CUNA Comment Letter

Proposed Field of Membership Changes Other Than the CAP Proposal

August 14, 2000

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

RE: Proposed Field of Membership Changes Other Than the CAP Proposal

Dear Ms. Baker:

The Credit Union National Association is pleased to submit its comments on the proposed changes to the National Credit Union Administration's field of membership (FOM policy, Interpretive Ruling and Policy Statement (IRPS) 99-1. This letter supplements the comment letter CUNA filed separately expressing our strongest opposition to the proposed community action plan (CAP) requirements. CUNA represents approximately 90% of the nation's more than 10,500 state and federal credit unions.

Like our comments on the CAP proposal, this letter reflects the views of our Federal Credit Union Subcommittee, chaired by Edwin Collins, President and CEO of Lockheed Georgia Employees Federal Credit Union.

Summary of CUNA's Position

CUNA is very supportive of NCUA's overall efforts to improve its field of membership policies and procedures. Our views are summarized here:

General Comments

CUNA applauds the NCUA Board for proposing a number of key changes that will facilitate federal credit union growth consistent with the Federal Credit Union Act. Such regulatory action, designed to enhance credit unions' membership capabilities, is precisely the kind of endeavor NCUA should be routinely undertaking to support and strengthen the value of the federal credit union charter. In that regard, this proposal is similar to the agency's Regulatory-Flexibility initiative which, if adopted, will also have important, favorable ramifications for federal credit unions.

While we believe there are areas in which the agency could be even more flexible, as discussed below, the proposal contains a number of beneficial changes that will assist credit unions in their efforts to serve additional individuals, groups, and geographic areas. We urge the agency to proceed with these important revisions as soon as practicable.

To facilitate your review of our comments, this letter generally addresses issues in which we feel the agency should demonstrate greater permissiveness than what it is proposed, as authorized by the Federal Credit Union Act. The other changes, which for the most part we do not separately address, are very positive, reasonable amendments that we strongly support.

Before addressing our comments, we want to recognize that there have been improvements in the select group addition process throughout the regions to reduce the time it takes the agency to process these applications. Such efforts are commendable. However, credit unions in a number of regions have expressed concerns about the processing of community charter applications. We urge NCUA to focus on streamlining this process as well.

When NCUA issued IRPS 99-1 for comments, CUNA urged a future review of the new policy. The CAP proposal aside, that review has yielded important proposed amendments for federal credit unions. We urge the Board to continue the review of the FOM policy and its implementation in the regional offices on a yearly or 18-month schedule.

Specific Issues

Since the insertion during the development of the Credit Union Membership Access Act that a credit union must be "adequately capitalized" to add groups, CUNA has taken the position that NCUA was not directed to give this term precisely the same meaning it has under the prompt corrective action provisions of the Act. Under PCA, "adequately capitalized" refers to a net worth level of 6-7%. However, under the Act's membership provisions the term is not defined, thus giving the agency latitude to determine how to apply this requirement.

As we stated in our November 1998 comment letter, because Congress could have defined "adequately capitalized" in the field of membership provisions but did not, it is most reasonable to conclude that NCUA is not required to use the PCA meaning but has flexibility to define the term, consistent with the purpose of the Act. We believe an overriding purpose of the Act is to encourage credit union growth.

As a step in the right direction, we strongly support the proposed language that would allow the regional directors to permit a federal credit union with net worth under 6% to add new groups, as long as the credit union is making "reasonable progress" toward attaining the 6% goal.

However, we believe NCUA has the authority to implement this provision more liberally than it is proposing, consistent with the Act. As we believe history shows, a credit union with net worth of, say, 5%, may likely be in sound condition and meeting its members' needs well. In fact, prior to PCA, NCUA gave credit unions with capital over 5% a CAMEL 2 rating, assuming other key indicators were comparable.

We believe NCUA has the authority to set the net worth requirement for field of membership additions at 5% across the board. Thus, credit unions with at least 5% net worth would be permitted to add new groups without additional analysis from NCUA on this point. Additionally, NCUA has the authority to permit credit unions with lower net worth to still add new groups, as long as the credit union is making reasonable progress in meeting its net worth requirements and the addition was consistent with the net worth restoration plan. In fact, adding new groups could be an important element of a net worth restoration plan.

This approach is fully consistent with the field of membership provisions of the Act in that it will help to foster credit union growth. Likewise, it is compatible with the PCA provisions of the Act and will not have a material impact on safety and soundness. Further, it will streamline the select group process for both the agency and federal credit unions. We urge NCUA to include this amendment in its FOM changes.

NCUA's current FOM policy does not permit credit unions to add new groups around a shared service facility. We agree with NCUA that this policy is too confining and that the IRPS should revised to allow such additions. We also agree with NCUA's basic approach, which is to allow a credit union with an appreciable interest in an area to add groups from that area, without opening the door to massive expansions from nonlocal credit unions.

NCUA is proposing to allow select group additions around shared service facilities if the credit union has a least a 5% interest in the facility, either directly or through a CUSO or similar organization or the service facility is local to the credit union. After considerable discussion regarding this issue, we generally support this approach. However, we believe there may be situations in which a nonlocal credit union is barred from attaining 5% ownership interest due to the number of other credit unions participating or to the size of the other credit unions' interests.

We think that NCUA should permit regional directors to authorize select group additions around a shared service center if the credit union has at least a 3% interest under some circumstances. This would include situations in which a credit union is unlikely to ever achieve a 5% ownership interest through no fault of its own or in which a credit union has already reached its maximum CUSO investment limits. Of course, all the requirements for a select group addition would have to be addressed, including the ability of the credit union to serve the group and whether the group wants such service.

The proposed revision to Chapter 4, Section III.A of IRPS 99-1 provides that a federal credit union converting to a state charter is responsible for the "entire operating fee for the year in which it converts." We believe that in fairness to such a credit union, the fee must be pro-rated.

Thus, a credit union converting in January would pay very little in the way of an operating fee for that year, while a credit union converting in December would pay the fee for the entire year.

We believe it is punitive to maintain a fee system that is not pro-rated, depending on the time of the year the credit union converts. We request NCUA amend the proposed policy to expressly state the fee will be pro-rated.

The Supplementary Information accompanying the proposal clearly states that NCUA will take into consideration the nonavailability of other credit unions to serve a group in determining whether a credit union may add a select group and that a change in the manual is not required to reflect this interpretation (Fed. Reg., Vol. 65, No.114, June 14, 2000, p. 37068). However, neither the proposed changes to the IRPS nor the current FOM policy reflect this interpretation so clearly. We believe to facilitate credit unions' understanding of NCUA's application requirements and the agency's process for approving applications, this interpretation should be incorporated explicitly into the manual.

There has been a misunderstanding among some in the credit system as to whether NCUA generally feels it is possible to show sufficient indicia of community for populations larger than 300,000. The Supplementary Information accompanying the proposal expressly states, "This was not to intended to suggest that geographical areas with populations larger than 300, 000, for example, would not qualify, for a community charter. There is no negative presumption for larger geographical areas. Simply, more detailed documentation will be necessary to support that the proposed area is a well- defined community" (Fed. Reg., Vol. 65, No.114, June 14,2000, p. 37071).

While the manual already states that multiple counties or local areas with populations of any size may meet community charter requirements, the language from the Supplementary Information makes that point even more clearly (IRPS 99-1, V.A.2. p. 2- 45). The Supplementary Information will assist credit unions in understanding NCUA's requirements for a community charter better, and we strongly recommend that this language be made part of the agency's FOM policy regarding community credit unions.

NCUA is requesting comments on how it should structure incentives that would encourage credit unions to serve the underserved. A real question that must be asked is whether such monetary incentives are necessary. While CUNA would not want to preclude this approach, it is not clear that credit unions will find these incentives attractive or meaningful. Before implementing any incentives, such as the ones NCUA is proposing, we urge the agency to provide more information to credit unions on how the agency's budget would be impacted by the use of these incentives.

Another approach we have consistently supported is for NCUA to work with the Treasury Department to allow credit unions to offer electronic transfer accounts (ETAs) to individuals outside of their fields of membership. As the agency is aware, the Treasury Department is responsible for implementing the requirement that government benefits be delivered to recipients electronically. In order to help meet that requirement for the more than 11 million individuals without an account at a financial institution, Treasury established the ETAs. However, the ability of credit unions to participate in the offering of these accounts is limited if credit unions cannot serve benefit recipients outside of their fields of membership.

NCUA staff has done an admirable job of both reviewing the FOM policy and looking for creative ways to enhance opportunities for credit unions to grow that are in agreement with the statute. One area on which the agency is silent is how credit unions may utilize the Internet and other technologies to provide credit union service to more individuals. The agency is developing an Internet application process through which credit unions may apply to add new groups of 500 or less. This will undoubtedly streamline the application process for credit unions and the agency alike. However, the whole area of Internet service --from a credit union's ability to add Internet groups to NCUA's capabilities to employ the Internet more fully to process applications --must be explored by NCUA. We urge the agency to focus on this issue, with an eye toward facilitating membership, and to make this initiative a priority.

Conclusion

The agency has proposed a number of FOM changes that we favor. We are recommending several important changes, such as allowing credit unions with net worth of at least 5% to add new groups without specific approval from the NCUA, which we urge NCUA to include in the final revisions. We also strongly encourage NCUA to undertake a review of the permissible uses of the Internet by credit unions to encourage growth.

Thank you for the opportunity to share CUNA's views on these very important amendments. If you have any questions about this letter, please feel free to give me a call at 202-218-7769.

Sincerely,

Mary Mitchell Dunn
CUNA Associate General Counsel
Assistant General Counsel