# Organization and Operations of Federal Credit Unions

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A98-34032

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 30, 1998
- **Citation:** 63 FR 71998

## Text

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 i

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-34032. Public record. Not legal advice.