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Letters to Regulators

Organization and Operations of Federal Credit Unions, Proposed Amendments on Chartering and Field of Membership Policies (IRPS 02-5)

February 3, 2003

Becky Baker, Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3248

Re: 12 CFR Part 701: Organization and Operations of Federal Credit Unions, Proposed Amendments on Chartering and Field of Membership Policies (IRPS 02-5)

Dear Ms. Baker:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to offer the following comments on the NCUA's proposed amendments to its chartering and field of membership manual to update chartering policies and further streamline documentation requirements.

Fundamentally, the ICBA believes that many of the proposed changes undermine completely the concept of the common bond, rendering it meaningless. The key tenet underlying the credit union charter is the existence of a common bond. The more that the NCUA disregards that fundamental element and allows membership to a broad variety of individuals that do not share a true common bond, the less significant the common bond becomes. And, if there is no common bond, then the justification for the credit union charter disappears.

With membership circles ever expanding, the credit union mission to "serve people of modest means" appears to be taking a back seat to unbridled desire for growth and expansion. We believe this zeal for expansion is being done on the backs of the customers of traditional credit unions, who do not stand to benefit from industry expansion and size polarization.


Currently, the NCUA takes steps to prevent two credit unions from having substantially overlapping fields of membership. Generally, an "overlap" exists when a group of persons is eligible for membership in two or more credit unions. Many credit unions are protected from overlapping fields of membership by an exclusionary clause precluding another credit union from serving a primary group in its field of membership. Current law requires the NCUA to do an overlap analysis on select group expansions for multiple group credit unions. Under the proposal, the NCUA would eliminate overlap analysis and protection for all other credit unions. In addition, the NCUA is proposing that an overlap of a group of less than 3,000 should be classified as an incidental overlap and no overlap analysis should be required. The NCUA bases this proposal on the premise that there is no empirical evidence that overlaps adversely impact credit unions and that elimination of overlap restrictions when not mandated by statute would foster consumer choice.

While the ICBA supports consumer choice, we do not believe it is appropriate for the NCUA to eliminate overlap analysis and protection. The strong underlying tenet of credit unions is the ability to serve members who have a common bond. The NCUA should continue to analyze overlaps and maintain overlap protections in the interest of ensuring that credit unions that seek to serve the same membership base can co-exist and operate safely and soundly.

Elimination of overlap analysis and protection could ultimately hurt the smaller, more traditional occupation-based credit unions, which could have their customer base "cherry-picked" by larger credit unions. Contrary to the contention in the Board's proposal that eliminating overlap protection would benefit credit union members, adoption of this proposal could ultimately hurt the membership base of the smaller credit unions by limiting the financial options available to them because of their smaller size and leaving the smaller credit union unable to continue to operate safely. The ICBA believes that this action will only help the big get bigger and the small get smaller and is unsupportable.

We also have concerns that classifying overlaps of less than 3,000 people as incidental and no longer subject to overlap analysis is arbitrary and not substantiated by facts. Overlaps of 3,000 people may, indeed, be incidental in urban areas, but not so in rural areas and other areas with less dense populations. The ICBA believes that an overlap analysis should continue to be required in all overlap cases.

Reasonable Proximity and Service Facility for Select Group Expansions

To add a new select group to a multiple common bond credit union, the Federal Credit Union Act, as amended, requires reasonable proximity.2 Under the Credit Union Membership Access Act (CUMAA), if the formation of a separate credit union is not practicable, then a select group can be included in the "field of membership of a credit union that is within reasonable proximity to the location of the group."3 The Board determines reasonable proximity on a case-by-case basis, stating that the group to be added must be within the "service area" of a "service facility" of the credit union. The Board is proposing to relax these restrictions to include ATMs that are wholly-owned by the credit union within the scope of that definition.

The ICBA does not believe that this proposal is in accordance with CUMAA. Congress clearly outlined that reasonable proximity is necessary to ensure that the existing credit union can adequately serve the members of the group to be added. The statutory interpretation that this proposal relies upon disregards this requirement by permitting credit unions to add select groups that are not reasonably proximate by simply installing an ATM near the select group to be added. This makes a mockery out of Congressional intent and undermines the basis upon which the Board determines that select group members are reasonably served. For example, is it fair and reasonable to conclude that a customer who has access only to a credit union's ATM has access to the same level of service and financial products as a customer who has access to a full service branch of the credit union? A plausible outcome of this proposal is a proliferation of credit union ATMs in areas of potential growth for the sole purpose of qualifying under the reasonable proximity requirement, regardless of whether the credit union can adequately serve the group to be added with a full array of services.

Moreover, current NCUA regulations encourage all credit unions to develop programs to serve low- and moderate-income individuals in underserved areas. A critical factor for these individuals is the access to human professionals that can provide assistance with these individuals' financial needs. An ATM does not offer that kind of support. The ICBA believes it is disingenuous to suggest that the presence an ATM creates reasonable proximity to the services of a credit union.

Associational Common Bond

Under current law and regulations, associational common bonds must have the following three indicia: the group must 1) hold meetings open to all members, 2) sponsor other activities which demonstrate that the members of the group meet to accomplish the objectives of the association, and 3) have an authoritative definition of who is eligible for membership. The NCUA Chartering Manual then lists other factors that the Board may consider in determining whether a proper associational common bond exists.

The Board is proposing the elimination of the three mandatory requirements, which would be merged into "other factors" that the Board may consider. Under the proposal, the Board will then look at the totality of the circumstances when determining whether an associational common bond exists.

The Board further proposes to explicitly state in the Chartering Manual that national associations qualify for credit union service in their entirety if the association's headquarters are within reasonable proximity to the credit union.

The ICBA strongly objects to these proposed changes. The three indicia required under current regulations to qualify as an associational common bond themselves have proven to be insufficient to preclude widespread abuses of the policy. If the intent of the three requirements was to be limiting, it has failed. If anything, the qualifications should be made more restrictive, not less.

The ICBA is concerned that liberalizing the requirements for an associational common bond credit union could lead to formation of "sham" credit unions. The NCUA must ensure that the association is a legitimate group serving a legitimate purpose with bona fide members, and not a sham established for the purpose of forming a credit union. The best way to do this, in our opinion, is to continue to require the three indicia in current regulations as pre-requisites to NCUA approval.

We also can find no justification for the proposal to qualify national associations in their entirety if the association's headquarters is within reasonable proximity to the credit union. Having the association's national headquarters near a credit union does not ensure that the association's membership, which could be spread all over the country, are being adequately served.

Indeed, the implications of this proposal is far reaching and border on the absurd. Since there is a credit union office within a block of ICBA headquarters in Washington, D.C., this would theoretically make every ICBA member in the country eligible to join an "ICBA associational credit union." Similarly, the National Association of Home Builders and the National Association of Realtors are nearby, so they, too, theoretically could form associational credit unions and offer membership to their hundreds of thousands of members nationwide. Is this what the drafters of the Federal Credit Union Act had in mind in 1934 when they created credit unions to "serve people of modest means" with a common bond - a handful of national mega-credit union behemoths serving far-flung populations? We think not, and urge the NCUA Board to reconsider this proposed change in FOM policy.

Occupational Common Bond

The NCUA Board is proposing to add a fifth definition of occupational common bond to include designations based on employment in a trade, industry or profession (TIP), at any number of corporations or other legal entities, based on a common bond of producing similar products, providing similar services, or sharing the same profession or trade.

The ICBA strongly objects to this proposed change. Even though the NCUA Board has indicated in its proposal that the "groups must have a close nexus and must be narrowly defined," and "in most cases, will contain a geographic limitation" to correspond to the credit union's current or planned service area, we are concerned that the outcome of this change will be the formation of large credit unions with national scope offering membership with little regard to affinity. For example, the proposal cites a potential TIP for certified public accountants (CPAs) and explains that the TIP would not include clerical or other administrative staff at CPA firms. But it would include CPAs, and there are currently 350,000 CPAs who belong to the American Institute of Certified Public Accountants (AICPA). This would constitute a substantial national credit union and presumably draw at least part of its membership base from other existing credit unions. With the liberal FOM rules currently in existence providing virtually every American an opportunity to join at least one credit union, we cannot see the justification for this further liberalization of the rules.

If such a change is allowed, the notion of an occupational common bond will be so diluted as to be meaningless. This expansion of eligibility for credit union membership has the potential to create credit union membership groups that are so geographically disbursed that individual members will have insufficient access to credit union facilities. The ICBA is concerned that this compromises the safe and sound operation of the credit union. Moreover, such breadth of membership and geographic disbursement of membership opens the door to potential fraud and money laundering activities, as members far removed from the credit union's offices can open accounts and conduct transactions without near proximity to the credit union. The ability to identify and confirm the identity of such members will be extremely problematic for the credit union.

According to the Credit Union Journal, "The TIP is one of a number of major reforms by NCUA to its FOM rules, which have been loosened enough over the past four years to more than double the number of potential members eligible to join an FCU to more than 280 million - greater than the entire U.S. population."4 (Emphasis added). One might ask - how much is enough?

Economic Advisability and the Process for Select Group Expansions of Less than 3000

When considering a request by a multiple common bond credit union to add a new employee group to its membership, the NCUA by statute must give deference to the formation of a separately chartered credit union by the group if it is practical and consistent with reasonable standards for safety and soundness. However, in 1999, the Board adopted an expedited process for groups of 200 or less primary potential members since the Board determined that a group that small would not be economically viable. In 2000, the Board increased the number to 500. The Board is proposing to again raise that number to 3,000.

As evidence, the Board notes that 95% of the groups added to multiple common bond credit unions in 2001 were 500 persons or less, and fewer than one percent of the approved expansions were for groups of 3,000 or more. Importantly, the Board notes, no group of less than 3,000 persons was denied for the reason that it was economically viable for the group to form its own credit union.

The ICBA agrees that the empirical evidence seems to support the Board's proposal to raise the cap for expediting processing to 3,000 persons. Our concern remains, however, that the outcome of such a change would be the creation of larger and larger credit unions, further polarizing the credit union industry to the detriment of customers of small credit unions. It would seem to make more public policy sense to encourage the formation of new credit unions by multiple employee groups rather than allow existing credit unions to continually expand their membership base.

The ICBA also questions whether such an increase in the cap of groups eligible to join other multiple group credit unions is in keeping with Congressional intent when it adopted CUMAA. Again, this is the type of step that dilutes the meaning of the common bond and diminishes the justification for the credit union charter.

Community Charters

The NCUA Board is proposing far-reaching changes to its rules governing community charter conversions and what constitutes a community. First, the Board is proposing that any city, county, or smaller political jurisdiction, regardless of population size, meets the definition of local community. Second, the Board is proposing that any area that is a Metropolitan Statistical Area (MSA), or its equivalent, or a portion thereof, having up to one million residents, meets the definition of local community. The Board notes that a credit union can request a local community that exceeds one million persons, but additional documentation would be required. Third, the Board is proposing that the presumptive size of a local community be increased to 500,000 residents, from 200,000, for multiple political jurisdictions that are not part of a single MSA. Again, a credit union may request a local community with a larger population base, but it must be supported by greater documentation. Fourth, the Board is proposing to amend the Chartering Manual to clearly allow community based credit unions to convert to serve a different community area. Fifth, the Board is proposing to clarify that persons or organizations that regularly do business in the community can be eligible for credit union membership.

The ICBA strongly objects to these proposed changes. Credit union powers and charters today bear little resemblance to what Congress envisioned when it chartered credit unions in 1934. Congress created credit unions to provide credit to "people of small means" who had a "common bond" of employment, association or community. Congress granted credit unions tax-exempt status in consideration of their restricted mission and limited scope. In 1998, Congress greatly liberalized the "common bond" requirement allowing credit unions to serve multiple employee groups and the general population. But we do not believe Congress ever intended that credit unions should serve population centers of one million people or more. What kind of common bond or affinity could a group that large possibly have except for the happenstance that they live in the same city, county or MSA?

As the preamble to the proposal recognizes, "A community credit union must meet the statutory requirements that the proposed community area is (1) well-defined, and (2) a local community, neighborhood, or rural district." It is hard to imagine how a metropolitan area of one million persons or more could meet the definition of a local community or neighborhood.

We do not believe that this NCUA proposal is consistent with the statutory mission of credit unions, or the specific requirements of CUMAA, and further raises safety and soundness concerns based on the limited experience of credit unions in serving large population centers with a diversified customer base.

Allowing credit unions to serve large population centers also calls into question their commitment and ability to serve the needs of lower income and un-banked populations. Last year, the Woodstock Institute, a Chicago-based nonprofit that promotes access to capital and credit, released a reports5 showing that credit unions do not live up to their statutory mission of serving people of small means. Based on surveys of about 3,000 respondents in the Chicago metropolitan area, the report refuted claims by the credit union industry and its regulator, the NCUA, that credit unions had achieved the goal of serving low-income people (the NCUA earlier withdrew a requirement that credit unions document their service to low-income areas, arguing that the industry had already met this goal).

The press release accompanying the report said, "Woodstock's report shows the claim to be false and damaging to the challenge of bringing low-income people into the financial mainstream." The fact is that credit unions get tax benefits, estimated to reach $6 billion by 2003, in part because, "they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means," according to the Federal Credit Union Act.

Indeed, the House Report on H.R. 1151 ("CUMAA") states: "Section 204 reaffirms the continuing and affirmative obligation of insured credit unions to meet the financial services needs of persons of modest means, including those with low- and moderate-incomes, consistent with safe and sound operations."6 We question whether the NCUA proposal to expand credit union access to large population groups is consistent with this mandate.

It has been clear for some time that there is a strong trend in the credit union industry, routinely enabled by NCUA actions, away from the statutory mandate to serve people of small means and towards direct competition with commercial banks for customers in the general population for all product and service lines. For example, some credit unions are now making commercial loans and are involved in electronic bill payment and presentment, trustee and custodial services, finder activities, certification services, marketing activities and financial counseling. Some even offer "smart cards." The proposal to allow credit unions to serve large population centers virtually without limit promotes that trend. The ICBA believes that if credit unions want to be the functional equivalent of banks and thrifts and compete with banks and thrifts on these expanded product and service lines in an open market, they should be willing to comply with the same laws and regulations as banks and thrifts, and that includes the obligation to comply with the Community Reinvestment Act (CRA) and pay taxes. And the NCUA should be the primary proponent of this requirement, not an active opponent.

The creation of a community credit union charter is designed to allow service for small, discrete communities. With each change that it proposes, the NCUA continues to expand this concept unreasonably. The ICBA receives phone calls regularly from bankers who cite case after case of credit unions offering credit union membership on the flimsiest of field-of-membership (FOM) pretense with little or no regard to membership affinity. One credit union proclaimed on a billboard ad that "anyone can join." Others have bare-bones membership requirements ensuring that anyone who wants to join will be able to do so. The Galveston, Texas, County Federal Credit Union, which converted from an employee group charter to a community charter in 1999, advertises that "Membership is open to the community. Live, work, worship or attend school in Galveston County and you are eligible for membership." The credit union's web site also notes that "immediate family members (spouse, child, sibling, parent, grandparent, or grandchild if not living in the same residence) or household (persons living in the same residence and who maintain a single economic unit)" also are eligible. One wonders who in Galveston County is not eligible?

If credit unions can serve large population centers contemplated by the proposed change, the concept of common bond in these instances becomes meaningless. Furthermore, the ability to serve such broad and diverse communities will put undue pressure on the credit union to engage in bank-like services to meet member needs. The ICBA believes that the step that the NCUA proposes will only serve to foster the growth of bank-like credit unions that are banks in virtually every way without the obligations of the CRA and taxes.

Common Bond Conversions

The NCUA Board is proposing to eliminate the three-year waiting period for a common bond credit union to convert to another type of charter, except a community charter. The Board argues that this prohibition unduly limits the flexibility needed for Federal credit unions to serve their members and make well-reasoned business decisions.

The ICBA believes that the three-year waiting period is appropriate and discourages rule manipulation for the purpose of expanding membership. For example, under current rules, a multiple-common bond credit union may elect to convert to a single-common bond charter for the purpose of adding groups outside its geographic area, then switch back to a multiple-common bond charter, thwarting common bond restrictions.

The ICBA believes that if there are extraordinary circumstances that require waiver of a general rule, then the NCUA Board should assess the situation on a case-by-case basis, but only after a clear showing of need.

Charter Conversions

The NCUA Board proposes to allow any state chartered credit union that converts to a Federal charter to retain any groups obtained through a state's emergency field of membership provision, which is a procedure equivalent to the NCUA's emergency merger provision.

The ICBA does not object to these changes.

The Appeals Process

The Board is proposing to make certain changes to the Chartering Manual to clarify certain procedures used during the appeals process, including adding an appeals section to cover underserved areas.

The ICBA does not object to these changes.

Miscellaneous Clarifications

The Board is proposing four "miscellaneous clarifications," including a conforming proposal on foreign branching, a proposal dealing with the transfer of membership involving "spin-offs," or terminated membership groups, and technical wording changes to the Chartering Manual. The ICBA has no objection to these three changes.

However, we strongly object to the fourth "miscellaneous clarification" that would allow single and multiple group credit unions to include corporate and business sponsors in their membership without requesting permission from the NCUA. Such a general waiver is now granted to community charters.

The ICBA has consistently expressed concerns about the rapid entry of credit unions into the commercial lending arena. Credit unions were created by Congress, and given certain tax and regulatory advantages, for the purpose of serving individuals of modest means. It is doubtful that Congress, in passing the Federal Credit Union Act of 1934, ever envisioned credit unions making commercial loans.

Indeed, the CUMAA imposed a limit on member business loans. The Senate Banking Committee report on this bill stated clearly that Congress intended that business lending by credit unions be incidental to, and not the main focus of, the services provided to their customers. The reasoning behind this concern was sound - commercial lending is a highly specialized and have the experience or staff to ensure the safety and soundness of their business lending operations.

The current restrictions on member business loan activity is, in our view, more than sufficient for any credit union to make member business loans as an incidental service. Still, the credit union industry has been relentless in its pursuit of expanded commercial lending powers in circumvention, in our view, of the statutory limitation on commercial lending:

  • They have asked the NCUA to make regulatory changes to facilitate a greater involvement in small business services (the NCUA has in the past been open to credit union expansion).

  • They are pressing the SBA to open its 7 (a) small business loan program to more credit unions (SBA loans are not covered by the limitation on "member business loans").

  • They are lobbying Congress to expand the types of loans that would be exempt from the "member business loan" cap (effectively raising the cap).

  • And they are seeking access to the Federal Home Loan Bank System (to circumvent statutory limitations on capital).

Credit unions have a decided funding advantage over community banks because of their tax exemption and exclusion from CRA. This may have been justifiable when the scope of credit unions was limited by the obligation to serve people with a "common bond." However, it is difficult to justify today as credit unions have expanded their scope to serve the general population through community charters. This makes their aggressive pursuit of expanded commercial lending opportunities all the more troubling.

The Board's proposal to facilitate the membership of business and corporate sponsors will exacerbate the trend into commercial activities and raise serious safety and soundness concerns as well as concerns about increasing the risk to the industry's insurance fund.

Large, corporate-style credit unions continue to stray from their statutory mission to serve people of modest means and offer many of the same products and services as commercial banks. Competition in the marketplace is healthy, provided the competition is fair. When one competitor pays taxes and the other does not, that constitutes unfair competition. If credit unions want to maintain their tax-exempt status, they should be required to focus on their statutory mission.

Thank you for this opportunity to comment.


A. Pierce Stone

1ICBA is the nation's leading voice for community banks and the only national trade association dedicated exclusively to protecting the interests of the community banking industry, ICBA has 5,000 members with branches in 17,000 locations nationwide. Our members hold more than $526 billion in insured deposits, $643 billion in assets and more than $405 billion in loans for consumers, small businesses, and farms. They employ more than 231,000 people in the communities they serve

2CUMAA section 102, adding section 109(f)(1)(B) to the Federal Credit Union Act.

312 USC 1759 (f)(1)(B)

4"NCUA Continues to Stretch Definition of The Common Bond," by Ed Roberts, Washington Bureau Chief, The Credit Union Journal, December 2, 2002.

5"Rhetoric and Reality: An Analysis of Mainstream Credit Unions' Record of Serving Low-Income People," Woodstock Institute, Chicago, IL, February 14, 2002.

6House Report 105-472, page 21

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