ALEXANDRIA, Va. — Credit unions and their representatives, aswell as banks and their respective organizations, weighed in onNCUA's proposed changes to its Field of Membership and CharteringManual from their own unique perspectives generating dozens ofcomment letters.

The proposed rule would expand the list of pre-designatedcommunities with regard to community charter applications whileadding a requirement for notice and comment for those notpre-qualified and cap the time frame exempting credit unions fromcommunity documentation of previously approved areas at five years.NCUA's proposal said it would keep the current presumptivecommunities while adding others to make it easier for credit unionsto define a community made up of multiple jurisdictions. This wouldbe based on the Office of Management and Budget's definition of acore based statistical area or part thereof lacking a metropolitandivision; the area must contain a dominant hub with the majority ofall jobs; and the dominant area must encompass one-third of theCBSA's total population.

“In our view,” CUNA Senior Vice President and Deputy GeneralCounsel Mary Dunn wrote, “it would facilitate applications formultiple-jurisdictional areas, is consistent with the Act, andappropriate at this time, although credit unions have asked thatNCUA clarify the definition to allow an application to include onlya portion of a CBSA.”

NAFCU Senior Vice President of Government Affairs Dan Bergeralso supported this change, writing, “In particular, NAFCU ispleased that the new presumptive definition eliminates populationceilings. As we have expressed on several previous occasions, NAFCUbelieves that population cannot and should not dictate whether thelocal community standard is met.”

However, the Ohio Bankers League pointed, “Credit unions areprovided several advantages so they can better serve people ofmodest means, but those advantages are tied to limitations.”

Minnesota Bankers Association General Counsel Tess Rice chimedin, “The current Chartering Manual already exceeds Congressionalintent by making any city or county a local community regardless ofpopulation size. NCUA should not further circumvent Congressionalintent by adding two new additional categories of presumptivewell-defined local communities.”

OBL also wrote, “OBM (sic) in fact specifically cautions thatthese definitions should not be used to implement governmentpolicies or programs without a full consideration of the effects ofusing those definitions for such purposes.”

Recognizing this language, CUNA in a pre-emptive move outlinedthat NCUA's own analysis and by inviting comment on this approachis already considering the totality of the circumstances.

However, the credit union groups objected to the five-year timelimit for exempting credit unions from documenting a community inpreviously approved areas. If at all, the trades felt 10 years wasmore appropriate as it is consistent with the federal census.

Notice and Comment

The provision that would require communities that do not meetany of the pre-approved definitions to be subject to a noticepublished in the Federal Register and a comment period raised somecontroversy.

“From our perspective, the most potentially dangerous part ofthis proposal is the requirement for a public notice and commentperiod to be posted in the Federal Register for some communitycharter applications,” Corning Credit Union President/CEO GaryGrinnell stated in his comment letter. “We feel that thedetermination of a credit union's field of membership is betweenthe credit union and its regulatory agency, not competitors,community activists, opponents or even supporters. While theircomments may be interesting, they are irrelevant to the decisionmaking process.”

Bethpage Federal Credit Union President/CEO Kirk Kordeleskiadded, “This requirement will establish an irrevocable precedentthat both opponents and supporters of a credit union's applicationhave standing in a regulatory compliance matter. Not only canopponents and competitors ferret through a credit union's communitycharter application for business strategies that should beprotected from such scrutiny, but supporters can be rallied toprovide countless testimonials for the credit union that–whilestrengthening the record–contribute nothing to the question athand.”

As part of the proposal, NCUA clarified and added more detailedinformation regarding the business and marketing plans submittedfor a community charter application. Some credit union advocatessaid this would be acceptable if the information was not madepublic. Clarifications in the requirements would help ensureconsistency across the regions, according to NAFCU.

The notice and comment provision was where American BankersAssociation Senior Economist Keith Leggett found something to agreeon with NCUA. “Such a process would have helped provide a balancedrecord in the case currently in litigation in Pennsylvania.” TheABA is currently engaged in a legal battle with NCUA over itsapproval of a six-plus county community charter for Member's 1stFederal Credit Union.

Leggett highlighted, “Significantly, the NCUA Board acknowledgesthat 'it is proposing a definition that reflects an area that maylack the traditional characteristics of interaction or sharedcommon interests.' The lack of meaningful affinity is clearly atodds with statute and would make it more difficult for creditunions to fulfill their public mission.”

The Independent Community Bankers of America took a differenttact. “Each community charter application or conversion proposalshould be handled on a case-by-case basis rather than onpresumptions of what are 'local' communities,” Regulatory CounselChristopher Cole said. “ICBA strongly objects to NCUA's attempts toexpand the statutory definition of a 'well-defined local community'by defining presumptive local communities. Without a distinct fieldof membership, a credit union should convert to a bank.”

A group calling itself the Credit Union Strategies Task Force ofPennsylvania–whose slogan is “Educate, Contain & Convert:Advancing the challenge against unfair credit unionexpansion”–argued that proposed communities “should be subject notonly to public review and comment, but also to administrativehearings upon the application of other adversely affected financialinstitutions located with the same alleged 'community.'”

Seeking a middle ground, credit union consultant and retiredNCUA employee Charles Agricola wrote, “Publication is a reasonablerequirement as espoused in the proposed rule. However, publishingthe notice in the Federal Register could be costly and is a virtualoverkill.” He suggested publication in the proposed community'smost widely read local newspaper.

CUNA, NAFCU, and the Texas Credit Union League generally agreed.“Such a method would be less burdensome on the credit unions and issimilar to the method banks follow in proposed mergers,” TCUL VicePresident of Regulatory Compliance & Legal Affairs SuzanneYashewski offered.

'Rural' Defined

NCUA was also using this proposed rule to establish a definitionof a rural district as permitted in the Credit Union MembershipAccess Act, according to the agency, but not yet defined by NCUA.NCUA's proposal would define a rural district “as an area that isnot in an MSA or MicroSA and has a population density that does notexceed 100 people per square mile where the total population of therural district does not exceed 100,000.

To the contrary of NCUA's assertion that it does have thestatutory authority, the Credit Union Strategies Task Force statedthat a rural district by definition would not meet congressionalintent.

Some executives from Wells Fargo even commented on the proposal,demonstrating that big banks do pay attention to credit unions,though the language was strikingly similar to the task force'sletter, which borrowed language from ABA's.

CUNA and NAFCU applauded NCUA's attempt at defining a ruraldistrict though they found the actual language overly restrictive.CUNA suggested removing the 100,000 population cap altogether andrely on interaction standards. CUNA also recommended allowing forpart of a rural district as well. TCUL agreed. NAFCU recommendedincreasing the cap to 250,000.

Consolidated Federal Credit Union President/CEO Ed Baldwincommented that the rural definition “seems to take a 'one size fitsall' approach”, but wanted to at least see an increase from 100,000maximum population to 500,000, consistent with a multi-countycommunity that is not a metropolitan statistical area.

Agricola said the avoidance of MicroSAs (Micro StatisticalAreas) in rural districts “is not logical since many of theMicroSAs are in rural areas with a single population center ofbetween 10,000 and 50,000 and with a total population considerablyunder 100,000 people that are widely dispersed. Furthermore,job-community statistics are not always meaningful when related torural districts.” Rural areas tend to have many self-employedfarmers resulting in low-commuting statistics.

However, the former NCUA employee said, “Nevertheless, theseresidents share a high degree of social and economic integrationwith the MicroSA through shopping, entertainment, farmorganizations, farm bureaus, shared county-fairs, etc.”

Hardin Community Federal Credit Union CEO Matthew T. Jenningspointed out NCUA's proposed definition conflicts with the USDA'sinterpretation. “Furthermore, there are MicroSAs in my home stateof Ohio alone that have populations well under 100 thousand andsparsely populated. Therefore excluding Micro areas from thedefinition of a rural district appears unreasonable andinconsistent.”

Voluntary Mergers

Concerning the voluntary mergers of community charters, NCUAsaid it was “unaware of any particular problems in this mergercontext” but welcomed comments.

According to NAFCU, “NCUA's merger policy stifles growth andhinders many federal credit unions from making reasonable businessdecisions that might benefit their members.”

Berger outlined, “Under NCUA's current policy, voluntary mergersinvolving community credit unions are essentially limited tomergers with other community charters. A community credit unioncannot merge into a single- or multiple- common bond credit union,except in an emergency merger.”

NAFCU stated that multiple common bond credit unions that chooseto convert to a community charter should be able to retain all thegroups previously added.

“Absent insolvency (or likely insolvency), these communitycredit unions have very limited options,” NAFCU said of many smallor rural community charters. “Credit unions must not be pushed tothe verge of insolvency before they are permitted to exercise theirbusiness judgment to merge.”

CUNA added that credit unions should have flexibility in mergersconsistent with safety and soundness but the issue should bereviewed in the larger context of members, “not with the goal offurther regulation but with the objective of facilitating theability of credit unions to make their own decisions regardingmergers.” CUNA urged NCUA to issue a separate advance notice ofproposed rulemaking on this matter.

However, ABA Associate General Counsel Gregory Taylor commentedin a letter following up on Leggett's that hybrid charters are notallowed under the law as reinforced by the famous National CreditUnion Admin. v. First Nat. Bank & Trust Co., that went all theway to the U.S. Supreme Court. The court found that NCUA could notcreate membership models not specifically in Section 1759 of theFederal Credit Union Act.

But, best options and not field of membership should drivemerger decisions, Kordeleski advocated. “This is the criteria theagency utilizes when it facilitates an emergency merger. Thisshould likewise be the criteria the agency utilizes to facilitatevoluntary mergers among the candidates to avoid futureemergencies,” he wrote.

Underserved Application

NCUA has also suggested applying the same requirements for proofof a to an underserved area application. However, those commentersaligned with the credit union community did not see the sense inthis idea. “Underserved areas are not communities. Credit unionsexpanding service to an underserved area are not communitycharters…Our reading of the present regulation is that an area iseither underserved or it is not. The standard is not interaction;it is need for service,” said Kordeleski.

–[email protected]