ROYAL OAK, Mich. — NCUA's proposal to amend the agency's chartering and field of membership rules could slow indirect lending at some credit unions, say industry insiders.
The new rule may also prompt a number of credit unions to switch to a community or state charter to avoid the guideline's reach.
The proposal amends NCUA'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. It may also impact CUs' existing associational relationships, analysts said.
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.
The rule, as well, would add an eighth factor to NCUA's "totality of the circumstances" test used when analyzing a request to add an association, explained Steven Van Beek, attorney at Howard & Howard. "This new factor would analyze numerous sub-factors to determine if there is sufficient corporate separateness between the association and the FCU."
While the primary objective of the proposal is seen as positive — preventing CUs from creating or partnering with an association just to expand reach, a practice that has drawn heavy fire from bankers — many predict there will be unintended consequences.
Besides the new hurdles possibly discouraging CUs to add an association to their field of membership, analysts fear NCUA may review existing associational relationships and remove associations CUs rely on — especially to sign new members for an indirect loan.
Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., told Credit Union Journal, he has listened to CEOs discuss the proposal's potential adverse impact on indirect lending.
The former NCUA chairman said CEOs are concerned their ability to retain legitimate associations and bring new ones into their FOM may be hampered. "They may be overly restricted by what some may view as examiner nitpicking of associational groups regarding details of [an association's] independent operations, to which the credit union often has little or any control."
Carrie Hunt, NAFCU SVP of government affairs and general counsel, said the trade association is paying close attention to this rule since NCUA has not demonstrated the clear risk to credit unions, or need, the rule addresses.
She stated that the letter to credit unions NCUA sent last fall regarding potential violations of common bond advertising should be sufficient. The letter outlined requirements for the associational common bond and reminded how CUs can — and cannot — advertise to consumers about the ability to join the CU.
"I think that was great letter, and it was appropriate," said Hunt. "But moving forward with rulemaking to try to solve some problem that may not exist — and NCUA has plenty of authority under their existing rules [to deal with associational common bonds] — is that necessary?"
NCUA spokesperson John Fairbanks said the agency proposed the change to address an enforcement issue in which some credit unions were advertising membership as "open to anyone. That statement could be misleading, and board members are providing a more specific framework for credit unions to follow to ensure potential additions are consistent with the limits in the Federal Credit Union Act for associations."
Van Beek pointed out the proposal states that NCUA will perform "quality assurance reviews" of existing associations to determine if they continue to meet the totality of the circumstances test.
If the association fails the test, NCUA will remove the group from the FCU's FOM, said Van Beek. Existing members would be grandfathered but no new members could join.
According to Van Beek, NCUA not clearly outlining in the proposal the process the agency will use in reviewing associations should concern credit unions.
"Without knowing the internal process NCUA will use, how does the credit union know how to document its review of its associations?" offered 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."
While CUNA is closely watching the proposal, Deputy General Counsel Mary Dunn pointed out that the basics of the proposal are not new, in that NCUA policy has always stated that associations can't be part of a CU's FOM if they are not doing their job as an association, and are simply existing to generate members.
What is new, according to Dunn, is that these guidelines are now expressly included in an NCUA regulation.
"Including [the policy] in the regulation begs the question: Arewe going to have an overly aggressive implementation that would cast a negative shadow on legitimate associations? That is what CUNA will be on the lookout for," said Dunn, who noted that the proposal itself does not call for NCUA to crack down on associations.
Van Beek and Dollar said CUs should be paying close attention to the proposed rule requiring an association to be operating as an independent organization for at least one year before it could be added to any FCU's FOM.
"The primary concern I have heard expressed is the one-year FOM threshold for a qualifying association and the extremely tight assumption that an association has to be physically close to the credit union," said Dollar. "This seems a bit dated thinking in this era of Internet and mobile participation."
Dollar, and several other sources, see the rule benefiting credit unions, as well.
"The [proposed rule] has the potential of being a net positive largely because it validates those associations that are legitimate and have integrity as a part of a credit union's FOM," said Dollar.
Dollar added that while it could be argued that over 99% of associations within credit unions' FOMs are structured properly and operating with integrity and the outlying 1% could easily be managed through the examination process without a new reg, "the reality is that — regulation or not — credit unions need to know unquestionably that NCUA respects the value of associational affiliations for FOM purposes. This rule does that."
Dollar, Van Beek and Dunn, as well, support the rule streamlining the approval process, automatically approving certain types of associations, such as church groups, alumni associations and homeowners associations.
Still, industry insiders predict, there will be many credit unions unhappy if the proposal goes through as currently written, and some may consider moving to a community or state charter to circumvent the rule.
"If a credit union had an associational group that it has been very successful with and spurred a great deal of growth, if NCUA suddenly told the credit union it could no longer add new members from the association, that might lead the credit union to discuss how the state regulator might view this associational group," said Van Beek.
In North Highlands, Calif., SAFE CEO Henry Wirz favors allowing credit unions to broaden their field of membership as much as they possibly can.
"The trend has been for credit unions to shift from serving single sponsor groups to being community-based credit unions. The common bond now is people helping people," said Wirz, whose $2 billion CU had to switch from a federal to a state charter when its sponsor, McClellan Air Force Base, closed in 2001. "My basic principle on membership is that if the credit union can serve a group of members, it should be able to add them to its field of membership."
Dunn summed up CUNA's preliminary stance on the rule, saying the trade association does not see the proposal adding to CU regulatory burden.
"We do think there is some supplementary information accompanying the rule that needs to be clearer in terms of the agency's intent — to know there is not undue regulation of credit unions utilizing associational common bonds," she said. "We want to make sure that credit unions that use associations are not disadvantaged in serving their members."
The proposal is out for comment, which are due June 30.
