On May 1, 2014, the National Credit Union Administration (the “NCUA”) published in the Federal Register a proposed rule to amend the associational common bond provisions of Appendix B to 12 C.F.R. Part 701, Chartering and Field of Membership Manual (the “Proposal”). Specifically, the amendments would (1) establish a threshold requirement that an association not be formed primarily for the purpose of expanding credit union membership, (2) expand the criteria in the totality of the circumstances test used to determine whether an association qualifies for inclusion in a federal credit union’s field of membership, and (3) establish pre-approved groups that the NCUA has determined automatically satisfy the associational common bond provisions.
The Federal Credit Union Act (the “FCU Act”) provides for three types of federal credit union (“FCU”) charters: single common bond (occupational or associational); multiple common bond; and community. An FCU’s field of membership (“FOM”) consists of those persons and entities eligible for membership for each type of charter. Moreover, the Chartering and Field of Membership Manual states that a single common bond FCU consists of one group having a common bond of occupation or association, and a multiple common bond FCU consists of more than one group, each of which has a common bond of occupation or association. The Proposal only affects the requirements for associational common bonds.
New Threshold Requirement
Currently, the NCUA determines whether an association is eligible to be included in an FCU’s FOM by applying the totality of the circumstances test. The Proposal would establish a threshold requirement, in addition to the totality of the circumstances test, focusing on the purpose for which the association is formed. Specifically, the NCUA will evaluate whether the association was formed “primarily for the purpose of expanding credit union membership.” If the NCUA makes such a determination, the application will be rejected. Alternatively, if the NCUA determines that the association was formed for a separate purpose, it will proceed to apply the totality of the circumstances test to make a final determination of whether the association meets the associational common bond requirements. Importantly, the Proposal states that an association must be in operation for at least one year prior to applying for inclusion in an FCU’s FOM.
Expanded Totality of the Circumstances Test
The second step in the NCUA’s amended evaluation process is a revised totality of the circumstances test. The Proposal expands the number of criteria considered in the current test from seven to eight. The proposed eighth criterion would be whether there is corporate separateness between the association and the FCU. The Proposal specifically lists the following five factors that the NCUA will consider in evaluating this particular criterion:
- The association’s and FCU’s business transactions, accounts, and records are not intermingled;
- Each observes the formalities of its separate corporate procedures;
- Each is adequately financed as a separate entity in light of the normal obligations reasonably foreseeable in a business of its size and character;
- Each is held out to the public as a separate enterprise; and
- The group maintains a separate physical location.
The proposed totality of the circumstances test would remain consistent with the current test in that no one factor would be determinative of the membership eligibility of an association and that all of the factors would be considered together.
Finally, the Proposal would provide for automatic qualification to certain categories of groups that have been previously approved by the NCUA. The NCUA stated that such automatic approval would ease regulatory burdens for FCU’s that desire to add those certain categories of associations, thereby allowing for more efficient use of NCUA resources. The Proposal provides a definitive list of pre-approved associations:
- Alumni associations;
- Religious organizations, including churches or groups of related churches;
- Electric cooperatives;
- Homeowner associations;
- Labor unions;
- Scouting groups; and
- Associations that have a mission based on preserving or furthering the culture of a particular national or ethnic origin.
The Proposal may prove helpful to FCUs exploring the possibility of expanding their FOM through associational common bonds by providing greater insight into the NCUA’s evaluation process and their likelihood of receiving regulatory approval. To that end, the NCUA stated that it expects that the Proposal would simplify the process of evaluating the existence of qualifying associational common bonds and that it does not believe the Proposal would add significant administrative burdens on FCUs.
Credit Unions interested in expansion of their FOM – associational, occupational or community – may contact any of the authors of this alert for more detailed guidance. Credit Unions interested in commenting on the Proposal must submit comments on or before June 30, 2014.