Promotional Plan To Increase Membership

April 1, 1997

Richard Rays, President/CEO
Paragon Federal Credit Union
370 Pascack Road
Township of Washington, New Jersey 07675

Re: Promotional Plan To Increase Membership (Your January 10, 1997, Letter)

Dear Mr. Rays:

Your letter asks whether a proposed plan to increase membership at Paragon Federal Credit Union (Paragon FCU) through "automatic enrollment" from select employee groups is permissible. It is my understanding that, because you wanted a response within a few days, Staff Attorney Mike McKenna discussed these issues with you and advised you informally of our opinion. This letter confirms our opinion on the issues you raise in your letter.

Under the proposed plan, Paragon FCU would obtain a listing of employees from its select employee groups and would identify all nonmember employees. Paragon FCU would automatically enroll these employees as members in the credit union, advance the initial $5.00 par value share requirement, and open an account for each of them. Simultaneously with opening an account, the credit union would set up an account receivable for the collection of the $5.00 advanced. Upon this "automatic enrollment," Paragon FCU would send some type of documentation providing all necessary disclosures, welcoming the newly enrolled employees to the credit union, and requesting that they complete all required paperwork.

Section 109 of the Federal Credit Union Act, in conjunction with Article II, Section 2 of the Federal Credit Union Bylaws, provides that to become a member of a federal credit union (FCU), an individual who is within the FCU's field of membership must complete a membership application, purchase or pay the initial installment on one share of stock, and pay an entrance fee if required. An FCU may engage in activities designed to promote the FCU or its services. 12 U.S.C. §107(17). However, until an individual becomes a member of an FCU, the FCU has no authority to extend credit to that individual. 12 C.F.R. §701.21(a).

Because the newly enrolled employees will not have signed any of the required membership papers nor paid the initial share requirement to establish their membership, this advance of the $5.00 share requirement and establishment of an account receivable for its collection is, in effect, an extension of credit to nonmembers. Therefore, this plan, as proposed, is impermissible.

Paragon FCU, however, may pay the initial $5.00 share requirement on behalf of the employees to begin their membership at the credit union. See Letter from Richard S. Schulman to Dale Verderano, dated June 8, 1995 (without referenced enclosures). Then, the employees interested in becoming members of Paragon FCU can do so simply by completing the necessary membership paperwork.