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ALEXANDRIA, Va.-A recent legal opinion letter (04-0453) from NCUA Associate General Counsel Sheila Albin stated that federal credit unions may recover certain costs from investing in a life insurance product to fund an employee benefit, including cost of funds with in limits. She noted that section 701.19 exempts federal credit unions from Federal Credit Union Act investment restrictions when it concerns the institution’s authority to provide and fund employee benefits. “Specifically, an FCU may purchase an otherwise impermissible investment to fund an employee benefit obligation as long as, among other regulatory limits, there is a direct relationship between the investment and the employee benefit obligation it serves to fund,” she wrote. Albin also cited a Feb. 27, 2004 legal opinion letter (03-0512), which stated, “NCUA has long taken the position that, if an FCU complies with 701.19 and is not investing for its own account, then the FCU may recover some of its costs of funding the employee benefit obligation. This is certainly the case when an FCU is purchasing life insurance products for that purpose.” However, the federal credit union cannot invest additional funds in an attempt to recoup “opportunity costs.” The inquiring entity advocated that beyond the costs included in that opinion, a federal credit union should be able to pursue its cost of funds. “We agree that cost of funds is a real cost of investing that should be recoverable under 701.19, but we do not completely agree with your characterization of what should be considered cost of funds under the rule,” Albin stated. “We agree that the amount an FCU must pay its members or others to borrow money reflects its cost of funds although we acknowledge there are other acceptable ways of calculating this cost. We do not believe, however, that the return an FCU would forego if it takes money out of an existing earning position to fund an employee benefit obligation should be considered cost of funds for purposes of 701.19. Rather, we view that cost as an opportunity cost.” “While NCUA does not require an FCU to follow any particular methodology for calculating costs of funds, NCUA recommends an FCU adopt an appropriate, conservative approach to doing so,” she wrote. “An FCU must maintain adequate documentation to support its calculations and demonstrate its approach is appropriate.” [email protected]

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