**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**: Proposed rule.

**SUMMARY**: NCUA proposes to change its credit union service
organization (CUSO) rule by adding two new categories of permissible
CUSO activities: credit card loan origination and payroll processing
services. The proposal would also add new examples of permissible CUSO
activities within existing categories and would expand the scope of two
categories of services to include persons eligible for credit union
membership. The proposal would impose new regulatory limits on the
ability of credit unions to recapitalize their CUSOs in certain
circumstances. While the CUSO rule generally only applies to federal
credit unions (FCUs), the proposal would revise and extend 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. The proposal would also clarify
that CUSOs may buy and sell participations in loans they are authorized
to originate under the current rule. Finally, NCUA proposes to delete as
unnecessary the section in the current rule concerning amendment
requests. These amendments will clarify the rule while enhancing CUSO
operations and addressing safety and soundness concerns.

**DATES**: Comments must be received on or before June 30, 2008.

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

·
^Federal\ eRulemaking\ Portal:\ [http://www.regulations.gov]{.underline}.\ Follow\ the\ instructions\ for\ submitting\ comments.^

·
^NCUA\ Web\ Site:\ [http://www.ncua.gov/RegulationsOpinionsLaws/proposed]{.underline}[\_regs/proposed\_]{.underline}[regs.\ html.]{.underline}\ Follow\ the\ instructions\ for\ submitting\ comments.^

·
^E-mail:\ Address\ to\ [regcomments@ncua.gov]{.underline}.\ Include\ "\[Your\ name\]\ Comments\ on\ Proposed\ Rule\ 712,\ CUSO\ Amendments"\ 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^**^:\ 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.\ These\ proposed\ changes\ are,\ 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\ proposed\ changes\ are\ intended\ to\ update\ and\ clarify\ the\ regulation.\ ^

**^B.\ Proposed\ Changes.^**

***^[Expanding\ the\ Scope\ of\ Certain\ Services\ to\ Include\ Persons\ within\ the\ Field\ of\ Membership.]{.underline}^***^\ In\ October\ 2006,\ Congress\ enacted\ the\ Financial\ Services\ Regulatory\ Relief\ Act\ of\ 2006\ (Reg\ Relief\ Act),\ which\ amended\ §107(12)\ of\ the\ FCU\ Act\ to\ permit\ FCUs\ to\ provide\ certain\ financial\ services\ to\ persons\ within\ their\ fields\ of\ membership.\ The\ Reg\ Relief\ Act\ also\ amended\ the\ FCU\ Act\ to\ extend\ the\ general\ lending\ maturity\ limit\ for\ FCUs\ from\ 12\ years\ to\ 15\ years.\ Pub.\ L.\ 109--351,\ §§\ 502--503,\ 120\ Stat.\ 1966\ (2006).\ \ On\ October\ 19,\ 2006,\ the\ NCUA\ Board\ issued\ an\ interim\ final\ rule\ to\ implement\ these\ provisions.\ 71\ FR\ 62875\ (October\ 27,2006).\ The\ Board\ made\ the\ interim\ rule\ permanent\ effective\ March\ 26,\ 2007.\ 72\ FR\ 7927\ (February\ 22,\ 2007).^

^Legislative\ history\ of\ the\ Reg\ Relief\ Act\ indicates\ that\ Congress\ intended\ to\ allow\ FCUs\ "to\ sell\ negotiable\ checks,\ money\ orders,\ and\ other\ similar\ transfer\ instruments,\ including\ international\ and\ domestic\ electronic\ fund\ transfers,\ to\ anyone\ eligible\ for\ membership,\ regardless\ of\ their\ membership\ status."\ S.\ Rpt.\ 109-256,\ p.\ 5;\ H.\ Rpt.\ 109-356\ Part\ 1,\ p.\ 63.\ The\ Board\ believes\ the\ enactment\ of\ that\ law\ warrants\ a\ parallel\ expansion\ in\ the\ CUSO\ rule,\ since\ an\ FCU\ may\ elect\ to\ provide\ some\ or\ all\ of\ these\ types\ of\ services\ through\ the\ vehicle\ of\ a\ CUSO.\ ^

^The\ current\ CUSO\ rule\ provides\ that\ CUSOs\ must\ "primarily"\ serve\ credit\ unions\ or\ their\ members.\ 12\ CFR\ 712.3(b).\ The\ rule\ is\ founded\ on\ language\ in\ the\ FCU\ Act\ permitting\ FCUs\ to\ lend\ to\ service\ organizations\ established\ primarily\ to\ serve\ the\ needs\ of\ credit\ unions\ and\ whose\ business\ relates\ to\ the\ daily\ operation\ of\ credit\ unions.\ 12\ U.S.C.\ 1757(5)(D).\ A\ similar\ constraint\ is\ contained\ in\ the\ investment\ authority:\ CUSOs\ must\ provide\ services\ "associated\ with\ the\ routine\ operations\ of\ credit\ unions."\ 12\ U.S.C.\ 1757(7)(I).\ Insofar\ as\ the\ Reg\ Relief\ Act\ has\ expanded\ the\ scope\ of\ FCU\ operations\ by\ authorizing\ certain\ money\ transfer\ services\ to\ be\ provided\ to\ persons\ eligible\ for\ membership,\ the\ Board\ believes\ it\ prudent\ to\ make\ a\ similar\ adjustment\ to\ the\ "primarily\ serves"\ governor\ applicable\ to\ CUSOs.\ Services\ covered\ in\ the\ Reg\ Relief\ Act\ correspond\ to\ the\ checking\ and\ currency\ services\ and\ the\ electronic\ transaction\ services\ categories\ in\ the\ CUSO\ rule.\ Accordingly,\ the\ Board\ proposes\ to\ amend\ 712.3(b)\ to\ specify\ that\ FCUs\ may\ lend\ to\ or\ invest\ in\ CUSOs\ providing\ services\ under\ these\ two\ categories\ so\ long\ as\ the\ CUSO\ primarily\ provides\ them\ to\ persons\ within\ the\ FCU's\ field\ of\ membership,\ or\ to\ persons\ eligible\ for\ membership\ in\ credit\ unions\ with\ which\ the\ CUSO\ has\ contracts.^***^[\ ]{.underline}^***

***^[Credit\ Card\ Loan\ Origination.\ ]{.underline}^***

^The\ Board\ is\ proposing\ to\ permit\ CUSOs\ to\ originate\ and\ hold\ credit\ card\ loans\ as\ a\ principal\ on\ its\ own\ behalf\ or\ on\ behalf\ of\ credit\ unions.\ \ As\ far\ as\ lending,\ the\ current\ CUSO\ rule\ permits\ CUSOs\ to\ engage\ in\ consumer\ mortgage\ lending,\ business\ lending\ and\ student\ lending.\ Generally,\ NCUA\ has\ permitted\ CUSOs\ to\ engage\ in\ loan\ origination\ where\ a\ degree\ of\ expertise\ is\ required\ to\ be\ successful,\ such\ as\ business,\ student\ and\ real\ estate\ lending,\ and\ that\ expertise\ may\ not\ be\ attainable\ by\ many\ individual\ credit\ unions.\ ^*^[See,\ e.g.]{.underline}^^,^^\ ^*^63\ FR\ 10743,\ 10752\ (March\ 5,\ 1998).\ NCUA\ believes\ credit\ card\ origination\ also\ requires\ a\ degree\ of\ specialization\ and\ expertise\ to\ succeed\ and\ the\ proposal\ will\ permit\ credit\ unions\ to\ collaborate\ and\ pool\ resources\ and\ expertise\ through\ the\ vehicle\ of\ a\ CUSO.\ Accordingly,\ the\ Board\ believes\ credit\ card\ origination\ should\ be\ an\ approved\ CUSO\ activity.\ \ ^

^Credit\ unions\ administering\ their\ own\ credit\ card\ programs\ encounter\ substantial\ risks\ and\ burdens.\ Thin\ margins\ and\ competitive\ pricing\ characterize\ the\ credit\ card\ business\ at\ the\ prime\ end\ of\ the\ market\ and\ a\ small\ number\ of\ banks\ with\ nationwide\ operations\ dominate\ the\ business.\ Permitting\ FCUs\ to\ use\ a\ CUSO\ to\ manage\ their\ card\ programs\ will\ help\ credit\ unions\ to\ manage\ that\ risk.\ ^

^CUSOs\ are\ already\ engaged\ in\ providing\ various\ types\ of\ card\ processing\ and\ related\ services.\ The\ expansion\ is\ also\ consistent\ with\ an\ underlying\ principle\ of\ the\ CUSO\ rule,\ which\ is\ to\ foster\ and\ support\ the\ development\ of\ expertise\ in\ a\ particular\ line\ of\ business\ to\ a\ degree\ that\ is\ often\ unattainable\ at\ the\ individual\ credit\ union\ level.\ The\ amendment\ would\ combine\ the\ scale,\ expertise,\ and\ back\ office\ operational\ support\ required\ to\ be\ successful\ in\ the\ credit\ card\ business.^

^Many\ credit\ unions\ have\ found\ it\ difficult\ to\ manage\ their\ credit\ card\ business\ successfully\ and\ have\ elected\ to\ sell\ that\ business\ to\ other\ financial\ institutions.\ In\ many\ cases,\ credit\ unions\ that\ have\ sold\ their\ business\ to\ another\ institution\ but\ retained\ an\ affinity\ association\ with\ the\ cards\ find\ that\ service\ levels\ and\ consumer\ support\ are\ not\ as\ good\ as\ the\ credit\ union\ had\ expected.\ In\ addition,\ in\ some\ cases\ the\ financial\ institution\ cross-markets\ other\ products\ and\ services\ to\ the\ cardholders\ and\ sometimes\ succeeds\ in\ drawing\ other\ business\ away\ from\ the\ credit\ union.\ Even\ if\ the\ acquiring\ institution\ allows\ a\ credit\ union\ to\ remain\ associated\ with\ the\ card,\ its\ earnings\ on\ the\ card\ business\ will\ be\ significantly\ reduced.\ The\ Board\ believes\ this\ amendment\ will\ provide\ an\ alternative\ for\ credit\ unions\ interested\ in\ selling\ their\ credit\ card\ business.\ \ \ ^

^The\ CUSO\ rule,\ implementing\ a\ statutory\ limitation,\ prohibits\ a\ CUSO\ from\ acquiring\ control,\ directly\ or\ indirectly,\ of\ a\ depository\ financial\ institution\ so\ an\ FCU\ seeking\ to\ establish\ a\ CUSO\ for\ credit\ card\ origination\ cannot\ fund\ its\ operation\ by\ receiving\ deposits.\ 12\ U.S.C.\ 1757(7)(I);\ 12\ CFR\ 712.6.\ In\ addition,\ the\ Board\ notes\ that\ NCUA's\ loan\ participation\ rule\ would\ not\ support\ the\ sale\ to\ FCUs\ of\ participation\ interests\ in\ a\ credit\ card\ portfolio,\ which\ consists\ of\ open-end,\ revolving\ credit.\ \ ^

***^[Applicability\ of\ ]{.underline}^**^[Select\ ]{.underline}^**^[CUSO\ Rule]{.underline}^**^[\ ]{.underline}^**^[Provisions]{.underline}^**^[\ to\ Federally\ Insured\ Credit\ Unions.]{.underline}^**^[\ ]{.underline}^***

^Currently,\ the\ CUSO\ rule\ only\ applies\ to\ FCUs\ but\ the\ Board\ is\ proposing\ to\ have\ two\ particular\ provisions\ addressing\ safety\ and\ soundness\ considerations\ apply\ to\ federally\ insured,\ state\ chartered\ credit\ unions\ (FISCUs),\ namely,\ the\ provision\ requiring\ a\ CUSO's\ agreement\ to\ permit\ NCUA\ to\ have\ access\ to\ its\ books\ and\ records\ and\ the\ provision\ requiring\ investing\ FCUs\ to\ take\ steps\ to\ ensure\ the\ CUSO\ maintains\ corporate\ separateness.\ 12\ CFR\ 712.3(d)(3),\ 712.4.\ While\ NCUA\ has\ the\ authority\ under\ the\ FCU\ Act\ to\ impose\ regulatory\ requirements\ on\ FISCUs,\ 12\ U.S.C.\ 1781--1790d,\ it\ works\ cooperatively\ with\ state\ supervisory\ authorities\ in\ exercising\ this\ authority\ and\ generally\ only\ regulates\ where\ there\ are\ safety\ and\ soundness\ concerns.\ \ ^

^The\ Board\ proposes\ to\ amend\ subpart\ B\ of\ part\ 741\ of\ its\ rules\ to\ add\ a\ new\ section\ specifying\ that\ FISCUs\ must\ adhere\ to\ the\ requirements\ in\ §712.3(d)(3)\ and\ §712.4.\ The\ proposed\ amendment\ would\ specify\ that\ 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.\ This\ provision\ follows\ the\ approach\ taken\ by\ NCUA\ in\ defining\ a\ CUSO\ for\ FCU\ investment\ and\ loan\ purposes.\ As\ discussed\ above,\ based\ on\ changes\ made\ by\ the\ Reg\ Relief\ Act,\ the\ Board\ is\ proposing\ to\ expand\ the\ CUSO\ definition\ to\ include,\ in\ the\ case\ of\ check\ cashing\ and\ money\ transfer\ services,\ entities\ that\ primarily\ serve\ individuals\ eligible\ for\ credit\ union\ membership.\ The\ Board\ proposes\ to\ incorporate\ this\ concept\ into\ this\ section\ of\ the\ rule\ as\ well\ by\ specifying\ that\ CUSOs\ that\ provide\ these\ types\ of\ services\ fall\ within\ the\ scope\ of\ the\ rule\ if\ the\ services\ are\ provided\ primarily\ to\ credit\ unions\ or\ individuals\ who\ are\ eligible\ for\ membership\ in\ credit\ unions\ having\ a\ loan,\ investment\ or\ contract\ with\ the\ CUSO.\ ^

^Some\ state\ laws\ may\ authorize\ FISCUs\ to\ lend\ to\ or\ invest\ in\ entities\ that\ are\ not\ primarily\ engaged\ in\ serving\ credit\ unions,\ credit\ union\ members,\ or\ persons\ eligible\ for\ membership,\ and\ the\ rule\ would\ not\ apply\ in\ these\ cases.\ The\ Board\ anticipates\ that\ entities\ that\ are\ not\ primarily\ engaged\ in\ serving\ credit\ unions\ or\ their\ members\ will\ not\ present\ the\ types\ of\ safety\ and\ soundness\ and\ systemic\ risks\ about\ which\ it\ is\ most\ concerned.\ \ Comment\ is\ solicited\ on\ possible\ other\ approaches\ to\ describing\ the\ scope\ of\ the\ rule.\ In\ addition,\ the\ Board\ proposes\ to\ revise\ the\ last\ sentence\ in\ §712.1,\ which\ currently\ states\ that\ Part\ 712\ has\ no\ applicability\ to\ FISCUs\ or\ their\ subsidiaries\ that\ do\ not\ have\ FCU\ investments\ or\ loans.\ \ ^

^FISCUs\ are\ exposed\ to\ significant\ potential\ safety\ and\ soundness\ and\ reputation\ risks\ based\ on\ their\ relationship\ with\ their\ CUSOs.\ Although\ NCUA\ has\ the\ right\ to\ examine\ books\ and\ records\ belonging\ to\ a\ FISCU,\ it\ does\ not\ enjoy\ a\ similar\ right\ concerning\ access\ to\ the\ books\ and\ records\ of\ the\ CUSO.\ Without\ that\ access,\ NCUA\ cannot\ \ thoroughly\ and\ accurately\ evaluate\ CUSO\ risks\ to\ FISCUs\ and,\ ultimately,\ the\ risk\ to\ the\ National\ Credit\ Union\ Share\ Insurance\ Fund.\ The\ Board\ notes,\ in\ this\ respect,\ that\ not\ all\ states\ impose\ the\ same\ type\ of\ relatively\ strict\ investment\ limits\ in\ the\ FCU\ Act,\ which\ limit\ FCU\ investment\ in\ all\ CUSOs\ to\ one\ percent\ of\ unimpaired\ capital\ and\ surplus.\ 12\ U.S.C.\ §1757(7)(I).\ Similarly,\ not\ all\ states\ limit\ the\ types\ of\ activities\ in\ which\ a\ CUSO\ may\ engage.\ Further,\ without\ some\ assurance\ that\ the\ FISCU\ is\ insulated\ from\ claims\ that\ might\ be\ asserted\ against\ its\ CUSO,\ there\ is\ risk\ that\ the\ FISCU\ could\ lose\ more\ than\ the\ value\ of\ its\ investment\ in\ its\ CUSO.\ ^

^NCUA\ experience\ with\ several\ FISCUs\ that\ own\ CUSOs\ presenting\ significant\ exposure\ to\ potential\ loss\ supports\ this\ amendment.\ There\ are\ CUSOs,\ for\ example,\ that\ have\ used\ extensive\ leveraging\ from\ non-credit\ union\ sources\ to\ fund\ commercial\ loans.\ In\ turn,\ credit\ unions\ often\ buy\ participations\ in\ these\ loans,\ sometimes\ without\ having\ conducted\ an\ adequate\ due\ diligence\ themselves.\ Other\ CUSOs\ are\ engaging\ in\ loan\ origination\ despite\ being\ thinly\ capitalized,\ presenting\ risk\ to\ the\ credit\ union\ that\ losses\ or\ affirmative\ liability\ sustained\ by\ the\ CUSO\ will\ pass\ to\ them.\ If\ the\ CUSO\ should\ become\ bankrupt\ or\ insolvent,\ losses\ to\ those\ credit\ unions\ holding\ participation\ interests\ in\ loans\ the\ CUSO\ originated\ and\ serviced\ could\ also\ result.\ In\ other\ cases,\ CUSOs\ may\ be\ used\ by\ the\ credit\ union\ to\ develop\ an\ undue\ concentration\ of\ loans\ in\ a\ particular\ business\ segment\ or\ geographic\ area.\ This\ presents\ reputation\ risk\ to\ the\ credit\ union,\ especially\ if\ significant\ defaults\ arise\ and\ foreclosures\ become\ necessary.\ CUSOs\ may\ also\ engage\ directly\ in\ lines\ of\ business\ that\ present\ risks,\ such\ as\ a\ trust\ business\ or\ mortgage\ or\ commercial\ loan\ origination.^

^The\ Board\ understands\ and\ acknowledges\ that\ the\ degree\ of\ risk\ to\ a\ FISCU\ depends\ on\ several\ factors,\ including\ the\ nature\ of\ the\ services\ its\ CUSO\ provides\ and\ the\ relative\ extent\ of\ the\ CUSO's\ involvement\ in\ the\ credit\ union's\ overall\ business.\ For\ example,\ the\ Board\ is\ substantially\ more\ concerned\ about\ a\ CUSO\ that\ originates\ mortgage\ and\ business\ loans\ than\ one\ that\ provides\ back-room\ management\ or\ operational\ support.\ CUSOs\ engaging\ in\ widespread\ sale\ of\ participation\ interests\ and\ providing\ loan\ servicing\ on\ behalf\ of\ a\ significant\ number\ of\ credit\ unions\ present\ potential\ systemic\ risks\ that\ the\ Board\ believes\ warrant\ direct\ monitoring.\ NCUA\ solicits\ the\ views\ of\ commenters\ about\ ways\ to\ isolate\ and\ address\ this\ type\ of\ risk\ without\ unduly\ burdening\ the\ industry\ or\ unnecessarily\ covering\ all\ CUSO\ relationships.\ For\ example,\ it\ may\ make\ sense\ to\ identify\ types\ of\ business\ or\ degrees\ of\ market\ penetration\ as\ conditions\ for\ applicability\ of\ the\ rule.\ ^

^The\ Board\ is\ aware\ a\ FISCU\ may\ be\ required\ to\ maintain\ an\ investment\ in\ an\ entity\ to\ receive\ services\ at\ optimal\ terms\ and\ rates,\ but\ in\ which\ the\ credit\ union's\ share\ of\ the\ overall\ business\ of\ that\ entity\ is\ relatively\ minor.\ In\ such\ cases,\ the\ credit\ union\ may\ not\ have\ enough\ influence\ or\ involvement\ with\ the\ entity\ to\ be\ able\ to\ require\ its\ consent\ to\ access\ to\ books\ and\ records\ by\ NCUA.\ The\ Board\ solicits\ input\ from\ the\ public\ about\ ways\ to\ address\ this\ circumstance,\ such\ as\ by\ creating\ a\ minimum\ investment\ threshold\ for\ applicability\ of\ the\ rule.\ ^

^Finally,\ the\ Board\ is\ aware\ some\ states\ may\ already\ have\ rules\ or\ requirements\ governing\ corporate\ separateness\ between\ FISCUs\ and\ their\ CUSOs.\ The\ Board\ solicits\ input\ from\ the\ public\ about\ whether\ the\ rule\ ought\ to\ include\ a\ provision,\ similar\ to\ that\ which\ exists\ in\ NCUA's\ member\ business\ lending\ rule,\ by\ which\ states\ could\ demonstrate\ that\ compliance\ with\ an\ existing\ state\ rule\ adequately\ addresses\ the\ liability\ concerns\ present\ in\ this\ context.\ Also,\ the\ proposed\ amendment\ states\ expressly\ that\ it\ does\ not\ preempt\ any\ applicable\ state\ law\ or\ regulation\ that\ currently\ authorizes\ a\ state\ credit\ union\ regulatory\ authority\ (SSA)\ to\ review\ a\ CUSO's\ books\ and\ records\ or\ to\ conduct\ an\ examination\ of\ the\ CUSO.\ ^

*^[Reciprocity.]{.underline}^*^\ As\ the\ discussion\ above\ documents,\ the\ right\ of\ access\ to\ books\ and\ records\ of\ CUSOs\ is\ an\ important\ tool\ in\ assuring\ safety\ and\ soundness.\ The\ Board\ understands,\ however,\ that\ not\ every\ SSA\ enjoys\ a\ right\ of\ access\ to\ books\ and\ records\ of\ CUSOs\ in\ which\ FISCUs\ chartered\ by\ that\ state\ have\ an\ investment\ or\ other\ relationship.\ There\ may\ also\ be\ cases\ in\ which\ a\ FISCU\ has\ only\ a\ contractual\ relationship\ with\ a\ CUSO\ but\ does\ not\ have\ either\ a\ loan\ to\ or\ an\ investment\ in\ the\ CUSO,\ which\ may\ be\ owned\ exclusively\ by\ one\ or\ more\ FCUs.\ ^

^To\ address\ this\ circumstance,\ the\ Board\ proposes\ to\ change\ §712.3(d)(3)\ to\ require\ the\ credit\ union's\ agreement\ with\ the\ CUSO\ to\ permit\ access\ not\ only\ to\ NCUA\ but\ also\ to\ any\ SSA\ having\ supervisory\ responsibility\ over\ any\ FISCU\ that\ has\ a\ loan,\ an\ investment,\ or\ a\ contractual\ agreement\ for\ products\ or\ services\ with\ the\ CUSO.\ This\ will\ assure\ that\ an\ SSA\ with\ responsibility\ for\ a\ credit\ union\ has\ the\ opportunity\ to\ review\ and\ evaluate\ the\ risk\ to\ which\ its\ institutions\ may\ be\ exposed.\ Even\ though\ NCUA\ enjoys\ a\ cooperative\ relationship\ with\ all\ SSAs\ 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\ SSA.\ 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\ SSAs\ to\ CUSO\ books\ and\ records.\ ^

*^[Transition\ Period\ for\ Compliance.]{.underline}^*^\ The\ Board\ acknowledges\ that\ it\ will\ take\ some\ time\ for\ FISCUs\ to\ develop\ and\ enter\ agreements\ with\ their\ CUSOs\ and\ to\ obtain\ legal\ opinions\ addressing\ corporate\ separateness\ issues.\ The\ Board\ also\ recognizes\ that\ FCUs\ with\ loans\ to\ or\ investments\ in\ CUSOs\ will\ be\ required\ under\ this\ proposal\ to\ make\ changes\ in\ the\ agreements\ they\ currently\ have\ with\ their\ CUSOs.\ The\ Board\ proposes\ to\ establish\ a\ compliance\ date\ for\ each\ of\ these\ changes\ that\ is\ not\ earlier\ than\ six\ months\ following\ the\ date\ of\ publication\ of\ the\ final\ rule\ in\ the\ ^*^[Federal\ Register.]{.underline}^*^\ Accordingly,\ the\ proposed\ rule\ changes\ reflect\ this\ compliance\ date.\ \ \ ^

***^[Recapitalization\ of\ Insolvent\ CUSOs.]{.underline}^***

^Under\ certain\ circumstances,\ an\ FCU\ may\ consider\ re-capitalizing\ a\ CUSO\ that\ has\ become\ insolvent\ because\ it\ determines\ the\ investment\ is\ prudent,\ even\ though\ some\ portion\ of\ the\ amount\ invested\ in\ the\ recapitalization\ effort\ may\ have\ no\ book\ value\ for\ the\ FCU.\ ^

^The\ Board\ believes\ the\ risks\ inherent\ in\ this\ situation\ warrant\ an\ amendment\ to\ the\ CUSO\ rule\ that\ would\ apply\ in\ cases\ in\ which\ an\ FCU\ is\ already\ less\ than\ adequately\ capitalized\ or\ where\ the\ recapitalization\ of\ the\ CUSO\ would\ render\ the\ FCU\ less\ than\ adequately\ capitalized\ under\ NCUA's\ prompt\ corrective\ action\ (PCA)\ rules.\ 12\ CFR\ Part\ 702.\ In\ either\ case,\ an\ FCU\ contemplating\ such\ an\ investment\ would\ be\ required\ to\ obtain\ approval\ in\ advance\ from\ the\ appropriate\ NCUA\ regional\ director\ if\ 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.\ ^

^This\ amendment\ would\ minimize\ the\ likelihood,\ which\ is\ possible\ under\ the\ current\ rule,\ that\ an\ FCU\ may\ be\ investing,\ on\ an\ aggregate\ basis,\ more\ than\ one\ percent\ of\ its\ capital\ in\ a\ CUSO.\ The\ amendment\ would\ also\ prevent\ an\ FCU\ from\ continuing\ to\ invest\ in\ an\ entity\ that\ has\ become\ a\ lost\ cause.\ NCUA\ has\ had\ specific\ experience\ with\ credit\ unions\ that\ have\ elected\ to\ invest\ additional\ funds\ with\ CUSOs\ that\ have\ experienced\ losses.\ That\ decision\ calls\ for\ business\ judgment\ and\ is,\ in\ most\ cases,\ within\ the\ discretion\ of\ the\ board\ of\ directors.\ Where,\ however,\ the\ proposed\ investment\ would\ change\ the\ credit\ union's\ PCA\ rating\ to\ less\ than\ adequate,\ or\ where\ the\ credit\ union\ is\ already\ in\ a\ less\ than\ adequately\ capitalized\ condition,\ the\ Board\ believes\ prior\ notice\ to\ and\ approval\ from\ NCUA\ is\ appropriate.^

***^[Amendment\ Requests.\ ]{.underline}^***

^The\ current\ rule\ has\ a\ section\ outlining\ a\ process\ by\ which\ the\ NCUA\ Board\ can\ consider\ approval\ for\ a\ CUSO\ activity\ not\ currently\ preapproved.\ 12\ CFR\ 712.7.\ This\ section\ provides\ that\ NCUA\ will\ consider\ a\ request\ to\ be\ a\ petition\ to\ amend\ the\ rule\ and\ indicates\ the\ agency\ will\ solicit\ public\ comment\ or\ otherwise\ act\ on\ the\ request\ within\ sixty\ days.\ This\ provision,\ which\ dates\ to\ 1986,\ was\ brought\ over\ intact\ from\ the\ prior\ version\ of\ the\ rule\ when\ NCUA\ conducted\ a\ wholesale\ review\ and\ revision\ of\ the\ rule\ in\ 1998.\ 63\ FR\ 10743,\ 10754\ (March\ 5,\ 1998).\ Although\ NCUA\ staff\ receive\ numerous\ inquiries\ about\ whether\ a\ particular\ CUSO\ activity\ is\ already\ within\ one\ of\ the\ preapproved\ categories,\ NCUA\ has\ received\ only\ one\ formal\ request\ to\ amend\ the\ rule,\ which\ the\ Board\ rejected.\ In\ addition,\ since\ the\ 1998\ amendment\ of\ the\ CUSO\ rule,\ NCUA\ adopted\ a\ change\ to\ its\ rule\ and\ policy\ on\ promulgation\ of\ regulations\ to\ include\ a\ general\ provision\ on\ the\ procedures\ by\ which\ members\ of\ the\ public\ may\ petition\ the\ NCUA\ Board\ for\ the\ issuance,\ amendment\ or\ repeal\ of\ any\ rule.\ 12\ CFR\ 791.8(c);\ Interpretive\ Ruling\ and\ Policy\ Statement\ 87-2\ as\ amended\ by\ Interpretive\ Ruling\ and\ Policy\ Statement\ 03-2.\ Accordingly,\ the\ Board\ believes\ the\ amendment\ provisions\ described\ in\ §712.7\ of\ the\ CUSO\ rule\ are\ redundant\ and\ should\ be\ deleted.^

***^[Payroll\ Processing.\ ]{.underline}^***

^The\ Board\ proposes\ to\ amend\ the\ CUSO\ rule\ to\ authorize\ CUSOs\ to\ provide\ payroll\ processing\ services\ directly\ to\ credit\ union\ members.\ NCUA's\ Office\ of\ General\ Counsel\ has\ concluded\ that\ an\ FCU\ may\ provide\ its\ members\ with\ payroll\ processing\ services\ as\ an\ exercise\ of\ its\ incidental\ powers\ and\ that\ a\ CUSO\ may\ assist\ the\ FCU\ in\ its\ provision\ of\ that\ service.\ OGC\ Op.\ 05-1204\ (February\ 15,\ 2006).\ Until\ now,\ however,\ NCUA\ has\ not\ permitted\ a\ CUSO\ to\ provide\ this\ service\ directly\ to\ members,\ based\ in\ part\ on\ the\ agency's\ longstanding\ view\ that\ clerical\ and\ managerial\ services\ authorized\ for\ CUSOs\ may\ only\ be\ performed\ on\ behalf\ of\ the\ FCU.\ Some\ public\ comments\ filed\ in\ response\ to\ the\ annual\ regulatory\ review\ proposed\ that\ NCUA\ authorize\ CUSOs\ to\ provide\ this\ service\ directly\ to\ members.^

^As\ with\ the\ credit\ card\ discussion\ above,\ the\ Board\ believes\ this\ is\ a\ logical\ extension\ of\ the\ CUSO\ rule.\ \ Some\ CUSOs\ currently\ provide\ support\ to\ credit\ unions\ offering\ payroll\ services\ to\ their\ members\ by\ providing\ data\ processing\ support,\ which\ is\ already\ a\ preapproved\ CUSO\ activity.\ Payroll\ services\ are\ essentially\ the\ electronic\ movement\ of\ money\ through\ accounts.\ It\ is\ a\ very\ common\ ancillary\ service\ for\ business\ members\ and\ a\ key\ part\ of\ the\ business\ services\ package\ of\ services.\ Allowing\ CUSOs\ to\ offer\ this\ service\ directly\ to\ credit\ union\ members\ would\ be\ a\ better\ and\ much\ simpler\ model\ to\ implement\ and\ is\ a\ natural\ extension\ of\ the\ current\ pre-approved\ services.^

***^[Additional\ Examples\ of\ Permissible\ Activities\ within\ Approved\ Categories.\ ]{.underline}^***

^The\ CUSO\ rule\ sets\ out\ broad\ categories\ of\ permissible\ CUSO\ activities\ that\ are\ related\ to\ the\ routine\ daily\ operation\ of\ credit\ unions.\ 12\ U.S.C.\ 1757(I);\ 12\ CFR\ 712.5.\ Most\ of\ the\ broad\ categories\ have\ examples\ of\ specific\ activities\ that\ are\ permissible\ within\ the\ category.\ The\ specific\ activities\ are\ provided\ as\ illustrations\ of\ activities\ permissible\ under\ the\ particular\ category,\ and\ are\ not\ intended\ as\ an\ exclusive\ or\ exhaustive\ list.\ 12\ CFR\ 712.5.\ ^

^From\ time\ to\ time,\ NCUA\ receives\ requests\ from\ FCUs\ and\ other\ interested\ parties\ to\ review\ and\ evaluate\ whether\ a\ particular\ activity\ falls\ within\ one\ or\ more\ of\ the\ approved\ categories.\ These\ determinations\ are\ usually\ made\ in\ legal\ opinion\ letters\ issued\ by\ NCUA's\ Office\ of\ General\ Counsel\ directly\ in\ response\ to\ the\ request.\ Although\ the\ opinion\ letters\ are\ posted\ on\ the\ agency\ website\ and\ are\ available\ for\ public\ review,\ the\ Board\ believes\ it\ is\ appropriate\ to\ amend\ the\ CUSO\ rule\ to\ include\ these\ examples\ in\ the\ rule,\ so\ that\ the\ agency's\ position\ has\ maximum\ exposure.\ ^

^In\ the\ recent\ past,\ NCUA\ has\ determined\ that\ a\ CUSO\ may\ provide\ for\ all\ aspects\ of\ a\ real\ estate\ settlement\ for\ mortgage\ loans\ the\ credit\ union\ grants\ to\ its\ members.\ Examples\ of\ permissible\ services\ include:\ arranging\ the\ title\ search;\ reviewing\ the\ title\ work;\ providing\ title\ insurance\ as\ an\ agent\ for\ the\ underwriter;\ and\ handling\ the\ settlement\ of\ the\ mortgage\ loan.\ The\ Office\ of\ General\ Counsel\ concluded\ these\ activities,\ although\ not\ specifically\ listed\ in\ the\ rule,\ fall\ within\ the\ preapproved\ categories\ of\ insurance\ brokerage\ services\ and\ loan\ support\ services\ and\ relate\ to\ the\ routine\ daily\ operations\ of\ credit\ unions.\ Accordingly,\ the\ Board\ proposes\ to\ amend\ the\ rule\ to\ include\ real\ estate\ settlement\ services\ as\ an\ example\ under\ each\ of\ these\ preapproved\ categories.\ ^

^NCUA's\ Office\ of\ General\ Counsel\ has\ also\ recently\ concluded\ the\ following\ activities\ are\ permissible\ examples\ of\ services\ that\ CUSOs\ may\ provide\ under\ one\ or\ more\ preapproved\ categories:^

-   ^Employee\ leasing\ services\ and\ support,\ permissible\ under\ professional\ and\ management\ services,\ §712.5(b);^

-   ^Purchase\ and\ servicing\ of\ non-performing\ loans,\ permissible\ under\ loan\ support\ services,\ §712.5(j);^

-   ^Business\ counseling\ and\ related\ services\ for\ credit\ union\ business\ members,\ permissible\ under\ professional\ and\ management\ services\ and\ financial\ counseling\ services,\ §712.5(b),\ (f);^

-   ^Referral\ and\ processing\ of\ loan\ applications\ for\ members\ turned\ down\ by\ the\ credit\ union,\ permissible\ under\ loan\ support\ services,\ §712.5(j).^

^Accordingly,\ the\ Board\ proposes\ to\ amend\ the\ rule\ to\ include\ each\ of\ these\ services\ as\ representative\ examples\ of\ permissible\ services\ under\ the\ noted\ preapproved\ category.^

***^[Loan\ Participations.\ ]{.underline}^***

^Part\ 712\ specifically\ authorizes\ CUSOs\ to\ engage\ in\ consumer\ mortgage\ loan\ origination,\ member\ business\ loan\ origination,\ and\ student\ loan\ origination.\ 12\ CFR\ 712.5(c),(d),(n).\ CUSOs\ are\ also\ recognized\ in\ NCUA's\ loan\ participations\ rule\ as\ a\ "credit\ union\ organization"\ authorized\ to\ engage\ in\ the\ purchase\ and\ sale\ of\ loan\ participations.\ 12\ CFR\ 701.22(a)(4).\ The\ CUSO\ rule\ does\ not,\ however,\ specify\ that\ a\ CUSO\ may\ engage\ in\ the\ purchase\ or\ sale\ of\ participation\ interests\ in\ loans\ they\ are\ authorized\ to\ make.\ The\ Board\ is\ aware\ CUSOs\ are\ currently\ engaged\ in\ this\ practice\ and\ believes\ it\ is\ permissible.\ The\ Board\ proposes\ to\ conform\ the\ CUSO\ rule\ with\ the\ loan\ participation\ rule\ by\ clarifying\ the\ authority\ to\ originate\ a\ loan\ includes\ the\ authority\ to\ buy\ or\ sell\ a\ participation\ interest\ in\ that\ type\ of\ loan.\ As\ noted\ above,\ however,\ the\ NCUA's\ loan\ participation\ rule\ would\ not\ support\ the\ sale\ to\ FCUs\ of\ participation\ interests\ in\ a\ credit\ card\ portfolio,\ which\ consists\ of\ open-end,\ revolving\ credit.\ ^

***^[Request\ for\ Comments]{.underline}^***^.^

^Although\ the\ Board\ is\ not\ proposing\ additional,\ specific\ regulatory\ changes\ to\ the\ CUSO\ rule\ at\ this\ time,\ the\ Board\ solicits\ comment\ on\ the\ issue\ of\ consolidated\ opinion\ audits\ for\ CUSOs\ that\ are\ majority\ owned\ by\ a\ single\ FCU.\ The\ CUSO\ rule\ currently\ requires\ an\ FCU\ to\ obtain\ a\ written\ commitment\ from\ any\ CUSO\ in\ which\ it\ has\ made\ an\ investment\ or\ to\ which\ it\ has\ made\ a\ loan\ that\ the\ CUSO\ will\ secure\ an\ annual\ opinion\ audit\ of\ its\ financial\ statements,\ performed\ in\ accordance\ with\ generally\ accepted\ auditing\ standards\ by\ a\ licensed,\ certified\ public\ accountant.\ 12\ C.F.R.\ 712.3(d)(2).\ In\ 2005,\ the\ Board\ amended\ this\ rule\ to\ allow\ an\ FCU\ owning\ 100%\ of\ a\ CUSO\ to\ comply\ with\ the\ audit\ requirement\ by\ conducting\ a\ consolidated\ audit\ in\ which\ the\ CUSO's\ financial\ data\ is\ included\ in\ the\ consolidated\ statement\ of\ financial\ condition.\ 70\ FR\ 55227\ (September\ 21,\ 2005).\ At\ that\ time,\ the\ Board\ considered\ and\ rejected\ the\ idea\ of\ permitting\ consolidated\ audits\ where\ the\ CUSO\ is\ majority\ owned,\ rather\ than\ wholly\ owned,\ by\ an\ FCU.\ Several\ commenters\ urged\ the\ Board\ to\ reconsider\ this\ approach,\ citing\ in\ support\ of\ their\ view\ the\ fact\ that\ consolidated\ audits\ for\ majority\ owned\ subsidiaries\ are\ permissible\ under\ generally\ accepted\ accounting\ principles.\ The\ Board's\ determination\ was\ based\ principally\ on\ concern\ for\ potential\ minority\ investors\ in\ a\ CUSO\ that\ is\ majority\ owned\ by\ one\ FCU,\ who\ might\ not\ be\ able\ to\ review\ a\ separate\ opinion\ audit\ before\ making\ an\ investment.\ The\ Board\ solicits\ comment\ from\ the\ public\ on\ whether\ to\ revise\ this\ rule\ to\ permit\ a\ majority\ owner\ to\ obtain\ only\ a\ consolidated\ audit\ and,\ if\ so,\ how\ the\ interests\ of\ minority\ investors\ can\ be\ protected.\ \ ^

^The\ Board\ believes\ these\ proposed\ changes\ are\ consistent\ with\ its\ ongoing\ efforts\ to\ reduce\ regulatory\ burden\ while\ assuring\ that\ credit\ unions\ operate\ in\ a\ safe\ and\ sound\ manner.\ The\ Board\ welcomes\ comment\ on\ all\ aspects\ of\ the\ proposal.\ \ ^

**^REGULATORY\ PROCEDURES^**

^[Regulatory\ Flexibility\ Act]{.underline}^

^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\ this\ proposed\ rule,\ if\ adopted,\ 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}^

### ^NCUA\ recognizes\ that\ the\ proposal\ to\ require\ FISCUs\ to\ comply\ with\ certain\ provisions\ of\ the\ CUSO\ rule\ constitutes\ an\ information\ collection\ within\ the\ meaning\ of\ the\ Paperwork\ Reduction\ Act\ (PRA).\ 44\ U.S.C.\ 3507(d).\ The\ aspects\ of\ the\ proposed\ amendments\ that\ raise\ PRA\ issues\ include\ the\ requirement\ that\ a\ FISCU\ obtain\ a\ written\ agreement\ with\ its\ CUSO\ providing\ NCUA\ and\ the\ relevant\ SSA\ with\ access\ to\ the\ CUSO's\ books\ and\ records\ and\ the\ requirement\ that\ it\ take\ steps\ to\ assure\ that\ it\ maintains\ a\ corporate\ identity\ separate\ from\ its\ CUSO.\ \ ^

^NCUA\ estimates\ it\ will\ take\ an\ average\ of\ two\ hours\ for\ a\ credit\ union\ to\ implement\ an\ agreement\ with\ its\ CUSO\ regarding\ access\ to\ information,\ and\ an\ additional\ two\ hours\ to\ obtain\ a\ written\ legal\ opinion.\ All\ FISCUs\ with\ an\ investment\ in\ or\ loan\ to\ a\ CUSO\ will\ need\ to\ comply\ with\ these\ requirements\ as\ an\ initial\ matter;\ however,\ thereafter,\ the\ rule's\ impact\ will\ only\ be\ on\ those\ FISCUs\ that\ enter\ into\ a\ new\ arrangement\ with\ a\ CUSO.\ According\ to\ NCUA\ records,\ of\ the\ 3,065\ FISCUs\ that\ filed\ a\ form\ 5300\ call\ report\ with\ NCUA\ as\ of\ December\ 31,\ 2007,\ 1,044\ reported\ at\ least\ one\ interest\ in\ a\ CUSO.\ These\ FISCUs\ reported\ a\ total\ CUSO\ count\ of\ 2,219.\ At\ year-end\ 2006,\ there\ were\ 3,173\ FISCUs,\ of\ which\ 1,050\ reported\ at\ least\ one\ interest\ in\ a\ CUSO.\ These\ FISCUs\ reported\ a\ total\ CUSO\ count\ of\ 2,183.\ For\ year-end\ 2005,\ there\ were\ 3,302\ FISCUs,\ of\ which\ 1,017\ reported\ at\ least\ one\ CUSO\ investment.\ These\ FISCUs\ reported\ a\ total\ CUSO\ count\ of\ 2,035.\ The\ three-year\ average\ suggests\ that,\ despite\ declining\ numbers\ of\ credit\ unions\ (due\ mainly\ to\ merger\ and\ consolidation\ activity),\ FISCUs\ make\ approximately\ 92\ new\ investments\ in\ CUSOs\ each\ year.\ Using\ these\ estimates,\ information\ collection\ obligations\ imposed\ by\ the\ rule,\ on\ an\ annual\ basis,\ are\ analyzed\ below:\ ^

^Initial\ Compliance\ by\ All\ FISCUs:^

^[a.\ ]{.underline}^*^[Written\ agreement\ relating\ to\ access\ to\ information.\ ]{.underline}^*

^Total\ FISCU\ investment\ interests\ ^

^reported\ in\ CUSOs,\ 12/31/2007:\ \ \ \ \ \ 2,219\ \ ^

^Frequency\ of\ response:\ \ \ \ \ \ \ one-time^

^Initial\ hour\ burden:\ \ \ \ \ \ \ \ 2^

^2\ hours\ x\ 2,219\ =\ 4,438^

^b.\ ^*^[Written]{.underline}^^[\ legal\ opinion.]{.underline}^*

^Number\ of\ respondents;\ \ \ \ \ \ \ 2,219^

^Frequency\ of\ response:\ \ \ \ \ \ \ one-time^

^Initial\ hour\ burden:\ \ \ \ \ \ \ \ 2^

^2\ hours\ x\ 2,219\ =\ 4,438^

^Annual\ Compliance\ Obligations\ ^

^a.\ ^*^Written\ agreement\ relating\ to\ ^^corporate\ separateness^^\ and\ access\ to\ information.\ ^*

^Average\ number\ of\ new\ FISCU\ investment\ interests\ ^

^reported\ in\ CUSOs:\ \ \ \ \ \ \ \ 92^

^Frequency\ of\ response:\ \ \ \ \ \ \ annually^

^Annual\ hour\ burden:\ \ \ \ \ \ \ 2^

^2\ hours\ x\ 92\ =\ 184^

^b.\ Written^*^\ legal\ opinion.^*

^Number\ of\ respondents,\ i.e.,\ requiring\ ^

^new\ or\ updated\ opinion\ per\ year:\ \ \ \ \ \ 92^

^Frequency\ of\ response:\ \ \ \ \ \ \ annually^

^Annual\ hour\ burden:\ \ \ \ \ \ \ 2^

^2\ hours\ x\ 92\ =\ 184^

^Two\ other\ aspects\ of\ the\ proposal\ raise\ PRA\ issues.\ FCUs\ with\ an\ investment\ in\ or\ loan\ to\ a\ CUSO\ will\ need\ to\ revise\ the\ current\ agreement\ they\ have\ with\ their\ CUSO\ to\ provide\ for\ access\ to\ books\ and\ records\ by\ any\ SSA,\ if\ the\ CUSO\ also\ has\ a\ loan\ or\ investment\ from\ a\ FISCU\ or\ provides\ any\ contractual\ services\ to\ a\ FISCU.\ According\ to\ NCUA\ records,\ of\ the\ 5,036\ FCUs\ that\ filed\ a\ form\ 5300\ call\ report\ with\ NCUA\ as\ of\ December\ 31,\ 2007,\ 1,112\ reported\ at\ least\ one\ interest\ in\ a\ CUSO;\ a\ total\ of\ 2,190\ CUSO\ interests\ was\ reported.\ For\ purposes\ of\ this\ analysis,\ NCUA\ estimates\ that\ this\ requirement\ will\ affect\ one-half\ of\ all\ CUSOs\ owned\ by\ FCUs.\ Using\ these\ estimates,\ information\ collection\ obligations\ imposed\ by\ this\ aspect\ of\ the\ rule,\ on\ an\ annual\ basis,\ are\ analyzed\ below:\ ^

*^[Changing\ the\ w]{.underline}^^[ritten\ agreement\ relating\ to\ access\ to\ information.\ ]{.underline}^*

^One-half\ of\ total\ FCU\ investment\ interests\ ^

^reported\ in\ CUSOs,\ 12/31/2007:\ \ \ \ \ \ 1,095\ \ ^

^Frequency\ of\ response:\ \ \ \ \ \ \ one-time^

^Initial\ hour\ burden:\ \ \ \ \ \ \ \ 1^

^1\ hour\ x\ 1,095\ =\ 1,095^

^The\ third\ aspect\ of\ the\ proposed\ changes\ that\ involves\ PRA\ consideration\ is\ the\ requirement\ pertaining\ to\ recapitalizing\ CUSOs\ that\ have\ become\ insolvent.\ The\ proposed\ rule\ would\ require\ certain\ credit\ unions\ to\ seek\ and\ obtain\ prior\ approval\ from\ NCUA\ before\ making\ an\ investment\ to\ recapitalize\ an\ insolvent\ CUSO.\ According\ to\ NCUA's\ records,\ as\ of\ December\ 31,\ 2007,\ there\ were\ only\ 36\ FCUs\ that\ were\ less\ than\ adequately\ capitalized\ (i.e.,\ net\ worth\ of\ under\ 6%).\ According\ to\ year-end\ 2007\ call\ report\ data,\ none\ of\ these\ FCUs\ currently\ has\ any\ interest\ in\ any\ CUSOs.\ As\ of\ December\ 31,\ 2007,\ there\ were\ no\ FCUs\ at\ or\ near\ the\ less\ than\ adequately\ capitalized\ threshold\ reporting\ an\ investment\ in\ an\ insolvent\ CUSO.\ NCUA\ estimates\ it\ would\ take\ an\ FCU\ approximately\ two\ hours\ to\ complete\ a\ request\ for\ NCUA's\ prior\ approval\ for\ an\ investment\ to\ recapitalize\ an\ insolvent\ CUSO.\ \ ^

*^[Obtaining\ NCUA\ prior\ approval:]{.underline}^*

^Total\ FCUs\ less\ than\ adequately^

^Capitalized,\ 12/31/2007:\ \ \ \ \ \ 36^

^Frequency\ of\ response:\ \ \ \ \ \ one-time^

^Initial\ hour\ burden:\ \ \ \ \ \ \ 2\ ^

^2\ hours\ x\ 36\ =\ 72\ \ \ \ ^

^In\ accordance\ with\ the\ requirements\ of\ the\ PRA,\ NCUA\ intends\ to\ obtain\ a\ modification\ of\ its\ current\ OMB\ Control\ Number,\ 3133-0149,\ to\ support\ these\ proposed\ changes.\ Simultaneous\ with\ its\ publication\ of\ this\ proposed\ amendment\ to\ Part\ 712,\ NCUA\ is\ submitting\ a\ copy\ of\ the\ proposed\ rule\ to\ the\ Office\ of\ Management\ and\ Budget\ (OMB)\ along\ with\ an\ application\ for\ a\ modification\ of\ the\ OMB\ Control\ Number.^

^The\ PRA\ and\ OMB\ regulations\ require\ that\ the\ public\ be\ provided\ an\ opportunity\ to\ comment\ on\ the\ paperwork\ requirements,\ including\ an\ agency's\ estimate\ of\ the\ burden\ of\ the\ paperwork\ requirements.\ The\ NCUA\ Board\ invites\ comment\ on:\ (1)\ whether\ the\ paperwork\ requirements\ are\ necessary;\ (2)\ the\ accuracy\ of\ NCUA's\ estimates\ on\ the\ burden\ of\ the\ paperwork\ requirements;\ (3)\ ways\ to\ enhance\ the\ quality,\ utility,\ and\ clarity\ of\ the\ paperwork\ requirements;\ and\ (4)\ ways\ to\ minimize\ the\ burden\ of\ the\ paperwork\ requirements.\ ^

### ^Comments\ should\ be\ sent\ to:\ OMB\ Reports\ Management\ Branch,\ New\ Executive\ Office\ Building,\ Room\ 10202,\ Washington,\ DC\ 20503;\ Attention:\ Mark\ Menchik,\ Desk\ Officer\ for\ NCUA.\ Please\ send\ NCUA\ a\ copy\ of\ any\ comments\ submitted\ to\ OMB.^

[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 bulk of this proposed rule, if adopted,
will apply only to federally-chartered credit unions. The proposal also
calls for the application of certain aspects of the CUSO rule to 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 any event, the proposed 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]{.underline}^

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).

# ^[Agency\ Regulatory\ Goal]{.underline}^

NCUA's goal is to promulgate clear and understandable regulations that
impose minimal regulatory burden. We request your comments on whether
the proposed rule is understandable and minimally intrusive if
implemented as proposed.

**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 April 17, 2008.

^\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_^

^Mary\ F.\ Rupp^

^Secretary\ of\ the\ Board^

^Accordingly,\ NCUA\ proposes\ to\ amend\ 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\ deleting\ the\ period\ at\ the\ end\ of\ the\ sentence\ and\ adding\ the\ phrase^

^";\ ^*^[provided,\ however,]{.underline}^*^\ that\ with\ respect\ to\ services\ provided\ under\ paragraph\ (a)\ and\ (g)\ of\ §712.5,\ 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\ \[INSERT\ DATE\ THAT\ IS\ 180\ DAYS\ FOLLOWING\ PUBLICATION\ OF\ THE\ FINAL\ RULE\ IN\ THE\ FEDERAL\ REGISTER\].^

^5.\ Amend\ §712.5\ as\ follows:^

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

^b.\ Amend\ paragraph\ (c)\ by\ deleting\ 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;"^

^c.\ Amend\ paragraph\ (d)\ by\ deleting\ 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;"^

^d.\ Redesignate\ paragraphs\ (e)\ through\ (r)\ as\ paragraphs\ (g)\ through\ (t),\ respectively,\ and\ add\ new\ paragraphs\ (e)\ and\ (f).^

^e.\ Under\ the\ newly\ redesignated\ paragraphs\ (h),\ (j)\ and\ (l)\ add\ new\ paragraphs\ (h)(7),\ (j)(4),\ and\ (l)(4)\ through\ (l)(6);\ ^

^f.\ Amend\ the\ newly\ redesignated\ paragraph\ (p)\ by\ deleting\ 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;"^

^The\ revisions\ to\ read\ as\ follows:^

**^§^^712.5^^\ What\ a^^ctivities\ and\ services\ are\ preapproved\ for\ CUSOs?^**

^\*\ \*\ \*\ \*\ \*^

^(b)\ \*\ \*\ \*^

^(11)\ Employee\ leasing\ services^

^\*\ \*\ \*\ \*\ \*^

^(e)\ Credit\ card\ loan\ origination;^

^(f)\ Payroll\ processing\ services;\ ^

^\*\ \*\ \*\ \*\ \*\ ^

^\ (h)\ \*\ \*\ \*^

^(7)\ Business\ counseling\ and\ consultant\ services;^

^\*\ \*\ \*\ \*\ \*^

^(j)\ \*\ \*\ \*^

^(4)\ Real\ estate\ settlement\ services;^

^\*\ \*\ \*\ \*\ \*^

^(l)\ \*\ \*\ \*^

^(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\ turned\ down\ by\ the\ credit\ union;^

**^§^^712.7\ \[Removed\ and\ Reserved\]^**

^6.\ Remove\ and\ reserve\ §712.7.^

**^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\ \[INSERT\ DATE\ THAT\ IS\ 180\ DAYS\ FOLLOWING\ PUBLICATION\ OF\ THE\ FINAL\ RULE\ IN\ THE\ FEDERAL\ REGISTER\].\ ^