Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 3, 1999, WEDNESDAY
SECTION: IN THE NEWS
LENGTH:
8441 words
HEADLINE: PREPARED TESTIMONY OF
LELAND
M. STENEHJAM
PRESIDENT AND CEO
EMPIRE FEDERAL CREDIT UNION
BEFORE
THE
HOUSE BANKING AND FINANCIAL SERVICES COMMITTEE
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT SUBCOMMITTEE
SUBJECT - THE
NCUA FIELD OF MEMBERSHIP IMPLEMENTING REGULATIONS
BODY:
Executive Summary
Good morning, Madame Chairwoman and Members of the
Committee. I am Lee Stenehjem, the President of First International Bank &
Trust, a $288 million community bank located in Fargo, North Dakota. I am
pleased to have the opportunity to testify on behalf of the IBAA regarding the
NCUA's implementation of the "
Credit Union Membership Access
Act of 1998."
Madame Chair, I would like to thank you for holding this
extremely important hearing. Because we believe that the NCUA has, once again,
totally ignored the will of the Congress and statutory mandates in implementing
their field of membership rule, IBAA has intervened as a co-plaintiff in the
ABA's lawsuit contesting the legality of the NCUA's actions. We appreciate the
fact that your Subcommittee believes this matter warrants a hearing, as well as
the comment letters that you and Mr. LaFalce wrote expressing your own
reservations about the proposed rule.
Underlying the formation of credit
unions is the notion of the common bond. To be truly meaningful, the concept of
"common bond" must be supported by the NCUA regulations. Allowing the common
bond to be distorted and blurred encourages the creation of large credit unions
while discouraging the formation of smaller credit unions, and could negatively
impact the safety and soundness of the credit union and financial services
industry.
Furthermore, as the concept of the common bond becomes more
meaningless, credit unions could fast become more and more like commercial banks
and thrifts. As the distinctions diminish, the need for a separate structure --
and an independent regulatory agency -- also will diminish, and it will become
increasingly illogical to continue allowing a credit union tax exemption based
upon a semantic distinction. Therefore, IBAA believes that it is the
responsibility of Congress and the NCUA to preserve the unique character of
credit unions, and an appropriate field of membership regulation is an excellent
place to start.
Your letter of invitation specifically asks that we address
a number of important issues.
Economic Advisability. The NCUA's economic
advisability provisions discourage the establishment of smaller credit unions
because, while groups with less than 3,000 members may apply to establish a
federal credit union, they will have to supply greater documentation, that is,
face a far greater burden, to demonstrate their viability. NCUA's assertion that
groups with less than 3,000 potential members are not economically viable is
simply not supported by fact. Over 3,300 credit unions have less than $2 million
in assets and an average membership of 700, and there are over 2,000
credit unions with memberships of 500 or less. These credit
unions are profitable and adequately capitalized, which totally contradicts the
NCUA's assertion.
New Credit Unions. The final rule discourages the
formation of new credit unions, despite the fact that CUMAA specifically directs
the NCUA to encourage the creation of separately chartered, single common bond
credit unions whenever practical consistent with reasonable safety and soundness
standards. Therefore, a greater documentation burden should be placed on groups
over 3,000 seeking to affiliate with multiple common bond credit unions, not
those that wish to remain independent.
Existing Credit Unions. A large
credit union's desire to join an existing credit union should not be given the
same weight as other factors considered by the NCUA in determining whether it
should be added to an existing credit union.
Overlaps. The NCUA's final rule
should provide community credit unions with overlap protection. Because the
field of membership provisions have significantly changed as a result of CUMAA,
the NCUA's reliance on its previous overlap experience and studies to support
the assertion that overlap protection for community credit unions isn't
necessary should no longer be considered reliable. The issue of overlapping
credit unions is extremely important given the fact that they could cause safety
and soundness concerns, could make it more likely that smaller credit unions
fail, and could cause community credit unions to lose market share.
Geographic Proximity. The NCUA rule reserves the right to grant a charter to
single common bond credit unions without regard to the geographic location of
the association's members or headquarters. Community bankers believe that this
geographic proximity provision inadequately implements Congressional intent
because it ignores the fact that a credit union can be too thinly spread. If
membership service is at all important, the final rule should acknowledge the
correlation between far-flung memberships and the burden of administration in
providing service. As one increases, so must the other.
Reasonable
Proximity. If creation of an independent single bond credit union is not
feasible. CUMAA requires that a group join a credit union that is "within
reasonable proximity to the location of the group." As defined by the NCUA
regulation, "reasonable proximity" would be within the service area of the
credit union the group wishes to join. However, merely providing that the group
to be added is within the existing credit union's service area is insufficient
to carry out the Congressional mandate. This geographical restriction should be
more definitive, and should impose a greater burden for credit unions seeking to
expand their geographical reach since, as geography increases, the burden to
provide service will also increase.
Safety and Soundness. CUMAA requires the
NCUA to make a written finding that five statutory criteria related to safety
and soundness have been met before a new select group may be added to an
existing credit union. While these criteria have been incorporated into the
regulation virtually verbatim, they fail to adequately implement the statute.
For example, one of the few elements defined is a "material unsafe or unsound
practice," (namely, any action or inaction that could result in an abnormal risk
or loss to the credit union, its members or the NCUSIF). In essence, the NCUA
regulation suggests that only if a credit union were close to failing would it
be denied the ability to add additional select groups. Meanwhile, if it does
come close to failing, other provisions in the rule would allow the credit union
to add select groups under an emergency merger. When read together, these two
provisions cancel each other out, and there really is no time when a credit
union cannot add a select group.
Also, despite the fact the safety and
soundness provisions are critically important, it appears as though the NCUA is
merely paying them lip-service since they are extremely weak and easily met.
IBAA recommends that the final rule be rewritten to specify under what
conditions the agency will deem it impractical to form a separate credit union,
setting forth detailed conditions on capital, sponsors, business plans and so
forth.
"Family Member" and "Member of Household." IBAA believes that the
terms "family member" and "member of household" are too broad since, by
eliminating the distinction between the primary member and secondary member, the
rules would allow for an exponential expansion of the field of membership by
contorting the immediate family member concept.
Family members should be
allowed to join, but only if the eligible individual is a member, not a
potential member. This should be made totally clear in the final regulation.
Also, the "once a member always a member" concept should be eliminated
because, where membership is clearly contemplated solely as an employee benefit
and the employee leaves that employment, a corporation should be able to require
its employee to terminate his or her membership in the company's credit union.
Community Credit Unions. The community credit unions provisions are
extremely problematic because the regulation fails to adequately define
"well-defined local community, neighborhood or rural district," and makes it far
too easy to establish large community credit unions which go well beyond the
local limitation imposed by Congress. Because the final rule does not offer
sufficient guidance as to what constitutes a "local" community, it should be
amended to include a list of criteria that a community may consider in
determining whether there is a single local community.
The regulation
essentially allows any political subdivision with less than 300,000 in
population to virtually self-certify as a local community. According to the 1990
U.S. Census figures, there are very few counties in the United States with a
population over 300,000 residents. Therefore, if an area is allowed to
self-certify with minimal documentation requirements imposed, that area should
be much smaller than 300,000 people. IBAA recommends that a population of 25,000
is a logical maximum. If the population exceeds that number, a community credit
union charter could still be available, but the applicant should face a greater
burden of demonstrating the local character of the area to be served.
IBAA
also believes that the provisions allowing purchase and assumption agreements to
take place between community credit unions and other credit unions should be
removed because they would allow a community credit union to expand service
beyond the service area established in its charter.
For community based
charters, the regulation provides that merger into a single or multiple common
bond credit union can only take place on an emergency basis. However, this
disregards the unique nature of the community charter. If such a merger is to be
allowed, it should be allowed only as a last resort when the NCUA clearly
establishes there are no other alternatives. Moreover, the service to be
provided should only be provided to existing members of the community credit
union, and not to new members. Finally, the continuing credit union should apply
for multiple common bond status, which is what Congress requires when different
groups are being served.
In addition, the rule provides that community based
credit unions may absorb single or multiple common bond credit unions on a
non-emergency basis, provided the credit union has a service facility or a
majority of its members are based within the community's boundaries. Again, this
is inappropriate. This completely ignores the community based credit union
concept, and violates the limitations that Congress seeks to apply with the
focus on "local." Allowing such mergers to take place seems a thinly veiled
attempt to allow community based credit unions to expand beyond the boundaries
established in their charters.
Furthermore, even though the rule would
provide that "the continuing credit union will remain a community charter," and
even though future expansions will be based on the original charter, the rule
does not address the adequacy of service to those outside the credit union's
boundaries. A single or multiple common bond credit union may serve members
without being restricted by geography, but a community based charter must serve
persons or organizations within a well-defined local community, neighborhood, or
rural district. Allowing these types of mergers violates the Congressional
restriction of local for community based charters, even in an emergency
situation. It also does a disservice to those that may be far outside the
community's boundaries in that they may be far removed from the operations of
the community based credit union.
In conclusion, it is vital that the NCUA's
final regulations contain specific rules and guidelines for credit unions and
charter applicants to follow consistent with the law and Congressional intent.
Vague standards and broad interpretations that depart from statutory
requirements will only lead to increased Congressional oversight and force
injured parties to turn to the courts to clarify or overturn the NCUA's
regulations.
Thank you for the opportunity to testify, and I welcome any
questions you might have.
*******************
Testimony of Leland M.
Stenehjem, Jr.
On Behalf of the Independent Bankers Association of America
Before the Subcommittee on Financial Institutions and Consumer Credit
U.S. House of Representatives
Regarding the Implementation of the
"
Credit Union Membership Access Act of 1998"
February 3,
1999
Good morning, Madame Chairwoman and Members of the Committee. I am Lee
Stenehjem, the president of First International Bank & Trust, a $288 million
community bank located in Fargo, North Dakota. I am pleased to have the
opportunity to testify on behalf of the Independent Bankers Association of
America (IBAA) regarding the National Credit Union Association's (NCUA)
implementation of the "
Credit Union Membership Access Act of
1998" ("CUMAA" or the "Act").
IBAA is the primary voice for the nation's
community banks, representing 5.500 institutions at nearly 16.000 locations
nationwide. Community banks, which are independently owned and operated, are
characterized by attention to customer service, lower fees and small business,
agricultural and consumer lending. IBAA's members hold nearly $445 billion in
insured deposits, $524 billion in assets and more than $314 billion in loans for
consumers, small businesses and farms in the communities they serve.
Madame
Chair, before I proceed with my testimony, I would like to thank you for holding
this extremely important hearing. The credit union regulators have, once again,
totally ignored the will of the Congress and statutory mandates in implementing
their field of membership rule. We have intervened as a co-plaintiff in the
ABA's lawsuit contesting the legality of their action. We appreciate the fact
that your Subcommittee believes this matter warrants a hearing, as well as the
comment letters that you and Mr. LaFalce wrote expressing your own reservations
about the proposed NCUA rule.
In establishing credit unions in the 1930's
with the passage of the Federal Credit Union Act ("FCUA"), Congress intended to
promote the development of independent institutions to serve small discrete
groups of individuals. The underlying premise was to ensure that like- situated
individuals of modest means had access to financial resources through pooled
assets.The FCUA limited
credit union membership to groups
having a common bond of occupation or association. Or to groups within a
well-defined neighborhood, community or rural district. However. recent changes
made by CUMAA authorize the chartering of multiple common bond credit unions in
addition to single occupational or associational common bond credit unions and
community credit unions serving well-defined local communities, neighborhoods or
rural districts.
Underlying the formation of credit unions is the notion of
the common bond. To be truly meaningful, the concept of common bond must be
acknowledged and supported by the NCUA regulations. Allowing the common bond to
be distorted and blurred, as we believe the NCUA regulations have done.
encourages the creation of large credit unions, discourages the formation of
smaller credit unions, and could negatively impact the safety and soundness of
the credit union and financial services industry if credit unions are allowed to
saturate the market. In the long run. a distorted common bond does a disservice
to the credit union movement.
Furthermore, as the concept of the "common
bond" becomes more meaningless, credit unions are fast becoming more and more
like commercial banks and thrifts. As the distinctions diminish, the need for a
separate structure -- and an independent regulatory agency -- also will
diminish, and it will become increasingly illogical to continue allowing a
credit union tax subsidy based upon a semantic distinction. Therefore, IBAA
believes that Congress and the NCUA should preserve the unique character of the
credit union industry, not blur it out of existence, and an appropriate field of
membership regulation is an excellent place to start.
The
Subcommittee's letter of invitation asks that our testimony specifically address
certain issues related to field of membership, namely: (1) whether the NCUA's
revised"economic advisability" level is consistent with Congress' intent to
encourage the formation of new. separately chartered credit unions for groups of
less than 3.000: (2) whether the NCUA has a duty to encourage the formation of
new. separately chartered credit unions: (3) whether the "desire" of a large
group to be added to an existing credit union should be taken into account in
determining whether the group should be added: (4) whether the NCUA's final rule
favors large. local credit unions at the expense of small, local credit unions,
and the impact, if any, of overlapping fields of membership on small credit
unions: (5) whether the NCUA implements Congressional intent with respect to the
"reasonable geographic proximity" requirement for adding groups to existing
credit unions: (6) whether the NCUA is obligated under CUMAA to place a group
with a local credit union which would most benefit in terms of safety and
soundness, even if the credit union did not file an application; (7) IBAA's
opinion regarding the terms "family member" and "member of household;" and. last
but not least. (8) our views regarding community credit union charters and
expansion and geographic and population limits which the final rule places on
community charters.
I. The NCUA's Economic Advisability Provisions
Discourage the Establishment of Smaller Credit Unions
The NCUA's final rule
on economic advisability provides that, as a general matter, groups should have
at least 3,000 members if they are to form a new credit union. IBAA strongly
believes that the NCUA rule on this issue is inconsistent with the unambiguous
intent of Congress and the law because it discourages the formation of new,
separately chartered credit unions for groups of less than 3,000.
The 3. 000
Member Criterion. Section 101 of CUMAA specifies that, in order for a group to
be included in a multiple common bond credit union, it must initially be "a
group with fewer than 3.000 members." Congress paid particular attention to this
size restriction during the legislative debate, and the limitation is designed
to foster the original purpose of credit unions -to serve small, distinct groups
of individuals. (There is an exception to this general prohibition if the NCUA
Board determines, in writing, that a group over 3.000 could not feasibly
establish its own independent single common bond credit union because: (1) it
lacks sufficient resources: (2) does not meet other criteria established by the
NCUA for a successful credit union: or (3) would not be likely "to operate a
safe and sound credit union." The numerical limits also do not apply to a group
transferred from another credit union.) Unfortunately. where Congress has set
3.000 as a ceiling, the NCUA is using it as a floor.
The NCUA's final rule
provides that, "While NCUA has not set a minimum field of membership size for
chartering a federal credit union, experience has suggested that a credit union
with fewer than 3,000 primary potential members (e.g., employees of a
corporation or members of an association) may not be economically advisable."
Therefore. while a group with less than 3.000 may apply to establish a federal
credit union, it will have to supply greater documentation, that is, face a far
greater burden, to demonstrate viability.
Also, stating that groups with
less than 3,000 potential members are not economically viable is not supported
by the facts. Over 3,300 credit unions have less than $2 million in assets and
an average membership of 700, and there are over 2.000
credit unions
with memberships of 500 or less. These credit unions are profitable and
adequately capitalized, and totally contradict the NCUA's assertion.
II. The
Final Rule Does Not Encourage the Formation of New Credit Unions Separately
Chartered Credit Unions.
IBAA believes that the NCUA regulation does not
encourage the formation of new, separately chartered, single common bond credit
unions. Section 102 of the Act specifically directs NCUA to encourage the
creation of separately chartered, single common bond credit unions whenever
practical consistent with reasonable safety and soundness standards. Because of
the way the NCUA final rule is drafted, it does little to encourage the
formation of new credit unions, while facilitating the creation of multiple
common bond credit unions.
While Congress only intended to allow groups over
3,000 to become allied in multiple common bond credit unions under exceptional
circumstances, the NCUA regulation would make it the rule rather than the
exception. This is inconsistent with the plain statutory language of the Act,
directly contradicts Congressional intent, and unfairly imposes a greater
documentation burden on groups smaller than 3,000. The high barrier placed in
front of groups with less than 3,000 members virtually requires them to
affiliate with other select groups in a multiple common bond.
The final rule
should make it easier for smaller groups to become established, and should place
a greater documentation burden on groups over 3,000 seeking to affiliate with
multiple common bond credit unions.
Ill. A Large Credit Union's Desire to
Join An Existing Credit Union Should Be Given Little Weight
The NCUA rule
provides that, in addition to other factors such as operational feasibility and
economic factors, it will consider a large group's "desire" to be added to an
existing credit union in determining whether the group should be added. In other
words, if a credit union exceeding 3,000 members wants to join a multiple common
bond credit union, its "desire" will be considered to the same extent as other
factors.
IBAA believes that this interpretation of the law undermines the
mandate in section 102 of CUMAA specifically directing the NCUA to encourage the
creation of separately chartered. single common bond credit unions whenever
practical consistent with reasonable safety and soundness standards. The fact
is, CUMAA creates a presumption that a credit union exceeding 3,000 members
should be required to form a single credit union, and the fact that a large
group wishes to join a multiple credit union should not be given the same weight
as other more important factors.
IV. The NCUA's Final Rule Favors Large,
Local Credit Unions At the Expense of Small, Local Credit Unions, and Should
Prohibit Certain Overlaps
IBAA has concluded that the NCUA's final rule
encourages groups to join large, local credit unions, as opposed to small, local
credit unions, despite the fact that the Act mandates that the single common
bond credit union should be the predominant form of organizational structure.
Section 101 of CUMAA authorizes groups of fewer than 3,000 members to be
added to a multiple common bond credit union if certain conditions are met.
Because Congress failed to include language limiting the number of groups with
less than 3,000 members which could be added to a multiple common bond credit
union, theoretically a multiple common bond credit union could have thousands of
members. In fact, there is nothing under current law which would prohibit every'
credit union with fewer than 3,000 members from combining into one huge,
behemoth credit union. This is an oversight which should be corrected
legislatively.Congress also provided two exceptions to the 3.000 member
limitation. The first exception under the statute allows the addition of groups
of 3.000 or more members if the Board finds that such a group could not
reasonably establish its own credit union, which we previously discussed. These
provisions clearly demonstrate the NCUA's desire to make large credit unions the
norm, rather than the exception to the rule.
Overlaps. Under the final rule,
no overlap protection will be provided to any credit union within a proposed
community credit union's service area unless it is newly chartered, by
definition, chartered less than two years. Moreover, protection will only be
provided for 12 to 24 months from the date of the overlap. The NCUA bases this
decision on the assertion that its previous experience, internal reviews and
surveys have proven that overlaps are beneficial to credit union members and are
not viewed by some credit unions as harmful.
Given the fact that the field
of membership provisions have significantly changed as a result of CUMAA. the
NCUA's reliance on its previous overlap experience and studies should no longer
be considered reliable, especially since competition among credit unions is
bound to increase. Therefore, overlap protection, at a minimum, should be given
to community credit unions. The issue of overlapping credit unions is extremely
important given the fact that overlaps -- and the competition for members from a
shared pool -- could lead to safety and soundness concerns, could make it more
likely that smaller credit unions fail, and could cause credit unions to lose
market share.
As an aside, it is ironic how the NCUA will consider
overlaps of service areas to limit competition among credit unions, but will not
consider the extent of the need for financial services or whether other
providers exist which sufficiently address the needs of the area to be served.
All of these factors should clearly be weighed in assessing the potential
success or failure of a proposed credit union.
V. The NCUA's Geographic
Proximity Requirement Is Inadequate Geographic Proximity. Community bankers
believe that the NCUA's final rule does not correctly implement Congressional
intent with respect to the reasonable geographic proximity requirement for
adding groups to existing credit unions. The NCUA reserves the right to grant a
charter to single common bond credit unions "without regard to the geographic
location of the association's members or headquarters." However, the final rule
must firmly recognize that a credit union must be able to provide service to its
members, and that the burden of providing that service will increase as the
geographical area served increases. The final rule ignores the fact that a
credit union can be too thinly spread. If the quality of membership service is
at all important, the final rules should acknowledge the correlation between
far-flung memberships, and the burden of administration in providing service. As
one increases, so must the other.
Reasonable Proximity. If the creation of
an independent single bond credit union is not feasible, then the statute
requires that the group join a credit union that is "within reasonable proximity
to the location of the group." The final rule provides that "a multiple common
bond credit union may serve a combination of distinct, definable, occupational
and/or associational common bonds." New groups can be added which are dissimilar
to the original credit union (called "select groups"), but unlike single common
bond credit unions, the groups to be added must be "within reasonable proximity
of the credit union. This restriction should be more definitively recognized in
the provisions of the NCUA chartering manual.
As defined by the NCUA
regulation, "reasonable proximity" would be within the service area of the
credit union the group wishes to join. but merely providing that the group to be
added is within the existing credit union's service area is insufficient to
carry out the Congressional mandate. As I noted above, the ability to serve
members is important. As the geography increases, the burden to provide service
to members also increases. Therefore. the final rule should take into account
that there is a greater burden for credit unions to meet as they seek to expand
their geographical reach.
Vl. Safety and Soundness
Statutory Criteria.
Another element of the statute requires the NCUA to make a written finding that
five statutory, criteria have been met before a new select group may be added to
an existing credit union: ( 1 ) the credit union must not have engaged in any
material unsafe or unsound practice during the preceding year; (2) the credit
union must be adequately capitalized (defined as a net worth ratio of not less
than 6 percent); (3) the credit union must have the administrative capability
and the financial resources to serve the proposed group; (4) the credit union
must demonstrate that any potential harm to another credit union is outweighed
by the benefits of adding the new group; and (5) the formation of a separate
credit union is not practical.
While these criteria have been incorporated
into the regulation virtually verbatim, they do not adequately implement the
statute. For example, one of the few elements that is given definition is a
"material unsafe or unsound practice," defined by the final rule as any action
or inaction that could result in an abnormal risk or loss to the credit union,
its members or the National Credit Union Share and Insurance Fund (NCUSIF). In
essence, the NCUA regulation suggests that only if the credit union were close
to failing would it be denied the ability to add additional select groups.
Meanwhile, if it does come close to failing, other provisions in the rule would
allow the credit union to add select groups under an emergency merger.
Therefore. when read together, these two provisions cancel each other out. and
there really is no time when a credit union cannot add a select group.
Again, it must be emphasized that these elements outlined in the statute
demonstrate that Congress viewed the creation of a multiple common bond credit
union as an exception to the general rule. Therefore, it is critically important
that the NCUA adhere to these criteria and not merely pay them lip-service. The
criteria that are provided in the proposal are extremely weak and easily met.
The NCUA should incorporate much more specific guidance and criteria in the
final regulation to detail when it is appropriate to allow these affiliations.
For example, merely stating that the formation of a separate credit union is not
practical, although repeating the statutory language, is not enough. Rather, the
final rule should specify under what conditions the agency will deem it
impractical to form a separate credit union, setting forth detailed conditions
on capital, sponsors, business plans and so forth.
VII. "Family Member" and
"Member of Household" Are Defined Too Broadly
IBAA believes that the terms
"family member" and "member of household" are not adequately defined. By
eliminating the distinction between the primary member and secondary member, the
rules would allow for an exponential expansion of the field of membership by
contorting the immediate family member concept.
The Act addresses the issue
of family membership by providing that membership by virtue of relation to
another is limited to "a member of the immediate family or household (as those
terms are defined by the Board, by regulation)." Not surprisingly, the NCUA has
chosen not to elaborate extensively on this provision of the law. A member of
the immediate family is defined as related persons (by blood, marriage, or other
recognized family relationships in the same household (under the same roof). In
addition, if the individual is not living in the same household as the credit
union member, immediate family also includes grandparents, parents. spouses,
siblings, children or grandchildren, as well as stepparents, stepchildren,
stepbrothers and stepsisters. According to the NCUA, this is a "tightened"
definition, since the definition of immediate family member is set by the NCUA
and not by each credit union.
Furthermore, some contend that if an
individual is eligible for membership (even though that individual has not
joined the credit union), his or her eligibility should confer eligibility on
their immediate families. This is an inappropriate reading of the statute. The
concept of allowing family members to belong is to allow all family or household
members to conduct their financial business at one location. The intent is not
to allow an expansion of the field of membership concept. Too broad a reading of
this concept distorts and undermines the concept of common bond, which is the
Congressional requisite for allowing credit unions in the first place. Rather,
family members should be allowed to join, but only if the eligible individual is
a member, not a potential member. The regulation should be revised to make this
totally clear.
To read the statute otherwise, that is to say that
eligibility confers eligibility, and carrying the argument to its logical
conclusion, anyone within the field of membership of the original charter of the
credit union would be able to confer eligibility on their immediate families,
and being a member of the immediate families (now eligible) would, in turn,
confer eligibility on their immediate families, and so on. Such a reading simply
does not make any sense. Rather, them should be a limitation such that only
individuals within the field of membership in the credit union charter are
eligible for membership. If-- and only if-- they become members of the credit
union can their immediate family members also join. And if an immediate family
member joins, that should not confer eligibility on any other individuals.
Once a Member Always a Member. The statute also codifies the notion that,
once an eligible individual has joined a
credit union, his or her
membership continues until the member decides to withdraw, even though
the status that made the individual eligible might change after he or she joins
the credit union. However, while the statute offers this definition, there are
situations where allowing an individual to retain membership in a credit union
would be inappropriate, and the final rule should be revised to recognize those
situations. For example, some corporations sponsor credit unions as an employee
benefit, supporting the administration of the credit union as a corporate
expense. Where membership is clearly contemplated solely as an employee benefit,
and the employee leaves that employment, the corporation should be able to
require the employee to terminate their membership in the company's credit
union.
VIII.
VIII.
NCUA's Community Credit Union Provisions
The last issue that your letter of invitation asked us to discuss concerns
the community chartered credit union which is actually one of the most important
aspects of the regulation. Because the regulation fails to adequately define
"well-defined local community, neighborhood or rural district," it makes it far
too easy to establish large community credit unions which go well beyond the
local limitation imposed by Congress.
Under CUMAA, "persons or organizations
within a well-defined local community, neighborhood, or rural district" may
establish a community credit union. The NCUA is required to "prescribe, by
regulation, a definition for the term 'well-defined local community,
neighborhood, or rural district.'" Previously, NCUA had limited community
charters to those within a single, geographically-defined area where residents
interact. Addition of the word "local" in the statute prompted NCUA to review
its existing policy.
While the change in the law prompted a review, the NCUA
made essentially little change from its previous policy regarding community
charters. The main distinction is that applicants for a community charter must
provide evidence that the individuals within the area interact or have common
interests. Generally, persons who live, work, worship or attend school in the
community will qualify. Businesses located in the community will also qualify,
although employees of those businesses that do not live, work, worship or attend
school in the community will not.
The NCUA has established three specific
criteria that must be met by an applicant for a community based credit union
charter: (1) the geographic boundaries must be clearly defined: (2) evidence
must be provided establishing the well-defined community; and (3) the residents
must have common interests or interact.
While interaction and common
interest may be useful guidelines in determining whether a community exists, the
simple definition of local that Congress emphasized is not incorporated into the
limitations presented by the rule. The focus on local should be given greater
prominence in the final regulation to acknowledge the Congressionally- imposed
restriction. Also, the outlines of the rule are much too vague, and do not offer
sufficient guidance as to what constitutes a "local" community. The IBAA
believes that the NCUA should provide a list of criteria that a community may
consider in determining whether there is a single local community. (For example,
service by a single elementary, school, having a single grocery store. having
less than four to five churches, having a single major industry, and so forth.)
While no one criterion would be defining, the more criteria present, the more
likely there is a local community. The NCUA regulation provides potential
applicants with little guidance on what is needed, and allows the NCUA to be
arbitrary and capricious in deciding whether to grant a community based charter.
Size of Community to be Served. The key to establishing a well-defined
community will be demonstrating interaction between those in the area: the
larger the area. the greater the burden applicants will have to demonstrate a
commonality. Amazingly, though, after giving lip-service to the Congressional
mandate to restrict community credit unions to "local" areas, the NCUA takes an
extremely expansive reading of what connotes "local" by proposing that a
geographic area "with less than 300,000 residents will often have sufficient
interaction and/or common interests to meet community charter requirements."
If the area is larger than a single political jurisdiction or has over
300.000 residents, more extensive and detailed documentation must be provided to
prove the proposed area is a well-defined community. Essentially, the regulation
allows any political subdivision with less than 300,000 in population to
virtually self-certify as a local community. The NCUA has a greater
responsibility to verify the existence of the kinds of activities that meet the
statutory mandate. Therefore, if an area is allowed to self-certify and have
minimal documentation requirements imposed that area should be much smaller than
300,000 in population.
The January 29, 1999, edition of Daily Report for
Executives reported how the NCUA had just approved two community credit union
charters which increased their potential membership to almost one million.
According to the article, the First Service Federal Credit Union of Groveport,
Ohio will serve all of Franklin County which has a population of 961,437.
Currently, the credit union serves a potential membership of 22.000.
The
second community charter that was approved involves the CBC Federal Credit Union
in Port Hueneme, California. That credit union was authorized to serve all of
Ventura county. the same territory covered by the Point Mugu Federal Credit
Union. As you may recall, the ABA, IBAA. and California Bankers Association sued
the Point Mugu credit union prior to the passage of CUMAA on the ground that
Ventura County was not a well-defined community. The Point Mugu case was dropped
because it was made moot by CUMAA, but our recently filed lawsuit will continue
the debate on this issue since it challenges the NCUA's definition of
"well-defined local community." Knowing where to draw the line for what
constitutes a local area may be difficult, but clearly the definition proposed
by the NCUA goes far beyond what is appropriate. While the NCUA acknowledges
"population and geographic size are also significant factors in determining
whether the area is local in nature," using a 300,000 population size as
defining belies that statement. In most states, 300,000 is a substantial
population, with a great diversity of interests, people and cultures. Although a
population that size provides a rich diversity, it does not provide the kind of
local community that Congress called upon the NCUA to find. While the NCUA does
acknowledge that "a larger population in a large geographic area may not meet
NCUA community chartering requirements, and that "the burden of demonstrating
interaction and/or common interests will be greater than the evidence necessary
for a smaller and less densely populated area, setting the bar at 300,000 is
much too high. The IBAA believes that 25,000 is a logical maximum. If the
population exceeds that number, a community credit union charter could still be
available, but the applicant would face a greater burden of demonstrating the
local character of the area to be served.
Furthermore, reference to the 1990
U.S. Census figures demonstrates just how expansive a 300,000 resident
restriction is. There are very few counties in the United States with a
population over 300,000 residents. In fact, even in a populous state like New
York. only 12 out of 62 counties would be excluded from automatically qualifying
to have a community credit union by the NCUA proposal. A population figure much
smaller than 300,000 (e.g,, 25.000) would ensure that the NCUA properly reviews
the applications to ensure that the area to be covered is truly "local" in
nature, and that the proposed credit union can properly serve the area.
Moreover, the 300,000 figure is only an illusory restricIncredibly, the
regulation does not prohibit areas larger than 300,000 from qualifying. While
the rule suggests that an entire state or a major metropolitan city will not
likely have sufficient interaction to qualify ("it is unlikely"), the
possibility is not ruled out. The preamble to the rule notes that the
requirements "make it difficult" for a state or a large city such as New York,
Boston, Dallas or Los Angeles to meet the requirements of a local community. The
possibility that an entire state or a major metropolitan area could qualify for
a community based credit union charter is left open. This is incompatible with
the intent of the statute and a huge leap beyond statutory parameters.
Going
Beyond the Local Community. The rule also would allow certain purchase and
assumption agreements to take place between community credit unions and other
credit unions. According to the regulation, "specified loans, shares, and
certain other designated assets and liabilities may also be acquired without
regard to field of membership restrictions." This would allow a community credit
union to expand service beyond the service area established in its charter,
violating the local specification imposed by Congress. This inappropriate
expansion of the service area of a community based credit union clearly violates
Congressional intent, and should be removed from the regulation.
Community
Credit Union Mergers. For community based charters, the regulation provides that
merger into a single or multiple common bond credit union can only take place on
an emergency basis. However, this disregards the unique nature of the community
charter. If such a merger is to be allowed, it should be allowed only as a last
resort when the NCUA clearly establishes there are no other alternatives.
Moreover, the service to be provided should only be provided to existing members
of the community credit union, and not to new members. Finally, the continuing
credit union should apply for multiple common bond status, which is what
Congress required in CUMAA when different groups are being served.
The rule also provides that community based credit unions may absorb
single or multiple common bond credit unions on a non-emergency basis, provided
the credit union has a service facility or a majority of its members based
within the community's boundaries. Again, this is inappropriate. Based on this
wording, it would be acceptable for a common bond credit union to become part of
a community credit union with only a small number of members located within the
established boundaries for the community charter, as long as it had a facility
there. This completely ignores the community based credit union concept, and
violates the limitations that Congress seeks to apply with the focus on "local."
Allowing such mergers to take place seems a thinly veiled attempt to allow
community based credit unions to expand beyond the boundaries established in
their charters.
Furthermore, even though the proposal would provide that
"the continuing credit union will remain a community charter," and even though
future expansions will be based on the original charter, the regulation does not
address the adequacy of service to those outside the credit union's boundaries.
'A single or multiple common bond credit union may serve members without being
restricted by geography, but a community based charter is to serve "persons or
organizations within a well-defined local community, neighborhood, or rural
district. Permitting such mergers violates the Congressional restriction of
local for community based charters, even in an emergency situation. Furthermore.
it does a disservice to those that may be far outside the community's
boundaries, in that they may be far removed from the operations of the community
based credit union.
IX. Additional Concerns
I also would like to take
this opportunity to mention a number of issues which we were not specifically
asked to address which are also important.
Types of Common Bonds. Single
common bond credit unions can be of two types, either associational or
occupational. (For the most part, these rules would not change under the final
regulations.) A single associational common bond consists of individuals or
groups "whose members participate in activities developing common loyalties,
mutual benefits and mutual interests." A single occupational common bond can be
established in one of four ways: (1) employment in a single corporation; (2)
employment in a subsidiary or parent of that corporation (there must be a 10
percent ownership interest between parent and subsidiary); (3) employment in an
independent company which demonstrates "a strong dependency relationship" to the
first company; and (4) employment or attendance at a school.
The IBAA
believes that some of these criteria go too far in creating the single common
bond concept. For example, allowing the minimal 10 percent affiliation between a
parent and a subsidiary to serve as the basis of a common bond allows for
tenuous relationships that violate the concept. More definitive relationships
are necessary, for there to be one common bond. and the final rule should
establish a much greater affinity with more specificity.
More significantly,
though, the regulation would allow a completely separate and distinct company to
be included if there is "a strong dependency relationship." This criterion
clearly violates the common bond concept, and allows tenuous relationships which
make a mockery or' the common bond notion to come under one umbrella credit
union. For instance, a large corporation could begin to include suppliers,
distributors, retailers, accountants and law firms. Also, if those having "a
strong dependency relationship" to this secondary tier are drawn in under the
original common bond, the extension could grow and insert itself into virtually
any and all occupations.
If there is to be service to distinct occupations,
the group should be required to apply for a charter amendment and become what it
actually is: a multiple common bond credit union. Since Congress revised the
concepts of the different common bonds in the Act, these rules should be revised
as well to require that a credit union convert to the new form of multiple
common bond credit union, instead of allowing it to extend its boundaries well
beyond what can be logically considered a single common bond.
Mergers.
According to the proposed NCUA rules, the nature of a credit union's charter
(e.g., single common bond, multiple common bond or community charter) will not
change in an emergency merger situation. Again, this violates the statutory
mandate, and allows credit unions to begin serving groups that are outside the
scheme established by Congress. Since CUMAA does not provide this latitude, the
NCUA should not read this authority into the law. Therefore,while it might be
necessary, to allow two disparate groups to merge in an emergency situation in
order to protect the members of the credit union or the NCUSIF. the law clearly
requires that disparate groups under one umbrella become multiple common bond
credit unions.
The proposal also provides that "an emergency merger may be
approved by the NCUA without regard to field of membership rules or other legal
constraints." However. the Act sets forth specific criteria for when the NCUA
must take prompt corrective action to prevent the failure of a federally-insured
credit union after considering specific levels of net worth and capitalization
established in the statute. Because the NCUA is considering a separate proposal
on prompt corrective actions, the emergency merger provisions should incorporate
the same guidelines. The proposed emergency merger provisions do not state with
specificity when such a merger can occur, but only offer vague guidance. (For
example, the NCUA must merely make findings that: (1) "an emergency requiring
expeditious action exists; (2) other alternatives are not reasonably available:
and (3) the public interest would best be served by approving the merger."
Without more specific criteria outlining when a merger must take place, these
provisions can easily be used to evade statutory restrictions and allow mergers
of credit unions when no true emergency exists. As a result, the emergency
merger provisions could be used arbitrarily and capriciously as a pretext for
allowing a merger of two credit unions, and for allowing an inappropriate
expansion of a credit union's field of membership without complying with the
statutory guidelines.
Conclusion
It is vital that NCUA's final
regulations contain specific rules and guidelines for credit unions and charter
applicants to follow consistent with the law and the intent of Congress.Vague
standards and broad interpretations that depart from statutory, requirements
appropriately result in increased Congressional oversight and force injured
parties to turn to the courts to clarify or overturn the NCUA's regulations.
Thank you for the opportunity to testify.
END
LOAD-DATE: February 4, 1999