CUNA Comment Letter

Proposed Community Action Plan

August 7, 2000

Ms. Becky Baker
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314-3428

RE: Proposed Community Action Plan

Dear Ms. Baker:

Because of our member credit unions' widespread opposition to the proposed Community Action Plan (CAP) requirements, the Credit Union National Association is taking the extraordinary step of filing two letters in response to the agency's single request for comments on the proposed changes to the field of membership policy (Interpretive Ruling and Policy Statement 99-1). This letter expresses our deep opposition to the agency's proposal regarding the CAP. A separate CUNA letter addresses all of the other changes the Board is proposing to its field of membership policies.

CUNA appreciates the opportunity to express our very strong views on the CAP proposal. Our comments were developed by our Federal Credit Union Subcommittee, chaired by Mr. Edwin Collins, Chairman and CEO of Lockheed Georgia Employees FCU. CUNA is the country's largest credit union advocacy organization, representing approximately 90% of the nation's 10,500 state and federal credit unions.

Summary of CUNA's Position Opposing the CAP Requirements

CUNA urges NCUA to eliminate or, at the very least, delay further consideration of its CAP proposal. Here are the highlights of CUNA's comments in opposition to the proposed CAP requirements.

There is Simply and Clearly No Need for the CAP Proposal

Since their inception, credit unions have had a strong tradition of providing service to all members, regardless of their financial background. This distinctive credit union characteristic is reflected in CUNA's longstanding record of supporting credit union efforts to provide membership and services to consumers throughout this country. As surveys such as those conducted yearly by the American Banker newspaper indicate, credit unions have a record second to none concerning members' financial needs.

Ironically, NCUA's Request for Comments on the CAP proposal emphasizes that community credit unions are indeed reaching out to their membership. "There is no evidence to support that community credit unions have failed to fulfill their responsibility to serve the entire community," the Supplementary Information accompanying the proposal states (Fed. Reg., Vol. 65, No. 114, June 13, 2000, p. 37071).

When the Credit Union Membership Access Act was before Congress, a letter from NCUA Director of Public and Congressional Affairs Robert E. Loftus, introduced into the Congressional Record July 27, 1998, and unchallenged by the NCUA Board, stated, ""our investigations have not produced any evidence that credit unions are guilty of redlining or other discriminatory practices." (Cong. Rec., July 27, 1998, p. S-9026).

Congress agreed and included in the findings of the Credit Union Membership Access Act the following relevant parts: "(1) The American credit union movement began as a cooperative effort to serve the productive and provident credit needs of individuals of modest means. (2) Credit unions continue to fulfill this public purpose" (emphasis added, 12 USC 1751(4)).

During the Senate floor debate on the Act, several Senators made eloquent statements denouncing the need for CRA-type provisions for credit unions. One example is the oratory of Senator Connie Mack (R-FLA): "In contrast to banks, credit unions, by their nature already lend to their members. It is ludicrous to impose CRA on credit unions" (Cong. Rec., July 27, 1998, p. S-9017).

The issue of credit union service was more recently addressed in a study by the Filene Research Institute entitled, "Mission Values and Leadership Styles in Credit Unions." The study clearly demonstrates that credit unions are committed to serving all their members, regardless of their income levels. The Institute surveyed 454 credit union chief executive officers regarding the importance of various values relating to a credit union's mission. The responses show that credit unions want to provide "the best possible service" and treat "all members with the same dignity and respect regardless of the size of their credit union business."

Clearly, a new regulation is unnecessary to force community federal credit unions to serve their fields of membership. Thus, rather than a needless, unsubstantiated, and unwarranted new rule, which will have costs for community credit unions, their members, and NCUA, CUNA supports the voluntary program initiated by the National Credit Union Foundation, Project Differentiation. Designed to help credit unions assess their efforts to serve all of their members, Project Differentiation is an important resource for the credit union system to utilize on a voluntary basis in evaluating existing services and planning future ones. Unlike a regulatory directive, this approach is fully consistent with the cooperative spirit of credit unions and with credit unions' outstanding record of service to members.

Project Differentiation has been completed or is currently underway at credit unions around the country. Adopted by all types of credit unions including those with a community charter, Project Differentiation encourages credit unions to develop a Statement of Commitment to Members. By creating their own statement, credit unions reinforce their support for traditional credit union values and document their successes in meeting members' needs. This process also allows credit unions to identify membership service areas that need greater attention. Such a voluntary approach will be far more effective in helping credit unions evaluate service to all members than will a draconian new regulation that the agency has publicly admitted is uncalled for.

The CAP Proposal Will Result In Further Devaluation Of The Federal Credit Union Charter.

In the last three years, 136 credit unions have converted from a federal credit union charter to state charter. This represents a significant change from the trend of only five years ago when state chartered credit unions were the predominate converting group. Another seven credit unions have converted to thrift charter during the same time frame (Credit Union Executive Notes, Vol. 26, No. 21, p. 2).

As NCUA's own research shows, these conversions are driven by deep-seated field of membership concerns (although in the case of conversions to a thrift charter, other issues are also involved) and the anticipation that conversion will permit greater growth and more flexibility in the regulation of common bond issues.

There is a growing perception that the value of the federal credit union charter has been diminished by, among other things, the fear of field of membership constraints and by the quest from some quarters in the agency to achieve social mission goals.

At a time when federal credit unions are seriously questioning the utility of their charter, the agency should be looking for ways to reinforce the benefits of the federal charter, not dilute them, as surely the adoption of the CAP requirements would do. Most state chartered credit unions do not have to comply with social policy regulations, such as the CAP requirements, and an increasing number of states are seeking to change their common bond provisions to encourage credit union expansion.

CUNA is a strong proponent of a robust dual chartering system. Just as we favor choices for consumers, we believe credit unions should have viable options for deciding whether to be regulated by the state or federal government. NCUA should not sacrifice the strength of the dual chartering system in an ill-conceived attempt to achieve social goals that will further diminish the value of the federal charter.

The CAP proposal violates Executive Order 12612, which requires NCUA to take into consideration the effect of its action on state interests. In the Federal Register notice, NCUA states the proposed FOM changes, including the CAP proposal, will have not effect on such interests (Fed. Reg., Vol. 65, No. 114, June 13, 2000, p. 37075). On the contrary, the CAP proposal will affect state interests by devaluing the federal charter and further upsetting the balance between state and federal charter options. NCUA has failed to comply with the Order by dismissing the impact of the CAP requirements on the dual chartering system.

The NCUA Board Does Not Have The Legal Authority To Adopt The Proposal

Looking back over the 66-year history of federal regulation of credit unions, it is starkly apparent that NCUA's proposed CAP requirements are a radical departure from the agency's prior understanding of its regulatory authority. In general, NCUA has refrained from imposing stringent regulations for reasons other than safety and soundness, except in rare instances of specific statutory authority.

No statutory basis exists for NCUA's attempt to regulate credit unions' fulfillment of social mission goals in the CAP proposal. This conclusion is based upon our exhaustive review of the Federal Credit Union Act and its legislative history. Our review compels us to conclude that neither the express language of the Federal Credit Union Act nor its legislative history authorizes the agency to implement the CAP proposal.

There are provisions in the Act that reference service to persons of modest means. In 1937, the Act was amended to authorize the Farm Credit Administration, which regulated federal credit unions at that time, to investigate the problems of people of small means in obtaining credit at reasonable rates of interest. In 1968, the Act was again amended to permit the Bureau of Federal Credit Unions to develop pilot programs to make grants for, or conduct credit union training programs to serve, low-income individuals. However, making grants and conducting training is a far cry from imposing supervisory sanctions to achieve service to the underserved. The Bureau was directed to consult with the Office of Economic Opportunity and other appropriate agencies. The fact that the OEO no longer exists raises serious doubts about the relevance of the 1968 amendments.

More importantly, the fact that Congress felt compelled to expressly state the authority for the training reveals that the greater authority to regulate service to the community, as the CAP proposal would do, does not exist in the absence of express language. Further, we have not discovered any legislative history that indicates Congress intended that NCUA regulate how credit unions meet the needs of their members, including those of small means.

The agency has repeatedly attempted to rely on the findings of the Credit Union Membership Access Act of 1998 to support its efforts to impose social mission objectives on credit unions. Yet, the findings of the Act do not provide a foundation upon which the agency may manufacture authority to engage in social policy regulation.

Finding #4 of the Act states:

Credit unions, unlike many other participants in the financial services market, are exempt from federal and most state taxes because they are member-owned, democratically operated, not-for profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means (12 USC 1751(4)).

While these provisions delineate credit unions' purpose, Congress refrained from taking the next necessary step and "find" that NCUA has the authority to mandate how credit unions will serve the needs of those within their fields of membership. Indeed, Congress expressly rejected the grant of any such authority to NCUA (as discussed below).

In proposing the CAP requirements, the agency cites no specific authority in the Federal Credit Union Act or legislative history that would demonstrate Congress intended NCUA to issue such a regulation. The only suggestion has been that, because Congress recognizes the role credit unions play in serving people of modest means, NCUA must have some implied authority to regulate that service. But this conclusion requires a leap of logic that cannot be sustained. The statute, historical practice and reasonableness all confirm that such specific authority does not exist and that NCUA cannot rely on its general powers of regulation in this instance.

The CAP proposal comprises new substantive requirements for federal community credit unions, which must be derived from express statutory authority. Otherwise, NCUA, not Congress, is writing new laws for federal credit unions, an activity the agency, of course, is not empowered to do. As the former chairman of the House Banking Committee stated when the National Credit Union Administration was created in 1970:

By elevating the Bureau of Federal Credit Unions to independent status, we are not giving the agency" any additional authority, privileges, or operational changes. Congress alone can change the Federal Credit Union Act and any major changes in credit union legislation must be made "by Congress (115 Cong. Rec. 20890, July 28, 1969).

NCUA has provided no express legal authority for the CAP proposal because none exists. The Supplementary Information on page 33 states, "One of the goals of the Federal Credit Union Act is to make credit available to people of small means." True enough, but this statement refers to what credit unions are intended to do, not what NCUA is intended to do. A statement of the most general nature, it is nonetheless the legal support NCUA relies upon for indicia of authority for the proposal. In essence, the agency has attempted to create authority for the proposal by using a bootstrap approach that attributes special powers to the agency based only on general rulemaking authority. This construct results in a chasm in the agency's rationale that cannot be bridged.

Congress Specially Chose to Protect Credit Unions from CRA Requirements

The silence of Congress regarding NCUA's authority in this field is testament enough to NCUA's lack of regulatory power over this subject. However, the record is even clearer than that. In passing the Credit Union Membership Access Act, Congress specifically declined the opportunity in 1998 to impose CRA requirements -- requirements very similar to the ones proposed by NCUA -- on credit unions. If NCUA already had this authority, that debate would have been completely unnecessary. The mere fact that the debate occurred is, in and of itself, strong evidence of NCUA's lack of power in this regard.

A review of the proposed legislative amendments to the Credit Union Membership Access Act entitled, "Serving Persons of Modest Means Within the Field of Membership of Credit Unions" reveals how similar those amendments are to the CAP proposal NCUA is seeking to adopt. These amendments were added in the House but were later dropped from the legislation before it passed in final form.

Regarding community credit unions, the CRA-type legislation called for the NCUA Board to establish additional criteria for annually evaluating the record of community credit unions in meeting the financial services needs of the field of membership and would have directed NCUA to "prescribe procedures for remedying the failure of any insured credit union to meet the criteria established" by NCUA.

Congress rejected these amendments and, in so doing, denied NCUA the authority to issue a regulation with similar requirements. Following the Senate Banking Committee's passage of the legislation which contained the CRA-type amendments, Senators Gramm, Shelby, Mack, Faircloth, Bennett, Grams, Allard, Enzi and Hagel issued a statement urging the provisions be stricken. The Senators stated:

"(T)hese provisions are inconsistent with the nature of credit unions and would result in expensive and wasteful record-keeping and examination costs. More significantly, because they fundamentally change the nature of the credit unions, the CRA-style provisions would ensnare credit union in a regulatory trap from which they could only find temporary release" (Senate Report No. 105-193, May 21, 1998, p. 26).

Unlike The Other Federal Financial Regulators, NCUA Has No CRA-Equivalent Authority

Congress' rejection of CRA for credit unions under CUMAA left NCUA in sharp contrast to the other federal financial regulators. Each of the other federal financial regulators has express authority under the Community Reinvestment Act to impose CRA-type requirements. The FCUA and CRA glaringly omit this authority for NCUA.

The legislative history of the Community Reinvestment Act shows that Congress felt CRA was needed for banks because they were not lending in their communities, a concern not shared for credit unions (Cong. Rec., July 27, 1998, p. S-9023). It is also apparent from the history that the CRA requirements evolved from federal banking statutes, such as the Banking Act of 1933 and the Bank Holding Company Act of 1956 which direct banks to meet the "convenience and needs of their communities." (Cong. Rec., July 27, 1998, p. S-8973).

The history of the CRA demonstrates that while the federal banking acts require banks to meet the needs of their communities, Congress felt it necessary to provide additional, express authority to the bank regulators in CRA in order to impose community service requirements on banking institutions. It has repeatedly declined to grant such power to NCUA, in 1977 when the Act was passed and again in1998.

Thus, concerning the issue of NCUA's authority, the most reasonable interpretation is that, because the Federal Credit Union Act is silent and does not confer on NCUA the express authority to issue a proposal such as the CAP requirements and because Congress specifically declined to include credit unions under CRA, the agency lacks the power necessary to promulgate the CAP proposal. Only Congress can impose such CRA-type requirements on credit unions.

The recent views of key members of the Senate and House Banking Committees -- all of whom participated in the debate on the Credit Union Membership Access Act -- confirm that Congress continues to believe that NCUA lacks the authority to engage in social policy regulation of credit unions.

In a June 5, 2000 letter to NCUA, Senate Banking Committee Chairman Phil Gramm asserted the proposal "is not authorized by law." He added, "I am disappointed to hear that this issue is being discussed again "after the last effort to burden credit unions with such an absurd regulatory requirement failed. In adopting such a proposal, the NCUA would appear to be arrogating to itself the task of making laws." He concluded, there is no place for "standards inconsistent with the NCUA statutes and the very nature of credit unions themselves."

House Banking Subcommittee Chair Marge Roukema (R-NJ), Spencer Bachus (R-AL), Richard Baker (R-LA) and Peter King (R-NY) also wrote to the NCUA Board Chairman on June 29, 2000, contesting the legality of the proposal. The proposed CAP requirements are "in direct conflict with the law passed as part of the Credit Union Membership Access Act," the House leaders stated. "We must express our absolute opposition to this proposed regulation, and urge you to withdraw the proposal immediately."

We do not believe NCUA can thumb its nose at the Federal Credit Union Act, which does not sanction or support this proposal. Neither should the agency disregard the counsel of knowledgeable Members of Congress who maintain NCUA's proposal is unauthorized.

The Proposal Is Arbitrary and Capricious and Violates The Administrative Procedure Act

As discussed above, NCUA's Supplementary Information states there is no evidence that community federal credit unions are not meeting the needs of their communities. This statement acknowledges that the proposal is unnecessary and thus, renders the proposal arbitrary, capricious, and an abuse of discretion, in violation of the Administrative Procedure Act (5 USC 552, 553, 558 and 706).

As discussed at length above, NCUA clearly does not have the legal authority to promulgate the CAP proposal, which includes sanctions. Under the APA, the agency may not impose sanctions or issue a substantive rule except as authorized by Congress (5 USC 558 (b)). We believe the plain language of the APA precludes NCUA from going forward with this proposal.

The Supplementary Information accompanying the FOM proposal states:

Internal guidelines to examiners would require them to periodically review a community credit union's CAP and its overall effectiveness in meeting the goals outlined in the plan. In the event a community credit union failed to reasonably follow its CAP, the regional director would have discretion to pursue appropriate supervisory actions (Fed. Reg., Vol. 65, No. 114, June 13, 2000, p. 37071).

The guidelines, which will address what the agency expects in terms of compliance and the sanctions, are substantive matters that should have been presented to interested parties for comment, along with the other substantive issues the field of membership changes address. The failure to publish and seek comments on such key policy issues violates the Administrative Procedure Act. If the agency determines it must proceed with the CAP proposal, it cannot do so until it first publishes the details of how the proposal will be enforced and what the agency's expectations will be for compliance. We believe there should be a reasonable comment period of at least 60 days on these critical enforcement issues (5 USC 553).

In addition, the CAP proposal must fail because of its pervasive vagueness. The proposal states, "If a credit union fails to make reasonable efforts to follow its community action plan, NCUA may initiate appropriate supervisory action." NCUA fails to define or elaborate on the terms, " reasonable efforts" or "appropriate supervisory action." We believe the use of these terms will make implementation for examiners difficult and compliance for credit unions uncertain. In addition, the vagueness of these terms may likely result in enforcement that is highly subjective and variable, based on different approaches in the regional offices.

As we have discussed above, the 1998 amendments to include CRA requirements for community credit unions would have been very similar in effect to the proposed CAP requirements. In NCUA's letter to the Senate Banking Committee in June 1998, the agency stated and never changed for the record that "implementation of the" statutory CRA provisions "will be a time-consuming and difficult process." The letter cites vague terms, such as "periodically" as problematic. Yet, the proposal calls for a CAP "that will be 'periodically' updated by the board of directors of the credit union and reviewed 'periodically' by NCUA." The proposal uses the very terms NCUA informed Congress would be "difficult" to implement. In its letter to the Committee, NCUA stated, "Staff expects that developing the community service regulation will be the most challenging part of implementing HR 1151."

In short, the CAP proposal is the embodiment of vagueness. Because the proposal regulates so much while saying so little, NCUA effectively deprives credit unions and other interested parties of the opportunity to analyze and comment on the criteria for review of a CAP, the measure of effectiveness in meeting the plan, and the details of how the proposal will be enforced under the internal guidelines. The proposal does not even state which supervisory actions NCUA would subject to a credit union if it failed to meet its CAP goals. We believe that the use of unclear terms in the proposal will result in significant difficulties in enforcement, as well as in execution by credit unions. In our view, the ambiguity of the proposal alone warrants its elimination.

The CAP Proposal Would Be More Severe Than CRA

The CAP proposal also represents an abuse of agency power because it is more stringent that is more stringent than CRA requirements are for banks. The CAP proposal encompasses agency sanctions for noncompliance; that is not the case for banks.

As Senator Carol Moseley-Braun stated during the Senate floor debate on the Credit Union Membership Access Act:

Another thing that CRA is not is sanctions". There are no sanctions for poor performance, no explicit sanctions. What it does is, the regulators will take an institution's CRA ratings into account in making evaluations with regard to their attempts to expand or merge or otherwise change the way they do business (Cong. Rec., July 24, 1998, S-8972).

Thus, NCUA's proposal would go far beyond the CRA requirements for banks. NCUA would subject credit unions to sanctions if they fail to meet the objectives of their CAP plans, while banks have a far less objectionable fate under CRA. NCUA has stated no justification for this radical departure from the bounds of CRA regulation. The CAP's combination of extraordinary vagueness and breadth in the sanctions available to NCUA violates reasonable notions of fairness and is arbitrary and capricious.

The CAP Proposal Is Contrary To NCUA's Stated Agency Regulatory Goal

In the Supplementary Information, the agency indicates that its goal is "clear, understandable regulations that impose a minimal regulatory burden" (Fed. Reg., Vol. 65, No. 114, June 13, 2000, p. 37075). As discussed in this letter, the proposal is far from clear or understandable, as key elements of the proposal have not been articulated outside of the agency. Just as NCUA indicated to Congress in 1998 that the CRA-type provisions would be burdensome, so too would these similar CAP provision impose stringent requirements on federal community credit unions. NCUA's proposed CAP requirements are in direct contravention of its stated agency regulatory goal.

The CAP Proposal Would Inappropriately Divert NCUA Resources

The CAP proposal would necessitate a shifting of agency resources away from safety and soundness priorities toward social mission goals. While we believe the Federal Credit Union Act, its legislative history and the Community Reinvestment Act indicate Congress did not intend to empower NCUA to issue CRA-type rules for credit unions, the FCU Act does clearly depict NCUA's role as a regulator of safety and soundness. The adoption of the CAP proposal will undoubtedly channel resources at the agency away from safety and soundness, which the agency is mandated to supervise, toward the achievement of social goals, which the agency has not been authorized to regulate.

Leaving legal issues aside for the moment, the CAP proposal is a misuse of NCUA funds and would constitute mismanagement by NCUA as a steward of credit union resources. This is particularly true now when NCUA has been roundly criticized by credit unions regarding resource allocation and cited by the General Accounting Office for failure to develop basic examiner tools for programs such as Information Technology examinations at credit unions.

The CAP Proposal Would Have The Opposite Result Of What Is Intended

Undoubtedly, the objectives of the CAP proposal are laudable - to ensure the financial services needs of all individuals within a community are being met. Yet, rather than empowering federal community credit unions to develop and continue innovative and creative strategies for service, the CAP requirements will encourage such credit unions to curtail activities in order to protect themselves from agency sanctions. If adopted, the CAP proposal will provide credit unions with a significant incentive to minimize expectations and service, rather than maximize them.

The Board Should Defer Action on the CAP Proposal

As our letter indicates, despite the best of intentions, there simply is no sound argument for proceeding with the CAP proposal. More importantly, there are many persuasive arguments as to why it should be rejected. However, if the NCUA Board is unwilling to eliminate the proposal at this time, at the very least it should defer action indefinitely on this very critical matter. Given the fact that the White House has signaled its intent to appoint a new member to the NCUA Board, the agency should refrain from taking action on such a crucial issue until the Board membership question is settled.


The NCUA Board is proposing a number of positive changes to its field of membership policy. Unfortunately, all of them are darkly overshadowed by the CAP proposal. We believe that the objectives of the proposal have merit, but in this case, the end cannot justify the means.

Few proposals from NCUA have received the overwhelmingly negative response from the credit union system that the CAP proposal has garnered. On the grounds stated above, particularly the fact that the proposal is unnecessary and NCUA's authority to regulate in this instance is at best highly questionable, we urge the Board to drop the proposal.

Thank you for consideration of our views on the CAP proposal, one of the most important issues facing credit unions at this time. If you have any questions about our comments, please feel free to contact CUNA General Counsel Eric Richard, Associate General Counsel Mary Dunn or me at 202-682-4200.


Daniel A. Mica CUNA President and CEO

Cc: NCUA Board Chairman Norman D'Amours
NCUA Board Member Dennis Dollar
NCUA Board Member Yolanda Wheat