McWatters statement on Associational Common Bond Final Rule
Statement by J. Mark McWatters
NCUA Board Meeting
April 30, 2015
Associational Common Bond Final Rule
Although it is my understanding that NCUA has undertaken to revise the current “field of membership” (FOM) rules so as to provide the credit union community with much needed regulatory relief, that aspiration is not reflected in the Associational Common Bond Final Rule (Final Rule) before the Board today. If credit unions are in any manner abusing the Associational Common Bond FOM rules, as presently in effect, NCUA should promptly, aggressively, and decisively address those breaches under the Federal Credit Union Act (FCUA) and existing NCUA promulgated regulations. NCUA should, in accordance with objective, transparent, and well-recognized standards of due process, investigate and cause any “bad apples” to cease and desist any activity that is contrary to the FCUA and the Associational Common Bond FOM rules and regulations as in effect today. The Final Rule – except for the regulatory relief offered in the preapproval process – accomplishes little except to increase the regulatory burden on the vast bulk of credit unions that remain in full compliance with the letter and the spirit of the Associational Common Bond rules.
In dissenting from the adoption of the Final Rule I wish to offer my thoughts concerning additional regulatory relief for the credit union community that is not incorporated in the Final Rule.
- Threshold Requirement. For purposes of qualifying for membership in a federal credit union (FCU) under the current FOM rules, NCUA determines if a group satisfies the Associational Common Bond requirements by applying a “totality of the circumstances test” (Totality of the Circumstances Test), which centers on a detailed multi-factor analysis. Under the Final Rule (as well as the Associational Common Bond April 2014 Proposed Rule (Proposed Rule)), NCUA has undertaken to incorporate a new burdensome “threshold requirement” (Threshold Requirement) that credit unions must satisfy before they are permitted to run the gauntlet of the Totality of the Circumstances Test.
The Threshold Requirement prohibits the addition of an association to a FCU’s FOM unless the association was not formed for the “primary purpose” of expanding the FCU’s membership. The “primary purpose” requirement appears subjective and duplicative of the more objective and transparent elements of the Totality of the Circumstances Test. Those who operate FCUs most assuredly appreciate that this requirement injects yet more uncertainty and time delay into the FOM regulatory process. One of the key goals of true regulatory relief is to lessen uncertainty and the ability of the regulator to operate in a less than transparent and fully accountable manner.
- Corporate Separateness. The Final Rule (as well as the Proposed Rule) also increases the regulatory burden associated with the Totality of the Circumstances Test by adding an additional factor of “corporate separateness” to the mix. Adding the new item of “corporate separateness” to the Totality of the Circumstances Test confuses substance and form and accomplishes little except to increase the cost of incorporating an association into a FCU’s FOM.
- Pre-Approved Associations. Although the Final Rule expands the list of groups pre-approved for Associational Common Bond status, notable omissions remain. In my view, the pre-approved list should also include – subject to reasonable and transparent limitations – any section 501(c)(3) nonprofit organization, as well as any other legitimate association that has operated for not less than five years. The expansion of the pre-approved list to include these organizations would constitute true regulatory relief for the credit union community.
- Quality Assurance Review and Removal Process. The quality assurance review and removal process contained in the Final Rule raises due process concerns. I remain troubled by any such rule that does not incorporate resilient standards of objective transparency, a meaningful period for a FCU to cure or remedy any non-compliance issue after written and timely notice from NCUA, and a formal rule-based and fair minded process by which a FCU may appeal any adverse determination by NCUA. The Final Rule states that quality assurance review and removal “are intended to protect the integrity of NCUA’s FOM requirements, not disrupt a FCU’s ability to serve its members or hamper a FCU’s ability to thrive.” Without the incorporation of meaningful due process standards into the Final Rule or, at a minimum, into regulatory guidance, these words offer modest comfort to the credit union community.
- Geographic Limitations. The Final Rule provides that NCUA was not “seeking to impose geographic limitation on associational groups, similar to the geographic limitation placed on multiple common bond FCUs” and that the “Board reiterates that the Chartering Manual clearly states that single Associational Common Bond FCUs do not have geographic limitation.” Nevertheless, in my view, it is imperative that NCUA address the geographic limitation/reasonable proximity rules applicable to multiple common bond credit unions. Today, a common bond may form, develop, and prosper among both disparate and homogenous groups over an iPhone or other device in a seamless manner regardless of the physical location of the participants. NCUA’s failure to act on the antiquated geographic limitation/reasonable proximity rules will place FCUs at a distinct competitive disadvantage to their peers.