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

"Staff in no way intends this to burden federal credit unions orget involved in bylaw disputes as a matter of course," NCUA StaffAttorney Elizabeth Wirick explained in presenting the proposedfinal rule to NCUA. She emphasized that NCUA would only getinvolved "in those rare cases where fundamental, material memberrights are at stake." The reincorporation came about after membersof two different credit unions, seeking to halt a mutual savingsbank conversion process were denied relief in the state courtswhere NCUA legal opinion letters directed them to go. The agencyhas previously said in opinion letters that the bylaws are acontract between the members and the credit union that should beconsidered under state corporation law and adjudicated as such.

The final rule reincorporating the federal credit union bylawsinto regulation after they were removed as part of the overallderegulation movement in the 1980s was approved 2-1 over NCUA ViceChairman Rodney Hood's objection. "I have asked a lot of questionsof the NCUA staff about the necessity of this proposal and couldonly come to one conclusion--incorporating the bylaws intoregulation is not only excessive, but unnecessary," he said. Thereare a few solid examples where NCUA enforcement would have beenhelpful, Hood acknowledged. However, he concluded, "While almostall credit unions follow their bylaws and consider them to be acontract between the board, its members, and the credit union, I donot believe that we should regulate to the exception."

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

CUNA expressed continued reservations as well but appreciatedsome of the changes made from the proposed regulation thatacknowledged some of their concerns, such as the clarificationsthat NCUA should only be contacted if the issue cannot be resolvedinternally and that the bylaws will not be part of the examinationprocess. "Nonetheless, the key to making those statements a realityis whether they are communicated to examiners," CUNA Deputy GeneralCounsel and Senior Vice President for Regulatory Advocacy Mary Dunncommented. "CUNA plans to be exceptionally vigilant as to theimplementation of the rule and urges the Board to take steps tomake sure examiners are aware of the board's message from themeeting today that the agency will not use the rule to encroachinto the details of corporate governance that are moreappropriately left to credit union boards and management."

However, NCUA Chairman JoAnn Johnson and Board Member GigiHyland, along with agency staff, did not concur and were successfulin putting the bylaws back into the regulations. "We're here toprotect those member rights when other means of reasonableenforcement are lacking," Johnson said.

The preamble to the rule states, "NCUA expects federal creditunions and their members will make every effort to resolve bylawdisputes using the credit union's internal member complaintresolution process." The next step would be to go to the NCUAregional office of jurisdiction for assistance. "NCUA hasdiscretion to take administrative actions when a credit union isnot in compliance with its bylaws...NCUA will not take actionagainst minor or technical violations, but emphasizes that itretains discretion to enforce the bylaws in appropriate cases, suchas safety and soundness concerns or threat to fundamental, materialcredit union member rights."

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

"In my opinion, this doesn't create any additional regulatoryburden," Hyland concluded. The decision merely offers members aforum to seek relief.

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

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

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

It's a FACT

The NCUA Board also received briefings for the record oninteragency final rules regarding red flags and affiliate marketingunder the Fair and Accurate Credit Transactions Act. The firstrequires credit unions and other financial institutions toimplement a written Identity Theft Prevention Program. The agencieswill issue guidance when the final rule is published in the FederalRegister. It also requires that credit and debit card issuersassess the validity of a change of address request in certaincircumstances.

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

You're Insured

Finally, the NCUA Board received the quarterly insurance fundreport, which showed the NCUSIF gross income above budget by $4.4million and operating expenses $1.4 million under budget but higherthan budgeted insurance losses of $25.4 million over the $18.0million 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 isprojected to reach 1.32% by yearend, allowing for the possibilityof a refund. NCUA Chief Financial Officer Dennis Winans showedhypothetically that even if insurance losses reached up to $110million, the equity ratio would still only dip to 1.31%. A loss ofup to $165 million would put the equity ratio at 1.30%.

He also reported that as of September, there were only 218problem credit unions (CAMEL 4/5s), as opposed to 240 last year and280 the year before that. Additionally, the percent of insuredshares they represent is falling from 1.12% in 2005 to 1.05% in2006 and 1.03% as of September.

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