H-3427.1          _______________________________________________

                                  HOUSE BILL 2127

                  _______________________________________________

State of Washington              54th Legislature             1996 Regular Session

By Representatives L. Thomas, Huff, Robertson, Sterk and Dyer

Read first time 01/08/96.  Referred to Committee on Financial Institutions & Insurance.

Funding the credit union share guaranty association.

     AN ACT Relating to funding the credit union share guaranty association; amending RCW 31.12A.010, 31.12A.050, and 31.12A.940; creating new sections; providing an effective date; and declaring an emergency.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1.  The legislature finds that credit unions are presently in good financial condition, and that the Washington credit union share guaranty association has successfully resolved the small credit union failures that have occurred since its inception.  However, the legislature also finds that now, in a period of financial stability for credit unions, it is appropriate to improve the ability of the guaranty association to protect depositors in the event of future problems.  The legislature intends to improve the liquidity of the guaranty association and its ability to respond to potential problems rapidly by having the association maintain a reserve, rather than the individual member credit unions.

     Sec. 2.  RCW 31.12A.010 and 1994 c 92 s 225 are each amended to read as follows:

     As used in this chapter, unless the context otherwise requires, the terms defined in this section shall have the meanings indicated.

     (1) "Assessment" means the amount levied by the association against its members in order to carry out its stated purposes.

     (2) "Association" means the credit union share guaranty association created in RCW 31.12A.020.

     (3) "Board" means board of directors of the guaranty association.

     (4) "Contracted guarantees" means those liabilities specifically agreed to by the association for providing assistance to member credit unions or for indemnifying any other entity against loss because of its participation in the absorption or liquidation of a distressed member credit union.

     (5) "Credit union" means a credit union organized and authorized under laws contained in chapter 31.12 RCW, as now or hereafter amended.

     (6) "Director" means the director of financial institutions.

     (7) "Initial member" means a member qualified by the director within sixty days after September 1, 1975, but not yet ratified by the board.

     (8) "Member" means a member of the guaranty association, ratified by the board.

     (9) "Share account" of a credit union shareholder includes the share and/or deposit accounts and the share and/or deposit certificates of which the shareholder is owner of record with the credit union.

     (10) "Shareholder" includes both members and nonmembers of a credit union, who have either shares and/or deposits in the credit union, including deposits of deferred compensation as referred to in RCW 31.12.125(10).

     (11) (("Transfer" means entering on the credit union's books of account a decrease to one account and a corresponding increase to another account)) "Share guaranty association contingency reserve" or "contingency reserve" means an account controlled and administered by the association into which payments from member credit unions under RCW 31.12A.050 are deposited.

     Sec. 3.  RCW 31.12A.050 and 1994 c 92 s 227 are each amended to read as follows:

     (1) Funding of the association shall be by ((transfers to)) payment by members into a share guaranty association contingency reserve as follows:

     (a) Credit unions approved by the director and ratified by the board for membership subsequent to those initial members shall ((establish a)) pay into the share guaranty association contingency reserve ((by transferring from their guaranty fund)) an amount equal to ((one-half of)) one percent of the total guaranteeable outstanding share and deposit balances as of the date of membership or the effective date of this act, whichever is later.  When one member credit union is merged into another member credit union, the continuing credit union shall include in its share guaranty contingency reserve payment amount the share guaranty contingency reserve payment amount of the merged credit union.  A nonmember credit union merging with a member credit union must ((transfer)) pay into the share guaranty contingency reserve ((of the continuing credit union)) an amount equal to ((one-half of)) one percent of the total guaranteeable outstanding share and deposit balances of the nonmember credit union as of the effective date of the merger, as determined by the director.

     (b) On the first business day of each year, member credit unions shall ((make a transfer of)) pay into the contingency reserve an amount sufficient to adjust the member's portion of the contingency reserve to a level of ((one-half of)) one percent of the guaranteeable outstanding share and deposit balances as of December 31st of the previous year.  If the member's guaranteeable outstanding share and deposit balances decrease from the previous year, and no moneys were spent from the contingency reserve, any excess which may then ((appear)) exist in the contingency reserve ((may be transferred to the guaranty fund)) due to the decrease in the pro rata share of the member's obligation may be returned to the member.

     (c) The board may require one additional ((transfer)) payment into the contingency reserve during the calendar year of an amount not to exceed ((one-half of)) one percent of the guaranteeable outstanding share and deposit balances as of December 31st of the previous year.  Credit unions which have merged during the year and credit unions which have joined during the year will be subject to the one additional ((transfer)) payment, even if that required ((transfer)) payment occurred before ratification of the joining member or the merger of the two credit unions.  The ((transfer)) payment will be based on the guaranteeable share and deposit balances of those credit unions as of the following dates:

     (i) For new members, the balances as of the date of membership;

     (ii) For members that merge, the sum of the balances as of December 31st of the previous year;

     (iii) For a nonmember merging with a member, the sum of the member's balances as of December 31st of the previous year, and of the nonmember's balances as of the effective date of the merger.

     (2) ((Sums specified in subsection (1) of this section may be offset from the statutory transfer requirement to the guaranty fund and shall be retained in the credit union share guaranty contingency reserve as an integral part of its guaranty fund until such time and if necessary to be drawn for the purposes set forth in this chapter)) The association shall establish and administer the share guaranty association contingency reserve to receive payments under subsection (1) of this section and to expend funds to carry out the purposes of this chapter.  The association shall ensure a minimum balance in the contingency reserve of one percent of the guaranteeable outstanding share and deposit balances of all members each year as provided under subsection (1)(b) of this section.  If the funds in the contingency reserve for any year, after payments are made under subsection (1)(b) and (c) of this section, are insufficient to meet the obligations of the association for that year and any previously unmet obligations, the association shall fulfill obligations owed to depositors or shareholders from previous years first.  The association shall keep an ongoing record of each member's pro rata share of funds in the contingency reserve, including payments made into the contingency reserve by each member and amounts expended from the contingency reserve prorated by member.

     (3) ((Members')) Share guaranty association contingency reserve funds shall be invested in very short-term investments by the association as permitted in the bylaws of the association and in consultation with the department.

     (4) The board, in concurrence with the director, may also suspend or diminish the ((transfer)) payment in any given period after reaching a normal operating sufficiency as provided in the bylaws.

     (5) Membership in this association may be terminated upon approval by a majority of the credit union members responding to such a proposal and subject further to acceptance by the national credit union administration of continued share insurance coverage under the national credit union administration share insurance program.  Notice of such intentions shall be in writing to the association's board of directors at least twelve months prior to such contemplated action:  PROVIDED, That in the event that the credit union board has voted to recommend to the membership liquidation, conversion from state to federal credit union charter, or merger with or conversion to a credit union organized under the laws of another state, the liquidating, converting, or merging member will notify the association in writing within seven days after the credit union board has taken such action.  Share guarantee coverage through the association will terminate with the effective date of the new charter or completion of the liquidation or merger as determined by the director.

     (6) Except for a credit union merging with a member credit union, any credit union terminating membership in the association shall be assessed its pro rata share of the difference, if any, between the association's current liability for contracted guarantees and the amount from previous assessments currently held for contracted guarantees by the association.  Such difference shall be determined by the director at the time the membership is terminated.  If the amount of the assessment exceeds the amount of the actual obligation when finalized, the excess shall be refunded in the same proportion as paid.

     Sec. 4.  RCW 31.12A.940 and 1975 1st ex.s. c 80 s 20 are each amended to read as follows:

     If any clause, sentence, paragraph, section or part of this ((act)) chapter shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder thereof but shall be confined in its operation to the clause, sentence, paragraph, section or part thereof directly involved in the controversy in which such judgment has been rendered.

NEW SECTION. Sec. 5.  The Washington credit union share guaranty association shall amend the bylaws and take other actions necessary for the timely implementation of this act.

NEW SECTION. Sec. 6.  (1) Sections 1 through 4 of this act take effect July 1, 1997.

     (2) Section 5 of this act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and shall take effect immediately.

                                    --- END ---