Administration of a Loan Program

John R. Edwards, President
Southern New England Federal Credit Union
P.O. Box 9625
New Haven, CT 06535

Re: Administration of a Loan Program(Your February 13, 1996, Letter to Chairman D'Amours)

Dear Mr. Edwards:

NCUA Chairman D'Amours has asked me to reconsider the opinion we gave to NCUA Region I (Albany) regarding the ability of your credit union to act as the administrator of a loan fund on behalf of your sponsor, Southern New England Telephone Company (SNET). After further review our opinion is unchanged. This program is not permissible because federal credit union's (FCU's) do not have the authority to underwrite and disperse loans on behalf of third parties.

It is my understanding that SNET plans to become a member of the FCU with a share account of $100,000. These funds would be used to issue loans of between $1000 to $5000 to SNET's employees, some of whom are not FCU members. It is unclear from the submitted documents whether the underwriting standards and loan documentation would be provided by SNET, the FCU or some combination. In any event, the FCU would disburse the funds to these employees and administer the loan program. You state that SNET's loans would be separate from the FCU's loans as advised by your outside accountants.

FCUs can only engage in activities that are either expressly authorized by the FCU Act or are incidental to an express power. 12 U.S.C. §1757(17). NCUA has previously stated that an FCU may, within its incidental authority, receive shares from a member and make disbursement of funds to third parties. 12 U.S.C. §1757(6). However, your proposed program goes beyond mere disbursement of funds to third parties. Your program instead requires FCU personnel to manage a non credit union loan program. This action is impermissible since FCUs do not have the general authority to provide service to nonmembers or administer a loan program for its sponsor. In support of your proposal, you cite the authority of FCUs to provide credit cards to a sponsor's John R. Edwards employees. However, NCUA views an employee credit card program as a loan to the sponsor since the loans are for the business related activities of the member/sponsor and the member/sponsor is ultimately responsible for repayment of the credit card loan. Therefore, I am unfortunately unable to give you a positive response to your request for NCUA to approve your program.