[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                  CREDIT UNION REGULATORY IMPROVEMENTS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 20, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-103


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

STEVEN C. LaTOURETTE, Ohio, Vice     BERNARD SANDERS, Vermont
    Chairman                         CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York               DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
WALTER B. JONES, Jr, North Carolina  DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia  JOSEPH CROWLEY, New York
PATRICK J. TIBERI, Ohio              STEVE ISRAEL, New York
MARK R. KENNEDY, Minnesota           MIKE ROSS, Arkansas
TOM FEENEY, Florida                  CAROLYN McCARTHY, New York
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            JOE BACA, California
TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 20, 2004................................................     1
Appendix:
    July 20, 2004................................................    31

                               WITNESSES
                         Tuesday, July 20, 2004

Cheney, Bill, President and CEO, Xerox Federal Credit Union (CA) 
  on behalf of the National Association of Federal Credit Unions.    19
Custer, Sharon, President and CEO, BMI Federal Credit Union (OH), 
  on behalf of the Credit Union National Association.............    17
Jackson, William E. III, Associate Professor of Finance and 
  Economics Kenan-Flager Business School, University of North 
  Carolina, Chapel Hill..........................................    21
Johnson, Hon. JoAnn, Chairman, National Credit Union 
  Administration.................................................     5
Little, Roger W., Deputy Commissioner of Credit Unions, Michigan 
  Office of Financial and Insurance Services, on behalf of the 
  National Association of State Credit Union Supervisors.........     8

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    32
    Oxley, Hon. Michael G........................................    35
    Gillmor, Hon. Paul E.,.......................................    36
    Hinojosa, Hon. Ruben.........................................    38
    Paul, Hon. Ron...............................................    39
    Sanders, Hon. Bernard........................................    40
    Cheney, Bill.................................................    44
    Custer, Sharon...............................................    63
    Jackson, William E. III......................................   120
    Johnson, Hon. JoAnn..........................................   139
    Little, Roger W..............................................   160

              Additional Material Submitted for the Record

Cheney, Bill:
    Financial Accounting Standards Board letter, April 27, 2004..   171
Custer, Sharon:
    Written response to questions from Hon. Spencer Bachus.......   174
Johnson, Hon. JoAnn:
    Written response to questions from Hon. Judy Biggert.........   179
American Bankers Association, letter July 15, 2004...............   182
America's Community Bankers, prepared statement..................   185
Independent Community Bankers of America, prepared statement.....   189

 
                  CREDIT UNION REGULATORY IMPROVEMENTS

                              ----------                              


                         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.
    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.
    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.
    [Recess.]
    [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.
    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.
    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.
    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.
    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.

  STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION 
                         ADMINISTRATION

    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.
    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.
    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.
    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.

  STATEMENT OF ROGER W. LITTLE, DEPUTY COMMISSIONER OF CREDIT 
 UNIONS, MICHIGAN OFFICE OF FINANCIAL AND INSURANCE SERVICES, 
     REPRESENTING THE NATIONAL ASSOCIATION OF STATE CREDIT 
                          SUPERVISORS

    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.
    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.
    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.
    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.
    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.
    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.
    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?
    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.
    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.
    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.
    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?
    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.
    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.
    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.
    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.
    [recess.]
    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?
    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.

  STATEMENT OF SHARON CUSTER, PRESIDENT AND CEO, BMI FEDERAL 
     CREDIT UNION, REPRESENTING THE CREDIT UNION NATIONAL 
                          ASSOCIATION

    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.
    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.
    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.
    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.

  STATEMENT OF BILL CHENEY, PRESIDENT AND CEO, XEROX FEDERAL 
  CREDIT UNION, REPRESENTING NATIONAL ASSOCIATION OF FEDERAL 
                         CREDIT UNIONS

    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.
    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.
    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.''
    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.

  STATEMENT OF WILLIAM E. JACKSON III, ASSOCIATE PROFESSOR OF 
      FINANCE AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA

    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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?
    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.
    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.]


                            A P P E N D I X



                             July 20, 2004


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