PACB Letter to PA Secretary of Banking
December 29, 2003
Honorable A. William Schenck III
Secretary of Banking
Pennsylvania Department of Banking
333 Market Street, 16th Floor
Harrisburg, PA 17101-2290
Re: Pennsylvania Association of Community Bankers Objection to Community Charter Application of Freedom Credit Union - Department of Banking Docket No. APP-2003-01
Dear Secretary Schenck:
I write to you on behalf of the Pennsylvania Association of Community Bankers (“PACB”) and its over 200 community bank and thrift institution members (together, “community banking institutions”) from across the Commonwealth of Pennsylvania to formally issue this written statement of opposition to possible regulatory approval by the Pennsylvania Department of Banking (“Department”) to the application of Freedom Credit Union (“FCU”) to convert to a community charter (“application”). This letter is an objection by PACB to the application, but is not a request from PACB for a protest hearing. PACB understands that a number of financial institutions have filed or intend to file a protest and participate in a protest hearing and we vigorously support those financial institutions and their protest filings. It is our present understanding that a trade association is ineligible to file a protest or be granted and participate in a protest hearing. In future matters, we hope that this would change. In this matter, we are not filing a protest or requesting a protest hearing also because we believe that this letter, as submitted to you, thoroughly and sufficiently states the public policy and legal bases upon which our association strongly objects and urges the Department to deny FCU’s application. PACB objects to the application for reasons of public policy and law described below.
Background: It is our understanding that Freedom Credit Union is a Pennsylvania state-chartered credit union regulated primarily by the Department, and that FCU’s deposits are insured by the National Credit Union Association (“NCUA”). FCU has approximately 184 occupational groups and associational groups including religious organizations in the Delaware River Valley that constitute FCU’s present field of membership. FCU has 45,565 current members and has forecast 75,000 potential members. FCU has assets of approximately $250 million, and has two branch offices respectively in Philadelphia and Warminster, Pennsylvania.1
According to the Department, FCU has applied to convert to a community field of membership geographically encompassing the five southeastern Pennsylvania counties of Philadelphia, Bucks, Chester, Delaware, and Montgomery, and three southwestern New Jersey counties of Burlington, Camden, and Gloucester (together, the “requested area”). In other words, FCU seeks approval to be granted a field of membership geographically containing a population of over 5,000,000 people in 2 States.
Public Policy Reasons for PACB Objection to the Application: For the following public policy reasons, PACB objects to FCU being afforded such a large geographic and population field of membership as the requested area.
Taxes: First, unlike banks and thrifts that are subject to Federal and Pennsylvania taxes,2 credit unions are not required by Federal or Pennsylvania law to pay taxes, except for real estate taxes,3 thereby resulting in lower business costs for credit unions versus banks and thrifts. Until non-taxed credit unions are required to pay taxes, FCU should not be permitted to operate on a geographic and potential customer basis as broad as that available or potentially available to any Pennsylvania tax-paying community banking institutions.
Shareholder Dividends: Second, unlike stock-issuing community banking institutions that are for-profit financial institutions with shareholders demanding dividend payments and who are not necessarily depositors of such banks and thrifts, credit unions as nonprofit entities without shareholders. Instead, credit unions are owned by their member depositors. Thus, credit unions are not subject to the same economic pressure to generate profits as stock-issuing banks and thrifts. We understand that credit unions may declare a “dividend” payable to their members, but that “dividend” amounts to extra deposit interest being paid to credit union members as opposed to shareholder dividends being paid to community banking institution shareholders after interest is paid to bank and thrift depositors. Until credit unions become for-profit depository institutions responsible to pay dividends to shareholders (and taxes to the government on a level equal to that required to be paid by banks and thrifts), FCU should not be permitted to operate on a geographic and potential customer basis as broad as that available or potentially available to any Pennsylvania community banking institutions.
Additionally, PACB has within its membership mutual thrift institutions which we recognize as having a similar ownership structure to credit unions in that both have depositors as owners with voting powers. Despite this ownership similarity, it is mutual thrift institutions, not credit unions, that are required to pay taxes. Accordingly, PACB objects to the FCU application not only on behalf of PACB’s stock-issuing banks and thrifts in terms of the shareholder dividends issue, but also on behalf of PACB’s mutual thrift institution members, based on the fact that credit unions are not required to pay taxes and mutual thrift institutions are required to pay taxes.
Unfair Competition: Third, in terms of unfair competition, FCU can be expected to use its relative tax advantage over banks and thrifts in the highly populated and diverse geographic requested area to compete on a loan, deposit, and other product price basis with Pennsylvania community banking institutions by offering rates that FCU could not otherwise offer if FCU were subject to the same tax burden as the banks and the thrifts. Accordingly, FCU should not be permitted geographic and customer access as potentially broad as that of banks and thrifts unless and until credit unions are required to pay taxes equaling the tax burden and shareholder dividend burden required to be paid by the community banking institutions.
Exponential Increase in Oversized “Community” Charters: Fourth, the precedent of allowing the requested area that is inhabited by over 5,000,000 persons to constitute the geographic field of membership of FCU can be expected to cause other Pennsylvania state-chartered credit unions to seek a similar unfair competitive advantage in southeastern Pennsylvania as well as other parts of this Commonwealth. Allowing FCU, and in the future other credit unions that also do not pay taxes, to have such a large geographic and highly populated field of membership area is likely to cause exponentially large levels of serious financial and safety and soundness harm to Pennsylvania community banking institutions that will have to compete while being subject to the heavy tax burden that is not presently applicable to credit unions.
Large Occupational and Associational Base Does Not Mandate Approval of Alleged “Community” Field of Membership: Fifth, the fact that FCU has been permitted to have its already enormously large number of 184 occupational and associational organizations does not constitute a regulatory fait accompli mandate to allow further gigantic field of membership expansion by FCU in the form of an over 5,000,000 person geographic field of membership to be authorized by the Department in favor of FCU. There is no reasonable basis for FCU to declare that a well-defined community for field of membership purposes is anything nearly as large as the area that FCU seeks Department approval to be eligible to serve. This fifth policy point is discussed further in the Legal Section below.
Based on the above public policy discussion, PACB strongly objects and urges the Department to deny FCU’s application.
Legal Basis for PACB Objection to the Application: PACB asked its attorneys to concisely state PACB's legal basis for this objection to the application. Such legal basis is stated immediately below.
Pursuant to the Pennsylvania Credit Union Code,4 there are two main provisions that statutorily define the permissible field of membership of a Pennsylvania state-chartered credit union and that are relevant to this discussion of community field of membership: (i) Membership Section 701(a)5 ("Section 701(a)"), and (ii) Parity Section 501(e)6 ("Section 501(e)").
Membership Section 701(a): Section 701(a) provides, in relevant part, that, Credit union organizations shall be limited to groups having a potential membership of 500 or more adult persons and having a common bond of association within a well-defined community or rural district by reason of occupation or of membership in a religious congregation or fraternal or labor organization or residence within a well-defined community or rural district.
17 Pa.C.S.A. § 701(a)(emphasis added).
PACB has not formally objected in writing to community development credit unions or to community credit unions respectively formed in recent years in much more finite areas of limited population than the requested area, and that at least resemble a local “community.” However, PACB must object to FCU's application for a field of membership comprising an 8 county area as populous and diverse as the requested area. PACB finds that the requested area is not a “community” but is much larger than that, and therefore should not be eligible for field of membership approval. Instead, such an alleged "community" actually more closely resembles a conglomeration of megalopolises containing over 5,000,000 inhabitants and extending over 3,547 square miles of urban, suburban, and rural lands.7 Such a large geographic and highly populated area should not be eligible for designation as the field of membership of any Pennsylvania state-chartered credit union including FCU.
The word “community” itself is not defined by the Credit Union Code. The common dictionary definition of "community" is a group of people living in the same locality and under the same government, or the district or locality in which such a group lives.8 The word "locality" also is not defined by the Credit Union Code, but according to the common dictionary definition is a particular neighborhood, place, or district.9 A "district" is a division of an area, as for administrative purposes, or a region or locality marked by a distinguishing feature.10 A “region” is a specific district or territory.11 The FCU requested area is governed by 2 State governments, 8 county governments, and hundreds of subcounty municipal and township governments12 and school districts.13
As you know, the Department is vested with (i) supervisory power over Pennsylvania state-chartered credit unions pursuant to the Credit Union Code,14 and (ii) discretionary regulatory authority over all depository institutions that the Department regulates pursuant to statutory authority including the Pennsylvania Department of Banking Code.15 Such discretion requires the Department to ensure the safe and sound conduct of the business of any and every depository institution subject to the Department’s supervision and to protect the public interest and the interests of depositors, other creditors, and shareholders thereof.16 It is inconsistent with the regulatory discretion, safety and soundness protection, and shareholder protection provisions of the Department of Banking Code for the Department to grant such a large field of membership in favor of a credit union and presumably to future similar requesting non-taxable credit unions when such a grant of authority is highly likely to cause present and growing future detriment to the tax-paying banks and thrifts. Such detriment to the community banking institutions was described above in the Public Policy section of this letter.
There are no Credit Union Code regulations further defining a community field of membership. In the absence of such guidance and the lack of a definition of community field of membership in the Credit Union Code, PACB concludes and recommends that the Department’s interpretation of membership Section 701(a) must not exceed the field of membership power granted to Pennsylvania state-chartered credit unions by parity Section 501(e), as further detailed in the Parity discussion below.
Furthermore, it is PACB’s view that the Department should exercise its regulatory discretion by determining that a “community” for purposes of the field of membership of a non-taxable credit union such as FCU does not include the over 5,000,000 people in the highly populated urban, suburban, and rural area that is the 8 county field of membership area sought by FCU. On the other hand, for taxable and tax-paying community banking institutions that are for-profit depository institutions responsible to their stockholders to pay dividends, or to their mutual thrift institution depositors and borrowers, and required by the government to pay taxes, such a geographic area and beyond is and should remain eligible ground for obtaining and servicing customers, and for the establishment of branch offices as confirmed by the intrastate and interstate banking and branching authority in the Banking Code of 1965 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Parity Section 501(e): As you know, by enactment of Act 207 of 2002, the Pennsylvania General Assembly amended the Credit Union Code to provide, among other things, that Pennsylvania state-chartered credit unions have parity with the powers of federal credit unions to create, amend, and expand their respective fields of membership, "subject to reasonable conditions, limitations and restrictions as may be imposed by the department, including, but not limited to, conditions, limitations and restrictions based upon safety and soundness."17 Section 501(e) in effect authorizes and requires the Department to reject any application for a community field of membership larger than the field of membership that a federal credit union would be able to create, amend, or expand as authorized by Section 109 of the Federal Credit Union Act at 12 U.S.C. § 1759. An analysis of 12 U.S.C. § 1759, NCUA regulation 12 C.F.R. § 701.1 regarding field of membership, and NCUA Interpretive Ruling and Policy Statement 03-1 titled NCUA Chartering and Field of Membership Manual ("NCUA FOM Manual"), as applied to the requested area leads to the conclusion that a federal credit union is not eligible to establish the requested area or persons within that area as its "community" field of membership. Therefore, pursuant to this parity analysis, FCU is not authorized to establish the requested area as its "community" field of membership.
More specifically, the Federal Credit Union Act provides that a federal credit union may establish its field of membership constituting persons or organizations within a well-defined local community, neighborhood, or rural district.18 NCUA regulation 12 C.F.R. § 701.1 provides that NCUA's field of membership rules are stated in certain predecessors to NCUA Interpretive Ruling and Policy Statement 03-1. It appears that NCUA has not yet updated the referenced regulation to state what NCUA has otherwise stated which is that as of March 27, 2003, NCUA Interpretive Ruling and Policy Statement 03-1 is the latest and presently valid statement of field of membership requirements issued by the NCUA. Notwithstanding the foregoing, the NCUA FOM Manual is reviewed and considered as follows.
Chapter 2, Section V of the NCUA FOM Manual provides that NCUA has established the following three factors as applicable to federal credit unions seeking to establish community charters: (i) the geographic area's boundaries must be clearly defined; (ii) the area is a well-defined local community, neighborhood, or rural district; and (iii) individuals within the area must have common interests and/or interact.
In terms of the geographic factor, FCU seeks a "community" field of membership area with geographic boundaries totaling 8 counties populated by more than 5,000,000 people in 2 States. The requested area is geographically larger than the States of Delaware and Rhode Island combined.19
In terms of the common interests and/or interaction factor, the extent to which individuals in this large geographic and highly populated requested area have common interests and/or interact is largely a matter of random semantics. For example, the people of the requested area can be said to have common interests in that they all breathe air and need food, water, clothing, shelter, jobs, health care, roads, and education for the children. But such common interests and/or interaction are not sufficient to justify establishment of the requested area for a "community" field of membership. Accordingly, pursuant to the NCUA FOM Policy at Chapter 2, Section V, it is the responsibility of the applicant federal credit union to demonstrate by letter to the NCUA how the proposed area meets the standards for interaction and/or common interests of individuals by providing documentation such as: the defined political jurisdictions, major trade areas, shared common facilities, organizations and clubs within the [alleged] community, newspapers and other periodicals published for and about the area, a local map designating the area to be served and locations of current and proposed service facilities and a regional or state map with the proposed community outlined, and any other documentation that demonstrates that the area is a community where individuals have common interests and/or interact.
This broad and amorphous NCUA documentation test for fulfilling the common-interests -and/or-interaction-of-individuals-factor does little to clarify on what basis the NCUA would find documentation adequate to demonstrate a local community suitable for a community field of membership versus a finding of multiple megalopolises not being so suitable. For example, the FCU requested area is governed by 2 State governments, 8 county governments, and hundreds of subcounty municipal and township governments and school district governments as described above at Footnotes 12 and 13. Such a large number of governments within FCU’s large geographic and highly populated requested area is evidence that there are not common interests and/or interaction adequate to support FCU’s application for the 8 counties in the requested area to constitute FCU’s field of membership area. As stated elsewhere herein, PACB finds that the requested area is far too large to be a permissible community for FCU or any other credit union’s field of membership purposes.
The second above-listed factor in and of itself is not met by FCU. In other words, FCU's requested area does NOT qualify as a “well-defined” local community, neighborhood, or rural district under a Pennsylvania Credit Union Code Section 501(e) parity analysis of 12 U.S.C. § 1759, 12 C.F.R. § 701.1, and the NCUA FOM Manual. Therefore, FCU is not eligible to establish the requested area as its "community" field of membership.
In further regard to the “well-defined” area factor, the NCUA FOM Manual at Chapter 2, Section V, provides that for purposes of establishing a permissible "community" field of membership, a "well-defined" local community, neighborhood, or rural district contains specific geographic boundaries, and may include a city, township, county, or a clearly identifiable neighborhood. "Well-defined" does not include Congressional districts or State boundaries. NCUA indicates that the following constitutes a permissible "well-defined" area: (i) multiple contiguous political jurisdictions (i.e., a city, county, or other political equivalent, or any contiguous portion thereof provided the population of the requested well-defined area does not exceed 500,000; OR (ii) 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 persons. If the proposed area meets either the multiple contiguous political jurisdiction or MSA criteria, then the credit union must also submit a letter describing how the area meets the standards for community interaction and/or common interests. If NCUA does not find sufficient evidence of community interaction and/or common interests or if the area to be served does not meet the MSA or multiple political jurisdiction requirements just stated, then the application must include documentation to support that it is a well-defined local community, neighborhood, or rural district.
Remarkably, even if the application does not meet all of these criteria, NCUA provides that if that geographic area was previously approved according to the appropriate NCUA regional office that the applicant need only include a statement to that effect in the application. We have determined from the NCUA’s Community Charter Approval Report20 and confirmed with the NCUA Regional Office in Alexandria, Virginia, that the requested area has not been previously approved as a permissible community field of membership area by the NCUA. But even if the NCUA had previously approved the requested area, which NCUA has not done, FCU’s requested area: (i) is overly broad; (ii) is not in compliance, through Credit Union Code parity Section 501(e), with the Federal Credit Union Act at 12 U.S.C. § 1759, NCUA regulation at 12 C.F.R. § 701.1, and the NCUA FOM Policy; (iii) is not in compliance with a reasonable interpretation of Section 701(a) of the Credit Union Code; (iv) is not consistent with the Congressional statute language of 12 U.S.C. § 1759 as improperly interpreted and implemented by the NCUA through its NCUA FOM Policy; and therefore (v) must not be approved by the Department according to Section 501(e) or 701(a) of the Credit Union Code.
The requested area is a portion of a Consolidated Metropolitan Statistical Area ("CMSA"). A CMSA has 1,000,000 or more population and separate component areas called primary metropolitan statistical areas ("PMSA"). The FCU requested area is within a CMSA called the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD CMSA.21 The components of this CMSA include, in relevant part: (i) the Philadelphia, PA Metropolitan Division of Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties of Pennsylvania; and (ii) the Camden, NJ Metropolitan Division of Burlington, Camden, and Gloucester Counties of New Jersey. The PMSA relevant to the requested area includes the 8 county requested area.22
According to the Year 2000 U.S. Census,23 the population and square mileage area of the respective counties that comprise the requested area are as follows:
Pennsylvania Counties Population Area in Square Miles Philadelphia 1,517,550 135 Bucks 597,635 607 Chester 433,501 756 Delaware 550,864 184 Montgomery 750,097 483 Totals for PA Counties: 3,849,647 2,165 New Jersey Counties Population Area in Square Miles Burlington 423,394 805 Camden 508,932 222 Gloucester 254,673 325 Totals for NJ Counties: 1,186,999 1,382 Totals for Combined
PA and NJ Counties:5,036,646 3,547
The population of FCU's requested area for field of membership vastly exceeds the respective 500,000 and 1,000,000 population level maximums for a "community" field of membership of a federal credit union according to the NCUA FOM Manual. In PACB's view, the NCUA's definition of a permissible community field of membership is excessively large relative to the statutory language in Section 19 of the Federal Credit Union Act at 12 U.S.C. § 1759(b)(3) and (g) regarding authority for NCUA to define the term “well-defined local community, neighborhood, or rural district.” Regardless of that, from a Section 501(e) parity analysis perspective specifically with regard to FCU's requested area, FCU must NOT be granted the requested area because of reasons including that: (i) the requested area's population vastly exceeds the NCUA FOM Manual guidelines for community field of membership; (ii) such a geographically vast and high population area does not have common interests and/or interact on a basis resembling a local community, neighborhood, or rural district type of common bond; and (iii) the geographic boundaries, while definable, are larger than some small States24 and since entire State boundaries are not permissible for a community field of membership pursuant to the NCUA FOM Manual, the requested area, by virtue of being larger than 2 States, should not be a permissible community field of membership area.
Based on the foregoing policy and legal analyses, PACB strongly objects and requests that the Department deny FCU's application.
Thank you for your time and attention in considering our association’s objection to FCU's application. PACB has provided this letter containing policy and legal reasons for the Department to deny FCU's application and has done so in the shortest form reasonably possible. If the Department requires additional information regarding PACB's objection to the application, please do not hesitate to contact me.
Sincerely,
Frank A. Pinto
President/CEO
Pennsylvania Association of Community Bankers
2405 North Front Street
Harrisburg, PA 17110-1110
1 Information sources include the Department’s website at www.banking.state.pa.us, FCU’s website at www.freedomcu.org, and the NCUA’s website at www.ncua.gov.
2 Banks are subject to taxes including the Bank and Trust Company Shares Tax, 72 P.S. § 7701 et seq. Thrift institutions are subject to taxes including the Mutual Thrift Institution Tax, 72 P.S. 8501 et seq.
3 As a general matter, state-chartered credit unions are exempt from: (i) federal taxation pursuant to the Federal Internal Revenue Code at 26 U.S.C. § 501(c )(14)(A), and (ii) Pennsylvania state taxation except for real estate taxes pursuant to the Pennsylvania Credit Union Code at 17 Pa.C.S.A. § 517. Federal credit unions are exempt from Federal, State, and Local taxation generally except for real property pursuant to both the Federal Internal Revenue Code at 26 U.S.C. § 501(c )(14)(A) and the Federal Credit Union Act at 12 U.S.C. § 1768. There is no such federal or Pennsylvania tax exemption for Pennsylvania state-chartered or federally-chartered banks and thrifts.
4 17 Pa.C.S.A. § 101 et seq.
5 17 Pa.C.S.A. § 701(a).
6 17 Pa.C.S.A. § 501(e).
7 See Census 2000 and related information from the U.S. Census Bureau at www.census.gov and quickfacts.census.gov.
8 The American Heritage Dictionary, Fourth Edition, Houghton Mifflin Company, New York and Boston, copyright 2002. This word may be interpreted pursuant to common and approved usage according to 1 Pa.C.S.A. § 1903,
9 Id.
10 Id.
11 Id.
12 According to the Government Organization 1997 Census of Governments by the U.S. Census Bureau at www.census.gov/prod/gc97/gc971-1.pdf, the Commonwealth of Pennsylvania ranked 2nd in the United States with 2,569 subcounty governments of which 1,023 were municipal (borough, city, town) governments and 1,546 were township governments. The same 1997 Census found that the State of New Jersey ranked 22nd in the United States with 567 subcounty governments of which 324 were municipal (borough, city, town, village) governments and 243 where township governments. Unfortunately, the survey did not disclose the number of such subcounty governments per the 8 county requested area, but one may extrapolate from the available statewide government data that the number of subcounty municipal and township governments over the 8 county area is in the hundreds.
13 According to the Government Organization 1997 Census of Governments by the U.S. Census Bureau at www.census.gov/prod/gc97/gc971-1.pdf, the Commonwealth of Pennsylvania had 516 public school systems composed of 516 school district governments, and the State of New Jersey had 628 public school systems composed of 552 school district governments and 76 dependent public school systems. Unfortunately, the survey did not disclose the number of such school district governments per the 8 county requested area, but one may extrapolate from the available statewide government data that the number of school district governments over the 8 county area is more than one hundred.
14 17 Pa.C.S.A. § 503(a).
15 71 P.S. §§ 733-1 et seq., 733-202.
16 71 P.S. § 733-202(B).
17 17 Pa.C.S.A. § 501(e)(2).
18 12 U.S.C. § 1759(b)(3).
19 Delaware is 1,982 square miles with a Year 2000 U.S. Census population of 783,600. Rhode Island is 1,214 square miles with a Year 2000 U.S. Census population of 1,048,319. Together, Delaware and Rhode Island have land area of 3,196 square miles as compared to the 2 State FCU requested area of 3,547 square miles. See U.S. Census Bureau website at www.census.gov and quickfacts.census.gov.
20 See the NCUA Community Charter Approval Report at www.ncua.gov/ref/comm_charter_rpt/communitychartersreport.html.
21 See U.S. Census Bureau website regarding CMSAs, PMSAs, and MSAs at www.census.gov and quickfacts.census.gov.
22 Id.
23 Id.
24 See Footnote 19.