DATE: August 7, 1998
LETTER NO.:98-CU-16
TO: The Board of Directors and Management of the Federally insured Credit Union
SUBJECT: The Credit Union Membership Access Act of 1998
The Credit Union Membership Access Act of 1998, HR 1151, was signed
into law by the President on August 7, 1998. This Act authorizes
multiple group chartering for Federal credit unions, and makes
other important changes in the Federal Credit Union Act. In many
cases those changes affect all federally insured credit unions.
The purpose of this letter is to provide you with information
about the contents of the 1998 Act, the implementation dates for
the various provisions of the Act, and the rules that will apply
in the interim. There are four titles to the Act. Each is addressed
separately below.
TITLE I - CREDIT UNION MEMBERSHIP
Title I re-authorizes multiple group chartering for Federal credit
unions. Specific criteria and procedures different from those
under NCUA's previous multiple group policy will now apply. Title
I also limits new community charter applications to well-defined
"local" communities, and requires that NCUA define the
term "immediate family member" for membership eligibility
purposes. Title I applies only to Federal credit unions.
Title I is not self-implementing; NCUA must issue implementing
rules. This will be done in the form of a new Chartering and
Field of Membership Manual. One of our first priorities under
HR 1151 will be to issue a proposed new Chartering Manual for
public comment. The proposed Manual will be distributed to all
Federal credit unions for comment, most likely with a 30 or 60-day
comment period. The NCUA Board expects to issue this proposal
August 31st.
After the comment period and a period to evaluate the comments,
the new Manual should be in effect within 4 to 6 months from the
date of enactment. Also, the final effective date for the definitions
of "immediate family member" and well-defined "local"
community may take somewhat longer because they are designated
by HR 1151 as major rules which must be submitted to Congress
60 days in advance of their effective date.
For the multiple group authority and other provisions of Title
I, the following guidelines apply until final new rules are in
place:
First, all persons and groups already included within your Federal
credit union's field of membership as of August 7, 1998 (the date
of enactment of HR 1151), are grandfathered by the Act. This
means you may continue to serve those groups and add new members
without interruption. You may not, however, add new select groups
until the new chartering rules take effect.
Second, with respect to "family member" eligibility,
your Federal credit union may continue to add family members under
your existing bylaw until the new rules are in place.
Third, with respect to community charter conversions, if your
credit union had an application pending as of August 7, 1998 to
convert to a Federal community charter, your application will
be processed pursuant to NCUA's existing policies. (If your Federal
credit union has an application to convert to a Federal community
charter pending, and you wish to withdraw it in view of Congress'
re-authorization of multiple group charters, please notify your
NCUA regional office.) Any new applications to convert to a Federal
community charter or to form a community Federal credit union
can be processed only after the new rules defining "local"
community are in effect.
Fourth, if your Federal credit union is considering a voluntary
merger with another credit union, you must wait until the new
rules are in effect unless the credit unions share a single common
bond.
Fifth, applications to convert to state charter are unaffected
by the new law.
Finally, with respect to Title I, if your credit union wishes
to expand by serving a low-income community, you must wait until
the new implementing rules are in place, unless you are a community
credit union that has already submitted its application as of
August 7, 1998.
TITLE II - REGULATION OF CREDIT UNIONS
Title II imposes new requirements on federally insured credit
unions with respect to: financial statements and audits; member
business loans; and conversions to mutual savings bank or savings
association charter.
Financial Statements and Audits
Title II establishes three important new requirements with respect
to financial statements and audits. First, all federally insured
credit unions with assets of $500 million or more must obtain
an annual independent audit by a certified public accountant or
state licensed accountant. Second, all federally insured credit
unions with assets of $10 million or more must follow generally
accepted accounting principles for all "reports or statements
required to be filed with the [NCUA] Board." Third, for
any Federal credit union with assets of more than $10 million
that uses "an independent auditor who is compensated for
his services," the audit is subject to state accounting laws,
"including licensing requirements."
The first of the three provisions should not present any problems
as virtually all credit unions with over $500 million in assets
already obtain an annual CPA audit. The other two provisions
will require NCUA to revise its accounting guidelines. We will
need to revise our forms for financial statements and reports
and address interpretive issues, such as what constitutes an "independent
auditor who is compensated." We will issue further guidance
as soon as possible, and we will carefully coordinate with the
state supervisory authorities. Meanwhile, your credit union may
use the forms and methods currently prescribed. For Federal credit
unions that have an audit planned or underway using a compensated
outside auditor, if you have concerns about the new requirements
related to state law and licensing, we recommend that you consult
with your auditor and your NCUA regional office.
Member Business Loans
Title II imposes a new aggregate limit on a credit union's outstanding
member business loans of the lesser of 1.75 times the credit union's
net worth or 12.25% of the credit union's total assets. Net worth
is all of your retained earnings. Retained earnings normally
includes undivided earnings, regular reserves and any other reserves.
This limit applies immediately to both Federal and federally
insured state credit unions. Member business loans are defined
in accordance with Section 701.21(h)(1) of NCUA's current regulation.
Thus, for example, if total business loans to one member are
less than $50,000, those loans are not considered member business
loans and they are not counted against the new aggregate limit.
There are three circumstances where a credit union may qualify
for an exception from the aggregate limit. The three exceptions
are: (1) credit unions that have a limited income designation
or participate in the Community Development Financial Institutions
program; (2) credit unions that have "a history of primarily
making member business loans;" and (3) credit unions that
were "chartered for the purpose of ... primarily making member
business loans."
As of August 7, 1998, unless your credit union qualifies for an
exception, you will not be able to make additional member business
loans if you exceed the aggregate limit or the loan would cause
you to exceed the limit. You will, however, have until August
7, 2001, to bring your existing loans within the limit. The NCUA
will provide interim rules or additional guidance on this issue
at its September 23, 1998, meeting, at the latest. However, in
the meantime, if you believe in good faith that you are covered
by an exception, you should memorialize that fact and you may
make additional member business loans. We are working closely
with the state regulators on this issue. If you have any questions
at this time, please contact your NCUA regional office or your
state regulator.
Conversion to Mutual Savings Bank or Savings Association Charter
Title II restricts NCUA's authority to regulate conversions by
insured credit unions to mutual savings bank or mutual savings
association charters. Such conversions may take place "without
the prior approval of the [NCUA] Board," as long as the transaction
is approved by the Board of Directors of the credit union and
by a majority of the members who choose to vote. Title II establishes
requirements for notice to members and NCUA, and NCUA's regulatory
role is limited to oversight and approval of voting "methods"
and "procedures".
NCUA is required to have implementing rules in place for the new
conversion provisions within 6 months after enactment of HR 1151.
Until those new rules are in effect, NCUA's existing rules will
apply. Proposed rules will be issued for public comment this
fall. Also, while these provisions of HR 1151 with respect to
conversions apply to all federally insured credit unions, they
only affect NCUA's authority and do not appear to restrict the
ability of the states to regulate conversions by state credit
unions, whether or not federally insured. NCUA will work carefully
with the state supervisory authorities in developing the required
new rules.
TITLE III - CAPITALIZATION AND NET WORTH OF CREDIT UNIONS
New Capital Requirements and Prompt Corrective Action
Title III establishes a new system of tiered capital requirements
for all insured credit unions other than corporate credit unions.
These new requirements do not take effect until 2 years after
the date of enactment of HR 1151 - August 7, 2000. Congress has
closely modeled these requirements on provisions that have existed
in federal banking law for the last several years.
A new net worth standard of 7% of assets will be established for
insured credit unions, as well as risk-based capital standards
for "complex" credit unions as defined by NCUA (the
risk-based standards will not take effect until January 1, 2001).
For credit unions not meeting these standards, progressively
more stringent "prompt corrective action" requirements
will apply. The lower the credit union's net worth the more stringent
the actions become. For example, all credit unions with less
than 7% net worth, and any complex credit union not meeting the
risk-based standards, will be required to make a reserve transfer.
Credit unions with less than 6% net worth, and any complex credit
union not meeting the risk-based standards, will be required to
implement a "net worth restoration plan." Administrative
actions will apply to credit unions below 4% net worth and to
"complex" credit unions below 5% and not meeting risk-based
standards. A separate system of prompt corrective action must
be developed for "new credit unions." For this purpose,
"new credit unions" are defined as credit unions that
have been in operation for 10 years or less and have less than
$10 million in assets.
Again, these new provisions, which are mandated by Congress, are
not effective until August of 2000 and January of 2001. Implementing
rules will be issued well in advance of these dates. Final rules
must be issued within 18 months, with the exception of final rules
concerning risk-based capital for complex credit unions, which
must be issued within 2 years. Also, proposed rules must be issued
for public comment within 270 days, and an advance notice of proposed
rulemaking concerning risk-based capital for complex credit unions
must be issued within 180 days. NCUA will work carefully with
the state supervisory authorities in developing these rules, and
there will be full public participation. Until the new provisions
are in effect, all insured credit unions should continue to operate
under the capital requirements and standards of their existing
laws and regulations.
National Credit Union Share Insurance Fund
Title III revises the provisions of the Federal Credit Union Act
concerning the National Credit Union Share Insurance Fund's equity
ratio and NCUA's premium and dividend authority, effective January
1, 2000.
NCUA will be required to use the most current Fund equity and
insured share data in determining the equity ratio. NCUA will
have the discretion to set the "normal operating level"
of the Fund, or the desired equity level, between 1.2 and 1.5%.
NCUA will also monitor the Fund's "available assets"
ratio --the ratio of liquid Fund assets to total insurance liabilities--
and will pay a dividend only when the available assets ratio exceeds
1% and the equity ratio exceeds the normal operating level.
Also, if the Fund's equity ratio declines below 1.2%, a premium
will be required in the amount necessary to restore the ratio
to 1.2%. Premiums will be assessed at times determined by the
NCUA Board, but no more than twice a year. Finally, insured credit
unions with $50 million or more in assets will be required to
adjust their 1% Insurance Fund deposit semi-annually, rather than
annually.
Again, these changes with respect to the Insurance Fund do not
take effect until January 1, 2000. NCUA will issue proposed rule
changes for public comment in early 1999, and final rules in advance
of the effective date.
TITLE IV - MISCELLANEOUS PROVISIONS
Title IV has no immediate effect on credit unions. Title IV requires
the Treasury Department to conduct three new studies addressing
first, the differences in regulation of credit unions and other
financial institutions and the potential effects of taxation on
credit unions; second, recommendations to reduce and simplify
the tax burden on small depository institutions; and third, member
business lending by insured credit unions. The Treasury Department
must complete each of these studies and report to Congress within
1 year after enactment of HR 1151. Also, pursuant to Title IV,
NCUA and the other financial institution regulators must submit
reports to Congress, within 1 year after enactment, on our progress
in implementing the 2-year regulatory review that was mandated
by the Riegle Community Development and Regulatory Improvements
Act of 1994.
CONCLUSION
We hope this letter provides your credit union with useful information
concerning what to expect from HR 1151 and the relevant time frames.
To further assist in that regard, we have attached a table showing
the major regulations required and the expected implementation
time frames. Our first priority at NCUA is the rulemaking process
that is necessary in order to re-authorize multiple group chartering.
Our second is to implement the other provisions of the legislation
within all established time periods.
We are committed to full public participation, including participation
by credit unions and their representatives, in all rulemaking
and policy decisions related to HR 1151. We are committed to
working carefully with the state supervisory authorities on all
matters affecting federally insured state credit unions. Copies
of the legislation and other related materials can be found on
NCUA's web site at www.ncua.gov.
If you have any questions concerning this letter or other issues
related to HR 1151, please contact your NCUA regional office or
your state supervisory authority.
Enclosure
ISSUE | EFFECTIVE DATE OF HR 1151 PROVISION | TARGET DATE FOR PROPOSED RULES | TARGET DATE FOR FINAL RULES |
1. Multiple group authority and other FOM changes | No delayed effective date, but not self-implementing | August 31 NCUA Board meeting | 4-6 months |
2. Member business loans | Cap effective immediately for new loans, unless an exception is met | Interim rules or guidance at September 23, 1998, NCUA Board meeting | Early 1999 |
3. Conversion to savings bank charter | Implementing rules must be issued within 6 months | Fall 1998 | On or before February 7, 1999 |
4. Capital and prompt corrective action -general | August 7, 2000 | May 1999 | February 2000 |
5. Capital and prompt corrective action - risk based capital | January 1, 2001 | February 1999-Advance Notice of Proposed Rule-making | August 7, 2000 |
6. National Credit Union Share Insurance Fund equity ratio and premium authority | January 1, 2000 | Early 1999 | Fall 1999 |