December 11, 2001
TO: Senior Examiner Brennan
FROM: Sharon Cherry, Associate Attorney - Legal Division
RE: Cornell FingerLakes Credit Union - Application to continue the operation of its auto-leasing program by its CUSO
Cornell FingerLakes Credit Union (the "Credit Union") on behalf of CFCU Financial Services Inc. ("CFS"), its credit union service origination ("CUSO"), has requested permission to resume its practice of offering automobile lease financing to persons who are not members of the Credit Union.
As will be discussed more fully below, the Legal Division is of the opinion that the Credit Union's request may be approved by the Superintendent in accordance with the provisions of Part 97.3(g) of the General Regulations of the Banking Board which authorizes the Superintendent to approve any activity for a CUSO that is not specifically listed in Part 97.3.
CFS was formed to qualify as a CUSO under federal law pursuant to then 12 CFR section 701.27. In or about April 1996, CFS began operating a direct motor vehicle leasing program. Under this program, CFS is named as lessor on the lease. Leases to Credit Union members are assigned to the Credit Union on a pre-approved credit basis. Non-member leases are held by CFS. On December 1, 1997 the Credit Union converted from a federal to a state charter. As the result of a Banking Department examination in March 1998, the Department requested that CFS cease financing auto leases to non-Credit Union members. The Department's request was apparently based on a reading of Part 97.3(d) of the General Regulations of the Banking Board, which provides that a credit union organization may engage in the financing of leases of personal property to members.
The Credit Union is now requesting permission to continue the operation of its auto leasing program in the same manner as that program operated prior to the Credit Union's conversion from a federal to a state charter. The Credit Union indicates that the automobile leasing program was entirely funded by the Credit Union prior to the Credit Union's conversion to a state charter. It also states that the ability to offer leases to non-members is what made the program successful. According to the Credit Union, when only members were allowed to obtain financing, dealerships avoided referrals of lease financing to the Credit Union because dealers did not want to become involved with Credit Union membership issues and risk potential lease financing being rejected and an auto sale lost because of a membership consideration. Accordingly, the Credit Union states that leasing to non-members is an incidental necessity and forms only a small portion of the leasing program's activities.
Section 454(19) of the Banking Law provides that, subject to Banking Board regulations, a credit union may invest its funds in and make loans to credit union organizations. A credit union organization is defined as "any organization established primarily to serve the needs of its member state and federal credit unions, and whose business relates to the daily operations of the credit unions it serves." This same definition of credit union organization is contained in Part 97 of the General Regulations of the Banking Board.
CFS's proposal to finance leases to non-Credit Union members may be approved by the Superintendent in accordance with Part 97.3(g) which authorizes the Superintendent to approve any activity for a credit union organization to engage in that is not specifically listed in Part 97.3. This provision authorizing other activities does not expressly limit those activities to members. However, pursuant to Part 97.2 the activities of the CUSO must primarily serve members of the Credit Union.
Since the National Credit Union Administration ("NCUA") has a similar customer base requirement for CUSO's servicing the needs of federal credit unions we looked to see how it handles this issue. Specifically 12 C.F.R. section 712.3(b) provides that a federal credit union can invest in or loan to a CUSO only if the CUSO primarily serves credit unions, its membership or the membership of credit unions contracting with the CUSO. NCUA's rules and regulations do not define "primarily serves."
I spoke with Larry Vanderveen, Supervision Analyst with the NCUA in Albany who advised me that the NCUA determines the issue of "primarily serve" on a case by case basis by looking at the totality of all transactions. The NCUA reviews a variety of factors, rather than choosing just one standard, in order to determine if the CUSO is primarily serving credit union members. This position is supported by a 1997 NCUA legal opinion (copy attached) which states the following: "In the past the definition of the term "primarily" has depended upon several variables, such as: type of business(es) provided; number of affiliate members served; gross or net revenues derived from affiliated members; amount of affiliated members assets under management; number of policies sold to affiliated members; number of services provided to affiliated members; and availability/access of services to affiliated members."
The Legal Division concludes that, in accordance with Part 97.3(g), the Superintendent may approve the Credit Union's request that its CUSO be allowed to offer automobile lease financing to non-members of the Credit Union. (We would note that a similar conclusion was reached by the Division in 1998). Such approval should be conditioned upon a requirement that the majority of the financing will always be made to members of the Credit Union. In order to determine that this requirement is being met, the factors to be reviewed by your division should at least include the total number of leases originated and the dollar amount of such leases to both members and non-members. In this regard, CFS indicated that as of August 31, 2001 the number of non-member leases had been reduced to [ ] accounts totaling $[ ] and CFS holds [ ] member leases totaling $[ ]. CFS has stated that in the event its request to resume financing non-member leases is approved, the majority of auto leases either in number of accounts or total dollar amount will be held by Credit Union members. We also recommend that the approval be limited to so-called "finance leases."