CUNA Comment Letter

RE: Proposed Changes to Federal Credit Union Bylaws

April 5, 1999

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

RE: Proposed Changes to Federal Credit Union Bylaws

Dear Ms. Baker:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on NCUA's notice and request for comment regarding proposed changes to the federal credit union (FCU) bylaws, which was issued on January 4, 1999. CUNA represents more than 90% of our nation's 11,000 state and federal credit unions.

The proposed changes consolidate two manuals, which currently contain the FCU bylaws and standard amendments, into one manual. The changes also eliminate or modernize several bylaws that have become outdated or obsolete. On March 7, 1997, NCUA issued a request for comments regarding NCUA's efforts to clarify and reorganize the existing bylaws. Those comments were considered during NCUA's preparation of the revised bylaws that were issued on January 4, 1999.

Summary of CUNA's Position
CUNA supports NCUA's efforts to update and clarify the FCU bylaws. We feel that the agency has done a commendable job in modernizing the bylaws, and we support most of the proposed changes. We are recommending the following changes:

General Comments
As a general observation, we note that in the past credit unions have adopted the bylaws in the NCUA manuals and have been able to amend these bylaws if the amendments were approved by NCUA. We support NCUA's decision not to require all FCUs to adopt the revised bylaws. Requiring FCUs to adopt the revised bylaws would eliminate previous amendments that were approved by NCUA. The better approach will be to encourage each federal credit union to review its bylaws to determine if they reflect the needs of the credit union and the requirements of current law. If a credit union is not satisfied with its current bylaws, it can adopt the revised bylaws along with any amendments that are approved by NCUA. Both CUNA and the credit union leagues will be ready to assist credit unions in this effort by providing necessary information, either in publications or on the CUNA Website.

We also agree with NCUA's efforts to remove operational issues from the bylaws. We have identified certain operational issues that have not been deleted, and these are discussed throughout the letter. We also agree with NCUA's efforts to remove provisions that are covered in NCUA's regulations. As discussed below, we believe one exception to this approach should be the inclusion in the bylaws of a definition of "immediate family member or household."

Lending
With regard to specific comments, we believe that the provisions in the proposed Article XI of the bylaws regarding member business loans should be deleted. Section 203 of the Credit Union Membership Access Act (CUMAA) added a new § 107A to the FCUA, which imposes limitations on member business lending. On September 29, 1998, NCUA's interim final rule that incorporated the limitations as set forth in the CUMAA took effect. Because of these new limitations, we believe it is no longer necessary to have provisions in the bylaws that address member business loans. Also, the proposed bylaws would only apply to federal credit unions. This could lead to different treatment between federal and state chartered insured credit unions with regard to this issue. Eliminating the proposed bylaw provisions on member business lending would result in consistency between federal and state chartered insured credit unions, as both would be subject to § 107A of the FCUA and the corresponding interim final rule that was issued last year.

Article VIII requires a federal credit union to make small loans over large loans if funds are limited. We suggest that this provision be deleted because credit unions should be able to make this decision on a case-by-case basis.

Definition of Immediate Family Member or Household
Article XVIII, Section 2(a), of the current bylaws requires federal credit unions to define the term "members of their immediate family" for purposes of deciding who may join a credit union. One of the proposed changes is to drop this provision because the definition is provided in the FOM chartering manual. The definition was effective as of March 5, 1999, although credit unions are also permitted to adopt a more restrictive definition.

Although we realize that the FOM manual provides a definition of "immediate family member or household," we believe that the definition should also be stated in a credit union's bylaws. Each credit union must have a definition of this term, whether it is the definition as provided in the FOM manual or a more restrictive definition as determined by an individual credit union. We believe that requiring the definition in the bylaws would result in consistency as to where the definition can be found for each federal credit union. This will be helpful if a member contacts a credit union to inquire if certain relatives are eligible for membership.

Furthermore, the FOM manual adopts a definition of "household." This is a new term that is not defined in the current version of the bylaws or even in a credit union's charter. Because the term "household" is not written anywhere in a credit union's records, we believe that it should be included in the bylaws so that there can be a written record as to how this term is defined. One approach to this issue of defining "immediate family member or household" could be to adopt the current approach where there would be blank lines for the credit union to define its FOM, along with commentary noting that the definition cannot be more expansive than what is provided in the FOM chartering manual.

Membership and Shares of Members
Article II, Section 5, of the current bylaws contains language regarding termination of membership for those no longer in the FOM. A proposed change would delete this provision because of the "once a member, always a member" provision that was added to Section 109 of the FCUA pursuant to Section 101 of the CUMAA. However, the FOM chartering manual allows federal credit unions to restrict services to members who are no longer in the FOM. We believe that the revised bylaws should acknowledge this ability to restrict services.

Sections 2 and 3 contain provisions requiring the signing of applications by members, providing reasons for membership rejections, and requiring another entrance fee for those who are terminated from membership and then readmitted. We believe that these are operational issues, and NCUA has stated in its comments that accompany the proposed changes that such operational issues should be removed from the bylaws.

Article III, Section 4, of the proposed bylaws permit the transfer of shares from one member to another. This provision is confusing because membership shares generally cannot be transferred. If this provision applies to other types of shares, we suggest that it be permitted under a non-standard bylaw provision for those federal credit unions that may have a need for it. Section 5 contains provisions regarding payroll deduction plans, continuation of share accounts of deceased members, and prohibitions on the withdrawal of shares below the amount of the member's primary or contingent liability to the credit union. We believe these are operational issues that should be removed from the bylaws.

As for other membership issues, Article XVII, Section 7, requires each member to keep the credit union informed of his or her address. We believe this is another operational issue that should be deleted. Also, Article XV of the proposed bylaws permits shares to be issued in the name of a minor. We believe that Article XV can be deleted because the FCUA already allows this.

Board of Directors and Officers
Article VI, Section 5, of the proposed bylaws allows audio or video meetings of a federal credit union's board of directors, as long as one regular meeting each quarter is conducted in person. We believe that this is another operational issue. We believe that a credit union's board of directors should have the authority to decide the necessity and frequency of meetings to be held in person. Other cooperative organizations have this flexibility, which recognizes the efficient use of modern technology. The use of modern technology should be a factor in NCUA's efforts to modernize and update the FCU bylaws. In fact, we believe that a credit union should have the option to use audio and video technology for all of its meetings. Furthermore, we also suggest that the bylaws be amended to permit notational and telephone voting by the credit union's board in appropriate situations. NCUA allows this for its own board, and we believe that it would also be appropriate for a federal credit union's board of directors.

Article VI, Section 2, of the proposed bylaws adopts the standard amendment that limits the number of directors who can be paid employees of the credit union. The proposal modifies the standard amendment by limiting the number of such directors to no more than two, as opposed to the standard amendment, which allows the credit union to determine how many directors may be paid employees. We believe the standard amendments should be adopted without the modification. The credit union and its members should continue to determine the number of directors who can be paid employees. Any concerns about board representation can be handled as a supervisory issue.

Article VII, Section 6, of the proposed bylaws requires the financial officer to post a copy of the current financial statement in a conspicuous place in the credit union. We believe this is another operational issue that should not be included in the bylaws.

Removals and Vacancies
Article XVII, Section 3, of the proposed bylaws deletes the authority of the membership to remove an employee of the credit union. We support this deletion and also suggest that NCUA either consider deleting the authority of the membership to remove an "officer" or clarify what the term means. The term "officer" is not defined in the bylaws, and many credit unions are using such titles as "chief executive officer," "chief operating officer," and "lending officer" to refer to employees of the credit union. Removing such officers under the terms of Section 3 may conflict with state and federal employment laws.

Article XVII, Section 3, allows directors, committee members, or officers to be removed by a majority of members voting at a special meeting. Because only 15 members constitute a quorum at an annual or special meeting, this provision can place removal powers into the hands of a small number of members. We question whether a higher minimum number would be appropriate to address this concern. Also, Article VI, Section 4, of the proposed bylaws allows vacancies on the board of directors, credit committee, and supervisory committee to be filled "within a reasonable time." We believe this language is vague and should be removed.

Member Privacy
Article XVII, Section 2, of the proposed bylaws requires that transactions between credit unions and their members, and all information regarding the members' personal affairs, be held in confidence. These provisions also provide specific exceptions to this requirement, which generally cover lending activities, the guarantee of share drafts by third parties, and participation by the credit union in credit and consumer reporting agencies under certain circumstances. We are concerned because of the recent developments at the federal level with regard to privacy and because these exceptions may conflict with certain state laws. Congress is currently examining the issue of financial privacy and legislation may be passed as a result. Our suggestion would be to keep the general provision requiring confidentiality. However, instead of outlining specific exceptions, we would suggest that the exceptions be limited to those that are "permitted under state and federal law."

Annual Meeting of Members
Article IV, Section 1, of the proposed bylaws requires the annual meeting of members to be held "in the county in which the office of the credit union is located or within a radius of 100 miles of such office..." We believe that this provision should be clarified to allow meetings within 100 miles of any office of the credit union. Certain credit unions may decide that it would be beneficial to allow these meetings to be held in different offices each year so that all members will have easy access to an occasional annual meeting. This may be especially important for credit unions that have offices in widely dispersed areas.

Article IV, Section 2, of the proposed bylaws requires that notice of an annual meeting to members must be sent between 30 and 75 days before the date of the meeting. We would prefer the current bylaw provision, which requires notice at least seven days before the date of the meeting. The proposed change provides less flexibility and removes a degree of decision making from the board of directors. We also do not support the proposed change in Section 3 that would increase the minimum number of members that may request a special meeting from 200 to 500. This would adversely affect small credit unions. A better alternative may be to set the number based on the percentage of total members.

Elections
Another issue in Article IV of the proposed bylaws is the order of business for annual meetings that is outlined in Section 4. Under the current bylaws, the elections are listed as the last item of business. We suggest instead that elections take place after the report of the supervisory committee. We believe this change will result in more time being devoted to the election process and could help to ensure that the results of the elections are announced prior to the end of the meeting.

Article V of the proposed bylaws provides four options regarding the elections process. We suggest an additional option. Under this option, the nominating committee would be required to send a notice at least 120 days prior to the election informing members that nominations are being solicited for certain vacancies. Any member could place his or her name in nomination, and that nominee would be listed on the ballot, as long as necessary qualifications are met. The nominating committee would be required to assure that there is at least one candidate for each vacancy. There would be no nominations from the floor or by petition. This option is provided under general corporate law. The option is fair, efficient, and prevents the disruptions that can occur when nominations are submitted from the floor at the last minute.

With regard to the fourth option outlined in the proposed bylaws, we suggest removing the requirement that the credit union keep the ballot identification form and seal ballot envelope in separate places for safekeeping pending the vote count. We believe this is another operational issue that should not be included in the bylaws. Also, this provision appears to contradict the provisions in Section 8 that allow credit unions to combine the identification form and ballot. Section 8 applies regardless of the option chosen.

For all of the proposed options, we suggest that the nominating committee be given the responsibility to ascertain whether the nominees meet the criteria established for the position. This should avoid vacancies resulting from an elected nominee's disqualification. We also suggest deleting the provisions prescribing the order of nominations, as outlined in Section 3. We believe this is another operational issue that does not need to be included in the bylaws.

Fees
The proposed bylaw changes would delete current Article III, Section 5(f), which allows the board of directors of a credit union to impose a fee for excessive share withdrawals from regular share accounts. NCUA has proposed deleting this provision because it is covered in the NCUA's Truth-in-Savings regulations. We believe that the issue of fees should be addressed in the bylaws because neither NCUA's Truth-in-Savings regulations nor the FCUA directly address this issue. Instead of deleting this provision, we suggest that it be changed to allow the board "to impose fees on members for products and services provided by the credit union, as well as fees to cover certain authorized expenditures of the credit union on a non-discriminatory basis."

Deposit of Credit Union Funds
Article XIII of the proposed bylaws requires federal credit unions to set deadlines for depositing funds into a qualified depository. We believe this is another operational issue that does not need to be included in the bylaws.

Definitions and Formatting
We suggest that the definitions contained in Article XVI of the proposed bylaws be moved to the front. In its comments that accompany the proposed changes, NCUA has expressed the desire to revise the bylaws so that they are more user friendly for FCUs. We believe that having the definitions in the front of the bylaws would help in those efforts. We also suggest that the term "applicable law and regulations" be amended to incorporate state laws and regulations that are applicable to credit unions. Examples of such laws include the Uniform Commercial Code and lender liability statutes.

As for formatting issues, we note that Subsection (d) in Article VII, Section 6, appears to be missing. We also recommend the removal of all gender specific language and would also suggest that the federal credit union's organization certificate charter and forms making changes to the FOM be included as an appendix to the bylaws. Both the credit union and NCUA would benefit if these important documents were located in one place.

Thank you for the opportunity to comment on the notice regarding the proposed changes to the FCU bylaws. If Board members or agency staff have questions about our comments, please give me a call at 202-218-7795.

Sincerely

Jeffrey Bloch

Assistant General Counsel