Nonmember and Public Unit Accounts

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

Nonmember and Public Unit Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed amendments.

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SUMMARY: Currently federally insured credit unions that wish to

maintain public unit and nonmember accounts in excess of 20 percent of

their total shares must have a waiver request approved by the Regional

Director. The waiver request must include a plan setting forth the

intended sources and uses of the funds. The proposed amendments would

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

accounts in excess of 20 percent of total shares but not greater than

$1.5 million would, as under the current rule, be required to develop a

written plan and send it to the Regional Director. Prior NCUA approval,

however, would no longer be required.

DATES: Comments must be postmarked by April 4, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary of the Board, 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, proposes to revise 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 shares, and

equivalent accounts authorized for federally insured state credit

unions under the 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).

NCUA's current regulation on nonmember accounts requires 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.

This rule was imposed in December 1988 (53 FR 50918, 12/19/88) in

response to mismanagement and misuse of nonmember accounts by some

credit unions. Pursuant to Sec. 741.6 of NCUA's Regulations, federally-

insured state chartered credit unions must adhere to NCUA's

requirements regarding nonmember accounts.

B. Discussion

In most credit unions, the only forms of nonmember accounts are

public unit and credit union accounts. However, as described above,

credit unions with a low-income designation from NCUA are authorized to

accept nonmember accounts from any source.

When the current nonmember account rule was instituted, NCUA's

concern with these accounts stemmed from abuses involving large sums of

money, often in excess of the $100,000 limit. In order to attract and

retain these accounts, some credit unions paid higher than market

dividend rates. Large influxes of funds into credit unions caused

asset/liability management problems that were often not within

management's expertise to control. In some cases, the total amount of

such account was far in excess of the amount necessary to meet the

legitimate needs of the members and was used to fund high risk loans

and questionable investments.

The imposition of the 20 percent limitation has virtually

eliminated problems involving nonmember funds. As discussed more fully

below, however, the process of requesting waivers, which has fallen

almost entirely on low-income credit unions, has proven burdensome for

some credit unions. The purpose of this proposal is to reduce that

burden without significantly increasingly the risk to the credit union

system and the NCUSIF.

As of June 1993, only 57 low-income credit unions out of 146

maintained nonmember accounts. The total dollar amount of these

accounts was approximately nineteen million, with the average dollar

amount per low-income credit union approximately $339,000. Surveys

indicate that low-income credit unions maintaining nonmember accounts

are currently paying below market rates on the vast majority of these

funds. It appears that most low-income credit unions, as most other

credit unions, use nonmember accounts prudently and do not maintain

excessive amounts of these funds.

NCUA recognizes that nonmember accounts can be crucial to a low-

income credit union in meeting the fundamental purpose of a credit

union: Promoting thrift and creating a source of credit for its

members. Nonmember funds can be invested to provide earnings that are

paid out to members in the form of dividends, and they can provide a

source of much needed loan funds. Moreover, nonmember accounts can

generate income that can be a source of badly needed capital.

Over the period from the adoption of the regulation in 1988 through

June 1993, 50 of 59 waiver requests (85%) have been approved. This

suggests that most waiver requests have been justified and acceptable

to the regional director. Although a high percentage of the waivers

have been approved, the procedure has proven burdensome for some credit

unions. Given the small asset size of most credit unions, the 20

percent limit frequently requires waivers for small amounts of funds

that pose very little risk to the credit union and the NCUSIF. Both

credit unions and NCUA may be expending much more time and paperwork on

waiver requests than safety and soundness requires.

Although the NCUA Board remains concerned with the potential misuse

of nonmember accounts, the Board believes that a modification of the 20

percent limit may be justified. The Board is proposing the following

changes to the rule.

It is 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. This change recognizes the benefit of a limitation on

nonmember accounts but also allows a credit union to maintain a

reasonable amount of nonmember accounts, up to $1.5 million, without

requesting one or more waivers from the regional director.

As under the current rule, all credit unions accepting nonmember

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

have a plan for the use of such deposits. Further, the plan would be

submitted to the Regional Director for information. Prior NCUA approval

would be required, however, only for amounts in excess of both 20% and

$1.5 million.

The plan would describe how nonmember accounts will be used to

serve the credit union's membership, i.e., by providing loanable funds

to its members or through increased earnings. This requirement should

ensure that federally-insured credit unions have a reasonable plan in

place for the use of the funds. As under the current rule, the plan

would provide for matching maturities of nonmember accounts with

corresponding assets, or a justification for any mismatch; and provide

for an adequate income spread between public unit and nonmember shares

and corresponding assets. The credit union would submit the plan to the

regional director, prior to receiving nonmember accounts in excess of

20 percent, for NCUA's information and monitoring. NCUA approval would

not be required before the credit union accepts additional nonmember

accounts, unless the aggregate amount exceeded both 20% of shares and

$1.5 million.

The proposed amendments, if adopted, would allow small credit

unions to receive significant amounts of nonmember shares, in relation

to their total shares, without the prior NCUA approval that has been

required since 1988. The Board is committed to working with these

credit unions to ensure that nonmember funds are used in a safe and

sound manner to benefit their membership. In this connection, 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 may consider 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.

C. Request for Comments

The Board also requests comment on a related issue; 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. Although the Board believes this language provides the

regional director with sufficient discretion to approve waivers for a

shorter or longer period, the Board is requesting comment on whether a

nondiscretionary time period for the waiver should be stated, possibly

three years, or whether the waiver should be open-ended and only

terminated upon action by the regional director or the credit union.

Paperwork Reduction Act

The proposed 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 proposed 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 in 12 CFR Part 701

Credit unions, Nonmember accounts, Public units.

By the National Credit Union Administration Board on February

28, 1994.

Becky Baker,

Secretary of the Board.

Accordingly, NCUA proposes to amend 12 CFR part 701 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. It is proposed that Sec. 701.32(b) be 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

plan concerning the intended use of these shares. The written plan must

include: (i) A statement of the credit union's need, 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 plan adopted by the credit union's board of directors

concerning the use of 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

paragraph (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 paragraph (b)(1)

of this section shall be accepted. Existing share certificates in

excess of the limits established pursuant to paragraph (b)(1) of this

section may remain in the credit union only until maturity.

[FR Doc. 94-4977 Filed 3-3-94; 8:45 am]

BILLING CODE 7535-01-M