ALEXANDRIA, Va. -- Despite assurances from NCUA that they are not interested in becoming bylaw police, the credit union trade associations were not pleased with the NCUA Board's 2-1 decision to reincorporate the bylaws into regulation.

"Staff in no way intends this to burden federal credit unions or get involved in bylaw disputes as a matter of course," NCUA Staff Attorney Elizabeth Wirick explained in presenting the proposed final rule to NCUA. She emphasized that NCUA would only get involved "in those rare cases where fundamental, material member rights are at stake." The reincorporation came about after members of two different credit unions, seeking to halt a mutual savings bank conversion process were denied relief in the state courts where NCUA legal opinion letters directed them to go. The agency has previously said in opinion letters that the bylaws are a contract between the members and the credit union that should be considered under state corporation law and adjudicated as such.

The final rule reincorporating the federal credit union bylaws into regulation after they were removed as part of the overall deregulation movement in the 1980s was approved 2-1 over NCUA Vice Chairman Rodney Hood's objection. "I have asked a lot of questions of the NCUA staff about the necessity of this proposal and could only come to one conclusion--incorporating the bylaws into regulation is not only excessive, but unnecessary," he said. There are a few solid examples where NCUA enforcement would have been helpful, Hood acknowledged. However, he concluded, "While almost all credit unions follow their bylaws and consider them to be a contract between the board, its members, and the credit union, I do not believe that we should regulate to the exception."

NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt was inclined to agree with the vice chairman. "I think it creates regulatory burden. Anytime there's a regulation on the books, credit unions need to make sure they're in compliance with it." Certainly it is an existing duty from a management standpoint, she explained, but now they have to view it from a regulatory angle as well.

CUNA expressed continued reservations as well but appreciated some of the changes made from the proposed regulation that acknowledged some of their concerns, such as the clarifications that NCUA should only be contacted if the issue cannot be resolved internally and that the bylaws will not be part of the examination process. "Nonetheless, the key to making those statements a reality is whether they are communicated to examiners," CUNA Deputy General Counsel and Senior Vice President for Regulatory Advocacy Mary Dunn commented. "CUNA plans to be exceptionally vigilant as to the implementation of the rule and urges the Board to take steps to make sure examiners are aware of the board's message from the meeting today that the agency will not use the rule to encroach into the details of corporate governance that are more appropriately left to credit union boards and management."

However, NCUA Chairman JoAnn Johnson and Board Member Gigi Hyland, along with agency staff, did not concur and were successful in putting the bylaws back into the regulations. "We're here to protect those member rights when other means of reasonable enforcement are lacking," Johnson said.

The preamble to the rule states, "NCUA expects federal credit unions and their members will make every effort to resolve bylaw disputes using the credit union's internal member complaint resolution process." The next step would be to go to the NCUA regional office of jurisdiction for assistance. "NCUA has discretion to take administrative actions when a credit union is not in compliance with its bylaws...NCUA will not take action against minor or technical violations, but emphasizes that it retains discretion to enforce the bylaws in appropriate cases, such as safety and soundness concerns or threat to fundamental, material credit union member rights."

In the case of DFCU Financial's failed conversion attempt, for example, the state and federal courts handed jurisdiction back an forth to each other, avoiding a ruling altogether. Hyland referred to the situation as "ping-pong" where the state court declined to follow NCUA's legal opinions as a state court and the federal court said it had to follow the agency's opinion.

"In my opinion, this doesn't create any additional regulatory burden," Hyland concluded. The decision merely offers members a forum to seek relief.

Wirick said for those commenters who said it was unnecessary because NCUA already had the authority to enforce the bylaws, "If you believe NCUA already has the authority it really shouldn't make a difference as a practical matter." In fact, the only authority NCUA has in resolving these matters without reincorporating the bylaws is charter suspension or liquidation, she said, which would do more harm to member rights than the actual bylaw violation.

In addition to reincorporating the bylaws, NCUA made a substantive change to them, establishing a succession order in the event an entire federal credit union board is unable to serve. The change would have the supervisory committee act as the board and call a special meeting to elect a new board.

Finally, the rule creates a streamlined process for federal credit unions to adopt bylaw amendments that have already been approved for another federal credit union.

It's a FACT

The NCUA Board also received briefings for the record on interagency final rules regarding red flags and affiliate marketing under the Fair and Accurate Credit Transactions Act. The first requires credit unions and other financial institutions to implement a written Identity Theft Prevention Program. The agencies will issue guidance when the final rule is published in the Federal Register. It also requires that credit and debit card issuers assess the validity of a change of address request in certain circumstances.

The second rule under the FACT Act gives consumers greater control over how their information is used. NCUA's rule would prohibit a federal credit union from using eligibility information from an affiliate to market to a consumer without proper notice and providing the consumer a reasonable opportunity to opt-out. NCUA's rule strictly covers federal credit unions and state charters and CUSOs will fall under the Federal Trade Commission's purview. NCUA Staff Attorney Linda Dent said it was possible the Securities and Exchange Commission may have oversight of those with trusts.

You're Insured

Finally, the NCUA Board received the quarterly insurance fund report, which showed the NCUSIF gross income above budget by $4.4 million and operating expenses $1.4 million under budget but higher than budgeted insurance losses of $25.4 million over the $18.0 million budgeted putting NCUA's net income just under budget, $154.0 million versus $154.9 million.

Even so, the NCUSIF equity ratio stands at 1.31% and is projected to reach 1.32% by yearend, allowing for the possibility of a refund. NCUA Chief Financial Officer Dennis Winans showed hypothetically that even if insurance losses reached up to $110 million, the equity ratio would still only dip to 1.31%. A loss of up to $165 million would put the equity ratio at 1.30%.

He also reported that as of September, there were only 218 problem credit unions (CAMEL 4/5s), as opposed to 240 last year and 280 the year before that. Additionally, the percent of insured shares they represent is falling from 1.12% in 2005 to 1.05% in 2006 and 1.03% as of September.

--scooke@cutimes.com

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