[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Rules and Regulations]
[Pages 36667-36671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10134]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending its field of membership rules regarding 
service to underserved areas to limit underserved area additions to 
multiple common-bond credit unions and revise facility requirements for 
underserved areas. These amendments are being made after a 
comprehensive review of chartering policy based upon NCUA's experience 
addressing field of membership issues and the uncertainty resulting 
from recent litigation challenging service to underserved areas in Utah 
and the current ambiguity in the Federal Credit Union Act on this 
issue. This final rule will ensure continued reliable and efficient 
service to federal credit union members located in approved underserved 
areas and continue to allow multiple common-bond credit unions to add 
underserved areas to their charters. The final rule generally adopts 
the amendments as proposed. In addition, the final rule retains the 
definition of service facility as a credit union owned facility where 
shares are accepted for members' accounts, loan applications are 
accepted, and loans are disbursed.

DATES: Effective July 28, 2006

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Deputy General 
Counsel, John K. Ianno, Senior Trial Attorney, or Regina Metz, Staff 
Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, 
Virginia 22314 or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    NCUA's chartering and field of membership policy is set out in 
NCUA's Chartering and Field of Membership Manual (Chartering Manual), 
Interpretive Ruling and Policy Statement 03-1. 68 FR 18333, Apr. 15, 
2003. The policy is incorporated by reference in NCUA's regulations at 
12 CFR 701.1. On December 29, 2005, the NCUA Board issued a moratorium 
suspending that portion of its chartering policy allowing non-multiple-
common-bond credit unions to add new underserved areas. After 
establishing a moratorium, the NCUA conducted a comprehensive review of 
its underserved area policy.
    On January 19, 2006, the NCUA Board approved a proposed rule 
regarding service to underserved areas. 71 FR 4530, Jan. 27, 2006. The 
NCUA proposed two amendments that would apply only prospectively. The 
first proposed change was to limit the addition of new underserved 
areas to only multiple common-bond credit unions. The second proposed 
change was to the definition and location of the service facility. When 
adding underserved areas, NCUA proposed requiring a physical presence 
in the underserved areas to assure better service to members in these 
locations and deleting the choice of a credit union owned electronic 
facility with certain functions as a service facility.

B. Comments

    NCUA welcomed general comments on the proposed rule and also on all 
aspects of NCUA's rules on credit unions serving underserved areas. In 
addition to seeking general comments on the proposed rule, the Board 
specifically sought comments on a series of questions related to the 
impact of the proposed changes on consumers and credit unions. The 
comments were

[[Page 36668]]

intended to assist the Board in understanding what, if any, impact the 
proposed changes would have on credit unions that have expended 
resources investing in underserved areas. The Board is concerned that 
there is both financial and reputation risk if credit unions, 
previously authorized to operate in underserved areas, are prohibited 
from continuing to do so. The Board is also concerned that the proposed 
changes could limit the ability of credit unions to grow and expand 
services into underserved areas and provide needed financial assistance 
to consumers of modest means who do not currently have access to low 
cost financial services and undermine the viability of the federal 
credit union charter.
    NCUA received 49 comment letters in response to the proposed rule: 
31 from federal credit unions, one from a state-chartered credit union, 
12 from credit union trade organizations, three from bank trade 
organizations, one from an individual, and one from an institute. Most 
credit union commenters opposed the proposal and support the status 
quo. One commenter believes the proposal contradicts congressional 
intent by only allowing multiple common-bond credit unions to add 
underserved areas. In contrast, some credit union commenters 
appreciated NCUA's concerns and supported the proposal. Whether opposed 
to or in favor of the proposal, most credit union commenters support a 
legislative solution amending the Federal Credit Union Act to expressly 
state that all federal credit unions may add underserved areas. Bank 
trade group commenters generally supported the proposal and, in some 
cases, recommended further requirements for credit unions serving 
underserved areas.
    The NCUA Board asked for specific comments on the following five 
questions.
    (1) NCUA's authority to permit expansions into underserved areas 
for all three federal charter types.
    With the exception of the bank trade groups, almost all commenters 
expressed the opinion that NCUA has the authority to allow all three 
charter types to add underserved areas. Six commenters support the 
continuation of the moratorium and understand the basis for NCUA's 
proposal in this area given the current litigation. Almost all credit 
union commenters suggest that NCUA seek a statutory change to the 
Federal Credit Union Act in order to insert express language 
authorizing this activity.
    Credit unions are leaders among financial institutions in providing 
affordable financial services to persons within their specific field of 
membership, including people of modest means. The Board is committed to 
assuring that credit unions have the regulatory tools necessary to 
perform this important role. One of the primary purposes of the Credit 
Union Membership Access Act (CUMAA) was to codify the legality of 
multiple common-bond credit unions. CUMAA also reflects Congress' 
intent to clarify that this new charter type was authorized to add 
underserved areas. Unfortunately, the statutory language does not 
expressly provide that authority to the other two charter types 
although there is legislative history that indicates Congress intended 
that all types of federal credit unions should be able to add 
underserved areas. This absence of specific statutory language, when 
considered together with the specific authorization for multiple 
common-bond credit unions, creates uncertainty about the continued 
authority of non-multiple common-bond credit unions to serve 
underserved areas. Though most commenters argued that the Board has the 
authority to authorize the other charter types to serve underserved 
areas, they provided no persuasive argument to address the issue 
created by the absence of any specific statutory language. In addition, 
recently the American Bankers Association and others have filed 
litigation challenging the authority of a non-multiple common-bond 
credit union to serve underserved areas in Utah.
    In light of this uncertainty, the Board is amending its chartering 
policies to allow only multiple common-bond credit unions to serve 
underserved areas pending clarification of the language contained in 
the Federal Credit Union Act that authorizes the addition of 
underserved areas. The amendments to the chartering policy will apply 
only prospectively. The NCUA Board agrees a statutory change is 
necessary.
    (2) The impact of limiting expansions into underserved areas to 
only multiple common-bond credit unions.
    Several credit union commenters described the negative impact on 
both credit unions and consumers of limiting underserved expansions to 
multiple common bond credit unions. Commenters wrote that low-income 
individuals and those who most need credit union service will receive 
less service. A couple of commenters wrote that there will be less 
competition. One commenter said there will be a negative impact on the 
dual chartering system and that some federal credit unions will convert 
to state charters.
    The Board agrees that restricting further expansions has the 
potential to limit the availability of credit union services to some 
consumers. Nevertheless, the Board has concluded that there are many 
opportunities for continued growth and expanded service to consumers 
within existing fields of membership, even with a change to chartering 
policies limiting prospective addition of underserved areas to multiple 
common-bond credit unions. The Board concludes that the ambiguity 
arising from the statute as well as the current litigation outweighs 
the potential harm to credit unions and potential members.
    (3) Whether, if only multiple common bond credit unions are 
permitted to add underserved areas, they should be permitted to retain 
these areas in the event they change charter type.
    Almost all credit union commenters who commented on this issue 
support permitting multiple common-bond credit unions to retain their 
underserved areas if they change charter types. The banking trade group 
commenters oppose credit unions retaining the areas.
    Given that the final rule will not permit non-multiple common-bond 
credit unions to serve underserved areas, the Board concludes that, 
upon conversion to another charter type, the restrictions applicable to 
the new charter type must apply. Therefore, a multiple common-bond 
credit union converting to either a single common-bond or community 
charter would be required to give up its underserved areas. The credit 
union could continue to serve its existing members. This approach is 
faithful to the requirements of this final rule which prospectively 
permits only multiple common-bond credit unions to serve underserved 
areas. It is also consistent with the approach taken when a multiple 
common-bond credit union converts to a community credit union. In those 
circumstances, a credit union must comply with the requirements of the 
new charter type and relinquish its select employee groups.
    The Board is aware that certain unpredictable factors, such as 
economic downturns and plant closings, could cause a multiple common-
bond credit union to convert its charter type. While the loss of 
underserved areas in these circumstances may seem harsh, the Board 
concludes that the credit union must balance the potential impact of 
the loss with other factors relevant to a decision on its charter type. 
Part of the consideration regarding whether a charter change makes good 
business sense should necessarily include the fact that, once a 
multiple common-bond credit union changes its charter, it will lose its 
underserved areas.

[[Page 36669]]

    (4) The type and extent of existing investment by non-multiple 
common bond credit unions in underserved areas including for example, 
capital investment, loans, share deposits, and other programs targeting 
low income people.
    The Credit Union National Association, a credit union trade group, 
provided a comprehensive list of investments by non-multiple common-
bond credit unions in underserved areas. Credit unions described 
investments in branch offices and ATMs, their involvement through 
loans, deposit products, services, and community involvement and 
charitable services in underserved areas. This information is discussed 
further in connection with question 5 below.
    (5) The impact to members of underserved areas, and non-multiple 
common-bond credit unions, of restrictions on the addition of new 
members in underserved areas they are currently serving.
    Almost all credit union commenters on this question believe the 
restrictions would have a negative impact. A few credit unions wrote 
they might have to close branches and would suffer economic loss. 
Several credit unions requested they be ``grandfathered'' so that they 
can continue to add new members from the underserved areas they 
currently serve.
    The information provided establishes that many credit unions have 
invested significant funds, totaling in excess of 400 million dollars, 
and other resources into serving more than 800 underserved areas. This 
investment includes the establishment of hundreds of branches in and 
near underserved areas. Activity by credit unions in these areas 
indicates the significance of their services to their financial well 
being and the needs of their membership. It includes billions of 
dollars in loans and share deposits.
    Generally, regulations are prospective in nature. Bowen v. 
Georgetown Hospital, 488 U.S. 204, 216 (1988) (Scalia, J., concurring). 
In considering the equities of applying a rule retroactively courts 
will consider such factors as the degree of hardship parties would 
experience, whether reliance on past regulation was justifiable and any 
statutory interest in retroactive application of the new rule. See, 
e.g., Consolidated Freightways v. N.L.R.B., 892 F.2d 1052, 1058 (D.C. 
Cir. 1989) citing Tennesee Gas Pipeline Co. v. FERC, 606 F.2d 1094, 
1115, 1116 n.77 (D.C. Cir. 1979), cert. denied, 445 U.S. 920 (1980).
    Application of these principles to this rule demonstrate that the 
equities favor prospective application.
    The comments received demonstrate that there has been significant 
financial investment by credit unions in reliance on NCUA's existing 
rule. These investments were made with the expectation that service 
would be available to all potential members in the underserved areas. 
Prohibiting the addition of new members would limit growth in these 
areas, expose the institutions to significant hardship through 
increased financial and reputation risk, and could cause safety and 
soundness concerns. Existing members would also suffer as a result of 
the diminished services that would result if further membership growth 
was prohibited.
    It is also clear that reliance by credit unions on NCUA's 
regulation permitting these expansions was justified. NCUA has 
authorized all federal credit unions, regardless of charter type, to 
add underserved areas since 1994. Prior to the passage of the CUMAA in 
1998 these areas were referred to as underserved communities.
    With the passage of CUMAA, NCUA made significant changes to its 
chartering policies but again reiterated that all charter types were 
permitted to add underserved areas. In the preamble to the regulatory 
changes implementing CUMAA, the Board noted that the new legislation 
specifically authorized flexible policies regarding multiple common-
bond credit unions providing service to underserved areas. At that time 
we also encouraged all credit unions to continue service to poor and 
disadvantaged areas and indicated that previous policy permitting all 
charter types to serve underserved areas would continue. IRPS 99-1, 63 
FR 71998, 72016 (Dec. 30, 1998). Credit unions reasonably relied on 
these policy statements by this Board.
    In short, investment by credit unions in underserved areas has 
occurred in reliance on long-standing NCUA policies that authorized and 
indeed encouraged such activity. Members in underserved areas have 
benefited from low cost financial services made available as a result 
of these efforts. They have become members in reliance upon NCUA policy 
that authorized credit union expansion into these areas. Credit unions 
that have invested in these areas have done so based on economic 
assumptions that included continued growth in membership. If continued 
growth is no longer possible, credit unions will be unable to sustain 
the current level of services provided in these areas. This could 
result in diminished or lost services to existing members.
    On balance therefore, the Board concludes that the equities support 
only prospective application of this rule. Credit unions, regardless of 
charter type, that were serving underserved areas at the time the 
proposed rule was issued should be permitted to continue to serve those 
areas to include adding new members. To require them to do otherwise, 
given their reasonable reliance on NCUA's policy as well as their 
substantial investments, would cause substantial harm to the credit 
unions, their members, and potential members in the underserved area.
    Regarding the service facility location, many commenters opposed 
NCUA's proposal to require a physical presence in the underserved area 
and recommend keeping the status quo. Some opposing commenters believe 
NCUA has the authority to require a credit union to locate a service 
facility in or near an underserved area. Some commenters believe the 
location of a branch is a business decision for the credit union to 
decide. Some commenters believe NCUA should focus on the level of 
service to the underserved area, not whether the branch is within the 
area, and one commenter noted that the Community Reinvestment Act does 
not require branches in an area and allows banks to provide service via 
ATMs and computers. Another commenter supported a specified distance 
from the underserved area to the service facility's location rather 
than requiring it to be in the underserved area.
    A commenter wrote that the service facility should not have to be 
in an underserved area within two years if there is public 
transportation to the service facility or is an acceptable distance 
from the underserved area. The same commenter suggested the proposed 
definition of local community should be revised to be 50 miles for 
heavily populated urban areas and 200 miles for lightly populated rural 
areas. The commenter believes common interests and interaction should 
be removed as they are no longer valid or necessary due to credit 
reports.
    Several commenters supported the service facility requirement as 
proposed, requiring a service facility be within the underserved area. 
A couple of commenters specifically mentioned that a physical presence 
ensures a credit union is serving the area.
    A banking trade group commenter wrote that NCUA should require 
credit unions serving underserved areas to establish a service facility 
in that area within one year. Another banking trade group wrote that 
NCUA should require a credit union to establish the service

[[Page 36670]]

facility in the area upon approval of the expansion.
    The NCUA Board finds that a service facility physically located in 
the underserved area assures better service to members in these 
locations. A credit union can build a better relationship and 
understanding of the needs of the community by having a physical 
presence in the area. By doing so the credit union will be better able 
to assess the needs of the underserved area and provide needed services 
to its members. NCUA believes requiring establishment of a service 
facility within two years of the credit union's addition of the area is 
reasonable and is retaining it. In addition, the Board has decided to 
retain as an option for an acceptable type of service facility within 
the underserved area, a credit union owned facility where shares are 
accepted for member accounts, loan applications are accepted, and loans 
are disbursed.

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a regulation may have on a 
substantial number of small credit unions (primarily those under $10 
million in assets). The final amendments will not have a significant 
economic impact on a substantial number of small credit unions and 
therefore, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    The Office of Management and Budget control numbers assigned to 
Section 701.1 are 3133-0015 and 3133-0116. NCUA has determined that the 
amendments will not increase paperwork requirements and a paperwork 
reduction analysis is not required.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The final rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this rule would not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act of 1999, Pub. L. 105-277, 112 
Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. NCUA is recommending the Office of 
Management and Budget determined that this rule is not a major rule for 
purposes of the Small Business Regulatory Enforcement Fairness Act of 
1996.

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements

    By the National Credit Union Administration Board on June 22, 
2006.
 Mary Rupp,
 Secretary of the Board.

0
For the reasons stated in the preamble, the National Credit Union 
Administration amends 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601, et seq., 42 U.S.C. 1981 and 3601-3610. Section 
701.35 is also authorized by 12 U.S.C. 4311-4312.


0
2. Section 701.1 is revised to read as follows:


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

    National Credit Union Administration policies concerning 
chartering, field of membership modifications, and conversions are set 
forth in Interpretive Ruling and Policy Statement 03-1, Chartering and 
Field of Membership Manual, as amended by IRPS 06-1, Copies may be 
obtained on NCUA's Web site, http://www.ncua.gov, or by contacting NCUA 
at the address found in Section 790.2(c) of this chapter.

(Approved by the Office of Management and Budget under control 
number 3133-0015 and 3133-0116.)


0
3. IRPS 03-1, Chapter 3, Section III.A is revised to read as follows:

    Note: The text of the IRPS 06-1 does not appear in the Code of 
Federal Regulations.

    A multiple common-bond federal credit union may include in its 
field of membership, without regard to location, communities satisfying 
the definition of underserved areas in the Federal Credit Union Act. 
Adding an underserved area will not change the charter type of the 
multiple common-bond federal credit union. More than one multiple 
common-bond federal credit union can serve the same underserved area. 
The Federal Credit Union Act defines an underserved area as a local 
community, neighborhood, or rural district that is an ``investment 
area'' as defined in Section 103(16) of the Community Development 
Banking and Financial Institutions Act of 1994.
    For an underserved area, the well-defined local community, 
neighborhood, or rural district requirement is met if:
     The area to be served is in a recognized single political 
jurisdiction, i.e., a city, county, or their political equivalent, or 
any contiguous portion thereof;
     The area to be served is in multiple contiguous political 
jurisdictions, i.e. a city, county, or their political equivalent, or 
any contiguous portion thereof and if the population of the requested 
well-defined area does not exceed 500,000; or
     The area to be served is a Metropolitan Statistical Area 
(MSA) or its equivalent, or a portion thereof, where the population of 
the MSA or its equivalent does not exceed 1,000,000.
    If the area to be served does not meet the MSA or multiple 
political jurisdiction requirements outlined above, the application 
must include documentation to support that it is a well-defined local 
community, neighborhood, or rural district.
    For an underserved area, an investment area includes any of the 
following, as reported in the most recently completed decennial census 
or equivalent government data:
     An area that wholly consists of or is wholly located 
within an Empowerment Zone or Enterprise Community designated under 
section 1391 of the Internal Revenue Code (26 U.S.C. 1391);

[[Page 36671]]

     An area where the percentage of the population living in 
poverty is at least 20 percent;
     An area in a Metropolitan Area where the median family 
income is at or below 80 percent of the Metropolitan Area median family 
income or the national Metropolitan Area median family income, 
whichever is greater;
     An area outside of a Metropolitan Area, where the median 
family income is at or below 80 percent of the statewide non-
Metropolitan Area median family income or the national non-Metropolitan 
Area median family income, whichever is greater;
     An area where the unemployment rate is at least 1.5 times 
the national average;
     An area meeting the criteria for economic distress that 
may be established by the Community Development Financial Institutions 
Fund (CDFI) of the United States Department of the Treasury.
    In addition, the local community, neighborhood, or rural district 
must be underserved, based on data considered by the NCUA Board and the 
Federal banking agencies.
    Once an underserved area is added to a Federal credit union's field 
of membership, the credit union must establish and maintain an office 
or service facility in the community within two years. A service 
facility is defined as a place where shares are accepted for members' 
accounts, loan applications are accepted and loans are disbursed. This 
definition includes a credit union owned branch, a shared branch, a 
mobile branch, an office operated on a regularly scheduled weekly 
basis, or a credit union owned facility that meets, at a minimum, these 
requirements. This definition does not include an ATM or the credit 
union's Internet Web site.
    The Federal credit union adding the underserved community must 
document that the community meets the definition for serving 
underserved areas in the Federal Credit Union Act. Adding an 
underserved community does not change the charter type of a multiple 
common-bond federal credit union. In order to receive the benefits 
afforded to low-income designated credit unions, such as expanded use 
of nonmember deposits and access to the Community Development Revolving 
Loan Program for Credit Unions, a credit union must receive low-income 
designation pursuant to 12 CFR 701.34.
    A Federal credit union that desires to include an underserved 
community in its field of membership must first develop a business plan 
specifying how it will serve the community. The business plan, at a 
minimum, must identify the credit and depository needs of the community 
and detail how the credit union plans to serve those needs. The credit 
union will be expected to review the business plan regularly to 
determine if the community is being adequately served. The regional 
director may require periodic service status reports from a credit 
union about the underserved area to ensure that the needs of the 
community are being met as well as requiring such reports before NCUA 
allows a multiple common-bond Federal credit union to add an additional 
underserved area.

[FR Doc. E6-10134 Filed 6-27-06; 8:45 am]
BILLING CODE 7535-01-P