UNITED STATES OF AMERICA
BEFORE THE NATIONAL CREDIT UNION ADMINISTRATION
In the Matter of
FEDERAL CREDIT UNION
Docket No. BD-01-23
Decision and Order on Appeal
This matter comes before the National Credit Union Administration Board (Board) as an administrative appeal under 12 C.F.R. Part 746, Subpart B. The appeal concerns the determination by the Director of the Office of Credit Union Resources and Expansion (CURE) to deny the application for a federal charter for proposed XXXX (XXXX).
XXXX, organizer for XXXX (Petitioner), has requested administrative review of the denial of his application for a federal charter for XXXX to serve “persons who live, work, worship or attend school in, businesses and other legal entities located in XXXX, XXXX,” a community with a population size of over 5 million.
Phase 1 – Proof of Concept
The purpose of the Proof of Concept (POC) phase is to determine whether organizing groups have addressed four critical elements before submitting a charter application: (1) purpose and core values; (2) field of membership (FOM); (3) capital; and (4) subscribers.
July 11, 20221 Submission. On July 11, 2022, CURE received a Phase 1 – POC and Field of Membership Preapproval submission indicating Petitioner’s interest in establishing a federal credit union to serve the community of XXXX, XXXX.
After reviewing Petitioner’s initial POC submission, CURE determined the group “did not provide adequate information to support moving forward to Phase 2 of the chartering process.” Specifically, CURE determined that the group did not provide enough information for it to sufficiently assess any of the four critical elements. Accordingly, in a letter dated July 27, 2022, CURE directed Petitioner to resubmit for further review updated POC information “[w]hen you are able to demonstrate all four critical elements and provide supporting documentation.”
July 28, 2022 Submission. On July 28, 2022, CURE received updated POC information from Petitioner. Again, however, Petitioner failed to provide sufficient information for CURE to determine if the group met critical element 1 (purpose and core values) and critical element 4 (subscribers). As such, on August 18, 2022, CURE notified Petitioner of the outstanding deficiencies, and again urged Petitioner to resubmit his POC information when able to demonstrate all four critical elements.
August 19, 2022 Submission. On August 19, 2022, CURE received from Petitioner a third POC submission. This time, Petitioner included supporting documentation that provided sufficient detail to demonstrate all four critical elements necessary to meet the requirements of Phase 1 of CURE’s review. Thus, on August 29, 2022, CURE invited Petitioner to proceed to Phase 2 of the chartering process by “submitting a full and complete charter application.”
In addition, CURE determined that Petitioner’s proposed FOM met the definition of a well-defined local community as defined in Appendix B to Part 701—Chartering and Field of Membership Manual (Chartering Manual), and preliminarily approved the FOM for the proposed credit union to read as follows:
"The field of membership shall be limited to those in the following community:
'Persons who live, work, worship, attend school, and businesses and other legal entities located in XXXX, XXXX;
Spouses of persons who died while within the field of membership of this credit union; employees of this credit union; volunteers in the community; members of the immediate family or household; and organizations of such persons'"
Phase 2 – Federal Charter Application
September 26, 2022 Application. On September 3, 2022, Petitioner sent a draft application via email to CURE staff asking “if [staff] could look over everything and tell me if I am missing anything or is there anything else I should include?” After being told by staff informally that there were multiple “items of concern” outstanding in the draft application, Petitioner reworked the application and formally submitted a revised version to CURE on September 26, 2022.
CURE began a preliminary review of Petitioner’s September 26, 2022, application packet for completeness. This routine preliminary step is conducted prior to a full review of a new charter application to ensure its completeness before CURE expends significant resources analyzing the sufficiency of documents submitted for its review. This preliminary review found that only one of the nineteen Phase 2 documentation requirements were met (mission statement). Multiple required items were determined to be entirely missing from the application packet. Of the documentation that was included in the packet, staff noted that the documents provided “scant detail,” lacked “meaningful information,” were sometimes “written in a confusing and non-binding manner,” and in certain areas “woefully insufficient.” Staff also preliminarily noted that, although they would “hold off on further review until a substantially complete packet is submitted,” a “cursory review” of the pro forma financial statements that were included with Petitioner’s submission “noted significant weaknesses.”
Accordingly, CURE issued a letter of incompleteness on October 6, 2022, notifying Petitioner that his application was deferred and CURE was “unable to proceed with a full review of the federal credit union charter application submitted on September 23, 2022, because the application is not substantially complete.” The letter included an attachment with guidance on the documentation required to move forward to a full application review.
October 18, 2022 Application. Petitioner resubmitted an updated charter application to CURE on October 18, 2022. CURE resumed its preliminary review of Petitioner’s second application packet but determined that only two of the nineteen Phase 2 documentation requirements were met (mission statement and complete NCUA Form 4001). Again, staff noted multiple required items were missing, the application lacked sufficient detail, or was otherwise inadequate. As such, CURE issued a second letter of incompleteness on October 27, 2022, notifying Petitioner that his application was again deferred until the application packet was substantially complete. The second letter included an attachment with guidance on the documentation required to move forward to a full application review.
October 31, 2022 Application. CURE received a third application from Petitioner on October 31, 2022. Presumably, CURE staff quickly identified continuing deficiencies, and, accordingly, sent an email to Petitioner on the same date acknowledging receipt of his October 31, 2022, resubmission, and pointing Petitioner to additional guidance on the documentation requirements in the Chartering Manual (including a link to the manual online). The email also directed Petitioner to further information on the required written credit union policies and samples of various required documents, such as the membership survey, the NCUA’s standard FCU bylaws, pro forma financial statement projections, and a marketing calendar.
Meanwhile, CURE resumed its preliminary review of Petitioner’s third application packet and determined that, again, only two of the nineteen Phase 2 documentation requirements were met. CURE staff again noted multiple required items were missing, the application lacked sufficient detail, or was otherwise inadequate. CURE issued a third letter of incompleteness on November 15, 2022, notifying Petitioner that his application was again deferred until the application packet was substantially complete. The third letter also included an attachment with guidance on the documentation required to move forward to a full application review.
November 22, 2022 Application. Petitioner resubmitted a fourth application on November 22, 2022. While the fourth application remained incomplete, CURE moved forward with a more substantive review of the application. On February 8, 2023, CURE staff reached out to Petitioner via email to schedule a meeting to discuss his application. CURE staff met with Petitioner via videoconference on February 23, 2023.
CURE issued a fourth letter on February 23, 2023, again deferring review because the application remained incomplete, and still lacked certain basic information and documentation to allow CURE to move forward with its full review. At that time, CURE also asked that Petitioner only resubmit the application when all the issues and concerns discussed in its prior letters had been addressed.
The February 23, 2023, deferral letter emphasized “[t]his is the fourth application submitted and despite repeated requests, we still have not received adequate information to determine whether the XXXX would be economically viable.” The letter also stated that “[o]verall, the information provided does not meet the requirements outlined in Appendix B to Part 701.” Additionally, the letter indicated Petitioner’s submitted business plan was “not commensurate with the population size (over 5 million people) of the community XXXX is planning to serve and therefore, we recommend you consider a smaller geographic area.”
In this fourth deferral letter, CURE provided a clear explanation about the outstanding deficiencies and included detailed instruction about what was needed to move the application forward. The fourth letter again urged Petitioner to review all relevant chartering guidance and encouraged Petitioner to continue seeking help from the XXXX Credit Union League and obtain assistance from a mentor credit union.
March 24, 2023 Application. CURE received a fifth application from Petitioner on March 24, 2023, and, after determining that the application “still lack[ed] sufficient information, and ha[d] substantial deficiencies,” CURE issued a letter on April 17, 2023, denying Petitioner’s application for a federal charter. The denial letter noted that, “despite repeated requests, you have not provided adequate information for us to determine whether the XXXX would be economically advisable for a federal charter as required in the Federal Credit Union Act §1754 and insurance of accounts as required in §1781(c)(1)(B).” CURE’s denial letter cited numerous deficiencies in Petitioner’s charter application, including:
- Inadequate survey information to demonstrate an ability to support the proposed community field of membership;
- Insufficient market conditions analysis in the business plan;
- Failure to address in the business plan terms and conditions, rates, use of third-party vendors, and other key details supporting the products and services the proposed credit union plans to offer;
- Failure to provide goals for shares, loans, and the number of members for the proposed credit union;
- Failure to provide names and resumes for the proposed credit union officials and employees;
- Lack of information about a training plan for officials and staff, and the role/function of each official or staff, including their relative knowledge, skills, and abilities;
- Lack of continuity and succession plans for directors, committee members, and staff;
- Inadequate information about the physical location for the proposed credit union, and any associated expenses for operating and maintaining a credit union facility;
- Insufficient information about the proposed credit union’s recordkeeping and data processing systems and the associated costs;
- Lack of a formal estimate for required surety bond coverage;
- Lack of pro forma financial projections to demonstrate how the credit union will operate independently, under any scenario or timeframe;
- Lack of a detailed marketing plan for at least the first two years of operations;
- Materially deficient and erroneous pro forma financial projections that are inconsistent with a credit union business model;
- Incomplete and incorrect credit union bylaws;
- Lack of written policies in the business plan; and
- Insufficient information and support as to the identity or qualifications of credit union mentors and other supporters.
CURE’s denial letter concluded that Petitioner did not provide sufficient information and documentation to allow it to make “fundamental determinations” about whether there was adequate interest among the potential credit union members to promote thrift; the general character and fitness of the credit union’s management; the projected financial condition of the credit union at start-up or during the first two years of operations; and whether the draft or approved credit union policies and written procedures adequately address risk, and safety and soundness.
On April 27, 2023, Petitioner appealed CURE’s determination to the Board, requesting administrative review of CURE’s decision to deny the application for a federal charter for XXXX. Petitioner also filed a request for an oral hearing on the matter; however, the Board denied that request on May 17, 2023 for lack of good cause for an oral presentation. If a request for an oral hearing is denied, the Board reviews and determines an appeal based on the written record.2
Petitioner submitted very little material information and no documentary evidence to support his appeal, stating: “We do not have much documentation to provide as to why we need this appeal to turn our determination into an approval. The many reasons why we need this is because we wear our hearts on our sleeve and the purpose that we have for this Credit Union.”
Petitioner’s appeal also stated: “The many functions of our [C]redit Union is to provide lending to those that are in the community that might not have had a chance anywhere else. We have over 26 plus years in lending experience and we tend to go further with other peoples’ financial portfolios. These are the many reasons why we have a basis for an appeal.”3
Issue on Appeal
The issue on appeal in this case is whether Petitioner’s application was sufficient to qualify XXXX for a federal charter by meeting the requirements of the Federal Credit Union Act (FCU Act), Part 701 of the NCUA’s regulations (Part 701), and the Chartering and Field of Membership Manual (Chartering Manual).
Federal Credit Union Act
Section 104 of the FCU Act requires that “[b]efore any organization certificate is approved, an appropriate investigation shall be made for the purpose of determining: (1) whether the organization certificate conforms to the provisions of this chapter; (2) the general character and fitness of the subscribers thereto; and (3) the economic advisability of establishing the proposed Federal credit union.”4
Section 201 of the FCU Act requires that before approving the application of any credit union for insurance of its member accounts, the Board must consider: (1) the history, financial condition, and management policies of the applicant; (2) the economic advisability of insuring the applicant without undue risk of the National Credit Union Share Insurance Fund (Fund); (3) the general character and fitness of the applicant's management; (4) the convenience and needs of the members to be served by the applicant; and (5) whether the applicant is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.5
Section 201 further requires that the “Board shall disapprove the application of any credit union for insurance of its member accounts if it finds that its reserves are inadequate, that its financial condition and policies are unsafe or unsound, that its management is unfit, that insurance of its member accounts would otherwise involve undue risk to the [F]und, or that its powers and purposes are inconsistent with the promotion of thrift among its members and the creation of a source of credit for provident or productive purposes.”6
Appendix B to Part 701 – Chartering and Field of Membership Manual
The NCUA’s rules concerning chartering, field of membership modifications, and conversions, also known as the Chartering Manual, are set forth in Appendix B to Part 701.7 At the outset, the Chartering Manual requires that in order to qualify for a federal credit union charter the potential credit union must be economically advisable: “Before chartering a federal credit union, NCUA must be satisfied that the institution will be viable and that it will provide needed services to its members. Economic advisability, which is a key factor in determining whether a potential charter will have a reasonable opportunity to succeed, is essential in order to qualify for a credit union charter.”8 The Chartering Manual stresses that “the success of any credit union depends on: (a) the character and fitness of management; (b) the depth of the members' support; and (c) present and projected market conditions.”9
Proposed Management's Character and Fitness. NCUA must ensure that the subscribers are of good “general character and fitness,” and have “reasonable 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.”10
Member Support. An important consideration when evaluating the economic advisability of a proposed credit union is “the degree of support from the field of membership. The charter applicant must be able to demonstrate that membership support is sufficient to ensure viability.”11
Present and Future Market Conditions—Business Plan. Noting that the “ability to provide effective service to members, to compete in the marketplace, and to adapt to changing market conditions are key to the survival of any enterprise,”12 charter applicants must submit a business plan based on realistic and supportable projections and assumptions that should contain, at a minimum, the following:
- Mission statement;
- Analysis of market conditions, including if applicable, geographic, demographic, employment, income, housing, and other economic data;
- Evidence of member support;
- Goals for shares, loans, and for number of members;
- Financial services needed/desired;
- Financial services to be provided to members of all segments within the field of membership;
- How/when services are to be implemented;
- Organizational/management plan addressing qualifications and planned training of officials/employees;
- Continuity plan for directors, committee members and management staff;
- Operating facilities, to include office space/equipment and supplies, safeguarding of assets, insurance coverage, etc.;
- Type of record-keeping and data processing system;
- Detailed semiannual pro forma financial statements (balance sheet, income and expense projections) for 1st and 2nd year, including assumptions—e.g., loan and dividend rates;
- Plans for operating independently;
- Written policies (shares, lending, investments, funds management, capital accumulation, dividends, collections, etc.);
- Source of funds to pay expenses during initial months of operation, including any subsidies, assistance, etc., and terms or conditions of such resources; and
- Evidence of sponsor commitment (or other source of support) if subsidies are critical to the success of the federal credit union. Evidence may be in the form of letters, contracts, financial statements from the sponsor, and any other such document on which the proposed federal credit union can substantiate its projections.13
Federal Credit Union Charter Application Guide
The Federal Credit Union Charter Application Guide (Guide)14 provides information and recommendations for organizing groups to navigate the process of applying for a new federal credit union charter. The Guide also encourages organizers to refer to the FCU Act, Part 701, and the Chartering Manual for information about specific requirements that need to be met for the agency to issue a federal charter. The Guide does not supersede those existing requirements, but rather serves two primary purposes. First, it describes the process for completing and submitting the information or forms as described in the Chartering Manual, including the steps involved in the NCUA’s online POC chartering tool. Second, the Guide lays out general guidance, advice, recommendations, and guidelines on how to submit a successful federal charter application.
The Guide also describes the phased approach to CURE’s application review process. Phase 1 involves the POC stage, in which organizers will demonstrate that the concept for the proposed federal credit union is well thought out before beginning the application process. CURE’s reviewing timeline goal for Phase 1 is 60 calendar days from the POC submission date.15 Once an organizer has satisfactorily described the concept of the proposed credit union and received notification from CURE to begin Phase 2, the organizer may begin the pre-planning activities, business plan development, and drafting of bylaws and operating policies. During this phase, organizers will also describe the proposed credit union’s marketing plans. Finally, once the organizer has satisfactorily submitted all items required in Phase 2 and received notification from CURE to begin Phase 3, the organizer may begin the final activities required in the chartering process, including completing the remaining required forms, meeting with NCUA staff to sign the Letter of Understanding and Agreement, and receiving a federal charter. CURE’s reviewing timeline goal for Phases 2 and 3 is 180 days from receipt of a complete application in Phase 2 to charter issuance in Phase 3.16
Pursuant to the FCU Act, Part 701, and the Chartering Manual, in order to qualify for a federal charter, chiefly, a proposed credit union must satisfactorily demonstrate to the NCUA that it can be viable. The economic advisability of a potential charter is a crucial factor in determining whether it can succeed. Economic advisability is also necessary for obtaining share insurance to avoid undue risk to the Fund.
In this case, concerns about the economic advisability of XXXX and its potential risk to the Fund are well founded. Significant deficiencies were noted in nearly every element of Petitioner’s charter application. Numerous necessary documentary items were missing from the application packet, and those items that were included were mostly deficient, contained errors, or demonstrated significant weaknesses.
Among the multitude of concerns raised in its denial, CURE correctly noted that the member survey information submitted by Petitioner was inadequate, statistically unsound, and failed to demonstrate an ability to support the proposed community field of membership, which consists of over 5 million people. Without supportable survey information that the degree of membership support is sufficient, NCUA cannot ensure viability of XXXX.
In addition, after CURE’s repeated requests for the names and resumes of the proposed credit union officials and employees, Petitioner provided the resumes for several non-US residents but did not indicate whether those individuals would be employees or board members. Petitioner failed to explain how officials or employees located overseas17 might effectively operate the credit union. Petitioner’s application also indicated that freelance board members would be paid $50/hour, which is inconsistent with the general prohibition on compensation for federal credit union board members.18 This information is inadequate to provide “reasonable assurance” that the management team will have the requisite skills, commitment, and ability needed to make the proposed federal credit union a success.
The application’s financial information was also materially lacking. Notably, the information provided in the business plan and financial projections did not demonstrate how the credit union would operate independently, and the pro forma financial projections were materially deficient, contained errors and poorly supported financial assumptions, and were generally inconsistent with the credit union business model (for example, referencing inventory and freight and being publicly traded). The submitted balance sheet was also out of balance, missing entries, and included projections with ratios showing errors in the formulas. The few entries included in the balance sheet did not correspond to the information provided in the business plan. Petitioner’s submitted marketing plan, which simply stated that Petitioner will “use [G]oogle” to obtain new membership, was also clearly deficient.
Petitioner did not provide written credit union policies. The submitted business plan included a section for policies that simply listed headings with statements about the development of policies, or instructions for developing the policy. Petitioner also offered privacy notices from an insurance company and a bank. These policies were clearly inadequate.
Overall, CURE was warranted in its conclusion that Petitioner failed to provide sufficient information and documentation to determine that there was adequate interest among potential members to promote thrift; the general character and fitness of the credit union’s management; the projected financial condition of the credit union; and whether the credit union policies and procedures would adequately address risk, and safety and soundness.
Moreover, Petitioner’s repeated failures to meet the documentary requirements necessary for a complete charter application hint at either a fundamental lack of understanding of the statutory and regulatory requirements for a federal charter and federal share insurance, or an inability or unwillingness to comply with those requirements. While it is not unreasonable for organizers to require some degree of assistance in navigating the agency’s charter application process, Petitioner’s application was repeatedly submitted with incomplete information despite CURE’s continuous assistance, direction, and clear instruction on what documentary support was still needed for its review.
All of these deficiencies demonstrate fundamental weaknesses in Petitioner’s charter application and weigh heavily against a finding of economic advisability for XXXX.
Based on a full de novo review of the administrative record,19 the Board has determined CURE’s denial of Petitioner’s application for a federal charter for XXXX was reasonable and is well supported by the record.
Irrespective of Petitioner’s persistence and palpable eagerness to charter XXXX to serve his community, Petitioner’s federal charter application was fundamentally deficient and failed to meet the requirements of the FCU Act, Part 701, and the Chartering Manual. It appears evident that, at the very least, Petitioner’s application for a federal charter for XXXX was premature and more diligent research, planning, and preparation is necessary before this group may qualify for a federal credit union charter.
The Board finds that the record supports CURE was reasonably justified in its decision to deny Petitioner’s application for a federal charter for XXXX.20
For the reasons set forth above, it is ORDERED as follows:
The determination by the Director of the Office of Credit Union Resources and Expansion to deny the application for a federal charter for proposed XXXX is AFFIRMED, and the appeal of proposed XXXX is DENIED.
The Board’s decision constitutes a final agency determination and is subject to judicial review in accordance with Chapter 7 of Title 5 of the United States Code.
So ORDERED this 25th day of July, 2023, by the National Credit Union Administration Board.
Secretary of the Board
1 It should be noted that the reference dates of Petitioner’s various submissions are inconsistent throughout the administrative record, presumably because in some circumstances the date refers to the date of Petitioner’s submission (which sometimes occurred after business hours and/or on weekends) and in some circumstances the date refers to the date of CURE’s receipt of Petitioner’s submission. As such, the referenced dates in this Decision and Order are somewhat approximate, yet not inaccurate. The minor variances in submission/receipt dates did not have any substantive bearing on the outcome of this review.
2 See 12 C.F.R. §746.207(c).
4 12 U.S.C. §1754.
5 See 12 U.S.C. §1781(c)(1).
6 12 U.S.C. §1781(c)(2).
7 See 12 C.F.R. §701.1.
8 12 C.F.R. §701, Appendix B, IV.A.
10 12 C.F.R. §701, Appendix B, IV.B.
11 12 C.F.R. §701, Appendix B, IV.C.
12 12 C.F.R. §701, Appendix B, IV.D.
13 See id.
14 See Federal Credit Union Charter Application Guide. The guide is publicly available on the NCUA’s website at .
15 See Chartering Application Guide Flowchart. The flowchart is publicly available on the NCUA’s website at .
17 Several of the submitted resumes did not list an address for the individual, but information contained in the resume described the individual’s education and experience in Kenya, India, and the United Kingdom, respectively.
18 See 12 C.F.R. §701.33. Under the rule, “only one board officer, if any, may be compensated as an officer of the board.”
19 See 12 C.F.R. §746.206.
20 The Board emphasizes that this Decision and Order does not preclude Petitioner from submitting a new charter application in the future. Should Petitioner choose to reapply and submit another charter application, the Board encourages ongoing dialogue with CURE to address the deficiencies discussed in the previous denial.