National Association of Federal Credit Unions

October 1, 2003

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke St.
Alexandria, VA 22314-3426

Dear Ms. Baker:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents the interests of our nation's federal credit unions, I am responding to the National Credit Union Administration's (NCUA) request for comment on the review of its regulations pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA).

NCUA requests comments on areas of regulations within the categories of "Applications and Reporting" and "Powers and Activities." NAFCU appreciates the opportunity to offer comments on these categories of NCUA's regulations, including areas in which statutory change is needed.

Applications and Reporting

Field of Membership/Chartering (12 C.F.R. § 701.1; IRPS 03-1)

NAFCU commends the NCUA Board and Field of Membership Task Force for the revisions to the Chartering and Field of Membership Manual that were implemented earlier this year. NAFCU believes the proposed changes will provide a significant benefit to consumers through increased access to federal credit unions (FCUs) and will reduce regulatory burden. NAFCU offers additional recommendations with respect to various sections of the rule intended to further improve IRPS 03-1.

Reasonable Proximity and Service Facility for Select Group Expansions

The NCUA Board (Board) has revised the definition of a service facility for the purpose of the reasonable proximity analysis and, after reviewing the Credit Union Membership Access Act (CUMAA) and its legislative history again, determined that ATMs that are wholly owned by the credit union should be included within the scope of the definition. In addition, shared service centers now meet NCUA's service facility definition as long as there is an ownership interest by the credit union. NAFCU fully supports the Board's decision to allow ATMs to meet the definition of a service facility. As more and more credit union members are moving away from the traditional brick-and-mortar services and using telephone, ATM and other electronic means to conduct transactions, it is increasingly important that NCUA revise the reasonability proximity provisions to recognize these developments in member service.

As NAFCU has stated in previous communications to NCUA, the Federal Credit Union Act (FCUA) specifically requires an "office or facility" only in the case of adding underserved areas; the law does not use these terms in connection with the reasonable proximity requirement for adding new groups.¹ The term "service facility" and the prohibition on the use of ATMs are discussed only in the legislative history of CUMAA pertaining to service to underserved areas, not in regard to establishing whether or not a group is within reasonable proximity of a credit union with which it might align.² Furthermore, Judge Kollar-Kotelly's statements in the ABA litigation that "the agency's decision to account for `advantages acquired from advancing technologies' is a permissible one" and that "...the departure from a policy that envisions a world of service centers where customers always receive personal attention from live representatives is both realistic, and in accordance with Congress's overarching intent in enacting the CUMAA: to `modernize' credit union law"³ must be given great weight. As a result, NAFCU believes that NCUA has the statutory authority to further liberalize the reasonable proximity requirement and believes allowing ATMs to meet this requirement is a necessary step in the right direction.

In order for an ATM to meet the reasonable proximity requirements, the ATM must be wholly owned. In connection with that change, the current ownership requirement for shared service facilities has been revised by stating these facilities will meet the reasonable proximity requirements as long as the credit union has some ownership interest in the facility. NAFCU does not support either of these ownership requirements.

NAFCU has stated to NCUA in the past and continues to believe that the degree of ownership has neither legal nor practical significance. Some credit unions have chosen to invest in cooperative ATM networks rather than purchase ATMs in order to better pool their resources and more effectively serve their members. As more and more credit unions choose this option, NAFCU believes such credit unions should not be punished for making such prudent business decisions in order to provide their members with a higher level of service. Furthermore, such restrictions may serve to hurt expansion opportunities for smaller credit unions that take advantage of economies of scale by choosing to invest in ATM networks or participate in shared branch networks on a non-ownership basis. NAFCU encourages the Board to remove the requirements for ownership of ATMs or shared branch facilities in IRPS 03-1.

Overall, NAFCU believes the "reasonable proximity" requirement is unnecessary and therefore strongly supports legislation to remove the reasonable proximity requirement from the FCUA. This requirement imposes a costly and undue burden on credit unions by requiring them to have a physical presence within a reasonable proximity of the location of a group that the credit union wants to add to its field of membership. In the financial marketplace of the 21st century that has seen an increase in Internet and remote banking, this requirement serves as an unnecessary burden and restriction on credit unions and those who wish to join them. In addition, the strict application of a "reasonable proximity" requirement could actually be counter-productive to the underlying goal of the Credit Union Membership Access Act of expanding opportunities for credit union membership, since it would discourage the establishment of new branches and facilities. In reality, if a credit union is allowed to serve a company or group and in the process builds its membership base in a particular area, it may lead to a future branch.

NAFCU also believes legislation is necessary to eliminate the preference imposed by CUMAA for the formation of new credit unions over the addition of groups to an existing credit union. Oftentimes, an existing credit union is better suited to meet the needs of a select employee group (SEG) and offer it better services than a new credit union would or could. An objective analysis would likely confirm that most SEG applicants simply do not have the time, money, or critical mass to form their own credit union. According to NCUA, since the passage of CUMAA in 1998 there have not been any SEG groups whose applications have been denied that have gone on to form their own credit union. These individuals have, therefore, been left without credit union services.

Occupational Common Bond

The Board has approved a fifth definition of occupational common bond based on employment in a trade, industry or profession (TIP). The proposed rule states that a "common bond based on employment in a trade, industry, or profession can include employment at any number of corporations or other legal entities that - while not under common ownership - have a common bond by virtue of producing similar products or providing similar services." NAFCU supports the concept of TIP and offers suggestions on how to implement this provision.

IRPS 03-1 states that the TIP may contain a geographic limitation, which will generally correspond to the credit union's current or planned service area. NAFCU does not support this geographic limitation. The FCUA imposes no geographic limitation for single common bond credit unions. In fact, Chapter 2, Section II.A. 1 of IRPS 03-1 already states that a "geographic limitation is not a requirement for a single occupational common bond."⁴ Furthermore, any potential safety and soundness concerns as to the credit union's ability to serve the proposed TIP will be addressed by the credit union's business plan that it must submit with its request. For these reasons, NAFCU believes a geographic limitation for TIP is unwarranted.

The Board has limited TIP to single common bond credit unions, citing the "relative complexity of this TIP policy" as the reason for this limitation. While NAFCU understands that permitting multiple common bond credit unions to take advantage of TIP may be more difficult to implement and administer, NAFCU sees no legal reason why TIP should not be applied to multiple group credit unions. In fact, the definitions of single common bond and multiple common bond credit union in the FCUA lend to the idea that TIP would be applied to both:

"(b) MEMBERSHIP FIELD. - Subject to the other provisions of this section, the membership of any Federal credit union shall be limited to the membership described in one of the following categories:

(1) SINGLE COMMON-BOND CREDIT UNION. - One group that has a common bond of occupation or association.

(2) MULTIPLE COMMON-BOND CREDIT UNION - More than one group - (A) each of which has (within the group) a common bond of occupation or association... "⁵

NAFCU understands that applying TIP to multiple common bond credit unions provides added difficulty in that the FCUA imposes reasonable proximity and numerical limitations on groups being added to multiple common bond credit unions. However, credit unions wishing to serve a TIP should be able to provide NCUA with information on the size of the group and how the reasonable proximity requirements will be met. NAFCU also acknowledges that it would not be feasible to obtain a letter from a TIP indicating its intent to be served. However, NAFCU reminds NCUA that there is no requirement in the FCUA for such a letter and that the credit union is in the best position to provide the information that NCUA currently requires to be included in the group's letter. Guidance currently exists to help credit unions define a proposed TIP, which can be utilized by both single common bond and multiple common bond credit unions. For these reasons, NAFCU encourages the Board to extend TIP eligibility to multiple common bond credit unions.

Documentation Requirements

IRPS 03-1 contains a process whereby the credit union must complete and submit a form detailing information concerning the group that wishes to be added. IRPS 03-1 also requires the credit union to provide a letter or equivalent documentation from the group providing additional information. Under the current rule, groups with 3,000 or more individuals that wish to be added to the field of membership of a multiple common bond FCU must indicate in this documentation why the formation of a separate credit union is not practical or consistent with safety and soundness standards.

As NAFCU noted in its discussion on TIP, there is no requirement in the FCUA for a credit union, either single common bond or multiple common bond, to submit documentation from the group with its request to expand the field of membership. In fact, direct contact with the group is not required anywhere in the language or legislative history of CUMAA. NAFCU understands the need for this information but believes the credit union is in the best position to provide it. Most groups do not have the time, or the expertise, to provide this level of information and look to the credit union for assistance in documenting this requirement. NAFCU believes that, in completing the information for NCUA that is required for a field of membership expansion, the credit union may provide and attest to the information that is currently required in the group's documentation. This would simplify the approval process for the group, the credit union and the agency and provide better consumer access to credit unions.

Voluntary Mergers

NAFCU believes the legislative history of CUMAA and the recent court decisions support a broader interpretation of NCUA's voluntary merger authority. In addressing the voluntary merger exception to the restrictions on adding groups of more than 3,000 to multiple common-bond credit unions, Rep. Paul Kanjorski, a co-author of CUMAA, stated:

"[I]n granting this specific retroactive exception from the multiple common bond requirements we are not in any way diminishing the existing authority of the National Credit Union [sic] authority under section 205 of the Federal Credit Union Act to grant or withhold approval for voluntary mergers of credit unions. All of the federal banking regulators, including the National Credit Union Administration, have broad authority to approve and disapprove mergers of institutions under their jurisdiction, and this legislation is not intended to obstruct that authority in any way."⁶

Judge Kollar-Kotelly, in denying the ABA's challenge against NCUA's voluntary merger policy, directly cited this language and stated that "the explanation of at least one legislator suggests that Congress intended to leave substantial authority with the agency to decide matters involving voluntary mergers."⁷

The court of appeals' opinion affirming the district court's decision provides further persuasive evidence that the provisions of the FCUA applicable to the expansion of multiple common bond credit unions do not affect voluntary mergers of FCUs. In fact, the court of appeals goes so far as to state that the requirements set forth in the expansion provision "make no sense in the case of mergers."⁸ The court asks, "... how can the Administration `encourage the formation of separate credit unions,' since mergers, by definition, bring together already-formed credit unions?" and "...why would Congress have written the `approval criteria' in the singular... if it had intended them to apply to mergers of two credit unions?"⁹

Although this discussion applies specifically to the language in section 109(f) of the FCUA, NAFCU firmly believes this argument can reasonably be extended to the multiple common bond credit union group requirements of section 109(d) as both sections are interrelated. For example, section 109(f) governs the criteria for expansion of a multiple common bond credit union by adding groups; section 109(d) governs the size of the groups that may be added. Also, section 109(f) states that a group may join an existing credit union if the formation of a separate credit union is not practicable or consistent with reasonable standards for safe and sound operation of a credit union; section 109(d) provides an exception from the 3,000 numerical limitation for a group that could not "feasibly or reasonably establish a new single common-bond credit union."

NCUA recognizes the similarity between these two sections of the FCUA given that NCUA has adopted one general approach for determining whether a group can be added to an existing credit union's field of membership (section 109(d)) and whether it is reasonable to encourage the formation of a separate credit union (section 109(f)). NAFCU encourages NCUA to remove the restrictions on voluntary mergers from IRPS 03-1.

While NAFCU believes NCUA has the regulatory authority to revise the merger restrictions in its rules, NAFCU supports legislation that would clarify that the numerical limitation of 3,000 does not apply to voluntary mergers of healthy credit unions. This revision is contained in section 308 of the Financial Services Regulatory Relief Act of 2003 (H.R. 1375).

Community Charter

NAFCU supports legislation that would give NCUA the authority to allow credit unions to continue to serve their SEGs after a credit union converts to a community charter. This revision is contained in section 309 of H.R. 1375 and is necessary to correct a federal field of membership issue that puts the federal charter at a significant disadvantage as many states' laws permit state-chartered credit unions that convert to a community charter to continue serving their groups located outside of the community. NAFCU is aware that numerous FCUs have converted from federal to state charter due to this problem and strongly supports Congress remedying this situation through an amendment to the Federal Credit Union Act.

Fees Paid by Federal Credit Unions (12 C.F.R. § 701.6)

NAFCU applauds the agency's ongoing efforts to reduce expenses, including the consolidation/reorganization of the regional offices, and encourages NCUA to continue to look for ways to decrease costs in order to reduce the fees FCUs pay to the agency. In connection with this, NAFCU supports the agency's efforts to accurately calculate the appropriate overhead transfer rate and encourages NCUA to maintain a rate that is equitable to FCUs given they are funding the remaining agency expenses through operating fees.

Conversion of Insured Credit Unions to Mutual Savings Banks (12 C.F.R.
§ 708a)

NAFCU will submit comments separately pursuant to NCUA's September 24, 2003 proposed rule on this section of NCUA's Rules and Regulations.

Powers and Activities

Loans to Members and Lines of Credit to Members (12 C.F.R. § 701.21)

NAFCU believes legislation is necessary to increase the FCUA's general 12-year limitation on the term of FCU loans. The 12-year limitation is outdated and does not meet with maturities that are commonly accepted in the market today. NAFCU supports the revision to this section as contained in section 304 of H.R. 1375, which would increase the 12-year limitation to 15 years or longer as permitted by the NCUA Board. NAFCU believes it is important that the NCUA Board have the rulemaking authority to extend this limitation beyond 15 years in order to address the flexibilities that are necessary in today's market.

NAFCU also supports legislation that would give NCUA greater latitude in adjusting interest rates depending on market conditions. Under current law, FCUs are the only type of insured institutions subject to a specific federal usury limit on consumer loans. NAFCU supports section 311 of H.R. 1375 as this section would help to alleviate this problem.

Member Business Loans (12 C.F.R. § 723)

NAFCU supports NCUA's recent efforts to modify and revise the member business lending regulations and other related rules. NAFCU provided comments to NCUA in its June 3, 2003 official comment letter; NAFCU offers no additional suggestions with respect to the regulations at this time.

NAFCU believes legislation is necessary to relax the current member business loan restriction imposed by CUMAA. This restriction limits a credit union's member business lending to the lesser of either 1.75 times net worth or 12.25 percent of total assets (12 USC Section 1757a(a), 1790d). A CUMAA mandated Treasury Department study (Credit Union Member Business Lending: January 2001) found that "credit unions' business lending currently has no effect on the viability and profitability of other insured depository institutions" and was often filling a market niche for business loans of modest amounts. If an outright removal of the cap is not plausible, NAFCU recommends that there should at least be parity with the 20 percent cap on thrifts that is included in section 212 of H.R. 1375.

NAFCU also supports legislation that would increase the threshold in the FCUA for when a loan maybe considered a member business loan from $50,000 to $100,000. NAFCU believes such a change is necessary and will allow credit unions to provide better service to their members.

Finally, NAFCU supports legislation that would exclude loans or loan participations by FCUs to non-profit religious organizations from the member business loan limit. This legislative change is contained in section 306 of H.R. 1375.

Investment and Deposit Activities (12 C.F.R. § 703)

Earlier this year, NCUA approved revisions to part 703 of NCUA's Rules and Regulations that expanded FCU investment authorities, clarified existing rules and reformatted the rule. NAFCU supports the increased investment opportunities that FCUs have been offered and commends the agency for its effort to improve the investments rule for FCUs. NAFCU offers the following comments on additional suggested revisions to the rule.

NAFCU agrees with NCUA's decision to allow RegFlex eligible FCUs to engage in commercial mortgage related securities (CMRS); however, NAFCU believes FCUs that are not RegFlex eligible but have otherwise demonstrated the expertise to manage such investments should also be eligible to invest in CMRS. NAFCU suggests that NCUA, in determining whether or not to offer this expanded investment authority to FCUs not eligible for RegFlex, could consider other factors such as the FCU's ability to manage such investments and their associated risks and the FCU's continued expertise in the field.

NAFCU urges NCUA to continue to be receptive to changes in investment opportunities and to evaluate new products and services that can be beneficial. NAFCU believes flexible investment options for FCUs are particularly important in the current interest rate environment.

The Federal Credit Union Act and NCUA regulations provide legislative and regulatory prohibitions against certain types of investments based on perceived safety and soundness concerns. In the constantly changing financial marketplace, these restrictions and regulations must be reevaluated when given the opportunity. Some of the types of activities that NCUA should consider allowing for a FCU that demonstrates its ability and expertise to manage these investments include:

• The purchase of commercial paper
• Investment in asset-backed securities, particularly in a security
   that does not expose the FCU to high levels of interest rate risk
• Derivative authority in order to hedge interest rate risk
• Utilization of financial futures or interest rate swaps
• Small business related securities
• Residual interests in CMOs/REMICs
• Mortgage servicing rights

FCUs' portfolios continue to change partly due to their greater involvement in the mortgage loan market. Yet, credit unions have few tools to hedge their interest rate risk because of regulatory restrictions. NAFCU believes a moderate amount of the investments listed above will not jeopardize the safety and soundness of FCUs with the ability and expertise to manage these investments. NAFCU strongly believes that these FCUs should have an option to engage in investment activities that fit their investment objectives within a reasonable limit.

NAFCU supports legislation that would increase investment options for FCUs. Section 303 of H.R. 1375 would provide additional investment options for FCUs by allowing certain investments in securities. The current limitations in the FCUA unduly restrict FCUs in today's dynamic financial marketplace and have the potential to adversely impact both safety and soundness in the future. NAFCU believes that FCUs should have the same investment authority that is approved for other federally regulated financial institutions with regulation by the NCUA Board.

NAFCU also supports legislation to increase the FCUA's one percent investment limit in credit union service organizations (CUSOs). Section 305 of H.R. 1375 would increase this limit to three percent. NAFCU believes the bill should go further and instead give the NCUA Board the authority to set the proper investment limit.

NAFCU supports providing credit unions regulatory relief from the requirement that they register with the Securities and Exchange Commission as broker/dealers when engaging in certain activities. The Gramm-Leach-Bliley Act provided banks with registration relief from certain specifically enumerated activities. Section 313 of H.R. 1375 would provide similar relief to credit unions.

Fixed Assets (12 C.F.R. § 701.36)

NAFCU encourages NCUA to reexamine its fixed asset rule, particularly with respect to section 701.36(d), which requires that a FCU have a plan to utilize the property for its own operation. NAFCU believes this section of the rule does not encourage long-term planning among credit unions. Credit unions that exceed their space limitations after time may be left with costly alternatives in order to expand their operations. Furthermore, credit unions may be unable to purchase space in the location of their choosing and/or may incur excessive costs to obtain a specific amount of space due to this restriction. NAFCU believes that credit unions should have the discretion to make this decision and that a plan to utilize assets within a specified amount of time should not be required by regulation.

Credit Union Service Organizations (12 C.F.R. § 712)

Part 712 of NCUA's Rules and Regulations contains categories of permissible activities that are preapproved for CUSOs. Many of these categories contain lists of activities which are intended by NCUA to be illustrative and not exhaustive. NAFCU supports the agency's efforts to permit a broader interpretation of permissible activities, particularly given advances in technology. However, NAFCU believes the regulation should provide guidance as to which activities are related to the routine activities of credit unions and permit FCUs to determine whether or not the activities of a CUSO meet this requirement before investing in, loaning to or contracting with a CUSO. Therefore, NAFCU suggests the agency consider including the categories in an appendix or as guidelines in order to provide examples of categories that are related to the routine operations of credit unions. NAFCU points out that, in the event any supervisory, legal or safety and soundness issue was to arise with respect to any CUSO activity or service, NCUA has the authority under Part 712 to limit or refuse to permit that activity or service.

The regulation currently states that FCUs should seek advisory opinions from the Office of General Counsel to determine if a proposed activity falls within one of the preapproved categories before suggesting an amendment to the regulation. Based on the previous discussion, NAFCU believes that FCUs should have the ability to independently determine whether or not an activity relates to the routine operations of credit unions based on guidance provided by the agency.

Charitable Contributions and Donations (12 C.F.R. §701.25)

Currently, credit unions that are eligible for RegFlex are exempt from the charitable contribution restrictions of section 701.25. As NAFCU stated in its May 11, 2003 comment letter on the RegFlex proposed rule, NAFCU believes that the board of directors of a credit should have the discretion to decide to whom a credit union will donate its funds. Limiting charitable donations to certain locations or certain types of entities appears arbitrary, especially given that advances in technology have allowed credit unions to serve members worldwide and not simply in areas where the credit union maintains a place of business. Furthermore, charitable contributions do not constitute a material part of credit union operations and therefore do not represent a significant safety and soundness concern. As there is no need for regulation of this issue, NAFCU believes the charitable contribution rule should be eliminated for all credit unions, not just those eligible for RegFlex.

NAFCU would like to thank you for this opportunity to share its views on the EGRPRA request for comment. Should you have any questions or require additional information please call me or Gwen Baker, NAFCU's Director of Regulatory Affairs, at (703) 522-4770 or (800) 336-4644 ext. 266.

Sincerely,
Fred R. Becker, Jr.
President/CEO
National Association of Federal Credit Unions
Arlington, VA

_______________________________________

1 See 12 U.S.C. § 7159(f)(1)(B).

2 See H.R. Rep. No. 105-472, 105'" Cong., 2d Sess. 19 (1988); S. Rep. No. 103-193, 105th Cong., 2d Sess. 7 (1988).

3 American Bankers Ass'n v. National Credit Union Admin., 93 F. Supp.2d 35, 42 (D.D.C. 2000); see 144 Cong. Rec. H1868-02, H1874 (daily ed. April 1, 1998) (statement of Rep. Vento) ("Credit union law needs to be modernized, addressing the membership base of credit unions because they would not be able to sustain a membership base and reasonable services under the strict interpretation of a 1934 federal credit union law.")

4 67 Fed. Reg. 72,444, 72,453 (2002)

5 12 U.S.C. § 1759(b) (emphasis added).

6 144 Cong. Rec. H7037, 7045 (Aug. 4, 1998) (emphasis added).

7 American Bankers, 93 F. Supp.2d at 46.

8 American Bankers Ass'n v. National Credit Union Admin., 271 F.3d 262, 273 (D.C. Cir. 2001).

9 Id. at 272.