[Federal Register Volume 59, Number 43 (Friday, March 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4977]


[[Page Unknown]]

[Federal Register: March 4, 1994]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

 

Nonmember and Public Unit Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed amendments.

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SUMMARY: Currently federally insured credit unions that wish to 
maintain public unit and nonmember accounts in excess of 20 percent of 
their total shares must have a waiver request approved by the Regional 
Director. The waiver request must include a plan setting forth the 
intended sources and uses of the funds. The proposed amendments would 
change the amount of nonmember and public unit accounts that a credit 
union may maintain, without a waiver, to 20 percent of total shares or 
$1.5 million, whichever is greater. Credit unions accepting nonmember 
accounts in excess of 20 percent of total shares but not greater than 
$1.5 million would, as under the current rule, be required to develop a 
written plan and send it to the Regional Director. Prior NCUA approval, 
however, would no longer be required.

DATES: Comments must be postmarked by April 4, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary of the Board, 1775 
Duke Street, Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT:
Michael J. McKenna, Staff Attorney, Office of General Counsel, at the 
above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

A. Background

    The NCUA Board, as part of its ongoing program of regulatory 
review, proposes to revise the regulation under which federally insured 
credit unions maintain nonmember and public unit accounts. Federal 
credit unions (FCUs) are authorized by section 107(6) of the Federal 
Credit Union Act (12 U.S.C. 1757(6)) to receive nonmember shares from 
other credit unions, from certain governmental entities (``public 
units'') and, if the credit union has a ``low-income'' designation from 
NCUA, from other outside sources. These nonmember shares, and 
equivalent accounts authorized for federally insured state credit 
unions under the state law are defined by section 101(5) of the Act (12 
U.S.C. 1752(5)) as ``accounts'' and ``member accounts'' for purposes of 
the various provisions of the FCU Act, including those establishing 
insurance coverage by the National Credit Union Share Insurance Fund 
(NCUSIF).
    NCUA's current regulation on nonmember accounts requires any 
federally-insured credit union that wishes to accept nonmember accounts 
in excess of 20 percent of total shares to submit to NCUA a plan 
setting forth the intended use of the funds and obtain NCUA approval. 
This rule was imposed in December 1988 (53 FR 50918, 12/19/88) in 
response to mismanagement and misuse of nonmember accounts by some 
credit unions. Pursuant to Sec. 741.6 of NCUA's Regulations, federally-
insured state chartered credit unions must adhere to NCUA's 
requirements regarding nonmember accounts.

B. Discussion

    In most credit unions, the only forms of nonmember accounts are 
public unit and credit union accounts. However, as described above, 
credit unions with a low-income designation from NCUA are authorized to 
accept nonmember accounts from any source.
    When the current nonmember account rule was instituted, NCUA's 
concern with these accounts stemmed from abuses involving large sums of 
money, often in excess of the $100,000 limit. In order to attract and 
retain these accounts, some credit unions paid higher than market 
dividend rates. Large influxes of funds into credit unions caused 
asset/liability management problems that were often not within 
management's expertise to control. In some cases, the total amount of 
such account was far in excess of the amount necessary to meet the 
legitimate needs of the members and was used to fund high risk loans 
and questionable investments.
    The imposition of the 20 percent limitation has virtually 
eliminated problems involving nonmember funds. As discussed more fully 
below, however, the process of requesting waivers, which has fallen 
almost entirely on low-income credit unions, has proven burdensome for 
some credit unions. The purpose of this proposal is to reduce that 
burden without significantly increasingly the risk to the credit union 
system and the NCUSIF.
    As of June 1993, only 57 low-income credit unions out of 146 
maintained nonmember accounts. The total dollar amount of these 
accounts was approximately nineteen million, with the average dollar 
amount per low-income credit union approximately $339,000. Surveys 
indicate that low-income credit unions maintaining nonmember accounts 
are currently paying below market rates on the vast majority of these 
funds. It appears that most low-income credit unions, as most other 
credit unions, use nonmember accounts prudently and do not maintain 
excessive amounts of these funds.
    NCUA recognizes that nonmember accounts can be crucial to a low-
income credit union in meeting the fundamental purpose of a credit 
union: Promoting thrift and creating a source of credit for its 
members. Nonmember funds can be invested to provide earnings that are 
paid out to members in the form of dividends, and they can provide a 
source of much needed loan funds. Moreover, nonmember accounts can 
generate income that can be a source of badly needed capital.
    Over the period from the adoption of the regulation in 1988 through 
June 1993, 50 of 59 waiver requests (85%) have been approved. This 
suggests that most waiver requests have been justified and acceptable 
to the regional director. Although a high percentage of the waivers 
have been approved, the procedure has proven burdensome for some credit 
unions. Given the small asset size of most credit unions, the 20 
percent limit frequently requires waivers for small amounts of funds 
that pose very little risk to the credit union and the NCUSIF. Both 
credit unions and NCUA may be expending much more time and paperwork on 
waiver requests than safety and soundness requires.
    Although the NCUA Board remains concerned with the potential misuse 
of nonmember accounts, the Board believes that a modification of the 20 
percent limit may be justified. The Board is proposing the following 
changes to the rule.
    It is proposed that a credit union be able to maintain permissible 
nonmember accounts up to 20 percent of total shares or $1.5 million, 
whichever is greater, before a waiver by the regional director is 
required. This change recognizes the benefit of a limitation on 
nonmember accounts but also allows a credit union to maintain a 
reasonable amount of nonmember accounts, up to $1.5 million, without 
requesting one or more waivers from the regional director.
    As under the current rule, all credit unions accepting nonmember 
accounts in excess of 20 percent of total shares would be required to 
have a plan for the use of such deposits. Further, the plan would be 
submitted to the Regional Director for information. Prior NCUA approval 
would be required, however, only for amounts in excess of both 20% and 
$1.5 million.
    The plan would describe how nonmember accounts will be used to 
serve the credit union's membership, i.e., by providing loanable funds 
to its members or through increased earnings. This requirement should 
ensure that federally-insured credit unions have a reasonable plan in 
place for the use of the funds. As under the current rule, the plan 
would provide for matching maturities of nonmember accounts with 
corresponding assets, or a justification for any mismatch; and provide 
for an adequate income spread between public unit and nonmember shares 
and corresponding assets. The credit union would submit the plan to the 
regional director, prior to receiving nonmember accounts in excess of 
20 percent, for NCUA's information and monitoring. NCUA approval would 
not be required before the credit union accepts additional nonmember 
accounts, unless the aggregate amount exceeded both 20% of shares and 
$1.5 million.
    The proposed amendments, if adopted, would allow small credit 
unions to receive significant amounts of nonmember shares, in relation 
to their total shares, without the prior NCUA approval that has been 
required since 1988. The Board is committed to working with these 
credit unions to ensure that nonmember funds are used in a safe and 
sound manner to benefit their membership. In this connection, the Board 
requests comment on whether periodic reporting on the sources and uses 
of nonmember shares, in excess of 20 percent of total shares, should be 
established. The Board may consider a monthly or quarterly reporting 
requirement or alternatively, revisions to the NCUA Call Report (NCUA 
Form 5300), to gather additional information on sources and uses of 
nonmember funds.

C. Request for Comments

    The Board also requests comment on a related issue; the length of 
an approved waiver, in those cases where a waiver request and approval 
are still required. The regulation currently states in 
Sec. 701.32(b)(2) that the waiver request will normally be for a two-
year period. Although the Board believes this language provides the 
regional director with sufficient discretion to approve waivers for a 
shorter or longer period, the Board is requesting comment on whether a 
nondiscretionary time period for the waiver should be stated, possibly 
three years, or whether the waiver should be open-ended and only 
terminated upon action by the regional director or the credit union.

Paperwork Reduction Act

    The proposed amendments do not change paperwork requirements.

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a proposed 
regulation may have on a substantial number of small credit unions 
(primarily those under $1 million in assets). The revised rule is 
generally less restrictive than the current regulation. Overall, the 
NCUA Board expects the change to benefit credit unions by permitting 
them to maintain a larger amount of nonmember accounts before 
requesting a waiver from the Regional Director. Accordingly, the Board 
determines and certifies that this final rule does not have a 
significant economic impact on a substantial number of small credit 
unions and that a Regulatory Flexibility Analysis is not required.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The amendment applies to federally-insured 
state-chartered credit unions that accept public unit and nonmember 
accounts. The proposed rule would make it possible for a federally-
insured credit union to accept a larger amount of nonmember deposits 
without requesting an exemption.

List of Subjects in 12 CFR Part 701

    Credit unions, Nonmember accounts, Public units.

    By the National Credit Union Administration Board on February 
28, 1994.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787 and 1789. Section 701.6 is also 
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.


    2. It is proposed that Sec. 701.32(b) be amended by redesignating 
paragraphs (b)(2) through (b)(4) as paragraphs (b)(4) through (b)(6) 
respectively, revising paragraph (b)(1) and the newly designated 
(b)(6), and adding new paragraphs (b)(2) and (b)(3) to read as follows:


Sec. 701.32  Payments on shares by public units and nonmembers, and 
low-income designation.

* * * * *
    (b) Limitations. (1) Unless a greater amount has been approved by 
the Regional Director, the maximum amount of all public unit and 
nonmember accounts shall not, at any given time, exceed 20% of the 
total shares of the federal credit union or $1.5 million, whichever is 
greater.
    (2) Before accepting any public unit or nonmember shares in excess 
of 20% of total shares, the board of directors must adopt a specific 
plan concerning the intended use of these shares. The written plan must 
include: (i) A statement of the credit union's need, sources and 
intended uses of public unit and nonmember shares;
    (ii) Provision for matching maturities of public unit and nonmember 
shares with corresponding assets, or justification for any mismatch; 
and
    (iii) Provision for adequate income spread between public unit and 
nonmember shares and corresponding assets.
    (3) A federal credit union seeking an exemption from the limits of 
paragraph (b)(1) of this section must submit to the Regional Director a 
written request including: (i) The new maximum level of public unit and 
nonmember shares requested, either as a dollar amount or a percentage 
of total shares;
    (ii) The plan adopted by the credit union's board of directors 
concerning the use of public unit and nonmember shares;
    (iii) A copy of the credit union's latest financial statement; and
    (iv) A copy of the credit union's loan and investment policies.
* * * * *
    (6) Upon expiration of an exemption, nonmember shares currently in 
the credit union in excess of the limits established pursuant to 
paragraph (b)(1) of this section will continue to be insured by the 
National Credit Union Insurance Fund within applicable limits. No new 
shares in excess of the limits established pursuant to paragraph (b)(1) 
of this section shall be accepted. Existing share certificates in 
excess of the limits established pursuant to paragraph (b)(1) of this 
section may remain in the credit union only until maturity.

[FR Doc. 94-4977 Filed 3-3-94; 8:45 am]
BILLING CODE 7535-01-M