CUNA Comment Letter

Proposed IRPS on Corporate Credit Union Chartering; RIN 3133-AD80

November 1, 2010

Ms. Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke St
Alexandria, VA 22314-3428

RE: Proposed IRPS on Corporate Credit Union Chartering; RIN 3133-AD80

Dear Ms. Rupp,

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the National Credit Union Administration Board’s (Board’s) request for comment regarding its proposed Interpretive Ruling and Policy Statement (IRPS) that would establish guidance on the chartering of corporate federal credit unions. By way of background, CUNA is the largest credit union trade organization in the country, representing approximately 90 percent of our nation’s nearly 7,700 state and federal credit unions, which serve approximately 93 million members. This letter was developed under the auspices of CUNA’s Corporate Credit Union Next Steps Working Group, chaired by Terry West of VyStar Credit Union.

Discussion of CUNA’s Views

CUNA appreciates the Board’s initiative to address the current lack of guidance on the chartering of federal corporate credit unions as we think such guidance is important for developing and reorganizing corporate credit unions.

Generally, the proposed IRPS explains the requirements that must be met in seeking approval for a new corporate credit union and describes the standards the Board will use for evaluating charter applications. The proposal also provides a timeline of the application review process.

While we generally support the proposal, this letter discusses issues we believe need to be clarified and offers recommendations for improving the final IRPS that we request the Board consider.

Clarification Regarding the Number of Organizers

Under Section II, Subscribers, of the proposed IRPS, an organization wishing to submit a charter application for a new corporate credit union would need to be comprised of “[s]even or more natural person representatives of natural person credit unions”—referred to as “subscribers.” While there are no express requirements under the Federal Credit Union (FCU) Act for corporate credit union subscribers, as there are for natural person credit unions, we believe the proposed language regarding corporate credit union subscribers is consistent with the Act under 12 U.S.C. 17536 and 12 U.S.C. 1766. These sections respectively lay out the requirements for natural person credit union subscribers and clarify that rules and conditions that apply to natural person credit unions generally apply to corporate (central) credit unions.

However, we do think this section needs to be clarified, as it is unclear whether each natural person subscriber must represent a different natural person credit union. CUNA generally agrees with this interpretation, as we believe that requiring at least seven subscribers from at least seven different natural person credit unions is consistent with the provisions in Section III of the proposed IRPS regarding “Economic Advisability” and “Member Support.” However, we also think there should be some latitude on a case-by-case basis that the seven subscribers could, for example, represent fewer than seven natural person credit unions such as five, as long as the member support requirements are met.

To address this concern, the language of the proposal in Section II should be revised to state that a group of subscribers must include “[s]even or more natural person representatives of seven or more natural person credit unions, unless on a case-by-case basis as permitted by the Board, the subscribers may represent fewer than seven natural person credit unions.”

Economic Advisability

Under the proposed IRPS, the Board would only approve a corporate charter application after it is satisfied that the proposed corporate would be viable and would provide needed services to its future members. The Board’s assessment would include consideration of: (1) the character and fitness of management; (2) the depth of member support; and (3) present and projected market conditions.

In regard to the character and fitness of management, the employees and officials of a proposed corporate would need to be “competent, experienced, honest, and of good character.” In its review, the Board would conduct background and credit investigations on prospective officials and employees, as it does for natural person credit union applicants. We support this approach.

The proposed policy also lists factors that may lead to the disqualification of an official or employee, such as criminal conviction, acts of fraud or dishonesty, serious or unresolved past due credit obligations and bankruptcies disclosed during credit checks. We believe these factors, that the IRPS identifies as ones that may be included for consideration, are the specific ones its review should address. However, the IRPS should be clarified to state that these are the only factors the Board will consider and those factors which are not identified in the IRPS will not be considered. We also do not agree that indictments alone should be factors for consideration as individuals may ultimately be found to be not guilty.

In addition, the Board would only approve those applications for which it is reasonably assured the management team will have the requisite skills—including “leadership, accounting, funds management, and payment systems risk—and the commitment necessary for the success of the corporate.” We question the inclusion of the word, “leadership.” While we agree this is an important quality for officials, we do not agree it is a characteristic that NCUA should assess as the proposal is silent on what criteria the agency would use to asses this quality. Section 701.14, which the agency lists for the approval of officials of newly formed federal credit unions, does not include the assessment of leadership but rather focuses on “competence, experience, character, or integrity,” which we believe should also be the focus on the Board’s review of corporate credit union officials. The Board also cites requisite skills in the areas of accounting, funds management, and payment systems. Again, we agree these should be considered but the IRPS should be amended to indicate there may be different levels of expertise in these areas, depending on the individual’s role at the corporate credit union.

The proposed IRPS also provides that subscribers would need to demonstrate to the Board a sufficient customer base from which to draw business in the form of membership applications, capital and share commitments, and commitments to use the corporate’s services. Further, subscribers would need to have a viable plan to solicit and maintain sufficient contributed capital. We support these requirements.

However, while the importance of a capital plan cannot be overstated, especially in light of the recent and forthcoming changes to the corporate system, we urge the Board to allow some flexibility for any newly chartered corporate credit union, as the FCU Act permits for newly formed natural person credit unions, to meet the new corporate credit union capital requirements. Under the Act, new natural person credit unions have up to 10 years to become adequately capitalized. While this timeframe may not be appropriate for a new corporate, we do think reasonable latitude should be afforded new corporate credit unions, as long as they are following a plan to build capital that is approved by the Board. In this connection, we urge the Board to clarify how a new corporate would be able to meet the specific requirement to maintain capital of at least four percent of its moving daily average net assets under the new corporate rule, “beginning on the date the Board issues the charter.”

Business Plan

The proposed IRPS would require a charter applicant to submit a business plan based on realistic and supportable projections and assumptions. The business plan would require projections on a number of items, including the corporate’s budget for the first three years and the date the corporate would break-even or achieve independent operations.

We agree with the Board that the proposed business plan is a key component of the application. However, while the goals under the business plan should be taken seriously by the corporate, we also think the IRPS should be clear that the elements of the business plans are targets and the corporate will not be penalized if every goal is not met as indicated in the application. Also, we think the IRPS should clarify that the Board’s review will be confined to consideration of whether the business plan is well-substantiated, well- documented, and contains appropriate, achievable goals and objectives. Finally, the business plan requirements contain provisions that are also required under Form 4012 that must be submitted by the subscribers. We request the Board clarify how this information may be provided as efficiently as possible for the credit union and for the agency, and avoid duplication of efforts.

NCUA Review

The proposed IRPS sets forth the timeline for the review of a charter application. It would appear that around six months would be the earliest that an application could be approved and likely would take much longer. While this may be a reasonable timetable, we urge the Board to provide a process under which subscribers could request an expedited review.

Upon Board approval of an application, the corporate’s officials would be required to sign a “Letter of Understanding and Agreement” (LUA) before operations could begin. The LUA would impose certain operational restrictions, require compliance with NCUA’s Rules and Regulations, and contain several mandatory financial performance milestones, consistent with Part 704. We urge the Board to clarify that it will avoid arbitrarily imposing any restrictions in the LUA that could severely hamper the corporate’s ability to grow, and, therefore, threaten its prospects for long-term viability.

Special Purpose Corporate

The Board has suggested the possibility of permitting special purpose corporates. The Board should clarify whether this field of membership guidance applies to an entity organized as a special purpose corporate.

Confidentiality

Finally, the proposed guidance does not address how the Board will keep the application information, such as the business plan, confidential throughout the application process. We believe this is an important aspect of the proposal and urge the agency to include information in the IRPS that details that the agency will maintain the confidentiality of the information while the application is pending and how this will be accomplished.

Thank you for the opportunity to express our views on the Board’s proposed IRPS. If you have any questions about our views, please do not hesitate to give me a call at (202) 508-6736.

Sincerely,

Mary Mitchell Dunn
CUNA Deputy General Counsel