thorized loan officer shall provide for payment or amortization by periodic, substantially equal, payments of principal which are to be made at intervals of not greater than 12 months and which are sufficient in amount to retire such loans at maturity.

(2) Notwithstanding the provisions of subparagraph (1) of this paragraph, and subject to any limitations imposed by the board of directors as provided for by paragraphs (a) and (b) of this section, loans with maturities in excess of 1 year but not in excess of 30 months, may provide for retirement by a single payment of principal at maturity or by payments at intervals greater than 12 months where the credit committee, or a duly appointed and authorized loan officer, finds that such terms are justified by the needs and condition of the borrower after taking into account, among other factors deemed relevant, his current commitments, the source or sources of the funds from which he plans and proposes to make such payment or payments, the regularity, frequency and reasonably predictable nature of the receipt of such funds, and the best interests of the credit union: Provided, That the payment or payments so provided for shall be scheduled to coincide with the anticipated receipt of the funds intended to be used therefor: And provided, That the findings of the credit committee, or a duly appointed and authorized loan officer, shall be in writing signed by the chairman of the committee or by such loan officer and retained in the borrower's loan file.

(3) Notwithstanding the provisions of subparagraph (1) of this paragraph, and to the extent that the board of directors by resolution approves, loans for the purpose of higher education and vocational education of the member-borrower may be made within maturities permitted by the Act and on such terms of payment or amortization as the credit committee, or a duly authorized and appointed loan officer, finds consonant with the needs of the member-borrower and the best interests of the credit union.

(e) All loans shall provide for the payment of interest with each payment of principal: Provided, however, That no loan shall provide for the payment of interest less frequently than at intervals of 12 months.

(f) A secured loan is one secured by collateral or the endorsement of a person on behalf of the borrower which will

serve as a source of recovery in the event of default by the borrower. The files of each Federal credit union shall contain evidence of the value of the security pledged-if collateral-or evidence of the financial responsibility of the endorser for each secured loan.

(g) Secured loans made for periods in excess of 5 years but not exceeding 10 years shall not be made for normal consumer-type purchases and expenditures. Examples of extraordinary purposes for which loans with maturities in excess of 5 years but not exceeding 10 years may be granted include home improvements, the purchase of mobile and seasonal homes, vocational and higher education, and other similar large-cost undertakings. In general, the terms, maturities, and conditions of secured loans made by a Federal credit union for longer than 5 years shall be in accord with the prevailing lending practices (with respect to the purposes of the loans) in the area being served by the credit union.

(Sec. 8, 73 Stat. 630; 12 U.S.C. 1757) [38 F.R. 2567, Feb. 3, 1968, as amended at 34 F.R. 1398, Jan. 29, 1969. Redesignated, 35 F.R. 17398, Nov. 13, 1970]

(a) A Federal credit union may undertake to sell negotiable checks (including travelers checks) and money orders to its members only, for a fee which does not exceed the direct and indirect costs incident to providing such service, when it is determined by the board of directors that the provision of such service will not have any adverse effect upon the accomplishment by the credit union of its basic purpose of promoting thrift among its members and of providing to them a source of credit for provident and productive purposes.

(b) A Federal credit union which undertakes to provide this service shall:

(1) Have adequate physical facilities to handle and safeguard the cash funds to be used in connection therewith;

(2) Establish and maintain effective internal controls for the handling of and accounting for the cash funds and fees to be received and charged in connection therewith;

(3) Establish and enforce reasonable rules covering the kinds of negotiable checks (including travelers checks) and money orders, and the maximum amounts thereof, that it will sell to members;

(4) Establish and enforce reasonable rules and procedures to assure that the service will be provided to members of the Federal credit union only, including the identification of any member who requests the service;

(5) Obtain, and maintain in force and effect, any additional surety bond and insurance coverage required thereby;

(6) Determine that the fee charged does not exceed the direct and indirect costs incident thereto.

(c) The board of directors of a Federal credit union which has undertaken to provide this service shall review its operation from time to time to make certain that it is not having any adverse affect upon the accomplishment by the credit union of its basic purpose, and that the requirements of paragraph (b) of this section are being fulfilled on a current basis. Controls, rules and procedures established pursuant to paragraph (b) of this section may be amended by the board of directors from time to time to provide new or increased safeguards against loss, and to meet the best interests of the cerdit union and its members.

(d) The fees or commissions which a Federal credit union may receive pursuant to a contract with a third party providing for the sale of negotiable checks (including travelers checks) and money orders furnished by the third party, shall be deemed to be not in excess of the direct and indirect costs incident to providing this service.

(e) No fee shall be charged by a Federal credit union to a member for a check drawn by it on its own bank account in connection with the withdrawal by the member from a share account, or in connection with the disbursement of the proceeds of a loan.

(Sec. 8, 73 Stat. 631; 12 U.S.C. 1757) [25 F.R. 5286, June 14, 1960, as amended at 36 F.R. 18638, Sept. 18, 1971. Redesignated, 35 F.R. 17398, Nov. 13, 1970]

of its basic purpose of promoting thrift among its members and of providing to them a source of credit for provident and productive purposes.

(b) A Federal credit union which undertakes to provide this service shall:

(1) Have adequate physical facilities to handle and safeguard the cash funds to be used in connection therewith;

(2) Establish and maintain effective internal controls for the handling of and accounting for the cash funds to be used and the fees to be charged in connection therewith;

(3) Establish and enforce rules covering the kinds of checks and money orders, and the maximum amounts thereof, that will be cashed;

(4) Establish and enforce rules and procedures to assure that the service will be provided to members of the Federal credit union only, including the identification of any member who requests the service;

(5) Obtain, and maintain in force and effect, any additional surety bond and insurance coverage required thereby;

(6) Determine that the fee charged does not exceed the direct and indirect costs incident thereto.

(c) The board of directors of a Federal credit union which has undertaken to provide this service shall review its operation from time to time to make certain that it is not having any adverse effect upon the accomplishment by the credit union of its basic purpose, and that the requirements of paragraph (b) of this section are being fulfilled on a current basis. Controls, rules and procedures established pursuant to paragraph (b) of this section may be amended by the board of directors from time to time to provide new or increased safeguards against loss, and to meet the best interests of the credit union and its members.

(d) No fee shall be charged by a Federal credit union to a member as for the cashing of a check or money order when such check or money order is used in whole or in part for payment of a loan, payment of interest, payment of any obligation to the credit union, or the purchase of shares. Nor shall any fee be charged to the member for the cashing of a check or money order drawn by the Federal credit union on its own bank account and issued to the member in connection with a withdrawal by the

member from a share account or in connection with the disbursement of a loan. (Sec. 8, 73 Stat. 631; 12 U.S.C. 1757)

§ 701.24 Refund of interest.

The board of directors of a Federal credit union may authorize an interest refund to all members who paid interest to the credit union during any dividend period and who are members of record at the close of business on the last day of any such dividend period. The amount of interest refund to the members shall be in proportion to the amount of interest paid by them during the dividend period as determined by the application of a uniform percentage. The board may authorize an interest refund for a dividend period only during a month in which, under the bylaws, it may declare a dividend for such period, except that if, under the bylaws, a credit union has for the calendar year dividend periods more frequently than annually and an interest refund was omitted for one or more of such dividend periods, the board, during the time permitted for the declaration of the current dividend, may authorize an interest refund for the current dividend period and for any one or more of the omitted dividend periods. However, the board shall not authorize an interest refund for any dividend period with respect to which it has not declared a dividend. An interest refund shall be recorded on the books of the credit union as a reduction of interest income. (Secs. 14, 21, 73 Stat. 632, 635; 12 U.S.C. 1761b, 1766) [33 F.R. 2567, Feb. 3, 1968. Redesignated, 35 F.R. 17398, Nov. 13, 1970] § 701.25 Insured loans to student members in eligible higher education or vocational institutions.

Notwithstanding the limitations of the Federal Credit Union Act with respect to loans to members, and the provisions of § 701.21, a Federal credit union may make insured loans to student members pursuant to the power conferred by the Higher Education Act of 1965, title IV, Part B, section 434, Public Law 89-329, 79 Stat. 1247, approved November 8, 1965, and the National Vocational Student Loan Insurance Act of 1965, section 16, Public Law. 89-287, 79 Stat. 1048, approved October 22, 1965. The exercise of this power by a Federal credit union, including the aggregate and individual amounts, terms, and conditions of insured loans to student members, and the necessary practices and procedures in

connection therewith, shall be in accordance with the provisions of title IV, Part B, of the Higher Education Act of 1965, the National Vocational Student Loan Insurance Act of 1965, and the regulations issued thereunder.

[38 FR 5341, Feb. 28, 1973; 38 FR 6667, Mar. 12, 1973]

§ 701.26 Credit union service center.

(a) For the purposes of this section. (1) "Service Center" means a credit union service center which provides services to include, but not necessarily limited to, physical facilities, centralized management, and accounting services.

(2) "Accounting Service" means the maintenance of bookkeeping, accounting, or other records related to the purposes and functions of a credit union by manual, mechanical or electronic methods, and the furnishing of reports and information derived from such records.

(3) "Individual Identity" means that the identity of each participating Federal credit union is easily distinguishable from other credit unions and organizations participating in the service center activities.

(4) "Centralized management" means the single authority responsible for supervising, controlling and directing the day-to-day operations of the service center.

(b) (1) One or more Federal credit unions may contract with a vendor other than a Federal credit union to provide a credit union service center. The contract shall be in writing, shall have the approval of the Administrator, and shall expressly provide for:

(i) Segregating the credit union's assets and records;

(ii) Maintaining the credit union's individual identity;

(iii) Establishing minimum security devices and procedures in accordance with Part 748 (12 CFR Part 748);

(iv) Complying with the mandatory requirements with regard to the advertisement of insured status in accordance with Part 740 (12 CFR Part 740);

(v) Describing the services to be provided by the vendor and establishing the costs of these services subject to periodic review and negotiation;

(vi) Complying with the provisions of 701.14 concerning all services performed;

(vii) Immediate availability and possession of the Federal credit union's

the period of the written agreement. No official or employee of a Federal credit union shall be engaged directly in the management or operation of the accounting services purchased pursuant to this section, except where the vendor of such services is owned and operated by or controlled by one or more credit union leagues. However, in no event shall an official or employee of a Federal credit union receive from the vendor of such services any salary or compensation other than the reimbursement of necessary expenses incurred in connection with the vendor's activities.

[32 FR. 5271, Mar. 29, 1967, as amended at 36 F.R. 18637, Sept. 18, 1971. Redesignated, 35 FR 17398, Nov. 13, 1970; 39 FR 44423, Dec. 24, 1974]

(a) A Federal credit union may participate with one or more other credit unions (either Federal or State chartered) in the establishment or maintenance of an accounting service center, the functions, facilities, and operations of which are limited to providing data processing services only for such participating credit unions. As used in this section the term "data processing services" means the maintenance of bookkeeping, accounting, or other records related to the purposes and functions of a credit union, primarily by mechanical or electronic methods, and the furnishing of reports and information derived from such records. Participation in the accounting service center may be by means of a partnership or other noncorporate arrangement between or among the participating credit unions or by participation in an accounting service center corporation organized for the sole purpose of providing data processing services to the participating credit unions, through ownership of a proportionate amount of the capital stock of such a corporation, provided that the remaining capital stock of such corporation is available for ownership only by the participating credit unions. A Federal credit union's proportionate ownership of the accounting service center shall be in similar proportion to the total ownership of the center as the total facilities and services used by the Federal credit union bears as a percentage to the total facilities and services provided by the accounting service center to all the participating credit

unions, but the cost of such ownership shall not exceed 2 percent of its members' shareholdings. Ownership by the participating credit unions will be reviewed not less frequently than every 2 years and adjusted among them as necessary to bring such ownership into conformity with the percentage of the total facilities and services of the accounting service center used by each of them.

(b) A Federal credit union may not participate in the establishment or maintenance of an accounting service center unless the arrangement provides, (1) that the operating costs of the accounting service center shall be charged to each of the participating credit unions in such proportion to the total operating costs as the total facilities and services used by each bears as a percentage to the total facilities and services used by all of them; (2) that each participating credit union will have in its records current information disclosing, (i) the name of each participant, (ii) the proportion and amount of ownership of each in the accounting service center, (iii) the proportion of the facilities and services used by each, (iv) the current total operating costs of the accounting service center, and (v) the proporation and the amount of the total operating costs charged to each of the participating credit unions; (3) that each participating credit union shall, at least annually, be provided by the accounting service center reports disclosing the financial affairs of the service center, including financial position and results of operations. Each such financial statement shall include an attached statement certifying to the participating credit union that the scope of the activities of the service center was confined to paragraph (a) of this section; (4) that the accounting service center shall establish and maintain the records of participating Federal credit unions in accordance with the requirements of § 701.14; and (5) that the records of participating Federal credit unions in possession of the accounting service center shall be available immediately for examination by the Administration. No official or employee of a participating Federal credit union may receive any salary or compensation from the accounting service center other than the reimbursement of necessary expenses incurred in connection with service center activities.