May 1, 2008

James E. Forney, Superintendent

Credit Unions Division

Iowa Department of Commerce

200 East Grand Avenue, Suite 370

Des Moines, Iowa 50309-1827

Re: Conflict of Interest under Member Business Loan (MBL) Rule.

Dear Mr. Forney:

You have asked if an inherent conflict of interest exists that prevents
credit unions from using the services of a particular Credit Union
Service Organization (CUSO) to satisfy the MBL rule's direct experience
requirement. If an inherent conflict of interest exists, you also asked
what changes or modifications the CUSO would need to make to be
considered an independent third party. Finally, you would like a
clarification of the proper use and citing of the preamble accompanying
the publication of a rule in the enforcement of the regulation.
Generally, there is not an inherent conflict of interest where a credit
union uses a CUSO to meet its MBL direct experience requirement,
provided the CUSO is independent as to each transaction. Preamble
language, among other things, can be used to clarify a rule's compliance
requirements.

The MBL rule allows credit unions to use a third party to meet the
minimum two-year direct experience requirement if the third party is
independent from the transaction. Generally, a third party is considered
to be independent from the transaction if, with respect to a loan it is
responsible for reviewing, it does not have a participation in the loan
or an interest in the collateral securing the loan. Additionally, credit
unions are able to use a third party to meet the experience requirement
when:

-   the third party provides the credit union with a service related to
    the transaction, for example, loan servicing;

-   the third party provides the required direct experience for, and
    purchases a loan or participation interest in, a loan originated by
    the credit union that the third party reviewed; or,

-   the third party, though not independent from the transaction, is a
    CUSO in which the credit union has a controlling financial interest
    as determined under Generally Accepted Accounting Principles.

Your letter indicates the CUSO "does not participate in any of the
funding of the MBL loans or have any interest in the collateral
securitizing any of the loans." 12 C.F.R. §723.5(a), (b). Also, it "is
not selling a loan, does not participate in

James E. Forney, Director

Page two

funding the loan, and does not have a security interest in the loan
collateral." Generally, the presence of these factors would enable
credit unions to still use a CUSO to meet its direct experience
requirement. We noted, however, the CUSO appears to be compensated on a
fee basis, collecting fees in connection with origination, servicing,
participations, referral and document preparation. Under this fee
structure, the CUSO appears to be paid only or primarily when a loan is
funded. This situation creates an inherent conflict of interest as the
CUSO has a direct interest in recommending a loan be funded and not
denied. We recommend you address any questions or concerns regarding the
nature of this arrangement or specific transactions with the appropriate
regional director.

The preamble to a rule serves several functions. It explains the basis
and purpose of the regulatory text for those who must comply with the
rule; for a court where a rule is challenged or an enforcement action
appealed; and for historical purposes. Generally, the preamble provides
a history of the issues addressed by the rulemaking, justifies the
agency's action, and elaborates on rule text, for example, by providing
clarifying information about the rule's compliance requirements. Linda
McCloud, *An Introduction to Regulation Writing* 59-60 (2006).

We hope you find this explanation on the issues you raised to be
helpful.

Sincerely,

/S/

Sheila A. Albin

Associate General Counsel

GC/LKD:bhs

08-0302

cc: Keith Morton, Region IV Director