62 Fed. Reg. 12929, 12936 (March 19, 1997). That discussion
pertains to a corporate's general lending authority, not its authority
to lend to corporate CUSOs. The discussion concerned deleting
the provision defining a corporate CUSO as an entity that had
received a loan from a corporate. The preamble stated that this
provision was being deleted based on comments that it would restrict
the ability of corporates to lend to natural person CUSOs. Id.
The lending authority referenced in the preamble is a corporate's
authority to make loans to members under §704.7(d), not a
corporate's authority to lend to a corporate CUSO under §704.11.
In summary, a corporate may make loans to its members, including natural person CUSOs if they are members, under §704.7(d). However, if a corporate wishes to lend under the corporate CUSO authority in §704.11, the CUSO must be "at least partly owned by a corporate credit union." 12 C.F.R. §704.11(a)(1).
Mr. Christopher Turner
Page Two
Regarding the second issue of whether the proposed indirect lending is a permissible service, the corporate rule restricts the services of a corporate CUSO to those related to the normal course of business of credit unions. 12 C.F.R. §704.11(a)(3). In your letter, you discuss and refer to permissible CUSO
activities under Part 712 of our regulations which applies to
natural person CUSOs. Part 712 does not apply to corporate CUSOs,
although its provisions may provide limited guidance on permissible
activities. We note that the permissible activities under Part
712 include services provided to natural person members which
would not be permissible for a corporate CUSO.
Although your letter does not fully explain the indirect lending
activity contemplated, it appears from the facts you provided
that it is not a permissible activity under either Part 704 or
Part 712. You correctly state that a CUSO may engage in indirect
lending under its authority to provide "loan processing,
servicing and sales." 12 C.F.R. §712.5(i)(2). The
attached letter from Richard S. Schulman to Guy A. Messick, dated
January 5, 1995, describes the conditions under which a CUSO may
participate in an indirect lending program. One of the requirements
is that the CUSO have a binding contract to sell a loan to a credit
union before it purchases a loan. Your letter states that the
CUSO intends to purchase some nonmembers' loans, pool them and
then sell them on the secondary market. You cite as authority
for this activity a letter from Richard S. Schulman to Edward
A. Keirn, dated September 20, 1996. You state that the second
paragraph of the letter indicates that nonmember loans could be
held until a pool is formed. The second paragraph is merely a
recitation of the proposed activity. The letter goes on to say
in explicit language that the proposed activity is impermissible.
In conclusion, the proposed indirect lending program, if it involves
the purchase and pooling of nonmember loans, was not permissible
under the former CUSO regulation and is not permissible now.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3501
98-1244
Enclosure
cc: Robert Schafer, Director, OCCU