November 21, 2002
This is the third major update of NCUA’s field of membership rules since the passage of the Credit Union Membership Access Act in 1998. The first two, approved in 1999 and 2000, have stood the test of time well, having been subject to congressional oversight hearings and a court challenge which sustained them at both the U. S. District Court and Circuit Court of Appeals levels. They have resulted in the extension of credit union services to literally millions of Americans from all walks of life while still maintaining the integrity of the original statute, both in its letter and its spirit...its restrictions and its opportunities.
Today we consider an update which will, after a 60 day comment period, be the basis for the NCUA 2003 Field of Membership rules. As in the past, our priority today is to propose a rule which will adhere to the letter and spirit of the Credit Union Membership Access Act, both its restrictions and its opportunities for greater access to credit union services by more Americans, while at the same time building upon a foundation of safety and soundness enhanced by greater diversification and a stronger federal charter option for visionary credit unions. This proposal accomplishes those purposes very well, and I believe it is an update which is timely and appropriate.
Since passage of the Credit Union Membership Access Act in 1998 through the end of October 2002, there have been 143 federal credit unions which have converted from the federal charter to state charters. Greater field of membership growth opportunities at the state level in many states and restrictions on field of membership growth at the federal level was the reason cited in almost all of these conversions. Perhaps even more significantly, there have been over 20 conversions from credit union charters to thrift and bank charters over the past years in which restrictive field of membership rules have been viewed by some credit unions as too confining to their ability to serve their members and communities in a way that fits into their long term business projections and needs. We should not allow field of membership restrictions which go beyond what the law requires to contribute to the de-mutualization of the credit union movement, nor should we force credit unions to make their state or federal charter decisions based solely upon federal restrictions that are, in some cases, more stringent than what the law mandates. The charter decision is the most basic of business decisions. It should be driven by business considerations, not by the lack of sufficient growth opportunities for a visionary credit union.
While there have been some who have promoted the solving of this growing imbalance by federal law being changed to restrict those state legislatures and state regulators who have liberalized their field of membership rules, I do not believe that approach is the right one if we are to have an effective and meaningful dual chartering system for credit unions. Rather than attempt to pre-empt those states who have chosen to allow their state chartered credit unions to grow with their markets’ demands, I believe the appropriate federal response is to do everything possible within the statutes passed by Congress to enable federal credit unions to do the same. To make the dual chartering system an effective one, both charters must be able to offer visionary credit unions the opportunity to have planned and managed growth.
This proposed update today, although it does not and cannot mirror the most liberal of the state field of membership laws because of federal statutory restrictions that we must and are totally committed to follow, does provide an updated approach to federal field of membership rules that will recognize the changes inherent in today’s post Gramm-Leach-Bliley financial marketplace even as it streamlines the field of membership approval process for federal credit unions and appropriately allows them all of the managed growth opportunities the Congress authorized when it passed the Credit Union Membership Access Act in 1998. The courts have ruled in upholding our earlier field of membership rules that visionary credit unions must have the opportunity to adapt to a changing financial marketplace. If not, long term safety and soundness ramifications could develop. We see this proposed update today as consistent with both the statute and safety and soundness, but it is also an opportunity for credit unions to be positioned to have managed growth and enhanced service opportunities without having to abandon the federal credit union charter to do so.
Although the areas of proposed update have been covered in today’s excellent presentation by the Field of Membership Task Force, I want to just briefly touch on several of the key updates which will, I believe, respect both the restrictions and the opportunities within the Credit Union Membership Access Act and enhance the field of membership options available to federal credit unions.
We have for the first time put in place a mechanism that we have previously authorized but never implemented for single sponsor credit unions to diversify their fields of membership and better manage their risk by adopting a single trade, industry or profession as their occupational group rather than a single employer. In this age of business restructuring, unanticipated industry shutdowns and military base closures, there is indeed much benefit in avoiding the risk of losing a good, solid credit union because its only sponsor closed down. Some have chosen to diversify by becoming multiple group occupational credit unions and this update assists these credit unions with faster approvals and streamlined process when they seek to add select employer groups of 3000 and less employees. This is an important update for multiple group occupational credit unions and is certainly consistent with the statute because it uses the same number Congress does for economic viability. However, a large percentage of our federal credit unions have chosen to remain single sponsor credit unions for business reasons of their own. Those who have made that very legitimate business decision should have some reasonable diversification options of their own within that decision. For a local hospital credit union to be able to diversify into all of the medical personnel in their geographic service area or a labor union credit union to be able to diversify into all of the plumbers or electricians in their area could make the difference in saving or losing a credit union if the hospital closed down or unemployment spiked three-fold or a year-long strike dramatically changed the economic landscape. TIP, as it is called, is an important diversification option which, although restricted to the geographic service area of single sponsor credit unions, is totally consistent with both the Credit Union Membership Access Act and good risk management. It can also be a real beneficial option which could perhaps save some of the smaller, single sponsor credit unions that we have unfortunately lost in recent years.
Another timely update is the definition of an ATM or a shared branch with credit union ownership interest as a service facility for making select employer groups eligible to affiliate with a credit union. Although we continue to require a physical branch location when a credit union adopts an underserved area into its field of membership and the Board unanimously believes that commitment must be made by a credit union taking advantage of our Access Across America initiative as it relates to underserved areas, we see no reason to require a credit union to invest in a bricks and mortar presence in order to recruit a SEG. In this “clicks and windows” technological era in which we live, if a business and a credit union are mutually satisfied with their service options through an ATM in the business’ cafeteria or a shared service center a block away, why should we as a regulator require the credit union to take on the fixed asset costs of a building and furnishings, not to mention the personnel costs to staff a branch. Long term, I personally cannot see why any effective safety and soundness regulator would require bricks and mortar in a clicks and windows age, except where it makes business sense or meets otherwise unmet member service needs to do so. In my opinion, this update is truly deserving of the term “update” when it comes to establishing a new millenium’s definition of reasonable proximity as it relates to a service facility.
Lastly, although less than 10% of federal credit unions are community chartered, the vast majority of those 143 federal credit unions who converted to state charter were or became community charters after their conversion to state charter. NCUA must streamline the process for federal credit unions who find it appropriate for their long term business vision to convert to a charter which will enable them to serve their entire community. Not only is this another diversification opportunity to spread risk beyond a single employer or group of employers, a community charter has been a recognized legal federal charter option since the Federal Credit Union Act was passed in 1934. Community credit unions are providing valuable lower cost financial services for decades to many neighborhoods that have been abandoned over the course of those same decades by banks and other traditional for-profit financial institutions. In fact, just last month I attended the ribbon-cutting of the America’s Credit Union Museum, located in Manchester, New Hampshire at the original location of this nation’s first credit union - a community credit union. Although the museum is in the original credit union location, just down the road the credit union itself - St. Mary’s, a faith-based community credit union, is still doing a robust business and making a positive difference in the same community it has served since 1908.
This update recognizes our over four years of experience in approving and disapproving federal community charter conversions. Those conversion applications that we have approved since 1998 have two things in common - one is that they have extensively well documented business and marketing plans demonstrating in great detail how they will serve their entire community and their financial and management ability to do so. The other part of those applications that we have approved over the past four years is an extensive, time-consuming and extremely costly documentation process which incorporates at NCUA’s insistence every school, hospital, newspaper, baseball team, university, shopping mall, festival and other cultural characteristic short of what movies are playing each weekend. For some communities, perhaps those with multiple political subdivisions and very large populations spread among these many entities, this level of documentation is appropriate. But for many other communities, those same characteristics are just a part of being a city or a county or a metropolitan statistical area. In fact, the primary documentation that is the basis of most community charter applications, before the inches of add-on documentation about festivals and the like, is evidence that - yes, this community is a recognized city, a township, a county, or MSA. I think it is time we streamlined this cumbersome process for documenting the community itself and return the focus of our approval process to where it should be - on the ability of the credit union to serve the community and the appropriateness of its extensive business and marketing plans to do so within its financial means. This proposed update gets NCUA back to that primary focus by recognizing single political subdivisions as communities, as well as MSAs less than a million and multiple counties which are not MSAs less than 500,000. Communities larger than those in the streamlined presumption designations still can provide sufficient documentation to demonstrate their community and we certainly encourage them to do so. We just see no reason for communities already clearly established by other political and legal definitions to be required to do so again and again - as we have required them to do since 1998, even though the law has not required it.
There are other modest updates that are included in this proposed rule and we look forward to your comments about all of these proposals over the next sixty days. I know that we will get many comments from credit unions that we should go further, even as there will likely be comments by some who for competitive reasons do not want to see us go as far as the law allows. My observation to all commenters is that the federal law restricts how far we can go, should go or will go in the arena of field of membership. We respect the integrity of the Credit Union Membership Access Act and will never go beyond what that law allows. The federal courts have already affirmed our commitment in that regard when they upheld our 1999 and 2000 field of membership rules. However, I strongly feel that the value of the federal charter in an effective dual chartering system requires us to offer all of the field of membership growth opportunities allowed by the federal law. Even as we respect the restrictions contained within the federal law, we must also empower the opportunities contained within that same law. In doing so, whether they choose a state or a federal charter, we can be pleased with the result that we will have stronger credit unions. We will have safer and sounder credit unions. We will have more diversified fields of membership. And, most importantly, our commitment to Access Across America - the word “access” derived from the Credit Union Membership “Access” Act - will be backed up by our actions today in proposing an update to our field of membership rules that makes that very statute work for the over 80 million Americans who are depending on NCUA to create a regulatory environment which protects their hard-earned dollars and also enables them to still have the consumer choice of dynamic, growing and viable credit unions available to them when they decide to pass those same hard-earned dollars, plus dividends, down to the next generation of credit union members in their families, businesses and communities. Thank you very much.