[Federal Register Volume 59, Number 106 (Friday, June 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12119]


[[Page Unknown]]

[Federal Register: June 3, 1994]


BILLING CODE 3410-11-P-M
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Part IV





National Credit Union Administration





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12 CFR Part 701




Organization and Operation of Federal Credit Unions; Rule
NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

 
Organization and Operation of Federal Credit Unions

AGENCY: National Credit Union Administration (``NCUA'').

ACTION: Final Interpretive Ruling and Policy Statement 94-1--Chartering 
and Field of Membership Policy (IRPS 94-1).

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SUMMARY: This final interpretive ruling and policy statement (``IRPS'') 
is the result of NCUA's policy of reevaluating all its regulations 
periodically to determine whether change is warranted. The NCUA Board 
approved publication of a proposed IRPS on chartering and field of 
membership after its July 15, 1993 open meeting; the public ultimately 
was given 180 days to submit comments. This final IRPS 94-1 reflects a 
full evaluation of those comments; substantial changes as outlined 
below were made to the proposal. This IRPS 94-1 replaces IRPS 89-1.
    The NCUA is also issuing a final amendment to update Part 701.1 of 
its Rules and Regulations entitled ``Organization and Operations of 
Federal Credit Unions''.

EFFECTIVE DATE: July 5, 1994.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: H. Allen Carver, Regional Director, 
National Credit Union Administration, (404) 396-4042, 7000 Central 
Parkway, Suite 1600, Atlanta, Georgia 30328.

SUPPLEMENTARY INFORMATION: 

Background

I. The Proposed IRPS

    On July 28, 1993, the NCUA Board published a proposed interpretive 
rule and policy statement (IRPS) updating chartering and field of 
membership policies, and also published a proposed amendment to Section 
701.1 of the NCUA Rules and Regulations (12 CFR 701.1), to reference 
the updated IRPS. The proposal was issued with a 90 day comment period 
that was extended by the NCUA Board for an additional 90 days due to a 
public request. The proposed IRPS was designed: (1) To update policies 
on low-income credit unions; (2) to streamline the charter application 
process; (3) to address credit unions undergoing corporate and military 
unit restructuring; (4) to clarify NCUA policy on the ``operational 
area'' requirement for select group expansions; and (5) to make certain 
other minor or technical changes to modify or clarify NCUA policy.
    The Board also requested specific comment on the following issues: 
(1) Whether NCUA should permit credit union chartering and field of 
membership expansions based on associational groups formed for the sole 
purpose of making credit union service available to low-income persons, 
such as is now permitted for existing credit unions seeking to extend 
service to senior citizens; (2) Whether NCUA should permit 
occupational, associational, and multiple group federal credit unions 
to add to their fields of membership communities satisfying the ``low-
income credit union'' definition found in Part 701.32 of NCUA's Rules 
and Regulations; (3) Whether there should be special procedures for 
permitting select group expansions ``in the public interest;'' and (4) 
Whether NCUA should establish a streamlining ``file and serve'' 
procedure for select group expansions of fewer than 50 potential 
members.

II. Summary of Comments Received

    One hundred and thirty-nine public comment letters were received. 
Comments were received from seventy-eight federal credit unions, six 
state chartered credit unions, one state regulator, thirteen state 
credit union leagues, seven national credit union trade organizations, 
and two individuals.
    The Board also received comments from thirty-two banks and banking 
associations. Briefly summarized, the bank commenters argued that 
federal credit unions are permitted to expand only within a single 
common bond, and that federal credit unions should be subject to tax 
like banks. The NCUA Board, in currently ongoing litigation, has 
repeatedly stated its disagreement with banking organizations' position 
on various matters regarding field of membership issues. The question 
of taxation has been decided by Congress and the President.
    In general, the credit union commenters partially supporting or 
opposed to the proposal argued that NCUA should go even further in 
liberalizing chartering and field of membership policy. For example, 
the vast majority of commenters favored deleting operational area 
requirements altogether for select group amendments. Though the credit 
union community's desire for more flexibility in accepting new members 
is understandable, the NCUA Board is unwilling to make the significant 
changes suggested in operating rules that have served the community 
well for so long. The Board, in the final IRPS, has adopted a more 
conservative approach to change.
    At the same time, the Board has noted the continuing decline in the 
number of credit unions and the lack of new chartering activity in 
recent years. The final IRPS makes significant changes to existing 
policy to encourage new chartering activity, particularly in low-income 
areas.

THE ISSUES AND NCUA BOARD DECISIONS

I. Field of Membership Changes To Promote Service to Low-Income 
Persons

A. Comments in General

    The Board's suggestions for significantly liberalizing field of 
membership policy to encourage service to low-income persons by any 
sector of the credit union movement generated a great deal of interest.
    The first suggestion was to permit credit union chartering and 
field of membership expansion based on associational groups formed for 
the sole purpose of making credit union service available to low-income 
persons, much as is now permitted for existing credit unions seeking to 
extend service to senior citizens. Nineteen commenters approved of this 
proposal as a proper method to increase financial services to low-
income individuals. However, one association commenter stated that in 
the case of a low-income credit union, it would oppose a low-income 
``association'' seeking to align with such a non low-income credit 
union if the association's constituents were already eligible for 
membership in an existing low-income credit union, unless the latter 
did not object. This commenter asked whether it was NCUA's intent that 
the individuals of this associational group themselves be low-income or 
simply have a stated interest in making services available to low-
income persons. This commenter also asked what method of income 
documentation NCUA would require for the association and whether all of 
the proposed members would have to qualify as low-income or simply a 
majority. Four commenters opposed this proposal as unnecessary.
    The Board also requested comment on a proposal to permit 
occupational, associational, and multiple group federal credit unions 
to add to their fields of membership communities satisfying the ``low-
income credit union'' definition of Part 701.32 of NCUA's Regulations. 
Thirty commenters approved of this proposal. Most of these commenters 
believed that it would allow healthy credit unions to help low-income 
individuals. Two commenters stated that in many cases credit unions are 
the only financial institutions that are willing to work with low-
income individuals in an effort to promote fiscal responsibility. Two 
commenters believed there was reason to limit this proposal to non-
community credit unions. These commenters believed there may be 
instances when it would be appropriate for a community credit union to 
serve a non-contiguous low-income community. Furthermore, these 
commenters suggested that any credit union wishing to serve a low-
income group or community should include in its business plan details 
on how it will serve the group and periodically review how successful 
its efforts have been.
    Eight commenters opposed the proposal. Three commenters believed 
there would be a potential for the credit union to ``cherry pick'' low-
income neighborhoods without truly being dedicated to its development.
    Two commenters suggested that the credit union maintain separate 
accounting records for the low-income addition, and at a later date, if 
the low-income addition was successful, it could be spun off and stand 
on its own. One commenter suggested that ``persons participating in 
programs to alleviate poverty or distress'' in a designated community 
also be considered an acceptable group for additions. Five commenters 
suggested it might be possible to charter new community development 
credit unions that would immediately operate under the agency's 
conservatorship policies--perhaps for a minimum period of three years. 
The commenters also suggested that under NCUA's broad conservatorship 
powers, NCUA could hire the services of a nearby existing credit union 
under a management contract to operate the new credit union.
    One commenter stated that minimum requirements should be instituted 
for any non-low-income credit unions seeking permission to enter a low-
income area to ensure that the community will be adequately served. One 
commenter suggested that a non low-income credit union be required to 
provide status reports on its service to such a low-income group. One 
commenter recommended that no expansion should be granted unless it 
could be demonstrated that there would be no adverse material impact on 
existing low-income credit unions in the area, or groups in the process 
of chartering a low-income credit union. One commenter stated that 
before an expansion was granted, the federal credit union should be 
required to perform a study of the credit and depository needs of the 
low-income group.
    One commenter supported using the existing limited income 
designation criteria as defined by NCUA to allow existing religious-
based credit unions to grant access to credit union service in their 
immediate financially underserved communities. One commenter 
recommended allowing minority chambers of commerce or other 
associations of minority and economically disadvantaged business 
people, along with their respective employees, to qualify for charters.

B. NCUA Board Decision

    The Board agrees that low-income persons need expanded credit union 
service. To ensure that all possible means of accomplishing this end 
can be used, the final IRPS:
     Permits chartering associational low-income federal credit 
unions, where the association is organized solely for the purpose of 
providing credit union service to low-income persons.
     Permits a low-income federal credit union, whether 
associational or community based, to include in its charter, 
occupational, associational, and community common bond groups without 
regard to location. The credit union will have to monitor such 
additions to its base common bond, however, to ensure that the credit 
union remains qualified for a low-income credit union designation.
     Permits a federal credit union of any type--occupational, 
associational, community, or multiple group--to include low-income 
groups in its field of membership, without regard to the groups' 
location, either by forming an association which is organized solely 
for the purpose of providing such service or by including a community 
group which could be the basis for chartering a low-income credit 
union.
    The Board shares some commenters' concerns that this policy change 
may be used to ``cherry pick'' by meeting the credit needs of a 
relatively well-off portion of a low-income community while leaving 
those most in need of service with nothing. The Board will institute 
special reporting requirements and special examination procedures for 
any credit union including a low-income group in its field of 
membership to ensure that adequate credit union services are provided 
to all persons in the community.
    The Board sees no limitation in the Federal Credit Union Act 
preventing this policy change. While true that NCUA has generally 
refrained from combining community-based common bonds with occupational 
and associational common bonds, the reason for that limitation has been 
a concern for the safe and sound development of credit unions. The 
language of Section 109 of the Federal Credit Union Act, 12 U.S.C. 
1759, which states ``Federal credit union membership shall be limited 
to groups having a common bond of occupation or association, or to 
groups within a well-defined neighborhood, community, or rural 
district,'' does not require segregation of community groups from other 
kinds of common bonds. The difference in wording for community based 
common bond seems to have arisen from the fact that the bond was more 
difficult to describe adequately. The ``or'' between the ``common 
bond'' provisions and the community description is no different from 
the ``or'' between ``occupation'' and ``association'', which the Board 
has long concluded permits combining occupational and associational 
common bonds in a single federal credit union, and which is consistent 
with the word's common usage.
    Moreover, in IRPS 89-1, the Board described all three groupings--
occupational, associational, and community--as ``common bonds'' without 
distinction, and in the case of distress mergers permitted 
intermingling of all three common bond types.
    Finally, there is nothing in the evident purposes of the Act which 
suggests that community groups are necessarily to be treated 
differently from other common bonds. Functionally, all three common 
bonds perform an identical role--to help maintain in credit union 
members the sense of belonging and ownership that is so crucial to 
credit union success.
    Other commenter suggestions--such as providing assurances that 
existing low-income credit unions are not overlapped and extending the 
agency's conservatorship power to help start low-income credit unions--
can be implemented under existing policy where appropriate.

II. Other Issues Relating to Low-Income Federal Credit Unions

A. Comments

    Four commenters approved of updating low-income credit union 
polices based on the revised regulatory definition. Two commenters 
believed that low-income credit unions should have access to the CDCU 
Revolving Loan Program immediately upon beginning operation. One 
commenter suggested that community groups be able to seek a preliminary 
determination of a low-income designation before final submission of a 
charter package.
    One commenter urged that associational groups proposing to start 
low-income credit unions not be required to demonstrate voting, dues-
paying membership structures because, among other things, it would hurt 
church based associational groups.

B. NCUA Board Decision

    The Board agrees with these suggestions. The final IRPS:
     Updates the provisions on low-income credit unions to 
reflect recent changes in the Rules and Regulations
     Eliminates the voting and dues-paying requirements for 
recognition of an associational common bond
     Provides for preliminary review of the low-income 
designation.
    Part 705 of the NCUA Rules and Regulations (12 CFR 705.0 et seq.) 
currently provides qualifying newly chartered credit unions with 
immediate access to the CDCU Revolving Loan Fund.

III. Streamlining the Process for New Charter Applications

A. Comments

    Six commenters approved the streamlining process for new charter 
applications. Four commenters believed that the amount of time that 
passes between the day a potential credit union submits a charter 
application to NCUA for approval and the day the application is 
actually approved or denied was acceptable. Two commenters believed the 
time frame for chartering was unacceptably lengthly. One commenter 
suggested that an acknowledgment of receipt of the chartering 
application ``be sent to the organizers in a timely fashion'' 
preferably within 10 days.
    One commenter stated that it would facilitate chartering if groups 
were able to obtain tentative approval of their fields of membership 
early in the process. This commenter also believed that early 
submission of NCUA 4012 may also speed the process.
    The proposal stated that the subscribers should be responsible for 
paying the cost of credit reports and background checks when applying 
for a credit union charter. Seven commenters agreed with this 
provision. Nine commenters believed that the subscribers should not be 
responsible for paying the cost of credit reports and background checks 
when applying for a new charter. Two commenters recommended that NCUA 
articulate the standards relied upon in disqualifying credit union 
organizers.

B. NCUA Board Decision

    The NCUA Board agrees with these suggestions and is hopeful that 
the result of all the changes made will be a significant increase in 
new federal chartering activity. Small, vibrant credit unions, serving 
their members on a first-name basis and willing to take reasonable 
credit risks based on personal knowledge of their members' character, 
are a vital part of the credit union movement. Many credit unions which 
used to fill this niche have through their success grown to the point 
where credit union management can no longer make these personal 
judgments on each individual member: A new generation of small credit 
unions is needed to fill that void, particularly in the many poor 
inner-city and rural areas where credit needs are now largely unmet.
    The final IRPS provides:
     That charter applicants will receive acknowledgment of the 
application's receipt in 10 business days
     That tentative field of membership approval will be given 
early in the process
     That early submission of NCUA 4012 will be encouraged
     That the cost of credit reports and background checks will 
be borne by NCUA
    The NCUA Board does not believe, however, that it would be 
productive to establish many other absolute standards and guidelines. 
Each application is to some extent unique and may require somewhat 
different procedures and time frames. The Board believes these are best 
left to be worked out between the prospective credit union officials 
and NCUA staff.

IV. Distress Situations Caused by Dramatic Changes in Economic 
Conditions Within a Federal Credit Union's Field of Membership

A. Comments

    The proposal would have permitted an associational, occupational, 
or multiple group credit union converting to a community charter as a 
result of significant corporate or military restructurings to maintain 
service to groups in its field of membership prior to conversion and to 
add other groups within the credit union's operational area after the 
conversion, but for only so long as needed to ensure the credit union's 
continued viability. A group consisting of all NCUA Regional Directors 
and the Director of Examination and Insurance would vote to determine 
the necessity of allowing the converting credit union to maintain the 
select employee groups. Eighteen commenters favored the proposal.
    Four commenters believed this authority should be expanded to all 
community charters where continued viability is threatened by a major 
employer's restructuring. These commenters believed there was no reason 
to treat a ``converting to'' community charter any different from 
existing community charters when in both cases the threat is viability 
caused by similar events.
    Though many commenters suggested abandoning the operational area 
requirement altogether (see ```Public Interest' Addition Comments'' 
below), one in particular urged that it at least be abandoned in 
distress situations. Eight commenters opposed the proposal. Two 
commenters stated that military credit unions should not be granted 
community charters except in rare cases where an isolated base is the 
community. These commenters believed that in a heavily populated area 
where there are many other credit unions already serving select groups, 
this proposal would grant an unfair advantage to military credit 
unions. Six commenters approved the special administrative approval 
procedure but nine objected to it.

B. NCUA Board Decision

    The Board is persuaded that federal credit unions of all types need 
additional flexibility when faced with distress situations such as 
significant corporate or military restructuring. The final IRPS:
     Permits federal credit unions of all types--occupational, 
associational, multiple group, and community--to apply for designation 
as a ``distressed federal credit union'' and to do so regardless of 
whether they are converting to community charter
     Permits federal credit unions with such designations to 
add occupational and associational groups to their fields of membership 
regardless of location.
    As an added assurance that the process is administered consistently 
and proper guidance is given, the NCUA Board will reserve to itself, at 
least initially, the authority to grant ``distressed credit union'' 
designations. The Board believes that, with this added requirement, 
there will be adequate controls in place to prevent abuse: There will 
be a comprehensive review by the NCUA Board prior to initial 
designation; groups must request service in order to be added to a 
distressed credit union's field of membership; the regional director 
must approve all expansion requests; and normal overlap procedures will 
apply.

V. Common Bond Issues

A. Occupational Common Bonds

1. Comments
    The proposal suggested only slight modifications of current policy. 
It stated that a proposed federal credit union whose primary sponsor is 
a particular corporation may include the employees of that corporation 
who work at another location, employees of the corporation who are paid 
from or are supervised from the headquarters location, such as sales 
persons or sales agents who work at a number of locations, employees of 
a division or majority-owned subsidiary of the parent company 
regardless of location, and employees of a related company (such as a 
person working regularly for an enterprise under contract and 
possessing a strong dependency relationship with the sponsoring 
enterprise). Each group to be served (e.g., majority-owned 
subsidiaries, contractors) was to be separately listed.
    One commenter objected to the proposal that each group to be served 
must be separately listed. This commenter suggested that NCUA be more 
lenient. Another commenter requested that if an occupational credit 
union furnished evidence of its parent company's preference for one 
credit union, that credit union should be allowed to describe its field 
of membership to include the parent and all other companies under 
common control. One commenter stated that the components of a field of 
membership definition should be limited to legal entities.
    One commenter stated that the Chartering Manual does not state 
procedures necessary for a credit union to keep its existing 
membership, if a company or a division has been sold. This commenter 
believes that if a company or division is sold to a company which has a 
credit union, then the original credit union loses the field of 
membership after the sale; otherwise, service should be allowed to 
continue.
2. NCUA Board Decision
    The NCUA Board agrees that the wording of this portion of IRPS 89-1 
pertaining to business relationships is in need of some revision. The 
final IRPS has been rewritten to provide more clarity. However, the 
Board does not see a need to broaden the occupational common bond 
definition in general at this time.
    The Board does believe, however, that it is a disservice to cut off 
service to groups which are divested from a sponsoring firm. The final 
IRPS permitted continued service if the group desires it.
    Finally, it is clear that some in the credit union community have 
misunderstood why the NCUA Board proposed requiring listing of 
subsidiary entities included in a common bond. The agency is in the 
process of establishing a field of membership database for internal 
monitoring of overlaps. Federal credit union listing of all subgroups 
would greatly enhance the reliability and overall usefulness of the 
database. But the NCUA Board sees no need to impose this requirement on 
a federal credit union which finds that process overly burdensome, and 
the final IRPS has deleted this portion of the proposal. Such a credit 
union should understand, however, that if a specific group is not 
mentioned in its charter, and the group in good faith states in a 
request for service from another credit union that it does not have 
credit union service available (as often happens with new subsidiaries 
of sponsoring groups), an overlap may inadvertently be permitted 
without full consideration for the overlapped credit union's interests. 
If the overlap is discovered after the other credit union has begun 
service, it is likely that, in the interests of the group and the other 
credit union, NCUA will permit the overlap to continue.

B. Associational Common Bonds

1. Comments
    The proposal clarified that a federal credit union seeking to 
include an association in its field of membership may only include 
natural persons who pay dues and have voting rights or hold office in 
the association. Eight commenters supported this change. Twenty-one 
commenters opposed the proposal. In general, these commenters believed 
that not all natural person associations require a member to pay dues. 
A few commenters stated that the proposal would harm church 
associations that have members that do not pay dues. Four commenters 
stated the proposal would harm low-income cooperatives. One commenter 
stated that the collection of dues for an associational group may be 
entirely irrelevant to the group's purpose or mission. One commenter 
stated that this requirement can not be reasonably monitored by a 
federal credit union.
    The proposal also clarified that a federal credit union's field of 
membership has to be updated and approved by NCUA when an association 
changed its bylaws to modify the scope of those eligible for 
membership. Six commenters approved of this clarification. One 
commenter stated that without this limitation an associational credit 
union would be allowed to change to an open field of membership. 
Thirteen commenters disapproved of the clarification. Six of these 
commenters believed that if an association changed its bylaws 
frequently it could cause an administrative nightmare for the credit 
union and NCUA if the charter had to be amended every time the bylaws 
changed. One commenter believed the main concern should be whether the 
association in question was a viable functioning organization. This 
commenter believed that an association with membership qualification 
requirements, bylaws and meetings should be defined as a functioning 
organization.
    The proposal removed the requirement that students must join the 
credit union prior to family members becoming eligible. Five commenters 
agreed with this change.
    One commenter stated that the final IRPS should be modified to 
allow for inclusion of an entire association in a federal credit union 
at a higher level if that level provided broad based services which 
were not available at a lower level.
2. NCUA Board Decision
    The NCUA Board agrees that the dues-paying and voting rights 
requirements of the proposal could be unfair to some bona fide 
associations. The final IRPS lists these elements as factors to be 
considered, not as requirements.
    The Board has also attempted to clarify in the final IRPS the 
ambiguities noted by some of the commenters.
    The Board does not agree, however, that it should alter its present 
policy in favor of service to associations at the lowest possible 
level, or that it is appropriate to allow associations to modify 
portions of their bylaws which dramatically change the make-up of 
membership without agency review. The final IRPS maintains these 
provisions as in the proposal.

VI. Select Group Addition Issues

A. Comments

    A number of comments were received on the various proposed changes 
to NCUA's select group addition policy. They are best discussed as a 
group.
1. ``Public Interest'' Addition Comments
    The Board requested comment on a limited ``public interest'' 
procedure by which NCUA might approve a federal credit union expansion 
to include a group outside the operational area of a home or branch 
office, if such action was in the interest of making quality credit 
union service available to all eligible groups who wish to have it, and 
if doing so would not have a significant adverse effect on the safe and 
sound operations of credit unions. Any federal credit union seeking 
such an expansion would need to provide certain documentation, 
including a summary of the views of each credit union with a home or 
branch office within a 25 mile radius as to whether each has agreed to 
inclusion of the group in the applying credit union's field of 
membership, and if the credit union refused, the reasons for the 
refusal.
    Thirty commenters supported the concept of the ``public interest'' 
proposal. These commenters generally believed that the proposal would 
provide more people with credit union service. However, most of these 
commenters believed the proposal's operational area requirement was 
unnecessary. Furthermore, sixteen commenters stated that the proposal's 
documentation requirements were so onerous that it would discourage 
most credit unions from trying to use the procedure. Six commenters 
opposed this proposal.
    One commenter believed that the only use for the ``public 
interest'' procedure should be to provide an exception to the rules for 
credit unions experiencing a loss of members due to some extraordinary 
circumstances, such as a base closing or a corporate restructuring. 
This commenter believed the test for a ``public interest'' procedure 
should be based on: (1) The demand for credit union service; (2) the 
capability of the credit union to provide services; and (3) the level 
of membership necessary to sustain the affected credit union.
2. ``Operational Area'' Comments
    NCUA has traditionally focused multiple group field of membership 
additions around the ``operational area'' of a home or branch office. 
This policy was designed to ensure a satisfactory level of commitment 
and service to the groups included in the field of membership, while 
also minimizing instances of overlap and deterring territorial 
stakeouts by overly aggressive credit unions. However, in response to 
new technologies and innovations, the proposal clarified operational 
area requirements. The first clarification was that for purposes of a 
field of membership expansion the ``standard'' operational area will be 
considered an area within a 25 mile radius of a home or branch office, 
but that this standard may be extended for rural areas. Six commenters 
believed the proposed operational area was reasonable and approve of 
it. Four other commenters agreed in general with the definition but 
believed that there should be more leeway for rural areas.
    Forty-one commenters objected to the 25 mile operational area as 
outdated in light of current technology. Thirty-seven commenters stated 
there should not be any operational area. They believed that direct 
deposit, automated teller service, and service-by-phone, in many cases, 
has eliminated the need for physical access to a branch. Five 
commenters believed operational area should just be one of many factors 
to be considered in a field of membership expansion.
    A few of the commenters stated that a progressive approach to the 
expansion of services is one based on functionality, not geography. 
They believed a functional approach should be based on the capacity and 
willingness to serve matched with a demand for those services. One 
commenter suggested that the determination of the operational area of a 
credit union should be based on whether the credit union can reasonably 
be expected to deliver adequate credit union service to the area. This 
commenter suggested that NCUA approve a field of membership expansion 
request if: (1) There is a clear demand for the credit union's 
services; (2) the credit union is capable of providing the services; 
and (3) other credit unions in the area are not already providing the 
service. Twelve commenters stated that any credit union should have the 
option to add select employee groups to its field of membership 
(without regard to operational area) if it has the financial resources 
to do so and there is no overlap.
3. ``Shared Facilities'' Comments
    The proposal stated that ``shared facilities'' and ``shared service 
centers'' were specifically to be excluded from consideration as either 
a ``home'' or ``branch'' office for purposes of meeting NCUA's 
operational area requirement, except in unusual circumstances--e.g., 
where a credit union is converting an existing home or branch office to 
a ``shared facility.'' Nine commenters believed this to be a reasonable 
position and agreed with the clarification. One commenter stated that 
this position would ultimately help service centers prosper and control 
predatory concerns from credit unions not participating in shared 
service center programs.
    Seven commenters opposed the clarification. Several commenters 
believed the proposal would force some credit unions into unnecessary 
expenditures for ``brick and mortar'' facilities. Some commenters 
suggested that field of membership expansions be allowed around a 
shared branch if the credit union has a material (20%) stake in the 
facility. They believed shared branches were tantamount to a credit 
union's own property.
4. ``Branch'' Comments
    The proposal stated that a facility which was directly and solely 
owned by, leased by or donated by a credit union and had credit union 
employees regularly on site who accept payment on shares and disburse 
loans was clearly a home or branch office. One commenter objected to 
the requirement that a branch office have a paid employee working in 
it. This commenter believed this section needed to be modified to 
include credit union volunteers.
    One commenter believed that in order to facilitate growth among 
credit unions, NCUA should reconsider its position that ``the addition 
of a new select group alone is not enough to justify a proposed home or 
branch office.''
    One commenter believed the definition of branches should be 
expanded to more closely identify and define the difference between an 
``open branch'' and a ``closed branch.'' This commenter stated that an 
open branch should be identified as one where members from any company 
or group could have free access and that a closed branch should be 
identified as one that is located within a sponsor's facility that is 
accessible only to employees of that group. This commenter believed 
that taking on additional small employee groups using a close branch as 
the base in determining the 25 mile radius should not be permitted.

B. NCUA Board Decision

    The NCUA Board is not prepared to jettison the ``operational area'' 
limitation or to make substantial changes in how that limitation is 
defined. The requirement has served credit unions well and remains 
vital. Some of the wording in the final IRPS has been changed to make 
the concept more adaptable to the variety of credit union service 
outlets, however. ``Home or branch office'' has been changed to 
``service facility,'' for example, and the requirement to have an 
``employee'' on site has been changed to ``representative'' to 
accommodate the possibility of volunteers.
    However, the final IRPS does not include provisions for a ``public 
interest'' field of membership expansion. Moreover, the Board does not 
believe that technology has reached the point where access to a 
facility where business can be transacted by interaction with another 
person is unimportant. Therefore, the operational area requirement will 
continue to be linked to the credit union's ability to provide service 
by such means. Finally, the Board cannot, without substantially more 
experience, allow ``shared service centers'' and other similar kinds of 
group service arrangements to be considered ``service facilities'' for 
select group expansion purposes; the effects of such a change are too 
unclear at this point. The final IRPS therefore excludes from the 
definition of a ``shared facility'' locations at which service is 
provided to a significant number of different credit unions' members.

VII. Community Charters

A. Comments

    Two commenters believed the proposal did not address the concerns 
of community credit unions. The proposal clarified that a community 
credit union's operational (service) area was to be defined by its 
boundaries. Four commenters agreed with this clarification. Four 
commenters believed that the authority to add new groups outside 
community boundaries should be extended to all community charters where 
continued viability is threatened by a major corporate or military 
restructuring. These commenters believed there was no reason to treat a 
``converting to'' community charter any differently from existing 
community charters when in both cases the threat is viability caused by 
similar events. Eight commenters believed any community credit union 
should have the option to add select employee groups to its field of 
membership if it has the financial ability to do so and NCUA determines 
that no other credit union in the area could serve the group. Four 
commenters suggested allowing community credit unions to merge with 
multiple group or associational credit unions while still continuing to 
serve the former fields of membership of both credit unions.
    Four commenters believed NCUA should provide for the chartering of 
community credit unions in two non-adjacent communities. These 
commenters believed the granting of community charter status in one 
area should not prevent the credit union from continuing to serve and 
admit new members from existing select employee groups in a second 
area, or obtaining a dual community charter.
    One commenter believed NCUA should make it easier to expand 
geographic boundaries of community credit unions by eliminating the 
requirement of showing a ``commingling of the two communities.'' This 
commenter believed this requirement was no longer realistic because 
electronic transactions have taken over in the marketplace.

B. NCUA Board Decision

    The Board believes the final policy statement addresses the needs 
of community charters. In response to the advent of new technologies in 
communication and the evolving character of communities, the Board has 
slightly revised the definition of a community common bond. A community 
charter must continue to be limited to ``a well-defined neighborhood, 
community, or rural district.'' However, a community will be defined as 
a single, well-defined area where residents interact. To meet this 
definition, the Board has established the following common bond 
requirements for a community charter: the geographic area's boundaries 
must be clearly defined; and the applicant for a new charter or an 
expansion must establish that the area is recognized as a ``distinct 
neighborhood, community or rural district.'' This new policy eliminates 
the commingling requirement while still requiring the members to 
interact. The final policy also clarifies that the community credit 
union's operational (service) area is defined by its boundaries.
    As stated earlier, community credit unions may also apply for a 
designation as a ``distressed federal credit union'' and to do so 
regardless of whether they are converting to a community charter. These 
credit unions, as well as low-income community credit unions, may add 
select employee groups outside their operational area to their fields 
of membership as long as they have the financial ability to serve the 
group. After the credit union community has some experience with this 
policy, the Board will assess the wisdom of extending this option to 
all community credit unions.

VIII. Overlap Issues

A. Comments

    The proposal clarified that NCUA may exclude from overlap 
protection state chartered credit unions with a field of membership so 
broadly defined as to include virtually everyone in a wide area. Four 
commenters agreed with this clarification. However, many commenters 
addressed other overlap issues. Two commenters supported the 
requirement that credit unions involved in overlap situations first 
attempt to resolve related issues among themselves before turning to 
NCUA. Three commenters stated that field of membership policy was 
overly liberal and permits numerous overlaps which hurt small credit 
unions. Eight commenters stated that overlaps between credit unions 
should be liberally permitted.
    Four commenters believed NCUA should include a definition of the 
term ``incidental overlap'' as a further aid to the credit union 
community. One commenter believed the term should be defined as 3% of 
the potential membership of the credit union being overlapped. One 
commenter stated that overlaps are incidental if they do not create 
questions of viability for the credit union affected by the overlap.
    The proposal stated that an overlap may be justified if the 
original credit union failed to provide quality service to the group. 
One commenter suggested that the Board define ``quality service'' and 
reexamine its position regarding the absence of ``specialized service 
as not being a justification for an overlap.'' Seven other commenters 
also believed that the term ``quality service'' needed to be defined. 
They believed the term was very subjective: Did it mean the number of 
services, hours open, or the attitude of workers? A few of these 
commenters believed the lack of a definition has hurt small credit 
unions.
    One commenter supported NCUA's intent to provide overlap protection 
for any type of charter if there are significant safety and soundness 
concerns. This commenter would expand this to include a low-income 
service impact test: A credit union should be protected from overlaps 
which would impair its ability to effectively serve low-income members 
of the community.
    The proposal also stated that in special cases exclusionary 
language should be used to limit the membership eligibility of widely 
dispersed employees or associations. One commenter disagreed with this 
limitation. This commenter believed that if there was a legitimate 
common bond, such as a single employer or association, and no credit 
union was serving the group, then exclusionary language was not 
necessary.

B. NCUA Board Decision

    The final IRPS contains the provision in the proposal removing from 
overlap consideration broadly based state chartered credit unions, 
which parallels how the agency approaches broadly based federal 
charters. As to most of the remaining comments, the Board disagrees 
with many of the suggestions. The Agency's long-standing policy is 
working well. The vast majority of all overlaps are consented to by the 
overlapped credit union. The remainder are resolved in a way which 
makes the interests of the group paramount. The Board continues to 
believe it needs flexibility in this area. Therefore, the final IRPS 
does not define ``incidental overlap'' or ``quality service.''
    However, the Board agrees that experience with exclusionary clauses 
has not been entirely satisfactory. This entire section has been 
rewritten in the final IRPS in the hope of limiting their use to the 
few situations where they are truly warranted and effective.

IX. Documentation Issues

A. Comments

    The proposal attempted to streamline documentation requirements. 
Five commenters stated that the documentation requirements in the 
proposal were not burdensome. Ten commenters disagreed. Many of these 
commenters also believed that financial statements were unnecessary in 
light of periodic call reports and examinations. Four commenters 
believed that financial statements should not be necessary for field of 
membership expansions.
    Two commenters noted that, for a field of membership expansion, the 
proposal required documentation from groups ``on the group's letterhead 
stationery and signed by an official representative to the group.'' The 
commenters believed this has generally been interpreted to mean an 
officer of the employer. These commenters believed that NCUA should be 
flexible and recognize that not all groups are represented by the 
employer or have an ``official'' representative. They suggested that 
the IRPS allow the regions to accept other documentation or 
certification.

B. NCUA Board Decision

    The NCUA Board agrees that in the vast majority of cases regional 
staff have sufficient financial information available to make a 
determination as to the economic advisability of the proposed charter 
change. Therefore, the requirement to submit financial statements with 
a charter change request has been deleted. If a regional office needs 
additional information, it may ask for it. The NCUA Board also agrees 
that the requirement for letterhead stationery can be relaxed. With 
regard to the requirement that an ``official representative'' of the 
group sign the letter requesting service, the Board does not believe a 
change in the wording is needed, but will ensure that the regional 
offices are instructed to be more flexible in applying the term to 
specific situations.

X. The Proposed ``File and Serve'' Procedure

A. Comments

    The proposal requested comment on a ``File and Serve'' select group 
expansion procedure. It was envisioned that the procedure would permit 
CAMEL code 1 and 2 credit unions to begin providing service to small 
groups--50 persons or fewer was suggested--prior to formal NCUA 
approval of the expansion. Thirty-six commenters favored the procedure. 
These commenters believed it would allow credit unions to timely serve 
new groups. However, some commenters suggested an increase in the 
number of potential members that could be added using the procedure. 
One commenter inquired whether the number included family members. Four 
commenters recommended NCUA issue guidelines on what to do if the 
expansion is subsequently denied by the Region.
    Eighteen commenters objected to the ``File and Serve'' proposal. 
The reasons were varied. Nine commenters stated there were no 
procedures for what would happen if the expansion was denied by the 
Region and that it would be an administrative nightmare if a denial 
occurred. Eight commenters believed this proposal was not justified 
since regulatory delay in approving expansion requests was not a 
problem. Six commenters believed that there would be more conflicts 
arising from both intentional and unintentional overlaps. Five 
commenters stated that regulatory approval distinguishes credit unions 
from banks.
    Three commenters suggested any CAMEL code 1, 2 and 3 credit unions 
be permitted to use the file and serve procedure. One commenter 
suggested that NCUA implement an alternative procedure by which CAMEL 
code 1 and 2 credit unions should be given preference by NCUA in 
reviewing field of membership expansions. Two commenters specifically 
objected to the procedure's being tied to a CAMEL rating. Four 
commenters recommended that all credit unions should be able to use the 
file and serve procedure. One of these commenters suggested NCUA could 
then restrict the file and serve authority on a case-by-case basis for 
any credit union it had concerns about. One commenter recommended 
adding a requirement that the filing credit union have to state that 
there was no overlap or existing eligibility for membership in another 
credit union for the group to be served.

B. NCUA Board Decision

    Many of the commenters' suggestions have been incorporated into the 
final IRPS. The new policy will permit well operated federal credit 
unions in good standing with NCUA to apply for charter amendments which 
authorize the credit unions to make use of a streamlined process for 
adding small occupational groups currently without credit union 
service. The initial maximum number of persons in a group to be added 
under this procedure has been set initially by the NCUA Board at 100. 
The Board may be resolution adjust that number from time to time as 
appropriate.

XI. Other Procedures for Reviewing Field of Membership Addition 
Requests

A. Comments

    The proposal sought to clarify the mechanics of requesting 
additions to a federal credit union's field of membership. Four 
commenters believed that the approval time on select employee group 
additions was excessive. Another commenter stated that the field of 
membership expansion procedure was burdensome and should be 
streamlined. Two commenters supported NCUA's goal of approving or 
denying field of membership expansion requests within the ``10 business 
day or less'' time frame.
    One commenter stated that, in regard to charter amendments, once 
NCUA approves one, the board of directors of the credit union should 
not subsequently have to adopt it to make it effective.
    Two commenters stated that pre-notification of a proposed field of 
membership expansion in another credit union's operating area should be 
a common courtesy. Three commenters believed the final IRPS should 
provide at a minimum for some form of publication and hearings or 
period of comment relative to an expansion of any credit union's field 
of membership.

B. NCUA Board Decision

    The NCUA Board believes that a ten-business-day turnaround for 
field of membership amendment requests is reasonable. All regions have 
automated the review process so that this time frame should be exceeded 
only in extraordinary cases. The Board strongly believes, however, that 
a federal credit union's board needs to be involved in the process--
after all, the board is responsible for the institution's overall 
direction and control. There are adequate procedures a federal credit 
union can put in place to ensure that needed board oversight can be 
maintained without delaying initiation of service to a group.
    The Board also disagrees that a public notice procedure should be 
implemented. The overlap procedures now in place provide adequate 
safeguards.

XII. Federalism Concerns

A. Comments

    The proposal would permit state-chartered credit unions that are 
converting to a federal charter and that had an established history of 
being able to serve multiple groups outside of its operational area to 
continue to serve these groups without regard to the operational area 
requirements normally applicable to new federal multiple group 
charters. Three commenters supported the change but suggested that the 
concept of operational area be discarded in favor of non-geographic 
criteria. One commenter opposed relaxing the rules for converting state 
charters.

B. NCUA Board Decision

    The Board believes that, with respect to converting state charters, 
where the commitment to the group and the ability to provide quality 
service have been demonstrated, there is no need to impose the 
operational area requirement. The final IRPS maintains this portion of 
the proposal. Moreover, the IRPS establishes the same flexibility for 
an occupational, associational, and multiple group federal credit union 
converting to a community charter.

XIII. Miscellaneous Matters

A. Staff Leasing

1. Comments
    The proposal attempted to clarify NCUA's policy on staff leasing 
arrangements. The proposal stated that where the requirements of 
existing policy were met, the employees leased to a firm listed in a 
federal credit union's field of membership might be added as a common 
bond expansion. Where those requirements were not met, the elements of 
a select group expansion to serve employees of the leasing company had 
to be met. When a leasing company was to be included in a credit 
union's field of membership, the company had to identify each client 
and work location served by the leasing company.
    Four commenters favored the leasing clarification. Five commenters 
disapproved of the clarification. These commenters believed that the 
requirement for specific delineation of each separate company that was 
a client of the employee leasing firm was both impractical and 
impossible from an operational standpoint.
2. NCUA Board Decision
    On reconsideration, it is evident that general policy can be 
adequately adapted to the leasing company situation. Therefore, this 
portion has been deleted from the final IRPS.

B. Spin-offs, Mergers, and Purchase and Assumptions

1. Comments
    The proposal clarified NCUA's policy on mergers, spin-offs and 
purchase and assumptions. Four commenters approved of the update on 
spin-offs. Three of these commenters specifically approved of the 
voting requirements for a spin-off. Seven commenters approved of the 
revised merger section. Three commenters approved of the provision to 
allow a merged state credit union's field of membership to be served by 
the continuing federal credit union even if the inclusion of this field 
of membership would otherwise be restricted under NCUA guidelines.
    One commenter disapproved of the merger policy. This commenter 
believed that by applying an operational area condition to distress 
mergers, NCUA is limiting its own range of action. This commenter 
further stated that a suitable merger candidate may not be located 
within the operational area of a distressed credit union and that it 
seemed wasteful to wait for emergency conditions to evolve and moot the 
operational area issue.
    One commenter suggested that NCUA should be able to put a credit 
union for which it is seeking a merger partner into temporary 
conservatorship, which would allow public notification and bidding from 
interested credit unions. In addition, this commenter stated that 
current merger procedures were left to the discretion of each regional 
office and suggested NCUA give serious consideration to standardizing 
procedures which would give all credit unions an opportunity to bid.
    Four commenters suggested allowing community credit unions to merge 
with occupational, associational, or multiple group credit unions while 
still continuing to serve the former fields of membership of both 
credit unions. Two commenters requested that with respect to mergers, 
the final IRPS should clarify that when a state chartered credit union 
is merged into a federal credit union, the federal credit union would 
be allowed to retain the merged state chartered credit union's select 
employee groups, regardless of operational area, in order to assure the 
vitality of the federal credit union after the merger. Another 
commenter agreed with this suggestion and would expand it to all 
mergers, including mergers between federal credit unions.
2. NCUA Board Decision
    The NCUA Board agrees that operational area limitations should not 
be an obstacle to merger of credit unions in distress situations, and 
believes this was Congress' intent in giving NCUA emergency merger 
authority. The Board has therefore interpreted Section 205(h) of the 
Federal Credit Union Act (12 U.S.C. 1785(h)) to permit authorizing as 
emergency mergers what have become known since IRPS 89-1 as distress 
mergers.
    For the reasons stated earlier, however, the Board does not believe 
that the operational area limitation should be discarded entirely or 
that exercise of NCUA's conservatorship authority should become a 
standard part of the merger process.

C. Removal of Groups

1. Comments
    The proposal clarified NCUA's policy on the removal of groups from 
a federal credit union's field of membership. Four commenters agreed 
with the clarification. One of these commenters suggested allowing the 
removal of a group when it does not respond to a federal credit union's 
repeated attempts to contact them.
2. NCUA Board Decision
    The final IRPS incorporates this suggested change.

 D. School Systems

1. Comments
    The proposal clarified that employees of different school systems 
and different government units do not have the same primary sponsor. 
Therefore, the addition of the employees of a particular school 
district by a federal credit union serving employees of an adjoining 
school district would have to be done under the select group addition 
procedures. Three commenters concurred with this clarification. Two 
commenters disagreed with this proposal. They believed that school 
employees in different school districts may share the same common bond 
and they should be added under the common bond procedure.
2. NCUA Board Decision
    The final IRPS deletes discussion of school systems. They will be 
analyzed under general common bond policy. In the vast majority of 
cases, different school systems will be considered different common 
bonds.

E. Industrial Parks

1. Comments
    The proposal suggested modifying existing policy to permit field of 
membership expansions to include all employees of office complexes, 
industrial parks, shopping centers and similar establishments upon 
request from the leasing agent or similar authoritative figure. No 
overlap protection would be given to the expanding credit union and 
exclusionary clauses would be used to prevent injury to those credit 
unions serving a portion of these employees. Sixteen commenters favored 
this proposal. One commenter believed NCUA needs to identify other 
contacts beside the leasing agent.
    Three commenters opposed this modification. One commenter stated 
that if NCUA adopted this modification, it should ensure that no 
overlap protection was given to the expanding credit union and that 
exclusionary language was incorporated into the bylaws of the expanding 
credit union to prevent possible injury to other credit unions which 
served the same employees. One commenter stated that this modification 
would cause numerous overlaps in fields of memberships.
2. NCUA Board Decision
    The Board has decided to adopt this proposal with a modification. 
Although the proposal stated that exclusionary clauses would be used to 
protect overlapped credit unions, the Board believes that the member, 
in such cases, should have the ability to use the credit union which 
best serves his/her needs. In many cases it might be the industrial 
park type credit union that is more attractive to the individual. 
Therefore, in general, no overlap protection will be given to the 
credit union with the industrial park or similar complex in its 
charter. However, the regional director may, for safety and soundness 
reasons, provide overlap protection or require exclusionary clauses to 
prevent significant economic injury to other credit unions serving a 
portion of these employees.
    Although NCUA has not specifically identified parties other than 
the complex leasing agent or owner, the final IRPS provides sufficient 
flexibility in this matter.

F. Outside Vendors

1. Comments
    The proposal provided guidance on the safety and soundness concerns 
NCUA had with a credit union using outside parties, insurance agents 
and car dealers, among others, to recommend select group expansions. 
Three commenters approved of this addition. One commenter stated that 
this guidance should be expanded to include discussion of indirect 
lending.
2. NCUA Board Decision
    The final IRPS includes the discussion on outside vendors and has 
been expanded to include indirect lending.

G. Approval of Officials

1. Comments
    The proposal clarified that NCUA must approve all prospective 
officials and management personnel of a newly chartered credit union 
during the first two years. A few comments opposed this provision.
2. NCUA Board Decision
    The Board has adopted the proposal in the final IRPS since the 
requirement is statutory; the reason for its inclusion in the IRPS is 
to be a reminder to credit union officials.

H. Appeal Rights

1. Comments
    The proposal clarified the appeal rights for new charters and for 
those credit unions denied requests for a field of membership 
amendment, spin-offs and mergers. Eight commenters supported the appeal 
procedure. Nine commenters believed the appeal procedure was 
insufficient. Four of these commenters requested that appeals be sent 
directly to the central office and bypass the region. One commenter 
questioned whether central office staff would act independently of the 
regional director. One commenter stated the proposal was unclear on 
what rights of appeal an overlapped credit union had involving the 
field of membership of another credit union.
    The appeal process in the proposal did not include a provision for 
oral argument. Six commenters agreed that oral argument before the 
Board was unnecessary. Fourteen commenters disagreed.
    One commenter suggested the proposal clarify that a resubmission or 
additional information for consideration to the Regional Director 
within 90 days of a denial should be considered a new request for 
purposes of the appeal time limit. Furthermore, the commenter stated, 
if the resubmission was denied, the credit union should then have 
another 60 days to appeal.
2. NCUA Board Decision
    The Board is currently undertaking a complete review of its appeal 
process. The final IRPS makes the agency's standard appeal process 
applicable.

I. Professional Organizations

1. Comments
    The proposal included language to minimize potential conflicts of 
interest when adding certain professional organizations to the field of 
membership of a federal credit union. Four commenters concurred with 
the guidance provided when adding a professional organization to a 
field of membership.
2. NCUA Board Decision
    The final IRPS includes this portion of the proposal.

J. Corporate Federal Credit Unions

1. Comments
    The proposal clarified that corporate credit union chartering and 
field of membership issues were handled by the Office of Examination 
and Insurance. Four commenters agreed with the proposed change.
2. NCUA Board Decision
    The final IRPS includes this portion of the proposal.

K. Appendix C--Type of Membership Classification System

1. Comments
    One commenter stated the classification was fixed at the time of 
chartering and it was his understanding that it never changed. 
Furthermore, in recognition that the membership composition of a credit 
union can undergo substantial change over time, this commenter 
suggested a procedure be created to provide classification changes. 
Otherwise, this commenter believed classification related data would 
become increasingly flawed.
2. NCUA Board Decision
    Since the coding is used for internal analytical purposes, Appendix 
C has been deleted from the final IRPS. As a note, the codes are 
changed periodically by NCUA staff.

L. Format of the Manual

1. Comments
    One commenter was concerned with the terminology ``field of 
membership expansion.'' This commenter believed that all changes in the 
field of membership were not for the purpose of expansion and some 
field of membership ``modifications'' were based on considerations 
other than the mere decision of a credit union to expand. This 
commenter recommended replacing the term ``expansion'' with 
``modification.'' Two commenters believed the manual should be 
reorganized so it would be more accessible to the user.
2. NCUA Board Decision
    The Board agrees that not all field of membership changes are 
expansions and therefore has replaced the term ``expansion'' with the 
term ``amendment.'' The format of the proposed IRPS has been modified 
substantially in the final version. Additionally, the IRPS, when put in 
the form of a manual, will be indexed to make it easier to use.

Regulatory Procedures

Regulatory Flexibility Act

    As was noted in the proposed IRPS, the NCUA Board has determined 
that changes to NCUA policy resulting from adoption of the IRPS will 
not have a significant economic impact on a substantial number of small 
credit unions (primarily those under $1 million in assets). The changes 
in the final IRPS clarify existing policy rather than create new 
restrictions. Therefore, a regulatory flexibility analysis has not been 
performed.

Paperwork Reduction Act

    Paperwork requirement should decrease under the final IRPS. The 
information collection requirements contained in the IRPS have been 
submitted to the Office of Management and Budget (OMB) for approval. 
OMB is in the process of reviewing these requirements. A notice of OMB 
approval will be published in the Federal Register upon its receipt. 
Any comments regarding collection requirement should be forwarded 
directly to the OMB Desk Officer indicated below at the following 
address: OMB Reports Management Branch, New Executive Office Building, 
room 3208, Washington, DC 20503; Attn.: Gary Waxman.

Executive Order

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The final IRPS makes no significant changes 
with respect to state credit unions and, therefore, will not materially 
affect state interests.

List of Subjects in 12 CFR Part 701

    Chartering, Conversions, Credit Union, Field of Membership 
Addition, Mergers by the National Credit Union Administration Board on 
May 12, 1994.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR part 701, supersedes 89-1 and 
establishes the following IRPS 94-1 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

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

    Authority: 12 U.S.C. 1755, 1756, 1757, 1759, 1761a, 1761b, 1766, 
1767, 1782, 1784, 1787, 1789, and 1798.

    2. Section 701.1 is revised as follows:


Sec. 701.1  Federal credit union chartering, field of membership 
modifications, and conversions.

    National Credit Union Administration practice and procedure 
concerning chartering field of membership modifications, and 
conversions are set forth in Interpretive Ruling and Policy Statement 
94-1--Chartering and Field of Membership Policy (IRPS 94-1). The IRPS 
is incorporated into this regulation.
    3. IRPS 89-1 is superseded by the following IRPS 94-1:

    [Note: The following ruling will not appear in the Code of 
Federal Regulations.]

CHAPTER 1--FEDERAL CREDIT UNION CHARTERING

I--Goals of NCUA Chartering Policy

    NCUA's chartering policies are directed toward achieving three 
goals:
     to uphold the provisions of the Federal Credit Union Act 
concerning granting federal charters
     to promote credit union safety and soundness
     to make quality credit union service available to all 
eligible groups who wish to have it.
    NCUA may grant a charter to any group or combination of groups 
desiring credit union service where it finds:
     the group or groups possess an appropriate common bond;
     the subscribers are of good character and are fit to 
represent the group; and
     establishment of the credit union is economically 
advisable--i.e., it will be a viable institution and its chartering 
will not materially affect the interests of other credit unions or the 
credit union system.
    Generally, these are the only criteria NCUA will look to. In 
unusual circumstances, however, NCUA may consider other factors, such 
as other federal law or public policy, in deciding if a charter should 
be approved.

II--Common Bond

    Congress, in the Federal Credit Union Act, has recognized three 
types of federal credit union common bonds--occupational, 
associational, and community. A federal credit union may also consist 
of a combination of occupational, associational, and, in certain 
limited circumstances, community groups. For example, NCUA may charter 
a federal credit union consisting of employees of a local school 
district and members of a church group.
    The Federal Credit Union Act and NCUA recognize that individual 
groups have their own common bond. All of the groups belonging to one 
particular credit union included in Section 5 of the credit union's 
charter make up the credit union's field of membership. If the charter 
is granted, the federal credit union will only be able to grant loans 
and provide services to persons within the groups defined in the field 
of membership.
    If a federal credit union later wishes to add persons to its field 
of membership, it must comply with the procedures set forth in Chapter 
2.

II.A--Occupational Common Bonds

II.A.1--General
    A federal credit union may include in a single occupational common 
bond, regardless of location, any and all persons who share that common 
bond. NCUA permits a person's membership in an occupational common bond 
to be established in a number of ways:
     Employment (or a long-term contractual relationship 
equivalent to employment) in a single corporation or other legal entity 
makes that person part of an occupational common bond of employees of 
the entity.
     Employment in a corporation or other legal entity with an 
ownership interest in or by another legal entity makes that person part 
of an occupational common bond of employees of the two entities.
     Employment in a corporation or other legal entity which is 
related to another legal entity (such as a company under contract and 
possessing a strong dependency relationship with another company) makes 
that person part of an occupational common bond of employees of the two 
entities.
    A proposed federal credit union must supply documentation from as 
many authorized representatives as are needed to establish that all 
persons to be included in a single occupational common bond are in fact 
linked in one of the ways described above.
    An occupational common bond must include a geographic definitions, 
e.g., ``employees, officials, and persons who work regularly under 
contract in Miami, Florida for ABC Corporation or any of these 
majority-owned subsidiaries. * * *'' Other acceptable geographic 
definitions are: ``employees of * * * who are paid from * * *'' or 
``employees of * * * who are supervised from * * *'' To the maximum 
extent possible, setting geographic definitions by changeable corporate 
or division boundary--e.g., ``employees of Federal Reserve District 
6''--is to be avoided.
    So that NCUA may monitor any potential field of membership 
overlaps, each group to be served (e.g., employees of subsidiaries, 
franchisees, and contractors) may be separately listed.
    The employer may also be included in this common bond--e.g., ``ABC 
Corporation and its subsidiaries.'' The employer group will be defined 
in the last clause describing the field of membership.
II.A.2--Sample Occupational Fields of Membership
    Some examples of occupational group definitions are:
     ``Employees of the Scott Manufacturing Company who work in 
Chester, Pennsylvania. * * *'' (common bond--same employer)
     ``Employees and elected and appointed officials of 
municipal government in Parma, Ohio. * * *'' (common bond--same 
employer)
     ``Employees of Johnson Soap Company and its majority-owned 
subsidiary, Johnson Toothpaste Company, who work in Augusta and 
Portland, Maine. * * *'' (common bond--parent and majority-owned 
subsidiary company)
     ``Personnel of fleet units of the U.S. Navy home ported at 
Mayport, Florida. * * *'' (common bond--same employer)
     ``Department of Defense civilian and U.S. Army personnel 
who work or are stationed at, or are attached or assigned to Fort 
Belvoir, Virginia, or those who are retired from, or their dependents 
or dependent survivors who are eligible by law or regulation to receive 
and are receiving benefits or services from, that military 
installation. * * *'' (common bond--same employer)
     ``Employees of those contractors who work regularly at 
U.S. Naval Shipyard in Bremerton, Washington. * * *'' (common bond--
employees of contractors)
     ``Employees, doctors, medical staff, technicians, medical 
and nursing students who work at Boston Medical Center at the locations 
stated: * * *'' (common bond--same employer)
     ``Employees and teachers who work for the School District 
Number 3 in Austin, Texas * * *.'' (common bond--same employer)
     ``Employees of the JKL Employee Leasing Company who are 
paid from Lake Charles, Louisiana * * *.'' (common bond--same employer)
     ``Employees of JKL, Inc. and STU, Inc. working for the XYZ 
Joint Venture Company in Los Gatos, California * * *.''
    Some examples of insufficiently defined occupational groups are:
     ``Employees of engineering firms in Seattle, Washington.'' 
(Not the same occupational common bond, since various firms compete 
against one another; names of firms must be stated; however, may be the 
basis for a multiple group charter.)
     ``Persons employed or working in Chicago, Illinois.'' (No 
common bond; names of firms must be stated.)
     ``Persons working in the entertainment industry in 
California.'' (No occupational common bond, since firms compete against 
one another; names of firms must be stated.)

II.B--Associational Common Bonds

II.B.1--General
    A federal credit union may include in its field of membership, 
regardless of location, all members of a recognized association.
    NCUA limits this common bond to groups consisting primarily of 
individuals (natural persons) who participate in activities developing 
common loyalties, mutual benefits, and mutual interests. Except for 
student, church, and similar groups, all associational common bonds 
will include a definition of the group that may be served based on the 
effective date of the association's charter and bylaws and a geographic 
limitation. Therefore, with the exceptions noted above, applicants for 
an associationally-based federal credit union charter must provide a 
copy of the association's charter and bylaws.
    Qualifying associational groups must hold meetings open to all 
natural person members at least once a year, must sponsor other 
activities which clearly demonstrate that the members of the group meet 
and interact regularly to accomplish the objectives of the association, 
and must have an authoritative definition of who is eligible for 
membership--usually, this will be the association's charter and bylaws.
    In determining whether a group satisfies the common bond 
requirement for a federal credit union charter, NCUA will consider the 
totality of the circumstances--such as whether members pay dues, have 
voting rights, and hold office, whether the group maintains a 
membership list, the clarity of the associational group's definition 
and compactness of its membership, and the frequency of meetings and 
the interaction of members. A support group, whose members are 
continually changing, may not meet the criteria.
    NCUA's focus with respect to chartering associational federal 
credit unions will be on the group's natural person members. In certain 
instances, however, NCUA will also allow non-natural persons (e.g., 
corporate sponsors, entities participating in programs to alleviate 
poverty and distress, or organizations of members) to be eligible for 
membership. It is not necessary that every non-natural person member of 
the group be a recognized legal entity; NCUA will consider such groups 
on a case-by-case basis.
    Student groups--for example, parent-teacher organizations, alumni 
associations, and students in a trade school or other curriculum--and 
church groups constitute associational common bonds and may qualify for 
a federal credit union charter. Since such groups usually do not have a 
formal association charter, there is no requirement for these groups to 
provide a charter or bylaws.
    Homeowners associations, tenant groups, electric co-ops, consumer 
groups and other groups of persons having an ``interest in'' a 
particular cause and certain consumer cooperatives may be eligible to 
receive a federal charter. However, they must make a strong showing of 
common activities which clearly demonstrate that the group meets and 
interacts regularly to accomplish the objectives of the association. 
Furthermore, they must provide clear evidence of economic viability.
    Newly-organized associations must make a similar strong showing of 
common activities. Experience has shown that a new group's efforts are 
best focused on solidifying member interest before attempting to offer 
credit union service.
    The associational sponsor itself may also be included in the field 
of membership--e.g., ``ABC Association''--and will be shown in the last 
clause of the field of membership.
II.B.2--Subsequent Changes to Association's Bylaws
    If the association's membership or geographical definitions in its 
charter and bylaws are changed subsequent to the effective state dated 
in the field of membership, the credit union must submit the revised 
charter or bylaws for NCUA's consideration prior to serving members of 
the association added as a result of the change. This type of field of 
membership amendment will require following select group amendment 
procedures discussed in Chapter 2.
II.B.3--Widely Dispersed Associational Charters
    NCUA policy is to charter associational federal credit unions at 
the lowest organizational level which is economically feasible. NCUA 
will grant associational charters with widely dispersed memberships 
only where clearly demonstrated to be in the best interests of the 
association's members and the credit union community, and only after 
scrutinizing the adequacy of the applicant's common bond and the 
economic advisability of a more compact field of membership. NCUA, in 
its discretion, may require that the proposed field of membership be 
narrowed before granting a new charter. Amendment to include a larger 
portion of the association's members may be allowed at a later time, if 
appropriate.
    Also, as with any widely dispersed group, overlap issues are likely 
to arise, either at the time of or subsequent to chartering. NCUA will 
consider the effect that granting a charter with such a group in its 
field of membership would have on any number of existing credit unions. 
In addition, an associational credit union with a widely dispersed 
membership may expect overlaps, particularly at the local level, to be 
granted to other credit unions in the future.
    In recognition of these unique circumstances, NCUA follows a 
separate internal procedure for associational charter applications for 
associations with proposed fields of membership of 500 or more persons 
which cross NCUA regional boundaries. NCUA's Director of Examination 
and Insurance and all NCUA regional directors with any of the 
association's members located in their region must vote on the charter 
application. A majority vote is required for approvals. Tie votes are 
referred directly to the NCUA Board for decision.
II.B.4--Limits of Associational Common Bond
    Except for retiree clubs and low-income groups (discussed below), 
associations formed primarily to obtain a federal credit union charter 
do not have a sufficient associational common bond. Similarly, 
associations based on a client-customer relationship--for example, an 
insurance company and its customers or a buyer's club and its members--
do not have a sufficient associational common bond.
    The common bond extends only to the association's members. The 
employees of a member of a local chamber of commerce, for example, do 
not have a sufficiently close tie to the association to be included. A 
proposal to include these persons among those to be served by the 
federal credit union may be considered as a multiple-group charter 
application. In such cases, letters of support and request for service 
must be provided from each separate entity.
II.B.5--Sample Associational Fields of Membership
    Some examples of associational group definitions are:
     Regular members of Locals 10 and 13, IBEW, Miami, Florida, 
who qualify for membership in accordance with their charter and bylaws 
in effect on May 20, 1994.''
     ``Members of the Hoosier Farm Bureau who live or work in 
Grant, Logan, or Lee Counties of Indiana, who qualify for membership in 
accordance with its charter and bylaws in effect on March 7, 1994.''
     ``Members of the First Baptist Church in Topeka, Kansas.''
     ``Members of the Shalom Congregation in Chevy Chase, 
Maryland.''
     ``Regular members of the Corporate Executives Association, 
located in Westchester, New York, who live or work in Westchester, 
Rockland, and Suffolk Counties in New York, who qualify for membership 
in accordance with its charter and bylaws in effect on December 1, 
1994.''
     ``Members of the Northern Michigan Electric Co-op located 
in Marquette, Michigan.''
     ``Members of the ABC Association living or working in New 
York, New York, who qualify for membership in accordance with its 
charter and bylaws in effect on January 21, 1994.'' Some examples of 
insufficiently defined associational group definitions are:
     ``Members of military service clubs in the State of New 
Mexico.'' (No single associational tie; specific clubs and locations 
must be named; may be considered as multiple group.)
     ``Veterans of U.S. military service.'' (Group is too 
broadly defined; no formal association of all members of the group.)
    Some examples of unacceptable associational common bonds are:
     ``Members of ABC Buyers Club.'' (An interest in purchasing 
does not meet associational standards.)
     ``Customers of ABC Insurance Company.'' (Policyholders or 
customer/client relationships do not meet associational standards.)

II.C--Community Common Bonds

II.C.1--General
    Congress requires that a credit union charter based on a tie to a 
specific geographic location be limited to ``a well-defined 
neighborhood, community, or rural district.'' NCUA policy is to limit 
the community to a single, geographically well-defined area where 
residents interact.
    NCUA recognizes three types of affinity on which a community common 
bond can be based--persons who live in, persons who worship in, and 
persons who work in the community. Businesses and other legal entities 
within the community boundaries may also qualify for membership. Given 
the diversity of community characteristics throughout the country and 
NCUA's goal of making credit union service available to all eligible 
groups who wish to have it, NCUA has established the following common 
bond requirements for community charters:
     The geographic area's boundaries must be clearly defined; 
and
     The charter applicant must establish that the area is 
recognized as a distinct ``neighborhood, community, or rural 
district.''
II.C.2--Special Documentation Requirements
    Information to support that the area chosen represents one well-
defined area, distinguishable from the immediate surrounding areas, 
includes:
     political jurisdictions
     major trade areas (shopping patterns)
     traffic flows
     shared/common facilities (for example, educational, 
medical, police and fire protection, school district, water, etc.)
     organizations/clubs whose membership is made up 
exclusively of persons within the area
     newspapers or other periodicals published for and about 
the area
     census tracts
     common characteristics and background of residents (for 
example, income, religious beliefs, primary ethnic groups, similarity 
of occupations, household types, primary age group, etc.)
     history of area
     in general, what distinguishes the chosen area and its 
residents to be distinguishable from the immediate surrounding areas 
and residents--some examples are old, well established ethnic 
neighborhoods, planned communities and small/rural towns
    The following information must be provided to support a need for a 
community credit union:
     a list of credit unions presently in area
     a list of other financial institutions (for example, 
banks, savings and loan associations) that service the area
    Necessary written documentation (for example, letters, surveys, 
studies, pledges, petitions) reflecting support for the application for 
or the conversion to a community credit union is as follows:
     For the residents of the area:
     Approximate number contacted.
     Number in favor of the credit union.
     Number against the credit union.
     Number who will join the credit union.
     Number who have pledged initial and/or systematic savings 
and amount of pledges.
     For the employers:
     Number of area employers and number of employees.
     Number contacted.
     Number in favor of the credit union.
     Number against the credit union.
     Number willing to provide payroll deductions to the credit 
union.
     Number willing to provide other type(s) of support to the 
credit union.
     For organizations (including churches):
     Number in areas and number of members.
     Number contacted.
     Number in favor of the credit union.
     Number against the credit union.
     Number willing to provide some type of support to the 
credit union, i.e., advertising facilities, etc.
     letters of support from area civic leaders.
    If the community is also a recognized legal entity, it may comprise 
or be included in the field of membership--for example, ``DEF Township, 
Kansas'' or ``GHI County, Minnesota.''
II.C.3--Community Service Area
    The service area of a community federal credit union is the area 
defined in its charter, usually with north, east, south, and west 
boundaries.
II.C.4--Sample Community Fields of Membership
    Some examples of community common bond definitions are:
     ``Persons who live or work in, and businesses located in 
the area of XYZ City bounded by Fern Street on the north, Long Street 
on the east, Fourth Street on the south, and Elm Avenue on the west.''
     ``Persons who live or work in Green County, Maine. . . .''
     ``Persons who live, worship or work in and businesses and 
other legal entities located in Independent School District No. 1, 
DuPage County, Illinois. . . .''
     ``Persons who live or work within a twenty mile radius of 
the main post office in Walnut, Illinois. . . .'' (Rural areas only.)
    Some examples of insufficiently defined community common bond 
definitions are:
     ``Persons who live or work within and businesses located 
within a ten-mile radius of Washington, DC.'' (Not a recognized 
neighborhood, community, or rural district.)
     ``Persons who live or work in the industrial section of 
New York, New York.'' (Not a recognized neighborhood, community, or 
rural district.)

II.D--Multiple Occupational/Associational Common Bonds

II.D.1--General
    NCUA may charter a federal credit union to serve a combination of 
distinct, definable occupational and/or associational common bonds. For 
a common bond which will constitute a majority of the federal credit 
union's field of membership, the requirements for occupational and 
associational fields of membership apply. Any other group constituting 
an occupational or associational common bond to be included within the 
federal credit union's field of membership must be within what will be 
the credit union's operational area.
    A proposed federal credit union's operational area is the area 
which, as determined by NCUA in its sole discretion, may reasonably be 
served by the service facilities that will be accessible by the groups 
to be included in the field of membership when the credit union begins 
operation. A credit union's service facility is a place where, also as 
determined by NCUA in its sole discretion: (1) Shares are accepted for 
members' accounts; (2) loan applications are accepted or loans are 
disbursed; (3) a member can deal directly with a credit union 
representative; and (4) the service provided is clearly associated with 
that particular credit union. An automated teller machine or similar 
device is not a federal credit union service facility. Similarly, a 
branch or service center shared by a number of credit unions is not a 
service facility for purposes of this Chapter.
    Any members of a group who will have access to one of a proposed 
federal credit union's service facilities may be included in the field 
of membership. In addition, the group as a whole will be considered to 
be within a proposed credit union's operational area when:
     A majority of the group's members live, work, or gather 
regularly within the operational area;
     The group's headquarters is located within the operational 
area; or
     The group's ``paid from'' or ``supervised from'' location 
is within the operational area.
    The following special additional requirements pertaining to 
multiple group applications must be satisfied before NCUA will grant 
such a charter:
     Each group to be included in the proposed field of 
membership of the federal credit union must have its own occupational 
or associational common bond.
     Except for employee groups in the same industrial park, 
shopping center or similar facility, each group must individually 
request inclusion in the proposed federal credit union's charter.
     The proposed federal credit union's business plan must 
show that the credit union will possess the financial resources and 
management capability to provide quality credit union service to each 
group.
     The proposed federal credit union must show that, when it 
begins operations, each group to be added will be within the 
operational area of a service facility to which the group will have 
access.
II.D.2--Sample Multiple Group Field of Membership
    An example of a multiple group field of membership is: ``The field 
of membership of this federal credit union shall be limited to the 
following:
    1. Employees of Dupont Corporation who work in Wilmington, 
Delaware;
    2. Partners and employees of Smith & Jones, Attorney at Law, who 
work in Wilmington, Delaware;
    3. Members of the GHI Association who live in Wilmington, Delaware, 
and qualify for membership in accordance with its charter and bylaws in 
effect on December 31, 1994.
II.D.3--Additional Documentation
    For multiple group charters, NCUA will need the following, in 
addition to what is required for new charters generally:
     For each group seeking to be included in the proposed 
federal credit union's field of membership, the credit union must 
provide a letter from the group, on the group's letterhead stationery 
and signed by an official representative of the group wherever 
possible, or if that is not possible, such other documentation or 
certification as the regional director may, in his or her discretion, 
deem appropriate, containing this information:
     The fact that the group wants to obtain service from the 
proposed federal credit union, the kind of service it desires and the 
credit union has agreed to provide, and the extent to which the group 
supports the credit union--e.g., by providing access to its employees 
or members via payroll deduction, by permitting use of employee or 
members' newsletter, etc.
     The number of employees or members in the group.
     The proximity to the proposed federal credit union's 
closest service facility.
     The name of any credit union to which the group currently 
has access.
     The group's headquarters location and all other work 
locations the credit union is proposing to serve.
     If the group is eligible for membership in another credit 
union, documentation must be provided to support inclusion of the group 
under the standards set forth in the ``Overlaps'' section of this 
chapter.

II.E--Other Persons Sharing Common Bond

    A number of persons by virtue of their close relationship to a 
common bond group may be included, at the charter applicant's option, 
in the field of membership. These include the following:
     ``Spouses of persons who died while within the field of 
membership of this credit union.''
     ``Employees of this credit union.''
     ``Persons retired as pensioners or annuitants from the 
above employment.''
     Members of their immediate families.''
     ``Volunteers.''
     ``Organizations of such persons.''
    ``Members of their immediate families'' may be generally defined as 
deemed appropriate by a federal credit union when including this group 
among those to be served. To be made effective, however, the federal 
credit union's board of directors must approve the definition by 
resolution, and include it in Article XVIII, Section 2, of its by-laws. 
NCUA approval is not necessary.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. Examples include volunteers working at a 
hospital or church.
    Under Article II, Section 5, of NCUA's Standard Bylaws, if a member 
leaves the field of membership, standard member services are 
terminated. However, the board of directors may, by resolution, set 
forth the circumstances under which a member may maintain membership. 
This option is commonly referred to as the ``once a member, always a 
member'' bylaw provision. NCUA approval is not necessary here, either.

III--Subscribers

    Federal credit unions are organized by persons who donate time and 
resources and are responsible for determining the interest, commitment, 
and advisability of forming a federal credit union. The organization of 
federal credit union takes considerable planning and dedication in 
order to ensure the success of the new credit union.
    Persons interested in organizing a federal credit union should 
contact the NCUA regional office serving the state in which the credit 
union will be organized or one of the trade associations. Lists of NCUA 
offices and trade associations are shown in the appendices. NCUA will 
provide information to groups interested in pursuing a federal charter 
and will assist them in contacting an organizer.
    A credit union organizer may be a trade association representative 
or a person with training and experience in chartering new federal 
credit unions. The functions of the organizer are to provide direction, 
guidance, and advice on the chartering process. The organizer also 
provides the group with information about a credit union's functions 
and purpose as well as technical assistance in preparing and submitting 
the charter application. Close communication and cooperation between 
the organizer and the group members are critical to the chartering 
process.
    The Federal Credit Union Act requires that seven or more natural 
persons--the ``subscribers''--must present to NCUA for approval a sworn 
organization certificate stating at a minimum:
     The name of the proposed federal credit union.
     The location of the proposed federal credit union and the 
territory in which it will operate.
     The names and addresses of the subscribers to the 
certificate and the number of shares subscribed by each.
     The initial par value of the shares.
     The detailed proposed field of membership.
     The term of the existence of the corporation, which may be 
perpetual.
     The fact that the certificate is made to enable such 
persons to avail themselves of the advantages of the Federal Credit 
Union Act.
    False statements on the organization certificate may be grounds for 
federal criminal prosecution.

IV--Economic Advisability

IV.A--Viability

IV.A.1--General
    Before chartering a federal credit union, NCUA must be assured that 
the institution will be viable and that it will not materially affect 
existing state or federal credit unions. This economic advisability 
inquiry has become especially important since 1970, when Congress 
assigned NCUA the obligation to establish a fund insuring credit union 
members' shares and to preserve that fund.
    NCUA will conduct an independent on-site investigation of each 
charter application to assure itself that the proposed credit union can 
be successful. In general, the success of any credit union depends on: 
(a) the depth of the members' support; (b) the character and fitness of 
management; and (c) present and projected market conditions.
IV.A.2--Proposed Management's Character and Fitness
    The Federal Credit Union Act requires NCUA to satisfy itself as to 
the ``general character and fitness'' of the subscribers. In addition, 
prospective officials and employees will be the subject of credit and 
background investigations. The investigation reports must demonstrate 
their ability to effectively handle financial matters.
    NCUA also needs assurance that the management team will have the 
requisite skills--particularly in leadership and accounting--and the 
commitment to dedicate the time and effort needed to make the proposed 
federal credit union a success.
IV.A.3--Member Support
    While NCUA has not set a minimum size field of membership for 
chartering a federal credit union, experience has shown that a credit 
union with under 500 potential members generally is unlikely to 
succeed. Therefore, a charter applicant with a proposed field of 
membership of under 500 will have to demonstrate convincing support for 
the credit union. For example, a small occupational group must 
demonstrate a commitment for significant long-term support from the 
employer.
    The group's size is meaningful only if members participate in the 
credit union. The charter applicant must show that a substantial 
percentage of the group's members will join the credit union and use 
its services. Survey results must be based, at a minimum, on a sampling 
of 250 potential members. In particular instances, especially where the 
common bond is broadly defined or newly established, NCUA may require a 
larger sampling.
IV.A.4--Present and Future Market Conditions--Business Plan
IV.A.4.a--General
    The ability to compete in the marketplace and to adapt to changing 
market conditions is key to the survival of any enterprise, and a 
crucial part of that is the ability to plan well. NCUA, therefore, 
requires an applicant to submit a business plan based on realistic and 
supportable projections and assumptions, including, as a minimum, these 
elements:
     Mission statement.
     Analysis of market conditions--economic prospects for the 
group, availability of financial services from other credit unions, 
banks, and savings and loans.
     Summary of survey results.
     Financial services needed/desired.
     Financial services to be provided.
     How/when services are to be implemented.
     Staffing of credit union and credentials of key employees.
     Physical facility--office, equipment.
     Type of recordkeeping system, including consideration of a 
data processing system.
     Budget for 1st and 2nd year.
     Semiannual pro forma financial statements for 1st and 2nd 
year, including assumptions--e.g., loan and dividend rates.
     Goals for number of members.
     Goals for operating independently.
     Source of funds to pay expenses during initial months of 
operation.
     Written policies (shares, lending, investments, funds 
management, capital accumulation, dividends).
     Goals for shares and loans.
     Plan for continuity--directors, committee members.
     Evidence of sponsor commitment if subsidies are critical 
to success of the federal credit union--evidence may be in the form of 
letters, contracts, or any other such document on which the proposed 
federal credit union can substantiate its projects.
    NCUA expects that the subscribers and proposed officials will 
understand and support the business plan submitted.
IV.A.4.b--Special Requirements for Community Credit Unions
    Community credit unions are frequently more susceptible to 
competition from other local financial institutions and generally do 
not have substantial support from any single sponsoring company or 
association. Also, the lack of payroll deduction creates special 
challenges in the development of savings promotion programs and in the 
collection of loans. Therefore, it is essential for the group to 
develop a detailed and practical business plan for at least the first 
three years of operation. The business plan should contain, but not 
necessarily be limited to, the following:
     Analysis of market area--geographic, demographic, 
employment, income, housing, and economic data.
     Service/market strategy--financial and other services to 
be provided, new member/share/loan promotion policies and procedures 
and income generation strategy.
     Organizational/management plan--qualification and planned 
training of officials/employees, operating facilities to include office 
space/equipment and supplies, accounting system, safeguarding of 
assets, insurance coverage, etc.
     Financial plan--sources and application of funds 
statements and pro forma balance sheet and income/expense statements 
and assumptions.

IV.B--Effects on Other Credit Unions--Overlaps

(This discussion pertains to new and existing charters.)

IV.B.1--Overlaps In General
    An overlap exists when a group of persons is eligible for 
membership in two or more credit unions, including state charters. 
General policy requires that every reasonable effort be made to avoid 
an overlap. Ideally, a group of persons should be included in the field 
of membership of only one credit union.
    New credit unions are obligated to investigate the possibility of 
an overlap prior to submitting an application for a new charter by 
surveying the prospective field of membership.
    When a potential overlap situation does arise, officials of the 
involved credit unions must attempt to work the problem out between or 
among themselves. In the case of a new federal credit union applying 
for or converting to a community field of membership, the applicant 
will generally be required to contact only those credit unions with a 
service facility within the community boundary. Other credit unions 
serving select groups within the proposed area will not ordinarily be 
contacted or afforded overlap protection unless a significant portion 
of their field of membership is affected. If the matter is resolved 
informally, the applicant must submit a letter to that effect from the 
credit union whose field of membership already includes the subject 
group.
    If no resolution is possible, an application for a new charter may 
still be submitted, but must also include information regarding the 
overlap and document attempts at informal resolution. Documentation on 
the interests of the group, such as a petition signed by a majority of 
the group's members, will be strongly considered.
    When resolution of the issue is not possible, and other 
circumstances warrant, an overlap may be permitted. Among the 
circumstances which may justify an overlap are:
     Failure of the original credit union to provide quality 
service.
     Limited participation by members or employees of the group 
in the original credit union after the expiration of a reasonable 
period of time.
     Incidental overlap--the group of persons in question is so 
small as to have no material effect on the original credit union.
    In reviewing the overlap, the regional director will consider the 
nature of the issue, efforts made to resolve the matter, financial 
effect on the overlapped credit union, the desires of the group(s), the 
desire of the sponsor organization, the opinion of the state credit 
union supervisor and other interested parties, as applicable, and the 
best interests of the affected group and the credit union members 
involved.
    Potential overlaps of a state credit union's field of membership by 
a federal credit union will generally be analyzed in the same way as if 
two federal credit unions were involved. However, where a state credit 
union's field of membership is so general as to include virtually 
everyone in a wide area, NCUA may exclude any state credit union from 
overlap protection altogether just as it would with a federal credit 
union with a broadly defined field of membership. Prior to making that 
decision, the regional director will consult the credit union and the 
state regulator. Any decision by the regional director will be provided 
in writing to the credit union and the state regulator.
    Generally, NCUA will permit federal credit unions serving 
occupational groups to overlap associational and community charters. 
However, should the proposed overlap pose significant safety and 
soundness concerns, NCUA may provide overlap protection for any type 
charter. For example, labor union groups constitute an associational 
common bond, and while some labor unions serve members who work 
regularly for several employers, others have members who work for only 
one employer. In these latter cases, overlap protection may be provided 
if a substantial portion of the company's employees are served by the 
credit union.
    Some situations may not justify approval of a requested overlap. 
For example, if the requesting credit union offers certain specialized 
services not offered by the original credit union (such as credit 
cards, ATMs, and IRAs), the extra services alone may not justify the 
overlap. Also, proximity, by itself, may not warrant approval of an 
overlap. A federal credit union in Chicago, Illinois, may not have a 
convincing argument, based on geography alone, that a select group also 
located in Chicago would be better served by it than by the select 
group's headquarters credit union located in Dallas, Texas.
    From an overlap prevention perspective, new charter applicants and 
every occupational or associational group which comes before the 
regional director for affiliation with an existing federal credit union 
must advise in writing whether the group is included within the field 
of membership of any other credit union. This requirement will alert 
the regional director to possible overlap situations before they occur. 
Most potential field of membership conflicts can be avoided in this 
way. If cases do arise where the assurance given to a regional director 
concerning unavailability of credit union service turns out later to be 
inaccurate, the misinformation is grounds for removal of the group from 
the federal credit union's charter.
IV.B.2--Overlap Issues as a Result of Organizational Restructuring
    A federal credit union's field of membership will always be 
governed by the group descriptions contained in Section 5 of its 
charter. Where a sponsor organization expands its operations 
internally, by acquisition or otherwise, the credit union may serve 
these new entrants to its field of membership if they are part of a 
group described in Section 5. Where acquisitions are made which add a 
new wholly-owned or majority-owned subsidiary, the group cannot be 
served until the subsidiary is included in the field of membership.
    Overlaps may occur as a result of restructuring of the parent 
organization. Credit unions affected by organizational restructuring 
are required first to attempt to resolve overlap issues among 
themselves. Once the affected credit unions reach agreement, they must 
apply to NCUA for a modification of their fields of membership to 
reflect the groups each will serve.
    In addition, credit unions must submit to NCUA correspondence from 
the parent organization explaining the restructuring and providing 
information regarding the new organizational structure. To help in 
future monitoring of overlaps, the organizational structure should 
identify divisions and subsidiaries and the location and number of 
employees at each location.
    Overlaps may also occur as a result of the parent organization's 
merger. NCUA's general policy of avoiding overlaps applies to those 
resulting from corporate mergers as well. Affected credit unions must 
make every reasonable effort to identify up front and address the 
overlap issue raised by parent corporation mergers and must attempt to 
resolve any differences among themselves. In those rare cases which 
require NCUA's intervention, all attempts to resolve the issues must be 
fully documented by the affected credit unions.
    Affected credit unions should consider consolidation (merger) of 
institutions as a possible alternative to dividing up the field of 
membership, particularly if safety and soundness concerns exist or 
future viability is in question. A federal credit union which has a 
broad based field of membership generally has a better chance of 
survival when a sponsor restructures or closes.
    While neutral, NCUA will make the final decision regarding field of 
membership amendments, taking into account the credit unions' 
agreements, safety and soundness concerns, the desires of the members, 
the significance of the overlap and other relevant issues.
    NCUA will be flexible when working with credit unions affected by 
parent corporation mergers and divestitures. Where no other credit 
union service is available and the sponsor and its employees desire to 
continue service, NCUA may use wording such as the following:
    ``Employees of XYZ Corporation, formerly a subsidiary of ABC, 
Incorporated, located in Charleston, South Carolina. . . .''
IV.B.3--Overlaps-Exclusionary Clauses

This discussion pertains to new and existing charters.)

    Where two credit unions agree and/or NCUA has determined that an 
overlap should be avoided, this decision may need to be memorialized in 
a federal credit union's charter through an exclusionary clause. 
Examples of exclusionary wording are:
     Persons who work for Hilo Sugar Company, except those who 
work in or are paid from or are supervised from San Francisco, 
California.
     Persons who work for the ABC Co., except those employed by 
the XYZ Division as of June 30, 1994.
     Persons who work for the ABC Co., except those who were 
members of the XYZ Federal Credit Union as of June 30, 1994.
    Exclusionary clauses are very difficult for credit unions and NCUA 
to monitor properly. To minimize this difficulty, NCUA generally does 
not require federal credit unions to apply exclusionary clauses to 
persons eligible for membership in another credit union simply because 
they are one of the ``other persons sharing common bond'' listed in 
Section II.E of this Chapter.
    Moreover, if phrased improperly or used in situations for which 
they are not suited, exclusionary clauses can be ineffective or create 
obvious inequities--one spouse may be eligible for membership in a 
federal credit union while the other may not; one employee may be 
eligible for credit union service while the person working next to him 
or her may not. For this reason, exclusionary clauses are rarely if 
ever appropriate for inclusion in a community charter's field of 
membership as a way to resolve overlap concerns.
    One example of an appropriate use of an exclusionary clause may be 
where there is a merger of two corporations served by two credit unions 
which will continue to serve their groups as they had prior to their 
sponsors' consolidation. Addition of an exclusionary clause to the 
field of membership of one or both of the credit unions may be the best 
way to clarify the division of service responsibility within the new 
corporate entity.
    When an exclusionary clause is included in a federal credit union's 
field of membership, NCUA will strive to define as precisely as 
possible:
     The identity of the group to be excluded;
     Whether the exclusion is to apply to the entire group or 
only to those who are actually members of another credit union; and
     Whether the exclusion is to apply only to the current 
members of the group or to future members as well.

V--Special Situations

    There are some instances where, because of overriding policy, 
special common bond rules apply. To ensure quality service to as many 
low-income and senior citizens as possible, NCUA has established 
broader common bond rules for federal credit unions seeking to serve 
those groups. Further, to expedite service to groups in industrial 
parks, shopping centers, and similar areas, the documentation 
requirements for federal credit unions seeking to serve these groups 
have been simplified. Finally, to ensure consistency throughout the 
credit union movement, NCUA has centralized decision making for the 
corporate credit union program in the Central Office.

V.A--Low-Income Credit Union Groups

V.A.1--General
    A low-income credit union is defined in Part 701.32 of the NCUA 
Rules and Regulations as one where a majority of its members either 
earn less than 80 percent of the average for all wage earners as 
established by the Bureau of Labor Statistics, or whose annual income 
falls at or below 80 percent of the median household income for the 
nation. In documenting its low-income membership, a credit union that 
serves a geographical area where a majority of residents fall at or 
below the annual income standard is presumed to be serving 
predominantly low-income members.
    A credit union designated by NCUA as serving predominantly low-
income members has greater flexibility in accepting non member deposits 
insured by the National Credit Union Share Insurance Fund. It also may 
participate in special funding programs such as the Community 
Development Revolving Loan Program for Credit Unions if it is involved 
in the stimulation of economic development and community revitalization 
efforts. A credit union participating in the revolving loan program is 
also eligible for technical assistance. The requirements for 
participation in the revolving loan program are set forth in Part 705 
of NCUA's Regulations. Only operating credit unions are eligible for 
participation in the revolving loan program.
    A federal credit union charter applicant meeting the definition of 
a low-income credit union should forward a separate request for low-
income designation, along with appropriate documentation, at the time 
the charter application is submitted. A charter applicant's low-income 
designation will be based on its primary field of membership and not on 
its actual members as is the practice for operating credit unions. In 
most cases, if the credit union qualifies, NCUA will grant the charter 
and low-income designation simultaneously.
    A low-income federal credit union charter applicant may contract 
with a third party to assist in the chartering process. Even after the 
charter is granted, a low-income credit union may contract with a third 
party to provide necessary management services. Such contracts should 
be for a duration of one year subject to renewal. However, within three 
years of commencement of operations, the credit union should no longer 
require such services.
V.A.2--Special Common Bond Rules for Low-Income Federal Credit Unions
    Generally, a low-income credit union is chartered as a community or 
associational credit union. A low-income credit union that has a 
community common bond may include the following language in its field 
of membership:
    ``Persons who live in [the target area]; persons who regularly 
work, worship, perform volunteer services, or participate in 
associations headquartered in [the target area]; persons participating 
in programs to alleviate poverty or distress which are located in [the 
target area]; incorporated and unincorporated organizations located in 
[the target area] or maintaining a facility in [the target area]; and 
organizations of such persons.''
    In recognition of the special efforts needed to help make credit 
union service available to persons in low-income communities, NCUA 
permits credit union chartering and field of membership amendments 
based on associational groups formed for the sole purpose of making 
credit union service available to low-income persons. The association 
must be defined so that all its members will meet the low-income 
definition of Part 701.32 of NCUA's Regulations. The association, in 
documenting its low-income membership, may use the same types of 
documentation as is currently permitted for determining whether a 
community is low-income under Part 701.32 of NCUA's Regulations.
    In addition, a proposed low-income community or associationally 
based federal credit union may include in its field of membership, 
without regard to location, another group constituting an occupational, 
associational or community common bond. Except for the operational area 
requirements, the proposed credit union must meet all the requisites 
for including the group in its charter. Moreover, the proposed credit 
union must take care to ensure that it will continue to meet the 
requirements for low-income status.
V.A.3--Special Common Bond Rules for Other Federal Credit Unions 
Seeking to Serve Low-Income Persons
    In the interest of making credit union service available to persons 
in low-income communities, NCUA also permits any occupational, 
associational, multiple group, or community federal credit union to 
include in its field of membership, without regard to location, 
communities and associational groups satisfying the low-income 
definition of Part 701.32 of NCUA's Regulations. The associational 
group may be formed for the sole purpose of providing eligibility for 
federal credit union service, but must comprise only persons meeting 
NCUA's low-income definition.
    The federal credit union adding the low-income community or 
association must document that the community or association meets the 
low income definition in Part 701.32 of NCUA's Regulations, just as is 
required for a designated low-income credit union. A federal credit 
union adding such a community or association, however, would not be 
able to receive the benefits, such as expanded use of non member 
deposits and access to the Community Development Revolving Loan Program 
for Credit Unions, offered to low-income credit unions.
    A federal credit union that desires to include a low-income 
community or association in its field of membership must first develop 
a business plan specifying how it will serve the entire low-income 
community. The business plan, at a minimum, must identify the credit 
and depository needs of the low-income community or association and 
detail how the credit union plans to serve those needs. The credit 
union will be expected regularly to review the business plan as well as 
loan penetration rates in the community to determine if the community 
is being adequately served. NCUA will require periodic service status 
reports on its service to the low-income community and may review the 
credit union's service to low-income persons during examinations.

V.B--Retiree and Senior Citizen Groups

    Special common bond rules also apply for providing service to 
retiree and senior citizen groups. It is NCUA policy to encourage 
federal credit unions to bring credit union service to senior citizens 
(aged 50 and over) and retired persons. To help in this effort, federal 
credit unions may form associations of such persons for the sole 
purpose of providing eligibility for credit union service. Except for 
the minimum age requirement of 50, the definition of a senior citizen 
is left to the credit union's discretion. Moreover, the only 
documentation requirement for including such an association in a 
federal credit union's charter is a written request from the credit 
union; no request from the group or copy of the association's charter 
or bylaws will be needed. In all other respects, however, the 
requirements for including an association in a federal credit union's 
field of membership apply, including those relating to the credit 
union's operational area.

V.C--Employees at Industrial Parks, Shopping Centers, and Similar 
Areas

    A federal charter may include in its field of membership persons 
working in a particular industrial park, shopping mall, office complex, 
or similar development either through a community or multiple group 
charter.
    If the multiple group option is selected, NCUA permits the credit 
union to satisfy the requirement for a request from each of the groups 
through a request by the complex owner, leasing agent, or similar 
responsible official. The complex owner, leasing agent or similar 
official must provide information regarding credit union service 
available to any segment of the proposed select group amendment or 
proposed federal credit union. It is up to the applicant credit union 
to investigate whether credit union service is already available to any 
segment of the select group amendment or proposed charter.
    In general, exclusionary clauses will not be used to protect any 
overlapped credit union. However, in those cases where each employee 
group in the complex has not specifically requested credit union 
service, NCUA may exercise broad discretion in addressing overlaps with 
other credit unions and any request from a group to be removed from the 
field of membership.
    The following or similar wording will be used to define groups 
added under this procedure: ``Employees who regularly work in the Plaza 
Mall, New Orleans, Louisiana''
    If the community option is selected, the industrial park, shopping 
center, or office complex must meet the standards for community 
charters.

V.D--Corporate Federal Credit Unions

    A corporate credit union is defined as one that:
     is operated primarily for the purpose of serving other 
credit unions,
     is designated by the NCUA as a corporate credit union, and
     limits natural person members to the minimum required by 
state or federal law to charter and operate the credit union.
    Corporate credit unions operate under and are governed by standards 
different from those applicable to natural person credit unions. These 
standards are set forth in part 704 of NCUA's Regulations.
    Supervision of corporate credit unions is the responsibility of 
NCUA's Office of Examination and Insurance. All applications for 
federal corporate charters as well as requested changes to section 5 of 
the charter of existing corporate federal credit unions should be 
directed to that office.

VI--Name Selection

    It is the responsibility of the federal credit union organizers to 
ensure that the federal credit union applicant's name or federal credit 
union name change does not constitute an infringement on the name of 
any corporation in their trade area. This responsibility also includes 
researching any service marks or trademarks used by any other credit 
union in their trade area. NCUA will ensure, to the greatest extent 
possible, that the credit union's name:
     is not already being officially used by another federal 
credit union;
     will not be confused with NCUA or another federal or state 
agency, or with another federal credit union; and
     does not include inappropriate language.
    The last three words in the name of every credit union chartered by 
NCUA must be ``Federal Credit Union.''

VII--Steps To Take To Organize a Federal Credit Union

VII.A--Getting Started

    Following the guidance contained throughout this policy, the 
organizers should submit the proposed field of membership to NCUA early 
in the process for written tentative approval.
    Once the field of membership has been tentatively approved, and the 
organizer is satisfied the application has merit, the organizers should 
conduct a preliminary organizational meeting to elect seven to ten 
persons to serve as subscribers. The subscribers should locate willing 
individuals capable of serving on the board of directors, credit 
committee, supervisory committee, and as chief operating officer/
manager of the proposed credit union.
    The organizers and subscribers should arrange for any meetings 
necessary to develop the business plan discussed in section IV.A.4 of 
this chapter and to complete the documentation for submittal to NCUA. 
Each of the required documents is discussed more fully later in this 
chapter.
    The organizers and subcribers must apply for insurance of member 
accounts. The Certificate of Resolutions (NCUA 9501) will be executed 
by the prospective chief executive officer and recording officer. 
Following action on this issue, the prospective chief executive officer 
and chief financial officer will execute the Application and Agreements 
for Insurance of Accounts (NCUA 9500). These documents should be 
provided to NCUA as part of the charter application.
    The organizers and subscribers should also complete an NCUA 4012, 
Report of Official or Employee, for each prospective board member, 
credit and supervisory committee member, and employee. The NCUA 4012s 
should be submitted to NCUA as early as possible to enable the 
necessary credit reports and background checks to be obtained well in 
advance of the anticipated charter date. NCUA will pay the direct costs 
of acquiring such credit and background checks.
    Subsequent organizational meetings may be held to discuss the 
progress of the charter investigation, to announce the proposed slate 
of officials, and to respond to any questions posed at the meeting.
    If NCUA approves the charter application, the subscribers, as their 
final duty, will elect the board of directors and credit committee of 
the proposed federal credit union. The new board of directors will then 
appoint the supervisory committee.

VII.B--Support for Charter Application

VII.B.1--General
    As discussed previously in this chapter, applicants for federal 
credit union charters must, at a minimum, provide evidence that:
     the group constitutes a recognized common bond;
     the subscribers, prospective officials and employees are 
of good character; and
     the establishment of the credit union is economically 
feasible.
    In addition, the Federal Credit Union Act requires applicants to 
submit a sworn organization certificate setting forth seven criteria 
(see section entitled ``Subscribers'' earlier in this chapter). In 
order to process the application and capture all required information, 
NCUA has developed certain chartering forms to assist organizers. See 
Appendix D for the necessary blank forms.
VII.B.2--Federal Credit Union Investigation Report, NCUA 4001
    Applications for new federal credit unions will be submitted on 
NCUA 4001. (State-chartered credit unions applying for conversion to 
federal charter will use NCUA 4000. See chapter 3 for a full 
discussion.) The organizer is required to certify the information and 
recommend approval or disapproval, based on the investigation of the 
request. Instructions and guidance for completing the form are provided 
on the form's reverse. Associational charter applicants must include a 
statement of their membership criteria (normally the group's charter or 
bylaws) and current financial statements on the associational sponsor.
VII.B.3--Report of Official and Employee, NCUA 4012
    This form documents general background information of each official 
and employee of the proposed federal credit union. Each official must 
complete and sign this form. The organizers must review each of the 
NCUA 4012s for elements--criminal convictions, indictments, etc.--that 
would prevent the prospective official or employee from serving in an 
official capacity. Further, such factors as past due credit obligations 
and bankruptcies disclosed during credit checks may disqualify an 
individual.
VII.B.4--Organization Certificate, NCUA 4008
    This document establishes the seven criteria required of 
subscribers by the Federal Credit Union Act and is signed by the 
subscribers and notarized. This document should be executed in 
duplicate. During his or her on-site contact, the NCUA staff member 
assigned to the case will assist in the proper completion of this 
document.
VII.B.5--Certification of Resolutions, NCUA 9501
    This document certifies that the board of directors of the proposed 
federal credit union has resolved to apply for insurance of member 
accounts and has authorized the chief executive officer and chief 
financial officer to execute the Application and Agreements for 
Insurance of Accounts. This form must be signed by both the chief 
executive officer and recording officer of the proposed federal credit 
union.
VII.B.6--Application and Agreements for Insurance of Accounts, NCUA 
9500
    This document contains the agreements with which federal credit 
unions must comply in order to obtain National Credit Union Share 
Insurance Fund (NCUSIF) coverage of member accounts. The document must 
be completed and signed by both the chief executive officer and chief 
financial officer. Each prospective federal credit union must qualify 
for federal share insurance.

VIII--NCUA Review

VIII.A--General

    As discussed previously, NCUA may provide tentative approval of the 
proposed federal credit union's field of membership. Additionally, 
credit and background investigations may be conducted concurrently by 
NCUA with other work being performed by the organizers and subscribers 
to reduce the likelihood of delays in the chartering process.
    Once NCUA receives a complete charter application package, an 
acknowledgment of receipt will be sent to the organizers within 10 
business days of receipt, and a staff member will be assigned to 
perform an on-site contact with the proposed officials and others 
having an interest in the proposed federal credit union. NCUA will make 
every effort to process the application expeditiously.
    The staff member will review the application package and verify its 
accuracy and reasonableness. The staff member will inquire into the 
financial management experience, suitability and commitment of the 
proposed officials and make an assessment of economic advisability. The 
staff member will also assist the subscribers in the proper completion 
of the Organization Certificate, NCUA 4008. By assisting in the 
completion of the Organization Certificate, the staff member may, 
without indicating his or her endorsement of the charter application, 
expedite the process.
    The staff member will thoroughly analyze the prospective credit 
union's business plan for realistic projections, attainable goals, and 
time commitment. Any concerns will be reviewed with the organizers and 
discussed with the prospective credit union's officials.
    The staff member will then make a recommendation to the regional 
director regarding the charter application. His or her recommendation 
may include specific provisions to be included in a Letter of 
Understanding and Agreement. In most cases, NCUA will require the 
prospective federal credit union's officials to enter into an agreement 
not to engage in certain activities. The agreement is for a limited 
term--usually two to four years. A sample Letter of Understanding and 
Agreement is attached in Appendix B.

VIII.B--Regional Director Approval

    Once approved, the board of directors of the newly formed federal 
credit union will receive a signed charter and bylaws from the regional 
director. Additionally, the officials will be advised of the name and 
mailing address of the examiner who has been assigned responsibility 
for supervising and examining the credit union.
    Generally, the examiner will contact the credit union officials 
shortly after approval of the charter in order to arrange for the 
initial examination (usually within the first six months of operation). 
Assistance in commencing operations is generally available through the 
various trade organizations listed in Appendix F.

VIII.C--Regional Director Disapproval

    Where a regional director disapproves any application, in whole or 
in part, under this Chapter, the organizers will be informed in writing 
of the specific reasons for the action. Where applicable, the regional 
director will provide information concerning options or suggestions 
that they could consider for gaining approval or otherwise acquiring 
credit union service.
    The letter of denial will include the procedure for and other 
information on the group's right to appeal the decision.

VIII.D--Appeal of Regional Director Decision

    The procedures for filing an appeal of any actions taken by NCUA 
regional directors will be followed. If not included with the denial 
notice, a copy of these procedures may be obtained from the regional 
director who made the decision.
    The prospective group may submit substantive new and additional 
information to the regional director for reconsideration. In these 
cases, the request will not be considered as an appeal but as a request 
for reconsideration by the regional director. If the request is again 
denied, the group may proceed with the appeal process.

IX--Future Supervision

    Once NCUA has granted a charter to a new federal credit union, an 
examiner will be assigned to supervise the credit union.
    The examiner will be responsible for monitoring the progress of the 
credit union and ensuring it gets off to a good start. The examiner 
will also monitor compliance with the terms of the Letter of 
Understanding and Agreement. Typically, the examiner will require 
copies of monthly board minutes and financial statements.
    Each federal credit union is examined regularly to NCUA to 
determine that it remains in compliance with law and regulation and to 
determine that it does not pose undue risk to the National Credit Union 
Share Insurance Fund.
    The Federal Credit Union Act requires all newly chartered credit 
unions, up to two years after the charter anniversary date, to obtain 
NCUA approval prior to appointment of any board member, any credit or 
supervisory committee member, or any senior executive officer. Part 
701.14 of the NCUA Regulations sets forth the notice and application 
requirements. If NCUA issues a Notice of Disapproval, the newly 
chartered credit union is prohibited from making the change. NCUA may 
disapprove an individual serving as a director, committee member or 
senior executive officer if it finds that the competence, experience, 
character, or integrity of the individual would not be in the best 
interests of the members of the credit union or of the public to permit 
the individual to be employed by or associated with the credit union.

CHAPTER 2--AMENDMENTS TO THE FIELD OF MEMBERSHIP

I--Introduction

    As stated in Chapter 1, Section 5 of every federal credit union's 
charter defines the groups the credit union is legally entitled to 
serve. There are a number of instances in which Section 5 may need to 
be changed. On each of these occasions, the federal credit union must 
obtain approval from NCUA before amending its charter.
    First, a group not included in a federal credit union's charter may 
wish to be served by that credit union. This may occur through 
agreement between the group and the credit union directly, or through a 
merger, purchase and assumption (P&A), or spin-off. Second, a federal 
credit union may wish to change it common bond entirely--from an 
occupational to a community credit union, for example, or vice versa. 
Third, which is discussed in Chapter 3, a state-chartered credit union 
may wish to convert to a federal charter. (The field of membership of a 
federal credit union converting to a state charter is determined under 
applicable state law, except to the extent that the credit union seeks 
to continue to be federally insured and the proposed new field of 
membership would adversely affect the safe and sound operation of the 
institution.) Finally, a federal credit union may wish to remove a 
group from its field of membership--for example, through agreement with 
the group or a spin-off.
    NCUA's goals with respect to amendments of federal credit union 
charters are the same as for including groups in the charters of new 
federal credit unions. The Agency's analysis, therefore, is also 
similar, though adapted for the different circumstances in which the 
issue arises--primarily the facts that the federal credit union is in 
existence and has a history of service that can be evaluated.
    The three issues NCUA must evaluate in deciding whether to approve 
a change in a federal credit union's field of membership are:
     whether the change satisfies NCUA's common bond 
requirements;
     whether the interests of the groups to be added are 
demonstrated; and
     whether the change is economically advisable.

II--Additions Through Direct Agreement With a Group

    The most common type of addition to a federal credit union's field 
of membership is through agreement with the group itself. The 
requirements are similar to those for including a group in a federal 
credit union's charter initially.

II.A--Common Bond Requirement

II.A.1--Additions to Fields of Membership of Occupational, 
Associational, and Multiple Occupational/Associational Federal Credit 
Unions
    As with new multiple occupational/associational federal credit 
unions, occupational and associational groups may be added to 
occupational, associational, and multiple occupational/associational 
federal credit unions in two ways. If the group is part of an 
occupational or associational common bond which constitutes a majority 
of the federal credit union's field of membership, the group may be 
added regardless of location. These are commonly called ``common bond 
additions.'' For any other occupational or associational common bond, 
the group must be within the credit union's operational area. These are 
commonly called ``select group additions.''
    The requirements for common bond additions are identical to those 
for inclusion of occupational and associational common bonds in a 
credit union's initial field of membership; please refer to Section 
II.A and II.B of Chapter 1 for guidance. The requirements for select 
groups additions are similar to those set forth in Section II.D of 
Chapter 1 for inclusion of other associational and occupational groups 
in a multiple group federal credit union's field of membership 
initially, with this exception: The credit union may add groups within 
the operational areas of one of its planned service facilities if:
     The planned facility begins operation shortly after the 
group is added; and
     The current field of membership constitutes a significant 
portion of the total field of membership to be served initially by the 
proposed facility. Although the addition of a new select group alone is 
not enough to justify a planned service facility, it is permissible to 
include new groups as partial justification for such a facility.
    Moreover, in the case of a planned facility, NCUA may, in its 
discretion, require financial projections and/or a business plan 
supporting amendments around that service facility in order to 
determine the economic feasibility and to address any safety and 
soundness concerns of the amendment.
II.A.2--Additions to the Common Bond of a Community Federal Credit 
Union
    Community federal credit unions, except those designated low-income 
or distressed, may expand their fields of membership only by redefining 
their boundaries. There must be interaction among persons who live or 
work within the proposed well-defined neighborhood, community or rural 
district. The burden of proof for existence of the common bond is 
placed upon the applicant credit union.
    In the majority of cases where community credit unions are asking 
to expand their areas of service, and in all cases where a conversion 
to a community charter is proposed, an NCUA staff member will make a 
documented on-site evaluation of the proposal. The staff member will 
prepare a separate analysis of the proposed amendment, independent of 
the credit union's application. Following completion of the on-site 
evaluation and regional office review of the staff member's report, the 
regional director will act on the proposal. Certain expansions require 
NCUA Board consideration.
II.A.3--Special Situations
II.A.3.a--General
    The special rules for credit unions serving low-income persons, 
serving retirees and senior citizens over 50 years old, and serving 
employees at industrial parks, shopping centers and similar facilities 
apply equally to field of membership additions. However, there are two 
special situations unique to existing federal credit unions: (1) 
corporate restructurings and (2) plant or base closings, and other 
kinds of distress to a substantial portion of a credit union's 
membership.
II.A.3.b--Corporate Restructuring
    If an occupational or associational group within a federal credit 
union's field of membership undergoes a substantial restructuring, the 
result is often that portions of the group are sold or spun off. This 
is an event which requires a change to the credit union's field of 
membership if the credit union is to continue to provide service. NCUA 
will permit a credit union to add to its field of membership a sold or 
spun off group to which it has been providing service, without regard 
to location, if the group requests continued service, documented by a 
letter from an official representative, on the group's letterhead where 
possible.
II.A.3.c--Distress Situations
    If a major group within the field of membership of any federal 
credit union--whether occupational, associational, community or 
multiple group--suffers a severe economic reversal--e.g., a plant or 
base closing--one option for the credit union may be to diversify its 
field of membership by adding groups desiring to be served. If 
economically advisable, NCUA may facilitate the credit union's 
diversification efforts, to the extent and only until the credit 
union's viability is assured, by allowing the credit union to add 
occupational and associational groups without regard to location. To 
obtain this authorization, the credit union must submit a request for 
designation as a distressed credit union to its regional director.
    The decision will be based on the totality of the circumstances, 
including the severity of the economic problem, whether offsetting 
gains from the expansion of other groups currently in its field of 
membership are reasonably foreseeable, the availability of other groups 
able to be served, the likely cost the credit union will incur in 
reorienting itself to serve those groups, the competitive environment 
it is operating in, the effect on other credit unions, and the 
availability of alternatives such as merger. Prior to making a 
determination on this issue, NCUA may request such additional 
information, including a business plan, as may be appropriate.

II.B--Interests of the Group to be Added

    Of primary concern to NCUA is that quality credit union service be 
provided to all groups served by a federal credit union. Therefore, 
with respect to each field of membership addition, NCUA requires 
documentation from each group to be added stating that it desires 
service from the applying credit union.

II.C--Economic Advisability

    Prior to granting a field of membership addition, NCUA will examine 
the amendment's likely effect on the credit union's operations and 
financial condition and its likely effect on other credit unions. Most 
of the information needed for analyzing the effect of adding a 
particular group will already be available to NCUA through the 
examination and call reports; generally, nothing more will be needed. 
However, in particular cases, a regional director may ask for 
additional information prior to making a decision. With respect to a 
proposed addition's effect on other credit unions, the requirements on 
overlapping fields of membership set forth in Section IV.A.2 of Chapter 
1 apply here as well.

II.D--Documentation Required

    The documentation needed for community charter additions will vary 
substantially depending on the circumstances, and has been described in 
general terms above. For common bond and select group additions, which 
constitute the bulk of amendment requests, the procedures are more 
standardized. A federal credit union requesting such a change must 
submit a formal written request, using the Application for Field of 
Membership Amendment form shown in Appendix D, or its equivalent, to 
the appropriate NCUA regional director. The request must be signed by 
an authorized credit union representative.
    The Application for Field of Membership Amendment form must be 
accompanied by the following:
     A letter signed by an official representative of the group 
to be added. Wherever possible, this letter must be submitted on the 
group's letterhead stationery--regional directors may, at their 
discretion, however, accept such other documentation or certification 
as they deem appropriate. This letter must indicate:
     that the group wants to be added to the applicant federal 
credit union's field of membership;
     whether the group presently has any credit union service 
available;
     the number of persons currently included within the group 
to be added and their locations; and
     in the case of a select group addition, the group's 
proximity to one of the credit union's service facilities to which the 
group has access.
     If the group is eligible for membership in any other 
credit union, documentation must be provided to support inclusion of 
the group under the standards set forth in Section IV.B of Chapter 1.
     If the group to be included is an associational group, the 
credit union must, where required as established in Chapter 1, also 
provide a copy of the group's charter and bylaws defining the group's 
purpose, membership classes, and geographical area.

III--Additions Through Consolidation With Another Credit Union

    NCUA supports credit unions desiring to remain a separate entity. 
However, there are three other ways a federal credit union can expand 
its field of membership, two of which result in a credit union's 
ceasing to exist--by taking in the field of membership of another 
credit union through a merger or a purchase and assumption (P&A), or by 
taking a portion of a continuing credit union's field of membership 
through a spin-off. Spin-offs are discussed in Section VI of this 
Chapter.

III.A--Mergers

    Generally, the standards applicable to field of membership 
amendments apply to mergers where the continuing credit union is a 
federal charter. In particular, where the merging credit union is state 
chartered, the field of membership rules applicable to a credit union 
converting to a federal charter apply. However, there are some 
differences:
     As to a merger involving a common bond addition, the 
requirements to provide a request for credit union service from the 
corporate, associational, or other unit to be added is not required, 
since the unit already has credit union service.
     As to a merger involving a select group addition:
     For the same reason, the requirement for a letter from 
each group included in the credit union's field of membership is not 
required.
     Where a state credit union is merging into a federal 
credit union, the operational area requirement may be waived on a 
proper showing that the state credit union will continue to be able to 
provide quality credit union service to its current field of membership 
as a federal credit union. Upon merging, the state credit union's field 
of membership will be worded to conform to the NCUA standards set forth 
in Chapter 1. Any subsequent field of membership amendments must comply 
with applicable amendment procedures.
     As to a merger of a community credit union into a federal 
credit union of any type, the continuing credit union may be permitted 
to continue to provide service to the merging credit union's members of 
record as of the merger date where the operational area requirement is 
satisfied. Except in the case of an emergency merger, the continuing 
federal credit union can obtain only the members of record of the 
merging community credit union.
    Where both credit unions are community charters, the continuing 
credit union is a federal credit, and the criteria for expanding the 
service area of a community federal credit union (as discussed 
previously in this Chapter) are satisfied, the entire field of 
membership of the merging credit union may be added to the continuing 
federal credit union's charter.
    Mergers must be approved by all affected NCUA regional directors, 
and, as applicable, the state regulators.

III.B--Emergency Mergers

    A specifically designated emergency merger may be approved by NCUA 
without regard to field of membership or other legal constraints. An 
emergency merger involved NCUA's direct intervention. The credit union 
to be merged must either be insolvent or will likely become insolvent 
within 12 months and NCUA must determine that:
     an emergency requiring expeditious action exists
     other alternatives are not reasonably available
     the public interest would best be served by approving the 
merger
    In an emergency merger situation, NCUA takes an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any field of 
membership restrictions and without changing the character of the 
continuing federal credit union for future amendments. Under this 
authority, therefore, a federal credit union may take into its field of 
membership a group defined by a community or associational common bond 
permitted under state law, regardless of whether that common bond 
definition could be approved under the Federal Credit Union Act.

III.C--Purchase and Assumptions (P&A's)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a purchase and 
assumption (P&A).
    A P&A has limited application because the failing credit union must 
be placed into involuntary liquidation. However, in the few instances 
where a P&A may occur, the assuming federal credit union, as with 
emergency mergers, may acquire the entire field of membership along 
with specified loans, shares and certain other designated assets and 
liabilities, without regard to field of membership amendment 
restrictions and without changing the character of the continuing 
federal credit union for purposes of future field of membership 
amendments.
    P&A's involving federally insured state credit unions in different 
NCUA regions must be approved by all affected regional directors and, 
as applicable, the state regulators.

IV--Field of Membership Conversions

    A community federal credit union may convert to an occupational, 
associational, or multiple group credit union, and an occupational, 
associational, or multiple group credit union may convert to a 
community credit union. In any case, a change to the credit union's 
field membership will be necessary.

IV.A--Conversion to Occupational, Associational, or Multiple Group 
Federal Credit Union

    A community federal credit union converting to an occupational, 
associational, or multiple group field of membership must meet the 
common bond and economic advisability requirements applicable to the 
type of charter which it seeks conversion to.

IV.B--Conversion to Community Charter

    An existing occupational, associational or multiple group federal 
credit union may apply to convert to a community charter. In most 
cases, groups currently in the credit union's field of membership but 
outside the new community credit union's boundaries may be included in 
the new community charter.
    In order to support a case for a conversion to community charter, 
the applicant federal credit union must develop a detailed business 
plan incorporating the following data:
     Current financial statements, including the income 
statement and a summary of loan delinquency.
     A map or maps showing both the existing and proposed 
boundaries for the field of membership.
     A written description of the area of community service for 
the proposed community credit union.
     The most current population figures for the existing and 
proposed boundaries.
     The source of the population information; census data are 
considered the most authoritative; the greater the population of the 
proposed area, the greater justification necessary to support the 
existence of the ``community'' and interaction among its residents.
     Evidence in the form of surveys or letters from official 
representatives of prominent groups located in the area to be added 
showing that the persons who live, work, or worship in the area are 
interested in affiliating with the applicant credit union.
     Evidence that the proposed area is a ``community'' as 
defined in ``Community Common Bond'' in Chapter 1.
     Information concerning the availability of financial 
services to the residents of the new area.
     A list of credit unions with a home or branch office in 
the proposed area. (If present credit union service to the residents of 
the new area is adequate, there may be no basis for the proposed 
conversion.)
     The attitude of current credit union sponsors and existing 
credit union members toward the proposed conversion.
     The anticipated financial impact on the credit union in 
terms of need for additional employees and fixed assets.

V--Removal of Groups From the Field of Membership

    Credit unions may request removal of a group from its field of 
membership for various reasons.
    The most common reasons for this type amendment are:
     The group is within the overlapping field of membership of 
two credit unions and one wishes to discontinue service.
     The federal credit union cannot continue to provide 
adequate service to the group.
     The group has ceased to exist.
     The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support.
     The group initiates action to be removed from the field of 
membership.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the regional director will determine why 
the credit union wishes to remove the group and whether the existing 
members of the group will continue membership. Membership may continue 
for those who are already members if the credit union has adopted the 
``once a member, always a member'' bylaw provision.

VI--Spin-Offs

    A ``spin-off'' occurs when, by agreement of the parties, a portion 
of the field of membership, assets, liabilities, shares and capital of 
a credit union, are transferred to a new or existing credit union. A 
spin-off is unique in that one credit union has a field of membership 
addition and the other has a removal.
    If the spin-off goes to a new federal charter, the requirements of 
Chapter 1 apply. (See that chapter for discussion of the field of 
membership and documentation requirements for new federal charters.) If 
it goes to an existing federal charter, the requirements of Chapter 2 
apply.
    Spin-offs involving federally insured state credit unions in 
different NCUA regions must be approved by all affected regional 
directors and the state regulators, as applicable.
    The request for approval of a spin-off must be supported with a 
plan that addresses, as a minimum:
     Why the spin-off is being requested.
     What part of the field of membership is to be spun-off.
     Whether the affected credit unions have a common sponsor 
or are located within the same operational area.
     Which assets, liabilities, shares and capital are to be 
transferred.
     The financial impact the spin-off will have on the 
affected credit unions.
     The ability of the acquiring credit union to effectively 
serve the new members.
     The proposed spin-off date.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers--see 
Part 708 of the NCUA Regulations--except that only the members directly 
affected by the spin-off--those whose shares are to be transferred--are 
permitted to vote. Members whose shares are not being transferred will 
not be afforded the opportunity to vote. Voting requirements for 
federally insured state credit unions are governed by state statute.

VII--Professional Conflicts

    It is important for a credit union, as well as professional 
organizations such as accounting firms, law firms, real estate title 
insurance firms and appraisal firms, to avoid the appearance of 
impropriety when the credit union contracts with a professional 
organization for services. This is even more critical if the 
professional organization and/or its employees are members of the 
credit union.
    When a professional organization is added to a federal credit 
union's field of membership, the credit union should notify the 
professional organization of certain provisions. The following notice 
is intended to ensure that decisions made by a credit union and the 
professional organizations serving the credit union are independent of 
any loan decisions or deposit activities:
    ``Please be advised that with respect to the addition of the 
employees of [professional organization] to the [FCU], any lending, 
deposit and/or other credit union services involving this group's 
members must avoid any appearance of impropriety and must follow the 
ethical standards of the profession.''

VIII--Procedures for Amending the Field of Membership

VIII.A--General

    All requests for approval to amend a federal charter must be 
submitted to the appropriate regional director. In normal cases, the 
regional director will make a decision on the request within 10 
business days. If a decision cannot be made within that time, the 
regional director will notify the credit union within the 10-business-
day period.
    To streamline the process further, NCUA has instituted two 
additional procedures--a limited preapproval process and a procedure 
for easing the workload when making substantial charter changes as with 
mergers and charter conversions.

VIII.B--Streamlined Expansion Procedure (SEP) for Small Occupational 
Groups

    In keeping with the goals of NCUA chartering policy to provide 
service to all eligible groups desiring credit union service, well 
operated federal credit unions except those designated as 
``distressed'' may take advantage of the SEP for adding occupational 
groups to their fields of membership.
    To use this procedure, the federal credit union's board of 
directors must first apply to their respective NCUA regional director 
for a charter amendment. The charter amendment request must be signed 
by the presiding officer of the board of directors.
    The following is a sample amendment for permitting a federal credit 
union to use the SEP authority:
    Groups of persons with occupational common bonds which are located 
within 25 miles of one of the credit union's service facilities, which 
have provided a written request for service to the credit union, which 
do not presently have credit union service available, and which have no 
more members in the group than the maximum number established by the 
NCUA Board for additions under this provision: Provided, however, that 
the National Credit Union Administration may permanently or temporarily 
revoke the power to add groups under this provision upon a finding, in 
the Agency's discretion, that permitting additions under this provision 
are not in the best interests of the credit union, its members, or the 
National Credit Union Share Insurance Fund.
    Once NCUA has approved the amendment and the credit union board has 
adopted it, the SEP authority may be implemented. The charter amendment 
permits approved federal credit unions to immediately begin serving 
employee groups meeting criteria set forth in this section. Under this 
procedure, there is no formal NCUA action necessary on each group being 
added.
    The maximum number of persons for each group of employees which may 
be added under SEP will be established by the NCUA Board from time to 
time. The number will be based on potential primary members--that is, 
the persons sharing the basic occupational affinity to each sponsor 
group; family members and other derivative members are not included in 
the SEP limit. Several groups may be simultaneously added using these 
procedures; however, the maximum number of persons for each group must 
fall within the SEP limit.
    The SEP does not apply to associational groups since NCUA must 
review membership requirements and geographical area prior to these 
groups' being added to a field of membership. The procedure also does 
not apply to community charter expansions because of the more 
individualized analysis required.
    The following SEP steps and documentation requirements must be 
adhered to:
     The federal credit union must complete, for each group to 
be added, an Application for Field of Membership Amendment form shown 
in Appendix D
     The federal credit union must obtain a letter, on the 
group's letterhead where possible, signed by an official representative 
identified by title, requesting credit union service and stating that 
the group does not have any other credit union service available from 
any source
     The group must be located within 25 miles of one of the 
federal credit union's service facilities
     The group must indicate the number of potential members--
the number of employees--seeking service
     The federal credit union must maintain the above 
documentation permanently with its charter
     The federal credit union must maintain a control log of 
groups added to its field of membership under the SEP procedure. The 
control log must include the date the group obtained service, the name 
and location of the sponsor group, the number of potential primary 
members added, the number of miles to the nearest main or branch 
office, the federal credit union board of director's approval of the 
group and the date approved. See Appendix D for a sample control log.
     The groups added under SEP must be reported to the federal 
credit union's board at the next regular board meeting and made a part 
of the meeting minutes
     The control log and other SEP documentation must be made 
available to NCUA upon request
    The regional director may from time to time request service status 
reports on groups added under SEP. It is advisable to use some method, 
such as a sponsor prefix added to the member account number, to readily 
access data for such groups.
    Should a federal credit union fail to provide quality credit union 
service, as determined by the group's members or employees, to a group 
added under SEP, NCUA may subsequently permit dual membership with 
another credit union.
    Should a federal credit union fail to follow the above procedures 
or deteriorate financially or operationally, NCUA, at its discretion, 
may revoke the SEP privilege.

VIII.C--Block Additions

    When a state credit union is converting to a federal charter or 
when a credit union is being merged into a federal credit union, large 
blocks of select groups frequently are added to a credit union's field 
of membership. In such cases, the federal credit union whose field of 
membership is being revised should consult directly with the 
appropriate regional office early in the process to ensure the 
efficient treatment of such revisions and to avoid misunderstandings.
    Therefore, when a block of 50 or more new groups is being added to 
a credit union's field of membership at any one time, NCUA may require 
that a list of the groups and their locations be provided on a computer 
diskette. Director coordination with the appropriate NCUA regional 
office will ensure the compatibility of hardware and software.

VIII.D--Regional Director's Decision

    Except for those field of membership amendments resulting from use 
of the SEP, all such amendment requests will be reviewed by regional 
office staff in order to ensure conformance to NCUA policy, are 
properly documented, and do not cause significantly harmful or 
unreasonable overlap with the fields of membership of existing credit 
unions.
    NCUA understands and appreciates the importance of timely 
processing of well-supported amendment requests. Therefore, NCUA has 
established a goal of ten business days from the date of receipt in the 
regional office for processing of a routine, complete amendment 
request. A fully documented request, including the Application for 
Field of Membership Amendment, that fulfills all of the criteria 
discussed in this manual and does not require written or telephone 
follow-up will normally be processed within this time.
    In some cases, an on-site review by NCUA staff may be required by 
the regional director before acting on a proposed amendment. In 
addition, the regional director may, after taking into account the 
significance of the proposed field of membership amendment, require the 
applicant to submit a business plan.
    The condition of the requesting credit union will be considered in 
every instance. The economic feasibility of expanding the field of 
membership of a credit union with serious financial or operational 
problems must be carefully considered if the safety and soundness of 
the credit union is to be preserved.
    In most cases, field of membership amendments will only be approved 
for credit unions which are operating satisfactorily. If a federal 
credit union is having difficulty providing good service to its current 
membership, it may have even more difficulty serving an enlarged field 
of membership. In some cases, expanding the field of membership of a 
struggling credit union may do more harm than good. A struggling credit 
union's resources need to be focused on current problems. Placing an 
additional strain on these resources by increasing the field of 
membership may also increase the credit union's problems.

VIII.E--Regional Director Approval

    If the requested amendment is approved by the regional director, 
the credit union will be furnished a formal, updated Section 5 of its 
charter which restates the field of membership, including the requested 
amendment. After action by the board of directors, the form should be 
promptly filed with the credit union's official charter and bylaws.

VIII.F--Regional Director Disapproval

    Where a regional director disapproves any application, in whole or 
in part, under this chapter, the applicant will be informed in writing 
of the specific reasons for the action. Where applicable, the regional 
director will provide information concerning options or suggestions 
that could be considered for gaining approval.
    The denial letter will include the procedure for and other 
information on the credit union's right to appeal the decision.

VIII.G--Appeal of Regional Director Decision

    The procedures for filing an appeal of any actions taken by NCUA 
regional directors will be followed. If not included with the denial 
notice, a copy of these procedures may be obtained from the regional 
director who made the decision.
    The prospective group may submit substantive new and additional 
information to the regional director for reconsideration. In these 
cases, the request will not be considered as an appeal but as a request 
for reconsideration by the regional director. If the request is again 
denied, the group may proceed with the appeal process.

IX--Service Status Reports

    Federal credit unions which frequently add select groups to their 
fields of membership should be prepared to furnish a written summary of 
the results of their efforts to bring service to the employees or 
members of the select groups.
    The regional directors will periodically request that such federal 
credit unions submit service status reports to NCUA showing, at a 
minimum, the number of primary potential members of each select group 
added and the number of persons from each select group who have 
actually enrolled as credit union members.
    These service status reports can be enlarged to require information 
concerning aggregate share and loan activity by select group or 
participation in other credit union services.
    In any event, federal credit unions using the select group 
amendment method should implement an information gathering system early 
in their amendment/diversification program to track their progress in 
providing service to the potential members of their select groups.
    This information will help the credit union to operate more 
efficiently and will give management the data necessary to make 
decisions about marketing strategy, new promotions, implementation of 
new services, etc.
    The service status reports will enable NCUA to determine which 
federal credit unions are serving newly added groups, as well as any 
federal credit unions that are not serving new groups.
    If the NCUA determines that a federal credit union is not 
adequately serving new groups, the regional director may restrict 
further amendments and permit the groups not being adequately served to 
be overlapped with another federal credit union or remove the select 
group(s) not being served from Section 5 of the credit union charter.

CHAPTER 3--CHARTER CONVERSIONS

I--Introduction

    A charter conversion is a change in the jurisdictional authority 
under which a credit union operates. A credit union's charter is the 
instrument granted to the institution by the state or federal 
government.
    Federal credit unions receive their charters from NCUA and are 
subject to its supervision, examination, and regulation; they are 
incorporated under federal law.
    State-chartered credit unions are incorporated in a particular 
state, receiving their charter from the state agency responsible for 
credit unions and subject to the state's regulator. If the state-
chartered credit union's deposits are federally insured it will also 
fall under NCUA's jurisdiction.
    A federal credit union's power and authority are derived from the 
Federal Credit Union Act and NCUA Rules and Regulations. State-
chartered credit unions are governed by state law and regulation.
    There are two types of charter conversions--federal charter to 
state charter, and state charter to federal charter. Although common 
bond is not an issue from NCUA's standpoint in the case of a federal to 
state charter conversion, the procedures and forms relevant to such a 
conversion have been included.

II--Conversion of a State Credit Union to a Federal Credit Union

II.A--General Requirements

    Any state-chartered credit union may apply to convert to a federal 
credit union. In order to do so, it must:
     Comply with state law regarding conversion;
     File proof of compliance with NCUA;
     File the required conversion application, proposed federal 
credit union organization certificate and other documents with NCUA;
     Comply with the requirements of the Federal Credit Union 
Act, e.g., common bond and reserve requirements; and
     be granted a charter by NCUA.
    Conversions are treated the same as any initial application for a 
federal charter, including mandatory on-site examination by NCUA. NCUA 
will also consult with the appropriate state authority regarding the 
credit union's current condition, management expertise, and past 
performance. Since the applicant in a conversion is an ongoing credit 
union, the economic advisability of granting a charter is more readily 
determinable than in the case of an initial charter application.
    Generally, a converting state credit union's field of membership 
must conform to NCUA chartering policy. However, if a converting credit 
union can demonstrate that it has been effectively serving groups 
outside what would have been its operational area if it had been a 
federal credit union, the regional director, in his or her discretion, 
may permit continued service to these groups after conversion. Every 
reasonable effort will be made to phrase the field of membership 
similar to the presentations in Chapters 1 and 2 with individually 
listed groups and their locations. In any case, subsequent changes must 
conform to NCUA amendment policy in effect at that time.

II.B.--Submission of Conversion Proposal to NCUA

    The following actions are to be taken before submitting a 
conversion proposal:
     The credit union board must approve a proposal for 
conversion.
     The Application to Convert (NCUA 4401) must be completed. 
Its purpose is to provide the regional director with information on the 
present operating policies and financial condition of the credit union 
and the reasons why the conversion is desired. A continuation sheet may 
be used if space on the form is inadequate. Particular attention should 
be given to answering the question on the reasons for conversion. These 
reasons should be stated in specific terms, not as generalities.
     The application must be accompanied by all required 
attachments including the following:
     Written evidence that the state regulator is either in 
agreement with the conversion proposal or, if not in agreement, the 
reasons therefor.
     The Application for Insurance of Accounts (NCUA 9600) in 
the case of a state credit union that is not federally insured.
     The Application and Agreements for Insurance of Accounts 
(NCUA 9500).
     The Federal Credit Union Investigation Report, Conversion 
of State Charter to Federal Charter (NCUA 4000).
     The most current financial report and delinquent loan 
schedule.
     The Organization Certificate (NCUA 4008). Only Part (3) 
and the signature/notary section of page 4 should be completed and, 
where applicable, signed by the credit union officials. The NCUA 
regional office will complete the other sections of this document.

II.C--NCUA Consideration of Application to Convert

II.C.1--Review by the Regional Director
    The application will be reviewed to determine that it is complete 
and that the proposal is in compliance with Section 125 of the Federal 
Credit Union Act. This review will include a determination that the 
state credit union's field of membership is in compliance with NCUA's 
chartering policies. The regional director may make further 
investigation into the proposal and may require the submission of 
additional information to support the request to convert. At this 
point, NCUA will conduct an on-site review of the credit union.
II.C.2--On-Site Review
    NCUA will examine the books and records of the credit union on-
site. Non-federally insured credit unions will be assessed an insurance 
application fee.
II.C.3--Approval by the Regional Director and Conditions to the 
Approval
    The conversion will be approved by the regional director if it is 
in compliance with Section 125 of the Federal Credit Union Act and 
meets the criteria for federal insurance. Where applicable, the 
regional director will specify any special conditions that the credit 
union must meet in order to convert a federal charter, including 
changes to the credit union's field of membership in order to conform 
to NCUA's chartering policies. Some of these conditions may be set 
forth in a Letter of Understanding and Agreement (``LUA''), which 
requires the signature of the officials and the regional director.
II.C.4--Notification
    The regional director will notify both the credit union and the 
state regulator of the decision on the conversion.

II.D--Action by Board of Directors

II.D.1--General
    Upon being informed of the regional director's approval, the board 
must:
     Comply with all requirements of the state regulator that 
will enable the credit union to convert to a federal charter and cease 
being a state credit union;
     Obtain a letter or official statement from the state 
regulator certifying that the credit union has met all of the state 
requirements and will cease to be a state credit union upon its 
receiving a federal charter. A copy of this document must be submitted 
to the regional director;
     Obtain a letter from the share insurer, if applicable, 
certifying that the credit union has met all withdrawal requirements. A 
copy of this document must be submitted to the regional director.
     Submit a statement of the action taken to comply with any 
conditions imposed by the regional director in the approval of the 
conversion proposal and, if applicable, submit the signed LUA.
II.D.2--Application for a Federal Charter
    When the regional director has received evidence that the board has 
completed the actions described above, the federal charter and new 
Certificate of Insurance will be issued.
    The credit union may then complete the conversion as discussed in 
the following section. Denials are appealable. (See Chapter 1, section 
VIII.D.)

II.E--Completion of the Conversion

II.E.1--Effective Date of Conversion
    The date on which the regional director approves the Organization 
Certificate and the Application and Agreements for Insurance of 
Accounts is the date on which the credit union becomes a federal credit 
union. The regional director will notify the credit union and the state 
regulator of the date of the conversion.
II.E.2--Assumption of Assets and Liabilities
    As of the effective date, the federal credit union will be the 
owner of all of the assets and will be responsible for all of the 
liabilities and share accounts of the state credit union.
II.E.3--Board of Directors' Meeting
    Upon receipt of its federal charter, the board will hold its first 
meeting as a federal credit union. At this meeting, the board will 
transact such business as is necessary to complete the conversion as 
approved and to operate the credit union in accordance with the 
requirements of the Federal Credit Union Act and NCUA Rules and 
Regulations. Actions to be taken at this meeting include:
     Change of the credit union's name on all records, 
accounts, investments and other documents evidencing assets or 
liabilities of the credit union;
     Changes to the credit union's books and records:
     As of the commencement of business, the accounting system, 
records, and forms must conform to the standard established by NCUA;
     New journal and cash record and general ledger records 
should be set up. The general ledger accounts for the state credit 
union will be posted through the effective date of the conversion, and 
the new balances will be transferred to the new general ledger accounts 
of the federal credit union;
     The income and expense accounts of the state credit union 
will not be closed unless the conversion is at the close of an 
accounting period or is required by the state regulator; and
     The individual share and loan ledger accounts used by the 
state credit union may continue to be used.
    The federal credit union's name will be properly reflected on these 
accounts.
II.E.4--Reports to NCUA
    Within 10 business days after commencement of operations, the 
recently converted federal credit union must submit to the regional 
director the following:
     Report of Officials (NCUA 4501).
     Financial and Statistical Reports, (Forms FCU 109A, 109B, 
and 109F, or their equivalent) as of the commencement of business of 
the federal credit union.

III--Conversion of a Federal Credit Union to a State Credit Union

III.A--General Requirements

    Any federal credit union may apply to convert to a state credit 
union. In order to do so, it must:
     Notify NCUA prior to commencing the process to convert to 
a state charter and state the reason(s) for the conversion;
     Comply with the requirements of Section 125 of the Federal 
Credit Union Act that enable it to convert to a state credit union and 
to cease being a federal credit union; and
     Comply with applicable state law and the requirements of 
the state regulator.
    Particular attention should be given to answering the question on 
the reasons for conversion. These reasons should be stated in specific 
terms, not as generalities.

III.B--Special Provisions Regarding Federal Share Insurance

    If the federal credit union wants to continue federal share 
insurance after the conversion to a state credit union, it must submit 
an Application for Insurance of Accounts (NCUA 9600) to the regional 
director at the time it requests approval of the conversion proposal. 
The regional director has the authority to approve or disapprove the 
Application.
    If the converting federal credit union does not want to continue 
federal share insurance or if its application for continued insurance 
is denied, insurance will cease in accordance with the provisions of 
Section 206 of the Federal Credit Union Act.
    If, upon its conversion to a state credit union, the federal credit 
union will be terminating its federal share insurance or converting 
from federal to non federal share insurance, it must comply with the 
membership notice and voting procedures set forth in Section 206 of the 
Federal Credit Union Act and Part 708 of NCUA's Rules and Regulations.
    Where the state credit union will be non federally insured, federal 
insurance ceases on the effective date of the charter conversion. If it 
will be otherwise uninsured, then federal insurance will cease one year 
after the date of conversion subject to the restrictions in Section 
206(d)(1) of the Federal Credit Union Act. In either case, the state 
credit union will be entitled to a refund of the federal credit union's 
NCUSIF capitalization deposit and any unused portion of the federal 
insurance premium after the final date on which any of its shares are 
federally insured.
    The NCUA Board reserves the right to delay the refund of the 
capitalization deposit for up to one year if it determines that payment 
would jeopardize the NCUSIF.

III.C--Submission of Conversion Proposal to NCUA

    Upon approval of a proposition for conversion by a majority vote of 
the board of directors at a meeting held in accordance with the federal 
credit union's bylaws, the conversion proposal will be submitted to the 
regional director and will include:
     A current financial report;
     A current delinquent loan schedule;
     An explanation and appropriate documents relative to any 
changes in insurance of member accounts;
     A resolution of the board of directors;
     A proposed Notice of Special Meeting of the Members (NCUA 
4221);
     A copy of the ballot to be sent to members (NCUA 4506);
     Evidence that the state regulator is in agreement with the 
conversion proposal; and
     A statement of reasons supporting the request to convert.

III.D--Approval of Proposal to Convert

III.D.1--Review by the Regional Director
    The proposal will be reviewed to determine that it is complete and 
is in compliance with Section 125 of the Federal Credit Union Act. The 
regional director may make further investigations into the proposal and 
require the submission of additional information to support the 
request.
III.D.2--Conditions to the Approval
    The regional director will specify any special conditions that the 
credit union must meet in order to proceed with the conversion.
III.D.3--Approval by the Regional Director
    The proposal will be approved by the regional director if it is in 
compliance with Section 125 and, in the case where the state credit 
union will no longer be federally insured, the notice and voting 
requirements of Section 206 of the Federal Credit Union Act.
III.D.4--Notification
    The regional director will notify both the credit union and the 
state regulator of the decision on the proposal.

III.E--Approval of Proposal by Members

    Upon approval of the proposal by the regional director, the 
following actions will be taken by the board of directors:
     The proposal must be submitted to the members for approval 
and a date set for a vote on the proposal. The proposal may be acted on 
at the annual meeting, at a special meeting for that purpose, or by 
written ballot to be filed by the date set for the vote.
     Members must be given advance notice (NCUA 4221) of the 
meeting at which the proposal is to be submitted in accordance with the 
provisions of the Federal Credit Union Bylaws (Article V). The notice 
shall:
     Specify the purpose, time and place of the meeting;
     Include a brief and accurate statement of the reasons for 
and against the proposed conversion, including any effects it could 
have upon share holdings, insurance of member accounts, and the 
policies and practices of the credit union;
     Inform the members that they have the right to vote on the 
proposal at the meeting, or by written ballot to be filed not later 
than the date and time announced for the annual meeting, or at the 
special meeting called for that purpose;
     Be accompanied by a Ballot for Conversion Proposal (NCUA 
4506); and
     State in bold face type that the issue will be decided by 
a majority of members who vote.
     A copy of the notice of the meeting shall be delivered to 
the regional director at the same time that it is delivered to the 
members.
     The proposed conversion must be approved by a majority of 
all of the members who vote on the proposal, a quorum being present, in 
order for the credit union to proceed further with the proposition. 
Ballots cast by members who did not attend the meeting but who 
submitted their ballots in accordance with instructions above will be 
counted with votes cast at the meeting. In order to have a suitable 
record of the vote, the voting at the meeting should be by written 
ballot as well.
     The board of directors shall, within 10 days, certify the 
results of the membership vote to the regional director. The statement 
shall be verified by affidavits of the Chief Executive Officer and the 
Recording Officer on NCUA 4505.

III.F--Compliance With State Laws

    If the proposition for conversion is approved by a majority of all 
members who voted, the board of directors should then:
     Ensure that all requirements of state law and the state 
regulator have been accommodated;
     Ensure that the state charter or the license has been 
received within 90 days from the date the members approved the proposal 
to convert;
     Ensure that the regional director is kept informed as to 
progress toward conversion and of any material delay or of substantial 
difficulties which may be encountered.
    If the conversion cannot be completed within the 90-day period, the 
regional director should be informed of the reasons for the delay.

III.G--Completion of Conversion

    In order for the conversion to be completed, the following steps 
are necessary:
     The board of directors will submit a copy of the state 
charter to the regional director within 10 days of its receipt. This 
will be accompanied by the federal charter and the federal insurance 
certificate. A copy of the financial reports (FCU 109A and 109B) as of 
the preceding month-end should be submitted at this time.
     The regional director will notify the credit union and the 
state regulator is writing of the receipt of evidence that the credit 
union has been authorized to operate as a state credit union.
     The credit union shall cease to be a federal credit union 
as of the effective date of the state charter.
     If the regional director finds a material deviation from 
the provisions that would invalidate any steps taken in the conversion, 
the credit union and the state regulator shall be promptly notified in 
writing. This notice may be either before or after the copy of the 
state charter is filed with the regional director. The notice will 
inform the credit union as to the nature of the adverse findings. The 
conversion will not be effected and completed until the improper 
actions and steps have been corrected.
     Upon ceasing to be a federal credit union, the credit 
union shall no longer be subject to any of the provisions of the 
Federal Credit Union Act, except as may apply if federal share 
insurance coverage is continued. The successor state credit union shall 
be immediately vested with all of the assets and shall continue to be 
responsible for all of the obligations of the federal credit union to 
the same extent as though the conversion had not taken place. Operation 
of the credit union from this point will be in accordance with the 
requirements of state law and the state regulator.
     If the regional director is satisfied that the conversion 
has been accomplished in accordance with the approved proposal, the 
federal charter will be canceled.
     There is no federal requirement for closing the records of 
the federal credit union at the time of conversion or for the manner in 
which the records shall be maintained thereafter. The converting credit 
union is advised to contact the state regulator for applicable state 
requirements. The credit union shall neither use the words ``Federal 
Credit Union'' in its name nor represent itself in any manner as being 
a federal credit union.
     If the state credit union is to be federally insured, the 
regional director will issue a new insurance certificate.

Appendix A--Glossary

    These definitions apply only for use with this Manual. Definitions 
are not intended to be all inclusive or comprehensive. This Manual, the 
Federal Credit Union Act, and NCUA Rules and Regulations as well as 
state laws may be used for further reference.
    Appeal--The right of a credit union or charter applicant to request 
reconsideration of an unfavorable NCUA decision to a higher authority.
    Associational common bond--Association resulting from membership in 
an organization, participation in whose activities develops common 
loyalties, mutual benefits and mutual interests. The association should 
hold regular meetings and sponsor other activities that provide for 
contact among members.
    Associational credit union--A credit union whose field of 
membership consists primarily of persons who are members of one or more 
related associational groups.
    Business plan--Plan submitted by a charter applicant or existing 
federal credit union addressing the economic viability of a proposed 
charter or field of membership addition.
    Charter--The document which authorizes or combination of groups to 
operate as a credit union and defines the fundamental limits of its 
operating authority, generally including the persons the credit union 
is permitted to accept for membership. Charters are issued by the 
National Credit Union Administration for federal credit unions and by 
the designated state chartering authority for credit unions organized 
under the laws of that state.
    Commond bond--The characteristic or combination of characteristics 
which distinguishes a particular group of persons from the general 
public. There are only three common bonds which can serve as a basis 
for a group's forming or being included in a federal credit union: 
employment by the same enterprise (``occupational common bond''), 
membership in the same association (``associational common bond''), and 
residence, employment, or religious affiliation in the same geographic 
area (``community common bond'').
    Community common bond--Residence or employment of persons and 
businesses and other legal entities located within the same well-
defined neighborhood, community or rural district.
    Community credit union--A credit union whose field of membership 
consists of persons who live or work in the same well-defined 
neighborhood, community, or rural district.
    Conversion--The process of changing from a federal to a state or 
state to federal credit union charter.
    Credit union--A member-owned, not-for-profit cooperative financial 
institution formed to permit those in the field of membership specified 
in the charter to save, borrow, and obtain related financial services. 
Federal credit unions are chartered as corporations pursuant to the 
Federal Credit Union Act.
    Economic viability--An overall evaluation of the credit applicant's 
ability to operate successfully.
    Emergency merger--Pursuant to Section 205(h) of the Federal Credit 
Union Act, authority of NCUA to merge two credit unions without regard 
to field of membership policy.
    Exclusionary clause--A limitation, written in a credit union's 
charter, which precludes the credit union from serving a portion of a 
group otherwise included in its field of membership. Exclusionary 
clauses are used to prevent certain overlaps of fields of membership 
between credit unions.
    Federal share insurance--Insurance coverage provided by the 
National Credit Union Share Insurance Fund and administered by the 
National Credit Union Administration. Coverage is provided for 
qualified accounts in all federal credit unions and participating state 
credit unions.
    Field of membership--The persons (persons may include organizations 
and other legal entities) a credit union is permitted to accept for 
membership. A federal credit union's field of membership, set forth in 
Section 5 of its charter, may be made up entirely of a single group, 
related groups with one common bond, or of unrelated groups each having 
its own common bond.
    Letter of understanding and agreement--Agreement between NCUA and 
federal credit union officials not to engage in certain activities and/
or to establish reasonable operational goals. These are normally 
entered into with new charter applicants, and occasionally with credit 
unions granted significant charter amendments and are for a limited 
time.
    Merger--Absorption by one credit union of all of the assets, 
liabilities and equity of another credit union. Mergers must be 
approved by the National Credit Union Administration and by the 
Appropriate state regulator whenever a state credit union is involved.
    Multiple group credit union--A credit union whose field of 
membership consists of groups of persons, each group with its own 
common bond. The groups may be occupation, associational, or a 
combination thereof and do not need to share a common bond or be in any 
way related to one another.
    Occupational common bond--Employment in the same enterprise. 
``Employment'' includes long term contractual arrangements which are 
the practical equivalent of regular employment.
    Occupational credit union--A credit union whose field of membership 
consists primarily of persons employed in the same enterprise.
    Operational area--The region which, as determined by NCUA in its 
discretion, may reasonably be served by one of a credit union's service 
facilities.
    Overlap--The situation which results when a group is eligible for 
membership in more than one credit union.
    Potential membership--Persons eligible to become primary members of 
a federal credit union.
    Primary members--Members sharing the basic occupational, 
associational or community affinity to the field of membership.
    Purchase and assumption--Purchase of all or a part of the assets of 
and assumption of all or a part of the liabilities of one credit union 
by another credit union. The purchased and assumed credit union must 
first be placed into involuntary liquidation.
    Select group--An occupational or associational group with its own 
common bond.
    Secondary or derivative members--Members included in the field of 
membership by virtue of their close relationship to a common bond group 
(e.g., immediate family members, employees of the credit union, etc.).
    Service facility--A facility staffed by a credit union 
representative which accepts share deposit and accepts loan 
applications or disburses loans. An ATM or similar device is not a 
federal credit union service facility. Similarly, a branch or service 
center shared by a number of credit unions is not a service facility 
for purposes of meeting the operational area requirements of non-common 
bond expansions.
    Service status report--Periodic written statements made by federal 
credit unions to NCUA summarizing the results of efforts to bring 
service to the employees or members of select groups.
    Subscribers--For a federal credit union, at least seven individuals 
who sign the charter application and pledge at least one share.

Appendix B--Letter of Understanding and Agreement

To the Board of Directors and Other Officials
________ Federal Credit Union
    Since the purposes of credit unions are to promote thrift and to 
make funds available for loans to credit union members for provident 
and productive purposes, and since newly chartered credit unions do not 
generally have sufficient reserves to cover large losses on loans or 
meet unduly large liquidity requirements, Federal insurance coverage of 
member accounts under the National Credit Union Share Insurance Fund 
will be granted to the above named credit union subject to the 
conditions listed in this Letter of Understanding and Agreement and in 
the Organization Certificate and Application and Agreements for 
Insurance of Accounts. These terms are listed below and are subject to 
acceptance by authorized credit union officials.
    1. The credit union will refrain from soliciting or accepting 
brokered fund deposits from any source without the prior written 
approval of the Regional Director.
    2. The credit union will refrain from the making of large loans, 
that is, loans in excess of 5 percent of unimpaired capital and 
surplus, to any one member or group of members without the prior 
written approval of the Regional Director.
    3. The credit union will not establish or invest in a Credit Union 
Service Organization (CUSO) without the prior written approval of the 
Regional Director.
    4. The credit union will not enter into any insurance programs 
whereby the credit union member finances the payment of insurance 
premiums through loans from the credit union.
    5. Any special insurance plan/program, that is, insurance other 
than usual and normal surety bonding or casualty or liability or loan 
protection and life savings insurance coverage, which the credit union 
officials intend to undertake, will be submitted to the Regional 
Director of the National Credit Union Administration for written 
approval prior to the officials committing the credit union thereto.
    6. The credit union will prepare and mail to the district examiner 
financial and statistical reports as required by the Federal Credit 
Union Act and Bylaws by the 20th of each month following that for which 
the report is prepared.
    7. As the credit union's officials gain experience and the credit 
union achieves target levels of growth and profitability, the above 
terms and conditions may be renegotiated by the two parties.
    We, the undersigned officials of the __________ Federal Credit 
Union, as authorized by the board of directors, acknowledge receipt of 
and agree to the attached Letter of Understanding and Agreement dated 
__________ 19____.
    This Letter of Understanding and Agreement has been voluntarily 
entered into with the National Credit Union Administration. We agree to 
comply with all terms and conditions expressed in this Letter of 
Understanding and Agreement.
    Should the NCUA Board determine that these terms and conditions 
have not been complied with or that the board of directors or other 
officials have not conducted the affairs of the credit union in a sound 
and prudent manner, the NCUA Board may terminate insurance coverage of 
the credit union. If actions by the officials, in violation of this 
Letter of Understanding and Agreement, cause the credit union to become 
insolvent, the officials assume such personal liability as may result 
from their actions.
    The term of this Letter of Understanding and Agreement shall be for 
the period of at least 24 months from the date the credit union is 
insured. This Letter of Understanding and Agreement may, at the option 
of the Regional Director, be extended for an additional 24 months at 
the end of the initial term of this agreement.

    Dated this __________ day of __________ 19____.

NATIONAL CREDIT UNION ADMINISTRATION BOARD ON BEHALF OF THE NATIONAL 
CREDIT UNION SHARE INSURANCE FUND

----------------------------------------------------------------------
Regional Director

____________ Federal Credit Union

By:

----------------------------------------------------------------------
    Chief Executive Officer          Date

----------------------------------------------------------------------
Chief Financial Officer        Date

----------------------------------------------------------------------
    Secretary          Date

Appendix C--NCUA Offices

CENTRAL OFFICE
1775 Duke Street
Alexandria, VA 22314-3428
Commercial: 703-518-6300

REGION I--Albany
9 Washington Square
Washington Avenue Extension
Albany, NY 12205-5512
Commercial: 518-464-4180
FAX: 518-464-4195
Connecticut
Maine
Massachusetts
New Hampshire
New York
Rhode Island
Vermont

REGION II--Capital
1775 Duke Street, Suite 4206
Alexandria, VA 22314-3437
Commercial: 703-838-0401
FAX: 703-838-0571
Delaware
District of Columbia
Maryland
New Jersey
Pennsylvania
Virginia
West Virginia

REGION III--Atlanta
7000 Central Parkway, Suite 1600
Atlanta, GA 30328-4598
Commercial: 404-396-4042
FAX: 404-698-8211
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Mississippi
North Carolina
Puerto Rico
South Carolina
Tennessee
Virgin Islands

REGION IV--Chicago
4225 Naperville Road, Suite 125
Lisle, IL 60532-3658
Commercial: 708-245-1000
FAX: 708-245-1016
Illinois
Indiana
Michigan
Missouri
Ohio
Wisconsin

REGION V--Austin
4807 Spicewood Springs Road, Suite 5200
Austin, TX 78759-8490
Commercial: 512-482-4500
FAX: 512-482-4511
Arizona
Colorado
Iowa
Kansas
Minnesota
Nebraska
New Mexico
North Dakota
Oklahoma
South Dakota
Texas
Utah
Wyoming

REGION VI--Pacific
2300 Clayton Road, Suite 1350
Concord, CA 94520-2407
Commercial: 510-825-6125
FAX: 510-486-3729
Alaska
American Samoa
California
Guam
Hawaii
Idaho
Montana
Nevada
Oregon
Washington

Appendix D--NCUA Forms

NCUA4000--Conversion of State Charter to a Federal Charter--FCU 
Investigation Report
NCUA4001--FCU Investigation Report
NCUA9500--Application and Agreement for Insurance of Accounts
NCUA9501--Certification of Resolutions
NCUA4008--Charter
NCUA4009--Approval of Organization Certificate & Certification of 
Insurance
NCUA4012--Report of Official & Agreement to Serve
NCUA4401--Application To Convert from a State Credit Union to an FCU
NCUA4221--Notice of Meeting of Members
NCUA4505--Affidavit
NCUA4506--Ballot for Conversion Proposal
NCUA9600--Information to be Provided in Support of the Application 
of a State Credit Union for Insurance of Accounts
NCUA4015--Application for Field of Membership Amendment
NCUA4016--Streamlined Expansion Procedure (SEP) Control Log
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BILLING CODE 7537-01-C

Appendix E--Use of Outside Agents to Solicit Field of Membership 
Amendments and Members

Purpose

    This appendix addresses the National Credit Union Administration's 
(NCUA) experience with credit unions and arrangements whereby agents 
outside the organization of the credit union solicit credit union 
membership in conjunction with the sale of products or services. This 
section also provides guidelines for these arrangements.
    While these guidelines are not mandated by federal law or 
regulation, they do represent what the NCUA considers to be safe and 
sound policies and procedures to protect the credit union's assets. 
Since state laws vary, the guidance may not address every area. Thus, 
each credit union considering such ventures should obtain a written 
legal opinion from its counsel, as well as financial counseling from 
its normal sources.

Background

    As credit unions continue to grow and expand their fields of 
membership to select groups, there has been an increased interest by 
vendors in mutually beneficial relationships. These business dealings 
involve the vendor selling services or products and may also include 
the credit union's financing the sale of items. Generally, such 
arrangements operate as follows:
     The vendor contacts select group sponsors providing 
information on the credit union and the insurance or other product to 
be offered. Alternatively, credit unions may initiate relationships, 
typically with an automobile dealer, to finance autos. This is commonly 
called ``indirect lending''.
     The vendor assists the sponsor in requesting inclusion in 
the credit union's field of membership. With an indirect lending 
arrangement, the vendor may have the purchaser prepare a membership 
application and promptly submits the application, usually by a fax, to 
the credit union.
     After the field of membership amendment is approved by 
NCUA or the state regulator, the vendor arranges to meet with 
employees. In the case of individual membership applications, approval 
or denial by the credit union's membership officer is required prior to 
consideration of lending activity. Under no circumstances may a credit 
union provide membership services conditioned upon subsequent action 
approving membership.
     The vendor represents the credit union to the employees 
and enrolls them into membership in accordance with appropriate laws, 
regulations, and bylaws.
     The vendor explains the products or services being 
marketed and enrolls the employee in a program or plan. In the case of 
insurance plans, policies are typically paid by periodic installments, 
and frequently in one lump sum.
     The vendor arranges for payroll deductions to the credit 
union. If the employee has an insurance policy or some other plan with 
periodic installments, generally, the credit union's deduction is 
increased and arrangements are made for the credit union to forward the 
appropriate amount to the vendor's company.
    These arrangements have been beneficial to some credit unions and 
vendors. The credit union receives a service--solicitation of members--
free of charge. Membership increases and the credit union grows. The 
vendor has a marketing tool to complement its marketing program. 
Additionally, in the case of insurance vendors, if the credit union 
distributes the premiums or other payments directly to the vendor's 
company, the vendor's paperwork is greatly reduced.

Safety and Soundness Issues

    NCUA's experience in these arrangements has shown that potential 
risk to the credit union exists unless prior planning and internal 
controls are in place. NCUA has liquidated or taken administrative 
action in a number of credit unions in recent years when these controls 
were absent. Some unsafe and unsound practices are described below:
     The credit union did not investigate the vendor's or the 
vendor's company's reputation, financial soundness, or the authority to 
do business in the state where the credit union operated. In those 
cases where NCUA liquidated the credit unions, the companies or firms 
were of the fly-by-night variety, out to obtain quick profits in short 
periods of time. Dealing with well established and reputable firms is 
important if problems arise to member complaints. Additionally, in the 
event of suits against the company or firm, adequate financial standing 
can often mitigate the credit union's losses.
     The credit union did not review the programs or products 
offered to ``its'' new members. In several instances, the policies were 
life insurance policies or annuity contracts which called for annual 
premiums (normally paid by installments) over long periods of time--20 
to 30 years. While normal for such contracts, they generally called for 
limited reimbursement in the event of cancellation, for instance 20 
percent reimbursement, if canceled before one year, 45 percent, two 
years, 55 percent, three years, etc. Many members who enrolled in these 
contracts did not understand the terms. When they subsequently canceled 
the policy and received only a 20 percent return, they held the credit 
union responsible. While the credit union had no legal obligation, it 
presented public relation problems which could have been avoided.
     The credit union was unfamiliar with the sales techniques 
used by the vendor to enroll members into the credit union and in the 
vendor's programs. In the liquidated credit unions mentioned above, 
unethical methods were used to sign unsophisticated members. It was not 
uncommon to have them just sign blank forms which included a membership 
card, payroll deduction authorization, insurance policy, and a loan 
application and the first year's premium or other payment.
     The credit union did not provide written instructions to 
the vendor on procedures to enroll members. Thus the vendor contacted 
groups which the credit union was ill-equipped to serve.
     The credit union authorized the vendor to approve loans en 
masse to cover first year fees or insurance premiums. NCUA considers 
this an unsafe and unsound practice which will result in appropriate 
administrative action. In several liquidated credit unions which had 
arrangements with insurance vendors, employees were enrolled in the 
credit union, received a loan to pay the first year's premium and 
authorized payroll deductions.
    The reason the insurance agency proceeded in this manner was to be 
reimbursed immediately by the carrier for new policies. Such 
reimbursement ranged from 85 to 105 percent of the first year's 
premium. Thus an agency that enrolled just 100 new members for $500 per 
year insurance contracts could have received $42,500 to $52,500 in 
fees. This desire to obtain reimbursement clouded the vendor's 
objectivity and resulted in members having unwanted policies, which 
they generally canceled. At a minimum, since the policy holder received 
only 20 percent return on the policy, the credit union had a public 
relations problem collecting its exposed 80 percent. At the worst, the 
credit union had a loss loan.
     The credit union failed to obtain proper payroll deduction 
authorizations and authority to remit fees or insurance premiums to the 
company. In several cases, payroll deduction for all members, even 
those who chose not to enroll in the vendor's program, were sent to the 
company first. The company then sent the unauthorized fee or premium 
deductions to the credit union. This procedure exposed the credit union 
to misappropriation of funds by the company, to a potential surety 
problem, and to an uninsured status until the funds were received in 
the credit union.
     In another case, a vendor contracted with a credit union 
to assist credit union members select, locate, and negotiate the 
purchase or lease of automobiles. Members paid a fee to the vendor 
during the closing transactions. The vendor also provided marketing 
assistance to attract select employee groups into the credit union.The 
vendor was alleged to have falsified and concealed material facts and 
to have aided prospective credit union members in falsifying credit 
information to the credit union in attempts to obtain credit. In some 
cases the prospective member obtained possession of the automobile 
prior to being accepted as a member and in other cases prior to being 
approved for the financing. Other operational issues that have led to 
abuses are the following:
    (1) The dealer directly accepting the borrower's payments.
    (2) The dealer making payments on behalf of the borrower 
potentially disguising past due accounts.
    (3) The borrower/purchaser applying for the title potentially 
resulting in an improperly recorded lien.
    (4) The dealer financing the down payment thus allowing the 
borrower to have no stake in the collateral.
    (5) The credit union permitting or initiating overdrafts in the 
vendor reserve or holdback accounts. (Sometimes the credit union 
requires deposits from the dealer to be held by the credit union to 
better assure good faith performance by the vendor.)
    (6) The credit union placing full reliance on the dealer for credit 
checks.
    (7) Financing indirect loans that are out of the credit union's 
normal trade area.
    (8) The dealer adds costs to the purchase price, such as insurance, 
warranties, and taxes, thus leaving the borrower with no equity in the 
car, and the lender with an undercollateralized loan.
    (9) Dealers generate a large volume of loans in an attempt to 
overwhelm credit union staff in hopes that the weaker loans will be 
approved. (There are instances where dealers resubmit previously denied 
loans during peak periods in attempts to get them approved.)
    (10) The dealer inflates the purchase price or the trade in values, 
resulting in undercollateralized loans.
    (11) An increased potential for making loans to persons who are not 
eligible to be credit union members exists because of dealer 
involvement.
    (12) By allowing the dealer to negotiate the contract, including 
interest rates, there is a possibility of inequity among members.
    In many instances, the prospective credit union member was 
pressured to solicit his employer for inclusion into the credit union's 
field of membership. In certain of these instances, the employer group 
had existing credit union affiliation with another credit union. In 
certain other instances, the vendor indicated the prospective member 
was affiliated with a legitimate group in the credit union's field of 
membership, when, in fact, the person was not employed by the group. 
The vendor failed to properly complete required documentation for loans 
and lease agreements. In some cases the vendor indicated excessively 
high annual mileage limits in lease agreements.

Recommended Investigative Procedures

    Before entering into an agreement with a vendor acting as the 
credit union's agent in soliciting membership, a federally insured 
credit union should thoroughly investigate the impact of this action on 
its financial operations and condition; determine its legal 
liabilities; clearly define its moral responsibilities; and assure 
proper control of these activities. The following steps are 
recommended:
     Thoroughly investigate the financial condition of all 
corporations, partnerships or other entities involved in the 
activities. Obtain and review financial statements and credit reports, 
such as Dun and Bradstreet, on each entity. Consider the need for 
appropriate bonding by each company.
     Review the organizational structure and reputation of each 
entity. Included in the review should be a certification that each 
entity is authorized to do business in the state where the credit union 
is authorized to do business.
     Review and approve the contracts or policies to be 
offered. Since members may hold the credit union morally responsible 
for problems which may occur, the officials should consider the impact 
of each contract or policy on its public relations with members.
     Determine through a written legal opinion that all forms, 
documents and procedures used by the credit union to obtain membership, 
payroll deductions or to transfer funds to a vendor are legal and 
protect the credit union.
     Ascertain the credit union's liability under the Holder in 
Due Course rule.
     Determine the type of recourse agreement (full recourse, 
limited recourse or without recourse) that the credit union will enter 
into with the vendor.
     Develop cash flow and budget projections showing the 
effect of increased membership on the credit union's financial 
condition and ability to serve new members.
     Track by individual vendor, loans, loan delinquency and 
loan losses for each financing derived from the indirect lending 
relationship.
     Develop procedures to monitor the activities of vendors as 
discussed below under Agreements.
     Develop brochures and handouts to be presented to 
potential members. Among these should be a disclaimer that the credit 
union does not endorse the products or services and that the vendor can 
make no commitments regarding membership approval or the granting of 
loans. Other materials to be presented are discretionary by the credit 
union.
     Obtain written confirmation from surety that such 
activities are bondable.
     Ensure the individual in charge of indirect lending is 
experienced with indirect financing or contacts another credit union 
with experience in this type of lending.
     Start slow, utilizing only one or two reputable new car 
dealerships.

Agreements

    All arrangements with a vendor should be in writing and reviewed by 
credit union legal counsel. Such agreements should include, but not be 
limited to, the following:
     Scope of the vendor's authority to contact sponsors, such 
as limits on sponsor's assets, number of employees/potential members, 
financial condition, organizational structure, geographical location, 
and sponsor stability in the area.
     Procedures for the vendor to follow in contacting 
sponsors. These should require the vendor to present any product or 
service as separate and distinct from credit union membership and to 
state that inclusion in the field of membership is subject to 
regulatory approval. There should be absolute indication that the 
credit union is not endorsing any product or services marketed by the 
vendor.
     Procedures for vendors to follow once a sponsor is 
included in the credit union's field of membership.
     Procedures for automobile dealers to follow when shopping 
sales contracts to lenders.
     Understanding and agreements on fees or points paid to 
automobile dealers.
     Agreement that products or services to be offered and 
materials, brochures and handouts to be presented by the vendor are to 
be approved, in advance, by the credit union.
     Agreement that all approved brochures and handouts of the 
credit union will be distributed.
     Agreement that credit union representatives may accompany 
the vendor on contacts with sponsors and on membership enrollments.
     Agreement that the credit union may disqualify any vendor 
or vendor's representative from representing the credit union. 
Generally such an agreement will include a preliminary approval process 
as well as monitoring standards to include necessary credit union 
training.
     Procedures for auditing indirect lending activities with 
the dealer.
     Any other standard contractual agreements necessary to 
contract law.

Summary

    Credit unions and vendors can engage in mutually beneficial 
contractual agreements provided that adequate planning and internal 
controls are instituted. Credit unions engaging in these activities 
should plan, direct, and control these activities in a safe and sound 
manner.

Appendix F--Trade Associations

Credit Union National Association (CUNA), P.O. Box 431, Madison, WI 
53701, 608-231-4000
National Association of Federal Credit Unions (NAFCU), 3138 N. 10th 
Street, Suite 300, Arlington, VA 22201, 703-522-4770
National Association of State Credit Union Supervisors (NASCUS), 
1901 North Fort Myer Drive, Suite 201, Arlington, VA 22209, 703-528-
8351
National Federation of Community Development Credit Unions (NFCDCU), 
120 Wall Street, 10th Floor, New York, NY 10005-3902, 212-809-1850

[FR Doc. 94-12119 Filed 6-2-94; 8:45 am]
BILLING CODE 7535-01-M