**7535-01-U**

**NATIONAL CREDIT UNION ADMINISTRATION**

**12 CFR Parts 712 and 741**

**RIN 3133 -- AD20**

**Credit Union Service Organizations**

**AGENCY**: National Credit Union Administration (NCUA)

**ACTION**: Final rule.

**SUMMARY**: NCUA is issuing a final rule amending its credit union
service organization (CUSO) regulation. The amendment adds two new
categories of permissible CUSO activities: credit card loan origination
and payroll processing services. The amendment also adds new examples of
permissible CUSO activities within existing categories and expands the
permissible scope of certain services to include persons eligible for
credit union membership. The amendment imposes new regulatory limits on
the ability of credit unions to recapitalize their CUSOs in certain
circumstances. Although the CUSO rule generally only applies to federal
credit unions (FCUs), the amendment revises and extends to all federally
insured credit unions the provisions ensuring that credit union
regulators have access to books and records and that CUSOs are operated
as separate legal entities; however, the rule also contains a procedure
through which state regulators may seek an exemption from the access to
records provisions for credit unions in their state. The amendment
clarifies that CUSOs may buy and sell participations in loans they are
authorized to originate. Finally, the amendment deletes as unnecessary
the section in the current rule concerning amendment requests. These
amendments clarify the rule, enhance CUSO operations, and address safety
and soundness concerns.

**DATES**: This rule will become effective on January 28, 2009.

**FOR FURTHER INFORMATION CONTACT**: Ross P. Kendall, Staff Attorney,
Office of General Counsel, at the above address or telephone (703)
518-6540.

**SUPPLEMENTARY INFORMATION**:

A.  **Background.**

FCUs have the authority to lend up to 1% of their paid-in and unimpaired
capital and surplus and to invest an equivalent amount in credit union
organizations. 12 U.S.C. §§1757(5)(D), (7)(I). NCUA regulates this FCU
lending and investing authority in the CUSO rule. 12 CFR Part 712. The
CUSO rule permits an FCU to invest in or lend to a CUSO only if the CUSO
primarily serves credit unions, its membership, or the membership of
credit unions contracting with the CUSO. 12 CFR 712.3(b).

NCUA's policy is to review its 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 amendment is, in
part, a result of NCUA's 2007 review under IRPS 87-2, which covered the
middle third of the regulations, including part 712. The amendment is
intended to update and clarify the regulation.

**B. Proposed Rule**

On April 17, 2008, the NCUA Board issued a proposed rule to amend Part
712. 73 FR 23982 (May 1, 2008). The proposal described each of the
changes covered in this final rule, including a discussion of the reason
for each change, and an invitation for public comment. NCUA also
solicited comment on whether to change the rule to allow for a majority
owner of a CUSO to conduct a consolidated opinion audit, although the
Board was not proposing that change. The public comment period closed on
June 30, 2008. NCUA received comments regarding the proposed changes
from five credit unions, six national trade associations, eight state
credit union trade associations, one law firm and four CUSOs, for a
total of twenty-four comments. Of these, three commenters also addressed
the consolidated opinion audit question.

**SUMMARY OF COMMENTS**

**A. General.** Many commenters supported most aspects of the proposal,
generally agreeing in principle with the approach of expanding CUSO
authority and providing clarification through the addition of examples
under approved categories, including the ability to buy and sell
participations in loans they are authorized to make. Several commenters
urged NCUA to expand authority by authorizing CUSOs to engage in any
activity permissible for FCUs. Eight commenters specifically requested
NCUA authorize CUSOs to make car loans, including direct lending and the
purchase of retail installment sales contracts from vehicle dealerships,
noting advantages that would flow to credit unions from the ability to
consolidate and leverage in this business. Another commenter suggested
NCUA authorize CUSOs to engage in payday lending as well.

The Board has elected not to expand CUSO lending authority beyond that
which was proposed. A primary rationale for allowing CUSOs to engage in
loan origination is, in some cases, such as business, student and real
estate lending, a level of expertise that may not be attainable by
individual credit unions is necessary for a successful loan program.
While the Board is convinced successful administration of a credit card
program requires this type of specialization and expertise, the same is
not true in the case of vehicle lending, which most credit unions are
able to manage successfully at the individual credit union level. In
response to the comments suggesting CUSOs should be permitted to engage
in any activity permissible for FCUs, the Board notes the statutory
authority for FCU activities is separate from the authority granted to
FCUs to lend to and invest in CUSOs, which provides CUSOs are "primarily
to serve the needs of member credit unions" and provide "services which
are associated with the routine operations of credit unions." 12 U.S.C.
1757(5)(D), 1757(7)(I).

Some commenters questioned the wisdom and the authority of allowing
CUSOs to expand into new areas. These commenters pointed out that NCUA
lacks direct supervisory authority over CUSOs and other third party
service providers and so suggested that expansions would lead to safety
and soundness concerns. Two of these commenters also criticized what
they characterized as continued erosion of the distinction between
services that CUSOs may provide for credit unions and services that may
be provided to credit union members and others. One commenter suggested
the credit union charter is in danger of simply becoming a shell,
permitting the ownership of businesses that are allowed to engage in
virtually any pursuit available to the credit union.

**B. Specific Comments and NCUA response.** Upon consideration of the
public comments, the NCUA Board has made some changes in the final rule.
The specific comments and NCUA's responses are discussed in the
following section-by-section analysis.

*[Expansion of certain services to persons within the field of
membership.]{.underline}* Several commenters supported the proposal to
expand the range of individuals for whom CUSOs may provide certain types
of services. Supporters noted their agreement with the logic in the
proposal that the enactment of the Financial Services Regulatory Relief
Act of 2006 (FSRRA; Pub.L. No. 109-351, §§502-503; 120 Stat. 1966
(2006)), authorizing credit unions to provide certain services to
individuals within their field of membership even though the individuals
were not members, supports a parallel argument broadening the scope for
CUSOs offering comparable services if primarily limited to the same
population. A few suggested the categories of service be more closely
correlated to the specific services authorized by FSRRA; one suggested
the proposal be broadened, in view of the open-ended nature of the
statutory term "money transfer instrument" as used in FSRRA.

Some commenters opposed the expansion, asserting that FSRRA makes no
mention of CUSOs and, thus, the proposed expansion is unauthorized. One
commenter, representing the banking industry, also challenged the basic
premise underlying all CUSO services provided to natural persons,
whether a credit union member or not. The commenter argued that the
original intent of Congress in amending the FCU Act to allow FCUs to
invest in or lend to CUSOs was that CUSOs would only provide services to
credit unions, not to their members. The commenter also specifically
criticized NCUA's reluctance to define what the term "primarily serves"
means and noted that, in this context in particular, the potential for a
significant expansion of CUSO services is present.

The Board has considered these arguments but has determined to proceed
with the concept of creating an expanded scope of individuals who are
eligible to receive certain CUSO services. With respect to the "original
intent" argument, the Board notes that the FCU Act contains no
restriction on FCUs making loans to or investing in a CUSO that provides
services to natural persons as opposed to credit unions. An FCU may make
a loan to a CUSO "established primarily to serve the needs of its member
credit unions, and whose business relates to the daily operations of
credit unions." 12 U.S.C. 1757(5)(D). An FCU may invest in a CUSO
"providing services which are associated with the routine operation of
credit unions." 12 U.S.C. 1757(7)(I). The legislative history cited by
the commenter in support of its view relates only to the authority of
FCUs to make loans to CUSOs. It has no bearing on the investment
authority. Moreover, the referenced legislative history contains a
listing of the types of services the committee members envisioned a CUSO
would provide, and while most of the services listed are services
typically provided to credit unions, the listing also includes
"non-profit debt counseling services." H.R. Rep. No. 95-23, at 11
(1977), *[reprinted in]{.underline}* 1977 U.S.C.C.A.N. 105, 115. Thus,
the original listing of services includes a service that would only be
provided to individuals. This service has been an approved CUSO category
since the original CUSO rule was promulgated in 1979. Since that time,
the rule has evolved and now includes numerous services that are
intended to be provided to individuals.

With respect to the expansion of the scope argument, the Board notes the
intention of FSRRA is to encourage FCUs to reach out to individuals in
the community who have no formal relationship with a depository
institution but who are in need of certain basic financial services,
such as check cashing and wire transfer services. With the enactment of
FSRRA, FCUs can offer these services to individuals regardless of their
membership status, so long as they are within the FCU's field of
membership. A CUSO's authority has always been derivative; since FSRRA
has expanded the scope of services that FCUs may provide, the Board
believes a parallel expansion for CUSOs is appropriate and supportable.

The Board has, however, re-evaluated the approach taken in the proposed
rule and has determined to clarify and narrow the scope of this
provision. The proposed rule simply noted that services covered in FSRRA
"correspond" to the checking and currency services and the electronic
transaction services categories in the CUSO rule. 73 FR 23982-83. The
Board now believes that some, but not all, of the services described in
these two categories correlate with the scope of FSRRA. The Board has
determined some of the examples listed under these two categories in the
CUSO rules, such as data processing, electronic income tax filing, and
ATM services are not within the scope of services contemplated by the
authority FSRRA granted to FCUs and that is the basis for the expansion
for CUSOs. Moreover, the categories in the CUSO rule are not designed as
defining limits, but rather are set out, with illustrative examples, to
outline the types of services permissible for CUSOs. Therefore, the
final rule clarifies the services CUSOs may provide to individuals who
are not credit union members but simply within the field of membership
by expressly referencing the regulation applicable to FCUs. Accordingly,
the final CUSO rule cross-references §701.30, which implements the FSRRA
authority for FCUs, and indicates FCUs with a loan or an investment with
a CUSO engaged in providing any of these particular services will be
considered compliant with our rule to the extent the CUSO provides them
primarily to persons within the FCU's field of membership.

*[Credit card loan origination.]{.underline}* The majority of commenters
supported this amendment, noting agreement with the advantages described
in the preamble to the proposed rule, such as improved efficiencies and
creation of an industry-based alternative for credit unions seeking to
sell their portfolios. Other commenters, however, questioned the wisdom
of this expansion, suggesting that NCUA lacked sufficient oversight
authority for CUSOs and that the proposal would result in increased
safety and soundness risks. The NCUA Board disagrees with the commenters
who oppose this expanded authority for FCUs and, for the reasons stated
in the preamble to the proposed rule, adopts the proposed amendment
without change.

The Board notes, in this respect, concerns some commenters identified
about an FCU's ability to acquire a participation interest in a
portfolio consisting of credit card loans. In the preamble to the
proposed rule, the Board observed that, given the revolving, open-end
nature of credit cards, NCUA's loan participation rule would not support
a sale to an FCU of a participation interest in a credit card portfolio.
NCUA's loan participation rule contemplates an acquisition of a specific
portion of a discrete loan or schedule of loans. 12 CFR 701.22. By its
nature, a credit card portfolio consists of many individual, dynamic,
credit relationships: typically, new card holders enter the pool
underlying the portfolio, and credit limits for existing card holders in
the pool may change. Under the loan participation rule, either event
would require modifications to the original schedule of loans as well as
approval from the credit union's board or investment committee. 12 CFR
701.22(d)(3), (4). Of equivalent concern, credit cards by their nature
have no discrete maturity date. It is unclear how a participant, once
having made its purchase, would know when its interest has matured and
may be recouped. Without tracking specific payments received on specific
accounts in the portfolio, a participant's interest appears to be more
closely aligned with the overall performance of the portfolio than with
any discrete segment of it. In this respect, it resembles an investment
rather than a participation.

*[Extending examination and corporate separateness requirements to
federally insured, state chartered credit unions (FISCUs).]{.underline}*
Several commenters opposed this aspect of the proposal. Some
characterized it as unnecessary, while others objected to the increased
compliance burden on credit unions. A few questioned whether NCUA has
the authority to impose this requirement; one added that NCUA lacked
expertise to conduct this type of review. The commenter representing
state credit union regulators suggested NCUA should continue to rely
primarily on cooperation with state regulators and should specifically
exempt credit unions from compliance in states in which the regulatory
structure is adequate. The commenter opposed an across the board
application of the rule, noting that it could simply add another layer
of regulation without an improvement in regulatory oversight. This
commenter recognized the validity of NCUA's insistence on corporate
separateness for all federally insured credit unions but asked that NCUA
specifically set out the regulatory requirement in part 741, rather than
incorporate the provisions by reference.[^1] This commenter also
advocated creation of thresholds for application of the rule, with
certain types of business exempt from compliance and suggested the
proposal not apply where a credit union simply has a loan to the CUSO or
a de minimis investment.

In view of these comments, the Board has determined to adopt and
incorporate into the rule a procedure whereby a state credit union
regulator can request an exemption for FISCUs in that state from
compliance with §712.3(d)(3), based on a showing to the appropriate NCUA
regional director of three things: first, current state law provides the
regulator with full rights of access to relevant books and records of
the CUSO; second, the regulator is willing and able to provide NCUA with
equal access; and, third, access must be available to NCUA on its own
timetable. The final version of §712.10 incorporates these concepts. The
procedure outlined here is similar to that which applies in the member
business loan context and enables a state regulator to initiate a
request for an exemption which, if approved by the NCUA Board, would
exempt FISCUs chartered in that state from compliance with this
requirement of the CUSO rule. *[See]{.underline}* 12 CFR 723.20.

The Board has not adopted the other recommended restrictions the
commenters advocated. The Board is not persuaded as to the merit of
these other elements. Risk to the credit union derives from the
transactions in which the CUSO is engaged, not the extent or character
of the credit union's interest in it. While some lines of business for
CUSOs are less risky than others, any CUSO engaged in a business
affecting member money, member transactions, or member personal
information presents a potential risk. Where a CUSO is engaged in a low
volume, low risk venture, NCUA is unlikely to have a reason to insist on
access to its books and records. Since it is the access, rather than the
requirement of having an agreement with the CUSO, that presents the
burden to institutions, the Board believes an exception based on line of
business is likewise not warranted.

*[Reciprocity.]{.underline}* The Board has retained the proposed change
in §712.3(d)(3), as discussed in the preamble to the proposed rule, to
require an FCU's agreement with its CUSO to permit access not only to
NCUA but also to any state regulator having supervisory responsibility
over any FISCU that has a loan, an investment, or a contractual
agreement for products or services with the CUSO. This requirement
assures a regulator with responsibility for a credit union can review
and evaluate the risk to which its institutions may be exposed. Even
though NCUA enjoys a cooperative relationship with state credit union
regulators and typically shares relevant information with them, the
Board recognizes there may be circumstances in which access to books and
records is useful or necessary for the state regulator. At the same
time, the Board does not anticipate that extending the rule in this way
will result in an inordinate number of requests for access by state
regulators to CUSO books and records.

*[Transition Period for Compliance.]{.underline}* The Board has also
retained in the final rule the provisions in the proposal providing
FISCUs with time to develop and enter agreements with their CUSOs and to
obtain legal opinions addressing corporate separateness issues.
Similarly, the final rule provides a transition period for FCUs with
loans to or investments in CUSOs to make changes in the agreements they
currently have with their CUSOs. As discussed in the proposal, the
compliance date the rule establishes for each of these changes is not
earlier than six months following the date of publication of the final
rule in the *[Federal Register.]{.underline}*

*[Prior approval for certain CUSO recapitalizations.]{.underline}*
Several commenters opposed this aspect of the proposal. Some suggested
notice to NCUA, rather than prior approval, should be sufficient; one
national trade association suggested changing the threshold below which
approval is necessary to credit unions with a net worth of less than
four percent. Notwithstanding these comments, for the safety and
soundness reasons discussed in the preamble to the proposed rule, the
Board has determined to retain this provision and adopts the amendment
as proposed.

*[Elimination of specific amendment procedures in part
712.]{.underline}* Half the commenters opposed eliminating the specific
amendment procedures in §712.7. Most indicated they prefer the unique
procedure in the rule, even though a generic amendment procedure is
available in part 791. Commenters noted they did not want to have to
rely on the three-year rolling regulatory review underlying the generic
amendment process and, also, that changes in the financial sector can
occur rapidly and, therefore, the sixty-day time limits in the CUSO rule
are preferable. One commenter suggested NCUA keep the unique amendment
provisions but extend the applicable time limits if necessary.

Notwithstanding these comments, the Board has determined to eliminate
the amendment provisions from part 712, as discussed in the preamble to
the proposed rule. The Board notes, in this respect, that the generic
amendment provisions in part 791 are not tied to the three-year cycle
NCUA follows in reviewing its regulations. Members of the public may
request an amendment to any rule, at any time, under the procedures in
part 791. If circumstances warrant, NCUA is able to move quickly and
can, if necessary, issue an interim final rule effective within a short
time frame. 5 U.S.C. 553(b)(B). Accordingly, the separate amendment
provisions in §712.7 are redundant and unnecessary.

*[Payroll services.]{.underline}* A substantial number of commenters
supported this expansion. Banking industry commenters noted opposition,
however, suggesting the change would serve to further erode what they
see as the credit union's principal mission of serving individual
consumers, especially those of modest means. The Board notes FCUs have
provided services and support to their members who are entrepreneurs and
small business owners for many years and enabling CUSOs to provide this
service to those members is a logical, efficient expansion of CUSO
authority. Accordingly, the Board is adopting this amendment as
proposed.

*[Additional Examples of Permissible Activities within Approved
Categories.]{.underline}* The proposed rule outlined several new
examples of permissible CUSO activities related to the routine daily
operation of credit unions, including real estate settlement services,
employee leasing and support, purchase of non-performing loans, business
counseling and related services for credit union business members, and
referral and processing of loan applications for members turned down by
the credit union. The Board has determined to include each of these
examples in the final rule.

The Board has received requests during the comment period for this
rulemaking and previously to consider permitting CUSOs to provide stored
value products, such as gift cards, pre-paid credit cards, postage
stamps, transportation tokens, and so forth, to credit union members.
Although not included specifically in the proposed rule, the Board
concludes that stored value products should be added as an illustration
under §712.5(a), Checking and currency services. Section 712.5(a) is
amended to add a new example titled "stored value products." The Board
intends stored value products in part 712 to have the same meaning as
provided in the incidental powers rule for FCUs. 12 CFR 721.3(k).
Currently, CUSOs provide check cashing, currency services, and sale of
money orders under §§712.5(a)(1), (2), and (3). The Board believes
permitting persons to convert their funds into stored value products
may, in many instances, provide a safer and more convenient transaction.
Like many of the CUSO services, the Board also believes selling stored
value products, such as gift cards, pre-paid credit cards, postage
stamps, transportation tokens, and similar media, is not an economical
endeavor for individual credit unions yet is one that credit unions
would like to make available. Therefore, this additional example is
added in the final rule.

*[Loan Participations.]{.underline}* For the reasons outlined in the
proposed rule, the Board has also determined to include in the final
rule the clarifying amendment specifying that CUSOs are authorized to
buy and sell participations in loans they are authorized to make.

*[Other aspects.]{.underline}* Two commenters expressed support for
allowing a credit union with a majority ownership interest in a CUSO to
obtain a consolidated opinion audit. Another commenter, noting the
expense of procuring an opinion audit can be significant, suggested the
rule be revised by incorporating a de minimis threshold. The commenter
suggested the rule should provide that a non-opinion audit be given to
investors with less than a controlling interest (the commenter suggested
less than 20% ownership as the measure) but at least \$50,000 and a
separate opinion audit only be required where the interest is at least
\$200,000.

The Board has determined not to adopt this modification for the
following reasons. A financial statement audit provides the advantage of
an independent, qualified and licensed third party attesting to the fair
presentation of the CUSO's financial statements in accordance with
generally accepted accounting principles as of a given date. A third
party relies on this opinion in conducting its due diligence surrounding
an investment decision. A non-opinion audit by either a licensed or
unlicensed person does not provide that opinion the Board is seeking to
guide credit union investment decisions.

CUSOs that must consolidate their financial statements with a parent
credit union owner already receive a consolidated financial statement
audit. Expanding the scope of that engagement to include a separate,
CUSO-only financial statement audit does not double the cost. CUSOs that
are not required to consolidate their financial statements with a parent
credit union already must obtain a separate financial statement audit,
so the current rule does not impose substantial, additional burden on
CUSOs.

Finally, the Board notes that the numbering and placement of new or
updated authorities in §712.5 are different than were proposed. The
final rule maintains the numbering and placement in the current rule by
adding the two new subsections at the end of the existing rule, rather
than in the middle. This should eliminate confusion where interested
parties make reference to particular provisions in the future.

The Board believes these changes are consistent with its ongoing efforts
to reduce regulatory burden while assuring that credit unions operate in
a safe and sound manner.

**REGULATORY PROCEDURES**

[Regulatory Flexibility Act]{.underline}

As noted in the proposed rule, the Regulatory Flexibility Act (RFA)
requires NCUA to prepare an analysis to describe any significant
economic impact any proposed regulation may have on a substantial number
of small entities. NCUA considers credit unions having less than ten
million dollars in assets to be small for purposes of RFA. Interpretive
Ruling and Policy Statement (IRPS) 87-2 as amended by IRPS 03-2. The
proposed changes to the CUSO rule impose minimal compliance obligations
by requiring credit unions to comply with certain one-time regulatory
requirements concerning agreements with CUSOs and maintenance of
separate corporate identities. Of the 3,599 credit unions (FCUs and
FISCUs) with assets of less than ten million dollars that filed a form
5300 call report with NCUA as of December 31, 2007, only 195 reported
any interest in a CUSO. Since approximately only 5.5% of credit unions
meeting the small credit union definition reported having any interest
in CUSOs of any type, NCUA has determined and certifies that the final
rule will not have a significant economic impact on a substantial number
of small credit unions. Accordingly, the NCUA has determined that an RFA
analysis is not required.

[Paperwork Reduction Act]{.underline}

The final rule contains information collection requirements. As required
by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), NCUA
submitted a copy of the proposed amendments as part of an information
collection package to the Office of Management and Budget (OMB) for its
review and approval of a modification of any existing collection of
information. On November 25, 2008, the OMB approved the modification
request and re-assigned the collection Control Number 3133-0149.

[Executive Order 13132]{.underline}

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 major aspects of the rule apply only to
federally-chartered credit unions. There is some impact on state
chartered, federally-insured credit unions. By law, these institutions
are already subject to numerous provisions of NCUA's rules, based on the
agency's role as the insurer of member share accounts and the
significant interest NCUA has in the safety and soundness of their
operations. In developing the proposal and the final rule, NCUA worked
closely with representatives of the state credit union regulatory
community. The final rule incorporates a mechanism by which states may
request an exemption from coverage of the rule for institutions in that
state, provided certain criteria are met. In any event, the final rule
will not have substantial direct effects on the states, on the
relationship 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 proposal 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

The NCUA has determined that this proposed rule will 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).

[Small Business Regulatory Enforcement Fairness Act.]{.underline}

The Small Business Regulatory Enforcement Act of 1996 (Pub. L. 104-121)
provides generally for congressional review of agency rules. A reporting
requirement is triggered in instances where NCUA issues a final rule as
defined by section 551 of the Administrative Procedure Act. 5 U.S.C.
551. The Office of Management and Budget has determined that this rule
is not a major rule for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996.

**List of Subjects in 12 CFR Part 712**

Administrative practices and procedure, Credit, Credit unions,
Investments, Reporting and record keeping requirements.

By the National Credit Union Administration Board on December 18, 2008.

> \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
>
> Mary F. Rupp
>
> Secretary of the Board

Accordingly, NCUA amends 12 CFR parts 712 and 741 as follows:

**Part 712 - CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)**

1\. The authority citation for part 712 continues to read as follows:

**Authority**: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 1784,
1785 and 1786.

2\. Amend §712.1 by revising the last sentence to read as follows:

**§712.1 What does this part cover?**

\* \* \* Sections 712.3(d)(3) and 712.4 of this part apply to
state-chartered credit unions and their subsidiaries, as provided in
§741.222 of this chapter.

3\. Amend §712.2 by adding a new paragraph (d)(3) to read as follows:

**§712.2 How much can an FCU invest in or loan to CUSOs, and what
parties may participate?**

**\* \* \* \* \***

\(d\) \* \* \*

> \(3\) *Special rule in the case of less than adequately capitalized
> FCUs.* This rule applies in the case of either an FCU that is
> currently less than adequately capitalized, as determined under part
> 702, or where the making of an investment in a CUSO would render the
> FCU less than adequately capitalized under part 702. Before making an
> investment in a CUSO, the FCU must obtain prior written approval from
> the appropriate NCUA regional office if the making of the investment
> would result in an aggregate cash outlay, measured on a cumulative
> basis (regardless of how the investment is valued for accounting
> purposes) in an amount in excess of one percent of the credit union's
> paid in and unimpaired capital and surplus.

\* \* \* \* \*

§712.3 \[Amended\]

4\. Amend §712.3 as follows:

a\. Amend paragraph (b) by removing the period at the end of the
sentence and adding the phrase

"; *[provided, however,]{.underline}* that with respect to any approved
CUSO service, as set out in §712.5, that also meets the description of
services set out in §701.30 of this chapter, this requirement is met if
the CUSO primarily provides such services to persons who are eligible
for membership in the FCU or are eligible for membership in credit
unions contracting with the CUSO." in its place.

b\. Revise paragraph (d)(3) to read as follows:

**712.3 What are the characteristics of and what requirements apply to
CUSOs?**

\* \* \* \* \*

\(d\) \* \* \*

(3)(i) Provide NCUA, its representatives, and the state credit union
regulatory authority having jurisdiction over any federally insured,
state-chartered credit union with an outstanding loan to, investment in
or contractual agreement for products or services with the CUSO with
complete access to any books and records of the CUSO and the ability to
review CUSO internal controls, as deemed necessary by NCUA or the state
credit union regulatory authority in carrying out their respective
responsibilities under the Act and the relevant state credit union
statute.

\(ii\) The effective date for compliance with this section is June 29,
2009.

5\. Amend §712.5 as follows:

a\. Amend paragraph (a)(2) by removing the word "and" after the
semicolon;

b\. Amend paragraph (a)(3) by adding "and" after the semicolon;

c\. Add a new paragraph (a)(4);

d\. Amend paragraph (b)(9) by removing the word "and" after the
semicolon;

e\. Amend paragraph (b)(10) by adding "and" after the semicolon;

f\. Add a new paragraph (b)(11);

g\. Amend paragraph (c) by removing the semicolon at the end of the
sentence and replacing it with the phrase: ", including the authority to
buy and sell participation interests in such loans;"

h\. Amend paragraph (d) by removing the semicolon at the end of the
sentence and replacing it with the phrase: ", including the authority to
buy and sell participation interests in such loans;"

i\. Amend paragraph (f)(5) by removing the word "and" after the
semicolon;

j\. Amend paragraph (f)(6) by adding "and" after the semicolon;

k\. Amend paragraph (h)(2) by removing the word "and" after the
semicolon;

l\. Amend paragraph (h)(3) by adding "and" after the semicolon;

m\. Amend paragraph (j)(2) by removing the word "and" after the
semicolon;

n\. Amend paragraph (j)(3) by adding "and" after the semicolon;

o\. Add new paragraphs (f)(7), (h)(4), and (j)(4) through (j)(6);

p\. Amend paragraph (n) by removing the semicolon at the end of the
sentence and replacing it with the phrase: ", including the authority to
buy and sell participation interests in such loans;"

q\. Add new paragraphs (s) and (t).

The revisions to read as follows:

**§712.5 What activities and services are preapproved for CUSOs?**

\* \* \* \* \*

\(a\) \* \* \*

\(4\) Stored value products.

\(b\) \* \* \*

\(11\) Employee leasing services

\(c\) Business loan origination, including the authority to buy and sell
participation interests in such loans;

\(d\) Consumer mortgage loan origination, including the authority to buy
and sell participation interests in such loans;

\* \* \* \* \*

\(f\) \* \* \*

\(7\) Business counseling and consultant services;

\* \* \* \* \*

\(h\) \* \* \*

\(4\) Real estate settlement services;

\* \* \* \* \*

\(j\) \* \* \*

\(4\) Real estate settlement services;

\(5\) Purchase and servicing of non-performing loans; and

\(6\) Referral and processing of loan applications for members whose
loan applications have been denied by the credit union;

\* \* \* \* \*

\(n\) Student loan origination, including the authority to buy and sell
participation interests in such loans;

\* \* \* \* \*

\(s\) Credit card loan origination;

\(t\) Payroll processing services.

**§712.7 \[Removed and Reserved\]**

6\. Remove and reserve §712.7.

7\. Add a new §712.10 to read as follows:

**§712.10 How can a state supervisory authority obtain an exemption for
state chartered credit unions from compliance with §712.3(d)(3)?**

(a) The NCUA Board may exempt federally insured credit unions in a given
    state from compliance with §712.3(d)(3) if the NCUA Board determines
    the laws and procedures available to the supervisory authority in
    that state are sufficient to provide NCUA with the degree of access
    to CUSO books and records it believes is necessary to evaluate the
    safety and soundness of credit unions having business relationships
    with CUSOs owned by credit union(s) chartered in that state.

(b) To obtain the exemption, the state supervisory authority must submit
    a copy of the legal authority pursuant to which it secures access to
    CUSO books and records to NCUA's regional office having
    responsibility for that state, along with all procedural and
    operational documentation supporting and describing the actual
    practices by which it implements and exercises the authority.

(c) The state supervisory authority must also provide the regional
    director with an assurance that NCUA examiners will be provided with
    co-extensive authority and will be allowed direct access to CUSO
    books and records at such times as NCUA, in its sole discretion, may
    determine necessary or appropriate. For purposes of this section,
    access includes the right to make and retain copies of any CUSO
    record, as to which NCUA will accord the same level of control and
    confidentiality that it uses with respect to all other
    examination-related materials it obtains in the course of its
    duties.

(d) The regional director will review the applicable authority,
    procedures and assurances and forward the exemption request, along
    with the regional director's recommendation, to the NCUA Board for a
    final determination.

(e) For purposes of this section, whether an entity is a CUSO shall be
    determined in accordance with the definition set out in §741.222 of
    this chapter.

**Part 741 -- Requirements for Insurance**

1\. The authority citation for part 741continues to read as follows:

**Authority**: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d.

2\. Add a new §741.222 to read as follows:

**§741.222. Credit Union Service Organizations.**

\(a\) Any credit union that is insured pursuant to Title II of the Act
must adhere to the requirements in §712.3(d)(3) and §712.4 of this
chapter concerning agreements between credit unions and their credit
union service organizations (CUSOs) and the requirement to maintain
separate corporate identities. For purposes of this section, a CUSO is
any entity in which a credit union has an ownership interest or to which
a credit union has extended a loan and that is engaged primarily in
providing products or services to credit unions or credit union members,
or, in the case of checking and currency services, including check
cashing services, sale of negotiable checks, money orders, and
electronic transaction services, including international and domestic
electronic fund transfers, to persons eligible for membership in any
credit union having a loan, investment or contract with the entity.

\(b\) This section shall have no preemptive effect with respect to the
laws or rules of any state providing for access to CUSO books and
records or CUSO examination by credit union regulatory authorities.

\(c\) The effective date for compliance with this section is June 29,
2009.

[^1]: Part 741, which sets out requirements for federal share insurance,
    is divided into two subparts: the first subpart has requirements on
    insurance applicable to both FCUs and state chartered credit unions
    not addressed elsewhere in the regulations. The second subpart part
    identifies and incorporates by reference provisions in other parts
    of the regulations, which apply to FCUs, that also apply, in whole
    or in part, to FISCUs.