**7535-01-U**

**NATIONAL CREDIT UNION ADMINISTRATION**

**12 CFR Part 721**

**RIN 3133-AD12**

**Incidental Powers**

**[A]{.smallcaps}gency**: National Credit Union Administration (NCUA).

**[A]{.smallcaps}ction**: Proposed Rule.

**[S]{.smallcaps}ummary**: NCUA proposes to amend its regulation
governing a federal credit union\'s (FCU's) incidental powers by adding
illustrations of permissible activities under the categories of
correspondent services, operational programs, and finder activities.
These amendments will provide useful information to FCUs by clarifying
and updating the illustrations regarding permissible activities.

**[D]{.smallcaps}ates**: Comments must be received on or before July 28,
2008.

**ADDRESSES:** You may submit comments by any of the following methods
(**Please send comments by one method only**):

-   NCUA Web Site:
    [**http://www.ncua.gov/news/proposed_regs/proposed_regs.html**](http://www.ncua.gov/news/proposed_regs/proposed_regs.html).
    Follow the instructions for submitting comments.

-   E-mail: Address to **<regcomments@ncua.gov>.** Include "\[Your
    name\] Comments on Notice of Proposed Rulemaking (Incidental
    Powers)" in the e-mail subject line.

-   Fax: (703) 518-6319. Use the subject line described above for
    e-mail.

-   Mail: Address to Mary Rupp, Secretary of the Board, National Credit
    Union Administration, 1775 Duke Street, Alexandria, Virginia
    22314-3428.

-   Hand Delivery/Courier: Same as mail address.

**For Further Information Contact**: Justin M. Anderson, Staff Attorney,
Office of General Counsel, at the above address or telephone (703)
518-6540.

**Supplementary Information.**

**A. Background.**

NCUA's policy is to review regulations periodically to "update, clarify
and simplify existing regulations and eliminate redundant and
unnecessary provisions." Interpretive Ruling and Policy Statement (IRPS)
87-2, Developing and Reviewing Government Regulations. NCUA notifies the
public about the review, which is conducted on a rolling basis so that a
third of its regulations are reviewed each year. This proposed rule is
the result of NCUA\'s 2007 review under IRPS 87-2, which covered the
middle third of the regulations, including part 721. The proposed
changes are intended to update and clarify the regulation.

Part 721 describes the incidental powers an FCU may exercise under the
incidental powers authority in the Federal Credit Union Act (Act), which
provides an FCU may \"exercise such incidental powers as shall be
necessary or requisite to enable it to carry on effectively the business
for which it was incorporated.\" 12 USC 1775(17). The current part 721
resulted from a rulemaking involving an advance notice of proposed
rulemaking in 1999, a proposed rule in 2000, and a final rule in 2001
that replaced the former group purchasing rule. 64 FR 66413 (Nov. 26,
1999); 65 FR 70526 (Nov. 24, 2000); 66 FR 40845 (Aug. 6, 2001). The
former group purchasing rule permitted FCUs to endorse and make
available insurance plans and other third party products to their
members and to perform administrative functions on behalf of the
vendors. 12 CFR 721.1 (as codified in the CFR as of January 1, 2000).
Until the revision in 2001, the former group purchasing rule had been in
place with little change since 1985 and recognition of a broad range of
other activities as permissible under the incidental powers authority of
the Act appeared only in legal opinions NCUA's Office of General Counsel
(OGC) issued. 66 FR at 40845-46.

Briefly summarized, the current incidental powers rule: provides a
standard derived from well-established case law for recognizing an
incidental powers activity; incorporates into broad, "pre-approved"
categories of activities the activities legal opinions had recognized;
describes an application process for adding new activities and seeking
advisory opinions from NCUA's OGC on whether an activity would fit
within an existing category; cautions FCUs to comply with any laws,
regulations, or legal opinions applicable to the activities; expressly
permits FCUs to earn income from their incidental powers activites; and
sets out conflict of interest provisions. 12 CFR Part 721. The rule
specifically states the examples of activities within each category are
provided as illustrations and "not as an exclusive or exhaustive list."
12 CFR 721.3. The broad categories include certification services,
correspondent services, electronic financial services, excess capacity,
financial counseling services, finder activities, loan-related products,
marketing activities, monetary instrument services, operational
programs, stored value products, and trustee or custodial services.

The Board believes it will be helpful to clarify certain provisions and
update the rule by adding examples of activities that have been
recognized as permissible incidental powers activities since 2001. Also,
since 2001, questions have arisen from time to time about the sale of
third party insurance products, negotiation of discounts, endorsements,
and provision of administrative services to support the sale of a third
party's products or services. As noted in the preamble to the proposed
rule in 2000, the Board intended to incorporate the concept of group
purchasing, particularly with regard to insurance products, into the
category of finder activities. 65 FR at 70527. Further, the Board
specifically noted that it contemplated the negotiation of
"membership-wide rates or benefits with vendors" as part of being a
finder of products, not only insurance. *[Id]{.underline}*. Although the
continued permissibility of activities covered by the former group
purchasing rule was addressed in preambles in the rulemaking several
years ago, the Board believes it will be helpful to add language to the
regulatory text under the finder activities category regarding
negotiation of discounts, sale of third-party insurance products, and
administrative functions on behalf of third-party vendors.

**B. Proposed Changes.**

**Section 721.3(b):** *[Correspondent Services with Foreign Credit
Unions]{.underline}*

The proposed rule would recognize that FCUs may provide correspondent
services to foreign as well as federal or state-chartered credit unions.
Generally, correspondent service agreements address circumstances where
a credit union, as a service to another credit union, provides a service
to a member of the other credit union, for example, where the geographic
location of the member does not permit the member's own credit union to
provide the service. A typical service would be receipt of funds from a
member by another credit union for credit to the member's account with
his or her credit union where the member is located some distance from
his or her credit union. The current rule permits correspondent services
between "credit unions" and NCUA regulations generally define credit
union to mean a federal or state chartered credit union. 12 CFR
700.2(d). In 2006, an OGC legal opinion recognized as permissible an FCU
receiving funds from a member of a foreign credit union that the FCU
would then transmit to the member's credit union located in a foreign
country. OGC Op. 05-0915 (March 3, 2006) (available on the NCUA website
at ncua.gov). To update this category in the rule, the Board proposes to
revise this provision to permit FCUs to provide correspondent services
to both foreign and domestic credit unions. The Board cautions, however,
that credit unions should consult United States and international laws
before engaging in any transaction with a foreign credit union.

**Section 721.3(f):** *[Finder activities]{.underline}*.

Finder activities is the category of incidental powers that allows FCUs
to introduce its members to an outside vendor so that the two sides may
negotiate and consummate a transaction. 12 CFR 721.3(f). The proposed
amendments clarify that finder activities include an FCU's negotiation
of group discounts and the performance of administrative functions for
outside vendors. As noted previously, the negotiation of group discounts
was contemplated under the old group purchasing rule and "performing
administrative functions on behalf of the vendors" was expressly
included in the old rule. *[See also]{.underline}* OGC Op. 02-0221
(April 26, 2002) (available on the NCUA website at ncua.gov) (An FCU, as
a finder, may provide information about vendors, perform administrative
functions for the parties, and negotiate group discounts or benefits on
behalf of its membership). The Board believes the additional language
will be a helpful clarification.

The proposed amendment would add language elaborating that vendors may
be providers of non-financial products or financial products, including
insurance. As noted above, the former group purchasing rule permitted
FCUs to endorse and make available insurance plans and other third party
products to their members and, in revising Part 721, the Board did not
intend to limit previously permissible activities. Further, as noted
above, the Board stated, when it was revising Part 721, that it
considered promotion of third party insurance covered by the finder
activities category. The Board believes specifically noting insurance as
an example in the regulation will be a helpful clarification.

The Board also proposes to add language to §721.3(f) clarifying that
FCUs may act as finders for the financial products of other financial
institutions. The incidental powers rule does not limit the types of
vendors or products and services an FCU may promote or facilitate, and
the Board believes an FCU bringing its members together with another
financial institution may significantly benefit members where an FCU
does not or is unable to provide to provide the product or service.

Nevertheless, as with any incidental powers activities, but particularly
here where the product may be a regulated investment or financial
product, FCUs must be particularly mindful of the provisions of §721.5.
This section states that, in engaging in any incidental powers activity,
FCUs must comply with all applicable law and regulations. *[See
also]{.underline}* OGC Op. 02-0221 (April 26, 2002) (available on the
NCUA website at ncua.gov) (FCU, as finder, may offer its members
depository products of other financial institutions but should clearly
understand legal and safety and soundness issues related to the
activity). Further, FCUs must be mindful that, although the rule
generally permits them to perform administrative functions in connection
with finder activities, in connection with the sale of financial
products, FCUs must be cautious that these functions do not create an
agency or brokerage relationship and trigger compliance problems under
any applicable laws or regulations. FCUs unclear as to the
permissibility of a particular function should consult with their own
private legal counsel with expertise in the activity or may consult with
NCUA\'s OGC.[^1]

**Section 721.3(j):** *[Payroll Services]{.underline}*.

The proposed rule adds payroll services to the operational programs
category. Generally, this category describes programs an FCU can
establish to deliver products and services that enhance member service
and promote safe and sound operation. 12 CFR 721.3(j). Payroll services
permit an FCU to make disbursements from a business member\'s account to
third parties, as well as deduct the appropriate amounts for income
taxes and employee-paid benefit premiums. In a 2006 opinion letter, NCUA
recognized that payroll services are related to other permissible
activities, such as electronic financial services and payroll
deductions, and concluded providing payroll services is a permissible
operational program. OGC Op. 05-1204 (February 15, 2006) (available on
the NCUA website at ncua.gov).

REGULATORY PROCEDURES

[Regulatory Flexibility Act]{.underline}

The Regulatory Flexibility Act requires NCUA to prepare an analysis to
describe any significant economic impact a proposed rule may have on a
substantial number of small credit unions (those under \$10 million in
assets). This proposed rule adds to the language of preexisting
permissible activities for FCUs. The proposed rule, therefore, will not
have a significant economic impact on a substantial number of small
credit unions and a regulatory flexibility analysis is not required.

[Paperwork Reduction Act]{.underline}

NCUA has determined that the proposed amendments will not increase
paperwork requirements and a paperwork reduction analysis is not
required.

## Executive Order 13132

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The proposed rule would not have substantial
direct effects on the states, on the connection between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this proposed rule does not constitute a policy that has
federalism implications for purposes of the executive order.

[The Treasury and General Government Appropriations Act, 1999 -
Assessment of Federal Regulations and Policies on Families]{.underline}

NCUA has determined that this proposed rule would not affect family
well-being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681
(1998).

**List of Subjects**

**12 CFR part 721**

Credit unions, functions, implied powers, and insurance.

By the National Credit Union Administration Board on May 22, 2008.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mary Rupp

Secretary of the Board

For the reasons stated in the preamble, the National Credit Union
Administration proposes to amend 12 CFR part 721 as set forth below:

**PART 721 -- Incidental Powers**

1.  The authority citation for part 721 continues to read as follows:

**Authority:** 12 U.S.C. 1757(17), 1766 and 1789.

2\. Amend §721.3 as follows:

a\. Amend the first sentence in paragraph (b) by adding the phrase
\"including foreign credit unions\" after the words \"other credit
unions.\"

b\. Revise paragraph (f) to read as set forth below.:

c\. Amend the second sentence in paragraph (j) by adding \"payroll
services\" after the phrase \"payroll deduction,\".

\* \* \* \* \*

\(f\) *[Finder activities]{.underline}.* Finder activities are
activities in which you introduce or otherwise bring together outside
vendors with your members so that the two parties may negotiate and
consummate transactions and include vendors of non-financial products,
vendors that are other financial institutions, and vendors of financial
products such as insurance and securities. Finder activities may include
endorsing a product or service, negotiating group discounts on behalf of
your members, offering third party products and services to members
through the sale of advertising space on your website, account
statements and receipts, and selling statistical or consumer financial
information to outside vendors to facilitate the sale of their products
to your members. You may perform administrative functions on behalf of
vendors to facilitate transactions between your members and another
institution.

\* \* \* \* \*

[^1]: For example, the Board notes FCUs should consult the Real Estate
    Settlement Procedures Act (RESPA) when accepting fees from a third
    party, as a finder of mortgage related products. NCUA\'s incidental
    powers rule permits FCUs to earn income for those activities
    determined to be incidental to its business. 12 CFR 721.6. RESPA,
    however, prohibits financial institutions from accepting fees or
    payments for referring members to settlement service providers in
    mortgage related transactions. 24 CFR 3500. FCUs acting as a finder
    of mortgage related products should consult RESPA to determine if
    the acceptance of fees in a particular transaction is prohibited.