R337-4. Establishment of "Credit Union Service Organizations", R337. Financial Institutions, Credit Unions, Utah Administrative Code

Utah Administrative Code (Current through November 1, 2019)

R337. Financial Institutions, Credit Unions

R337-4. Establishment of "Credit Union Service Organizations"

R337-4-1. Authority, Scope, and Purpose

Latest version.

(1) This rule is issued pursuant to Sections 7-1-301(15) and 7-1-505 and construes and applies to Sections 7-9-5(21) and 7-9-5(34).

(2) This rule applies to all state-chartered credit unions.

(3) The purpose of this rule is to define "credit union service organizations", outline the procedures and requirements for establishing these organizations, and establish rules governing the affairs of the organizations.

R337-4-2. Definitions

Latest version.

(1) "Capital and surplus" means shares, deposits, reserves, and undivided earnings.

(2) "Commissioner" means the Commissioner of Financial Institutions.

(3) "Credit union service organization" means an organization owned by one or more credit unions which provides any of the following services:

(a) Checking and currency services:

(i) Check cashing;

(ii) Coin and currency services, and

(iii)Money order, savings bonds, travelers checks, and purchase and sale of U.S. Mint commemorative coins services;

(b) Clerical, professional and management services:

(i) Accounting services;

(ii) Courier services;

(iii)Credit analysis;

(iv) Facsimile transmissions and copying services;

(v) Internal audits for credit unions;

(vi) Locator services;

(vii)Management and personnel training and support;

(viii)Marketing services;

(ix)Research services; and

(X) Supervisory committee audits;

(d) Electronic transaction services;

(i) Automated teller machines (ATM) services;

(ii) Credit card and debit card services;

(iii)Data processing;

(iv) Electronic fund transfer (EFT) services;

(v) Electronic income tax filing;

(vi) Payment item processing;

(vii)Wire transfer services; and

(viii)Cyber financial services;

(e) Financial counseling services:

(i) Developing and administering Individual Retirement Accounts (IRA), Keogh, deferred compensation, and other personnel benefit plans;

(ii) Estate planning;

(iii)Financial planning and counseling;

(iv) Income tax preparation;

(v) Investment counseling; and

(vi) Retirement counseling;

(f) Fixed asset services:

(i) Management, development, sale, or lease of fixed assets; and

(ii) Sale, lease, or servicing of computer hardware or software;

(g) Insurance brokerage or agency:

(i) Agency for sale of insurance;

(ii) Provision of vehicle warranty programs; and

(iii) Provision of group purchasing programs;

(h) Leasing:

(i) Personal property; and

(ii) Real estate leasing of excess credit union service organization property;

(i) Loan support services:

(i) Debt collection services;

(ii) Loan processing, servicing, and sales; and

(iii)Sale of repossessed collateral;

(j) Loans and extensions of credit;

(k) Member business loans;

(l) Record retention, security and disaster recovery services:

(i) Alarm-monitoring and other security services;

(ii) Disaster recovery services;

(iii)Microfilm, microfiche, optical and electronic imaging, CD-ROM data storage and retrieval services;

(iv) Provision of forms and supplies; and

(v) Record retention and storage;

(m) Securities brokerage services;

(n) Shared credit union branch (service center) operations;

(o) Student loan origination;

(p) Travel agency services;

(q) Trust and trust-related services:

(i) Acting as administrator for prepaid legal service plans;

(ii) Acting as trustee, guardian, conservator, estate administrator, or in any other fiduciary capacity;

(iii)Trust services; and

(r) credit union service organization investments in non-credit union service organization service providers: In connection with providing a permissible service, a credit union service organization may invest in a non-credit union service organization service provider. The amount of the credit union service organization's investment is limited to the amount necessary to participate in the service provider, or a greater amount if necessary to receive a reduced price for goods or services.

(4) "Loans and extensions of credit" means any direct or indirect advance of funds in any manner whatsoever to a member, that is made on the basis of any obligation of that member to repay the funds, or repayable from specific property pledged by or on behalf of a member. "Loans and extensions of credit" includes:

(a) A contractual commitment to advance funds;

(b) An acquisition by discount, purchase, exchange, or otherwise of any note, draft, or other evidence of indebtedness upon which a member may be liable as maker, drawer, endorser, guarantor, or surety;

(5) "Loans and extensions of credit" does not include:

(a) An endorsement or guarantee for the protection of a credit union and credit union service organization of any loan or other asset previously acquired by the credit union service organization in good faith or any indebtedness to a credit union and the credit union service organization for the purpose of protecting the credit union and the credit union service organization against loss or of giving financial assistance to it;

(b) The purchase of investment grade securities subject to a repurchase agreement in which the purchasing credit union has a perfected security interest, or where the securities are purchased from the state or any political subdivision thereof;

(c) Loans or extensions of credit which have become unenforceable by reason of discharge in bankruptcy or are no longer legally enforceable for other reasons.

(6) "Member" means a member of a stockholder credit union.

(7) "Participation" means the purchase or sale by a lender of a loan or part of a loan under circumstances in which the acquiring institution;

(a) Has no formal or direct role in establishing the terms and conditions binding the borrower; or

(b) is not a signatory of the loan agreement binding the borrower.

(8) "Participation agreement" means an agreement between the lead financial institution and the participant financial institution spelling out in detail the terms, conditions, and understandings between the parties to a loan participation.

(9) "Recourse" means an oral or written agreement whereby a selling institution of a loan or participation in a loan agrees to repurchase in whole or in part upon request of the purchaser or the seller.

(10) "Well capitalized" means "well capitalized" as defined in 12 U.S.C. Sec. 1790d(c)(1).

R337-4-3. Establishment and Approval of a Credit Union Service Organization

Latest version.

(1) A credit union by action of its board of directors may establish or invest in, or both, a credit union service organization authorized to engage in the services specified in this rule if:

(a) The credit union has capital and surplus of $500,000 or more and;

(b) The credit union meets the net worth classification of "well capitalized".

(2) The total investments in, or loans to all service organizations shall not exceed 5% of the capital and surplus of the credit union.

(3) The services performed by the credit union service organization are limited primarily to stockholder credit unions and their members or members of credit unions contracting with the credit union service organization. However, for member business loans and loans and extensions of credit, the credit union service organization shall only serve members.

(4) To establish a credit union service organization, a credit union shall file an application with the commissioner identifying the services the credit union service organization will provide.

The application shall contain pro forma statements or other information sufficient to determine:

(a) The benefits the credit union service organization will create for the credit union or its members; and

(b) That the investment will not represent an unreasonable risk to the safety and soundness of the credit union.

(5) The commissioner shall approve or disapprove the application within 30 days after accepting it as complete. If the commissioner does not approve or disapprove an application within this time, it is considered approved. A credit union service organization approved prior to the effective date of the 2002 rule change need not reapply for authorization.

(6) A credit union may not change the type of services engaged in by the credit union service organization or engage in new services without providing 30 days written notice to the commissioner.

(7) The commissioner may at any time, based upon supervisory, legal, or safety and soundness reasons, limit the services engaged in by the credit union service organization.

(8) The credit union service organization shall comply with all relevant and applicable state and local laws and ordinances for the specific services offered.

(9) A credit union may establish or invest in, or both, a credit union service organization to provide services not set forth in this rule upon approval of the commissioner obtained pursuant to R337-4-3(4) and (5).

(10) A credit union service organization may provide services not set forth in this rule upon approval of the commissioner obtained pursuant to R337-4-3(4) and (5).

R337-4-4. Examination of Credit Union Service Organizations by Commissioner or Supervisor

Latest version.

(1) The commissioner or the supervisor of credit unions shall visit and examine, or cause to be visited and examined, every credit union service organization as the commissioner considers necessary or advisable.

(2) At every examination of a credit union service organization, careful inquiry shall be made as to:

(a) the condition and resources of the credit union service organization examined;

(b) the mode of conducting and managing its affairs;

(d) the investment and disposition of its funds;

(e) whether or not it is violating any provision of law relating to the credit union service organization or the business of the credit union service organization examined;

(f) whether or not it is complying with its articles of incorporation and bylaws; and

(g) such other matters as the commissioner may prescribe.

(3) The commissioner may, in the commissioner's discretion, accept examinations of any credit union service organization which are made by federal examiners or examiners from other states having jurisdiction over that credit union service organization in lieu of any examination required under the laws of this state.

R337-4-5. Prohibited Member Business Loans

Latest version.

A credit union service organization may not extend a member business loan to the following individuals of the credit union service organization or credit unions which invest in or lend to the credit union service organization; or in entities in which these persons have control:

(1) board members;

(2) executive officers; and

(3) appointed committee members.

R337-4-6. Written Member Business Loan Policies

Latest version.

A credit union service organization offering member business loans shall adopt specific written loan policies and review them at least annually. The credit union service organization shall establish written credit policies, loan security requirements, loan investment, personnel, and collection policies. At a minimum, the policies shall address the following:

(1) the types of member business loans to be made;

(2) the qualification and experience of personnel (minimum of two (2) years) involved in making and administering member business loans;

(3) a requirement to analyze and document the ability of a borrower to repay the loan;

(4) receipt and periodic updating of financial statements and other documentation, including tax returns;

(5) a requirement for sufficient documentation supporting each request to extend credit, or increase an existing loan or line of credit (except where the credit union service organization finds that the documentation requirements are not generally available for a particular type of member business loan and states the reasons for those findings in the credit union's written policies). At a minimum, the documentation shall include the following:

(a) balance sheet;

(b) cash flow analysis;

(d) tax data;

(e) analysis of leveraging; and

(f) comparison with industry average or similar analysis;

(6) the collateral requirements shall include:

(a) loan-to-value ratios;

(b) determination of value;

(d) steps to secure various types of collateral; and

(e) how often the credit union service organization will reevaluate the value and marketability of collateral;

(7) the interest rates and maturities of member business loans; and

(8) general loan procedures which include:

(a) loan monitoring;

(b) servicing and follow-up; and

R337-4-7. Allowance Account for Loan Losses

Latest version.

A credit union service organization that makes member business loans is required to establish and maintain an allowance account for loan losses as set forth in Rule R337-5-3.

R337-4-8. Purchase and Sale of Loans and Participations in Loans

Latest version.

(1) A credit union service organization shall have authority to make loan participation arrangements with other credit unions, credit union service organizations, or financial organizations in accordance with its written policies, if the credit union service organization that originates a loan for which participation arrangements are made retains an interest of at least 10% of the loan.

(2) A credit union service organization shall comply with Rule R331-12.

(3) The limitations set forth in Section 7-9-20(7)(f) apply to loan participations purchased or sold by a credit union service organization.

R337-4-9. Loan Limitations

Latest version.

(1) The individual and aggregate loan limitations set forth in Section 7-9-20 shall apply to all loans and extensions of credit and member business loans made by a credit union and its wholly owned credit union service organization as if they were one entity.

(a) A credit union service organization may extend a member business loan to a person if the person is a business entity, and at least one individual having a controlling interest in that business entity has been a member of the credit union for at least six months prior to the date of the extension of the member business loan; or

(b) A credit union service organization may extend a member business loan to a person if the person is an individual, and the individual is a member of the credit union for at least six months prior to the date of the extension of the member business loan.

(2) The individual and aggregate loan limitations for a credit union service organization that is a non wholly owned subsidiary of a credit union shall be the same as set forth in Section 7-9-20. The limitation shall be determined by allocating loans made by the non wholly owned credit union service organization to its member credit unions on a pro-rata ownership basis.

(a) A credit union service organization that is a non wholly owned subsidiary of a credit union may extend a member business loan to a person if the person is a business entity, and at least one or more of the individuals having a controlling interest in that business entity has been a member of each of the credit unions participating in the credit union service organization for at least six months prior to the date of the extension of the member business loan; or

(b) A credit union service organization that is a non wholly owned subsidiary of a credit union may extend a member business loan to a person if the person is an individual, and the individual is a member of each of the credit unions participating in the credit union service organization for at least six months prior to the date of the extension of the member business loan.

(3) Loan limitations shall be determined using the last quarterly report of condition filed with the Department.

R337-4-10. Trust Business

Latest version.

(1) Only a credit union service organization that is a wholly owned subsidiary of a single credit union may seek authorization to become a trust company and engage in trust business in this state. A wholly owned credit union service organization seeking to become a trust company shall file an application as provided in Section 7-5-3 with the commissioner in the manner provided in Section 7-1-704, and shall pay the fee prescribed in Section 7-1-401(6).

(2) In addition to the criteria set forth in Section 7-5-3(2) the wholly owned credit union service organization shall have and maintain a minimum capital level of two million dollars ($2,000,000). Capital shall be determined in accordance with Generally Accepted Accounting Principles (GAAP).

(3) Wholly owned credit union service organizations authorized to engage in trust business in this state shall comply with the requirements of Section 7-5-1 et. al.

(4) The safety and soundness examination of a wholly owned credit union service organization engaged in trust business may be performed in conjunction with the safety and soundness examination of the credit union. A trust examination fee shall be assessed in accordance with Section 7-1-401(2).

(5) Any loss, liability or contingent liability of a wholly owned credit union service organization operating as a trust company shall be offset first against the capital of the wholly owned credit union service organization and then against the capital of the credit union.

(6) A wholly owned credit union service organization that engages in trust business shall maintain its books according to GAAP. A wholly owned credit union service organization that engages in trust business shall annually make or cause to be made an audit of the credit union service organization's books by a licensed certified public accountant.