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Contact ABA ABA-Member Relations 1120 Connecticut Ave, NW Washington, DC 20036 1-800-BANKERS Questions? E-mail: Member Services

August 14, 2000

Dear Ms. Baker:

On June 13, 2000, the National Credit Union Administration ("NCUA") Board ("Board") issued for public comment the above proposed rule amending its current chartering and field of membership manual ("IRPS 99-1"). This proposed rule reflects NCUA’s experience with issues arising from IRPS 99-1 and the work of NCUA’s Field of Membership Task Force. In particular, the proposal modifies IRPS 99-1 in the areas of the reasonable proximity test, capitalization for select group expansion, expanded expedited process for select groups of 500 or less, liberalization of the voluntary merger rules, establishment of a Community Action Plan and expansion of credit union services to underserved areas. The American Bankers Association brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership--which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks--makes ABA the largest banking trade association in the country.

The American Bankers Association ("ABA") believes that the thrust of a number of NCUA’s proposed changes to IRPS 99-1 defies the intent of Congress in establishing meaningful field of membership requirements for Federal credit unions. In the Credit Union Membership Access Act ("CUMAA") Congress established the parameters for these requirements when it stated in the law that "a meaningful affinity and bond among members . . . is essential to the fulfillment of the public mission of credit unions." In the guise of "clarifying" and "streamlining" its existing chartering and field of membership policies, NCUA has further expanded opportunities for many Federal credit unions to ignore the "meaningful affinity and bond", that rests at the core of the credit union industry.

ABA urges NCUA to significantly modify the proposal to maintain this "meaningful affinity and bond." This includes the elimination of the proposed use of shared branches as a basis for measuring reasonable proximity; rejection of the proposed "reasonable progress" toward adequate capitalization approach; rejection of the proposed increase to 500 or fewer "primary potential members" to invoke the expedited process for select group additions; retention of the statutory requirement that, in a voluntary merger, a separately chartered credit union analysis must be performed for a select group of 3000 or more potential members and retention of the requirement that credit unions that add an underserved area to their field of membership "must establish and maintain an office or facility in the community."

In addition, ABA supports that aspect of NCUA’s proposal that establishes a "Community Action Plan" ("CAP") for community credit unions. However, ABA believes this approach does not go far enough and that the CAP should be applied to all Federal credit unions regardless of their common bond or community structure.

In addressing issues relating to the application of CUMAA’s "reasonable proximity" test for including a select group within an existing Federal credit union, NCUA proposes to retain the ability of Federal credit unions to acquire select groups within reasonable proximity of a shared service center. ABA reiterates its objection to the use of such shared branches as a nexus for measuring "reasonable proximity" (See ABA comment letter to NCUA regarding IRPS 98-3, November 13, 1998).

Including a shared branch within the meaning of "service facility" remains a major departure from the historical definition of that term. The ability of a Federal credit union to expand its field of membership from such a base even with the limitations proposed by NCUA greatly expands the types of facilities that are deemed service facilities for purposes of all multiple group field of membership determinations. The use of these shared branches as launching sites for recruitment of select groups would permit almost unlimited credit union service areas and expanded fields of membership.

Congress never intended such a result. Representative John J. LaFalce, in his November 12, 1998 letter to NCUA in response to NCUA’s proposed revision to IRPS 98-3 expressed strong reservations regarding NCUA’s expansive interpretation of a credit union "branch." According to Representative LaFalce, NCUA’s proposed treatment of "reasonable proximity" exceeded Congressional intent. This problem, he noted, was further "compounded" by "NCUA’s interpretation of a credit union branch that goes significantly beyond the traditional idea of a full-service branch office." The Congressman further stated that this interpretation would "include shared branches and also branches and electronic facilities owned by multiple credit unions through credit union service organizations (CUSOs). This would permit each credit union that shares a branch or electronic facility or participates in a CUSO that operates such facilities to expand through inclusion of new groups in concentric circles around each of these locations regardless of the geographic base of their own operations and membership." He concluded that "these scenarios are inconsistent with Congressional intent."

NCUA correctly adopts the premise that shared service centers that are linked by state or national networks without ownership should not be used as the basis for select group expansions. However, ABA contends that all shared service centers should not be treated as sites for select group expansion regardless of ownership.

In any case, if NCUA determines to go forward with this aspect of the proposal, the proposed language modifying the treatment for shared services should be changed. This language authorizes the addition of select groups "if the credit union either (1) owns directly or through a CUSO or similar organization, at least a 5 percent interest in the service facility or (2) the service facility is local to the credit union and the credit union is an authorized participant in the service center." (Emphasis added.) The ABA believes that, at the very least, tests (1) and (2) both should be met for select group expansion from a shared branch. Incorporating the requirement that a shared branch be " local", however that may be defined, comes closer to the statutory "reasonable proximity" test for purposes of the expansion process.

NCUA’s proposal provides the NCUA regional director with discretionary authority to authorize a Federal credit union to incorporate a select group within its field of membership even if the credit union fails to attain NCUA’s definition of adequate capitalization (net worth ratio of not less than 6 percent.) This exception to the adequate capitalization requirement would exist for all Federal credit unions other than those chartered for less than ten years or defined as low-income credit unions provided that " the credit union is making reasonable progress toward meeting the 6 percent net worth requirement, and the addition of the group would not adversely affect the credit union ’s capitalization level." Those credit unions chartered less than ten years or defined as low-income would only have to meet the "reasonable progress" component of the test

Under Section 102 of CUMAA, NCUA may not approve the addition of a select group unless it determines in writing among several criteria that "the credit union is adequately capitalized." (emphasis added) Congress’s use of the present tense shows that it did not intend this requirement to mean "adequately capitalized in the future." There is no indication in CUMAA that "reasonable progress" toward adequate capitalization is a substitute for adequate capitalization. Instead, if a Federal credit union fails to meet the adequate capitalization test, it does not meet the statutory criteria to expand its field of membership through select groups.

In fact, this is a step backward towards NCUA’s former policy of trying to restore a Federal credit union’s financial health by adding new select groups to its field of membership so as to grow the institution. Such "grow your way to health" policies compounded economic problems rather than solved them in the 1980s. NCUA should also recognize that there are other options for extending credit union services, such as the chartering of new credit unions. Authorizing select groups for Federal credit unions not adequately capitalized is not the answer. Thus, ABA objects to NCUA’s efforts to evade Congressional criteria and urges NCUA to eliminate this aspect of its proposed rule.

At the same time, ABA reiterates its overall objection, reflected in its November 13 letter, to NCUA’s establishing a 6 percent net worth level for adequate capitalization without recognizing the requirements of CUMAA relating to the definition of "complex credit union" and the application of a risk-based capital standard to the measurement of adequate capitalization.

In the proposal, NCUA seeks to modify the expedited process criteria for adding groups to a multiple common bond Federal credit union. Currently, this expedited process is triggered if the group has 200 or fewer "primary potential members". NCUA intends to expand this expedited process to groups of 500 or fewer "primary potential members". NCUA justifies this expansion based on its own statistics, which NCUA believes demonstrate the advisability of such a liberalization. According to NCUA, 96.7% of all approved expansions constitute groups of 500 or less while only 2% of all applications for such expansions resulted in NCUA’s denial. NCUA also claims that all groups of 500 or less which sought incorporation in a multiple common bond Federal credit union would not have qualified to establish their own credit unions.

The ABA suggests that NCUA has not demonstrated a need to enhance this expedited process. According to NCUA, the average time for approving a SEG currently is less than 2 days, a reduction of 11 days from the average time required in 1999. A two-day turn around time hardly imposes a hardship on credit unions.

In any case, ABA believes that the expansion of this expedited process serves to further discourage groups from establishing their own self-sustaining independent Federal credit unions. As reflected in ABA’s November 13 letter, Congress intended that "the NCUA should charter new credit unions wherever possible…." (House Banking Committee report relating to CUMAA at page 20). The report further states that NCUA "should encourage groups, regardless of size to form their own credit unions." Thus, the legislative history demonstrates a very strong directive to NCUA to charter new credit unions rather than automatically adding groups to existing multiple common bond credit unions, essentially on request. In addition, the Senate Banking Committee report relating to CUMAA emphasizes that in all cases, NCUA should determine, based on objective criteria and the facts of each individual situation, whether a particular group of fewer than 3000 persons can operate as a viable and independent Federal credit union.

By making it even easier for a select group, otherwise eligible to establish its own credit union, to be included within a multiple common bond credit union, NCUA further erodes Congressional intent to encourage, wherever possible, the formation of Federal credit unions. With NCUA’s bias against the establishment of small credit unions, NCUA further undermines the incentive for the formation of such credit unions. Further, NCUA ignores the fact that there are currently almost 2000 credit unions with 500 or fewer members. These credit unions are profitable, adequately capitalized, and provide their members with products and services deemed appropriate for their memberships. These credit unions reflect the potential for a true cooperative, democratic experience offered by the credit union industry. Each member is able to participate actively in the oversight of his or her credit union more effectively in an independent Federal credit union than as a member of a select group in a much larger credit union. Therefore, ABA urges NCUA not to diminish further the opportunity for individuals to join together in groups of 500 or fewer to establish their own credit unions by making it even easier for these individuals to be absorbed into a multiple group credit union.

NCUA proposes to modify its policy relating to voluntary mergers by eliminating the requirement for an analysis of the ability of a select group of more than 3000 primary potential members to establish its own credit union. NCUA’s current regulation mandates an analysis of each group to determine whether the formation of a separate credit union is "practical." If the creation of such a separate credit union is not "practical" because the group lacks sufficient volunteer and other resources to support the efficient and effective operation of a separate credit union, a merger may occur.

In proposing this modification, NCUA ignores the statutory requirement of CUMAA, that mandates NCUA first encourage the formation of separately chartered credit unions. There is no indication that Congress intended any exception for situations involving select groups of more than 3000 potential members involved in a voluntary merger. CUMAA does not provide any exception from the requirement that there be an analysis of whether a select group of 3000 or more potential members should establish its own Federal credit union. There is no justification for creating such an exception solely because there is an overlap between the fields of membership of the two merging credit unions. NCUA should require this test regardless of the situation and retain the existing requirement of IRPS 99-1 in its final revision to that regulation.

The NCUA acknowledges that one of the primary goals of the Federal Credit Union Act ("FCUA") is to make credit available to people of small means. 1 Further, all Federal credit unions are required to have Federal insurance for member accounts, and the NCUA is charged with considering "the convenience and needs of the members to be served" before granting member account insurance. 2 Further, the NCUA is charged under the FCUA with determining that any application to form a credit union "conforms to the provisions" of FCUA. 3 It follows, then, that the NCUA is by law obligated to determine whether an application will, if approved, in fact meet the convenience and needs of people of small means before approving the application. While the NCUA currently requires that applicants for expanding, chartering or converting a credit union include a marketing plan and a business plan, NCUA observes that marketing plans are not required to address any specific segment of the proposed membership, such as low-income persons or residents of underserved areas (people of small means). The NCUA is proposing to require that applications to expand, charter or convert to a community credit union (not single common bond or multiple common bond credit unions) include a CAP, which would "supplement the marketing plan by specifically addressing the credit union’s plan to market its services to the entire community, including underserved or low-income areas (if applicable)."

The NCUA by its own statement does not require that marketing plans for common bond credit unions demonstrate how such a credit union will market to members to be served who are of small means, apparently in the belief that such marketing is inherent in the idea of a "credit union." As a result, the NCUA only proposes to apply its CAP requirement to community credit unions. In making the proposal, the NCUA states that "there is no evidence to support that community credit unions have failed to fulfill their responsibility to serve the entire community." In fact there is evidence that credit unions do not see as their primary purpose the making of credit more available to people of small means. The Filene Research Institute and the Center for Credit Union Research has published a study showing that credit union CEOs rank "offering services to low and moderate income people by expanding our field of membership" 26th out of 28 value statements in importance. 4 These same CEOs ranked such a value as next to last in a listing of values practiced by their credit unions. As the study reported, only ten percent of the 454 respondents said that they practice this value to an extreme extent and an additional 20 percent said that they did so to a considerable extent. 5 This suggests that 70 percent of credit union CEOs consider in their business plans the purpose of service to low- and moderate-income individuals and underserved areas to some extent or less. This is not a standard of practice that will implement a primary purpose of credit unions.

Unlike these credit union CEOs, ABA believes that the FCUA imposes an affirmative duty on the NCUA to ensure that Federal credit unions do in fact meet the primary purposes of their chartering and account insuring, which includes making credit more available to people of small means. The NCUA does not meet this affirmative duty by saying that there is no evidence of failure: affirmative duties are met by gathering evidence of performance, something which the NCUA is apparently reluctant to do.

Thus, ABA supports the NCUA proposal to require Community Action Plans but believes that the current proposal does not actually meet the obligation placed upon the NCUA, both as chartering authority and as insurer, to determine that a Federal credit union will serve the convenience and needs of the members to be served. Since that statutory obligation is applicable to the NCUA with respect to all Federal credit unions, not just community credit unions, ABA urges the NCUA to expand its proposal.

The NCUA should require measurably more evidence of service by all credit unions to potential members of small means who are in their membership fields or who are resident in the low-income and underserved areas in which they have offices. ABA believes that the NCUA could meet its affirmative obligation by requiring all Federal credit unions to file and annually review a CAP that would set forth the specifics by which the credit union would market to low-income and underserved people, select employee groups, and communities either within the actual or potential common bond or within their service areas. The NCUA would need to also periodically review performance under the CAP, which the NCUA has proposed to do. With respect to community credit unions, the NCUA should require even more, since community credit unions are in fact chartered primarily to serve their entire communities, including low- and moderate-income residents and neighborhoods. The NCUA needs to require affirmative evidence from community credit unions of their performance in serving the entire community, including those low-income or underserved areas. As the NCUA has suggested, such performance reviews should look to "current or future delivery systems, such as ATMs, 24 hour voice response systems, internet web sites; current or future customized programs to assist community residents such as credit counseling and budgeting; and current or future service facility locations." The NCUA should also look for special outreach efforts by community credit unions. Finally, the NCUA should compare the economic demographics of the membership of the credit union, to see if it is reflective of the demographics of the potential members, especially the low- and moderate-income members. For the NCUA not to take these steps is to fall short of meeting the affirmative obligation placed upon the NCUA by the Federal Credit Union Act.

NCUA proposes to modify the existing language of IRPS 99-1 relating to Federal credit union service to underserved areas as defined in CUMAA, which would undermine the statutory criteria for authorizing credit unions to provide services to underserved areas. Among these criteria is the requirement that "the credit union establishes and maintains an office or facility in the local community, neighborhood, or rural district in which credit union services are available." The current regulatory language tracks this statutory requirement mandating that credit unions that add an underserved area to their field of membership "must establish and maintain an office or facility in the community."

NCUA proposes to change this statutory requirement to one in which the credit union need not establish an office in an underserved community. This is contrary to the statute. Instead, the proposal would authorize credit unions that have a "preexisting office within close proximity to the underserved area" to ignore the statutory requirement. The statute does not authorize NCUA to substitute "close proximity" for "in" the community. ABA urges NCUA to honor the existing statutory requirement and delete this provision from its proposed regulation.

As stated in ABA’s November 13 letter, NCUA should encourage the chartering of new credit unions to serve underserved areas as a better alternative to expanding the fields of membership of existing credit unions to accomplish this objective. To do so would ensure that the boards of directors of these credit unions chartered in underserved areas would consist of individuals from the underserved community and that the credit unions’ policies would better reflect the needs of these communities. When de novo credit unions are not practical, NCUA should ensure that those credit unions incorporating underserved areas in their fields of membership provide credit and service to the people of the underserved areas. One of the best ways to do so is to have one or more facilities operating in that area providing full services to the community. Not only should the credit union meet the statutory test of operating a facility in the underserved area, but in approving field of membership expansions to include underserved areas, NCUA should look to credit unions in close proximity to the underserved areas. To do so would better enable the members of the credit union from that area to actively participate in the credit union’s governance.

The ABA urges NCUA to modify its proposed amendments to IRPS 99-1 in keeping with ABA’s specific suggestions as identified in this letter. ABA urges adoption of NCUA’s proposed "Community Action Plan" with modifications that would extend its requirements to all Federal credit unions regardless of their common bond or community structure.

The ABA welcomes the opportunity to provide further suggestions regarding this proposal and to respond to any questions. Please do not hesitate to contact the undersigned or John C. Rasmus at 202-663-5333.

Sincerely,

Edward L.Yingling

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