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Testimony of the 107th Congress

NCUA Implementation of the Credit Union Membership Access Act of 1998

TESTIMONY
106th CONGRESS

 

Prepared Statement of
Lee Stenehjem
On Behalf of the Independent Bankers Association of America
Submitted to the
Subcommittee on Financial Institutions and Consumer Credit
U.S. House of Representatives
Regarding
NCUA Implementation of the Credit Union Membership Access Act of 1998
February 3, 1999

Good morning, Madame Chairwoman and Members of the Committee. I am Lee Stenehjem, the President of First International Bank & Trust, a $288 million community bank located in Fargo, North Dakota. I am pleased to have the opportunity to testify on behalf of the Independent Bankers Association of America (IBAA) regarding the National Credit Union Association's (NCUA) implementation of the "Credit Union Membership Access Act of 1998" ("CUMAA" or the "Act").

IBAA is the primary voice for the nation's community banks, representing 5,500 institutions at nearly 16,000 locations nationwide. Community banks, which are independently-owned and operated, are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. IBAA's members hold nearly $445 billion in insured deposits, $524 billion in assets and more than $314 billion in loans for consumers, small businesses and farms in the communities they serve.

Madame Chair, before I proceed with my testimony, I would like to thank you for holding this extremely important hearing. The credit union regulators have, once again, totally ignored the will of the Congress and statutory mandates in implementing their field of membership rule. We have intervened as a co-plaintiff in the ABA's lawsuit contesting the legality of their action. We appreciate the fact that your Subcommittee believes this matter warrants a hearing, as well as the comment letters that you and Mr. LaFalce wrote expressing your own reservations about the proposed NCUA rule.

In establishing credit unions in the 1930's with the passage of the Federal Credit Union Act ("FCUA"), Congress intended to promote the development of independent institutions to serve small discrete groups of individuals. The underlying premise was to ensure that like-situated individuals of modest means had access to financial resources through pooled assets.

The FCUA limited credit union membership to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district. However, recent changes made by CUMAA authorize the chartering of multiple common bond credit unions in addition to single occupational or associational common bond credit unions and community credit unions serving well-defined local communities, neighborhoods or rural districts.

Underlying the formation of credit unions is the notion of the common bond. To be truly meaningful, the concept of common bond must be acknowledged and supported by the NCUA regulations. Allowing the common bond to be distorted and blurred, as we believe the NCUA regulations have done, encourages the creation of large credit unions, discourages the formation of smaller credit unions, and could negatively impact the safety and soundness of the credit union and financial services industry if credit unions are allowed to saturate the market. In the long run, a distorted common bond does a disservice to the credit union movement.

Furthermore, as the concept of the "common bond" becomes more meaningless, credit unions are fast becoming more and more like commercial banks and thrifts. As the distinctions diminish, the need for a separate structure -- and an independent regulatory agency -- also will diminish, and it will become increasingly illogical to continue allowing a credit union tax subsidy based upon a semantic distinction. Therefore, IBAA believes that Congress and the NCUA should preserve the unique character of the credit union industry, not blur it out of existence, and an appropriate field of membership regulation is an excellent place to start.

The Subcommittee's letter of invitation asks that our testimony specifically address certain issues related to field of membership, namely: (1) whether the NCUA's revised "economic advisability" level is consistent with Congress' intent to encourage the formation of new, separately chartered credit unions for groups of less than 3,000; (2) whether the NCUA has a duty to encourage the formation of new, separately chartered credit unions; (3) whether the "desire" of a large group to be added to an existing credit union should be taken into account in determining whether the group should be added; (4) whether the NCUA's final rule favors large, local credit unions at the expense of small, local credit unions, and the impact, if any, of overlapping fields of membership on small credit unions; (5) whether the NCUA implements Congressional intent with respect to the "reasonable geographic proximity" requirement for adding groups to existing credit unions; (6) whether the NCUA is obligated under CUMAA to place a group with a local credit union which would most benefit in terms of safety and soundness, even if the credit union did not file an application; (7) IBAA's opinion regarding the terms "family member" and "member of household;" and, last but not least, (8) our views regarding community credit union charters and expansion and geographic and population limits which the final rule places on community charters.

I. The NCUA's Economic Advisability Provisions Discourage
the Establishment of Smaller Credit Unions

The NCUA's final rule on economic advisability provides that, as a general matter, groups should have at least 3,000 members if they are to form a new credit union. IBAA strongly believes that the NCUA rule on this issue is inconsistent with the unambiguous intent of Congress and the law because it discourages the formation of new, separately chartered credit unions for groups of less than 3,000.

The 3,000 Member Criterion. Section 101 of CUMAA specifies that, in order for a group to be included in a multiple common bond credit union, it must initially be "a group with fewer than 3,000 members." Congress paid particular attention to this size restriction during the legislative debate, and the limitation is designed to foster the original purpose of credit unions -- to serve small, distinct groups of individuals. (There is an exception to this general prohibition if the NCUA Board determines, in writing, that a group over 3,000 could not feasibly establish its own independent single common bond credit union because: (1) it lacks sufficient resources; (2) does not meet other criteria established by the NCUA for a successful credit union; or (3) would not be likely "to operate a safe and sound credit union." The numerical limits also do not apply to a group transferred from another credit union.) Unfortunately, where Congress has set 3,000 as a ceiling, the NCUA is using it as a floor.

The NCUA's final rule provides that, "While NCUA has not set a minimum field of membership size for chartering a federal credit union, experience has suggested that a credit union with fewer than 3,000 primary potential members (e.g., employees of a corporation or members of an association) may not be economically advisable." Therefore, while a group with less than 3,000 may apply to establish a federal credit union, it will have to supply greater documentation, that is, face a far greater burden, to demonstrate viability.

Also, stating that groups with less than 3,000 potential members are not economically viable is not supported by the facts. Over 3,300 credit unions have less than $2 million in assets and an average membership of 700, and there are over 2,000 credit unions with memberships of 500 or less. These credit unions are profitable and adequately capitalized, and totally contradict the NCUA's assertion.

II. The Final Rule Does Not Encourage the Formation of New Credit Unions

Separately Chartered Credit Unions. IBAA believes that the NCUA regulation does not encourage the formation of new, separately chartered, single common bond credit unions. Section 102 of the Act specifically directs NCUA to encourage the creation of separately chartered, single common bond credit unions whenever practical consistent with reasonable safety and soundness standards. Because of the way the NCUA final rule is drafted, it does little to encourage the formation of new credit unions, while facilitating the creation of multiple common bond credit unions.

While Congress only intended to allow groups over 3,000 to become allied in multiple common bond credit unions under exceptional circumstances, the NCUA regulation would make it the rule rather than the exception. This is inconsistent with the plain statutory language of the Act, directly contradicts Congressional intent, and unfairly imposes a greater documentation burden on groups smaller than 3,000. The high barrier placed in front of groups with less than 3,000 members virtually requires them to affiliate with other select groups in a multiple common bond.

The final rule should make it easier for smaller groups to become established, and should place a greater documentation burden on groups over 3,000 seeking to affiliate with multiple common bond credit unions.

III. A Large Credit Union's Desire to Join An Existing Credit Union
Should Be Given Little Weight

The NCUA rule provides that, in addition to other factors such as operational feasibility and economic factors, it will consider a large group's "desire" to be added to an existing credit union in determining whether the group should be added. In other words, if a credit union exceeding 3,000 members wants to join a multiple common bond credit union, its "desire" will be considered to the same extent as other factors.

IBAA believes that this interpretation of the law undermines the mandate in section 102 of CUMAA specifically directing the NCUA to encourage the creation of separately chartered, single common bond credit unions whenever practical consistent with reasonable safety and soundness standards. The fact is, CUMAA creates a presumption that a credit union exceeding 3,000 members should be required to form a single credit union, and the fact that a large group wishes to join a multiple credit union should not be given the same weight as other more important factors.

IV. The NCUA's Final Rule Favors Large, Local Credit Unions At the Expense of
Small, Local Credit Unions, and Should Prohibit Certain Overlaps

IBAA has concluded that the NCUA's final rule encourages groups to join large, local credit unions, as opposed to small, local credit unions, despite the fact that the Act mandates that the single common bond credit union should be the predominant form of organizational structure.

Section 101 of CUMAA authorizes groups of fewer than 3,000 members to be added to a multiple common bond credit union if certain conditions are met. Because Congress failed to include language limiting the number of groups with less than 3,000 members which could be added to a multiple common bond credit union, theoretically a multiple common bond credit union could have thousands of members. In fact, there is nothing under current law which would prohibit every credit union with fewer than 3,000 members from combining into one huge, behemoth credit union. This is an oversight which should be corrected legislatively.

Congress also provided two exceptions to the 3,000 member limitation. The first exception under the statute allows the addition of groups of 3,000 or more members if the Board finds that such a group could not reasonably establish its own credit union, which we previously discussed. These provisions clearly demonstrate the NCUA's desire to make large credit unions the norm, rather than the exception to the rule.

Overlaps. Under the final rule, no overlap protection will be provided to any credit union within a proposed community credit union's service area unless it is newly chartered, by definition, chartered less than two years. Moreover, protection will only be provided for 12 to 24 months from the date of the overlap. The NCUA bases this decision on the assertion that its previous experience, internal reviews and surveys have proven that overlaps are beneficial to credit union members and are not viewed by some credit unions as harmful.

Given the fact that the field of membership provisions have significantly changed as a result of CUMAA, the NCUA's reliance on its previous overlap experience and studies should no longer be considered reliable, especially since competition among credit unions is bound to increase. Therefore, overlap protection, at a minimum, should be given to community credit unions. The issue of overlapping credit unions is extremely important given the fact that overlaps -- and the competition for members from a shared pool -- could lead to safety and soundness concerns, could make it more likely that smaller credit unions fail, and could cause credit unions to lose market share.

As an aside, it is ironic how the NCUA will consider overlaps of service areas to limit competition among credit unions, but will not consider the extent of the need for financial services, or whether other providers exist which sufficiently address the needs of the area to be served. All of these factors should clearly be weighed in assessing the potential success or failure of a proposed credit union.

V. The NCUA's Geographic Proximity Requirement Is Inadequate

Geographic Proximity. Community bankers believe that the NCUA's final rule does not correctly implement Congressional intent with respect to the reasonable geographic proximity requirement for adding groups to existing credit unions. The NCUA reserves the right to grant a charter to single common bond credit unions "without regard to the geographic location of the association's members or headquarters." However, the final rule must firmly recognize that a credit union must be able to provide service to its members, and that the burden of providing that service will increase as the geographical area served increases. The final rule ignores the fact that a credit union can be too thinly spread. If the quality of membership service is at all important, the final rules should acknowledge the correlation between far-flung memberships, and the burden of administration in providing service. As one increases, so must the other.

Reasonable Proximity. If the creation of an independent single bond credit union is not feasible, then the statute requires that the group join a credit union that is "within reasonable proximity to the location of the group." The final rule provides that "a multiple common bond credit union may serve a combination of distinct, definable, occupational and/or associational common bonds." New groups can be added which are dissimilar to the original credit union (called "select groups"), but unlike single common bond credit unions, the groups to be added must be "within reasonable proximity of the credit union. This restriction should be more definitively recognized in the provisions of the NCUA chartering manual.

As defined by the NCUA regulation, "reasonable proximity" would be within the service area of the credit union the group wishes to join, but merely providing that the group to be added is within the existing credit union's service area is insufficient to carry out the Congressional mandate. As I noted above, the ability to serve members is important. As the geography increases, the burden to provide service to members also increases. Therefore, the final rule should take into account that there is a greater burden for credit unions to meet as they seek to expand their geographical reach.

VI. Safety and Soundness

Statutory Criteria. Another element of the statute requires the NCUA to make a written finding that five statutory criteria have been met before a new select group may be added to an existing credit union: (1) the credit union must not have engaged in any material unsafe or unsound practice during the preceding year; (2) the credit union must be adequately capitalized (defined as a net worth ratio of not less than 6 percent); (3) the credit union must have the administrative capability and the financial resources to serve the proposed group; (4) the credit union must demonstrate that any potential harm to another credit union is outweighed by the benefits of adding the new group; and (5) the formation of a separate credit union is not practical.

While these criteria have been incorporated into the regulation virtually verbatim, they do not adequately implement the statute. For example, one of the few elements that is given definition is a "material unsafe or unsound practice," defined by the final rule as any action or inaction that could result in an abnormal risk or loss to the credit union, its members or the National Credit Union Share and Insurance Fund (NCUSIF). In essence, the NCUA regulation suggests that only if the credit union were close to failing would it be denied the ability to add additional select groups. Meanwhile, if it does come close to failing, other provisions in the rule would allow the credit union to add select groups under an emergency merger. Therefore, when read together, these two provisions cancel each other out, and there really is no time when a credit union cannot add a select group.

Again, it must be emphasized that these elements outlined in the statute demonstrate that Congress viewed the creation of a multiple common bond credit union as an exception to the general rule. Therefore, it is critically important that the NCUA adhere to these criteria and not merely pay them lip-service. The criteria that are provided in the proposal are extremely weak and easily met. The NCUA should incorporate much more specific guidance and criteria in the final regulation to detail when it is appropriate to allow these affiliations. For example, merely stating that the formation of a separate credit union is not practical, although repeating the statutory language, is not enough. Rather, the final rule should specify under what conditions the agency will deem it impractical to form a separate credit union, setting forth detailed conditions on capital, sponsors, business plans and so forth.

VII. "Family Member" and "Member of Household" Are Defined Too Broadly

IBAA believes that the terms "family member" and "member of household" are not adequately defined. By eliminating the distinction between the primary member and secondary member, the rules would allow for an exponential expansion of the field of membership by contorting the immediate family member concept.

The Act addresses the issue of family membership by providing that membership by virtue of relation to another is limited to "a member of the immediate family or household (as those terms are defined by the Board, by regulation)." Not surprisingly, the NCUA has chosen not to elaborate extensively on this provision of the law. A member of the immediate family is defined as related persons (by blood, marriage, or other recognized family relationships in the same household [under the same roof]). In addition, if the individual is not living in the same household as the credit union member, immediate family also includes grandparents, parents, spouses, siblings, children or grandchildren, as well as stepparents, stepchildren, stepbrothers and stepsisters. According to the NCUA, this is a "tightened" definition, since the definition of immediate family member is set by the NCUA and not by each credit union.

Furthermore, some contend that if an individual is eligible for membership (even though that individual has not joined the credit union), his or her eligibility should confer eligibility on their immediate families. This is an inappropriate reading of the statute. The concept of allowing family members to belong is to allow all family or household members to conduct their financial business at one location. The intent is not to allow an expansion of the field of membership concept. Too broad a reading of this concept distorts and undermines the concept of common bond, which is the Congressional requisite for allowing credit unions in the first place. Rather, family members should be allowed to join, but only if the eligible individual is a member, not a potential member. The regulation should be revised to make this totally clear.

To read the statute otherwise, that is to say that eligibility confers eligibility, and carrying the argument to its logical conclusion, anyone within the field of membership of the original charter of the credit union would be able to confer eligibility on their immediate families, and being a member of the immediate families (now eligible) would, in turn, confer eligibility on their immediate families, and so on. Such a reading simply does not make any sense. Rather, there should be a limitation such that only individuals within the field of membership in the credit union charter are eligible for membership. If -- and only if -- they become members of the credit union can their immediate family members also join. And if an immediate family member joins, that should not confer eligibility on any other individuals.

Once a Member Always a Member. The statute also codifies the notion that, once an eligible individual has joined a credit union, his or her membership continues until the member decides to withdraw, even though the status that made the individual eligible might change after he or she joins the credit union. However, while the statute offers this definition, there are situations where allowing an individual to retain membership in a credit union would be inappropriate, and the final rule should be revised to recognize those situations. For example, some corporations sponsor credit unions as an employee benefit, supporting the administration of the credit union as a corporate expense. Where membership is clearly contemplated solely as an employee benefit, and the employee leaves that employment, the corporation should be able to require the employee to terminate their membership in the company's credit union.

VIII. NCUA's Community Credit Union Provisions

The last issue that your letter of invitation asked us to discuss concerns the community chartered credit union which is actually one of the most important aspects of the regulation. Because the regulation fails to adequately define "well-defined local community, neighborhood or rural district," it makes it far too easy to establish large community credit unions which go well beyond the local limitation imposed by Congress.

Under CUMAA, "persons or organizations within a well-defined local community, neighborhood, or rural district" may establish a community credit union. The NCUA is required to "prescribe, by regulation, a definition for the term 'well-defined local community, neighborhood, or rural district.'" Previously, NCUA had limited community charters to those within a single, geographically-defined area where residents interact. Addition of the word "local" in the statute prompted NCUA to review its existing policy.

While the change in the law prompted a review, the NCUA made essentially little change from its previous policy regarding community charters. The main distinction is that applicants for a community charter must provide evidence that the individuals within the area interact or have common interests. Generally, persons who live, work, worship or attend school in the community will qualify. Businesses located in the community will also qualify, although employees of those businesses that do not live, work, worship or attend school in the community will not.

The NCUA has established three specific criteria that must be met by an applicant for a community based credit union charter: (1) the geographic boundaries must be clearly defined; (2) evidence must be provided establishing the well-defined community; and (3) the residents must have common interests or interact.

While interaction and common interest may be useful guidelines in determining whether a community exists, the simple definition of local that Congress emphasized is not incorporated into the limitations presented by the rule. The focus on local should be given greater prominence in the final regulation to acknowledge the Congressionally-imposed restriction.

Also, the outlines of the rule are much too vague, and do not offer sufficient guidance as to what constitutes a "local" community. The IBAA believes that the NCUA should provide a list of criteria that a community may consider in determining whether there is a single local community. (For example, service by a single elementary school, having a single grocery store, having less than four to five churches, having a single major industry, and so forth.) While no one criterion would be defining, the more criteria present, the more likely there is a local community. The NCUA regulation provides potential applicants with little guidance on what is needed, and allows the NCUA to be arbitrary and capricious in deciding whether to grant a community based charter.

Size of Community to be Served. The key to establishing a well-defined community will be demonstrating interaction between those in the area; the larger the area, the greater the burden applicants will have to demonstrate a commonality. Amazingly, though, after giving lip-service to the Congressional mandate to restrict community credit unions to "local" areas, the NCUA takes an extremely expansive reading of what connotes "local" by proposing that a geographic area "with less than 300,000 residents will often have sufficient interaction and/or common interests to meet community charter requirements."

If the area is larger than a single political jurisdiction or has over 300,000 residents, more extensive and detailed documentation must be provided to prove the proposed area is a well-defined community. Essentially, the regulation allows any political subdivision with less than 300,000 in population to virtually self-certify as a local community. The NCUA has a greater responsibility to verify the existence of the kinds of activities that meet the statutory mandate. Therefore, if an area is allowed to self-certify and have minimal documentation requirements imposed, that area should be much smaller than 300,000 in population.

The January 29, 1999, edition of Daily Report for Executives reported how the NCUA had just approved two community credit union charters which increased their potential membership to almost one million. According to the article, the First Service Federal Credit Union of Groveport, Ohio will serve all of Franklin County which has a population of 961, 437. Currently, the credit union serves a potential membership of 22,000.

The second community charter that was approved involves the CBC Federal Credit Union in Port Hueneme, California. That credit union was authorized to serve all of Ventura county, the same territory covered by the Point Mugu Federal Credit Union. As you may recall, the ABA, IBAA, and California Bankers Association sued the Point Mugu credit union prior to the passage of CUMAA on the ground that Ventura County was not a well-defined community. The Point Mugu case was dropped because it was made moot by CUMAA, but our recently filed lawsuit will continue the debate on this issue since it challenges the NCUA's definition of "well-defined local community."

Knowing where to draw the line for what constitutes a local area may be difficult, but clearly the definition proposed by the NCUA goes far beyond what is appropriate. While the NCUA acknowledges "population and geographic size are also significant factors in determining whether the area is local in nature," using a 300,000 population size as defining belies that statement. In most states, 300,000 is a substantial population, with a great diversity of interests, people and cultures. Although a population that size provides a rich diversity, it does not provide the kind of local community that Congress called upon the NCUA to find. While the NCUA does acknowledge that "a larger population in a large geographic area may not meet NCUA community chartering requirements, and that "the burden of demonstrating interaction and/or common interests will be greater than the evidence necessary for a smaller and less densely populated area, setting the bar at 300,000 is much too high. The IBAA believes that 25,000 is a logical maximum. If the population exceeds that number, a community credit union charter could still be available, but the applicant would face a greater burden of demonstrating the local character of the area to be served.

Furthermore, reference to the 1990 U. S. Census figures demonstrates just how expansive a 300,000 resident restriction is. There are very few counties in the United States with a population over 300,000 residents. In fact, even in a populous state like New York, only 12 out of 62 counties would be excluded from automatically qualifying to have a community credit union by the NCUA proposal. A population figure much smaller than 300,000 (e.g., 25,000) would ensure that the NCUA properly reviews the applications to ensure that the area to be covered is truly "local" in nature, and that the proposed credit union can properly serve the area.

Moreover, the 300,000 figure is only an illusory restriction. Incredibly, the regulation does not prohibit areas larger than 300,000 from qualifying. While the rule suggests that an entire state or a major metropolitan city will not likely have sufficient interaction to qualify ("it is unlikely"), the possibility is not ruled out. The preamble to the rule notes that the requirements "make it difficult" for a state or a large city such as New York, Boston, Dallas or Los Angeles to meet the requirements of a local community. The possibility that an entire state or a major metropolitan area could qualify for a community based credit union charter is left open. This is incompatible with the intent of the statute and a huge leap beyond statutory parameters.

Going Beyond the Local Community. The rule also would allow certain purchase and assumption agreements to take place between community credit unions and other credit unions. According to the regulation, "specified loans, shares, and certain other designated assets and liabilities may also be acquired without regard to field of membership restrictions." This would allow a community credit union to expand service beyond the service area established in its charter, violating the local specification imposed by Congress. This inappropriate expansion of the service area of a community based credit union clearly violates Congressional intent, and should be removed from the regulation.

Community Credit Union Mergers. For community based charters, the regulation provides that merger into a single or multiple common bond credit union can only take place on an emergency basis. However, this disregards the unique nature of the community charter. If such a merger is to be allowed, it should be allowed only as a last resort when the NCUA clearly establishes there are no other alternatives. Moreover, the service to be provided should only be provided to existing members of the community credit union, and not to new members. Finally, the continuing credit union should apply for multiple common bond status, which is what Congress required in CUMAA when different groups are being served.

The rule also provides that community based credit unions may absorb single or multiple common bond credit unions on a non-emergency basis, provided the credit union has a service facility or a majority of its members based within the community's boundaries. Again, this is inappropriate. Based on this wording, it would be acceptable for a common bond credit union to become part of a community credit union with only a small number of members located within the established boundaries for the community charter, as long as it had a facility there. This completely ignores the community based credit union concept, and violates the limitations that Congress seeks to apply with the focus on "local." Allowing such mergers to take place seems a thinly veiled attempt to allow community based credit unions to expand beyond the boundaries established in their charters.

Furthermore, even though the proposal would provide that "the continuing credit union will remain a community charter," and even though future expansions will be based on the original charter, the regulation does not address the adequacy of service to those outside the credit union's boundaries. A single or multiple common bond credit union may serve members without being restricted by geography, but a community based charter is to serve "persons or organizations within a well-defined local community, neighborhood, or rural district. Permitting such mergers violates the Congressional restriction of local for community based charters, even in an emergency situation. Furthermore, it does a disservice to those that may be far outside the community's boundaries, in that they may be far removed from the operations of the community based credit union.

IX. Additional Concerns

I also would like to take this opportunity to mention a number of issues which we were not specifically asked to address which are also important.

Types of Common Bonds. Single common bond credit unions can be of two types, either associational or occupational. (For the most part, these rules would not change under the final regulations.) A single associational common bond consists of individuals or groups "whose members participate in activities developing common loyalties, mutual benefits and mutual interests." A single occupational common bond can be established in one of four ways: (1) employment in a single corporation; (2) employment in a subsidiary or parent of that corporation (there must be a 10 percent ownership interest between parent and subsidiary); (3) employment in an independent company which demonstrates "a strong dependency relationship" to the first company; and (4) employment or attendance at a school.

The IBAA believes that some of these criteria go too far in creating the single common bond concept. For example, allowing the minimal 10 percent affiliation between a parent and a subsidiary to serve as the basis of a common bond allows for tenuous relationships that violate the concept. More definitive relationships are necessary for there to be one common bond, and the final rule should establish a much greater affinity with more specificity.

More significantly, though, the regulation would allow a completely separate and distinct company to be included if there is "a strong dependency relationship." This criterion clearly violates the common bond concept, and allows tenuous relationships which make a mockery of the common bond notion to come under one umbrella credit union. For instance, a large corporation could begin to include suppliers, distributors, retailers, accountants and law firms. Also, if those having "a strong dependency relationship" to this secondary tier are drawn in under the original common bond, the extension could grow and insert itself into virtually any and all occupations.

If there is to be service to distinct occupations, the group should be required to apply for a charter amendment and become what it actually is: a multiple common bond credit union. Since Congress revised the concepts of the different common bonds in the Act, these rules should be revised as well to require that a credit union convert to the new form of multiple common bond credit union, instead of allowing it to extend its boundaries well beyond what can be logically considered a single common bond.

Mergers. According to the proposed NCUA rules, the nature of a credit union's charter (e.g., single common bond, multiple common bond or community charter) will not change in an emergency merger situation. Again, this violates the statutory mandate, and allows credit unions to begin serving groups that are outside the scheme established by Congress. Since CUMAA does not provide this latitude, the NCUA should not read this authority into the law. Therefore, while it might be necessary to allow two disparate groups to merge in an emergency situation in order to protect the members of the credit union or the NCUSIF, the law clearly requires that disparate groups under one umbrella become multiple common bond credit unions.

The proposal also provides that "an emergency merger may be approved by the NCUA without regard to field of membership rules or other legal constraints." However, the Act sets forth specific criteria for when the NCUA must take prompt corrective action to prevent the failure of a federally-insured credit union after considering specific levels of net worth and capitalization established in the statute. Because the NCUA is considering a separate proposal on prompt corrective actions, the emergency merger provisions should incorporate the same guidelines. The proposed emergency merger provisions do not state with specificity when such a merger can occur, but only offer vague guidance. (For example, the NCUA must merely make findings that: (1) "an emergency requiring expeditious action exists; (2) other alternatives are not reasonably available; and (3) the public interest would best be served by approving the merger." Without more specific criteria outlining when a merger must take place, these provisions can easily be used to evade statutory restrictions and allow mergers of credit unions when no true emergency exists. As a result, the emergency merger provisions could be used arbitrarily and capriciously as a pretext for allowing a merger of two credit unions, and for allowing an inappropriate expansion of a credit union's field of membership without complying with the statutory guidelines.

Conclusion

It is vital that NCUA's final regulations contain specific rules and guidelines for credit unions and charter applicants to follow consistent with the law and the intent of Congress. Vague standards and broad interpretations that depart from statutory requirements appropriately result in increased Congressional oversight and force injured parties to turn to the courts to clarify or overturn the NCUA's regulations.

Thank you for the opportunity to testify.

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