Credit Union Community Presents United Front to Congress at CURIA Hearing

WASHINGTON-The entire credit union community, from trades to regulators, showed unanimous support for the provisions contained in the Credit Union Regulatory Improvements Act (H.R. 3579) before the House Financial Institutions and Consumer Credit Subcommittee. In testimony before the subcommittee last week, NCUA Chairman JoAnn Johnson expressed strong support for all of CURIA’s provisions. She told the lawmakers that the agency not only supported the risk-weighted Prompt Corrective Action system included in the bill, but also would like to see the minimum leverage ratio for a `well-capitalized’ credit union reduced to 5% from the current 7%. NCUA recommended keeping the undercapitalized threshold at 2%, Johnson added. NASCUS Chairman Roger Little, deputy commissioner for credit unions in the Michigan Office of Financial and Insurance Services, devoted the bulk of his testimony to capital reforms. NASCUS supports risk-weighted capital for credit unions, but, Little noted, CURIA does not include a provision allowing credit unions to hold alternative forms of capital, which it should. “As a regulator, it makes no business sense to deny credit unions the use of other forms of capital that improve their safety and soundness. We should take every financially feasible step to strengthen the capital base of this nation’s credit union system.” When Congressman Brad Sherman (D-Calif.), who has discussed introducing a separate bill regarding secondary capital for credit unions, pressed Johnson for the agency’s view on secondary capital, she said they were still looking at the issue. She noted that there is some controversy among credit unions over whether alternative capital is philosophically appropriate for the non-profit, cooperative financial institutions. BMI FCU President and CEO Sharon Custer testified on behalf of CUNA, stating, “Credit unions have higher statutory capital requirements 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.” Prompt Corrective Action currently serves as an incentive for credit unions to be overcapitalized, she pointed out. Regarding the member business lending provisions-one raises the cap on business loans from 12.25% of assets to 20% of assets, while the other would increase the threshold of loans to count against that cap from $50,000 to $100,000-credit unions were also united. “These provisions would facilitate member business lending without jeopardizing the safety and soundness of credit unions,” Xerox Federal Credit Union President and CEO Bill Cheney testified on behalf of NAFCU. Custer elaborated, “There was no safety and soundness reason to impose [the member business lending] 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 of credit union loans.” She explained that with a 12.25% cap, small credit unions cannot begin to make up the costs of initiating a business lending program. However, at 20%, they would be more interested. Additionally, she pointed out that increasing the member business lending threshold for loans counted against the cap from $50,000 to $100,000 would help out smaller credit unions. “This would be especially helpful to smaller credit unions, as they would then be able to provide the smallest of these loans without the expense of setting up a formal program,” Custer said. Johnson added, “NCUA continues to believe.that a cap on business lending is unwarranted and hampers the ability of individual credit unions to meet the varying needs of their memberships.” Johnson, together with NCUA Board Member Debbie Matz, has led the way in modernizing NCUA’s member business lending regulations. University of North Carolina Chapel Hill Associate Professor of Finance and Economics William E. Jackson III, who has completed studies for the Filene Research Institute, also testified at the hearing. In his research for Filene, Jackson suggested that credit unions receive regulatory relief in several areas, including member business lending, capital requirements, investing restrictions, the provision of incidental financial services, and non-member services. “I believe that the proposed Credit Union Regulatory Improvements Act (CURIA) represents significant progress in the economic regulation of federally insured credit unions,” his written testimony stated. “It is my opinion that the changes proposed in CURIA will help the U.S. financial system by allowing credit unions to become more efficient members of our dynamic financial services marketplace. It will do this by providing more flexibility, where appropriate, for both credit unions and their regulator, the National Credit Union Administration.” In addition to the provisions already in H.R. 3579, each of the trades and regulators raised the issue of modifying the definition of net worth for credit unions found in the Federal Credit Union Act from simply `retained earnings’ to `equity.’ The Financial Accounting Standards Board has recently said it will push through a proposal to shift all non-profits from the purchase to the pooling method of accounting, which would cause serious PCA problems for credit unions. Cheney explained, “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.” He noted that FASB has written NAFCU that they approved of the alteration to the definition. NASCUS also advocated that the provisions permitting non-federally insured credit unions to join the Federal Home Loan Bank System from H.R. 1375, the Financial Services Regulatory Relief Act, be included in CURIA. The provision is reportedly not in CURIA because the main Democratic sponsor to the bill, Paul Kanjorski (Pa.) is opposed to private insurance for credit unions. Though NAFCU has not come out against the provision in the reg relief bill, their opposition to private insurance for credit unions is well known. Little pointed out that the change would not be without precedent “since 86 insurance companies, none of which are federally insured, now belong to the Federal Home Loan Bank System.” Also during the hearing, NCUA’s Johnson lobbied for the agency to regain its examination authority for third-party vendors. NCUA was given this authority in preparation for Y2K, but it sunset in 2001 and was not renewed. During the question and answer period, the trade associations said they did not feel the authority was necessary. Bachus also said he was skeptical of granting the authority, according to NAFCU Communications Manager John Zimmerman. “In conclusion,” Cheney said, “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 union as we move forward in the 21st century.” Though no bankers were invited to testify regarding CURIA, which they unanimously and adamantly oppose, they did not stand by in silence. Prior to the hearing, American Bankers Association Executive Vice President Edward L. Yingling wrote a memorandum to all of the House Financial Institutions and Consumer Credit Subcommittee members. “This legislation would, among other things, greatly expand credit union commercial lending authority while at the same time undercut the regulation of capital levels at federally-insured credit unions,” the memo stated. “Taken together, these changes would fuel even more aggressive growth within an ever-increasing segment of the credit union industry comprised of credit unions that are virtually indistinguishable from commercial banks.” Yingling added that the “new breed of credit unions”-essentially larger credit unions-”is aggressively entering business lending. Their current tax-exempt status and lack of equivalent regulation have created huge competitive inequities in the local marketplace. Unfortunately, H.R. 3579 would further exacerbate these competitive inequities, as well as raise safety and soundness concerns.” The ABA argued that exempting business loans up to $100,000 plus raising the cap to 20% would give credit unions business lending authority over and above “tax-paying federal savings associations.” America’s Community Bankers was equally decisive in its stance against the bill. “Despite their aggressive product offerings and profitability, this new breed of credit union does not pay federal, state or local income taxes,” ACB said. “As a result, these credit unions and community banks compete for the same customers on an unlevel playing field.” Additionally, ACB stated that granting the $623 billion credit union industry enhanced authorities would further erode the tax base and increase the federal budget deficit. “If credit unions desire to become major business lenders or undertake other bank activities, they should become banks, which they can do without changing their cooperative status.” ACB concluded. “Bottom line: If credit unions want to play like banks they should pay like banks.” Independent Community Bankers of America President and CEO Camden R. Fine noted in a letter to the subcommittee that the Government Accountability Office (then the General Accounting Office) performed a study, which he said found credit unions’ asset concentration requires greater risk management. “Credit unions should be reducing their risk portfolio, not increasing it,” Fine said. Credit unions’ tax exemption and exclusion from Community Reinvestment Act requirements may have been justifiable when they were limited to single sponsors, he added. “However, it is difficult to justify today as credit unions have expanded their scope to serve the general population through community charters,” Fine said. “This makes their aggressive pursuit of expanded commercial lending opportunities all the more troubling.” During the Q&A period of the hearing, Bachus stated that the bankers are often complaining credit unions are taking away market share from banks and asked NCUA and NASCUS if data citing credit union market share growth from 1.4% to 1.6% from 1980 to 2003 was accurate. NASCUS Chairman Little stated, “The evidence, as indicated by banks continually reporting record profits, would seem to indicate that they’re doing very well in the markets they have.” [email protected]