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

    The committee met, pursuant to notice, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Bereuter, Baker, Lazio, Bachus, Castle, King, Campbell, Lucas, Metcalf, Ney, Ehrlich, Barr, Kelly, Paul, Weldon, Cook, Snowbarger, Riley, Hill, Sessions, LaTourette, Manzullo, Fossella, LaFalce, Vento, Frank, Kanjorski, Kennedy, Sanders, C. Maloney of New York, Gutierrez, Roybal-Allard, Barrett, Velazquez, Watt, Hinchey, Bentsen, Jackson, Kilpatrick, Hooley, Carson, Weygand, Sherman, and Sandlin.

    Chairman LEACH. The hearing will come to order, and let me apologize for a little bit of a late start. We've had a very active and vigorous Republican caucus underway, and so, some of the Republican Members will be coming in a few minutes late.

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    We're here today to take testimony on the issue of membership of credit unions. Nine proposals have been circulated on the subject, some of these long before the Supreme Court's February 25 decision, and a number of them since.

    Credit unions are an integral part of the American way of life. They represent democracy at work. In the financial services sector, which seems to change almost daily, credit unions have carved out a unique consumer niche.

    Credit unions hold a little over 2 percent of American household assets, and this figure has changed only modestly in the last ten years.

    The National Credit Union Insurance Fund has operated for seven consecutive years with an equity ratio above 1.25 percent, and the industry has survived economic downturns without any cost to the taxpayer.

    As Chairman of this committee, I support and believe Americans and the world benefit from our Nation's highly competitive financial services industry, which is hallmarked by strong money-centering and community banks and prosperous thrift institutions, as well as vibrant, efficient, and consumer-based credit unions. Healthy, market-driven competition among and between the various forms of financial services firms is good for the consumer and good for the country.
    By nature, when you have competitive situations, differences emerge between the parties. This has occurred with credit unions after their Federal regulators allowed them to expand beyond traditional markets, a move which drew objections from the banking industry.

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    As a general rule, for which there are few exceptions, Congress hesitates to intervene in the middle of court proceedings. Now that the Court has ruled, however, Congress has a responsibility to review the ruling and ascertain how any new interpretation of law comports with the public interest.

    It is apparent to me from discussions with numerous Members of the House, on both sides of the aisle, that there is a general recognition that there's a degree of merit in all sides, and that the precision of a legislative solution will take reasoned judgment and compromise. It is inconceivable to me, however, that Congress will allow a court ruling to cause millions of Americans to be kicked out of the financial institution of their choice.

    This hearing, which builds on the information obtained at a similar hearing held last May by Mrs. Roukema, the Chairwoman of our Subcommittee on Financial Institutions and Consumer Credit, will lay the basis for committee action.

    We welcome the testimony of all those who will be appearing before us today, beginning with a panel of our colleagues who have introduced legislation on this issue. Subsequent panels will include Federal and State regulators, and representatives from the credit union and banking industries.

    Before introducing this first panel, I'd like to turn to our distinguished Ranking Member, Mr. LaFalce.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I join you in welcoming all of our witnesses for today's hearing. I'd like to extend a special welcome to our congressional colleagues, who'll be testifying today, and to our ex-colleague and CUA Chairman, Norm D'Amours.
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    Last month's Supreme Court decision has created considerable uncertainty for potentially 20 million Americans who could lose their membership in occupation- and association-based credit unions.

    The court's five-to-four ruling—four Justices not considering the substantive merits of the case one way or the other, ruling that no standing existed—five Justices believing that the regulator had gone beyond permissible regulatory interpretation of longstanding law. In any event, the ruling was that a single common bond must unite each and every member of a credit union, and that decision severely restricts the ability of credit unions, both now and in the future, to expand needed services throughout our communities.

    Members of Congress, as well as the American public generally, do not wish to see anyone lose their membership in a credit union, nor see unreasonable restrictions placed on credit union growth. Therefore, it is incumbent on Congress to act to address this problem and to do so expeditiously.

    Unfortunately, the industry groups have polarized on this issue, at least thus far; each coming in with their own proposals. The credit union proposal would provide occupationally-based credit unions with a very broad definition of membership to permit continued growth through multiple common bond groups. That is very attractive in its simplicity. But, the approach could, taken to an extreme, virtually obliterate the original cooperative purpose of the common bond requirement, and it would also leave unaddressed the regulatory framework that produced numerous examples of what many believe is inappropriate, unrestricted credit union growth.
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    On the other side, the banking and thrift industries recently advanced several proposals which have not yet been introduced as bills, and those proposals would subject all but the very smallest credit unions as the quid pro quo for permitting multiple group expansion to Federal taxation, State taxation, community investment requirements, and other bank-like regulation.

    In my view, issues such as taxation, are extraneous to the core issue before this committee: the need to define appropriate credit union membership for today's financial marketplace. But, I also do not believe making credit unions mirror images of banks would improve their ability to serve persons of limited means who believe they are inadequately served by banks.

    I believe the best public policy is somewhere in between these extreme positions, and have circulated my own ideas as one possible basis for pursuing this issue.

    And, my idea would provide occupationally-based credit unions, with a broad definition of membership, to allow them to continue serving multiple common bond groups. I believe that is essential.

    In addition, it would impose some limits on future membership expansion by requiring that new common bond groups be located within the same generally defined community or rural district as defined in regulation by the NCUA. It would require that larger occupation and association-based groups form their own separate credit unions. What is larger is up for grabs—it's up for definition. It would improve regulatory oversight by requiring written regulations that define minimum standards of service to credit union members, and specific requirements for approval of future field of membership applications. It would impose CRA-like service obligations on larger, multiple group credit unions only if they fail to meet the new standards of membership service, and it would impose new criteria for the President to consider in appointing members to the NCUA board.
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    While I do not presume to say this is where the committee ultimately should come out on this issue, I do believe, Mr. Chairman, that it might be one good way to begin our discussions. It might offer the basis for a reconciliation of competing interests and, most importantly, just might make good public policy.

    I hope that today's witnesses would comment on these ideas and the other ideas or proposals now before the committee. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. LaFalce. Does anyone seek recognition on this subject?

    Mr. McCollum.

    Mr. MCCOLLUM. I would just like to comment, Mr. Chairman, that I'm really looking forward to this hearing today because it's very clear that credit unions have a major role to play, and should have one, in our system of financial services, and that the Supreme Court decision of a few days ago is going to require us to address the question of common bond. And, I gather from looking at the advance text of the testimony, the Department of the Treasury is going to suggest to us other things that we should be doing with regard to credit unions to shore up their position, and it's a very timely hearing you're having today, and we should find it most productive. I don't think that most of us have predispositions on precisely how they should come down, except for the fact that we certainly do want to make sure that the viability of credit unions, as a force in our financial services system, survives and thrives, and that we do it the right way so the competition is fair among all financial services entities. Thank you, Mr. Chairman.
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    Chairman LEACH. Thank you, Mr. McCollum.

    Mr. Vento.

    Mr. VENTO. Yes, Mr. Chairman. I am appreciative of your calling the hearing today on an important issue facing the Congress and the credit union movement since the dramatic Court decision of February 25, 1998. I would hope, I think most of us hoped, that we could have resolved this before. In fact, we had had hearings on it last year, but, as often happens when there are Court actions pending, and appeals, we waited. I think, frankly, as you look at it now, we realize that the issue has become more polarized, but I still think there's still time to recognize common ground. There are lots of non-starters, I would say, with regard to this on both sides of the issue.

    So, I hope we can get to work now and, as this concern has risen, and address it and demonstrate that the Congress can deliver results in terms of this important issue. The committee should, of course, explore all the options, examine the issues. The main question of course is, should there be any limits on credit union membership at all?

    Other cooperatives, after all, simply predicate membership upon application. That's their common bond, their field of membership. Of course, that's a broad expansion as with any change from current law, and would most likely raise other questions or concerns. In other words, a simple solution to the common bond may rest upon overall size limits and other requirements.

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    It's time, of course, for us to clear up and face up to the real underlying issue. The field of membership limitation does not fit the economic dynamics of the 1990's. The downsizing of corporate America has changed the landscape for credit unions, forcing divestiture, mergers, in fact, and, of course, the closing even of some credit unions and corporations, and job categories. A recent Grant Thornton paper cites the reduction of some 10,000 credit unions in the past 20 years, to about 12,000 credit unions today.

    Federal credit union law needs to be modernized to broaden the membership base of credit unions in which would otherwise shrink or atrophy. Superimposing a new, patched-up common bond field of membership fix will, in short order, likely encounter the reality of new icebergs to sink the credit union groups in court or other places. And, this is important to the American people. There may be 70 million Federal credit union families, but there probably are an equal number of State credit union families. I mean, well over half of our population of this country and their families have chosen to participate in credit unions as a means of dealing with their financial affairs.

    We hear a lot of the number of proposed legislative solutions today. They're relatively simple, though they're quite complex. It will be our task, of course, to try and design a path through that and deal with the interested parties. As we consider how we will modernize 1934 credit union law, there are some solutions that fit the credit union movement better than others. For example, community investment or other member service tests should not be a criteria that would be unreasonable or problematic for credit unions to fulfill. More likely to cause some major heartburn with credit unions, of course, is the taxation of cooperatives that operate as nonprofit entities. Such proposed changes will turn up the volume of the 70 million Federal credit union members, and I'm sure, the State participants.
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    In any case, one of the admonishments to my colleagues—one predicate that I've always followed—is that we don't pursue successful legislation by expanding the problems that are on the table. And, some have repeatedly proposed that we have enough to do without trying to reform the world's financial imperfections on the basis of what the problem is here today.

    While many things have changed socially and politically since 1934, some of the fundamentals of financial services we've not been able to adapt. We continue to struggle with modernization of banking, securities, and insurance laws that have morphed by regulation, with the court's blessing, but not statutorily.

    Perhaps the Holy Grail was discovered yesterday with the announcement of a new financial modernization, H.R. 10. But, I suspect rather than a Holy Grail, we have a clay cup—another mirage, Mr. Chairman.

    Speculation persists that the credit union ''fix'' takes the lead to fuel the engine for financial services bill on the floor. I'm certainly withholding final judgment on the cars and the caboose of this new train that's been put together. But, I've no doubt that the GOP engineers hope they'll keep rolling on the main line.

    As a participant last fall, I'm appreciative of the enormity of the financial modernization work that needs to be accomplished, but I think that the process has been undemocratic in the way this train has been assembled, and the tracks laid.

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    We are somewhat familiar with the difficulty of forced marriages, in other words, putting the credit unions into this bill. Somehow in these forced marriages—these shotgun weddings—the beauty of the bride becomes illusive under such duress.

    In closing, Mr. Chairman, credit unions have been faced by the same competitive pressures, changing technologies, and the evolution of products and services that other financial institutions are facing. In order to meet the challenges of the next century, credit union law, regulation and operation must modernize and grow. Unfortunately and ironically, the National Credit Union Administration has been more cautious and much less activist in permitting and promoting credit union changes.

    This is perhaps a good reason, for while the courts have upheld the regulatory liberalization of banking laws, the recent credit union decision is strict construction at its worst; a literal interpretation of the law of 1934, and certainly not a pragmatic decision, or in the spirit of that law.

    That has brought us here today with the necessity of writing a new law on the future credit union movement in this country. Mr. Chairman, I look forward to that task. Let's do it, let's do it now. Thank you.

    Chairman LEACH. Well, thank you very much.

    Mrs. Roukema.

    Mrs. ROUKEMA. Mr. Chairman, thank you very much. You will be relieved to know that I am not going to give my full statement. I am most anxious to get to our panelists today, and to have this hearing. This is a very substantive hearing. You are to be congratulated, Mr. Chairman, for expediting this hearing. As Mr. Vento indicated, last year my subcommittee, on which he is the Ranking Member, had a hearing on this subject. But we now have a reality testing here, and I want to join you in expediting consideration of corrective legislation.
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    I would also just like to make one point. I have been a little surprised, and somewhat disappointed, at the overreaction of the credit union industry. I say this because sometimes only your best friends will tell you—and I consider credit unions among my best friends—that the panic reaction to the Supreme Court decision is not constructive. I am concerned because the industry's overreaction could complicate our task of finding a solution to this problem and particularly with the potential here of the appeal that's going to be made before the district court, I believe on April 15.

    We have to find a solution. We have to address this in a dispassionate way, and I would ask that all members, and certainly the interest groups, whether it be credit unions or banks, to be cognizant of that and to be helpful in that regard because we do not want to run up against a stone wall. I might also say that we have not only credit unions, but we also have—and this is not a question of credit unions versus big money center banks—a lot of independent small banks and community savings and loans that have equal needs. We've got to be fair to all market participants. I recognize the evolution of the market and the blurring of differences between credit unions and banks that has occurred over these years. I pledge to work with you, Mr. Chairman, and with these various constituencies to find the right solution in a timely fashion.

    I yield back.

    Chairman LEACH. Thank you, Mrs. Roukema.

    Let the Chair indicate that I would hope to be able to wrap up opening statements on a timely basis, but I don't want to cut anyone off. Does anyone else seek recognition at this time?
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    Mr. SANDERS. I do.

    Chairman LEACH. All right, Mr. Sanders.

    Mr. SANDERS. OK. Thank you very much, Mr. Chairman, and let me start out from the get-go in saying that I am a very strong supporter of credit unions and very proud to support H.R. 1151. I find it a little bit ironic that some of our friends from the banking industry are telling us that they're in unfair competitive situations with regard to credit unions because credit unions don't pay taxes, and they do. I would remind those folks that it was not the credit unions who came before Congress a few months ago to ask for a $19 billion bail-out for their bad investments in Asia. It was not the credit unions who came before this Congress five years ago to be bailed out for bad investments in Mexico. It was not the credit unions who came before this committee some ten years ago—or eight years ago—to ask for several hundred billion dollars to be bailed out of the savings and loan fiasco.

    To my mind, credit unions serve an enormously important function in this country. They are nonprofit, and I would say to some of the larger banks, that if they don't like the competitive disadvantage that they perceived themselves to be, Chase Manhattan could also go nonprofit. It's not a problem. But, some of us think that it is very good that in our communities, and in Vermont, we have tens and tens of thousands of people who are members of credit unions. Just local people who come together and, you know what? They actually elect their leadership and their leadership talks to them, and they reinvest in their community, and not in Mr. Suharto's Indonesia, and so forth and so on. So, some of us think that people, especially in small businesses, have the right to be members of credit unions, and will strongly support Mr. Kanjorski and Mr. LaTourette's legislation. We thank them for offering it. Thank you very much, Mr. Chairman.
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    Chairman LEACH. Thank you, Mr. Sanders.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman. I know you're trying to expedite this, understandably, so we can hear from my colleagues. I want to say very briefly, however, that, of course, the hearing today is to review the recent Supreme Court decision. I believe the Supreme Court's decision gives Congress a starting point at which we'll begin to consider legislation on this issue. Dramatic reform action before this point was, I believe, premature. Therefore, today's hearing is the first step in our consideration of the legislation solution.

    What's obvious is that a legislative remedy is going to be sought, and is sought by the credit union organizations. There are a number of such proposals currently before the Congress. It's likely the new legislation will be introduced that takes into account the Supreme Court's decision beyond the legislation which is introduced now.

    I want to say, I'm very much opposed to dealing with this issue as part of H.R. 10, which I cannot support for a variety of reasons. I want to make sure we do take this action on credit unions this year.

    I told the credit union leaders in my State, as well as the bankers, that we are now going to meet, listen to, and seek guidance of all interested parties in my State, but also, especially here today and in subsequent meetings.
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    Although it's unclear what the final impact on existing credit union members will be, there are a few principles that, I believe, should be established. These principles include the ground rule that any such legislative remedy should provide that existing credit union members will not lose their existing membership with the credit union. In addition, a competitive environment must be allowed to exist between the credit unions and other financial institutions under any such legislative remedy. We need a strong commercial banking sector, and we need a very strong credit union sector.

    So, I look forward to working from this starting point to ensure that not only the concerns of the credit unions and other financial institutions are heard on this issue, but that the concerns of all of our constituents are heard as well. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bereuter. Does any one else seek—Mrs. Maloney.

    Mrs. MALONEY. Mr. Chairman, I will pass, but ask that my written statement be placed in the record.

    Chairman LEACH. Without objection, and the Chair at this point is going to recognize other Members, too, but let me say the Chair asks unanimous consent that the opening statements, and all statements given, be allowed to be revised and extended, without objection, so ordered. The Chair would also ask unanimous consent that statements of Representative Martin Frost, Representative Lane Evans, Representative Bennie Thompson, and the Air Force Sergeants Association also be placed on record, without objection.
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    Mr. Bachus.

    Mr. BACHUS. Thank you. I'd like to speak to my colleagues and say this. I think what we ought to seek here is not a fix, but really a remedy, which will ensure that consumers and citizens have more choices, that they have credit available at lower cost, that we strengthen both the credit unions and the banks, and make credit more available. And, I think that we can do that. I think there are two paths that we could take. We could take a path where we level the playing field—there's been a lot of talk about ''inequities,'' and quite frankly, there are all sorts of regulations and taxes that apply to banks that don't apply to credit unions. And I know that some of my colleagues have talked about leveling this playing field by putting these regulations and these requirements on the credit unions. I would caution you against that. I think that that's going to lead to higher cost for consumers, and I think they're going to pass on the cost of those regulations, just like the banks have, particularly the small banks.

    I would say that, as opposed to taking that approach, and I think this committee has an opportunity that doesn't present itself very often, and that's an opportunity to level the playing field by taking regulations off the banks. And I know that when I suggest, maybe, repealing CRA that sounds like a bold proposal. But, I believe that we can level the playing field, and we can do that by giving regulatory relief to the banks.

    If you'll look at the credit unions, they've been safe, they've been sound, and according to information we have, they are reaching out into the community and making loans available to a wide spectrum of people. They do that without any of the requirements that we've put on the banks. They've operated safely without those requirements. Why can't the banks do the same? Why do they, quote, ''need all of the regulations that we've piled on them''? I don't think they do. And, I think, in fact, this situation that we find ourselves confronted to tells us that a lot of the regulations we've put on the banks are unnecessary, unneeded, and expensive to the American taxpayer and to the American banking customer.
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    So, I would simply close by saying this, and I know that Congressman Paul shares—some of what I'm saying here, I've heard him say over the past few years—and I've become more and more convinced, that we can get rid of CRA, and I think now's the time to do it. And, I think we level the playing field by taking regulations off the banks, giving relief to the banks, and allowing them to function the way the credit unions function on a daily basis. And, I think that is the fair solution to the situation that confronts us, and it's a situation which, I think, would improve our whole financial system. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bachus. If there is no—excuse me. Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman. I really thank you, and Ranking Member LaFalce, for agreeing to hold a hearing today on the Supreme Court's decision. As the oversight body for financial institutions, I see it as essential for us to hold the hearing and listen and question all sides on what type of legislative vehicle we can assemble now that the Supreme Court has ruled.

    In today's session, we're going to be able to examine, in detail, the many different ideas for a package that would quickly pass Congress and clear up the issue. Personally, I'm reluctant to embrace any proposal that might raise taxes or impose new fees to resolve the matter. But, I believe we must examine all ideas before we reach any final conclusions. For instance, I've reviewed ''dear colleagues'' from my friend, Congressman Barrett, who has spoken of extending Community Reinvestment Act compliance standards to credit unions. This is an interesting concept, but there may be some inherent problems with such an idea for organizations with a mutual structure, like credit unions, that can only loan to their members.
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    We will also hear people speak of initiatives to limit the growth of credit unions, while not stifling the ability of credit unions to remain sound, financial institutions.

    It's my hope that through this hearing we can bring all parties to the table, and find a common ground for agreement. I'm pleased to report that the bankers from my district that I have spoken with, indeed, recognize the important role that credit unions play in the diverse range of financial institutions. Bankers have been quite clear that they do not want to kick any current credit union members out of their credit union, and this recognition and accommodation is an excellent starting point for our hearing. Again, I look forward to maintaining an open dialog with all sides on this issue, and thank you, Mr. Chairman, for holding today's hearing.

    Chairman LEACH. Well, thank you very much, Mrs. Kelly, and you referenced Mr. Barrett, and I'd like him to have the opportunity to speak, as well.

    Mr. BARRETT. Thank you, Mr. Chairman, and thank you for holding these timely hearings today on the Supreme Court decision involving credit union membership. Now that the Supreme Court has made it's decision, we obviously need to fully examine the complicated issues surrounding this case, and the implications of the court's ruling, to determine the appropriate congressional response.

    As we work to resolve the credit union common bond controversy, credit unions will stress the importance of consumer choice, the relative size of the credit union industry in contrast to the banking industry, and its cooperative nature and nonprofit aspects. Banks, on the other hand, will contend that some credit unions have become indistinguishable from banks, and should no longer be afforded differential treatment.
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    Despite these competing views and interests, it has become apparent that, in considering the common bond issue, we must make sure that credit unions and their members are protected. Credit unions serve millions of working families in Wisconsin and throughout our Nation, and we should be exploring ways to clarify the common bond definition in a manner that will ensure the future safety and soundness of credit unions.

    Another important public policy issue to consider is how to balance the need for continued growth by credit unions and expanded access to membership with the credit needs of all individuals and communities, especially those who are underserved. As we address the issues surrounding the credit unions' common bond controversy I'm confident we can find new ways to meet this important challenge.

    Although the credit union industry as a whole makes up a relatively small portion of our financial services market, and a vast majority of credit unions are small in size, the situation we find ourselves in today provides us with an opportunity to strengthen and improve our credit union laws, taking into account significant changes that have occurred in the credit union industry over the last quarter century.

    Credit unions today have grown into roughly a $300 billion industry, providing diversified services to a variety of customers. In fact, there are very large credit unions in existence today with membership in the hundreds of thousands and assets in the billions. Despite their size, these large institutions are not required to serve low- and moderate-income neighborhoods in their service area, even if it encompasses an entire State. Essentially, they are exempt form the Community Reinvestment Act.
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    Although the legislative remedy to the Supreme Court's ruling has yet to be determined, I believe it should include provisions that are tailored to meet the goals of CRA. I plan on introducing a bill in the coming days, and will offer it as an amendment when the House Banking Committee takes up credit union legislation later this month. CRA has worked at the State level, and, when you think about it, credit unions were formed to help people. Large, geographically-based credit unions, in particular, ought to find it simple to meet CRA requirements. I look forward to the opportunity to explore all the aspects of the credit union issue, and hope that today's hearing will offer us new insights and balance our understanding of the common bond issue and related credit union issues presented by all the witnesses who are here with us today.

    Thank you.

    Chairman LEACH. Thank you, Mr. Barrett.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I'll be very brief because I know we want to get on to the hearing. I can't think of an issue that cries out for a series of hearings more than this issue. There seems to be only one proposition that seems to be a growing consensus about, and that is that we want to protect existing credit union memberships. Beyond that, it seems to me that the field is wide open, and when you get a number of disputed issues on the table, the best way to try to resolve those is through hearings and so, I want to compliment the Chairman for having hearings promptly, and I hope we'll continue to have as many hearings as we need to hear from all the parties, And, what I'd like to try to do is keep an open mind, and listen to the witnesses who are here and coming to try to make a reasonable decision. I have some ideas, but I think it's more important to listen to the witnesses at this point. So, I'll withhold making any substantive comments until that time. Thank you, Mr. Chairman.
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    Chairman LEACH. Well, thank you, Mr. Watt. If there are no further comments, we'll begin with our witnesses, and let me just say, it sounds like a small issue, but I want to tell you, I gave it some thought, in what order people would be received.


    Chairman LEACH. There's no committee precedent, and so we decided, in this case, to go on the order in which bills were introduced. And, I don't mean to set a precedent for any future hearing, but it seemed like a fair way to go about it for this particular hearing.

    Mr. BARRETT. Mr. Chairman. Maybe you could go from the best to the worst legislator.


    Chairman LEACH. Yes, of course, yes. That's always a subjective—we'd want to vote on each one, I'm sure.


    Chairman LEACH. But, in any regard, the first bill introduced in this Congress is that of our distinguished colleague, Congressman Paul. At the risk of presumption, first let me say, by asking unanimous consent, that all full statements be placed in the record and that Members be allowed the opportunity to revise and extend those statements. Second, I'd like to request that comments be held to a maximum of five minutes.
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    Dr. Paul.


    Dr. PAUL. Mr. Chairman and fellow Members, I appreciate very much this opportunity. I would like to also add that I have supporting documents to go in with my printed record.

    I am pleased to come here and talk about this very important issue, and it is true that, early-on last year, I became very much aware that this would be an important issue. I didn't know it would take a whole year to come around for us to deal with it, but obviously, the Court ruling had a lot to do with this. It's been a year since I introduced the Financial Freedom Act of 1997, H.R. 1121, dealing with this very important issue. I'm convinced that all Members of Congress, regardless of which political spectrum they find themselves, have a goal of seeking fairness, and we come down on a different side of how to achieve this very often, but I think we all want fairness.

    The prevailing attitude in Congress, so often, is intervention. That is, that we so often condone a form of economic intervention to try to bring about this fairness. But, there is an alternative, and it's the alternative that I support. And, that is fairness ought to be achieved with a maximum amount of freedom and a minimum amount of taxation. So that is always my goal, whether it has to do with banking matters or any other issue. And, it is this reason that I introduce the Financial Freedom Act, because I believe it is very important, in a free society, that if you have a service to provide, memberships or customers ought to be as free and open as possible. So I would never want to consider limiting the accessibility of customers or memberships to any service company. And, also on the side of taxes, I think it is very easy for one who believes in a minimal Government to come down on the side of saying that we ought to always have the least amount of taxes.
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    Here we have a situation, which is readily apparent, that one group has lower taxes and less regulations than the other group. But, instead of considering the imposition of more regulation and more taxes, we should give much more serious thought to lowering regulation and lowering taxes. That is the fair and equitable way. Besides that, it's the best way to serve the consumer. By bringing down the cost of regulation and bringing down the cost of taxes, you will bring down the rate of interest and the ability to promote services.

    Regulations are costs; regulations are a tax, and frequently we don't consider this a tax, but it is truly a tax. I want to read one brief statement from a small State bank in Muenster, Texas, where he explains why regulations are so difficult. He says, ''My bank received an outstanding rating from its first CRA exam. The last CRA exam resulted in a satisfactory rating. I asked the examiner why we did not get an outstanding rating. His reply. 'You obviously do an outstanding job of community reinvestment and service to your community, but we could not give you outstanding because you did not do enough documentation.' '' So he did the job, but they didn't fill out the reports, and didn't do the work, and that is a cost that always has to be passed on.

    My bill repeals CRA. If we don't want to impose CRA, which I hope we don't, on credit unions, and we know we don't want to impose them on the financial interest of airlines, and auto dealers, and Sears, and WalMarts, and anybody else that is involved in credit allocation, then we should consider the burden of CRA at least on the smaller banks. But, my bill would repeal CRA, which I think would be a tremendous benefit. The other thing it would do, it would lower the tax rate for the small banks.

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    The way this bill works out, it will be more beneficial to the smaller banks than the larger banks. Larger banks handle regulations. The marginal cost of regulations is much greater for a smaller company or smaller bank than it is for a large corporation or a large bank. So this would help, tremendously, the community banks over the larger banks, but, it would repeal CRA. It would repeal it, it would lower the taxes, and I think this would be a tremendous benefit.

    The Community Reinvestment Act is a form of credit allocation. Credit allocation is misdirecting credit. It's all well-intended. It's to do social good, but unfortunately, it increases risk, and that risk ultimately is borne by other consumers or the taxpayer. So, please give it consideration. If indeed we are all for fairness, let's argue the case for fairness by lowering taxes and lowering regulations. And, I yield back.

    Chairman LEACH. I thank you very much, Dr. Paul.

    Congressman LaTourette, who has introduced a bill which has become a namesake in the country, I believe. But, please—and Mr. Kanjorski, who's the co-introducer, and I assume we begin with Mr. LaTourette.


    Mr. LATOURETTE. Thank you very much, Mr. Chairman, and I first want to thank you for responding so quickly to the Supreme Court decision of February 25, and for scheduling today's hearing. I also appreciate the opportunity to testify.
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    I have to admit that when my colleague, and friend, Paul Kanjorski, and I introduced——

    Chairman LEACH. Excuse me. If I could interrupt for a second. If you could take the microphone a little closer——

    Mr. LATOURETTE. All right.

    Chairman LEACH. Thank you.

    Mr. LATOURETTE. I have to admit that when Congressman Kanjorski and I introduced H.R. 1151 a year ago, it was my hope, and I know Paul's hope, and probably some of those on the Committee, that the Supreme Court would have ruled a different way, and made the issue moot so we didn't have to deal with it. But, we felt that because this was going to be such a serious problem, and not only affect 3,600 credit unions, but also millions of members, that we would get ahead of the curve and have a legislative remedy prepared in case the Court ruled as it did.

    I should also acknowledge to my colleagues that I am a sinner, and that I am a 20-year credit union member. When I graduated from law school in 1979, I became an assistant public defender in a place called Lake County, Ohio, and they paid me the amazing sum of $13,000 a year. My future wife was a probation officer, and she said, ''You know, you really need to join the Lake County Federal Employees credit union.'' And, I said, ''Why? I have a nice account at the bank. Why do I need to become a credit union member?'' She said, ''Look Steve, you make $13,000 a year, you like to go out on Friday nights, and you need the $200 overdraft protection, so join the credit union.''
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    Mr. LATOURETTE. And, I've been proud to be associated with that ever since.

    Mr. Chairman, I've listened very carefully to the thoughtful opening remarks of our colleagues today, and there's no scarcity of great ideas on both sides of the aisle. But, H.R. 1151 is hardly a radical new fix for the credit union common bond issue. As you know, it merely codifies the manner in which the National Credit Union Administration has permitted new employee groups to join for the last sixteen years.

    I think it's also important to point out that H.R. 1151 deals solely with the membership issue in credit unions, not with taxes, not with CRA compliance, or a myriad of other issues. The membership issue, as Mr. LaFalce pointed out, was the root of the Supreme Court case, and it's also the root of H.R. 1151. And, if I may be so bold, since there are so many good ideas, I think that—and certainly Congressman Kanjorski will speak for himself—that perhaps we should stop the bleeding, pass H.R. 1151 and then deal with issues and discussions like Mr. Paul's and Mr. Bachus', and Mr. LaFalce's and Mr. Vento's.

    Why is it so important for credit unions to be allowed to expand? Recently, just last week, I received a letter in my office from a woman named Betty Yelochen from Mayfield Village, Ohio. She has been a member of something known as the Clark General Federal Credit Union for 40 years. And, here's what she wrote to me, and here's what the problem is with some of the discussions we're going to hear later about simply grandfathering in existing credit union members.
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    She writes, ''Our original sponsor company, the Clark Controller Company, went out of business a number of years ago. In order to survive, the credit union took in a number of mergers. When the policy was adopted in 1982, permitting multiple groups, we took in a number of smaller companies that couldn't support a credit union on their own. Our credit union is small, only $1.7 million in assets, and approximately 1,300 members. All of my financing has been handled by our credit union. Clark General Federal Credit Union offers personalized service with minimal fees.''

    This particular credit union was formed 49 years ago. When Clark's sponsor went out of business, the credit union had between 1,200 and 1,400 members. Today, she writes that the membership is just 1,300, so you can see that it certainly hasn't grown by leaps and bounds, and it isn't giving our local banks a run for their money.

    It's as simple as this. It's members have died, they've been replaced by members from small companies, some of which join in increments, and as few as four employees at a time. Additionally, in the last sixteen years, following the relaxation of membership rules, the Clark General Federal Credit Union has taken in a few smaller credit unions, including one from the Curtis Employees Credit Union in Eastlake, which was on the brink of collapse when it was hampered by a protracted labor strike.

    The last comment that I would make, in keeping with the Chairman's admonition to remain within five minutes, I find it ironic that at the same time this Congress is considering ripping down Depression-era regulations imposed by Glass-Steagall in an effort to make financial services more competitive, and, yes, more profitable, we would not act to modify another Depression-era law to allow credit unions to continue to grow. And, to my Republican colleagues, I would only reiterate the Speaker's observations when he cosponsored H.R. 1151, if we believe in less regulation, and if we believe in lower taxes, and if we believe in greater competition and greater consumer choice, H.R. 1151 is the way to solve this problem, and, Mr. Chairman, I thank you, and I thank our colleagues.
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    Chairman LEACH. Thank you, Steve, for that very thoughtful statement.



    Mr. KANJORSKI. Thank you, Mr. Chairman. I want to thank the committee for holding the hearing today, and of course, Steve and I are joined with 185 other Members of Congress who are cosponsoring H.R. 1151, the Credit Union Membership Access Act.

    To put it simply, H.R. 1151 is the bill that has the largest and broadest bipartisan coalition of Members supporting it. I think there are a lot of great ideas that have been expressed here today, but, in reality, we have to act and act rather quickly if we're not going to start an atrophication of the credit union movement in the country. All we do in H.R. 1151, as Steve had indicated, is codify the unanimous bipartisan position of the National Credit Union Administration that was followed under the Reagan Administration, the Bush Administration, and the Clinton Administration, and which contains no extraneous material. I may say on that: to return to extraneous material in the future, we can certainly do. But to put off action on solving the membership access problem at this point would be foolhardy.

    I also want to point out that Speaker Gingrich and Minority Whip Bonior are cosponsors of H.R. 1151, so it covers the full spectrum of the political philosophies of the House. This is also the only bill that the Consumer Federation of America supports.
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    What we really have heard in the Supreme Court's narrow 5-4 decision interpreting the 1934 Federal Credit Union Act is that some people would like us to return back to 1934. And the good old days were great days, of the Depression. But, you know, if we go back to 1934 and the banking laws, we should look at what they were able to do. And I just call Members attention to what the restrictions on banks were in 1934: they were allowed to establish and operate new branches only within the limits of cities, towns, and villages in which said association was situated, and only if such establishment and operation at the time permitted to State banks by the law of the State in question. The limitations and the size of the banking system in 1934, as compared to 1998, is the greatest example of why we don't want to return back to the limitations of membership that previously existed.

    I call the Members' attention to the issues of interstate banking and bank branching that are contained in the full text of my opening statement in the record. But what does it really mean?

    It means that if we were to create a level playing field here, and allow this Court decision to stand, and not pass H.R. 1151 to broaden the access of membership that has already occurred over the last sixteen years, and go back instead to 1934 and put everybody on a level playing field, we'd have no interstate banking. We'd have no ATM network nationwide. We'd have no branches outside of towns, cities, villages, where the banks are headquartered. In unit banking States, like Texas and Illinois, among others, no branches would be allowed at all. In my entire congressional district, no bank could have more than one branch.

    Does this make sense? Of course, not. Is this an attack on banks and do we want to go back and constrict banks? No. Are we for modernization of banking—we know we're working on H.R. 10. But there should be a distinct separation. I agree with my colleague from Nebraska, Mr. Bereuter: we should not link H.R. 10 and H.R. 1151. They are distinct legislation. Each should stand on its own merits. It is not a situation of compromising and working out. This is something that the credit union movement needs a response from Congress on today, and not being bought into H.R. 10 with all its problems.
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    H.R. 1151 and the credit union issues that are before us today are also a safety and soundness issue. If there is a single lesson this committee should have learned from the thrift crisis, it is that concentration increases risk and diversity reduces it. And if we haven't learned that lesson, we haven't learned anything.

    Limiting credit unions to a single employee group significantly increases the risk for both the credit union, the National Credit Union Share Insurance Fund, and, ultimately, U.S. taxpayers. No one could make the argument now that we don't understand that credit unions that are limited to businesses, or a single narrow region, when that business fails or has tough times, or large unemployment occurs, that is the very time that people draw out their funds. That is the time they need to make more loans. That's the very time the credit union would become at risk. Diversity of membership does away with that very large risk-taking factor of concentration by creating a larger base for the credit union.

    And what has this really brought out? Well, it's allowed employees in small businesses that otherwise could not belong to credit unions to belong to credit unions. Other than that, we're really denying millions—I think 14 million people in the United States could not belong to credit unions because the companies where they work aren't large enough in size.

    Now, should we get into the issue of allowing only groups with fewer than 1,000 members, or 500 members, or 2,000 members to join existing credit unions? I know that's appealing to us. But that means only we have to return here another day because, as I point out to my colleagues, as we heard one of the members make that comment, just recently in my congressional district, a major company decided to relocate to Mexico and close its doors. It had 1,400 employees who had a credit union. Under the existing regulations, they would have to disband and divest that credit union because they can't join any other federal credit union under the existing interpretation of limitations by the Court now. And further, if we were to put a limitation of 1,000 on new groups, that's not practical, either.
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    What are we really facing? We're facing a fact that we want to serve more people, and we don't want to be competitive. And I point out why we're not competitive. We're not competitive because the difference between a credit union and a bank is the bank can sell shares. It can increase its equity by going out in the market and seeking funds to be invested for acquisition. The major difference with a credit union is the only way they can expand is retained earnings inside the credit union. If it's a small credit union, you don't have to worry about it becoming a great big credit union.

    Now I heard one of my colleagues mention that the largest credit union in the United States, interestingly enough, is not impacted by the membership restriction, because it only has one membership group, and unfortunately—or fortunately, as the case may be—has 1,400,000 employees in that one membership group. That's the U.S. Navy. And if anybody's dealt with the Navy and the people who are members of the credit union of the Navy, if they haven't served their membership, I'd be surprised. It's when these people are overseas in Europe and Asia and around the world, and they have an emergency in the family or a need for funds, the funds are there through the credit union. So regardless of what this Congress does or doesn't do, it's not going to affect the very largest credit union in America, because it only has one single membership group and one common bond.

    I would also like to point out that we have 12,000 entities here, and they've been proceeding under these rules and this process, as interpreted by the administrative agency that regulates them, for sixteen years. And what has the effect been?

    Well, fifteen years ago, they controlled about 2 percent of the financial assets of this country. Fifteen years later, under these expanded membership possibilities, they still control only 2 percent of the financial assets of this country. As a matter of fact, the banks, in just the last two or three years, have grown in size beyond the total deposits of the credit unions over 64 years of their existence.
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    What we really have to get to here is not talking about a level playing field, not talking about taxation, not talking about threats to existence, but realize that all these arguments are basically red herrings. I just want to point out one further thing and have Members think about it: would we expect non-profit hospitals to be taxed because they compete with for-profit hospitals? Would we expect only Shriners to go to the Shriners' Hospital or should all children of this country be allowed to go to the Shriners' hospital? Should we stop the Girl Scouts from selling cookies because they compete with some for-profit businesses? If that isn't ludicrous, or if America's diverse economy and competitive spirt isn't enough to give room for the growth of the credit union movement and to fill the vacuum that they do fill in our society, then we're being foolish. Does anybody have a monopoly in financial services? The banks don't. The securities companies don't. And certainly the credit unions don't. They fill a particular, small need for 2 percent of the financial assets of this country. They service 70 million Americans. I urge my committee to pass H.R. 1151 as fast and as soon as possible so that we can put this question of membership aside. And if at some future date, we want to talk about the modern era of banking and financial services as they impact on credit unions and other institutions, I think we can address that. But today, we have to make sure that the threat to the credit union movement is relieved by responsible congressional activity.

    Chairman LEACH. Thank you, Paul.

    Congressman Cannon, you're welcome to appear before this committee. You're our first non-committee Member. Welcome.

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    Mr. CANNON. Thank you, Chairman Leach and Members of the committee.

    My name is Chris Cannon. I represent Utah's third congressional district. I am pleased to be here today to testify on the credit union issue.

    According to data prepared by the credit union industry, my congressional district has one of the largest populations of credit union members of any district in the country. And as a long-time credit union member, I'm included in that number.

    As those present know, the U.S. Supreme Court ruling on the issue of credit union field of membership was a significant event. The next day, USA Today led with the Court's decision, capped by the headline: ''Court Curbs Credit Unions; Multifirm Membership Called Illegal by Justices.''

    This and similar news stories have caused concern among many of the nearly 70 million Americans who are members of credit unions. If your office is like mine, the phones began ringing, faxes started flying, e-mail zipped in and out, and letters began arriving. Most were seeking an answer to a single question: ''Congressman, can I still keep my credit union account?''

    I suspect the same experience has been repeated all over Capitol Hill. U.S. credit union members are unsure and unsettled. And, as the debate over credit union reform begins here in the Banking Committee, those concerns will escalate.
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    And with good reason. As each Member of this committee knows, the Supreme Court sent the AT&T case back to the district court in North Carolina. While the banks and credit unions both claim that current credit union members are not at risk from the Supreme Court decision, the final resolution is in the hands of a district court judge. Clearly, the Supreme Court decision supports the proposition that, under current law, a credit union's membership may not consist of multiple common bonds. While I doubt that the district court would go so far as to divest current members, the very potential has an unnerving effect on millions of Americans.

    It is appropriate for Congress to act to calm these concerns. Careful and narrowly-focused congressional attention could protect current credit union members and provide a safety net to millions of our constituents, while allowing the greater debate to go forward within this committee and within Congress.

    That is why I introduced H.R. 3265. The bill simply provides that anyone who belonged to a credit union as of the Supreme Court's February 25 decision is grandfathered in as a member, regardless of pending court decisions or congressional action toward reform. H.R. 3265 provides absolute protection to the current credit union members.

    Moreover, H.R. 3265 codifies and puts into statute what is probably the only area of agreement between credit unions and banks: that current members should not be adversely affected by any pending or potential changes. In fact, H.R. 3265 could be the first step toward diminishing the animosity between the parties on this issue.

    H.R. 3265 is a narrow bill—a solution-oriented proposal which would calm the fears of the public in what should be a non-controversial manner. I am pleased to announce that the concept is picking up steam. Currently, H.R. 3265 has 50 cosponsors: Republicans, Democrats, pro-bank Representatives, and Members who are staunchly pro-credit union.
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    Finally, let me reemphasize that I do not see H.R. 3265 as an end of the debate on the scope of the credit union membership, but rather a means to that end. By removing the emotional question of what impact any congressional reforms will have on those currently enrolled in credit unions, this committee can create a more neutral, less hostile playing field, free of demagoguery and horror stories by either side.

    A congressional resolution of the credit union issue may or may not fit into the broader context of financial reform pending before this committee. Regardless, I believe that H.R. 3265 could adequately stand alone, sending a clear message to the 10 or 20 million credit union members put in jeopardy by the Court's decision that they need not fear.

    In that context, I would encourage the committee to look closely at H.R. 3265, and I look forward to working with you on this issue in the future.

    Thank you, Mr. Chairman.

    I yield back the balance of my time.

    Chairman LEACH. Thank you, Chris.

    Congressman Smith.

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    Mr. SMITH. Mr. Chairman, did I understand you to say that the prepared text would be included in the record?

    Chairman LEACH. Absolutely.

    Mr. SMITH. Mr. Chairman, first of all, thank you very much, thank the committee very much for allowing me some time to relate my thoughts on the issue. It seems to me that the challenge before this committee is not only to pass legislation that won't disrupt the services that banks and thrifts and credit unions are now giving their members, but actually to look at how we can increase the services to the citizens of this country—how we can make borrowing money, lending money, working with financial institutions, easier and more favorable to the customers, namely the taxpayers and citizens of this country.

    I would suggest that when a lot of us were growing up, we had local community banks. Those banks were interested very much in what happened in that community. They borrowed money locally. They looked at individuals that wanted to start a business and sized up that individual based on their familiarity with the abilities of that individual. And most of our small businesses in this country got started that way. Those banks, at that time, were willing to make a loan of $100 or $200 or $300. Now we're seeing traditional banks more reluctant to lend. Credit unions have filled this gap in many instances.

    So as we saw the interstate banking systems and the multinational banking systems come in and buy out our local banks, we saw a lot of the money move out of the community. If there was a quarter-of-a-percent interest rate more money that could be achieved by lending the money to Indonesia or someplace else, that money went out of the community. So we came up with the CRA and said, ''Well, we still want the money to be in the community, so we're going to start passing Federal and State laws to get back some of the services that the old banking institutions achieved.'' So, I see that the challenge of this committee is to look at the possibility of reducing regulations. I see the challenge of the Ways and Means Committee to reduce some of the tax burdens, because our goal, if we truly want to serve our constituents, is to increase competition so that the thrifts, so that the credit unions, so that the traditional banks can do what they need to attract their customers and do a better job.
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    On the day that the Supreme Court made their decision, I introduced my own bill, H.R. 3276. That bill has been sitting on my desk for the last year. That bill simply addresses the more pressing matter of those credit union members who could potentially lose their membership due to the recent Supreme Court ruling in National Credit Union Administration v. National Bank and Trust.

    I would suggest that we should pass clear measures to reassure credit unions—and their existing members—that their current membership is protected. That's what my bill does.

    Specifically, H.R. 3276 would create a new class of credit union members beyond those currently allowed under law. This class would consist solely of those members that were members of their credit union on February 25, 1998, when the Supreme Court came down with their decision, in effect grandfathering-in their membership status. I believe this provision represents the minimum necessary action that should be accomplished as quickly as possible.

    Mr. Chairman, Members of the committee, let me conclude by saying customers of banks and credit unions benefit with a system that maximizes competition and forces institutions to compete for customers. And we should lessen the tax and regulatory burden on banks, and on thrifts, and on credit unions to maximize their ultimate benefit to their customers.

    Thank you.

    Chairman LEACH. Thank you, Mr. Smith.
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    Congressman Baker.


    Mr. BAKER. Thank you, Mr. Chairman. And, again, thanks for calling this hearing.

    I wish to speak this morning more to process than ultimately remedy in the current difficulty. It's my opinion that there should be a clear message delivered as quickly as possible to all members of credit unions, a message which virtually all interested parties that I am aware of have expressed support for. Along the line of Congressmen Cannon and Congressman Smith's proposals, I also share the view that an immediate emergency message indicating that all members currently in a credit union should be grandfathered, with one slight addition. And that would be the suggestion that all current affiliations or special employee groups also be grandfathered. What this would ensure at least is, for the short term, continued operations of credit unions without anyone having fear of losing their bass boat loan.

    Second, that the affiliated group itself would not be dispossessed if members of that affiliation retired or otherwise moved on to other interests so that the affiliation would also be preserved.

    Now, I think this is important for us to act on as quickly as possible because of the large numbers of people who believe today that the Supreme Court will deny them access to a current line of credit. I think equally important, however, for the committee's consideration of the issues in H.R. 10, that we not couple the resolution of the credit union membership issue and the very complicated and uncertain future of H.R. 10. Were we to successfully include the provisions of H.R. 1151 as, for example, in H.R. 10, no one today, I don't believe, despite my continued optimism for the hope of financial reform, would guess that H.R. 10 would successfully make it through the House and Senate before the conclusion of this Congress. Therefore, we would then be leaving members of the credit union without an appropriate remedy during the long coming recess.
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    It's my suggestion—not to suggest a dilatory process, not to speak for banks or for credit unions, but simply to say, ''Let's move quickly to do what we know is in the best interest of those who've been dispossessed by the Supreme Court's order, deal with the issues of H.R. 10 separately, and before conclusion of this Congress, give absolute assurances to the credit union leadership and to the independent bankers that this committee and this Congress will find a remedy for the broader issue of how can we allow independent bankers, who look very much like independent credit union operators, the guarantees to both have a place in the marketplace without either having a view that the other has unfair competitive advantages.''

    These are not going to be easy issues to resolve, and it will require a very difficult vote of this Banking Committee and on the House floor. And I suggest coupling the resolution of the credit union issue together with H.R. 10 would create a very difficult vote on final passage, no matter what the constitution of that ultimate package.

    So, Mr. Chairman, I strongly support your effort in seeking remedies and hope that we can move forward with an answer that attempts to seek some parity between all parties.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Richard.

    Congressman Kennedy, you're welcome.

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    Mr. KENNEDY. Thank you very much, Mr. Chairman. And thank the other Members of the committee for listening to so many statements as well.

    First of all, Mr. Chairman, I want to thank you for holding the hearing. My purpose in being here today is to announce the introduction of legislation to apply the Community Reinvestment Act to credit unions with over $25 million in assets. The legislation is supported by the National Community Reinvestment Coalition which has a statement which I would like to ask to be accepted into the record, Mr. Chairman.

    Chairman LEACH. Without objection. Their statement will be placed in the record. Yes, of course.

    Mr. KENNEDY. Thank you, Mr. Chairman.

    For many years, there's been mounting evidence that credit unions do not have the sterling record of serving low- and moderate-income individuals and minority consumers that they have purported to have. In 1991, the GAO pointed out that ''Available data clearly indicate that credit unions do not exclusively serve people of 'small means' today.'' More recent data shows that the average household income of credit union members is $43,500, which is significantly higher than the average household income nationwide.

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    In 1996, HMDA data shows that credit unions made a lower percentage of home loans to low- and moderate-income borrowers than did banks, thrifts, and mortgage companies. Credit unions made only 5.4 percent of their single family loans to low-income borrowers and only 16.2 percent of their loans to moderate-income borrowers, the lowest percentages of all four groups, Mr. Chairman.

    Both banks and thrifts and mortgage companies, which are subject to CRA, did better than credit unions, which are not. Clearly, the record of credit unions serving the little guy does not match the rhetoric. Credit union lending to minorities is equally spotty. At the time of a credit union hearing in 1994, which I chaired, the record showed that in 1992, HMDA data demonstrated that credit unions had a higher home loan denial rate for minorities than for whites. This pattern has not changed since then. Some of the largest credit unions in the country show a dismal record of minority lending.

    I'd like to just read from the testimony from NCRC for just a moment, Mr. Chairman: ''The fair lending performance of the largest credit unions is troublesome. For example, the Navy Federal Credit Union, which has the highest number of applications of any credit union in 1996, had a very suspect lending record. A few years ago, the NCRC conducted a comprehensive home loan study analyzing lender performance in the 20 largest metropolitan areas using 1990 to 1993 HMDA data. Our study found that the Navy Federal denied blacks and Hispanics 10.9 times higher than whites in Washington.''

    Since that study, the Navy Federal has not been forthcoming with their lending record. In 1996, the credit union took in 27,579 applications all over the country, but 22,871 of them came in as ''race unknown.'' It's legal to code applications taken over the phone as ''race unknown,'' but such a high number raises serious questions as to whether or not, basically, coaching took place, especially in the wake of the national studies that revealed that Navy Federal had one of the highest denial disparity ratios of all lenders. In addition, the Navy Federal denied 88 of—well, I could go on, Mr. Chairman. But essentially, Navy Federal denied blacks and Hispanics almost three times the rate of white borrowers. Now I have heard it said by a number of Members of the committee that you can't really assess whether or not this is fair, because credit unions are only providing funding or making loans to a set number of people that are participating in credit unions.
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    The fact of the matter is that some of these credit unions cross State lines, some of them cross all sorts of geographic areas. And the data that is being talked about here doesn't just compare them to the national averages, it compares them in addition to their lending to other individuals that are members of those credit unions that have, in fact, been denied credit in what would appear clearly to be because of the color of their skin or because of the amount of money they make.

    Ladies and gentlemen, this is clearly an issue that has to do with prejudice, and what I'm saying to you is there's a lot of rhetoric that is going to surround whether or not we stand up for the little guys and credit unions. This issue has not to do with whether or not you support credit unions. I have always supported credit unions. But credit unions should not be held up with some halo over their head, when all of the data that comes in demonstrates that they are prejudiced in their lending practices, prejudiced against blacks, prejudiced against Hispanics, and prejudiced against people with low incomes.

    Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Kennedy.

    Mr. Ehrlich.


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    Mr. EHRLICH. Thank you, Mr. Chairman. And I want to thank all the Members of this committee who've come here today and testified, and talked in the many, many months prior today about this very important issue.

    Congressman LaFalce, my friend LaFalce, of whom I have great respect, used the term ''middle ground.'' And my testimony also relates to potential middle ground. I really appreciated his testimony with respect to trying to come to grips with quite frankly an issue that raises great concern with many Members because we find meritorious arguments on both sides of the issue. And I'll also be brief, Mr. Chairman. I do have a statement I will submit for the record.

    Approximately a year ago, credit unions in my district—and I have an awful lot of members in my district—came to me with respect to Congressman LaTourette's bill. And Steve's a good friend—and somebody I have great respect for—we came into this Congress together. In thinking about his bill and looking at the logical conclusion as to what his bill would do, I thought it was a good starting point, but would probably lead to: one, a policy result which I could not support—rather limitless membership with respect to credit unions; and two, of equal importance, invite certain policy initiatives that my friends in the credit union movement would not welcome.

    As a result, over the last many months, I've been meeting with various credit unions and bankers in my district, talking to an awful lot of Members of this committee, including the Chairman and Steve and a bunch of other folks here, trying to come to grips with what that middle ground should be, as Congressman LaFalce testified about with respect to his bill. We looked at different parameters with respect to thresholds—asset levels, retained earning ratios, number of members and so forth. And none of the proposals, with respect to any of those individual criteria, made sense to me. So I went back to look at the issue of common bond, and what truly makes credit unions, ''credit unions''. And in my view, the common bond constitutes the ''union'' in the concept of ''credit union.''
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    At the same time, my approach views the fact that credit unions must be allowed to grow in a safe and sound manner as an obviously very legitimate policy concern and certainly a fundamental belief shared by every Member of this committee. The bottom line, Mr. Chairman, is that my bill, which will be dropping today—I'm certainly looking for cosponsors as well—does a number of things.

    It allows credit unions to grow in a safe and sound manner, but not in the ''limitless'' way, which I thought that—I believe Congressman LaTourette's bill will lead to, and, in fact, is the conclusion the Supreme Court reached in Justice Thomas' opinion in what was really a 5–0 decision.

    It redefines certain categories with respect to enterprise and trade; expands the definition of trade within the context of a credit union. Some of the bankers have already given me some feedback with respect to this definition. They're concerned that it will lead to extremely, extremely large credit unions under the category of trade. I'm certainly willing to look at parameters with respect to this category—just talking, embedding this with my staff and other Members, perhaps something along the lines of the Federal Reserve Districts and the Federal Home Loan Bank Board Districts. But that's certainly something we can discuss over the next few days.

    My approach also, because I do believe credit unions are not banks and will not be banks, nor should become banks, does not tax credit unions, or place regulatory burdens along the lines of CRA, but keeps this issue of common bond sacrosanct.

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    Additionally, with respect to Congressman Smith and Congressman Cannon and Congressman Baker's comments, I certainly agree, and I think it's certainly a starting point with respect to our discussions that grandfathering should occur and that all members and organizations who've taken advantage of the 1982 ruling maintain their membership within their existing credit union.

    The bottom line here, Mr. Chairman, is it's a commonsense approach, I think. It's something that represents a middle ground between vastly conflicting viewpoints that we've been presented with over the last few months. It's certainly something I hope the Chairman will consider in the mix of legislative remedies over the next few days. And I really appreciate the time today.

    Chairman LEACH. Well, thank you very much. Let me just say, as we move ahead, the approaches of all these bills will be considered by the full committee; and some have obviously juxtaposed positions, but we certainly appreciate the perspective being reflected.

    It's my hope, because we have a whole series of other panels, that we will not consume the morning with questions to this panel; and the Chair, therefore, has no questions, but other Members certainly are welcome to ask any questions they might have.

    Mr. LaFalce.

    Mr. LAFALCE. Mr. Chairman, I agree with you that it would be good to get on to the other panels; and, therefore, I will ask no questions. I simply want to commend all the Members of Congress for their testimony. I want to give particular commendation to Representatives LaTourette and Kanjorski for taking such a leadership role on this. A good many Members who have cosponsored your bills have come up to me and said, ''Look, we hope your committee's going to take expeditious action, maybe not on the specific bill, but on the issue.'' That's what we are trying to focus our attention on, the imperative for addressing the issue in an appropriate manner.
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    To that end, I think I've heard virtually unanimous opinion expressed in order to obtain expeditious consideration of the issue, we ought not to link it or merge it in any way with H.R. 10. That would be very counterproductive and dilatory in my judgment, and I think there's unanimity amongst the credit unions and the banking industries on that specific point.

    Thank you.

    Chairman LEACH. Does anyone else have any——

    Mr. KANJORSKI. Mr. Chairman.

    Chairman LEACH. Sorry. Oh, Paul, yes.

    Mr. KANJORSKI. If I may, I have over 100 editorials of newspapers across the country that have supported H.R. 1151, and I would like ask unanimous consent that they be made part of the record.

    Chairman LEACH. Without objection.

    Chairman LEACH. And since the gentleman's a Member of the committee, would he like to ask a question of himself?


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    Mr. KANJORSKI. Perhaps, Mr. Chairman. What am I doing here?


    Mr. VENTO. Mr. Chairman.

    Chairman LEACH. Of course, Mr. Vento.

    Mr. VENTO. I just have a rhetorical comment, and that is that I first of all thank my colleagues, especially on the committee, that have tried to forge a policy path. I appreciate their efforts—and others not on the committee as well, I mean, because I think it's all done in good faith. I must say, though, I think that the tendency, Mr. Chairman, to move and treat credit unions like banks for taxation or regulation seems to me have a ''one-size-fits-all'' type of a solution. I've heard that someplace before, Mr. Chairman, I hope nobody's getting sick here this morning.

    But I think we need to deal with this problem as the problem that doesn't lend itself to that. And I also am concerned the sort of idea that the consumers or the credit unions have gained something here so, therefore, they have to give up CRA. I think that Mr. Kennedy's proposal raises some very tough questions that need to be answered with regard to this, and I hope that they will. I appreciate his willingness to bring it forward, and I think many see some serious concerns here with regard to it. With that said, Mr. Chairman, I don't really need an answer to my question, but I want to move ahead.

    Thank you.
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    Chairman LEACH. Fine. Well, thank you very much, Mr. Vento.

    Yes, Ms. Kilpatrick.

    Ms. KILPATRICK. Thank you, Mr. Chairman, and for all of my colleagues for their testimony. I did not hear a distinction in terms of—it was like a ''one-size-fits-all,'' and there are differences in the credit unions. I would hope that community development credit unions be included. I did not hear anything addressed on that. I think Mr. Kennedy did offer a number in terms of $25 million in assets that would be applicable to CRA. But as we talk about credit unions in the next two panels that will come before us, I hope that we share interest or support for community development credit unions. They do play a role. They are not the large credit unions that compete with banks. I need to hear more from you on that.

    Thank you very much.

    Mr. KENNEDY. If the gentlelady would just permit me, I'd just like to point out that at the $25 million level, 62 percent of all credit unions would be exempted from the CRA.

    Chairman LEACH. Thank you. If there's no one else seeking recognition, let me thank this panel, not only their comments, but the rigor of the thought that went into developing bills, which makes the comments that much more meaningful. So thank you very much.

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    Our next panel will be composed of Mr. Richard Carnell, who is Assistant Secretary for Financial Institutions in the Department of the Treasury; Mr. Norman D'Amours, who is Chairman of the National Credit Union Administration and a former colleague; Mr. Harold E. Feeney, who is Chairman of the National Association of State Credit Union Supervisors.

    We will, unless people want to arrange for something differently, we will begin with the Department of the Treasury and Mr. Carnell. You're welcome, Richard.


    Mr. CARNELL. Thank you, Mr. Chairman.

    Mr. Chairman, Mr. LaFalce, Members of the committee. I appreciate this opportunity to present the credit unions' views on two topics involving credit unions.

    First, the safety and soundness reforms recommended in the Treasury's recent——

    Mr. LAFALCE. Mr. Carnell, are you presenting the credit unions' views or the Treasury's views?

    Mr. CARNELL. I meant to say the Treasury's views. I'm sorry. Treasury's views on two topics involving credit unions. First, the safety and soundness reforms recommended in the Treasury's recent congressionally-mandated report on credit unions. And second, the common bond of credit union membership.
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    As not-for-profit depository institutions, credit unions add something special to our financial system. They give their members an alternative, cooperative structure for depositing savings and obtaining credit and other financial services.

    The Treasury's report recommends that Congress take several steps to make federally-insured credit unions and the National Credit Union Share Insurance Fund even safer, sounder and more resilient than they are today.

    My written statement describes these steps. I want to focus here on two of them: capital requirements and prompt corrective action.

    Strong capital requirements and prompt corrective action are foundations of modern safety and soundness supervision of federally-insured depository institutions. Capital requirements help ensure that such institutions have a sufficient buffer to absorb unforeseen losses without, in turn, imposing losses on depositors or the deposit insurance fund.

    Prompt corrective action is a capital-based approach to supervision. It aims to resolve capital deficiencies before they grow into large problems. It has applied to all FDIC-insured depository institutions since 1991 and the results have been good.

    Credit unions hold over $300 billion in federally-insured deposits. But unlike all other federally-insured depository institutions, they are not currently subject to capital requirements or to a system of prompt corrective action.

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    We recommend that Congress require federally-insured credit unions to have 6 percent net worth to total assets in order to be in good standing.

    We also recommend requiring credit unions to set aside, as retained earnings, a small percentage of their income if they have less than 7 percent net worth.

    Credit unions themselves recognize the wisdom of maintaining such capital levels. Ninety-six percent of credit unions have more than 6 percent net worth and those credit unions hold 98 percent of total credit union assets.

    We further recommend that Congress establish a system of prompt corrective action for credit unions. This system would be a streamlined version of that currently applicable to all FDIC-insured institutions, and would be specifically tailored to credit unions as not-for-profit, member-owned cooperatives.

    With the economy strong and credit unions flourishing, now is an excellent time to enact the safeguards proposed in the Treasury report. These safeguards involve little or no cost or burden to credit unions today, yet they could pay enormous dividends in more difficult times.

    Moreover, as credit unions increase in size and complexity and compete directly with banks and thrifts, Congress needs to ensure that comparable safeguards apply to credit unions' risk-taking. The safeguards applicable today fall short of being comparable.

    Let me turn now to the requirement that members of a credit union share a common bond. I'll start by describing what we at the Treasury see as the distinguishing characteristics of credit unions, the features that set them apart from banks and thrifts.
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    I'll then set forth six principles that we believe should guide policy relating to the common bond requirement. And I'll close by providing some general comments on what Congress may wish to consider in this area.

    Credit unions have five characteristics that, taken together, distinguish them from banks and thrifts. First, credit unions are member-owned cooperatives. Second, credit unions generally rely on unpaid, volunteer boards of directors.

    Third, credit unions do not operate for profit. Fourth, credit unions have a public purpose, which involves serving people of modest means. Fifth, credit unions generally have limitations on their membership, limitations based on some affinity among their members. These limitations constitute the common bond requirement.

    We see the common bond as an important part of the difference between credit unions and other depository institutions. And the affinity among a credit union's members, reflected in the common bond, reinforces credit unions' other defining characteristics.

    In considering how to deal with the common bond, there is a spectrum of possible options. At one end of the spectrum, you could require each and every member of a credit union to share a single, tightly defined common bond. At the other end of the spectrum, you could have no common bond requirement at all.

    We suggest that Congress consider the choices here in light of the following principles. First, reaffirm credit unions' role in serving people of modest means. Second, correct perverse incentives to abandon occupation- and association-based Federal credit union charters.
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    Here's what I mean. The Supreme Court's decision creates incentives for Federal credit unions with membership based on occupation and association to switch to other charters.

    They can switch to State charters, which in many cases have a looser common bond requirement, and in some cases, have no common bond requirement at all. Or they can switch to geographically-based Federal charters.

    But what would such changes accomplish? These changes will not increase the affinity among a credit union's members, and they may very well decrease it.

    Third, preserve a meaningful common bond requirement as a characteristic of credit unions. As I mentioned earlier, we see the common bond requirement as a distinguishing characteristic of credit unions, and one that reinforces credit unions' other characteristics.

    A sense of affinity among members encourages credit unions to serve all their members, even those whose business may not be profitable. For example, a hallmark of credit unions has been their willingness to make small unsecured loans.

    Yet the less members have a sense of affinity with one another, the less willing they may be to maintain such possibly unprofitable services in the face of other opportunities.

    A lack of meaningful membership restrictions may make credit unions highly competitive and flexible, but it may also make them increasingly like banks operating under another name.
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    Our fourth principle is to assure safety and soundness. With the rise of larger, more impersonal credit unions, the formal safeguards proposed in the Treasury report become all the more important.

    The fifth principle is to take account of market dynamics. Let me give you an example of those dynamics. Many credit unions offer technology-based services like ATMs and computer and telephone banking.

    The technology needed to provide these services involves sizable up-front costs. A larger membership base makes investments in new technology more economical by allowing a credit union to spread the investment over more members.

    Our sixth principle is to protect existing credit union members and membership groups.

    Whatever policy decision is made on the common bond issue will affect credit unions for many years to come. It will also affect the dynamic between credit unions and other financial institutions.

    We suggest, Mr. Chairman, that legislation dealing with the common bond requirement should do at least three things. First, grandfather all existing credit union members and membership groups added before the Supreme Court ruling, and permit those membership groups to add new members.

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    Second, include the safety and soundness reforms outlined in the Treasury report. And third, preserve a meaningful common bond requirement while providing reasonable flexibility for credit unions to include additional groups within their membership.

    We look forward to working with the committee to develop legislation.

    Chairman LEACH. I thank you very much, Mr. Carnell.

    And I'd like to turn to Mr. D'Amours, but with one 15-second inquiry. The Treasury has proposed this series of safety and soundness. Are you prepared to send up more detailed language to us on this subject if we ask for your assistance?

    Mr. CARNELL. We'd be glad to do that, Mr. Chairman.

    Chairman LEACH. Thank you. Fine.

    Mr. D'Amours.


    Mr. D'AMOURS. Thank you very much, Mr. Chairman.

    Chairman Leach, Ranking Member LaFalce, Members of the committee, it is a pleasure to appear here again before you today on behalf of the NCUA Board to discuss the urgent need for legislation codifying the National Credit Union Administration's policies on credit union field of membership.
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    As this committee well knows, on February 25, the Supreme Court decided against credit unions in the AT&T case. The vast majority of the groups affected by the Supreme Court decision—and that's fully half or more of the Federal credit unions—94 percent of them, representing 10 million credit union members, have fewer than the 500 members needed to sustain a viable credit union.

    These groups represent 10 million Federal credit union members. The assets, shares and loans of the Federal credit unions that would be affected by this ruling comprise more than 75 percent of the industry total.

    Even in the absence of an order to divest these groups, the Supreme Court ruling will undermine the safety and soundness of the Federal credit union system and will also limit access to credit unions for more than 50 million Americans who are employees of small businesses and who reside in low-income communities, the inner city or isolated rural areas.

    The entire NCUA Board is unanimously and strongly recommending quick passage of H.R. 1151, the bipartisan Credit Union Membership Act, which has in excess of 185—which has 185, according to Congressman Kanjorski—cosponsors as of today.

    Whatever the exact shape the lower courts give to the Supreme Court ruling in a final order, the outcome is certain to inhibit credit unions' ability to achieve the purposes of the Federal Credit Union Act in the following ways.

    First, credit union safety and soundness would suffer. Federal credit unions have remained healthy and have grown because they invested substantial capital in achieving economic strength and diversity through the addition of select groups of members.
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    The changing nature of our national and world economies make it reasonable to expect continued downsizing, mergers and the elimination of companies and industries. Deprived of the option to diversify their membership, many credit unions over time will suffer unsustainable losses and millions of credit union members will lose needed services.

    If Federal credit unions are not permitted to add new members from existing groups or add new groups, the financial viability of a large proportion of federally-chartered credit unions is in question.

    Second, millions of employees of small businesses would be denied access to credit unions. Small businesses are usually defined as those having fewer than 500 employees, which also happens to be the number NCUA has found over the years to be the critical mass needed to sustain credit union viability.

    Since 94 percent of the employee groups currently served by multiple group credit unions have fewer than 500 employees, it is clear that NCUA's multiple-group policy allows credit unions to serve groups who might otherwise be unable to access credit union services.

    Third and finally, multiple-group credit unions would be unable to expand into low-income areas. A policy adopted by the NCUA Board in July of 1994 allowed larger, healthy credit unions to directly reach out into low-income, inner city and rural areas by adding these communities to their fields of membership and opening branches there.

    NCUA policy was invalidated by the Court of Appeals in 1996 and remains invalid under the Supreme Court's ruling.
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    It is important to understand that credit union uniqueness is based not on asset size or whom a particular credit union is able to serve, but on the organizational and operational structure and mission of credit unions.

    Every credit union is a member-owned, democratically controlled, not-for-profit cooperative. Operating in a cooperative system, the larger, more liquid institutions are able to provide resources to the smaller, more needy elements of the system.

    Credit union policies are set by unpaid board members elected by the membership. Each credit union member/owner gets one vote regardless of how many shares he or she has on deposit.

    Credit unions are the only financial institutions chartered with the express social mission of making credit available to people of small means and teaching the benefits of thrift.

    Nor are credit unions with multiple employee groups necessarily the largest. As has been pointed out by Congressman Kanjorski, I believe, the largest credit union in our country serves only one employee group.

    NCUA's 1982 decision to allow Federal credit unions to diversify their fields of membership increased the safety and soundness of the credit union system. It allowed credit unions to adapt to profound changes in the American economic landscape. It empowered low-income people by supplying fair access to our mainstream economic system at reasonable prices, and gave many more Americans the freedom to choose to receive financial services from their member-owned cooperatives.
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    In 1934, Congress enacted the Federal Credit Union Act to promote a safe and sound credit union system that would flourish and provide low-cost financial services to people of small means and give freedom of choice to other people who desired such services.

    We believe that modification of the common bond provision is perfectly in tune with this congressional intent.

    We at the NCUA Board therefore urge the quick enactment of an unamended H.R. 1151 to allow all consumers the freedom to choose credit union service. We urge the quick enactment of H.R. 1151 to alleviate uncertainty and ensure a continued safe and sound credit union system.

    And finally, we urge the quick enactment of H.R. 1151 to restore NCUA's policies allowing access to credit union services for employees of small businesses and for residents of low-income neighborhoods.

    I thank the committee for its attention to this issue and for the time it allowed me.

    Chairman LEACH. Well, thank you very much, Norm. We appreciate your testimony.

    We'll now hear from Mr. Feeney. And let me make an announcement to the committee. There is a vote pending, and what I'd like is for Mr. Feeney to present his testimony and then we will recess until 1 o'clock or shortly thereafter.
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    Mr. Feeney.


    Mr. FEENEY. Mr. Chairman, distinguished Members of the House Banking Committee, I sincerely appreciate the invitation to appear before you this morning.

    As Chairman of the National Association of State Credit Union Supervisors, the professional association representing this nation's 48 State and territorial credit union regulators, I welcome the opportunity to discuss credit unions and the need for Congress to respond to the recent decision by the United States Supreme Court.

    The perspective I bring here to this committee meeting this morning comes not only from being chairman of the representative body of the various State regulators, but also from being the Commissioner of the Texas Credit Union Department.

    Like my counterparts in other State governments, the Texas Credit Union Department is obligated to charter, regulate and supervise Texas-chartered credit unions. The sovereign State of Texas holds my department solely responsible for the supervision of Texas credit unions and charges my agency with vigorous enforcement of State laws.

    The recent Supreme Court decision has major implications for Federal credit unions and their members. But of utmost concern to State credit union regulators is the fact that the decision seriously impacts the credit union dual chartering system.
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    It is a major premise in my remarks this morning that the dual chartering system, which allows for regulatory and supervisor diversity, is a national asset and must be preserved at all costs.

    NASCUS has steadfastly supported the promotion of a strong and healthy dual chartering system and would like to stress the favorable impact that our system has had on the financial services industry in this country.

    This favorable impact can be seen not only from the perspective of the credit union movement, but equally from the perspective of the banking industry. This unique State-Federal partnership is unquestionably the finest system of distributing financial services in this world.

    Many of NASCUS's members are not only the primary regulator of State credit unions, but also the primary regulator of State-chartered banks. As such, the Nation's State credit union regulators are uniquely positioned to provide a specific input on the issues now before this committee.

    We believe the evolution of the credit union system supports that it is appropriate for Congress to look to the States when making its decision about the future of the Federal credit union system.

    Across the Nation, State legislatures have clearly defined a credit union and who is eligible for membership. This is noteworthy because over the past decades, State legislatures in a large majority of the States have adopted multiple common bond policies to permit greater access to credit unions and to strengthen those credit unions.
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    I suspect the rationale for the multiple common bonds concept is as varied as are the State legislatures. In my mind, regardless of what drove the lawmakers to the conclusions they made, the conclusion is especially sound.

    Multiple group field of memberships have permitted credit unions to diversity their memberships and their sources of income more fully, have reduced the impact of economic shock in a particular employer, and have provided a greater margin of safety to the credit union and its share insurer.

    Just as farmers have warned us about putting all of our eggs in one basket, regulators have come to understand that there is generally value in mixing employers in the field of membership of credit unions. Diverse employers have ensured the economic viability of credit unions and their local economies.

    There is evidence that this public policy strengthens the economic elasticity of credit unions, rather than diminishing their long-term viability.

    As a State credit union regulator, I claim a certain enlightened bias in favor of a strong, responsive dual chartering system. Credit unions have been successful in large part because of the healthy system of Federal and State credit unions. This system has led to improvements in each sector.

    The Supreme Court decision weakens the Federal system, will cause it harm, and threatens great damage to the competitive harmony of the dual chartering system itself.
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    We believe Congress should act quickly and decisively. NASCUS urges Congress to clarify Federal law and allow Federal credit unions to serve diverse fields of membership. And I thank you, Mr. Chairman.

    Chairman LEACH. Well, I thank all three of you, and we will now recess pending the vote. And I would ask if you could return, and we will ask questions of you after the vote. And we will also recess until 1 o'clock.


    Chairman LEACH. The hearing will reconvene.

    First, I want to thank all three panelists for their very thoughtful commentary, and I want to particularly thank the Department of the Treasury for presenting a statement that indicates that it is prepared to make some constructive suggestions on how credit unions might be made more safe and sound as we look at this whole issue.

    Are there questions of our panelists?

    Mr. McCollum.

    Mr. MCCOLLUM. I do have a couple of questions that come to mind, perhaps best directed to Mr. D'Amours or Mr. Feeney. We have some testimony that we are expecting coming up here shortly from another panel, and one of the witnesses has cited a couple of examples with regard to credit unions that I wanted to ask about.
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    One of them cites U.S. First Federal Credit Union in California having a program to sign up automobile dealerships to participate in its discount loan program in which it is stated here in this advance text of the testimony, it can fax to U.S. First, the dealership can, the application for a loan of anyone who walks in off the street.

    If U.S. First decides the borrower qualifies for the loan, the dealership signs the borrower for membership in a specific common bond group of U.S. First that anyone can join. And the first year's membership fee in that common bond group is paid for by the credit union.

    And the question, of course, is, is this an appropriate role for credit unions to play? The other is that this testimony suggests that this is not uncommon, that similar situations with auto dealers exist with credit unions in a lot of the country.

    Can you respond? Maybe I should ask Norm, you, that first.

    Chairman LEACH. Excuse me. If you'd pull the microphone closer.

    Mr. MCCOLLUM. Is this, in fact, a common practice? Are you familiar with this particular case?

    Mr. D'AMOURS. Thank you. Well, Congressman, I know that occurs at both the State and the Federal level. Is this a State or a federally-chartered credit union?
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    Mr. MCCOLLUM. Apparently, it's Federal. It says U.S. First Federal Credit Union in California.

    Mr. D'AMOURS. OK, well, then it's Federal. The indirect lending, as it is called, is generally being practiced by all financial institutions and some number of credit unions have availed themselves of that practice.

    But the statutory requirements of credit union membership are adhered to, at least they should be being adhered to, as this practice is being implemented.

    Mr. MCCOLLUM. Well, the reason that this witness is going to point this out, apparently—and again, I'm reading from—I have not talked with the witness, I'm just reading from the text here in front of us.

    He says that at this particular dealership that he cited, that a doctor, a lawyer, anybody of means, can use the credit union in this way to buy a Mercedes or a Lexus, they are not a member of the credit union for any other purpose after the one year necessarily, and in fact, older cars, pre-1993, are excluded from the arrangement.

    All of that sounds like the point being made is that it appears that we are not serving—or that credit union, is not serving people of small means. And the issue is, is that common for credit unions to have a practice where they serve people regularly who might well be of substantial means?

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    Mr. D'AMOURS. Well, first of all, with regard to the specifics of that case, I wouldn't draw any conclusions without availing myself of much more information than either of us currently have.

    My guess would be if that is happening, that it's a community-based credit union, so that membership in that credit union would be available to anyone living in the community, whether one is a doctor or a lawyer or a janitor.

    There is nothing wrong, Congressman, as I said in my testimony. Credit unions serve people of all income levels. The credit union system would not work very well if its service was limited to people of small means.

    You need a certain amount of liquidity for a credit union to do any good. It's people of means working cooperatively with people of small means that makes the system work.

    Mr. MCCOLLUM. But what do you think about the idea of somebody being able to go in, assuming this is true. We have to be hypothetical, because I realize you don't know whether this case is real or not.

    But assuming it's true, that somebody can go to an auto dealership and there's an arrangement with a credit union for anybody that walks in the door to that auto dealership to get their loan through that credit union by the credit union signing that person up as a member, presumably just for that purpose alone. Isn't that a problem with a common bond concept and should we be concerned about that?

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    Mr. D'AMOURS. In the cases that I'm familiar, where such indirect lending occurs, the credit union is involved in the decisionmaking process by which that loan applicant becomes a member.

    Mr. MCCOLLUM. Mr. Carnell, do you see a problem with that in the common bond sense? The kind of example I just gave?

    Mr. CARNELL. Again, as has already been recognized, I don't know the specific facts here.

    Mr. MCCOLLUM. I realize that.

    Mr. CARNELL. But taking it as you put, as a kind of hypothetical——

    Mr. MCCOLLUM. Assuming it was true. I don't know either. I'm just reading from the testimony. I have no knowledge of this case.

    Mr. CARNELL. If the only bond among the members is a willingness to pay $5.00 or to have $5.00 paid on your behalf for one year in order to enter into a commercial transaction, that does not suggest a real sense of affinity among the credit union's members.

    That's not the way credit unions have historically operated and it's not the way most credit unions, I believe, operate now. It would concern me.
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    Mr. MCCOLLUM. And does it concern you that there are people of means who are using credit unions to the extent they are, that Mr. D'Amours said that should not be a problem—in fact, that it is very necessary, despite this small means language in the original charter, the language in the statute.

    Do you have a problem with that?

    Mr. CARNELL. I'd put it this way. The Administration sees credit unions' central public purpose as being serving people of modest means. That doesn't mean serving only people of modest means. And I think Chairman D'Amours is correct that it makes sense to have other people in the group.

    So I think what you would want to look at in that respect is how good a job does the credit union do of serving people of modest means. Are its loan and deposit products affordable to people of modest means? Does it reach out to them? But that doesn't mean that credit unions should consist only of such people.

    Mr. MCCOLLUM. Thank you. Thank you, Mr. Chairman.

    Mr. D'AMOURS. Congressman McCollum, if I may.

    Mr. MCCOLLUM. Yes, Mr. D'Amours.

    Mr. D'AMOURS. I will be happy to look into this further and send you more information, if you would like.
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    Mr. MCCOLLUM. I would appreciate it if you would. In fact, you might want to look at the testimony that's being submitted by the other witnesses because a number of specific examples I couldn't begin to get into are given. And it would be helpful to us, because we are going to have to figure out what the policy is, and I would appreciate it.

    Mr. D'AMOURS. I will see to it that you get some information on this, Congressman McCollum.

    Mr. MCCOLLUM. Thank you.

    Chairman LEACH. Well, thank you, Mr. McCollum.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    Mr. D'Amours and Mr. Feeney, you heard Treasury articulate some guiding principles, six in number. Do you agree with all six? And if not, which of the six guiding principles might you disagree with or at least want further clarification of?

    Mr. D'Amours.

    Mr. D'AMOURS. I wonder, Congressman LaFalce, if you'll give me a quick recap of the list before I agree or disagree with all six.
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    Mr. LAFALCE. I was assuming that you had heard them and studied them over the break. We'll go on.

    Mr. Feeney.

    Mr. FEENEY. Congressman——

    Mr. LAFALCE. You want the same answer as Mr. D'Amours?

    Mr. FEENEY. In general, we don't have an objection to the Treasury's recommendation. We would be concerned, however, if those recommendations would supersede and/or interfere with——

    Mr. LAFALCE. Let me be more specific. Let me focus in on one of them. They recommend that we preserve a meaningful common bond as a distinguishing characteristic of credit unions.

    Now, Mr. D'Amours and Mr. Feeney, do you think there should be a meaningful common bond or a nonmeaningful common bond? Which of the two would you favor, a meaningful or a nonmeaningful?

    Mr. D'AMOURS. I favor common bond, such as common bond as has existed since the creation of the credit union movement.

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    Mr. LAFALCE. We're getting to the nub of the problem. Some might consider that nonmeaningful.

    Mr. D'AMOURS. Well, common bond—I would say, Congressman LaFalce, that I do not subscribe to Treasury's interpretation of common bond. I think they might have read different history books than I read about the common bond.

    Mr. LAFALCE. Well, I'm not sure that I've read or heard Treasury's definition of common bond yet, other than meaningful. And that's why I'm using the word ''meaningful.''

    Mr. D'AMOURS. Well, perhaps you should ask——

    Mr. LAFALCE. Well, this is—the debate is going to revolve around this issue, so let's come to grips with it fairly quickly.

    Mr. Carnell, no one will assent or disagree, I suspect, with having a meaningful common bond until they have some idea of what that means. What do you mean by it?

    Mr. CARNELL. By common bond, we mean a sense of affinity among the——

    Mr. LAFALCE. No, not by common bond, by meaningful common bond.

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    Mr. CARNELL. OK. I thought to say that it's meaningful, it would help to start to say what the ''it'' was.

    Mr. LAFALCE. OK, good.

    Mr. CARNELL. So by common bond, we are referring to a sense of affinity among the credit union's members. For example, just at the very least, it means that those members would see each other in some different respect than people whose only relationship to each other was being customers of City Bank or Riggs Bank, for example.

    Mr. LAFALCE. All right. So we have a common bond meaning a sense of affinity, and a meaningful common bond meaning, I assume, a meaningful sense of affinity.

    Mr. CARNELL. Yes.

    Mr. LAFALCE. What does that mean?

    Mr. CARNELL. Well, at the very least, it means that the common bond is not just a legal fiction where you say, ''OK, well, we found something that's called a common bond; there's three people, there's somehow a connection between them, throw them in along with 2,000 other groups of people that don't have any connection with each other, other than just being customers of an institution providing financial services.''

    So traditionally, one of the strong principles of the credit union movement is mutual aid. This is the notion of mutual self-help among credit union members. And so part of what I have in mind with saying a meaningful common bond is a sense of affinity with other people such that one is going to be willing to support mutual aid through the credit union to the other people.
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    And some of the examples I gave in my testimony earlier were credit unions' willingness to make the $300 loan that most other financial intermediaries aren't interested in.

    Mr. LAFALCE. Well, I've suggested, too, that there has to be a common bond. I don't know that I've used the word ''meaningful,'' but certainly that's the thrust of it, and I suggest that it could be multiple. But there also, if there can be multiple, ought to be within certain restrictions.

    And I'm not sure exactly what those restrictions should be, but I would think those restrictions ought to be, well, for example, within a certain defined area. The question is, what's a defined area? Are you talking about a 25-mile radius? A 50-mile radius? A 75-mile radius? Or are you talking about a whole State? I would not be. Are you talking about the Northeast? I would not be.

    Are you talking about a common bond, meaning, well, you use a telephone, I use a telephone, therefore, we've got a lot in common, we can really talk the same language over the same kinds of phones. Therefore, we, because of the fact we have a phone, can belong to the same credit union. I would suggest that's not a meaningful common bond.

    Mr. D'Amours, would you think that the fact that an individual owns a telephone and uses a telephone would establish a meaningful common bond with somebody else who owns and uses a telephone? Therefore, they could be part of the same credit union for that reason.
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    Mr. D'AMOURS. No, I do not, Congressman LaFalce. And over the history, if anybody would look at the history of credit unions and the history of the NCUA's application of principles, one would find that the NCUA has rejected such loose definitions of common bond.

    But I do disagree with the Treasury on this basic assumption that common bond is the distinguishing, or a major distinguishing characteristic of credit unionism. It is one characteristic.

    As I said in my testimony, it was an organizational tool in the early days which was codified when the 1934 Act was passed. But all it did was reflect the economic realities of its time.

    Mr. LAFALCE. Well, let's focus in on this a little bit, because, first of all, if we're going to take the common bond approach, we'd better give some definition to what we're talking about so it's not loose.

    You don't want something loose. Mr. Carnell, you want something meaningful. Where do we come to closure between loose and meaningful, with respect to common bond? But my concern is that common bond is not the only way to achieve credit union status.

    I mean, we could go to community-based, for example. And how do you define ''community'' right now, Mr. D'Amours?

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    Mr. D'AMOURS. People who live, work, worship, interrelate within a geographic boundary, have similar interests, go to the same——

    Mr. LAFALCE. All right, now what is the geographic boundary?

    Mr. D'AMOURS. Well, it's vague, Congressman, and these are issues——

    Mr. LAFALCE. How vague is it right now?

    Mr. D'AMOURS. Well, we have granted fields of membership expansions two or three counties in breadth, because we have determined——

    Mr. LAFALCE. How many miles would these two or three counties include?

    Mr. D'AMOURS. Oh, I don't——

    Mr. LAFALCE. Are we talking about 25? Are we talking about 225 miles?

    Mr. D'AMOURS. I'm sure that we've granted fields of membership that are much greater than 25 miles. I don't have any numbers that spring to mind right now. There are varying sizes.

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    But I would suggest, Congressman LaFalce, and I know of your great interest in this and that you want to work to resolve some very important questions that you're raising. And I would be delighted, and our agency would be glad to work with you on this.

    I just hope that because of the urgency of the matter before us, that we don't lose sight of the importance and the emergent nature of the need to do something like H.R. 1151. As Congress Kanjorski said earlier, to solve that problem and then we could work on these others.

    Mr. LAFALCE. Yes. My problem, Norm, is that if we do that right now, we'll never get to the other problems. This is the time, this is the moment. If we just permit a future that's as unlimited as the past, we will never be able to come to closure on any of these other issues as a political matter.

    And that's why I think we are either going to have to—I also don't think we can take on the world. I don't think we can take on financial modernization. But at least there ought to be closure on a number of these relevant issues.

    Let me go to one more area, occupationally-based. Now I hear different rumors and I don't know what the facts are. Some individuals say, well, you know, if you are an employee of this company, you can join the credit union. Obviously, if you are the spouse of an employee, you can join. If you are the dependent of an employee, you can join. And others say, yeah, and if you are a customer, you can join. Or if you are a 25th cousin, once removed, you can join.

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    Who can or can't join an occupationally-based credit union?

    Mr. D'AMOURS. It's limited. Well, depending on the kind of credit union, if it's a geographic, occupational or associational credit union, it would be different standards. But yes, we do, and I think for good public policy purposes, allow family members to belong to the same credit union. But we don't get to those extents——

    Mr. LAFALCE. But Mr. D'Amours, we are all members of the same human family, so, you know, the question is what is a family for purposes of credit union membership definition?

    Mr. D'AMOURS. Every credit union, Congressman, I'm told, defines it as a member of the immediate family. We don't allow these extensions that you've alluded to.

    Mr. LAFALCE. You say every credit union defines it. Is this something then that is left up to the definition of the credit union, or is this something that is defined by the regulator of the credit unions?

    Mr. D'AMOURS. Both. We supervise, and we would not allow an extension beyond immediate family membership. But the credit union makes the initial determination. The credit union may not——

    Mr. LAFALCE. Is the word ''immediate'' in your regulations?

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    Mr. D'AMOURS. Yes.

    Mr. LAFALCE. Thank you.

    Mr. D'AMOURS. If I may, Congressman LaFalce, one of the difficulties in dealing with this right now, and thinking that we have to deal with now when we are in an emergent situation—and I have looked at your bill, Congressman LaFalce, and it raises many good points and many good ideas. But the difficulties in dealing with, say, Navy Federal Credit Union and other credit unions that have a million and a half members all over the——

    Mr. LAFALCE. They're grandfathered, aren't they?

    Mr. D'AMOURS. But still, that situation could replicate itself. Putting an arbitrary geographic limit could deprive people who badly need services.

    Mr. LAFALCE. But we don't put an arbitrary or any geographic limit on something like Navy, do we?

    Mr. D'AMOURS. Well, I'd have to maybe look at your bill again, Congressman. I'm sure you don't do anything that isn't well thought out.

    Mr. LAFALCE. I'm not sure about that.

    Mr. D'AMOURS. And ethical and proper. But there are difficulties that present themselves, and adding geographic bases, restrictions.
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    Mr. LAFALCE. Well, we can't have geographic bases to everything. And something like the Navy, we would not. Thank you.

    Chairman LEACH. Well, we've got a new standard to disagreement. If one says it's well thought out, difficult and proper, it means I disagree.

    Mrs. Roukema.

    Mrs. ROUKEMA. Mr. LaFalce just asked most of my questions. But I do want to go back and ask perhaps for further clarification from Mr. Carnell of Treasury, because I'm still not sure I understand what the Treasury's position is on this.

    I had the same question that Mr. LaFalce had about permitting credit unions to expand their fields of membership to include new groups. Your testimony sounded internally contradictory with respect to grandfathering and then allowing new groups. It wasn't precise. I'm not quite sure what Treasury's position is. It sounded as if Treasury supports what I think was a very grand and open-ended definition supported by Mr. D'Amours and the NCUA.

    Could you be more precise? And then, as we go on from there, I want you to amplify on the safety and soundness issues and the merger questions. It seems to me that we have to be more precise in terms of safety and soundness with respect to any expansion of common bond definition.

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    So I'd like you to address these issues with more precision and clarity.

    Mr. CARNELL. Certainly.

    Mrs. ROUKEMA. Treasury's position seems surprisingly similar to what Mr. D'Amours has said, and from my point of view, I don't think that's what was intended.

    Mr. CARNELL. It would be more interesting if it sounded like we were disagreeing.

    Mrs. ROUKEMA. No, I think it would be more interesting if we understood Treasury's position, which I understood was to be quite distinct from NCUA.

    Mr. CARNELL. Fair enough. To start out, we are proposing to grandfather all credit union members and all credit union membership groups, regardless of whether or not they comport with the common bond as articulated by the Supreme Court and regardless of whether or not they would comport with the common bond as it might be modified by this committee. So that's something independent of the other things.

    The notion is that the NCUA and the credit unions and the credit union members all acted in good faith under an interpretation of the law that had been in place since 1982, and it does not make sense to overturn that or to have people be in uncertainty about their relationship to their credit union.

    Mrs. ROUKEMA. That much was clear. What about expanding the field of membership—extending it?
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    Mr. CARNELL. All right. You are talking about—when you say ''extending'' it, are you talking about going forward?

    Mrs. ROUKEMA. Yes.

    Mr. CARNELL. OK.

    Mrs. ROUKEMA. You indicated that you supported a grandfathering of membership groups as well as providing flexibility for adding new membership groups. I don't quite understand that.

    Mr. CARNELL. OK. What we've done here is to articulate six principles that are to some degree in tension with each other, and I will acknowledge that up front. But we think it is the right tension. It's posing the right questions and pushing in the right directions.

    For example, there is tension between market dynamics and a meaningful sense of affinity. They can be reconciled, but let me speak to that tension for a moment. Market dynamics cut in some different directions here, but in general, they suggest that there should be more freedom to add memberships to a credit union than would have been allowed 60 years ago or even 30 years ago.

    And some of those have already been touched on. We see plant closings, we see more employee turnover. There was a time when someone might enter the workforce and expect to work for a single company and belong to a single credit union for their working life. And there's a lot more flux now and it's logical that credit unions would want to be able to add new members to offset losses there.
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    In addition, the growth of technology-based financial services is changing the economics of financial services generally. If you went back to the economic literature of 10 or 20 years ago, and you looked at what's the optimal size for a bank, or more specifically, what's the size of a bank beyond which you don't get economies of scale?

    They would suggest a size that was less than a billion dollars. It might be a $100 million; it might be half-a-billion. What we're seeing now is significant consolidations in financial services. This may reflect a lot of different things, but I think one of the things that it definitely does reflect is that information technology creates significant economies of scale.

    You have to make a large, fixed up-front investment and it then means that if you can spread that investment over a larger customer base, it's going to make economic sense.

    So what this suggests is that the old standard where you would expect that you could form a credit union with just 500 people in the eligible membership—and that's the NCUA's official guideline right now—is unrealistically low, and that we have to provide more leeway.

    And also, it suggests that the old definitions where you're expecting every member of the credit union to share the same common bond very tightly defined is too strict.

    Mrs. ROUKEMA. Then let me ask you how you would address the concerns of a small community bank or a local savings bank of sorts. Why should banks and credit unions be treated differently with respect to taxes, mandatory safety and soundness requirements, as well as community reinvestment and other regulatory requirements?
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    Why, then, in the grand scheme of things, if banks and credit unions are so similar, should Treasury's point of view on the tax question, as well as the community reinvestment be different? It appears very inconsistent.

    Mr. CARNELL. You raise a lot of different issues there. Let me take them in turn.

    I believe the Treasury's proposal would really provide comparable safety and soundness requirements. It fills in the gaps that exist right now in the credit union statutes. For example, where credit unions don't have capital requirements, there's not a statutory system of prompt corrective action.

    So I think our proposal would achieve parity in terms of having comparable standards apply to both, but in each case, standards that are tailored to the type of institution in question and are sensitive to the ways that those are different from the other institutions.

    The community reinvestment is a more complicated question. The answer that credit unions have historically given there is that they are limited to serving people within their common bond, so how can they have the same expectations.

    Mrs. ROUKEMA. I know. But that's no longer relevant. We're looking forward and considering permitting credit unions to expand their field of membership significantly, such as you've outlined. And in that new world, in the new world, how would Treasury evaluate CRA compliance by credit unions?
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    Mr. CARNELL. Well, I think the issue still comes up in different ways, depending upon whether you're talking about an associational or occupational credit union on the one hand, or a geographically-based credit union on the other.

    Our basic principle is that credit unions have a public purpose of serving people of modest means. And I think we've proposed that Congress reaffirm that in that legislation. There's different ways you could carry that out. CRA would be one way to carry it out; it's not the only way.

    And also, when you say CRA, it means different things to different people. For some, it might mean the general idea of encouraging an institution not to cherry-pick the affluent among its potential customers. To others, it might mean specific procedures, rules, and so forth.

    And so we certainly think that there should be an emphasis on making sure that people of modest means within the field of membership get served.

    I think the case for something that might look a little more like CRA would certainly logically be stronger in the case of geographically-based credit unions. Again, whether we're talking about something that would really look like CRA, or some more generalized expectation not to cherry-pick, and a positive expectation to reach out to people, I'm not in a position to say right now.

    Mrs. ROUKEMA. The tax question? My time is up, but can you address that issue?
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    Mr. CARNELL. The Administration has not proposed taxing credit unions.

    Mrs. ROUKEMA. And if credit unions are permitted to expand their field of membership, Treasury would maintain that same position?

    Mr. CARNELL. Well, we would have to take a look at the full range of circumstances here, but we have been consistent over the last five years in not proposing credit union taxation.

    Mrs. ROUKEMA. Thank you very much. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mrs. Roukema.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman. You know, there's all sorts of folks who are full of good intentions right now with regard to what is going to happen, but the second shoe may drop when they suggest that maybe current members, you know, maybe some of them are ineligible.

    I mean, that could happen in terms of the Court case, couldn't it, Mr. D'Amours?

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    Mr. D'AMOURS. I'm sorry?

    Mr. VENTO. Well, my point is that the second shoe may drop in the Supreme Court decision in terms of what the remedy is with regard to the decision that was made in February.

    Mr. D'AMOURS. The Supreme Court—I'm not sure I heard every word you said, Congressman—I don't know if it's the audio in here—but the Supreme Court case, if it's not quickly reversed, is going to result in possibly some members being disenfranchised.

    It's going to certainly result in people who work for small businesses, some 50 million people, being ineligible for credit union services because they don't have the 500 members that are necessary for the economies of scale required to sustain a credit union.

    And it's going to certainly result in people in inner cities whose only chance at fairly priced financial services are credit unions, from receiving those. In 1994, shortly after I joined the agency, we put into place a policy that made it possible for credit unions to branch into underserved areas in the inner city or in isolated rural areas. And that was beginning to work wonderfully, but it was short-cutted two years after it began to be implemented by the Circuit Court of Appeals, Judge Ginsberg's decision.

    So these are emergent matters that need to be taken care of. And if we don't do it quickly, as Congressmen LaTourette and Kanjorski have suggested in their testimony, there are real people who are going to be deprived of their only chance at fairly priced financial services.
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    And as the Treasury just said, allowing NCUA to serve those people of small means that they are statutorily required to serve.

    Mr. VENTO. Well, I think that the concern is, though, that it isn't just this single case, either. There have been a series of court cases. If we were to start splitting hairs again with regard to membership here, trying to alleviate and remedy the problem that the Supreme Court put before us in terms of its interpretation of common bond, we are very likely to end back up in additional court cases.

    Mr. D'AMOURS. Well, I think that if Mr. Kanjorski and Mr. LaTourette's bill were to pass, that would resolve the problem and obviate any further court decisions along these lines.

    Mr. VENTO. Yes, Mr. D'Amours, I understand that. The suggestion, of course, is to try and define this and redefine what community bonds and community credit unions are. Which are they? I don't know if the community credit union—I don't know if that's really been—the decision here has been made on an occupational basis, not on a community.

    Mr. D'AMOURS. Right.

    Mr. VENTO. So the issue, of course, is to try to go back in and to modify the definition of community, to modify the other definitions. There's been a lot of suggestions here in terms of modifying definitions.
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    But they're very likely to lead us right back into another court case, isn't that correct?

    Mr. D'AMOURS. Well, I would suggest, Congressman Vento, that if the LaTourette-Kanjorski Bill were to pass, the pressure to make those kinds of definitional changes would disappear and you would be——

    Mr. VENTO. Well, obviously, if we could—but the issue is that there are many other alternatives to just that one bill that are being discussed, and I just want to point out that some of those will lead us right back to where we are today. That's all I want to point out.

    Mr. D'AMOURS. And I——

    Mr. VENTO. You agree.

    Mr. D'AMOURS. I agree with that, and that's why we need to pass it in an unamended form, Congressman.

    Mr. VENTO. Well, we need to pass legislation that will recognize that fact, that we don't want to be back here again with another solution. I think that's important.

    Mr. D'AMOURS. I understand your question now, and your answer is absolutely, yes.
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    Mr. VENTO. The way Alexander solved the Gregorian Knot problem was one answer with regard to common bond. As I said, I think, that no one else has that test, and Mr. Carnell, when you commented about paying the $5.00 to join, I think that's how most of us joined various credit unions at various times.

    And given the dynamics in terms of the world of work and the change of occupations, it's very likely that we're going to have this problem over and over again with occupations.

    There was some comment about various laws. For instance, credit unions are covered by HMDA. They're covered by Fair Housing, they're covered by TILA, they're covered by TISA.

    Mr. D'AMOURS. Fair Lending.

    Mr. VENTO. Yes. So they're covered by all of these, and there are remedies. If there is a violation of those, they are subject to remedies, are they not, Mr. D'Amours?

    Mr. D'AMOURS. Yes, they are. As a matter of fact, the Fair Lending, for instance, would, properly applied, cover a lot of the discriminatory practices that were alluded to earlier in occupational and associational credit unions.

    Moreover, our agency issued for comment back last October a community service amendment that would have applied credit union specific community service standards upon credit unions that served geographic areas, to assure that they are in fact and indeed reaching out to and serving everybody in those communities.
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    Comments on that standard have closed and it was scheduled for a few board meetings. I think it will come up a week from Thursday.

    Mr. VENTO. You're telling us you have a CRA-like policy that will apply to community-based credit unions?

    Mr. D'AMOURS. Yes, sir.

    Mr. VENTO. And the fact is, though, that unless there is a change—in fact, isn't there a contradiction between suggesting that you ought to have CRA apply to occupationally-based credit unions, and at the same time, limit the membership?

    Mr. D'AMOURS. Yes, Congressman. I would suggest—Congressman Kennedy isn't here, but as I understand it, in July of 1996, his State legislature approved a revision to their statute applying CRA to State-chartered credit unions, because they were having problems applying it to occupational and associational credit unions and the legislature has passed legislation making it possible for the regulator, as I understand it, and I hate to speak for—maybe our State regulator friend can help us on this—but I believe that applying CRA to occupational, associational credit unions is, first of all, unnecessary, and second, extremely difficult.

    As far as communities go, we can. And we have out for comment, comments that would, I think, resolve the questions most Members might have about credit unions serving all of their members.
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    Mr. VENTO. Just to reclaim my time, just to say that I think you need to look at a solution to that in terms of how it will fit. Obviously, the idea of using a CRA-like mechanism that applies to community or to other financial institutions doesn't exactly fit occupational.

    I do think that there are certain tests outside of basically the discriminatory suits that could be brought in terms of disparate treatment, and I think we need to have that type of—I think that type of guidance, that type of briar patch is the place that credit unions should be willing to be put into.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you, Mr. Vento.

    Mr. Bachus.

    Mr. BACHUS. Thank you.

    Assistant Secretary Carnell, you deal with a wide range of financial institutions and are familiar with them. Do you believe that the local small banks have a disadvantage with credit unions, with the small credit unions?

    Mr. CARNELL. You're saying small banks versus small credit unions?
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    Mr. BACHUS. Yeah. Are small banks, local banks, are they disadvantaged in competing with small local credit unions?

    Mr. CARNELL. They certainly say they are.

    Mr. BACHUS. Well, have you reviewed industrial data? I mean, I'm sure you see a lot of industrial data. What do you see?

    Mr. CARNELL. I would not be able to—I'm not in a position to make a comment in terms of data on that. Some of the things people bring to light are differences in regulation and in other rules that apply to them.

    Mr. BACHUS. You know, in the difference on regulation, I know there was an Independent Banking Association study that said that their cost of compliance was 24 percent of their net profit. Are you aware of that?

    Mr. CARNELL. Is this for a community bank?

    Mr. BACHUS. It was the Independent Banking Association. Have you seen that study?

    Mr. CARNELL. I have seen figures like that. I would want to note that the ability to do different definitions of cost of compliance is enormous. For example, do you count the requirement to keep reserves at the Federal Reserve Bank as a compliance cost? What else do you count as a compliance cost?
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    There are some things people do that comply with regulations that would make business sense to do anyway.

    Mr. BACHUS. Yeah, I guess where I'm coming from is you seem like you would be in a perfect position to know whether there is a competitive disadvantage due to the difference in regulation and taxation of your small banks, to either say that that argument has basis or that it doesn't, or that the jury is still out.

    Mr. CARNELL. We certainly have been looking at these issues. We have sought, in general, in the Treasury's approach to this to focus on the question of what's in the best interest of America's consumers.

    There is an awful lot to look at and to listen to in terms of the points that different kinds of financial institutions make about how their regulation compares to their competitors and whether or not the playing field is level.

    Our concern was that if we got too much into that, you are really sort of deep in the undergrowth of people asking you to referee competitive contests here. And we really do want to put the focus on making affordable competitive services available to people.

    Mr. BACHUS. You understand how that would be important, that there not be competitive disadvantage.

    Mr. CARNELL. It's certainly a perfectly reasonable request of a business that the Government not give their competitors an advantage.
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    Mr. BACHUS. If I supplied you a copy of that 1993 study by the Independent Bankers, would Treasury make some comment back to me?

    Mr. CARNELL. We'd be glad to.

    Mr. BACHUS. Thank you. What is the reaction of the credit unions to your proposal?

    Mr. CARNELL. We have had very positive responses from the credit unions to our proposal. Actually, let me be more specific about the proposal.

    When I spoke this morning about the common bond, that's the first time the Treasury has spoken on the substance of the common bond. We had the Supreme Court, the litigation pending in the different courts, then before the Supreme Court, and we had a decision two weeks ago.

    So the part that we've had a chance to talk to people about and get feedback on is recommendations for various kinds of legislative and administrative action to improve credit union safety and soundness. And the response has been very positive.

    Mr. BACHUS. How about the central liquidity facility? Have they said that that might——

    Mr. CARNELL. The response has been much less positive to that. Let me say something about that.
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    Mr. BACHUS. Was that that it might jeopardize some small credit unions, or what?

    Mr. CARNELL. Well, I think there's a lot of questions about what the facts are and what we actually intend here, and this may be a good point to start clarifying that.

    The central liquidity was set up as a kind of central bank for credit unions back in 1978 when credit unions had no access to the Fed. Two years later, Congress gave credit unions access to the Fed, as long as they have reservable deposits, which nowadays would include what are called share draft accounts, a checking account at a credit union.

    Our concern is that the central liquidity facility has virtually no capital of its own, and that it's been limited by acts of Congress to lending such small amounts to credit unions, namely $600 million, that in our judgment, the CLF could not carry out the purpose for which Congress established it.

    Its core mission was to serve as an emergency lender of last resort for credit unions. Now, a $600 million line of credit to deal with systemic problems in institutions that have $300 billion in federally-insured deposits is just not realistic.

    Now, let me just emphasize. We are not suggesting that any kind of crisis like that is likely. But what we're saying is if we did have a crisis in the national financial system or a crisis specific to credit unions, that the CLF would not be able to deal with that crisis.
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    And so we think that the CLF creates a false sense of security. And there are ways that credit unions can get reliable access to emergency liquidity, and that's been our basic point there.

    Mr. BACHUS. Let me ask Mr. D'Amours one quick question. He can probably answer it just in 20 words or less.

    Mr. D'AMOURS. I'll try.

    Mr. BACHUS. Are credit unions allowed to engage in any type of commercial lending?

    Mr. D'AMOURS. Yes, they are, Congressman, but commercial lending can't very much be a problem competitively for banks, because business lending represents only 1 percent of credit union deposits.

    Mr. BACHUS. In what manner can they engage in commercial lending?

    Mr. D'AMOURS. Well, they have to follow strict guidelines and there is a whole series of guidelines they have to meet. Most of them don't try for that, and as I say, only 1 percent or less of their assets are involved in commercial loans.

    Mr. BACHUS. Could you supply me with those guidelines?
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    Mr. D'AMOURS. Yes, sir, I'd be delighted to.

    Mr. BACHUS. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bachus.

    Mr. Kanjorski.

    Mr. KANJORSKI. Mr. Chairman, I'm going to take just a few moments of my time to structure why we're here today, and I wish some of my colleagues would listen.

    This is a Constitutional question, fundamentally. The credit union movement, if you look at it, is the basic right of Americans to assemble. It's very fundamental. The Founding Fathers said that Government should not interfere with the rights of people coming together for a variety of purposes, not only political purposes, but economic purposes, sustenance purposes, common relationship purposes to protect themselves.

    The credit union movement didn't occur in this country because the Government passed a statute. It long preceded Government regulations. Government regulations came into play as a restriction of our right of assembly for particular purposes.

    And that's the only right of defense this Congress has—to make sure there is safety and soundness and not to abuse people who are assembling and exercising control over their own funds and economics of people's lives, that they are not abused.
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    We are a protective device. That's where Government comes into play.

    Mr. LAFALCE. Would the gentleman yield for a short——

    Mr. KANJORSKI. I will in a moment. So I think that, you know, as we look at the common bond, we'd better look at the history. The first credit union in America that was chartered, as I understand it, was a State charter in the State of New Hampshire. Anyone in the State of New Hampshire could join that credit union.

    And we are talking today about 500 member limits. You can't get together if there are more than 500 of you. What is this? Why can't all of an Indian tribe get together, whether there are 500 or 10,000? And if they're related to other Indian tribes, why can't—if they can't efficiently operate today and the economics of operation call for it—several Indian tribes get together? Or religious organizations? Or brotherhood organizations? Or working people, or people who work for different companies?

    Why does this Congress think that it has a right to play with the Constitutional right of assembly? Why do we feel that we are giving something to the credit union movement?

    The only reason this Congress is here today is to define how we should allow credit unions to operate in a very sophisticated financial services industry to protect the safety and soundness of those members of that assemblage, and that they don't abuse the laws of the country or impact unfavorably and unfairly on competing operations that also exist by virtue of the Constitution.
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    Now, I'd like to suggest that we keep it within that range and that when we're talking to the regulators, they have been given certain powers under the 1934 statute now on the books—as federally-charted credit unions to do certain things, and they've done them pretty well.

    For 64 years, regulators have encouraged a broad definition by finding flexibility in groups of common bond memberships to come together and defining and issuing charters to individual common bond groups.

    And then over the last 15 or 16 years, since credit unions have been allowed to mix and match in order to meet the challenges of a very sophisticated dynamic and growing economic system, the credit union movement still hasn't expanded beyond 2 percent of the financial resources or assets of this country. They were that way in 1932 and they are that way today, 2 percent of the financial assets of America.

    The only thing we should be directing our attention to is guaranteeing that there aren't abuses, that there's a reasonably defined policy so that the regulators can put up a red light if there's a problem. All oxygen-breathing mammals should not necessarily be allowed to be considered as a common bond.

    But let's not play this game of numbers, because we're talking about—I'm going to tell you what we're talking about. We're talking about my community. My community and my Congressional district have 176 communities. We haven't come together like some of the other communities of this country and consolidated communities.
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    If you were to limit a credit union to, say, in Pennsylvania, only the existing communities, the largest community in my Congressional district is 44,000 people. It could no longer, if it consolidated with the communities around it, have that charter expanded to consider those other people that would come into that common community.

    Is it unfair that an industry that closes down in my district because it has 1400 employees has to divest its credit union's membership, even though it could find a credit union that it could deposit its membership in and they could continue their service?

    When did we get this right to dictate to the American people of how they carry on their financial services through free assembly?

    I think what we have to look at is that we don't create monsters, that we don't give them unfettered opportunity to compete unfairly. But by God, they should be given the same right to compete and adjust to a growing dynamic American economy as any other institution in this economy.

    And I go back to the fact that we have nonprofit hospitals that compete with profit hospitals. And you don't get denied going to the University of Pennsylvania to get a cancer operation because you come from the State of Oklahoma or you come from the State of Texas or the State of Alabama.

    We compete because we are either the best or we try to be the best. And that's the American principle. And to start limiting this idea or thinking that we have some legal right to do that, all I call your attention to, gentlemen, is that we also have a Constitution and the last time I read it, it said the people have the right to petition the Congress and that means they can fill our offices—some people call them lobbyists, I call them constituents.
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    And my constituents have the right to assemble. And if they assemble because they want lower interest rates or they want to educate their children and they can in a common bond pool their money together to accomplish that in a cheaper way, I don't think the Constitution disallows them and I don't think this Congress should either.

    I see my time has expired. I will catch my questions on the next round.

    Mr. BACHUS. [presiding]. Thanking the gentleman from Pennsylvania.

    Congressman Ehrlich from Maryland.

    Mr. EHRLICH. Thank you, Mr. Chairman.

    Mr. Carnell, I have a question for you, but allow me 20 seconds just to say hello to my friend and constituent Don Lewis, who I may not be here for your testimony. And this gentleman—we've had various discussions over the last year with you and your folks back home at APG concerning how to deal with this issue, and I appreciate your presence here today. But I may not be here for your testimony.

    Sir, with respect to Congressman LaFalce's questions, Congresswoman Roukema's questions, Congressman Bachus's questions, you see a common theme. And let me just read parts to you. What I want to do is just make a series of observations and then get a specific answer with you, and I understand we are asking you some very difficult things today.
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    With respect to your written testimony, on page 14 you say, ''The common bond requirement is not merely a convenient organizing principle. The affinity among a credit union's members, as reflected in a common bond, reinforces credit unions' other defining characteristics.''

    On page 19 you say, ''A lack of meaningful membership restrictions may make credit unions highly competitive and flexible, but may also make them increasingly like banks operating under another name.''

    On the last page of your testimony, you say, ''An appropriate balancing of legitimate, but competing interests requires careful deliberation and something other than a winner-take-all outcome.''

    I heard your earlier testimony with respect to your observations that members have made to you, and I've heard you talk about the economies of scale, the need for credit unions to grow in a safe and sound manner, the need for tailored standards of safety and soundness, and so forth.

    In view of your statements in your written testimony, in view of your oral testimony, and in view of, I think, your practical knowledge that even many members who have signed on to Congressman LaTourette's bill do not necessarily support a clean bill, will Treasury be giving us any direction with respect to the lines in the sand that we really have to draw, which is what this hearing is truly all about.

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    I understand the observations you made. I understand the criterion you set out. I support it; I think it makes great sense. But you all know the reason we get paid is to make policy decisions.

    Probably in the end, the concluding statement you make in your statement is going to be what happens here. It's not going to be a clean H.R. 1151. It certainly is not going to be what the banks have come and advocated for; it's going to be something in the middle.

    Are you willing today, or will Treasury be giving us sometime in the near future, specifics with regard to your policy recommendations concerning the two directions that we have discussed today? Either redefining common bond requirements, occupational, geographical, and so forth, or Congressman LaFalce's approach and Congressman Barrett's approach, which is coming to some sort of arbitrary line with respect to assets or membership and requiring larger credit unions to assume some responsibilities they do not presently have?

    And that's my long-winded question and I appreciate your putting up with me here.

    Mr. CARNELL. Sure. We would very much like to work with the committee on these issues. Let me just say something by way of background here.

    One of the reasons these issues are so difficult is that the positions of the different sides have been, and to a large degree are, extremely polarized. There has not been much of a middle ground developed so far.

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    Mr. LaFalce's bill stands out as the first and most concrete attempt to develop middle ground proposals. But it's only been two weeks since the Supreme Court decided. And so we at the Treasury are very willing to engage in discussions and trying to work together toward a sensible solution here.

    We don't feel we can just go off on our own to our mountain or our library or wherever we would go and cook something up. The very nature of the issues, the lack of—the fact that alternatives to some polar opposite positions have not been well-developed means it's particularly important to be talking to a wide range of people, including Members of Congress, in figuring out what makes sense here.

    So it's not something we are well-equipped to do just on our own at this point.

    Mr. EHRLICH. And I'm not asking you to do our jobs. We make the votes and that's what we get paid for and all that. I have a bill coming in that takes a somewhat different approach, as you know, and I'd love your comments on my bill, along the lines of Congressman LaFalce's bill.

    So I appreciate it very much, and I yield back, Mr. Chairman.

    Mr. BACHUS. Thank you.

    The gentleman from Vermont, Mr. Sanders.

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    Mr. SANDERS. Thank you very much, Mr. Chairman. Let me ask Mr. D'Amours and anyone else up there who would like to comment on this. As I understand it, one of the major objections and concerns that the banking industry has is they see it as unfair competition that credit unions don't pay any taxes and they have got to pay taxes.

    Some have argued, however, that private banks have received huge amounts of taxpayer subsidies, and the savings and loan bailout amounts to a couple hundred billion dollars, the bailout where the taxpayers helped out the banks; and the Mexican bailout, and the recent East Asia bailout for $19 billion.

    Mr. D'Amours, would you comment on that?

    Mr. D'AMOURS. Well, I would suggest that the Congressman makes some very good points, but leaves out that many banks have available to them a Subchapter S advantage, which, in effect, gives them a tax—the same type of tax exemption that banks have, and I understand that's growing in popularity amongst many banks. So you could add that to your list.

    Mr. SANDERS. That's right. Actually, I was going to talk about that. But does anyone else want to comment on that? Mr. Feeney, what about the terrible tax advantage that the credit unions have over those little old banks?

    Mr. FEENEY. Congressman, it's difficult for me, as a regulator, to comment on taxes, because that obviously is a public policy issue. But I will tell you that in many States, State-chartered credit unions currently pay a number of State taxes that obviously the legislatures in those particular States deliberated very carefully on and have imposed sales tax and franchise taxes, and so forth.
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    So it does have an effect. Certainly, when taxation occurs, there is pressure on the bottom line and that results in many services that are now free or at low cost are feed and/or eliminated. So, certainly, taxation has some effect, but clearly, in the State's perspective, taxation is a part of a State-chartered credit union's life.

    Mr. SANDERS. OK. Let me just get back to maybe a very simple question. And that is credit unions are nonprofit. Generally speaking, they don't pay their CEOs something like the $46 million that Citibank pays its CEO, I gather. They serve a different function.

    Mr. D'Amours, why were credit unions allowed that tax exemption in the first place and how does their function differ from privately held banks?

    Mr. D'AMOURS. Well, Congressman, credit unions by statutory directive of this Congress in 1934, were created to make loans and instill habits of thrift amongst their members and particularly amongst people of small means.

    They are given statutorily a social mission, and I think it's in part in return for their performing that social mission that they receive the tax exemption. And they are performing that social mission. They are performing it quite well.

    Recently, in a speech to their government affairs committee, I raised the specter of what has happened to a number of cooperatives, consumer cooperatives over the years, and the need to stay focused on that social mission.
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    They are focused on that social mission and I would suggest that if you remove credit unions from the scene, and taxation would be one way to do that. Another way to do that would be to not pass H.R. 1151. If you were to do that, you are going to deprive many, many Americans working for small companies and in inner cities and isolated rural areas of their only chance at fairly priced financial services.

    Mr. SANDERS. Let me ask you this.

    Mr. D'AMOURS. That's why they get the exemption.

    Mr. SANDERS. Right. I mean, if people come together in a nonprofit way in order to make credit available to their own members, is there any reason why that type of nonprofit cooperative institution should not be treated differently than a bank whose goal is to make as much money as it can for the owners of that bank?

    Mr. D'AMOURS. There are a number of ways, some of which we have mentioned. The other is that they can't sell stock to raise capital. They have to be given some abilities to grow and to function, and the tax exemption is just another way to do that. So all of these things intermesh.

    Mr. SANDERS. How—just out of curiosity, do you have any information, in terms of some of the services provided by credit unions, as opposed to the same services provided by banks? What about credit card rates? Who would get——

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    Mr. D'AMOURS. Every study that I have seen, Congressman Sanders, shows that credit unions do very well and outperform banks when one compares the fee for services that are being charged, returns on shares and costs of lending.

    Mr. SANDERS. My understanding is the credit card rates for the credit unions are 5 percent lower on average than at banks. Does that seem to be consistent?

    Mr. D'AMOURS. Yes, every study I've seen shows that the credit unions stack up very, very favorably with banks on fees, deposit returns and loan rates.

    Mr. SANDERS. Mr. Chairman, I would just conclude by saying that we should be very proud that people all over this country have come together to form and sustain financial institutions which serve the members themselves in a democratic way, and we should look at that process very differently than we do from banks, whose primary goal is to make money for the people who own those banks.

    And I am a strong supporter of H.R. 1151, and I hope that we can pass it. Thank you, Mr. Chairman.

    Mr. BACHUS. I thank the gentleman from Vermont.

    Congressman Barr, do you have a question?

    Mr. BARR. Thank you, Mr. Chairman.

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    Mr. D'Amours, you mentioned social mission. What would you say to the argument that might be raised by some of the banks that through CRA, they are being forced to perform a social mission?

    And therefore, would the solution to the dispute between banks and credit unions be to either give them the same tax benefit because they are being forced to perform a social mission, although not directly, sort of through the back door of CRA, or to do away with CRA?

    Mr. D'AMOURS. Well, I have been to a number of communities, Congressman Barr, across this country where I have seen firsthand that bank compliance with CRA requirements has produced great good and much-needed investment opportunities for people of smaller means.

    In fact, many banks meet their CRA requirements by making deposits in community development credit unions which are allowed to take nonmember deposits.

    I certainly would not be in favor of CRA being removed, but on the other hand, credit unions are CRA by definition. So I don't know that one could apply the same standard and needs to credit unions in terms of the need for CRA that one does to banks.

    Mr. BARR. Mr. Carnell, have you had a chance to review H.R. 1121, which is one of the bills that we discussed earlier, that's been introduced by Mr. Paul and a number of others?

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    Mr. CARNELL. I regret that I have not.

    Mr. BARR. In essence, his Financial Freedom Act of 1997 repeals CRA and lowers tax rates for small banks, I believe. What is your impression of that?

    Mr. CARNELL. The Administration would oppose the repeal of CRA. We do think that the Community Reinvestment Act has, in practice, done tremendous good. Banks do receive significant benefits from their status, both as federally-insured institutions and their access to the Federal Reserve as a lender of last resort. These are tremendously valuable.

    If you look at what capital levels were in the banking industry before the Federal Reserve System, they were in the range of 20 percent of assets. If you look at them between the creation of the Federal Reserve System and the inauguration of Federal Deposit Insurance, they were over 10 percent.

    They were significantly higher than those that have prevailed since then, and I think that points to the benefits that banks have received from the Government's role as lender of last resort and as deposit insurer.

    And it is not unreasonable then to ask banks to look to their entire communities as potential places to lend. We are not talking about making unsound loans. We are talking about looking in the full range of the community for opportunities to make good loans to creditworthy borrowers.

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    And the Administration has placed a priority on getting CRA enforcement away from the old system of paperwork, of people documenting things for the file—and we had an example of that cited earlier—move away from that, toward looking at actual performance, so that a community bank or any other depository institution that is, in fact, doing a good job of meeting its community needs, that kind of bank should get a good CRA rating.

    Mr. BARR. I think in response to a question by Chairman Bachus, you indicated that you didn't have specific figures on the relationship or the fact of any competition between small banks or community banks and smaller credit unions. What would the profit picture look like if one looked at whether or not the profits of banks have dropped off significantly over the last several years because of competition from credit unions? Would we see a dropoff?

    Mr. CARNELL. Well, no, no; quite the contrary, Mr. Barr. The bank profits have reached record levels in each of the last five years. And capital is the highest it has been since the 1960's. The operating margins have been excellent. So these have been very, very good times for banks; the best really in some decades.

    Mr. BARR. Would your data support that same conclusion, Mr. D'Amours?

    Mr. D'AMOURS. Yes, it would, generally, Congressman Barr. And also I would like to point out that I'm not sure I fully understand the fears of the bankers toward credit union competition, because what is frequently overlooked is how severely limited and how strictly, I should say, limited credit unions are in their investment authorities. They can't invest in overseas institutions, for instance. They make only 20 percent of their assets in real estate lending; as I just said, only 1 percent in commercial lending. Mostly credit unions can only invest in insured financial products. So, I would think that bankers have an enormous advantage in terms of the range of their investment abilities over credit unions.
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    Mr. BARR. And their profit margins apparently reflect that?

    Mr. D'AMOURS. And their profit margins, as Mr. Carnell has just said, have been extremely robust.

    Mr. BARR. For which we are all grateful. I mean that helps in the whole economy.

    Mr. D'AMOURS. And so are credit unions doing quite well.

    Mr. CARNELL. Mr. Barr, I also want to mention, my understanding is that in the last month, the General Accounting Office released a report that deals with the effects of competition between banks and credit unions in North Carolina. And I have not had a chance to review the report myself, but my understanding is that the conclusion was that banks were doing OK, as well as credit unions doing OK in their competition with each other there.

    Mr. BARR. OK. Thank you, gentlemen.

    Mr. BACHUS. Thank you, Congressman.

    The gentleman from North Carolina, Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I unfortunately have been tied up on the floor and didn't have the opportunity to hear the testimony of these three witnesses. For that I apologize to them and I think it would be unfair for me to start asking questions that might have already been asked. I will certainly read their testimony—the full testimony—and study it very carefully, and if I have questions I will direct them to the members of the panel in writing if that is all right. Thank you, Mr. Chairman.
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    Mr. BACHUS. I thank the gentleman.

    Mr. Hill, does the gentleman from Montana have questions?

    Mr. HILL. Thank you, Mr. Chairman.

    Mr. D'Amours——

    Mr. BACHUS. I just made a mistake. Mr. Cook would like to ask questions. And I apologize to the gentleman from Utah.

    Mr. COOK. Well, thank you, Mr. Chairman. I would not have minded at all going after Mr. Hill, but——

    Mr. BACHUS. You need to get over on this side of the aisle.


    You may have heard yesterday, that Zions First National Bank, which is one of the two largest banks in my district, Salt Lake City, announced that they intend to file for a credit union charter. There aren't a whole lot of details, but they have said in their press release that the field of membership would be quote, ''persons affiliated with Zions Bank.'' I would like to ask Mr. D'Amours or Mr. Feeney if you could speculate on how Zions would be able, actually, to charter a credit union, or any bank for that matter.
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    Mr. D'AMOURS. Yes, sir; we'd be delighted to work with them. All they have to do is comply with the requirements of chartering, but I think they might be a State charter, in which case Mr. Feeney would have the pleasure of making that conversion; or Mr. Feeney's constituency would have the pleasure of making that conversion.

    Mr. COOK. Would the National Credit Union Savings and Insurance Fund be able to ensure such an institution?

    Mr. D'AMOURS. If they qualified, sir, Congressman Cook. We would look them over very carefully. If they qualified and met our standards, yes, they could qualify for our insurance.

    Mr. COOK. OK, Zions has had a reputation for being ahead in the banking industry. For example, just a few weeks ago, they became the first bank to receive approval from the Office of the Comptroller of the Currency to underwrite municipal revenue bonds. Just last week, I think, they got approvals for digital signature authentication for the electronic mail and so forth. If Zions really does go ahead and form a credit union and other financial—other banks—do the same thing, what impacts would there be on the Treasury, for one, and on the credit union industry in general, particularly small credit unions?

    Mr. D'AMOURS. I don't know enough about the case, especially given that this is, as I understand it, a State bank. Am I correct in understanding that this is a State bank, Congressman Cook?

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    Mr. COOK. No, it is a federally-chartered bank.

    Mr. D'AMOURS. It's Federal. OK. Then I was misinformed. I don't know enough about it to comment on those specifics. I know that they are going to have to make a number of changes. The directors will have to go from paid—whatever that is—to unpaid.

    Mr. COOK. I don't think——

    Mr. D'AMOURS. I don't know enough about it.

    Mr. COOK. Mr. D'Amours, I don't think the idea of Zions was to convert to a credit union, but rather to file for a charter so that they could get a credit union charter.

    Mr. D'AMOURS. They could only do that by converting, as I understand it. You can't own a credit union. You can't buy a credit union.

    Mr. COOK. What you are saying is Zions Bank can't really do what they announced they were going to do yesterday?

    Mr. D'AMOURS. I have to be honest and tell you that I don't know a whole lot about this. It just happened yesterday. I was not in the office much yesterday, and this is all relatively new to me. But if what you are suggesting is their intention, I would say it would be very difficult for them to do. They are going to have to change their structure.
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    Mr. COOK. Well, they have made it clear that they are not in any way talking about a conversion, but just applying for a charter.

    Mr. D'AMOURS. Well, it could be then that what you're suggesting is that they want to start a credit union and be the parents of a credit union—the sponsors of a credit union—and that's entirely possible. I understand the American Bankers Association sponsors a credit union. So that's entirely possible, but that's an enormously different question.

    Mr. COOK. I think what you're saying, and I'd like to make sure that Mr. Carnell agrees, you're saying that this is a——

    Mr. CARNELL. I'm not familiar with the facts of the case.

    Mr. COOK. Well, I'll make sure. I'll have our staff get you copies of their press release.

    Mr. CARNELL. It certainly would make a tremendous difference whether it was Zions Bank becoming a credit union, or whether it was a credit union for employees of the bank, or something different from that.

    Mr. COOK. Well obviously they are talking about the latter. They said that it would—or their press release indicates: ''persons affiliated'' with Zions Bank in one way or another I suppose. But, I take it that Treasury—that the regulators—think this is perhaps a flip action on the part of Zions First National Bank; that there's not a whole lot of seriousness associated with their intent. Is that what you're saying?
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    Mr. CARNELL. We don't have any prior knowledge of this. I did look at my watch to see if it was April first, but it——


    You know, I really don't know.

    Mr. D'AMOURS. Congressman Cook, if I may, I have been advised that I mis-spoke, and I apologize to my friends here from the ABA. I thought there was a credit union within the organization. My staff tells me there is not. There is one within the FDIC, but not within the ABA. So, I apologize, I apparently mis-spoke.

    Mr. COOK. You know, we're talking about a bank that, as I mentioned, is one of the two largest banks. It was rated in, I can't remember which magazine, as the No. 1 bank in the United States last year. Certainly Mr. Simmons is a very serious man. I come from a State where there are more members of credit unions than just about any other State. And I'm a real fan of credit unions. I just want to make sure I understand this development in the context of legislation that we're going to try to put together. And to not have any opinion on that, I'm really rather surprised that you don't. Because this was announced quite clearly yesterday, and I think it obviously will have a significant impact on the kind of legislation that we're going to be considering here and hopefully coming up with.

    Mr. CARNELL. Mr. Cook, that's a very reasonable point. My focus yesterday was on trying to make sure that we got the Treasury's written testimony to Members in a timely way, and there was just less opportunity to take in new events under those circumstances. We'll certainly, you know, follow with interest what in fact Zions has in mind here.
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    Mr. COOK. I sort of have a feeling that we tend to work on problems as they were five and six years ago around here, and we really aren't sensitive enough to the future problems with modernization. I think this is an issue that fits in with the modernization bill that we started a year ago, and it is certainly my intent to make sure consumers, taxpayers, citizens have the best possible range of financial options. But I, you know, I think we really need to understand this in light of what things are going to happen as a result of not only the Supreme Court decision, but the likely legislation that's going to come forth from this body. And I think you know that there is tremendous support for credit unions in Congress. And we have to do this right, I think, or we're going to really endanger the opportunities of the public. We could actually end up doing a lot more harm than good if this isn't handled precisely correctly.

    Mr. CARNELL. I think you're exactly right, Mr. Cook. I think Congress has an opportunity to look at a range of issues here and there is time to think it through. I think legislation ought to be dealt with this year, but there is time to think these things through. And I think you're right that credit unions, credit union members, other financial institutions are going to be living with the outcomes of these decisions for a very long time to come.

    Mr. BACHUS. I thank the gentleman from Utah.

    Mr. Carnell, in the event that we do move H.R. 10 next week or the week after, is Treasury still going to have the ability to respond to these questions?

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    Mr. CARNELL. You're talking about follow-up answers to the questions?

    Mr. BACHUS. Yes.

    Mr. CARNELL. We will move them as quickly as we can.

    Mr. BACHUS. OK, thank you.

    The gentleman from Texas, Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman; and perhaps my colleague—maybe we should be asking the Comptroller of the Currency about Zions Bank. Maybe this is just a parting shot on their part to expand the operating subsidiary to allow credit union ownership by national banks.

    But, in any event, let me focus on trying to get to sort of the merits of this, or the issue I think we have to deal with. I think it's pretty apparent that pretty much everybody on the panel supports credit unions, and certainly I do. And I think all of us could probably raise our hand and say we have a membership in a credit union or know somebody who has a membership in a credit union. But we do have the issue of the Court and the Court's decision that we have to deal with. And my concern has been not so much that we have to look at solvency, I think solvency is very important, but at some point I do think the SEG concept can become abusive if in fact, and I agree with Treasury in saying we cannot be too constrictive because we will affect solvency, but on the other hand, if we are too loose in this policy, my concern is that anybody who wants to be could become their own SAG and we would have a two-tiered financial system—one which is taxable and one which is tax exempt. And that does pose a problem for us.
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    Now, the NCUA policy, I believe, is: in order to start a Federal credit union, you must have at least 500 members within some form of a common bond. And Treasury says, actually, it's probably closer to 1,000 to be financially doable.

    I guess my first question would be to Mr. D'Amours, as well as to Mr. Feeney, as it relates to the State credit unions: is there a policy, a strict policy, as it relates to the size of a SEG, and what is the review process for accepting a SEG? And that is, does a SEG have to be any certain size? Can it be 1; can it be 10; can it 50; can it be 1,000?

    Mr. D'AMOURS. There is no limit on the size of the SEG. You would be talking an operational or an occupational group that we would look at the SEG to see whether in fact it fits the occupational requirements for example, a single employer and the like, or the associational requirements: that it is a legitimate bonafide association. Beyond that we would not—it could be a SEG of as many as a handful of people—three or four people—or as many as hundreds, or thousands of people, as long as they fit the definition—the occupational or associational definition correctly.

    Mr. BENTSEN. Could you provide for the record, because I am sure you don't have it with you today: in the last five years, prior to the circuit court ruling on the AT&T case, what the average size of SEGs were that were approved by NCUA?

    Mr. D'AMOURS. Yes, we will, Congressman Bentsen. When I testified, I did in my testimony—oral testimony—point out that 94 percent of our SEG groups are under 500. But we will get that information for the past five years.
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    Mr. BENTSEN. OK, but could you be a little more specific.

    Mr. D'AMOURS. Mr. Chairman, I wonder if you would be so kind as to allow me to excuse myself for two minutes?

    Mr. BACHUS. You are excused.

    Mr. D'AMOURS. Thank you.

    Mr. BENTSEN. If I could ask Mr. Feeney: you mentioned that a number of States, maybe 40 States, had adopted policies as it related to SEGs. Have any of the States in those policies put limitations on the size of SEGs, asset value of the SEGs, or has it tracked pretty much the NCUA? And I realize some States were prior to NCUA, but is there any legislative law or State legislative precedent with respect to setting a ceiling or a floor or anything like that?

    Mr. FEENEY. Congressman, it's very difficult to say, because you have to remember that there really are 49 different bodies of law operating in this country. The Federal Credit Union Act is just one. Each State has a unique set of laws that detail and describe how Select Employee Groups or any other operational aspect of credit unions operates. So, each one is different and I couldn't give you an average. I would say that in general they are all probably pretty close to the NCUA's 500 number, but given the parameters of each State, they could be significantly different.

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    Mr. BENTSEN. And if Treasury could just provide for the record what growth you've seen in small community banks taking advantage of the change in Subchapter S for the 1996 tax law, and whether that results—what is the tax differential between a community bank and a nonprofit credit union?

    Mr. CARNELL. We'll do our best.

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Mr. BACHUS. I thank the gentleman from Texas.

    The gentleman from Montana, Mr. Hill.

    Mr. HILL. Thank you, Mr. Chairman. I did have a question for Mr. D'Amours, I hope he'll return sometime.

    Mr. BACHUS. And we will give you a chance to ask that.

    Mr. HILL. Thank you, Mr. Chairman.

    I will go then to Mr. Carnell. Mr. Carnell, in Mr. D'Amours' testimony he raises concerns about whether this ruling will affect—he suggest it will affect the safety and soundness of credit unions. Would you agree with that?
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    Mr. CARNELL. Well, over time there would be effects on some credit unions. If you have, for example, a credit union whose sponsor was a plant that has closed or is going to close, where right now they are not in a position to add members and they are losing people because of changes relating to their sponsor, you could have a concentrated affect on particular credit unions there. Certainly there is no reason for any American to doubt the safety and soundness of their insured deposits in credit unions. And credit unions as a group are well capitalized. There isn't a reason for short-term anxiety here.

    Mr. HILL. Depositors out there shouldn't be alarmed at this point.

    Mr. CARNELL. Absolutely not.

    Mr. HILL. So, in your view, the Treasury has suggested some proposals with regard to further securing the solvency and safety of credit unions. You don't see any urgency in adopting those either at this particular point in time.

    Mr. CARNELL. We think that Congress has an opportunity to deal with those right now that it will probably not have again for a very long time. And we think it is, both because there are other credit union issues pending—that's one reason.

    Mr. HILL. It's a good time to do it.

    Mr. CARNELL. But there are a couple of other reasons why it would be particularly timely. There have been difficulties in the past when Congress has dealt with problems in the financial system only after the problems have arisen and grown to a significant point. Because that means that you not only have to correct the problem, but you are doing it at a time when financial institutions are already under stress. Part of our thinking here is, at a time when the National Share Insurance Fund is fully capitalized, at a time when credit unions as a group are very well capitalized, this is a particularly opportune time to bring in new safety and soundness safeguards because people are already going to be in compliance with them by and large. It is going to bring in some of the weaker outliers. But the transitional costs of complying with the safeguards right now are minimal and it does not pose the kinds of challenges that it would if you waited until a problem actually arose.
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    One other thing that I would like to emphasize is——

    Mr. HILL. I do want to get a question for Mr. D'Amours first.

    Mr. CARNELL. Sure.

    Mr. HILL. And that is: you raised the question of Subchapter S corporations, likening the taxation of credit unions to Subchapter S corporations and banks. I guess I would just like to ask you this question: are you suggesting that we tax credit unions the way we tax Subchapter S banks?

    Mr. D'AMOURS. No, I am not, Congressman. I raised that point in response to a question from Mr. Sanders who was pointing out that in fact banks, while objecting to the tax status of credit unions, are availing themselves of tax advantages—of the advantage of not being taxed.

    Mr. HILL. But you're not suggesting that they have similar taxation at all?

    Mr. D'AMOURS. Absolutely not. I think taxation, Congressman, would drive credit unions away from their statutory mission and be absolutely counterproductive. And I would like to say——

    Mr. HILL. But I just want to clarify this point though. You are not suggesting that the Subchapter S tax treatment of banks is similar to the tax treatments of credit unions.
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    Mr. D'AMOURS. No, I'm not. I'm just—OK.

    Mr. HILL. I just wanted to clarify that because I see that argument frequently: is that banks already have similar tax treatment to credit unions because they are Subchapter S corporations, and they're not. As you know, the shareholders of Subchapter S corporations pay taxes on the basis of the earnings and you don't have that in credit unions.

    Mr. D'AMOURS. Well, you do, because the people who receive the dividends——

    Mr. HILL. But not on the earnings; not on the retained earnings; just on the dividends, on the deposits.

    Mr. D'AMOURS. Well, that's the way it happens in the credit union world.

    Mr. HILL. I have another question for Mr. Carnell. And that is: are there any services or are there any people that banks ought to be able to serve that credit unions can't?

    Mr. CARNELL. Cannot, you said?

    Mr. HILL. Yes.

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    Mr. CARNELL. So, you're saying: would you put certain classes of people who could be bank customers off-limits for credit unions?

    Mr. HILL. In other words, if we deal with this issue of common bond and expand the field of credit unions, or determine what it is, should there be any difference? Should there be people that credit unions can't serve that banks could serve? Or services? Are there services that banks ought to be able to offer that credit unions can't?

    Mr. CARNELL. OK, there's a couple of questions, so let me take them in turn.

    Mr. HILL. Yes, there are.

    Mr. CARNELL. On the first question about are there groups of people that banks can't serve and that—oh, sorry, that banks could serve—that credit unions can't——

    Mr. HILL. Should there be, is the question.

    Mr. CARNELL. Should there be? I think there are sort of two ways to look at the question. If what we mean is whether there's a type of person or a type of entity that banks could serve that credit unions can't, well, there is one distinction right now. As I understand it, credit union members have to be actual people, and so corporations generally can't be credit union members.

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    Mr. HILL. Business, but not corporations.

    Mr. CARNELL. Right, so that would be one distinction. Now, the other point I'd make here goes back to our basic point that we believe that some kind of common bond, some sense of affinity among a credit union's members, is part of what makes credit unions different. So, if you have somebody who is not going——

    Mr. HILL. Has no bond with anybody, huh?

    Mr. CARNELL. Yes. Then that would, you know, be a possible candidate. Now I would say by the same token, you know the point has been made, that we now have more and more people in the workforce who work for small businesses. I'm not suggesting that they should be off-limits for credit unions one way or another—whether it's a credit union aimed at the employees of different small businesses or allowing them in the field of membership of another credit union, there are ways to deal with them. But we do think that the fact that not just anybody can go into any credit union is part of the credit union difference. And makes sense.

    Mr. HILL. How about services? Are there any services?

    Mr. CARNELL. Well, there are credit unions today that provide—some of the larger credit unions provide services that are, as I understand it, comparable to the consumer-type services that regional banks would provide. I'm not sure that I would—I think you'd have to go—to answer the question intelligently, I'd have to go through different types of proposed services. So, I wouldn't be in a position off-hand. I don't know. I mean, there is certainly—I don't know that serving as a future's commission market on the floor of the Merc is something credit unions need to be getting into. But I think I would have to go through specifically what was in question.
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    Mr. HILL. Should Congress establish those things that they should be prohibited from doing?

    Mr. CARNELL. Well, Congress has given a certain scope to the Federal Credit Union Charter. Federal credit unions cannot do just anything, and they can't do as many things as some State-chartered credit unions. So, the question then would be whether you're dissatisfied with where the line is drawn right now in the Federal Credit Union Charter.

    Mr. HILL. I guess my point is, and, Mr. Chairman, I see my time is expired, is that we're being asked to draw this line again. And you're suggesting that there are some things that we should address with regard to safety and soundness, and others are suggesting that there are some places we should draw the line with regard to what services could be offered. And I was just trying to get the Treasury's position.

    Thank you, Mr. Chairman.

    Mr. BACHUS. I thank you.

    Mr. Secretary, Congressman Hill mentioned Subchapter S corporations as did Mr. D'Amours. It is my understanding that that would be limited to 100 shareholders. Is that right? Subchapter S. Are there——

    Mr. D'AMOURS. That's correct. There are limits. I did not mean, Mr. Chairman, to suggest that there was an unlimited availability, but for those that do qualify for it, several are taking advantage of it.
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    Mr. HILL. Would the restrictions on Subchapter S corporations really make it impractical for most banks, or even local banks, to apply for Subchapter S status?

    Mr. CARNELL. Well, as I understand it——

    Mr. BACHUS. What are some of those restrictions, like the 100 shareholder restriction?

    Mr. CARNELL. There are limits on the number of shareholders. So certainly, if you think of banks of any size, they are generally going to have numbers of shareholders that is well above 100, so it's not available to—it would not be available to most of the assets of the banking system, although if you looked at the number of banks in the company by number, it gets—it certainly is an option for many of them.

    Mr. BACHUS. OK, thank you.

    The gentleman from Wisconsin, Mr. Barrett.

    Mr. BARRETT. Thank you.

    Mr. Carnell, I looked through your testimony, and I didn't see any reference to the Community Reinvestment Act. What is the Treasury Department's position with regard, and let me be specific, large geographic credit unions?

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    Mr. CARNELL. Well, we certainly believe that all credit unions have a public purpose of serving people of modest means. And as I mentioned earlier, something like CRA would be one way to carry out that public purpose. There are other ways, but it would be one way. And I think the case for applying something along the lines of CRA is certainly much, much stronger with a large geographically-based credit union than it is with a credit union that has an association or occupational bond.

    Mr. BARRETT. Mr. D'Amours, in your testimony, you made reference to a credit union ruling, or IRPS 94–1, an interpretive ruling and policy statement designed to permit credit unions to expand in low-income areas. And you also state that you feel that the bill before us today would permit this even though it has been invalidated by the court of appeals. What, specifically, leads you to that conclusion?

    Mr. D'AMOURS. Well, our staff has been doing research on this for a number of months in anticipation of a negative ruling from the Supreme Court, and quite frankly, Congressman, I have to tell you that I am not at all confident that that's the case.

    Mr. BARRETT. That this interpretation would be reinstated by this bill? Or what are you not confident about?

    Mr. D'AMOURS. The bill would certainly reinstate the interpretive ruling, yes. I thought you were asking me if it would be reinstated absent the bill.

    Mr. BARRETT. No.

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    Mr. D'AMOURS. Oh, no. Then absolutely it would. And that's one of the reasons why the bill needs to be passed very quickly because there are a lot of people—inner city and isolated areas, low-income people—who are effectively today shut off from fairly priced financial services. That's totally being ignored unless we pass H.R. 1151.

    Mr. BARRETT. Of course, there are other ways to do it as well.

    Mr. D'AMOURS. And may I say, Congressman, because you weren't here when I answered a question earlier, in terms of community service, we have out for comment—the agency put out for comment several months ago—a proposal that for geographically-based credit unions, would put into place specific enforceable requirements that those geographically-based credit unions, through their plans and activities, are reaching out to serve all segments in all of their geographically-based field of membership.

    Mr. BARRETT. Let me ask you a question in that regard. The district that I represent is two-thirds city, one-third suburban. I can foresee the occurrence of municipally-based suburban credit unions in essence forming a donut where each suburb would have its own municipal credit union. Under your ruling, would that require them to reach into the center of the donut?

    Mr. D'AMOURS. Not unless they were a community-chartered credit union. On the other hand, you will recall, Congressman, that we had this conversation a year ago when I testified here, and I looked into that. And the truth of the matter is that the credit unions that form that donut are State-chartered credit unions, they are not federally-chartered credit unions. I would suggest that you might want to get into that with my friend Mr. Feeney who's representing the State-chartered groups.
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    Mr. BARRETT. I look to the Federal Government for leadership.

    Mr. D'AMOURS. But yes, and we're trying. And as I have said, we tried to provide some. The answer would be a community development credit union in that inner city, in the hole, as you would call it, of the donut. And we could work with your people, with any people in that area interested in doing that. We have an office of community development.

    Mr. BARRETT. Of course they would have limited resources if they were in the center of the donut. That's——

    Mr. D'AMOURS. Pardon?

    Mr. BARRETT. They would have limited resources vis-a-vis the suburbs.

    Mr. D'AMOURS. There are a number of credit unions that have been done with few resources because credit unions are cooperative and it's amazing the help available to them.

    Mr. BARRETT. Let me just move on. I appreciate your comments, let me move on, if I may. And I don't mean to cut you off, but I don't have much time.

    I look at the language, what I consider to be the operative language of the bill: ''The membership of any Federal credit union shall be limited to one or more groups each of which have within such a group a common bond.'' Does that mean in the State of Wisconsin that the common bond you could have—there are 72 counties in Wisconsin—could you have a field of membership in each county and then have that be the common bond? In other words, every person in the State then could become a member of the credit union. I'm not saying that's good, and I'm not saying that's bad.
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    Mr. D'AMOURS. What would the bond be?

    Mr. BARRETT. Well, that you live in a specific county.

    Mr. D'AMOURS. That would be a geographic community credit union and that would—no that would not be the case.

    Mr. BARRETT. Could you have a bond that anybody who filed a tax return?

    Mr. D'AMOURS. No, you could not.

    Mr. BARRETT. I'm not—I'm just trying to—and I'm not saying that's bad.

    Mr. D'AMOURS. And I'm saying the answer is: no, you could not.

    Mr. BARRETT. And why couldn't you do that?

    Mr. D'AMOURS. Because we look for some realistic definition of what a common bond is. And like Congressman Kanjorski just said, air-breathing mammals is not a realistic common bond. We look to provide a real definition—interpretation—of the term common bond.

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    Mr. BARRETT. But why? I mean, I'm a loner.

    Mr. D'AMOURS. Well, because, for a number of reasons; one of which is: a number of Members of Congress would be very upset with us if we did not. Another is that over the course and history of the credit union movement, common bond has played an important role. Another is that the statute specifies common bond——

    Mr. BARRETT. But I'm looking now at the proposed language. And again, under the proposed language, I don't see why. And I'm not saying it's bad, but I don't see why under the proposed language that the common bond could not be that you file a tax return.

    Mr. D'AMOURS. I don't see anything in the proposed language—and maybe the sponsor of the bill could help us on this—but I see nothing in the proposed language that changes the current definition of common bond. And the current definition of common bond does require some affinity of occupation or association, some reasonably cohesive——

    Mr. BARRETT. OK, and the last question, because again, my time is limited: what is your opinion on application of CRA?

    Mr. D'AMOURS. I think, as I've just said, for community credit unions it would make sense to require—and we have outlined, we've put out for proposal and for comment to credit unions—community service requirements to assure, credit union specific——

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    Mr. BARRETT. Not CRA though?

    Mr. D'AMOURS. Not bank CRA. That wouldn't work.

    Mr. BARRETT. And why is that?

    Mr. D'AMOURS. Because credit unions are not banks and they don't operate in the same way. It should be credit union specific and it should not apply to associational or occupational groups. In Massachusetts where it does, I understand they're having trouble doing that and the legislature is reintroducing a new law to cover——

    Mr. BARRETT. OK, well then, let's limit it to large geographic credit unions, applicability of CRA to large geographic credit unions.

    Mr. D'AMOURS. Well, my staff just told me I might have mis-spoken and used the word legislation for regulation. They've put out a regulation, if I mis-spoke. I want to make that clear.

    A large geographic area in my view, and this is a matter that's going to be on the board agenda in just over a week, could be required to in its plan demonstrate to the NCUA as its regulator how it intends to reach out to all, and serve all segments, all areas, all people within that geographic area. That's something that could be monitored.

    Mr. BARRETT. And what's the statutory basis for that?

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    Mr. D'AMOURS. Pardon?

    Mr. BARRETT. What's the statutory basis for you to do that?

    Mr. D'AMOURS. Well, we have the authority, as I understand, generally, to charter credit unions, and we can require that charter contain elements as to how it is going to serve its membership. It would be part of their charter.

    Mr. BARRETT. OK. I believe my time is expired.

    Mr. BACHUS. OK. Thank you, Mr. Barrett.

    Mr. Kanjorski.

    Mr. KANJORSKI. Maybe I could answer some of Mr. Barrett's questions.

    First of all, the bill you are referring to, Mr. Barrett, does not involve itself with the community-chartered credit unions, just occupational and association-based credit unions. And that's the definition, so you don't have to worry about the community.

    And second, as the Chairman has indicated, CRA is really being taken up in a regulatory forum by the Administration. The regulators may impose that by regulation on certain community-based credit unions so that it's almost unnecessary for us to include them in any separate——
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    Mr. BARRETT. If the gentleman would yield very briefly.

    Mr. KANJORSKI. Yes, sure.

    Mr. BARRETT. I guess my point is: if we've got it in the statute for banks, shouldn't we have it in the statute for credit unions? I don't see the difference.

    Mr. KANJORSKI. Why? Why, just to feel——

    Mr. LAFALCE. I wonder if I could intervene a bit in this conversation?

    Mr. KANJORSKI. Yes, sure.

    Mr. LAFALCE. I think you have to distinguish between community-based which Mr. D'Amours is referring to. That's one thing. And Mr. Kanjorski is saying: well, he's only talking about community-based and that's not applicable with respect to occupational or associational. Maybe it shouldn't be. Let's suppose you have an occupational that includes multiple groups. Then——

    Mr. KANJORSKI. Those multiple groups aren't community and occupations.

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    Mr. LAFALCE. Let me finish my thought. If you have multiple groups, then Mr. D'Amours' regulations wouldn't affect them and I think Mr. Barrett might be interested in having some statutory guidance as to when you might have CRA-like requirements applicable to them if they are not fulfilling the mission that the regulator has articulated, and we leave that up to him to articulate.

    Mr. BACHUS. Let me say this, and maybe by way of trying to help, you mentioned community development credit unions.

    Mr. D'AMOURS. Yes, sir.

    Mr. BACHUS. How does that differ from the low-income expansion policy?

    Mr. D'AMOURS. Well, community development credit unions are credit unions that themselves qualify for that application because over 50 percent of their members fall at or below 80 percent of the national poverty standards. They are community development credit unions by definition, and they are allowed certain powers that other credit unions aren't allowed.

    Mr. BACHUS. But if we're familiar with the low-income expansion policy, how does that differ from the community development credit union? How does that policy differ?

    Mr. D'AMOURS. Well, a non-community development credit union, a large credit union with an affluent membership primarily, could reach out into a low-income area and take in that entire community as a SEG group so long as the community itself fit the definition I've just mentioned.
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    Mr. BACHUS. Now, didn't the district court enjoin?

    Mr. D'AMOURS. Yes, sir. That is now illegal.

    Mr. BACHUS. That is not related.

    Mr. D'AMOURS. That is now illegal and that's one of the reasons we feel strongly that H.R. 1151 should pass, to remedy that—to take care of that situation.

    Mr. BACHUS. Because you don't have that ability.

    Mr. D'AMOURS. Not since the Supreme Court—not since the appellate court injunction.

    Mr. BACHUS. All right. Does the gentleman from Ohio have any questions?

    Mr. LATOURETTE. I do. Thank you very much, Mr. Chairman. I want to make some observations about the questions of urgency that were being bantered about before. And I would just opine and echo some of what Mr. Kanjorski had said earlier. I think that there is an urgency for a legislative vehicle, be it H.R. 1151 or something else. I cited earlier today the case of the 49-year-old credit union, where everybody in the credit union had been a member for 40 years. And if the Supreme Court goes unchallenged and those members, as we all do, will eventually expire and they don't have the ability to attract different members from the SEGs that have already been admitted, which is the net affect of the Supreme Court case, I would assume that we would eventually have a safety and soundness question. We'd eventually have—there's a phrase that was bantered around here in Washington a couple of years ago—it would die and wither on the vine, I guess is what would happen to that credit union. Likewise, if there should be a change of heart from the publicly released statements by those in the banking community that they would seek divestiture in the lower courts in the wake of the Supreme Court decision, that would create an urgent situation. And last, I think the situation that was mentioned by Mr. Kanjorski that there are now those that are excluded because they don't happen to be in a large enough group or in an existing group are excluded from reaching out and seeking the benefits of credit union membership.
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    I do want ask this question though of Mr. D'Amours, if I may: when I go around and talk to some of my uncommitted colleagues about the potential of cosponsoring H.R. 1151, there are a number of observations they make to me and I assume they make to Paul as well, and I'd like to have your observations if I could. One of them is that H.R. 1151 has as its goal the ability to permit credit unions to admit members without any limitation. And it sort of falls in line with what Mr. Barrett was just asking. And somehow they see this H.R. 1151 and the initiatives that we're promoting here the ability for credit unions to take anybody that they chose to and just expand willy nilly credit union membership.

    The other observation is—and this one's to Mr. Bentsen's earlier questions—I understand that it's been your agency's policy to require at least 500 people. I know that we'll have someone testify a little later that makes the observation that the interpretation of the 1934 Act is that you can have as little as seven sponsors to begin a credit union if you want to.

    And last, we heard from Mr. Kennedy when he was discussing his bill, and also from others today—and another argument that's made—is that community banks tend to serve a greater spectrum of the general public, specifically lower-income individuals than do credit unions. So if credit unions have as their objective and as their mission the fact that they take care of ordinary people with ordinary financial concerns that that goal isn't being met and, therefore, there should be no special tax consideration—I'm wondering if you could offer any—and all of this depends upon, I guess my view is that we believe that if we pass H.R. 1151, that there's going to be a regulator who acts reasonably. And since you happen to be the chairman of the regulator—and I see Mr. Dollar is here as well—is there any reason that anyone should fear that somehow the regulator would not be reasonable and that these fears that are articulated would somehow come to pass.
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    Mr. D'AMOURS. I don't think any of those fears are realistic, Congressman. I think, perhaps, one of the causes of the first fear—this gets back to the conversation I had with Mr. Barrett earlier. In the description of the bill, it limits to one or more groups, each of which have within such group a common bond. It does not pick up the following language of the statute which is: of occupation or association, which is a limitation. So, the description of your legislation leaves off a limitation that might be causing some confusion.

    Second, the fact that it still takes seven founders to form a credit union, that is not the membership of the credit union, it requires that seven people be willing to sign on the dotted line saying that they are interested in forming a credit union and becoming actively involved in its development.

    And in terms of community banks serving people of small means better than credit unions do, I would suggest the only way that could possibly happen would be if H.R. 1151 doesn't pass. But even then I wouldn't believe it, because I think—and people overlook this—even the largest credit unions have within their fields of membership large numbers of people of very small means who otherwise wouldn't have access to credit union service. Let me give you a statistic: Navy Federal Credit Union was mentioned earlier by Congressman Kennedy. Navy Federal Credit Union has about 1.5 million accounts. Eight-hundred thousand of those are less than $100. That's an enormously important thing to remember. I don't think that you would find that situation in any bank. So to imply that somehow banks are doing better service—providing better service—for people of small means, or people who otherwise wouldn't have access to fairly priced financial services, I just think is wrong. I'd like to see what statistics those are based on. I doubt they're accurate.
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    Chairman LEACH. Thank you. We're going to have one question from Congressman Vento and then Congressman—I mean, not one question, but your five minutes.

    Mr. VENTO. No, no, I've had my questions.

    Chairman LEACH. Just one question and then Congressman LaFalce. The gentleman from New York will start.

    Mr. LAFALCE. Mr. D'Amours, we heard an argument from Mr. Kanjorski earlier that gave me some cause for concern. It was a constitutional argument. The constitutional argument was that we have a constitutional right to form credit unions, the right of association; that any limitations upon that are unconstitutional. I had never heard that argument before, and I'm wondering your opinion of it. Is the Credit Union Act which establishes the necessity for a common bond constitutional or unconstitutional? And could it be constitutional because of the fact that it's only with respect to insured depository institutions as opposed to some entity that you would want to form by yourself that's unregulated but also uninsured?

    Mr. D'AMOURS. Well——

    Chairman LEACH. Justice D'Amours, you don't have to answer that unless you want to.


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    Mr. D'AMOURS. Thank you, thank you, thank you, Mr. Chairman. I was about to say that I practiced law for several years, but I never practiced constitutional law.

    Mr. KANJORSKI. Mr. Chairman, if I could—if you're finished—if I could indulge with one more question. I realize you want to finish.

    Chairman LEACH. And I'm going to ask the gentleman from Minnesota, Mr. Vento and then the gentleman from Wisconsin.

    Mr. VENTO. Well, I have just a statement: I didn't expect to see you three here when I came back.


    I don't have any constitutional questions, just to repeat my point that is that——

    Chairman LEACH. Your time has expired.

    Mr. VENTO. ——We don't want to—thank you, Mr. Chairman—we don't want to solve one problem of the common problem and then create another problem with the community credit union. I think that this—we want to solve it, and I think most are going forth in good faith, but that really necessitates working together with others. So, it is possible to solve the common bond issue and then impose new requirements on community credit unions or others that would be divisive and end up with further court cases. So, that's a concern I have. We've got this before us; we should take the time to resolve it, and hopefully we'll have adequate time before things become too ragged. Thank you.
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    Mr. D'AMOURS. All I would—if I could suggest, Congressman Vento, adequate time depends on your perspective. There are people today—50 million people today and untold numbers of low-income people who, because of the absence of this legislation and the court order, are deprived of access to credit union services to fairly-priced services, which is their only shot at a participation in the American economic experiment. Thank you.

    Mr. KANJORSKI. Mr. Chairman, if I may or will you yield, Mr. LaFalce?

    Mr. LAFALCE. I'd be delighted, yes.

    Mr. KANJORSKI. I would like to make a point, too, that this committee just held a hearing on the electronic transfer issue no more than a week ago. Now, let us recognize that we're talking about forcing Social Security and veteran's recipients to transfer over to bank accounts, people who don't have bank accounts, so they can receive an electronic transfer. Presently, that's still on track to occur at some point, and those 10 million people will not be able to have those electronic transfer accounts in credit unions unless we do something.

    Mr. LAFALCE. Is the gentleman suggesting that if you're a Social Security recipient, you have a common bond which would qualify you?

    Mr. KANJORSKI. What I'm suggesting is that each credit union could define its membership to include unbanked senior citizens so they could be a participant in providing electronic transfer accounts in nearby towns. Now, it may be humorous to think about this, but in the Commonwealth of Pennsylvania, in the consolidation of banking, talking about this level playing field over the last 60 years, there are many communities, my district being one, that practically have no community banks, or few community banks, within a reachable distance from elderly people, but credit unions still do exist in all these communities. Some of those people would like to use a credit union rather than a bank and, particularly, a large city bank that's sprawled all over the country where they lack identity, and we're not going to afford them that opportunity unless we pass H.R. 1151; unless we take that into consideration.
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    I would hope that the regulators define anyone who is required by law to have an electronic transfer account that is a recipient of Social Security or veteran's benefits that they could use a credit union for this purpose, yes, and save the amount of money involved.

    Mr. BARRETT. Mr. Chairman, if I could ask a follow-up question?

    Chairman LEACH. All right. Well, first—you have the time—the gentleman's——

    Mr. BARRETT. Would the gentleman yield?

    Chairman LEACH. Well, let me recognize Mr. Barrett.

    Mr. BARRETT. Thank you, and I had this line of questioning, but I'm still not comfortable that I understand the response, and I understand now a little differently the definitions that are not included in this bill, but, again, let me paint the picture, and it may involve the State credit unions as opposed to Federal, but I think we all—everybody here knows—we're hearing from both, people interested in State credit unions and Federal credit unions.

    So, we have a situation with a Waukesa credit union, municipal credit union, Mecquan municipal credit union, Racine municipal credit union. Each of them have been formed. Under this legislation, as I understand it, they could come to you and say we now would like, because we all have our individual common bonds, people who live in those three communities, we are now coming to you saying that there is more than one common bond here, but now we would like to band together to form the suburban credit union which would comprise three communities surrounding the city with the lake on the other side. I don't see where you would have the jurisdiction to say no to that even if you wanted to, and my question to you is aren't we sort of setting the stage, again, for a doughnut situation?
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    Mr. D'AMOURS. No, as I understand it, first of all, if they were Federal they would come to us——

    Mr. BARRETT. I understand that.

    Mr. D'AMOURS. ——But we would have the ability, and very likely, depending on the shape of the area, would say no unless we found that there was a single community common bond or that they were trying to just combine into one credit union that had several common bonds, but then it wouldn't be, as you described it, a community.

    Mr. BARRETT. But where would you have the authority to deny? I mean, I would make the argument they have—right now, there are suburban high school basketball conferences, so they could use that argument. I mean, frankly, you can, I think, quite easily, draw a reason as to why they do have a common bond.

    Mr. KANJORSKI. Will the gentleman yield?

    Mr. BARRETT. I would yield.

    Mr. KANJORSKI. If I could make a point, neither the Supreme Court case nor our legislation affects that issue. What can or can't be done is not going to change. It doesn't affect geographic-based credit unions. We will only affect occupational and association credit unions.

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    Mr. BARRETT. I don't know that that's true.

    Mr. KANJORSKI. Yes.

    Mr. D'AMOURS. Congressman, if I may? Our present standards require that the definition of community be a well defined community. There has to be interrelationship; it has to actually be something that you can reasonably say is a separate, distinct, protean, well-defined area.

    Mr. BARRETT. So, you're saying there are no Federal geographic credit unions?

    Mr. D'AMOURS. Oh, yes, there are, but they are well defined communities as is Mecquan.

    Mr. BARRETT. As is what?

    Mr. D'AMOURS. As is a suburb of Milwaukee. It's a well defined incorporated community.

    Mr. KANJORSKI. But that could be a community credit union——

    Mr. BARRETT. Exactly.

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    Mr. KANJORSKI. ——But it may not be combining all of these other——

    Mr. BARRETT. No, but what my point is—again, looking at this language—the membership of any Federal credit union shall be limited to one or more groups each of which have within such group a common bond. So, within Mecqua, you have a group within which you have a common bond, then you have—I mean we've seen it with AT&T that you've got this company that's in Texas; this company that's in North Carolina. I, frankly, think you can make a stronger case that these contiguous suburbs have more in common than one employer in Texas and one employer in North Carolina. So, I don't know where you would have an incentive to turn them down.

    Mr. KANJORSKI. But the language there that you've read, Mr. Barrett, should be followed with what remains in the statute which restricts that to occupation- and association-based.

    Mr. BARRETT. But you just said that they do have geographic——

    Mr. KANJORSKI. That's a separate licensing provision. This bill does not affect the geographic licensed Federal credit unions. I mean, what we're arguing here today, whatever you want to accomplish is not going to change by passing this bill. It isn't going to change what they can or can't do.

    Mr. BARRETT. I'll follow up. Thank you.
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    Chairman LEACH. Thank you, congressman. Are there any more questions?

    Mr. KANJORSKI. There is counsel present maybe to give their opinion or so that Mr. Barrett is clear on that.

    Chairman LEACH. They would give the same answer you just gave, Congressman.

    Are there any more question of Members? If not, let me thank this panel for their very thoughtful assistance. Thank you, Mr. Feeney, Mr. D'Amours, and Mr. Carnell.

    Our next panel consists of Don W. Lewis who is the President and CEO of the Aberdeen Proving Ground Federal Credit Union of Aberdeen, Maryland on behalf of the National Association of Federal Credit Unions; Ms. Rose Bartolomucci, who's President and CEO of Kent Credit Union, Kent, Ohio on behalf of the Credit Union National Association; Ms. Gail Briles who's Director of Human Resources, Klaussner Furniture Company on behalf of the Alliance to Protect Credit Union Choice; Mr. Jeffrey L. Plagge, who's President and CEO of First National Bank, Waverly, Iowa on behalf of the American Bankers Association; Mr. K. Reid Pollard, President and CEO of the Randolph Bank and Trust Company of Ashburn, North Carolina on behalf of the Independent Bankers Association of America; Mr. John D. Garrison, who's Chairman, President, and CEO of Walden Savings Bank, Walden, New York on behalf of America's Community Bankers.

    We'll begin in the order of their introduction with Mr. Lewis, who speaks on behalf of the Federal Credit Unions. Mr. Lewis.
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    Mr. LEWIS. Thank you, Chairman Leach and Members of the committee. My name is Don Lewis, and I am President and CEO of Aberdeen Proving Ground Federal Credit Union. I consider it an honor to come before you to testify. I am pleased to represent the 65,000 members of my credit union, the National Association of Federal Credit Unions, and all the members of the credit union community. Thank you for inviting me to testify.

    The field of membership issue is a challenging one for us all. At the heart of this complex matter is a simple question: Should consumers have the right to choose their financial institutions? We believe strongly that they do and that Congress should act swiftly to ensure it.

    Since 1982, a number of credit unions across the country, following the direction of the Federal Government, began serving more than one group of members. These credit unions did so for nearly a decade before a lawsuit was filed by the banking industry. We believe that this policy made sense then and that it makes sense now; just ask any member of the 25 Select Employee Groups at my credit union. We are not coming here today asking for anything new. We are not seeking new powers; we are not seeking new expansions. All that credit unions are asking is that you take action to uphold that policy.

    The banking industry contends that credit unions enjoy unfair advantages, however, they tend to ignore that credit unions consistently take more risk with their members and that we do not charge any fees to offset the cost of the accounts of members of modest means.
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    The banks are truly not being injured as a result of the multiple group membership policy. In 1980, two years prior to the introduction of this policy, credit unions accounted for 2 percent of household financial assets. In 1997, credit unions held 2.1 percent. In addition, for seven straight years, banks have shown record profits.

    On the issue of market share and asset size, I would like to talk about growth in mission. I would like for us to focus, briefly, on non-profit organizations such as the Girl Scouts of America, the American Red Cross, the Boys and Girls Club of America. These are non-profit organizations that are growing, and we, as Americans, strongly support them because we believe in what they're doing. We understand that they have consistently adhered to their original purpose of organizing. This is true of not-for-profit organizations called credit unions. We have remained true to our cause. We have adhered to our original purpose.

    If the Supreme Court's decision is not overturned by Congress and Federal credit unions are permitted to add members only from the original core membership group and existing members are forced out of their credit unions, the impact on credit unions would be devastating, either immediate erosion and possible failure of individual credit unions. On a long-term basis, the movement would be negatively impacted.

    To date, at least six bills have been introduced that address the field of membership issue. We applaud the efforts of Congress in developing these bills. Of these, only H.R. 1151, the Credit Union Membership Access Act, succeeds in reaffirming NCUA's field of membership policy. On behalf of all credit unions, I wish to express our thanks to the more than 185 cosponsors of H.R. 1151.
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    In closing, there are two issues I feel that I must address: CRA and taxation. The Federal Credit Union Act requires credit unions to serve their entire membership, and because credit unions were not a part of a history of a series of complaints of red lining, complaints about discriminatory practices, it is very hard for us to understand why CRA is being talked about within the credit union context.

    On taxation, my response is quite simple: Credit unions are not-for-profit financial institutions run by volunteer boards for the public good.

    Every day that Congress delays in resolving this issue, real people are hurt because they simply do not have access to credit union services.

    In the 64 years since the passage of the Federal Credit Union Act, credit unions have asked little of Congress. We have not been a burden to the taxpayer. Credit unions have stayed on focus with the credo of people helping people. Now, credit unions have something to ask of Congress on behalf of the 70 million current members and millions more potential members: enact the language of H.R. 1151.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you very much, Mr. Lewis, for that strong statement, and, at this point, I would like—before turning to our next witness—to ask unanimous consent to place the statement in the record of the Navy Federal Credit Union and also unanimous consent to put in the record a memo that has just been given to me by Mr. Dan Mica on behalf of CUNA. Without objection, so ordered.
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    Chairman LEACH. Our next witness is Ms. Rose Bartolomucci. Please.


    Ms. BARTOLOMUCCI. Thank you, Mr. Chairman, Members of the committee. My name is Rose Bartolomucci, and I am President and CEO of Kent Credit Union in Kent, Ohio. On behalf of the 70 million credit union members nationwide, thank you for this opportunity to testify today on the situation confronting America's credit union movement.

    If is fitting that this hearing is being held in the Wright-Pattman room. Chairman Pattman was a champion of the credit union movement and was an author of the Federal Credit Union Act. One of Chairman Pattman's strongest beliefs was that every American should have the opportunity to belong to a credit union, for as he was once quoted, ''Next to the church, credit unions do more good for people than any other institution.''

    My belief, Mr. Chairman, in the credit union difference runs deep. Both my parents were immigrants. My father spoke little English when he arrived here, and he was turned down by three different banks for a $2,000 loan to open his own business. He tried St. Anthony Federal Credit Union which was open after mass on Sundays. The loan committee took a chance on him, and that was his start in the American dream and my start as a credit union believer.

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    Most accounts of last month's Supreme case decision have cited that 3,500 directly affected Federal credit unions could lose 10 million credit union members. That's an institutional approach. Let's look at this from a personal perspective. Ten million Americans could be denied the ability to remain members of the credit union of their choice, and many million more will never be able to join a credit union.

    I want to make a few points in my testimony. First, bank profitability has not been impacted by credit union multiple group flexibility. 1997 was the sixth consecutive year for record bank profits. Banks of all sizes are doing extremely well. A study released last month by the GAO underscores just how well banks are doing even while having to labor on what banks call an unlevel playing field. The GAO concluded that asset and net income growth for North Carolina banks and thrifts substantially exceeded that of credit unions in that State. When considering these facts, I can't resist wondering what their real agenda is. I believe it is appropriate for banks to emphasize profitability. Banks should be making money. Without strong and profitable banks, the American economy could not function.

    Another point I would like to make is the irony of bank nostalgia for the 1930's, at least when it comes to credit unions. Last year, banking industry witnesses told this committee of the need to revise the 1933 Glass-Steagall Act as well as a variety of other statutes. They said that regulators should have discretion to reinterpret banking regulations across the board. Contrast that to what happened when our regulator reinterpreted our 1934 statute; he was sued, and that's why we're here today. If the charge is that credit unions have changed since 1934, let me plead guilty. Credit unions have changed; so have consumers; so have banks; so has America, and our changes have enabled consumers and small businesses to exercise their right to choose their financial institution.
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    All of that has been put at risk by the Supreme Court decision, but the decision wasn't simply against individual consumers; it was also a decision against small businesses which play a central role in our economy. Over 63 percent of the private sector work force is employed by companies of less than 500 employees, and, unfortunately, the Supreme Court's decision will deprive those workers from choosing to belong to a credit union only because their company is too small to start one of their own. That sends an unmistakable signal that if you work for a small company, you just don't deserve the same choices.

    H.R. 1151 restores the status quo that existed to the benefit of American consumers and small businesses since 1982. It guarantees that credit unions will continue our record of never costing the American taxpayer a penny, and it creates a competitive environment in the financial marketplace. H.R. 1151 provides Congress with a rare opportunity to be both pro-consumer and pro-business. Even though my credit union is not affected right now by the Court ruling, my participation in these hearings should make it clear that all credit unions are extremely concerned by what's happening. Most importantly, the potential restriction on credit union membership is not really about any institution, it's about consumers and their right to determine where and how they conduct their financial affairs.

    I would also like to offer my thoughts on the concept of grandfathering current credit union members without allowing for membership growth. We estimate that there will be an annual 8 percent attrition rate impacting those credit unions that are unable to add new members. As a credit union shrinks, it won't be able to maintain previous levels of service, accelerating the shrinkage. The credit union will be locked into a downward spiral that will be difficult to reverse and the safety and soundness cushion provided by a diverse field of membership will be a thing of the past.
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    Federal Reserve Chairman Alan Greenspan said, credit unions were set up for a specific purpose, and like any institution, they expand, and they should expand because that is basically the nature of a viable institution; if it doesn't expand, it dies. That's the real point. Credit unions of all types need to be empowered to pursue their cooperative mission of member service, and they need to grow to survive.

    Mr. Chairman, I would also like to add for the record, we believe the testimony presented on the HMDA data paints an inaccurate picture of the credit union movement. Therefore, we will prepare current data and comments to be submitted for the record after the hearing. I would like to end with, you don't have to be anti-bank to be pro-credit union, and, in this case, Congress should act to preserve the ability of Americans to exercise real control over their financial lives and pass H.R. 1151. Consumers deserve nothing less. Thank you.

    Chairman LEACH. Thank you very much. Our next witness will be Ms. Gail Briles. Please proceed.


    Ms. BRILES. Mr. Chairman and Members of the Committee, I am Gail Briles, and I'm the Industrial Relations Manager with Klaussner Furniture. We had a little misstatement of my position earlier when I was introduced.

    Chairman LEACH. I apologize.
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    Ms. BRILES. That's all right. I'm sure that that was not information that you provided.

    First, I would like to thank you for the invitation to appear today and tell you this issue affects American business and its employees who are the ultimate concern of all of us. In addition to Klaussner Furniture industries of North Carolina, I am on the advisory board of the Business Alliance to Protect Credit Union Choice. The alliance is a coalition of more than 1,000 large and small businesses and organizations dedicated to protecting the rights of employees to join existing credit unions and to offer credit union membership to their employees. In short, I'm here to represent employees who need the choice of a credit union.

    I would like to provide a brief historical perspective at this time because it is a fact that the fluctuation of the American economy is what has got us into our present predicament. As you all know, the Congress of the United States in 1934 passed legislation establishing credit unions. The law limited membership to groups having a common bond. Well, over a period of 48 years, credit unions multiplied and became an integral part of American life. Then, in the early 1980's, the economy took a tumble. More than 600 plants closed in 1982 and 251 credit unions were liquidated in one year alone. What about all the credit unions in those shut down plants? The financial base was gone, how would they survive? The Federal Government came to the rescue. The National Credit Union Administration decided to allow credit unions to combine with other credit unions. Edgar Callahan, Chairman of the NCUA, said their multiple group policy enables credit unions to take their eggs out of one basket, so the credit unions won't rise or fall with its sponsoring organization. According to the NCUA, by increasing the chances of survival, the safety and soundness of the entire credit union system was enhanced. It was a great move; no bail-out was needed. So, credit unions continued to prosper until this current crisis developed. As we all well know, the banks challenged the 1982 action by the NCUA and the Supreme Court has held that the 1934 act did not allow for multiple groups, and we're here before you today to ask you to change the law to allow for multiple groups. For sixteen years, that's what's happened, so we've got sixteen years of history to look at to see how that has helped.
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    Now, I appreciate what's been said about no one losing his or her membership in a credit union, but the big question is what about the 62 million Americans who work for small business and are not already in a credit union? Are they to be permanently barred from membership? And I'm talking about 62 million Americans in mid to small size businesses like hardware stores, metal shops, shoe factories, window manufacturers, daycare centers. These groups cannot form their own credit unions. It takes at least 500 members to do that, and they are the folks who need it the most. On average, employees of small to mid-size firms earn significantly lower wages, and they're much less likely to receive help in pension benefits.

    Well, why is a credit union good for these small businesses? Well, I'll tell you what my employees at Klaussner Furniture say: that the credit union is one of the best benefits a company can provide. Most of our people tell us even given the fact that we started a health clinic at our company, they still tell me that the credit union is the best benefit. That's the first thing they ask me about when they come to work. A credit union is particularly important in today's marketplace, because it is getting harder and harder to recruit and keep good workers, and, apparently, it's important to these workers, because they do ask me about that when they come to our company.

    Credit unions can make the kind of character lines to working families that, in many other cases, other lending institutions cannot. One of my favorite experiences with AT&T Family, which is our credit union, is one about a young lady who worked in our frame shop, and she ran a ripsaw. She hadn't finished high school; she was a single parent; she was an orphan; she was always in debt; she had a good work history with us, but her credit history was not so good, and to finance her vehicles, she had to get loans from finance companies at very high rates, and she came to me one day and said ''You know, my transmission's gone out on my vehicle, and they won't extend me any more credit, and what should I do?'' I said, ''Well, go to the credit union and try them.'' So, she did. She went and talked to them. They made her a small loan. She made her payments on time over a year. They increased her line of credit to the point that she could get away from that finance company. Now, she goes to school during the day; she works at night; she's bought herself a small home; she's doing great, and I really firmly believe one of the main reasons is because the credit union expressed faith in her, and I'm really proud of what she's done, but I think the credit union was a big part of what she was able to do.
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    Her story brings up another important point for our company. All of our workers drive to work. They have to. We do not have mass transit. They drive 20 or more miles sometimes. They drive through rain. They need reliable vehicles, and transportation is not an acceptable excuse for absenteeism, and the credit union, a lot of times, has provided small, affordable loans that have allowed these workers to drive good, reliable vehicles instead of the ones that seem to be in the repair shop so often. Our workers feel comfortable going to a credit union, and they've told me in a lot of cases, they do not feel as comfortable in a bank.

    So, in conclusion, just let me say I believe all Americans deserve a right to self sufficiency. They can achieve this through credit unions. I have seen it where I work, and I just ask that you please let this continue. Thank you.

    Chairman LEACH. Well, thank you, Ms. Briles.

    Our next witness is Jeff Plagge from Waverly, Iowa, one of the most impressive young community bankers in the country. Please, go ahead, Jeff.


    Mr. PLAGGE. Thank you, Mr. Chairman. Before I start with my comments, I'd just like to give everybody a perspective, because when people mention banks everyone has different views of what a bank is. Our bank is approximately a $100 million bank in northeast Iowa. We're community owned by over 325 shareholders. In fact, that number is 375 shareholders if you take into account our staff; we're all owners of our bank through an ESOP. So, our community is 8,500 people with three community banks and three credit union offices.
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    I would also mention I handed Congressman LaFalce's staff a comment about the immediate family membership issue on credit unions and the John Deere Community Credit Union in our area advertises that anybody that's a member of the immediate family—cousins, in-laws, aunts, and uncles—are all eligible for membership, so that was a comment that Mr. D'Amours made early on that said just immediate family.

    Mr. Chairman, it's clear that the emotions on both sides of the credit union issue are running high. I want to thank you for holding this hearing to help us get beyond the emotional rhetoric and focus on the important public policy issues.

    Credit union representatives say that unless Congress acts quickly to reverse the Supreme Court decision, the sky will fall on the credit union industry and its members. Let me assure you, Mr. Chairman, that nothing could be further from the truth. Just yesterday, the banking industry filed our suggested remedy with the court. This remedy would mean business as usual for credit union customers. No current credit union customer would lose his or her account or membership status.

    Today's debate raises some fundamental issues, particularly with regard to credit union exemption from Federal income taxes and the Community Reinvestment Act, or CRA. The public policy questions are very straightforward. First, who should have access to Government subsidized financial services? Second, what standard of community responsibility should credit unions be required to meet? Legislation sought by the credit unions would eliminate the common bond. This has major implications for both of these public policy questions. Eliminating the common bond means an unlimited expansion of the tax subsidy which is paid for by all taxpayers, and with no common bond and no CRA, credit unions can pick and choose who they will serve, and, therefore, who will benefit from the tax subsidy.
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    Let me give you an example of what this means in Waverly, Iowa. One of my biggest competitors is John Deere Community Credit Union. It is four times bigger than my bank. In fact, all ten banks in Bremer County added together are barely as large as John Deere Community Credit Union. John Deere competes for, essentially, the same customers as all ten of us, but John Deere has a huge tax advantage. It doesn't pay a dime in Federal income taxes even though last year it had $4.3 million in undistributed profits. On the other hand, the ten banks in Bremer County paid more than $2 million in taxes.

    Also, we hear a lot about the non-profit situation, but I have a hard time describing to my customers and my staff and shareholders and board how a non-profit credit union made four times more money than the First National Bank of Waverly last year, and in the process of being non-profit has built $40 million in reserves. So, I think the whole non-profit issue needs to be clearly understood. There are profits retained by many, many credit unions.

    My customers, many who are small farmers, small business people, retailers, and we get together annually with our customers—we get together more often than that—but we get together annually to do a very complete analysis of their business whether it's a farming operation or retail or small business. Through that analysis we see what our customers make; we see the hard work that they put into their businesses, and we also see the Federal taxes they pay at the end of each year. It's hard for me to describe to them why a $434 million credit union in the same community making over $4 million a year gets by without paying a single dollar in Federal taxes when all of those small businesses and small farmers are paying taxes all along.

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    Industry-wide, the taxpayer subsidy amounts to almost $1 billion per year. That's as much as the Federal Government spent on school breakfasts for low-income kids last year and is more than the Federal payments to the States to provide daycare. Who benefits from the credit union tax subsidy? The credit union's own numbers show that the average household income of members is over $43,000; 37 percent higher than non-members. This hardly reflects the credit union's chartered mandate to serve people with small means.

    With regard to CRA, we believe that credit unions should be held to the same high quality standards and community responsibility as banks and thrifts. In fact, a reasonable case could be made that because of their tax subsidy, credit unions should be held to an even higher standard of community reinvestment, but that is not the case today. Today, credit unions serve those segments of the community they choose to serve. They are free to define and extend their constituency as they please, allowing them to cherry-pick the areas of individuals that will be part of their community. In fact, even credit unions with geographic common bonds whose field of membership is based on a town, a county, or some movement toward entire States, have no obligation to serve low- and moderate-income neighborhoods. We believe that, number one, credit unions should be required to meet the standards set by the Community Reinvestment Act, and, two, that limits should be placed on the extension of the taxpayer subsidy to credit unions.

    The credit union industry's bill meets neither one of these goals; passage of H.R. 1151 would mean no requirements to serve to low- and moderate-income neighborhoods and no constraints on the extension of taxpayer subsidy. ABA and a group of bank trade associations have developed a legislative approach that we believe is fair to credit unions, taxpayers, and tax paying financial services providers. It would establish criteria for determining whether an institution functions as a small, traditional credit union for which the tax exemption is justified and CRA is unnecessary, and it would require that credit unions not meeting these criteria should be subject to taxation and CRA. In other words, special purpose, special benefits; if not the special purpose, the benefits disappear as well.
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    In conclusion, Mr. Chairman, the Supreme Court decision will not affect current credit union members. Congress now has ample time to look carefully into the special tax and regulatory treatment of credit unions. We are prepared to work with you, Members of Congress, and the credit union representatives to find such a solution. Thank you.

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

    Our next witness is Mr. K. Reid Pollard who represents the Independent Bankers Association of America. Please proceed, Mr. Pollard.


    Mr. POLLARD. Thank you, Mr. Chairman, and before I begin, I would like to introduce two editorials for the record.

    Chairman LEACH. Without objection, and all of your statements, without objection, in a fuller manner will be presented for the record, and I know some of you have much more lengthy statements than you've presented. Please, go ahead.

    Mr. POLLARD. Thank you. Mr. Chairman and Members of the committee, my name is Reid Pollard, and I am President and CEO of Randolph Bank and Trust Company, a $135 million community bank located in Ashburn, North Carolina. I am pleased to testify today on behalf of the Independent Bankers Association of America.
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    I personally welcome this opportunity to comment on the proposed congressional response to the recent Supreme Court ruling and not only because my bank was one of the original plaintiffs in the suit that was decided by the Court; I also think there are important public policy issues at stake here that Congress should address.

    Specifically, I would pose two additional questions for the committee's consideration. First, is it fair for the American taxpayers to continue to subsidize one segment of the financial services industry, those credit unions that have evolved into highly profitable, multimillion dollar conglomerates? And, second, should these credit unions continue to enjoy immunity from the legal requirement to reinvest a portion of their profits in their communities?

    The immediate question before this committee is whether or not to enact H.R. 1151, the credit union industry's bill that would reverse the Supreme Court's decision. Enacting this legislation would give the 3,600 largest, most aggressive Federal credit unions the right to add members from any group without any limitations. Paraphrasing from the majority opinion of the Supreme Court, this would mean that every employee in the Nation could be a member of a single occupational credit union. We submit that this is neither desirable nor reasonable public policy, especially when there are alternatives.

    A united banking industry has proposed one such alternative. The IBAA, together with the American Bankers Association, America's Community Bankers, the National Bankers Association, American League of Financial Institutions, and the Association of Military Bankers of America are proposing: first, that in the enforcement action on the common bond case, every current member of every occupational group, regardless of when the group was added, be grandfathered. This will lay to rest the charges by the credit unions that we are seeking to make widows and orphans out of credit union customers. Second, we propose that smaller credit unions continue to operate as they do today, so long as they comply with the law in the future. Third, we propose that larger credit unions that want to have multiple association groups maintain commercial accounts and advertise to the general public. In other words, those credit unions that want to be the functional equivalent of banks would have to make a choice. They could retain their credit union charter but come under bank laws and regulations, or they could convert to a mutual savings bank charter, thus, maintaining their member structure while engaging in banking activities.
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    Finally, we propose that the community-based credit unions should be limited to the community which is ''compact and contiguous'' and consists of families of limited means or underserved by banks or thrifts. Specialized community development credit unions however would be treated the same as small credit unions.

    We also support the U.S. Treasury's suggestions to improve the safety and soundness of credit unions.

    I would like to briefly address the question of consumer choice which has been at the core of the credit union arguments on H.R. 1151. Contrary to some of the credit union rhetoric, financial consumers have ample choices of credit union membership, now, under the Supreme Court's decision. They can join an occupational credit union, Federal or State, unfortunately for the banking industry. They can also join an association-based or community-based credit union.

    In addition, the Credit Union Act allows any seven persons to form an occupational credit union. Now, I know that seven persons is not realistic to fully support a modern credit union, but clearly, opportunities exist today just as they did on February 24, 1998, the day before the Supreme Court's decision.

    Finally, I would like to address the issue of taxation. If larger credit unions are acting in every way like commercial banks or thrifts, we believe they should be required to pay taxes like commercial banks or thrifts. We would emphasize that such a decision is entirely up to each credit union. If the Congress is not willing to consider taxing credit unions like banks, then Congress should consider granting community banks tax relief comparable to that enjoyed by credit unions.
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    The current credit union tax subsidy is worth roughly $1 billion per year and the OMB—Office of Management and Budget, Executive Office of the President—forecasts this figure will escalate to $5.8 billion over the next five years. If H.R. 1151 is enacted, there is no way to predict how much this subsidy will grow.

    The IBAA represents our Nation's small community banks. The median-sized IBAA member is $50 million in assets. We believe that the primary theater of competition will continue to be between large credit unions and smaller banks. Small credit unions, like community banks, add to the diversity of the financial services market place. They should be preserved. But we submit that larger credit unions are simply banks wrapped in the cloak of a tax-free entity.

    They must decide if they want to be credit unions or banks. The sooner the credit unions, themselves, own up to this fact of life, the sooner we will be able to sit down together and work out a long-term solution that is in the best interest of all our customers and is also fair to the American taxpayer.

    Thank you, Mr. Chairman, for this opportunity to testify. I would be happy to answer any questions you or the other committee Members may have.

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

    Our last witness is John D. Garrison on behalf of America's Community Bankers.

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    Mr. GARRISON. It's a pleasure to be here.

    Mr. Chairman, Members of the committee, I'm Chairman, President, and CEO of Walden Savings Bank, that's a small mutual institution in Walden, New York. I'm also on the Board of Directors of America's Community Bankers and serve as ACB's Chairman of the Coordinating Committee on credit unions.

    First, I'd like to make the point that ACB is not opposed to credit unions, however, credit unions that serve geographically-based, community-chartered, and multiple employer groups should be treated like any other banking institution and should be subject to Federal taxation and the requirements of community reinvestment. The legislative proposal developed by the bank and trade groups to address credit union issues is aimed at the minority of the bank-like credit unions.

    Most credit unions do not resemble the AT&T credit union, a huge financial organization with 150,000 customers and reportedly 560 subgroups. ACB wants to work with Congress to assure that those credit unions abandoning the original mission will have the same obligation as banks and savings institutions to pay taxes and to play by the same rules. Congress took a similar step in 1952 when it provided equivalent treatment for mutual institutions.

    To illustrate the point even further, I would like to talk for a moment about a David and Goliath situation. The Hudson Valley Federal Credit Union. Approximately, 30 miles from my bank has almost $900 million in assets in 1997 compared to $115 million in my bank. Formerly, the IBM Federal Credit Union, Hudson Valley now encompasses approximately 100 different employee groups, ranging from car dealers, hotels, and insurance companies. Their products and services are no different from those at Walden Savings Bank.
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    At my bank, customers have no required minimum balances on checkings accounts. There are no service charges either monthly or per-check fees. We charge no points on mortgages and no application fees on portfolio mortgages. Our interest rates on loans are competitive with those of the credit union.

    In short, there's no difference to the customer; but here's the key difference. Walden last year earned $820,000, after paying $500,000 in Federal and State income taxes. Hudson Valley Federal Credit Union last year earned nearly $10 million, of which they paid zero in taxes. If they had paid taxes, it would have been nearly $4 million.

    Within the two years, Hudson Valley opened four new offices using tax-subsidized dollars. The one right in the middle of my service area, cost $1.2 million. That's just land and buildings, to illustrate this point that they are able to use over 40 percent of their earnings that otherwise would have been paid in Federal and State taxes to compound their growth.

    Competition is fine, ladies and gentlemen, but it should be fair. My mutual savings bank operates much like a credit union. Everything we make goes back into the institutions and back to our customers.

    The way credit unions operate, where income earned from borrowers is returned to savers after expenses in required allocations to reserves, 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 a credit union, but they, too, pay taxes.
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    In many ways, mutual savings institutions were forerunners to credit unions. Both were founded along the same principles by individuals with a collective good of themselves and the neighbors who likewise lacked financial wherewithal required to gain access to the banking system at the time. Like credit unions, mutual savings institutions were created by banding together like-minded individuals striving to meet a perceived community need.

    In 1952, Congress determined that all those savings institutions provided many benefits to the community. The savings industry had matured to the point where it was appropriate to give it the full responsibilities of commercial bank brethren. As a result, savings institutions lost their tax exemption in 1952, but many have still remained mutual form and have survived and prospered.

    Today, mutual savings institutions are taxed exactly the same way as other savings institutions and banks. Notably, among the insured depositor institutions, only credit unions remain untaxed. ACB does not believe in more laws, more regulations, more controls, and certainly not in more taxes. But we believe all bank-like institutions should play by the same rules.

    Bank-like credit unions are worthy competitors who should have the confidence to operate without this—undeserved special benefits in their effort to serve the public more efficiently. Bank-like credit unions seem unwilling to accept the commitment to make their communities better. Perhaps, worse, they are robbing the taxpayer to pass on benefits to members who are better off than the average American. America's Community Bankers stands ready to assist in any way possible to address these issues.
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    I will be happy to answer any questions you may have. Thank you, very much.

    Chairman LEACH. Well, thank you, Mr. Garrison for that excellent testimony.

    Mr. LaFalce.

    Mr. LAFALCE. Pass, Mr. Chairman.

    Chairman LEACH. Mr. Kanjorski.

    Mr. KANJORSKI. Mr. Garrison, what's the full distinction between your mutual bank and a credit union, only the fact that you call yourself a mutual bank and your ownership is controlled by or voted on the dollar value of the owner's deposits as opposed to a one-vote-per-member for a credit union?

    Mr. GARRISON. We're a State-chartered savings bank. We have no owners.

    Chairman LEACH. But, you are mutual?

    Mr. GARRISON. We're a trusteeship. We have no owners.

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    Mr. KANJORSKI. Well, if the credit unions—if you feel credit unions really have a decided advantage over you?

    Mr. GARRISON. I do.

    Mr. KANJORSKI. Why don't you file for a credit union charter?

    Mr. GARRISON. Because I'm a hard-nosed savings banker who believes in the integrity of the American system.

    Mr. KANJORSKI. Well, it just seems to me that if you stop running into the wall, the head stops hurting.

    Mr. GARRISON. I can.

    Mr. KANJORSKI. I think you can do things that credit unions can't do, can't you?

    Mr.GARRISON. I couldn't hear that.

    Mr. KANJORSKI. You can do things that credit unions can't do.

    Mr. GARRISON. Yes, there are some things.

    Mr. KANJORSKI. Sure, there are advantages to being in your structure, in your charter.
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    And it would be grossly unfair to represent that you're just out there paying taxes to the United States Government because that's the only way you want to do it. We have the Regulator here, we could have talked him into giving you a charter.


    Mr. GARRISON. I'd like to offer the credit union the opportunity to take that course.

    Mr. KANJORSKI. See, they don't want to leave. They aren't willing to become your form, but you don't want to or are not willing to become theirs. So, it leaves me with the conclusion that there are some advantages to remaining in your form. There's nothing wrong with that.

    Mr. GARRISON. There honestly are some differences—very differences, their inability to transact business.

    Mr. KANJORSKI. You know I used to own a large interest in a community bank, and I understand your problem because we used to compete with credit unions all the time. But almost the same question goes to you that if you don't like the idea that you can sell stock to raise capital, if you don't like the idea that you can have a limited number of ownerships in your bank and that they get the profit that's earned by the bank as opposed to separating. If you don't like the idea that you can carry on certain transactions, you, too, can file for a charter for a credit union. If it's so good.
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    Mr. GARRISON. I like all those factors at our community bank

    Mr. KANJORSKI. That's why I owned stock in a bank, and that's why I was willing to see the bank pay income tax when the credit union we were competing against did not, because I got the benefit of the dividend return on the profits the bank made. There's nothing wrong with that. But in this instance, that's what I don't understand.

    I come from a background of small bankers too, and I think this argument that somebody's taking bread out of somebody else's mouth is really not a viable argument from the standpoint that I don't think you want to deny people who can't buy shares of stock in a bank who don't have the wherewithal to do that, that they can't participate in American capitalism or democratic capitalism?

    Mr. GARRISON. No, and it's not an issue—I would say it's not an issue of competition——

    Mr. KANJORSKI Well, if you want to buy Mr. Garrison's bank, you can go out and float 10,000 issues of shares of stock and if you're convinced that you could sell those stockholders to buy those shares, you'll have the equity to buy his bank.

    But you know a credit union can't go out and sell shares of stock. A credit union can only expand by retained earnings and if it doesn't have a profit, if it doesn't retain earnings, it doesn't grow at all as a matter of fact, it will wither on the vine and die.

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    Mr. GARRISON. Can I help answer that?

    Mr. KANJORSKI. Let me ask you this. Would you like the Congress to equalize the powers? The credit unions can do everything your bank can do and sell stock, but then impose the tax on them.

    Mr. GARRISON. If the credit union system paid taxes and all the regulations and abided by CRA then we're fine.

    Mr. KANJORSKI. And then would you be agreeable to allow them to function in every way a bank functions, to all the powers of banks, expand as banks?

    Mr. GARRISON. Absolutely.

    Mr. KANJORSKI. Expand as banks and sell shares as banks?

    Mr. GARRISON. Absolutely.

    Mr. KANJORSKI. And so if that's the case, what's this distinction that you may not want to become a credit union now. If they can do that, why would it be an advantage to you to think back, except I would suspect that you probably have shares of stock in your bank, don't you?

    Mr. GARRISON. Very few. I'm relatively new to the bank so I haven't had an opportunity to buy many shares myself and they're tightly held from the standpoint people like holding stock in our banks so we don't have much go to market——
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    Mr. KANJORSKI. How many shareholders do you have in your bank?

    Mr. GARRISON. We have approximately 325 and we also have employee ESOPS where employees are another 45 on top of that.

    Mr. KANJORSKI. Ah, you've got a little credit union your employees can form if you break your bank into three equal groups. They can go out and get Sub S corporations and they won't have to pay taxes either.

    Mr. GARRISON. I guess going back to some of your original comments, it's not an issue of competition. We've been competing with John Deere for years. We'll compete with them today, we'll compete with them tomorrow. Our question begs back to the general policy question of who should continue to get the tax subsidies of financial services. John Deere Community Credit Union, $434 million, if I could, please, made $4 million last year. Now, if they had paid taxes like me, that still left them over $2.5 billion for retained earnings.

    They act like a bank, they control—they're very well-run institutions and I'm not here to target them. They have good board members. They have good staff members and they do things within their communities.

    Mr. KANJORSKI. I understand. But if, and if they weren't competing with you, you probably wouldn't be disturbed with them. Then what should we say to the Subchapter S bank in Dallas, Texas? It is $1.5 billion in size, but they have a limited number of shareholders, so they formed a Sub S corporation so they have almost the same tax advantage, almost not quite the same as a credit union.
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    They don't pay any corporate taxes. They shove it all down in the shareholders benefit. What is the difference? You know we have almost $50 billion in bank assets in Sub S corporations.

    Mr. GARRISON. And all being paid taxes on. Our solution——

    Mr. KANJORSKI. They don't pay taxes.

    Mr. GARRISON. If the credit union industry today would agree to a Sub S chapter tax situation, the discussion's over. We'd look at that as a very viable solution, because they're paying taxes on the retained earnings they have.

    Anything they pay us goes back to their members before that point is untaxed just like the structures are intended to be. They retain it and the Sub S would be the same situation. They're going to pay it.

    Mr. KANJORSKI. So, you're basically saying to the Congress, you want them to pay taxes, and we should give credit unions all the powers that an actual bank has if they pay taxes and then you're happy?

    Mr. GARRISON. What we're saying——

    Mr. KANJORSKI. Is that correct?
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    Mr. GARRISON. What we're saying to Congress is if you look at 70 percent of the credit unions today, they fall within the niche of the credit union and we have no concern about those credit unions. The other ones, if they want to continue to grow and act like banks and operate like banks and they want to pay taxes, if they want to follow under the bank regulations that they have and they want to follow CRA——

    Mr. KANJORSKI. And if they elect to do that and they do pay taxes, then we should give them an equal playing field and they should have the right to do everything banks do.

    Mr. GARRISON. Basically, then they become a mutual savings bank, a mutual bank and they can switch their charter——

    Mr. KANJORSKI. Well, we should allow them to sell shares, too.

    Mr. GARRISON. Pardon, give them the power, they can convert that way as well. If they wanted to go to a mutual savings bank, they could convert then to a stock company.

    Mr. POLLARD. Mr. Chairman, could I comment?

    Chairman LEACH. Briefly because we have limited period of time for each——

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    Mr. POLLARD. First of all, for the Subchapter S corporations, the taxes are passed to the owners. They're not ignored. There is a tax base there passed to the owners. This other thing I'd like to establish is that in a mutual savings bank, there is no ownership. Nobody can buy it unless it wishes to be sold.

    Chairman LEACH. Thank you, Mr. Pollard.

    Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman. I just have a couple of questions that I would like to ask. I gather that the main concern you have been raising and I apologize I've been running around and didn't hear you, but I think one of the points that the banks have been raising is that they perceive to be unfair that credit unions do not pay taxes and they pay taxes, is that correct? That seems to be one of the problems.

    Mr. GARRISON. That's one of the issues, yes.

    Mr. SANDERS. How would you argue against somebody who would point out that in the last ten years the taxpayers of this country have subsidized banks to the tune of hundreds of billions of dollars in terms of the savings and loan bailout, the Mexican bailout, the Asian bailout just a few months ago where six banks ended up with $19 billion in taxpayers money. How would you answer that? Credit Unions did not do that.

    Mr. GARRISON. Could I answer?

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    Mr. SANDERS. Sure.

    Mr. GARRISON. That's true. The credit unions directly have not cost the taxpayer a dollar. But, neither have they paid taxes into the Treasury, so in effect the subsidy does cost the taxpayer. The next thing, if I could go on a second——

    Mr. SANDERS. No, let me ask you a question, please, because here's your point. I read in an ad put out by the bankers that you estimate that if credit unions pay taxes it would be about a billion dollars a year. Does that make sense to you?

    Mr. GARRISON. Initially, that's correct.

    Mr. SANDERS. Fine, now just several months ago, the taxpayers of this country just for the Asian bailout coughed up $19 billion for six banks. I don't recall what the Mexican bailout is, but the savings and loan bailout was several hundred billion dollars. It would be many hundreds of years before—what the credit unions received what the banks got in the last ten years.

    Mr. GARRISON. That's true. And let me say this to you. We're only affecting about 15 percent of the credit unions. That's all we're asking to affect. Those are that are doing all of the things that we're doing.

    Mr. SANDERS. Yes, but what you're not denying is that the banks, themselves, have received hundreds of times more in Federal subsidies than the credit unions did in the last ten years?
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    Mr. GARRISON. I have no way of answering. Other than to say, I don't know the amount we've paid in——

    Mr. SANDERS. But taking from your ad, in the last ten years, either we're just talking in very gross terms here. You would argue—or your argument would suggest that the credit unions did not pay some $10 billion in taxes. That's rough. But, what I'm suggesting to you is that in the last ten years between the savings and loan bailout, the bailout of Mexico, the bailout of Asia, the banking industry in this country has received several hundred billion. That's one point.

    Number two, let me ask you this point and I think this came up earlier. How are the banks doing in general? Things really pretty tough now? Your competition from the credit unions are really driving you guys to the bankruptcy?

    Mr. GARRISON. You asked that question in an economic advantage. The entire system in the United States is doing well, including us and the credit unions.

    Mr. SANDERS. According to information I received, in 1996, commercial banks were the 13th most profitable industry in the country and in that year, commercial banks produced a 41 percent annual return for their investors on average. Is that a true statement, do you think? Does that sound right to you? Forty-one percent return?

    Mr. POLLARD. It sounds high to me but——
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    Mr. SANDERS. No, that's the information that I have from Fortune. Does anyone want to comment on it? Does that seem—41 percent return?

    Mr. GARRISON. We don't have that information with us I believe. We will be glad to supply it.

    Mr. SANDERS. OK.

    Mr. POLLARD. Sir, none of our community banks certainly made that, I guarantee you. And as far a the banks here, we're more in the 10- to 12-percent range over any given period of time, over the past five years.

    Mr. SANDERS. OK, the information I have comes from Fortune Magazine. That was a 41 percent rate of return. My point being that it seems like the banking industry has somehow managed to survive amidst all of this competition, does not seem to be doing terribly bad.

    Mr. LEWIS. Congressman, may I add something?

    Mr. SANDERS. Please.

    Mr. LEWIS. There is a chart to my right, to your left there, it's credit union and bank asset growth and it clearly shows how well the banks are surviving. The red line is shows the growth of the banks and the blue line is the credit union community. You can see that. I ask, Mr. Chairman, if that could be added into the record, that particular chart?
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    Chairman LEACH. Without objection, it certainly will be.

    Mr. LEWIS. Thank you, sir.

    Mr. SANDERS. Well, I thank you for your point then what you're suggesting is that under the playing field that has existed the last 15 or so years, banks have done just fine. I gather that is your point.

    Mr. GARRISON. Yes, sir.

    Mr. SAUNDERS. OK, thank you.

    Chairman LEACH. Excuse me. Let me just inform the committee, we have a circumstance. We've got a series of votes from the floor. We have about 6 minutes before we should recess. Would people like to take a minute each and end the panel or do you want to come back? Well, it's Mr. Bachus' turn in any regard. If you want to ask a question.

    Mr. BACHUS. If everyone else is in agreement to take a minute. I mean, I'll agree with that I don't want to.

    Chairman LEACH. You want to begin.

    Mr. BACHUS. Yes, Mr. Lewis, and I'll ask this to Ms. Bartali——
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    Ms. BARTOLOMUCCI. Bartolomucci.

    Mr. BACHUS. Bartalomucci, OK. Do you all think anyone should be allowed to join a credit union? You think there ought to be any restrictions?

     Mr. LEWIS. I don't. I don't think anyone should be allowed to join. In our credit union, there is a field of membership that we have to abide by. We are an occupational credit union and all of our 65,000 members are coming in according to the rules. So, not just anyone.

    Mr. BACHUS. What is your credit union?

    Mr. LEWIS. It's a DOD credit union servicing Aberdeen Proving Ground.

    Mr. BACHUS So, what is the common occupation is that they work for the——

    Mr. LEWIS. Eighty percent of the population of our members are DOD-related. Twenty percent are coming from Select Employee Groups and the Select Employee Groups cover many different categories of occupations ranging from county government to medical to personnel services.

    Mr. BACHUS. How would a medical service, how would that be a—you talked about a common bond in a credit union. How is that a common bond?
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    Mr. LEWIS. The common bond is that within each unit; for instance in our credit union, there are 25 Select Employee Groups. Each unit has its own common bond.

    Mr. BACHUS. But how about a common bond? Is there any common bond among the whole unit?

    Mr. LEWIS. As a whole, there is a common goal of moving forward and empowering the community. As a goal, what we're seeing is diversification between the groups. We have 26 groups.

    Mr. BACHUS. I just want to——

    Mr. LEWIS. Our primary core group and 25 and 25 other groups. I just wanted to answer that, sir.

    It's through that diversification that we're able to offer services to people who normally would not get those services. So, there is a subsidizing that does occur because of the strength of diversification, sir.

    Mr. BACHUS. How about the AT&T Credit Union that had a 150 different occupational groups? Would their common bond be the common goal to move forward as you're describing?

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    Mr. LEWIS. The credit union is made up of each field of membership. Each unit within AT&T has a common bond. So what we have are groups within the community of the credit union there. Groups within the credit union that are of common bond.

    Mr. BACHUS. Do those 150 different occupational groups at AT&T, do they have a common bond?

    Mr. LEWIS. I am not the most familiar with AT&T.

    Mr. BACHUS. Well, do the 20 that are in your credit union, do they have a common bond?

     Mr. LEWIS. No, they do not. If you're calling a common bond a——

    Mr. BACHUS. Well, you just said that credit unions are financial institutions united by a common bond. That was your testimony.

    Mr. LEWIS. There are multiple groups that have a common bond. Each unit has a common bond. For instance——

    Mr. BACHUS. Within the unit.

    Mr. LEWIS. Within a unit there's an occupational——

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    Mr. BACHUS. Well, what is the common bond that unites those 20 groups?

    Mr. LEWIS. Within the unit, there is an occupational affinity, within the entire credit union, it's occupational.

    Mr. BACHUS. Just that all of them have an occupation?

    Mr. LEWIS. That is the similarity between all of the groups.

    Mr. BACHUS. And just any occupation, right? It wouldn't matter what kind of occupation? Let me ask you something, Mr. Bartal—I'm sorry.

    Mr. BARRETT. I realize that we're only supposed to be a minute, the true bankers, non-profit hospitals, for-profit hospitals. Should non-profit hospitals pay taxes? I ask each of the three bankers. Yes or no? I mean just——

    Mr. PLAGGE. Yes, to me it goes back to the non-profit definition again. And we talk about non-profit credit union and its retained——

    Mr. BARRETT. No, I'm just talking hospitals. Non-profit, for-profit hospitals. Do you think non-profit hospitals should pay taxes?

    Mr. GARRISON. I think that non-profit is determined by tax code, whether it's for-profit or non-profit, they have to have certain qualifying requirements. The credit unions have a different——
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    Mr. BARRETT. I'm just asking you a question.

    Mr. GARRISON. I understand.

    Mr. BARRETT. I've only got a minute. Yes or no? Do you think non-profit hospitals——


    Mr. GARRISON. I said they're under the law, so yes I think they should be able to have tax and non-tax.

    Mr. POLLARD. In a hospital yes.

    Mr. BARRETT. Mr. Lewis, DOD community—lots of people in the DOD credit union. I'm a poor guy who works at the car wash, why can't I join your credit union? And your credit union members get a tax advantage that I don't get. Why is that fair?

    Mr. LEWIS. Why is it fair that my credit union is tax exempt?

    Mr. BARRETT. I'm a poor guy. I'm a schlep who works at the car wash. Why shouldn't I be part of your credit union?

    Mr. LEWIS. If you're working at your employer, why shouldn't you be able to——
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    Mr. BARRETT. But you're saying there should be a special common bond, why should there be a special common bond?

    Mr. LEWIS. The common bond would be within your unit, as working for that particular business—the car wash.

    Mr. BARRETT. But aren't we excluding with the common bond—Aren't we excluding people who are not of the economic means to join another——

    Mr. LEWIS. Well, that's not true, sir. In my credit union, there are units, there are SEGs that are people of modest means and we are taking——

    Mr. BARRETT. So, why should we have that? Why should we have that limitation at all?

    Mr. LEWIS. Why should we have the limitation of what, sir?

    Mr. BARRETT. Of a common bond. Why can't I—OK, I'm a guy who runs a shoe shine on the corner. I don't have an employer. Why shouldn't I be able to join that credit union?

    Mr. LEWIS. Because that is the nature of credit unions. That they're most——

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    Mr. BARRETT. So, why should you get a tax advantage if I've got to put my money in one of these guys' banks? Why should I pay for the tax advantage for you?

    Mr. LEWIS. Because that guy is buying, his bank, his board of directors——

    Mr. BARRETT. But, I want to join your credit union. I'm a shoe shine guy. I want to join your credit union. I don't have an employer.

    Ms. BARTOLOMUCCI. Are you a self-employed?

    Mr. BARRETT. Self-employed. Yes. Just me and my shoes.

    Ms. BARTOLOMUCCI. OK, you and your shoes. Being a State-chartered credit union in Ohio, you would be able to apply for a Select Employee Group under our Ohio statute, therefore you would have the benefit of credit union membership and then if your business grows as well, your employees would have the ability to have the choice of a credit union. May I go back to Mr. Bachus and he's not here. I just wanted to ask——

    Chairman LEACH. Let me tell you, you have 30 seconds.

    Ms. BARTOLOMUCCI. My belief is that every American should be able to have a choice to be able to belong to a credit union. And I just wanted to make that statement. They should have that choice whether they take that choice or not is their prerogative.
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    Chairman LEACH. Thank you. Let me thank in entirety the panel. All the committee now has to do is resolve the modest differences that have been reflected.


    And we'll do our best to proceed expeditiously. No decisions have been made on precisely the process of how this may come before the floor, but I will assure the audience that the committee is committed to moving expeditiously and Mr. LaFalce and I are going to be working together as closely as possible to try to put together a consensus bill.

    I want to thank you all. This has been a very, very interesting panel with very profound thoughts being expressed on all sides.

    Thank you. The hearing is adjourned.

    [Whereupon, at 4:15 p.m., the hearing adjourned subject to the call of the Chair.]