Organization and Operations of Federal Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration.

ACTION: Proposed rule and request for comments.

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SUMMARY: The NCUA Board requests comment on the issue of field of

membership overlaps and the use of exclusionary clauses. Also, the NCUA

Board proposes to update the requirements for obtaining a community

charter. The proposal clarifies the documentation requirements

necessary for a new, expanding or converting community charter. Most

importantly, the credit union must document its plan to serve all

segments of the community. The proposal also clarifies the authority of

the NCUA Board to take supervisory and/or administrative action against

a credit union that fails to follow its marketing plan and/or business

plan to serve all segments of the community.

DATES: Comments on the proposed amendments to Sec. 701.1 of NCUA's

regulations and IRPS 94-1 (section B of the Supplementary Information)

must be received by November 28, 1997. Comments on Section A of the

Supplementary Information regarding the request for comments must be

postmarked or received by December 29, 1997.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax

comments to (703) 518-6319. E-Mail comments to [email protected].

Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: J. Leonard Skiles, President, Asset

Management and Assistance Center, 4807 Spicewood Springs Road, Suite

5100, Austin, Texas 78759, or telephone (512) 795-0999; Stephen E.

Austin, Director of Supervision, Office of Examination and Insurance,

1775 Duke Street, Alexandria, Virginia, or telephone (703) 518-6360;

Lynn K. McLaughlin, Program Officer, at the above address and telephone

number; Michael J. McKenna, Staff Attorney, Office of General Counsel,

at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Overlaps and Exclusion Clauses

Overlaps in credit union fields of membership have increased in

recent years due to a number of factors. The overlaps primarily are a

result of more credit unions either being chartered as community credit

unions, or existing occupational/associational based charters making

application to convert to community charters. Also, many state

regulators routinely permit overlaps of not only state chartered credit

unions, but also federally chartered credit unions. As a result, issues

relating to the competitive relationship between overlapped credit

unions, particularly a community charter and any occupational/

associational based credit union within the community charter's area of

operations, are being reviewed. Data on the implications to both the

credit unions and the members of federal credit unions directly

competing with one another is limited but it is recognized that credit

unions are an integral part of a dynamic and constantly changing

financial marketplace. It is, therefore, important to identify all

potential issues as they relate to the policy on overlaps. For example:

From the perspective of the credit union member, what harm

or benefit is derived from exclusionary clauses?

Is overlap protection necessary for a credit union

properly serving its members?

What confusion, if any, is created for a credit union

member when he or she is unable to join a community credit union

because he/she is part of an excluded group?

Do overlapping fields of membership increase or decrease

services to the member?

Should the NCUA Board consider safety and soundness

concerns in the advent of credit unions with overlapping fields of

membership?

Will small credit unions and credit unions chartered to

serve low-income areas be affected by overlapping fields of membership?

Do overlapping fields of membership affect the

``cooperative spirit'' philosophy as articulated and practiced in the

credit union movement?

Should other factors, such as mutual consent, be taken

into consideration in allowing or not allowing overlaps?

Should federal credit unions gain tangible, quantifiable

regulatory competitive protection from other federal credit unions, but

not from state chartered credit unions?

What are state policies and experience on overlaps?

Do newly chartered, low-income, or any other types of

credit union need overlap protection?

Should the size of either the overlapped or overlapping

credit union be taken into consideration in permitting or not

permitting the overlap?

Issues relating to overlaps must be thoroughly analyzed in order to

develop a revised policy on overlaps. Accordingly, the Board invites

comments on the issues related to NCUA's overlap policy and the use of

exclusion clauses.

B. Community Service Amendments

NCUA's community chartering policy is not affected by the

injunction issued in the consolidated cases of First National Bank and

Trust Co., et al. v. NCUA and the American Bankers Association v. NCUA

et al., which was partially stayed by the Court of Appeals on December

24, 1996. Current policy requires that a community charter must be

based on ``a well-defined neighborhood, community, or rural district.''

Given the diversity of community characteristics throughout the

country, NCUA's policy is to limit the community to a single,

geographically well-defined area where residents have common interests

or interact. NCUA recognizes four types of affinity on which a

community charter can be based--persons who live in, worship in, go to

school in, or work in the community. More than one community credit

union may serve the same community area.

The Board believes it is important, for reasons discussed below, to

provide

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clarification to credit unions on what is necessary for the approval of

a request to convert to a community charter. The Board wishes to ensure

that credit unions requesting to convert have fully considered the

challenges in serving an entire community. Community credit unions are

frequently more susceptible to competition from other local financial

institutions and do not have a sponsoring company or association. The

lack of a payroll deduction makes it more difficult to develop a

savings promotion program and in the collection of loans. A diverse

membership base creates new challenges in developing an appropriate

business plan and marketing strategy, especially if this diverse

population is located in a rural community. This guidance also applies

to newly established community credit unions as well as credit unions

wishing to expand their community boundaries.

IRPS 94-1, as amended by IRPS 96-1, specifies certain requirements

that must be satisfied before a community charter can be granted.

Integral to the current approval process for a community charter is the

requirement that a business plan and marketing strategy for serving the

community must be submitted. The business plan requirements, primarily

an analysis of the market area, a service market strategy, an

organizational/management plan, and financial plan, remain the same.

However, further guidance has been requested on what constitutes an

acceptable business plan/marketing strategy for approval as a community

charter. In particular, questions have arisen regarding the NCUA

Board's expectations relative to a community charter. In response to

these questions, the NCUA Board believes it is necessary to clarify

certain aspects regarding how a credit union intends to serve a

community as evidenced by its business plan/marketing strategy.

First, the Board is clarifying that all community charters must be

prepared to serve all segments of the community. The credit union must

be willing and able within a reasonable period to not only serve, but

also to market, to a diverse membership base, which should generally

reflect the make-up of the community. This may require community credit

unions to develop special marketing programs or services and products

for different segments of the community. This type of information needs

to be addressed in either the business plan or the marketing plan. Most

importantly, this amendment highlights the fundamental difference

between a community charter and other types of charters. That is, a

community charter must make reasonable and prudent efforts to market

its services to all segments of the community. An overall marketing

strategy that primarily targets one segment, or select segments, of the

community to the exclusion of others will not be acceptable. Membership

and loan penetration rates, among other factors, will be reviewed to

assess how well the credit union is serving the entire community.

Second, the Board is also clarifying that a new community charter

or a credit union converting to a community charter will be held

accountable for its business plan/marketing strategy outlining how it

will serve the entire community submitted to NCUA as part of the

approval process. Of course, there may be safety and soundness

concerns, as well as other reasons, why a credit union did not follow

or could not meet its business plan or marketing strategy objectives.

Such reasons would be factored into any review by NCUA before a

decision is made to take any supervisory and or administrative action.

For example, if a credit union established and then implemented a

special marketing plan for a group in specific need of credit union

service within the community, and, notwithstanding its best efforts to

attract membership from and provide service to that group the

penetration rate is lower than projected, then failure to meet the

business plan would not be cause for supervisory action. The NCUA Board

recognizes that local marketplace factors may influence the time tables

and even the ability to meet the business plan, though reasonable due

diligence to meet the plan is expected.

Third, the Board is clarifying that the requirements set forth in

Chapter I of the Chartering Manual to obtain a community charter,

except for any requirements to demonstrate community support, also

apply to an existing credit union converting to a community charter.

The Board is requesting comment on the deletion of the requirements in

IRPS 94-1 to provide written evidence of community support such as

letters of support, petitions, or surveys.

A converting credit union must provide information on the groups

being served, including penetration rates of all segments of its field

of membership, marketing efforts to service the current field of

membership and any special programs the credit union may have sponsored

to assist groups in need of credit union services, such as adding a

low-income community to its field of membership or mentoring a low-

income community.

Finally, the Board is proposing to eliminate the ability of a

credit union converting to a community charter to continue to serve

groups outside the new community boundaries. Continued service to

occupational and associational groups outside the community is not

consistent with the nature of a community charter. This proposal is

consistent with NCUA's policy regarding new community charters. Credit

unions could continue to serve members of record of groups outside the

community boundaries.

C. Thirty-Day Comment Period

These proposed amendments are being issued with a thirty (30) day

comment period since the amendments are simply clarifying the Board's

policy on community charters and explicitly stating the Board's

implicit enforcement authority. Because these are technical amendments

the Board believes a 30 day comment period is appropriate. Requests for

comment is being expedited due to ongoing work requirements of NCUA's

Field of Membership Task Force and the number of pending community

charter conversions.

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 credit unions (primarily those under $1

million in assets). The proposed amendments will not have a significant

economic impact on a substantial number of small credit unions and

therefore a regulatory flexibility analysis is not required.

Paperwork Reduction Act

NCUA has determined that the proposed amendments do not increase

paperwork requirements under the Paperwork Reduction Act of 1995 and

regulations of the Office of Management and Budget (OMB). 60 FR 44978

(August 29, 1995).

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. This proposed amendment makes no

significant changes with respect to state credit unions and therefore,

will not materially affect state interests.

Congressional Review

NCUA has determined that this is not a major rule under 5 U.S.C.

Chapter 8.

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List of Subjects in 12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board on October 22,

1997.

Hattie Ulan,

Acting 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, 1789. Section 701.6 is also

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

12 U.S.C. 1601, et seq., 42 U.S.C. 1981 and 3601-3610. Section

701.35 is also authorized by 12 U.S.C. 4311-4312.

2. Section 701.1 is revised to read as follows:

Sec. 701.1 Federal credit union chartering, field of membership

modifications, and conversions.

National Credit Union Administration policies concerning

chartering, field of membership modifications, and conversions are set

forth in Interpretive Ruling and Policy Statement 94-1, Chartering and

Field of Membership Policy (IRPS 94-1), as amended by IRPS 96-1 and

IRPS 97-1. Copies may be obtained by contacting NCUA at the address

found in Sec. 792.2(g)(1) of this chapter. The combined IRPS are

incorporated into this section.

(Approved by the Office of Management and Budget under control number

3133-0015.)

Note: The text of the Interpretive Ruling and Policy Statement

(IRPS 94-1) does not, and the following amendments will not, appear

in the Code of Federal Regulations.

1. In IRPS 94-1, Chapter 1, Section IV.A.4.b is revised to read as

follows:

IV.A.4.b.--Special Requirements for Community Credit Unions

Community credit unions are frequently more susceptible to

competition from other local financial institutions and generally do

not have substantial support from any single sponsoring company or

association. Additionally, community credit unions must be prepared to

serve all segments of the community. As a result, a community charter

will often encounter financial and operational factors that differ from

an occupational and associational charter serving select or defined

groups. This results primarily from the fact that a community credit

union will have a more diverse and possibly geographically dispersed

membership base, which should generally reflect the make-up of the

community. This diverse membership potential may require special

marketing programs targeted to different segments of the community. For

example, the lack of payroll deduction creates special challenges in

the development of savings promotional programs and in the collection

of loans. Accordingly, it is essential for the proposed community

charter to develop a detailed and practical business plan for at least

the first three years of operation that focuses on the accomplishment

of the unique financial and operational factors of a community charter.

The business plan shall contain, but not necessarily be limited to, the

following:

Analysis of market area--geographic, demographic,

employment, income, housing, and economic data;

Service/marketing strategy for all segments of the

community--financial and other services to be provided, new member/

share/loan promotion policies and procedures and income generation

strategy;

Organizational/management plan--qualification and planned

training of officials/employees, operating facilities to include office

space/equipment and supplies, accounting system, safeguarding of

assets, insurance coverage, etc.; and

Financial plan--sources and application of funds

statements and pro forma balance sheet and income/expense statements

and assumptions.

Community credit unions will be required to follow the marketing

and/or business plan submitted with their application. In the event any

community credit union fails to follow its marketing and/or business

plan, supervisory and/or administrative actions may be taken against

the credit union. If the business plan is not sufficiently detailed or

does not satisfactorily address how the credit union will serve all

segments of the community, the charter request may be conditionally

approved by NCUA subject to the credit union's agreement of the imposed

conditions.

A community credit union will be expected to regularly review its

business plan as well as membership and loan penetration rates

throughout the community to determine if the entire community is being

adequately served. NCUA may require periodic service status reports on

its service to the community and will review the credit union's service

to the entire community during examinations.

2. In IRPS 94-1, Chapter 2, Section IV.B is revised to read as

follows:

IV.B--Conversion to Community Charter

An existing occupational, associational, or multiple group federal

credit union may apply to convert to a community charter. In order to

support a case for a conversion to community charter, the applicant

federal credit union must, in addition to the requirements for a

community charter set forth in Chapter I (except for the requirement to

demonstrate community support), develop a detailed business plan which

may include, but not be limited to the following data:

Current financial statements, including the income

statement and a summary of loan delinquency;

A map or maps showing both the existing and proposed

boundaries for the field of membership, as well as existing and planned

service facilities;

A written description of the area of community service for

the proposed community credit union;

The most current population figures for the existing and

proposed boundaries;

The source of the population information (census data are

considered the most authoritative); the greater the population of the

proposed area, the greater justification necessary to support the

existence of the ``community'' and interaction among its residents;

Evidence that the proposed area is a ``community'' as

defined in ``Community Common Bond'' in Chapter 1;

Information concerning the availability of financial

services to the residents of the new area;

A list of credit unions with a home or branch office in

the proposed area (If present credit union service to the residents of

the new area is adequate, there may be no basis for the proposed

conversion.);

Information regarding the attitude of the current credit

union sponsors and existing credit union members toward the proposed

conversion (a letter from the board of directors of the credit union is

sufficient evidence);

Information on the groups presently being served, to

include, but not necessarily limited to, income data on its membership,

the penetration rate of the current field of membership, core group,

and any low to moderate group, and any special programs the credit

union sponsored to serve a low to moderate group; and

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The anticipated financial impact on the credit union in

terms of need for additional employees and fixed assets.

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[FR Doc. 97-28587 Filed 10-28-97; 8:45 am]

BILLING CODE 7535-01-P