Nonmember and Public Unit Accounts

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741

Nonmember and Public Unit Accounts

agency: National Credit Union Administration (NCUA).

action: Final amendments.

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summary: The final amendments change the amount of nonmember and public

unit accounts that a credit union may maintain, without a waiver, to 20

percent of total shares or $1.5 million, whichever is greater. Credit

unions accepting nonmember and public unit accounts in excess of 20

percent of total shares are still required to develop a written plan

and send it to the Regional Director. However, prior NCUA approval is

required only for amounts exceeding 20% of total shares and $1.5

million.

effective date: June 20, 1994.

addresses: National Credit Union Administration, 1775 Duke Street,

Alexandria, Virginia 22314-3428

for further information contact: Michael J. McKenna, Staff Attorney,

Office of General Counsel, at the above address, or telephone: (703)

518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

The NCUA Board, as part of its ongoing program of regulatory

review, is revising the regulation under which federally insured credit

unions maintain nonmember and public unit accounts. Federal credit

unions (FCUs) are authorized by section 107(6) of the Federal Credit

Union Act [12 U.S.C. 1757(6)] to receive nonmember shares from other

credit unions, from certain governmental entities (``public units'')

and, if the credit union has a ``low-income'' designation from NCUA,

from other outside sources. These nonmember accounts, and equivalent

accounts authorized for federally insured state credit unions under

state law are defined by section 101(5) of the Act [12 U.S.C. 1752(5)]

as ``accounts'' and ``member accounts'' for purposes of the various

provisions of the FCU Act, including those establishing insurance

coverage by the National Credit Union Share Insurance Fund (NCUSIF).

Prior to these final amendments, NCUA's regulation on nonmember

accounts has required any federally-insured credit union that wishes to

accept nonmember accounts in excess of 20 percent of total shares to

submit to NCUA a plan setting forth the intended use of the funds and

obtain NCUA approval. On February 28, 1994, the NCUA Board issued

proposed amendments to change the amount of nonmember and public unit

accounts that a credit union may maintain without a waiver, to 20

percent of total shares or $1.5 million, whichever is greater (See 59

FR 10334, March 4, 1994). The Board is now adopting these proposed

amendments, without substantive change from the proposal.

B. Comments

Thirteen comments were received. Six were received from FCUs, one

from a state-chartered credit union, one from a state credit union

league, three from national trade associations, and two from bank trade

organizations. Six commenters expressed complete approval of the

proposed amendments. Most of these commenters believe the amendments

will not have an effect on safety and soundness and will greatly reduce

paperwork requirements. Five commenters expressed general support. The

bank trade organizations opposed the proposed amendments.

C. Discussion

The Board proposed that a credit union be able to maintain

permissible nonmember accounts up to 20 percent of total shares or $1.5

million, whichever is greater, before a waiver by the regional director

is required. Eleven commenters supported this rule change. They believe

that this amendment would generally benefit smaller credit unions by

allowing them to receive significant amounts of nonmember deposits

without the administrative delay caused by the current regulation.

However, two of these commenters would go further and remove all

limitations on the use of nonmember deposits.

One commenter recommended that the final rule provide for an annual

automatic increase of $250,000 in the $1.5 million nonmember threshold.

The Board has determined that it will not increase the $1.5 million

threshold until it has an opportunity to assess the impact of this

final rule.

As under the current rule, all credit unions accepting nonmember

accounts in excess of 20 percent of total shares will be required to

have a plan for the use of such deposits. The plan must describe how

nonmember accounts will be used to serve the credit union's membership,

e.g., by providing loans to its members or through increased earnings.

The credit union must submit the plan to the regional director, prior

to receiving nonmember accounts in excess of 20 percent, for NCUA's

information and monitoring. However, under the change, NCUA approval

will not be required unless the aggregate amount exceeds both 20

percent of shares and $1.5 million. Three commenters objected to the

production of a written plan by credit unions with nonmember deposits

exceeding 20 percent of total shares but less than $1.5 million. They

believe the requirement for a written plan in such circumstances

generates needless paperwork. These commenters suggest a written plan

should only be required in connection with a waiver request. The Board

disagrees. Although the requirement for a written plan may

disproportionately affect small credit unions, the plan is a necessary

component to the successful management of nonmember deposits.

One commenter recommended that in addition to the written plan, the

credit union should also provide details on how the credit union plans

to be completely self sustaining with regard to member deposits. This

commenter believes that these credit unions need to eventually become

independent from all public unit and nonmember deposits. While this is

a worthy goal for all credit unions, it fails to recognize the reality

that many low-income credit unions will have long term needs for, and

legitimate uses of, nonmember funds. The Board declines to adopt this

recommendation.

One commenter recommended in those cases where a waiver is

required, that the rule specify that the business plan must be approved

by NCUA before the waiver is granted. This is implicit in the waiver

decision. The regional director will only grant a waiver if the

business plan is acceptable.

D. Request for Comments

The Board requests comment on whether periodic reporting on the

sources and uses of nonmember shares, in excess of 20 percent of total

shares, should be established. The Board considered a monthly or

quarterly reporting requirement or alternatively, revisions to the NCUA

Call Report (NCUA Form 5300), to gather additional information on

sources and uses of nonmember funds. Five commenters objected to the

suggestion that credit unions submit monthly or quarterly reports on

the use of nonmember deposits. These commenters believe a new reporting

requirement would be contrary to the intent of the higher dollar limit

and would increase regulatory burden on small credit unions. Two of

these commenters suggested the regional director exercise oversight of

troubled credit unions as appropriate. One commenter supported the use

of quarterly periodic reporting on the sources and uses of nonmember

deposits in excess of 20 percent. This commenter believes such a

requirement will give NCUA the ability to determine whether or not a

credit union is adhering to its written plan as well as protect the

NCUSIF. Three commenters supported a revision of the Call Report to

gather additional information on nonmember accounts but two of these

commenters objected to reporting on the sources and uses of nonmember

deposits. The Board agrees that increased reporting may be burdensome

to small credit unions and therefore will not require any additional

reporting. However, NCUA will allot more time for additional on-site

examiner review.

The Board also specifically requested comment on the length of an

approved waiver in those cases where a waiver request and approval are

still required. The regulation currently states in Sec. 701.32(b)(2)

that the waiver request will normally be for a two year period. Three

commenters believe that the current two year period is appropriate. One

commenter stated that the regional director should have full discretion

to set the length of the waiver. Two commenters stated that the length

of the waiver should be open-ended but could be terminated at any time

by the regional director. Three commenters suggested the waiver period

should be for three years. Two of these commenter stated the wavier

should be routinely renewed unless a credit union seeks a waiver for an

expanded amount or an examiner determines that a renewal of the waiver

would present safety and soundness concerns. One commenter suggested

that the waiver should be granted for five years.

The Board believes the current language provides the regional

director with sufficient discretion to approve waivers for shorter or

longer periods, especially since the number of waivers should decrease

with the adoption of these amendments. Furthermore, the Board is not

inclined to permit an automatic renewal of the waiver. An automatic

renewal would make the timeframe meaningless and may tend to actually

promote a continuing dependence on nonmember deposits. Therefore the

Board is not making any changes to the length of the waiver.

Two commenters stated that the nonmember limitations should not be

applied to any funds received in connection with the proposed new

federal community Development Banking and Financial Institutions

program or enterprise zone grants. The Board will consider such action

if and when such legislation is established.

The Board has adopted the proposed amendments in final with only a

minor technical change. Language has been added to Sec. 701.32(b)(2) to

clarify that a copy of the credit union's plan must be forwarded to the

Regional Director. The Board believes that the final amendments remove

burdens on small credit unions as well as provide them with greater

flexibility in the maintenance of nonmember deposits without

significantly increasing the risk to the NCUSIF.

The Board has also made a technical change to Sec. 741.6(a), which

references the limitation on nonmember deposits. The change is made to

conform this section to the amendments in Sec. 701.32. The change

deletes the term ``20%''.

Paperwork Reduction Act

The final amendments do not change paperwork requirements.

Regulatory Flexibility Act

The Regulatory Flexibility Act requires the NCUA to prepare an

analysis to describe any significant economic impact a proposed

regulation may have on a substantial number of small credit unions

(primarily those under $1 million in assets). The revised rule is

generally less restrictive than the current regulation. Overall, the

NCUA Board expects the change to benefit credit unions by permitting

them to maintain a larger amount of nonmember accounts before

requesting a waiver from the Regional Director. Accordingly, the Board

determines and certifies that this final rule does not have a

significant economic impact on a substantial number of small credit

unions and that a Regulatory Flexibility Analysis is not required.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. The amendment applies to federally-insured

state-chartered credit unions that accept public unit and nonmember

accounts. The final rule would make it possible for a federally-insured

credit union to accept a larger amount of nonmember deposits without

requesting an exemption.

List of Subjects

12 CFR Part 701

Credit unions, Nonmember accounts, Public units.

12 CFR Part 741

Bank deposit insurance, Credit unions, Reporting and recordkeeping

requirements.

By the National Credit Union Administration Board.

Dated: May 12, 1994.

Becky Baker,

Secretary of the Board.

Accordingly, NCUA is amending 12 CFR parts 701 and 741 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority citation for part 701 continues to read as

follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,

1761b, 1766, 1767, 1782, 1784, 1787 and 1789. Section 701.6 is also

authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by

15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.

2. Section 701.32(b) is amended by redesignating paragraphs (b)(2)

through (b)(4) as paragraphs (b)(4) through (b)(6) respectively,

revising paragraph (b)(1) and the newly designated (b)(6), and adding

new paragraphs (b)(2) and (b)(3) to read as follows:

Sec. 701.32 Payments on shares by public units and nonmembers, and

low-income designation.

* * * * *

(b) Limitations. (1) Unless a greater amount has been approved by

the Regional Director, the maximum amount of all public unit and

nonmember accounts shall not, at any given time, exceed 20% of the

total shares of the federal credit union or $1.5 million, whichever is

greater.

(2) Before accepting any public unit or nonmember shares in excess

of 20% of total shares, the board of directors must adopt a specific

written plan concerning the intended use of these shares and forward a

copy of the plan to the Regional Director. The plan must include:

(i) A statement of the credit union's needs, sources and intended

uses of public unit and nonmember shares;

(ii) Provision for matching maturities of public unit and nonmember

shares with corresponding assets, or justification for any mismatch;

and

(iii) Provision for adequate income spread between public unit and

nonmember shares and corresponding assets.

(3) A federal credit union seeking an exemption from the limits of

paragraph (b)(1) of this section must submit to the Regional Director a

written request including:

(i) The new maximum level of public unit and nonmember shares

requested, either as a dollar amount or a percentage of total shares;

(ii) The current plan adopted by the credit union's board of

directors concerning the use of new public unit and nonmember shares;

(iii) A copy of the credit union's latest financial statement; and

(iv) A copy of the credit union's loan and investment policies.

* * * * *

(6) Upon expiration of an exemption, nonmember shares currently in

the credit union in excess of the limits established pursuant to (b)(1)

of this section will continue to be insured by the National Credit

Union Insurance Fund within applicable limits. No new shares in excess

of the limits established pursuant to (b)(1) of this section shall be

accepted. Existing share certificates in excess of the limits

established pursuant to (b)(1) of this section may remain in the credit

union only until maturity.

3. The authority citation for part 741 continues to read as

follows:

Authority: 12 U.S.C. 1757, 1766, and 1781-1790.

Section 741.11 is also authorized by 31 U.S.C. 3717.

Sec. 741.6 [Amended]

4. Section 741.6(a) is amended by removing the term ``20%''.

[FR Doc. 94-12120 Filed 5-18-94; 8:45 am]

BILLING CODE 7535-01-M