# Chartering and Field of Membership Manual

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-26956

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 7, 2016
- **Citation:** 81 FR 88412

## Text

NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
RIN 3133-AE31
Chartering and Field of Membership Manual

AGENCY:

National Credit Union Administration (NCUA).

ACTION:

Final rule.

SUMMARY:

The NCUA Board is comprehensively amending its chartering and field of membership rules to maximize access to federal credit union services to the extent permitted by law, and to organize the rules in a more efficient framework. The amendments will implement changes in policy affecting: The definition of a local community, a rural district, and an underserved area; the chartering and expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the process for applying to charter, or to expand, a federal credit union.

DATES:

The effective date of this final rule is February 6, 2017.

FOR FURTHER INFORMATION CONTACT:

Matthew Biliouris, Deputy Director, or Robert Leonard, Director, Division of Consumer Access, or Rita Woods, Director, Division of Consumer Access South, Office of Consumer Protection, at the above address or telephone (703) 518-1140; or Senior Staff Attorney Steven Widerman, or Staff Attorney Marvin Shaw, Office of General Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

II. Summary of Comments on Proposed Rule

III. Regulatory Procedures

I. Background

NCUA's Chartering and Field of Membership Manual, incorporated as Appendix B to part 701 of its regulations (“Chartering Manual”),
1

implements the field of membership (“FOM”) requirements and limitations established by the Federal Credit Union Act (“the Act”) for federal credit unions (each an “FCU”).
2

As amended by the Credit Union Membership Access Act of 1998 (“CUMAA”), the Act provides a choice among three charter types: a single common bond consisting of a group whose members all share the same occupational or associational common bond;
3

a multiple common bond in which each group has a distinct occupational or associational common bond among its own members;
4

and a community common bond among persons or organizations within a well-defined local community, neighborhood, or a rural district.
5

1
Appendix B to 12 CFR part 701 (“Appendix B”).

2
12 U.S.C. 1759.

3

Id.
§ 1759(b)(1).

4

Id.
§ 1759(b)(2)(A).

5

Id.
§ 1759(b)(3).

To facilitate consumer access to credit unions and to enhance their delivery of services as the Act contemplates, the Board periodically modifies and updates the Chartering Manual to advance certain objectives. Among these are relief from undue burdens and restrictions on an FCU's ability to provide services to consumers who are eligible for FCU membership, especially to benefit those of modest means; enhancement of the menu of strategic options for FOM expansions; and maximization of competitive parity between federal and state charters to the extent allowed by law, while respecting the national system of dual chartering. To serve those objectives, the Board published a proposed rule in December 2015 requesting public comment on fifteen substantive modifications to the rules affecting each of the three FOM types that the Act authorizes.
6

6
80 FR 76748 (December 10, 2015).

As explained below, this final rule will implement proposed modifications to the rule affecting: The definition of a local community, a rural district, and an underserved area; the expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the type and extent of information that must be submitted to support an application to charter or expand an FCU's FOM.

II. Summary of Comments on Proposed Rule

NCUA received approximately 11,380 comments on the proposed rule: 31 from national and regional credit union trade associations and leagues; 99 from individual FCUs; 14 from federally-insured state-chartered credit unions; 8291 from individual credit union members; 14 from national and regional bank trade associations; 6 from individual banks; 2925 from individual bank customers; and 6 from other commenters.
7

The commenters generally supported the proposed rule by a ratio of approximately 3 to 1, mostly without reference to a specific proposal and without suggesting alternatives or modifications.

7
Among credit union- and bank-affiliated commenters combined, 98 percent of the 11,380 comments consisted of form letters, with minimal original content and often submitted by a third party vendor on the commenter's behalf.

A. Community Common Bond

The Act limits membership in a community credit union to “[p]ersons or organizations within a well-defined local community, neighborhood, or rural district,”
8

directing the Board to establish criteria defining those terms for purposes of “making any determination” regarding such a credit union,
9

and to establish applicable criteria for any such determination.
10

The Act does not impose for any of the three community categories a maximum limitation on population or geographic size, thus supporting the Board's observation that “there is no statutory requirement or economic rationale that compels the Board to charter only the smallest [well-defined local community] in a particular area.”
11

8
12 U.S.C. 1759(b).

9

Id.
§ 1759(g)(1)(A).

10

Id.
§ 1759(g)(1)(B).

11
74 FR 68722, 68725 (Dec. 29, 2009).

To qualify as a well-defined local community (“WDLC”) or as a rural district, the Board requires a proposed area to have “specific geographic boundaries,”
12

and for residents within those boundaries to interact or share common interests that signify a cohesive community. Since 2010, the Board has offered two “presumptive community” options that by definition meet the statutory criteria of a WDLC. Each is based on uniform, objective geographic units. One is a “Single Political Jurisdiction . . . or any individual portion thereof” (each an “SPJ”), regardless of population.
13

The other is a single Core Based Statistical Area (“CBSA” or “a statistical area,” or a portion thereof) as designated by the U.S. Census Bureau (“Census”), or a Metropolitan Division within a CBSA, subject in either case to a 2.5 million population limit.
14

12
Appendix B, Ch. 2, § V.A.2.

13
Appendix B, Ch. 2, § V.A.2.

14
Appendix B, Ch. 2, § V.A.2. According to the Census, “the term `core-based statistical area' became effective in 2003 and refers collectively to metropolitan statistical areas and micropolitan statistical areas.”
https://www.census.gov/geo/reference/gtc/gtc_cbsa.html#md.

1. “
Core Based Statistical Area” Population Limit.
The existing 2.5 million population limit that applies to a community consisting of a CBSA, or a Metropolitan Division or other portion within, conforms to the population threshold by which the Office of Management and Budget (“OMB”) designates Metropolitan Divisions

within a CBSA.
15

The proposed rule retained the 2.5 million limit, but solicited public comment on whether to adjust it, to what amount, and for what specific reasons.

15

https://www.whitehouse.gov/sites/default/files/omb/bulletins/2015/15-01.pdf

(at page 62).

The vast majority of commenters urged the Board to eliminate the population cap on statistical areas altogether because the Act does not mandate it. They maintained that an area's population is unrelated to what should be the paramount considerations in identifying a local community, namely, interaction or common interests among residents, and the FCU's ability and commitment to serve the area. The commenters also contended that, by imposing a population limit, the Board is substituting its judgment for Census data, by which CBSAs are designated without regard to population, and that population alone is not a source of undue risk to an FCU or to the National Credit Union Share Insurance Fund (“the Insurance Fund”). Finally, some commenters protested that a population cap on statistical areas puts FCUs at a competitive disadvantage compared to communities consisting of an SPJ, which are not limited by population.

Some commenters advocated increasing the present cap from 2.5 million to between 3.5 million and as much as 5 million, respectively, to ensure the long-term growth and viability of FCUs in general. Others urged increasing the population limit to match that of the most populous SPJ the Board has approved (Los Angeles County, CA, at 10 million), or that of the nation's most populous Metropolitan Statistical Area (New York-Newark-Jersey City, NY-NJ-PA Metro Area at 20 million). One commenter recommended linking the population limit to an appropriate index that would trigger periodic reevaluation and possible adjustment of the existing limit.

In contrast, dozens of commenters criticized the existing 2.5 million cap as being too high, urging that it be reduced. One insisted that the 2.5 million cap is not a credible “indicator of common, close-knit interaction.” Another predicted that an area as populous as 10 million could qualify as a local community as long as its residents “interact in some way . . . within lines drawn by NCUA.” Yet another criticized the Board for implying that the existing 2.5 million cap is too low only by comparison to the most populous SPJs the Board has approved (
e.g.,
Los Angeles County, CA, and Harris County, TX).

The Board finds considerable merit in commenters' suggestions to eliminate the population cap, increase the present population cap to a given amount, tie the cap to the population of a certain geographic unit, or administer any cap according to a framework of oversight and internal controls. Out of concern that the public should have notice and an opportunity to address such recommendations, as the Administrative Procedure Act requires,
16

the Board has decided to make no change to the existing 2.5 million population cap at this time. Instead, the Board will issue a proposal soliciting public comment on alternatives to modify the cap, and an alternative to the “presumptive community” options to form a WDLC.

16
5 U.S.C. 553(c).

2. “
Core Area” Service Requirement.
Since 2010, the Board has required a community consisting of a portion of a CBSA to include the CBSA's “core area,”
17

defined in practice as the most populated county or named municipality in a CBSA's title. The Act itself does not mandate any such requirement for a community. The proposed rule repealed the “core area” service requirement in favor of relying on NCUA's practice of annually reviewing an FCU's business and marketing plans, for the first three years following approval of a community charter expansion or conversion, to assess whether the credit union is adequately serving the intended beneficiaries of the requirement—namely low-income and underserved populations within an original or an expanded community.
18

17
75 FR 36257, 36260 (June 25, 2010).

18
80 FR at 76749.

The majority of commenters favored repeal of the “core area” service requirement, primarily because it is not mandated by the Act and thus unnecessarily imposes an additional constraint on who credit unions can serve. They further speculated that relief from an obligation to serve a “core area” will give FCUs the flexibility to adapt to the specific area each initially is able to reasonably and safely serve, allowing it to establish and maintain a “marketplace footprint” there. Other commenters criticized the “core area” service requirement for dividing an otherwise viable community or excluding portions that would enhance its viability; for causing an FCU to sacrifice service to other areas within the chosen portion of a CBSA; and as a disincentive to serve populated urban areas due to the additional cost and resources of serving a “core area.”

A few commenters suggested alternatives in lieu of applying a “core area” service requirement to a portion of a CBSA. One is to permit an FCU to develop a presence, reputation and services to enable it to later expand into the “core area” of a CBSA. The other is to defer to the National Federation of Community Development Credit Unions and to the Community Development Financial Institutions Fund regarding how best to identify and to provide service to low-income and underserved populations.
19

19
For Underserved Area purposes, the Act, at 12 U.S.C. 1759(c)(2)(A)(i), relies on the Community Development Banking and Financial Institutions Act,
id.
§ 4702(16)(A), to define an “investment area,” which, among other things, can consist of an “empowerment zone” or “enterprise community” as defined by 26 U.S.C. 1391.

In contrast, bank-affiliated commenters generally favored retaining the “core area” service requirement. One predicted that its absence would effectively permit “redlining” through formation of a community primarily consisting of wealthier areas within a CBSA, while excluding areas where low-income and minority populations are concentrated. Another urged the Board to retain the “core area” service requirement given that, unless expressly required by state law, credit unions typically are not subject to the Community Reinvestment Act, which requires financial institutions
other than credit unions
to publicly document service to people of modest means.
20

20
12 U.S.C. 2902(2)

What critics of repealing the “core area” service requirement overlook is that NCUA has in place a supervisory process to assess management's efforts to offer service to the entire community an FCU seeks to serve. NCUA holds credit union management accountable for the results of an annual evaluation that encompasses a community FCU's implementation of its business and marketing plans,
21

extending for three years after the credit union either is chartered, converts or expands. Experience confirms that the agency's evaluations are a more effective means of ensuring that the low-income and underserved populations are fairly served compared to the rest of the community, in contrast to a requirement forcing a credit union to serve the “core area” of the portion of a CBSA that comprises its community. The Board considered extending this review period to five years, but has declined to do so,

believing that three years is sufficient time to gauge a credit union's commitment to serve an original or expanded area, and that the additional two years of projections would be too stale to be probative.

21
The results of an annual evaluation of an FCU's implementation of its business and marketing plans typically would be reflected in the “findings” or “overview” sections of an examination report, or in a “Document of Resolution” issued following an examination.

Another relevant part of the supervisory process is the agency's mandate to consider member complaints alleging discriminatory practices affecting low-income and underserved populations, such as redlining, and to respond as necessary when such practices are shown to exist.

Having considered the comments addressing repeal of the “core area” service requirement, and because it is not a requirement mandated by the Act, the Board has decided to repeal it in view of credit unions' success in providing financial services to low-income and underserved populations without regard to where they are located within a community,
i.e.,
beyond its “core area.” This assessment is based on the periodic evaluations, overseen or conducted by the Office of Consumer Protection since 2010, of FCUs' implementation of their business and marketing plans.
22

In place of the “core area” service requirement, the final rule requires NCUA to continue these evaluations to ensure fair and adequate service to the low-income and underserved populations within a community consisting of a portion of a CBSA.

22
For communities with a population of less than 1 million, NCUA regional offices conduct the review of business and marketing plans to assess an FCU's service to the community as a whole, including low-income and underserved populations within. They report the results to the Office of Consumer Protection semi-annually. For communities with a population of 1 million or greater, the Office of Consumer Protection itself conducts the review and assessment.

3.
Population Limit as Applied to a Portion of a “Core Based Statistical Area”.
The existing rule disqualifies a
portion
of a CBSA as a WDLC when the population of the CBSA
as a whole
exceeds the 2.5 million population cap, even when the population of the portion
by itself
does not exceed that limit—an unintended consequence.
23

To correct this oversight, the proposed rule modified the “statistical area” definition to specify that in the case of a community consisting of a portion of either a CBSA or a Metropolitan Division within, the portion
by itself
must have a population of 2.5 million or fewer, regardless whether the CBSA or Metropolitan Division
as a whole
exceeds the limit.

23
Appendix B, Ch. 2, § V.A.2. (“statistical area” definition).

The majority of commenters supported this technical remedy in order to prevent the unintended disqualification of a portion of a CBSA that falls within the population cap solely because the CBSA as a whole exceeds it. In that event, an FCU would have no recourse but to serve an area smaller than the portion it seeks to serve (
e.g.,
an SPJ consisting of a city or town). Although many commenters opposed the existing 2.5 million population cap as excessive, none opposed this proposal to narrowly apply the cap exclusively to the portion of a CBSA that an FCU designates as its community.

Having considered the comments addressing this proposal, the Board considers it an appropriate remedial initiative to limit to the population cap adopted in the final rule the portion of a CBSA a credit union seeks to serve.

4. “
Combined Statistical Area” as a Well-Defined Local Community.
The existing rule designates two “presumptive communities” that by definition qualify as a WDLC—an SPJ regardless of population, and a CBSA subject to a 2.5 million population limit.
24

The proposed rule added a third “presumptive community”: A Combined Statistical Area as designated by OMB,
25

subject to the same population limit. The 174 Combined Statistical Areas that OMB has designated each combine “two or more adjacent CBSAs that have substantial employment interchange.”
26

As with any community an FCU seeks to serve, a Combined Statistical Area would be subject to NCUA's practice of periodically reviewing the FCU's implementation of its business and marketing plans to assess its capability of, and success in, serving its original or previously expanded community.

24
75 FR 36257 (June 25, 2010).

25
OMB Bulletin No. 15-01 to Heads of Executive Departments and Establishments (July 15, 2015) at:
https://www.whitehouse.gov/sites/default/files/omb/bulletins/2015/1-01.pdf.

26
U.S. Census Bureau,
Geographic Terms and Concepts,
at:
https://www.census.gov/geo/reference/gtc/gtc_cbsa.html#md.

Scores of commenters supported the proposal to recognize Combined Statistical Areas as “presumptive communities,” concurring that OMB's approach in designating Combined Statistical Areas is consistent with NCUA's long-standing consideration of factors such as employment, commuting patterns and economic interaction to identify a WDLC. These commenters further contended that Combined Statistical Areas are appropriate “presumptive communities” according to social and economic integration among residents within them, apart from strict population and density numbers, because Combined Statistical Areas represent the same “commonality of substantial employment interchange” that an individual CBSA's residents must have.

In addition, commenters cited certain benefits of recognizing Combined Statistical Areas as “presumptive communities.” One is the flexibility to serve multiple counties located within a single Combined Statistical Area, or to expand a community beyond an individual CBSA's boundaries. Another is the opportunity for an FCU serving a single CBSA with a population less than 2.5 million to further expand in scope up to that limit. Another benefit is the addition of Combined Statistical Areas to the menu of safe and sound strategic options for an FCU to grow and survive once it reaches a saturation level within its present FOM.

Finally, one commenter supported the recognition of Combined Statistical Areas as “presumptive” communities as a “welcomed change that is obviously within the confines [of the Act].” Another cited an OMB pronouncement in support of Government agency use of Metropolitan and Micropolitan Statistical Area or Combined Statistical Area delineations to develop a non-statistical program, as long as the agency seeks public comment on the proposed use
27

—as the Board did in this rulemaking through the proposed rule.

27
OMB Bulletin No. 15-01
supra
note 24.

Bank trade associations opposed recognizing Combined Statistical Areas as “presumptive communities.” One criticized the proposal as exceeding the reasonable definition of “local.” Others contended that a Combined Statistical Area necessarily is too expansive to be “local” because it “represents larger regions” that can encompass thousands of square miles crossing county and state borders. One opponent predicted that Combined Statistical Areas would be used to create state-wide FOMs, believing that this was not what Congress intended. Another claimed that Congress sought to impose narrow limits on areas a community credit union serves.

These commenters overlook certain facts that contradict the notion that a Combined Statistical Area is too expansive to be “local.” First, of the 174 designated Combined Statistical Areas, the 22 largest would not qualify as a WDLC because each, as a whole, exceeds the 2.5 million population cap. Second, the average geographic size among the 152 Combined Statistical Areas that would each qualify as a WDLC, at 4553 square miles, is comparable to the average geographic

size among the 243 individual CBSAs the Board has approved since 2010, at 4572 square miles.

Having considered the comments addressing the proposal to recognize a Combined Statistical Areas as a “presumptive community,” the Board adopts the proposal given that a Combined Statistical Area simply unifies, as a single community, two or more contiguous CBSAs that each independently meet the existing rule's definition of a “statistical area” that presumptively qualifies as a WDLC. Accordingly, subject to the existing 2.5 million population limit for a CBSA, the rule adds to the “statistical area” definition “all or an individual portion of . . . a Combined Statistical Area designated by the U.S. Office of Management and Budget.”
28

28
Appendix B, Ch. 2, § V.A.2.

5.
Addition of an Adjacent Area to a Well-Defined Local Community.
The existing rule does not, for general use, give credit unions the option to submit a narrative, supported by objective documentation, that an FCU contends will demonstrate common interests or interaction among residents of a proposed community (the “narrative model”).
29

The proposed rule allows credit unions to once again use a narrative approach supported by objective documentation to demonstrate that an area adjacent to a community consisting of an SPJ, a CBSA or a Combined Statistical Area qualifies as part of that local community. The credit union, using objective documentation, must demonstrate that the adjacent area is logically part of a WDLC that includes an SPJ, CBSA, or Combined Statistical Area due to common interests or interaction among residents on both sides of the perimeter. The expanded community still is subject to the applicable population limit. Any FCU has the option of pursuing a community charter that combines an adjacent area with all or a portion of an SPJ, CBSA or Combined Statistical Area. To support such an expansion, an FCU with a proven track record in serving an existing FOM may be permitted to use an agency-prescribed set of relaxed business plan requirements, as set forth in the final rule.
30

However, a credit union without an established track record of serving a community, such as a credit union converting to a community charter, will need to provide a full business and marketing plan.

29
In 2010, the Board abandoned the narrative model in favor of giving credit unions an option among “presumptive communities” that each by definition qualifies as a WDLC. 75 FR 36257, 36260 (June 25, 2010).

30
80 FR at 76750; Appendix B, Ch. 2, § V.B.

Most credit union-affiliated commenters supported the proposal to permit a community credit union to add an adjacent area upon narrative proof of common interests or interaction among residents of the expanded community. They recommended that option as a logical advance in business development because it would allow an FCU to add an adjacent area without requiring it to discontinue serving its existing community. However, several commenters opposed the requirement that an FCU must support its application to add an adjacent area with a business plan demonstrating its post-expansion commitment and ability to serve the entire community.

Bank trade associations opposed the concept of permitting adjacent area additions to a community, regardless how common interests or interaction among residents is demonstrated, and in a few cases opposed it conditionally. Without specifying a substantive or procedural objection, some commenters asserted that the Board lacks statutory authority to implement the proposal. Another contended that, due to the breadth and scope of the banking industry, the adjacent areas the proposal addresses do not lack sufficient access to financial services. Still another complained that approval of an adjacent area addition on the basis of NCUA's qualitative assessment of a narrative would render the process non-transparent.

Two critical commenters conditioned their opposition to the proposal to allow adjacent area additions on certain modifications. The first would be to require the Board develop a complete record confirming that the proposed adjacent area meets six interaction or common interest characteristics among its residents, rather than accepting on its face the supporting information the credit union provides. The second would be, in each case, to require the Board to then publish a notice in the
Federal Register
inviting public comment on whether the proposed adjacent area is a WDLC.

The Act gives the Board broad discretion to define a WDLC for purposes of “making
any determination”
regarding a community credit union,
31

and to establish criteria to apply to any such determination.
32

Under that authority, the Board proposed a set of criteria that a narrative should address, and which NCUA staff would consider in evaluating an application to add an adjacent area to an existing community.
33

In contrast, the Act did not require NCUA to effectively subject each such application to a referendum by means of notice and an opportunity for the public to comment. In that event, the volume of community charter, conversion and expansion applications the agency's staff receives each year (an annual average of eighty-seven since 2010) would make it impracticable to seek public comment on each proposed adjacent area addition, and would needlessly consume agency resources. Further, a notice and opportunity to comment on each application, followed by agency review of the comments, would delay credit union service to the residents of the adjacent area in each case.

31
12 U.S.C. 1759(g)(1)(A) (emphasis added).

32

Id.
§ 1759(g)(1)(B).

33
80 FR at 76772 (referring to the presence of an economic hub, quasi-governmental agencies, Government designated programs, shared public services and facilities, and colleges and universities).

Having considered the comments addressing the proposal to permit an adjacent area addition to a community and, for that limited purpose, to accept narrative proof of common interests and interaction among residents, the Board has decided to adopt the proposal in the final rule.
34

In addition, the Office of Consumer Protection, or its successor, will separately issue guidance on the criteria introduced in the proposed rule that a narrative should address to support the addition of an adjacent area, and which the Board will consider in deciding an FCU's application to do so. The guidance may specify a certain number of criteria that, if met, would presumptively qualify an adjacent area for approval.

34
Appendix B, Ch. 2, § V.A.2.

6.
Individual Congressional District as a Well-Defined Local Community.
Although not prohibited by statute, since 1999 the Board has maintained that Congressional districts and whole states do not qualify as a WDLC, even though both are well-defined.
35

In the December 2015 proposed rule, the Board reconsidered its policy and, as a result, proposed to recognize an individual Congressional district as a SPJ, thus qualifying each as a “presumptive community” without regard to population.
36

As with any other community charter application, the proposal required an FCU to support its application to serve a Congressional district with a business and marketing plan demonstrating its ability and

commitment to serve the entire community.

35
63 FR 72012, 72013, 72037 (Dec. 30, 1998); Appendix B, Ch. 2, § V.A.2.
See also
75 FR at 36258 (affirming that entire state is not acceptable as WDLC).

36
Appendix B, Ch. 2, § V.A.1.

At least a thousand credit union-affiliated commenters supported the proposal to recognize Congressional districts as SPJs; only one opposed it.
37

The supporters emphasized that the Act never restricted Congressional districts from qualifying as a WDLC, thus giving the Board latitude to reconsider its original policy disqualifying them. One commenter characterized Congressional districts as the “ultimate political jurisdictions” because their average population of about 710,000 is far less than that of many SPJs, and less than the population threshold by which OMB may divide a CBSA into Metropolitan Divisions (2.5 million). Another suggested that a community consisting of an individual Congressional district should be allowed to encompass a certain radius of miles beyond the district's boundaries. In contrast, hundreds of bank-affiliated commenters opposed recognition of individual Congressional districts as SPJs.

37
The single credit union-affiliated opponent alleged a lack of “commonality” among residents of a Congressional district because it is “skewed for political reasons to enable election of a certain party's candidates.”

The Board has considered the comments addressing the proposal to recognize an individual Congressional district as a “presumptive community.” Notwithstanding certain merits of the proposal, the Board has decided to defer action on it at this time, consistent with an incremental approach to introducing, and permitting credit unions to acclimate to, other significant community common bond enhancements adopted in the final rule (
e.g.,
Combined Statistical Areas, adjacent area additions, and an increased population limit and a new multi-state expansion limit on Rural Districts). As a result, the final rule does not designate an individual Congressional district as a “presumptive community.”

7.
Commenters' Recommendations in Response to the Proposed Rule.
Several commenters initiated community common bond recommendations that the Board did not propose. The first commenter-initiated recommendation was that the Board accept as a “presumptive community” (in addition to CBSA and SPJ that the existing rule permits)
any
“Federal, state or other statistical model” an FCU chooses to designate as its community. The second recommendation was that the Board extend membership eligibility to non-profit organizations that provide services to the community a credit union serves, regardless whether the organization is headquartered or located there (as the existing rule requires). The third recommendation was that the Board accept for general use a narrative to demonstrate interaction or common interests among residents to support
any
application to charter, expand or to convert to a community credit union (not just in support of an adjacent area addition, as the final rule provides). The fourth recommendation was that the Board, by regulation, permit a multiple common bond credit union that converts to a community charter to add and serve new members from its
pre- conversion
select employee groups (“SEGs”) now located
outside
its community boundaries. This proposal would interpret the Act's “grandfathered members and groups” exception
38

to permit what would effectively be a “once a SEG, always a SEG
regardless of common bond”
policy allowing a multiple common bond credit union to retain those outside SEGs after it converts to a community charter.

38
The “grandfathered members and groups” exception provides that “Notwithstanding [section 1759(b)]—(i) any person or organization that is a member of any Federal credit union as of August 7, 1998, may remain a member of the credit union after August 7, 1998; and (ii) a member of any group whose members constituted a portion of the membership of any Federal credit union as of August 7, 1998, shall continue to be eligible to become a member of that credit union, by virtue of membership in that group, after August 7, 1998.” 12 U.S.C. 1759(c)(1)(A).

The Administrative Procedure Act (“APA”) prohibits the Board from adopting these four recommendations in the final rule because the proposed rule did not introduce them for public comment, thus not “provid[ing] sufficient factual detail and rationale for the rule to permit interested parties to comment meaningfully.”
39

Nor is any of the four recommendations a logical outgrowth of a proposal that
was
introduced for public comment in the December 2015 proposed rule. As a result, the public was not given reasonable notice and an opportunity to address these commenters' recommendations.

39
5 U.S.C. 553(b)(3), 706(2)(A);
United States Telecom Ass'n
v.
Federal Communications Commission,
2016 WL 3251234 (slip op. page 10);
CSX Transp., Inc.
v.
Surface Transp. Bd.,
584 F.3d 1076 (D.C. Cir. 2009);
Ass'n of Private Sector Colleges and Univ.
v.
Duncan,
681 F.3d 427 (D.C. Cir. 2012).

B. Rural District Definition

The Act does not mandate a population limit for a Rural District. However, to qualify as a Rural District, the existing rule restricts the area's total population to the
greater
of either 250,000 people
or
3 percent of the population of the state in which the majority of the proposed Rural District's residents would be located.
40

In addition, either at least 50 percent of the proposed Rural District's population must reside in geographic units the Census designates as “rural,”
or
the proposed Rural District's population density cannot exceed 100 persons per square mile.
41

40
Appendix B, Ch. 2, § V.A.2.

41

Id.

1.
Population Limit.
The proposed rule modified the present Rural District definition to increase the population limit from 250,000 to 1 million persons to ensure that the population of a Rural District is sufficient to provide a level of operating efficiencies and scale that would make the area attractive as a strategic option, and to facilitate credit unions' statutory responsibility to provide consumers, including persons of modest means who may reside in rural areas, with access to our national system of cooperative credit. The proposed rule also omitted as redundant the alternative population limitation of 3 percent of the population of the state in which the majority of the Rural District's residents would be located.

Nearly all of the credit union-affiliated commenters who addressed the proposed population increase to 1 million supported it, provided the Board does not eliminate the population cap on Rural Districts altogether. They dismissed the cap as superfluous in view of other qualifying criteria—the existing minimum population density and “rural” designation options and, if it were adopted, the multi-state expansion limit. They further contend that the characteristics of a Rural District do not change much as its population fluctuates. Conversely, one commenter conditioned its support for a 1 million population cap on elimination of the population density criterion, arguing that (at 100 persons per square mile) it is unduly low in any case.

Others believed that the sole criterion to qualify as a Rural District should be a credit union's ability to serve the area, as demonstrated by business and marketing plans, including via online services to members. To expand a Rural District, these commenters urged that the decisive factor should be evidence of the contiguous area's economic and social ties to the pre-expansion Rural District. One commenter suggested permitting an area to qualify as a Rural District so long as the Census does
not
classify it as either an “urban area” or

an “urban cluster.”
42

Instead of relying on “rural” versus “urban” distinctions, another commenter urged the Board to treat a Rural District the same as the final rule treats an adjacent area addition to a community,
i.e.,
allow the use of a narrative to demonstrate interaction and common interests among proposed Rural District residents.

42
For Census identification of “urban areas” and “urban clusters,” see
https://www.census.gov/geo/reference/ua/urban-rural-2010.html
.

Apart from the preference to eliminate the Rural District population cap, several commenters predicted that a 1 million population cap would open up consumer choice for a cooperative form of financial institution, helping credit unions to serve the low wage workers who dominate certain rural markets. Others emphasized the difficulty of delineating the borders of a Rural District versus an urban community, due to scattered population hubs and widely dispersed individuals and businesses, and urged the Board to modify its rules to facilitate credit union service to those areas.

Six bank-affiliated trade associations objected to the proposal because it quadrupled the Rural District population cap. These commenters stated that the proposal was an unreasonable interpretation of the statutory terms “rural” and “local.” They expressed concern that credit unions will exploit the increased population cap to combine densely populated and thinly populated areas into a single area to meet the population density limit, and to create state-wide fields of membership.

To limit Rural District expansions, one commenter urged NCUA to require the
majority
of persons within a proposed Rural District to reside in geographic units the Census designates as “rural.” Another commenter opposed the use of similar Consumer Financial Protection Bureau (“CFPB”) designations of “rural” counties, which would qualify approximately 3 out of 4 counties in the commenter's state for a Rural District expansion, believing that such a result would exceed a reasonable interpretation of “local” and “rural.” On the assumption that the Act requires a Rural District to be “local,” a commenter maintained that “a Rural District encompassing a large region inherently would lack interaction or common interests among residents and thus inconsistent with the Act.”

These views rely on a pair of misconceptions: That “local” as used in section 1759(b) and (g) modifies “rural district,” when in fact it does not; and that a “local” area and a “rural” area necessarily share similar characteristics, which they inherently do not. In any case, a Rural District by its very nature typically covers an area that is too large to be considered “local.”

As the proposed rule explained, a Rural District must have a population sufficient to enable it to provide a level of operating efficiencies and scale that will make it attractive to credit unions as a strategic option. In that regard, a commenter questioned why a population of 1 million is needed to achieve that objective when, according to the commenter, community banks manage to serve far fewer than 1 million people located in rural areas. Another commenter expressed concern that NCUA will exploit the need for “operating efficiencies” to raise the Rural District population cap beyond 1 million.

Having considered the comments addressing the Rural District population cap, the Board has decided to set the rural district population cap at 1 million, as proposed. The Board believes this higher limit will achieve a “balance . . . between permitting rural districts to be large enough to be economically viable but not unreasonably large taking into account the purpose of the rural district,”
43

and will bring affordable financial services to portions of the country that would not otherwise meet the requirements of a WDLC.

43
78 FR 13460, 13462 (Feb. 28, 2013).

A higher population cap is supported by the Board's experience since 2013 with eight credit unions, in four different states, serving Rural Districts with an average population of 536,646.
44

The ability of these credit unions to bring affordable financial services to more populated areas has convinced the Board that a population cap should permit additional growth opportunities in rural areas. These opportunities would assist credit unions located in areas where residents are unable to readily interact or share common interests to support a WDLC—which is subject to a much higher population cap—even though these residents need access to affordable financial services.

44
Each of these eight Rural Districts was approved under the existing rule despite a population in excess of 250,000 because, in each case, its population was less than 3 percent of the population of the state in which the majority of the Rural District's residents were located.

The existing rule provides an alternative population limit of 3 percent of the population of the state in which a majority of a rural districts residents are located. Under that alternative, the Board has approved 8 rural districts above the general population limit of 250,000. Moreover, that alternative already allows a rural district with a population of at least 1 million in one state, and of at least 800,000 in another. Having set a 1 million precedent in one state, the purpose of the alternative limit also justifies a
fixed
1 million population cap for the other 49 states—a high enough cap to accommodate not only the hub area within a rural district, but also the surrounding population of potential members, to support the rural district's economic viability.

In view of this objective, a 1 million cap is appropriate because it strikes an appropriate balance between economic viability and an excessive population. It also leaves credit unions that already serve a Rural District, as well as those that would consider doing so, sufficient flexibility going forward to maintain economic viability and to maximize penetration of the potential membership base.

Most importantly, an increased cap will enhance consumer access to our national system of cooperative credit, particularly those of modest means in rural areas, who may otherwise lack access to a not-for-profit cooperative credit union. In this regard, the Board finds it compelling that in 97 percent of non-metropolitan counties, more than 50 percent of the population is either low, moderate, or middle income.
45

Accordingly, the final rule increases the Rural District population cap to 1 million, while still requiring credit unions to demonstrate an intent and ability to serve the entire area.

45

https://www.ffiec.gov/geocode/help3.aspx

Bank-associated commenters speculated that larger regions would lack interaction or common interests among their residents. What these commenters overlook is that these defining characteristics of a WDLC do not apply to a Rural District. Rather, primarily due to the sparsely distributed population in rural areas,
46

the defining characteristic of a Rural District necessarily is population density.

46
74 FR 68722, 68723 (December 29, 2009).

The Board believes that increasing the population limit on rural districts is warranted by the contemporary economic realities of serving sparsely populated areas. The penetration rate among community charters typically is five percent. As a result, for a credit union serving a rural district to thrive, a sufficiently large population base is essential to enable it to offer financial services economically. Although some commenters believe that the higher limit would give credit unions an unfair

competitive advantage, the reality is that credit unions in rural districts are subject to restrictions on who they may serve, unlike other types of financial institutions. The Board believes that the objective of expanding opportunities for credit unions to serve more consumers in rural areas outweighs any perceived impact on competition. The Board's concern about excessive expansion of rural districts is addressed below.

2.
Multi-State Expansion Limit.
The existing rule permits the expansion of a Rural District beyond the boundaries of the state in which the FCU maintains its headquarters. To achieve consistency with Census recognition of expansive rural areas while appropriately limiting multi- state expansion, the proposed rule revised the present Rural District definition (population limit plus either sparse population density or a “rural” designation) to confine a Rural District's expansion to the boundaries of the states that are
immediately contiguous
to the state in which the FCU approved to serve the Rural District is headquartered (
i.e.,
not to exceed the outer perimeter of the layer of states immediately bordering the headquarters state).

Relatively few commenters addressed the proposed multi-state expansion limit. Some of the credit union-affiliated commenters opposed the multi-state expansion limit as redundant, suggesting that it should be eliminated in view of the population cap, which would function as an appropriate check on overexpansion. Conversely, others advocated retaining the multi-state expansion limit, provided the population cap on Rural Districts is eliminated. One commenter urged that the sole criterion for approving a Rural District should be the credit union's ability to serve an area lacking in access to credit union service, including by technological means. The few bank commenters who addressed the proposed multi-state expansion limit opposed the concept of multi-state Rural Districts altogether, dismissing it as a means to effectively allow state-wide and multi-state FOMs.

In contrast to these comments, the Board's purpose is to have dual limitations that each serve a unique purpose—one on population, the other on geographic area size. Therefore, having considered the comments addressing the proposed multi-state limit on Rural District expansions, the Board has decided to adopt it without alteration in the final rule. Accordingly, the final rule provides that, to qualify as a Rural District, an area's boundaries must “not exceed the outer boundaries of the states that are
immediately contiguous
to the state in which the credit union maintains its headquarters (
i.e.,
not to exceed the outer perimeter of the layer of states immediately surrounding the headquarters state).”
47

47
Appendix B, Ch. 2, § V.A.2.

C. Underserved Areas

The Act authorizes the Board to allow multiple common bond credit unions to serve members residing in an “underserved area,” provided the FCU establishes and maintains a facility “in” the area.
48

To qualify as “underserved,” an area must, among other criteria, be “underserved . . . by other depository institutions . . ., based on data of the Board and the Federal banking agencies.”
49

In the absence of a specific test or criteria to assess such “underservice,” the Board developed a “concentration of facilities ratio” (“COF ratio”)
50

that it has relied upon to determine whether a proposed area is underserved by other depository institutions.

48
12 U.S.C. 1759(c)(2).

49

Id.
§ 1759(c)(2)(A) citing
id.
§ 461(b)(1)(A). The Act relies on the Community Development Banking and Financial Institutions Act to define “depository institution.”
Id.
§ 4702(16). By definition, a “depository institution” is insured and includes credit unions.
Id.
§ 461(b)(1)(A)(iv).

50
73 FR 73392 (Dec. 2, 2008). Using census tracts as the unit of measure, the concentration of facilities ratio compares the concentration of depository institution facilities among the population within the non-“distressed” portions of the proposed area against the concentration of such facilities among the population of the area as a whole. 73 FR at 73396. Appendix B, Ch.3, § III.B.3. An area qualifies as underserved by other depository institutions when the concentration of facilities ratio within its non-“distressed” census tracts exceeds the concentration of facilities ratio within the census tracts of the area as a whole.

1.
Exclusion of Non-Depository Institutions and Non-Community Credit Unions from Concentration of Facilities Ratio.
To prevent dilution and distortion of the COF ratio, as well as to strictly adhere to the letter and the spirit of the “depository institutions” definition,
51

the proposed rule excluded non-depository banks (
e.g.,
trust companies, which do not accept deposits from the general public)
52

and non-community credit unions (
e.g.,
multiple common bond credit unions other than those already serving an Underserved Area) from the COF ratio. By definition or in practice, neither is capable of serving the general public of a proposed Underserved Area.

51
12 U.S.C. 461(b)(1)(A).

52
As identified in FDIC's “Summary of Deposits Survey,”
e.g.,

https://www.fdic.gov/news/news/financial/2015/fil15024.pdf
.

Of the commenters who specifically addressed the proposed non-depository bank and non-community credit union exclusions from the COF ratio, most opposed the COF concept altogether, denouncing it as: Flawed, unduly cumbersome and incapable of producing a meaningful analysis; the cause of unnecessary disapprovals; and a disincentive to serve an Underserved Area.
53

However, assuming the Board would retain the COF ratio, 41 credit union-affiliated commenters supported both exclusions.

53
As the Board explained when it proposed the COF ratio: “CUMAA did not specify a methodology for determining whether a proposed area meets the `underserved . . . by other depository institutions' test; instead, it broadly refers to unspecified `data of the [NCUA] Board and the Federal banking agencies.' 12 U.S.C. 1759(c)(2)(A)(ii). In the decade since CUMAA, raw data has accumulated within government on branch locations and the volume of business in certain products and services, but meaningful and reliable data on these points has only recently become readily accessible. This data makes it possible to quantify and compare the presence of financial institution facilities in a given area. The proposed rule suggests [the COF ratio as] a flexible methodology that relies on publicly available population data and data on the location of financial institution branches.” 73 FR 34366, 34369 (June 17, 2008).
See also
73 FR 73392, 73396 (Dec. 2, 2008).

Other commenters urge that once a Government agency designates an area as “underserved,” the Board should not require the FCU to also demonstrate that the area is “underserved by other depository institutions” (even though the Act mandates exactly that); should disregard the number of depository institutions already serving the area (even though the Act mandates the opposite); and should exempt underserved areas from the population cap that applies to a CBSA. These commenters maintained that greater flexibility concerning Underserved Area criteria would reduce burden—presently a disincentive for credit unions to expand service to an Underserved Area. However, these commenters overlooked the Act's explicit requirement that an area be “underserved by other depository institutions”
54

regardless of the other statutory criteria, in order to qualify as an Underserved Area.

54
12 U.S.C. 1759(c)(2)(A)(ii).

One commenter asked the Board to clarify how shared branches would count to determine whether an area is “underserved by other depository institutions” (
i.e.,
whether each shared branch
participant
counts as an individual depository institution, or the shared branch as a whole counts as a single depository institution regardless of the number of participating institutions). As an incentive to serve Underserved Areas, another commenter asked the Board to develop and make public a list of Underserved Areas that qualify under the applicable criteria (effectively pre-approving them) in

order to conserve the resources credit unions otherwise must devote to identifying Underserved Areas.

Although many bank-affiliated commenters opposed the concept of the COF ratio altogether, one supported the proposed exclusions. Having considered the comments addressing the proposed exclusions from the COF ratio, the Board considers the proposal an appropriate improvement and, therefore, implements both exclusions in the final rule.

2.
Alternatives to Identify Areas “Underserved by Other Depository Institutions.”
As alternatives to using the COF ratio to assess whether a proposed area is underserved by other depository institutions, the proposed rule permitted use of “underserved county” designations by the CFPB,
55

as well as a metric of a credit union's own choosing provided it is based on NCUA or other Federal banking agency data.
56

In addition, the proposed rule invited commenters to identify other methodologies and Federal banking agency data that would be useful to objectively determine whether an area is “underserved by other depository institutions.”

55
CFPB's annual “Rural or underserved counties list” does not segregate “rural” and “underserved” counties. Therefore, NCUA will use the data collected by CFPB to produce and make available a list that identifies “underserved areas” exclusively.

56

E.g.,
FDIC “Summary of Deposits Survey,”
supra
note 51.

Credit union-affiliated commenters suggested various metrics to use in addition to, or instead of, the COF ratio to assess the existing level of service by depository institutions already present in a proposed Underserved Area. These included the CFPB's “underserved” county designations, and Home Mortgage Disclosure Act (“HMDA”) data indicating the number of depository institutions that meet a minimum ratio of mortgage loans extended to residents within an area versus borrowers from outside, and to persons below a certain credit score limit. In many cases, the suggested metric is generic because the commenter did not specify the data the metric would rely on and/or the source of the data.
57

A single bank commenter opposed the use of alternative metrics altogether, finding it inappropriate to allow credit unions to rely on a metric of their own choosing.

57

E.g.,
U.S. Department of Agriculture data; Pew Research Center reports; changes in an area's characteristics between decennial Censuses; local economic factors; local poverty rates; local unemployment rate; local median family income; and reports and surveys an applicant credit union itself develops.

Having considered the comments suggesting alternative metrics to determine whether a proposed area is underserved by other depository institutions, the Board has decided to accept the CFPB's “underserved county” designations as a proxy for a determination of “underservice.” The Board also will consider an FCU-chosen metric, provided it is based on NCUA or Federal banking agency data. An example of such a metric would be relevant data from the publicly available reports of Community Reinvestment Act examinations conducted by the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, or from HMDA data collected by these agencies.
58

58
12 U.S.C. 2902(2)

Accordingly, the final rule provides that “a proposed area will qualify as `underserved by other depository institutions' if it is designated as, or is within, an `underserved county' according to data produced by the CFPB. . . . NCUA will make a list of `underserved counties' available on its Web site.”
59

Alternatively, the final rule permits a credit union to submit for approval “a metric of its own choosing that is based on NCUA or other Federal banking agency data, [that] establishes to NCUA that the proposed area is `underserved by other depository institutions.'
60

59
Appendix B, Ch. 2, § III.B.3.

60

Id.

3.
Commenters' Recommendations in Response to the Proposed Rule.
In response to the proposed rule, a few commenters initiated Underserved Area recommendations of their own. The Board can adopt a regulatory proposal only when, and to the extent, it is authorized by law, and then only if it is supported by rational and reasonable policy conclusions as reflected in the rulemaking record.
61

61
5 U.S.C. 706(2)(A).

The first commenter recommendation was that the Board, by regulation, permit any charter type to add an Underserved Area, whereas the existing rule permits only a multiple common bond credit union to do so. To allow any charter type to serve an Underserved Area would require Congress to amend the Act, which presently limits Underserved Area additions to FCUs in the “the field of membership category of which is described in [section 1759(b)(2)],”
i.e.,
exclusively a “multiple common-bond credit union.”
62

Pending such an amendment to the Act, the Board lacks the authority to adopt the recommendation to allow
any
charter type to add an Underserved Area.

62
12 U.S.C. 1759(c)(2).

The second commenter recommendation was that the Board permit “other technical means,” beyond what the existing “service facility” definition permits, to meet the Act's explicit mandate that a credit union “establish and maintain an office or facility
in”
the Underserved Area it is approved to serve.
63

For the Board to depart from this statutory mandate would require Congress to amend the Act to, for example, substitute “to serve” for the word “in.” Pending such an amendment to the Act, the Board lacks the authority to adopt the recommendation to permit a transactional Web site to qualify as a valid service facility within an Underserved Area.

63

Id.
§ 1759(c)(2)(B) (emphasis added). The Board authorized video teller machines in an opinion letter dated August 6, 2012, at:
https://www.ncua.gov/regulation-supervision/Pages/rules/legal-opinions/2012/0965.aspx
.

D. Multiple Common Bond

As amended in 1998, the Act restored the Board's multiple common bond policy, permitting a multiple common bond credit union to serve a combination of distinct, definable occupational and/or associational groups, provided each has its own common bond among group members.
64

64
63 FR 71998, Dec. 30, 1998; 12 U.S.C. 1759(b)(2)(A).
See NCUA
v.
First National Bank & Trust Co.,
522 U.S. 479 (1988).

1.
Credit Union's “Reasonable Proximity” via Members' Online Access to Services.
When it is either impracticable or inconsistent with reasonable standards of safety and soundness for a group to form a stand-alone single common bond credit union, the Act requires “inclusion of [a new] group in the [FOM] of a credit union that is within
reasonable proximity
to the location of the group whenever practicable and consistent with reasonable standards for the safe and sound operation of the credit union.”
65

Solely to meet the “reasonable proximity” requirement, the Board proposed revising the definition of a “service facility” to include online internet access in the form of a transactional Web site that gives members of added occupational or associational groups access to their credit union's products and services.
66

The Board noted the significant benefits of access via an electronic service facility, namely that it would put multiple common bond credit unions in parity with their depository institution competitors, and would permit them to keep pace with advances in technology that enable more efficient delivery of products and services to their members.

65
12 U.S.C. 1759(f)(1)(B) (emphasis added).

66
The revised definition would not permit an individual to qualify remotely for membership in a

community credit union based on electronic access to it from outside its well-defined local community. Nor would the revised definition apply to meet the requirement that a credit union serving an Underserved Area “must establish and maintain an office or facility in [the Underserved Area].”

66
12 U.S.C. 1759(c)(1)(B).

Scores of credit union commenters supported the proposal to modify the definition of service facility to permit use of a transactional Web site to achieve reasonable proximity between a multiple common bond credit union and members of its added groups. These commenters contented that the proposal is within the Board's authority to interpret the Act. As a practical matter, the commenters asserted that online proximity reflects the large and growing role of modern financial technology, making geographic location and physical branches less representative of the scope of a credit union's service area. Online access would allow FCUs to efficiently meet their members' needs and expectations.

Commenters stated that while an FCU's physical presence conveniently close to the groups it served may have been a practical necessity in the past, evolving technology has expanded the menu of options members have to interact with their financial institution, effectively putting them in close proximity regardless of geographic location. In contrast, scores of bank commenters opposed the proposal to amend the definition of service facility to include online access. They claimed that the proposal exceeds the Board's statutory authority and is inconsistent with Congressional intent, in that an online internet channel would “effectively remove the statutory requirement that a multiple common bond FCU be in a `reasonable proximity to the location of the group.” Moreover, they criticized the proposal as inconsistent with NCUA's prior interpretation of “reasonable proximity” as mandating an FCU branch office or mobile office physically near the group to be added. One commenter recommended that NCUA study the effect of the proposal on the wider financial services industry.

The Board has considered the comments addressing the proposal to modify the definition of service facility to permit use of a transactional Web site to achieve “reasonable proximity” between a multiple common bond credit union and members of its added groups. Notwithstanding certain merits of the proposal, the Board has decided to defer action on it at this time, consistent with an incremental approach to introducing the other FOM modifications adopted in the final rule, thus permitting credit unions to acclimate to them. The Board will further study the impact of the proposal.
67

However, this decision does not detract from the Board's belief in the utility of on-line access to facilitate transactions between credit unions and their members generally.

67
The Board notes that a shared branch or other facility can be used as an alternative to meet the “reasonable proximity” requirement.

2.
Inclusion of Select Employee Group Contractors in a Multiple Common Bond.
The proposed rule extended to
multiple
occupational common bond credit unions the ability (that single common bond credit unions already have)
68

to add persons who work regularly for an entity that is under contract to any of the SEG sponsors listed in a credit union's charter, provided there is a “strong dependency relationship” between the contractor and the SEG sponsor in each case.

68
Appendix B, Ch. 2 § II.A.1.

Scores of FCU commenters supported this proposal, believing that it better reflects today's modern workforce, in which it is not uncommon for businesses to outsource work to contractors whose employees, although not directly employed by a SEG sponsor, are integral to the sponsor's functioning and operations. In some cases, the employees of an independent contractor have worked for a SEG sponsor longer than many of the sponsor's
own
employees, who were eligible for membership from the outset of their employment. As many commenters pointed out, there is no functional distinction between a single and multiple common bond credit union for purposes of recognizing the occupational common bond between a SEG sponsor's own employees and those of its contractors with whom they work.

These commenters noted that the proposal would allow greater flexibility for potential members to join an FCU, thus easing or eliminating unnecessary administrative burdens and restrictions on FCUs. As a result, they claimed that this proposal would help to expand the multiple common bond membership base nationally, thereby making affordable financial services available to more American consumers.

In contrast, bank commenters opposed the contractor eligibility proposal, arguing that it is inconsistent with the Act and its legislative history to include within a SEG the employees of its sponsor's contractors. They asserted that the Act favors the formation of single common bond credit unions.

Having considered the comments addressing inclusion of SEG contractors in a multiple common bond, the Board has determined that the proposal not only is consistent with the statute, but reflects the modern economy's increasing reliance on contractors. Specifically, the Board notes the proposal's consistency with the Act's provisions requiring a stand-alone feasibility assessment above the 3000 member threshold. The strong mutual dependency of a SEG sponsor and its contractor on each other effectively cements the single common bond the sponsor's employees and the contractor's employees share with each other.

Despite the Act's preference for the formation of single common bond credit unions, the Act expressly permits a multiple common bond addition when a group cannot reasonably establish a single common bond credit union, or likely would be unable to successfully manage and sustain such a credit union.
69

The addition of a contractor's employees to a SEG consisting of the sponsor's employees with whom they work is consistent with that approach. Accordingly, the final rule provides that a
multiple
occupational common bond credit union may add persons who work regularly for an entity that is under contract to any of the SEG sponsors listed in the credit union's charter, provided there is a “strong dependency relationship” between the contractor and sponsor. To extend to
multiple
common bond credit unions the ability that
single
common bond credit unions already have to add persons who work regularly for an entity under contract to its sponsor advances the Board's goal to enable parallel functioning between single and multiple common bond credit unions whenever feasible and consistent with the Act.

69
12 U.S.C. 1759(f)(1)(B).

Some commenters requested the Board to define what constitutes a “strong dependency relationship” between a SEG sponsor and its contractor, but cautioned against requiring either SEG sponsors or their contractors to disclose trade secrets or confidential financial information. Some suggested permitting an FCU to pledge in good faith that it can

document a “strong dependency relationship” between each SEG's sponsor and the sponsor's contractor in accordance with the particulars of the industry in which they operate. Reflecting the Board's preference for a more objective standard, the final rule defines a “strong dependency relationship” between a SEG sponsor and the sponsor's contractor to mean that both rely on each other as measured by a pattern of regularly doing business with each other, for example, as documented by the number, the term length and the dollar volume of prior and pending contracts between them. The Board intends the “strong dependency” standard to be determined by credit unions themselves, so as to create a rebuttable presumption that the sponsor's employees and those of the contractor share a single common bond, as the Act requires. NCUA's Office of Consumer Protection, or its successor, anticipates issuing further guidance to clarify what documentation will be acceptable to confirm a contractual relationship based on a pattern of regularly doing business.

3.
Multiple Common Bond of Office/Industrial Park Employees.
The existing rule expressly permits a community charter to consist of persons who are employed within an office or industrial park.
70

As an alternative to such a community charter, the proposed rule expressly permitted a multiple common bond credit union to combine in a single SEG all the employees of a park's business and retail tenants (
e.g.,
within a shopping mall, an office building or an office complex), provided each tenant has fewer than 3000 employees working regularly at a facility within the park—effectively a SEG consisting of park tenants themselves rather than their employees.

70
Appendix B, ch. 2 § V.A.7.

About a dozen credit union commenters specifically addressed the tenants' SEG proposal, generally favoring it as an enhancement of an FCU's ability to serve multiple businesses within an office/industrial park by leveraging its resources to provide more value to its membership. Specifically, the proposal enabled an FCU to use a park's tenant base to more efficiently identify and offer services to employees of businesses within the park.

Critics of the proposal included some credit unions and several banks that believed the proposal would create an impermissible “hybrid” charter that combined community and occupational common bond characteristics. Specifically, these commenters believed such a charter would make a SEG out of a group (
i.e.,
employees of a park's retail and business tenants) that is more properly characterized simply as persons who work in a geographically based community. These commenters emphasized that the Act prescribes distinct criteria for groups sharing an occupational versus an associational common bond.
71

The opponents also questioned the justification for this proposal beyond administrative convenience.

71
As set forth in the Chartering Manual, the criteria of an occupational common bond are: (1) Employment in a single corporation, (2) employment in a corporation with a controlling interest in or by another legal entity, (3) employment in a corporation which is related to another legal entity (such as a company under contract and possessing a strong dependency relationship with another company); (4) employment or attendance in a school, or (5) employment in the same Trade, Industry or Profession. Appendix B, ch. 2, § II.A.1.

Having considered the comments addressing the tenants' SEG proposal, the Board believes it is appropriate to give the employees of a park's tenants the option to join a multiple common bond credit union. However, a SEG sponsored by a landlord and consisting of its tenants (as opposed to the landlord's
own
employees) unequivocally lacks the essential
occupational
common bond due to the lack of an employment relationship between the landlord and each tenant. Notwithstanding this structural flaw, the existing rule's language and its application in practice have convinced the Board that the rule
already
permits a park's tenants, in each one's capacity as
an employer,
to form a multiple occupational common bond credit union combining each one's individual SEG.
72

72
Appendix B, ch. 1 § XI.

Accordingly, in lieu of the tenant SEG proposal, the final rule clarifies the current availability of the multiple common bond option for employers within an industrial park, shopping mall, office park, or office building (each a “park”) by expressly specifying it as an example within the rule; no rule change is required.
73

Consistent with the Act's stand-alone feasibility exemption for groups with fewer than 3000 members,
74

each park tenant's SEG must have fewer than 3000 employees who work at a facility within the park, each of whom would be eligible for FCU membership only for so long as he/she regularly works there.
75

This existing multiple common bond option creates neither a new charter type nor an impermissible hybrid community/multiple group charter; rather, it gives FCUs a choice between
either
distinct charter type to serve an office/industrial park.

73
To facilitate the formation of multiple SEGs among a park's retail and business tenants, a multiple common bond credit union could rely on a letter from an authorized representative of the park, such as its leasing agent, to identify each incoming tenant capable of forming its own SEG, and to give notice of the departure of an existing SEG's sponsor from the park, thus discontinuing its SEG.

74
12 U.S.C. 1759(d)(2)(A).

75
Appendix B, ch. 2, § IV.A.1.

4.
Streamlined Documentation to Assess Stand-Alone Feasibility of Groups of 3000 or Greater.
The proposed rule streamlined NCUA's process for assessing the stand-alone feasibility of a group of 3000 or more members (“≥3000 group”) that seeks to be added to the FOM of an existing multiple common bond credit union, instead of forming a single common bond credit union. A group of fewer than 3000 members (“<3000 group”) is subject to the existing process under the Application for Field of Membership (NCUA form 4015 EZ). A group between 3000 and 5000 is required to document its inability to form a credit union of its own based on evidence of a lack of available subsidies, disinterest among the group's members, and an overall lack of sufficient resources (NCUA form 4015-A). Groups with more than 5000 members are subject to the existing standard application process, requiring a group to fully describe its inability to establish a new single common bond credit union (NCUA form 4015). The proposed rule invited comments on whether to increase the 5000 member threshold that triggers the standard application process.

Scores of comments, both in support and in opposition, addressed the proposal to streamline the documentation requirement to assess the stand-alone feasibility of ≥3000 groups. Credit union commenters generally favored the proposal, but requested modifications, particularly to increase the membership threshold and the method of quantifying group size. Most commenters recommended increasing the threshold to 5000, while others recommended increasing it to as many as 20,000 members. One commenter recommended eliminating a numerical threshold completely. Further, many credit union commenters recommended evaluating the stand-alone feasibility criteria using the number of actual rather than potential members. Acknowledging the Board's initial rationale for the streamlined approach—that 80 percent of failures occur among FCUs with fewer than

5000 actual members
76

—certain supporters urged NCUA to consider the safety and soundness consequences and the risk to the Insurance Fund of insisting that groups between 3000 and 5000 members form their own credit unions. They suggested that NCUA's goal should be to charter FCUs that are most likely to survive.

76
80 FR at 76754.

Several bank commenters criticized the proposal, claiming that it violates the Act and is inconsistent with the legislative history. These commenters stated that, with limited exceptions, the Act expressly limits to 3000 members the size of a group that can be added to an existing multiple common bond credit union. The commenters were concerned that the proposal's practical effect would be to unilaterally increase the numerical limitation prescribed by law.

In contrast, credit union commenters insisted that the proposal is within the Act's statutory authority because it does not obviate the requirement that a >3000 group demonstrate its inability to establish a new single common bond FCU. In their view, it allows NCUA to accept a group's statement of inability to form a stand-alone credit union in lieu of full supporting documentation. To the extent such documentation is absent, they noted that NCUA retains the ability to reject or to further investigate a group's statement of inability to form a stand-alone credit union.

Having considered the comments addressing the streamlined documentation proposal for assessing the stand-alone feasibility of >3000 groups, it is clear that commenters opposing the proposal relied on a fundamental misconception—that the proposal would alter the 3000 member stand-alone feasibility threshold mandated by the Act. On the contrary, the final rule merely reduces the documentation required, depending on group size, to support a stand-alone feasibility determination, while continuing to honor both the 3000 member feasibility threshold and the feasibility criteria that the Act prescribes. Further, streamlining the required documentation is a response to complaints to the agency from multiple common bond credit unions that the excessive paperwork demand on groups they seek to add has been a disincentive to those groups, causing them to withdraw in frustration.

Certain credit unions urged the Board to increase the threshold above 5000, if based on potential members or, if left at 5000, to base it on actual members. These commenters did not provide a compelling justification for adjusting this amount at this time. On the contrary, the Board has determined that the proposed 5000 member threshold is appropriate at this time, believing that it represents the minimum number of potential members needed for a credit union to maintain long-term economic viability.

The process of applying the statutory stand-alone feasibility criteria is identical under both the streamlined documentation and the standard approaches. In either case, the Board would review a >3000 group's application and determine whether to accept or reject it, or to request additional supporting information. Accordingly, the streamlined documentation proposal is consistent with the Act's stand-alone feasibility mandate.

5.
Commenter-initiated Emergency Merger Proposal.
To facilitate mergers between credit unions with unlike common bonds, several commenters recommended a variety of approaches for relaxing, if not effectively disregarding, the statutory standard authorizing an emergency merger free of the FOM constraints the Act otherwise imposes. “Notwithstanding any other provision of law,” including the FOM limitations it may impose, the Act permits the Board to authorize the merger of an insured credit union (or a purchase and assumption of its assets) provided the credit union is “insolvent or is in danger of insolvency.”
77

Given that this explicit, objectively measurable “insolvency” standard is expressly imposed by the Act, the Board is bound by it no matter what other circumstances it would consider to warrant a merger of unlike common bonds. Within that standard, the Board retains discretion to define “danger of insolvency,”
e.g.,
in terms of imminence, as the existing rule does according to time increments (between 12 and 36 months) pending a credit union's declining net worth classification.
78

The Board will, in a separate rulemaking, consider alternative approaches to define the “danger of insolvency” prerequisite for an emergency merger of unlike common bonds.

77
12 U.S.C. 1785(h).

78
Appendix B, Ch. 2, section II.D.2. (glossary definition of “danger of insolvency”).

E. Other Persons Eligible for Credit Union Membership

NCUA has historically recognized a variety of persons who, by virtue of their relationship to a common bond group, have been entitled to credit union membership eligibility.
79

To recognize the contributions of those who have served in the United States Armed Forces, and to give them the benefit of access to credit union service following active duty, the proposed rule permitted a credit union to include as an affinity group within its common bond the honorably discharged veterans of any branch of the United States Armed Forces listed in its charter.

79
Appendix B, Ch.2, sections II.H., IV.H., and Appendix 1 (glossary definition of “affinity”).

Credit union commenters uniformly favored this proposal for recognizing not only the affinity that veterans share with their own active duty branch of service, but the affinity among active duty and retired military personnel generally. Some commenters supported the proposal as a means to protect military veterans from unscrupulous lenders. Another opposed it as too expansive, contending that it would justify membership eligibility for retirees of other organizations within an FOM. Conversely, yet another commenter advocated expanding the proposal to grant membership eligibility based upon the affinity of, for example, retired federal employees and retired teachers. The single bank commenter who addressed this proposal was concerned that it would enable individuals to use “creative measures” to join an FCU by group affinity generally.

Having considered the comments addressing the proposal to extend membership eligibility to honorably discharged military members, the Board believes that it is appropriate due to the unique bond that discharged veterans typically retain with their former branch of service (
e.g.,
via military-sponsored morale, welfare and recreational associations). The Board emphasizes that such an affinity applies exclusively to honorably discharged veterans; in contrast, membership eligibility would be available to retirees of other groups, such as teachers or federal employees within an FOM, only to the extent an individual credit union permits it in its charter. Accordingly, exclusively for “Honorably discharged veterans who served in any of the Armed Services of the United States listed in [a credit union's] charter,” the final rule automatically grants membership eligibility.
80

80
Appendix B, Ch. 2, § II.H.

F. Inclusion of “Strong Dependency” Vendors and Suppliers in a Single Common Bond Within a Trade, Industry or Profession

A single occupational common bond within a trade, industry or profession (a “TIP”) is based on employment by any number of separately owned corporations or other legal entities that share a common bond by reason of producing similar products, providing similar services, sharing the same profession or trade, or participating in the same industry.
81

A TIP-based common bond requires a narrow commonality of interests among the TIP entities' employees and a close nexus among the entities themselves.
82

81
68 FR 18334, 18336 (April 15, 2003); Appendix B, ch. 2, § IIA.2.

82

Id.

The proposed rule clarified that the existing definition of a TIP-based single common bond of occupation includes employees of entities that have a strong dependency relationship on, and whose employees work directly with employees of, other entities within the same industry, to the extent that a significant, if not equal, economic impact is likely if one were unable to continue in its operations without doing business with the other.

Several credit unions favored the proposal to include “strong dependency” vendors and suppliers in a TIP, stating that it would provide regulatory relief in allowing TIP credit unions to reach potential members more easily. One commenter welcomed the Board's recognition that current employment practices frequently involve outsourcing of work to independent vendors and suppliers under contract. No commenter opposed the proposal.

Some commenters expressed a mistaken belief that the existing rule restricts a TIP charter from serving the entire nation. On the contrary, the existing rule imposes no geographic limitation on service to the groups within a TIP. In fact, NCUA has approved several TIPs whose groups span the whole nation.

Having considered the comments addressing the proposal to include “strong dependency” vendors and suppliers in a TIP, the Board has decided to adopt it in the final rule.
83

Further, at the request of commenters, the final rule defines a “strong dependency” relationship between TIP entities and their vendors and suppliers as a relationship in which they rely on each other to the extent, for example, that the absence of one likely would cause the other to suffer a material decline in either revenue, functionality or productivity, among other consequences.
84

83
Appendix B, Ch. 2, section II.A.2.

84

Id.

G. Technical Updates

Since publishing the December 2015 proposed rule, the Board has renamed the agency's Office of Consumer Protection as the Office of Consumer Financial Protection and Access (“OCFPA”). Accordingly, the final rule updates the agency's Chartering Manual to substitute OCFPA in place of certain references to regional office and regional director chartering responsibilities, and to substitute the Board Secretary for the former Office of Consumer Protection in reference to appeals of chartering decisions.
85

The final rule also corrects statutory and regulatory citations and cross-references in the Chartering Manual and its appendices, and updates those appendices to reflect current information and practices.

85
Appendix B, Ch. 2, sections II.C., II.C.6., III.C., III.C.6., IV.B., IV.B.5., V.C. and VII.D.

III. Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small entities.
86

For purposes of this analysis, NCUA considers small credit unions to be those having under $100 million in assets.
87

This rule is anticipated to economically benefit FCUs that choose to expand their FOMs, but not to the extent that it will affect a substantial number of small entities. In any case, NCUA certifies that the rule will not have a significant economic impact on small credit unions.

86
5 U.S.C. 603(a).

87

See
80 FR 57512 (Sept. 24, 2015).

Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”)
88

applies to collections of information through which an agency creates a paperwork burden on regulated entities or the public, or revises existing burden.
89

For purposes of the PRA, a paperwork burden may take the form of either a reporting, recordkeeping, or third-party disclosure requirement, also referred to as information collections.

88
44 U.S.C. 3501
et seq.

89

Id.
§ 3507(d); 5 CFR part 1320.

Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB control number. This rule involves a collection of information approved under OMB control number 3133-0015—Chartering and Field of Membership Manual.

The final rule creates new strategic options for FCUs, while requiring of them essentially the same information that the existing rule required to apply for and be granted a charter expansion or conversion, with two exceptions. It introduces a new form (NCUA 4015-A) within Appendix 4 to the Chartering and Field of Membership Manual that condenses the application process that otherwise would apply to the addition of certain groups to a multiple common bond FOM. Using this condensed version will streamline the application process and will no longer require completion of the Form 4015. By adding this option, no new burden is realized with the addition of NCUA 4015-A.

Regarding a community common bond, the final rule permits a community FCU to add an area adjacent to the perimeter of an existing community consisting of a Single Political Jurisdiction, Core Based Statistical Area or Combined Statistical Area, based upon a narrative showing that residents on both sides of the perimeter interact or share common interests. For that purpose, the rule identifies compelling indicia of interaction or common interests that would be relevant in developing and supporting a narrative to establish that the residents of the expanded community meet the requirements of a well-defined local community.

NCUA has determined that the procedure for an FCU to assemble such evidence of interaction or common interests, and to develop and submit a narrative summarizing the evidence to support its application to expand, would create a new information collection requirement. In the proposed rule, NCUA identified and described this new information collection requirement, estimating the time it would take to comply, and solicited commenters on the information collection aspects of the proposed rule. The sole commenter who addressed the information collection aspects of the proposed rule concluded without explanation that it would double the existing paperwork burden. The burden outlined in the December proposed rule revealed an increase of 26,160 hours due to the new and revised information collection requirements. With this estimated increase, the total burden

requested under OMB No. 3133-0015 is 44,223 hours.

Executive Order 13132

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. To adhere to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the Executive Order. Primarily because this rule applies to FCUs exclusively, it will not have a substantial direct effect on the states, on the connection between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined this rule does not constitute a policy that has federalism implications for purposes of the Executive Order 13132.

Assessment of Federal Regulations and Policies on Families

NCUA has determined that this final rule will not affect family well-being within the meaning of Section 654 of the Treasury and General Government Appropriations Act, 1999.
90

90
Public Law 105-277, 112 Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121) (“SBREFA”) provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by Section 551 of the Administrative Procedure Act.
91

NCUA does not believe this final rule is a “major rule” within the meaning of the relevant sections of SBREFA, but as required, has submitted this final rule to OMB for its determination.

91
5 U.S.C. 551.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board on October 27, 2016.
Gerard S. Poliquin,
Secretary of the Board.

For the reasons stated above, NCUA amends 12 CFR part 701 as follows:

PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority for part 701 continues to read as follows:

Authority:

12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601
et seq.;
42 U.S.C. 1981 and 3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

2. Appendix B to part 701 is revised to read as follows:
Appendix B to Part 701—Chartering and Field of Membership Manual

Chapter 1 — Federal Credit Union Chartering

I—Goals of NCUA Chartering Policy

The National Credit Union Administration's (NCUA) chartering and field of membership policies are directed toward achieving the following goals:

• To encourage the formation of credit unions;

• To uphold the provisions of the Federal Credit Union Act;
92

92
12 U.S.C. 1751
et seq.

• To promote thrift and credit extension;

• To promote credit union safety and soundness; and

• To make quality credit union service available to all eligible persons.

NCUA may grant a charter to single occupational/associational groups, multiple groups, or communities if:

• The occupational, associational, or multiple groups possess an appropriate common bond or the community represents a well-defined local community, neighborhood, or rural district;

• The subscribers are of good character and are fit to represent the proposed credit union; and

• The establishment of the credit union is economically advisable.

Generally, these are the primary criteria that NCUA will consider. In unusual circumstances, however, NCUA may examine other factors, such as other federal law or public policy, in deciding if a charter should be approved.

Unless otherwise noted, the policies outlined in this manual apply only to federal credit unions.

II—Types of Charters

The Federal Credit Union Act recognizes three types of federal credit union charters— single common bond (occupational and associational), multiple common bond (more than one group each having a common bond of occupation or association), and community.

The requirements that must be met to charter a federal credit union are described in Chapter 2. Special rules for credit unions serving low-income groups are described in Chapter 3.

If a federal credit union charter is granted, Section 5 of the charter will describe the credit union's field of membership, which defines those persons and entities eligible for membership. Generally, federal credit unions are only able to grant loans and provide services to persons within the field of membership who have become members of the credit union.

III—Subscribers

Federal credit unions are generally organized by persons who volunteer their time and resources and are responsible for determining the interest, commitment, and economic advisability of forming a federal credit union. The organization of a successful federal credit union takes considerable planning and dedication.

Persons interested in organizing a federal credit union should contact one of the credit union trade associations or the NCUA regional office serving the state in which the credit union will be organized. Lists of NCUA offices and credit union trade associations are shown in the appendices. NCUA will provide information to groups interested in pursuing a federal charter and will assist them in contacting an organizer.

While anyone may organize a credit union, a person with training and experience in chartering new federal credit unions is generally the most effective organizer. However, extensive involvement by the group desiring credit union service is essential.

The functions of the organizer are to provide direction, guidance, and advice on the chartering process. The organizer also provides the group with information about a credit union's functions and purpose as well as technical assistance in preparing and submitting the charter application. Close communication and cooperation between the organizer and the proposed members are critical to the chartering process.

The Federal Credit Union Act requires that seven or more natural persons—the “subscribers”—present to NCUA for approval a sworn organization certificate stating at a minimum:

• The name of the proposed federal credit union;

• The location of the proposed federal credit union and the territory in which it will operate;

• The names and addresses of the subscribers to the certificate and the number of shares subscribed by each;

• The initial par value of the shares;

• The detailed proposed field of membership; and

•

• The fact that the certificate is made to enable such persons to avail themselves of the advantages of the Federal Credit Union Act.

Willfully and knowingly making false statements on any of the required documentation filed in obtaining a federal credit union charter may be grounds for federal criminal prosecution under 18 U.S.C. 1001.

IV—Economic Advisability

IV.A—General

Before chartering a federal credit union, NCUA must be satisfied that the institution will be viable and that it will provide needed services to its members. Economic advisability, which is a key factor in determining whether a potential charter will have a reasonable opportunity to succeed, is

essential in order to qualify for a credit union charter.

NCUA will conduct an independent on-site investigation of each charter application to ensure that the proposed credit union can be successful. In general, the success of any credit union depends on: (a) The character and fitness of management; (b) the depth of the members' support; and (c) present and projected market conditions.

IV.B—Proposed Management's Character and Fitness

The Federal Credit Union Act requires NCUA to ensure that the subscribers are of good “general character and fitness.” Prospective officials and employees will be the subject of credit and background investigations. The investigation report must demonstrate each applicant's ability to effectively handle financial matters. Employees and officials should also be competent, experienced, honest and of good character. Factors that may lead to disapproval of a prospective official or employee include criminal convictions, indictments, and acts of fraud and dishonesty. Further, factors such as serious or unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.

NCUA also needs reasonable assurance that the management team will have the requisite skills—particularly in leadership and accounting—and the commitment to dedicate the time and effort needed to make the proposed federal credit union a success.

Section 701.14 of NCUA's Rules and Regulations sets forth the procedures for NCUA approval of officials of newly chartered credit unions. If the application of a prospective official or employee to serve is not acceptable to the Office of Consumer Financial Protection and Access Director, the group can propose an alternate to act in that individual's place. If the charter applicant feels it is essential that the disqualified individual be retained, the individual may appeal the Office of Consumer Financial Protection and Access Director's decision to the NCUA Board. If an appeal is pursued, action on the application may be delayed. If the appeal is denied by the NCUA Board, an acceptable new applicant must be provided before the charter can be approved.

IV.C—Member Support

Economic advisability is a major factor in determining whether the credit union will be chartered. An important consideration is the degree of support from the field of membership. The charter applicant must be able to demonstrate that membership support is sufficient to ensure viability.

NCUA has not set a minimum field of membership size for chartering a federal credit union. Consequently, groups of any size may apply for a credit union charter and be approved if they demonstrate economic advisability. However, it is important to note that often the size of the group is indicative of the potential for success. For that reason, a charter application with fewer than 3,000 primary potential members (
e.g.,
employees of a corporation or members of an association) may not be economically advisable. Therefore, a charter applicant with a proposed field of membership of fewer than 3,000 primary potential members may have to provide more support than an applicant with a larger field of membership. For example, a small occupational or associational group may be required to demonstrate a commitment for long-term support from the sponsor.

IV.D—Present and Future Market Conditions—Business Plan

The ability to provide effective service to members, to compete in the marketplace, and to adapt to changing market conditions are key to the survival of any enterprise. Before NCUA will charter a credit union, a business plan based on realistic and supportable projections and assumptions must be submitted.

The business plan should contain, at a minimum, the following elements:

• Mission statement;

• Analysis of market conditions, including if applicable, geographic, demographic, employment, income, housing, and other economic data;

• Evidence of member support;

• Goals for shares, loans, and for number of members;

• Financial services needed/desired;

• Financial services to be provided to members of all segments within the field of membership;

• How/when services are to be implemented;

• Organizational/management plan addressing qualification and planned training of officials/employees;

• Continuity plan for directors, committee members and management staff;

•

• Operating facilities, to include office space/equipment and supplies, safeguarding of assets, insurance coverage, etc.;

• Type of record-keeping and data processing system;

• Detailed semiannual pro forma financial statements (balance sheet, income and expense projections) for 1st and 2nd year, including assumptions—
e.g.,
loan and dividend rates;

• Plans for operating independently;

• Written policies (shares, lending, investments, funds management, capital accumulation, dividends, collections, etc.);

• Source of funds to pay expenses during initial months of operation, including any subsidies, assistance, etc., and terms or conditions of such resources; and

• Evidence of sponsor commitment (or other source of support) if subsidies are critical to success of the federal credit union. Evidence may be in the form of letters, contracts, financial statements from the sponsor, and any other such document on which the proposed federal credit union can substantiate its projections.

While the business plan may be prepared with outside assistance, the subscribers and proposed officials must understand and support the submitted business plan.

V—Steps in Organizing a Federal Credit Union

V.A—Getting Started

Following the guidance contained throughout this policy, the organizers should submit wording for the proposed field of membership (the persons, organizations and other legal entities the credit union will serve) to NCUA early in the application process for written preliminary approval. The proposed field of membership must meet all common bond or community requirements.

Once the field of membership has been given preliminary approval, the organizer should conduct an organizational meeting to elect seven to ten persons to serve as subscribers. The subscribers should locate willing individuals capable of serving on the board of directors, credit committee, supervisory committee, and as chief operating officer/manager of the proposed credit union.

Subsequent organizational meetings may be held to discuss the progress of the charter investigation, to announce the proposed slate of officials, and to respond to any questions posed at these meetings.

If NCUA approves the charter application, the subscribers, as their final duty, will elect the board of directors of the proposed federal credit union. The new board of directors will then appoint the supervisory committee.

V. B—Charter Application Documentation

V.B.1—General

As discussed previously in this Chapter, the organizer of a federal credit union charter must, at a minimum, provide evidence that:

• The group(s) possess an appropriate common bond or the geographical area to be served is a well-defined local community, neighborhood, or rural district;

• The subscribers, prospective officials, and employees are of good character and fitness; and

• The establishment of the credit union is economically advisable.

As part of the application process, the organizer must submit the following forms, which are available in appendix 4 of this Manual:

• Federal Credit Union Investigation Report, NCUA 4001;

• Organization Certificate, NCUA 4008;

•

• Report of Official and Agreement To Serve, NCUA 4012;

• Application and Agreements for Insurance of Accounts, NCUA 9500; and

• Certification of Resolutions, NCUA 9501.

Each of these forms is described in more detail in the following sections.

V.B.2—Federal Credit Union Investigation Report, NCUA 4001

The application for a new federal credit union will be submitted on NCUA 4001. State-chartered credit unions applying for conversion to a federal charter will use NCUA 4000. (See Chapter 4 for a full discussion.) The organizer is required to certify the information and recommend approval or disapproval, based on the investigation of the request.

V.B.3—Organization Certificate, NCUA 4008

This document, which must be completed by the subscribers, includes the seven criteria established by the Federal Credit Union Act. NCUA staff assigned to the case will assist in the proper completion of this document.

V.B.4—Report of Official and Agreement To Serve, NCUA 4012

This form documents general background information of each official and employee of the proposed federal credit union. Each official and employee must complete and sign this form. The organizer must review each of the NCUA 4012s for elements that would prevent the prospective official or employee from serving. Further, such factors as serious, unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.

V.B.5—Application and Agreements for Insurance of Accounts, NCUA 9500

This document contains the agreements with which federal credit unions must comply in order to obtain National Credit Union Share Insurance Fund (NCUSIF) coverage of member accounts. The document must be completed and signed by both the chief executive officer and chief financial officer. A federal credit union must qualify for federal share insurance.

V.B. 5—Certification of Resolutions, NCUA 9501

This document certifies that the board of directors of the proposed federal credit union has resolved to apply for NCUSIF insurance of member accounts and has authorized the chief executive officer and recording officer to execute the Application and Agreements for Insurance of Accounts. Both the chief executive officer and recording officer of the proposed federal credit union must sign this form.

VI—Name Selection

It is the responsibility of the federal credit union organizers or officials of an existing credit union to ensure that the proposed federal credit union name or federal credit union name change does not constitute an infringement on the name of any corporation in its trade area. This responsibility also includes researching any service marks or trademarks used by any other corporation (including credit unions) in its trade area. NCUA will ensure, to the extent possible, that the credit union's name:

• Is not already being officially used by another federal credit union;

• Will not be confused with NCUA or another federal or state agency, or with another credit union; and

• Does not include misleading or inappropriate language.

The last three words in the name of every credit union chartered by NCUA must be “Federal Credit Union.”

The word “community,” while not required, can only be included in the name of federal credit unions that have been granted a community charter.

VII—NCUA Review

VII.A—General

Once NCUA receives a complete charter application package, an acknowledgment of receipt will be sent to the organizer. During the review process, a staff member will be assigned to perform an on-site contact with the proposed officials and others having an interest in the proposed federal credit union.

NCUA staff will review the application package and verify its accuracy and reasonableness. A staff member will inquire into the financial management experience and the suitability and commitment of the proposed officials and employees, and will make an assessment of economic advisability. The staff member will also provide guidance to the subscribers in the proper completion of the Organization Certificate, NCUA 4008.

Credit and background investigations may be conducted concurrently by NCUA with other work being performed by the organizer and subscribers to reduce the likelihood of delays in the chartering process.

The staff member will analyze the prospective credit union's business plan for realistic projections, attainable goals, adequate service to all segments of the field of membership, sufficient start-up capital, and time commitment by the proposed officials and employees. Any concerns will be reviewed with the organizer and discussed with the prospective credit union's officials. Additional on-site contacts by NCUA staff may be necessary. The organizer and subscribers will be expected to take the steps necessary to resolve any issues or concerns. Such resolution efforts may delay processing the application.

NCUA staff will then make a recommendation to the Office of Consumer Financial Protection and Access Director regarding the charter application. The recommendation may include specific provisions to be included in a Letter of Understanding and Agreement. In most cases, NCUA will require the prospective officials to adhere to certain operational guidelines. Generally, the agreement is for a limited term of two to four years. A sample Letter of Understanding and Agreement is found in appendix 2.

VII.B—Office of Consumer Financial Protection and Access Director Approval

Once approved, the board of directors of the newly formed federal credit union will receive a signed charter and standard bylaws from the Office of Consumer Financial Protection and Access Director. Additionally, the officials will be advised of the name of the examiner assigned responsibility for supervising and examining the credit union.

VII.C—Office of Consumer Financial Protection and Access Director Disapproval

When the Office of Consumer Financial Protection and Access Director disapproves any charter application, in whole or in part, the organizer will be informed in writing of the specific reasons for the disapproval. Where applicable, the Office of Consumer Financial Protection and Access Director will provide information concerning options or suggestions that the applicant could consider for gaining approval or otherwise acquiring credit union service. The letter of denial will include the procedures for appealing the decision.

VII.D—Appeal of Office of Consumer Financial Protection and Access Director Decision

If the Office of Consumer Financial Protection and Access Director denies a charter application, in whole or in part, that decision may be appealed to the NCUA Board. An appeal must be sent to the NCUA Board Secretary within 60 days of the date of denial and must address the specific reasons for denial. The appeal must be clearly identified as such and address the specific reason(s) the prospective group disagrees with the denial. A copy of the appeal must be sent to the Office of Consumer Financial Protection and Access Director. NCUA central office staff will make an independent review of the facts and present the appeal with a recommendation to the NCUA Board.

Before appealing, the prospective group may, within 30 days of the denial, provide supplemental information to the Office of Consumer Financial Protection and Access Director for reconsideration. A reconsideration will contain new and material evidence addressing the reasons for the initial denial. The Office of Consumer Financial Protection and Access Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A second request for reconsideration will be treated as an appeal to the NCUA Board.

VII.E—Commencement of Operations

Assistance in commencing operations is generally available through the various credit union trade organizations listed in appendix 5.

All new federal credit unions are also encouraged to establish a mentor relationship with a knowledgeable, experienced credit union individual or an existing, well-operated credit union. The mentor should provide guidance and assistance to the new credit union through attendance at meetings and general oversight. Upon request, NCUA will provide assistance in finding a qualified mentor.

VIII—Future Supervision

Each federal credit union will be examined regularly by NCUA to determine that it remains in compliance with applicable laws and regulations and to determine that it does not pose undue risk to the NCUSIF. The examiner will contact the credit union officials shortly after approval of the charter in order to arrange for the initial examination (usually within the first six months of operation).

The examiner will be responsible for monitoring the progress of the credit union and providing the necessary advice and guidance to ensure it is in compliance with applicable laws and regulations. The examiner will also monitor compliance with the terms of any required Letter of

Understanding and Agreement. Typically, the examiner will require the credit union to submit copies of monthly board minutes and financial statements.

The Federal Credit Union Act requires all newly chartered credit unions, up to two years after the charter anniversary date, to obtain NCUA approval prior to appointment of any new board member, credit or supervisory committee member, or senior executive officer. Section 701.14 of the NCUA Rules and Regulations sets forth the notice and application requirements. If NCUA issues a Notice of Disapproval, the newly chartered credit union is prohibited from making the change.

NCUA may disapprove an individual serving as a director, committee member or senior executive officer if it finds that the competence, experience, character, or integrity of the individual indicates it would not be in the best interests of the members of the credit union or of the public to permit the individual to be employed by or associated with the credit union. If a Notice of Disapproval is issued, the credit union may appeal the decision to the NCUA Board.

IX—Corporate Federal Credit Unions

A corporate federal credit union is one that is operated primarily for the purpose of serving other credit unions. Corporate federal credit unions are not governed by this manual, but instead operate under and are administered by the NCUA Office of National Examinations and Supervision.

X—Groups Seeking Credit Union Service

NCUA will attempt to assist any group in chartering a credit union or joining an existing credit union. If the group is not eligible for federal credit union service, NCUA will refer the group to the appropriate state supervisory authority where different requirements may apply.

XI—Field of Membership Designations

NCUA will designate a credit union based on the following criteria:

Single Occupational: If a credit union serves a single occupational sponsor, such as ABC Corporation, it will be designated as an occupational credit union. A single occupational common bond credit union may also serve a trade, industry, or profession (TIP), such as all teachers.

Single Associational: If a credit union serves a single associational sponsor, such as the Knights of Columbus, it will be designated as an associational credit union.

Multiple Common Bond: If a credit union serves more than one group, each of which has a common bond of occupation and/or association, it will be designated as a multiple common bond credit union.

Community: All community credit unions will be designated as such, followed by a description of their geographic boundaries, including but not limited to city or county boundaries, roadways, rivers, transportation lines.

Credit unions desiring to confirm or submit an application to change their designations should contact the Office of Consumer Financial Protection and Access.

XII—Foreign Branching

A federal credit union is permitted to serve foreign nationals within its field of membership wherever such individuals reside if management has the ability and resources to serve them. Before a credit union opens a branch outside the United States, it must submit an application to do so and have prior written approval of the regional director or Office of National Examinations and Supervision Director. A federal credit union may establish a service facility on a United States military installation or United States embassy without prior NCUA approval.

Chapter 2 — Field of Membership Requirements for Federal Credit Unions

I—Introduction

I.A.1—General

As set forth in Chapter 1, the Federal Credit Union Act provides for three types of federal credit union charters—single common bond (occupational or associational), multiple common bond (multiple groups), and community. Section 109 (12 U.S.C. 1759) of the Federal Credit Union Act addresses the membership requirements for each type of charter.

The field of membership, which is specified in Section 5 of the charter, defines those persons and entities eligible for membership. A single common bond federal credit union consists of one group having a common bond of occupation or association. A multiple common bond federal credit union consists of more than one group, each of which has a common bond of occupation or association. A community federal credit union consists of persons or organizations within a well-defined local community, neighborhood, or rural district.

Once chartered, a federal credit union can amend its field of membership; however, the same common bond or community requirements for chartering the credit union must be satisfied. Since there are differences in the three types of charters, special rules apply to each, which are fully discussed in the following sections of this Chapter.

I.A. 2—Special Low-Income Rules

Generally, federal credit unions can only grant loans and provide services to persons who have joined the credit union. The Federal Credit Union Act states that one of the purposes of federal credit unions is “to serve the productive and provident credit needs of individuals of modest means.” Although field of membership requirements are applicable, special rules set forth in Chapter 3 may apply to low-income designated credit unions and those credit unions assisting low-income groups or to a federal credit union that adds an underserved community to its field of membership.

II—Occupational Common Bond

II.A.1—General

A single occupational common bond federal credit union may include in its field of membership all persons and entities who share that common bond. NCUA permits a person's membership eligibility in a single occupational common bond group to be established in five ways:

• Employment (or a contractual relationship equivalent to employment) in a single corporation or other legal entity makes that person part of a single occupational common bond;

• Employment in a corporation or other legal entity with a controlling ownership interest (which shall not be less than 10 percent) in or by another legal entity makes that person part of a single occupational common bond;

• Employment in a corporation or other legal entity which is related to another legal entity (such as a company under contract and possessing a strong dependency relationship with another company) makes that person part of a single occupational common bond;

• Employment or attendance at a school makes that person part of a single occupational common bond (see Chapter 2, Section III.A.1); or

• Employment in the same Trade, Industry, or Profession (TIP) (see Chapter 2, Section II.A.2).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-26956. Public record. Not legal advice.