Organization and Operations of Federal Credit Unions; Underserved Areas (IRPS 08-2)

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AD48

Organization and Operations of Federal Credit Unions; Underserved Areas (IRPS 08-2)

AGENCY:

National Credit Union Administration (NCUA).

ACTION:

Final rule.

SUMMARY:

NCUA is adopting a final rule implementing four modifications to its Chartering and Field of Membership Manual to update and clarify the process of approving credit union service to “underserved areas.” First, the rule clarifies the procedure for establishing that an “underserved area” qualifies as a local community. Second, it makes explicit the process for applying the economic distress criteria that determine whether an area combining multiple geographic units is sufficiently “distressed” to qualify as “underserved.” Third, it updates the documentation and clarifies the scope requirements for demonstrating that a proposed area has “significant unmet needs” for loans and financial services. Finally, the rule utilizes data provided by NCUA on the location of depository institution facilities to determine whether an area is “underserved by other depository institutions” according to the presence of their facilities within the area.

DATES:

This rule is effective January 2, 2009.

FOR FURTHER INFORMATION CONTACT:

Michael J. McKenna, Deputy General Counsel; John K. Ianno, Associate General Counsel; or Steven W. Widerman, Trial Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314, or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

In this preamble, the version of Chapter 3, section III, of the Chartering and Field of Membership Manual, entitled “Service to Underserved Communities,” that is presently in effect is referred to as “the existing rule,” cited as “IRPS 06-1,” and located at 71 FR 36667 (June 28, 2006). The version of Chapter 3, section III, as modified in the proposed rule is referred to as “the proposed rule,” cited as “Prop. Rule,” and located at 73 FR 34366 (June 17, 2008). The version of Chapter 3, section III, adopted in this rule is referred to as “the final rule,” cited as “App. B, Ch. 3, § III.,” and located in Appendix B

infra.

The rest of the Chartering and Field of Membership Manual presently in effect (

i.e.

, other than Chapter 3, section III) is referred to in the preamble as “the Chartering Manual,” cited as “IRPS 03-1,” and published in Appendix B to the proposed rule, 73 FR at 34371

et seq.

I. Background

A. Authority To Serve Underserved Areas

1.

Credit Union Membership Access Act.

In 1998, Congress enacted the Credit Union Membership Access Act (“CUMAA”), Public Law 105-219, 112 Stat. 914 (1998), authorizing the NCUA Board to allow multiple common bond credit unions to serve members residing in “underserved areas,” provided the credit union establishes and maintains a facility there. 12 U.S.C. 1759(c)(2). For an area to be “underserved,” CUMAA requires the NCUA Board to determine that the area is: (1) A “local community” that (2) qualifies as an “investment area” as defined in the Community Development Banking and Financial Institutions Act of 1994 (“CDFI Act”),

id.

§ 4702(16), and (3) is “underserved * * * by other depository institutions.”

1

Id.

§ 1759(c)(2)(A). By incorporating the CDFI Act's definition of an “investment area,” CUMAA's “underserved area” authority also incorporated the regulations implementing that definition.

1

By definition, a “depository institution” is insured and includes credit unions. 12 U.S.C. 461(b)(1)(A)(iv).

The CDFI Act defines an “investment area” as a geographic area that, unless it is presently designated an Empowerment Zone or Enterprise Community,

2

“meets the objective criteria of economic distress developed by the [Community Development Financial Institutions] Fund” (“CDFI Fund” or “Fund”) and also “has significant unmet needs for loans or equity investments.”

Id.

§ 4702(16). By regulation, the CDFI Fund adopted a definition of “investment area” that established “criteria of economic distress” and implemented the “significant unmet needs” criterion. 12 CFR 1805.201(b)(3)(ii) (2008). The regulation dictates that “[a]n Investment Area shall meet specific geographic and other criteria” prescribed in the CDFI Fund's “investment area” definition.

Id.

§§ 1805.201(b)(3)(i), 1805.104(dd). Further, the regulation gives the Fund sole discretion to determine whether these criteria are fulfilled.

Id.

§ 1805.201(a)(5).

2

A proposed area that is currently designated an Empowerment Zone or Enterprise Community automatically qualifies as an “investment area”; no further “investment area” criteria must be met. 12 U.S.C. 4702(16)(B). Unexpired Empowerment Zones and Enterprise Communities are identified at:

http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/tour/index.cfm.

a “CDFI Worksheet” produced as explained

infra

by the “My CDFI Fund” Web site is not a reliable source for current Empowerment Zone or Enterprise Community designations.

2.

CDFI “Investment Area” Definition.

Under the CDFI Fund's distress criteria, a proposed “investment area's” location within or outside a designated Metropolitan Area (a “Metro” or “Non-Metro” area, respectively) determines the “geographic unit(s)” into which the area must be translated in order to apply the economic distress criteria.

Id.

§ 1805.104(ff). For a Metro area, the permissible geographic units are limited to: A census tract; a block group; and an American Indian or Alaskan Native area.

Id.

§ 1805.201(b)(3)(ii)(B). For a Non-Metro area, the permissible geographic units are limited to: “A county (or equivalent area); minor civil division that is a unit of local government; incorporated place; census tract; block numbering area; block group; and an American Indian or Alaskan Native area.”

Id.

The CDFI regulation designates as “distressed” a proposed area that meets the applicable economic distress criteria as reported by the most recent decennial U.S. Census.

Id.

§ 1805.201(b)(3)(ii)(D). How the distress criteria apply in each case depends on which geographic units are permitted (based on the area's designation as Metro or Non-Metro) and whether the area consists of a single geographic unit or multiple contiguous units. A Metro proposed area consisting of a single census tract, for example, must meet the distress criterion for either unemployment, poverty, or median family income.

Id.

§ 1805.201(b)(3)(ii)(D)(1) and (3). A Non-Metro proposed area consisting of a single county, for example, must meet the distress criterion for either unemployment, poverty, median family income or, if the area is a county, population loss or migration loss.

Id.

§ 1805.201(b)(3)(ii)(D)(1), (3), (4) and (5).

A proposed area consisting of

multiple contiguous

geographic units (

e.g.,

adjoining census tracts in a Metro area or adjoining counties in a Non-Metro area) may combine “distressed” and non-“distressed” units. However, that area must satisfy a population threshold requiring the “distressed” units—those that “together meet one of the [applicable distress] criteria”—to represent at least 85 percent of the area's total population (“85% population threshold”).

Id.

§ 1805.201(b)(3)(ii)(C)(2).

Finally, to qualify as an “investment area,” the proposed area also must “have significant unmet needs for loans or equity investments.” 12 U.S.C.

4702(16)(A)(ii). The CDFI regulation deems this criterion to be fulfilled when “a narrative analysis * * * adequately demonstrates a pattern of [such] unmet needs” within the proposed area. 12 CFR 1805.201(b)(3)(ii)(E).

3.

Chartering Manual.

Following the enactment of CUMAA in 1998, NCUA revised its Chartering Manual to implement its new authority to allow service to “underserved areas.”

Id.

§ 701.1 (1999). As then revised, Chapter 3, section III of the Chartering Manual incorporated the statutory definition of “underserved area,” including the then-existing CDFI “distress” criteria and the CUMAA criterion requiring the area to be “underserved by other depository institutions.” 63 FR 71998 (December 30, 1998). In the event of periodic revisions to the then-existing distress criteria, the Chartering Manual incorporated by reference revised or additional criteria that the CDFI Fund might adopt in the future. 67 FR 20013, 20017 (April 24, 2002).

B. Comments on Proposed Rule

The NCUA Board published its proposed rule (Interpretive Ruling and Policy Statement 08-2) updating and clarifying the process for approving service to “underserved areas,” with a 60-day comment period that closed on August 18, 2008. 73 FR 34366. NCUA received comments from 23 commenters in response to the proposed rule—nine were federally-chartered credit unions, two were state-chartered credit unions, eight were state credit union leagues, two were credit union industry trade associations, and two were banking industry trade associations. The comments from credit union industry participants were opposed to the proposed rule, while comments from banking industry trade associations supported it. The comments on the proposed rule are addressed below.

II. Discussion of Comments on Proposed Rule

A. Local Community

1.

“Local Community” Prerequisite.

To be eligible for approval as an “underserved area,” the rule requires a proposed area to qualify as a “local community, neighborhood or rural district” (“local community”). IRPS 06-1, 71 FR at 36670-36671. The proposed rule clarified, but did not alter, this requirement. It simply incorporated by reference the sections of the Chartering Manual (Ch. 2, sections V.A.1. and V.A.2.) where the existing “local community” criteria are located, replacing the rule's summary of those criteria. Prop. Rule, 73 FR at 34385, 34388.

Clarification of the “local community” prerequisite generated nine comments. The commenters insisted that interaction among residents of a proposed area is irrelevant to whether an area is “underserved” and, in fact, undermines the “underserved” concept; that being “underserved” in and of itself is evidence of sufficient interaction to bind the residents together as a “local community”; and that meeting the CDFI definition of an “investment area” establishes that an area is a “local community.” One commenter claimed that there is “neither a requirement in the statutes, nor in NCUA regulations” that an area must be a “local community.” The gist of these comments is that an area otherwise qualifying as “underserved” should not be subject to the “local community” definition that applies to a community charter.

What these comments overlook is that CUMAA expressly imposes the “local community” requirement as an independent criterion for approval as “underserved.” CUMAA authorizes a multiple common bond credit union to include in its field of membership (“FOM”) “any person

within a local, community, neighborhood or rural distr ict

if—(A) the Board determines that

the local, community, neighborhood or rural district

” otherwise meets CUMAA's definition of an “underserved area.” 12 U.S.C. 1759(c)(2)(A) (emphasis added). The final rule affirms this long-standing statutory requirement, modifying it only to incorporate by reference the “local community” criteria set forth in the Chartering Manual's chapter on community chartering. App. B, Ch. 3, § III.B.1.

2.

Supplemental Letter.

Under the Chartering Manual's chapter on community chartering, among the ways an area may qualify as a “local community” is if it either consists of multiple political jurisdictions with a total population of 500,000 or less, or is located within a Metropolitan Statistical Area (“MSA”) that has a population of 1 million or less (in either case a “multi-jurisdiction/MSA community”). IRPS 03-1, 73 FR at 34385. In such cases, the chapter on community chartering requires a credit union to submit a supplemental letter “describing how the area meets the standards for community interaction and/or common interests” within the proposed area.

3

Id.

In contrast, the Chartering Manual's chapter on “underserved areas” does not require an equivalent letter to establish that a proposed area is a multi-jurisdiction/MSA community. IRPS 06-1, 71 FR at 36670-36671.

3

There are two instances in when a credit union must provide a full analysis to establish that a proposed area is a well-defined “local community.” The first is when an area is unable to qualify as a community under either the “single political jurisdiction” criterion or the multi-jurisdiction/MSA criteria in section V.A.2. The second is when the area does qualify as a community under the multi-jurisdiction/MSA criteria, but the supplemental letter fails to present sufficient evidence of community interaction and/or common interests. IRPS 03-1, 73 FR at 34385.

The supplemental letter's purpose is to reinforce the “local community” criterion with qualitative evidence of interaction and common interests within the community. The proposed rule invited public comment on whether the letter is needed at all to fortify a multi-jurisdiction/MSA community in either the community chartering or “underserved area” contexts. Prop. Rule, 73 FR at 3467. The invitation to comment on the supplemental letter requirement attracted eleven comments—those who oppose the requirement in either context, and those who oppose extending it to proposed “underserved areas.” Among those who oppose the letter altogether, several commenters felt that it was unnecessarily burdensome, insisting that NCUA should assume responsibility for assembling qualitative evidence of interaction and common interests to support the multi-jurisdiction/MSA community. Another commenter pronounced the supplemental letter requirement redundant because it demands proof of what already is seemingly presumed, making the presumption conditional and thus not truly a presumption.

Among those who commented that “underserved areas” should remain exempt from the supplemental letter requirement, nearly all objected that it would be unnecessarily burdensome to comply. For that reason, one commenter suggested making the requirement optional for “underserved areas.” Another insisted that ensuring consistency with community charters does not justify burdening “underserved areas” that qualify as multi-jurisdiction/MSA communities. Yet another predicted that equalizing the burden between community charters and “underserved areas” would encourage credit unions to choose conversion to a community charter over adding an “underserved area.” Concerned primarily with uniformity, one commenter recommended an all-or-none approach: Either require the supplemental letter for multi-

jurisdiction/MSA communities in both the community charter and “underserved area” contexts or require it in neither. These objections raised the issue of whether the burden of submitting a supplemental letter is justified to support the approval of a multi-jurisdiction/MSA community as “underserved.”

CUMAA imposes the “local community” criterion on community charters and “underserved areas” alike, but in fact there is a distinction between them that makes a difference. As a commenter correctly pointed out, with a community charter, the “local community” is the essential criterion of the common bond among all of the credit union's members. It signifies a level of interaction and/or common interests sufficient to sustain the viability of the credit union itself. In contrast, the “local community” comprising an “underserved area” is an accessory to an already viable credit union whose FOM is based entirely on a pre-existing multiple group common bond.

This distinction highlights a meaningful difference in scope and significance between the “local community” that comprises a community credit union's whole FOM, and the “local community” that represents only a segment of a multiple group credit union's FOM—its “underserved area.” The differing role of a “local community” in each context has convinced the Board that the demand for qualitative proof to meet the “local community” criterion is greater for a community charter than for an “underserved area.” For that reason, the final rule preserves the existing rule's exemption of a proposed “underserved area” from the requirement to submit a supplemental letter explaining interaction and common interests within a multi-jurisdiction/MSA community. App. B, Ch. 3, § III.B.1.

B. Economic Distress Criteria

1.

Geographic Units.

The rule implies, but does not expressly indicate, that the CDFI Fund's geographic unit(s) and 85% population threshold apply when implementing the economic distress criteria. As the proposed rule explains, there is a fundamental incompatibility between an “underserved area” and a CDFI “investment area.” Prop. Rule, 73 FR at 34367. A proposed “underserved area” comes to the CDFI Fund's economic distress criteria already pre-packaged in its own “geographic unit”—a single, well defined “local community” consisting of a single jurisdiction or integrating multiple contiguous jurisdictions—whereas an “investment area” is not similarly pre-defined. 65 FR 37065, 37072, 37082 (June 13, 2000). This suggests that it would be redundant to dissolve a single, already well-defined “local community” into the applicable CDFI-designated geographic unit(s), thus implicating a population threshold, to determine whether the community is sufficiently “distressed.”

For these reasons, the Board is concerned that the existing rule is not explicit enough to ensure that the prescribed geographic unit(s) and population threshold are implemented when applying the distress criteria to a proposed area. IRPS 06-1, 71 FR at 36670-36671. Further, in the decade since CUMAA, convenient on-line access to relevant data has considerably simplified the task of translating an “underserved area” into the geographic units the CDFI Fund prescribes for applying the economic distress criteria that define an “investment area.”

The proposed rule addressed this concern by updating and clarifying the Chartering Manual in two significant respects to explicitly reflect the CDFI Fund's “investment area” definition. For purposes of the economic distress criteria, the proposed rule expressly required that a proposed area must conform to the geographic unit(s) prescribed by CDFI, and that an area combining “distressed” and non-“distressed” geographic units must comply with the 85% population threshold.

NCUA received thirteen comments opposing the requirement to conform a proposed area into CDFI-prescribed geographic units. Most stated for one reason or another that a “local community's” own geographic and political boundaries should trump the CDFI-designated geographic units. Other commenters noted that the geographic unit(s) and population threshold requirements do not apply to “underserved areas” in the first place. One commenter stated that “the language in [CUMAA] directs [NCUA] to use the community as the geographic basis for determining whether an underserved area exists.” Another commenter felt that census tracts are an impractical measure because residents typically cannot identify what census tract each resides in, and credit unions typically do not market their products and services according to tract boundaries. Yet another commenter confirmed that credit unions uniformly develop their business plans according to geographic and political boundaries, not census tract boundaries. One commenter predicted that conforming proposed areas to census tracts will result in fewer and smaller “underserved area” approvals.

4

Nearly all of the commenters' criticism addressed the use of census tracts. Recognizing that “underserved areas” typically comprise an entire city or county located within an MSA, the consensus of commenters advocated that such a whole city or county should be treated as a single geographic unit for purposes assessing whether a proposed area is “distressed.”

4

It is not necessarily true that conforming the boundaries of a proposed area to census tracts will result in fewer and smaller approvals. For example, a credit union recently added an “underserved area” comprising a large part of Los Angeles County, CA, which when conformed to census tracts, qualified as distressed under population threshold.

NCUA received four comments opposing the imposition of the 85% population threshold on a proposed area combining “distressed” and non-“distressed” units. One dismissed the population threshold as a “technical correction,” while another objected that it departs from the notion that a proposed “underserved area” already is a single entity. To enhance the “distressed” population, a credit union trade association proposed counting not only the residents of the “distressed” units, but also the people who work, worship or go to school there, even though the CDFI Fund limits a unit's population to its “residents.” 12 CFR 1805.201(b)(ii)(C)(2). Another commenter believed the population threshold does not go far enough, and would require each and every geographic unit within a proposed area to be “distressed,” even though the 85% population threshold allows some entirely non-“distressed” units among a group of contiguous units.

Id.

Notwithstanding the comments, the final rule is explicit in requiring a proposed area to conform to the geographic unit(s) prescribed by CDFI according to whether an area is located within or outside a Metro area.

Id.

§ 1805.104(ff). For this purpose, the rule follows the CDFI Fund's practice of deeming a proposed area located in a designated MSA

5

to be within a Metro area, and vice versa. App. B, Ch. 3, § III.B.2.a. The rule then prescribes the corresponding applicable CDFI

geographic units—“Metro units” when a proposed area is located within an MSA, and “Non-Metro units” when the area is located outside an MSA. 12 CFR 1805.201(b)(3)(ii)(B).

5

To ensure consistency with the CDFI Fund's distress criteria, which are measured according to the most recent decennial Census, the final rule relies solely on the MSA designations that correspond to the same decennial census, rather than on the Office of Management and Budget's updated annual designations. For MSA designations that correspond to the 2000 decennial Census, see “Metropolitan Areas and Components, 1999, with FIPS Codes” (6/30/99 revised 1/28/02) at:

http://www.census.gov/population/estimates/metro-city/99mfips.txt

.

A proposed area that is partly within and partly outside an MSA (

i.e.

, straddles an MSA's boundary) is deemed to be entirely within a Metro area because the corresponding geographic units include ones that are permissible for areas located either within or outside an MSA (

e.g.

, a census tract). Further, regardless of its location, a proposed area must be comprised entirely of

whole

geographic units of single kind; it cannot have fractional units (

e.g.,

half of a census tract or half of a county). To avoid fractional units, the proposed area should be conformed to the next smallest applicable geographic unit (

e.g.

, block groups).

In the case of a proposed area consisting of multiple contiguous geographic units (

e.g.

, a group of adjoining census tracts inside an MSA or a group of adjoining counties outside an MSA), the final rule expressly imposes the 85% population threshold.

Id.

Thus, when a proposed area combines “distressed” and non-“distressed” geographic units, the “distressed” units must represent at least 85 percent of the area's total population.

Id.

§ 1805.201(b)(3)(ii)(C)(2) (2008). The final rule follows the CDFI Fund's practice of allowing each “distressed” unit within a group to qualify as such under any one of the criteria; they do not all have to qualify under the same criterion. App. B, Ch. 3, § III.B.2.a.

2.

CDFI Fund Web site.

The rule is designed to work in coordination with the CDFI Fund's “My CDFI Fund” Web site—an invaluable resource for determining whether a proposed area is “distressed.” The Web site is equipped to analyze the most commonly used geographic units: A census tract, a county or an independent city (which is treated as equivalent to a county).

6

The “My CDFI Fund” Web site's “Information and Mapping System” feature allows the user to select and enter geographic units that it then analyzes, individually and as a single proposed area, using the most recent decennial Census data.

7

The results are displayed on a comprehensive “Investment Area/Hot Zone Worksheet” (“CDFI Worksheet”).

6

The “My CDFI Fund” Web site's “Information and Mapping System” (“CIMS”) is available at:

https://www.cdfifund.gov/myCDFI/Organization/Mapping/Mapping.asp

The “Welcome to CIMS” page explains the options for identifying “CDFI Investment Areas” and a “Mapping System Overview and Tutorial.” The “My CDFI Fund” Web site is accessible to registered users through an organizational account holder. For instructions on how to become a registered user, see

http://www.ncarea.gov/CreditUnionDevelopment//Underserved/underserved.html

. Under the “Expanding into Investment Areas” section is a link entitled “Instructions to Use the CDFI Web site.”

7

Typically, there is an 18-month lag between the taking of a decennial U.S. Census and the publication of the results. Thus, for example, the results of the 2000 census became available when published in 2002 and will remain the most recent census until the results of the 2010 census are published.

The CDFI Worksheet shows whether an individual geographic unit is located within an MSA; its total population; its poverty rate; the percent of benchmark MFI;

8

the unemployment rate; and most importantly, whether in the end the unit qualifies as “distressed.”

9

For a proposed area that combines contiguous “distressed” and non-“distressed” units, the CDFI Worksheet applies the 85% population threshold to determine if the area's population is sufficiently represented in the “distressed” units (which the decennial Census itself does not do), determines that the combined units are contiguous, and shows the tract-by-tract population. Compared to manually downloading census data, the “My CDFI Fund” Web site's analysis of census tracts and counties is a more expeditious way to establish that a proposed area is sufficiently “distressed,” thus conserving credit union resources.

8

The “My CDFI Fund” Web site apparently does not compare a geographic unit's MFI against the

national

MFI for Metro Areas and Non-Metro Areas, as the case may be, which is a prescribed alternative. 12 CFR 1805.201(b)(ii)(D)(2). The CDFI Fund is working to fix this flaw, but in the meantime a credit union can compare a unit's MFI against the national MFI as determined by the U.S. Census to determine if that changes the area's initial non-“distressed” result. Current national MFI data is available from the U.S. Census at:

http://censtats.census.gov/pub/Profiles.shtml

. (Enter “U.S. Summary” and then “metro”).

9

The “My CDFI Fund” Web site implies that it determines whether a proposed area “qualifies as an investment area.” It does not. The Web site determines only whether a proposed area's geographic units are “distressed.” An applicant still must independently demonstrate the proposed area's “significant unmet needs for loans,” etc., in order to qualify as an “investment area.”

C. Significant Unmet Needs for Loans or Financial Services

In addition to determining that a proposed area is “distressed,” the CDFI Act's definition of an “investment area” requires the area to have “significant unmet needs for loans or equity investments.” 12 U.S.C. 4702(16)(A)(ii). To meet this criterion, the CDFI Fund requires “a narrative analysis * * * adequately demonstrat[ing] a pattern of unmet needs” for financial products and services within the proposed area. 12 CFR 1805.201(b)(3)(ii)(E). Further, the Fund retains sole discretion to determine whether this criterion is met.

Id.

§ 1805.201(a)(5).

The existing rule addresses this requirement through the business plan that must be developed by a credit union seeking to add an “underserved area.” The business plan must “identify the credit and depository needs of the community and detail how the credit union plans to serve those needs.” IRPS 06-1, 71 FR at 36671. To ensure a sound record, the proposed rule followed the CDFI Fund's practice of requiring a credit union to submit a one-page “narrative statement” demonstrating a pattern of “significant unmet needs” in the proposed area for one or more of the following financial products and services that credit unions are authorized to offer: Checking accounts, savings accounts, check cashing, money orders, certified checks, automated teller machines, deposit taking, safe deposit box services, and similar services (“authorized credit union services”).

10

Prop. Rule, 73 FR at 34389.

10

The financial services credit unions are authorized to offer are drawn from the CDFI Fund's definition of “financial services” that institutions generally offer. 12 CFR 1805.104(v). To these financial services, the Fund also added certain “financial products” that, except for loans, credit unions do not offer to their members.

Id.

§ 1805.104(u) (2008).

To support the narrative statement, the proposed rule required relevant, objective statistical data and allowed objective testimonial evidence. The proposed rule then required the business plan to “explain how the credit union plans to fulfill the unmet needs for loans and credit union services identified in its Narrative Statement.”

Id.

Commenters were invited to indicate whether the narrative statement should be integrated into the business plan a credit union is already required to submit, and to identify statistical data that would help to establish unmet needs for loans and authorized credit union services.

NCUA received fourteen comments addressing the proposal to require a narrative statement on “significant unmet needs.” Nearly all of the commenters felt the narrative statement was redundant of the CDFI distress criteria, contending that by definition a “distressed” area must have “significant unmet needs” for loans and financial services. They believed the requirement would be a costly, burdensome duplication of effort. The information to establish “significant unmet needs,” the commenters further maintained, is too difficult to find, too subjective to quantify, too difficult to organize by census tracts, and too difficult to

document other than by what one characterized as “documents on steroids.”

To alleviate these difficulties, the commenters urged NCUA to specify the information that would establish “significant unmet needs,” to specify how and where to find it, to put it on the NCUA Web site, and to suggest what kind of testimonial evidence would support it. Alternatively, some commenters advocated that the narrative statement either should be made optional or NCUA itself should assume responsibility for documenting an area's “significant unmet needs.” Two commenters challenged the substance of the requirement. One observed that the availability of financial services within an area doesn't establish that they are accessible to all residents. The other believed that only a comprehensive “broad-based study” of all financial services would suffice to establish ‘significant unmet needs’ within a proposed area. Finally, the commenters were split on the question whether the narrative statement should stand alone or be included in the business plan for the proposed area.

As noted in the proposed rule, 73 FR at 34389, the CDFI Fund itself accepts a one-page narrative statement describing the significant unmet capital or financial services within a proposed area. “CDFI Certification Application” (June 2007) at 11. The analysis must be supported by relevant, objective reasons or statistical data. There are no definitive standards of evaluation; the statements are evaluated on a case-by-case basis.

Neither the “distress” criterion nor the “significant unmet needs” criterion can be interpreted as redundant of the other because both criteria are set forth independently within the CDFI Act's “investment area” definition. 12 U.S.C. 4702(16)(A). The existing requirement that the business plan “identify the credit and depository needs of the community and detail how the credit union plans to serve those needs” (IRPS 06-1, 71 FR at 36671) is the functional equivalent of “demonstrating a pattern of ‘significant unmet needs’ for one or more [authorized credit union services],” as the proposed rule would require. Prop. Rule, 73 FR at 34389. For this reason, the existing “credit and depository needs” standard is a legitimate measure of “significant unmet needs,” provided it addresses authorized credit union services.

Upon consideration of the comments and further inquiry into the CDFI Fund's practices regarding fulfillment of the “significant unmet needs” criterion, the final rule modifies the proposed narrative statement requirement in the following respects. First, a credit union may meet the “significant unmet needs” criterion by fulfilling the existing requirement to “identify the credit and depository needs of the community and detail how the credit union plans to serve those needs.” App. B, Ch. 3, § III.B.2.b. Second, a stand-alone narrative statement is not required. Instead, a section of the business plan, one page in length, and entitled “Significant Unmet Needs for Credit Union Services,” must address the existing “credit and depository needs” criterion.

Id.

Finally, no supporting statistical data is required. Instead, the existence of each of the “credit and depository needs” the credit union identifies and plans to serve must be supported by objective reasons and/or accompanying documentation derived from an identified, authoritative source of the credit union's choice. Third party documentation is generally the most compelling. Anecdotal evidence will not suffice. Id.

D. Underserved by Other Depository Institutions

Independent of the CDFI Fund's “significant unmet needs” test, CUMAA requires a proposed area to be “underserved * * * by other [insured] depository institutions.” CUMAA did not specify a methodology for making this determination other than to provide that it must rely on unspecified “data of the [NCUA] Board and the Federal banking agencies.” 12 U.S.C. 1759(c)(2)(A)(ii). To the extent such relevant and meaningful data existed in raw form, it was not distilled and made readily accessible until recently.

To determine whether a proposed area is underserved by other depository institutions, the proposed rule compares the concentration of depository institution facilities within the non-“distressed” portions of the proposed area against the concentration of such facilities in the area as a whole. Prop. Rule, 73 FR at 34389. Regardless of the geographic units used to determine whether the proposed area is “distressed,” this comparison uses the area's census tracts as the unit of measure.

A comparison of two ratios determines a proposed area's concentration of facilities. The first is the ratio of depository institution facilities within a proposed area's non-“distressed” tracts (regardless whether they are contiguous) to the combined population of those tracts. This establishes a benchmark level of adequate service. The second is the ratio of depository institution facilities among all the tracts of the proposed to the combined population of those tracts.

As shown below, if the facilities-to-population ratio (the benchmark) within the non-“distressed” tracts (column A below) exceeds the same facilities-to population ratio within the combined tracts of the proposed area as a whole (column B below), the rule deems the area to be “underserved by other depository institutions,” and vice versa (column C below).

Concentration of Depository Institution Facilities

A

Non-“distressed” census tracts only

B

All census tracts in proposed area

C

All census tracts in proposed area

Population (numerator)

15,000

100,000

100,000.

Facilities (denominator)

100

571

800.

Ratio of facilities to population (concentration)

1:150 (1 facility for every 150 persons)

1:175 (1 facility for every 175 persons)

1:125 (1 facility for every 125 persons).

Example of:

Benchmark ratio

“Underserved”

Not “Underserved”.

The seventeen comments on this criterion were critical of using the concentration of facilities to assess whether a proposed area is “underserved by other depository institutions.” Four commenters criticized this methodology as a cumbersome, complex, time consuming and labor intensive exercise. Others objected to the use of any methodology not specifically prescribed by CUMAA (even though CUMAA didn't prescribe

any methodology). One commenter was concerned that an area without even a single credit union facility still could be deemed

not

“underserved” due to the concentration of non-credit union facilities. In such cases, this commenter urged, the area should be deemed “underserved” by definition. In contrast, a commenter argued that the presence of even a single depository intuition facility (even a credit union's) should render the area

not

“underserved” by such institutions.

Several commenters emphasized that the physical presence of depository institutions is not a reliable indicator of the availability, cost and quality of products and services that would benefit an area's underserved residents. They proposed various alternative methodologies involving: The ratio of “banked” consumers or households to the population of the “distressed” tracts compared to the whole area's combined tracts; the distance of travel required to reach a facility; the area's income and unemployment levels; a subjective “fact-sensitive inquiry”; a market analysis of current depository institution services; an analysis of competitive market factors; and residents' use of branches and ATMs. Regarding ATMs, two commenters noted the irony in the possibility of counting them among depository institution facilities while refusing to recognize them as a credit union “service facility” for an “underserved area.”

Finally, two commenters believed that the “underserved by other depository institutions” criterion is misconceived in the first place. In their view, an “underserved area” can never be too “overserved” by other depository institutions because their increasing presence expands consumer choice among products and services, thereby stimulating competition and ultimately reducing the price of those products and services for the area's residents.

For the following reasons, the final rule adopts the concentration of facilities methodology as proposed to assess whether a proposed area is “underserved by other depository institutions.” App. B, Ch. 3, § III.B.3. First, the “significant unmet needs” criterion addresses the need for products and services within a proposed area. In order not to duplicate that, the concentration of facilities, by design, addresses the presence of facilities that dispense those products and services. Second, although there is merit to the alternative methodologies suggested by the commenters, CUMAA requires the determination that an area is “underserved by other depository institutions” to be “based on data of the [NCUA] and the Federal banking agencies.” 12 U.S.C. 1759(c)(2)(A)(ii). Therefore, in making this determination, NCUA is compelled to rely on the limited, relevant data it and the banking agencies have collected, to the exclusion of third party data.

Finally, taking into consideration the comments on the burden of obtaining and organizing the data needed to calculate the facilities versus population ratios, the final rule relaxes any such burden. For the denominator of each ratio, the proposed rule required credit unions to obtain current tract-by-tract population data. For the numerator of each ratio, however, it required credit unions to also obtain the tract-by-tract totals of the depository institution facilities using several on-line resources.

Under the final rule, credit unions still are responsible for obtaining tract-by-tract population data (from either the “My CDFI Fund” Web site or the decennial Census). However, upon request to a regional office, NCUA will be responsible for providing credit unions with tract-by-tract totals of the number of insured depository institutions. Using proprietary software, NCUA regional offices will be equipped to determine and provide the total number of depository institution facilities in each of the census tracts of a proposed area. The total for each tract will combine not only credit union facilities (based on a credit union's annual “Report of Officials”) but non-credit union facilities, and will exclude the ATMs of both. As a result, credit unions can easily obtain the data needed to calculate the facilities-to-population ratio of the “distressed” tracts and compare it to the facilities-to-population ratio of the tracts of the area as a whole.

E. Approval To Serve an Already Approved “Underserved Area”

The statement in the existing rule that “More than one multiple common bond federal credit union can serve the same underserved area” is accurate but not complete. IRPS 06-1, 71 FR at 36670. The rule is vague about whether an area must be requalified as “underserved” each time an additional credit union seeks approval to serve it. The proposed rule makes it clear that a credit union that was approved to serve an “underserved area” is “grandfathered,” but the “underserved area” itself is not. App. B, Ch. 3, § III.D.

The distinction is that once a credit union receives approval to serve an area that qualified as “underserved” at the time it was approved, the credit union will be able to continue serving that area if and when it no longer qualifies as “underserved.” In contrast, if another credit union subsequently seeks approval to serve the same “underserved area,” the subsequent applicant must demonstrate that the area still qualifies as “underserved,”

i.e.

, is still “distressed,” has “significant unmet needs,” and is “underserved by other depository institutions” at the time it applies.

Ten commenters addressed the “grandfathering” issue. All of them praised the “grandfathering” of credit unions that had been approved to serve an “underserved area,” but advocated “grandfathering” the already approved “underserved areas” themselves as well so that other credit unions would be free to serve them. One commenter criticized the reapproval requirement as an unnecessary duplication of effort while another charged that it was a “back-door return” to NCUA's old overlap protection policy. One commenter proposed a compromise: If the final rule will not permit “grandfathering” of “underserved areas” themselves once it becomes effective, then the rule should expressly “grandfather” all “underserved areas” approved under the existing rule prior to the final rule's effective date under the rule. Recognizing the possibility that an “undeserved area” may not remain underserved forever, one commenter proposed limiting the “grandfathering” of “underserved areas” themselves to a period of 5 years from the date each was first approved. Another acknowledged that the greater the number of credit unions serving an already approved “underserved area,” the sooner the area's “significant unmet needs” for credit unions services will be met.

What all the commenters but one fail to consider is that, with the passage of time, an “underserved area” may not continue to meet the definition of an “investment area.” Once a new decennial Census is published, the area may no longer be “distressed” according to CDFI criteria. Over time, the credit union(s) approved to serve the area may succeed in meeting some or all of the area's “significant unmet needs” for credit union services. As more depository institutions locate facilities within the area, the concentration ratio may shift to reflect that the area finally is adequately served by other depository institutions.

At the time of approval as “underserved,” a proposed area must meet the CDFI definition of an “investment area.” For that reason, the final rule cannot assume that a once approved “underserved area” remains frozen in time regardless of changing

circumstances that may disqualify it as an “investment area.” Accordingly, the final rule continues to “grandfather” credit unions that are approved to serve “underserved areas,” but does not “grandfather” the “underserved areas” themselves. App. B, Ch. 3, § III.D. However, the final rule does not require an applicant seeking to serve an already approved area to demonstrate that the area still is “distressed” if no new decennial Census has been published since the area was last determined to be “distressed.”

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small credit unions (primarily those under $10 million in assets). These final amendments to the existing regulation will not have a significant economic impact on a substantial number of small credit unions and therefore, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

This final rule imposes a requirement that any multiple common bond federal credit union that wishes to add an “underserved area” must apply for the NCUA Board's written approval to do so. Based upon past experience, NCUA anticipates approximately 100 applications per year. This rule mandates certain specific information that must be included in the application. NCUA solicited public comment on all aspects of the collection of information this rule entails. Having considered the comments and the type of information required to be obtained and included in the application, NCUA estimates a burden of 40 hours per application.

Executive Order 13132

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. In adherence to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. The final rule will not have substantial direct effects on the states, on the connection between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined that this final does not constitute a policy that has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999

The NCUA has determined that this final rule would not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act of 1999, Public Law 105-277, 112 Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121) (SBREFA) provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by section 551 of the APA. 5 U.S.C. 551. The Office of Management and Budget has determined that this rule is not a major rule for purposes of SBREFA. As required by SBREFA, NCUA will file the appropriate reports with Congress and the General Accounting Office so this rule may be reviewed.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board on November 20, 2008.

Mary Rupp,

Secretary of the Board.

For the reasons stated above, 12 CFR part 701 is amended as follows:

PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

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

Authority:

12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601,

et seq.

, 42 U.S.C. 1981 and 3601-3610. Section 701.35 is also authorized by 12 U.S.C. 4311-4312.

2. Section 701.1 is revised to read as follows:

§ 701.1

Federal credit union chartering, field of membership modifications, and conversions.

National Credit Union Administration policies concerning chartering, field of membership modifications, and conversions are set forth in Interpretive Ruling and Policy Statement 08-2, Chartering and Field of Membership Manual (IRPS 08-2) published as Appendix B to this part. The Chartering and Field of Membership Manual also is available on-line at

http://www.ncua.gov

.

3. Appendix B to 12 CFR Part 701 is added to read as follows:

Appendix B to Part 701—Chartering and Field of Membership Manual

Chapter 1

Federal Credit Union Chartering

I—Goals of NCUA Chartering Policy

The National Credit Union Administration's (NCUA) chartering and field of membership policies are directed toward achieving the following goals:

• To encourage the formation of credit unions;

• To uphold the provisions of the Federal Credit Union Act;

• To promote thrift and credit extension;

• To promote credit union safety and soundness; and

• To make quality credit union service available to all eligible persons.

NCUA may grant a charter to single occupational/associational groups, multiple groups, or communities if:

• The occupational, associational, or multiple groups possess an appropriate common bond or the community represents a well-defined local community, neighborhood, or rural district;

• The subscribers are of good character and are fit to represent the proposed credit union; and

• The establishment of the credit union is economically advisable.

Generally, these are the primary criteria that NCUA will consider. In unusual circumstances, however, NCUA may examine other factors, such as other federal law or public policy, in deciding if a charter should be approved.

Unless otherwise noted, the policies outlined in this manual apply only to federal credit unions.

II—Types of Charters

The Federal Credit Union Act recognizes three types of federal credit union charters—single common bond (occupational and associational), multiple common bond (more than one group each having a common bond of occupation or association), and community.

The requirements that must be met to charter a federal credit union are described in Chapter 2. Special rules for credit unions serving low-income groups are described in Chapter 3.

If a federal credit union charter is granted, Section 5 of the charter will describe the credit union's field of membership, which defines those persons and entities eligible for membership. Generally, federal credit unions are only able to grant loans and provide services to persons within the field of membership who have become members of the credit union.

III—Subscribers

Federal credit unions are generally organized by persons who volunteer their time and resources and are responsible for

determining the interest, commitment, and economic advisability of forming a federal credit union. The organization of a successful federal credit union takes considerable planning and dedication.

Persons interested in organizing a federal credit union should contact one of the credit union trade associations or the NCUA regional office serving the state in which the credit union will be organized. Lists of NCUA offices and credit union trade associations are shown in the appendices. NCUA will provide information to groups interested in pursuing a federal charter and will assist them in contacting an organizer.

While anyone may organize a credit union, a person with training and experience in chartering new federal credit unions is generally the most effective organizer. However, extensive involvement by the group desiring credit union service is essential.

The functions of the organizer are to provide direction, guidance, and advice on the chartering process. The organizer also provides the group with information about a credit union's functions and purpose as well as technical assistance in preparing and submitting the charter application. Close communication and cooperation between the organizer and the proposed members are critical to the chartering process.

The Federal Credit Union Act requires that seven or more natural persons—the “subscribers”—present to NCUA for approval a sworn organization certificate stating at a minimum:

• The name of the proposed federal credit union;

• The location of the proposed federal credit union and the territory in which it will operate;

• The names and addresses of the subscribers to the certificate and the number of shares subscribed by each;

• The initial par value of the shares;

• The detailed proposed field of membership; and

• The fact that the certificate is made to enable such persons to avail themselves of the advantages of the Federal Credit Union Act.

False statements on any of the required documentation filed in obtaining a federal credit union charter may be grounds for federal criminal prosecution.

IV—Economic Advisability

IV.A—General

Before chartering a federal credit union, NCUA must be satisfied that the institution will be viable and that it will provide needed services to its members. Economic advisability, which is a determination that a potential charter will have a reasonable opportunity to succeed, is essential in order to qualify for a credit union charter.

NCUA will conduct an independent on-site investigation of each charter application to ensure that the proposed credit union can be successful. In general, the success of any credit union depends on: (a) The character and fitness of management; (b) the depth of the members' support; and (c) present and projected market conditions.

IV.B—Proposed Management's Character and Fitness

The Federal Credit Union Act requires NCUA to ensure that the subscribers are of good “general character and fitness.” Prospective officials and employees will be the subject of credit and background investigations. The investigation report must demonstrate each applicant's ability to effectively handle financial matters. Employees and officials should also be competent, experienced, honest and of good character. Factors that may lead to disapproval of a prospective official or employee include criminal convictions, indictments, and acts of fraud and dishonesty. Further, factors such as serious or unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.

NCUA also needs reasonable assurance that the management team will have the requisite skills—particularly in leadership and accounting—and the commitment to dedicate the time and effort needed to make the proposed federal credit union a success.

Section 701.14 of NCUA's Rules and Regulations sets forth the procedures for NCUA approval of officials of newly chartered credit unions. If the application of a prospective official or employee to serve is not acceptable to the regional director, the group can propose an alternate to act in that individual's place. If the charter applicant feels it is essential that the disqualified individual be retained, the individual may appeal the regional director's decision to the NCUA Board. If an appeal is pursued, action on the application may be delayed. If the appeal is denied by the NCUA Board, an acceptable new applicant must be provided before the charter can be approved.

IV.C—Member Support

Economic advisability is a major factor in determining whether the credit union will be chartered. An important consideration is the degree of support from the field of membership. The charter applicant must be able to demonstrate that membership support is sufficient to ensure viability.

NCUA has not set a minimum field of membership size for chartering a federal credit union. Consequently, groups of any size may apply for a credit union charter and be approved if they demonstrate economic advisability. However, it is important to note that often the size of the group is indicative of the potential for success. For that reason, a charter application with fewer than 3,000 primary potential members (e.g., employees of a corporation or members of an association) may not be economically advisable. Therefore, a charter applicant with a proposed field of membership of fewer than 3,000 primary potential members may have to provide more support than an applicant with a larger field of membership. For example, a small occupational or associational group may be required to demonstrate a commitment for long-term support from the sponsor.

IV.D—Present and Future Market Conditions—Business Plan

The ability to provide effective service to members, compete in the marketplace, and to adapt to changing market conditions are key to the survival of any enterprise. Before NCUA will charter a credit union, a business plan based on realistic and supportable projections and assumptions must be submitted.

The business plan should contain, at a minimum, the following elements:

• Mission statement;

• Analysis of market conditions, including if applicable, geographic, demographic, employment, income, housing, and other economic data;

• Evidence of member support;

• Goals for shares, loans, and for number of members;

• Financial services needed/desired;

• Financial services to be provided to members of all segments within the field of membership;

• How/when services are to be implemented;

• Organizational/management plan addressing qualification and planned training of officials/employees;

• Continuity plan for directors, committee members and management staff;

• Operating facilities, to include office space/equipment and supplies, safeguarding of assets, insurance coverage, etc.;

• Type of record keeping and data processing system;

• Detailed semiannual pro forma financial statements (balance sheet, income and expense projections) for 1st and 2nd year, including assumptions—e.g., loan and dividend rates;

• Plans for operating independently;

• Written policies (shares, lending, investments, funds management, capital accumulation, dividends, collections, etc.);

• Source of funds to pay expenses during initial months of operation, including any subsidies, assistance, etc., and terms or conditions of such resources; and

• Evidence of sponsor commitment (or other source of support) if subsidies are critical to success of the federal credit union. Evidence may be in the form of letters, contracts, financial statements from the sponsor, and any other such document on which the proposed federal credit union can substantiate its projections.

While the business plan may be prepared with outside assistance, the subscribers and proposed officials must understand and support the submitted business plan.

V—Steps in Organizing a Federal Credit Union

V.A—Getting Started

Following the guidance contained throughout this policy, the organizers should submit wording for the proposed field of membership (the persons, organizations and other legal entities the credit union will serve) to NCUA early in the application process for written preliminary approval. The proposed field of membership must meet all common bond or community requirements.

Once the field of membership has been given preliminary approval, and the organizer is satisfied the application has merit, the organizer should conduct an organizational meeting to elect seven to ten persons to serve as subscribers. The

subscribers should locate willing individuals capable of serving on the board of directors, credit committee, supervisory committee, and as chief operating officer/manager of the proposed credit union.

Subsequent organizational meetings may be held to discuss the progress of the charter investigation, to announce the proposed slate of officials, and to respond to any questions posed at these meetings.

If NCUA approves the charter application, the subscribers, as their final duty, will elect the board of directors of the proposed federal credit union. The new board of directors will then appoint the supervisory committee.

V.B—Charter Application Documentation

V.B.1—General

As discussed previously in this Chapter, the organizer of a federal credit union charter must, at a minimum, provide evidence that:

• The group(s) possess an appropriate common bond or the geographical area to be served is a well-defined local community, neighborhood, or rural district;

• The subscribers, prospective officials, and employees are of good character and fitness; and

• The establishment of the credit union is economically advisable.

As part of the application process, the organizer must submit the following forms, which are available in Appendix 4 of this Manual:

• Federal Credit Union Investigation Report, NCUA 4001;

• Organization Certificate, NCUA 4008;

• Report of Official and Agreement To Serve, NCUA 4012;

• Application and Agreements for Insurance of Accounts, NCUA 9500; and

• Certification of Resolutions, NCUA 9501.

Each of these forms is described in more detail in the following sections.

V.B.2—Federal Credit Union Investigation Report, NCUA 4001

The application for a new federal credit union will be submitted on NCUA 4001. State-chartered credit unions applying for conversion to a federal charter will use NCUA 4000. (See Chapter 4 for a full discussion.) The organizer is required to certify the information and recommend approval or disapproval, based on the investigation of the request.

V.B.3—Organization Certificate, NCUA 4008

This document, which must be completed by the subscribers, includes the seven criteria established by the Federal Credit Union Act. NCUA staff assigned to the case will assist in the proper completion of this document.

V.B.4—Report of Official and Agreement To Serve, NCUA 4012

This form documents general background information of each official and employee of the proposed federal credit union. Each official and employee must complete and sign this form. The organizer must review each of the NCUA 4012s for elements that would prevent the prospective official or employee from serving. Further, such factors as serious, unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.

V.B.5—Application and Agreements for Insurance of Accounts, NCUA 9500

This document contains the agreements with which federal credit unions must comply in order to obtain National Credit Union Share Insurance Fund (NCUSIF) coverage of member accounts. The document must be completed and signed by both the chief executive officer and chief financial officer. A federal credit union must qualify for federal share insurance.

V.B.6—Certification of Resolutions, NCUA 9501

This document certifies that the board of directors of the proposed federal credit union has resolved to apply for NCUSIF insurance of member accounts and has authorized the chief executive officer and recording officer to execute the Application and Agreements for Insurance of Accounts. Both the chief executive officer and recording officer of the proposed federal credit union must sign this form.

VI—Name Selection

It is the responsibility of the federal credit union organizers or officials of an existing credit union to ensure that the proposed federal credit union name or federal credit union name change does not constitute an infringement on the name of any corporation in its trade area. This responsibility also includes researching any service marks or trademarks used by any other corporation (including credit unions) in its trade area. NCUA will ensure, to the extent possible, that the credit union's name:

• Is not already being officially used by another federal credit union;

• Will not be confused with NCUA or another federal or state agency, or with another credit union; and

• Does not include misleading or inappropriate language.

The last three words in the name of every credit union chartered by NCUA must be “Federal Credit Union.”

The word “community,” while not required, can only be included in the name of federal credit unions that have been granted a community charter.

VII—NCUA Review

VII.A—General

Once NCUA receives a complete charter application package, an acknowledgment of receipt will be sent to the organizer. At some point during the review process, a staff member will be assigned to perform an on-site contact with the proposed officials and others having an interest in the proposed federal credit union.

NCUA staff will review the application package and verify its accuracy and reasonableness. A staff member will inquire into the financial management experience and the suitability and commitment of the proposed officials and employees, and will make an assessment of economic advisability. The staff member will also provide guidance to the subscribers in the proper completion of the Organization Certificate, NCUA 4008.

Credit and background investigations may be conducted concurrently by NCUA with other work being performed by the organizer and subscribers to reduce the likelihood of delays in the chartering process.

The staff member will analyze the prospective credit union's business plan for realistic projections, attainable goals, adequate service to all segments of the field of membership, sufficient start-up capital, and time commitment by the proposed officials and employees. Any concerns will be reviewed with the organizer and discussed with the prospective credit union's officials. Additional on-site contacts by NCUA staff may be necessary. The organizer and subscribers will be expected to take the steps necessary to resolve any issues or concerns. Such resolution efforts may delay processing the application.

NCUA staff will then make a recommendation to the regional director regarding the charter application. The recommendation may include specific provisions to be included in a Letter of Understanding and Agreement. In most cases, NCUA will require the prospective officials to adhere to certain operational guidelines. Generally, the agreement is for a limited term of two to four years. A sample Letter of Understanding and Agreement is found in Appendix 2.

VII.B—Regional Director Approval

Once approved, the board of directors of the newly formed federal credit union will receive a signed charter and standard bylaws from the regional director. Additionally, the officials will be advised of the name of the examiner assigned responsibility for supervising and examining the credit union.

VII.C—Regional Director Disapproval

When a regional director disapproves any charter application, in whole or in part, the organizer will be informed in writing of the specific reasons for the disapproval. Where applicable, the regional director will provide information concerning options or suggestions that the applicant could consider for gaining approval or otherwise acquiring credit union service. The letter of denial will include the procedures for appealing the decision.

VII.D—Appeal of Regional Director Decision

If the regional director denies a charter application, in whole or in part, that decision may be appealed to the NCUA Board. An appeal must be sent to the appropriate regional office within 60 days of the date of denial and must address the specific reasons for denial. The regional director will then forward the appeal to the NCUA Board. NCUA central office staff will make an independent review of the facts and present the appeal with a recommendation to the NCUA Board.

Before appealing, the prospective group may, within 30 days of the denial, provide supplemental information to the regional director for reconsideration. A reconsideration will contain new and material evidence addressing the reasons for the initial denial. The regional director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal

process within 60 days of the date of the last denial. A second request for reconsideration will be treated as an appeal to the NCUA Board.

VII.E—Commencement of Operations

Assistance in commencing operations is generally available through the various credit union trade organizations listed in Appendix 5.

All new federal credit unions are also encouraged to establish a mentor relationship with a knowledgeable, experienced credit union individual or an existing, well-operated credit union. The mentor should provide guidance and assistance to the new credit union through attendance at meetings and general oversight. Upon request, NCUA will provide assistance in finding a qualified mentor.

VIII—Future Supervision

Each federal credit union will be examined regularly by NCUA to determine that it remains in compliance with applicable laws and regulations and to determine that it does not pose undue risk to the NCUSIF. The examiner will contact the credit union officials shortly after approval of the charter in order to arrange for the initial examination (usually within the first six months of operation).

The examiner will be responsible for monitoring the progress of the credit union and providing the necessary advice and guidance to ensure it is in compliance with applicable laws and regulations. The examiner will also monitor compliance with the terms of any required Letter of Understanding and Agreement. Typically, the examiner will require the credit union to submit copies of monthly board minutes and financial statements.

The Federal Credit Union Act requires all newly chartered credit unions, up to two years after the charter anniversary date, to obtain NCUA approval prior to appointment of any new board member, credit or supervisory committee member, or senior executive officer. Section 701.14 of the NCUA Rules and Regulations sets forth the notice and application requirements. If NCUA issues a Notice of Disapproval, the newly chartered credit union is prohibited from making the change.

NCUA may disapprove an individual serving as a director, committee member or senior executive officer if it finds that the competence, experience, character, or integrity of the individual indicates it would not be in the best interests of the members of the credit union or of the public to permit the individual to be employed by or associated with the credit union. If a Notice of Disapproval is issued, the credit union may appeal the decision to the NCUA Board.

IX—Corporate Federal Credit Unions

A corporate federal credit union is one that is operated primarily for the purpose of serving other credit unions. Corporate federal credit unions operate under and are administered by the NCUA Office of Corporate Credit Unions.

X—Groups Seeking Credit Union Service

NCUA will attempt to assist any group in chartering a credit union or joining an existing credit union. If the group is not eligible for federal credit union service, NCUA will refer the group to the appropriate state supervisory authority where different requirements may apply.

XI—Field of Membership Designations

NCUA will designate a credit union based on the following criteria:

Single Occupational: If a credit union serves a single occupational sponsor, such as ABC Corporation, it will be designated as an occupational credit union. A single occupational common bond credit union may also serve a trade, industry, or profession (TIP), such as all teachers.

Single Associational: If a credit union serves a single associational sponsor, such as the Knights of Columbus, it will be designated as an associational credit union.

Multiple Common Bond: If a credit union serves more than one group, each of which has a common bond of occupation and/or association, it will be designated as a multiple common bond credit union.

Community: All community credit unions will be designated as such, followed by a description of their geographic boundaries (

e.g.

, city or county).

Credit unions desiring to confirm or submit an application to change their designations should contact the appropriate NCUA regional office.

XII—Foreign Branching

Federal credit unions are permitted to serve foreign nationals within their fields of membership wherever they reside provided they have the ability, resources, and management expertise to serve such persons. Before a credit union opens a branch outside the United States, it must submit an application to do so and have prior written approval of the regional director. A federal credit union may establish a service facility on a United States military installation or United States embassy without prior NCUA approval.

Chapter 2

Field of Membership Requirements for Federal Credit Unions

I—Introduction

I.A.1—General

As set forth in Chapter 1, the Federal Credit Union Act provides for three types of federal credit union charters—single common bond (occupational or associational), multiple common bond (multiple groups), and community. Section 109 (12 U.S.C. 1759) of the Federal Credit Union Act sets forth the membership criteria for each of these three types of credit unions.

The field of membership, which is specified in Section 5 of the charter, defines those persons and entities eligible for membership. A single common bond federal credit union consists of one group having a common bond of occupation or association. A multiple common bond federal credit union consists of more than one group, each of which has a common bond of occupation or association. A community federal credit union consists of persons or organizations within a well-defined local community, neighborhood, or rural district.

Once chartered, a federal credit union can amend its field of membership; however, the same common bond or community requirements for chartering the credit union must be satisfied. Since there are differences in the three types of charters, special rules, which are fully discussed in the following sections of this Chapter, may apply to each.

I.A.2—Special Low-Income Rules

Generally, federal credit unions can only grant loans and provide services to persons who have joined the credit union. The Federal Credit Union Act states that one of the purposes of federal credit unions is “to serve the productive and provident credit needs of individuals of modest means.” Although field of membership requirements are applicable, special rules set forth in Chapter 3 may apply to low-income designated credit unions and those credit unions assisting low-income groups or to a federal credit union that adds an underserved community to its field of membership.

II—Occupational Common Bond

II.A.1—General

A single occupational common bond federal credit union may include in its field of membership all persons and entities who share that common bond. NCUA permits a person's membership eligibility in a single occupational common bond group to be established in five ways:

• Employment (or a long-term contractual relationship equivalent to employment) in a single corporation or other legal entity makes that person part of a single occupational common bond;

• Employment in a corporation or other legal entity with a controlling ownership interest (which shall not be less than 10 percent) in or by another legal entity makes that person part of a single occupational common bond;

• 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 a single occupational common bond;

• Employment or attendance at a school makes that person part of a single occupational common bond (see Chapter 2, Section III.A.1); or

• Employment in the same Trade, Industry, or Profession (TIP) (see Chapter 2, Section II.A.2).

A geographic limitation is not a requirement for a single occupational common bond. However, for purposes of describing the field of membership, the geographic areas being served may be included in the charter. For example:

• Employees, officials, and persons who work regularly under contract in Miami, Florida for ABC Corporation and subsidiaries;

• Employees of ABC Corporation who are paid from * * *;

• Employees of ABC Corporation who are supervised from * * *;

• Employees of ABC Corporation who are headquartered in * * *; and/or

• Employees of ABC Corporation who work in the United States.

The corporation or other legal entity (i.e., the employer) may also be included in the common bond—e.g., “ABC Corporation.” The corporation or legal entity will be defined in the last clause in Section 5 of the credit union's charter.

A charter applicant must provide documentation to establish that the single occupational common bond requirement has been met.

Some examples of single occupational common bonds are:

• Employees of the Hunt Manufacturing Company who work in West Chester, Pennsylvania. (common bond—same employer with geographic definition);

• Employees of the Buffalo Manufacturing Company who work in the United States. (common bond—same employer with geographic definition);

• Employees, elected and appointed officials of municipal government in Parma, Ohio. (common bond—same employer with geographic definition);

• Employees of Johnson Soap Company and its majority owned subsidiary, Johnson Toothpaste Company, who work in, are paid from, are supervised from, or are headquartered in Augusta and Portland, Maine. (common bond—parent and subsidiary company with geographic definition);

• Employees of MMLLJS contractor who work regularly at the U.S. Naval Shipyard in Bremerton, Washington. (common bond—employees of contractors with geographic definition);

• Employees, doctors, medical staff, technicians, medical and nursing students who work in or are paid from the Newport Beach Medical Center, Newport Beach, California. (single corporation with geographic definition);

• Employees of JLS, Incorporated and MJM, Incorporated working for the LKM Joint Venture Company in Catalina Island, California. (common bond—same employer—ongoing dependent relationship);

• Employees of and students attending Georgetown University. (common bond—same occupation);

• Employees of all the schools supervised by the Timbrook Board of Education in Timbrook, Georgia. (common bond—same employer); or

• All licensed nurses in Fairfax County, Virginia. (occupational common bond TIP).

Some examples of insufficiently defined single occupational common bonds are:

• Employees of manufacturing firms in Seattle, Washington. (no defined occupational sponsor; overly broad TIP);

• Persons employed or working in Chicago, Illinois. (no occupational common bond).

II.A.2—Trade, Industry, or Profession

A common bond based on employment in a trade, industry, or profession can include employment at any number of corporations or other legal entities that—while not under common ownership—have a common bond by virtue of producing similar products, providing similar services, or participating in the same type of business.

While proposed or existing single common bond credit unions have some latitude in defining a trade, industry, or profession occupational common bond, it cannot be defined so broadly as to include groups in fields which are not closely related. For example, the manufacturing industry, energy industry, communications industry, retail industry, or entertainment industry would not qualify as a TIP because each industry lacks the necessary commonality. However, textile workers, realtors, nurses, teachers, police officers, or U.S. military personnel are closely related and each would qualify as a TIP.

The common bond relationship must be one that demonstrates a narrow commonality of interests within a specific trade, industry, or profession. If a credit union wants to serve a physician TIP, it can serve all physicians, but that does not mean it can also serve all clerical staff in the physicians' offices. However, if the TIP is based on the health care industry, then clerical staff would be able to be served by the credit union because they work in the same industry and have the same commonality of interests.

If a credit union wants to include the airline services industry, it can serve airline and airport personnel but not passengers. Clients or customers of the TIP are not eligible for credit union membership (e.g., patients in hospitals). Any company that is involved in more than one industry cannot be included in an industry TIP (e.g., a company that makes tobacco products, food products, and electronics). However, employees of these companies may be eligible for membership in a variety of trade/profession occupational common bond TIPs.

Since a TIP must be narrowly defined, it cannot include third party vendors and other suppliers. For example, the steel suppliers to the automobile industry would not be part of the automobile industry TIP. However, the automobile industry includes manufacturers and their automobile dealerships.

In general, except for credit unions currently serving a national field of membership or operating in multiple states, a geographic limitation is required for a TIP credit union. The geographic limitation will be part of the credit union's charter and generally correspond to its current or planned operational area. More than one federal credit union may serve the same trade, industry, or profession, even if both credit unions are in the same geographic location.

This type of occupational common bond is only available to single common bond credit unions. A TIP cannot be added to a multiple common bond or community field of membership.

To obtain a TIP designation, the proposed or existing credit union must submit a request to the regional director. New charter applicants must follow the documentation requirements in Chapter 1. New charter applicants and existing credit unions must submit a business plan on how the credit union will serve the group with the request to serve the TIP. The business plan also must address how the credit union will verify the TIP. Examples of such verification include state licenses, professional licenses, organizational memberships, pay statements, union membership, or employer certification. The regional director must approve this type of field of membership before a credit union can serve a TIP. Credit unions converting to a TIP can retain members of record but cannot add new members from its previous group or groups, unless it is part of the TIP.

Section II.B on Occupational Common Bond Amendments does not apply to a TIP common bond. Removing or changing a geographical limitation will be processed as a housekeeping amendment. If safety and soundness concerns are present, the regional director may require additional information before the request can be processed.

Section II.H, on Other Persons Eligible for Credit Union Membership, applies to TIP based credit unions except for the corporate account provision which only applies to industry based TIPs. Credit unions with industry based TIPs may include corporations as members because they have the same commonality of interests as all employees in the industry. For example, an airline service TIP (industry) can serve an airline carrier (corporate account); however, a nurses TIP (profession) could not serve a hospital (corporate account) because not everyone working in the hospital shares the same profession.

If a TIP designated credit union wishes to convert to a different TIP or employer-based occupational common bond, or different charter type, it only retains members of record after the conversion. The regional director, for safety and soundness reasons, may approve a TIP designated credit union to convert to its original field of membership.

II.B—Occupational Common Bond Amendments

II.B.1—General

Section 5 of every single occupational federal credit union's charter defines the field of membership the credit union can legally serve. Only those persons or legal entities specified in the field of membership can be served. There are a number of instances in which Section 5 must be amended by NCUA.

First, a group sharing the credit union's common bond is added to the field of membership. This may occur through various ways including agreement between the group and the credit union directly, or through a merger, corporate acquisition, purchase and assumption (P&A), or spin-off.

Second, if the entire field of membership is acquired by another corporation, the credit union can serve the employees of the new corporation and any subsidiaries after receiving NCUA approval.

Third, a federal credit union qualifies to change its common bond from:

• A single occupational common bond to a single associational common bond;

• A single occupational common bond to a community charter; or

• A single occupational common bond to a multiple common bond.

Fourth, a federal credit union removes a portion of the group from its field of

membership through agreement with the group, a spin-off, or because a portion of the group is no longer in existence.

An existing single occupational common bond federal credit union that submits a request to amend its charter must provide documentation to establish that the occupational common bond requirement has been met. The regional director must approve all amendments to an occupational common bond credit union's field of membership.

II.B.2—Corporate Restructuring

If the single common bond group that comprises a federal credit union's field of membership undergoes a substantial restructuring, the result is often that portions of the group are sold or spun off. This requires a change to the credit union's field of membership. NCUA will not permit a single common bond credit union to maintain in its field of membership a sold or spun-off group to which it has been providing service unless the group otherwise qualifies for membership in the credit union or the credit union converts to a multiple common bond credit union.

If the group comprising the single common bond of the credit union merges with, or is acquired by, another group, the credit union can serve the new group resulting from the merger or acquisition after receiving a housekeeping amendment.

II.B.3—Economic Advisability

Prior to granting a common bond expansion, NCUA will examine the amendment's likely effect on the credit union's operations and financial condition. In most cases, the information needed for analyzing the effect of adding a particular group will be available to NCUA through the examination and financial and statistical reports; however, in particular cases, a regional director may require additional information prior to making a decision.

II.B.4—Documentation Requirements

A federal credit union requesting a common bond expansion must submit an Application for Field of Membership Amendment (NCUA 4015-EZ) to the appropriate NCUA regional director. An authorized credit union representative must sign the request.

II.C—NCUA's Procedures for Amending the Field of Membership

II.C.1—General

All requests for approval to amend a federal credit union's charter must be submitted to the appropriate regional director.

II.C.2—Regional Director's Decision

NCUA staff will review all amendment requests in order to ensure compliance with NCUA policy.

Before acting on a proposed amendment, the regional director may require an on-site review. In addition, the regional director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.

The financial and operational condition of the requesting credit union will be considered in every instance. NCUA will carefully consider the economic advisability of expanding the field of membership of a credit union with financial or operational problems.

In most cases, field of membership amendments will only be approved for credit unions that are operating satisfactorily. Generally, if a federal credit union is having difficulty providing service to its current membership, or is experiencing financial or other operational problems, it may have more difficulty serving an expanded field of membership.

Occasionally, however, an expanded field of membership may provide the basis for reversing current financial problems. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union's financial or operational problems. The applicant credit union must clearly establish that the expanded field of membership is in the best interest of the members and will not increase the risk to the NCUSIF.

II.C.3—Regional Director Approval

If the regional director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.

II.C.4—Regional Director Disapproval

When a regional director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:

• Specific reasons for the action;

• Options to consider, if appropriate, for gaining approval; and

• Appeal procedure.

II.C.5—Appeal of Regional Director Decision

If a field of membership expansion request, merger, or spin-off is denied by the regional director, the federal credit union may appeal the decision to the NCUA Board. An appeal must be sent to the appropriate regional office within 60 days of the date of denial, and must address the specific reason(s) for the denial. The regional director will then forward the appeal to the NCUA Board. NCUA central office staff will make an independent review of the facts and present the appeal to the Board with a recommendation.

Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the regional director for reconsideration. A reconsideration will contain new and material evidence addressing the reasons for the initial denial. The regional director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A second request for reconsideration will be treated as an appeal to the NCUA Board.

II.D—Mergers, Purchase and Assumptions, and Spin-Offs

In general, other than the addition of common bond groups, there are three additional ways a federal credit union with a single occupational common bond can expand its field of membership:

• By taking in the field of membership of another credit union through a common bond or emergency merger;

• By taking in the field of membership of another credit union through a common bond or emergency purchase and assumption (P&A); or

• By taking a portion of another credit union's field of membership through a common bond spin-off.

II.D.1—Mergers

Generally, the requirements applicable to field of membership expansions found in this chapter apply to mergers where the continuing credit union has a federal charter. That is, the two credit unions must share a common bond.

Where the merging credit union is state-chartered, the common bond rules applicable to a federal credit union apply.

Mergers must be approved by the NCUA regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union, and, as applicable, the state regulators.

If a single occupational credit union wants to merge into a multiple common bond or community credit union, Section IV.D or Section V.D of this Chapter, respectively, should be reviewed.

II.D.2—Emergency Mergers

An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA's direct intervention and approval. The credit union to be merged must either be insolvent or likely to become insolvent, and NCUA must determine that:

• An emergency requiring expeditious action exists;

• Other alternatives are not reasonably available; and

• The public interest would best be served by approving the merger.

If not corrected, conditions that could lead to insolvency include, but are not limited to:

• Abandonment by management;

• Loss of sponsor;

• Serious and persistent recordkeeping problems; or

• Serious and persistent operational concerns.

In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.

As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any common bond

restrictions. Under this authority, therefore, a single occupational common bond federal credit union may take into its field of membership any dissimilar charter type.

The common bond characteristic of the continuing credit union in an emergency merger does not change. That is, even though the merging credit union is a multiple common bond or community, the continuing credit union will remain a single common bond credit union. Similarly, if the merging credit union is also an unlike single common bond, the continuing credit union will remain a single common bond credit union. Future common bond expansions will be based on the continuing credit union's original single common bond.

Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union and, as applicable, the state regulators.

II.D.3—Purchase and Assumption (P&A)

Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. In the few instances where a P&A may be appropriate, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency merger criteria are satisfied. However, if the P&A does not meet the emergency merger criteria, it must be processed under the common bond requirements.

In a P&A processed under the emergency criteria, specified loans, shares, and certain other designated assets and liabilities, without regard to common bond restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments.

If the purchased and/or assumed credit union's field of membership does not share a common bond with the purchasing and/or assuming credit union, then the continuing credit union's original common bond will be controlling for future common bond expansions.

P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the purchased and/or assumed credit union and, as applicable, the state regulators.

II.D.4—Spin-Offs

A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.

All common bond requirements apply regardless of whether the spun-off group becomes a new credit union or goes to an existing federal charter.

The request for approval of a spin-off must be supported with a plan that addresses, at a minimum:

• Why the spin-off is being requested;

• What part of the field of membership is to be spun off;

• Whether the affected credit unions have a common bond (applies only to single occupational credit unions);

• Which assets, liabilities, shares, and capital are to be transferred;

• The financial impact the spin-off will have on the affected credit unions;

• The ability of the acquiring credit union to effectively serve the new members;

• The proposed spin-off date; and

• Disclosure to the members of the requirements set forth above.

The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.

For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see Part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.

Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable.

II.E—Overlaps

II.E.1—General

An overlap exists when a group of persons is eligible for membership in two or more credit unions. NCUA will permit single occupational federal credit unions to overlap any other charter without performing an overlap analysis.

II.E.2—Organizational Restructuring

A federal credit union's field of membership will always be governed by the common bond descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of the common bond described in Section 5. NCUA will permit a complete overlap of the credit unions' fields of membership.

If a sponsor organization sells off a group, new members can no longer be served unless they otherwise qualify for membership in the credit union or it converts to a multiple common bond charter.

Credit unions must submit documentation explaining the restructuring and providing information regarding the new organizational structure.

II.E.3—Exclusionary Clauses

An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new chartering manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.

II.F—Charter Conversion

A single occupational common bond federal credit union may apply to convert to a community charter provided the field of membership requirements of the community charter are met. Groups within the existing charter which cannot qualify in the new charter cannot be served except for members of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion. Members of record can continue to be served. Also, in order to support a case for a conversion, the applicant federal credit union may be required to develop a detailed business plan as specified in Chapter 2, Section V.A.3.

A single occupational common bond federal credit union may apply to convert to a multiple common bond charter by adding a non-common bond group that is within a reasonable proximity of a service facility. Groups within the existing charter may be retained and continue to be served. However, future amendments, including any expansions of the original single common bond group, must be done in accordance with multiple common bond policy.

II.G—Removal of Groups From the Field of Membership

A credit union may request removal of a portion of the common bond group from its field of membership for various reasons. The most common reasons for this type of amendment are:

• The group is within the field of membership of two credit unions and one wishes to discontinue service;

• The federal credit union cannot continue to provide adequate service to the group;

• The group has ceased to exist;

• The group does not respond to repeated requests to contact the credit union or refuses to provide needed support; or

• The group initiates action to be removed from the field of membership.

When a federal credit union requests an amendment to remove a group from its field of membership, the regional director will determine why the credit union desires to remove the group. If the regional director concurs with the request, membership will continue for those who are already members under the “once a member, always a member” provision of the Federal Credit Union Act.

II.H—Other Persons Eligible for Credit Union Membership

A number of persons, by virtue of their close relationship to a common bond group,

may be included, at the charter applicant's option, in the field of membership. These include the following:

• Spouses of persons who died while within the field of membership of this credit union;

• Employees of this credit union;

• Persons retired as pensioners or annuitants from the above employment;

• Volunteers;

• Members of the immediate family or household;

• Organizations of such persons; and

• Corporate or other legal entities in this charter.

Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.

Household is defined as persons living in the same residence maintaining a single economic unit.

Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person's immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.

Volunteers, by virtue of their close relationship with a sponsor group, may be included. Examples include volunteers working at a hospital or school.

Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership.

III—Associational Common Bond

III.A.1—General

A single associational federal credit union may include in its field of membership, regardless of location, all members and employees of a recognized association. A single 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. Separately chartered associational groups can establish a single common bond relationship if they are integrally related and share common goals and purposes. For example, two or more churches of the same denomination, Knights of Columbus Councils, or locals of the same union can qualify as a single associational common bond.

Individuals and groups eligible for membership in a single associational credit union can include the following:

• Natural person members of the association (for example, members of a union or church members);

• Non-natural person members of the association;

• Employees of the association (for example, employees of the labor union or employees of the church); and

• The association.

Generally, a single associational common bond does not include a geographic definition and can operate nationally. However, a proposed or existing federal credit union may limit its field of membership to a single association or geographic area. NCUA may impose a geographic limitation if it is determined that the applicant credit union does not have the ability to serve a larger group or there are other operational concerns. All single associational common bonds should include a definition of the group that may be served based on the association's charter, bylaws, and any other equivalent documentation.

The common bond for an associational group cannot be established simply on the basis that the association exists. In determining whether a group satisfies associational common bond requirements for a federal credit union charter, NCUA will consider the totality of the circumstances, which includes:

• Whether members pay dues;

• Whether members participate in the furtherance of the goals of the association;

• Whether the members have voting rights. To meet this requirement, members need not vote directly for an officer, but may vote for a delegate who in turn represents the members' interests;

• Whether the association maintains a membership list;

• Whether the association sponsors other activities;

• The association's membership eligibility requirements; and

• The frequency of meetings.

A support group whose members are continually changing or whose duration is temporary may not meet the single associational common bond criteria. Each class of member will be evaluated based on the totality of the circumstances. Individuals or honorary members who only make donations to the association are not eligible to join the credit union.

Educational groups—for example, parent-teacher organizations, alumni associations, and student organizations in any school—and church groups may constitute associational common bonds.

Student groups (e.g., students enrolled at a public, private, or parochial school) may constitute either an associational or occupational common bond. For example, students enrolled at a church sponsored school could share a single associational common bond with the members of that church and may qualify for a federal credit union charter. Similarly, students enrolled at a university, as a group by itself, or in conjunction with the faculty and employees of the school, could share a single occupational common bond and may qualify for a federal credit union charter.

The terminology “Alumni of Jacksonville State University” is insufficient to demonstrate an associational common bond. To qualify as an association, the alumni association must meet the requirements for an associational common bond. The alumni of a school must first join the alumni association, and not merely be alumni of the school to be eligible for membership.

Homeowner associations, tenant groups, consumer groups, and other groups of persons having an “interest in” a particular cause and certain consumer cooperatives may also qualify as an association.

Associations based primarily on a client-customer relationship do not meet associational common bond requirements. However, having an incidental client-customer relationship does not preclude an associational charter as long as the associational common bond requirements are met. For example, a fraternal association that offers insurance, which is not a condition of membership, may qualify as a valid associational common bond.

Applicants for a single associational common bond federal credit union charter or a field of membership amendment to include an association must provide, at the request of the regional director, a copy of the association's charter, bylaws, or other equivalent documentation, including any legal documents required by the state or other governing authority.

The associational sponsor itself may also be included in the field of membership—e.g., “Sprocket Association”—and will be shown in the last clause of the field of membership.

III.A.2—Subsequent Changes to Association's Bylaws

If the association's membership or geographical definitions in its charter and bylaws are changed subsequent to the effective date stated in the field of membership, the credit union must submit the revised charter or bylaws for NCUA's consideration and approval prior to serving members of the association added as a result of the change.

III.A.3—Sample Single Associational Common Bonds

Some examples of associational common bonds are:

• Regular members of Locals 10 and 13, IBEW, in Florida, who qualify for membership in accordance with their charter and bylaws in effect on May 20, 2001;

• Members of the Hoosier Farm Bureau in Grant, Logan, or Lee Counties of Indiana, who qualify for membership in accordance with its charter and bylaws in effect on March 7, 1997;

• Members of the Shalom Congregation in Chevy Chase, Maryland;

• Regular members of the Corporate Executives Association, located in Westchester, New York, who qualify for membership in accordance with its charter and bylaws in effect on December 1, 1997;

• Members of the University of Wisconsin Alumni Association, located in Green Bay, Wisconsin;

• Members of the Marine Corps Reserve Officers Association; or

• Members of St. John's Methodist Church and St. Luke's Methodist Church, located in Toledo, Ohio.

Some examples of insufficiently defined single associational common bonds are:

• All Lutherans in the United States (too broadly defined); or

• Veterans of U.S. military service (group is too broadly defined; no formal association of all members of the group).

Some examples of unacceptable single associational common bonds are:

• Alumni of Amos University (no formal association);

• Customers of Fleetwood Insurance Company (policyholders or primarily customer/client relationships do not meet associational standards);

• Employees of members of the Reston, Virginia, Chamber of Commerce (not a sufficiently close tie to the associational common bond); or

• Members of St. John's Lutheran Church and St. Mary's Catholic Church located in Anniston, Alabama (churches are not of the same denomination).

III.B—Associational Common Bond Amendments

III.B.1—General

Section 5 of every associational federal credit union's charter defines the field of membership the credit union can legally serve. Only those persons who, or legal entities that, join the credit union and are specified in the field of membership can be served. There are three instances in which Section 5 must be amended by NCUA.

First, a group that shares the credit union's common bond is added to the field of membership. This may occur through various ways including agreement between the group and the credit union directly, or through a merger, purchase and assumption (P&A), or spin-off.

Second, a federal credit union qualifies to change its common bond from:

• A single associational common bond to a single occupational common bond;

• A single associational common bond to a community charter; or

• A single associational common bond to a multiple common bond.

Third, a federal credit union removes a portion of the group from its field of membership through agreement with the group, a spin-off, or a portion of the group that is no longer in existence.

An existing single associational federal credit union that submits a request to amend its charter must provide documentation to establish that the associational common bond requirement has been met. The regional director must approve all amendments to an associational common bond credit union's field of membership.

III.B.2—Organizational Restructuring

If the single common bond group that comprises a federal credit union's field of membership undergoes a substantial restructuring, the result is often that portions of the group are sold or spun off. This is an event requiring a change to the credit union's field of membership. NCUA may not permit a single associational credit union to maintain in its field of membership a sold or spun-off group to which it has been providing service unless the group otherwise qualifies for membership in the credit union or the credit union converts to a multiple common bond credit union.

If the group comprising the single common bond of the credit union merges with, or is acquired by, another group, the credit union can serve the new group resulting from the merger or acquisition after receiving a housekeeping amendment.

III.B.3—Economic Advisability

Prior to granting a common bond expansion, NCUA will examine the amendment's likely impact on the credit union's operations and financial condition. In most cases, the information needed for analyzing the effect of adding a particular group will be available to NCUA through the examination and financial and statistical reports; however, in particular cases, a regional director may require additional information prior to making a decision.

III.B.4—Documentation Requirements

A federal credit union requesting a common bond expansion must submit an Application for Field of Membership Amendment (NCUA 4015-EZ) to the appropriate NCUA regional director. An authorized credit union representative must sign the request.

III.C—NCUA Procedures for Amending the Field of Membership

III.C.1—General

All requests for approval to amend a federal credit union's charter must be submitted to the appropriate regional director.

III.C.2—Regional Director's Decision

NCUA staff will review all amendment requests in order to ensure conformance to NCUA policy.

Before acting on a proposed amendment, the regional director may require an on-site review. In addition, the regional director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.

The financial and operational condition of the requesting credit union will be considered in every instance. The economic advisability of expanding the field of membership of a credit union with financial or operational problems must be carefully considered.

In most cases, field of membership amendments will only be approved for credit unions that are operating satisfactorily. Generally, if a federal credit union is having difficulty providing service to its current membership, or is experiencing financial or other operational problems, it may have more difficulty serving an expanded field of membership.

Occasionally, however, an expanded field of membership may provide the basis for reversing current financial problems. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union's financial or operational problems. The applicant credit union must clearly establish that the expanded field of membership is in the best interest of the members and will not increase the risk to the NCUSIF.

III.C.3—Regional Director Approval

If the regional director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.

III.C.4—Regional Director Disapproval

When a regional director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:

• Specific reasons for the action;

• Options to consider, if appropriate, for gaining approval; and

• Appeal procedures.

III.C.5—Appeal of Regional Director Decision

If a field of membership expansion request, merger, or spin-off is denied by the regional director, the federal credit union may appeal the decision to the NCUA Board. An appeal must be sent to the appropriate regional office within 60 days of the date of denial and must address the specific reason(s) for the denial. The regional director will then forward the appeal to the NCUA Board. NCUA central office staff will make an independent review of the facts and present the appeal to the NCUA Board with a recommendation.

Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the regional director for reconsideration. A reconsideration will contain new and material evidence addressing the reasons for the initial denial. The regional director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A second request for reconsideration will be treated as an appeal to the NCUA Board.

III.D—Mergers, Purchase and Assumptions, and Spin-Offs

In general, other than the addition of common bond groups, there are three additional ways a federal credit union with a single associational common bond can expand its field of membership:

• By taking in the field of membership of another credit union through a common bond or emergency merger;

• By taking in the field of membership of another credit union through a common bond or emergency purchase and assumption (P&A); or

• By taking a portion of another credit union's field of membership through a common bond spin-off.

III.D.1—Mergers

Generally, the requirements applicable to field of membership expansions found in this section apply to mergers where the

continuing credit union is a federal charter. That is, the two credit unions must share a common bond.

Where the merging credit union is state-chartered, the common bond rules applicable to a federal credit union apply.

Mergers must be approved by the NCUA regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union, and, as applicable, the state regulators.

If a single associational credit union wants to merge into a multiple common bond or community credit union, Section IV.D or Section V.D of this Chapter, respectively, should be reviewed.

III.D.2—Emergency Mergers

An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA's direct intervention and approval. The credit union to be merged must either be insolvent or likely to become insolvent, and NCUA must determine that:

• An emergency requiring expeditious action exists;

• Other alternatives are not reasonably available; and

• The public interest would best be served by approving the merger.

If not corrected, conditions that could lead to insolvency include, but are not limited to:

• Abandonment by management;

• Loss of sponsor;

• Serious and persistent record keeping problems; or

• Serious and persistent operational concerns.

In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.

As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any common bond restrictions. Under this authority, therefore, a single associational common bond federal credit union may take into its field of membership any dissimilar charter type.

The common bond characteristic of the continuing credit union in an emergency merger does not change. That is, even though the merging credit union is a multiple common bond or community, the continuing credit union will remain a single common bond credit union. Similarly, if the merging credit union is an unlike single common bond, the continuing credit union will remain a single common bond credit union. Future common bond expansions will be based on the continuing credit union's single common bond.

Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union and, as applicable, the state regulators.

III.D.3—Purchase and Assumption (P&A)

Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. In the few instances where a P&A may be appropriate, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency merger criteria are satisfied. However, if the P&A does not meet the emergency merger criteria, it must be processed under the common bond requirements.

In a P&A processed under the emergency criteria, specified loans, shares, and certain other designated assets and liabilities, without regard to common bond restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments.

If the purchased and/or assumed credit union's field of membership does not share a common bond with the purchasing and/or assuming credit union, then the continuing credit union's original common bond will be controlling for future common bond expansions.

P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the purchased and/or assumed credit union and, as applicable, the state regulators.

III.D.4—Spin-Offs

A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.

All common bond requirements apply regardless of whether the spun-off group becomes a new credit union or goes to an existing federal charter.

The request for approval of a spin-off must be supported with a plan that addresses, at a minimum:

• Why the spin-off is being requested;

• What part of the field of membership is to be spun off;

• Whether the affected credit unions have the same common bond (applies only to single associational credit unions);

• Which assets, liabilities, shares, and capital are to be transferred;

• The financial impact the spin-off will have on the affected credit unions;

• The ability of the acquiring credit union to effectively serve the new members;

• The proposed spin-off date; and

• Disclosure to the members of the requirements set forth above.

The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.

For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see Part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.

Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable.

III.E—Overlaps

III.E.1—General

An overlap exists when a group of persons is eligible for membership in two or more credit unions. NCUA will permit single associational federal credit unions to overlap any other charters without performing an overlap analysis.

III.E.2—Organizational Restructuring

A federal credit union's field of membership will always be governed by the common bond descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of the common bond described in Section 5. NCUA will permit a complete overlap of the credit unions' fields of membership. If a sponsor organization sells off a group, new members can no longer be served unless they otherwise qualify for membership in the credit union or it converts to a multiple common bond.

Credit unions must submit documentation explaining the restructuring and providing information regarding the new organizational structure.

III.E.3—Exclusionary Clauses

An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new chartering manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.

III.F—Charter Conversions

A single associational common bond federal credit union may apply to convert to a community charter provided the field of membership requirements of the community charter are met. Groups within the existing charter which cannot qualify in the new charter cannot be served except for members

of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion. Members of record can continue to be served. Also, in order to support a case for a conversion, the applicant federal credit union may be required to develop a detailed business plan as specified in Chapter 2, Section V.A.3.

A single associational common bond federal credit union may apply to convert to a multiple common bond charter by adding a non-common bond group that is within a reasonable proximity of a service facility. Groups within the existing charter may be retained and continue to be served. However, future amendments, including any expansions of the original single common bond group, must be done in accordance with multiple common bond policy.

III.G—Removal of Groups From the Field of Membership

A credit union may request removal of a portion of the common bond group from its field of membership for various reasons. The most common reasons for this type of amendment are:

• The group is within the field of membership of two credit unions and one wishes to discontinue service;

• The federal credit union cannot continue to provide adequate service to the group;

• The group has ceased to exist;

• The group does not respond to repeated requests to contact the credit union or refuses to provide needed support; or

• The group initiates action to be removed from the field of membership.

When a federal credit union requests an amendment to remove a group from its field of membership, the regional director will determine why the credit union desires to remove the group. If the regional director concurs with the request, membership will continue for those who are already members under the “once a member, always a member” provision of the Federal Credit Union Act.

III.H—Other Persons Eligible for Credit Union Membership

A number of persons by virtue of their close relationship to a common bond group may be included, at the charter applicant's option, in the field of membership. These include the following:

• Spouses of persons who died while within the field of membership of this credit union;

• Employees of this credit union;

• Volunteers;

• Members of the immediate family or household;

• Organizations of such persons; and

• Corporate or other legal entities in this charter.

Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.

Household is defined as persons living in the same residence maintaining a single economic unit.

Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person's immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.

Volunteers, by virtue of their close relationship with a sponsor group, may be included. One example is volunteers working at a church.

Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership.

IV—Multiple Occupational/ Associational Common Bonds

IV.A.1—General

A federal credit union may be chartered to serve a combination of distinct, definable single occupational and/or associational common bonds. This type of credit union is called a multiple common bond credit union. Each group in the field of membership must have its own occupational or associational common bond. For example, a multiple common bond credit union may include two unrelated employers, or two unrelated associations, or a combination of two or more employers or associations. Additionally, these groups must be within reasonable geographic proximity of the credit union. That is, the groups must be within the service area of one of the credit union's service facilities. These groups are referred to as select groups. A multiple common bond credit union cannot include a TIP or expand using single common bond criteria.

A federal credit union's service area is the area that can reasonably be served by the service facilities accessible to the groups within the field of membership. The service area will most often coincide with that geographic area primarily served by the service facility. Additionally, the groups served by the credit union must have access to the service facility. The non-availability of other credit union service is a factor to be considered in determining whether the group is within reasonable proximity of a credit union wishing to add the group to its field of membership.

A service facility for multiple common bond credit unions is defined as a place where shares are accepted for members' accounts, loan applications are accepted or loans are disbursed. This definition includes a credit union owned branch, a mobile branch, an office operated on a regularly scheduled weekly basis, a credit union owned ATM, or a credit union owned electronic facility that meets, at a minimum, these requirements. A service facility also includes a shared branch or a shared branch network if either: (1) the credit union has an ownership interest in the service facility either directly or through a CUSO or similar organization; or (2) the service facility is local to the credit union and the credit union is an authorized participant in the service center. This definition does not include the credit union's Internet Web site.

The select group as a whole will be considered to be within a credit union's service area when:

• A majority of the persons in a select group live, work, or gather regularly within the service area;

• The group's headquarters is located within the service area; or

• The group's “paid from” or “supervised from” location is within the service area.

IV.A.2—Sample Multiple Common Bond Field of Membership

An example of a multiple common bond field of membership is:

“The field of membership of this federal credit union shall be limited to the following:

1. Employees of Teltex Corporation who work in Wilmington, Delaware;

2. Partners and employees of Smith & Jones, Attorneys at Law, who work in Wilmington, Delaware;

3. Members of the M&L Association in Wilmington, Delaware, who qualify for membership in accordance with its charter and bylaws in effect on December 31, 1997.”

IV.B—Multiple Common Bond Amendments

IV.B.1—General

Section 5 of every multiple common bond federal credit union's charter defines the field of membership and select groups the credit union can legally serve. Only those persons or legal entities specified in the field of membership can be served. There are a number of instances in which Section 5 must be amended by NCUA.

First, a new select group is added to the field of membership. This may occur through agreement between the group and the credit union directly, or through a merger, corporate acquisition, purchase and assumption (P&A), or spin-off.

Second, a federal credit union qualifies to change its charter from:

• A single occupational or associational charter to a multiple common bond charter;

• A multiple common bond to a single occupational or associational charter;

• A multiple common bond to a community charter; or

• A community to a multiple common bond charter.

Third, a federal credit union removes a group from its field of membership through agreement with the group, a spin-off, or because the group no longer exists.

IV.B.2—Numerical Limitation of Select Groups

An existing multiple common bond federal credit union that submits a request to amend

its charter must provide documentation to establish that the multiple common bond requirements have been met. The regional director must approve all amendments to a multiple common bond credit union's field of membership.

NCUA will approve groups to a credit union's field of membership if the agency determines in writing that the following criteria are met:

• The credit union has not engaged in any unsafe or unsound practice, as determined by the regional director, which is material during the one year period preceding the filing to add the group;

• The credit union is “adequately capitalized.” NCUA defines adequately capitalized to mean the credit union has a net worth ratio of not less than 6 percent. For low-income credit unions or credit unions chartered less than ten years, the regional director may determine that a net worth ratio of less than 6 percent is adequate if the credit union is making reasonable progress toward meeting the 6 percent net worth requirement. For any other credit union, the regional director may determine that a net worth ratio of less than 6 percent is adequate if the credit union is making reasonable progress toward meeting the 6 percent net worth requirement, and the addition of the group would not adversely affect the credit union's capitalization level;

• The credit union has the administrative capability to serve the proposed group and the financial resources to meet the need for additional staff and assets to serve the new group;

• 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. With respect to a proposed expansion's effect on other credit unions, the requirements on overlapping fields of membership set forth in Section IV.E of this Chapter are also applicable; and

• If the formation of a separate credit union by such group is not practical and consistent with reasonable standards for the safe and sound operation of a credit union.

A detailed analysis is required for groups of 3,000 or more primary potential members requesting to be added to a multiple common bond credit union. It is incumbent upon the credit union to demonstrate that the formation of a separate credit union by such a group is not practical. The group must provide evidence that it lacks sufficient volunteer and other resources to support the efficient and effective operations of a credit union or does not meet the economic advisability criteria outlined in Chapter 1. If this can be demonstrated, the group may be added to a multiple common bond credit union's field of membership.

IV.B.3—Documentation Requirements

A multiple common bond credit union requesting a select group expansion must submit a formal written request, using the Application for Field of Membership Amendment (NCUA 4015 or NCUA 4015-EZ) to the appropriate NCUA regional director. An authorized credit union representative must sign the request.

The NCUA 4015-EZ (for groups less than 3,000 potential members) must be accompanied by the following:

• A letter, or equivalent documentation, from the group requesting credit union service. This letter must indicate:

○ That the group wants to be added to the applicant federal credit union's field of membership;

○ The number of persons currently included within the group to be added and their locations; and

○ The group's proximity to credit union's nearest service facility.

• The most recent copy of the group's charter and bylaws or equivalent documentation (for associational groups).

The NCUA 4015 (for groups of 3,000 or more primary potential members) must be accompanied by the following:

• A letter, or equivalent documentation, from the group requesting credit union service. This letter must indicate:

○ That the group wants to be added to the federal credit union's field of membership;

○ Whether the group presently has other credit union service available;

○ The number of persons currently included within the group to be added and their locations;

○ The group's proximity to credit union's nearest service facility, and

○ Why the formation of a separate credit union for the group is not practical or consistent with safety and soundness standards. A credit union need not address every item on the list, simply those issues that are relevant to its particular request:

Member location—whether the membership is widely dispersed or concentrated in a central location.

Demographics—the employee turnover rate, economic status of the group's members, and whether the group is more apt to consist of savers and/or borrowers.

Market competition—the availability of other financial services.

Desired services and products—the type of services the group desires in comparison to the type of services a new credit union could offer.

Sponsor subsidies—the availability of operating subsidies.

The desire of the sponsor—the extent of the sponsor's interest in supporting a credit union charter.

Employee interest—the extent of the employees' interest in obtaining a credit union charter.

Evidence of past failure—whether the group previously had its own credit union or previously filed for a credit union charter.

Administrative capacity to provide services—will the group have the management expertise to provide the services requested.

• If the group is eligible for membership in any other credit union, documentation must be provided to support inclusion of the group under the overlap standards set forth in Section IV.E of this Chapter; and

• The most recent copy of the group's charter and bylaws or equivalent documentation (for associational groups).

IV.B.4—Corporate Restructuring

If a select group within a federal credit union's field of membership undergoes a substantial restructuring, a change to the credit union's field of membership may be required if the credit union is to continue to provide service to the select group. NCUA permits a multiple common bond credit union to maintain in its field of membership a sold, spun-off, or merged select group to which it has been providing service. This type of amendment to the credit union's charter is not considered an expansion; therefore, the criteria relating to adding new groups are not applicable.

When two groups merge and each is in the field of membership of a credit union, then both (or all affected) credit unions can serve the resulting merged group, subject to any existing geographic limitation and without regard to any overlap provisions. However, the credit unions cannot serve the other multiple groups that may be in the field of membership of the other credit union.

IV.C—NCUA's Procedures for Amending the Field of Membership

IV.C.1—General

All requests for approval to amend a federal credit union's charter must be submitted to the appropriate regional director.

IV.C.2—Regional Director's Decision

NCUA staff will review all amendment requests in order to ensure conformance to NCUA policy.

Before acting on a proposed amendment, the regional director may require an on-site review. In addition, the regional director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.

The financial and operational condition of the requesting credit union will be considered in every instance. An expanded field of membership may provide the basis for reversing adverse trends. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union's adverse trends. The applicant credit union must clearly establish that the approval of the expanded field of membership meets the requirements of Section IV.B.2 of this Chapter and will not increase the risk to the NCUSIF.

IV.C.3—Regional Director Approval

If the regional director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.

IV.C.4—Regional Director Disapproval

When a regional director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:

• Specific reasons for the action;

• Options to consider, if appropriate, for gaining approval; and

• Appeal procedure.

IV.C.5—Appeal of Regional Director Decision

If a field of membership expansion request, merger, or spin-off is denied by the regional director, the federal credit union may appeal the decision to the NCUA Board. An appeal must be sent to the appropriate regional office within 60 days of the date of denial, and must address the specific reason(s) for the denial. The regional director will then forward the appeal to the NCUA Board. NCUA central office staff will make an independent review of the facts and present the appeal to the Board with a recommendation.

Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the regional director for reconsideration. A reconsideration will contain new and material evidence addressing the reasons for the initial denial. The regional director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A second request for reconsideration will be treated as an appeal to the NCUA Board.

IV.D—Mergers, Purchase and Assumptions, and Spin-Offs

In general, other than the addition of select groups, there are three additional ways a multiple common bond federal credit union can expand its field of membership:

• By taking in the field of membership of another credit union through a merger;

• By taking in the field of membership of another credit union through a purchase and assumption (P&A); or

• By taking a portion of another credit union's field of membership through a spin-off.

IV.D.1—Voluntary Mergers

a. All Select Groups in the Merging Credit Union's Field of Membership Have Less Than 3,000 Primary Potential Members

A voluntary merger of two or more federal credit unions is permissible as long as each select group in the merging credit union's field of membership has less than 3,000 primary potential members. While the merger requirements outlined in Section 205 of the Federal Credit Union Act must still be met, the requirements of Chapter 2, Section IV.B.2 of this manual are not applicable.

b. One or More Select Groups in the Merging Credit Union's Field of Membership Has 3,000 or More Primary Potential Members

If the merging credit unions serve the same group, and the group consists of 3,000 or more primary potential members, then the ability to form a separate credit union analysis is not required for that group. If the merging credit union has any other groups consisting of 3,000 or more primary potential members, special requirements apply. NCUA will analyze each group of 3,000 or more primary potential members, except as noted above, to determine whether the formation of a separate credit union by such a group is practical. If the formation of a separate credit union by such a group is not practical because the group lacks sufficient volunteer and other resources to support the efficient and effective operations of a credit union or does not meet the economic advisable criteria outlined in Chapter 1, the group may be merged into a multiple common bond credit union. If the formation of a separate credit union is practical, the group must be spun-off before the merger can be approved.

c. Merger of a Single Common Bond Credit Union Into a Multiple Common Bond Credit Union

A financially healthy single common bond credit union with a primary potential membership of 3,000 or more cannot merge into a multiple common bond credit union, absent supervisory reasons, unless the continuing credit union already serves the same group.

d. Merger Approval

If the merger is approved, the qualifying groups within the merging credit union's field of membership will be transferred intact to the continuing credit union and can continue to be served.

Where the merging credit union is state-chartered, the field of membership rules applicable to a federal credit union apply.

Mergers must be approved by the NCUA regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union, and, as applicable, the state regulators.

IV.D.2—Supervisory Mergers

The NCUA may approve the merger of any federally insured credit union when safety and soundness concerns are present without regard to the 3,000 numerical limitation. The credit union need not be insolvent or in danger of insolvency for NCUA to use this statutory authority. Examples constituting appropriate reasons for using this authority are: abandonment of the management and/or officials and an inability to find replacements, loss of sponsor support, serious and persistent record keeping problems, sustained material decline in financial condition, or other serious or persistent circumstances.

IV.D.3—Emergency Mergers

An emergency merger may be approved by NCUA without regard to field of membership rules, the 3,000 numerical limitation, or other legal constraints. An emergency merger involves NCUA's direct intervention and approval. The credit union to be merged must either be insolvent or likely to become insolvent, and NCUA must determine that:

• An emergency requiring expeditious action exists;

• Other alternatives are not reasonably available; and

• The public interest would best be served by approving the merger.

If not corrected, conditions that could lead to insolvency include, but are not limited to:

• Abandonment by management;

• Loss of sponsor;

• Serious and persistent record keeping problems; or

• Serious and persistent operational concerns.

In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.

As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any field of membership restrictions including numerical limitation requirements. Under this authority, any single occupational or associational common bond, multiple common bond, or community charter may merger into a multiple common bond credit union and that credit union can continue to serve the merging credit union's field of membership. Subsequent field of membership expansions of the continuing multiple common bond credit union must be consistent with multiple common bond policies.

Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the merging credit union and, as applicable, the state regulators.

IV.D.4—Purchase and Assumption (P&A)

Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. Generally, the requirements applicable to field of membership expansions found in this chapter apply to purchase and assumptions where the purchasing credit union is a federal charter.

A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. However, in the few instances where a P&A may occur, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency criteria are satisfied. Specified loans, shares, and certain other designated assets and liabilities, without regard to field of membership restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments. Subsequent field of membership expansions must be consistent with multiple common bond policies.

P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director where the continuing credit union is headquartered, with the concurrence of the regional director of the purchased and/or assumed credit union and, as applicable, the state regulators.

IV.D.5—Spin-Offs

A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the

other loses a portion of its field of membership.

All common bond requirements apply regardless of whether the spun-off group becomes a new charter or goes to an existing federal charter.

The request for approval of a spun-off group must be supported with a plan that addresses, at a minimum:

• Why the spin-off is being requested;

• What part of the field of membership is to be spun off;

• Which assets, liabilities, shares, and capital are to be transferred;

• The financial impact the spin-off will have on the affected credit unions;

• The ability of the acquiring credit union to effectively serve the new members;

• The proposed spin-off date; and

• Disclosure to the members of the requirements set forth above.

The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.

For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see Part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.

Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable.

IV.E—Overlaps

IV.E.1—General

An overlap exists when a group of persons is eligible for membership in two or more credit unions, including state charters. An overlap is permitted when 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.

Credit unions must investigate the possibility of an overlap with federally insured credit unions prior to submitting an expansion request if the group has 3,000 or more primary potential members. If cases arise where the assurance given to a regional director concerning the unavailability of credit union service is inaccurate, the misinformation may be grounds for removal of the group from the federal credit union's charter.

When an overlap situation requiring analysis does arise, officials of the expanding credit union must ascertain the views of the overlapped credit union. If the overlapped credit union does not object, the applicant must submit a letter or other documentation to that effect. If the overlapped credit union does not respond, the expanding credit union must notify NCUA in writing of its attempt to obtain the overlapped credit union's comments.

NCUA will approve an overlap if the expansion's beneficial effect in meeting the convenience and needs of the members of the group clearly outweighs any adverse effect on the overlapped credit union.

In reviewing the overlap, the regional director will consider:

• The view of the overlapped credit union(s);

• Whether the overlap is incidental in nature—the group of persons in question is so small as to have no material effect on the original credit union;

• Whether there is limited participation by members or employees of the group in the original credit union after the expiration of a reasonable period of time;

• Whether the original credit union fails to provide requested service;

• Financial effect on the overlapped credit union;

• The desires of the group(s);

• The desire of the sponsor organization; and

• The best interests of the affected group and the credit union members involved.

Generally, if the overlapped credit union does not object, and NCUA determines that there is no safety and soundness problem, the overlap will be permitted.

Potential overlaps of a federally insured state credit union's field of membership by a federal credit union will generally be analyzed in the same way as if two federal credit unions were involved. Where a federally insured state credit union's field of membership is broadly stated, NCUA will exclude its field of membership from any overlap protection.

NCUA will permit multiple common bond federal credit unions to overlap community charters without performing an overlap analysis.

IV.E.2—Overlap Issues as a Result of Organizational Restructuring

A federal credit union's field of membership will always be governed by the field of membership descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of any select group listed in Section 5. Where acquisitions are made which add a new subsidiary, the group cannot be served until the subsidiary is included in the field of membership through a housekeeping amendment.

Overlaps may occur as a result of restructuring or merger of the parent organization. When such overlaps occur, each credit union must request a field of membership amendment to reflect the new groups each wishes to serve. The credit union can continue to serve any current group in its field of membership that is acquiring a new group or has been acquired by a new group. The new group cannot be served by the credit union until the field of membership amendment is approved by NCUA.

Credit unions affected by organizational restructuring or merger should attempt to resolve overlap issues among themselves. Unless an agreement is reached limiting the overlap resulting from the corporate restructuring, NCUA will permit a complete overlap of the credit unions' fields of membership. When two groups merge, or one group is acquired by the other, and each is in the field of membership of a credit union, both (or all affected) credit unions can serve the resulting merged or acquired group, subject to any existing geographic limitation and without regard to any overlap provisions. This is accomplished through a housekeeping amendment.

Credit unions must submit to NCUA documentation explaining the restructuring and provide information regarding the new organizational structure.

IV.E.3—Exclusionary Clauses

An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new charte

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