Opinion #5248

The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)

STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5248

December 9, 1977

CREDIT UNIONS:

Authority to make an internationally-recognized credit card available to members.

A credit union may offer a charge card service to its members.

A credit union may join and pay fees to an international charge card system.

A credit union may join and pay fees to an organization created to assist credit unions in processing credit card transactions and provide other services incidental to the offering of a credit card service to credit union members.

A credit union may permit its members to receive a cash advance by use of a credit card at a location apart from the credit union.

A credit union may make cash advances to international charge cardholders who are members of other credit unions, but may not make cash advances to individuals whose international charge cards are issued by a bank or savings and loan association or a credit union which is not eligible to receive a loan from the disbursing credit union.

A credit union may establish an account in a central credit union from which member charges will be deducted and paid to the collecting institutions.

A credit union may receive reimbursement in the form of 'intercharge fees' charged to merchants for their participation in the credit card system.

Richard J. Francis

Commissioner

Financial Institutions Bureau

Department of Commerce

Law Building

Lansing, Michigan 48913

You have requested my opinion on whether credit unions may offer to their members credit cards for the purpose of purchasing consumer goods and receiving cash advances in a manner similar to the credit cards presently being offered by banks. The service contemplates providing interested members with an internationally recognized credit card which is accepted by participating merchants in lieu of cash for the purchase of goods. Upon purchasing a product, the member will present the card and will execute a sales draft, which will in turn be presented by a merchant to his bank. The draft is then processed through a clearing mechanism, after which it is presented to the credit union for payment. In a similar procedure, a member may secure cash advances by presenting the card to a participating financial institution.

In addition, you advise that a non-profit, non-stock membership organization has been formed, known as Credit Union Card Services, Inc. (CUCS). This organization will be owned by credit unions participating in the charge card system which elect to avail themselves of the CUCS services. By contractual arrangement, CUCS will provide a collective endpoint that will interface participating credit unions with the international charge card system. In addition, it will provide data processing, computer, legal, administrative, promotional, marketing, training and security services. Membership of a credit union in CUCS is voluntary. The credit union member-cardholders' primary relationship, however, will remain with the credit union which authorizes issuance of the charge card. The credit union alone will make the decisions which establish credit card limits for each member and which involve delinquency procedures and card reissuances.

The above program raises several issues which must be addressed. They are:

1. May a credit union chartered pursuant to the Michigan credit union act, 1925 PA 285, MCLA 490.1 et seq; MSA 23.481 et seq, offer a charge card service to its members?

2. May a credit union join and pay fees to an international charge card system.

3. May a credit union join and pay fees to an organization created to assist credit unions in processing credit card transactions and provide other services incidental to the offering of a credit card service to credit union members?

4. May a credit union permit its members to receive cash advances by use of credit cards at locations apart from the credit union?

5. May a credit union establish an account in a central credit union from which member charges will be deducted and paid to the collecting institutions?

6. May a credit union receive reimbursement in the form of 'interchange fees' charged to merchants for their participation in the credit card system?

These questions will be addressed seriatim.

1. May a credit union chartered pursuant to the Michigan credit union act, 1925 PA 285, MCLA 490.1 et seq; MSA 23.481 et seq, offer a charge card service to its members?

A credit union is a ceature of a statute and possesses only those powers expressly granted to it by the statute, as well as those powers necessarily incident to the exercise of the expressly granted powers. OAG 1969-1970, No 4650, p 49 (May 9, 1969); OAG, 1961-1962, No. 3559, p 42 (February 18, 1961).

Credit unions are expressly permitted by the Michigan credit union act, supra, to establish line of credit loans. Section 4, subsection (b) of the Act, supra, provides that a credit union shall have the power:

'To make loans to members for provident or productive purposes. With the written approval of the commissioner, a credit union may make line of credit loans. A line of credit loan is a loan approved by the credit committee under which a member from time to time may request advances and under which he may maintain an outstanding loan balance not to exceed a stated sum during a specified period of time. The commissioner shall consider the reserve position of the credit union, the performance of management, the quality of the credit union's loan portfolio, and the extent to which payroll deduction agreements are used in loan repayment in arriving at his decision whether to approve or disapprove an application to make line of credit loans. A credit union authorized to make line of credit loans shall maintain reserves as the commissioner may prescribe.'

Under the terms of the credit card arrangement in question, the user is liable to the issuing credit union for the value of goods purchased by use of the card or funds received by way of a cash advance. The member is approved for issuance of the card in the same way that a member receives approval to make a loan. Upon use of the card, the member becomes obligated to the credit union and is required to pay interest on such obligation just as if the member has secured a loan from the credit union. In substance, the credit union is advancing cash on behalf of the member, either as payment for the purchase of goods or reimbursement for a cash advance. There is no relevant distinction between this activity and the creation of a line of credit by the member with the credit union and the drawing upon that line of credit each time goods are purchased or cash received.

The courts have recently concluded that the use of a credit card is, in substance, identical to a draw on a pre-approved line of credit. In Illinois ex rel Lignoul v Continental Illinois National Bank and Trust Co of Chicago, et al, 409 F Supp 1167, 1178 (D. C. Ill, 1975), aff'd 536 F 2d 176 (CA 7, 1976), the Federal District Court stated:

'The contracts underlying the issuance of credit cards with respect to cash advances are, in effect, agreements to make small loans to the customer at some future presentation of a valid card. That agreement [by itself] does not transfer any funds and, therefore, is not a loan as urged by defendants. Nor is interest charged with the opening or establishing of a line of credit. The funds are transferred and interest commences when the CBCT disburses the [funds] . . . That is when and where the loan is made. Many holders of bank credit cards never use them to obtain funds and, therefore, never make any loans with them although the line of credit is available.' See also, Independent Bankers Association of America v Smith, 534 F2d 921 (CA DC 1976), at pp 945-948.

Related to the instant question is OAG, No 4650, supra, which held that a member having secured a loan may issue drafts on the loan proceeds drawn on the credit union and made payable to a third party. In pertinent part, that opinion, at page 51, recognized that:

'. . . there is no relevant statutory limitation on the mechanics of the loan. If, as a matter of convenience to its members, a credit union desires to utilize drafts in unstated amounts, but limited by imprint thereon to a stated maximum, which the members may at their convenience complete and endorse as payable to a stated party, the credit union is free to do so.'

Subsequent to the issuance of OAG, No. 4650, supra, section 4, subsection (n) was added to the credit union act, supra, to provide that a credit union may 'disburse from the proceeds of a loan as the borrower directs in writing.' Since the current Michigan credit union act does not provide the mechanics of a draw on a pre-approved line of credit, it is my opinion that a credit union may provide credit cards to its members for the purpose of permitting them to draw loans on a line of credit. However, I caution that any state chartered credit union intending to issue credit cards to its members must first secure the written approval of the Commissioner of the Michigan Financial Institutions Bureau, pursuant to section 4, subsection (b) of the Michigan credit union act, supra, and Administrative Code, 1974 AACS, Rule 490.21, p 7626.

2. May a credit union join and pay fees to an international charge card system?

To effectively establish a credit card system, it is necessary that the card be widely recognized and that a mechanism exist whereby merchants accepting the card may easily and quickly receive payment. While a credit union may itself establish such a charge card system, I am informed that the costs incidental to that establishment would, in almost all cases, be prohibitive. Accordingly, the credit unions intend to become a part of an existing and internationally recognized charge card system. By becoming a member of the international charge card system and paying a fee to that organization, a credit union is simply contracting out the mechanism of the charge card system. The authority for a credit union to contract out ministerial and data processing service was recognized by OAG, No. 3559, supra, p 44, as follows:

'. . . such organizations [credit unions] may have assets representing modest sums or totaling millions of dollars. Bookkeeping and data processing must be kept current if a credit union is to function property. In larger organizations, more efficient operation and less expense may result if a credit union is enabled to take advantage of trained personnel and modern equipment of other organizations.

'Based on the foregoing, a credit union would have the implied power to enter into such contracts as are necessary to its proper operation. Such contracts would be under the jurisdiction of the directors, who have the responsibility for general management under the provisions of section 9 of the act. However, only ministerial bookkeeping and data processing could be contracted for. The organizational integrity of each individual credit union would have to remain intact and could not be destroyed by such contracts. The prerogatives of loaning (vested by section 6 of the act in the credit committee), investing (vested by subsection 9(g) of the act in the board of directors), making audits (vested by section 11 of the act in the supervisory committee), control of funds and other management functions could not be contracted away. Marvin v. Solventol Chemical Products, Inc., 298 Mich. 296, 301-302.'

Modern operations of credit unions require that many services be acquired from outside sources. Since the utility of the credit card system is dependent on its commercial acceptance, it is my opinion that a credit union may contract with and pay a fee to the international charge card organization for the right to make that card available to credit union members and for the ability to have access to a nationwide charge card network with its concomitant national authorization network for credit approvals and data exchange.

In addition to the question of whether credit unions may join a national charge card system, you also inquire whether credit unions may belong to an organization which provides necessary services incidental to the maintenance of the charge card service. Such services will include the development of promotional programs, the training of staff personnel, the development of collection procedures, fraud control, data processing services, the fiscal preparation and delivery of credit cards to members, the preparation of monthly international charge card account statements, and the cash settlement on drafts. All of these services constitute ministerial activities of the type which are commonly contracted for with a specialized company. It is therefore my opinion that credit unions may, for the reasons expressed in answer to question 2, contract for these services with Credit Union Card Services, Inc.

As previously indicated herein, 'CUCS' is a membership corporation which only credit unions may join. Its sole function is to connect the credit union with the international charge card system and to provide the aforementioned services to participating credit unions. The courts have recognized that becoming a member in such an association is tantamount to becoming a shareholder in a corporation. See Michigan Savings and Loan League v Municipal Finance Commission, 347 Mich 311; 79 NW2d 590 (1956).

The authority for a credit union to become a member in 'CUCS' and thereby acquire certain proprietary rights in that organization is set forth in section 4, subsection (r) of the Michigan credit union act, supra, which provides that all credit unions shall have the power:

'To invest, with the approval of the commissioner, an aggregate amount not to exceed 5% of its capital in the shares, stocks, or obligations of an organization, corporation, or association whose principal purpose is to service or otherwise assist credit unions in the performance of the powers granted to them under this act.'

Accordingly, it is my opinion that since 'CUCS' has as its principal purpose the providing of services to credit unions, and will assist them in the performance of an expressly granted power, i.e. the issuance of line of credit loans, state chartered credit unions may become members and invest up to 5% of their capital in 'CUCS'.

4. May a credit union permit its members to receive cash advances by use of credit cards at locations apart from the credit union?

You advise that the credit card in question may be used, not only for the purchase of goods and services, but also for the receipt of cash advances from participating financial institutions. In securing such an advance, the member must execute a draft to the dispensing institution instructing his credit union to pay that institution the amount which the member receives. Under the terms of the international charge card arrangement, each credit union is contractually bound to reimburse such financial institutions for the amounts which their members receive. In turn, the credit unions must seek payment from the member and, in the event of default, loss is incurred by the card issuing credit union and not the cash dispensing institution. However, before any cash advance can be effected, the dispensing institution must obtain computer authorization from the card issuing credit union. Accordingly, when a member of a credit union receives funds from another source and the credit union thereby incurs an obligation to repay those funds, the credit union has, for all practical purposes, borrowed funds from that other institution. The authority for a credit union to borrow money is set forth at section 4, subsection (f) of the Michigan credit union act, supra, which provides that a credit union shall have the power to '. . . borrow money as indicated in this act.' The provisions of the act governing the borrowing of funds is section 15 of Act, which states that:

'A credit union may borrow, at the discretion of its board of directors, from any source in total a sum which shall not exceed 50% of its paid-in and unimpaired capital, other than shares received from credit unions.'

Accordingly, credit unions may permit their members to receive cash advances by use of their credit cards at locations apart from the credit union. However, the aggregate of all outstanding obligations of the credit union, including credit card transactions, is subject to the 50% limitation contained in section 15 of the Michigan credit union act.

A question also arises as to whether a credit union may make a loan to a non-member who carries an international charge card issued by another financial institution.

The authority of a credit union to make loans to other credit unions is provided in section 4, subsection (d) of the Michigan credit union act, supra, which provides that a credit union shall have the power to:

'As authorized by its board of directors or executive committee, . . . invest in shares of or loans to federally insured credit unions and credit unions chartered in this state, except that a credit union shall not deposit with or invest in shares of or loans to a credit union whose application for federal share insurance shall have been denied and which has not received an extension of time from the commissioner pursuant to section 31. . . .' (emphasis added)

Accordingly, a credit union may, pursuant to the limitations contained in section 4, subsection (d), make cash advances to international charge cardholders who are members of other credit unions, for when the credit union makes a cash advance to such non-member, it is in effect making a loan to the card-issuing institution of that individual. However, there is no authority in the Credit Union Act, expressed or implied, which permits a credit union to make loans to any other financial institutions, such as a bank or savings and loan association. In the absence of such authority, it is my opinion that a credit union may not make cash advances to individuals whose international charge cards are issued by a bank or savings and loan association or a credit union which is not eligible to receive a loan from the disbursing credit union.

5. May a credit union establish an account in a central credit union from which member charges will be deducted and paid to the collecting institutions?

Under the settlement system contemplated, participating credit unions will maintain a share account in Central Credit Union of Michigan, from which sales drafts and cash advances written by that credit union's international charge cardholders will be paid daily. In effect, Central Credit Union will act as a clearing house to effect prompt payment on sales and cash advance drafts. In addition, Central Credit Union will advise each participating credit union on a daily basis of the total amount of drafts paid on its behalf.

Central Credit Union of Michigan is a state chartered credit union whose field of membership consists only of other credit unions and whose assets are comprised primarily of funds from such member credit unions. Express authority to maintain a share account at Central Credit Union is contained at section 4, subsection (d) of the Michigan credit union act, supra. Accordingly, a state chartered credit union may maintain a share account for the purpose of facilitating international charge card draft payments in Central Credit Union.

6. May a credit union receive reimbursement in the form of 'interchange fees' charged to merchants for their participation in the credit card system?

The operation of the international charge card system contemplates that a merchant accepting the international charge card as payment for the purchase of goods and services discount the aggregate amount of such drafts with the bank at which it does business. Part of this discount is retained by the paying bank and part is remitted to the card users' institution. This discount, known in the industry as an 'interchange fee', is designed to cover the costs incidental to the maintenance of the charge card system.

Although a credit union may make loans to its members, and may receive as income thereon interest on those loans, there is no authority in the Michigan credit union act, for credit unions to receive income in the form of interchange fees or discounts. However, the payment of such fees as a true cost reimbursement is consistent with the intent that credit unions benefit all members. Without such reimbursement, members not electing to participate in the charge card system would subsidize the administrative costs for those who do. In the area of other specialized services, credit unions have long been permitted to recover costs from non-members. For example, in providing insurance to members, Federal credit unions have been permitted to receive 'reimbursement for the actual costs of ministerial tasks performed'. 12 CFR Sec. 721.1(m). It is therefore my opinion that credit unions may receive payment for the administrative expenses directly expended in relation to providing the charge card service in question.

Frank J. Kelley

Attorney General