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House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
Washington, DC.

  The subcommittee met, pursuant to call, at 9:35 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema [chairwoman of the subcommittee] presiding.

  Present: Chairwoman Roukema, Representatives Royce, Ehrlich, Barr, Kelly, Weldon, Ryun, Leach (ex officio), LaFalce, Vento, Maloney, Roybal-Allard, Watt, Bentsen, and Kilpatrick.

  Chairwoman ROUKEMA. I call this hearing to order. We are a little late, but we are not too late. We do appreciate the fact that everyone has cooperated in terms of rescheduling this hearing. We wanted to accommodate both Congressman Martin Frost's schedule, as well as the schedules, the travel schedules, of some of our panelists. So we will try to begin immediately and expect that some other Members will be arriving, although I have got to say that the voting schedule has been so uncertain this week, Members are probably arriving back in Washington from their district work period, as we speak.

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  But in any event, we are most anxious to have this subcommittee hearing today and address the issue that literally has pitted the credit union industry directly against banks and savings and loans. I don't think we should try to mask the fact that the issues are rather direct.

  We obviously need to review these issues surrounding the credit union industry and its regulator, the National Credit Union Administration, as to whether credit unions are complying with the common bond rule under the Federal Credit Union Act and with the intent of Congress at the time the act was enacted. That is maybe a little further than the Supreme Court expects us to go. By the way, these hearings were scheduled and organized some weeks ago, not knowing what, if any, action the Supreme Court would take on the appeal before it.

  Of course, now we know that the Supreme Court has made a decision, which I will get onto, but nevertheless I want to state categorically that we have an obligation here, and the purpose of this hearing is to explore all aspects of the issue because we may very well address this at some point along the line.

  As those here know, or should know, the Supreme Court agreed to determine whether the credit unions--that is, last Monday--agreed to determine whether credit unions may serve employees at more than one company. An earlier district court and an appeals court ruled that the credit unions could not expand their fields of membership or, quote/unquote, ''common bond.'' However, the appeals court stated that it might reconsider its decision if the Supreme Court would hear the case. Oral arguments will be heard in October.

  In the meantime, credit unions are under a partial stay by the appeals court that only allows them to expand their membership. They cannot allow new, unaffiliated members. However, all parties have 14 days from yesterday to file their views on the stay. Although there is a general feeling that the Supreme Court action could slow down any legislative initiatives, I remain convinced that holding this hearing is important, due to the timeliness of the Court's decision and the need to look at the policy implications of the issue, and it is an important issue.
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  Today's New York Times has on its front page of the business section an extensive article on the subject, and I would move that the article from the New York Times be included in the record today.

  [The information referred to can be found on page 87 in the appendix.]

  Chairwoman ROUKEMA. Many arguments will inevitably be made here today and in the future debate by the credit unions about consumer choice, the relative size of the credit union industry in comparison to the banking industry, and the cooperative nature of their organization and the non-profit aspects of it.

  Banks and thrifts will continue to make the case and argue that the credit unions obscure the public policy questions. They argue that the extension of the single common bond to multiple common bonds carries with it an extension of government benefits, such as exemption from taxation and special regulatory benefits, such as exemption from CRA. These are not new issues to our panelists, and we will hear extensively from all of them on both sides of these issues.

  Would Congress be stifling competition in the banking industry if we permitted credit unions to continue to expand their fields of membership? Are we doing our financial services industry a great disservice by allowing such expansion without a quid pro quo, such as imposing taxes and CRA on the credit union industry? These are highly controversial and very much open to policy debate.

  I hope that we can get new insights and balance our understandings here today by giving free and open expression to all sides of the issue. While I seriously doubt that the Congress--and here I am speaking now only for myself--I seriously doubt that the Congress will take preemptive action while the Supreme Court has it under review. It nevertheless is the responsibility of this subcommittee and our full Banking Committee to understand the competitive interests and not, like the ostriches, hide our heads in the sand.
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  So knowing that by next year at this time we could be under great pressure to redefine the common bond statute and address these very complex and controversial issues, I open this hearing today stating that we have an open mind and that we are going to look at this as objectively as possible and take into consideration the statements and the proof on all sides of this issue as presented by the interests that are represented here today, including, of course, the consumer interests.

  And with that, I will turn the hearing over to Mr. Vento, the Ranking Member on this subcommittee, for his opening statement.

  [The prepared statement of Hon. Marge Roukema can be found on page 84 in the appendix.]

  Mr. VENTO. Thank you, Madam Chairwoman, for your recognition and for holding this hearing today.

  As our lengthy witness list demonstrates, there is pent up demand and urgency before Congress today surrounding the issues of credit union membership and other matters affecting credit unions.

  This hearing today is critically important for everyone to take a good, solid look at this relatively narrow band of the financial services marketplace and to understand both what is currently happening and what could happen if we make changes to it. Credit unions, as with every other financial institution in the 1980's and 1990's, have changed and modernized. The marketplace has virtually dictated that financial institutions adapt or withdraw in atrophy. Congress and the various regulators have worked with laws, and within the parameters of laws, to keep depositories--that is financial institutions--viable and serving consumers, whether they be thrifts, banks or credit unions.
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  There will certainly continue to be disputes about the parameters of the marketplace as we evaluate the unique cooperative entities that have evolved into today's credit unions. Congress needs to examine all aspects of credit unions, indeed to evaluate if credit unions are fulfilling the role and vision for them even as credit union parameters have shifted and grown. Often these credit union changes took place in the context of significant economic and social change: Business mergers, failures, diversifications, spinoffs from court decisions and public policy actions, such as base closures and abandonment of communities by banks, thrifts and other financial institutions. Such circumstances and events could have left people with unmet credit needs and no credit options.

  Credit unions have seen their parameters change dramatically, as I said, but there is no conspiracy theory here. Credit unions had to adapt or die. Interestingly the parameters of other financial institutions have changed dramatically as well.

  In fact, even on the taxation issue, last year we passed the Subchapter S corporation law that could, in fact, make more small banks and thrifts become Subchapter S corporations and actually change the way they are treated for tax purposes; that is to say, not taxed at the corporate level, only taxed insofar as the dividends are paid to the investors, one of the common protests, I might add, that is leveled at credit unions, an old chestnut to be certain.

  In any case, I think that just demonstrates the types of changes that are occurring, dramatic changes in terms of how financial services meet the needs of our constituents today. The issue of credit unions has many facets and complications. Just as we worked in the last Congress with the banking insurance Barnett case in the backdrop, and a parallel universe, we again face the challenge of working on a dual track because Monday, February 24, as the chairwoman noted, the AT&T case was accepted by the Supreme Court.
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  Whether the subcommittee accepts this reality or not, the pace and content of legislative activity should not be dictated by the United States Supreme Court or by court decisions. The fact that the courts are involved is an indication that we have not moved to deal with, and set forth a clearly-defined path with regard to this problem which has been growing for the last 12 years. And these court cases are not a matter of effort that is accidental. This has been a concerted effort in terms of bringing these matters before the courts in order to thwart and to question and to challenge the role and the ability of credit unions to meet the needs of people in our districts.

  The question is whether 11,500 financial institutions, and in excess of that, credit unions will continue to serve our communities and constituencies.

  As we begin, many in Congress will ask credit unions or entities if they merit a different tax status or not, qualification of membership, limitation on powers. Given the product financial service modernization that we are about to embark upon with regard to other financial institutions more closely identified with Wall Street than Main Street, the credit union role and the services in our community will be more important than ever before.

  I will be fighting for the survival of the historic and relevant role of credit unions for my constituents and for this Nation. Groups representing consumer interests are fairly clear, as we will hear in the testimony today, that credit unions provide special services at highly-competitive costs when compared with other financial institutions or other service and credit agencies, including revolving credit and, to say the least, some of the more high-priced check cashing and other types of credit, which I would say are more exploitative than anything else.
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  So critics may argue they can do so because advantages to credit unions are extended in policy and law. Surely we must evaluate the merits of such points. We don't want to get in the way of anyone reducing interest rates or paying greater dividends. But let's keep in mind that the structure and powers are not limited to this entry franchise.

  As I said, in our first modernization hearing, we should do no harm to consumers who benefit directly from credit union service and indirectly through competition. This subcommittee and the Congress need to ensure viable credit unions while limiting risks to the shared insurance fund and to the taxpayer in general, in terms of the moral hazard, and yet we should strive to fully understand the concerns of credit union competitors--I am intent upon doing that today--who have been motivated to seek to remain competitive and viable in an ever-changing environment as well.

  Madam Chairwoman, I look forward to this hearing. As you know, Minnesota is the center of some of the cooperative activity. As an undergraduate from a school in the Midwest, I had to take required courses in cooperative economics, and I think that they have served us well. But my community, in fact, in terms of law firms in my district, I have most of the cooperatives, such as Cenex, Harvest States, Land o' Lakes. It is a center of cooperatives. They have been a successful part of Middle America, and I would suggest they are a successful part, especially through the work of credit unions. In almost every district across this Nation--in fact, one of the materials that we had before us pointed out that each of us have 160,000 credit union members in each one of our districts. I think that is ample evidence of the fact that they are meeting needs in a very important way in our districts and Nation.

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  I am very pleased to welcome our colleague Martin Frost, who speaks of one of the special focuses of credit union service in his district, and Scott Jones who is with us, the First Vice President of the American Bankers Association from Red Wing, Minnesota. That's where they make the great clay pots, Madam Chairwoman.

  In any case--and also Bob Anderson from Liberty Check Printers, who is an important service organization working with the credit unions.

  I appreciate the hearing. But more important, I will appreciate it if we can set up a markup and get moving on this particular issue, Madam Chairwoman. Thank you.

  [The prepared statement of Hon. Bruce F. Vento can be found on page 106 in the appendix.]

  Chairwoman ROUKEMA. Thank you. Mr. LaFalce, I want to reiterate to all Members now present that we are under certain time constraints because of the travel requirements of some of our panelists, but we will try to keep our opening comments limited, and I will be enforcing the 5-minute rule.

  Mr. LaFalce.

  Mr. LAFALCE. Thank you very much, Madam Chairwoman.

  First of all, I would ask unanimous consent to have my statement inserted into the record. I thank the Chairwoman.
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  A few points. First of all, we are delighted at a number of witnesses, all of the witnesses, but three in particular I want to mention; first of all, Congressman Martin Frost. Congressman Frost and I had the pleasure of having cocktails at the White House last night for almost 3 hours, much conversation. You would think that he and I would have talked about the budget or the death of Deng Xiaoping and its impact on world policy, but no, we talked about credit unions. And there were other discussions there about credit unions because this is one of the paramount issues right now.

  I am also very pleased that we will be having before us in panel number two a former Member of Congress, Norman D'Amours. Congressman D'Amours is a Member of the famous Class of 1974, one of the Watergate babies, my Class. Of course, everybody on this subcommittee should know that we start out with the presumption that a Member of that Class can say no wrong, do no wrong, speak no wrong, and so forth.

  But, Norm, that is a rebuttable presumption rather than a conclusive presumption. OK?

  And we also will have, not on the first, not on the second, not on the third, not on the fourth, but saving the best until last, on the fifth panel, a constituent of mine--that would have to be the best, of course--Mr. Michael Vadala, who is the President and Chief Executive Officer of the Summit Federal Credit Union in Rochester. They now serve over 60,000 members, the vast preponderance of whom work for very small businesses, about 60 percent of businesses of fewer than 100 members, and about a third have 25 or fewer employees.

  And even under the Court stay we have some difficulties. We have a number of small businesses, five, six employees, that would like to join but can't because they are a new group. We have a number of friends of mine from a parish in my hometown, for example, the town of Tonawanda, Saint Christopher, would like to join a credit union, and they can't, even under the latitude of the stay that exists. Madam Chairwoman, we have got to do something for Saint Christopher.
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  Chairwoman ROUKEMA. Why don't you introduce the legislation, Mr. LaFalce?

  Mr. LAFALCE. Well, I am working on that, and I will be shortly, because I don't think it is good enough. The legislation that the Supreme Court is interpreting is over 60 years old, and for us to say that we ought to wait for a Supreme Court interpretation, which probably wouldn't come until the beginning of 1998, to fashion the financial modernization legislation that we seek, I think, would be a dereliction of our duty. I think we should act as part of our modernization legislation, at the very least, if not separate from it, but quickly, to determine how we can maintain the character of credit unions as we originally envisioned them in today's modern world, without bringing about unfair competition with other types of financial institutions.

  I think that is a challenge before us and that we should rise to that challenge. I thank the Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Hon. John J. LaFalce can be found on page 100 in the appendix.]

  Chairwoman ROUKEMA. I want to acknowledge the presence of the Chairman of the full Banking Committee, Chairman Jim Leach. Mr. Chairman, do you have an opening statement?

  Mr. LEACH. I would like to point out that the subcommittee has chosen this week to listen to this issue under Mrs. Roukema's leadership, and we expect to give all sides the fairest possible hearing, and we will be open to any and all reasonable suggestions. There are no guarantees that anything can be resolved, but there are going to be totally open minds, and we are going to try to move toward consensus if at all possible between all parties, in both the private and the public sector.
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  Thank you.

  [The prepared statement of Hon. James A. Leach can be found on page 90 in the appendix.]

  Chairwoman ROUKEMA. Thank you, Mr. Chairman.

  Is there a Minority Member that has an opening statement?

  Ms. Roybal-Allard.

  Ms. ROYBAL-ALLARD. Thank you, Madam Chairwoman.

  First I would like to thank Chairwoman Roukema for calling this hearing on the issue of the common bond provision of the National Credit Union Act.

  The issue before our subcommittee is a significant one, because credit unions fill a serious void in the financial services industry. Credit unions provide millions of Americans with basic financial services, such as debt consolidation and personal loans to individuals who would not qualify at most banks. And as not-for-profits, they provide this service at lower costs.

  Credit unions are cooperatives owned by their members who have an equal vote in electing the board of directors. Because credit unions are tied to the community, it is not surprising that consumers consistently give credit unions the highest marks in consumer satisfaction. Without credit unions, many consumers would be without easy access to financial services.
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  For example, in my district located in Southeast Los Angeles, there is approximately one bank branch per 11,000 individuals, as compared with a more affluent community like Pasadena, which has one bank branch for 2,700 individuals. This is an example where credit unions are crucial to meeting the financial needs of underserved areas like my Congressional district.

  It is for this reason that the common bond issue concerns me greatly. For many credit unions, the ability to diversify and serve new groups is what has enabled them to survive. A good example is the Los Angeles Schools Federal Credit Union, which currently serves over 17,000 members, over 2,000 of which live in my Congressional district. We are pleased that Ms. Winifred Corey, the CEO of this credit union, is here to testify.

  Originally, the L.A. Schools Federal Credit Union only served employees of the Los Angeles Unified School District. In 1992, the school district encountered financial problems which resulted in large reductions in the district's workforce. The resulting financial impact on the credit union was devastating. Had they not been able to diversify to include local community colleges, the credit union most likely would have closed, leaving many underserved areas without adequate financial services.

  Therefore, in considering the common bond issue, we must make sure that credit unions, their members and the American consumer are protected. And I look forward to exploring this issue further, and I look forward to hearing the testimony.

  Thank you, Madam Chairwoman.

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  Chairwoman ROUKEMA. Thank you very much. Are there other opening statements?

  Mr. BENTSEN. Madam Chairwoman.

  Chairwoman ROUKEMA. Yes, Congressman Bentsen.

  Mr. BENTSEN. Thank you, Madam Chairwoman. I don't have a prepared statement, but I have a couple of comments I would like to make quickly.

  First of all, I want to thank you for calling these hearings. I think it is appropriate and important that we address this issue and try and get to the bottom of it as quickly as possible. I welcome my colleague Mr. Frost, from Texas, who will testify before us today.

  This is a very difficult issue, indeed. While I believe very strongly in credit unions, the credit union industry has evolved as our society and economy have evolved, and the definition of ''common bond'' has changed over time, and so I think it is a difficult issue. I think the Congress has to be prepared to deal with it.

  The fact that the Supreme Court has now decided to take up the issue perhaps further complicates the issue, but I am eager for our subcommittee to move forward on it, work on it, try and come to a solution which may evade us at this point.

  I thank the Chairwoman.

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  Chairwoman ROUKEMA. Thank you.

  Mr. Barr, do you have an opening statement?

  Mr. BARR. Just very briefly, Madam Chairwoman, and I thank you for the opportunity, and also for the opportunity for the American people to begin the process of focusing on the very, very important issue of maintaining our credit unions as an option for American citizens, particularly for small businesses and individual citizens in small communities, large communities as well, and corporate employees.

  The availability of credit unions provides a very, very important component of the array of social--of financial--services that are available to consumers, and I think it is very important that we begin this process of focusing in on what the real issues are, look at the real statistics, the history of what has gone on before over the last 12-or-so-years, and I look forward to developing, if we need to, legislation that maintains a proper balance, yet does not, in any way, shape or form, detract from the very, very important, indeed essential, role that credit unions play as a part of a financial services delivery to consumers in this country.

  So I appreciate, Madam Chairwoman, your beginning that very important process that we will work through, and I am sure that through this committee and the work of this subcommittee and under your leadership, we will have hearings and, if necessary, legislative markup over the course of this next year-and-a-half that is not swayed or drawn off-track by unrealistic or inaccurate information, that we focus in on what the real story is.

  And I think through that it will become apparent that we must maintain the ability of credit unions, we must maintain their strength, and yet do so in a very fair way. And I look forward to that process, Madam Chairwoman.
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  Chairwoman ROUKEMA. Thank you.
  Ms. Kilpatrick.

  Ms. KILPATRICK. Thank you, Madam Chairwoman, for the opportunity to speak.

  As my colleagues have said, we do look forward to, and I want to thank the Chairwoman for having this, convening, this meeting so that we can hear from the credit unions. There has been much written about their use, about their need. I personally have been a credit union member for all of my adult life, as a teacher, as a State legislator and now as a Federal employee. So I am very anxious to hear from you.

  There was quoted in a New York Times article a week or so ago that one of my districts, and I represent seven communities in Michigan, Hamtramck, one of the credit unions there, the banks are wanting to close it because of the competition, I believe, and I believe that the credit union industry does provide the competition American consumers need as we take care of our banking needs. So I am anxious to hear and look forward to hearing our colleague Mr. Frost as he addresses the subcommittee.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Congressman Frost, we welcome you here today.

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  The Congressman represents the 24th District of Texas and is a senior and prominent Member of the House Rules Committee. He had requested the opportunity to testify before us on a specific concern of his.

  Congressman Frost.


  Mr. FROST. Well, good morning, Madam Chairwoman, Mr. Vento and Members of the subcommittee. I appreciate the opportunity to appear before you this morning to share with you a concern I have regarding the current debate about the future of the credit union industry.

  As each of you is aware, the future of the credit union industry will, absent any action by Congress, be determined by the Supreme Court. Given the fact that on Monday the Court agreed to review the now-consolidated AT&T Family Credit Union case, appealed from the U.S. Court of Appeals for the District of Columbia, the decision of the Court could have an impact on literally millions of current and future credit union members across the country.

  I commend this subcommittee for holding this hearing at this early date, because in a matter affecting so many Americans, all sides of the issue surrounding the field-of-membership debate should be fully aired. And even if this matter is now pending in the courts, it is still one of great consequence deserving the full and close attention of this subcommittee.

  My purpose in appearing before you today is to bring to your attention a bill I have introduced which concerns only a small part of the current debate, but one which relates directly to the questions you have raised, Madam Chairwoman. As you point out in your letter of February 19th, the Federal credit union system was originally established to make credit available to people of small means. In my Congressional district, in Fort Worth, Texas, there is a low-income minority neighborhood which is, for all intents and purposes, unserved by mainstream financial institutions. There are no branches of banks within the neighborhood. The closest is five miles away, which for residents without a car, especially the elderly or those with small children, is a long way to go to conduct simple banking transactions.
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  Last Fall, I was present when a branch of a local credit union was opened in the Polytechnic Heights neighborhood of my district. This branch was opened to serve the residents of Polytechnic Heights, despite the lack of a common bond association with the original core group of the credit union. The credit union was given the authority to create and open this branch through a National Credit Union Administration Interpretive Ruling and Policy Statement, which has allowed since 1994 Federal credit unions to expand their field-of-membership to specific low-income communities or associations. But access to this new financial service is at risk because of the pending court case, since by and large the residents of Polytechnic Heights are not members of the originally common bond association of the credit union.

  Minority and low-income neighborhoods throughout the country are chronically underserved by mainstream financial institutions, and many of those that are located in such neighborhoods cannot make their services available at costs that are within reach of the poorest of an area's residents. In this day and age when electronic banking, debit cards and ATMs are commonplace to the majority of the consumers, I want to ensure that my constituents living in Poly can have access to those conveniences most of us take for granted. Credit unions can offer that access, and my legislation will codify their ability to go into the Nation's poorer communities and offer their services.

  House Resolution 57, the Improved Availability of Banking Services in Underserved Communities Act, amends current law to specifically provide that even absent a common bond affiliation, credit unions may expand into specifically defined low-income neighborhoods which are currently underserved by other banks or savings associations.

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  In order to assure that low-income neighborhoods are adequately defined, H.R. 57 uses the definition found in the Bank Enterprise Act of 1991, which generally provides that an area be within the jurisdiction of one unit of local government; that it have a population of not less than 4,000 within a metropolitan area with a population of 50,000 or more; that at least 30 percent of its residents have incomes which are less than the national poverty levels; and that the unemployment rate be one-and-a-half-times greater than the national average.

  This proposal does not address the larger issues of field-of-membership or common bond association. Rather, it codifies a ruling which grants credit unions the ability to offer traditional financial services in neighborhoods that might otherwise remain unserved.

  As you examine the spectrum of issues related to the current credit union case, I would urge you to give serious consideration to my proposal. Thousands of Americans have no easy or affordable access to financial services. A credit union wants to do it in my community, and I feel sure that there are many more who stand ready to do the same in communities across the Nation.

  I appreciate your attention. Thank you, Madam Chairwoman and Members of the subcommittee.

  Chairwoman ROUKEMA. Thank you, Congressman Frost. I really appreciate your testimony here today. It is quite appropriate that this be brought before the subcommittee because it is, as you have identified and I agree with you, it is in the context of the larger debate. Again, whether or not we will be directly addressing this in separate legislation is still open to question, but we will know far better after we have this hearing today and as we evaluate the intended actions of the Court.
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  But it is appropriate to note this particularly-defined issue is not only confined to your district. It would apply across the country, and, of course, then it becomes part of the CRA debate as well. But you are quite correct to point out the relevance of it in the context of this debate, and we thank you for your testimony.

  Congressman Vento.

  Mr. VENTO. Well, thanks, Madam Chairwoman. I appreciate my colleague's testimony. I think he is Exhibit A in terms of why we need to legislate in this area. As they are struggling to meet needs in various parts, this category of credit union, in terms of communities is one, I think, that there is general agreement on. But yet it is limited, and will be limited for some 18 months. Being limited for 16 months--or whatever the time is between now and the Court decision--can change the entire complex of what happens in terms of our economy and in these neighborhoods across America.

  So I think it is just another example of why we should not hold up action on this. We should move, deliberate, understanding what we are doing and try to provide whatever relief we can without compromising some of the issues.

  I appreciate his testimony.

  Thank you, Martin.

  Chairwoman ROUKEMA. And, Congressman Frost, if you have further expansion of your statement, the full text of it will be included in the record.
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  Mr. FROST. Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you very much.

  [The prepared statement of Hon. Martin Frost can be found on page 101 in the appendix.]

  Now, our first panelist is Mr. Norman D'Amours, who is not only a former Congressman, as identified as part of the Class of 1974--I believe he was identified by one of our colleagues--but a former Member of this committee.

  Mr. D'AMOURS. That is correct.

  Chairwoman ROUKEMA. He is here today as Chairman of the National Credit Union Administration, which oversees and is more or less the regulator of, the U.S. State and Federal credit unions, National Credit Union Administration Chairman Norm D'Amours, welcome today.

  I would ask for unanimous consent not only for Mr. D'Amours, but all of our panelists today, to have the full text of their statements included in the record. I will be trying to enforce the 5-minute rule with some courtesies, of course, but that will mean that some statements have to be abbreviated. But the full text and all documentation, with unanimous consent, will be included in the statement. So moved.

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  Mr. D'AMOURS. Thank you, Chairwoman Roukema, Ranking Member Vento, Congressman LaFalce, members of the panel, Chairman Leach. I appreciate this opportunity to testify. I am going to try my best to keep my remarks within the 5-minute. In practice, I can do it. I don't know if in actuality I will succeed.

  Madam Chairwoman, I am pleased to report that credit unions and their Federal insurance fund have just had the best year in their history. Year end 1996 data shows a gross capital ratio of 11.4 percent, delinquencies at only 1 percent, net return on average assets a healthy 1.1 percent, and the number of failures fell for the third straight year to a record low of 19. That is out of a universe of about 11,500 credit unions.

  This picture of health could be threatened, however, if our existing field-of-membership and expansion policy is rolled back or severely curtailed.

  To address viability problems resulting from the economic downturn in the early 1980's, the NCUA Board in 1982 interpreted the Federal Credit Union Act to allow federally-chartered credit unions to expand their field-of-membership to include multiple groups, so long as members in each group shared a common bond. This strategy of diversification was adopted to strengthen credit union safety and soundness, and it worked.

  In 1981, 222 Federal credit unions failed. In 1982, with the newly revised policy in effect, those failures dropped to only 112; and in 1983, to only 40.

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  The multiple field-of-membership policy has helped keep credit union failure rates and payouts from the taxpayer-backed insurance fund at relatively low levels. Unfortunately, the U.S. Court of Appeals for the District of Columbia in July 1996 reversed the district court decision, which sustained our multiple-group policy. This reversal, if sustained, severely threatens the viability of credit unions by forcing them to rely on a single sponsor, and that is why the NCUA Board believes that Congress should act to clarify the Federal Credit Union Act on the question of common bond.

  In addition to preserving the freedom of financial choice for Americans, addressing safety and soundness concerns and helping employees of small businesses, NCUA's evolving field-of-membership policy has enabled credit unions to better fulfill the mission of the Federal Credit Union Act that requires credit unions to make reasonably-priced financial services available to people who banks are not particularly interested in serving.

  For instance, a policy statement adopted by the NCUA Board in July 1994 encouraged larger healthy credit unions to directly reach out into low-income inner-cities and rural communities. The district court injunction has halted the successful new policy.

  Common bond is not a sine qua non for credit unions. The earliest credit unions in Canada and the United States and New England were mostly based on geographic boundaries without regard to common bond, but it was discovered in practice to be easier to organize credit unions within factories or associations because those units were already organized. People working or associating or living together in compact communities knew each other and were usually aware of a colleague's ability or disposition to repay a loan. They had a bond.

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  Common bond then was an organization mechanism for credit unions and an early standard of safety and soundness. It was never the defining characteristic of credit unions. Should Congress decide to remove what we and some Federal judges believe is an ambiguity in the common bond provisions of the Federal Credit Union Act, it would simply be protecting the original purposes of the act by promoting safety and soundness and facilitating the availability of fairly-priced financial services to people who otherwise wouldn't have access to them.

  Madam Chairwoman, there are clear differences between the operations and regulatory activities of credit unions and banks. Credit unions are unique because they are not-for-profit. They are member-owned, volunteer-directed and democratically operated cooperatives where each member has one vote. They are the only financial institutions chartered with the avowed social mission of making loans available and teaching the benefits of thrift to people of small means. And credit unions are much more strictly limited in their investment authorities than are banks.

  I am almost finished. If you would bear with me, Madam Chairwoman.

  Chairwoman ROUKEMA. Absolutely.

  Mr. D'AMOURS. Thank you.

  NCUA's multiple-group policy has simply allowed credit unions to achieve the safety of diversity and enabled them to offer low-cost financial services to a greater number of working and low-income Americans. They should not be taxed, because taxation will ultimately destroy this uniqueness. Nor should they be subjected to Community Reinvestment Act requirements.

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  The vast majority of credit unions have an occupational or associational bond. They can legally only serve those members. All credit unions, by definition, are controlled by their depositors and borrowers. They have no incentive to deprive their member-owners of services.

  In summary, by allowing Federal credit unions to diversify their fields of membership, the safety and soundness of the credit union system has been significantly bolstered. Credit unions have been enabled to adapt to profound changes in the American economic landscape, and many more Americans have freely chosen to be served by these member-owned financial cooperatives.

  I thank you for your attention, and I would be happy to try to answer any questions.

  [The prepared statement of Mr. D'Amours can be found on page 115 in the appendix.]

  Chairwoman ROUKEMA. Mr. D'Amours, you have raised a couple of issues here, but I am going to go to a question that was brought to my mind not only by some comments made by some of the credit union people in my own State, but more directly when I happened to have a business meeting, roundtable meeting, last Monday, and along with certain corporate entities that were there, there were a few bankers who naturally, knowing of not this hearing, but knowing of financial modernization, had questions in that context. But in the context of that, questions were raised which kind of parallel what some of the credit unions have been saying, and that is do we have a savings-and-loan-type debacle in terms of defaults that would be out there should we not address the credit union question?

  Now, I think it is your opportunity to address that question. That is, would there be a taxpayer liability? Are the credit unions out there not able to deal with the common bond approach? Is there a real threat to solvency out there? Can you address that question?
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  Mr. D'AMOURS. I would be----

  Chairwoman ROUKEMA. Quite aside from the tax question that I know is going to come up over and over again, both from the bankers as well as other Members on this subcommittee.

  Mr. D'AMOURS. Chairwoman Roukema, I would be delighted to address that question. Credit unions are among the healthiest of financial depository institutions extant today. Their capital is 11.4 percent. Their net capital is 10.8 percent. They are the only financial institution in America that has never made a claim for a penny upon the United States Treasury. Their fund is at very healthful levels and, in fact, paid a dividend in the past 2 years and is expected to pay a dividend in the next year to the depositors into that fund.

  I can assure you, Madam Chairwoman and this subcommittee, that there is nothing appearing on the horizon that should cause anyone to be concerned, unduly concerned, about the health and viability of the credit union system.

  Chairwoman ROUKEMA. Now, as part of that, can you address the direct question of the field-of-membership, if there were sharp limits on the field-of-membership that----

  Mr. D'AMOURS. Oh, I am sorry.

  Chairwoman ROUKEMA. No, no, you are correct. I had both of those questions, and I wanted you to make a statement on the safety and soundness. But now the related question is, are we out there with credit unions that have been planning and are dependent upon the current interpretation of field-of-membership?
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  Mr. D'AMOURS. If Judge Jackson's injunction had not been stayed, in part, by the Circuit Court of Appeals, credit unions within 6 months, some within a year, most of them over time, being unable to add new fields to their membership, would have begun to take a hit upon their earnings and, therefore, over time upon their capital.

  There is also the question of the ability of--I am sorry. I lost my point. I had two points to make. I got to the first one and lost the second one.

  Chairwoman ROUKEMA. Take your time.

  Mr. D'AMOURS. There is another dimension to that. Exactly. Madam Chairwoman, forgive me for losing this point.

  Chairwoman ROUKEMA. That is all right. Take your time.

  Mr. D'AMOURS. It is the more important of the two points. If credit unions are forced to rely on single sponsors, are prohibited from diversifying--I think one of the things we have come to learn in this subcommittee and in this Congress over the years is the importance of capital, but also of diversification. If credit unions are forced to rely upon a single sponsor, then they rise and fall in a rapidly-changing American economy and world economy on the health and viability of that sponsor. By allowing them to diversify, we assure their safety and soundness. By withdrawing that ability, I think we put them at greater risk.

  Chairwoman ROUKEMA. All right. Thank you. I think we will be hearing a contrary point of view from some others on panels later, but I did want to have your assessment on the record. And if you have some sort of documentation that you would like to add to the record and present to this subcommittee in writing on that issue, I would greatly appreciate it.
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  Mr. D'AMOURS. We have, and I will.

  [The information referred to can be found on page 141 in the appendix.]

  Chairwoman ROUKEMA. Congressman Vento.

  Mr. VENTO. Thank you, Madam Chairwoman.

  I think what I hear you saying is that if credit unions are not able to adapt to the changing marketplace in terms of field-of-membership, that, in fact, it has a direct relationship to their safety and soundness.

  Mr. D'AMOURS. Absolutely. Absolutely, because you are prohibiting them from exercising the same rights to diversification that you are simultaneously allowing to most of the rest of the financial sectors.

  Mr. VENTO. What particular action are you proposing? Are you asking Congress to take action, or are you asking us to wait until there is a conclusion to court decisions?

  Mr. D'AMOURS. I think I would agree with the comments that you made earlier in your opening statement, Congressman Vento, that Congress should begin addressing this question immediately. The Supreme Court, we think, in its wisdom may very likely agree with the policy interpretations that our agency made in 1982. There is always a chance that they would not, and it would be awfully late in the game to start addressing that question if we had precipitously imposed upon us some draconian injunction that would not only prevent us from adding new fields of membership to credit unions, but allowing the addition of new-member credit unions, but also the divestiture of existing fields of membership. That question should be approached, tackled by the Congress now, and Congress should act either now or, depending on what the Supreme Court does, immediately upon that Supreme Court decision.
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  Mr. VENTO. I think it is a question of whether--obviously, is this an acute issue? It obviously is not a crisis, because Judge Jackson's order was stayed. So it is not a crisis, but it is an acute problem, isn't it?

  Mr. D'AMOURS. Judge Jackson's order is stayed because of the Supreme Court appeal. We were ordered by the U.S. Circuit Court of Appeals to report back to them in 14 days, as Chairwoman Roukema noted, of the Supreme Court deciding to take certiorari or not take certiorari. If the Supreme Court should decide this case against us--we are confident they would not, but if they do, there could be an immediate emergency that Congress would not have time to address. We would suggest that Congress get started on this immediately.

  Mr. VENTO. Well, I agree, and I, you know--as you look at the number of individuals that are members of credit unions, it obviously could have a profound effect upon our economy. I mean this is something. I think there is some sort of intermediate action that we could take in terms of some safe harbor, as it were, for certain activities. As you look at the field-of-membership, aren't there three different points you made? I can't remember all of them. One of them based on occupation, one of them based on company, one based on community. And it sounds as though the issue with regard to community, and correct me if I am wrong, Norm, or, sorry, Mr. D'Amours, the----

  Mr. D'AMOURS. Or Mr. D'Amours, if you will take the Italian pronunciation.

  Mr. VENTO. But the issue is that there isn't or shouldn't be controversy over the community. In fact, there seems to be a lot of consensus over the issue of community or outreach-type of issue, and I note that even as I talk to the members--the bankers who have, of course, instituted some of these questions through these court proceedings, they agree that there ought to be--there is some common ground here.
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  And the question is, we should act to try and avert or at least provide some guidance in this case without necessarily completely vitiating the Court decision. If you could gain that type of an agreement, it would be fine. But I think that we should be in a position where we are acting, not waiting on the Court. I mean, that has been sort of one of, I think, the pitfalls of the subcommittee in terms of depending upon regulators to do extraordinary things as was done in 1982, but the evolving definition here has absolutely been essential for the credit unions to continue to operate and serve.

  And I think the same is true if all of a sudden we pull the rug out under banks or other S&L's that had functions--maybe at some time we should have, I guess, thinking about the conduct and the consequence of the S&L problems, but--and I might say that Mr. Leach and I voted for issues dealing with direct investment, if the Chairman might remember.

  But in any case, we should, in fact, be acting in this instance, especially on such a fundamental point as this, rather than waiting on the Court. If you wait on the Court, wait until the Court decisions are concluded, it might be a long time because they seem to be proliferating court cases rather than coming to some sort of definitive conclusion.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Chairman Leach.

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  Mr. LEACH. No question, other than to thank you very much, Chairman D'Amours. You have a great deal of respect on the Hill, and we appreciate your testimony.

  Mr. D'AMOURS. Thank you, Chairman Leach.

  Chairwoman ROUKEMA. I believe Mr. LaFalce is next.

  Mr. LAFALCE. Thank you very much, Madam Chairwoman.

  Mr. D'Amours--Norm, I think there is a tendency on the part of Congress generally to defer action so that there can be a gestation period to give thought to it, particularly when the Supreme Court is going to decide the case.

  The problem is, you don't know how the Supreme Court is going to decide that case. The ABA and the IBAA, and so forth, they don't know how the Supreme Court is going to decide the case. And when the Supreme Court decides, probably one side is going to have a big upper hand; the other side not. But between now and then there is a state of uncertainty, and, therefore, there's a certain leverage equilibrium, and it is possible for reasonable people to get together and find an accord and almost, you know--and fashion legislation, and yet I don't think we are there yet. I still think we are seeing posturing on the side of the credit unions, posturing on the side of the banks, and we have got, for the most part, extreme legislative positions being discussed, even if not introduced yet.

  At some point in time, as we go along, it would be helpful if there was some mechanism that is developed involving the interest groups with competing perspectives, to see if they can find some common accord and common ground. I think that would be helpful. And you are in a position to reach out and help bring that about. And I hope that you would do that and make some suggestions, as opposed to just saying, well, the maximum interpretation we can give the law that has existed, you know, that is one position, but that is not the position that will lead to some common ground.
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  Another thing is for us to do that, either independently or in concert with the outside world, and I think we should do both, proceed independently, but offer to meet with outside groups and fashion our own legislation. It is worth a beginning. You know, Congress just got back. This is what, our second hearing of the year on this subcommittee or third?

  Chairwoman ROUKEMA. No. It is our fourth.

  Mr. LAFALCE. Whatever. I have been at all of them, but this is the first on credit unions. It is still early in the session.

  In the BIF/SAIF legislation, I introduced about a dozen bills taking a dozen separate approaches. That is what I am thinking of doing now, working on a lot of different approaches that we could take to deal with this issue to try to be fair. They might go in different directions, and I would want to work with you on that, not because any one of them would be right, the best, but I think we have got to start moving the ball rather than just staying still and waiting for somebody else or something else to do it, because we could come back here at the end of this year--October, November--and say well, the Supreme Court heard the case, and now they will decide it at some point in time, and we would not have advanced very much. I look forward to working with you in that process.

  Mr. D'AMOURS. Thank you. If I may respond briefly?

  Chairwoman ROUKEMA. Please do.

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  Mr. D'AMOURS. Mr. LaFalce, I appreciate the suggestion, and I can assure you that we will be open to reasonable approaches to solving this problem, but we must be insistent on maintaining and preserving a system that allows the provision of credit union services to low-income people, blue collar people, wherever they be. It may be in an area like Polytechnic Heights that Congressman Frost represents, or they may be scattered diversely in other places.

  So as long as we can come up with a system that allows the provision of credit unions to bring their services of empowering Americans to the fore and does not threaten their ability to operate as a cooperative member-owned system, as we believe taxation would. You know, I am reminded of the old story of the chicken and the hog walking down the street, and the chicken suggesting: Wouldn't it be great if they could cooperate? They could come up and have a meal of ham and eggs. And the hog said, ''Well, for you that is a contribution. For me, that is a total commitment.'' I am not sure that is--I am not sure--sometimes it is difficult to compromise.

  Mr. LAFALCE. Do I have any time left, Madam Chairwoman?

  Chairwoman ROUKEMA. No, I am afraid not.

  Mr. LAFALCE. All right.

  Chairwoman ROUKEMA. Mr. Barr, I would like my panelists to know, particularly the newer Members of the panel, that the custom is to accept Members in the order in which they have arrived at the hearing.

  So Mr. Barr is next.
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  Mr. BARR. Thank you, Madam Chairwoman.

  Mr. D'Amours, I think that credit unions are founded in, I presume, every State of the Union in virtually every community, large and small, or at least the vast majority of communities across America. Unfortunately, when the national media gets ahold of something, they will find the one wart that is out there, the one institution that maybe you don't want highlighted, or the one problem area, whatever it is that we are talking about. And I think the New York Times has probably done that today in an article here talking about Omni American. And it says that, of course, that they put out literature talking about worldwide this and that and millions and billions of dollars, as Carl Sagan would say, and, you know--I suspect that that is not really, and I hope that that is not, typical of credit unions.

  Credit unions, I think, do fill an important niche, and I hope that the goal would not be for credit unions to become multibillion-dollar worldwide organizations. I think that would be, if that were sort of the course on which you all are heading, which I don't think it is--would not be advisable, and I think would legitimately set off some red flags in other components of our financial services industry in this country.

  But I would appreciate--if you could, focus with me for just a minute on the current language of the Federal Credit Union Act, which states that, quote, ''Federal credit union membership shall be limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district.''

  To me on its face that seems pretty clear, but there obviously is some, you know, confusion that has been engendered by both the industry--the competing components of the industry--as well as now the courts. And I think some of the language that the courts have used is unfortunate also.
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  But focusing on that language, and I know that there is some draft legislative language out there that would change that to read: ''Groups having common bonds of occupation or association,'' and so forth. Is that the only way that this problem can legitimately be addressed legislatively? Or is there some other way that we can perhaps focus in on the existing language and tighten it up so that it covers what credit unions need to have tightened up so that they can continue to offer legitimate services within some defined unit or area or purpose, yet not open the door to, you know, having Omni American--and I hate to pick on them, but, you know, it is the one in the paper--so that this does not really become the goal or the norm, because I don't think it is or should be.

  Mr. D'AMOURS. Well, to answer your question in inverse order, Congressman Barr, I would not be very credible if I suggested that the legislative solution that you mention is the only way of doing it. We think it is the best way, the simplest way, the neatest way of approaching the problem. There very well may be equally good ways of doing it.

  Mr. BARR. And I am not--don't read anything into what I am asking. I am really just legitimately asking objectively if there are some other ways that we can look at this specifically?

  Mr. D'AMOURS. We think that the way that you outlined is probably the best way to do it, because it is the cleanest way of doing it.

  On the question of size, Omni American, I would just like to assure you that one-third of all credit unions are below $2 million in assets. Two-thirds of all credit unions are below $10 million in assets. Yes, there are large credit unions. The largest credit union in the world is Navy Federal Credit Union, just a few miles from where we sit. It is truly, in every way, a credit union. It serves people in the military, several of whom are on food stamps. It provides services, counseling services, free of charge, that they could not receive at competing financial institutions.
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  Size is not the determinant. Some credit unions have grown to be very large. That does not change their character, nature or definition. They still operate as credit unions. So while size is not the determinant, I assure you that the vast majority of credit unions compared to other financial institutions are very tiny.

  Mr. BARR. And is the major goal of what you and your member organizations are trying to accomplish to ensure that either through the court system or through legislation that the goal of making sure that it is those credit unions, the vast majority of credit unions, that their ability to reach out to citizens in local communities and form a credit union or to retain membership in a credit union, that that is not destroyed?

  Mr. D'AMOURS. That is correct.

  Mr. BARR. Is that the primary goal?

  Mr. D'AMOURS. That is our primary goal, but the large credit union also can reach out into that inner-city to provide services through a branch operation, for instance, to people who otherwise wouldn't have it. And even within those large credit unions, there already exists groups, as Congressman Vento said in his opening statement, that are too small on their own to form a credit union. Their choice is to join an existing credit union or to not have credit union services, and if a number of these, a sufficient number of these groups, get together in a single credit union, then that credit union becomes a large credit union.

  There is also the question of success. As credit union members do better, the assets of that credit union grow. We should not build a standard that penalizes success, that says, ''We like credit unions so long as they are not very successful; if they begin to succeed and their members begin to do well, we don't think they should any longer have access to credit union services.''
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  There is such a thing as American free choice at work here. If people choose to remain members of credit unions well after they have succeeded, we should not deprive them of that choice. Or if they choose to join a credit union, whatever their financial service, we should not deprive them of that choice, because it is those assets brought to the credit union that cooperatively are shared and make possible the provision of services to those people in Polytechnic Heights, Texas, and in large credit unions, if those people happen to be of small means.

  Mr. BARR. Thank you, sir.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Congressman Bentsen.

  Mr. BENTSEN. Thank you, Madam Chairwoman.

  Mr. D'Amours, I guess the problem, as you stated it, is credit unions are founded with a limited deposit base, and as that deposit base changes, Carswell Air Force Base closes down, then they must find ways to supplement a contracting deposit base. So we move to the separate employer groups or multiple-employer groups.

  The problem--the question that I have is this: How small is too small? If you can go from a group that has a common bond of a thousand, to a group that has a common bond of 250, to a group that has a common bond of 15, to a group that has a common bond of 1--I believe in the co-op system and the credit union system, but can you have a co-op of 1? And if you end up with a co-op of 1 and anyone can join, have you then created a two-tier consumer financial system which opens the door? That is the concern I have. And how would you address that?
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  I realize that, if I understand correctly, at the Federal level, you all must approve any entrance at 100 or more, but below 100, the credit union board can determine whether they can come in. Under Texas law, as I understand it, for a State-chartered credit union--and I don't know what it is around the country--they cannot go below 250.

  So there are two or three questions in there if you could address those.

  Mr. D'AMOURS. Well, again, in inverse order, our policy allows for a streamline expansion procedure of 100 or fewer members. We allow a credit union to take in a separate group with its own common bond of 100 or more people, or fewer people in low-income areas, and begin to serve them immediately without any paperwork. The paperwork comes afterwards. We call it ''streamlined expansion procedure.''

  We approve all additions, large or small, on a regular basis, if they are for a federally-chartered credit union.

  On the question of size, Congressman, I think it is generally accepted that you need a minimum of 500 members if you are going to have a successfully operating credit union. There is just not sufficient scale, economy of scale, to operate successfully if you have fewer than 500 members. And interestingly enough, that tends to be the definition of small business today, fewer than 500 employees.

  Mr. BENTSEN. But my question is--I understand that, and the economics would not work if you did that with some number, but once you have 500 and you have a credit union, then you go and merge with another small business that maybe does business with that community, and they have 15 employees, a design firm or whatever, a software firm, I guess the question I have is, is it possible that you can ratchet down to where you are merging with such small numbers of other employee groups that you end up merging with--you know, people who are self-employed, and you have opened the door to individuals who can just walk in and join a credit union?
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  Mr. D'AMOURS. Well, I don't know that any--we ever have had any experience of a single person claiming to be--to come in a credit union as a separate entity with a common bond. I just haven't given that any thought at all. But groups of 15 or 20 or 100 are not uncommon, and I don't know why one would want to prevent those people from having access to the credit union.

  And if there were three low-income people working as janitors in a certain company, and they wanted to join a credit union as members of that company, I don't know why we should tell them they can't, if they can't afford the fees that banks charge for checking, or if they want a better loan rate than a bank will give them. I don't know why we should tell them that because there are only three of them, they can't join a credit union.

  Mr. BENTSEN. Thank you.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Dr. Weldon.

  Dr. WELDON. We would thank you--I thank the Chairwoman. I do not have a question at this time.

  Chairwoman ROUKEMA. All right.

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  Ms. Kilpatrick.

  Ms. KILPATRICK. Thank you, Madam Chairwoman.

  Mr. D'Amours, how are you this morning?

  You made some mention of this in your remarks about the CRA, but in lieu of the CRA, what are the specific types of programs, services or commitments does the credit union make to the various communities? I am happy that you are well, you are financially sound, you are growing, you are serving, you are representing in areas where banks do not exist. What specific programs and services in the local CRA do you offer?

  Mr. D'AMOURS. Credit unions operate cooperatively not only individually, but even amongst themselves. Credit counseling, teaching credit union members the benefits of thrift, how to balance their checkbooks. We have even had cases where a member wanted to join a credit union. This was in Cincinnati, Ohio, a small, low-income community, called Over the Rhine, where a person wanted to join a credit union because they wanted to borrow money to buy a television set--to pay for a television set they had already purchased from a rent-to-own store.

  They came into the credit union. The manager looked at the television set and said, ''What did you pay for it?'' And it turned out that the price of the television set was way above what the fair retail price should have been, and that was their down payment. They were going to have to make monthly payments beyond that for a couple of years. It was an absolute rip-off.

  The credit union manager sent that person back to the rent-to-own store with the television set, helped them to get their money back, and gave them a loan to buy a television set at a fair price that they could afford.
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  There is no other financial institution than credit unions that get involved on the personal, one-on-one basis, that credit unions do.

  Navy Federal Credit Union, the largest Federal credit union in the country, has a department that provides free of charge credit counseling. Anybody can come in and say, ''I am in trouble; my credit cards are overwhelming me,'' or ''my checkbook is out of balance,'' and they get free services, absolutely no charge. They get counseling as to how to do the basic things that a lot of us have learned to do over the years because of our backgrounds or educations, but there are a lot of people who don't know how to do those things. Nobody but the credit union people are servicing those people the way they should be serviced.

  Ms. KILPATRICK. If I might follow up, Madam Chairwoman, then, as a Congressperson who represents seven cities and many credit unions and banks in those, some of the larger banks in the country in this district, are your services available to me to take on the road to amplify what you just described in a larger setting, and groups of people in that kind of way? Do you do the one-on-one only, or are you available to me to use as a resource as I represent the people in that district?

  Mr. D'AMOURS. I am not sure I understand the question.

  Ms. KILPATRICK. What you just described was a one-on-one kind of thing or as a person who wants to come in and use it.

  Mr. D'AMOURS. To the credit union?
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  Ms. KILPATRICK. To the credit union.

  I want to expand that, as I think of CRA and their investing, how credit unions might be used to amplify what you just said in a broader sense, to teach or educate.

  Mr. D'AMOURS. Congresswoman Kilpatrick, credit unions can only serve their members. So they are limited in being able to do this kind of counseling to their existing membership, or to people within their fields of membership. They are doing that today.

  Ms. KILPATRICK. Thank you, sir.

  Mr. D'AMOURS. You are welcome.

  Chairwoman ROUKEMA. All right. Thank you.

  Mrs. Kelly.

  Mrs. KELLY. Thank you, Madam Chairwoman.

  Madam Chairwoman, I was unable to be here when the subcommittee convened. And I respectfully request that my initial statement be included in the record of this hearing.

  Chairwoman ROUKEMA. There is a unanimous consent request for all Members.

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  Mrs. KELLY. Thank you.

  [The prepared statement of Hon. Sue W. Kelly to can be found on page 105 in the appendix.]

  Mrs. KELLY. Mr. D'Amours, I am glad you are here today. I wanted to just ask you three quick questions. We have a very short period of time for these questions, so that is why they are quick.

  If the Court finds against AT&T and the credit unions will be affected, how many of those credit unions do you think are likely to close, just quickly off the top of your head?

  Mr. D'AMOURS. I don't think anybody could answer that question, even--not even over a period of time. Time will tell. But we know it will have a significant impact on over 3,000 credit unions, 3,500 credit unions that have multiple groups.

  Mrs. KELLY. OK. Thank you.

  Next, the GAO has found there is no evidence that today's credit union members are for the most part people of small means. Why do credit unions have the ability to offer the same range of consumer lending products in accounts and services as banks and savings institutions, but they are exempt from taxes under CRA requirements for those--I am talking about those credit unions specifically. And if institutions are--don't have a level playing field, how can we rectify the problem? That is a two-part question.

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  Mr. D'AMOURS. I am not aware, Congresswoman Kelly, of any such GAO study. I would be happy to consider that study if you would make it available, but I--neither I nor anybody--any of my staff here are aware of it.

  Mrs. KELLY. We are talking about a credit union study that the GAO--a study that they did about credit unions--that indicated that they serve a great deal of high-income people.

  Mr. D'AMOURS. Well, I know that there have been some studies showing that the average household income of people whom credit unions serve is higher than the average household income of people whom credit unions do not serve. There might be many reasons for that, one of them being that most of the people who belong to credit unions are employed.

  The American Bankers Association has been spreading that number around for quite some time now. But what is not included in those numbers is that the average bank customer earns much more than the average credit union customer in terms of household income. So one has to put these matters into perspective.

  Mrs. KELLY. Our problem is trying to find a level playing field for banks and credit unions. I really feel very strongly that having the availability of credit unions that are someplace where the little guy can go offers a tremendous assistance to small people who don't have much money, so they can get started in life, and that you are serving a very good community purpose there.

  Our problem is to find this level playing field, and we need to have all the help we can get to understand that.
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  Mr. D'AMOURS. I very much agree with you, Congresswoman Kelly. The level playing field is for those people of small means who don't have access to traditional financial services. One of the functions of credit unions is to teach, and by statute, they are ordered to make loans to people of small means and also to instill habits and teach the benefits of thrift and of systematic savings to people.

  Only credit unions are doing this. The level playing field is for those people who are credit union members.

  Mrs. KELLY. Would you think that the credit unions would agree to some form of taxing?

  Mr. D'AMOURS. No, they would not.

  Mrs. KELLY. To level the playing field?

  Mr. D'AMOURS. That would be most pernicious to the cooperative structure of credit unions and would change the way they are managed, change the way they compete. Credit unions are fundamentally cooperatives, and one has to be very careful in taking any action that might have a negative effect upon that cooperative structure.

  Mrs. KELLY. Thank you.

  Chairwoman ROUKEMA. Mr. D'Amours, the reference to the GAO study and the quote that we had here, I will get the documentation and present that to you to see when that study was done and what that quote was. I don't have it here at hand, but we are----
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  Mr. D'AMOURS. The study was in 1991. I read that study at one point.

  Chairwoman ROUKEMA. The quote is that ''There is no evidence that today's credit union members are for the most part of small means'', unquote.

  We will get that for you, and then you can respond to it. OK?

  Mr. D'AMOURS. I will be glad to. Does it state that there is evidence that they are ''not'' of small means?

  Chairwoman ROUKEMA. That is the quote. Now whether the quote was taken out of context or which GAO report, which year it was, we are now documenting, and we will get it to you.

  Mr. D'AMOURS. Of course, Madam Chairwoman, I would be delighted to receive that information and respond forthwith.

  [The information referred to can be found on page 150 in the appendix.]

  Chairwoman ROUKEMA. All right. Thank you.

  Congressman Watt.

  Mr. WATT. Thank you, Madam Chairwoman.

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  Mr. D'Amours.

  Mr. D'AMOURS. You have got it.

  Mr. WATT. I get it. I have heard people call you lot of things. I was waiting on someone to call you ''Damn Hours.'' I won't do that.

  I have already got enough credit people--credit union--people concerned about my position on this. Maybe I should just keep my mouth shut. I have been meeting with credit union people for the last 2 days from my district and trying to push them to give me some information about where they think the outer limits of what credit unions ought to be doing is and kind of come to grips with what should be inside the circle and what should be outside that circle. Some of them have interpreted that as being unfriendly. I assured them that it is not.

  I started out representing, when I was a lawyer, small credit unions and am a strong defender of credit unions, but I am struggling with this issue, which I was hoping that your statement would address, and I have been feverishly reading your statement. I was not here when you gave it, but I don't see it addressed.

  Let me direct you to the middle of page 7 of your statement, where you say, ''The NCUA board believes that Congress should act now to clarify the Federal Credit Union Act on the question of common bond and to obviate the negative safety and soundness implications of court actions crippling the ability of credit unions to serve different groups that each have a common bond.''

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  Suppose I agreed with you that Congress should, in fact, act now. How should we act? I don't see that your statement really addresses that. How would you define the boundary of what credit unions ought to be doing, what the definition of ''field-of-membership'' should be. If we were going to define it legislatively, what would you want to be inside the circle, and what would you want to be--what would you think would be outside the circle?

  Mr. D'AMOURS. Well, first of all, Congressman, let me suggest that this written testimony that you are reading from was, under the rules of the committee, submitted before the Supreme Court granted certiorari.

  Mr. WATT. That doesn't make this a new issue.

  Mr. D'AMOURS. No, I understand. But if I may, I just wanted, when this statement was written, there might have been even a greater sense of urgency in our supplication to Congress to act than there would be now, although we do, as I said today, think Congress should act.

  Common bond, as I said in my oral statement, Congressman Watt, is not the sine qua non of credit unionism. Common bond became an operational principle and a safety and soundness principle over the years. We now have ways to provide safety and soundness to credit unions because of new technology.

  Mr. WATT. Let me restate my question, Mr. D'Amours. If you were telling Congress to act, what would you want us to do at this point?

  Mr. D'AMOURS. I would suggest that the best action that could be taken would be to adopt language such as was mentioned by Congressman Barr a few minutes ago, simply saying that groups sharing a common bond could belong to a credit union.
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  Mr. WATT. All right. Now, as I understand it, that would get some of the activities that are currently being engaged in by credit unions possibly outside the circle. Do you disagree with that?

  Mr. D'AMOURS. I am not sure I understand it.

  Mr. WATT. Would everything that credit unions are currently doing now be inside that definition, as you understand it?

  Mr. D'AMOURS. Yes, they would, Congressman.

  Mr. WATT. OK.

  Madam Chairwoman, I have plenty more questions, but I think my red light is on, and I think your timer is off. I can't imagine that that was 5 minutes.

  Chairwoman ROUKEMA. Thank you. I appreciate that. We do have a lot of Members here expressing interest, and we have other panels, too. But I do appreciate it. And, of course, any further questions you have can----

  Mr. WATT. Is that a 5-minute light?

  Chairwoman ROUKEMA. Yes, it really is.

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  Mr. WATT. Thank you.

  Chairwoman ROUKEMA. I don't believe it either.

  Mr. D'AMOURS. May I correct an error I just made, Madam Chairwoman?

  Chairwoman ROUKEMA. Yes, please, Mr. D'Amours.

  Mr. D'AMOURS. I said groups ''sharing'' a common bond could belong to a credit union. I should have said groups ''having'' a common bond can belong to a credit union. It is a small error but I would like to correct it.

  Chairwoman ROUKEMA. That does open up another question, which I am sure you will want to ask for in writing a response.

  Mr. D'Amours, before I call on Mr. Ehrlich, I believe is the next person, I do want to ask you, because these charts were distributed and I gave permission after-the-fact for them to be distributed, although I explained to one of the people that it was--normally the procedure would be to ask before-the-fact for distribution, or more likely to have them distributed when the person was testifying. Did your group distribute these, or is this the State credit union group?

  Mr. D'AMOURS. Our group had nothing to do with those charts.

  Chairwoman ROUKEMA. All right. I just wanted to have that in the record.

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  Mr. D'AMOURS. I don't think I have ever seen them before.

  Chairwoman ROUKEMA. Because there is no disclosure, no definition here. Mr. Vento and I did want to know who had distributed these. But we will ask the other panelists as they come forward.

  Thank you.

  Mr. Ehrlich.

  Mr. EHRLICH. Sir, it is nice to see you again. I am really interested in your testimony. It is a fascinating issue for a lot of us, as you know, because a lot of us bring our backgrounds to this issue, particularly some of us who served in State legislatures.

  I have been interested in some of the words that you have used in answer to a number of the questions from Members. I have tried to write a couple down: ''common ground'', ''moving the ball forward'', ''general areas of agreement'', ''reasonable approaches''.

  What I would ask you to do is give me your present view of what, if any, areas of common ground exist with respect to the two principle issues here. In my view, one being that the definition of ''common bond''; the second being what parameters, if any, exist in your mind with respect to the variety of financial services that credit unions should be able to offer? What common ground exists with respect to those two issues right now with the bankers?

  Mr. D'AMOURS. I don't know that we have specifically identified areas of agreement, but I think generally there is likely agreement on the fact that credit unions are much more strictly-limited than banks in the area of commercial lending, securities investments and the like. I think there is general agreement with banks that credit unions are a useful tool at bringing services into the inner-city because banks use credit unions to perform their CRA, to meet their CRA requirements.
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  I know that there is some--there are some--leaders in the banking movement, the president of the New York Fed, Mr. Bill McDonough, Ed Boehne, the president of the Philadelphia Fed, who have been exhorting bankers for some years now to try to better live up to their responsibilities of bringing financial services and empowering people in isolated rural areas and into the inner-city. So there is that kind of dialogue going on.

  But in terms of defining ''common bond,'' I don't think there is any commonality of interest there.

  I think bankers misapply the term. I think there is some misunderstanding out there that ''common bond'' is somehow quintessentially a part of the definition of credit unions when, in fact, it is not. It grew as an historical accident and as a working tool. ''Common bond'', as it is currently interpreted by we at NCUA and applied in the system, allows people who wouldn't otherwise have access to banks, little groups located here and there, to avail themselves of financial services they can afford. It is a useful tool, common bond is, but it is not a sine qua non by any means.

  Mr. EHRLICH. I think we could go on with this give and take for an hour, and I appreciate your answer.

  Let me quickly ask you, because my time is running out, you used the term earlier--''success.'' And you used it in the context of: ''Why should small, successful credit unions not become more successful and grow?''

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  Mr. D'AMOURS. That is correct.

  Mr. EHRLICH. Do you define ''success'' with respect to terms of size, membership, or assets? Obviously, what I am asking is this: is there a logical line of demarcation in your mind for those of us who have always viewed credit unions as small entities?

  We see articles like this, obviously, and some of the numbers that we have seen thrown about make us believe some, and your numbers are well taken, but at least a portion of the credit unions of this country are fairly large entities, which is at odds with the traditional view that many of us have, particularly those of us who support credit unions, of credit unions.

  Mr. D'AMOURS. Congressman, because credit unions cannot capitalize themselves like banks can by issuing stock, every credit union, even the largest today, started as a small entity. They have to build their capital slowly as they accumulate earnings and transfer those to capital.

  As I said earlier, there are a lot of measures of success in a credit union. One of the ways we measure success in credit unions and one of the ways NCUA looks at them is whether they are making loans, because by statute they are supposed to be making loans, and loans to people of small means. We look at that.

  The credit union loan-to-share ratio has been rising very dramatically in the past few years. We are up to nearly 75 percent loan-to-share ratio.

  We measure how they provide services to people of small means, how they reach into the inner-city through branching, how they cooperate, even amongst each other, to provide these services.
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  Let me give you one little story, something I have never seen. I have worked in the banking industry as well as in the credit union industry. This credit union I mentioned earlier Over the Rhine, which serves people of the smallest means in a part of Cincinnati, Ohio, a credit union opened a branch to serve the people in that inner-city. And to prepare that branch for opening, there were people from other credit unions, some as large as more than a billion dollars, who on a weekend flew in, put on work clothes and helped to paint and to ready that credit union for services.

  I don't know that you will see a billion-dollar banker in his work clothes painting the branch of another bank. There is something special about credit unions. It is hard to quantify and hard to measure. They are cooperatives. They cooperate in their own structures, and they cooperate amongst each other. There are millions of ways to measure success. We look at all of these ways.

  Mr. EHRLICH. Thank you very much. I apologize. I have another meeting to run to, but we will have a continuing dialogue, I am sure.

  Mr. D'AMOURS. Be delighted to, Congressman. Thank you.

  Chairwoman ROUKEMA. Thank you.

  Congressman Barrett.

  Mr. BARRETT. Thank you, Madam Chairwoman. Thank you for holding these hearings. I apologize also. I have been in and out of other hearings.
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  I represent a district that is a very diverse district, and recently we had a rather suburban area open a communitywide bond of interest membership. And I watched that with interest, and I thought about the six or seven suburbs that I represent, and if each of them opened a credit union that served only the people who lived in that area, that would be good for the people who lived in that area.

  But as I thought about it more, I thought. ''We are building a nice doughnut here around the central city,'' which I also represent, and that brings to mind to me the question that I have often had about credit unions, which I support and which I am a member of, as to why they should get this pass on CRA, in particular, especially with the litigation going on, for a Statewide field-of-membership credit union, not an occupational common bond membership, not an associational common bond membership, and not a credit union that has been created to serve predominantly low-income memberships?

  And I understand 346 now exist, which is about 3 percent, only 3 percent. What is the reason why, for example, a Statewide community bond membership credit union should not be required to show that they are serving the poorest community in the State?

  Mr. D'AMOURS. Well, I would like to state, Congressman, that there are no federally-chartered Statewide credit unions.

  Mr. BARRETT. For the sake of argument, let's say that there is, because that is obviously some of the debate that is going on here.

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  Mr. D'AMOURS. I think on the next panel one of the State credit union supervisors is going to be testifying, and I am sure you will ask him that question. We have not seen fit to expand our chartering beyond what we consider to be a well-contained, well-defined community, much smaller than Statewide. But let me not evade your question and try to take it head on.

  Credit unions are cooperative, member-owned financial service providers, and it would seem to me that if Americans of their own free choice would like to have an alternative to the banking system and voluntarily join a credit union, that I see no harm in allowing them to do that. I don't think that has caused any harm at all to any bank anywhere in this country, at least none that has been demonstrated to us, to this date, but I am not arguing in favor of that policy. You just asked me what possible rationale could be given for it. I am suggesting one.

  If you or I of our own free choice want to belong to a financial institution which we own and which we control, and at which we think we can get a better, a fairer price from than a bank, why would you, why would anybody, want to prevent us from doing that?

  Mr. BARRETT. I would never in a million years want to prevent you from doing that. I think that is wonderful. But if I was someone who wanted to own a bank, I would purchase stock in a bank and then own a bank. But then to say, ''We don't think it's necessary for us to make loans in a particular neighborhood,'' what--I don't see how a justification--if a poor person can join a credit union, that is great. But if an entire neighborhood doesn't have access to credit from any financial institution--and I would be making the same argument if it were a bank or a savings and loan or a GE credit--but I guess philosophically I find it difficult to say, ''All right, we are going to make the banks do it, but we are not going to make a credit union.'' For example, in my area that serves entire Southeastern Wisconsin, for us to say, ''No, you do not have to make loans in the central city.'' It is great that a poor person can join it, but can a poor person, or a person who lives in a particular neighborhood get credit? That is what I am interested in, and why that should not be part of the dynamic here?
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  Mr. D'AMOURS. Because that poor person or those poor people are members of that credit union, they have an equal vote with any other member of that credit union. They elect the board of directors of that credit union. They can control the management of that credit union. It is hard to see how a credit union would not be providing services to a member-owner of that credit union, unlike a bank.

  Banks are owned by a handful of stockholders, who may live in another State or even in another country. But in the credit union, people who belong to credit unions own the credit union and direct the credit union. They have one man, one vote; one person, one vote ownership.

  Mr. BARRETT. AT&T operates in every State. How--if I am a poor person in Milwaukee--how do I control AT&T to make loans in my neighborhood?

  Mr. D'AMOURS. Well, if you had the same number of votes at AT&T as the president, chairman of the board or wealthiest stockholder, you would have much more control over the----

  Mr. BARRETT. But the reality is you don't.

  Mr. D'AMOURS. But you do in credit unions.

  Mr. BARRETT. But the reality is--I have yet to be convinced that you are going to have a poor neighborhood that is going to move a credit union like AT&T to come into a neighborhood.

  Mr. D'AMOURS. You meant AT&T credit union. Sorry. I thought you were referring to AT&T, the company. I am sorry.
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  Mr. BARRETT. How do I get AT&T credit union to do it?

  Mr. D'AMOURS. Well, there are common bond requirements that exist. You would need to have either people in that community who worked for AT&T and they could join the AT&T credit union, or perhaps we could, under our policies, allow AT&T to expand into your neighborhood if, for instance, it was a low-income community, as I think you said it was.

  Mr. BARRETT. Has that happened?

  Mr. D'AMOURS. Oh, yes, that happens.

  Mr. BARRETT. If you could get me some information.

  Mr. D'AMOURS. That happens, it has been happening, but the Court injunction prevents that from going on today.

  Mr. BARRETT. Why don't you get me some information on that, please.

  Mr. D'AMOURS. Thank you, sir.

[The following information was inserted later by Mr. D'Amours: Congressman Thomas Barrett asked for information on how and if non-low-income credit unions are serving poor neighborhoods. As noted in the testimony, the NCUA Board approved an Interpretive Ruling and Policy Statement, (IRPS) 94-1, that allows Federal credit unions to include communities and associational groups. Since that IRPS went into effect, 73 credit unions have expanded to serve low-income groups, with a potential membership of 1.4 million. The witness statement cites 76 credit unions, but the correct number is 73. An additional 14 applications of credit unions wishing to serve low-income groups are on hold because of the court injunction.]
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  Mr. VENTO. Madam Chairwoman, I don't know on this issue, I see we are almost done, but I just wanted to comment because I think Mr. Barrett has hit on a very important point, because in the chartering of a Federal or State credit union that would be in, for instance, what we would consider an affluent or exclusive area, it seems to me that chartering there ought to be included in that charter a geographic area that reaches in and cuts across. Otherwise we would have the net effect of redlining.

  For instance, if a bank only had service in an affluent area, that--you say, ''Well, anyone can join, anyone can come in and join,'' but if you have a geographic membership in this community. So, I mean, I think the issue here is in terms of some direction with regard to chartering, and I appreciate--in fact, for instance, in my community we have credit unions that deal with Southeast Asians, the Hmong, and the credit unions themselves have done a great deal.

  I might say that I have worked right alongside a lot of good bankers on Habitat for Humanity and other things, too, so I applaud the work of the credit unions. I think we ought to recognize the banks and financial institution officers are doing an awful lot in this area. We need to continue to push the envelope on that.

  One way, just picking up on what Mr. Barrett's thought was, is to push that envelope in terms of community service credit unions so that they are not redlining, so that they are picking up and periodically reexamining, you know, where they are doing or what they are doing.

  Now an occupation, an associational--and I don't think anyone--I think what I hear is everyone is approving of the fact that credit unions move in that direction. Now, of course, as you said, sometimes they are big credit unions that can do that because of the cross-subsidization that might occur in terms of having--and I was not--I was surprised to hear that rich people are associated with banks and credit unions. I mean, obviously you have to have people that have some savings in order to participate. You can't all be like I was when I joined the credit union. I paid $5 and took out $1,000 to buy my first Ford, and my last one a lot more, you know.
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  But I think that is a point.

  I appreciate your indulgence, Madam Chairwoman.

  Mr. D'AMOURS. But may I briefly respond?

  Chairwoman ROUKEMA. Briefly.

  Mr. D'AMOURS. OK, very briefly.

  Chairwoman ROUKEMA. Very briefly.

  Mr. D'AMOURS. Yes, there are banks who are very socially responsible. Most banks are doing the kinds of things you say because you have pushed the envelope and you have required them through CRA to do that, because redlining was discovered.

  There is no evidence of anything like redlining going on in credit unions. I would suggest that it does not exist in credit unions. I don't think you need to push credit unions to do that. They do it by definition. They serve their members. They would be depriving their own owners of service if they didn't serve them.

  Mr. VENTO. Well, you know, we like the redundant reiteration to the self-evident in terms of legislation, so it might give a little comfort to myself, Mr. Barrett and to others that are strong supporters of credit unions and others to, in fact, articulate that particular policy in law, and one I think that is reasonable.
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  Mr. D'AMOURS. And we have done that sort of thing, Congressman.

  Chairwoman ROUKEMA. All right. I am going to conclude this by simply observing that this question has come up in one form or another through many of the questions today, not only my own, but Mrs. Kelly's and now Mr. Barrett's. And I am sure that the issue will be fully explored on both sides as we get to some of our other panelists a little later in this hearing. But do I appreciate your work, Mr. D'Amours.

  By the way, we do have the quotation from the 1991 GAO report and we will submit it to you in the context for any comments that you want to make on that subject.

  Mr. D'AMOURS. Thank you, Madam Chairwoman. Thank you for your hospitality.

  Chairwoman ROUKEMA. Thank you.

  With that, we will call up our next panelist, who is Mr. David L. Paul.

  We welcome you here, Mr. Paul. You are here on behalf of the National Association of State Credit Unions, and you are Commissioner of the Division of Financial Services for the State of Colorado, but testifying on behalf of the national association. Thank you very much.

  You know the rules. We try to adhere to the 5-minute rule, but we will take individual circumstances into consideration. Thank you very much.

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  Mr. PAUL. Thank you, Madam Chairwoman, distinguished Members of the subcommittee. I appreciate being invited to testify today, and I will try my best to adhere to the time limitations.

  I am Chairman of the National Association of State Credit Union Supervisors, which is the professional association comprised of the credit union regulators from 47 State governments and the territory of Puerto Rico. I am also Commissioner of Financial Services in Colorado and responsible for regulating our State's credit unions. My testimony provides Congress with the State regulator's perspective on issues facing the credit union industry.

  Collectively, the State regulators supervise nearly one-half of all credit unions chartered across the Nation. We want to help educate the Congress on the issues facing credit unions by assisting Congress to understand the important role of dual-chartering and to understand how the States regulate their credit unions.

  State legislatures have deliberately designed distinct State credit union systems. State legislatures have wrestled with many of the questions which the subcommittee wishes to be addressed during this hearing, and I would like to briefly discuss our response to some of the key questions raised.

  The question was asked about the intent of the Federal Credit Union Act and serving more than one employer group. It would be inappropriate for a State regulator to attempt to interpret Federal law on this point. However, I can tell you that throughout the State credit union system, one seldom finds that State legislatures created State credit unions for the sole purpose of serving people of small means.
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  In addition, State laws in many States allow employees of different employers to be members of one credit union. Regulators have come to understand that there is generally value in mixing employers in the field-of-membership of a credit union. Diverse employers help ensure the economic viability of credit unions.

  Next, it is asked if permitting credit unions to serve multiple unaffiliated groups has a competitive impact on other providers of financial services, and I think the brief answer to that question is, yes. But State legislatures have meticulously provided various choices in financial institutions, competitive choices, to the citizenry. This did not come about by accident or by chance. State legislatures deliberately provide options to State consumers, and legislatures have often seen credit unions as being a clear alternative to others in the diverse financial services marketplace.

  Another question asked about the effect on the credit union industry if the Federal court's common bond ruling is upheld. As I suggested a moment ago, the State regulators share a concern about the safety and soundness of credit unions which have no alternative but to put all their eggs in one basket in a membership sense.

  There is another aspect to be considered. The AT&T Family Federal Credit Union decision threatens the balance between the State and the Federal credit union systems. We need a strong State system, but we also need a strong Federal system, and an exodus from the Federal system as a result of conversions from Federal to State charter would disadvantage the entire credit union system.

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  Regarding the question about taxation of credit unions, many States, in fact, tax credit unions in some fashion. Most often it is some form of State-imposed sales tax. Rarely is it an income tax. State taxation of credit unions is a decision made by State legislatures after careful and deliberate analysis.

  We believe that Federal taxation of State and federally-chartered credit unions is a public policy decision to be weighed very carefully by the Congress. There certainly are some safety and soundness considerations that regulators would have about the imposition of taxation.

  The final question posed by the subcommittee concerns various regulatory requirements from which credit unions have been excluded, such as CRA. It is not correct to suggest that credit unions have been excluded from many regulations. I would submit that credit unions, like other financial institutions, are closely regulated and are subject to most Federal consumer and depository laws. The main exception that comes to mind is the Community Reinvestment Act, but the CRA is probably not appropriate in its present construction for the vast majority of credit unions in this country which are either occupational-based or associational-based in their fields of membership.

  In closing, I want to emphasize two key points. First, the dual-chartering system is of paramount importance to credit unions and their members. Second, the overall health of credit unions is excellent, both at the State and Federal level.

  I appreciate the opportunity to present our comments and our testimony for the record and will be pleased to respond to any questions that you have. Thank you.

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  [The prepared statement of Mr. Paul can be found on page 254 in the appendix.]

  Chairwoman ROUKEMA. Thank you, Mr. Paul.

  I have a couple of questions. One, perhaps I wasn't listening carefully enough when you referred to a statement concerning State taxation.

  Mr. PAUL. Yes.

  Chairwoman ROUKEMA. Could you amplify on that? How many States and to what extent are States taxing the credit unions?

  Mr. PAUL. My written statement for the record contains a bit more detail on this. I will try to recall some of it for you.

  Chairwoman ROUKEMA. I will review that personally, but I would like you to address it now.

  Mr. PAUL. There are only three States that impose State income tax on credit unions. The most prevalent type of State taxation of credit unions is the imposition of sales tax. I believe about two-thirds of the States impose sales tax. That would be if the credit union purchased furniture or a computer system or something like that. Then there are a variety of other taxes of different sorts; franchise taxes, for example.

  Chairwoman ROUKEMA. Are there any States that tax the credit unions the same as the banks in their States?
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  Mr. PAUL. The same as banks in terms of income taxation?

  Chairwoman ROUKEMA. Yes.

  Mr. PAUL. I do not know the answer to that. We could attempt to get that information for you, though.

  Chairwoman ROUKEMA. But three States do have an income tax?

  Mr. PAUL. They do have some form of income tax.

  Chairwoman ROUKEMA. Thank you. Now, the one I would like you to spend a little more time on is your statement about how important the dual-chartering system is to you.

  Can you explain that to me with a little more specificity, because you just made the statement twice, both at the beginning and at the end of your statement, but you didn't amplify as to the rationale that you use in stressing the dual-chartering system. Not that it is central to our basic question, but I am interested in your perspective on this. There may be an application here.

  Mr. PAUL. Well, thank you for your interest in that question. That is one that is near and dear to the heart of a State regulator.

  Dual-chartering references the fact that credit unions are chartered by both the Federal Government and the governments of 47 States. In fact, the credit union movement in this country began in the States, the New England States, actually. And there were some, I believe 35, State credit union acts in place and some 3,000 State credit unions in place when the Federal Credit Union Act was adopted in 1934.
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  The philosophy of the dual-chartering system is to provide a choice of charter for credit unions and their members, with the States typically serving as a bit of a laboratory for experimentation--I think we have all heard that terminology--to experiment with new products and services for credit union members on a State or a regional level without expanding those sorts of concepts to the entire Nation. We get to experiment a little bit, and find out what the risks are before they expand to the whole country.

  An element of the dual-chartering system that puts us in partnership with the National Credit Union Administration is that most credit unions in this country are insured by the National Credit Union Share Insurance Fund, so with State charters we share regulatory responsibility with the NCUA because of their administration of the insurance fund.

  Is that along the lines of what you asked, Madam Chairwoman?

  Chairwoman ROUKEMA. Yes, that is helpful. Thank you.

  I will say without further comment that I noted your reference to safety and soundness and the quote that we shouldn't be putting all our eggs in one basket, basket of membership. That, of course, is central to our whole discussion today and deliberations. So that did not pass me without notice.

  Thank you very much. I appreciate it.

  Do you want to make a final comment on that subject?
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  Mr. PAUL. Well, I would just like to say, I certainly don't mean to imply by that term--using the term ''putting all of your eggs in one basket''--that single-sponsor credit unions are fundamentally unsound. There is plenty of evidence around the country of single-sponsor credit unions, large and small, that are thriving. But in my experience as a regulator, I have seen more difficulties in keeping credit unions viable that have too-limited of a field-of-membership rather than too broad of a field-of-membership.

  Chairwoman ROUKEMA. Thank you. I appreciate your experience here.

  Mr. Vento.

  Mr. VENTO. Yes. Thank you, Madam Chairwoman.

  Thank you, Mr. Paul, for your statement.

  One of the key elements here, of course, we are trying to get to, everyone wants to talk about taxation and that is interesting, or other aspects, but one of the things that is important is this field-of-membership issue. What would be the implications, and will this occur, credit unions switching to State charters, in order to assure broader membership and to--rather than gamble on what the courts will say or what the Congress will do?

  Do you have--I mean, I know that there are applications pending. I know that--for instance, I had a group from my home State of Minnesota that were mentioning that one large credit union had recently proceeded to charter federally. Now they are examining the possibility of moving back to a State charter because of the type of differential in terms of the treatment.
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  Mr. PAUL. Congressman, the States--at least a number of States--are beginning to see a fair amount of interest in conversions from Federal to State charter, as a part of the fallout, if you will, from the court decision. I would not in any way characterize that as an exodus from the Federal credit union system.

  As I said in my prepared remarks, I think it is a dual-chartering concern, and you might find it a little unusual for a State official to be so concerned about Federal regulatory officials, but if you believe in dual-chartering, you believe in the need for viable partners in dual-chartering. We can't have a situation where there would be an exodus from either the State or the Federal systems and have viable dual-chartering. You would pretty soon have a monopolistic situation on one side or the other.

  My own State of Colorado is experiencing a very modest amount of conversion interest, and that is something that State regulators aren't soliciting. We are not trying to capitalize on this court decision. But we have obligations under our State laws to process conversion applications as they come to us and, if the application meets the statutory standards, to approve it.

  I think we are certainly not at a point where there is a concern about a mass exodus from the Federal system, but I certainly wouldn't want to see us get to that point, because of the concerns that I would have for the balance in the dual-chartering system.

  Mr. VENTO. One of the phenomena, Mr. Paul, and Madam Chairwoman, is that each State--as a State legislator some years ago, I remember having to--or rewriting or dealing with the field-of-membership definitions of our own State, and each State has slightly different language. In fact, I know that there are proposals even today that are being advanced on a cooperative basis, believe it or not, between banks and credit unions in Minnesota. Obviously they can achieve a consensus on this, which is, I think, sort of hopeful.
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  But the real problem at this point is that you may have some 47, or some of them may be similar, but potentially you would have 47 different definitions plus a different definition with regard to the Federal law, the 1934 law.

  Would you comment on that, please?

  Mr. PAUL. Well, I actually don't view that as a problem. I view that as a strength of the credit union system, that there is such diversity in the credit union system. The Federal Credit Union Act isn't necessarily the model for how credit unions should operate. There are actually 48 other models out there in terms of State laws, and you are absolutely correct, Congressman. They handle field-of-membership and many other provisions regarding credit unions a little bit differently from State to State, and often between State systems and the Federal system. But I see that as a strength of the system and actually a resource for Congress as it looks at this question of what should be the right structure.

  Mr. VENTO. Well, I think it is a resource, but it also provides, you know, sort of an amorphous grouping. It doesn't provide a clear, you know, you are going to have this potential movement back and forth. If field-of-membership becomes a defining issue, I guess we are going to see some movement back and forth. And so there are different qualifications or requirements that will, in fact, affect what we do.

  What about the question that my colleague from Wisconsin, Mr. Barrett, raised with regard to the chartering of credit unions or the establishment of credit unions on a boundary basis? Obviously, the occupational and association limitations--now, I think there is some discussion. We don't need--CRA isn't going to work as it is, but is there--what type of--is there a willingness or an interest in working to accept some sort of a responsibility in terms of not permitting these areas to become basically enclaves of just affluent or well-off individuals where--I mean, to carry this to its logical conclusion, where credit unions--I mean, if they are going to dominate the financial marketplace, as some have suspected or suggest might occur, what is going to--you know, we could exclude large areas from having credit availability, and shouldn't chartering actually include or look at, or some requirements--do you have--can you give us any idea of how States deal with this in terms of geographic boundaries to ensure that low-income communities are met in the basic charter, not just as a matter of beneficence in terms of what we are going to do, but in fact going beyond this? It is nice that they paint houses, but I would like to see this put on a more businesslike basis.
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  Mr. PAUL. Congressman, I am not familiar with the Wisconsin situation. Let me talk a little bit about the State that I do know something about, my own, Colorado. And we have community-based credit unions, but not very many.

  Overwhelmingly the industry nationwide is occupational-and associational-based in terms of credit unions. I think community expansions are a growing component, and I would share a concern with you if there was evidence of credit unions taking in communities and then not serving portions of those communities for----

  Mr. VENTO. That is one problem, and my time is expired, but the problem I am talking about is how do you get the basic boundaries right in the first place? Obviously if they are not serving people in it, you are going to deal with that as a regulator, I assume, rigorously. That is what we assume.

  But, I mean, the issue is establishing the basic boundaries in the first place that embraces a cross-section of the population and not just an exclusive group.

  Mr. PAUL. The regulators who deal with community applications respond to a request that is made by the credit union volunteers, the board of directors that governs that credit union, for the community that they would like to serve. Take, for instance, a couple of examples in Colorado of the types of expansions that we have had. They haven't been Statewide expansions, and they haven't been for all of Metropolitan Denver, which is by far our largest city. We have had one for West Denver, a small area of about 40,000 people, mostly low-income, largely minority population. The credit union specifically expanded to do a better job of serving that area. It had been serving just the Catholic parishioners within that geographic area.
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  We have a fair number of community expansions in the rural parts of our State, which tend to be low-income areas. For an area that had been traditionally underserved, perhaps not served at all by any traditional financial institutions, about 3 years ago we chartered a community development credit union in an inner-city area to specifically serve those needs. And you found that banks and, to a much greater extent, the credit union movement in Colorado supported that effort financially, to get that credit union off the ground.

  Mr. VENTO. Well, my time has expired, but I think this issue is--I think there are a lot of questions I could follow up with based on your statement. But I think there is no objection to the low-income areas, in fact. But you are talking about one of the major problems here is a move from an associational--I assume that the Catholic parish was an associational, a two-way geographic, and I think that is one of the other issues that is a major issue here.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Mr. Bentsen.

  Mr. BENTSEN. Thank you, Madam Chairwoman.

  Mr. Paul, how many--you may or may not know, but how many States set a floor for the size of membership for an employer group to associate with another employer group in a multiple-employer group credit union?
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  Mr. PAUL. I do not know how many States do that. And by a floor, do you mean a minimum size of the group?

  Mr. BENTSEN. Right. My understanding, and this may be incorrect, but my understanding is that, for instance, the State of Texas requires a minimum of 250. Obviously that is the State of Texas. That is not uniform. I am just curious as to whether States require that or not.

  Mr. PAUL. I am not sure. In our own State, we don't have a minimum on the size of a small employee group. It could be a very small group, one or a few people. It could be a sole proprietor. That is the way our law is constructed.

  There are a lot of small businesses in Colorado starting out, very small employers, and they certainly don't have the means to start their own credit unions. So we don't have a formal minimum. We tend to be a little more concerned about the larger groups and could they have their own credit union? Although I might add it is a very difficult task to open a credit union in these highly-competitive days of the 1990's.

  I could attempt through our national association to get you some additional information on that, though.

  Mr. BENTSEN. Do you think that it would be--any sort of floor would be problematic, as you--as a regulator, as you try and ensure the safety and soundness of the institutions you oversee, and through mergers that--as they try to broaden their deposit base or replace deposit base that is lost, that setting a floor would be problematic?
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  Mr. PAUL. I am not sure that I am following your question. You mentioned a merger. Would that be a merger between employer groups?

  Mr. BENTSEN. Well, opening up--I mean, the problem we are dealing with here is the multiple-employer group, as I understand it.

  Mr. PAUL. Yes.

  Mr. BENTSEN. And the reason for that, as I understand, or it has been said, is to replace deposit base, or as credit unions change you need to add new depositors to keep them strong, to keep growing. The argument is that, well, you keep adding groups that have a different common bond and different type of association, and the size of it continues to get smaller and smaller.

  Do you think there would be a problem if you set some sort of threshold on the size of the different-employer group that could join with the existing credit union?

  Mr. PAUL. Set some minimum; in other words, a group would have to exceed that size?

  Mr. BENTSEN. Right. Then another business employee group, you know, had to have at least 50 employees or 100 employees or 250 employees, or that the association had to have at least that amount.

  Mr. PAUL. I guess, Congressman, I would see the potential problem that there would be some small businesses that until they grew to that size would be unable to obtain credit union service.
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  Mr. BENTSEN. But from a safety and soundness point, would that be a problem?

  Mr. PAUL. From a safety and soundness point, I don't believe that would be a problem. We have--in credit unions that have multiple groups--employers of various sizes, and I don't think any of them necessarily, because of their size, have a safety and soundness impact on the credit union.

  Mr. BENTSEN. You are a credit union regulator, not a bank regulator, so this may not be a fair question, and I will ask it later.

  We talked about the CRA, and the previous speaker talked about the--those who were served by credit unions. And I agree in many respects, I think that is correct, why shouldn't credit unions be subject to the CRA. And if, in fact, what we are hearing today is true, wouldn't most credit unions automatically achieve at least a satisfactory rating under the CRA because of what they are doing?

  Mr. PAUL. I approach that question, Congressman, from the standpoint of a State regulator, and I can tell you that it just doesn't seem, as it is presently constructed, to be a good fit for most credit unions. If you are limited to serving one or more employee groups, the construction of CRA speaks to serving the credit needs of a community in which you are chartered, and it just doesn't make a good transference to the concept of occupational credit unions.

  Mr. BENTSEN. But--well, occupational, but then community credit unions, which, of course, Mr. Barrett is probably going to ask about, there you--indeed you do serve the community, you serve part of it, certainly, who are membership. Should you be required to somehow serve all of it? And I don't know. I am just asking you the question.
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  Mr. PAUL. Well, certainly, the concept is a better fit for communities, but I think they would need to be broad communities. For instance, in the example I just cited earlier of the small portion of West Denver that is entirely low-income, I don't think CRA would make a whole lot of sense in that particular area. That is the only area that that credit union can serve anyway. They can only serve people who reside in that very small area.

  And then in the examples of the small towns and small rural counties in Colorado that I am familiar with where we have granted some community expansions, they are uniformly very small populations, uniformly fairly low-income, and that is all that credit union can serve, really.

  CRA is maybe a better fit with the concept of community credit unions, but I think we would have to be talking about much broader communities. We certainly look for any evidence of concerns when we are supervising our credit unions, but we don't have that many that are in truly broad communities.

  Mr. BENTSEN. Thank you.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Ms. Kilpatrick.

  Ms. KILPATRICK. I will pass, ma'am.
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  Chairwoman ROUKEMA. All right. Mr. Watt, do you have a question?

  Mr. WATT. Madam Chairwoman, could you come back to me after Mr. Barrett?

  Chairwoman ROUKEMA. I would be happy to.

  Mr. Barrett.

  Mr. BARRETT. Thank you. And I actually wasn't planning on talking about CRA, but I will continue to talk about CRA, I guess, in terms of trying to put together a fit for CRA working here.

  I agree with you that for an occupational credit union, that it is difficult to, and maybe not appropriate to, have CRA apply in that situation. I am talking about the credit unions that represent a larger geographic area. You referred to credit unions that only represent a small geographic area, and my concern there is that you will have a situation where wealthier neighborhoods, perhaps through a suburb--and I have a situation in my district where what was formerly a credit union for the municipal workers, good credit union, good people, nothing bad to say about any of them, they changed it to be a charter for a city that has 60,000 people, a good middle class suburb.

  If that is replicated in my district or in other areas around the country, my concern is that you will have geographic-based credit unions that serve a population that, frankly, does not include many minorities, and again, in my district I am concerned about the doughnut effect, and you will not have the central city served at all. And I would like you to respond to that concern.
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  Mr. PAUL. Yes, Congressman. As I said a bit earlier, the concept, the philosophy of CRA has its best fit for broader community-based fields of membership, but I don't have a whole lot of experience with those. I have related the experience that I have had.

  I think a comment that Chairman D'Amours made about the democratic organizational form of credit unions and the fact that you have one vote for one member, means that the folks who live in a particular part of the community that the credit union serves can actually have an influence on the lending policies of the institution. They can self-police that.

  Mr. BARRETT. Let's use my example where you have a suburb; all the people live in the suburb. What is the incentive for them, for any member, to come in and say, let's extend some credit to the central city?

  Mr. PAUL. Well, the incentive for the members of a suburban credit union?

  Mr. BARRETT. Other than they think it is responsible public policy? Economically, if they are acting in their economic best interest or in the co-op or in the co-op's best interest, what is in it for them to move outside of an insulated setting into a neighborhood that by definition they are not required to serve?

  Mr. PAUL. It is difficult for me to answer that. I am not familiar with any situations like that.

  Mr. BARRETT. I am presenting one to you, a real life one, where it does occur.
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  Mr. PAUL. Well, I would say there is no disincentive to doing that. Credit unions serve limited fields of membership, and we don't require them to expand beyond that. That is a decision that the members themselves may make, and I am struggling with the premise of your question. I am not sure I am understanding you.

  Mr. BARRETT. Again, my concern is that you have--I have two concerns. One is a large geographic area, a CRA. That one for me, it is hard for me to understand why a CRA that serves all of southeastern Wisconsin should not include the central city of Milwaukee as part of its mission, and why it is offended. And I agree with Mr. Vento, if, as has been reported, credit unions are doing a great job serving this area, then yes, there is the discomfort of filling out this paperwork for the Federal Government; but if they are doing it, they are doing it. So let's just show it so that we can sort of end this debate. But if they are not doing it, then I think we should know about it.

  The other concern I have is that what I fear is a potentially growing trend to--by moving to a geographic-based credit unions, that we will do so only in those areas that do not include a large portion of poor people, and there is a real Balkanization effect there. And it is the attitude, maybe, that it is not my problem. Let that be the problem of that credit union that is located in the central city.

  And every person in this room knows that there are just simply not the economic resources in the poorest neighborhood, in Milwaukee or Detroit or Cleveland, to serve that community. So the money has to come from outside that community if that community is going to grow. And I think we are making a mistake if we just say, well, you know, let that credit union, let those people do that. I don't think it is going to happen.
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  Mr. PAUL. Well, I understand your concern, and I would agree with your concern. That would be disturbing to me as a regulator as well. I haven't seen any evidence of that.

  Mr. BARRETT. Well, it is happening in my city.

  Mr. PAUL. But what we have seen in Denver, for example, is the creation of a community development credit union to serve specifically the residents of inner-city Denver and a lot of support from the rest of the credit union community to do that. The credit unions are now working cooperatively among themselves, rather than just within themselves, to meet those needs, and the same thing is happening in some rural areas of our State.

  Chairwoman ROUKEMA. Yes. Mr. Watt.

  Mr. WATT. Thank you, Madam Chairwoman.

  I perhaps am going to be redundant on this same issue. I actually start at the other end of the spectrum. I never thought that CRA, even though I am a big, big supporter of CRA, should apply to credit unions. But I also never thought that credit unions would be doing some of the things that credit unions are doing now. And it seems to me that you--it is very troublesome to have both sides of that equation. The broader you expand the base of credit unions, the more difficult it is to justify the position that I have always taken, that CRA really has no application to credit unions.

  So I think all of us, most of the people who are questioning you about this issue, are strong supporters of credit unions. We are somewhat troubled by some of the things that we are hearing credit unions would like to be doing because the broader and broader and broader your membership base is and service base is, the more difficult it is to justify both a tax-exempt status and an exemption from CRA.
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  Now, you in your opening statement said that the great bulk of credit unions really are not set up in a way that CRA would have any application to it, and I agree with that. By implication, you were saying that there are some credit unions who may be doing--having coverage that should be subjected possibly to CRA.

  Can you articulate where you would--maybe I misunderstood what you were saying, but by implication there is a small group of credit unions out there that have gotten to the point where you even might concede that we have a valid argument. Am I misinterpreting what you said? And, if not, how would you articulate what that line ought to be?

  Mr. PAUL. Congressman, I intended to convey that over 90 percent of the credit unions in the country are occupational- or associational-based credit unions, and that the concept of CRA as it is constructed is not a good fit.

  Mr. WATT. OK. So we are talking about that 10 percent then?

  Mr. PAUL. Less than 10 percent actually, but it may be a growing percentage of community credit unions, and is probably a concept that ought to be looked at. But many of the community expansions that I am familiar with----

  Mr. WATT. I don't want to talk about that part of it. I want to talk about the 10 percent or 8 percent or 7 percent.

  Mr. PAUL. Well, that----
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  Mr. WATT. Are there credit unions in there that you think ought to be possibly complying with CRA because of their activities?

  Mr. PAUL. Congressman, there is no evidence that has come to my attention of a need for that.

  Mr. WATT. Well, how then do you distinguish between that 90 or 92 percent and the 7 percent or 8 percent that is left over there in terms of--I mean, what is the distinction that you are making? I am just trying to understand what you are saying.

  Mr. PAUL. Well, all I am saying is that over 90 percent of the credit unions are occupational- or associational-based. And I would like to address your concern about the less than 10 percent that are community-based.

  Again, I am a State regulator from one State. We have not compiled any evidence through our national association on this, but I am not aware of that sort of problem in community credit unions. I am not aware of it in my State.

  Mr. WATT. But we have got a bill here that says we are going to drive the definition and make it explicit that we are going to create a bunch of these things. The bill that I understand is circulating for possible consideration would drive you right into the heart of this issue.

  Mr. PAUL. Well, I am not sure exactly which bill you are referring to. Congressman Frost's? If it is Congressman Frost----
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  Mr. WATT. No, it is not Congressman Frost's bill that I have got problems with. It is the bill that I just got handed a copy of this morning that somebody is circulating now. It is going to drive you right into the heart of this because basically what it says is you can have any kind of affiliation standards that you want, as long as there is some affiliation.

  Mr. VENTO. If the gentleman would yield?

  Mr. WATT. Yes, I would be happy to yield.

  Mr. VENTO. I think this is at the heart of the question of field-of-membership, because as you are talking about mergers or you are talking about--all of this is what is the effect of the merger? Are we just putting two occupational groups? In other words, I think that--frankly, I think that credit unions welcome saying throw us into this briar patch because I think, in essence, they have the ability, even within occupation, you can talk about whether they are meeting the needs.

  You know, the way most of us became members of credit unions is not because we were machinists or teachers. I needed a car loan, and so one of my very good friends said to me, well, come on over here and we will take care of you. The first thing I did was plop down 5 bucks and became a member of the credit union. The next thing I did was took out a thousand dollars for the car. I mean, that is the way the membership--that is the way it works in occupations, because you knew someone. That is the way.

  Now, my question is: Are you going to all the right people, all the--in other words, in an occupational group, when you merge, all of this deals with field-of-membership, and the fact is while CRA as we know it doesn't fit, but if the bank said, well, nobody is coming to us they would never have a CRA. Forget it. They have to reach out and do things.
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  And what I am suggesting to the credit unions is in occupation, in association, in geographic areas, you have to reach out.

  Chairwoman ROUKEMA. All right. I am going to call this portion of our hearing to a close. But I would say to Mr. Watt and to Mr. Paul, Mr. Watt has raised a legitimate question, but I do not believe that Mr. Paul has full information on the precise piece of legislation. This is legislation that is being circulated by the national group. I do think that we will give Mr. Paul the opportunity to respond to your question in writing, after he has the opportunity to look at that legislation. But right now, we are going to be having, of necessity, Mr. Paul, to recess for half an hour. We will--we have concluded your testimony, assuming that--understanding that you will respond to Mr. Watt and the rest of us in writing on that subject. But we have a 15-minute vote followed by three 5-minute votes, so we will be a good half hour in recess, and then we will bring up the next panel. We thank you, Mr. Paul. And anything else that you want to include in the record, please submit to me for the permanent record.

  Mr. PAUL. Thank you.

  Chairwoman ROUKEMA. Thank you.

  Mr. PAUL. Thank you, Madam Chairwoman.

  [Mr. Paul's written responses to Members' questions can be found on page 265 in the appendix.]

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  [Brief recess.]

  Chairwoman ROUKEMA. Thank you very much for your patience. I was delayed with a call and do appreciate your being here. We are most anxious to hear this panel. I will defer to Mr. Vento now, with Mr. Scott Jones, in acknowledging his presence.

  Mr. VENTO. I will just be very brief, Madam Chairwoman.

  We appreciate the patience of the witnesses as we are going through this. As you can see, I don't know if it helps or hurts to be our friends, based on the questions. But you know we are talking about issues where there is disagreement and where there is controversy and so we need to address that up front.

  But I am very pleased to extend a welcome to Scott Jones, the Vice President of the American Bankers Association from Minnesota, from Red Wing, Minnesota. We are pleased he is here and going to be serving in this capacity. I think we will be hearing from him on a regular basis, Madam Chairwoman. So I look forward to his participation in our work this year. Thank you.

  Mr. JONES. Thank you, Congressman.

  Chairwoman ROUKEMA. Thank you. Thank you very much.

  Mr. Stenehjem, did I pronounce that correctly?

  Mr. STENEHJEM. Stenehjem.
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  Chairwoman ROUKEMA. All right, Stenehjem, President of the IBAA, and also President of First National Bank and Trust in Fargo, North Dakota. Mr. Stenehjem, we appreciate your being here.

  Mr. STENEHJEM. Thank you very much.

  Chairwoman ROUKEMA. Welcome.

  And John Garrison, Mr. John Garrison, representing America's Community Bankers, also from New York State, Walden, New York, where he is President and CEO of the Walden Savings Bank. Appreciate your attendance and your patience.

  And without further ado, we are ready for your testimony in that order.

  Mr. Jones.


  Mr. JONES. Madam Chairwoman, I am pleased to be here to present the views of the American Bankers Association on the issue of credit unions. As you well know, this is a very emotionally charged topic. This hearing gives us an opportunity hopefully to get beyond that emotion and focus our attention on some very important public policy issues before us today.

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  The credit unions have raised many issues over the past few months, including the relative size of their industry versus the banking industry; their mutual form of ownership; and also consumer choice. But these issues, in my mind, obscure some of the more fundamental questions, which are: Who should receive or have access to government-subsidized financial services? Where should the line be drawn?

  The fact is that NCUA's multiple common bond policy encouraged credit unions to grow rapidly by adding new groups to their field-of-membership. The problem is, though, each time they extended that field-of-membership, they also extended the tax subsidy.

  NCUA Chairman D'Amours indicated this morning and has said in a recent interview, and I quote, ''I think there will be a day when anyone will be able to belong to any credit union, anywhere,'' end quote.

  Now the credit union industry is proposing a bill that would accomplish this goal by ending even the pretense of a common bond. If their bill is enacted, anyone, anywhere would be able to be a member of a credit union, including the most affluent of their customers. The floodgates will be wide open and the taxpayers will face a rising river of new tax subsidies for just one segment of the financial services industry.

  Let me give you a few examples of the practical impact of NCUA's multiple common bond policy.

  The $1.6 billion Alaska USA Federal Credit Union is the second largest financial institution in all of Alaska. I brought with me their description of their common bond. It is 135 pages long. It is 3,000 common bonds that are part of the Alaska USA Credit Union. They include companies like Rent-a-Can Toilet Company all the way to Coopers & Lybrand.
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  And apparently the 3,000 common bonds is not enough for the Alaska USA Credit Union. It has applied to change its charter to include the entire State of Alaska, although I might add they may have already accomplished that with the 3,000 common bonds.

  Or let's take a look at U.S. First Federal Credit Union. This California credit union recruits car dealers for their discount loan program. Participating dealers can send U.S. First a loan application from anyone who walks in off the street. If the application is approved by the credit union, the dealership then signs up the person for the credit union. Anyone can join. Clearly, this is nothing more than a subterfuge to be able to make loans to non-members.

  And the growing government subsidy involved in these loans is available to virtually anyone, including doctors and lawyers who may be buying a Mercedes or a Lexus. Incredibly, though, it appears that older used cars, those most likely to be bought by people of small means, are excluded from this program. Is this an appropriate use of taxpayer subsidy?

  Then let's take a look at the Allied Pilots Association Credit Union, which finances million-dollar boats and recreational vehicles and recreational airplanes. All of this done with a government tax subsidy. The members of this credit union have been characterized as something that other depositories would find very attractive, that they would drool over, including us. The president of that credit union did say at one point, ''Our guys have big toys.''

  The ASI Federal Credit Union's field-of-membership includes 100 doctors' practices and 56 law firms, certainly a well-heeled and a well-represented group of people.

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  First Entertainment Federal Credit Union includes the Harlem Globetrotters, the California Angels Baseball Team, Playboy Enterprises, and the Pacific Coast Horse Show Association.

  The government subsidies also extend to business loans these days. The CEO of Citizens Equity Federal Credit Union said in a recent interview, we expect to be number one in the area of business lending, as we are in everything else we do. He went on to say that their commercial loan maximum limit is $17 million.

  In conclusion, Madam Chairwoman, if the credit unions' government subsidy were used to serve those truly in need of government-subsidized financial services, it may be an appropriate use of taxpayer dollars. Many credit unions are doing exactly that, and we in the banking industry have no quarrel with that part of the industry. But it is clear that many credit unions are no longer meeting their mandate. If they are not, then taxpayer dollars are subsidizing people who can afford unsubsidized financial services. And if the credit unions' model bill is enacted, this subsidy will grow and grow.

  Thank you for the opportunity to speak with you today. I would be happy to answer any questions.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Jones can be found on page 268 in the appendix.]

  Chairwoman ROUKEMA. Mr. Stenehjem.
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  Mr. STENEHJEM. Thank you, Madam Chairwoman, Mr. Ranking Member, Chairman Leach, Members of the subcommittee. My name is Lee Stenehjem, Jr., and I am President of First International Bank and Trust in Fargo, North Dakota. I also have the honor of being the President of the Independent Bankers Association of America. I am pleased to be here today to present the views of our Nation's community bankers on credit unions.

  The privileges and advantages enjoyed by the credit union industry heavily tilt the competitive balance in their favor. These benefits have been fostered largely by the policies of the NCUA.

  We contend that these privileges and advantages add up to subsidies for the credit union industry that exceed $3 billion per year. The details of that are in our written testimony, which I have presented to you. My written testimony details these tax, regulatory and occupancy subsidies. I would like to spend the remaining time that I have on the impact of credit unions on community banks.

  The growth of the credit union industry in the past 30 years has been nothing short of phenomenal, and this growth has largely been achieved at the expense of our Nation's community banks. In 1960, the GAO reported that credit unions have $5.65 billion in assets. Today they have more than $300 billion in assets. This represents a growth of 5,500 percent, or an average growth of 148 percent per year.
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  Columnist Jane Bryant Quinn wrote in The Washington Post that credit unions were engaged in a ferocious expansion drive aimed at reaching 100 million members by the end of the decade. And this expansionistic agenda is not based upon the principles of common bond membership.

  And if I may, Madam Chairwoman, I would like to give an example of that. I have here two ads from Wisconsin by credit unions, and this is what one of them says, and I will quote: ''You will become a member as soon as you understand the strict qualifications for joining the credit union. You have to live somewhere--one, you have to live somewhere; two, Murray, the CUNA credit union monkey has to like you.'' In parenthesis: ''Don't worry, Murray likes everyone,'' end parenthesis.

  Different ad, same credit union: ''Anyone, anywhere can join''--and here it shows a picture of Murray--''. . . as long as you are as tall as Murray. Actual size shown.'' So really they have made a mockery of the common bond over the years.

  Now, can anyone even find a trace of serious common bond anywhere in these ads?

  Mr. D'Amours made a comment this morning dealing with commercial loans and he indicated that credit unions were severely limited in the commercial loans that they make.

  I have here a financial statement, 1996, of the Melrose Credit Union in Minnesota. And let me just read some of the officers that they have in addition to the President and the Chief Financial Officer: Vice President, Commercial Lending; Vice President, Agricultural Lending; Ag Loan Officer; Vice President, Real Estate Lending; Consumer Loan Officer; Internal Auditor; Commercial Loan Clerk; Agricultural Loan Clerk; Agricultural Loan Clerk; Real Estate Loan Clerk; Real Estate Loan Clerk. And they have got five different offices.
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  In the services that this credit union offers, they offer loans to include personal, business, agriculture, real estate, auto, recreational, and many more, secondary market mortgages, home improvement loans, home equity loans, trust accounts, estate accounts, clerk options, credit cards, ATM cards, and it lists where they have got their ATM machines.

  Now, that looks and sounds an awful lot like a bank and yet they have the tax advantages that the credit unions presently enjoy.

  The credit unions like to perpetuate a myth and that myth is that they serve the people of lower means. That is not true. I think, Madam Chairwoman, you pointed out a comment from the GAO study of a number of years ago that indicates that that is not true.

  Mr. D'Amours also gave some examples of how they help out people of small means. I can assure you that I could spend a lot of time telling you how we help out people of small means.

  I personally made a loan of $2,000 on Monday afternoon. We have a loan program over the holidays that we have had for many years in our smaller communities that has free interest rates. We have loans anywhere--going from anywhere from a couple hundred dollars up to huge loans. So if he would like to take us on as far as serving our smaller communities and our people of lesser means, I would be delighted to do that.

  It is almost impossible to compete against an industry--in the same industry with an entity that has tax-exempt status. Over the long-term, I do not know how you do that. How do you compete over the long-term in a regulated industry when you are taxed against an industry that is not taxed?
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  We have lost, in one of our offices, it is a $27 million office, I can name nine loans that we have lost in the past year to a credit union totaling $2 million, 17.5 percent of our loans, and the only reason is rate. And here is the ad someplace that used it: Credit union, 7.8 percent operating loans. At that time, prime was eight and a quarter; 45 basis points under prime. They are making the loans to everybody.

  Now, I would be delighted to do that, but under our tax system of taxation, we are unable to do that.

  Madam Chairwoman, my time has expired. I would be delighted to answer any questions at the end of the panel. Thank you.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Stenehjem can be found on page 285 in the appendix.]

  Chairwoman ROUKEMA. Mr. Garrison, please.


  Mr. GARRISON. Madam Chairwoman and Members of the subcommittee and Chairman Leach, my name is John Garrison, and I am President and Chief Executive Officer of the Walden Savings Bank, a mutual institution in Walden, New York. Walden Savings Bank was established 125 years ago and has $109 million in assets.
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  Today I am representing America's Community Bankers. ACB represents approximately 2,000 savings and community financial institutions, nearly half of which are mutual in form. I also serve on the board of the Community Bankers Association of New York State and past chairman of that organization. ACB appreciates the opportunity to testify on the credit union industry and commends you for your timely leadership in calling this hearing.

  In light of the credit union industry's evolution and recent court decisions, a policy discussion regarding the expansion of the common bond and continued exemption of credit unions from Federal taxes is particularly warranted. Congress should use this occasion to look at the remaining differences between credit unions and other insured depositories to determine whether, and under what circumstances, certain advantages and differentiated regulatory and tax treatment are justified.

  I should stress at the outset, like other ACB members, I generally have no argument with the traditional credit union industry, those generally smaller credit unions that have not strayed beyond the real common bond. You have probably seen an open letter which ACB and the other banking trade groups sent to credit unions to set the record straight on this score. The problem arises when a credit union changes its charter and becomes bank-like, blurring the line between credit unions and banks until they become indistinguishable to consumers.

  As an illustration of how absurd the situation has become, the employees of America's Community Bankers were asked to join the Andrews Federal Credit Union. A copy of the letter is attached to my testimony. The request was declined, of course, for obvious reasons.

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  The fact that they were inviting employees of a banking trade association to join a credit union simply on the basis of location of their workplace certainly goes far beyond anything originally conceived. And it is certainly inconsistent with the purpose of establishing the Federal credit union system.

  To illustrate the point even further, I would like to talk a moment about a David and Goliath situation that takes very much to my heart. Unfortunately, I am the little guy and I don't have a slingshot.

  The Hudson Valley Federal Credit Union, approximately 30 miles from my bank, has $843 million in assets, compared to $109 million in my bank. Formerly the IBM Credit Union, Hudson Valley now encompasses perhaps over 100 different employee groups, ranging from car dealers and hotels to insurance companies. Their products and services are no different from those at Walden Savings.

  At my bank, customers have no required minimum balances on checking accounts. There are no service charges, either monthly or per check fees. We charge no points on mortgages. Our interest rates on loans are competitive with those of the credit union's. In short, there was no difference to the consumer, but there is a key difference here. Walden Savings Bank last year earned $753,000 after paying $515,000 in Federal and State income taxes. Hudson Valley Federal Credit Union last year earned nearly $10 million--of which they paid zero in taxes.

  Within the last year, Hudson Valley opened four new offices using tax-subsidized dollars. The one right in the middle of my service area cost $1.2 million, just land and buildings. They are able to use over 40 percent of their earnings, that would otherwise be paid to Federal and New York State taxes, to compound their growth.
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  Ladies and gentlemen, competition is fine but it should be fair.

  Expansion of the common bond has opened the floodgates to an unbridled expansion of credit unions and their tax subsidy draining away business from taxpaying banks. To prevent disastrous effects on the Federal budget, as well as depository institutions themselves, the tax-exempt status of bank-like credit unions should be revoked. The threat of unconstrained growth of tax-free credit unions is so grave that some banks are exploring chartering credit unions as subsidiaries to gain partial tax-free status as a defense.

  My mutual savings bank operates like any credit union. Everything we make goes back into the institution and to our customers, the way credit unions operate, where income earned from borrowers is returned to savers after expenses and required allocations to reserves. It is not different in substance from that of the mutually-organized savings and loan association or mutual savings bank. Even a mutual life insurance company has a great deal in common with credit unions.

  Mutual savings institutions in many ways were the forbearers of the credit unions. Both were founded along the same principles, by individuals for the collective good of themselves and their neighbors, who likewise lack the financial wherewithal required to gain access to the banking system. Like credit unions, mutual savings institutions were created by banding together like-minded individuals striving to meet perceived community needs.

  Savings institutions lost their tax exemption in 1952, when Congress determined that even though savings institutions provided many benefits to communities, the savings industry had matured to the point where it was appropriate to give it the full responsibilities of the commercial bank brethren. Mutual institutions survived and have prospered. Today, mutual savings institutions are taxed exactly the same way that savings institutions and banks are. Notably, among the insured depository institutions, only credit unions remain untaxed. Taxation has not unduly inhibited the mutual savings industry, nor should taxation create a threat for the credit union industry.
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  The law was right in 1952 for a mutual savings institutions and it would be right now for bank-like credit unions.

  Today's mutual savings institutions are vibrant contributors to the economy, paying their fair share, no longer dependent on government-subsidized tax exemption and fully meeting community reinvestment and other regulatory requirements. Why can't credit unions voluntarily act the same as banks?

  America's Community Bankers stand ready to help in any way possible.

  This concludes my prepared remarks, and I would be delighted to answer any questions. Thank you very much.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Garrison can be found on page 239 in the appendix.]

  Chairwoman ROUKEMA. Now, I have heard your positions, of course, on the central issues of taxes, the definition of ''common bond'' and regulation, although I don't think anyone addressed the CRA question here, but if you would like to add more to that, you can put that in writing, or maybe some of my colleagues might ask that question.

  Mr. GARRISON. Madam Chairwoman, I considered that community reinvestment in my remarks.
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  Chairwoman ROUKEMA. I am sorry if I missed that. Maybe I was thinking ahead to my own question here. Sorry about that. But the point is, I think that we are aware of your major concerns here.

  But I want to ask you an overriding question. You may not be able to answer it for your associations but I would sure like to hear your own personal views on it.

  Most everybody has made reference to some kind of common ground here, finding common ground if not just absolutely going back to the 1982 position before the NCUA made its changes, its reinterpretation. But given the Supreme Court pending decision, do you believe that we can or should find a common ground and deal with this issue as a Congress prior to a Supreme Court disposition of the case?

  Mr. JONES. Madam Chairwoman----

  Chairwoman ROUKEMA. Mr. Jones.

  Mr. JONES. In response to your question, I think that the American Bankers Association, and myself personally, have a difficult time at this point deciding where the line ought to be drawn and who should receive the tax subsidy. It is a question that will evolve, of course, over time as more and more information is being surfaced from subcommittees like this that are taking up this issue.

  The Supreme Court case, and its pending decision probably early next year, does not, though, stop nor does it even hinder the problem. The problem is that there are wealthy Americans who are receiving government-subsidized financial services and we, I think, from a public policy point of view, need to consider where that should happen. At what point does that make sense in our society?
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  ABA is on record as saying that we very much support the small, single common bond credit unions that serve the purpose, the people of small means that they were originally chartered to serve. Banks have served that market for a long, long time and have done so, I think, with considerable success. And it is a valid area for the government to be looking.

  Is that responsive to your question?

  Chairwoman ROUKEMA. Yes, I think so.


  Mr. STENEHJEM. Madam Chairwoman, we would support what Mr. Jones said.

  Also, all we are asking for really is that the unions follow the law, and the law was established many years ago. We think they have gone beyond what the law required of them in return for some of the favorable treatment that they have received. So basically, we are just asking that they follow the law.

  Chairwoman ROUKEMA. What you are asking for, however, is a rollback. And my question was, pending a decision by the Supreme Court, is there a common ground that we as legislators could find and action could be taken that would deal with the problems as they have been outlined for us today?

  Mr. STENEHJEM. Madam Chairwoman, I would point out that it would not be a rollback of the law. The law has been there. It would be a rollback of regulation, and we would contend that the regulator went beyond what the regulator should have done during the past number of years.
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  Chairwoman ROUKEMA. But am I correct, the Supreme Court decision per se would not deal with that issue?

  Mr. STENEHJEM. Madam Chairwoman, I can't answer that strictly from a legal standpoint. It would probably depend on how far the Supreme Court went in their decision.

  Chairwoman ROUKEMA. Mr. Jones, I can see you are anxious to add to this.

  Mr. JONES. Madam Chairwoman, I think the issue in terms of finding a common ground is that we in the banking industry are willing to try to find that common ground, and I can certainly pledge to you that the banking industry and the American Bankers Association will help find where that common ground is.

  To me, it is clearly not credit unions making loans to doctors, lawyers, and baseball players but, instead, serving people of small means. And if we can come to agreement on that, I think we are willing to find common ground.

  Chairwoman ROUKEMA. Thank you.

  Mr. Garrison, do you want to conclude?

  Mr. GARRISON. I think there is not much difference between the credit union and the mutual savings bank to start with, and I said that before. Deferral back to the Court would not be completely out of order, and I don't think that the Court would render a decision that would automatically roll back the membership which would create economic mayhem in this country, so there would be a real plan of divestiture if that were the case.
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  I have two things----

  Chairwoman ROUKEMA. By the way, I am not suggesting that the Court would do that.

  Mr. GARRISON. No, I am not, either. But if they do, I don't think it would be the worst thing in the world.

  Chairwoman ROUKEMA. Mr. Jones.

  Mr. JONES. Madam Chairwoman, one additional point, and Mr. Garrison, I think, made me think of it and that is the whole issue of mutual savings banks. When we start looking at the credit union industry, and their mutual form of ownership, we have great precedent in this country concerning mutual forms of ownership that Congress at one point or another, in its history, looked at and saw growing outside of their original intent and purpose. One example, of course, is the mutual savings banks, which Mr. Garrison represents. In addition to that, there are mutual forms of ownership in the savings and loan industry, the thrift industry.

  In addition to that, the mutual insurance companies were viewed back in the 1950's as working outside of their original purpose and were seen fit to be taxed by the Congress. And so the mutual conversion allows members of credit unions to still own their credit union, but play by the same rules.

  Chairwoman ROUKEMA. If any of the other members of the panel would like to add to your statements on this subject, please submit them in writing to me.
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  Thank you.

  Mr. Vento.

  Mr. VENTO. Thank you.

  Mr. Jones, you commented about the income variations of individual customers at credit unions. Do you think there is a substantive difference between the income levels of customers in banks versus credit unions or are they--I mean, most people that are associated with banks have some money to save or they have some financial relationships. We know--I mean, the profile of who qualifies for an account or who qualifies for a credit card is always to the middle upper end of--is much friendlier, right?

  Mr. JONES. Well, certainly there is less risk, presumably, with people of higher means. But the point I would make in response to your question, Congressman, is that the credit unions are going after the wealthiest of people in this country. When we look at the Allied Associated Pilots Association or the Alaska USA examples, and there are countless other examples, what they have seemed to do is to move toward the upper end of the scale with a tax subsidy. Banks do not have that.

  Mr. VENTO. No. I understand. I mean, there are also banks like Mr. Pohlad's banks, which are moving to the upper end of the scale in our region, you know, the owner of the Twins and Marquette, which he kept part of that business. But I think that substantively, I think a lot of credit unions, in fact, go the other direction, which I think you endorse.
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  The issue with regard to the Melrose situation, Mr. Stenehjem, is--I mean, wasn't that an illegal--isn't that an illegal activity, so you are saying the State or the Federal Government wasn't doing its job, the regulator?

  Mr. STENEHJEM. Congressman, what they were doing was probably permitted by regulation under various credit union regulators. We would contend that that would go beyond the common bond requirement that has been in force in law for many, many years.

  Mr. VENTO. I was talking about the business loans, specifically is what I was talking about.


  Mr. VENTO. It is always hard to tell in this common bond issue because as I questioned about the 47 States and Puerto Rico having control over--of defining common bond by territory and States, and/or the Federal Government, it makes it difficult. Beyond that, though, after 63 years of case law, between whoever wrote the law in 1934 and 1997, we have some other problems; don't we?

  Mr. STENEHJEM. Congressman, we have researched and tried to find authority for credit unions making commercial and ag loans and we don't find any authority for that.

  Mr. VENTO. But you find case law, a lot of case law, I would expect, with regard to this?
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  Mr. STENEHJEM. I am not aware of that, sir.

  Mr. VENTO. Mr. Garrison.

  Mr. GARRISON. Could I comment, Congressman Vento? In my area, there are, every Sunday morning in the local newspaper, 21 banks listed and 13 credit unions listed. They include all of those loans that you could imagine that the banks have. They also, on the other side of the ledger, include the deposit accounts. The interest rates on both sides of the ledger are very, very close, very competitive.

  But my information also has it that the average mean income of the credit union people is higher than the bank income on a customer basis. I haven't got those statistics in my head but I will be glad to supply them.

  Mr. VENTO. I expect that in any case that--I don't know, I mean, if that is what it is going to get down to, I guess, is who has the most low-income people as customers or members, but I guess I am not surprised. In a sense, I don't know. I think most people who save at banks or have accounts at banks tend to have money, as I indicated, and qualify for credit cards and so forth.

  I understand that particular concern. I am just trying to kind of pull us away from it.

  The issue I am trying to point out also is this field-of-membership is sort of divided up between the States and we are talking about rechartering. You are obviously under the tax issue in terms of trying to describe that as something. I guess in terms--you will all be eligible now for the Subchapter S corporation organization, or at least some of the smaller banks will be eligible for that; at least they think they will. Whether or not that interpretation--I am not giving out any tax advice.
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  Mr. GARRISON. May I comment on that?

  Mr. VENTO. Yes.

  Mr. GARRISON. I think if I am correct, the small community banks, maybe some of them would be eligible for Subchapter S. I think you have to have less than 75 stockholders to do that, but definitely the mutual savings and loans and savings banks cannot be part of the Subchapter S legislation.

  Mr. VENTO. Well, I have--there is a report that we have, and what I am trying to understand that many, for a significant portion, have some plans to do that.

  So I will put in the record a CRS document when I receive it concerning that particular treatment. I guess I have it right here so I will put in this article. One Texas thrift has already changed and others are planning on doing it.

  Without objection, I would put that into the record, Madam Chairwoman.

  Chairwoman ROUKEMA. So moved.

  [The information referred to can be found on page 108 in the appendix.]

  Mr. VENTO. In any case, if that is going to be the issue--I think the issue for us is field-of-membership, and I would hope that Congress would get out there and define it. I understand we may face a situation here sometime next year where the Supreme Court could come through and look at this Gregorian knot of 63 years and all of the different credit unions, regulators in the States and use Alexander Sort to solve the problem.
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  So I think that in a sense if we think there is a field-of-membership and there is some common ground here, and are some differences, I would think that my preference is not to do nothing. My preference is to do something and act on that basis and try to achieve some understanding in terms of the niche or the role that credit unions--and they need to change, just as you heard my comments, just as banks need to change. If you were still doing the same activities and membership and customers that you had in 1934, there isn't a one of you sitting in the table that would be in business.

  Mr. JONES. Madam Chairwoman, could I respond just for a moment to the Subchapter S issue?

  Chairwoman ROUKEMA. Yes, yes, briefly.

  Mr. JONES. I will be very brief.

  I think there is a lot of misunderstanding about the Subchapter S issue, because it only is effective for the very smallest of banks and thrifts in this country. But the point is, it's not a tax exemption at all. The bank's income is still taxed but it acts much like a partnership form of taxation where the income is shoved down to the owners and they are taxed on it. That is contrasted with the credit unions who are paying zero tax.

  Mr. VENTO. I think that those of us that get dividends from a credit union or anyone, or maybe even you, are members of credit unions, you pay tax on whatever your earnings are.

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  Mr. JONES. I am not a member of a credit union.

  Mr. VENTO. Well, Scott, we will be happy to sign you up.

  Chairwoman ROUKEMA. Mr. Jones, I will tell you, we will have staff consult with the ABA's legal staff on this because there seems to be a difference of opinion about the meaning of this tax question and Subchapter S status. OK.

  Chairman Leach.

  Mr. LEACH. Mr. Jones started to address what I was going to talk about a minute ago, but let me go over this very carefully, because there are some distinctions here.

  What Subchapter S implies is that the full income of the bank gets taxed but it gets taxed by the individuals. What happens in a credit union, as I understand it, is that there is full tax of any share dividend, but retained earnings there is no tax. Is that correct?

  Mr. JONES. That is correct.

  Mr. LEACH. And that is a distinction. Now, what is of interest on this panel and caught me a little bit by surprise, Mr. Stenehjem, and I think also you, Mr. Jones, indicated that you are not advocating taxing credit unions. You are saying that this can be solved in other ways.

  Is that valid or invalid? You pointed out that there is an advantage to a tax-free status but then you haven't come back and said you are advocating taxation of credit unions. Or am I wrong on that?
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  Mr. JONES. I believe I have not communicated clearly enough on that issue, because it is our position that some credit unions should be taxed. When the tax exemption in the form of a tax subsidy is used to serve very wealthy people or people of significant means outside of the original purpose that credit unions were formed for, then we believe that is an abuse of their tax exemption. So we do believe that we have----

  Mr. LEACH. Then are you arguing that there should be taxation for given types of loans, by amount; given types of income that people may deposit with the credit union? How do you--I mean, it is a pretty slippery way of defining things.

  Mr. JONES. It is, indeed, Mr. Chairman. It is a very difficult question to try to get our arms around. But we are not here today saying exactly where a line should be drawn. We are here saying that we need to step back and look at where there are abuses. And if there are in fact abuses, we need to correct them.

  Mr. LEACH. Will you----

  Mr. JONES. Excuse me. But we still do believe that there is that group of credit unions and there are many of them that are serving their purpose, doing it well and should continue to operate as they are today.

  Mr. LEACH. That means without taxes?

  Mr. JONES. Correct.
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  Mr. LEACH. That is your position?

  Mr. STENEHJEM. Mr. Chairman, generally speaking, we just feel that those that are acting like banks should be taxed like banks.

  Mr. LEACH. Well, let me stress that one of the public policy aspects of all of this is, everybody kind of understands in Congress but few outside of Congress, we divide by committee of jurisdiction, and tax issues are not within this subcommittee's jurisdiction. And so it is, in one sense, a relevant issue and then in another sense, it doesn't fit this subcommittee of activism. So the case to maintain a tax exemption or the case to change a tax exemption is fundamentally the province of, on the House side, the Ways and Means Committee; in the Senate, the Finance Committee.

  Mr. GARRISON. May I add something on that?

  Mr. LEACH. Yes, Mr. Garrison.

  Mr. GARRISON. I think that the non-taxation of credit unions is broader than some people are talking about. It really allows them to grow at a much faster rate than what the savings institutions and banks who have to pay taxes. If you take 40 percent of my earnings away, it controls the way I can grow my bank and serve my community. And that is really what you are really talking about here.

  So equity of those credit unions that are acting like banks, I think, is a very important ingredient here.
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  Mr. LEACH. Well, I appreciate that.

  There are also some public policy concerns. I mean, one of the aspects of all of this is that, I mean, this country is confronted with enormous disincentives to save, and so to the degree that we can infuse in our system incentives to save is a very important circumstance.

  Then on top of that, you get the competitive equity issues that are obviously awkward. But all one can say with certitude is that all sectors of finance are serving this country very well. And then if you look at trends in place, are there competitive advantages or disadvantages and is it good public policy to do something about those advantages or disadvantages? And so what you are suggesting is that in your judgment there ought to be some compensating circumstances.

  Can any of you figure, in your own minds, any compensating circumstances that have nothing to do with putting new burdens on credit unions?

  Mr. GARRISON. Well, I can look back, if I can comment, Madam Chairwoman, I can look back on the bad debt reserves which were incentives for savings institutions and they, too, were discontinued just a couple of years ago because we were put on an even peer group with the commercial banks. So there are reverse things that are happening here.

  I suppose, on the other side of this thing, you could reverse and give the incentives back to the banks and the savings institutions as an equitable means of accommodating. And I agree with you, we are not saving enough maybe in the economy of the United States today. We are not keeping pace with our other industrial nations.
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  Mr. LEACH. Mr. Stenehjem.

  Mr. STENEHJEM. Mr. Chairman, without increasing the burden on credit unions, you could remove the Community Reinvestment Act burden from the community banks of this Nation.

  Mr. LEACH. Mr. Jones.

  Mr. JONES. Another approach that could be contemplated is that if, in fact, credit unions are serving people of small means, and reaching out to those communities and not being taxed for that because that is something that Congress wants to stimulate, why not look at the banking and thrift industries in the same way? To the extent that we reach out to communities of low- and moderate-income people, why not make the earnings off of those activities tax exempt for banks?

  Mr. LEACH. Although I must say, Mr. Stenehjem threw out an anecdote that is unprecedented in this subcommittee and that is that his bank made no-interest loans. I don't know where one gets in that line.

  Mr. JONES. I am going to Fargo next week.

  Mr. LEACH. In any event, I thank you very much.

  And I would ask for you, and your associations, to think through in particular this precept are there counterbalancing incentives that do not imply necessarily changing the structure and manner in which credit unions operate today? And these will be ideas that will be thrown in the mix. Thank you.
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  Chairwoman ROUKEMA. Mr. Barrett, please.

  Mr. BARRETT. Thank you, Madam Chairwoman.

  We have talked a little bit today, and I assume that you have seen the bill that is being floated around, it hasn't been introduced, that would deal with the issue of State-wide charters or removing any necessity for a single common bond.

  There is a second bill, a bill that I think has been introduced, has been introduced, in fact, by Congressman Martin Frost, that takes a much more limited view and tries to deal with underserved neighborhoods and removes the necessity for common bond in strictly defined underserved neighborhoods.

  Can you give me your opinion on that bill, please?

  Mr. JONES. Congressman, I will start out, if that is all right with the rest of the panel. First of all, relative to Congressman Frost's bill, I believe that we support the narrow nature of that bill. It very much reaches out to people of low- to moderate-income in underserved areas, and the banking industry and the thrift industry have responded, I think, quite well to the needs of CRA. We support that. We know it can be good business to be in those neighborhoods and helping them grow. And so we would, as an association, support Mr. Frost's bill.

  Mr. BARRETT. Mr. Stenehjem.

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  Mr. STENEHJEM. Congressman Barrett, generally speaking, we are all in favor of helping those of smaller means. I would point out that the people in that community right now could form a credit union if they wanted to.

  Mr. BARRETT. With what common bond?

  Mr. STENEHJEM. Well, apparently--community common bond or occupational or whatever would fit their circumstance. I think we have established that common bond has very big meanings.

  Mr. BARRETT. That is a violation of the law; isn't it? I mean----

  Mr. STENEHJEM. They could form a credit union under the laws, under the occupation or association or whatever else the law states.

  Mr. BARRETT. But earlier, though, when you were saying--you were asserting that the credit unions were in violation of the law because of actions they are taking that have been permitted by the regulators. Maybe you can help me, then, specifically where you contend that they have violated the law.

  Mr. STENEHJEM. They have violated the law. The regulator has gone far beyond what the law initially contemplated.

  Mr. BARRETT. By permitting what? Again, I want to----

  Mr. STENEHJEM. Well, the multiple-employer groups as exampled by--or as shown by the AT&T--credit union. That is one prime example.
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  Mr. BARRETT. OK. But you are comfortable then, you don't think it is a violation of the law then for people in an entire State to have a common bond?

  Mr. STENEHJEM. Not under the way it has been defined by the regulators. I would personally have a problem with that.

  Congressman, as a practical matter, we are--we serve--we are in a community. As a practical matter, our community goes so many miles around us. We are a community bank. That is what we serve. We serve our local community.

  Mr. BARRETT. I appreciate that. Let me move on because you have answered my question and I appreciate that.


  Mr. BARRETT. Mr. Garrison.

  Mr. GARRISON. ACB supports the Frost Bill, number one. Number two, I have a very unusual situation maybe right now. As the community bank in our area, and we are rapidly becoming known as the community bank there because of the mergers and acquisitions, and so forth, I have been asked by a group of community people in the city of Newburgh to consider putting a branch in the city of Newburgh so that the small low-income, moderate-income people would have a representative institution there, and my bank, I am very proud to say, is giving very serious consideration to that at this moment.
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  Mr. BARRETT. Thank you.

  Mr. Jones, in the first question from the Chairwoman, she thought you did a good job answering it. I thought you did a good job answering it, and I want you to do an even better job, if you can, and that is I do need help in where you think we should draw the line. Is it the size of the institution? Is that a place where the line should be drawn in terms of--I think all three of you at one point or another have either said directly or indirectly that these small credit unions that we sort of envision as the perfect credit union are not what you are out against but it is something other than that. And I want to know what the other than that is.

  Clearly, we know that you don't like the ones like the one you referred to from Madison, Wisconsin. Where do you think it is appropriate to draw the line?

  Mr. JONES. Well, I know that this will seem as if I am equivocating a bit but, frankly, we don't know where to draw that line. We do know, we do know, however, that the line should be drawn somewhere below which we are not giving government-subsidized financial services to people of ''significant and abundant means.''

  Mr. BARRETT. But clearly you couldn't say people can draw--can join credit unions unless they make more than $100,000 a year; I don't think you are saying that.

  Do you think it is appropriate to have a size demarcation in this debate?

  Mr. JONES. It may be appropriate to look at size. On the other hand, I think any time we move beyond single common bonds, the original purpose----
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  Mr. BARRETT. I understand. So you would think if we move beyond a single common bond that would be something that would trigger it?

  Mr. JONES. That would be difficult, I think, because then every time you do that and don't put rules around what they can be in terms of unlimited common bonds, you end up at the far end of the spectrum with this Alaska USA example.

  Mr. BARRETT. OK. Let me, if I could get answers from the other two gentlemen, as well.

  Mr. STENEHJEM. Congressman, I think, first of all, it is important that a line be drawn someplace. There are probably a number of places that that line could be drawn. Certainly when you get a credit union that is in the $50- or $100-million range, that credit union is offering bank-like services to everybody.

  Mr. BARRETT. So you think $50-million or $100-million would be a correct line?

  Mr. STENEHJEM. I threw them out to indicate that they are certainly getting sophisticated in the services they offer more so than the $2-, or $3-, or $5-million credit union. So at some point they are a very sophisticated bank-like institution.

  On the other hand, if you have a Honeywell that has a credit union for their employees, I don't know that we have much problem with that, if they serve their employees. Or----

  Mr. BARRETT. Even if it is over $50 million?
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  Mr. STENEHJEM. Yes. If they stick within their initial common bond. Our problem is when you have got one credit union with 150 or a 1,000 different common bonds or when you get a huge credit union that is basically serving everybody that is at least as sophisticated as the most sophisticated banks and they are not--and they have the tax subsidy.

  Mr. BARRETT. OK. Mr. Garrison.

  Mr. GARRISON. There very likely could be some way, and I don't have all the answers, to use both the multiple common bond and the size of the institution. And to use my figures, and they are round figures compared to the ones the credit union used this morning, you have a group of about 50 percent of the credit unions that are under $5 million, I think. About 80 percent of them are under $25 million. So maybe you could compromise that, keeping in mind the fact that the smallest savings institution in my association, New York State, is $8 million. And, they are fully taxed and have all the other regulatory requirements and accounting requirements as well. They are somewhat different than the credit unions.

  So there ought to be a compromise, I think, on the size, and I would submit maybe between $5 million and $25 million would be an equitable size, and also you have got to build in there the common bond somehow so that those who continue to serve as they were supposed to, when they were chartered, have some kind of protection.

  Mr. BARRETT. Thank you. Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Mr. Bentsen.
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  Mr. BENTSEN. Thank you, Madam Chairwoman.

  I apologize for not being here for your testimony. I do have a number of questions.

  I am a little confused because initially when we started out talking about this, I thought the issue was more in line with the common bond. Now it appears that the issue may have shifted to who should and who should not be able to form a credit union.

  Looking at the testimony from the ABA, I think things like the Alaska U.S.A. raise a concern, or the Wisconsin situation raises a concern. But on the other hand, I am not so sure that the Allied Pilots Union, which has been of much note recently since that is the American Air Lines Pilots Union, I am not sure that they maybe shouldn't be allowed.

  I think the question more, to me, comes back to more of, when you put together these multiple-employer groups, at what point do you stop where you do create a two-tiered consumer financial system, one which has a tax subsidy and one which does not, just as traditional bank subsidies that exist that we have debated on this subcommittee.

  So I am a little surprised at where we are going. I don't know that we should be going down the path of saying, well, if you make more than $100,000, you should not be allowed to form a cooperative financial arrangement. I am not sure I would agree also saying $50 million is the cutoff for assets under control, because you could have an IBM credit union, which IBM, they continue to have fewer and fewer employees but at one point had quite a few employees.

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  Let me ask you this: Would something like, as I understand, again, the State of Texas has, which says with regard to employer groups that you can add that they must have at least 250 employees, and that is just as an arbitrary number as anything else--would some threshold like that make sense to you all and perhaps CRA requirement as well?

  Mr. JONES. Well, I will start, Congressman, and take a crack at trying to answer your question.

  I think the wisdom of holding these hearings makes all the sense in the world. Here we are talking about the difficulty of dealing with the public policy issue of who should receive an incentive or tax subsidy and who should not. It is difficult to draw it at the size of the institution or the income of the individual.

  But I do believe that every credit union, no matter what their size and no matter how many common bonds they serve, have an option that makes all the sense in the world, and that is the conversion to a mutual savings bank. They can still enjoy the mutual ownership, they can still work together to serve the communities that they were originally chartered to serve, but they still are a taxed institution because they have grown outside of that single purpose that they were originally formed for.

  Mr. BENTSEN. We may change the mutual saving bank though as well, so I am not sure that option will always be around. But go ahead.

  Mr. JONES. I am done.

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  Mr. BENTSEN. Let me ask you this, and others may want to comment on my other question, but if not: Who is being primarily hurt? When you look at the statistics of assets, it is about 2 percent of household assets that are held in the credit unions. The loan statistics are higher. Is it primarily the community banks, the smaller banks, that are being affected by this? Is it all the banks or thrifts, as the case may be, that are being affected by this?

  Mr. STENEHJEM. Madam Chairwoman, Congressman, if I may respond briefly to that, the credit union industry is now roughly the size of the community bank industry, the membership of IBAA. So when you are talking about the credit union industry, you are roughly talking about the independent community banking type of industry also. So that is the size they are.

  Certainly, in the whole scheme of things, when you add in the $500-billion banks and everything else, the impact of the credit unions would appear to be smaller, but I can assure you that the impact is not insignificant when it comes to our members operating on a day-to-day basis and competing against a credit union.

  Mr. GARRISON. They were just whispering in my ear. I would say though, if I may, that the credit union industry is infringing on the ability of the tax institutions simply--and I don't know if you heard when I spoke before--simply because they have additional funds available through the retention of earnings.

  In my institution we are competitive, as I said before, 21 banks versus 13 credit unions, all of which the asset side and liability side rates are very, very comparable. So the earnings are much better than ours are; therefore, they can grow and they can capture the market. And my fear is that you are going to be shifting the growth in the banking industry--and I include credit unions in that--to a non-taxed entity.
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  Mr. BENTSEN. I guess that, and maybe I am not asking the question correctly. Going back to my first question, but the growth is occurring because they are merging with other groups or they are going out and finding the pipefitters are tapped out at this point, so they find XYZ business that has a certain number of employees that wants to have a credit union, but they are too small to form their own credit union, so they join with the pipefitters credit union and they go on from that; correct?

  That is part of the problem. And ultimately, the way that the banks and the thrifts see it is that the doors are just opening wider to where there is no real common bond, the common bond means anyone, I guess is the concern.

  So it comes back to trying to, if there is an arbitrary solution, because any solution will be arbitrary if it is not--and I think trying to set asset size is more arbitrary, to saying does it make sense to say here is a threshold, you can only associate with other common bond groups of a certain size or more in terms of employees or community perhaps, that may be more difficult, and you have to comply with CRA. Is that something that makes sense to you all or not?

  Mr. JONES. Congressman Bentsen, I will take a try at it. I think in the example that you have just given, there have to still be some curbs on how the merging of common bonds is put together.

  The danger is that, without some limitations, virtually anyone can become a member of a credit union. And the bill that is being circulated to you all this week looking for a sponsor basically does just that; it basically says that any amount of common bonds are just fine. And if that does happen--the point that you make is an excellent one--the floodgates are open and everyone then will be receiving this government subsidy.
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  Mr. BENTSEN. Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  I believe you have been very helpful. One of the questions that you didn't address--and I won't take the time up here, but feel free to address it--is this dual system, Federal and State regulation. And you heard the testimony of the State regulator. If you have any follow-up understandings or commentaries on that aspect of this subject, I would appreciate your contribution.

  Thank you very much.

  Mr. JONES. Thank you.

  Mr. GARRISON. Thank you very much.

  Chairwoman ROUKEMA. Very good.

  Chairwoman ROUKEMA. Now, Winifred Corey is here from the Los Angeles Schools Federal Credit Union. But I believe that Mr. Royce would like to do the honors and introduce Ms. Corey today.

  Mr. ROYCE. Thank you, Madam Chairwoman.

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  Yes, Winifred Corey, we want to introduce you, from the Los Angeles Schools Federal Credit Union. We are very glad you are with us today to tell your story.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Also, we have Michael Vadala testifying on behalf of the National Association of Federal Credit Unions.

  Mr. Vadala, I understand you are President and CEO of the Summit Federal Credit Union in Rochester, New York.

  Mr. VADALA. Yes, I am. Thank you.

  Chairwoman ROUKEMA. Welcome.

  Steve Brobeck, Executive Director of the Consumer Federation of America, is certainly well known here and about as a consumer advocacy spokesman.

  And I believe Mr. Vento would like to introduce Mr. Robert D. Anderson.

  Mr. VENTO. Yes. Thank you, Madam Chairwoman, for responding and inviting Mr. Anderson to testify. He is with one of the service organizations, an important one, from Liberty Check Printers. He is the President and CEO from Minnesota, which has over 400 employees and facilities in Minnesota, Wisconsin, Pennsylvania, and several other States. They do a lot of check printing, and I am pleased that he is here and look forward to his brief statement.
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  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Winifred Corey, before you begin your statement, am I correct that these charts and graphs were distributed by your organization?

  Ms. COREY. That is correct, to clarify for the record.

  Chairwoman ROUKEMA. I wanted to have all the Members here today to understand the source. Thank you very much.


  Ms. COREY. OK. Thank you, Chairwoman Roukema.

  I am Winifred Corey, President and CEO of the Los Angeles Schools Federal Credit Union. My goal today is to convince you that the ability of credit unions to serve multiple groups does not alter but in fact enhances the original intent of Congress concerning the Federal Credit Union Act.

  The credit unions, by public policy, provide affordable financial services to working men and women. Our credit union is one example. We were chartered in 1938 to serve the support workers for the Los Angeles Unified School District. Today our credit union holds $50 million in assets and we serve 17,000 members. We enjoy a strong financial position.
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  However, our future financial position is in jeopardy if either the courts or Congress do not act to protect consumers' rights to choose their own financial institution. Please let me explain.

  Prior to 1990, our credit union exclusively served school district employees and their immediate families. In 1992, the district encountered financial problems which resulted in the reductions in force and a series of unpaid furloughs for many of our members. Because of our membership concentration, the financial impact on the credit union was immediate and substantial. Members' delinquencies and bankruptcies rose dramatically, forcing the credit union into the red.

  Even so, the credit union did all it could to help its members by honoring warrants or promises for payment by the district when banks refused them and by helping members with debt consolidation. We knew that unless the credit union took steps to diversify our membership, we would be at the mercy of the school district actions.

  Like thousands of other credit unions, we were favored with the option of diversification or the possibility of liquidation. We turned to the students enrolled at the campuses of our community college district. As a group, they were being poorly served by for-profit banks. While banks do come on campus with preapproved credit cards, they have very high interest rates and fees, and these frequently get students in trouble, while ensuring the students access to reasonably priced financial services.

  Unlike banks, our credit union doesn't show up on college campuses and offer students high rate charge cards. Instead, we offer a series of free seminars to educate students on money management. We also have a student intern program and on-campus student representatives who regularly communicate with us about student issues.
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  While there were costs in both money and time, I am confident that these were good investments in our future growth and stability. Our financial position has improved dramatically, and the students have been exposed to finance and credit in an environment that is conducive to their education and well-being.

  However, if the Court's decision stands, our credit union will be enjoined from serving any new college students because they do not work for our single core sponsor. We are now forced to turn down applications from students on other campuses in our district not currently served by our credit union, groups which, in today's economy and regulatory environment, couldn't possibly start their own credit union.

  Without diversification, the Los Angeles Schools Federal Credit Union faces an uncertain future and our district's student population will lose their access to the benefits of credit union membership. Without these students, our total membership will actually regress.

  In conclusion, we must realize that in spite of bankers' statements to the contrary, this issue is not about fair competition, it is about greed.

  For credit unions, I do not exaggerate when I say this is about survival. Without the ability to serve multiple groups, many credit unions will disappear. Further, the 63 million Americans who work for small businesses will be forever denied access to credit union membership.

  According to the results of a recent survey, 83 percent of Americans support legislation to protect their right to join a credit union. Credit unions play a vital role in our economy, and I firmly believe that Congress did not intend to limit credit unions' membership to select segments of society.
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  If you buy the bankers' arguments, you will, in effect, deny the original intent of Congress to provide affordable financial services to working men and women. Please help us preserve America's credit unions.

  Thank you, Chairwoman Roukema.

  [The prepared statement of Ms. Corey can be found on page 172 in the appendix.]

  Chairwoman ROUKEMA. Thank you.

  Michael Vadala.


  Mr. VADALA. Thank you, Chairwoman Roukema, Members of the subcommittee. I would also like to say thank you to Congressman LaFalce for his warm words of introduction this morning. I hope I can live up to his lofty billing.

  I am Mike Vadala, and I am President of the Summit Federal Credit Union in Rochester, New York. I thank you very much for allowing me to testify here today. I responded to the questions contained in your letter of invitation in my written testimony, but I have a brief oral statement I would like to share with you now.
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  We are here to address a very important question: Who can avail themselves of credit union services? Now that seems like it should be a simple question to answer. The Federal Credit Union Act tells us that membership shall be limited to groups having a common bond; that is, ''groups'' with an ''s''; clearly it means more than one. So serving more than one group is entirely consistent with the original intent of Congress when it established the credit union system to make more credit available through a national system of cooperative credit. The question is whether each of those groups needs to share a single common bond and whether or not it makes any sense to limit credit unions to one single common bond.

  In previous Supreme Court rulings, it has been decided that ambiguities in the law should be resolved by Federal agencies; in other words, the Federal regulator. In this case, the National Credit Union Administration should be left to make reasonable interpretations of any such ambiguity.

  Now over the course of the last 15 years, a number of credit unions have begun serving multiple groups. Federal credit union membership is still very much restricted by the credit union's charter, which is determined by the Federal Government. Adding multiple groups is an approved government policy which made good sense when it was enacted in 1982, and it makes sense today. Ask any member of the 382 groups served by The Summit Federal Credit Union.

  NCUA implemented this change primarily to protect American taxpayers. Remember what things were like in the 1980's? Savings and loans and banks were collapsing at record rates, and credit unions were also threatened. But thanks to NCUA's highly responsible action in implementing this policy, credit unions survived these turbulent times and closed the decade of the 1980's financially stronger.
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  This policy has served consumers well without adversely impacting banks and thrifts. For the past 5 years, banks have enjoyed record profits and record growth. The $302 billion growth in assets in 1995 at FDIC-insured institutions nearly matched the size of the entire credit union system. Now any industry that grows by an amount equal to the underlying size of another industry cannot seriously claim to be threatened or harmed by such competition.

  Banks are asking Congress and the regulators to expand their powers while recommending the credit unions strictly be held to the banks' interpretation of the 1934 Credit Union Act. Those who are really being hurt by limitations on credit union multiple groups are real people with real needs for financial services that could, in effect, only be obtained by a credit union. They are people like Betty Dudman, whose bank was unwilling to refinance her mortgage to current market rates following the death of her husband. They are people like Pamela Simmons, who could not afford the adoption of her first child without the help of the credit union. They are people like 800 members of The Summit who received personal unsecured loans of less than $2,500 last year alone and many other members, some of whose stories I have attached to my written statement.

  Now, just 2 days ago the Supreme Court agreed to hear our case. But with argument in the Fall, decision likely to be over a year away, the hurt and uncertainty will continue. In the absence of Congressional action, what really upsets me is that real people with real financial issues who could benefit from credit union services tomorrow will be turned away for at least another year.

  I would like to point out that every single judge who has written an opinion in this case has laid the issue squarely at the doorstep of Congress. We have no reason to believe that the Supreme Court will feel any differently. The dilemma facing the courts is that they are being asked to interpret a 63-year-old law. Their decision will not necessarily be based on the underlying merits of the issue but, rather, on the standing or wording of the law.
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  Congress is the only branch of government with the power to resolve this issue solely on the basis of what is right and what is wrong, based solely on what is the best interest of the American consumer. It was a government policy decision to promote multiple-group fields of membership for credit unions. All the credit unions ask is that you take action to uphold that policy. We are not asking for new powers, we are not asking for an expansion of whom we can serve, all we ask is that you confirm a government policy that has been in place for a generation.

  Thank you, and I will be happy to answer any questions when the time comes.

  [The prepared statement of Mr. Vadala can be found on page 295 in the appendix.]

  Chairwoman ROUKEMA. Mr. Brobeck.


  Mr. BROBECK. Thank you, Madam Chairwoman, Members of the subcommittee.

  I am Stephen Brobeck, Executive Director of the Consumer Federation of America. The Federation greatly appreciates the opportunity to testify on issues facing the credit union industry.

  Let me say at the outset that we strongly believe that every American should be able to join a credit union. During the past decade and one-half, our belief has been strengthened by changes in the financial services marketplace. In the first place, there has been increasing concentration in the banking industry that in certain low- and moderate-income neighborhoods has significantly reduced consumer access to affordable banking services. Also, for-profit banking institutions have increasingly focused on short-term profit maximization. That new emphasis helps explain the well-publicized rising number and level of fees assessed by these for-profits.
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  In this context, it is important for consumers to have banking alternatives. The only other institutions providing a full range of banking services throughout the country are credit unions. Moreover, their services offer higher value to consumers than do those offered by for-profit banking institutions.

  Research released by CFA last year confirmed what all previous research has concluded; namely, that credit unions pay higher savings yield, charge lower loan rates, and assess fewer and lower fees than do commercial banks. Just as importantly, credit unions tend to treat members with unavoidable problems with greater understanding and sympathy than do for-profit institutions.

  Consumers recognize this credit union difference. The annual American Banker consumer surveys have always revealed that a significantly higher percentage of credit union members than banks' customers are very satisfied.

  But it is not only the credit union members who benefit from the existence of these non-profit cooperative organizations. By competing with and serving as a yardstick for the for-profit institutions, the credit unions act to restrain the prices that the for-profits charge their customers. In this way, credit unions act to promote truly competitive, efficient financial services markets.

  Given these realities, it is important that all consumers have the ability to join credit unions. According to a recent survey conducted by the Luntz Research Companies and Global Strategy Group, Inc., a large majority of Americans want everyone to have this ability.

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  Unfortunately, many do not have this opportunity today. Less than half of all households are within the traditional field-of-membership of existing credit unions. This unfortunate reality reflects both past public policy and current economic reality. One result is that those in small firms who earn less than those working for larger organizations are denied access to credit union services. That helps to explain the average difference in income, by the way, between credit union members and bank customers.

  It is significant that the campaign against credit unions has been initiated by commercial banks. I would ask why are these for-profit institutions, who are much larger than credit unions--13 times the assets--have recently grown just as rapidly as the credit unions, and have enjoyed in recent years record profitability, trying to weaken the credit unions?

  One can only speculate, but it would be plausible to conclude that banks are embarrassed by the superior value of credit union services, they are nervous about the favorable consumer evaluation of these services, and they now see an opportunity to weaken their non-profit competitors.

  The question remains, to what extent should credit unions be regulated differently than for-profit bank institutions? It should be stressed that credit unions are subject to almost all the same consumer regulations that are the banks. There are few exceptions, most notably CRA, and at present these are appropriate.

  Currently, a large majority of credit union members belong to credit unions that are each associated with an employer. It does not seem to make sense or to be fair to require credit unions to meet CRA requirements for serving all socioeconomic groups in a metropolitan area. After all, they are limited by field-of-membership restrictions as to whom they can serve.
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  However, if Congress were to permit large urban, regional, or Statewide credit unions to be organized--and we would strongly support that--then these new organizations clearly should be subject to CRA requirements.

  That concludes my testimony.

  [The prepared statement of Mr. Brobeck can be found on page 157 in the appendix.]

  Chairwoman ROUKEMA. Mr. Anderson.


  Mr. ANDERSON. Thank you very much, Madam Chairwoman, Congressman Vento, Members of the subcommittee. I appreciate the opportunity to speak with you today.

  My name is Bob Anderson. I am President and Chief Executive Officer of Liberty Check Printers headquartered in Roseville, Minnesota.

  Founded in 1985, Liberty is a privately-held company that prints checks for nearly 3,400 of the Nation's 6,200 credit unions that offer checking accounts. We have employees working at manufacturing facilities in Minnesota, Wisconsin, Pennsylvania, Tennessee, Texas, and California, and we have employees in nearly all of the 50 States of the United States.

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  What is our interest as a manufacturer and as a supplier to the credit unions? First, our company was designed to serve credit unions, and we are fully invested with the purpose that they have in helping people. Our customers are honorable, and their members have been tremendous supporters of our efforts.

  But second, we must make huge investments as a manufacturer, and as a supplier we have spent millions of dollars over the past 11 years. We are now at the point of continuing to renew our manufacturing capabilities and having to spend again millions of dollars. These are important decisions, and the fate and stability of the credit union movement directly affects the investments that we have or will make.

  What has happened as a result of our manufacturing efforts? We believe that for our customers but also for the customers of other check printers, the price of checks to credit unions has come down dramatically in the past decade, and we would be pleased to provide information to that effect.

  But we think there are also other suppliers which have done as we have, which has been to have a mission to help credit unions and credit union members and have made investments accordingly. Let me respond ever so briefly to the questions that you have set out. I detailed these in my testimony, and I will just be brief in responding.

  First, in regard to the question on the intent of the 1934 Act, I would respectfully disagree with the premise as stated. My reading of that act indicates the original legislative intent was to provide additional financial services outside of banks but not just for those of small means. Multiple associations are not prohibited. Therefore, serving more than one group does not appear inconsistent with the original purpose of the act. Section 1752 significantly establishes a cooperative association. Section 1759 points to a limited number of groups, plural, and I think that is highly significant in our reading of the Act.
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  Second, permitting credit unions to serve multiple unaffiliated groups should have a positive effect on other providers of finance services by heightening competition for consumer dollars. And we have reviewed some of the effects of those, but I would point out not from our research, which we do extensively but from that of the American Banker, that 69 percent of credit union members last year were very satisfied with their institutions and a substantially smaller number of bank customers indicated that level of satisfaction. We conduct primary research throughout the country. We find the same thing.

  Third, in my responsibilities I have had the opportunity to travel and meet with many of our credit union customers, their management, and their employees. Throughout the country, their interpretation of the effects of AT&T Family would be a devastating response for many. Millions of credit unions members and their families who joined in the wake of NCUA's 1982 regulation might be expelled. The potential havoc on personal finances is immense, and, as I indicated at the outset, this can have a real effect on suppliers who intend to expand services or continue serving or servicing credit unions.

  Deregulation, in response to your fourth question, has not altered the fundamental differences between credit unions and banks. They still have dramatically different purposes. Organized as not-for-profit, member-owned cooperatives, credit unions reinvest surplus fund in the form of lower loan rates, higher savings rates, and decreased fees. Banks continue to be designed to allow for profits for shareholders.

  I responded in writing and we have discussed much today questions 5 and 6. It is our view that taxation should not be extended to credit unions nor should regulations such as CRA, that these institutions have served their role well.
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  I would like to thank you, Madam Chairwoman, for the opportunity to testify today.

  [The prepared statement of Mr. Anderson can be found on page 155 in the appendix.]

  Chairwoman ROUKEMA. Thank you.

  I am a little perplexed as to where we are now. I know that you are intent on pushing through some other legislation in advance of the Supreme Court decision, so I won't ask you the question the way I posed it to the previous panel. But is it absurd to think that we can find that common ground and address these questions in a fresh way in this term, or must we wait on the--practically speaking--on the Supreme Court decision? Can we find the common ground? It sounds intransigent to me.

  Mr. VADALA. If you don't mind, I will answer that.

  Chairwoman ROUKEMA. Please. I would like to have you. You see, I don't want to be cynical about this whole hearing today, but I am not sure that I have heard anything new that we have not heard already and I am not accusing only your group of this, I mean every panel that has been in here today. And I had hoped we might have gained some new insights; I am not sure we have.

  But Mr. Vadala, on the basis of your experience--and it is extensive--let me know what your feeling is.

  Mr. VADALA. One of the difficulties in finding that common ground is that credit unions have been operating this way for 15 years, and so now, with a compromise, it is very difficult to feel like anything that we give up is justified.
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  Certainly the biggest concern is for consumers and members. I really, truly believe that if we wait for the Supreme Court ruling, credit unions will survive as credit unions. The concern is for the potential members and for the people. And I have included a number of letters of testimony in my written comment, but virtually every letter, without exception, tells us how they went to the bank, got turned down, went to the credit union, we took care of them. We can give you a pile of letters as high as you need to prove that point. I think every credit union could.

  Chairwoman ROUKEMA. Yes, but we are talking about the evolution that has taken place with Omni American, for example, where it is talking about membership that exceeds 500,000 locally, nationally, and worldwide. Those are quotes from Omni American literature.

  Mr. VADALA. There is an insinuation that Omni American, though, is no longer able to stick to purpose.

  Chairwoman ROUKEMA. That is the question.

  Mr. VADALA. But my credit union certainly, we have 63,000 members, I think that is a sizable group. We have $175 million in assets. Yet 31,000 of those 63,000 people have accounts less than $100. We are making loans under $2,500 every day, where the banking alternatives in our area won't even talk to you about a loan. We are sticking to purpose, and more so than we were able to do with one group, because we are making credit available to more people.

  I believe--and I think Mr. Garrison was a great example--there are institutions trying to be as consumer-friendly, and if they want to be not-for-profit organizations with the incentive strictly for service, one member, one vote, I think a tax exemption would be justified for them too. I do not believe that what you are giving us is anything but what we should have. If there are other organizations that deserve that, we should look into that. I think that might be some common ground.
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  Chairwoman ROUKEMA. Thank you.

  Does anyone else want to comment on that? No? All right.

  Mr. Vento.

  Mr. VENTO. Thanks, Madam Chairwoman.

  Mr. Vadala, the Court decision, or the case that was assumed by the Supreme Court, would not deal with great segments of the credit union movement, would it? Many of the individual credit unions wouldn't be directly affected by that particular decision, would they?

  Mr. VADALA. I think there are 3,500 federally-chartered credit unions out of about 1,300 credit unions directly affected. What we have seen in our community is that single-employer credit unions, community credit unions, State-chartered credit unions, everybody has risen to task on this, because we understand this is not somebody who has a problem with common bond, this complaint was raised by somebody that has a problem with the fact that credit unions have done good things for people and it is threatening to them.

  Mr. VENTO. Well, I think that might describe their concerns differently. I mean, obviously there is an issue here in terms of common bond, but the common bond issue, as was described, is each State has a slightly different common bond.

  We are dealing with the Federal common bond in this court case. How it will come down, I guess, is anyone's guess based on, as I said, 63 years of case law and practice and regulations. So it is hardly a crystal clear issue. So I think it is time for Congress to try to deal with this.
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  I mean, here we have got an industry with millions of our constituents, something like--how many members are there?--25 or 30 million members, and they represent each a family. So half the population has a credit union account or some relationship with it; right?

  Mr. VADALA. I believe there are 70 million credit union members. I think it is something that Congress absolutely needs to look at after this much time.

  Mr. VENTO. The question rhetorically is, you know, as a segment serving consumer needs, are we going to deal with this issue because we have a problem in terms of defining ''field-of-membership''? I tell you the truth. As a State legislator, I wrote laws on common bond, but I would be very hard pressed today to explain to you what I did 20 years ago.

  Mr. VADALA. Correct.

  Mr. VENTO. And I think that is the case, if we want to be candid about it, in trying to describe this. We are all not saying or asking the question exactly right with regard to common bond. So I think we need to rationalize this common bond issue so that we can move forward to certainty and predictability. And the Court decision is anything but certain or predictable. It may be a winner-take-all. Maybe they will come out and do our job for us. I guess we are going to have them do it on the budget and have them do it on everything. If a tax break could solve this, I am sure we would solve it.

  Mr. VADALA. I would imagine, whatever the Court decides, somebody won't be happy. I think what we have to look at is the fact that there are many, many small businesses who have employees of moderate means that, without expanding the common bond to multiple groups, would never be able to offer credit unions as an alternative.
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  Mr. VENTO. I don't know if that is what Congress is looking for, but, as I read it, some Members appear to be saying let's see what the Court says, because we may be waiting until the cows come home because there are going to be court decisions and court decisions on and on.

  Mr. Brobeck you filed an amicus to the Supreme Court case, the AT&T case. You cited a study done by the Consumer Federation of America and CUNA, the Credit Union National Administration. Could we obtain a copy of that study for the record?

  [The information referred to can be found on page 164 in the appendix.]

  Mr. BROBECK. Yes. There are three studies that we conducted, two in cooperation with CUNA that I think bear on the subject matter of this testimony. One was released a year ago, and that compared bank fees and fees charged by credit unions, and I was surprised at the extent of the differences across the board.

  The second report--and this was used independent data, NCUSIF and bank rate monitor data for the banks--was on the rates that banks charge on loans versus the rates that credit unions charge; and then also the comparison of the yields on savings accounts. Here, there were even larger differences; for example, a 5 percentage point difference on credit card rates.

  Mr. VENTO. Let me just interrupt because my time is about to expire and I want to get a question in to you, Mr. Brobeck, and I am sorry I don't have a question to ask Mr. Anderson, but it is important.

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  We heard in the last series of testimony that non credit union members and credit union members have income differences, non-members, but that is not a comparison to bank members versus credit union members.

  Mr. Brobeck, you work in consumer financial issues. I note yesterday you were concerned about the credit cards and credit problems that people are experiencing. Could you shed some light on this issue for the subcommittee, either in written testimony or in something briefly here today, to give us some guidance with regard to what we are hearing here and what we are not hearing?

  Mr. BROBECK. Well, the problem is, this is a difficult issue that we have not completely resolved as an organization, but the common bond, as has been traditionally defined, has basically biased the organization toward large employer groups.

  A large majority of credit union members belong to large organizations, and they, for reasons that have nothing to do with the nature of a credit union, have higher salaries, and as a result, it is not surprising to me that the incomes of credit union members are somewhat above that of bank customers.

  However, let me just now address your concern. I would like to see credit unions do more to serve the needs of low- and moderate-income households. I have been very encouraged over the last several months that we have been working with credit unions. But I would emphasize that we are separate and distinct from credit unions even though some credit unions participate in our organization. I think you are well aware we have sat here on the panel and disagreed with them on a number of issues.
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  Mr. VENTO. My time has expired. But I think there is a difference here that I am not coming through to you, and that is to say that when you compare non credit union members with credit union members, that is fine, but they may be non-members of any financial institution because they don't qualify for a loan. They don't qualify because they don't have any savings, just as we know, for instance, that individuals that have credit cards, only 60 percent of the population is eligible for a credit card. Or at least it used to be that way.

  But what I am saying is, if you are going to compare non-members, comparing apples and oranges, you are better off comparing customers of banks to customers of credit unions and determine what the profile is of income, because suggesting that these wealthy members of credit unions are getting basically various types of tax breaks----

  Mr. BROBECK. You may find not much difference in the income levels. I think the important issue is to what extent the needs of low- and moderate-income households are being served.

  Mr. VENTO. That is another question, and Mr. Barrett and others and myself have articulated on that question, and I think it can be done.

  Thank you.

  Chairwoman ROUKEMA. Mr. Royce.

  Mr. ROYCE. Thank you, Madam Chairwoman.
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  Ms. Winifred Corey, I know this is a long way for you to come out today, and I appreciate you coming so far to testify.

  Ms. COREY. Thank you.

  Mr. ROYCE. In your testimony today, you gave us some history of the Los Angeles Schools Federal Credit Union and how you came to diversify your membership in the early 1990's.

  One thing I found particularly interesting and, in fact, quite commendable was your decision to add community college students to your field-of-membership. This is an area, as you know, that many financial institutions do not want to enter, especially to the extent that your institution did.

  In fact, the willingness of your institution to serve college students in such a comprehensive way represents a key difference, I believe, between credit unions and most other financial institutions.

  I would like you to expand, therefore, on your credit union's experience in this area, how you adapted your institution to meet the needs of this unique group and what the results have been expanding this to include these students?

  Ms. COREY. Well, one of the things that the expansion has done for the students is to provide them with financial expertise that we are giving through our money management classes. These classes are well attended, typically running 30 students to a class, and the college campuses themselves and teachers on the campuses are delighted that we are there and we are doing this.
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  As a matter of fact, I indicated that we have a number of colleges in our district. There are nine community colleges in our district. Only seven of them actually had applied for membership by the time the injunction came. So we have two community colleges who have asked for membership, but we have not been able to serve them. And I have to admit that despite the fact that we are unable to serve them at this time, we have still gone ahead and held the financial seminars on money management in their schools, but simply not been able to enroll their students even at their request.

  So we do definitely have a focus and a concentration on these people, and we have established a network of on-campus student representatives who are in regular contact with us and tell us what the issues are for the students in their particular campuses.

  Some of these students are virtually poverty level, because of course, as students, it is difficult to work and it is also very difficult to find the money to continue their education. So we can't wait; we are very eager; we want very much to be able to serve these people; but as long as the injunction stands, we will not be able to do so.

  Mr. ROYCE. Winifred, you state in your testimony that should the Supreme Court uphold the appeals court decision, your institution would be enjoined from serving any new college students. As a matter of fact, you just mentioned there are two colleges in the system you can't serve now. What options would those students have? Would it be possible for those students--and you indicated in your written testimony that there is a significant number of them--would it be possible for them to start their own credit union? I mean, what is their recourse now?

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  Ms. COREY. Starting their own credit union is just not an option for them, and there are two reasons. Yes, the groups are large. However, these are community college students; this is not a 4-year campus that we are talking about. These are highly transitory students, some of which complete their degrees and get a 2-year associate's degree, others of which are there just to obtain the skills that they need in order to get to work, and as a result, they would not have the strength of continuity to be able to form and maintain a credit union on their own. With all the regulatory compliance that is required and with all the need for financial resources, the students as a group would not be able to raise sufficient money to lend to themselves to achieve their purposes.

  So the stability of the Unified School District employees lends itself very well to be able to lend to the students in that community college.

  Mr. ROYCE. Thank you, Winifred.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Mr. Barrett.

  Mr. BARRETT. Thank you, Madam Chairwoman.

  Ms. Corey, I also applaud you for including the community colleges in the plan that you have in Los Angeles. I would also say that the description that you just gave, which I think is an accurate description, of the difficulties that a transient population like community college students face in raising capital also applies to poor neighborhoods, and that is the reason that I keep beating the drum on the needs for credit unions to be included in this mix as well.
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  When you gave your description of the economic conditions in Los Angeles that led to the attempt to expand, I thought that that was also very much on target. You were talking about layoffs and the inability of people to pay bills. Again, I thought that that underscored why people like me keep harping on this issue of community reinvestment. So I just wanted to say that.

  I also, as I was sitting here, was thinking about the whole issue of taxation. And, Mr. Vadala, you can help me, because when we talked about it earlier, the issue seemed to be the taxation of the retained earnings. Is that the nub of the issue here?

  Mr. VADALA. We don't have retained earnings, we have undivided earnings, and I think it is called that for a very specific reason. We are not-for-profit organizations. And those funds are still held on behalf of the members to be used for the benefit of the members. I think it is very important to distinguish the difference, that we are not-for-profit and that is why we are not taxed.

  Mr. BARRETT. That was my perception. And so as I was listening or reflecting back on the testimony of some of the earlier witnesses who are very much in favor of taxation, in some ways I thought, ''Well, they may end up being hoisted by their own petard,'' because I think you may have a situation--and maybe you can correct me on this--if they win, and let's say they win and Congress reaches the decision that the retained earnings from their standpoint--and, how do you describe it----

  Mr. VADALA. Undivided earnings.

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  Mr. BARRETT. Undivided earnings could be taxed, that is going to leave credit unions with one of two options: They can either divide it and give it all back to those members, which is just going to make those institutions look all the better to the consumer.

  I mean, that is why I used the phrase, ''Hoisted by their own petard.'' I fail to see where they are going to come out as great winners, because my gut instinct is, the credit unions are cooperatives and that may be what they do.

  Mr. VADALA. The only concern with dividing all the undivided earnings is, of course, safety and soundness. So when rainy days come along, I mean there have been many instances where our credit union and others have needed to use the undivided earnings to pay out the dividends to the members and also to protect against--we do take an enormous amount of risk that I don't believe the banks take, and I think we lend to people that are not your traditional easy loans to make--but we do that with the understanding that we have put our reserves in the position where we can do that. I mean, strength in credit unions is very, very important.

  Mr. BARRETT. Mr. Brobeck, you stated your support for CRA for the large institutions. How do you serve----

  Mr. BROBECK. No. I want to clarify my position on that. Not for large employer-based credit unions. In fact, there are virtually no credit unions that I think should be subject to CRA now. What we would like to see in the future is large regional, citywide, State credit unions that serve all communities, and those should be subject to CRA.

  Mr. BARRETT. But what about the example in Wisconsin of one that does serve Southeastern Wisconsin? Should that be----
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  Mr. BROBECK. I am not familiar at all with that situation. I would be happy to take a look at it and give you an opinion on that.

  Mr. BARRETT. I would appreciate that very much.

[Mr. Brobeck's response to Hon. Thomas Barrett was added later: In response to Rep. Barrett's queries, I am unable to identify a particular credit union in Wisconsin that fits the question. To my knowledge, the credit unions in that part of the State are closed to most consumers.]

  Mr. BARRETT. But if you do have more than one bond, is there a point to where you have 13 or 14 different bonds?

  Mr. BROBECK. I mean, this is the tougher issue that the subcommittee is having to wrestle with.

  Mr. BARRETT. That is why we are asking you. That is why you make the big bucks.

  Mr. BROBECK. I made my position, I think, very clear. I think the clear distinction is between the non-profits and the for-profits, and non-profits should be given the opportunity to serve all consumers. Now some of them will choose only to serve a narrow group of consumers.

  Of course, as a consumer advocate, we are not as concerned about the credit unions themselves, we are concerned that all consumers have the ability to participate in at least one credit union.
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  Mr. BARRETT. Obviously, the banks did a good job in their timing in getting that story in the newspaper. If you could take a look at that credit union and the different options to become a member, I would be interested in your thoughts in writing as to how that applies.

  Mr. BROBECK. I would be happy to give you my thoughts. I have not seen that article.

  Mr. BARRETT. It is interesting.

  Mr. BARRETT. Mr. Anderson, I am just happy you print checks in Wisconsin.

  Mr. ANDERSON. Thank you very much.

  Chairwoman ROUKEMA. Mr. Barr.

  Mr. BARR. Thank you.

  If I could ask both Ms. Corey and Mr. Vadala, since you are both here representing national credit union associations, to respond to a question that I had earlier to one of the early panels, and that is, looking at the language with which I know you are both very familiar and could probably cite it in your sleep, from the Federal Credit Union Act that deals with the issue of common bonds and so forth, looking at that and understanding, as you do, intermittently the problems that we are talking about here in terms of common bond, not the tax issue or the other issue of spreading the misery, which is a strange concept--gee, we have some institutions that are not burdened with mandates and so forth--but looking at the two legitimate issues or the one of the two legitimate issues, looking at that language and the proposed legislative language that we have seen, and without asking you to disclose publicly here any sort of negotiating positions that you all may be developing, just from a general standpoint, are there not some other ways possibly that we could address this issue other than the one legislative proposal that we have seen?
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  Maybe focusing in more on it may take a few more words, but really trying to come to grips and do a better job of defining what common bonds and so forth are, rather than simply removing the ''a'' and making common bonds generally. Is that the only way to solve it, or are there possibly some other things that we could be looking at?

  Mr. VADALA. Mr. Barr, thank you. I can start.

  I would like to point out the way that our groups have taken shape because I think it is pretty important. We serve 382 groups. We started off as a telephone company credit union in Rochester, New York, and now are similar to the AT&T credit union that got sued initially.

  Our core group, our initial group, had average shares of $7,800 or $7,600 last year, with average loans of $3,800. They are 50 percent loan-to-share. All our 381 other groups are net borrowers. Their average share account is $1,600, about one-fifth the size of the core group. An average loan account is $2,000. These are clearly people with smaller means.

  We think that on the credit union size issue, because of that very fact, to not expand the common bond would keep all these people who are clearly of lesser means--or at least their response to the credit union indicates that--that they would keep them out of the credit union.

  Now I think that there are probably some banks that could use some regulatory relief, and, you know, as they don't have any problem with our credit unions, I don't think we have any problem with them. And I think if there are people who have repeatedly shown a very high CRA rating, let's give them a break from regulation.
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  The CRA was created, I am sorry, because of abuses, and it is very clear that the job was not getting done. There are no documented abuses like that in credit unions. We serve these people every day.

  I agree with you, putting more regulation on credit unions is not the best answer for this, but there may be players on the bank side that could get some relief. I would recommend a compromise in that way.

  Mr. BARR. So from both standpoints, there may be some areas where, over the course of maybe the next few months, we could maybe look at some different proposals and come up with some different alternatives rather than just, you know, here is the only way that it is going to solve it, sort of take it or leave it approach that has been found, unfortunately, in some other areas, not in this one but in some other areas, where we have been trying to reform, like tort reform correction, for example.

  Mr. VADALA. I can clearly say that credit unions are going to be very concerned about closing out the American consumers from credit unions, but if there is a way to do this in the best interest of consumers, I think credit unions have to listen to it because of what we are.

  Mr. BARR. OK. Is your perspective any different Ms. Corey, or would you agree with that?

  Ms. COREY. I would agree with that. As a matter of fact, one of the mutual bank groups that spoke earlier had indicated that they performed very much like a credit union, and in many ways I am sure that this is true. But the fundamental differences between credit unions and mutual thrifts are their structure. They may be for mutual profit and they may be owned by their people, but it is not on an equal basis.
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  In other words, those mutual thrifts, they pay their money to their various shareholders on the basis of the shares that they hold, and when it comes to voting, they vote in--they have proxy voting capabilities--and they are able to perpetuate a mutual thrift board by holding proxy votes and perpetuating their system. And these are strong differences between them and credit unions. And so until the differences are a little less pronounced, I still do feel that the credit unions deserve their not-for-profit status without having to surrender on the field-of-membership issue.

  Mr. BARR. Thank you, Madam Chairwoman.

  Mr. VADALA. Could I add one thing, please?

  Chairwoman ROUKEMA. Yes, you are welcome to.

  Mr. VADALA. Thank you.

  I have an article here which was in the Bankers News, and I think it is pretty important to point this out. The bankers have laid the groundwork for what they think legislation should be based on in the future, and it says here organizations, and this is Bill McConnell, the President-Elect of the ABA, who is quoted here: ''Organizations representing all the major players in the financial service industry, of which we must not be a part, because we were not included, including the ABA, have developed a set of principles to guide new legislation. These principles include: Law shouldn't be allowed to inhibit competition, innovation, or efficiency to the detriment of consumers of financial services and modernization should seek to increase competition and thereby expand consumer choices.''
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  Now I think that is pretty clear what the ABA is looking for, but they didn't invite us to this meeting, and I think that clearly well would be for that forum. If we could be included in the next meeting, I think we would agree with those principles.

  Chairwoman ROUKEMA. I am not familiar with that article, but kind of minor amusement here, because I think I know exactly what their answer would be: As long as there is a level playing field and you are paying the same taxes that they are paying. But we will have that article included in the record. What day was that? Is that today?

  Mr. VADALA. February 11, 1997.

  Chairwoman ROUKEMA. OK. We will be happy to include it in the record for consideration.

  [The information referred to can be found on page 371 in the appendix.]

  Chairwoman ROUKEMA. I mean no disrespect to you, I am just saying that I think we would all like you to all be included, but having had a number of hearings over the years and particularly within the last month, we have heard the level playing field quotation used by everybody on all sides of the issue. So it may be boilerplate rhetoric, but it has a validity to it.

  Thank you.

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  Mr. Bentsen.

  Mr. BENTSEN. Thank you, Madam Chairwoman.

  And I apologize for not being here for your testimony. I had to pick up my charge for the afternoon.

  But I support credit unions. I am a member of a credit union as well as having a bank account, a brokerage account. I think they are a great idea. But I do have a concern with things like what is being alleged, and I would ask you to respond to what the ABA said when they were here.

  In their testimony, which you heard and I am sure have read, they talk about the Alaska U.S.A. Credit Union seeking to, as I understand it, make Alaska a community for a credit union. I don't think they have achieved that, but apparently that request has been put in. They talk about a credit union in Madison that has some very odd and very broad common-bond category.

  Now, are these stories correct, or are they fabrications? That is sort of where we need to go, because I still think we are coming back to the question: Is the common bond being exploited to the point that there really isn't a common bond, it is just you can be a member of a credit union and you can have a bank account, and if you do get to that point, then you do have an unlevel playing field?

  Mr. VADALA. Would you like me to answer?

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  Mr. BENTSEN. Sure.

  Mr. VADALA. As a federally-chartered credit union--and I can respond most accurately to the Federal regulations--if you want to include an association in your field-of-membership, there is a checklist that is provided by the National Credit Union Administration as to what that association needs to do, which I will gladly provide for the record.

  Chairwoman ROUKEMA. Excuse me. Is that since 1982?

  Mr. VADALA. It is what is currently used.

  Chairwoman ROUKEMA. It is from 1982, which created the----

  Mr. VADALA. The checklist complies with the current NCUA policy. And so these associations certainly have met the criteria that the regulator spells out. Now how a credit union goes out and recruits members based on these associations is policed by the regulator. If there are perceived abuses, and these are found by the regulator, I know of cases where the regulator has gone into credit unions and put the stop to it. I am just not familiar with Alaska Federal or some of the others that were cited. Some, I believe, were even State charters. But I do know that the NCUA takes it seriously and will go in and police these, because we have heard of instances of that.

  Mr. BENTSEN. Would it be the position of your organization and Ms. Corey's organization that the common-bond should not be so broad as to include an entire State or to be like this Wisconsin case?
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  Ms. COREY. Including an entire State can conceivably have some validity. I have never been to Alaska, I don't know what Alaska is like, but if it is unique enough and far removed enough that it is necessary for common-bond to include an entire State and if the regulator feels that it is appropriate in that case, then I would have to basically support the regulator's position because they have done the analysis to determine that was, in fact, fair.

  I don't know that there are any States that are totally covered in a Federal credit union's field-of-membership, but, again, I am not familiar with Alaska or the Alaska credit union.

  Mr. BENTSEN. Let me ask you, and this question may have been already asked before I was here, and I have asked the others, and no one has really answered it, and you may not either. But in seeking a resolution to this, would it be fair to consider saying any multiple-employer group is fine? One or more common bonds, but the association or the community or the employer group as a threshold of the number of people that have to be within that association or within that common bond?

  And, furthermore, would it be fair it say in addition--and this is a two-part question--that CRA now applies to credit unions, or would that be something that your organizations would be opposed to? And, in fact, wouldn't most of the member groups within your organizations qualify, wouldn't they already meet various CRA standards because of the people of small means that they are already assisting?

  Ms. COREY. Well, I would like to take that one for a moment because my concern about threshold--bottom line, size--to a select group of people who wish to join a credit union is that that is disenfranchising the very people that we are trying to reach out and serve. Those 63 million Americans that work for small groups or small employers are the very ones we are most concerned about and the ones that most of our credit unions, with multiple groups in their fields of memberships, are serving. Sometimes there are groups----
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  Mr. BENTSEN. If I might interrupt you just for a second, though. If you don't do that, don't you ultimately say anyone could join a credit union?

  Ms. COREY. No. NCUA does, as Mr. Vadala indicated, have a checklist. You must have an association defined and accepted by the NCUA in order to include them in your field-of-membership or an employer group, as the case may be.

  Many of these credit unions that have been cited as having hundreds or more small groups, that is exactly what they do have, small groups; companies with 10 people, companies with 37 people. These are groups that if we had a floor, a threshold of 250 people, I believe, was a number used at one point, then those companies are the ones that are the lowest paid because they are the small companies, the struggling companies, and they would be the ones we would most feel that our purpose is to serve and would not be able to serve.

  Mr. BENTSEN. But doesn't that go beyond--and I am not--I am being the devil's advocate here, I guess. But doesn't that go beyond the original intent of the credit unions? Because then you are saying, well, every company, every small business, ought to be able to combine and be part of that. Well, that is going to include a lot of the employees of the United States. So you are really broadening beyond anybody who is within one association or another association, and at some point you do open the doors, I think, to everybody.

  Ms. COREY. That would appear to be the position taken by Mr. Brobeck and----

  Mr. BENTSEN. And when you do that--my only concern is, when you do that--and maybe Mr. Brobeck wants to comment on this, and it may be the position of the CFA--that when you do that, then you are saying, if you want to--we have a choice in this country. You can be--you can keep your money in a bank or in a thrift or in your mattress, if you wish--or you can keep it in a credit union, but the credit union, by virtue of its non-profit status, will be tax exempt, and therefore you create a two-tiered system. Is that not correct, if you open it up to everybody? And if you say every small business can be part of it?
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  Mr. VENTO. If the gentleman would yield to me, I think the point was--if the gentleman would yield?

  Mr. BENTSEN. Sure.

  Mr. VENTO. I think the question is, are they meeting the charter requirements of the non-profit and the other checklist in terms of whether they are meeting the needs. In other words, obviously feel that membership is one, as you would have it, a vertical question, but you are asking, as a cross-section, are they actually meeting the needs of basically what the charter is or the intent or purpose of the credit union? And if they are meeting that, then they would qualify, just like other non-profits.

  And there is--I might say, contrary--someone said today there wasn't much debate about non-profits. Listen, they are after the YMCA's, they are after the co-op bookstores, they are after a lot of different non-profits today. So it is very much an issue. I think that would be the test basically.

  Mr. BENTSEN. And my time is up, and I don't want to abuse it, but I guess the only question I have--and I am again trying to be the devil's advocate here--it just appears that possibly you could continue to expand that charter more and more and more where you have different groups that, you know, maybe don't--multiple common bonds that don't have a lot in common.

  Mr. VADALA. Congressman, if I could make one statement?

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  Chairwoman ROUKEMA. Yes, go ahead.

  Mr. VADALA. I think that if we limited or if we misconceive the intent of the Federal Credit Union Act to be common bond, I think that is a mistake. The intent of the Federal Credit Union Act is to provide more credit through a system, a national cooperative credit system.

  I think that common bond was a way to structure credit unions many, many years ago, where corporations were very, very large. Times have changed, and small business is what is going on in America today, and everyone knows it, and I think that to shut out small business shuts out America. And I believe that the intent to provide more credit to people is based on--is what the Federal Credit Union Act says.

  Mr. VENTO. I just want to interject, you know, that in order to have a bank, you have to establish a franchise, you have to have a corpus of business in which you can conduct, and credit unions are no different than that today. In fact, if you wanted to establish a community credit union in St. Paul, you would have to--other credit unions must have a period to comment about whether or not there is a corpus of business there.

  So the idea that somehow banks don't have a corpus--and obviously it has been greatly expanded in some international banks, but still, community banks, you wouldn't keep granting charters for banks or thrifts, historically at least, unless there was a corpus of business there that could be, because you realize there has to be a certain economy of scale in order for that institution to function.

  Mr. VADALA. Sure.
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  Chairwoman ROUKEMA. Well, I am glad that Mr. Bentsen took the role of devil's advocate, because really you have come right back down to the issue that the Supreme Court has faced us with. OK?

  I will restrain myself there. You know, condemned to see both sides of every issue. That is my problem.

  Mr. Chairman, Mr. Leach, we are pleased to have you here.

  Mr. LEACH. Thank you, Madam Chairwoman.

  I don't have any questions. I just want to make one comment because we are going to be using these hearings as a springboard for trying to see if there is a way that there may or may not be Congressional action.

  In this regard, I think the one perspective that we have got to lay on the table to all of you is that this is an issue not of Congress' making, this is an issue of the courts' making, and it is brought to us by an industry that has been successful, not unsuccessful, and your problem vis-a-vis your competition is too much success.

  I only lay this on the table because in this subcommittee, over the last decade, we have had to deal with problems brought to us based on failure and based on great cost to the taxpayer, and so this is an issue of competitive equity and success, which is a far better problem to deal with than the reverse. And so it just--it is something that, in framework, we ought to understand, that it is a problem coming from the credit union community but it is a problem for which everyone should be proud rather than embarrassed.
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  Then you have different judgments of how to deal with that problem. It is clear cut the American credit union community has served its members well and served the country well. So as a subcommittee framework, we have got to acknowledge that in the most forthright way we can. Whatever is done should not be done in such a way as to jeopardize the access of--in the profoundest sense, of people to various forms of American finance, and then at the same time to recognize that there are competitive issues that should be addressed.

  But I just wanted to say that and to say that we thank you all. I mean from my perspective, I thank you for coming, and I want to express particular gratitude to the Chairwoman of the subcommittee, Mrs. Roukema, for the hearings.

  Thank you.

  Mr. VADALA. Thank you.

  Chairwoman ROUKEMA. Thank you. I won't add too much to that. I think that Mr. Leach has summarized the issues before us, and I won't diminish them by going back into the rhetoric of level playing fields, and so forth.

  But there are serious issues that have been raised here, and aside from the Court case, I think that they are legitimate issues for review, and I do appreciate the fact that the Chairman has quite correctly pointed out that some degree of it has been brought to our attention because of success rather than economic anxiety in your particular field.

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  So we do appreciate your contribution here. Again, you are welcome to add to the record, and we may very well be coming back to you with some other questions. The level playing field is one area, but certainly I had been more hopeful that we might come to a common ground. That is all right. We have made a good start.

  Thank you very much.

  [Whereupon, at 3:10 p.m., the hearing was adjourned.]

  [Insert offset folios 83 to 371 here.]