Organization and Operations of Federal Credit Unions

SUMMARY: The Credit Union Membership Access Act modified NCUA's

chartering and field of membership authority. Accordingly, NCUA is

finalizing a number of amendments to its policies to update them

consistent with the recent legislation.

Additionally, the final rule revises and updates NCUA's chartering

and field of membership policy to reflect the advances and changes in

chartering requirements since the promulgation of IRPS 94-1. The

majority of the revisions reflect NCUA's policy on the types of federal

credit union charters and the criteria necessary to amend a credit

union's field of membership. The legislation authorizes three types of

credit union charters. These charter types include a single

occupational or associational common bond, a multiple common bond, or a

local community, neighborhood, or rural district serving a well defined

area.

Along with a comprehensive update of chartering policy, the format

of the chartering manual has been changed to make it more user-

friendly. The final rule further clarifies overlap issues, mergers,

low-income policies regarding low income charters and service of

underserved areas, the definition of immediate family member or

household, and the ``once a member, always a member'' policy.

DATES: Effective date: January 1, 1999.

Applicability date: IRPS 99-1 will be applicable January 1, 1999,

except for the provisions on the definition of ``local community,

neighborhood or rural district, and ``immediate family member or

household,'' which will be applicable March 5, 1999, unless disapproved

by Congress under the major rule provisions.

ADDRESSES: National Credit Union Administration, 1775 Duke Street,

Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: J. Leonard Skiles, Chairman, Field of

Membership Task Force, 4807 Spicewood Springs Road, Suite 5100, Austin,

Texas 78759, or telephone (512) 231-7900; Michael J. McKenna, Senior

Staff Attorney, Office of General Counsel, 1775 Duke Street,

Alexandria, Virginia 22314 or telephone (703) 518-6540; Lynn K.

McLaughlin, Program Officer, Office of Examination and Insurance, 1775

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

SUPPLEMENTARY INFORMATION: In 1982, the changing negative economic

environment created safety and soundness concerns that prompted the

Board to revise its chartering policy to permit membership in a federal

credit union to consist of multiple common bonds, provided each group

possessed a common bond. Such membership could be accomplished through

the chartering process, through charter amendments, or by way of merger

to form a single credit union. This policy change strengthened the

federal credit union system by enabling NCUA to merge credit unions

that otherwise would have failed because of the loss of a sponsor or

other financial or operational downturns. The policy also enabled

federal credit unions to diversify their membership and become less

dependent on the financial success of one sponsoring company or group.

An important advantage of the policy change was that it provided access

to credit union service for small groups of people who did not have the

resources to charter their own credit unions. The Board issued

subsequent changes to the 1982 chartering policy in 1984, 1989, 1994,

1996, and 1998, most of which addressed the multiple common bond

policy.

In First National Bank and Trust Co., et al. v. National Credit

Union Administration, 90 F.3d 525 (D.C. Cir. 1996), the U.S. Court of

Appeals for the District of Columbia Circuit invalidated certain select

group additions to the field of membership of a North Carolina credit

union (the ``Decision''). In that case, the Court ruled that groups

with unlike common bonds could not be joined to form a single credit

union. Furthermore, in the consolidated cases of First National Bank

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

al. v. NCUA et al., the U.S. District Court issued a nationwide

injunction prohibiting federal credit unions from adding new select

groups to their fields of membership that did not share a common bond

(the ``Order''). The Decision and Order affected the operations of

approximately 3,600 multiple common bond federal credit unions serving

approximately 158,000 select groups.

On February 25, 1998, the U.S. Supreme Court ruled that NCUA's

multiple common bond policy was impermissible under the Federal Credit

Union Act (FCUA). National Credit Union Administration v. First

National Bank & Trust Co. et al., 118 S. Ct. 927 (1998). The Supreme

Court affirmed the lower court's finding that groups with unlike common

bonds could not be joined to form a single occupational credit union.

As a result, Congress addressed the multiple common bond and other

field of membership issues and recently enacted legislation reinstating

NCUA's multiple common bond policy with some modifications. The Credit

Union Membership Access Act (``CUMAA''), Public Law 105-219. CUMAA

updated the statutory common bond rules for the first time since 1934.

Accordingly, on August 31, 1998, the Board issued a proposed rule

that revised and updated NCUA's chartering and field of membership

policies with a sixty day comment period. 62 FR 49164 (September 14,

1998). The policy was issued as proposed IRPS 98-3. Three hundred and

sixty-nine comments were received. Comments were received from one

hundred and eighty-one federal credit unions, twenty-three state

chartered credit unions, thirty state credit union leagues, four

national credit union trade associations, two congressmen, seventy-two

banks, thirty bank trade associations, twenty credit union members, two

law firms, one credit union sponsor, one certified public accountant,

one consulting firm, one advocacy group and one other individual.

Except for the bank and bank trade associations, most commenters were

very supportive of the proposed chartering and field of membership

policies, although most commenters suggested ways they would modify the

final rule. Except for the section on mergers, the bank and bank trade

association comments are summarized in a separate section. Although a

separate section is devoted to the comments received from the bankers

and bank associations, the issues they raised are addressed throughout

the preamble in response to other similar comments.

The comments received were varied and addressed virtually every

field of membership issue. All the comments were carefully reviewed,

particularly those that expressed concern or that were in opposition to

the proposed field of membership provisions, and a response to most of

the issues raised is set forth in the section by section analysis of

the comments. There were, however, five issues that generated numerous

comments and either were confusing or proved somewhat controversial to

the commenters. They were: (1) overlaps and exclusionary clauses; (2)

economic advisability (the

[[Page 71999]]

numerical threshold for member support to charter a new credit union);

(3) reasonable proximity and service facility requirements for select

group additions to multiple common bond credit unions; (4) voluntary

mergers of financially healthy multiple common bond credit unions; and,

(5) the definition of immediate family member or household.

Accordingly, these five issues are separately addressed in the

preamble.

A. Overlaps and Exclusionary Clauses

Occupational and Associational Single Common Bond Credit Unions

The Board proposed that, as a general rule, NCUA will not charter

two or more credit unions to serve the same single occupational or

associational group. Consequently, the proposal provided overlap

protection for single occupational or associational credit unions.

However, the Board further proposed that an overlap would be permitted

when two or more credit unions are attempting to serve the same group

if the overlap's beneficial effect in meeting the convenience and needs

of the members of the group proposed to be included in the field of

membership clearly outweighs any adverse effect on the overlapped

credit union. This language parallels the statutory requirement for

multiple common bond credit unions.

The proposal set forth when NCUA would permit an overlap of an

occupational or associational credit union and what NCUA considers in

reviewing an overlap. The Board stated that an occupational or

associational credit union will rarely, if ever, be protected from

overlap by a community charter. The Board also stated that where a

federally insured state credit union's field of membership is broadly

stated, NCUA will exclude its field of membership from overlap

protection. NCUA defines ``broadly stated'' to mean either a statewide

field of membership or a field of membership that would not comport

with or is inconsistent with federal field of membership policies.

Multiple Common Bond Credit Unions

The Board proposed that NCUA will generally not approve an overlap

unless the expansion's beneficial effect in meeting the convenience and

needs of the members of the group proposed to be included in the field

of membership clearly outweighs any adverse effect on the overlapped

credit union. The proposed overlap policy restated the statutory

requirement for addressing overlap issues affecting multiple common

bond credit unions. The proposal also set forth the issues NCUA would

consider in reviewing the overlap. In general, if the overlapped credit

union did not object, and NCUA determines that there are no safety and

soundness problems, the overlap would be permitted. If, however, the

overlapped credit union objected to the overlap, a more detailed

overlap analysis would be required.

The Board proposed that overlaps between multiple common bond

credit unions and community chartered credit unions would be permitted

without performing an overlap analysis, since NCUA has determined that,

in these types of overlaps, the benefit of the overlap to the member

will always outweigh the harm to either credit union. The Board stated

that a multiple common bond credit union would rarely, if ever, be

protected from overlap by a community charter.

Community Charters

The Board proposed that a credit union seeking a community charter

contact all federally insured credit unions with a service facility in

the proposed service area. Notwithstanding the requirement to contact

all credit unions within the proposed service area, the proposal

permitted a community credit union to overlap any other type of credit

union charter. The Board stated that a community charter would rarely,

if ever, be protected from overlap by a single occupational, single

associational or multiple common bond credit union. If safety and

soundness concerns existed, the Board proposed providing overlap

protection from a community charter for a limited period of time,

generally 12 to 24 months.

In the past, exclusionary clauses were permitted for reasons other

than for safety and soundness, such as when there was an agreement

between the overlapping credit unions. An exclusionary clause, under

circumstances other than for safety and soundness, would not be

permitted under the proposal if the overlapping credit union was a

community charter. The Board requested specific comment as to whether

exclusionary clauses are appropriate for community charters and, if so,

under what circumstances.

Comments

There were numerous comments on overlaps and how NCUA should

address this issue. For example, seventeen commenters objected to

overlap protection for any credit union regardless of the reason.

Eleven commenters objected to overlap protection, except if the overlap

causes significant harm to the existence of another credit union. Five

commenters approved of NCUA's proposed policy on overlaps. One

commenter stated that overlap procedures should be the same for all

types of credit unions. Five commenters recommended overlap protection

for small credit unions. One commenter recommended that NCUA carefully

review any overlaps of small credit unions. Two commenters recommended

overlap protection. Many other commenters suggested different methods

of addressing overlap issues.

There were also numerous comments on exclusionary clauses. For

example, forty-two commenters suggested that NCUA provide a procedure

to allow one credit union to petition to remove existing exclusionary

clauses, regardless of charter type. A number of these commenters

suggested that exclusionary clauses are almost impossible to police and

frustrate the consumer. One commenter stated that NCUA should rarely

impose exclusionary clauses. Seven commenters believed the removal of

an exclusionary clause should be approved only if both credit unions

agreed. Three commenters opposed a process to remove exclusionary

clauses. Many other commenters addressed the use of exclusionary

clauses.

Three commenters approved of the overlap rules for community

charters. Three commenters stated that exclusionary clauses should

never be a part of a community charter's field of membership. One

commenter stated that exclusionary clauses should rarely be used. Five

commenters requested overlap protection from community credit unions.

Three commenters requested overlap protection for community credit

unions. Three commenters recommended exclusionary clauses for small

credit unions that are overlapped by community charters. Three

commenters stated that only one credit union should be chartered per

community.

Forty-two commenters supported the proposal to provide a process

for removing existing exclusionary clauses from community charters.

Many of these commenters did not believe that two credit unions should

be required to agree to remove the exclusionary clause. Seven

commenters believed that an exclusionary clause should be removed only

if the two affected credit unions agreed. A number of these commenters

suggested that exclusionary clauses are almost impossible to police and

frustrate the consumer. Three commenters opposed a process to remove

exclusionary clauses.

[[Page 72000]]

NCUA Board Analysis and Decision on Overlaps and Exclusionary Clauses

In formulating its opinion on overlaps, NCUA considered not only

the comments in response to the current proposal, but also the

information gathered in the internal review of the overlap policies

permitted under IRPS 94-1 and previous field of membership policies. In

the internal review of 58 overlapped credit unions, no long-term

adverse financial trends were discovered. The information tended to

support the contention that overlaps have not caused any credit union

to fail, even though there was, in a limited number of cases, a

temporary loss in market share. This finding was consistent with other

studies on overlaps, including a recent analysis by the Office of

Examination and Insurance on 14 overlapped credit unions where the

original recommendation to include an exclusionary clause was not

approved by the Board. Overall, the overlapped credit unions did not

suffer any harm and reported positive financial trends. Most credit

unions experienced an increase in shares, assets, and loans.

Delinquency declined and share and loan growth improved. The earlier

research was supplemented by a random survey of federally insured

credit unions that obtained a response rate of 57 percent. Of the 642

responding credit unions, 284 were overlapped and 34 overlapped other

credit unions. In summary, 52 percent of the responding credit unions

viewed field of membership overlaps as harmful for credit unions while

48 percent reported overlaps were beneficial. Interestingly, however,

when viewed as harmful or beneficial for the credit union members, the

opinions were decidedly different. In response to this issue, 82

percent indicated that overlaps benefit members.

The proposed policy on overlaps took into consideration NCUA's

experience, the internal review and the survey. The final rule also

considered the commenters' opinions. The Board's opinion remains that

the overlap policy, as enunciated in the proposal for single

occupational and associational credit unions, is supportable and in the

best interests of credit unions. In general, credit unions will not be

chartered to serve the same common bond group, but incidental overlaps,

as defined below, would be permitted. The final rule includes a

provision that allows a credit union that has an existing exclusionary

clause to petition NCUA to have the exclusionary clause removed.

A decision on whether the clause will be removed will be based on

an analysis of the impact of removing the clause on the overlapped

credit union.

This same concept adopted for single common bond credit unions also

applies to multiple common bond credit unions in that an overlap

analysis, except for incidental overlaps, will be required before a

group will be added to a credit union's field of membership. This is a

statutory requirement. An overlap will not be permitted unless the

expansion's beneficial effect in meeting the convenience and needs of

the members of the group proposed to be included in the field of

membership clearly outweighs any adverse effect on the overlapped

credit union. The final rule includes the same criteria set forth in

the proposed rule relative to what the regional director will consider

in determining whether an overlap will be permitted.

The final rule, however, clarifies that an overlap analysis will

not be required if the group to be added has 200 primary potential

members or less. In view of the fact that approximately one-third of

the primary potential members join a credit union, the Board believes a

group of 200 primary potential members or less will be considered

incidental. That is, the benefit to the members will always outweigh

the harm to the credit union. Accordingly, a credit union applying to

add a group of 200 or less primary potential members will only have to

complete the 4015-EZ, which is a shortened version of the standard 4015

(the application for a field of membership amendment). No overlap

analysis is required if the group being added is 200 or less.

The overlap policy for community credit unions recognizes the

operational difficulty in enforcing exclusionary clauses. Additionally,

it recognizes that credit union members will benefit if additional

credit union choices are made available. Accordingly, it is the Board's

view that community credit unions should be allowed to overlap, with a

minor exception for newly chartered single common bond or multiple

common bond credit unions, any credit union within the community.

Consequently, no overlap analysis will be required for any credit union

within a proposed community credit union's well defined area unless it

is a newly chartered credit union (chartered less than 2 years).

Although the commenters requested a longer time frame for protection

from a newly chartered community charter (by way of conversion or a new

credit union charter), the Board is only providing protection through

the inclusion of an exclusionary clause for a period of 12 to 24 months

from the date of the overlapped credit union's charter for a new single

common bond or multiple common bond credit union. If safety and

soundness concerns exist, the regional director may extend the

exclusionary clause protection for a period that does not exceed 60

months from the date the overlapped credit union was chartered. Unlike

the proposed rule, no overlap protection will be provided any community

charter.

B. Economic Advisability

NCUA's proposed provisions on new charters and charter expansions

emphasized that NCUA will evaluate the economic advisability of the

proposed institution or expansion as well as its effect on other credit

unions. While NCUA did not set a minimum field of membership size for

chartering a federal credit union, the Board suggested, based on

historical data and evidence of economic viability, that a credit union

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 a proposed credit union with a larger field

of membership in order to demonstrate that it is economically advisable

and that it will have a reasonable chance to succeed. The 3,000 primary

potential member threshold number is also operationally consistent with

the multiple common bond expansion requirements. The Board specifically

requested comments on whether the economic advisability number should

be set at a lower or higher level.

Comments

Fifty-one commenters supported the 3,000 primary potential member

number as a useful threshold for defining the viability of a new credit

union. A few commenters stated that the 3,000 minimum presumption

promotes consistency with the statutorily required 3,000 member cap for

the addition of a new select group in a multiple common bond credit

union. A number of these commenters stated that NCUA should be flexible

in determining how many people are necessary to start a new credit

union. These commenters suggested that NCUA consider other factors in

determining viability such as the ability to obtain adequate

capitalization and the level of resources. Fourteen commenters believed

the economic advisability number is low and six suggested a number in

excess of

[[Page 72001]]

5,000 primary potential members as a threshold for viability. A few

commenters stated that the 3,000 threshold is almost meaningless in

today's economy. These commenters stated that consumers are not going

to wait for a credit union to grow to offer financial services.

Twenty-one commenters did not agree with the economic advisability

number. Ten commenters believed the economic advisability number is too

high. A number of these commenters stated that NCUA should be flexible

with any numerical member threshold. A number of commenters further

stated that, if a smaller group is financially sound, NCUA should

charter the credit union. Conversely, if a larger group is not

financially sound, then NCUA should not charter the credit union. One

commenter believed the 3,000 threshold may soon become a requirement

which will be particularly onerous to the chartering of faith-based

credit unions. Some commenters requested that NCUA provide the

rationale for choosing the 3,000 number threshold.

NCUA Board Analysis and Decision on Economic Advisability

The Board is adopting the 3,000 primary potential member threshold

in the final rule. This position is consistent with congressional

intent as well as NCUA experience. This threshold is not intended to

undermine the statutory requirement to encourage the formation of new

credit unions. Rather, it has been established to provide potential new

charters necessary advice and guidance to charter a successful credit

union. Any group desiring to form its own credit union will be given

every opportunity to demonstrate it has met the economic advisability

requirements. Additionally, any group not desiring to charter its own

credit union will be reviewed to determine if in fact it can be

separately chartered.

IRPS 94-1 established the economic advisability threshold as 500

primary potential members. Notwithstanding this threshold number of

500, the Board's opinion has long been that the 500 primary potential

members threshold was extremely low, particularly in view of the fact

that only approximately one-third of the primary potential members

join. Accordingly, there have been numerous recommendations that the

500 threshold number should be increased.

Since 1996, NCUA has chartered 29 new credit unions. Only one of

these new charters had a primary potential membership that was less

than 3,000. While there are many factors impacting why the number of

new charters since 1996 is low, experience has indicated that one

critical factor is the financial service expectation of the potential

members. That is, what type of financial service will the new credit

union provide? If the financial service is limited, then it will not

meet the members' financial service expectations and, as a result, the

credit union will not be fully supported. The analysis of whether a new

group can form a new credit union must take the members reasonable

expectations into consideration. Failure to do so would put the

National Credit Union Share Insurance Fund (``NCUSIF'') at risk.

The Board's view is that the 3,000 primary potential membership

threshold is an economically advisable number for potential new

charters, but not an absolute requirement. This distinction is

important. For example, there are approximately 3,100 federal credit

unions with primary potential members of less than 3,000. Approximately

700 of those have primary potential members of 500 or less. For the

most part, however, at the time of their charter, economic conditions

and the financial service expectations of the credit union members were

different. These differences provided the credit unions an opportunity

to become established and develop a loyalty base under marketplace

expectations that significantly differ from those of today. The Board

must consider the evolving nature of the financial marketplace. It

would be remiss simply to say that, since a lower threshold number

worked in the past, there is no need to change the economic

advisability number requirement today.

The Board's intent is that every group being added to a multiple

common bond credit union should be analyzed to determine whether it has

the capability and desire to support an independent operation. Indeed,

that is the intent of the legislation. This requirement, however, must

be balanced with operational feasibility. To overlook the complexities

of providing financial services will only lead to additional

supervisory problems. The regulatory approach, therefore, should

incorporate known economic factors and the likelihood of success in

establishing and managing a new credit union in today's marketplace. To

this end, the Board's intent is that a group desiring a separate

charter should have every reasonable opportunity to form a new credit

union. As stated earlier, the 3,000 primary potential member threshold

is not an absolute, but simply a threshold. There are numerous examples

where smaller groups can and should have a separate credit union. For

example, faith based credit unions, as one commenter suggested, may be

uniquely positioned to be separately chartered.

The expectation is that those groups above the threshold of 3,000

primary potential members must be able to demonstrate why they cannot

satisfactorily form a separate credit union if they want to be added to

another credit union. Statutorily, there is a presumption that, unless

certain exceptions apply, a group larger than 3,000 should form its own

credit union. That is, the exception criteria will be closely

evaluated. Groups below the 3,000 threshold, however, must be able to

demonstrate why they can successfully operate a credit union. In other

words, the emphasis shifts based on the size of the group. For example,

a group of 525 may have more difficulty demonstrating economic

advisability than a group of 3,000. This is a balanced approach to the

financial service expectations of the members, the intent of Congress

that all groups should be analyzed to determine if the formation of a

separately chartered credit union is practicable and consistent with

economic advisability criteria, and those factors that are historically

important in evaluating a new charter applicant from a regulatory

standpoint. This is an economically and operationally sound approach to

chartering new credit unions. The Board believes it must not only

encourage new charters, but also ensure to the fullest extent possible

that those groups receiving a separate charter will have a reasonable

basis for success and thereby avoid unnecessary risks to the NCUSIF.

Accordingly, the field of membership rules on economic advisability

must reflect known economic factors and the potential risks to the

NCUSIF. It is essential, therefore, that the approval process

incorporate the necessary regulatory analysis to make these

determinations.

The question was raised concerning the standard that will be used

in determining what level of services is adequate in determining the

separate charter analysis vis-a-vis an already established credit

union. That is, if a new charter can only offer limited services, but

an existing charter offers a full service menu, will that fact in of

itself be sufficient to determine that a separate charter is not

required. One commenter stated that ``the economic advisability does

not take into consideration whether the group would be able to have

similar services.'' The Board's opinion is that such a standard would

circumvent the intent of the statute and, if adopted, the potential for

new charters would be drastically

[[Page 72002]]

reduced. Except in very rare circumstances, no new credit union charter

can offer the same financial services of an established credit union.

Accordingly, a similar service criterion cannot be a factor in

determining whether a new group will meet that standard. However, if

the group is already in the field of membership of a credit union and

has been receiving expanded financial services, it is reasonable to

consider that factor. This may occur in voluntary merger situations.

For that reason, out of fairness to such a group, the failure to

provide similar or equal services is more important, but not

necessarily dispositive of the issue.

It is also incumbent on the Board to establish rules that are not

unnecessarily burdensome. For that reason, it has adopted the

presumptive factor of 3,000 in determining what criteria will be

applicable. In adopting the 3,000 primary potential member threshold

factor, the Board recognizes that newly chartered credit unions in

today's financial marketplace have unique challenges. Those groups that

can or should be able to meet those challenges, regardless of size,

will be required to form a separate credit union unless they meet the

common bond requirements. As the legislation directs, the Board will

encourage the formation of separately chartered credit unions if it is

prudent and economically advisable. Important factors in making this

determination, however, are the desire and intent of the group and the

sponsor support. In other words, to ignore the group's administrative

capability may lead to unnecessary supervisory problems in the future.

While the intent of the group and sponsor support cannot be ignored and

will carry great weight, they are not the sole factors. The final

decision must be based on an independent regulatory analysis in

consideration of the remaining factors specified in the regulation.

Four commenters recommended that NCUA include in its definition of

economic advisability the statutory language from CUMAA that encourages

the formation of separately chartered credit unions ``whenever

practicable and consistent with reasonable standards for the safe and

sound operation of the credit union.'' 12 U.S.C. 1759(f)(1)(A). The

Board agrees with these commenters and has incorporated this change

into the final rule in the discussion on multiple common bond charter

expansions.

C. Reasonable Proximity and Service Facility Requirements for

Select Group Additions

CUMAA reinstated NCUA's multiple common bond policy, as set forth

in IRPS 94-1, with significant modifications. A multiple common bond

credit union may serve a combination of distinct, definable,

occupational and/or associational common bonds. Multiple common bond

credit unions can add groups with dissimilar common bonds, which are

called select groups. These groups must be within reasonable proximity

of the credit union. That is, the groups must be within the service

area of one of the credit union's service facilities.

Comments

Twenty-five commenters agreed with NCUA's definition of reasonable

proximity, although a number of these commenters stated NCUA should

give consideration to accessibility via the internet and home banking.

Six commenters were unsure as to what is meant by ``within the

service area'' and questioned how that term will be applied. Ten

commenters stated that the reasonable proximity standard should not be

applied in a blanket fashion. For example, some of these commenters

stated that the distance should be farther in rural areas for the

purpose of determining what constitutes reasonable proximity.

Fifty-two commenters disagreed with NCUA's definition of reasonable

proximity. Most of these commenters believed it is not necessary,

legally or for safety and soundness reasons, since credit unions can

automatically and electronically deliver services around the globe.

Some commenters stated that NCUA's definition of reasonable proximity

goes well beyond congressional intent. These commenters stated that

Congress intended that groups be located within a close geographic area

to the credit union.

The Board defined a service facility as a place where shares are

accepted for members' accounts, loan applications are accepted, and

loans are disbursed. This definition included a credit union owned

branch, a shared branch, or a credit union owned electronic facility

that meets, at a minimum, these requirements. This definition did not

include an ATM. Thirty-one commenters agreed with NCUA's definition of

service facility. One commenter requested that NCUA specifically state

that a mobile branch is a service facility for multiple common bond

expansions.

Thirty-one commenters did not approve of NCUA's definition of

service facility. Most of these commenters believed that, with the

advent of electronic services, a ``brick and mortar'' facility is

obsolete. Nineteen commenters requested that ATMs be included as a

service facility. Some of these commenters recommended deleting parts

of the definition that requires the facility to be a place where

deposits are made, loan applications are accepted and funds disbursed.

A few commenters stated that NCUA's definition of service facility goes

well beyond congressional intent.

NCUA Board Analysis and Decision on Reasonable Proximity

As indicated above, there were numerous comments on the proposed

definition of ``reasonable proximity.'' Suggestions ranged from mileage

to electronic limitations. Reasonable proximity is an essential factor

in determining whether a group can be added to a multiple common bond

credit union. The Board's view is that CUMAA and its legislative

history sets forth the requirement that reasonable proximity should be

a geographic limitation. That is, the group to be added must be within

reasonable proximity geographically to the credit union. Therefore, the

advantages acquired from advancing technologies do not undermine what

the Board considers is the congressionally mandated requirement that

the group to be added must be within ``reasonable proximity'' to the

credit union.

However, it is not the Board's view that the location of the group

must be within reasonable proximity to the main credit union office

only. This would be an overly restrictive requirement. Since reasonable

proximity is not specifically defined in the legislation, the terms

service area and service facility were proposed in an effort to

establish the limits of a geographic reasonable proximity. That is, the

group to be added must be within the service area of a service facility

of the credit union. As specified in the final rule, service facility

does not include an ATM. The legislative history of CUMAA is clear that

NCUA should not treat ATMs as service facilities for select group

expansions. Therefore, the final rule excludes an ATM as a service

facility. A service facility will include, however, a credit union

owned branch, a shared branch, a mobile branch that goes to the same

location on a weekly basis, or a credit union owned electronic

facility. Additionally, the Board's view is that an office that is open

on a regularly scheduled weekly basis will also qualify as a service

facility. This will enhance the development of credit union

[[Page 72003]]

services in low income and underserved areas. At a minimum, to qualify

as a service facility, the member must be able to deposit funds, apply

for a loan, and obtain funds on approved loans.

Past experience with mileage limitations indicates that using

distance factors to define reasonable proximity would create numerous

inequities. Rural areas obviously differ from urban areas. Small towns

differ from large cities. The vast geographic territory combined with

the sparse population in the southwest and western mountain areas

differ from the rural areas of the east. While mileage limitations

often facilitate regulatory decisions, frequently, they are artificial

and cause unfair results simply because of small geographic

differences. Accordingly, mileage limitations were deemed inappropriate

and not advisable. Essentially, the service area means that a member

can reasonably access the service facility. In rural areas this may

include distances encompassing several counties. In a densely populated

area, it may be a portion of a city.

D. Voluntary Mergers of Financially Healthy Multiple Common Bond

Credit Unions

The proposal set forth the requirements for the merger into, and

by, a multiple common bond credit union. In making the proposal, the

Board was mindful of the historic importance of mergers to the

financial stability of credit unions and of the importance of credit

unions to independently determine what is in the best interests of

their members. Often in today's marketplace, membership diversity and

growth are essential ingredients to financially strong credit unions.

Merging credit unions is crucial to the entire credit union system and

helps reduce the risk to the NCUSIF. Generally, credit union officials

are best suited to judge when a healthy credit union's membership and

financial strength will be enhanced by a merger. In making its

proposal, the Board sought to balance these realities against its

responsibility to assure mergers are consistent with the statutory

requirements of CUMAA and that they do not weaken credit unions or

increase the risk to the NCUSIF.

The Board proposed, that generally, the requirements applicable to

field of membership expansions apply to a credit union merging into a

multiple common bond credit union. That is, if the continuing credit

union in a proposed merger is federally chartered and the merging

credit union has a select group of 3,000 or more persons (excluding

family members), the merger can be approved only if NCUA's expansion

requirements are met. If the expansion requirements are not met, this

would require a credit union to spin-off a select group of 3,000 or

more persons from the merging credit union or the merger could not be

approved. In all cases, the individual groups in the merging credit

union would have to meet the multiple common bond policies.

Comments

Only one commenter supported the proposed merger process. Sixty-two

commenters believed financially healthy multiple common bond credit

unions should be permitted to merge without the constraints of the

proposed 3,000 limitation approval process. Twenty-two of these

commenters stated that CUMAA did not change NCUA's existing merger

authority under Section 205(b) of the Federal Credit Union Act

(``FCUA'') and that the 3,000 numerical limitations only applies to

field of membership expansions and not mergers. Generally, all bank and

bank trade organizations opposed the proposal. They argued that CUMAA

and its legislative history require that the statutory standards,

including the 3,000 numerical limitation, apply whether a single group

is being added to a credit union or whether a voluntary merger of a

credit union with many groups is being contemplated.

NCUA Board Analysis and Decision on Voluntary Mergers of Multiple

Common Bond Credit Unions

In response to the comments raised by credit union trade

organizations and bank trade organizations, as well as a further review

of the statutory language and legislative history, the Board has

decided to amend its proposal. Recognizing the importance of mergers to

a stable healthy credit union system, the final rule permits the

voluntary merger of healthy multiple common bond credit unions

containing select employee groups of less than 3,000 primary potential

members without regard to the statutory analysis that is required when

non-affiliated groups of less than 3,000 members seek to join an

existing credit union. In credit unions seeking to merge containing

groups with 3,000 or more members, the provisions of Section

101(d)(2)(A) of CUMAA must be met or the groups in excess of 3,000 will

have to be spun off in order for the merger to proceed. All credit

unions seeking a voluntary merger will still be required to comply with

the requirements of Section 205(b) of the FCUA, 12 U.S.C. 205(b).

However, because of statutory requirements, a financially healthy

single common bond credit union with a primary potential membership in

excess of 3,000 primary potential members cannot merge into a multiple

common bond credit union, absent supervisory reasons.

In making this change the Board is mindful of its obligation to be

faithful to the statutory language. In doing so, ``the starting point

must be the language of the statute itself.'' Int'l Brotherhood of

Electrical Workers v. NLRB, 814 F.2d 697, 710 (D.C. Cir. 1987) (quoting

Lewis v. United States, 445 U.S. 55, 60 (1980). Frequently, the ``best

guide to what a statute means is what it says.'' Stewart v. National

Shopmen Pension Fund, 730 F.2d 1552, 1561 (D.C. Cir.) cert. denied 469

U.S. 834 (1984) (emphasis in original). Section 101(b)(2) of CUMAA

authorizes multiple common bond credit unions. Section 101(d)(1)

provides that groups of fewer than 3,000 members can generally be added

to a multiple common bond credit union provided certain criteria are

met. Section 102 sets forth the statutory criteria that must be met.

Taken together, these provisions address the chartering of new multiple

common bond credit unions and the addition of non-affiliated groups of

less than 3,000 members to existing institutions. Though Congress could

have done so, it did not include any language discussing or limiting

NCUA's ability to authorize the merger of existing multiple common bond

credit unions containing groups with less than 3,000 members.

A merger involves the combination of pre-existing corporations, a

process different both legally and practically from the addition of a

group to a credit union. Mergers of multiple common bond credit unions

after adoption of this rule will involve groups already added to the

merging credit unions, either after consideration of the criteria set

forth in Section 102 of CUMAA, or through the grandfather provision in

Section 101(c). In either case, they would already be contained within

the field of membership of an existing multiple common bond credit

union. Had Congress expected each such group to be evaluated again in

accordance with the criteria set forth in Section 102, it could easily

have said so.

Congress next provided two exceptions to the 3,000 member

limitation in Sections 101(d)(2)(A) and (B) of CUMAA. The first allows

the addition of groups of 3,000 or more members if the Board finds that

such a group could not reasonably establish its own credit union

because: (1) the group lacks sufficient support to form a credit union;

(2) it is unlikely to be successful in establishing and managing a

credit

[[Page 72004]]

union; and (3) the group would be unlikely to operate a safe and sound

credit union.

The next exception contains the first mention of mergers in the

statute. Section 101(d)(2)(B) expressly eliminates any restriction on

the addition of groups of 3,000 or more if the group is being

transferred as part of a merger for safety and soundness reasons. By

implication, it is the Board's view that, if there are no safety and

soundness concerns, groups of 3,000 or more cannot be included as part

of a merger unless the statutory criteria of Section 101(d)(2)(A) are

met. The Report of the Committee on Banking and Financial Services

supports this conclusion. In discussing the exceptions provided in

Section 101(d)(2), the report states ``the Board may merge or

consolidate a group with over 3,000 members with another credit union

for supervisory reasons. The Committee does not intend for these

exceptions to provide broad discretion to the Board to permit larger

groups to be incorporated within or merged with other credit unions.

The exceptions are intended to apply where the Board has sufficient

evidence to support a finding that creation of a separately chartered

credit union, or the continued operation of an existing credit union,

present safety and soundness concerns.'' H.R. Rep. No. 105-472, 105th

Cong., 2nd Sess. 19 (1998). Notably absent from this discussion is any

mention of limitations on mergers of credit unions containing groups of

less than 3,000 members.

In Section 101(d)(2)(C), Congress created an exception applicable

to a limited number of cases where a merger was in process, but not

completed, under the NCUA's previous field of membership policy. That

policy was enjoined in the litigation that led to the passage of CUMAA.

The Board believes this provision was intended as a one time

authorization to complete a limited number of in process mergers

without regard to the size of the groups in the institutions involved.

Finally, the Board does not believe that Congress' failure to amend

Section 205(b)(2)-(3) of the FCUA supports a conclusion that Congress

intended no limitation on voluntary mergers of credit unions. Section

205(b) does not provide independent statutory authority to allow

mergers, but rather permits the Board to regulate voluntary mergers

that are otherwise authorized by law. In contrast, Section 205(h)

allows the Board to authorize mergers in emergency situations

``[n]otwithstanding any other provision of law.'' Thus, the Board may

regulate and approve mergers under 205(b) only if they do not conflict

with the limited restrictions, discussed above, provided by CUMAA's

amendments to the FCUA.

The limitation on voluntary mergers applicable to multiple common

bond credit unions does not apply to the mergers of single common bond

credit unions or community charter mergers. The Board recognizes that

the numerical limitation in the voluntary merger rule for multiple

common bond charters may, in rare circumstances, encourage a federal

credit union to seek a state charter credit union as a merger partner

if the state rules are more permissive.

The proposal also clarified requirements for mergers of multiple

common bond credit unions for safety and soundness reasons and

emergency situations. The numerical limitation would not apply to

mergers where there are safety and soundness concerns or the emergency

criteria exist. Four commenters requested that NCUA expand the

discussion on supervisory mergers. Two commenters recommended that NCUA

state that the numerical limitation does not apply for safety and

soundness mergers even if the credit union is not insolvent or in

danger of insolvency. One commenter stated that, when merging two

credit unions for supervisory reasons, nonmember employees of the

merging credit union would still be eligible for membership in the

continuing credit union. The Board has expanded the discussion on

mergers for safety and soundness reasons and has specifically stated

that the credit union need not be insolvent or in danger of insolvency

for NCUA to use this statutory authority. In a supervisory merger, the

continuing credit union is able to serve all of the groups from the

discontinuing credit union and not just members of record.

Twelve commenters stated that supervisory mergers and emergency

mergers should require all credit unions in the area of the merging

credit union to be notified so that they have an opportunity to be

considered as a merger partner. One commenter stated that when NCUA is

seeking out merger partners for a credit union, it should give credit

unions in the same state the right of first refusal. NCUA will attempt

to find local merger partners for a credit union that is involved in

supervisory or emergency mergers. However, the Board is not requiring

notification of all local credit unions. The Board believes such a

requirement would be a needless bureaucratic hurdle and cause

unnecessary delay. The delay could exacerbate existing problems for the

soon to be merged credit union. The Board believes that in such cases

it could create losses for the NCUSIF, as well as the credit union that

accepts the troubled credit union as a merger partner. However, the

Board is reemphasizing that it will expect the regions to look first to

local merger partners before considering other credit unions. If the

Board is notified that the regions are not conducting the process in

this way, the Board may consider a more formalized process.

E. Immediate Family Member or Household

As mandated by CUMAA, the Board is required to define ``immediate

family member or household.'' The definition of these terms is

designated as a major rule and must be submitted to Congress for

approval. Accordingly, the Board proposed to define ``members of their

immediate families'' as related persons i.e., blood, marriage, or other

recognized family relationships in the same household (under the same

roof), or if not in the same household, as a grandparent, parent,

spouse, sibling, child, or grandchild. For the purposes of this

definition, immediate family member included stepparents, stepchildren,

and stepsiblings, and, although not specifically stated, adopted

children or any other legally recognized family relationship. The Board

also stated that the immediate family member must be related to the

credit union member. In other words, once a person becomes a member,

then that person's immediate family could join. The proposed definition

was controversial and generated numerous comments.

Comments

Thirty-seven commenters generally approved of NCUA's definition of

``immediate family member.'' Seven commenters further stated that it

will have a positive effect on a credit union's ability to grow. Five

commenters believed NCUA's proposed definition of ``immediate family

member'' would have a neutral effect on their credit unions.

One hundred and seven commenters generally disagreed with NCUA's

definition of ``immediate family member'' and twenty-three of these

commenters further stated that it would have a negative effect on a

credit union's ability to grow. Twenty-seven of these commenters stated

that a credit union should be able to define ``immediate family

members.'' Twenty-six commenters requested that in-laws, aunts, uncles

and cousins outside the household be included in the definition of

``immediate family member.'' Fifteen commenters suggested that NCUA

define ``immediate family member'' to

[[Page 72005]]

include all relatives by blood or marriage. Five commenters suggested

that NCUA should limit the definition of ``immediate family member'' to

those persons directly related by blood, marriage, or other recognized

family relationship. Two commenters requested that any existing

immediate family member definition as described in the existing charter

of a credit union be grandfathered.

Twenty-four commenters questioned whether adopted children were

part of the ``immediate family member'' definition and requested they

be included within the definition. Two commenters requested that NCUA

specifically state that custodial and guardianship arrangements are

encompassed by the ``immediate family'' definition.

Nine commenters requested one definition for immediate family

member and one definition for household member. These commenters

believed that persons living under the same roof, even if not in the

same immediate family, are still eligible for membership. Twenty-one

commenters requested domestic partners and other nontraditional family

relationships be included in the definition of ``immediate family

member.'' Thirty-two commenters asked for clarification on the

definition of what is a recognized family relationship. One commenter

specifically did not want clarification. A number of commenters

requested that the final rule clarify what sources, such as state laws

or regulations credit union may use as a reference to determine other

family recognized relationships, as well as who does the recognizing--

the credit union, the credit union's sponsor, or the state where the

credit union is located.

Forty-nine commenters stated that the immediate family member

should be able to join, even if the primary member has not joined. Most

of these commenters stated that this interpretation is permitted by

CUMAA. Thirty-nine commenters requested that credit unions have the

ability to adopt a more restrictive definition. Three commenters

requested that NCUA provide guidance as to what procedures, if any,

credit unions need to follow to conform to the new immediate family

member definition.

NCUA Board Analysis and Decision on Immediate Family Member or

Household

In initially addressing the issue of immediate family member or

household, the Board combined the eligibility requirements for the

immediate family and household members into one inclusive definition

based on traditional relationships of blood, marriage or other

recognized family relationship. Within a household, any person related

by blood, marriage or other recognized family relationship would

qualify. Outside the household, which included those family

relationships not living in the same residence, the Board proposed that

the immediate family member relationship would be limited to a spouse,

child, sibling, parent, grandparent or grandchild.

The initial proposed definition was narrowly construed by the

Board. The Board considered the fact that the statute specifically

states that ``[n]o individual shall be eligible for membership in a

credit union on the basis of the relationship of the individual to

another person who is eligible for membership in the credit union''

unless the individual is ``a member of the immediate family or

household.'' For that reason, the Board required that, except for the

immediate family member of the primary member, the ability of an

immediate family member to join be based on that person's immediate

family member having joined, as opposed to simply being eligible to

join. In other words, before an immediate family member of a member's

child could join, the child would first have to join the credit union.

In proposing the definition of immediate family member, the Board

took notice of the fact that Congress intended some limitation of the

definition of family member since it defined that term with the

qualifier ``immediate.'' Accordingly, an open-ended definition of

family member would not be consistent with the statutory language and,

therefore, was deemed inappropriate. A definition that included any

family member related by blood or marriage was considered unduly

expansive. Consequently, the proposed definition followed a more narrow

meaning of immediate family member as applied to fields of membership

and the common bond concept.

Many commenters, however, took strong issue with the Board's

proposed definition and approach to defining immediate family member.

In consideration of those comments, the Board is adopting a modified

definition which, while being more expansive than the proposed

definition, retains the essential requirement that the definition

cannot be defined by the credit union. After again reviewing the

statutory language, the Board has determined that membership

eligibility based on family relationships or household should be

segregated and defined separately. The proposed definition of

``immediate family member'' is retained. That is, immediate family

member eligibility is limited to a spouse, child, sibling, parent,

grandparent or grandchild if not living in the same residence.

Stepchildren, stepparents, stepsiblings and adopted children, as

previously proposed and intended, are included in this definition. Once

an immediate family member joins, then that person's immediate family

would be eligible to join.

Household is defined as persons living in the same residence and

who maintain a single economic unit. Included in this definition is any

person who is a permanent member of and participates in the maintenance

of the household. For example, two people sharing an apartment would be

considered a household. In turn, the immediate family member of each

member of the household who joins could also join because eligibility

is then tied to the member. However, a fraternity, sorority, or

condominium complex would not be considered a single economic unit.

Individual residences in a condominium or apartment complex would

qualify as a single economic unit. The definition of household

contemplates or intends some permanency and not simply someone who is

visiting for a short period. Domestic partners would be included in the

household definition, since they share a residence and qualify as a

single economic unit, as would anyone who lives in the household and

demonstrate a degree of permanency. Legal guardian relationships are

considered part of the household definition.

CUMAA does not permit NCUA to grandfather existing definitions or

allow credit unions to define ``immediate family or household.'' CUMAA

requires NCUA to define ``immediate family or household and although a

credit union can adopt a more restrictive definition than NCUA's, it

cannot establish a more expansive definition. The flexibility to adopt

a more restrictive definition results from potential operational

concerns. For example, a sponsor may restrict accessibility to the

credit union office located on the sponsor's property.

Unless a federal credit union adopts a more restrictive definition

of an ``immediate family or household'' through a board policy, NCUA's

definition will automatically apply. That is, absent a board of

directors' policy stating otherwise, a credit union may use NCUA's

definition without taking any other action. However, a credit union

should update its bylaws to

[[Page 72006]]

delete its prior definition of immediate family member. The Board

believes that its definition of ``immediate family member or

household'' is reasonable, and judging from the commenters, more

restrictive than the definition used by many credit unions.

The proposal did not explicitly address whether the primary member

must first join the credit union before the immediate family member can

join. NCUA's intent was that the primary member need not join before

the immediate member joins. Thus, the final rule sets forth NCUA's

long-standing policy that the immediate family or household member may

join the credit union even if the eligible primary member has not

joined. However, once the primary member leaves the field of

membership, the individual's immediate family or household members are

no longer eligible to join through that person.

F. Section-by-Section Analysis

I. Chapter 1 of the Chartering Manual

Chapter 1 set forth the goals of NCUA's chartering policy and the

requirements and procedures for chartering a new federal credit union.

One commenter stated that NCUA should have an additional goal ``to

support the continuing success of existing credit unions.'' The Board

is not specifically stating this as a chartering goal since it is

already part of NCUA's continuing regulatory mission. One commenter

recommended that NCUA state an additional goal to preserve and foster

the cooperative nature of credit unions. Likewise, the Board does not

need to explicitly state this goal since it is inherently part of the

credit union system.

Chapter 1 encouraged the formation of newly chartered federal

credit unions and the use of mentor relationships with existing, well-

managed credit unions. The Board stated that experienced credit unions

are a valuable resource to newly chartered credit unions and can

provide needed guidance and assistance. Forty-one commenters expressed

support for credit unions mentoring new credit unions. One commenter

opposed mentoring relationships. Three commenters stated that NCUA

should state that mentoring is not required. Three commenters stated

that NCUA should provide incentives for credit unions to engage in

mentoring relationships. The Board, in the final regulation, continues

to encourage mentoring relationships. However, mentoring is not a

regulatory requirement. The main incentive for mentoring is the

cooperative nature of credit unions and the social benefit of a healthy

credit union system.

On the issue of name selection, the proposal stated that the word

``community'' can only be included in the name of federal credit unions

that have been granted a community charter. One commenter opposed this

limitation. The Board has revisited this issue and will grandfather

existing non-community charters with the word ``community'' in their

names. However, to avoid confusion, NCUA will not grant a new charter

or a name change with the word ``community'' in the name, unless the

credit union is a community charter.

Chapter 1 also set forth the various field of membership

designations available to prospective and existing credit unions. These

designations included single occupational, single associational,

multiple common bond, or community. Four commenters asked how an

existing credit union obtains a charter type designation. Two

commenters requested that the credit union be allowed to make its own

designation. One commenter requested that a credit union not

immediately make a designation, but be provided some latitude until its

next examination or when it requests a charter amendment. The Board

encourages credit unions to review their charters to determine which

designation is most appropriate. NCUA will provide a designation for a

credit union when the credit union asks for its first charter expansion

under this policy, or upon request by the credit union. If a credit

union is unsure of its designation it should contact the regional

office. If a credit union disagrees with the designation approved by

the region, the credit union can appeal the decision to the Board.

Finally, this chapter sets forth NCUA's long-standing policy

prohibiting the establishment of a federal credit union for the primary

purpose of serving the citizens of a foreign nation. The Board stated

that federal credit unions are permitted to serve foreign nationals

within the field of membership when they reside or work in the United

States and that foreign nationals may also be served if they reside in

a foreign country, but only when the primary purpose of the credit

union's foreign service facility is to serve United States citizens who

are credit union members residing in the foreign country. Five

commenters disagreed with this policy. They believe federal credit

unions should be able to serve foreign nationals from the United States

who are within their field of membership, even if the foreign national

has never resided in the United States. The Board finds these comments

persuasive. The Board is retaining its policy of limiting branches

outside the United States to locations on U.S. military installations

or in U.S. embassies. However, the Board believes that a credit union

should be able to serve its entire field of membership no matter where

the individual resides. Although there is no legal restriction on such

service, there are often legitimate safety and soundness concerns when

a federal credit union serves foreign nationals outside the United

States. For this reason, the Board is requiring that a federal credit

union, wishing to serve foreign nationals within its field of

membership and who have never resided in the United States, obtain

written approval from the regional director. The credit union will

address in its business plan the loan quality, collection and

collateral policies involving individuals residing outside the United

States. If there are safety and soundness concerns, the regional

director may restrict the services a federal credit union may provide

to foreign nationals residing overseas. If a credit union is currently

serving foreign nationals, they can continue such service until the

regional director renders a decision. The credit union has 60 days from

the effective date of the manual to send in its request to continue to

serve foreign nationals.

II. Chapter 2 of the Chartering Manual

Chapter 2 set forth the field of membership requirements for a

federal credit union. This chapter was divided into the following

comprehensive sections: (1) single occupational charters, (2) single

associational charters, (3) multiple common bond charters, and (4)

community charters.

Twelve commenters believed that an occupational group and

associational group can be included in a single common bond credit

union. One of these commenters believed that the final regulation

should expressly authorize that individuals with a common employer can

rely on that mutuality of outlook to join the same credit union as

individuals belonging to an association which is derived from that

employment. One commenter stated that the regulation inconsistently

uses the term ``group.'' This commenter stated that, since a single

common bond credit union consists of one group, then if NCUA is

addressing a subset of a common bond group it should refer to that

entity as a subgroup. Eight commenters believed that multiple common

bond credit unions should be able to have common bond additions for

each group in the credit union's field of

[[Page 72007]]

membership. For example, the commenters would argue that, if a multiple

common bond credit union has an occupational group in New York in its

field of membership and wishes to add a division of that occupational

group located in California, then the select group criteria do not

apply.

The Board believes that a credit union consisting of an

occupational group and a closely tied associational group should be

treated as a multiple common bond credit union. Any other

interpretation would appear to violate the intent of CUMAA which

defines a single common bond credit union as ``one group that has a

common bond of occupation or association.'' The Board's intent is that

any expansion of a multiple common bond credit union must comply with

the multiple common bond rules. It is not intended that a group that

has a common bond with a group in a multiple common bond credit union

can be added based on the common bond rules. The criteria relative to

numerical limitation, reasonable proximity, economic advisability,

etc., remain applicable when any new group not previously analyzed is

requested to be added. For example, an occupational group with a

primary potential membership of 1,000 was previously added to a

multiple common bond credit union. The credit union now wants to add

all the subsidiaries of the occupational group. In order to add the

subsidiaries, they must be independently evaluated to determine

compliance with the multiple common bond criteria. Finally, multiple

common bond credit unions will not be allowed to circumvent the

multiple common bond requirements by repeatedly and methodically adding

separate groups within the same common bond.

a. Single Occupational Common Bond Credit Union

The Board proposed that a federal credit union may include in a

single occupational common bond all persons and entities who share that

common bond without regard to geographic location. The Board stated

that eligibility for membership in an occupational common bond can be

established in four ways:

Employment (or a long-term contractual relationship

equivalent to employment) in a single corporation or other legal entity

makes that person part of an occupational common bond of employees of

the entity;

Employment in a corporation or other legal entity with an

ownership interest of not less than 10 percent in or by another legal

entity makes that person part of an occupational common bond of

employees of the two legal entities;

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 an occupational common bond of employees of the two

entities; or

Employment or attendance at a school.

Thirteen commenters were satisfied with an ownership interest of 10

percent. Sixteen commenters recommended the ownership interest should

be reduced from 10 percent to 5 percent. Six commenters stated that

there should be no limits on ownership interest. The Board is retaining

the 10 percent ownership interest requirement. There are other federal

regulations setting forth 10 percent ownership as a rationale

presumption for control of another entity. For example, the Federal

Reserve Board presumes that when one company owns 10 percent of the

voting securities of a state member bank or bank holding company, the

10 percent ownership constitutes the acquisition of control under the

Bank Control Act. 12 CFR Section 225.41(c)(2).

Thirty-three commenters suggested that NCUA's approach to

occupational common bond cover other possible relationships among

corporations such as franchise relationships. Five commenters opposed

including franchisee relationships as part of an occupational common

bond. Franchise relationships may be part of an occupational common

bond depending on whether there is any contractual or dependency

relationship with the occupational group. However, this test is fact

specific so NCUA cannot set forth a general rule that all franchises

are part of a single occupational group.

Thirty-one commenters recommended that NCUA's approach to common

bond include other types of common bonds, such as all schools in an

area, or all health care facilities, or public safety employees and one

of these commenters stated that these common bond groups be

specifically named in the credit union's charter. A majority of these

commenters stated that NCUA should be more flexible in defining an

occupational common bond. For example, one commenter requested that

occupational groups such as electricians, plumbers, and taxicab drivers

should be defined as an occupational group. Seven commenters opposed

expanding the occupational common bond to include all schools in the

area, or all health care facilities or public safety employees. It

appeared that a majority of these commenters requested that NCUA

establish a policy that was first promulgated in IRPS 96-2. That policy

recognized a fourth definition of occupational common bond based on a

trade, industry or profession (''TIP'').

In First National Bank and Trust Co., et al. v. NCUA, the U.S.

Court of Appeals for the District of Columbia Circuit recognized that

in some respects NCUA's chartering and field of membership policies may

be more restrictive than required by the FCUA. That is, NCUA may

identify and approve interpretations that provide broader common bonds

than presently permitted. Moreover, given the Court of Appeals

determination that the mere element of ``resemblance or common

characteristic'' in the definition of groups is the equivalent of a

common bond, NCUA clearly has very broad discretion in defining what

constitutes a common bond for purposes of federal credit union

membership.

CUMAA defines a single common bond credit union as ``one group that

has a common bond of occupation or association.'' While the term

``occupation'' is consistent with the Court of Appeals finding, for the

purposes of this rule, the Board has decided to again adopt a

definition that is more restrictive than that permitted by statute. For

the most part, a single occupational credit union is based on

employment and any contractual, ownership and dependency relationships

to that employment. The decision to not propose a TIP policy is based

on operational concerns and the fact that when credit unions were

allowed to expand using multiple common bond policies it did not appear

that a broader definition was necessary. However, while the Board is

not adopting a TIP definition of occupational common bond at this time,

the Board's view is that such a policy is legal and may again be

proposed after evaluating the impact and effectiveness of the current

multiple common bond policy.

One commenter stated that employees and students at a school do not

share an occupational common bond. Three commenters stated the

occupational common bond for a school should be expanded to include

multiple schools. Although the Board believes that employees and

students at a school clearly share the same common bond, it does not

believe the same is true for multiple schools. Each school is

separately organized and chartered and the employees and students at

one school may not necessarily share the

[[Page 72008]]

same common bond with another school. For example, the employees and

students at the University of Buffalo do not share a common bond with

the employees and students at the University of Texas. However,

employees in schools supervised by the same school district or board of

education may share an occupational common bond.

Two commenters requested that a group that has a contractual

relationship with an occupational group be considered part of one

occupational group. One commenter stated that government contractors of

government agencies should be considered part of the occupational

common bond. The Board, as stated above, permits contractors to be part

of a single occupational common bond provided they have a contractual

and strong dependency relationship with the group.

Five commenters requested that the tenants of individual parks,

shopping malls and office complexes and their employees should be

considered to have a common bond of employment. NCUA cannot define an

occupational common bond based on location--it must be based on the

statutory requirement of occupation. Therefore, the final rule does not

include this type of occupational common bond. However, industrial

parks, shopping malls, etc., may qualify as a community charter.

A few commenters questioned whether a single occupational common

bond credit union, after adding one new group, could still serve its

sponsor group outside the service area. The Board believes the credit

union can continue to serve its sponsor group outside the service area.

However, the credit union then becomes a multiple common bond credit

union and service area requirements apply to any new groups the credit

union wishes to add.

A number of commenters objected to providing a geographical

description for single occupational common bond credit unions. NCUA has

historically provided a geographic definition for single occupational

common bond credit unions because more than one credit union may be

serving different divisions of the same company. Additionally, overlap

concerns, other than incidental overlaps, still must be resolved. While

there are no geographical limitations for federal credit unions, a

federal credit union must still specify its geographic definition,

which can be located throughout the United States.

Occupational Common Bond Amendments. The proposed rule set forth

when NCUA would approve an amendment to expand a credit union's field

of membership. Specifically, the Board addressed the situation where

the sponsor organization is involved in a corporate restructuring. The

Board stated that a credit union could continue to provide service to a

group that is spun-off only if it otherwise qualifies as part of the

single occupational common bond, or if the credit union converts to a

multiple common bond credit union. Six commenters stated that, if a

business sells or spins off an operating unit or subsidiary, both

current and future employees of the operating unit or subsidiary should

remain eligible for membership in the occupational credit union without

having to convert to a multiple common bond credit union. The Board

does not find these comments persuasive. If a company spins off a group

that the credit union was serving, the credit union will be able to

continue to serve the group if the credit union converts to a multiple

common bond charter. If the credit union wishes to expand, it must

follow the multiple common bond expansion policies.

The Board set forth a second instance requiring an amendment when

the entire field of membership is acquired by another corporation. The

credit union can serve the employees of the new corporation, including

any subsidiaries of the acquiring corporation, after receiving NCUA

approval. The Board stated that, in this instance, the credit union

remains a single common bond credit union.

One commenter opposed a conversion process if a single common bond

credit union wishes to become a multiple common bond credit union. This

commenter believed that, if a credit union added an unlike group to its

field of membership the credit union has converted to a multiple common

bond credit union. The Board believes that a credit union that wants to

serve multiple common bonds should formally convert its charter.

Accordingly, the final regulation sets forth this process.

b. Single Associational Common Bond Credit Union

The proposal set forth the definition of associational common bond.

The Board stated that an associational common bond consists of

individuals (natural persons) and/or groups (non-natural persons) whose

members participate in activities developing common loyalties, mutual

benefits, and mutual interests. This would permit an associational

common bond to include members of the association, groups which are not

comprised primarily of natural person members but are members of the

association, and employees of the association, as well as the

association. The proposal also stated that an associational charter may

be granted without regard to the geographic location of the

association's members or headquarters. This means a credit union could

serve a widely dispersed membership base if NCUA determines that it has

the ability to serve the area.

One commenter requested that public housing residents be treated as

an associational common bond. Public housing residents, who simply are

in the same location, do not meet NCUA's associational common bond

requirements. Public housing residents must be part of a bona fide

association to be considered an associational group.

The Board also stated that associations based primarily on a

client-customer relationship would not meet associational common bond

requirements. For example, members of an automobile club, such as the

American Automobile Association, which primarily sells services, would

not qualify as an associational common bond. The Board is adopting this

policy in the final regulation.

The Board further stated that the alumni of a school must first

join the alumni association, and not merely be alumni of the school to

be eligible for membership. One commenter objected to this provision

because in some schools the graduates are automatically members of the

alumni association. If an alumnus is automatically a member of the

alumni association because the individual graduated from that college,

then the person is considered part of the associational common bond.

However, in most cases, the person must satisfy membership requirements

of the alumni association, such as paying dues or participate in alumni

activities, to be eligible for credit union membership based on an

associational common bond. One commenter stated that an alumni group

and a college group share the same associational common bond. The Board

disagrees. The interests of the alumni association and the interests of

the students at the university are often divergent.

Finally, the Board stated that, if an association subsequently

changes its bylaws, the credit union cannot serve the new members of

the association until NCUA approves the revised charter and bylaws

through a field of membership amendment. The Board is adopting this

policy in the final regulation.

Corporate Restructuring. Due to a corporate restructuring of a

select group,

[[Page 72009]]

a credit union may be required to request an amendment to its field of

membership if it wishes to continue to provide service to that group.

The Board proposed to permit an associational credit union to continue

to serve the group if it was still part of the associational common

bond or the credit union converts to a multiple common bond credit

union. Three commenters stated that the associational credit union

should be able to continue to serve the group regardless of common bond

requirements. The Board does not find these comments persuasive. If an

association spins off a group that the credit union was serving, the

credit union will be able to continue to serve the group if the credit

union converts to a multiple common bond charter. If the credit union

wishes to expand, it must follow the multiple common bond expansion

policies.

One commenter stated that, if an associational common bond spun-off

part of the association, the final rule should clarify that relatives

of existing members of the credit union belonging to the sold or spun-

off group could continue to be eligible for membership in the credit

union. Immediate family members of existing credit union members are

still eligible for membership even if the group is no longer in the

credit union's field of membership provided that the credit union does

not further restrict family member eligibility. This rationale has

universal application to all charter types.

c. Multiple Common Bond Credit Union

Five Statutory Criteria. Before a credit union can add a new

occupational or associational select group, NCUA must determine in

writing that five statutory criteria have been met. The first criterion

is that the credit union did not engage in any unsafe or unsound

practice which is material during the one-year period preceding the

filing of the application. The Board defined an unsafe or unsound

practice for this criterion to mean any action, or lack of action,

which would result in an abnormal risk or loss to the credit union, its

members, or the NCUSIF. The Board stated that the determination of an

unsafe and unsound practice would be decided by the regional director.

Two commenters requested further guidance on what is an unsafe and

unsound practice. The Board's view is that additional clarification may

unduly restrict the regional director's ability to properly ascertain

if a safety and soundness concern exists. Obviously, what is a safety

and soundness concern for one credit union may not be for another

credit union because of a credit union's size, resources, management

expertise, etc.

The second criterion is that the credit union is adequately

capitalized. The Board defined adequately capitalized to mean the

credit union has a net worth ratio of not less than 6 percent. The

Board also specifically requested comment on what criteria should be

considered when defining ``adequately capitalized'' for newly chartered

credit unions.

Thirty-four commenters stated that they approved of the definition

or that requiring a net worth of 6 percent in order to add select

groups would not place an unreasonable burden on their credit unions.

One commenter stated that there should be no minimum capital adequacy

requirements for new or low-income credit unions wishing to expand

their charters.

Twenty-five commenters opposed the definition and some of these

commenters stated that requiring a net worth of 6 percent would place

an unreasonable burden on credit unions. Many of these commenters

stated that CUMAA does not require the 6 percent level. Two commenters

stated that, if the Board determines that it is necessary to retain the

6 percent capital requirements for group additions then they encourage

the Board to consider as part of its economic advisability

determination whether the addition will actually raise the credit

union's capital. These commenters stated that such an addition should

be permitted if the expansion increases capital to at least 6 percent

within a reasonable period of time. These commenters also stated that a

credit union with a capital of less than 6 percent should be allowed to

bring in a group as part of a sanctioned net worth restoration plan.

Twelve commenters stated that adding new groups may be the best way for

an undercapitalized credit union to obtain an adequate capitalization

level. Three commenters stated that NCUA should be flexible in defining

adequately capitalized.

In 1982, the Board decided that multiple groups could be joined

together through the chartering process, amendment of the charter, or

by way of merger to form a single credit union. A major reason for the

policy change was to provide small groups of people, who did not have

the ability to charter their own credit unions, access to credit union

service. Another reason for the policy change was to assist credit

unions in diversifying their fields of membership for safety and

soundness reasons. The rationale applicable in 1982 remains applicable

today. For that reason, the Board included in the final rule for single

common bond and community credit unions the possibility that an

expansion could be approved notwithstanding the credit union's

financial or operational problems.

CUMAA, however, requires a different standard for multiple common

bond credit unions in that it requires the credit union to be

adequately capitalized before an expansion can be approved. As of June

1998, the average net worth ratio for all federal credit unions was

13.55 percent. Of the 6,907 federal credit unions, 39 percent were

above the average and 61 percent were below. More importantly, only 4

percent, or 269 federal credit unions, would not now meet the 6 percent

adequate capitalization requirement. It is the Board's view that a 6

percent capitalization for field of membership expansions for multiple

common bond credit unions chartered more than 10 years is reasonable

and establishes a standard that, while not meeting the average

capitalization level of federal credit unions, is indicative of a

credit union that generally is managed in a safe and sound manner.

Additionally, although not required by CUMAA to set the capitalization

level at 6 percent, such a percentage ties to the capitalization level

established for prompt corrective action. However, the Board believes

that a newly chartered multiple common bond credit union, chartered

less than 10 years, or a low-income credit union, may obtain a field of

membership expansion even though its capitalization level is less than

6 percent if the credit union, as determined by the regional director,

is making reasonable progress toward meeting the 6 percent

capitalization level.

The Board believes that a restoration capitalization plan, which

was a basis for the 1982 policy and which remains operationally

desirable, is not consistent with the statutory requirement in CUMAA

that, before an expansion can be granted, the credit union must be

adequately capitalized. A capitalization restoration plan, while

operationally desirable, could essentially render the statutory

requirement that the credit union be adequately capitalized

meaningless. A ten-year window to obtain a capitalization level of 6

percent is reasonable, obtainable and consistent with prudent safety

and soundness goals.

The third criterion is that the credit union has the administrative

capability and the financial resources to serve the proposed group. To

determine whether the credit union has met this criterion, the Board

stated that it would review

[[Page 72010]]

the credit union's most recent examination report or, if necessary,

contact the credit union directly. Two commenters stated that there

should not be any undue requirement under this criterion for small

groups. The Board simply expects a credit union adding new groups,

regardless of the size of the group, to demonstrate how it will serve

the group. The larger the group, the greater the burden the credit

union has to show that it can serve that group. In approving new select

groups, the regional director has the discretion in requesting

documentation on how well the credit union is serving its current field

of membership.

The fourth criterion is that the credit union must demonstrate that

any potential harm the expansion may have on any other credit union and

its members is clearly outweighed by the probable beneficial effect of

the expansion. The Board stated that the agency will perform an overlap

analysis to determine whether this criterion has been met.

Thirty-two commenters believed this test is useful. Most of these

commenters believed overlaps help the consumer. Twelve commenters

opposed this statutory criteria. Most of these commenters believed

overlaps are good for the member. A number of these commenters

requested NCUA to base decisions on potential harm on objective

criteria. Twelve commenters questioned how the convenience and needs of

the members will be quantified and measured. One commenter stated that

if the two credit unions agree to the overlap, then NCUA should find no

harm to the overlapped credit union. Some of these commenters suggested

that a measurement of ``convenience and needs of the members'' should

include new or expanded products/services which are not offered by the

other credit union as well as increased access to the credit union

through fixed service sites, mobile sites, extended service hours and

24 hour electronic media. In response to the comments regarding the

measure of the convenience and needs of the members, NCUA will review

the products, services and service delivery methods offered by the

overlapping credit union. NCUA will measure potential harm to the

overlapped credit union as a threat to its solvency. A recent NCUA

study determined that overlaps, as a general rule, will not adversely

affect the overlapped credit union. Therefore, in most cases, NCUA will

probably find that the convenience and needs of the members will

outweigh the harm to the overlapped credit union. This suggestion of

probability, while not conclusive, is based on experience.

An expanding credit union has the duty to investigate whether an

overlap exists. Many of the commenters that opposed the criterion did

not believe the credit union should investigate whether an overlap

exists. A few commenters suggested that an expanding credit union

discharges this duty by asking the group whether it receives services

from other credit unions. The Board agrees with these comments. As long

as the expanding credit union has, in good faith, documented that the

group does not have other credit union service, it will not be

penalized if an overlap is discovered at some later time. However, the

group may be removed from the expanding credit union's field of

membership.

The fifth criterion is that NCUA must determine that the formation

of a separate credit union is not practical or does not meet the

economic advisability criteria. Four commenters requested more guidance

on how to determine whether forming a separate credit union is

practical. A few commenters suggested that when evaluating this

criterion, NCUA should determine whether the independent credit unions

can be full service and offer share drafts, ATM cards, etc. The Board

will look at the desire of the group, the services it can provide and

its economic advisability before deciding whether to allow a group with

under 3,000 primary potential members to join the credit union. If the

group does not wish to form its own credit union, does not have the

volunteers and resources to charter a credit union, and is otherwise

not economically advisable, NCUA will allow the group to join an

existing credit union. Although some commenters did not believe this

criterion was necessary for groups under 3,000, it is consistent with

the statutory language and congressional intent. If the group is 3,000

or more primary potential members, the desire of the group, while

important, must be weighed against the statutory criterion that the

group cannot feasibly or reasonably establish a single common bond

credit union.

One commenter asked whether NCUA has to make a formal determination

on all five criteria when adding a group to a credit union's field of

membership. Four commenters stated that a written determination is not

always required, as in the case of ``successor'' groups. The Board

believes it does not have the discretion to waive a written

determination. However, in those cases where there is no overlap and

the group is small, the written determination should be processed

expeditiously. A ``successor'' group would not be treated as a select

group expansion, rather it is treated as a housekeeping amendment and,

therefore, a written determination is not necessary.

While all federal credit unions are encouraged to expand their

service to underserved areas, the Board especially encourages multiple

common bond credit unions that add new groups to consider service to

underserved areas. The Board believes that multiple common bond credit

unions are uniquely positioned, because of their service delivery

systems, to provide credit union service to such areas.

3,000 Numerical Limitation. The proposal also set forth the

requirements for adding a group in excess of 3,000 primary potential

members to a credit union's field of membership. One commenter asked

whether it is permissible to add the employees of a sponsor (which has

total employees exceeding 3,000) working in a specific geographic area,

if the number of employees in that area is less than 3,000 (i.e., can

sponsors be segmented to meet the requirement applicable to the number

of employees). Two commenters supported NCUA's interpretation of the

numerical limitation. One commenter questioned whether the 3,000 number

is potential new members or that the group itself has no more than

3,000 total members. The 3,000 numerical limitation is based on the

current number of employees or members of the group. Five commenters

stated that the wishes of the group and sponsor should be key factors

for NCUA to review in making its determination as to whether a group

can be added. Although NCUA agrees with these comments that these are

key factors, they are not conclusive.

Three commenters opposed the statutory 3,000 numerical limitation.

Some commenters requested more specific criteria on when a group of

3,000 or more would be approved as an addition to an existing multiple

common bond credit union. The Board believes that such an addition is

determined on a case-by-case basis consistent with the statutory

requirements. NCUA will look at the size of the group (is the group

100,000 or 3,000), desires of the group, the volunteers and resources

to support the efficient and effective operations of the credit union,

whether the group meets the economic advisability criteria and the

demographics of the group. A few commenters asked whether a letter from

the CEO of the company stating that it does not wish to form a new

credit union and does not have volunteers and

[[Page 72011]]

resources to start a new credit union is sufficient. Although such a

letter is persuasive evidence, NCUA will look at the totality of the

evidence surrounding the request.

Documentation Requirements. The proposal set forth the

documentation requirements to add a select group and NCUA's procedures

for amending the field of membership. One commenter believed that NCUA

should not require a letter from an authorized representative of the

group to be added. This commenter suggested that if the credit union

cannot get a letter from an authorized representative that a petition

from the group should be acceptable. NCUA agrees and the final rule

allows the regional director to accept other documentation as

appropriate.

Streamlined Procedures. Seventy-three commenters requested NCUA

adopt a streamlined application program for the addition of small

employee groups. Two commenters did not support a streamlined approach.

Twenty commenters requested that NCUA reinstate the Streamlined

Expansion Procedure (SEP). The Board cannot reinstitute SEP because

CUMAA requires a written determination by NCUA before a group is added

to a credit union's field of membership. Three commenters stated that

groups added under SEP be included in the credit union's current

charter. The Board agrees and the SEP log will be made part of the

official credit union charter.

The Board has developed an expedited process for groups of 200 or

less primary potential members. Although a written determination

regarding the listed regulatory and statutory criteria is still

required, the processing of small groups will be accomplished more

expeditiously by the region through the use of the Form 4015-EZ.

Eighteen commenters requested that the regional director respond to

multiple common bond expansion requests within a specific time frame.

Although the Board is not setting a definitive time frame for rendering

a decision, it expects the regions to make a decision expeditiously

upon receipt of a completed application.

Distressed Designation. Under IRPS 94-1, a credit union could apply

for a distressed designation that eliminated certain field of

membership restrictions for the applicant credit union. No credit union

ever applied for the designation. Two commenters requested that NCUA

reinstitute the distressed designation so that a credit union could add

groups regardless of location or common bond. The Board does not

believe there is a need for such a policy. Additionally, the Board

believes that CUMAA does not provide NCUA with the latitude to

institute such a policy.

Corporate Restructuring. Due to a corporate restructuring of a

select group, a credit union may be required to request an amendment to

its field of membership if it wishes to continue to provide service to

that group. The Board proposed to permit a multiple common bond credit

union to retain in its field of membership a sold or spun-off group to

which it has been providing service, without regard to location, if the

original group is clearly identifiable and requests continued service.

The Board stated that it views this as a housekeeping amendment and not

a field of membership expansion. Eight commenters specifically

supported this position. Two commenters stated that the policy should

encourage a company to provide a signed letter requesting service but

that it doesn't need to be a requirement. Two commenters stated that in

a corporate restructuring no new overlap analysis is necessary. The

Board agrees with all these comments and will treat such corporate

restructuring amendment requests as a housekeeping amendment and no

overlap analysis is required. Furthermore, the Board is no longer

requiring a letter from the company requesting service. Finally, a name

change is not a corporate restructuring, but the credit union should

obtain a housekeeping amendment to update its charter.

Branching. Under IRPS 94-1, a credit union could justify a new

branch by adding groups within the branch's operational area as long as

a significant portion of the total number of persons to be served by

the facility when it opened were from the field of membership that

existed prior to adding the select groups. Although ``significant

portion'' of the field of membership was not defined, the intent behind

the policy was not to encourage federal credit unions to establish

branches simply for the purpose of adding groups. In practice, NCUA

viewed as few as 300 members to be a significant portion of the field

of membership for the purpose of branching. NCUA's current proposal

does not have any limitations on when and where a credit union could

branch. Hypothetically, a multiple common bond credit union could

branch in an area where it has no current members. One commenter

disagreed with this provision and stated credit unions can only branch

where they have existing members. Seven commenters requested that NCUA

allow groups to be added to a credit union's field of membership before

they even establish a service facility in the area. Although the Board

does not have many restrictions on branching, the Board does not agree

with these commenters. The Board's view is that CUMAA requires a

service facility be established before a credit union adds a group not

currently within its service area. Groups cannot be added in

anticipation that a service facility will be established. That is, a

credit union that intends to expand into a geographical area not

currently served by the credit union, must first establish a service

facility. Once the service facility is established, then the credit

union can add groups that are within the service area of that service

facility.

Conversions. The proposal stated that a multiple common bond

federal credit union may apply to convert to another type of charter

provided the field of membership requirements of the new charter type

are met. Groups that do not qualify in the new charter type cannot be

served, only members of record from those groups. Furthermore, the

Board has established a process for multiple common bond credit unions

converting to single common bond credit unions. One such requirement

would not permit the credit union to convert to another type of

charter, except a community charter, for 3 years after approval, unless

the regional director determines that a charter conversion is necessary

to resolve safety and soundness concerns. Additionally, the credit

union must notify the groups that will no longer be served. This

notification requirement also applies to single common bond credit

unions converting to community charters. Community credit unions

converting to single or multiple common bond charters are exempt from

the notification requirements.

One commenter suggested that groups acquired through an emergency

merger can continue to be served after the charter is converted. The

Board agrees and the final regulation exempts groups or communities

that were acquired through an emergency merger or purchase and

assumption agreements.

d. Community Charters

CUMAA requires that a community charter be based on ``a well-

defined local community, neighborhood, or rural district.'' The Board

set forth the following requirements for a community charter:

The geographic area's boundaries must be clearly defined;

The charter applicant must establish that the area is a

well-defined ``local community, neighborhood, or rural district;'' and

The residents must have common interests or interact.

[[Page 72012]]

The Board proposed that ``well-defined'' means the proposed area

has specific geographic boundaries. The Board also stated that a

``local community, neighborhood, or rural district'' encompasses

several factors including interaction and/or common interests. Although

the proposal did not precisely define interaction or common interests,

it did suggest that a greater burden needs to be met when either the

geographic size or the population of the area is large. The Board

stated that in determining interaction and/or common interests, a

number of factors become relevant. For example, the existence of a

single major trade area, shared governmental facilities, local

festivals, area newspapers, among others, would be significant indicia

of community interaction and/or common interests. Conversely, an area

which has numerous trade areas, multiple taxing authorities, or

multiple political jurisdictions would tend to diminish the factors

that demonstrate the existence of a local community, neighborhood or

rural district.

Comments. It was clear that many of the commenters confused the

standard community chartering policy with the requirements for a

streamlined approach to obtaining a community charter. Thirty-five

commenters stated that NCUA's approach to the definition of ``local

community'' provides sufficient guidance for credit unions that might

be seeking a community charter. Seven commenters specifically approved

of the requirement that the residents of the proposed community either

interact or have common interests. One commenter requested further

standards for interaction. One commenter opposed the interaction and

common interest standards. One commenter stated that the interaction

requirement does not take into account sparsely populated rural areas.

One commenter encouraged the Board to strengthen the language in the

final rule that concentrates on interaction and confluence of interest

within an area as the most important test of whether the requirements

for a community have been met, rather than the size of any particular

area. A number of commenters provided suggested definitions for a local

community.

Six commenters stated that NCUA's community policy should be

flexible for sparsely populated areas. For example, these commenters

stated that a rural multiple-county area should be considered a local

community. Two commenters stated that the definition needs to be

flexible when drawing the boundaries of a well-defined community. A few

commenters suggested that the Board should recognize that what

constitutes a community in California might be significantly different

from what constitutes a community in South Carolina or Alaska.

Thirteen commenters disagreed with NCUA's approach to the

definition of ``local community.'' Five commenters stated the

definition is too restrictive. Four commenters stated NCUA's definition

of local community needs to be more specific. Three commenters stated

that large metropolitan cities should be considered as local

communities. One commenter stated that a state might qualify as a local

community. Two commenters stated that multiple counties should not

constitute a local community.

NCUA Board Analysis and Decision on Community Charters. CUMAA

modified NCUA's community chartering policy. It requires that a

community charter be based on ``a well-defined local community,

neighborhood, or rural district.'' Although Congress did not provide

specific guidance on what constituted a ``local community, neighborhood

or rural district,'' the Board concluded that the addition of the word

``local'' to the previous statutory language was intended as a limiting

factor and that additional clarification was required relative to what

would qualify as a community charter. The Board further concluded that

a more circumspect and restricted approach to chartering community

credit unions appeared to be the congressional intent. Accordingly,

recognizing that ``local'' was a limiting factor, NCUA staff reviewed

those community charter applications approved by the Board in the last

three years in an effort to more narrowly define what will constitute a

community charter based not only on operational feasibility, but also

historical data that tended to support whether a particular well-

defined area would qualify as a local community, neighborhood or rural

district.

Although the proposal did not completely define interaction or

common interests, the Board stated that in determining interaction and/

or common interests, a number of factors, are relevant. The Board

continues to believe those factors remain valid. These factors are

limiting in the sense that they clearly require a community charter

applicant proposing to serve multiple trade areas, etc., to demonstrate

more definitively how it meets the local requirement. The Board

believes that increased documentation requirements need to be met when

either the geographic size or the population of the area is large.

The Board stated that, in general, a large population in a small

geographic area or a small population in a large geographic area, may

meet community chartering requirements. Conversely, the Board stated

that a large population in a large geographic area will not normally

meet community chartering requirements. In so doing, however, the Board

has not summarily dismissed or prejudged any potential application.

While an area with a large population may require additional

documentation, it still may meet the definition of a local community.

Similarly, multiple counties, particularly in rural areas, may qualify

for a community charter.

One commenter stated, ``[t]herefore, no geographic size area and no

population size is ruled out--all are fair game, subject only to NCUA's

discretion. So, effectively, there is no geographic or population size

limitation for the chartering of community credit unions in the NCUA

proposal.'' The commenter correctly interpreted the proposal relative

to geographic and size limitations, but failed to acknowledge the

overriding requirement that, regardless of the size, the proposed

community area must meet the ``local'' standard that Congress directed

NCUA to develop. NCUA's responsibility is to review community charter

applications to ensure this statutory requirement is satisfied.

Accordingly, the Board believes the proposed definition properly

incorporates the congressional intent with the need to provide

opportunities for community charters. Except for the addition of some

clarifying language, the Board is adopting the proposed policy in

final.

Two commenters asked if multiple but separate, well-defined areas

could comprise a local community charter. This is not statutorily

permitted. The entire area must be a single well-defined location. Two,

noncontiguous, well-defined areas cannot be the basis for a community

charter.

The Board also stated that a low-income area meeting the low-income

definition found in Section 701.34 of NCUA's Regulations has many of

the common characteristics and demographics of a local community, and

generally lacks the basic financial services found in more affluent

communities. 12 CFR 701.34. The Board proposed that, when reviewing

low-income community charter applications, NCUA's documentation

requirements would be more flexible and fewer documentation

requirements would be required than for a standard community charter

package. There was no significant objection to this provision.

[[Page 72013]]

The Board is adopting this proposal in the final regulation.

Presumptive Community. The Board also proposed a streamlined

community chartering process for a well-defined local community,

neighborhood, or rural district where the area to be served is a

recognized political jurisdiction, not greater than a county or its

equivalent, and the population of the requested well-defined area does

not exceed 300,000. The Board stated that, generally, the single

jurisdiction will most often coincide with a county, or its political

equivalent. Multiple contiguous smaller political subdivisions within a

county or its equivalent, such as a city, township or a school

district, would also qualify under this proposal. The Board proposed

that for this type of community charter, the applicant must only submit

a letter demonstrating how the area meets the indicia for community

interaction or common interests. In addition, the applicant would have

to provide evidence of the political jurisdiction and size of the

population.

The Board further stated that, at its discretion, NCUA may request

more documentation demonstrating the area is a well-defined local

community, neighborhood, or rural district. If the requested area is

not a single political jurisdiction or exceeds 300,000, more detailed

documentation would have to be provided to support that the proposed

area is a well-defined local community, neighborhood or rural district.

The Board also stated that community charters were not limited to a

recognized single political jurisdiction, or to a proposed area where

the population is 300,000 or less. Simply, additional documentation, as

required for standard community charters, would be required if the

proposed community charter exceeds an area greater than a county or

300,000 in population. In other words, the definition of local

community may include not only those that qualify under the presumptive

factor, but also other local well-defined areas meeting the community

charter requirements. The Board specifically requested comment as to

whether a streamlined approach for community charter approval is

appropriate and, if so, in accordance with what criteria.

Comments. As stated earlier, many commenters confused the

presumptive community with the standard community chartering policies.

Again, a local community is not limited to a single political

jurisdiction with a population of 300,000 or less.

Thirty-eight commenters approved of the limited documentation

requirements for community charter applications that are within a

single political jurisdiction and have 300,000 or less in population.

One commenter stated that the size of the population should not matter

and that the streamlined procedure should be available for any

community charter request that does not exceed a single political

jurisdiction not larger than a county or its political equivalent.

Nineteen commenters suggested that other types of communities should

also have limited documentation requirements, with many of these

commenters stating that multiple counties should also be a part of the

streamlined documentation requirements. Two commenters stated, that if

the community consists of multiple counties, then NCUA should lower the

population requirements.

Six commenters suggested a higher population threshold. One

commenter suggested that the population size be increased to 500,000.

Two commenters suggested that the population size be increased to one

million. One commenter stated that the population size should be up to

one million and include multiple counties. Six commenters would

eliminate any population size. Sixteen commenters generally disapproved

of the streamlined approach as proposed. Two of these commenters stated

that the population size and political jurisdiction should simply be

taken into account when considering the application but should not be

the deciding factors. Some commenters were opposed to the 300,000 limit

for a streamlined approach either because the number was too large or

too small.

One commenter wondered whether it was a concern if the proposed

community area was located in two different states. It depends on the

facts but, conceptually, a community could cross political

jurisdictional boundaries and still qualify for the streamlined

approach. For example, a town that is in parts of two counties and has

a population 300,000 or less would qualify for the streamlined

approach.

NCUA Board Analysis and Decision on Presumptive Community. The NCUA

Board is adopting the presumptive community as initially proposed.

Additionally, the Board is adopting a second method based on multiple

contiguous counties or multiple political subdivisions thereof with a

lesser population threshold by which a presumptive community can be

established. As to the initial proposal, the Board is limiting the

streamlined approach to communities contained in a single political

jurisdiction where the population does not exceed 300,000. The Board is

not raising the population threshold because experience has

demonstrated that a single political jurisdiction of this size, or

less, has the normal indicia for community chartering.

Relative to the second method, the Board is also of the opinion

that multiple contiguous counties, or multiple political subdivisions

thereof, will most likely have the normal indicia for community

chartering, particularly in rural localities, if the population of the

well defined area does not exceed 200,000. In both instances the

presumption is rebuttable, and the regional directors may require

additional evidence to support the local community, neighborhood or

rural district criteria. The Board may revisit this issue in the future

if more experience with larger communities is obtained by NCUA.

In setting forth the example of a ``county'' with a population of

300,000 or less as a presumptive community, the Board was simply

providing guidance and setting a maximum geographic limit for the

streamlined process. A state or a congressional district would not

qualify for a presumptive community. However, for purposes of the

streamlined approach, a political jurisdiction that is less than a

county would qualify. For example, a municipality or a city would

qualify as a single political jurisdiction for the streamlined approach

if the population of the municipality or city does not exceed 300,000.

Some commenters asked for NCUA's rationale for establishing the

presumptive community at 300,000. The Board's rationale for this number

is based on the Board's review of its historical actions in granting

community charters. In every case where the community was 300,000 or

less and contained in a single political jurisdiction, the Board found

that the particular area would qualify as a local community,

neighborhood or rural district.

Credit Unions Converting to Community Charters. The Board stated

that a credit union converting to a community charter must contact all

federally insured credit unions in the area regarding the potential

overlap. A few commenters requested that this requirement be eliminated

due to the burden placed on the community credit union. The Board

agrees, and it is no longer required.

The Board stated that a credit union that converts to a community

charter may continue to serve existing members

[[Page 72014]]

of the credit union who are not within the community, under the

statutory provision that once a person becomes a credit union member,

he or she can remain a member. However, the Board stated that a

community credit union would not be able to add new members from those

groups in the previous field of membership that are outside the

community boundaries or add new groups outside the community

boundaries. Members of record, outside the community boundaries, could

still be served by the community charter. Three commenters approved of

NCUA's position. Twenty commenters requested that all groups outside

the community boundary should continue to be served by the community

credit union. Two commenters requested that, in a conversion to a

community charter, NCUA permit the credit union to continue to serve

its original sponsor even if the original sponsor is outside the

community boundaries. The Board believes that when a credit union

converts to a community charter it should serve the community and not

select groups. Serving groups outside the community boundaries is not

indicative of a community charter. The only exception is for groups

obtained through an emergency merger or emergency purchase and

assumption. The grandfather provision in CUMAA is not applicable since

the credit union has changed its charter type.

The proposed rule on community charters specified that

``[c]ommunity credit unions will be expected to follow, to the fullest

extent economically possible, the marketing and/or business plan

submitted with their application. The 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.'' Four commenters believed

this requirement is reasonable. Six commenters stated that, in

reviewing a community credit union's business plan, NCUA should

consider the credit union's good faith efforts to comply with its plan

and not just focus on the extent to which the credit union is achieving

the plan. Thirteen commenters strongly objected to the inclusion of

this language, particularly the reference to membership and loan

penetration rates. It is their position that the language would impose

Community Reinvestment Act (CRA) standards, and that Congress clearly

has had no such intent. When this language was first developed in 1997,

it was not the intent to impose CRA standards. The intent was to simply

outline the expectation that community charters are chartered to serve

the entire community, just like any other charter type should attempt

to serve their field of membership, and not a portion of the approved

well-defined area, and that the business plans should reflect this

goal. That is the nature of a community charter. Finally, with respect

to the proposed language, it was never intended that additional

examination or supervisory controls would be required. At the time this

language was under consideration, there was considerable evidence that

the number of community charter applications would increase due to the

adverse court rulings. Again, the objective was to reiterate that

community charters should make every effort to serve the community, and

not just those groups already in the converting credit union's field of

membership. However, to further clarify the Board's position, the Board

has modified the language to read as follows: ``Community credit unions

will be expected to regularly review and to follow, to the fullest

extent economically possible, the marketing and business plan submitted

with their application.''

Mergers. The proposal stated that a community credit union cannot

merge into a multiple common bond credit union except in an emergency

merger. Three commenters stated that a community charter should be

allowed to merge with a multiple common bond credit union. It remains

the Board's view that community charters should not be allowed to merge

into multiple common bond charters, absent emergency merger criteria.

If a multiple common bond credit union merges into a community charter,

the community charter may only serve new members of groups that are

located within the community charter boundaries. Of course, the

continuing credit union can retain members of record under the ``once a

member, always a member'' policy.

Applications In Process. The Board has determined that all

community charter applications that were submitted prior to August 7,

1998, and are still outstanding, must be finally submitted with all

required documentation to the regions by June 30, 1999, in order to be

processed pursuant to the community policies set forth in IRPS 94-1. If

a completed community charter application package is not received by

the regions by June 30, 1999, then it will be necessary to process the

application consistent with IRPS 99-1.

e. Changes Applicable to All Federal Credit Unions

Removal of Groups. The proposal set forth the procedures for a

credit union, with NCUA approval, to remove groups from a credit

union's field of membership. One commenter stated that this section

needed to be clarified so that, if a group is removed from a credit

union's field of membership, current members retain membership. The

Board agrees. If a group is removed from a credit union's field of

membership, current members retain membership under the ``once a

member, always a member'' policy. This rationale applies to all charter

types.

Appeal Procedures. The regulation sets forth certain appeal

procedures. Unless the credit union is requesting reconsideration, it

has 60 days to appeal a denial. One commenter requested 90 days to

appeal and 60 days to provide supplemental information in a

reconsideration. Two commenters asked how long NCUA has to respond to

an appeal and one of these commenters stated that the appeal process

favors NCUA.

The Board believes that a 60-day time frame gives the credit union

sufficient time to appeal the region's determination. The Board's

recent experience leads it to believe flexibility is necessary in

deciding appeals. Although the appealing credit union may want an

expeditious decision, most importantly, it wants a correct decision.

The Board, therefore, is not setting a definitive time frame for

rendering a decision on appeal, but will attempt to notify the

appellant any time a decision cannot be reached within 90 days. The

Board is cognizant of the need for an appellant to receive a decision

as soon as reasonably possible. Accordingly, every effort will be made

to expeditiously process and consider all appeals.

In general, credit unions can appeal adverse decisions by the

regional director, including decisions regarding exclusionary clauses.

Except for this modification regarding exclusionary clauses, the Board

is adopting the proposal in final.

Emergency Mergers. The Board issued clarifying language regarding

emergency mergers and purchase and assumption agreements for

occupational, associational and community charters. Among other minor

modifications, the Board proposed to remove the 12 month period within

which insolvency must occur, since it is not required by the FCUA. One

commenter approved of this entire provision. One commenter approved of

the removal of the 12

[[Page 72015]]

month insolvency period. One commenter requested that a multiple common

bond or single common bond credit union that takes in a community area

as the result of an emergency merger or purchase and assumption should

be able to expand the community portion of its charter. The Board

disagrees with this suggestion and is adopting a policy that community

fields of membership acquired through emergency mergers cannot be the

basis of an expansion since the character of the acquiring credit union

has not changed. The Board is adopting the proposed emergency merger

provisions in final and would like to emphasize that, in the coming

year, consistent with legal advice, credit unions not making acceptable

progress in becoming Y2K compliant may be determined to have serious

and persistent operational problems requiring expeditious action.

Once a Member Always a Member. CUMAA permits any person or

organization, who is a member of any federal credit union at the date

of enactment, unless expelled under Section 118 of the FCUA, to

maintain membership in the credit union. This provision codifies the

``once a member, always a member'' policy. The Act also permits a

member, or subsequent new member, of any group whose members

constituted a portion of the membership of any federal credit union at

the date of enactment, to continue to be eligible for membership in the

credit union. For example, an employee of a select group who was

eligible for membership prior to August 7, 1998, but did not join the

credit union, is still eligible to join the credit union. This also

applies to new employees hired subsequent to the date of enactment.

Twelve commenters approved of the ``once a member, always a member''

policy.

Twenty-five commenters disapproved of the proposed ``once a member,

always a member'' policy. Several commenters discussed the practice of

some larger corporations, which provide sizable support for their

employee's credit union, and view membership in the credit union as a

company benefit. In other words, if an employee leaves the employ of

the company, the credit union also terminates the individual's

membership. These commenters believed CUMAA would allow continuation of

this practice. The observation was made that a credit union should be

able to divest members that have left the employment of the sponsor if

that is what the sponsor desires. The Board does not concur with this

observation. The Board's view is that Congress established a permanent

membership relationship with the credit union, and unless a member is

expelled under the provisions of Section 118 in this Act, membership

cannot be unilaterally terminated by the credit union. However, the

commenters raise a legitimate operational concern. To address this

issue, the Board determined that a credit union can limit the services

to members in those situations where membership would conflict with

sponsor policy and who are no longer in the field of membership. While

membership is retained, the delivery of member services can be

qualified. It is anticipated that this approach will adequately address

the problem.

Grandfather Provision. Section 101 of CUMAA established that

membership is grandfathered for persons: (1) in a single common bond

credit union; and (2) in groups comprising multiple common bond credit

unions as of the time of passage of the Act. It also indicates, that

where the groups comprising either the single or multiple common bond

credit unions are defined by any particular organization or business

entity, the grandfather provisions will ``continue to apply with

respect to any successor to the organization or entity.'' One commenter

stated that the final rule should state that successors are

automatically grandfathered and the statutory mandate is self-

executing. The Board does not believe that this provision is self-

executing. The regional director must still approve the housekeeping

amendment in the charter. Except for documentation from the credit

union explaining the new organizational structure, no further

documentation will be required. However, for credit unions undergoing a

charter conversion, once the charter type is converted, the protection

provided by the grandfather provision no longer applies.

III. Chapter 3 of the Chartering Manual

The Board proposed a separate chapter setting forth special

policies for low-income credit unions and special chartering policies

for underserved areas. The Board's intent was to encourage the

formation of new credit unions and the expansion of existing credit

unions into underserved and low-income areas.

One commenter supported NCUA's proposals concerning the chartering

of low-income credit unions. One commenter requested a new definition

of low-income credit unions. The Board believes the current definition

of low-income is satisfactory.

CUMAA authorizes credit union service to people of modest means.

This is particularly evident with the addition of underserved areas to

the field of membership of a federal credit union with the approval of

NCUA. The legislation defines an underserved area as a local community,

neighborhood, or rural district that is an ``investment area'' as

defined in Section 103(16) of the Community Development Banking and

Financial Institutions Act of 1994. A credit union adding an

underserved area must establish a service facility in the area.

An investment area includes any of the following:

An area encompassed or located in an Empowerment Zone or

Enterprise Community designated under section 1391 or the Internal

Revenue Code of 1996 (26 U.S.C. 1391);

An area where the percentage of the population living in

poverty is at least 20 percent and the area has significant unmet needs

for loans or equity investments;

An area in a Metropolitan Area where the median family

income is at or below 80 percent of the Metropolitan Area median family

income or the national Metropolitan Area median family income,

whichever is greater; and the area has significant unmet needs for

loans or equity investments;

An area outside of a Metropolitan Area, where the median

family income is at or below 80 percent of the statewide non-

Metropolitan Area median family income or the national non-Metropolitan

Area median family income, whichever is greater; and the area has

significant unmet needs for loans or equity investments;

An area where the unemployment rate is at least 1.5 times

the national average and the area has significant unmet needs for loans

or equity investments;

An area where the percentage of occupied distressed

housing (as indicated by lack of complete plumbing and occupancy of

more than one person per room) is at least 20 percent and the area has

significant unmet needs for loans or equity investments;

An area located outside of a Metropolitan Area with a

county population loss between 1980 and 1990 of at least 10 percent and

the area has significant unmet needs for loans or equity investments.

Three commenters completely supported the proposal. One commenter

supported NCUA's definition of an underserved area. Three commenters

objected to placing a service facility in an underserved area that is

added to the credit union's field of membership. The definition of an

underserved area and the service facility requirement are statutory and

are incorporated into the

[[Page 72016]]

final rule. A few commenters requested that an ATM be treated as a

service facility. The legislative history of CUMAA clearly indicates

that for this provision an ATM is not a service facility.

Two commenters believed NCUA should define service facility in this

section to include a credit union's commitment to regular hours on a

periodic basis at a local facility, such as a church or community

center. The Board agrees with this comment and has incorporated it into

the final regulation. One commenter requested that the Board provide an

example of an area having ``significant unmet needs for loans or equity

investments.'' An example of ``significant unmet needs for loans or

equity investments'' is an area where there are few financial

institutions or a high ratio of residents in relation to traditional

financial institutions.

Although the new legislation specifically authorizes flexible

policies regarding multiple common bond credit unions providing service

to underserved areas, the Board has determined that previous agency

policies allowing similar service to poor and disadvantaged areas

should continue. Accordingly, the Board stated that the criteria

established for multiple common bond credit unions would also apply to

single occupational, single associational, and community credit unions

desiring to serve underserved areas. Thirteen commenters approved of

NCUA's decision to allow all types of credit union's to serve

underserved areas. The proposal has been adopted in the final

regulation.

The proposal stated that federal credit unions adding the

underserved community must first develop a business plan on how it will

serve the community and that NCUA would require periodic reviews on how

the credit union is serving the community. Four commenters stated that

to encourage credit unions to add underserved areas to their field of

membership, NCUA should avoid requiring burdensome reporting

requirements to credit unions attempting to service the

``underserved.'' These commenters stated that requiring loan

penetration rate and other community statistical information may

discourage credit unions from pursuing that important sector of the

market. The Board agrees. However, the Board believes it is necessary

first to have a business plan to address how financial services will be

provided to an underserved areas. Although not required by regulation,

the regional director may require periodic service status reports from

a credit union about the underserved area to ensure that the needs of

the underserved area being met as well as requiring reports before NCUA

allows a federal credit union to add an additional underserved area.

Although one commenter requested public hearings before adding an

underserved area, the Board believes such a requirement will simply add

another bureaucratic hurdle and impede service to the underserved.

One commenter questioned why a credit union that adds an

underserved area cannot participate in the Community Development

Revolving Loan Program (CDRLP). One commenter requested that the final

rule state that a credit union that adds an underserved area cannot

participate in the CDRLP. One commenter suggested that providing

service to an underserved area does not equate to a low-income

designation. Only a credit union with a low-income designation may

participate in the CDRLP under NCUA Regulations and the FCUA. If a

credit union that adds an underserved area qualifies for a low-income

designation, it may apply for the designation and be entitled to the

benefits of the CDRLP, and the Board encourages eligible credit unions

to do so.

Chapter 3 also permitted any multiple common bond credit union to

add a low-income association to its field of membership, if all members

of the association meet NCUA's definition of low-income. One commenter

stated that NCUA should not require that all members of this type of

association be low-income. The Board disagrees with this comment.

Because a low-income association has limited common bond requirements,

changing its membership criteria may invite abuse and vitiate the

Board's intent to allow credit unions to serve low-income people.

IV. Chapter 4 of the Chartering Manual

This chapter discusses the requirements and procedures for

conversion of a state credit union to a federal credit union and

conversion of a federal credit union to a state credit union. The

proposed policy for charter conversions was basically the same as

current policy. The major change concerned changing the credit union's

name on all signs, records, accounts, investments, stationery and other

documents. The proposal allowed credit unions to have 180 days from the

effective date of the conversion to change its signage and promotional

material. The credit union would be able to reissue, with its new name,

its outstanding debit cards, ATM cards, credit cards, at the time of

renewal. Share drafts with the credit union's name could be used by the

member until depleted. This proposal would apply to both types of

conversions, state-to-federal and federal-to-state. Under the proposal,

if the state credit union is not federally insured, it must change its

name and must immediately cease using any credit union documents

referencing federal insurance and a federal name, including checks and

credit cards.

Four commenters supported all of the provisions in this chapter.

One commenter requested a one year time frame to convert signage,

promotional materials, etc. One commenter requested that the regional

director have the authority to extend the time frame. The Board

believes the current time frames are adequate but has provided the

regional director with the discretion to extend the time frame for an

additional 180 days.

One commenter requested NCUA to exempt converting state credit

unions, whose fields of membership do not conform to federal standards,

from compliance with NCUA's community charter requirements. The Board

believes that this is not permitted under CUMAA. One commenter stated

that a state charter converting to a federal charter should be able to

continue to serve all of its existing members under the ``once a

member, always a member'' policy. The Board agrees with this commenter

and a credit union converting to a federal charter can continue to

serve members of record after the date of conversion.

One commenter stated that this section should address conversion to

a thrift or bank and provide citations to that information. Thrift and

bank conversions are addressed in Section 708a of NCUA's Regulations.

12 CFR 708a.

V. Glossary

Three commenters commended NCUA for removing the definition of

``secondary member'' from the glossary. The Board has decided that

there is no longer a need for this term and it will not be included in

the glossary of the final manual. Nine commenters recommended NCUA also

remove the definition of ``primary member'' from the glossary and any

other references to it in the final regulation. The Board believes the

term ``primary potential member'' is useful when addressing the issue

of economic advisability and select group additions and, therefore, is

not deleting the reference.

[[Page 72017]]

VI. Effective Date

One commenter requested that the manual be made effective six

months after publication so that credit unions would have an equitable

opportunity to apply for select group expansions, instead of a first-

come, first serve approach. The Board is establishing January 1, 1999,

as the effective date for this regulation, except for the definitions

of ``immediate family member or household'' and ``well-defined local

community, neighborhood or rural district,'' which Congress has

designated as major rules. The major rules are effective March 5, 1999.

The law contemplates an effective date at least 60 days after

publication or submission to Congress for major rule provisions. This

serves the public interest by providing all parties, including

Congress, an opportunity to review and analyze these provisions prior

to their effective date. The Board believes that credit unions are

continuing to be harmed by the inability to add new groups and any

benefit of delaying the effective date is outweighed by the harm to

credit unions. Accordingly, the Board for good cause, finds that

pursuant to 5 U.S.C. 553(d)(3) the rule shall be effective on January

1, 1999 and without 30 days advance notice of publication.

VII. General Comments on the Format of the Manual

The Board believed the new format of the manual would be more user-

friendly by making information easier to locate. Ten commenters stated

that the format of the manual is better and easier to read. Three

commenters commended NCUA for a well written proposal. Two commenters

commended NCUA for the comprehensiveness and clarity of the proposal. A

few commenters recommended consolidating parts of the manual. Two

commenters believed the format was difficult to use and recommended a

revision. A frequent criticism of the previous chartering manual was

that it was difficult to locate information quickly about a particular

topic as it related to the different types of charters. To eliminate

this problem and to ensure that each section was ``self contained,''

the manual segregates each type of charter into sections and addresses

all the various issues that may affect that charter type. In so doing,

some of the information applicable to all types of charters is repeated

in the different sections. Naturally, in repeating similar information,

the actual length of the manual is increased.

However, for the general public or the casual user, it makes for a

more user-friendly document and facilitates research on the various

types of charters.

VIII. Miscellaneous Comments

There were several comments received that did not directly address

specific issues in the manual. One commenter questioned whether NCUA

will change charters that do not meet the requirements of this

proposal. NCUA will not apply this regulation retroactively. CUMAA

grandfathered current credit union members and groups. However, NCUA

encourages credit unions to examine and update their charters because

it will be important for future credit union expansions or mergers. It

is always important for a credit union to maintain an accurate and

updated charter to ensure that it serve all eligible groups.

Two commenters are concerned that the proposed manual does not

include any specific enforcement provisions, examination procedures or

language that addresses the remedies for interested parties in the

event that a credit union allegedly fails to adhere to the provisions

of the manual. The Board believes that the normal examination

procedures should be used to ensure compliance with the regulation. If

a violation is discovered and cannot be handled at the regional level,

appropriate enforcement actions as set forth in NCUA's Regulations and

the FCUA will be initiated by the Board.

Two commenters requested that NCUA set forth procedures for

chartering a credit union for the primary purpose of making business

loans. A new credit union that wishes to be chartered for this purpose

will have it included in its charter if the regional director agrees

that the credit union can carry out that objective.

As a general observation, IRPS 99-1 applies only to federal credit

unions, unless otherwise specified.

IX. Comments From Banks and Bank Trade Organizations

Briefly summarized, the bank commenters argued that NCUA did not

interpret CUMAA correctly and that federal credit unions should be

subject to taxation like banks. In general, these commenters opposed

the definition of occupational common bond, reasonable proximity,

service facility, local community, the streamlined approach for

community charters with populations of 300,000 or less in a single

political jurisdiction, capital adequacy and the definition of low-

income credit unions. Some of these commenters supported NCUA's

definition of ``immediate family members'' while others opposed it.

Most of the commenters believe NCUA's definitions and standards are

vague and lack clarity. In general these commenters argued that the

proposal defeats the concept of ``meaningful affinity'' found in CUMAA.

The Board has considered all issues raised by these commenters and

has previously addressed the major issues in this preamble since other

commenters also opposed many of the same provisions. As to the question

of taxation, this issue was legislatively addressed in CUMAA at Section

2.(4), which states that ``[c]redit unions, unlike many other

participants in the financial services market, are exempt from Federal

and most State taxes. . . .''

Finally, many of the commenters stated that the proposed regulation

does nothing to encourage the formation of separate credit unions to

serve groups of fewer than 3,000 persons. The Board strongly disagrees

with this comment. In fact, it is the Board's intent that any group

that can meet the economic advisability requirements, should form its

own credit union. The Board has simply established criteria that

provides guidance based on historical experience relative to those

groups that may have the best opportunity to succeed. Every effort will

be made to encourage new charters, but operational feasibility and

requirements are valid factors and cannot be ignored in the decision

making process.

G. 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 final rule 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 previously determined that several requirements of this

final rule constitute collections of information under the Paperwork

Reduction Act. The requirements are that federal credit unions: (1)

complete a charter application or conversion application; and (2)

provide written requests for changes in a credit union's field of

membership. These documents are necessary to ensure the safety and

soundness of credit unions as well as

[[Page 72018]]

ensuring that the legal requirements of the Act have been met. Other

aspects of this final rule reduce the paperwork requirements from the

current rule.

It is NCUA's view that some aspects of the time it takes a credit

union to complete a charter application, charter amendment, or a

community conversion or expansion application is not a burden created

by this regulation but is the usual and customary practice in the

normal operations of a business entity. However, NCUA estimated that it

should take a credit union an average of 80 hours to develop a written

charter or conversion request. NCUA estimates that it will receive 80

charter or conversion requests in any given year. The annual reporting

burden would be 6,400 hours to comply with this requirement. NCUA also

estimates that it should take a credit union an average of two hours to

provide a written request for changes in a credit union's field of

membership. NCUA estimates that it will receive 9,000 of these requests

in any given year. The annual reporting burden would be 18,000 hours to

comply with this requirement. The total annual burden hours imposed by

the proposed rule is 24,400 hours. Two commenters stated that the

average of 80 hours to develop a charter conversion package was an

insufficient amount of time. The commenters seem to confuse paperwork

requirements with oral communications between the credit union and the

region. The Board disagrees with the commenters' analysis and believes,

on average, this time is sufficient. Furthermore, the Board believes

the number of community charter conversions requests and select group

expansion request is an accurate estimation.

The reporting requirements in IRPS 99-1 have been submitted to the

Office of Management and Budget for approval and the OMB number will be

published as soon as it received by NCUA. Under the Paperwork Reduction

Act of 1995, no persons are required to respond to a collection of

information unless it displays a valid OMB control number. The control

number will be displayed in the table at 12 CFR 795.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. This final rule makes no significant

changes with respect to state credit unions and therefore, will not

materially affect state interests.

Congressional Review

Congress, by statute, has determined that NCUA's definition of

``immediate family or household'' as well as NCUA's definition of a

``well-defined local community, neighborhood, or rural district,''

shall be treated as a major rule for purposes of chapter 8 of title 5

United States Code. OMB has determined that the remaining provisions of

IRPS 99-1 do not constitute a major rule.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board on December

17, and December 22, 1998.

Becky Baker,

Secretary of the Board.

Accordingly, NCUA amends 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 99-1, Chartering and

Field of Membership Policy. Copies may be obtained by contacting NCUA

at the address found in Sec. 790.2 of this chapter. The IRPS is

incorporated into this section.

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

3133-0015.)

IRPS 99-1--[Added]

Note: The text of the Interpretive Ruling and Policy Statement

(IRPS 99-1) does not appear in the Code of Federal Regulations.

3. IRPS 99-1 is added to read as follows:

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;

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.

[[Page 72019]]

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.

False statements on any of the required documentation filed in

obtaining a federal credit union charter may be grounds for federal

criminal prosecution.

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

determination that 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 regional 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 regional 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. This is particularly true for groups of 200

or less primary potential members. 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, com

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