BIRMINGHAM, Ala. — NCUA's proposed rule on associational common bond requirements has many credit union executives saying they are uncertain about what the agency will be looking for when it reviews existing associational relationships.
"The viability and growth opportunities for FCU's could be negatively impacted by the proposed rule," wrote Steve Hennigan, president and CEO of the $2.7 billion San Antonio Federal Credit Union in a comment letter to the NCUA. "The removal of or the threat to remove previously approved groups from their [fields of membership] will adversely impact the ability of FCUs to execute existing business plans, possibly forcing them to downsize."
Patrick S. Jury, president and CEO of the Iowa Credit Union League echoed similar concerns in his letter: "ICUL is concerned that prohibiting the formation of an association unnecessarily restricts a credit union's growth abilities, without taking into consideration other possible contributing factors."
One industry expert advises CUs to pay attention to current examiner trends.
Dennis Dollar, principal at Dollar Associates, said credit unions have shared that associational quality assurance reviews are already being conducted by some of the agency's field team.
"NCUA is going back now and making sure approved associations are doing what they are supposed to be doing," said the former NCUA chairman. "Credit unions need to realize that the field of membership police are on patrol."
In April NCUA proposed a regulation on associational common bond requirements that would amend the agency's process to evaluate a request from a federal credit union having a single associational FOM, or multiple common-bond FOM, to add an associational group. The rule is also expected to impact current associational ties as examiners review current associational relationships.
The proposal's comment period closed June 30. On Tuesday,
What Are Examiners Looking For?
But what many in the community have concluded in the last month, and are worried about, is that the proposal is unclear about what examiners will look for when they review existing associational relationships.
"What is most concerning to credit unions is the quality assurance review, the kind of behind-the-scenes addition to this proposal," said Steven Van Beek, attorney at Howard & Howard in Royal Oak, Mich. "NCUA has not explained the criteria for these reviews."
Van Beek, and other sources, stated that without knowing what the agency is looking for as it reviews CUs' current associational ties, a credit union cannot know how to properly evaluate an association.
"Without knowing the internal process NCUA will use, how does the credit union know how to document its review of its associations?" noted Van Beek. "You don't know what NCUA will look at and it may be hard to gauge whether your associations are in line with the new rule."
The primary objective of the proposal is seen by credit unions as positive — preventing CUs from creating or partnering with an association just to expand reach, a practice that has drawn heavy fire from the banking industry.
The proposed rule would subject many associations to additional scrutiny, adding a "threshold requirement" that would reject associations created primarily for the purpose of expanding an FCU's membership.
Eighth Factor to 'Totality of the Circumstances'
The rule would also add an eighth factor to NCUA's "totality of the circumstances" test used when analyzing a request to add an association, explained Van Beek. "This new factor would analyze numerous sub-factors to determine if there is sufficient corporate separateness between the association and the FCU."
NAFCU is concerned that the threshold requirement, where NCUA evaluates if the group has been formed primarily for the purpose of expanding the credit union's field of membership, precedes the totality of the circumstances test.
"Most concerns we have heard from credit unions is over this threshold requirement," said Mike Coleman, NAFCU's director of regulatory affairs. "We question why there is this first hurdle to get over to get to the real test in the field of membership and chartering manual, which is the totality of the circumstances test."
Coleman said credit unions and NAFCU "don't want to see an association, which would pass the totality test, denied the full evaluation [by failing the threshold requirement]."
CUNA Deputy General Counsel Mary Dunn said her trade association's biggest issue with the proposal is language in the supplementary information.
Credit unions fear that that it could lead to reviews and possible removal of existing, legitimate and NCUA approved associational relationships and they are concerned about the impact on indirect lending programs, according to Dunn.
"There are a lot of concerns, more around how the proposal will be implemented into the future," she said. "We don't want to see credit unions that are working with solid associations, providing great services to those associations' members, disadvantaged in any way."
During a recent webinar on the field of membership proposal, Dollar reiterated that credit unions can gain insights today into how NCUA will evaluate associational relationships by looking at how current examiners are addressing the issue.
The former NCUA chairman said he has received correspondences from credit unions saying NCUA is looking at things such as how many people show up for an association's event, do members of the association have voting rights for board elections and budgets and how frequently associations hold meetings.
"While there is nothing inherently wrong with bringing an associational SEG into a credit union to build membership for both the credit union and the association, and the rules have clearly allowed this for decades, some questions are being asked by NCUA as to whether or not an association is formed solely to promote credit union membership — what kinds of events the association sponsors and if the association is actively cultivating its own members."
Eligibility Requirements--Bylaws & Membership Process
Dollar said examiners are also taking a close look at associations' eligibility requirements — bylaws and the membership process.
"NCUA, too, wants to know how a member knows he is a member of an association. It is important that people clearly know they are joining an association."
Another question being asked — and will certainly be asked in the future — is how long the association has been in existence, noted Dollar.
Recognizing that the vast majority of associations within credit unions' fields of membership are not simply in existence to further CU membership, Dollar indicated that some institutions will have trouble answering those questions because they do not control the associations.
Still, he advised that CUs examine associations' bylaws and be familiar with how they operate in adherence with them.
"The biggest problem we are seeing is an association sometimes not adhering to its bylaws," said Dollar. "They have to follow their bylaws. Take some time, get a copy of the association's annual report, make sure they are doing what their bylaws say they should be doing."
Signs that an association may not be performing as it should be, according to Dollar, include not holding an annual meeting in several years or not sponsoring an activity in a reasonable number of months.
"Those things could raise NCUA's attention and possibly have the credit union and association answering some questions, or run the risk of the association being removed from the field of membership."
NCUA spokesman John Fairbanks said the agency has had quality-control processes with regard to associational common bond in place for "a long time."
"The agency is more likely to review associational groups after the issuance, last September, of a
Fairbanks said NCUA requests the association's bylaws or equivalent documentation and then determines if the group meets the current requirements in Appendix B of Part 701 of the agency's Rules and Regulations.
"In rare cases where this review identifies material concerns, the group is evaluated on a case-by-case basis to determine if the concerns can be cured or not," Fairbanks noted. "NCUA works with the credit union officials to develop a reasonable solution within its regulatory authority. NCUA typically does not request any documentation in a quality control review that the credit union is not already responsible for obtaining prior to adding the group."
