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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Baker, Bachus, Weldon, LaFalce, Vento, Jackson, and Kilpatrick.

    Vice Chairman MCCOLLUM. [presiding]. This hearing will come to order. Chairman Jim Leach is a little bit delayed this morning and has asked that I get this hearing started as the Vice Chairman. And so I will do that.

    The committee knows this morning, as the Members were notified last week, that the hearing today is to address two important matters. First, the committee is going to hold a hearing and mark up H.R. 3116, the Examination Parity and Year 2000 Readiness for Financial Institutions Act.

    Second, the committee will consider an amendment to the committee rules to account for an increase in the membership of two subcommittees, the Financial Institutions and Capital Markets Subcommittees, as a result of the committee being expanded by one additional Majority Member and one additional Minority Member. The size of the full committee has been increased from 58 to 60 Members. To accommodate this increase of the committee membership, this amendment will increase the size of the Financial Institutions and Capital Markets Subcommittees from 26 to 28 Members each.
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    Last week, each Member was provided with a copy of H.R. 3116, a section-by-section analysis; a copy of the amendment to the rules; and, in addition, a brief explanation of the amendment. Additional copies were placed before each Member today.

    If there are no questions about today's proceedings, we'll turn to the first order of business, which is H.R. 3116. I'm prepared to recognize opening comments, but I would prefer not to this morning. Jim is not here to make his opening statement. He may wish to either do that at some point or enter it into the record. But, because we have a markup today and the business is at hand, we have a lot of very important witnesses to go to today, I would prefer not to have those unless somebody has a burning passion to give an opening statement. Does anybody have such a burning passion?

    [No response.]

    Vice Chairman MCCOLLUM. There is no burning passion. All right.

    In that case, I want to welcome my first panel of witnesses today. We're pleased to have as the first witnesses the Director of the Office of Thrift Supervision, Ellen Seidman, who is appearing before this Committee for the first time since her confirmation. We welcome you this morning to this Committee.

    We also have with us Chairman Norman D'Amours of the National Credit Union Administration, who is a frequent witness before our Committee, a former colleague. We welcome you as well.
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    Before proceeding, I want to note that we also have written statements in support of H.R. 3116 from the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC, which will be entered into the record without objection as well.

    With that in mind, Ms. Seidman, if you would proceed, I would appreciate it.


    Ms. SEIDMAN. Thank you very much, Mr. Chairman.

    Mr. McCollum and Members of the Committee, thank you for the opportunity to present the Office of Thrift Supervision's views on H.R. 3116, the Examination Parity and Year 2000 Readiness for Financial Institutions Act. I'd like to request that my written statement be entered into the record.

    The legislation would grant the OTS statutory authority to examine entities that provide a host of services critical to the core business operations of savings institutions. These services include data processing, information systems management, and—should I just go on?

    Chairman LEACH. [presiding]. Yes. Please continue.

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    Ms. SEIDMAN. Thank you.

    Chairman LEACH. If I could interrupt for just a second, let me apologize to my colleagues. We had a prayer breakfast this morning that went forever. And that's all right. There's no complaint that——

    Ms. SEIDMAN. I'm glad we have——

    Chairman LEACH. When the President of the United States is leading a prayer, one listens. And when he's complemented by Billy Graham, you even listen stronger.

    Thank you. Please go ahead.

    Ms. SEIDMAN. Thank you, Mr. Chairman.

    The legislation would grant the OTS statutory authority to examine entities that provide a host of services critical to the core business operations of savings institutions. These services include data processing, information systems management, and the maintenance of computer systems that are used to track everything from day-to-day deposit and loan activity to sophisticated hedging and portfolio management transactions at an institution. Unlike the other Federal banking agencies, the OTS does not currently have explicit statutory authority to examine these third party service providers.

    In addition, the proposed legislation calls upon the Federal banking agencies and the NCUA to continue developing guidance on the year 2000 computer problem. We are fully supportive of both of these initiatives.
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    Mr. Chairman, your continued leadership on these issues is greatly appreciated. Let me also add that the work conducted by your staff on this legislative effort has been outstanding. We are very grateful for the time and energy that they have devoted to this narrow, yet critical, area of exposure for the institutions we regulate.

    Your proposed legislation, Mr. Chairman, will support the OTS' ongoing efforts to educate the industry about the year 2000 problem and assist us in better understanding the year 2000 risks that savings associations may be exposed to from their service providers.

    In fact, we are already working with the other banking agencies through the FFIEC to do what the legislation requires with respect to educating our regulated institutions on the implications of the year 2000 computer problem. This is an important aspect of our year 2000 efforts to protect the safety and soundness of depository institution operations. In particular, we are working with the other agencies to develop appropriate approaches to common year 2000 computer problems, including project management, testing, and business continuity planning.

    This legislation, Mr. Chairman, further enhances awareness of year 2000 issues and promotes a better understanding of the steps needed to properly identify and correct potential computer problems. It also buttresses the aggressive efforts of the Federal banking agencies to inform financial institutions and service providers about year 2000 issues through seminars and conferences and, where possible, to recommend guidance for management to follow.

    To date, the FFIEC interagency efforts include development of policy statements and advisory letters issued to financial institutions; industry conferences and formal presentations to financial institution management, industry trade groups, and service providers; direct contact with and counseling of institutions through the examination process; and joint agency examinations of large service providers that pose a systemic risk to the financial industry, including software companies involved in core business operations, such as wire transfers and loan and deposit activities.
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    The OTS, in conjunction with the other FFIEC agencies and on its own, has taken every opportunity to speak with the industry in advisories and directly. We are also working very hard to move through our examination schedule to ensure that institutions are well on their way to year 2000 compliance.

    The institutions' compliance, however, depends in many cases on compliance by service providers. The OTS' lack of proposed statutory examination authority for service providers has at times posed problems for the OTS in carrying out its primary mission of protecting the safety and soundness of insured savings associations. So far, the obstacles have not been insurmountable. However, the types and lengths of delays that have arisen in the past when examining a service provider may prove costly in addressing a time-sensitive year 2000 problem. This legislation, which would provide OTS with statutory authority to examine service providers, is highly desirable as a continuing matter. It is even more critical as we face the year 2000.

    Mr. Chairman, your bill will help thrifts make sure that those who provide them with services will be able to continue to do so without disruption, both with respect to the year 2000 and in connection with all the other functions performed for thrifts by service providers. Consequently, it is incumbent on us to conduct detailed reviews of the progress of service providers to help thrifts ensure that systems will function properly, now and in the year 2000.

    Although OTS has been aggressive in its examination efforts, the proposed legislation will remove some of the obstacles that have complicated and delayed our effort to review the performance of thrifts' outside service providers. The proposed legislation will provide the OTS with the same statutory authority as the other Federal banking agencies have under the Bank Service Company Act to examine the operations of third party contractors that perform various data processing and electronic network services for savings associations.
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    Right now we address this statutory shortcoming by requiring savings associations to obtain a service provider's consent to OTS examination as part of the association's contract with a service provider. Some service providers, however, have been resistant to these contractual provisions. And, as a result, thrifts have been hindered in their ability to contract for services. Smaller institutions, in particular, may lack the bargaining power to get service providers to agree to OTS exams. This presents safety and soundness risks.

    With your legislation, Mr. Chairman, the OTS will be able to continue to perform examinations of service providers, but will no longer have to rely primarily on contract provisions negotiated by the institutions we regulate. The proposed legislation supports our efforts to examine service providers whose activities could directly impact the safety and soundness of thrifts. This authority will be especially useful in our examination of service providers delivering year 2000-sensitive services, but will be valuable in many other circumstances.

    Mr. Chairman, every day when I walk in the OTS lobby I pass posted on the wall our mission statement. It reads, in part, that the mission of the OTS is to effectively and efficiently supervise thrift institutions to maintain the safety and soundness and viability of the industry.

    Your legislation, Mr. Chairman, will aid us in this effort. It enables us to protect our regulated institutions, their customers, and the insurance fund by educating the industry to make sure thrifts and their service providers are ready for the year 2000. And, most importantly, your legislation will aid us in the examination of service providers, whose activities could directly impact the safety and soundness of thrifts.
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    The proposed legislation is well-designed to achieve its purposes. And we are pleased to support it. Again, we thank you, Mr. Chairman, and the Committee for your timely leadership on this issue. Thank you. And I'd be happy to answer any questions.

    Chairman LEACH. [presiding]. Thank you very much, Ms. Seidman.

    We'll hear first from Mr. D'Amours. And then we'll return to questions from both of you.

    We welcome a former colleague, Norman D'Amours.


    Mr. D'AMOURS. Thank you very much, Mr. Chairman, Members of the Committee.

    I am pleased to be here on behalf of the NCUA to express our full support for H.R. 3116 and to thank you for your attention to this matter and for your introduction of this bill.

    NCUA has long recognized, Chairman Leach, the threat posed by the year 2000 conversion, and we are working diligently to ensure that every credit union will have systems in place to solve this problem.
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    Section 4 of this bill will increase our ability to oversee these preparations by granting NCUA examination authority over service providers by entities under contract to federally-insured credit unions. This authority mirrors that which the banking regulators already have under the Bank Service Corporation Act.

    We believe this authority is crucial to ensuring that credit unions are prepared for the year 2000. Increasing numbers of credit unions receive services, such as share and loan processing, from external service providers. These services must be made year 2000-compliant and integrated with other credit union systems.

    Credit union contractors fall into two broad categories: credit union service organizations, called CUSOs, which are owned by credit unions, and service providers that are not credit union-owned. Currently, NCUA has no direct statutory authority over either type of service provider. Credit union ownership of CUSOs has the potential to affect the safety and soundness of the credit union.

    To address this risk, NCUA has required through regulation that Federal credit union contracts with CUSOs provide for access to the books and records of the CUSO. Despite this regulatory authority, we believe that a clear statutory directive would be more efficient.

    In contrast to our position with regard to CUSOs, NCUA has not attempted to assert authority over non-credit union-affiliated service providers through regulation. While we believe year 2000 compliance by contract vendors is critical to the safety and soundness of credit unions, we currently must assert this in each case and request the voluntary consent of the service provider before we can assess their year 2000 efforts. We are not always successful in obtaining such cooperation. For example, only 30 of 87 service providers replied to our survey inquiring about year 2000 efforts.
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    If NCUA is to ensure that all critical services credit unions receive from outside service providers are year 2000-compliant, we must have clear statutory authority to collect information from these service providers.

    Mr. Chairman, under current law, even if we learn of a year 2000 problem, which could threaten the safety and soundness of an insured credit union, we cannot direct the service provider to make any necessary changes. While we can exert some authority indirectly through the credit union customer, the oversight process would be improved greatly with statutory authority allowing us to take swift and decisive action to assure that the service provided to the credit union is compliant.

    Section 2 of H.R. 3116 would require the agencies to hold seminars and provide model approaches for institutions on year 2000 issues. We at NCUA agree that it is right and appropriate for regulators to take the lead in such activities.

    My written testimony highlights the efforts of NCUA and the other agencies under the auspices of the Federal Financial Institutions Examination Council to educate financial institutions about year 2000 issues. I would ask, Mr. Chairman, that my full statement be included for the record.

    And, in conclusion, I thank you and your staff and the Members of this Committee for your diligent work on the year 2000 issue and urge the quick enactment of H.R. 3116. And I'd be happy to answer any questions.

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    Chairman LEACH. Without objection, your statement is put in the record.

    I would also ask unanimous consent that my opening statement be put in the record and the opening statement of any other Members. Without objection, so ordered.

    Chairman LEACH. I would further ask unanimous consent that I place in the record a letter relating to two issues from the National Association of State Credit Union Supervisors as well as a response from NCUA. And, without objection, those will be placed in the record.

    I want to thank you for your thoughtful testimony. And this is in a way an abstract issue, but it's an extraordinarily important one. It's important internally because many institutions of differing size have different problems. And particularly we're concerned with the vendor issue as a safeguard for smaller institutions. And so this is intended as a very pro-small institution approach. It's also intended as a very pro-consumer approach because consumers are those who are going to be affected.

    I would also just simply observe in a larger worldwide perspective, having just come back from the Far East, I am very impressed that internationally many countries have not given as much attention to this issue and it's going to be a very competitive circumstance for this country. And I wouldn't at all doubt because of the year 2000 problem alone that you're going to have internationally a mini run to American financial institutions that are compliant with the sophisticated computer circumstance that's involved.

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    And so, it's very important that our regulators, both from an internal orderly perspective as well as an international competitive perspective be on top of this issue. And I'm pleased that both of you are representing your two institutions that have dedicated the time and effort to this.

    Let me ask first, Mr. Vento, if you would care to ask a question.

    Mr. VENTO. Mr. Chairman, I just arrived. I'm sorry I wasn't here for your comments.

    I want to welcome our former colleague and my friend, Norm D'Amours, and our new head of the OTS, Ellen Seidman. I'm pleased that they're both here to represent their views.

    Mr. Chairman, I must say I'm a little underwhelmed at the fact that the regulators are here and willing to accept more responsibility and authority if it will help them do their jobs. This is not uncommon. They would like more flexibility and more dollars to run their programs.

    Frankly, I think that the type of reasoned approach, Mr. Chairman, that you have introduced here is one that should be extended to regulators dealing with and being able to monitor service organizatons as an example on this problem that deals with the software and the year 2000 matter.

    I know that some Members may not have a comfort level in extending this vast new regulatory power to the OTS or the credit union administrator, but I think that hopefully we will find that comfort level, be able to address this, and provide them the tools and the authority that they need to properly deal with this and other issues that relate to service providers and organizations. I think indirectly they have that power and that responsibility. I think to be explicit about it is appropriate.
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    More than once, Mr. Chairman, we have spent our time dealing with the redundant authorities or reiteration of what already is the authority. But I think in this case, it is worthwhile and necessary and important.

    Again, I welcome the witnesses and look forward to working with the new Director of the OTS as well as our friend, Administrator D'Amours.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman.

    Mr. D'Amours, welcome.

    Mr. D'AMOURS. Thank you.

    Mr. BAKER. It's my understanding that there is not explicit statutory authority now to examine a third party relationship with a credit union. But you may, by regulatory right, require a provision in a contract, for example, that would enable you to subsequently review that provider's financial condition. Is that correct?

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    Mr. D'AMOURS. That is correct, Congressman.

    Mr. BAKER. Is it also reasonable to assume that the NCUA would have the ability, given concerns about safety and soundness of a particular credit union, to demonstrate a necessity that such a review take place? In other words, as a financial regulator, do you have the ability to look beyond the credit union when, in the regulator's opinion, it would perhaps affect safety and soundness of the credit union?

    Mr. D'AMOURS. Absent contractual or statutory authority, we could not, Congressman Baker, go into the provider to examine or to monitor.

    Mr. BAKER. In the event that—and I'm understanding that the reasoning for the granting of authority in this case is that the fear of complications in meeting the year 2000 event could perhaps lead to untoward financial results if you don't have this ability.

    Mr. D'AMOURS. That is correct. And we could document experiences with service providers in the past where our inability to monitor or to examine did result in failures in cost to the insurance fund.

    Mr. BAKER. I noted in the closing comments of your testimony that you indicate you do not think the expanded authority is simply for regulatory turf purposes, as you state it, but, rather, for the purpose of overseeing critical system vendors' year 2000 preparations. That leads me to conclude that once this transition period has ended, would not the need or justification for the expanded authority also come to an end?
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    Mr. D'AMOURS. Well, Congressman Baker, we do support the bill as it was introduced. As I understand it, there is some talk of a sunset amendment that might go to the end of the year 2001, 12–31–2001.

    Frankly, speaking for myself, when I was a Member of Congress, I always supported sunset provisions as a useful tool to force review of legislation. So, whatever the Committee's will on that would be certainly we would support.

    Mr. BAKER. You would not strenuously object to such an amendment?

    Mr. D'AMOURS. Especially not if it meant, Congressman Baker, an expeditious passage of the legislation by the removal of side issues.

    Mr. BAKER. I can't speak for Mr. Bachus, but as a cosponsor of the suggested amendment, if there's a demonstration between now and the grandfathering date that such an expanded authority is needed to continue a safe and sound business practice, I certainly would have no objection to granting such an extension.

    My concern is that without a demonstrated problem in the past, such an extraordinarily broad grant of authority may be inappropriate, except for the fact that the year 2000 complication is obvious, evident, and near-term.

    And, for those reasons, I would be supportive of the expansion of authority, but at the appropriate time will suggest that the Committee do add a grandfathering provision.
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    Mr. D'AMOURS. I appreciate your position. I can only repeat what I have already said about the efficacy and the usefulness of grandfathering to force review of situations, but also to say that we have had experiences in the past where the NCUA's inability to monitor or examine service providers has resulted in losses to the insurance fund.

    Mr. BAKER. In recent years?

    Mr. D'AMOURS. Yes, in the relatively recent past. And I would be glad to have——

    Mr. BAKER. In congressional terms, that's two years. How do you define it?

    Mr. D'AMOURS. I guess recent years is six, or two, depending on which house you belong to.

    Mr. BAKER. I understand.

    Mr. D'AMOURS. But I would say relatively recent times. I don't have anything——

    Mr. BAKER. For modest aspirations, it's two, though.

    Mr. D'AMOURS. We'll get you information on that, Congressman.
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    Mr. BAKER. Thank you very much.

    Mr. D'AMOURS. You're welcome.

    Chairman LEACH. Thank you.

    Did you want to ask any questions?

    Mr. Jackson.

    Mr. JACKSON. Thank you, Mr. Chairman.

    Let me first just make a comment for the record. I prayed for at least two years, Mr. Chairman, to have some seniority on this Committee. And I want the record to reflect that this morning because of the prayer breakfast, the fact that my colleagues aren't here, it gave me tremendous seniority on the Committee and that the blind market forces of this Committee have denied me the opportunity to go first once again.

    My question is I think a relatively simple one. Given the fact that the year 2000 problem is partly precipitated by the reality that many computers have 999 as a delete code, what is the problem presented by September 9th, 1999, which is several months before the year 2000? And should there be any concern that the 9th month of the 9th day of 1999 could create a problem even earlier than the problem that we're talking about?

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    Ms. SEIDMAN. Let me say that it's my understanding that September 9th is not a particularly difficult problem because there are zeros. It's 09–09–99.

    But, the ''99'' itself, as the year turns to January 1, 1999, can present some difficulties. It is something that people are looking at as they are assessing the year 2000 problem. It appears to be far less likely to be a significant problem, because it in general is not a date, like ''00'' is a date. It is a code that has a different set of meanings, so that you don't find it in the same subroutines. But it is an issue, and it is being looked at in the same context as the year 2000 assessments.

    Mr. JACKSON. Does that pose a particularly different problem for us in terms of the timetable that we must extend the authority?

    Ms. SEIDMAN. Well, I think it poses an issue that suggests that the rapidity with which this Committee and the Chairman have put this bill before the Committee is appropriate and that we ought to be moving as quickly as possible since obviously that will come before the year 2000.

    Mr. JACKSON. Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you very much, Mr. Jackson.

    Mr. Bachus.

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    Mr. BACHUS. Thank you.

    It's my understanding that this authority is being granted so that you can address the year 2000 problem. Is that correct?

    Mr. D'AMOURS. That is correct, Congressman.

    Mr. BACHUS. OK. And once that's addressed, the purpose of this bill would be completed. Is that right?

    Mr. D'AMOURS. That is correct. We are supporting the bill, Congressman, as you know, as it is written. Congressman Baker just asked about the sunsetting amendment, three-year sunsetting amendment, that I believe is going to be added. And I indicated that while the agency supports the bill, I can say that I don't believe that we would object to that.

    When I was a Member of Congress, I always supported sunset provisions as a good forced review mechanism. And I think at that three-year time, we could see where we stand. And we believe the important thing now is to pass this bill to get to the year 2000 problem.

    Mr. BACHUS. Thank you. That was my understanding. Thank you very much.

    Chairman LEACH. Thank you.

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    Dr. Weldon.

    Mr. JACKSON. Mr. Chairman. Ms. Kilpatrick.

    Chairman LEACH. Excuse me. I apologize. Ms. Kilpatrick, please.

    Ms. KILPATRICK. Thank you very much, Mr. Chairman. I know sometimes we don't see fresh people down on the front row, particularly since Mr. Jackson moved up to the top. But thank you.


    Chairman LEACH. We appreciate the gentlelady's modesty.

    Ms. KILPATRICK. Thank you very much.

    And welcome again to the new person. It's good to see a woman in that slot.

    Ms. SEIDMAN. Thank you very much.

    Ms. KILPATRICK. Mr. D'Amours, you talked about the largest credit unions and that ten are working with Cooper's and Lybrand to give you feedback. How many large credit unions are there, first of all, and which one would you consider to be the largest? How many in that group?
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    Mr. D'AMOURS. I believe the testimony was talking about vendors reporting, rather than credit unions.

    Ms. KILPATRICK. Yes, right. And then you mentioned in your remarks that——

    Mr. D'AMOURS. The total number was——

    Ms. KILPATRICK. Nationally how many large credit unions would you have in the large group? I know there are all sizes. How many? Ten of those responded to Cooper's and Lybrand.

    Mr. D'AMOURS. The ten vendors that we mentioned serve as perhaps 70 percent of all credit unions.

    Ms. KILPATRICK. OK. And then the questionnaire that you sent out, 30 of 87 responded. From your testimony, you thought that was a low amount. I'm trying to get at: Why so few? And do they not consider this to be a major problem?

    Mr. D'AMOURS. Well, I can't really answer for why they did not respond.

    Ms. KILPATRICK. What did the 30 say?

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    Mr. D'AMOURS. But certainly it does indicate a need for expanded authority on our part to compel responses and to compel compliance.

    Ms. KILPATRICK. And then the profile of the 30 that did respond, what kind of response did you get from them?

    Mr. D'AMOURS. My staff informs me that we are satisfied with the level of awareness those responses indicated and with their willingness to take the steps to become compliant. So, generally those that did respond encouraged us that they were paying proper attention to the problem.

    Ms. KILPATRICK. I see. And to both yourself and Madam Seidman, you both support the legislation in its current form, with amendments or not. I know the sunset provision has been discussed quite a bit. There are other pending amendments. Yes or nay or some strong, some not?

    Ms. SEIDMAN. Ms. Kilpatrick, we support it in its current form. We have had a number of problems in getting in to service providers, who didn't understand how important it is that the systems that they are providing to the thrifts, which are systems that in the old days thrifts would have had on paper in the office, be fully accurate, do what they're supposed to do, perform accurately under all circumstances, even beyond the year 2000.

    And so it's very important to us that this legislation be enacted. And we strongly support the current form of the legislation.

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    Ms. KILPATRICK. Thank you very much.

    Mr. D'Amours, in its current form without amendment other than a sunset? Are you strongly supportive or opposed to any of the proposed amendments?

    Mr. D'AMOURS. What we are strongly supportive of, Congresswoman Kilpatrick, is passage of this legislation. And, as I indicated in response to comments from Congressman Baker and Congressman Bachus, if this Committee sees fit to add a sunset amendment or whatever other amendments do not change the basic focus of this bill, being to give us the authority, in this area authority, to require service providers to be Y2K-compliant, we would probably remain in support of the bill.

    Ms. KILPATRICK. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    Dr. Weldon.

    Dr. WELDON. Thank you, Mr. Chairman.

    I just have a few quick questions. I'll be interested in both your perspectives on how we got into this problem in the first place. Were the programmers and the service providers expecting the world to end? I haven't really gotten a good explanation. It would seem to me anybody purchasing a system within this decade would want a system that would be functional beyond the year 2000.
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    Maybe you're not prepared to answer that question. I don't see either of you opening your mouths.

    Ms. SEIDMAN. Certainly anyone purchasing a system within this decade would have wanted the system to be functional beyond the year 2000. I believe that a large part of the problem is that many people thought systems would be superseded, that old mainframe systems would have been replaced much faster than they have, in fact, been.

    Old mainframe systems were very difficult to program. They were essentially hard-wired. They were hard to change. And so what happened was code was added on. And the systems essentially grew, like Topsy, as the needs grew. And then they became even more difficult to replace.

    And so many, many institutions—and it is by no means confined to the financial services industry; in fact, probably the financial services industry is ahead of many other parts of the economy.

    Many, many institutions still rely very heavily on mainframes that, frankly, were built in the 1960's and 1970's. Memory was extremely expensive, much more so than today's PCs. And so, in order to save memory as they coded, they left out the two digits. It was not in expectation that the year 2000 would not come. It was in expectation that the machines would be gone long before 2000 arrived.

    Dr. WELDON. While you're still talking, I just had a follow-up question: Why didn't you ask for this authority sooner, particularly in light of the fact that many institutions have been contracting out for services for some time?
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    Ms. SEIDMAN. Well, there are two reasons. First of all, we have been working with the various committees for a while to try to make certain that people understood that we were not engaging in regulatory overkill, turf-building, and so forth, that this was authority that is consistent with what the other banking agencies have and is necessary.

    Frankly, we had been able until recently to deal with it on a one-on-one contract-by-contract basis. It's gotten complicated. We've had a number of situations where we have been denied access, where we have had to have lawyers arguing for three months over things that people needn't argue about.

    And with the year 2000 upon us, those kinds of delays are just much more risky. And so, while we've been able to essentially work around the problem for a while, the work around has now become something that poses too much risk to the system.

    Dr. WELDON. Do you have anything to add to that?

    Mr. D'AMOURS. Yes, Congressman Weldon. I think that Ms. Seidman answered the question very well. I would just add that in terms of not seeking the authority earlier, I would only add that it was only six months ago that we began to bear down on service providers that we sent out our questionnaire and realized that the response was inadequate. And it became increasingly clear to us that some statutory stronger authority was necessary.

    Dr. WELDON. Thank you.

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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Dr. Weldon.

    Mr. Barrett, did you wish to ask any questions?
    Mr. Bentsen, did you?
    Mr. Sherman, did you wish to ask a question? Thank you.
    Ms. Kelly, you've no questions.
    Mr. Fossella, did you have a question you wished to ask?
    Well, that being——

    Ms. SEIDMAN. Thank you.

    Mr. JACKSON. Mr. Chairman.

    Chairman LEACH. Yes.

    Mr. JACKSON. Could I just ask one quick follow-up if you don't mind?

    Chairman LEACH. Of course.

    Mr. JACKSON. Ms. Seidman, I want to go back to my September 9, 1999 question.

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    Ms. SEIDMAN. Right.

    Mr. JACKSON. Are we absolutely sure that systems produced in the 1960's and 1970's, with the limited memory that was available and since people are obviously not replacing them in a fast enough time, that those systems have 09–09–99?

    Ms. SEIDMAN. Well, since there are more than nine months and more than nine days, in order to have a date, you have to have a system that uses six digits. People didn't really contemplate the notion of using only single digits for days and months. For every date you need six digits.

    The difference between that and the year 2000 is that 30 years ago, they weren't focusing, or they weren't expecting the computers would last long enough. So they didn't think they needed four digits for the year.

    I can have our technical people look more closely into that. Frankly, you're never totally sure of anything in this area, but there is a difference in that there are always six digits needed for a year field.

    Mr. JACKSON. Thank you very much.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

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    Let me recognize Mr. LaFalce also for a particular purpose.

    Mr. LAFALCE. First let me say hello again to my longtime friend and colleague Mr. D'Amours. It is a pleasure to have you before us, Norm. Let me also say to Ms. Seidman that I'm delighted at your appointment. I think this is your first appearance before the Banking Committee.

    Ms. SEIDMAN. It is. Thank you.

    Mr. LAFALCE. You have acquitted yourself quite admirably and well.

    I'm not going to ask you any question on the issue of the day, but I do want to tell you that I'm cognizant of the effort that is being made by a good many institutions to adopt or convert to a unitary thrift charter. And this comes in your bailiwick.

    I think that this is progress. I think this is good, not bad. But I also think that it requires a much higher degree of oversight of these unsteadinesses than they otherwise would receive. And there are very few institutions that came within the ambit of your jurisdiction before for this type of specialized oversight.

    So, I want to make sure of two things: that your resources to perform appropriate oversight exist, but that also the legislative framework for your oversight, the authority that you need, exists.

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    I don't know if you would care to comment on that now or whether you'd like to comment at some future point in time, but if there is any additional legal authority you think you need that would be helpful to give the vigorous type of oversight that's necessary to make sure that the new powers that a good many institutions might be able to exercise in the future that they have not historically exercised in the past is done in a way that does not bring about an abuse of those powers, we want to know ahead of time. We want to deal with it in a preventive, rather than a curative, way. Fair enough?

    Ms. SEIDMAN. Thank you very much, Congressman. I appreciate that. It is certainly one of the issues that I walked in the door and knew that I really had to take a very serious look at. We are being very judicious as we look at these new charters, charter applications. We are, in fact, making certain that as we place conditions on these institutions, as we work through the process, that we are fully capable and have plans in place to enforce those conditions. We are taking a more thorough look at the issues raised by the interrelationships between these thrifts and other regulated entities in their family and also at the——

    Mr. LAFALCE. And unregulated entities.

    Ms. SEIDMAN. No, no. I understand.

    ——And the resources and training that our examiners and the whole staff have. And so I truly appreciate what you've said. And we will be back to you as soon as we find any sort of gap in the legal authority.

    Mr. LAFALCE. Let's get together even before that. Maybe let's make an arrangement to do it.
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    Ms. SEIDMAN. Certainly.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Well, let me also welcome and thank Ms. Seidman for her first performance, Mr. D'Amours for professionalism of an old hand. There being no further questions, I'd like to thank the two of you. And you're excused.

    Ms. SEIDMAN. Thank you.

    Chairman LEACH. In terms of a second panel, we welcome: Mr. James D. Shelton, who is Chairman, President and CEO, First Federal Savings and Loan of East Hartford, Connecticut, on behalf of America's Community Bankers; Mr. James G. Mills, President and CEO of Three Rivers Federal Credit Union of Ft. Wayne, Indiana, on behalf of the National Association of Federal Credit Unions; and Mr. Tom Sargent, who is President and CEO of First Technology Credit Union of Beaverton, Oregon, on behalf of the Credit Union National Association.

    We welcome you all, and we thank you for coming before us. We will begin with Mr. Shelton, please.


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    Mr. SHELTON. Thank you, Mr. Chairman.

    Mr. Chairman and Members of the Committee, I am Jim Shelton, as the Chairman just said. My real job is President and CEO of First Federal Savings and Loan Association of East Hartford, Connecticut. I also chair the America's Community Bankers' Task Force on Electronic Banking. But of relevance here this morning also is that I'm Chairman of the Board of the Connecticut On-Line Computer Center, which is a full service data processor that serves financial institutions in the Northeast.

    First Federal has nearly one billion dollars in assets and is supervised by the Office of Thrift Supervision. I am pleased to appear before the Committee on behalf of America's Community Bankers to discuss the year 2000 problem and the important role of the Federal regulators.

    We're all now aware of the nature of the year 2000 problem. If not resolved properly, it could have serious destabilizing effects on insured financial institutions and their customers. I will not elaborate on the nature of that problem except to say that public confidence is at stake in our commercial banks, our savings institutions, and our credit unions.

    That is why I cannot emphasize enough the important role of the Federal regulatory authorities. They must ensure that the institutions they supervise meet the year 2000 challenges in a timely and effective fashion.

    The year 2000 compliance effort requires active coordination among all of the parties involved: the federally-insured institutions, the Federal agencies, and their affiliated and unaffiliated service providers.
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    The FFIEC has played a valuable role in developing uniform guidance on the major components of the year 2000 problem resolution process. It stands to reason that each of the agencies represented on the FFIEC, the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, all should be furnished with the necessary examination authority to determine how well institutions are complying with the year 2000 mandates. The legislation under consideration by this Committee would help accomplish this objective. And ACB supports its prompt enactment.

    America's Community Bankers has been a leader in raising the awareness of community bankers to the serious nature of the systems problems associated with the year 2000. ACB continues to provide leadership in resolving these problems.

    In my written statement, I have described a number of ACB's various efforts to educate and energize its members on year 2000 matters. Most notably, ACB is working with the FDIC and the OTS in sponsoring a series of three Quick Strike conferences on the year 2000 problem. I believe that ACB's efforts in the year 2000 awareness-building has been effective.

    At my own institution, we are well along the way in meeting the year 2000 challenges. By the end of the year, we expect to be fully tested and compliant with year 2000 requirements for all parts of our operation.

    Our main data processor is Connecticut On-Line Computer Center. As Chairman of the Board of that center, I have reviewed the center's year 2000 plan. And I have every confidence in their commitment to take all reasonable measures to become year 2000-compliant.
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    Of course, this does not relieve my institution of its obligation to test the year 2000 performance. All insured institutions have their own separate requirement to test how well their service provider and vendor is progressing toward year 2000 compliance.

    The grant of the new examination authority to OTS, though, does not alter that basic obligation of OTS-supervised institutions, but it gives them direct authority to go in to examine those service bureaus.

    So, in conclusion, the year 2000 presents a substantial challenge for financial institutions, their customers, and the regulatory agencies. The industry welcomes the helpful and thoughtful oversight that this Committee has provided in this area of vital interest to consumers and the economic system. We must continue the cooperative spirit that has been shared to date. In this way, we will come as close as possible to the best outcome from all of this effort. And that is a non-event when the calendar turns to the year 2000.

    Thank you very much, Mr. Chairman, for this opportunity to express our views.

    Chairman LEACH. Thank you, Mr. Shelton, for that thoughtful testimony. And, by the way, the full statements if there are fuller statements of everybody will be placed in the record. And, without objection as well, a statement submitted by the National Association of State Credit Union Supervisors will be placed in the record.

    Mr. SHELTON. Thank you.
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    Chairman LEACH. Mr. Mills.


    Mr. MILLS. Chairman Leach, Members of the Committee, my name is Jim Mills. I'm the President and CEO of Three Rivers Federal Credit Union of Fort Wayne, Indiana. Thank you for inviting me to testify before the Committee today as a representative of the National Association of Federal Credit Unions.

    NAFCU and the Federal credit union community recognize the need to address the year 2000 computer problem and support the legislative efforts to resolve the problem. I have written testimony that I have submitted to the Committee and have a brief oral statement that I would like to share with you.

    The inability of most computer programs to distinguish the year 1900 from the year 2000 poses substantial risk to all financial institutions. Virtually every credit union in the Nation will have its computing operations affected in a serious way at midnight on December 31, 1999, when the internal clocks of the nation's computer systems roll over to the year 2000.

    This presents a unique problem for most credit unions. A vast range of technical knowledge and sophistication exists among the nation's nearly 12,000 credit unions. More technologically advanced credit unions are likely to have trained specialized staff who are responsible for the technical needs of the credit union. Other credit unions may have staffs of only a few individuals, often volunteers, who do not have the expertise in computer systems.
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    At Three Rivers Federal Credit Union, we have three people in our Data Processing Department. The entire Data Processing Department along with our Executive Vice president, one Board member, and myself make up our Y2K Compliance Committee.

    We at Three Rivers have approximately $115,000 in the 1998 budget to get our systems in compliance. We have completed a complete inventory of all software providers and have sent two separate letters to each of them to respond to the date they will be in compliance with Y2K. We have tested all 70 of our platform PCs, and we expect to be in compliance by December 31, 1998. During 1999, we will thoroughly complete the testing of all systems for final compliance.

    Because of this great variety of sophistication, credit unions have a high degree of dependency on vendors. This raises an important aspect of the year 2000 computer problem. While credit unions themselves may have followed the necessary steps to be the year 2000-compliant, their vendors may not have done the same. Credit unions and the members they serve may be affected by the action or inaction of their vendors. Credit unions must rely on communication, testing to determine if these outside providers are year 2000-compliant.

    While credit unions recognize that the gravity of the year 2000 compliance may require the participation of the National Credit Union Administration in areas previously outside of the power and scope of the agency, NCUA's role in regulating and examining credit union service organizations, or CUSOs, should be limited to the issues concerning year 2000 performance and should be one of supporting credit unions in their efforts to ensure that their CUSOs are compliant.
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    The entire process of reviewing Y2K compliance in credit unions and CUSOs, I believe as a former NCUA examiner and currently a president and CEO, reveals that much of the effort of the examination staff is of limited value. Often the credit union staff is more knowledgeable about the year 2000 computer problem than the examiners. To us, this demonstrates a need to work closely with the agency on the specific issue.

    The intersession of NCUA into credit unions' vendor relationships raises another concern. The fact is that whenever a Government agency is given expanded authority and responsibilities, it soon follows that the agency needs more staff to exercise these new powers. Any increase in costs associated with the addition of NCUA examiners or other steps that NCUA might take under the authority granted to the agency in H.R. 3116 will come not from the taxpayers, but it will be increased operating fees to credit unions.

    I believe that the scope of any legislative effort, such as H.R. 3116, should be focused only on issues directly related to the Y2K problem. The focus of this legislation should be strictly limited to ensuring compliance. But in its present form, the legislation contains a broad and permanent expansion of NCUA's examination and regulatory authority. Regardless of whether the authority may or may not be warranted, it does not seem necessary to address year 2000 compliance concerns.

    Legitimate questions may be raised as to whether, absent the year 2000 issue, NCUA, as a Federal financial regulatory agency, should have the authority not just to examine, but to actually regulate, private business enterprises.

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    NCUA's own regulations already give it the power to scrutinize the credit unions-CUSO relationships. The authority given to NCUA in H.R. 3116 is not limited to the examination and regulation of credit unions, but would allow NCUA to examine and regulate third party businesses, vendors, and outside providers. Do the Members of the Committee intend to give NCUA authority to regulate private entities without adequate review and study?

    I also believe that any authority given to NCUA to address the year 2000 computer problems should be of a limited duration. Since the legislation is intended to ensure year 2000 compliance, the legislation should expire at the time the credit unions and CUSOs have proven to be 2000-compliant.

    Mr. Chairman, your efforts and the efforts of the Committee are helping to focus much-needed attention in the year 2000 computer problem. By working together, financial institutions, Federal regulators, and vendors will be able to tackle the risks associated with the Y2K computer problem.

    I appreciate this opportunity to contribute to the important discussion. Thank you. And I'm happy to respond to any of your questions.

    Chairman LEACH. Well, thank you very much, Mr. Mills.

    Mr. Sargent.

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    Mr. SARGENT. Thank you.

    Mr. SARGENT. Mr. Chairman and Members of the Committee, thank you for allowing me this opportunity to testify before you today on the year 2000 issue and the proposed legislation, H.R. 3116, that I understand you'll be considering later today.

    I represent the Credit Union National Association, CUNA, the largest trade association in the credit union movement. CUNA represents 91 percent of the Nation's 11,500 credit unions, both federally and State-chartered.

    Before I begin my testimony, I would like to briefly discuss my role in the credit union movement and outline a few details about my credit union. I'm the President of First Technology Credit Union in Beaverton, Oregon.

    First Tech has $445 million in assets and 62,000 members. Our field of membership consists of employees of high tech firms in the Pacific Northwest, notably Microsoft, Intel, and Tektronix.

    Because of the significance of the year 2000 compliance and the enormity of the task to ensure compliance by each credit union, I have been asked by CUNA to chair a subcommittee devoted entirely to the issue.

    The subcommittee's mission is to: assess the technological problems arising from the advent of the year 2000; develop educational resources to assist credit unions in managing their process of evaluation, testing, and implementations; and work closely with regulators in monitoring deadlines as well as the very real deadline of December 31, 1999.
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    As the name might suggest, my credit union, its members, volunteers, and staff are very aware of the technologies driving our Nation's financial services industry. Part of that awareness recognizes the potential as well as the limits of technology.

    The English writer G.K. Chesterton wrote, ''Progress is the mother of all problems.'' While I don't completely endorse his sentiments, the year 2000 compliance issue can dampen my enthusiasm for both technology and the millennium. It emphasizes the role computer-based technology plays in our day-to-day lives and the urgency to address this problem.

    Consumers benefit greatly from the convenience of virtually instantaneous financial transactions. Consumers, however, have varying degrees of understanding of the technologies that create this convenience and varying degrees of willingness to take advantage of the options presented. But all consumers, regardless of their participation, have a basic and well-placed trust in their financial institution. They have a right to believe, no matter how their transactions are conducted, their funds are safe and secure and their privacy is protected.

    Against that backdrop, I'd like to outline several of the steps being taken by CUNA to ensure that credit unions fulfill the contract of trust between members and their credit union. Over the course of the last several months, CUNA has included numerous articles on the year 2000 compliance in our publications. These articles have: tracked CUNA's educational initiatives; provided checklists, how-to guides; and outlined regulatory approaches.

    In November 1997, the CUNA Chief Financial Officer Council developed a comprehensive model year 2000 approach that can be utilized by credit unions of all sizes. Also in November 1997, CUNA President Dan Mica wrote every credit union about the issue, reemphasizing the urgency of planning, and included a sample vendor letter to facilitate communications on the year 2000.
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    On March 11, 1998, there will be a CUNA teleconference to the Nation's credit unions regarding the year 2000, in which the NCUA will also participate. Also, I might add that Chairman Leach and CUNA President Dan Mica have corresponded on this issue since December in an effort to gauge the overall readiness of the credit union movement concerning Y2K.

    I would now like to make a few observations about H.R. 3116. CUNA recognizes the need for Congress to take expedient and appropriate steps to ensure credit unions and entities providing services to credit unions experience no disruption in their operations. From things intrinsic to the day-to-day operations of a credit union, such as dividend calculations and loan repayment schedules to non-transactional functions, security systems and payroll software, credit unions and consumers require a seamless transition.

    The Chairman's bill, H.R. 3116, takes several important steps in providing safeguards and assurances from credit union service organizations, CUSOs, and third party providers in their year 2000 compliance.

    However, I would emphasize that since the matter being addressed is a year 2000 problem, Congress should only formulate a year 2000 solution. For that reason, I suggest the Committee consider modifying the legislation in two ways. First, there should be a sunset provision in the legislation regarding third party and credit union service organization examinations. This exam authority should expire on December 31st, 2001. Second, the examinations conducted by NCUA should be limited in scope to the year 2000 compliance.

    There are several valid reasons for these amendments. First and perhaps foremost is the fact that the NCUA, the Federal regulator agencies have never asked for the authority to conduct third party exams of this nature.
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    A corollary to that point is the fact that no one has ever suggested examination authority for CUSOs and third party vendors was needed for safety and soundness reasons prior to the onset of the year 2000. It would be unfortunate of this Congress to take a camel's nose under the tent approach to exam authority at this juncture.

    Finally, a perpetual examination and regulation of credit unions and service providers will divert NCUA's resources from its primary mission, which is the regulation of Federal credit unions and the supervision of federally-insured credit unions.

    I would also respectfully ask the Committee consider report language recognizing the essential role State regulators play in assessing year 2000. There must be a viable exchange of information between Federal and State regulators for reasons of practicality and fiscal responsibility, and respect for State authority.

    In conclusion, CUNA realizes the year 2000 is a unique situation that requires a unique response. We stand ready to assist you as you continue to work on the year 2000. We also hope you will feel free to call upon us in developing your solutions for the looming year 3000 problem.

    Chairman LEACH. Thank you very much for that very thoughtful testimony.

    I would note to my colleagues we have a vote to be followed by a vote. And if there aren't extensive questions, it's possible we can end the panel before the vote, but I don't know if that's the case.
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    Mr. LaFalce.

    Mr. LAFALCE. Mr. Chairman, I believe that there's a general consensus behind this bill. I have no questions. If the other Members have no questions, I would hope we could take the bill up.

    I know of only one amendment outstanding. I would not offer that amendment, but I would not oppose that amendment either. I also do not want to infringe upon the right of any Member to ask questions of the members of the panel.

    Chairman LEACH. Does anyone wish to ask any further questions? If not, let me thank the panel for your very thoughtful testimony. And we appreciate your attendance very much. Thank you.

    [Whereupon, at 11:04 a.m., the hearing was adjourned.]