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Tuesday, July 20, 2004
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 2:05 p.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] Presiding.
    Present: Representatives Bachus, Royce, Biggert, Kennedy, Hensarling, Brown-Waite, Sanders, Maloney, Watt, Ackerman, Lucas of Kentucky, Sherman and Davis.
    Chairman BACHUS. Good morning, I want to call the Subcommittee on Financial Institutions to order.
    We have a series of votes on the floor, but what hopefully we can do to expedite things is to give opening statements; then when we come back, we will go right to the testimony.
    I want to start by thanking the witnesses for being here today to discuss regulatory improvements to the credit union system. I would like to extend a special welcome to NCUA Administrator, Chairman Joann Johnson, who is making her first appearance before this subcommittee after taking over leadership at the NCUA earlier this year from Chairman Dennis Dollar. And we are excited about your chairmanship.
    Credit unions are a vital part of our Nation's financial service infrastructure. As nonprofit cooperatives managed by their members, credit unions excel at providing the services families and small businesses need most.
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    I have got many constituents who tell me that it was very important for them—their credit union was very important to them in being able to afford a new home, a purchase that would allow their children to attend college, or to obtain a loan for various and sundry things.
    Not surprisingly, the Nation's almost 100,000 credit unions consistently rank high in customer satisfaction surveys and play a particularly important role in expanding the financial alternatives available in historically underserved urban and rural areas. And a member of one of our panels, Bill Cheney's credit union recently reached out to four underserved areas, and I commend you for that, Mr. Cheney.
    Under Chairman Oxley's leadership, this committee has been at the forefront of efforts to improve the regulatory environment in which credit unions operate, thereby enhancing their availability to meet the needs of their more than 80 million members nationwide. In addition to passing a deposit insurance reform bill out of the House that gives credit unions full parity with their bank and thrift counterparts, the committee developed bipartisan legislation affording significant regulatory relief to credit unions, banks, and thrifts. That legislation, H.R. 1375, was spearheaded by two members of the subcommittee, Ms. Capito of West Virginia and Mr. Ross of Arkansas.
    It passed the House last March with over 400 votes, thanks in no small part to the enthusiastic support and grass-roots efforts of the credit union industry. Among other provisions, H.R. 1375 expands credit unions' investment authority, increases the general limit on the limit of credit union loans from 12 to 15 years, authorizes credit unions to provide check cashing and money transfer services to nonmembers so long as they are within the credit union's field of membership, permits privately insured credit unions to join the Federal Home Loan Bank system, and excludes loans made to nonprofit religious organizations from the limits that otherwise apply to credit unions' commercial lending authority.
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    The bill also includes a provision that I first offered as an amendment when the Judiciary Committee marked up the regulatory relief bill in the 107th Congress granting the credit unions the same exemptions from premerger notification requirements that banks and thrifts already enjoy under Federal antitrust laws.
    Last November, Congressman Royce and Congressman Kanjorski, two respected members of this subcommittee, introduced H.R. 3517, the Credit Union Regulatory Improvement Act, which mirrors in many respects the credit union provisions of H.R. 1375 but also includes several additional regulatory reforms. For example, H.R. 3579 would increase the aggregate level of commercial loans that a credit union could make to its members from approximately 12 percent of total assets to 20 percent, as well as establish a risk-based approach for measuring credit union capital.
    While action this year on H.R. 3579 is unlikely, given the limited amount of time remaining in the congressional calendar, today's hearing will allow the subcommittee to hear the perspectives of credit union regulators and industry representatives on the legislation and other proposals for improving credit union regulation.
    Today's hearing is also an appropriate bookend to a hearing that the subcommittee held in May focusing on the crippling regulatory burdens faced by America's small community banks. Taken together, these hearings demonstrate this committee's continued commitment to identifying and eliminating outdated or unnecessary regulatory requirements which will serve ultimately to benefit American consumers in the form of more innovative financial products and services offered at more competitive prices.
    At this time, we are going to recess the committee for the floor vote. When we get back, we will either hear from the Ranking Member of the subcommittee, Mr. Sanders, for any opening statement he may have, or go directly to our first panel. We ask for your patience and indulgence. This subcommittee hearing is recessed. Thank you.
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    [The prepared statement of Hon. Spencer Bachus can be found on page 32 in the appendix.]
    Chairman BACHUS. The Subcommittee on Financial Institutions will come to order. At this time, I would like to recognize—I should have looked up right away. I would like to recognize Mr. Sanders, the Ranking Member, for any opening statement he wishes to make.
    Mr. SANDERS. Thank you very much, Mr. Chairman. And thank you for holding this important hearing on one of the most significant, I think, and successful and important institutions in the United States, and that is our credit unions. And I am proud to be a cosponsor of H.R. 3579, the Credit Union Regulatory Improvement Act, and I applaud Congressman Ed Royce and Paul Kanjorski for their leadership in introducing this legislation.
    Mr. Chairman, America's credit unions are one of the most vital and most democratic institutions in a country which in many ways is becoming less democratic. Without the need to focus on having to make huge profits, without heavy advertising costs, without huge bonus packages to corporate executives, credit unions can and are providing loans at lower rates than other financial institutions and in that way improving the lives of millions of Americans.
    Today I am pleased to report that credit unions are stronger than ever and serving more people than ever. There are over 9,000 credit unions in existence today, serving over 80 million Americans.
    Now, I know, Mr. Chairman, and I am sure this is an issue that will come before this committee, that some of our large banking friends and their lobbyists here are saying, gee, $627 billion in assets for credit unions; we have got to tax them. It ain't fair. We are paying taxes and these guys are not.
    Well, you know, Mr. Chairman, the truth is that credit unions pay property taxes, they pay sales taxes, they pay payroll taxes. They are exempt from Federal income taxes for good reasons and not because anyone is doing them a special favor. Credit unions are tax exempt because they are nonprofits, just like churches and hospitals and libraries and universities and other nonprofit institutions. Federal law exempts credit unions from Federal taxes, and in my view we have to maintain that exemption.
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    You know, the big banks will then tell us, gee, it is not fair, but somehow or another the big banks forget to tell us that the Federal Government through the savings and loan bailout, through the financial collapse in Asia, that the taxpayers of this country have spent tens and tens of billions of dollars bailing out big banks who are investing all over the world, propping up dictatorships, giving their CEOs huge compensation packages. I don't recall that we are spending billions of dollars bailing out the Adamant Credit Union in Adamant, Vermont. And I don't recall that we are bailing out other credit unions.
    The bottom line here is that credit unions serve the community in a nonprofit way to provide inexpensive financial services to the people who own the institution. Very different from large banks.
    So, Mr. Chairman, I don't know which side we are going to be on, if we are going to be opposing each other on this issue, but when this issue comes before this body, I am going to do everything I can to make sure that the credit unions of this country are not taxed. And with that, I just ask unanimous consent to lay my full remarks into the record.
    Chairman BACHUS. Thank you. There is no objection to your unambiguous remarks going into the record.
    [The prepared statement of Hon. Bernard Sanders can be found on page 40 in the appendix.]
    Chairman BACHUS. Mr. Royce, do you have an opening statement?
    Mr. ROYCE. I do, Chairman Bachus. I thank you. I thank you for the hearing, too. And I appreciate Chairman Oxley, his acquiescence in holding this timely hearing on regulatory challenges that face credit unions. Credit unions now serve over 85 million Americans, and this makes that particular industry a very important part of our Nation's financial system. They are an engine of economic activity, an engine of growth for America. They help our constituents finance the purchase of homes and cars and save for college and save for retirement, and, I think, equally as important, help access savings for small business investment. The capital they provide there is very, very critical.
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    Last November, Mr. Kanjorski and I co-authored H.R. 3579, the Credit Union Regulatory Improvements Act. They are calling it CURIA. This would modernize Federal regulation of chartered credit unions, and the legislation is needed to help credit unions better serve their members.
    I would like to point out two important provisions of this bill. The first is that this would allow the National Credit Union Administration to create a risk-based capital standard for credit unions. The National Credit Union Administration could then determine the relative risk of a credit union's assets and improve the safety and soundness of credit unions and the safety of the National Credit Union Share Insurance Fund.
    In addition to that, the bill would eliminate the current asset limit on member business loans at a credit union from a lesser of 1.75 times actual net worth or 1.75 times net worth required for well-capitalized credit union, and it would replace that with a flat rate of 20 percent of the total assets of the credit union.
    It was important to me that any changes made would satisfy two conditions. First, the change would remove unnecessary regulatory burdens that inhibit credit unions from serving their members. And, two, any changes would not have the potential to put the safety and soundness of the credit union system at risk. Both industry and regulatory officials have offered positive feedback on both counts, and I look forward to further comments from our distinguished panels of witnesses today.
    And again, Chairman Bachus, thank you for having this hearing, and I yield back.
    Chairman BACHUS. I appreciate that, Mr. Royce.
    Mr. Sherman do you have an opening statement?
    Mr. SHERMAN. I have a very brief opening statement, and that is that, as other speakers have said, credit unions play a critical role. We have to help them play that role more efficiently and to meet some financial services needs that are not currently being met. And that is why I want to commend Mr. Royce and others for giving us an opportunity to sweep away some of the regulatory problems so they can do that.
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    Mr. SANDERS. Chairman, his remarks are too brief. Doesn't he have to go on for 2 more minutes?
    Chairman BACHUS. Go on.
    Mr. SHERMAN. I can prove that this is Brad Sherman and not an impostor, although the length of my statement would argue.
    Chairman BACHUS. Are there other members who wish to make opening statements? If not, we will go to the introduction of our first panel.
    Our first panelist is the Honorable JoAnn Johnson, Chairman of the National Credit Union Administration. President George W. Bush named Ms. Johnson appointee to the NCUA Board January 22nd, 2002. That appointment was confirmed by the U.S. Senate on March 22, 2002. Senator Johnson was named NCUA Board vice chairman in January of 2003 and the agency's chairman on May 3, 2004.
    The Board consists of three members appointed by the President and confirmed by the Senate. And they regulate all federally chartered credit unions and administer the Federal Insurance Fund for approximately 9,500 credit unions nationwide.
    Senator Johnson, elected to the Iowa Senate in 1994, chaired both the Senate Ways and Means Committee and the Senate Commerce Committee. As a former teacher, she taught physical education and coached a number of sports, actively involved in family farming, and served her community as a 4-H leader, director of the local Food Pantry, Economic Development Board member, school teacher, library board member, school board member, university alumnae board member, received her bachelor's degree from the University of Northern Illinois. She has two adult children, Clint and Brooke, you and your husband. So, we welcome you.
    Our next panelist is Deputy Commissioner Roger W. Little, Chairman of the National Association of State Credit Union Supervisors. Mr. Little has worked for the Office of Financial and Insurance Services since 1984. He is a Deputy Commissioner and directs the Credit Union Division which regulates Michigan's 268 State-chartered credit unions.
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    He began his OFIS career as a credit union examiner, later serving as regional supervisor in both the Credit Union and Bank And Trust divisions. He graduated with honors from Central Michigan University, and is a CPA. He also completed a graduate School of Banking program at Louisiana State University. He currently serves as Chairman of the NASCUS Board of Directors.
    He and his wife Linda have been married 32 years, they have two daughters and reside in central Michigan.
    Chairman BACHUS. We welcome both of you. And, Chairman Johnson, we will start with your testimony.
    Ms. JOHNSON. Chairman Bachus, Representative Sanders, and members of the subcommittee, thank you for inviting me to appear before you today.
    On behalf of the National Credit Union Administration, I am pleased to provide information on the condition of the credit union industry and our agency's views on regulatory efficiency recommendations and the Credit Union Regulatory Improvements Act of 2003.
    My written comments, previously provided to you, cover a number of issues, some of which I will highlight for you today. It is my strong belief that effective, not excessive, regulation should be the underlying principle supporting NCUA's critical mission of ensuring the safety and soundness of federally insured credit unions.
    In addition to participating with the other four financial institution regulatory agencies in the review project mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, NCUA scrutinizes one-third of NCUA existing regulations annually to find ways to simplify or improve any rule that is outdated or in need of revision. To date, this internal process has brought about important regulatory reform for credit unions in many of NCUA's rules, including those on lending, share accounts, and incidental powers.
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    I am pleased to report to the subcommittee the state of the credit union industry remains strong and healthy. Our indicators show that credit unions, which serve nearly 83 million Americans, are safe and sound and well positioned for continued strength and vitality in our Nation's financial marketplace.
    The National Credit Unions Share Insurance fund also remained strong as of December 31, 2003. The fund had a ratio of 1.27 percent equity ratio. As of May 31, 2004, the equity ratio grew to 1.29 percent.
    CURIA addresses some of the most compelling issues being discussed in the credit union industry today, including risk-basing credit union net worth for purposes of prompt corrective action.
    Section 301 of CURIA would address inequities in the operation of the current system of setting net worth standards by establishing a risk-based system for PCA.
    A well-designed risk-based system would alleviate regulatory concerns by not penalizing low-risk activities and by providing credit union management with the ability to manage their compliance though adjustments to their assets and activities.
    While NCUA is continuing to develop its specific recommendations, we suggest that the leverage ratio below which a credit union is critically undercapitalized remain at its current 2 percent and that the minimum leverage ratio for a well-capitalized credit union be set at 5 percent.
    Federal credit unions have been authorized since 1934 to make member business loans and have had a successful record of meeting the small business loan needs of their members. NCUA has issued regulations establishing safety and soundness standards for member business lending as a result of some losses on business lending beginning in the early 1980s.
    Those regulations have been successful in ensuring that credit union business lending is carried out in a safe and sound manner that does not present undue risk to the National Share Insurance Fund. In fact, since the time that NCUA issued its regulation, defaults for member business lending have consistently been lower than the ratios for member loans generally.
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    In 1998, the Credit Union Membership Access Act established an aggregate cap on member business lending of 12.25 percent of total assets for well-capitalized credit unions. NCUA continues to believe, as it did in 1998, that a cap on business lending is unwarranted and hampers the ability of individual credit unions to meet the varying needs of their membership. However, raising the cap to 20 percent of total assets and increasing the threshold below which an individual loan is not treated as a business loan for the purposes of the cap from the current $50,000 level to that of $100,000, as proposed by CURIA, are vast improvements.
    The time-sensitive recommendation in my testimony today stems from the Financial Accounting Standards Board proposed change in the accounting treatment of credit union mergers. This is a recent development; therefore, it has not previously been included in recommendations NCUA has submitted for your review.
    FASB's change will in effect prevent credit unions from moving forward with mergers which are clearly in the best interest of their members. Specifically, the change will provide that when two credit unions merge, their retained earnings of the discontinuing credit union would not be included in the postmerger net worth. FASB expects to implement this change as early as January 2006. FASB has indicated it supports a legislative solution and that such a solution will not impact their standards-setting activities. NCUA has suggested statutory language as well as report language clarifying the limited purpose of this amendment to maintain net worth as it is. That language is attached to and has been made a part of my written testimony for the committee's consideration.
    An important area where NCUA does not have jurisdiction comparable to the other financial regulators involves third-party vendors. NCUA does not have direct authority to examine third-party vendors that provide services to federally insured credit unions. Statutory authority previously existed for NCUA, but under a sunset provision expired in 2001, we are currently required to work through credit unions to obtain vendor information or seek voluntary cooperation from vendors. We believe that in these times, privacy, money laundering, and financing of terrorism are issues of paramount national interest as well as general safety and soundness concerns.
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    NCUA should have direct examination authority over those vendors providing services for federally insured credit unions. A restoration of NCUA's examination authority would provide parity with other financial regulators and would eliminate the need for us to approach the matter indirectly through credit unions, thus providing some measure of regulatory relief. This is consistent with the October 2003 GOA report which states that Congress may wish to consider granting this authority.
    NCUA has reviewed all of the additional credit union provisions included in the House-passed bill, and the agency has no safety and soundness concerns with these provisions.
    Mr. Chairman and members of the committee, thank you for allowing me to testify today and address these important regulatory reform issues. We hope to gain your support for these recommendations, and I would be pleased to assist your further deliberations on these in any way. Thank you very much.
    Chairman BACHUS. Thank you.
    [The prepared statement of Hon. JoAnn W. Johnson can be found on page 139 in the appendix.]
    Chairman BACHUS. Deputy Commissioner Little.
    Mr. LITTLE. Good afternoon, Chairman Bachus and distinguished members of the Financial Institutions and Consumer Credit Subcommittee. Again, I am Roger Little, Deputy Commissioner of Credit Unions for the Michigan Office of Financial and Insurance Services. I appear today on behalf of the National Association of State Credit Union Supervisors, or NASCUS.
    NASCUS applauds the introduction of the proactive credit union legislation in H.R. 3579. My written testimony includes our views in support of the provisions that affect State-chartered credit unions contained in this bill. My comments today focus specifically on the importance of capital reform for credit unions.
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    NASCUS has studied the risk-based capital reform proposal outlined in H.R. 3579, and NASCUS supports a risk-weighted capital regime for credit unions. H.R. 3579 changes the term ''net worth'' in section 216 of the Federal Credit Union Act from being the ratio of credit union net worth to total assets of the institutions to being the ratio of net worth to risk assets of the credit union. In effect, this establishes a risk-based capital system for credit unions.
    The existing PCA and net worth numerical categories in the statute would remain unchanged; however, NCUA would establish the new risk-weighting categories hopefully in a manner similar to those used by banks and thrifts.
    State regulators would assist the NCUA in crafting these regulations. The existing Credit Union Membership Access Act requires the NCUA to consult and cooperate with State regulators in the crafting of PCA and member business lending regulations. This cooperation between the NCUA and State agencies, many of whom also regulate bank and thrift institutions, will help ensure a safe and sound process for determining the risk-weighting categories.
    The proposed bill does not change the definition of net worth to permit credit unions to count alternative types of capital for PCA purposes, however, and NASCUS believes that it should. NASCUS strongly supports alternative capital for credit unions. We believe it is complementary to a risk-based capital system and in no way conflicts with proposals outlined in H.R. 3579.
    A combination of PCA requirements established by Congress for credit unions in 1998 and significant deposit growth has created a financial and regulatory dilemma for many State-chartered credit unions. With the economic downturn and the flight to safety from the stock market, credit union member savings are growing rapidly and many credit unions are reporting reduced net worth ratios as earnings retention lags growth in assets. Many State-chartered credit unions will not be able to rely solely on retained earnings to meet the capital base required under the current PCA standards.
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    As a financial institution's regulator, it makes no business sense to deny credit unions the use of other forms of capital to improve their safety and soundness. We should take every financially feasible step to strengthen the capital base of this Nation's credit union system.
    NASCUS also supports amending the definition of net worth to cure the unintended consequences for credit unions of business accounting rules the Financial Accounting Standards Board will apply to combinations of mutual enterprises. I will refer you to my written testimony for more information about these unintended consequences of FASB's rules on credit union mergers. I do note that FASB also supports such an amendment.
    NASCUS firmly believes that nonfederally insured credit unions should be eligible to join the Federal Home Loan Banks. I note this is not a new precedent, since 86 insurance companies, none of which are federally insured, are now members of the Federal Home Loan Bank system. We would appreciate your support by including this proposal in H.R. 3579.
    Finally, recent preemptive actions of the Office of the Comptroller of the Currency have a potentially significant impact on the dual-chartering system for commercial banks. We are concerned this could open the door to similar actions by the Federal credit union regulator unless Congress intervenes.
    Determining the extent to which such additional Federal banking power should be granted by the OCC is an important matter for all of those who support the dual-chartering system for depository institutions. The importance of this matter dictates that Congress should resolve these conflicts.
    This concludes my remarks. NASCUS appreciates the opportunity to testify today. We welcome further participation and dialogue. We urge this subcommittee to protect and enhance the viability of the dual-chartering system for America's credit unions by acting favorably on the provisions we have outlined in our written and oral testimony.
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    I will be happy to respond to any questions the committee may have. Thank you.
    Chairman BACHUS. Thank you.
    [The prepared statement of Roger W. Little can be found on page 160 in the appendix.]
    Chairman BACHUS. I will start out by asking this question. There has been quite a lot of discussion by some of the banking organizations over credit unions eating into their market share, taking over business. And the reason that I think they have advanced those is in resistance to some of these proposals and some of the proposals in the Royce bill.
    In reading the testimony of Mr. Cheney about market share, I would like to read something from his testimony and ask you to comment on that and give me your response to whether you think it is accurate or not.
    According to data obtained from the Federal Reserve Board during the 23-year period from 1980 to 2003, the percentage of total household financial assets held by credit unions increased from 1.4 to 1.6 percent, or merely 0.2 percent, over the course of 23 years.
    That at least, if that is accurate, that to me gives indication that the credit unions are not capturing market share from anyone. What is your comment? That is one—Mr. Sanders mentioned the whole idea of tax exemptions and that the tax exemption is giving an unfair advantage to the credit unions.
    Mr. LITTLE. A couple of comments on that, Mr. Bachus. The evidence as indicated by banks' continuing reporting of record profits quarter after quarter would seem to indicate that they are doing relatively well in the markets that they have. My understanding of the Federal Tax Code is that the tax exemption for credit unions is not based in any way on the products or services or market share of credit unions. It is based on the ownership structure and the fact that they are cooperatives of a financial nature, rather than another nature. As a regulator, we have a neutral position on tax policy, but I don't think the argument is very persuasive in terms of market share.
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    Ms. JOHNSON. Mr. Chairman, I would like to add just a little bit in the area of the member business lending, because I know there has been some opposition to raising the limits in the member business lending area in particular.
    Member business loans granted by credit unions currently amount to, based on loans to total assets, less than 3 percent. For the banking industry, it currently stands at over 20 percent of their assets. The number of credit unions, or the percentage of credit unions that are currently involved in member business lending is approximately 17 percent, a little over 1,600 credit unions. So it is actually——
    Chairman BACHUS. One in six.
    Ms. JOHNSON. Right. It is a small part of the market.
    Chairman BACHUS. All right. Is your information pretty much in keeping with this data and what it seems to indicate; that credit unions don't appear at least to be expanding their market share?
    Ms. JOHNSON. Credit unions continually look for ways to serve their members.
    Chairman BACHUS. I understand that.
    Ms. JOHNSON. But the market share is still relatively small compared to——
    Chairman BACHUS. It seems like it is almost the status quo.
    Ms. JOHNSON. That's right.
    Chairman BACHUS. And I will say this, if someone says to me we have a problem with credit unions taking our market share, then the first response is to find out how much market share they are taking. Not analytical information. I have checked auto loans, and, actually, the percentage of auto loans by credit unions has actually declined——
    Mr. LITTLE. Yes.
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    Chairman BACHUS.—over the last 10 or 15 years. So I am just raising that. I didn't know if you had any comment on that.
    Secondly, with 45 seconds, I am simply going to make a comment. The accounting treatment for business combinations of FASB 141, apparently there doesn't seem to be any dissent by any of the witnesses that there needs to be some change of definition of net worth in the Federal Credit Union Act.
    Ms. JOHNSON. That's correct.
    Chairman BACHUS. Are you aware of any opposition to this change, making that change in definition?
    Ms. JOHNSON. No. We know of none. The Accounting Standards Board is favorable to a legislative change.
    Chairman BACHUS. If they are for it, you all are for it.
    Ms. JOHNSON. But it is actually language in the Federal Credit Union Act that needs to be changed. It is not accounting standards.
    Chairman BACHUS. That is right. It is a net worth, just changing—but I am saying, do you know of any opposition in the industry, regulators or anyone saying this isn't a good thing?
    Ms. JOHNSON. No.
    Chairman BACHUS. No reason why that shouldn't be done?
    Ms. JOHNSON. No reason.
    Chairman BACHUS. Actually, we are going by members who arrived first. Mr. Davis is our first member.
    Mr. DAVIS. Thank you, Mr. Chairman. Let me welcome the witnesses this afternoon and let me try to frame my questions a little bit more broadly than some of the previous comments that you may have made may have been framed.
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    One of the things that is obvious is that we are going through a period in our economy when a lot of the banks are consolidating and we are having a lot of growth and consolidation among our banks. Certainly looking over the next 5 to 10 years, that is likely to continue. A lot of our smaller banks are likely to be continued to be merged than the larger banks.
    One of the things that I certainly wonder about is how credit unions and the nature of credit unions are going to change over that period of time. So let me get each of you to comment very briefly on where you see the credit union industry in the next 10 years, and how you see that being affected by the bank consolidations we are witnessing right now.
    Mr. LITTLE. I think it is fair to predict that there will be consolidation in the credit union movement as well. I think that is a natural economic consequence. With regard to the consolidation in the banking industry, I can give you a little perspective on what is happening in our State back in Michigan. Large banks are buying up small banks.
    However, approximately 40 percent of our banks, State-chartered banks, have been chartered in the last 10 years. As banks are consolidated and purchased by larger banks, new community banks arise to fill the need. And, really, the consolidation just provides opportunities for capitalism to work on a local level and new banks to arise.
    Mr. DAVIS. Let me ask you this question. Obviously, one of the things the chairman was alluding to and one of the things the banks regularly raise is whether or not there has been a change in market share. Certainly as you put it, Ms. Johnson, credit unions are certainly being very aggressive in terms of expanding the kinds of services they provide.
    What I want to get a sense of is, are there any outer limits that the industry envisions? Is there a certain growth point that you would reach where you would think that beyond this point, we are dramatically changing the nature of what credit unions are? Have you looked at that question, whether you have any upper limits to what the arc should be?
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    Ms. JOHNSON. When I look at the mission that credit unions fulfill, I don't see any difference in their mission determined by their size. They are still to serve the needs of their members. We continue to see mergers and some consolidation as well.
    I believe last year, 2003, we chartered 11 new credit unions. And I believe in the 2 years prior to that, combined, there were 11 new credit unions chartered. We don't see many new charters.
    It is difficult to charter a credit union from the get-go, getting members to pool their money and to start a credit union from the very beginning. But the mission of credit unions continues to be the same regardless of whether they are a $1 million credit union or a larger credit union.
    Mr. DAVIS. Let me ask you a question that kind of flows out of that assumption on your part, that the mission of credit unions is not different from the mission of banks, other than just being obviously a different scale of service. The banks' response to that is that if credit unions are going to assume a larger part of the mission and the space that banks have historically occupied, should the credit unions come under some of the burden, for example, of CRA compliance?
    I know that is something that typically has been a subject of controversy in your industry. I presume that you are opposed to credit unions being covered by CRA. So let me ask a better question than that. Are there any circumstances or any trade-offs that the industry would be willing to accept to come under the purview of CRA?
    What would credit unions need to garner if you had to talk to this body and treat us as a set of rulemakers or lawmakers that could affect your industry? What would you want this institution to do if it were ever going to provide CRA compliance rules for credit unions?
    Ms. JOHNSON. Well, Congress decided as late as 1998 that the CRA requirements were not necessary for credit unions because they were meeting the needs of their members within the community. We have tried to facilitate that from a regulatory standpoint by facilitating and easing restrictions for credit unions to adopt underserved areas and to reach out to their communities more easily.
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    So I think I would rather look at it from a positive standpoint, of how can we facilitate reaching to the underserved; of being able to serve those who are unbanked and who are subject to predatory lending, et cetera.
    So I think the focus is still the same, and I think we need to look for ways that we can help facilitate that movement into the neighborhoods.
    Mr. DAVIS. I think my time has expired, but if the Chair will give me an additional 20 seconds or so, let me try to get a little more direct answer.
    Is there anything that CRAs would be willing to accept or anything that you would require, maybe looking at it from that standpoint, if this body were ever to consider making credit unions fall under the purview of CRA? What would you require if that happened as a trade-off?
    Mr. LITTLE. From a regulatory standpoint, we would require that the institutions follow whatever requirements were imposed. My understanding of CRA is that it was put in place to identify specifically identified problems in the banking industry. Absent such specifically identified problems in the credit union movement, I guess I would recommend that there not be that burden placed on the credit unions, unless there is a demonstrated need for it, which, to my knowledge, there is not.
    Mr. ROYCE. [Presiding.] Thank you, Mr. Davis.
    Chairman Johnson, one of the issues we have been discussing on this committee is following the money in terms of fighting terrorist financing and the efforts of credit unions and the NCUA have not been widely discussed in this debate at all. I would ask if you could elaborate today on efforts being taken in terms of implementing the Bank Secrecy Act and implementation of the PATRIOT Act. Can you tell us about your enforcement efforts on that front?
    Ms. JOHNSON. Yes, sir. I had the opportunity to testify before the Senate Banking Committee on the Bank Secrecy Act hearings, and I was pleased to report at that time that we are working very hard with the other agencies to comply with all of the requirements.
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    At that time I did mention, however, there is one tool which we believe would help assist us further in this area, and that would be the ability to examine third-party vendors that serve federally insured credit unions. Currently, if a problem with a vendor is identified, we have to work through the credit union or voluntarily with the vendor in order to work through any problems. And we believe that, especially with money laundering, terrorism, other things that are foremost in the minds of those when we think about the Bank Secrecy Act, we believe this ability to go in and examine these third-party vendors, who may hold all of members' information, would be very helpful.
    Mr. ROYCE. It is helpful for us to know that, and I thank you, and we will look into trying to provide you with that ability.
    Ms. JOHNSON. Thank you.
    Mr. ROYCE. I think most of us would agree that capital is a very good thing. At the same time, too much capital at times can be a detriment to economic growth. There certainly needs to be balance. So, in your view, is the credit union industry well capitalized and, perhaps, is it over capitalized?
    Ms. JOHNSON. Well, the credit union community is well capitalized, and I believe the current average figure is 10.64 percent, which is indeed commendable. But it speaks to the conservative nature of credit unions and their risk-averse management style.
    We believe that the risk basing the capital for PCA purposes really deserves a good hard look, and action, hopefully. We believe that the 7 percent minimum that is currently in place could be reduced to 5 percent. The excess capital could be put to better use to funding new services or reducing rates or fees on existing services.
    It is time consuming to build capital, and so for most credit unions we believe they maintain a level higher than that 7 percent in order to have that cushion against unexpected growth.
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    Mr. ROYCE. Another question I have is, as you are aware, the legislation I co-authored would slightly increase credit unions' ability to make member business loans, and I was going to ask you if you can assure this committee that the NCUA has the expertise and has the resources at its disposal that would be necessary to oversee business lending at credit unions?
    Ms. JOHNSON. Indeed, I can assure you of that. I believe we have a very good track record. Prior to, I believe, 1998, there was no top limit. Through the regulations that have been put into place, we know that credit unions are doing a very good job with their member business lending.
    As I mentioned earlier, actually the percentage on defaults is less than for other member loans. We are proud of our member business lending regulation. We updated it this last year to better accommodate credit unions so they could better serve the business needs of their members, and we are working very hard to make sure it is done appropriately and with safety and soundness foremost.
    Mr. ROYCE. Thank you for that response.
    I think is it Mr. Sherman next, I believe.
    Mr. SHERMAN. Thank you. Obviously, with regulatory relief, credit unions will be able to serve communities better. One of those areas is in the area of check cashing and remittances, where right now people in usually poorer communities have to turn to very expensive financial services. We really need much more competition in the area of check cashing, and especially in international remittances, particularly in the greater Pacoima area, I might add.
    If we authorize Federal credit unions to engage in those two activities for anyone eligible to join the credit union, what can we expect of credit unions? Will they step forward and provide competition, particularly in lower-income communities?
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    Ms. JOHNSON. Absolutely. We feel having the opportunity to offer those services to anyone that is eligible will be that first opportunity to have individuals work with a financial institution and begin building a relationship. So I think this is the first way to get them in the door and begin building—most of these folks are unbanked with a Federally insured or with an insured institution. And we believe getting them in the door and beginning the relationship is very key. They will become, hopefully, good members and seek other services as well.
    Mr. SHERMAN. Obviously, the bill we are focused on would redefine the net worth ratio to focus on risk assets and risk-based capital, so we would have a better calculation of the amount of capital that a particular credit union needs.
    I am part of an entity called the U.S. Government, that got stung just a little bit when the thrifts didn't have enough capital. So I have become a real fan of capital. So in addition to calculating the amount of capital that a credit union should have, I am in favor of giving them all the tools to get as much capital as possible. It makes me sleep better at night.
    What do you think of alternative capital, and what would that do both to allow credit unions to serve more financial services needs and also just to provide more capital to stand between the risks of their business and the U.S. taxpayer?
    I might add, and this is unique to credit unions, it is not just the capital of that institution. If that institution goes under, all the other credit unions in the country also have to ante up to the full extent of their capital. So it is probably more likely that an undercapitalized credit union costs some of the folks in this room something rather than the Federal Government.
    But either way, capital insulates other credit unions and, ultimately, the Federal Government, from risk, and what do we do to get more of it?
    Ms. JOHNSON. Well, Congressman, I think the question on secondary capital has certainly been floating out there for about the last year and a half now. The discussions have stepped to the forefront. The jury is still out in a lot of people's minds. We at the agency continue to study the issue. So I don't have a definitive answer for you today.
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    Mr. SHERMAN. Can you think of a disadvantage to having more capital in the system?
    Ms. JOHNSON. Well, I think the questions that arise in people's minds are more towards the structure of how to do it.
    Mr. SHERMAN. Yes. I think it is obvious we cannot assign votes to those who provide alternative capital. It is one member, one vote. And we have to make sure alternative capital is sold in such a way so that there is not a single person who thinks they are getting a Federally insured deposit, when in fact they are getting a subordinated note.
    Ms. JOHNSON. Yes. But I assume the discussions will continue.
    Mr. SHERMAN. I look forward to hearing about those discussions and look forward to ending this one.
    I yield back.
    Mr. ROYCE. Mrs. Maloney of New York.
    Mrs. MALONEY. Very briefly, because we have been called to a vote.
    I would like to ask Mr. Little, because he thought that credit unions should be allowed to join home loan banks. Would you elaborate? What would be the advantage to members of the credit union and to the community?
    Mr. LITTLE. Okay. What I specifically commented on was non-Federally insured credit unions. There are approximately 400 credit unions in the country that have a form of member deposit insurance other than that provided by the NCUA.
    Federally insured credit unions can be and are members of the Federal Home Loan Bank. Privately insured credit unions cannot. The advantage to allowing that would be to provide the members of those credit unions the same access to affordable housing lending and the other types of services that the Federal Home Loan Bank system offers that are currently not available to that relatively small population of non-Federally insured credit unions.
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    As I mentioned, it certainly would not be a new precedent, as there are currently 86 insurance companies, none of which are federally insured, that are members of the home loan bank system.
    Mrs. MALONEY. And I would like to ask both of the panelists, and I thank you for your testimony today, what are the two main things we could do on the Committee on Financial Services to improve the loan and savings services that credit unions provide to their members?
    Ms. JOHNSON. Well, I believe you are taking a step forward with your Regulatory Improvements Act and reducing unnecessary burdensome regulation.
    A couple of the things in this particular bill with the risk-based capital and the improvements to the member business lending are things that will really step forward to help members.
    Mr. LITTLE. Yes. I would certainly agree on the member business lending. Removing the cap on business lending would be ideal. Certainly increasing it from the current level would be a good interim step.
    As to what could be done on the savings side? Providing forms of alternative capital would be one way that members could invest in a different manner in their credit union. So I think we would be in harmony with the NCUA on those issues.
    Mr. ROYCE. Well, thank you, Mr. Little.
    At this point, we have a series of votes. Two votes on. After those votes, Chairman Bachus will be back from his meeting with Chairman Oxley and will reconvene this committee.
    I want to thank our two witnesses for their testimony here today.
    Before we recess here, I would just like to recognize and welcome a constituent of ours from California, Bill Cheney, to the committee this afternoon. Not only is he the President and CEO of Xerox Federal Credit Union, but equally importantly he is very involved in the financial services industry as an active voice on credit union issues at the State and national level. He serves as the Legislative Committee Chairman and an at-large director and Board Secretary for the National Association of Federal Credit Unions. He is a member of the Board of Directors of Western Corporate Federal Credit Union, WesCorp. He is a member of the Diversity Committee for the California Credit Union League, and, as I mentioned, he serves as Chairman of the Board of Xerox Federal Credit Union's Capital Corporation, a broker-dealer owned and controlled by 17 credit unions.
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    This is his second appearance here before this committee, and we look forward to his testimony.
    We will stand in recess until after these votes are over.
    Chairman BACHUS. Good afternoon. It is my understanding, Mr. Cheney, that Mr. Royce introduced you previously, so I would like to introduce and welcome Ms. Sharon Custer, President and CEO, BMI Federal Credit Union of Ohio, and representing the Credit Union National Association.
    We also welcome Dr. William A. Jackson, III, Associate Professor of Finance and Economics at the University of North Carolina at Chapel Hill.
    Ms. Custer has served as President and CEO of BMI Federal Credit Union in Columbus, Ohio, since 1986. Ms. Custer is a graduate of Franklin University, Columbus, Ohio, where she majored in business management and received her bachelor's in business administration. She is a member of the Credit Union National Association and a certified credit union executive.
    Past activities include serving as a board member of the Credit Union Executive Society, the Credit Union Service Corporation, the Corporate One Federal Credit Union, the Member Mortgage Corporation, the World Computer Credit Union Association, and the Ohio Central Credit Union. And you are presently the Committee Chair of the Ohio Credit Union League.
    Dr. Jackson is an associate professor of finance and economics at Kenan-Flagler Business School, University of North Carolina, Chapel Hill. He is a recognized expert in the area of financial intermediation and industrial economics. He earned his B.A. In economics and mathematics at Centre College, his MBA at Stanford University, and PhD at the University of Chicago.
    He is the author of numerous articles, with the most recent publishing focused on issues related to small firms' access to credit markets, corporate governance, bank mergers, and risk management. He has published in many journals, held positions with the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Atlanta, Boston University, Jackson and Company, which is his consulting firm; is that right?
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    Mr. JACKSON. Yes, Mr. Chairman
    Chairman BACHUS. Ernst & Young and your alma mater.
    We welcome both of you to today's hearing.
    Chairman BACHUS. And as is our custom, we will start from my left. Ms. Custer, welcome.
    Ms. CUSTER. Chairman Bachus, Ranking Member Sanders, and members of the subcommittee, on behalf of the Credit Union National Association, I appreciate the opportunity to express the Association's views on legislation to improve the regulatory environment in which credit unions operate. I also want to express our gratitude to Representatives Royce and Kanjorski, as well as LaTourette and Maloney, and all the other cosponsors of H.R. 3579, the Credit Union Regulatory Improvements Act.
    I am Sharon Custer, President and CEO of BMI Federal Credit Union in Columbus, Ohio.
    According to the U.S. Treasury, credit unions are clearly distinguishable from other depository institutions in their structure and operational characteristics. And despite the relative small size and restricted fields of membership, Federal credit unions operate under bank statutes and rules virtually identical to those of banks and thrifts. However, Federal credit unions have more limited powers than national banks and Federal savings associations.
    My written statement catalogs and describes the more than 135 laws and regulations that apply to credit unions, including many unique restrictions that are far more stringent and limiting than laws applicable to other depository institutions. Given the limited time available this afternoon, however, I will devote the rest of my statement to describing a few exceptionally important issues for credit unions.
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    As part of our mission, credit unions are devoted to providing affordable services to all our members, including those of modest means. One provision pending in both the House and the Senate would better enable us to meet that goal. I am referring to legislation to permit credit unions to provide broader check cashing and remittance services.
    Many of the individuals who would benefit from this change live from paycheck to paycheck and do not have established accounts. We know of members who join a credit union one day, deposit their necessary share balance, and come in the very next day and withdraw because they need the money. Sometimes a $5 withdrawal means the difference between eating or not.
    Accomplishing our mission can also be greatly enhanced by revisiting two major components of the 1998-passed Credit Union Membership Access Act. With 6 years of experience, we have learned that what was thought to be good policy at the time actually created new problems that need to be resolved to assure that credit unions can continue to meet their mission.
    The first of these issues is the current cap on member business loans. There was no safety and soundness reason to impose these limits, as the historical record is clear that such loans are not only safer than those in the banking industry, but also safer than other types over credit union loans. In fact, public policy argues strongly in favor of eliminating or increasing the limits from the current 12.25 percent to the 20 percent suggested in H.R. 3579, the Credit Union Regulatory Improvements Act.
    Small business is the backbone of our economy and responsible for the vast majority of new jobs in America. Yet a February SBA study reveals that small businesses are having greater difficulty in getting loans in areas where bank consolidation has taken hold. The 1998 law severely restricts small business access to credit and impedes economic growth in America. Although few credit unions are currently bumping up against the cap, in a few years that is likely to change.
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    Then there is the case of many small credit unions. Investing in the expertise needed to run a member business lending operation is a very expensive proposition. With a 12.25 percent cap, they could not make up the cost needed to run such an operation. If the cap were increased to 20 percent, they could seriously consider entering into this line of lending.
    Furthermore, the NCUA should be given the authority to increase the current $50,000 threshold, as proposed in CURIA, to $100,000. This would be especially helpful to smaller credit unions, as they would then be able to provide the smallest of these business loans without the expense of setting up a formal program.
    Another critical issue is the prompt corrective action regulations governing credit unions. Credit unions have a higher statutory capital requirement than banks. But credit unions' cooperative structure creates a systemic incentive against excessive risk taking, so they may actually require less capital to meet potential losses than do other depository institutions.
    Because of their conservative management style, credit unions generally seek to always be classified as ''well'' rather than ''adequately'' capitalized. To do that, they must maintain a significant cushion above the 7 percent level. PCA requirements provide a powerful incentive for credit unions to operate at ''overcapitalized'' levels.
    CUNA believes that the best way to reform PCA would be to transform the system into one that is much more explicitly based on risk management. It would place much greater emphasis on ensuring that there is adequate net worth in relation to the risk a particular credit union undertakes.
    Reforming PCA along the lines of a risk-based approach would preserve and strengthen the National Credit Union Share Insurance Fund. It would more closely tie a credit union's net worth requirements to exposure to risk. It would also free up more capital for making loans to members and putting resources into the economy.
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    Finally, I call your attention to two pending issues before the Financial Accounting Standards Board that raise serious concerns for credit unions. One involves the issue of the accounting treatment of credit union mergers. FASB's proposed change from the pooling method would have the unintended consequence of discouraging, if not eliminating, voluntary mergers that would be advantageous to credit union members.
    The other issue relates to the accounting treatment of loan participations. They are used increasingly by credit unions to control interest rate risk, credit risk, balance sheet growth, and maintain net worth ratios.
    In summary, Mr. Chairman, we strongly urge the subcommittee to act on this very important issue this year. Credit unions would benefit greatly from reducing unnecessary and costly regulatory burdens, especially those addressed in CURIA. And, more importantly, so would American consumers benefit from the savings that credit unions would pass along to their 85 million members.
    Thank you.
    [The prepared statement of Sharon Custer can be found on page 63 in the appendix.]
    Chairman BACHUS. Mr. Cheney. Thank you, Ms. Custer.
    Mr. CHENEY. Good afternoon, Chairman Bachus, Ranking Member Sanders, and members of the subcommittee. My name is Bill Cheney. I am the President and CEO of Xerox Federal Credit Union located in El Segundo, California. I am here today on behalf of the National Association of Federal Credit Unions to express our views on the need for regulatory relief and reform for credit unions.
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    As with all credit unions, Xerox Federal Credit Union is a not-for-profit financial cooperative governed by a volunteer board of directors who are elected by our member-owners.
    America's credit unions have always remained true to their original mission of promoting thrift and providing a source of credit for provident or productive purposes. A 2004 Filene Research Institute study entitled ''Who Uses Credit Unions?'' found that the average household income of those who hold accounts solely at a credit union was less than $43,000, while the average household income for those who solely hold accounts at a bank was almost $77,000.
    NAFCU is pleased to report to you today that America's credit unions are vibrant and healthy and that membership in credit unions continues to grow, with credit unions serving over 85 million Americans. At the same time, it is important to note that while credit union membership is growing, over the past 23 years, credit unions have increased their market share only minimally. And, as a consequence, provide little competitive threat to other financial institutions. In fact, according to data obtained from the Federal Reserve Board, during the 23-year period from 1980 to 2003, the percentage of total household financial assets held by credit unions increased from 1.4 percent to only 1.6 percent.
    Mr. Chairman, as your subcommittee considers regulatory relief issues for credit unions, we hope that you will consider supporting the Credit Union Regulatory Improvements Act. I would like to thank Mr. Royce and Mr. Kanjorski for introducing this vital legislation. The facts confirm that credit unions are more heavily regulated than other consumer financial services providers. Restrictions on the operations of credit unions limit not only who can avail themselves of credit union services, but also how credit unions can raise capital, an issue I know that has been of concern to certain members of this subcommittee, particularly Mr. Sherman.
    As members over this subcommittee realize, neither NAFCU nor the credit union community at large hesitated from embracing the increased regulatory burden imposed upon us with the passage of the U.S.A. PATRIOT Act. We willingly and faithfully accepted those burdens necessary for our national security. The provisions of CURIA, while leaving in place the burdens imposed by the U.S.A. PATRIOT Act, would be a positive step in reducing the number of unnecessary or outdated regulatory burdens and restrictions currently imposed on Federal credit unions, some of which date to the very early days of the Federal Credit Union Act.
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    NAFCU is pleased to see the growing support in the House for CURIA. This legislation addresses additional key issues for credit unions not addressed in the House-passed Financial Services Regulatory Relief Act. As outlined in my written testimony, NAFCU supports the 12 credit union regulatory relief provisions included in both bills. There are additional provisions in CURIA not included in the regulatory relief bill I would like to highlight, as they are needed in the credit union community.
    NAFCU urges you to modernize credit union capital requirements by redefining the net worth ratio to include risk assets. This would result in a new more appropriate measurement to determine the relative risk of a credit union's balance sheet, and improvement the safety and soundness of credit unions and our share insurance fund.
    NAFCU also supports the provisions in CURIA to refine the member business loan cap established as part of the Credit Union Membership Access Act in 1998, replacing the current formula with a flat rate of 20 percent of the total assets of a credit union. We support revising the definition of a member business loan by giving NCUA the authority to exclude loans of $100,000 or less from counting against the cap. These provisions would facilitate member business lending without jeopardizing the safety and soundness of credit unions.
    There is a lot of rhetoric on this issue, but I must note that a 2001 Treasury Department study entitled ''Credit Union Member Business Lending'' concluded that credit unions' business lending currently has no effect on the viability and profitability of other insured depository institutions.
    Finally, if the subcommittee were to act on credit union regulatory relief legislation, we would urge you to include language that would address the strain that could be placed on merging credit unions when the Financial Accounting Standards Board changes merger accounting rules from the pooling method of accounting to the purchase method.
    This can be done through a simple modification of the statutory definition of net worth in the Federal Credit Union Act to mean equity rather than the retained earnings balance of the credit union, as determined under GAAP. FASB has reviewed this proposed change and stated in an April 27 letter to NAFCU that, ''While our primary concerns are not regulatory issues, we do have an interest in supporting an expedited resolution of this matter. The attached proposed amendment proposes a way to resolve this matter.''
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    Mr. Chairman, I have a copy of the letter from FASB with me and would ask that it be included in the record with my testimony at this time.
    [The following information can be found on page 171 in the appendix.]
    In conclusion, the state of the credit union community is strong, and the safety and soundness of credit unions is unquestionable. Nevertheless, there is a clear need to ease the regulatory burden on credit unions as we move forward into the 21st century. NAFCU urges this subcommittee to support and pass the CURIA bill and the important credit union provisions we have outlined in this testimony. We look forward to working with you on this important matter and would welcome your comments or questions. Thank you.
    [The prepared statement of Bill Cheney can be found on page 44 in the appendix.]
    Chairman BACHUS. Thank you. Dr. Jackson.
    Mr. JACKSON. Good afternoon, Chairman Bachus and other members of this subcommittee. I count it a great honor to have been invited to present a few ideas on the important topic of credit union regulation improvements before this distinguished subcommittee.
    Chairman BACHUS. Mr. Jackson, if you could pull that mike a little closer, I think that will help.
    Mr. JACKSON. Is that a little better?
    Chairman BACHUS. Yes. I'm just a little worried about my hearing and the court reporter's.
    I guess we're not actually in a court, though, are we?
    Mr. JACKSON. I hope not, Mr. Chairman.
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    My name is William Jackson, and I am Associate Professor of Finance and Economics at the University of North Carolina at Chapel Hill, and this year I am a visiting research scholar at the Federal Reserve Bank of Atlanta where I conduct research on financial institutions and financial markets.
    Also, let me mention that my views or my comments today do not represent or necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System. They are my views and my views only. I am not sure if anyone is going to take credit for them beyond myself today after I present them.
    Last year, a study that I authored was published by the Filene Research Institute. The title of that study was ''The Future of Credit Unions: Public Policy Issues.'' It was a very broad-based study, but the major research question in the study was: Based on sound economic evidence, can we draw any conclusions about whether credit unions should receive some form of regulatory relief?
    For my testimony here today, I would like to summarize the conclusions from that study and relate them to the proposed Credit Union Regulatory Improvements Act under consideration by this subcommittee.
    The four main conclusions from my Filene study were that deregulation of banks, thrifts, and credit unions by Congress over the last 15, 20 years was the right thing to do. And today the U.S. financial system is much stronger because of that deregulation and other factors. Today, if you look at the U.S. financial system, by any reasonable measure it is the biggest and the best in the world. And I attribute a lot of the improvements in the financial system over the last 20 years to an active reevaluation of regulatory policy, and I am a fan of what Congress has done in that area.
    My second conclusion was that credit unions received less deregulation than either banks or thrifts.
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    Thirdly, I concluded that more deregulation for credit unions would very likely have positive effects on our economy.
    And fourth, and last, that the appropriate level of deregulation of credit unions is probably similar to that received by banks, adjusted for the special characteristics of credit unions.
    Now, most of the specific areas of deregulation that I covered in my Filene study are addressed in the proposed Credit Union Regulatory Improvements Act. In general, I agree with those areas, especially the areas of member business lending and capital requirements, and my written testimony goes into more detail on those particular topics and other areas. But let me just speak for a moment or two about member business loans and about capital requirements.
    To a large extent, credit union member business loans, looking at them from the outside as an economist, I see them more as personal loans for business purposes. And that appears to be the way that they should be categorized as opposed to the traditional small business loans that you would think of held in the loan portfolio of a commercial bank. Because of that, they have different risk characteristics. To a large extent, I think these loans are less risky than a typical commercial loan held in the portfolio of a commercial bank. And the idea of expanding the possibilities for credit unions to make more member business loans, I think, could possibly even reduce the overall riskiness of the credit union's loan portfolio through diversification effects. At worst, I would think it would not have a significant increase in the overall risk of the credit union industry.
    Another issue that is obviously very important in terms of thinking about what happens when you expand the possibilities for more member business loans, is who receives these member business loans. The loans tend to be very, very small loans, very small businesses, and they tend to go to help improve the credit supply to very, very small businesses. Also, it appears from a recent Treasury study in the year 2001, that about one-fourth of member business loans made by credit unions actually go to low- and moderate-income individuals.
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    So the supply of very small business loans to very small businesses and the availability of credit to low- and moderate-income individuals could be improved by this particular relaxation of the current regulations, by allowing credit unions to increase the proportion of member business loans that they are currently making.
    In terms of capital regulations, the idea of instituting a risk-based capital program makes a lot of sense. We have a good prototype from what has been developed in the banking industry. Obviously, that would have to be tweaked in certain ways to make it appropriate for credit unions, but I think that it allows for a good starting point.
    One thing I would mention is that I think there is good theoretical and empirical evidence that would suggest that credit unions are probably less risky for given size and management profile than other types of depository institutions. So we might want to keep that in mind as we go through and think about how to develop the proper capital requirements, minimum net worth requirements, and the appropriate weighting system for credit union assets.
    One of the other issues covered in CURIA that I would like to mention is nonmember services. I am really, really excited about allowing credit unions to get involved in the business of check cashing for nonmembers. And, hopefully, at some point, maybe getting more credit unions involved in payday lending. I like the idea of getting credit unions involved in those areas. One of the major credit unions in my State, the State Employees Credit Union of North Carolina, has been actively involved in those areas, and I can see that it is making a difference. I have some close friends that work with the credit unions and close friends that work with the banks too, and they tell me that programs like these are starting to make a difference.
    To just wrap this up, I really think, looking at it from an economic theory standpoint, that what is being done in the proposed Credit Union Regulatory Improvements Act allows for the right approach to thinking about the optimal regulation of credit unions. And one thing that I will sum up and point to that I really think is appropriate is the idea of reducing legislative mandates and allowing the fine regulatory institution that oversees credit unions, the NCUA to have more authority and more flexibility to change its regulations in response to market changes as credit unions obviously have to respond to market changes.
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    Thank you very much.
    [The prepared statement of William E. Jackson III can be found on page 120 in the appendix.]
    Chairman BACHUS. Thank you, Dr. Jackson. I think my first question, I will actually pick up on what you have just talked about, and that is check cashing and what we might call payday lending. And I will ask any of the panelists.
    Ms. Custer, you mentioned in your testimony, CUNA's support for the ability of credit unions to offer check cashing and, I think, remittance services to their members?
    Ms. CUSTER. Yes.
    Chairman BACHUS. How do credit unions use these basic banking services as an opportunity to educate the unbanked and the underserved members of the community of the services that are available to them in a credit union, including financial literacy programs sponsored by the credit unions?
    That will be my first question. My follow up is: What are the statutory and regulatory impediments that prevent you from doing even more to serve the underserved or to make these payday loans or check cashing services or remittance services?
    And I will just start with Ms. Custer and go down the line.
    Ms. CUSTER. The statutory impediment that gives us the restrictions today is that we are limited to providing services to credit union members. This expands the ability to credit unions to provide these services to individuals who are in our field of membership, not just those individuals who have account relationships with us today.
    This is important, because, for whatever reason, many people do not have banking accounts; they do not have relationships with financial institutions. By giving us the ability to provide these services to them, hopefully we can, along with the service, provide the incentive to have an account at the credit union and to educate them on financial literacy.
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    At BMI, I can speak to my own credit union, we have a program we call Second Chance Checking. And this is for individuals who have had checking accounts, and because they have had difficulty handling them in the past, we give them that second chance, and have a specific program for them to help them become acclimated to handling their personal finances.
    I think credit unions have always been out in the forefront of providing financial education to their members and to nonmembers. We have in Columbus, Ohio, I think it is the second largest Somali population in the United States. We participate in the Somali Outreach Program. These are individuals who don't have account relationships at all and are just learning about the American financial system.
    So giving us this ability helps us to provide even more services to those individuals that are learning to handle their own finances.
    Chairman BACHUS. Okay, thank you.
    Mr. Cheney, I mentioned, and I think you mentioned in your testimony too, that your institution has gone into four or five underserved areas?
    Mr. CHENEY. Yes.
    Chairman BACHUS. But I would invite your comment.
    Mr. CHENEY. Sure. We have added underserved communities in four different locations where we had existing branches. We have not entered new markets, but we happened to have branches in those underserved areas, and allowing us to serve our entire field of membership in those areas would allow us, as Sharon was saying, to reach out to people who don't currently have accounts.
    Often, that is an issue of trust. They have an issue of trust with a financial institution. So if we can bring them in and offer them services and offer them education on financial literacy, then it is an opportunity, as she said, to welcome them into our membership and to provide them with the full range of products and services. And today we are not allowed to serve nonmembers in any fashion.
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    Chairman BACHUS. All right. Mr. Jackson, or Dr. Jackson.
    Mr. JACKSON. I think one of the impediments is the cost of actually making loans. There is a certain fixed cost associated with making any loan. And if the loan is too small, it is very difficult to institute a strategic plan that allows you to make the loan at any profit at all.
    With payday lending, that is one of the issues that you run into in terms of the very small loans. And in some cases, I guess usury laws and regulations also prevent charging a rate or a fixed amount that will actually cover the cost of the loan. And kind of tweaking those things to allow for a small fee to be associated with making the loan, I think, would be very helpful.
    Chairman BACHUS. Okay, thank you.
    Ms. Custer, your testimony touched on the importance to many on this subcommittee and goes to the essence of what many of us feel is the mission of credit unions, the idea of providing services to members of modest means.
    To many of us, modest means is another term for those who are poor and those who are underserved. We are aware of a recent GAO study—well, I tell you what, I am not going to ask that question.
    In the interest of time, Mr. Cheney, NAFCU has been supportive in the past of a provision that is included in both H.R. 1375 and H.R. 3579 which gives federally insured credit unions the same exemption from premerger notification requirements imposed by antitrust laws that banks and thrifts already enjoy.
    For those members who might question the wisdom of limiting the reach of these antitrust laws, can you explain why it is, in your view, that credit unions should be entitled to the same treatment as banks and thrifts in this instance? And I am a sponsor of that legislation and promoter of it, so I agree with you.
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    Mr. CHENEY. I am aware of that. Thank you very much.
    Well, other insured financial institutions have been exempt for some time, and I can't prove it, but I wonder whether credit unions were left off merely as an oversight. I don't think that mergers of credit unions present consolidation issues in any markets.
    Typically, as we said, credit unions as an industry hold 1.6 percent of all household assets. So I think it is just, more than anything, a technical correction, which would help with not only the cost of mergers, but also the paperwork and regulatory hurdles that credit unions have to go through when their members and boards members decide they want to merge. So we appreciate your leadership on that issue.
    Chairman BACHUS. Okay. Let me go back to this question, which I have decided I will ask. I keep switching back and forth.
    Ms. Custer, you are aware of the GAO study that suggested that you all might not be doing as good a job in the area of people of modest means as you could do?
    Ms. CUSTER. Yes.
    Chairman BACHUS. And in your testimony, you provide some interesting reasons for that. For the sake of just hitting that again and reemphasizing that, could you repeat those reasons?
    Ms. CUSTER. In serving the individuals of modest means, or giving more data on supporting the fact that those are members of modest means, I do have some figures here that may be helpful to you, and this goes back to a study done by the Filene Research Institute. They show that the average credit union member is less affluent than the average bank customer. By race and ethnicity, African-American households are more likely to use a credit union than any other ethnic group and are more likely to do so as households overall.
    It also shows that minority applicants and low-income households have a substantially higher likelihood of obtaining a first mortgage with a credit union. So I think these are all very consistent with the cooperative spirit and the fundamental philosophy of credit unions in helping all of our members.
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    Chairman BACHUS. Okay. Well, I applaud the credit unions for their outreach and successful efforts in serving those of modest means, which is something that I think members on both sides have urged all our financial institutions to do. And in that regard, credit unions have an enviable record of accomplishment.
    I am going to ask this question. I really was going to talk to Ms. Johnson, but she, in her testimony, recommended that NCUA be given statutory authority to examine third-party vendors that provide data processing and other related services to insured credit unions. And I think this is actually probably a reversal of their position in the past. I will have to say that I am kind of skeptical of giving them this statutory authority.
    Has the absence of that authority or the absence of their ability to do that created any problems that you all know of?
    Ms. CUSTER. Not that I am aware of. I know that NCUA had the ability to look at third-party vendors in anticipation of Y2K. I think at this point, there would have to be more consideration to look at the whole issue, because I could not address it any more than that.
    Chairman BACHUS. Yes, and that is the reason they were given that limited authority, and at that time, they assured us that would sunset and they would not ask that that be extended. I am curious to see what the reason is.
    I didn't know if you all knew of some reason why they should have this authority; why maybe not having the authority has created a problem of safety and soundness; or is it something that the member institutions are asking them to do?
    Chairman BACHUS. Do you have an opinion on that Mr. Cheney.
    Mr. CHENEY. I am not aware of any credit unions that are asking NCUA for this authority, and I am not aware of any existing problems. Although I must say that this is an issue we haven't addressed—the NAFCU board has not addressed in some time, as we were certainly involved in support of the sunsetting of the authority, as you know, some time ago.
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    Chairman BACHUS. Right. And at least as chairman of the subcommittee I would—without seeing something substantial, I certainly wouldn't be in favor of granting them that authority.
    I think that basically concludes—I want to ask Dr. Jackson one final question, and then we will conclude the hearing. In your testimony you express the view that excessive regulatory burdens are not just a minor nuisance for credit unions but have a significant impact on credit union customers and local economies. We have heard testimony that affirms that compliance burdens divert resources from customer service and community development. Can you elaborate on the impact that regulatory burdens on the credit unions have on the local economy?
    Mr. JACKSON. In general, when I think about this, the notion of regulatory burdens, I usually think of it in a basic cost-benefit framework where, when you think of the benefits of regulation, for example, in capital regulation, the benefits would be reducing the risk of an event that might lead to taxpayers having to inject funds into the insurance system. But the whole idea of being able to maintain a safe and sound industry and having the regulations in place that focus on that issue and allow for that issue would definitely be a benefit in terms of regulation.
    But in my way of thinking, in terms of credit unions, the regulations, the cost side of it in terms of restricting the credit union from providing products and services—financial products and services that the customers, their members, demand, it would outweigh the benefits from having a slight reduction in the risk of the adverse event for the deposit insurer.
    So that was kind of my framework for thinking about the cost and benefits of regulation, and I think that the credit unions are basically—their insurance system over time has demonstrated that it is in good shape. It is very safe; and the idea of restricting innovation, restricting goods and services flowing to credit union members and not allowing them to have the same types of opportunities to utilize modern financial products is a very heavy cost.
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    That was kind of the general framework I was thinking of.
    Chairman BACHUS. Thank you.
    I think I do have one other question. Ms. Custer, you mentioned in your testimony you endorsed Mr. Royce's risk-based approach for determining capital; and I think, Mr. Cheney, you endorse that as well. And I actually think Dr. Jackson favorably endorsed that.
    I know, Ms. Custer, do you—if my recollection serves me correct, you also talked about ability to raise secondary capital as maybe an appropriate way of addressing problems with a prompt, you know, corrective action. Are you—could you elaborate on that? Am I making myself clear?
    Ms. CUSTER. I understand. As NCUA Chairman Johnson stated, NCUA had looked at the possibility of secondary capital for credit unions. It has been discussed within the industry. At this point in time, I think the general attitude is, at least with CUNA, who I represent at this hearing, is that the secondary capital was considered an option that was looked at. It was considered, still is being considered, still is being researched.
    The reason that we have looked at risk-based capital as being a possibly more appropriate way of addressing the capital situation is because it is very fair and it walks or goes hand in hand with risk-based examination. NCUA went to risk-based examination a couple of years ago, putting more emphasis on the examination process where there are riskier elements within the credit union operation.
    Risk-based capital does the same thing. If a credit union chooses to have more risk, allowable risk within their operation, then it is appropriate to have more capital required to cover that risk. Conversely, if a credit union has a more simplistic or less risky operation, then it would require less risk. So it simply seems to be a more appropriate way of addressing capital for credit unions.
    Chairman BACHUS. Okay. Miss Custer or Dr. Jackson—I mean, I am sorry, Mr. Cheney or Dr. Jackson, do you have any comments on that?
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    You know, I certainly personally would prefer a risk-based approach; and I am wondering if there are any—I am not seeing any objection to that on the merits. I think that everyone agrees, at least I think your regulators, the institutions would say that a risk-based approach is really the—it is almost a nondebatable issue, that that is—is that a fair assumption?
    Mr. CHENEY. Yes, I agree. NAFCU supports and I do, too, risk-based capital for credit unions. It makes a lot more sense than the current one-size-fits-all program that we have for the reasons that were just mentioned. NAFCU is looking at alternative sources of capital, and we support the concept, although we think there is more work that needs to be done on that issue before we would propose anything to this subcommittee.
    Chairman BACHUS. And, Dr. Jackson, has there been any—in the academic world, or regulatory—among the regulatory bodies, is there a general consensus that risk-based approach makes more sense?
    Mr. JACKSON. Mr. Chairman, I think the general consensus in the academic community is that it makes more sense, that if you think of capital as any other product that has a price and that it should be priced appropriately and if the insurance fund's purpose is to price risk and charge those who are imposing more risk on the insurance fund the appropriate fee, then there has to be some metric that allows you to assess the individual riskiness of each institution. So I think that is the way to go.
    Most people would say that it is better than the alternative of a flat fee, that there are still problems even with the risk-based system. These problems are being worked on. But, we know much more about it now than we did before from banking research. A lot of that, I think, can be utilized for developing an appropriate system for credit unions.
    Chairman BACHUS. All right. Thank you.
    This concludes our hearing. I have to read some more words just for the record.
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    First of all, to both panels of witnesses, without objection, written statements will be made a part of the record and each of you will—your record will—I mean, your full statement will be put in the record.
    The Chair notes that there may be some members that have additional questions to this panel. They may actually have just questions, as opposed to additional questions, for the panel, which they may wish to submit in writing; and, without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
    The Chair asks unanimous consent that Mr. Paul, a member of the full committee who does not serve on this subcommittee, be permitted to submit a statement for inclusion in the hearing record. And without objection, hearing none, that is so ordered.
    [The prepared statement of Hon. Ron Paul can be found on page 39 in the appendix.]
    Chairman BACHUS. With that, this hearing will be concluded. So you witnesses are dismissed; and, again, I compliment the credit unions of this country for their service to the American public and meeting their financial needs. Thank you.
    [Whereupon, at 4:55 p.m., the subcommittee was adjourned.]