[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE NEED FOR CREDIT UNION
REGULATORY RELIEF AND IMPROVEMENT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MARCH 6, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-95
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41-726 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
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 RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma KEVIN McCARTHY, California
DEAN HELLER, Nevada
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
March 6, 2008................................................ 1
Appendix:
March 6, 2008................................................ 57
WITNESSES
Thursday, March 6, 2008
Dorety, Tom, President and Chief Executive Officer, Suncoast
Schools Federal Credit Union, on behalf of the Credit Union
National Association (CUNA).................................... 16
Johnson, Hon. JoAnn M., Chairman, National Credit Union
Administration................................................. 12
Lussier, Michael N., President and Chief Executive Officer,
Webster First Federal Credit Union, on behalf of the National
Association of Federal Credit Unions (NAFCU)................... 18
Menzies, R. Michael Stewart, Sr., President and Chief Executive
Officer, Easton Bank and Trust Company, on behalf of the
Independent Community Bankers of America (ICBA)................ 44
Reynolds, George, Senior Deputy Commissioner, Georgia Department
of Banking and Finance, on behalf of the National Association
of State Credit Union Supervisors (NASCUS)..................... 14
Rock, Bradley E., Chairman, President, and Chief Executive
Officer, Bank of Smithtown, on behalf of the American Bankers
Association (ABA).............................................. 46
APPENDIX
Prepared statements:
Kanjorksi, Hon. Paul E....................................... 58
Neugebauer, Hon. Randy....................................... 60
Paul, Hon. Ron............................................... 61
Dorety, Tom.................................................. 62
Johnson, Hon. JoAnn M........................................ 78
Lussier, Michael N........................................... 94
Menzies, R. Michael Stewart, Sr.............................. 115
Reynolds, George............................................. 124
Rock, Bradley E.............................................. 130
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
Follow-up information provided by Hon. JoAnn Johnson......... 153
CUNA Response to ABA's ``Top 10 Questions''.................. 156
THE NEED FOR CREDIT UNION
REGULATORY RELIEF AND IMPROVEMENT
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Thursday, March 6, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Sherman, Moore of Kansas, Hinojosa, Clay, Baca,
Lynch, Miller of North Carolina, Scott, Green, Cleaver, Davis
of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter,
Donnelly; Bachus, Castle, Royce, Lucas, Biggert, Shays, Miller
of California, Capito, Feeney, Hensarling, Garrett, Pearce,
Neugebauer, Price, McHenry, Marchant, and Heller.
The Chairman. Good morning. This is a hearing of the
Financial Services Committee on the question of the legislation
that should govern the activities of credit unions. This has
been a subject of considerable interest for some time. I'm very
proud that, largely due to the efforts of the chairman of the
Subcommittee on Financial Institutions, my colleague from
Pennsylvania, Mr. Kanjorski, we are engaged in a serious
legislative consideration of this for the first time in the
memory of a number of people. This is an issue that has been
before us, and I want to acknowledge that it was Mr.
Kanjorski's accession to the chairman of the subcommittee and
our working together that is the major reason that we are here
today. And I am hoping that we are not just going to be talking
about this but legislating.
I believe that this committee has shown a willingness with
regard to all of our financial institutions to do sensible
deregulation. Now deregulation can be carried too far, as it
was in the origination of mortgages. I think it should be noted
that the percentage of subprime mortgages that have run into
difficulty that were originated by credit unions is tiny. The
credit unions and the regulators who are here are to be
congratulated for showing that it is possible to lend to people
of moderate economic means to help them accede to homeownership
without irresponsibility and fiscal crisis.
That is a model to which we want to adhere. That is, yes,
we want to deregulate because we do not want bureaucratic
interference with our ability to help people. But we do not
want to take that to the point where abuses run rampant. And so
our goal is to continue a pattern that we think has been
manifest in the credit union sector of sensible regulation that
allows consumers to be served and helps the economy, but does
not lead to abuses.
I want to make another point. This is one of the issues
that I intend to deal with as we go forward legislatively, and
I hope that many of my colleagues will agree. One of the best
things we can do for lower income people in this country is to
get them into the depository system--credit unions and
community banks.
People who are outside of that system pay a far higher
percentage in the transactions they do of the cost of those
transactions than any of us here, and I daresay than any of you
there. Payday lending, check cashing, excessive fees for
remittances; those are all problems that lower income people
face if they do these transactions outside of the system of
credit unions and community banks.
One of the things that I hope we will do is to enhance the
ability of both sets of institutions to offer to people in that
economic category an opportunity to save money. And so today we
are talking about the credit unions that will be particularly
our goal; to enhance the ability of credit unions to offer
services to people of lower income. Because, again, we have the
experience that doing it within the appropriate regulatory
structure that we have allows this to go forward in a
reasonable way.
I also believe that--and it is on the agenda of this
committee--that there are similar deregulatory things we should
do with regard to the banking system. I understand that there
are conflicts, and there will continue to be. But I believe
there is also a commonality of interest in both sets of
institutions in reducing regulation which gets in the way of
serving people, particularly people in the lower income
category.
So it is my hope that this committee will be able to come
up with legislation. And let me say, as I am reminded of the
stimulus, if we do this well, we will come out with a bill, in
my view, that will make no one deliriously happy but that I
hope will make no one delirious. Those are the outer limits of
our choices. But I think there is room for us to enhance the
ability of regulated institutions in general to serve the
entire economy, and particularly people in the lower income
area, and that is where we will be proceeding.
I have other duties that I need to attend to, so I am going
to turn over the hearing to the second ranking member, the
chairman of the Financial Institutions Subcommittee, the
gentleman from Pennsylvania, who is the main sponsor of the
CURIA bill and a man of significant experience and interest in
this.
I believe we have indicated--the indication I have received
is that under our rules, as a matter of right, each side is
entitled to 10 minutes, for a total of 20 minutes. Is that
correct? No. Each side gets 20 minutes. Wishful thinking. And I
have used only a little over 5 minutes, so I leave my side for
the time, and we will proceed with opening statements for the
full amount of 20 minutes on each side, and then we will hear
the witnesses, and I thank the witnesses for their attendance.
We will begin with the ranking member of the full
committee, the gentleman from Alabama, for 5 minutes.
Mr. Bachus. Thank you, Mr. Chairman. First of all, I would
like to associate myself with your remarks. I think the
millions of Americans who are members of credit unions are a
testament to the important services that credit unions provide
to the Nation. I think that is particularly true and valuable
in some of our underserved communities, where the credit union
is really the only financial institution.
And sometimes those areas, for whatever reason, are
overlooked by other financial service providers. Because they
are nonprofit cooperatives managed by their members, credit
unions excel at providing high-quality, low-cost services that
are responsive to customer needs. In some underserved and rural
areas, a credit union, as I said, is the only conventional
financial institution to be found. Many constituents have told
me that they have been able to afford their house or repairs to
their house, start new businesses or even attend colleges
because of the help of a credit union loan.
In addition, I--and I know Mrs. Biggert feels the same
way--am impressed by credit unions' commitment to financial
literacy. It is a well-known fact that credit unions help their
members become better educated customers or consumers of
financial services.
As we learned during a series of hearings before the
Financial Institutions Subcommittee, some of the regulations on
credit unions are overly burdensome, they are unnecessarily
costly, and they are largely duplicative of other legal
requirements. Whenever we can identify these examples of
regulatory overkill, Congress should strive to eliminate them.
And I acknowledge the gentleman from California, Mr. Royce, for
his leadership on these issues.
With our regulatory reform bill, we built a bipartisan
consensus last year, and I hope that we can do the same thing
this year with these regulatory bills. If we're serious about
regulatory relief for credit unions, however, our efforts must
be directed not only at eliminating excessive burdens that
currently apply but resisting attempts to impose broad new
regulatory mandates.
For example, there are some on this committee and in
Congress who argue that CRA should be extended to credit unions
that currently fall outside the law's coverage. On this point,
I strongly disagree. Rather than expanding the regulatory
dragnet, our focus must be on providing appropriate regulatory
relief so that the credit unions are free to serve the needs of
their communities, and by very definition of who they are, they
do serve communities. Further, we must ask whether regulatory
impositions like CRA would be counterproductive and take away
from their resources to lend to their members.
In conclusion, we must keep in mind that our goal should be
to improve the quality and lower the price of financial
services for consumers. Experience shows that when financial
institutions compete for customers, customers benefit.
Thank you, Mr. Kanjorski. I yield back the balance of my
time.
Mr. Kanjorski. [presiding] Thank you, Mr. Bachus. I am
pleased that we meet today to examine the need for making
statutory improvements and providing regulatory relief for our
Nation's credit unions. Nearly 4 years have passed since the
Financial Services Committee last met to exclusively examine
the many issues of concern to the credit union movement. I
therefore commend Chairman Frank for convening this long
overdue hearing.
I am also optimistic that today's proceedings will lay the
groundwork for swift action on legislation to modify the
Federal Credit Union Act. The last time we acted on a
comprehensive credit union legislation occurred a decade ago
when the Congress adopted H.R. 1151, the Credit Union
Membership Access Act. For the last 5 years, we have also
worked to craft and build bipartisan support for the Credit
Union Regulatory Improvements Act, or CURIA. I have been a
leader in both of these reform efforts.
CURIA would help to fix several problems created by the
rushed drafting of H.R. 1151. These fixes including putting in
place a modern, risk-based capital system for credit unions,
allowing credit unions of all types to expand into underserved
communities, and amending conversion voting standards.
CURIA also contains a number of provisions to facilitate
the ability of credit unions to make business loans. For
example, CURIA would raise the current asset limit on members'
business loans from 12.25 percent to 20 percent, a limit
comparable to the current one of thrifts for their non-real
estate commercial lending.
Some have suggested that this modest change represents a
major expansion of business lending authority. I have a
different view. Prior to the enactment of H.R. 1151, we had no
limits on business lending activities of credit unions. CURIA
would therefore provide minor but needed adjustments to the
limitations on business lending currently imposed by the law.
Support for CURIA has steadily grown over time. During the
108th Congress, we had 69 supporters. In the 109th Congress, we
garnered 126 supporters. To date, in the 110th Congress, we
have now gained the endorsement of 147 supporters in the House.
Our legislation, moreover, no longer has just bipartisan
support in the House. It now enjoys bicameral support. I am
very pleased that Senator Mary Landrieu announced that she
would introduce CURIA in the Senate, along with Senator Joseph
Lieberman. Their support clearly demonstrates that the momentum
of enacting credit union statutory reforms is growing.
Although support for CURIA is building, I recognize that
enacting legislation into law is often a multi-stage process.
Therefore, in order to achieve some progress on these matters,
I recently introduced a pared-back credit union bill known as
the Credit Union Regulatory Relief Act. Like CURIA, Congressman
Ed Royce joined me in these efforts. H.R. 5519 contains eight
noncontroversial provisions found in CURIA and previously
passed by the House.
It also includes language to permit all credit unions to
assist those living and working in underserved census tracts,
help individuals with short-term financial difficulties to
obtain loans, and expand member business lending activities
very modestly, through some narrow carveouts and
clarifications.
The swift adoption of H.R. 5519 will allow us to continue
to work on enacting the many other important legislative
reforms contained in CURIA but not contained in this new bill.
Before I close, I would like to strike a cautionary note.
At today's hearing, we will hear not only from regulators but
also credit unions and banks. In the past, banks and credit
unions have sometimes found themselves engaged in what might be
termed a family feud. In reality, credit unions and banks have
much in common. I hope that they realize this fact. In my view,
we can work to expand the pie for both of them by advancing
well-crafted reforms to their underlying statutes consistent
with safety and soundness objectives.
In closing, I look forward to hearing from our witnesses
and engaging in a thoughtful debate. I also look forward to
moving a credit union bill through our committee in the very
near future.
I yield back the balance of my time. And the Chair will now
recognize Mrs. Biggert for 5 minutes.
Mrs. Biggert. Thank you, Mr. Chairman, for holding today's
hearing to examine credit union regulations. Like banks, credit
unions plan an important role in our communities. Credit unions
serve the financial needs of upwards of 90 million Americans,
some would say as many as one-third of U.S. citizens. Again,
like banks, credit unions have provided millions of Americans
the credit and financial services that they need to buy cars,
build homes, and pay for education.
However, unlike banks, credit unions are tax-exempt
organizations that are run by their members. Banks serve both
customers and investors, are required to comply with the
Community Reinvestment Act requirements and pay taxes. Back in
1934, in the midst of the Great Depression, when banks were
failing and credit was scarce, Congress passed the Federal
Credit Union Act which established requirements for chartering
credit unions as well as a national regulator. Congress
revisited this Act a decade ago, and here we are again today.
Based on the written testimony of today's witnesses, it is
clear that competition is alive and well in the financial
services industry. This is a good thing. It points to the
success of this sector of our Nation's economy, but more
importantly, to the fact that Americans benefit from such
competition.
We are here today to examine the playing field for this
competition. Is it level? Should it be level? I hope that today
we can better understand the original intent of Congress for
credit unions and how that intent holds up in the face of
today's realities. Was it to encourage competition with banks?
Did Congress intend for credit unions to fill the void left by
banks in niche markets and underserved communities? What are
underserved communities, or who is underserved in communities?
Are credit unions fulfilling or not fulfilling their
congressional directive?
Is it also important that we flesh out further what, if
any, true need there is to change the capital system and expand
member business lending for credit unions, which H.R. 1537
envisions? Well, this committee is always up for a good
challenge, and with that, I thank my colleagues, Congressmen
Kanjorski and Royce, for presenting us with another challenge,
and I look forward to today's discussions.
Thank you, Mr. Chairman. I yield back.
Mr. Kanjorski. Thank you very much, Mrs. Biggert. And now
the Chair recognizes Mr. Baca for 2 minutes.
Mr. Baca. Thank you very much, Mr. Chairman. Okay. Remember
I have the additional seconds because my clock didn't start
yet.
[Laughter]
Mr. Baca. Thank you very much, Mr. Chairman, for calling
this important meeting. I'm proud to be a cosponsor of H.R.
1537, the Credit Union Regulatory Improvement Act. I appreciate
my colleagues, Representative Kanjorski and Representative
Royce, for having offered this legislation again, and I look
forward to doing everything possible to help provide credit
unions with the Regulatory Relief and Improvement Act that they
need to better serve their members.
I state, to better serve their members, and I think this is
what it is all about--the quality of service, and how do we
serve the members as well? There are 13 credit unions
headquartered in my district that serve one hundred and--I
mean, one thousand and twelve plus one hundred and twelve
credit union members who live in my district. I agree that
several of them contained by Mr. Dorety's testimony, especially
when he talks about the services to the underserved.
And I state to the underserved. This is about the
underserved, and that's what this hearing about individuals as
well, who are underserved. It's hard for me to understand how
anyone can complain that credit unions are not doing enough to
serve the underserved, given the barriers that credit unions
face today. The fact is that those who complain the loudest are
the ones who fight the hardest to keep credit unions out of the
underserved areas. And I state out of the underserved areas
where a lot of us, minorities and others, live.
Mr. Chairman, there are reasons that we call these areas
underserved. The banks aren't there, and most credit unions
cannot serve these areas. One way that we can provide more
services to those needs is to allow credit unions to enter the
underserved areas and provide literally unbanked in our country
with mainstream and affordable financial services. And this is
what we have to do.
I look forward to hearing from today's witnesses on how we
can help credit unions continue to reach the underserved--and I
state the underserved--in our communities. I yield back the
balance of my time.
Mr. Kanjorski. Thank you very much, Mr. Baca. Now my good
friend, Mr. Royce of California.
Mr. Royce. Thank you, Chairman Kanjorski. I want to begin
just by thanking you for your efforts over the years on behalf
of credit unions. I know their 90 million members across the
country very much appreciate your efforts. I also want to thank
you as a friend and colleague for holding this hearing and
focusing our attention on this important issue.
I believe, as you do, that priority should be passage of
CURIA. I think it has been a decade since we had any major
credit union legislation passed through the Congress, and it is
important, I think, to modernize the regulations overseeing
credit unions. And I think putting credit unions, as you say,
on a par with other FDIC-insured institutions is a good way to
do that.
Let me say that Representative Kanjorski and I introduced
H.R. 5519 in the meantime, the Credit Union Regulatory Relief
Act, this week. And while this legislation does not go as far
as many would like, it's important that we not let the perfect
be the enemy of the good. And as we build momentum and support
for CURIA, we are now looking at passage of this piece of
legislation.
It does several things. It provides the NCUA with increased
flexibility to determine the interest rates on loans from
Federal credit unions. It authorizes credit unions to invest in
non-stock investment grade securities totaling up to 10 percent
of the credit union's net worth. It permits all credit unions
to expand their services into underserved areas, and it exempts
business loans made to members within those underserved areas
from the lending caps.
And lastly, the Credit Union Regulatory Relief Act would
support the community development work of nonprofit religious
institutions by excluding such loans from credit union business
lending caps. This is based on legislation I had introduced
prior in 2003, and we have been trying to advance this
particular concept, because this provision would close a long-
standing liquidity gap between creditors and nonprofit
organizations.
A major priority, by the way, which was left out of this
legislation, is the modernization of the current capital
requirements for credit unions. And as Chairman Paul Kanjorski
shared with you, CURIA incorporates the net worth and prompt
corrective action reform proposals of the National Credit Union
Administration, the Federal regulator responsible for the
safety and soundness of the credit union system.
CURIA would replace the current one-size-fits-all leverage
capital requirement for credit unions with a more rigorous two-
part net worth structure that would more closely monitor actual
asset risk. The revised credit union capital/PCA structure
would incorporate the relevant international risk-based
standards for Basel I and Basel IA financial institutions, and
it would very closely resemble the current risk-based capital
standards for FDIC-insured banks and thrift institutions in
this country.
So I believe this, along with many of the other provisions
found in CURIA, but not in H.R. 5519, are important. They
should not be forgotten as we continue to work toward that
goal. We have 145 Members of Congress who have signed onto the
legislation. It is going to remain the primary vehicle to
modernize regulation of credit unions, and of course, it has
also been introduced this week in the United States Senate.
So, again, I'd like to thank Chairman Kanjorski for his
work on this issue. I think we have a good starting point, and
as we move toward a markup on this legislation, I am hopeful we
can gain a better perspective and develop a workable solution.
I look forward to hearing from our extensive panel of witnesses
who are with us today, and I thank them for making the trip out
here. I yield back the balance of my time, Mr. Chairman.
Thank you.
Mr. Kanjorski. Thank you very much, Mr. Royce. The
gentleman from Georgia, Mr. Scott.
Mr. Scott. Mr. Chairman, if I may, could I just yield to my
good friend, Mr. Green? He has an appointment. Then I could
come after him?
Mr. Kanjorski. Surely.
Mr. Green. Thank you, sir. Thank you, Mr. Chairman. I thank
the ranking member as well. I thank the members of the panel
who will appear today. I am honored to be with you and regret
that I will have to leave.
I just want to note that we have 8,100 credit unions across
the length and breadth of the country, serving 90 million
members. In Texas, we have 603 credit unions, about 6.9 million
members. Credit unions are making a difference, and sometimes
they can be the difference in asset acquisition and wealth
building. I thank you again, and I yield back the balance of my
time.
Mr. Kanjorski. Thank you very much, Mr. Green. The
gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. I have 89,000
members, credit union members, in my district, and I know how
important the credit union movement is to them. I also have
noticed in my district the important role that credit unions
are playing in the subprime challenge that we have, given their
relatively low exposure to that market, that they are being
very helpful in a lot of workouts and a lot of financial
situations.
I would also let folks in the credit union movement know,
and I see several of my friends here today. They may not know
it, but recently, I became a credit union member myself. But
before you get too excited, no, I have yet to cosponsor CURIA.
I did, however, as my friends know, along with the gentleman
from Kansas--I do not see him here at the moment--Mr. Moore,
helped champion regulatory relief in the last several
Congresses. Many titles that were in our regulatory relief bill
are also simultaneously in CURIA.
I continue to be very concerned about the regulatory burden
on our financial institutions, and I continue to support
regulatory relief that is generally applicable to all financial
institutions. I am particularly concerned about the burden that
the Bank Secrecy Act continues to play in our financial system.
However, I am also very mindful that one person's regulatory
relief is another person's regulatory advantage.
We do know that credit unions enjoy certain unique
privileges within our system. Those privileges I am happy to
defend, but there was a dramatic change a decade ago when the
common bond requirements were modified. I believe tradeoffs
were had at that time with respect to lending caps and capital
requirements. Although I have many persuasive friends in the
credit union movement, I have yet to be persuaded that balance
should be upset.
Having said that, I continue to have an open mind. It is
not an empty mind. So I look forward to hearing the testimony,
and I am very glad to hear my good friend from California, Mr.
Royce, talk about the ability to perhaps advance H.R. 5519,
where we do have common ground, in hopes that these other
issues may be worked out at a later time.
With that, I yield back. Thank you.
Mr. Kanjorski. The gentleman from Georgia now, Mr. Scott,
for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. This is
indeed a very, very important and timely hearing. And we have
what really amounts to a delicate balancing act here to
accomplish.
First of all, we do have a need. The credit unions are
there. They deserve the attention and relief under this bill,
because they do serve an underserved community, particularly
lower and moderate income communities and minority communities.
And so we need to make sure we keep that in mind.
Now there are four actors here that have to be taken care
of. We have the regulators. We have the banks. We have the
credit unions. But the most important part of this is the
consumer themselves. We have the banks, the regulators, and the
credit unions here before us, but we don't have the consumer.
And that is where we, who represent the consumers, must take
that into consideration.
But there are areas where we can work together,
particularly when you take the meltdown in the mortgage
markets. There is a need that we could have for credit unions
to be able to help take some of the downward pressure off of
banks now that are tightening up on their requirements, to give
the consumers another way and another resource with which to
refinance their homes. That is one area that we have to take
into consideration.
Now this is sort of like a ball game. We have to get to
several bases. We have to compromise. We have to work. Any
reform, it takes time, it takes patience. But if we understand
our mutual goal, which is to provide that kind of relief to
assist an underserved community that needs that service, an
unbanked community, then I believe we have room for agreement
here.
Today, with this hearing, we will certainly get to first
base. Then we have to get to second base, third base, and then
home. And I believe we will be able to score some runs that
way.
I look forward to this hearing. It is a very important
hearing. Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you very much, Mr. Scott. We now have
Mr. Pearce of New Mexico.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate you
convening the hearing. New Mexico is very much rural. Some
counties have more land mass than States back East, and fewer
than 1,000 or 2,000 residents underserved is a very key problem
that we face, not just available access to lending.
I understand and appreciate the concerns of the banks. I
see the large, large growing institutions that look almost like
banks and have tax advantages, so we are very familiar with
those. But at some point in our State, we have to address the
access to liquidity. So we are interested in the hearing on the
bill to hear both sides and look to see the ways that we can
make the system more fair.
I would encourage the chairman to hold a hearing on the
Communities First Act, H.R. 1869. I think that more than
regulatory relief right now we have to be concerned with the
entire aspect of our financial institutions. We had a couple of
hearings last week that raised significant concerns. And so we
need to be looking through this problem to making all financial
institutions more sound and more competitive worldwide. So I
hope that the chairman would consider that also.
I look forward to the hearing and appreciate the chairman
for convening it. Thank you.
Mr. Kanjorski. Thank you very much, Mr. Pearce. And now
we'll have Mr. Cleaver of Missouri.
Mr. Cleaver. Thank you, Mr. Chairman. I appreciate this
hearing. It seems as if each hearing this committee
participates in is one that deals with those who hate
regulations and those who want more. I have twin sons, and when
they were smaller--we have a huge backyard and they would be
riding their bicycle, and one of them would say, ``Daddy, would
you make him get off so I can ride?''
I think that is kind of what we hear when we deal with
credit unions and banks and other financial institutions. And I
think that it is our responsibility to protect the consumers
while at the same time making sure that there are opportunities
available to the financial institutions, such as banks, and
that we ought to create those opportunities with as few
barriers as possible.
But I'm looking forward to getting into the question and
answer period, because I think that the great conflict is
always, you know, laissez-faire. And I think if we have
laissez-faire, we probably don't need Congress, and I don't
need any response to that. It seems to me that we have a
responsibility to play this role, and I look forward to playing
it.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Mr. Kanjorski. Thank you very much, Mr. Cleaver. And now we
will hear from the gentleman from Georgia, Mr. Price, for 1
minute.
Mr. Price. Thank you, Mr. Chairman. I want to thank the
chairman and Ranking Member Bachus as well and add my
commendation to them for holding this hearing. And I want to
commend Congressman Kanjorski and Congressman Royce for their
ongoing efforts to spotlight this issue.
I want to welcome all the members of the panel. I want to
particularly welcome Mr. George Reynolds, who is the senior
deputy commissioner of the Georgia Department of Banking and
Finance. Welcome. We look forward to your testimony.
I am interested in a number of issues. One of the
provisions of H.R. 1537, the CURIA Act, would update the
current capital requirements for credit unions addressing some
concerns that NCUA has that the current capital requirements
for credit unions may be too inflexible and should become more
risk-based. We are all aware of the challenges that the housing
market is creating for our whole economy, and I would be
interested in hearing all panel members' thoughts on whether
those challenges that we're facing require or would benefit
from any legislative or congressional action as it relates to
credit unions.
Additionally, Chairman Kanjorski and Congressman Royce have
introduced a couple of pieces of legislation on regulatory
relief, and I am interested in hearing from the panel
specifically on those regulatory challenges that you or your
clients and those that you represent face during their daily
routine. Specifically, are there compliance tasks that you feel
are overly burdensome and end up costing more in compliance
costs than they're worth for either the system or for
consumers?
And again, I appreciate each of you coming and look forward
to your testimony and the Q&A. Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you, Mr. Price. And now, we will hear
from Representative Neugebauer of Texas for 2 minutes.
Mr. Neugebauer. Thank you. And I thank Chairman Frank for
calling today's hearing. It's good to have all of our friends
from the credit unions in Washington this week. I had several
from my district, from Big Spring and Abilene yesterday. And I
think it's important that you come to your Nation's capital and
talk to the people who represent you here and make sure that
your views, which are the views of your shareholders, your
stakeholders, are expressed on this important issue.
I appreciate the contribution that the many credit unions
in my district make to the folks in West Texas. They are
working very hard to make sure that they serve their customers.
And one of the things that we're very blessed in our Nation,
and particularly in our--in Texas is we have a lot of good,
healthy financial institutions, banks, thrifts, and credit
unions that provide for the financial needs of the folks that
we serve.
I think one of the important things is that whether it is a
credit union or a bank or a thrift, what I hear over and over
again is we have to do something about decreasing the amount of
regulation because they said--what they tell me is they spend
more time now working for the regulators than they spend time
working for the people that they serve. And certainly I support
additional efforts on behalf of this committee to look at ways
to reduce the regulatory environment and also make sure that we
have a streamlined, efficient, 21st Century financial services
industry.
Like many of my other colleagues, I am particularly
interested in looking at the way that we assess the capital
needs of credit unions in our country. I think the current
system is an antiquated system today that we ought to measure
the amount of capital that a financial institution has not
based on what some arbitrary number that we're going to try to
make one size fit all, but with a number that is based on the
kinds of loans and lending practices that that particular
credit union is using, as we do with other financial
institutions to measure what is the risk that they are taking
and then make their capital requirements to coincide with that.
And so I think that's a system that makes sense. I again
thank of the panelists for being here today. We look forward to
hearing from you as we try to make America's financial
institutions a better place and better serve the folks for whom
we all work.
Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you very much. And now we will hear
from Mr. Davis of Tennessee for 1 minute.
Mr. Davis of Tennessee. Thank you, Mr. Chairman. Living in
a rural area as I do, and representing 10,000 of Tennessee's
40,000 square miles in the 4th, one of the most rural
residential Congressional districts in America, we need every
available resource to us that we can that will supply credit
for those consumers in the 4th District to be able to at least
access reasonable rates and reasonable terms.
Since 1934, 8,100 credit unions have been established
across the State, representing over 90 million people. But in
the district I represent, we have small, independent bankers as
well. And from my perspective, there's a reason that subprime
lending is not damaging our small local banks nor our credit
unions. We haven't gotten involved in that, consumer lender. So
I applaud the folks in 1934 and Congress who saw fit to
establish--and saw the need for the credit unions.
But I also realize that as I live in a small rural area, I
live in an area where there were two banks that didn't close in
1929 during the Great Depression. So I want to be sure that as
we navigate through the future, we continue to allow credit
unions to be able to provide the great service they are
providing today, but also to be sure that our small banks in
the district I represent are still going to be standing 10
years, 20 years, and 30 years down the road.
Thank you for coming today, and I look forward to the
question and answer session. I yield back my time.
Mr. Kanjorski. Thank you, Mr. Davis. I will now introduce
the panel. Thank you for appearing before the committee today,
and without objection, your written statements will be made a
part of the record. You will each be recognized for 5 minutes
for a summary of your testimony.
First, we have the Honorable JoAnn M. Johnson, Chairman of
the National Credit Union Administration.
Ms. Johnson.
STATEMENT OF THE HONORABLE JOANN M. JOHNSON, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION
Ms. Johnson. Thank you, Mr. Chairman, Ranking Member
Bachus, and members of the committee. I thank you for this
opportunity to testify. The variety of proposals before
Congress would strengthen NCUA's ability to maximize the safe
and sound operations of over 8,000 federally insured credit
unions, modernize important aspects of the Federal Credit Union
Act, and grant greater flexibility to credit unions serving
consumers.
The written statement I have submitted contains analysis of
four bills: H.R. 1537; H.R. 1849; H.R. 3113; and H.R. 5519. I
would like to devote most of my statement to two paramount
issues--prompt corrective action reform, and extension of
credit union service to consumers in underserved areas.
I want to thank Chairman Frank for his leadership and
Representatives Kanjorski and Royce for their stewardship of
the issues contained in CURIA, and in a new iteration, H.R.
5519, just introduced this week. You have consulted with and
advised this agency on a number of occasions as you assess
possible updates to the Federal Credit Union Act, and have led
an informed discussion of issues that have real world benefits
for consumers.
I also commend Representative Velazquez for her tireless
efforts to assist credit union efforts to reach out to small
business communities, and Representative Serrano for his
legislation to improve credit union service in disadvantaged
communities.
NCUA currently administers a system of prompt corrective
action with the purpose of resolving problems at credit unions
at the least possible cost to the National Credit Union Share
Insurance Fund. Our experience in regulating and supervising
credit unions has shown that a more fully risk-based system,
such as the one contemplated in H.R. 1537, would improve the
regulatory regime while at the same time enable credit unions
to put more money in the hands of their members.
The legislation mirrors a proposal adopted by NCUA last
summer and incorporates substantive and very helpful input from
the Department of the Treasury. It also recognizes developments
that have occurred with the adoption of the new Basil II
capital standards for FDIC-insured institutions. A new risk-
based system promotes active management of risk in relation to
capital levels.
By emphasizing risk assessment, credit unions would be able
to better relate their capital to the risk they are assuming.
Cash in the vault carries a different degree of risk than a 30-
year fixed mortgage, and we believe our regulation should be
able to recognize this. Also, NCUA oversight will be
strengthened using additional tools to identify each credit
union's risk profile based on their activities.
It is important to note that the proposed leverage ratio
thresholds will in fact result in some credit unions being
required to hold more capital than under the current system.
The proposed system would be robust and would promote a
regulatory regime that more accurately portrays risk. It would
reduce regulatory burden on credit unions while enhancing their
ability to manage their balance sheets in a more efficient,
effective, and most importantly, safe manner.
What I have just described is an accountant's-eye view of
PCA reform. What it means to consumers is more dollars
available from their credit union for them to save, invest, and
put to productive use, all in a safe and closely monitored
environment.
Another important feature of my regulatory relief
legislation--of any regulatory relief legislation--involves
modernizing the statute to allow all types of federally
chartered credit unions to adopt underserved areas. Currently,
NCUA can only permit multiple group credit unions to add
underserved areas in their field of membership. Single group
and community chartered credit unions are not authorized to
adopt these areas.
All types of federally chartered credit unions should be
able to improve access, particularly at a time when so many
Americans have turned to predatory lenders and are suffering
the unfortunate consequences. Three different bills have
language that would address the situation, and NCUA would be
supportive of these approaches.
I do note that H.R. 5519 establishes new standards
regarding how credit unions are serving consumers when adopting
underserved areas. We want to work with Congress to make sure
that all consumers have choices in financial services. NCUA
takes outreach seriously.
Turning briefly to other issues addressed in regulatory
relief proposals, several bills propose to improve the ability
of credit unions to make member business loans. We support
those efforts and note that credit union member business
lending can be beneficial and productive service offered to
consumers. We also underscore the importance of strong and
active NCUA supervision of these activities. NCUA continues to
devote significant attention to guidance for all credit unions
in all types of lending. Irrespective of any statutory limits
on individual or aggregate credit union member business loans,
NCUA will continue to be vigilant and aggressive in its
supervision.
H.R. 5519 contains a provision that builds upon the
progress Congress made 2 years ago in helping consumers find
lower-cost alternatives to predatory lenders. Allowing credit
unions to provide payday loan services within their field of
membership makes sense, and we commend the approach.
NCUA believes these modernizations represent significant
improvements to our ability to regulate and supervise credit
unions. We stand ready to work with Congress as you seek ways
to improve the delivery of financial services to credit union
members, and we feel confident that your deliberations will
succeed.
Thank you very much.
[The prepared statement of Ms. Johnson can be found on page
78 of the appendix.]
Mr. Kanjorski. Thank you very much, Ms. Johnson. As
everyone knows, we have two votes on the House Floor, and
rather than taking any more statements, we have about 6 minutes
remaining on those votes, so we're going to recess the
committee for about 20 minutes, and then we will reconvene and
take further testimony.
The committee stands in recess.
[Recess]
Mr. Kanjorski. We will now reconvene. Next, we will hear
from Mr. George Reynolds, senior deputy commissioner of the
Georgia Department of Banking and Finance, testifying on behalf
of the National Association of State Credit Union Supervisors.
Welcome to the committee. Mr. Reynolds, if you will present
your testimony?
STATEMENT OF GEORGE REYNOLDS, SENIOR DEPUTY COMMISSIONER,
GEORGIA DEPARTMENT OF BANKING AND FINANCE, ON BEHALF OF THE
NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS (NASCUS)
Mr. Reynolds. Good morning, Chairman Kanjorski, and
distinguished members of the House Committee on Financial
Services. I appear today on behalf of NASCUS, a professional
association of State credit union regulators. NASCUS believes
that H.R. 1537, the Credit Union Regulatory Improvement Act of
2007 called CURIA, is important legislation.
As State regulators, we determined our position on the
provisions in CURIA after reviewing the effect on credit union
safety and soundness and State law.
NASCUS supports comprehensive capital reform. First, credit
unions need to be assessed using risk-based capital standards;
and second, credit unions should have access to alternative
capital. From a State regulatory perspective, capital reform
that addresses these areas makes sense.
CURIA expands risk-based capital options to all federally
insured credit unions. NASCUS has long supported that risk-
based capital standards are appropriate. We believe it is a
sound and logical approach to capital reform for credit unions.
The implementation of prompt corrective action for credit
unions doesn't just happen. It requires strong cooperation and
consultation between State and Federal credit union regulators
as provided by the Credit Union Membership Access Act. We
believe coordination between State and Federal regulators is
imperative to ensure effective capital reform.
Also, comprehensive capital reform requires more than just
risk-based capital. NASCUS believes that CURIA's capital reform
provisions would be enhanced by allowing a provision for the
inclusion for alternative capital.
Simply put, credit unions would benefit from alternatives
that allow them to raise capital other than through retained
earnings. In fact, low-income and corporate credit unions
currently have access to alternative capital. We understand
that additional dialogue with policymakers, the credit union
industry, and NCUA is necessary to reach a consensus on
alternative capital. Now is the time for dialogue before
capital requirements are refute and time sensitive.
Let me point out a few considerations. First, NASCUS is not
the only voice advocating access to alternative capital. The
Filene Research Institute released a study in November of 2007
entitled, ``Alternative Capital for U.S. Credit Unions: A
Review and Extension of Evidence Regarding Public Policy
Reform.'' The report concludes that it is in the public
interest to permit credit unions greater access to alternative
capital. It is attached to our testimony.
Next, while the majority of credit unions were not involved
in the subprime real estate market problems, all financial
institutions are experiencing impacts from the residential
mortgage market.
How would alternative capital help? It would allow credit
unions, as it does other financial institutions, to meet these
challenges and potentially thrive in an uncertain market
environment.
As regulators, we realize that alternative capital requires
solid regulation and rigorous regulatory review to ensure that
these products are properly structured, meet proper disclosure
requirements, and do not create any systemic risk. Before a
credit union would be given access to alternative capital, it
must demonstrate that it has the resources to properly manage
alternative capital.
NASCUS supports revisions to member business lending.
Changes will provide an opportunity for credit unions to better
serve members. With proper underwriting and controls, these
changes are not believed to be a risk to safety and soundness.
While NASCUS supports revisions, we recognize that they
require proper regulatory oversight through examination and
supervision. Credit unions must have a thorough understanding
of member business lending and be diligent in their written
policies, underwriting, and controls for provisions to be
implemented in a safe and sound manner.
CURIA also outlines procedures on conversion voting
requirements. NASCUS supports full transparency and disclosure.
We believe that any legislation concerning conversion
requirements of a State-chartered credit union should recognize
State law.
NASCUS appreciates the opportunity to testify. Our
discussion was limited to those provisions in CURIA that impact
State-chartered credit unions. We urge this committee to be
watchful of Federal preemption and to protect and enhance the
viability of the dual chartering system. We welcome questions
from committee members.
Thank you.
[The prepared statement of Mr. Reynolds can be found on
page 124 of the appendix.]
Mr. Kanjorski. Thank you, Mr. Reynolds.
We will now hear from Tom Dorety, president and chief
executive office of the Suncoast Schools Federal Credit Union,
testifying on behalf of the Credit Union National Association.
Mr. Dorety?
STATEMENT OF TOM DORETY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
SUNCOAST SCHOOLS FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT
UNION NATIONAL ASSOCIATION (CUNA)
Mr. Dorety. Thank you. Chairman Kanjorski and members of
the committee, on behalf of the Credit Union National
Association, I appreciate the opportunity to appear before you
to express our support for H.R. 1537, the Credit Union
Regulatory Improvement Act.
CUNA is the largest credit union advocacy organization,
representing over 90 percent of our Nation's 8,400 State and
Federal credit unions and their 90 million members. I am Tom
Doherty, CEO of Suncoast Schools Federal Credit Union in Tampa.
As you are well aware, we are experiencing a credit crunch
in many sectors of the economy. It is ironic that credit unions
are ready, willing, and able to help alleviate the problem and
promote economic growth, and yet we are inhibited from doing so
by outmoded laws that protect the narrow self-interests of
bankers.
Mr. Chairman, the last major changes to the Federal Credit
Union Act were made in 1998. These changes did not provide
significant regulatory relief to credit unions. In fact, the
opposite is the case. The Credit Union Membership Access Act
imposed statutory burdens related to business lending and
prompt corrective action.
It is now time for Congress to reconsider the applications
of these statutory requirements. Credit unions support the
provisions of H.R. 1537 which would increase the current limit
on credit union member business loans from 12.25 percent to 20
percent of total assets and permit the NCUA to increase the
threshold for defining an MBL from $50- to $100,000.
We hope that Congress will also consider eliminating the
statutory business lending cap entirely. There is no economic
rationale for this cap. Credit unions have been providing these
loans safely for nearly 100 years. If that broader approach is
not approved as an alternative, CUNA asks Congress to consider
exempting MBLs made in underserved areas from that cap.
Credit unions also seek modernization of the statutory
capital requirements Congress enacted in 1998. By law, not
regulation as for other depository institutions, credit unions
must maintain a 7 percent net worth ratio in order to be
considered well capitalized. In comparison, the current ratio
for banks to be well capitalized is only 5 percent.
This capital requirement for credit unions is inefficient.
It unnecessarily retards member service and growth and it does
not appropriately account for risk of a credit union's assets.
Under the proposal in H.R. 1537 which has been endorsed by
NCUA, the new capital requirements would still be more
strenuous than bank capital requirements and would accurately
account for the risk for the credit union's portfolio. A more
precise, risk-based capital requirement would enable credit
unions to do even more to help members in these economically
stressful times.
CUNA also supports a statutory clarification that all
Federal credit unions may apply to NCUA to add underserved
areas. This provision will enhance the ability of credit unions
to assist underserved communities with their economic
revitalization efforts. It provides all Federal credit unions
with an opportunity to expand services to individual and groups
working or residing in areas that meet unemployment and other
distress criteria identified by the Treasury Department.
Mr. Chairman, it's unfortunate that credit unions must come
to Congress to ask for this clarification. You, yourself, along
with several members of this committee thought that had been
addressed 10 years ago. We were forced to ask Congress for this
provision because the American Bankers Association sued NCUA in
2005 for authorizing single sponsor and community chartered
credit unions to add underserved areas to their field of
membership.
In a November 2005 hearing before the House Ways and Means
Committee, the ABA complained that credit unions do not do
enough to serve people of modest means. Within days, the same
group took credit unions to court to prevent them from doing
so.
Mr. Chairman, as you know, these areas are called
underserved with good reason. Banks make a business decision
not to operate in underserved areas. Credit unions seek to
serve the underserved. It is not just part of our
congressionally mandated mission; it is part of our core
mission.
Six years ago my credit union added and opened a branch in
an underserved area in Immokalee, Florida. The median income in
this county is $24,000. We currently have over 6,600 members,
$24,000 million in deposits, and $62 million in loans from this
area. We are providing quality financial services to an area
that otherwise would not have it.
Those living in underserved areas lack access to mainstream
financial services. For millions of lower income families, this
means their only alternative is to use the high cost products
provided by check cashers, payday lenders, finance companies,
and pawn shops. CURIA would permit all Federal credit unions to
apply to NCUA to add underserved areas. This is what many
Americans need in order to have mainstream financial services.
Mr. Chairman, my written testimony provides greater detail
on these and other provisions. I appreciate the opportunity to
appear before the committee and look forward to any questions
the members may have.
Thank you.
[The prepared statement of Mr. Dorety can be found on page
62 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Dorety.
Next we will hear from Mr. Michael N. Lussier, president
and chief executive officer of the Webster First Federal Credit
Union, testifying on behalf of the National Association of
Federal Credit Unions.
Mr. Lussier?
STATEMENT OF MICHAEL N. LUSSIER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WEBSTER FIRST FEDERAL CREDIT UNION, ON BEHALF OF THE
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)
Mr. Lussier. Good morning, Mr. Chairman, and members of the
committee. My name is Michael Lussier, and I am the president
and CEO of Webster First Federal Credit Union located in
Webster, Massachusetts. I'm here today on behalf of the
National Association of Federal Credit Unions, where I proudly
serve on the board of directors.
We appreciate the opportunity to express our views and the
need for credit union regulatory relief and improvements. As
with all credit unions, Webster First is a not-for-profit
financial cooperative governed by a volunteer board of
directors who are elected by our members.
I am pleased to report to you that unlike other types of
financial institutions that put many people into predatory
subprime loans, credit unions work with their members to give
them responsible loans at rates that they can afford. America's
credit unions are vibrant and healthy. Membership in credit
unions continues to grow, now serving over 90 million
Americans.
According to data obtained from the Federal Reserve Board,
in terms of financial assets, credit unions have just a 1.1
percent market share and, as a consequence, provide little
competitive threat to other financial institutions.
NAFCU would like to thank Representatives Paul Kanjorski
and Ed Royce for their leadership in introducing H.R. 1537, the
Credit Union Regulatory Improvements Act; and H.R. 5519, the
Credit Union Regulatory Relief Act; and the many members of
this committee who have cosponsored these important pieces of
legislation.
The facts confirm that credit unions are more heavily
regulated than other financial institutions. We believe H.R.
5519 is a solid and non-controversial bill and urge the
committee to take up and pass these needed first steps at
regulatory relief in a timely manner.
I want to focus my statement today on two aspects of CURIA
which are much needed by the credit union community. First,
Prompt Corrective Action, or PCA reform, would modernize credit
union capital requirements by redefining the net worth ratio to
include risk assets as proposed by the NCUA. This would result
in a new, more appropriate measure to determine the relative
risk of a credit union's balance sheet and also improve the
safety and soundness of credit unions and our share insurance
fund.
For example, the current capital system treats a new 1-
year, unsecured, $10,000 loan the same as a secured, 30-year
mortgage that is on its last year of repayment; something that
just simply makes no sense. It is important to note that this
proposal would not expand the authority for NCUA to authorize
secondary capital accounts.
Rather, we are moving from a model where one-size-fits-all
to a model that considers the specific risk posed by each
individual credit union. This proposal creates a level
comparable to but still greater than what is required by FDIC
insured institutions.
Secondly, NAFCU also asks the committee 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.
At Webster First, we are currently at the cap of 12.25
percent and, as a result, each week we must turn away members
requesting business loans that cannot be obtained elsewhere.
The simple modification of the Member Business Lending cap
would allow Webster First to provide an additional $32 million
in small business loans to our members in central
Massachusetts.
There are many credit unions like mine in congressional
districts across the country that can provide the immediate
economic stimulus to their local areas by this simple change
that does not cost the government a dime.
We also 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. The current de
minimis level of $50,000 was established in 1998 and has been
eroded by inflation over the last 10 years.
There is a lot of rhetoric out there 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.''
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. It has been 10 years since
Congress last enacted major credit union legislation.
NAFCU supports H.R. 5519 as important first step in
providing regulatory relief and urges its passage. Furthermore,
we call on the committee to follow the lead of the 145 Members
of the House who are supporting CURIA and pass this important
legislation.
Lastly, we ask that any efforts to provide regulatory
relief to financial institutions are balanced and equitable. We
look forward to working with you on this important matter and I
welcome your comments and questions.
Thank you very much.
[The prepared statement of Mr. Lussier can be found on page
94 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Lussier. And I
thank the entire panel for their testimony. It was very
informative. I certainly have a few questions, as I am sure my
colleagues do.
First and foremost, I am certainly going to reserve some of
the questions for the banking witnesses, because I am at a
loss, honestly, to understand the two elements of H.R. 1537
that I hear the most objection to from the banks: the risk-
based capital question; and the conversion question.
It would seem to me that it is just good practice to put
the credit union financial position on the same level with risk
as other banking institutions have. It would be good for the
system. It is good for the credit union movement and it would
actually be good for the banking system as a whole. So I do not
understand their objection to that.
Secondly, the conversion problem is almost insulting in
terms of so few people today can dissolve credit unions and
dispose of the assets in a favorable way to themselves as
opposed to having a recognition of the built-up equity over
generations that credit unions represent. I find that
offensive, if for no other reason than that.
Rather than having the type of conversion system we have
now, I would rather a court dispose of the assets and direct
the assets to a like or similar type of entity to carry on the
mission that was originally indicated for the to-be dissolved
credit union. But we will save those questions.
What do the witnesses have to say in terms of, maybe I will
start with Ms. Johnson. Why do you think there is such
objection to the risk-based capital structure that we have put
in place, since our committee and the Congress have really
worked very closely with the regulators to take exactly what
they have recommended in its best regards and try to put it
into place and adopt it into law? Have you heard any response
or comment as to what the objection is to everyone else on this
point?
Ms. Johnson. Congressman, I think the proposal before you
is one, on this risk-based capital, is one that is coming from
the regulator. It is not coming from the trades. It is not
coming from the credit unions that have been working on this
for over 3\1/2\ years.
I think the opposition that is out there is misleading in
that it is being sold as an across-the-board reduction in
capital for credit unions. This is not true. What this is, it
is a positive--this will have a positive impact on our
insurance fund from the standpoint that it allows us as the
regulator to identify problems more quickly.
Credit unions will be assessed higher risk levels for
riskier activities, or higher capital levels for riskier
activities; and it's actually a tool for us as a regulator.
This is not a give-away. In fact, for 30 percent of the credit
unions it is actually going to raise their capital levels, or
those standards.
So I think it has been sold as a give-away, and by all
means, it is just the opposite. It is a tool for us. It is my
number one priority of all of the regulatory items that we are
addressing today. This is probably the one that is most
important to me as a regulator and so I would really ask for
your serious consideration of this proposal that it either be
included in the legislation, or put back in whatever piece
might actually pass.
Mr. Kanjorski. Well, as you may or may not know, what we
broke out is H.R. 1537 to stand on its own as it was originally
introduced, and maybe modified by H.R. 5519, which we recently
introduced this week, which would take the less contentious
elements so that we can move them through the Congress quickly
and get them passed.
But of course, we are not going to accomplish the two most
important things there: the conversion correction; and the risk
capital correction. How can we make this strong issue?
Maybe I am asking the wrong person on this since you
participated as a regulator in adopting this, but I have been
sort of frustrated myself over the last several years because I
thought we invited everybody's comment. It was not anything
that anyone individually promoted, not the association or the
credit union movement themselves, but in fact the regulator.
And we waited, if you recall, until you completed all of
your studies before we wrote the bill and then incorporated
what the regulator asked us to incorporate in the bill.
Ms. Johnson. Congressman, it is frustrating for me, too,
that this item is being seen as contentious, because it
shouldn't be. We have put over 3 years of work into this.
Actually I saw written quotes in the media early on from
the bank and trade associations that they understood that this
was probably necessary. And then I think as time went along and
the fires were stoked in a competitive nature, I think it
became contentious, but in my belief for the wrong reasons.
This is substantive and we see it as a necessary tool.
Mr. Kanjorski. Now you know we have made some corrections
in CURIA in terms of conversion. I am just going to take
another minute. Do you feel that we have made sufficient
corrections to prevent abuse in conversions that have been
occurring over the last several years? And as a regulator, are
you satisfied with what we have done?
Ms. Johnson. Well, from our standpoint, we just recently
put out a new ANPR that we are continuing to study some of
these elements that we still find in conversions, and I think
this is probably the most important ANPR that we have put out
during my tenure at the agency and we're asking for additional
ideas. We have been doing additional study in areas of
conversions, mergers, insurance, and so we will continue to
work with you. This has been an area of concern for us as well.
Mr. Kanjorski. I remember particularly conversions so well.
It had to have been about 11:00 or 12:00 at night when we were
in the final consideration of H.R. 1151, and I was so
frustrated with the blowing away of getting reasonable quorums
to vote for conversion that I almost decided to oppose H.R.
1151, but I knew how important it was for the membership
portions of it that we would have destroyed the credit union
movement.
So I accepted thinking--this is 10 years ago--that we would
never let this happen and continue to go on in Congress. We
would come back and correct it. I anticipated that we would
have a correction in a matter of years. Here we are 10 years
later, still fighting the same issue.
Mr. Reynolds. Mr. Chairman, I just wanted to make one
comment about the conversion issue from the State perspective.
I just wanted to make sure that it is understood that there is
sensitivity to the fact that there are State law issues.
We do have State laws in place in many of our States that
deal with conversions. They have very robust disclosure and
governance provisions in them and whatever solution in this
area is considered, we just want to make sure that for State
credit unions in particular, there is acknowledgement of the
fact that there are State law issues that should be considered.
Mr. Kanjorski. Have you--
Mr. Reynolds. Yes, I commented on that in our written
testimony, and I alluded to it in my oral testimony as well.
Ms. Johnson. Congressman, I would just add that, as you
know, credit unions are member-owned cooperatives, and our
focus has been on the members and the transparency in this
process. I have been up here to testify a couple of times on
conversions, and that has always been our focus and will
continue to be the focus. But these are member-owned
cooperatives, and so the members' interest is our priority.
Mr. Kanjorski. Thank you all, very much. And now, Ms.
Biggert, if you will?
Mrs. Biggert. Thank you, Mr. Chairman. I would like to
thank the panel for all of their testimony. And I would also
like to recognize the Illinois credit unions that are here to
hear your testimony and our questions.
Mr. Dorety, one thing that always bothers me just a little
bit is that credit unions do enjoy certain advantages, such as
the tax-exempt status. But it was because they are established
as member-owned financial cooperatives to meet the financial
needs of the members.
But given that advantage, shouldn't Congress make sure that
whatever regulatory changes we make do not change the
fundamental character of credit unions? And when we are taking
today about raising the business lending cap or expanding into
the broadly defined underserved areas, will this invite credit
unions to disregard the congressional mandate that credit
unions serve people of modest means, which is one of your
criteria?
Mr. Dorety. Congresswoman, we totally agree with you that
we should never get away from the core of who we are, which is
a not-for-profit cooperative institution. The things that you
refer to can only enhance our ability to serve those members
that we were chartered to serve.
Underserved communities, an example is we have done five at
Suncoast. The community I referred to, Immokalee, has a total
of 25,000 individuals in that community. In 6 years time, we
now are serving 6,600 of those individuals in that community.
If credit unions are given the ability to expand further
into underserved communities, then more people of modest means
will in fact be served, which is exactly what I think most
folks here want us to do.
In the member business lending cap, credit unions serve a
number of members and do it very well on the consumer side.
Many of those members would love to have small business loans
from their credit unions. But because of the cap and the
expense involved in putting together a business service
program, it costs a lot of money to do that. And many small
credit unions are not able to fund or to spend the money to
even start a member business loaning program.
So I think both of these features of the new bill would
certainly help credit unions do even more in providing services
to folks, and ensure that we are doing exactly what you want us
to do.
Mrs. Biggert. How do you define what are underserved
communities or who is underserved in those communities?
Mr. Dorety. Our regulator defines who are underserved
communities, and it is a certain portion of folks. It has to do
with income levels, and Chairman Johnson can certainly answer
this better than I can. It has to do with certain income levels
and the availability of services in those communities.
Mrs. Biggert. Maybe, Chairman Johnson, could you respond to
that?
Ms. Johnson. That is correct. It is based on geographic
areas that meet income standards. It is difficult to say. I
think a better approach to what is underserved versus what the
ability or what the number of institutions, etc., might be what
is the access to affordable financial services.
What is the appropriate number of institutions? There is no
criteria out there. Is it so many check cashers? Is it so many
other financial institutions? But having access to affordable
financial services is what is key.
We know that when a credit union has access to an
underserved area, it is offering all of the consumers another
option. And that is what the goal is. It has to be made
available before they can take advantage of it.
Mrs. Biggert. Well, we are hearing from banks that credit
unions are purchasing or participating in business loans to
non-members. And how many credit unions are making these types
of loans, or is that true?
Ms. Johnson. Credit unions only make member business loans
to members. I think the figures that you are referring to,
credit unions have the option or the opportunity to purchase
participations from other credit unions. But these are member
business loans that have been made by a credit union to a
member. So credit unions don't make business loans to non-
members.
Mrs. Biggert. Did you exclude these loans from the
aggregate business loan cap?
Ms. Johnson. Loans that are $50,000 or less in the amount
are excluded from the business lending cap. Participations are
also excluded from the business lending cap.
Mrs. Biggert. I think that most people would agree that
anything that provides lower income Americans with an
alternative to high-cost short-term loans would be a good
thing. Can you tell me what impediments currently prevent
financial institutions from offering these alternatives, and
are the impediments economic or regulatory?
Ms. Johnson. Well, I would say the biggest impediment is
having access to the area in order to provide them.
Mrs. Biggert. So is there an economic impediment? That is
all right.
Ms. Johnson. I guess I am not understanding the question.
Mrs. Biggert. My time is expired, and I will yield back.
Mr. Kanjorski. Ms. Biggert, just a little point of
information. On both bills that are pending, the definition
that we are using in both bills for ``underserved area'' have
been taken out of the new markets tax credit initiatives, are
very restrictive to census track definition, and consistent
with the existing definition, and from the CDFI definition of
underserved areas. And we use in the alternative. But they are
much more restrictive than other definitions in underserved
areas. But it would get us into about 40 percent or less of the
country of underserved areas.
Ms. Waters?
Ms. Waters. Thank you very much, Mr. Chairman. I am sorry I
was not here for an opening statement. We were tied up in
another committee. But I would like to ask a question based on
an anecdote that I would have mentioned in my opening
statement, namely, a local credit union in my district helping
to reach out to folks who had previously relied on a check
cashing and payday lending franchise.
Mr. Lussier and Mr. Dorety, can you tell me, from a
national perspective, what you know or understand that credit
unions are doing to move people from being unbanked, so to
speak, meaning without a relationship with a reputable
financial institution, and thus reliant on extortionate sources
of credit, interrelationships with credit unions in particular?
Can you share with us something about what credit unions may be
doing, collectively moving to meeting the short-term borrowing
needs that many working and poor folks need?
Mr. Lussier. Yes. I just want to say that as far as the
financial literacy programs that are out there--I will address
that first--I know that our credit union itself has had
educational facilities in the local high schools as well as
branches in the high schools to help assist and train the young
to become educated financially on their responsibilities of
what is going to take place in the next few years of their
lives.
We have just enhanced our program by having an educational
facility within our own new operations center to address just
that issue, to help financial literacy in both from people from
underserved areas in the community as well as minorities and/or
people who are in high school or even some of the senior
citizens.
So we have gone to great strides to having additional staff
put onto our staffing to assist just for the financial literacy
programs. That is what we do regarding that.
As regarding the payday lending, we actually again go out
to give many small loans of the $500 to $600 area, and charge
no abnormal fees or underwriting costs or anything else, and
just do that for many, many people within our community to help
and assist them to get away from some of the payday lenders.
Ms. Waters. Thank you very much. And let me just address
this question to any of you who would like to answer: What will
H.R. 5519, the Credit Union Regulatory Relief Act, which we
have been discussing--what can happen with the passage of this
legislation? Will you be able to expand to be of more
assistance to our constituents and their ability to borrow? And
would this include businesses also?
Mr. Dorety. Congresswoman, really quickly, the national
efforts on serving the underserved--we have a national program
called Real Solutions. It is administered by the National
Credit Union Foundation, and it is in over half of the States.
It provides products, services, and guidance to credit unions.
It is a very popular program. It is being moved out nationally
at this time.
And our State leagues are also getting involved in a
program called the Real Deal. So there are national efforts on
credit unions attempting to go out and provide services to the
underserved.
This particular bill that we are talking about would enable
more credit unions, obviously, to include underserved
communities in their field of membership. It would also enable
more credit unions to offer business loans to their small
business members. Clearly, it would help to provide economic
stimulus to the constituency that you are referring to.
Ms. Waters. Simply put, you just would have more resources
to expand out into these communities that are not available to
these communities today. Is that correct?
Mr. Dorety. I couldn't put it any better myself.
Ms. Waters. I like that. Thank you very much. I yield back
the balance of my time.
Mr. Kanjorski. Thank you very much, Ms. Waters.
And now my friend from California, Mr. Royce.
Mr. Royce. Thank you very much, Mr. Chairman.
I am going to Mr. Dorety with a question first, and that
is: Credit unions, by their very nature, are quite risk-averse.
By law, they lack any access to capital markets. The current
prompt corrective action rules induce credit unions to maintain
capital levels higher than those necessary to protect the share
insurance fund.
So I would ask if you would explain why credit unions must
maintain their current net worth requirements, and how credit
union members would benefit from modifying these requirements
proposed by CURIA?
Mr. Dorety. Congressman, I think the reason that we are
required are basically what you suggested. First of all, we
have to account for the 1 percent share insurance fund. But
also, we do not have the availability, or most credit unions
don't have the availability, to go into the area of alternative
capital.
So I think that is probably the basis for why we are where
we are. The new provisions under prompt corrective action would
allow credit unions obviously to address some of that. Now,
credit unions are risk averse, and many credit unions have
capital levels that are above that level of 7 percent that we
consider to be well capitalized.
If we were to enable to move that well-capitalized level
still to a safe and sound level that our regulators would
adhere to, then more credit unions would certainly be
encouraged to provide more capital and spend more money,
provide better products and services, and enhance their
products and services to members.
The risk-based side of this provision would certainly help
credit unions make more loans and allocate risks appropriately
towards making those loans. The one-size-fits-all, as we heard
here earlier today, just doesn't make sense any more. So we
really believe that would assist credit unions in providing
more economic stimulus to our membership.
Mr. Royce. So in theory, we have a more rigorous two-part
net worth structure that is actually going to closely monitor
actual risk.
So I will ask Chairwoman Johnson: What type of impact would
you expect that to have, then, on the national credit union
share insurance fund when we go to a risk-based capital system?
Ms. Johnson. Congressman, actually it will have a positive
impact on our insurance fund because it will allow us to--it
accelerates our ability to deal with those thinly capitalized
institutions.
I would also like to point out that the other regulators
have the ability to adjust their capital levels by regulation.
We are held to statute. And that is why we need action in a
bill such as you are proposing.
Mr. Royce. Going to another issue, Chairwoman Johnson, with
the economy continuing to work through some pretty challenging
and difficult times here, is this the time to be thinking about
the prompt corrective action reform that is in the CURIA bill?
Ms. Johnson. It is actually the very best time, because the
way we have seen the economic conditions, although credit
unions have done a terrific job in the mortgage lending area,
and have not gotten themselves into some of these precarious
positions, their record is very good, but it is because of the
focus now on the economy and where institutions are and the
interest rates, etc. This is the time that we should be
addressing the issue through this statute.
Mr. Royce. Thank you very much, Chairwoman Johnson.
I am going to go back to Mr. Dorety. There has been a lot
of discussion here today about how the Credit Union Membership
Access Act of 1998 was the last major piece of credit union
legislation that we have enacted here in the United States
Congress.
But as I think you pointed out, while this Act certainly
saved a number of credit unions from disappearing, it was not
regulatory relief. In fact, the legislation put additional
statutory burdens on credit unions.
So the question I would ask you is: When was the last time
Congress provided credit unions with change to the Federal
Credit Union Act that provided some type of regulatory relief,
in your memory?
Mr. Dorety. Congressman, it has been over 20 years. It was
after the Garn-St Germain Depository Institutions Act of 1982,
but it has been over 20 years since Congress has enabled--has
given credit unions any meaningful regulatory abilities, in my
memory.
Mr. Royce. Well, I thank you all. I thank the witnesses
again for traveling out here to testify today. And Chairman
Kanjorski, I yield back the balance of my time.
Mr. Kanjorski. Thank you very much, Mr. Royce.
And now we will hear from our friend from North Carolina,
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I want to relate an
experience going back, and I am going to assume some risk
today, the same risk that I did the first time I mentioned
this. I will put it in context.
I represented a credit union before I came to Congress, and
was a member of two credit unions at that time. And about a
year or two into my service on this committee, after I came to
Congress, I was at a breakfast and made the political judgment
that I had enough credibility with credit unions to raise a
basic question, and have incurred the wrath of some credit
unions, especially the larger ones, since that.
The basic question was: What is the dividing line between
what credit unions do and banks do? What should the appropriate
dividing line be, given the fact that credit unions are not
taxed and other financial institutions are?
I have found over the years that has been the real
undercurrent of just about everything that this committee has
dealt with, and continues to be the underlying question. And so
I want to put that question out here as a general context
again.
I think it raises itself in the context of this proposed
legislation, especially modifications that may be made to the
service of underserved areas. And I want to start with Ms.
Johnson because one of the concerns I have--I mean, I will do
anything to get more financial services access to poor people.
And one of the concerns I have is that the interpretation of
underserved areas may need a lot more attention than your
office is giving it.
I am reading here from a report that was done in 2004,
which says to me, ``Treasury Department Federal Credit Union,''
and defines its field of membership as ``persons who live,
work, or regularly conduct business, worship, or attend school
in, and businesses and other legal entities located in,
Washington, District of Columbia. Underserved addition 12/8/
04.''
I am reading a provision that allows JSC, Houston, Texas,
if I read this correctly, to serve a field of membership
``persons who live, work, worship, or attend school in, and
businesses or other entities located in Houston, Texas and
underserved area.''
Could it possibly be that the whole City of Houston, Texas,
is an underserved area? Could it possibly be that the whole
City of Washington, D.C., is an underserved area? Could it
possibly be, if I look at some of these other descriptions,
that the whole City of Monterey, California, is an underserved
area?
Is this just a misstatement of this, or do we have a
problem? Because I think part of the problem that people are
having here is that if you define this area as being so broad,
people don't understand what the distinction is any more
between a nonprofit credit union and a for-profit financial
services entity of another kind.
That is one serious problem that I think needs to be
addressed here. And it entails more than just a question of
serving underserved people. I think everybody is willing to
serve underserved people, but if the definition is that broad,
there are a lot of people in these areas who fall in that
definition.
The second question, and giving my speech here, I have run
out of time. But the same thing applies when you convert out of
a credit union because if the owners are the people who are
being served in a credit union, it is like a mutual insurance
company.
I had some litigation about that before I came here, too. I
stopped a conversion from a mutual insurance company to a
stock-based insurance company because the people who were
benefitting from the conversion disproportionately were the
people at the top of that institution. The people at the bottom
of that mutual insurance company were getting virtually nothing
out of the conversion process. That is the issue that Mr.
Kanjorski raised.
I think we have to do more work on these two issues to
satisfy people that the status of credit unions is not being
abused. And maybe you can shed some light on the first of
those, Ms. Johnson. I will shut up and give you an opportunity
to respond.
Ms. Johnson. Thank you, Congressman. I would be pleased to
respond.
The underserved areas that have been granted do meet the
statistical criteria for the definitions of the underserved.
And these are statistics--
Mr. Watt. You are telling me that the entire City of
Washington, D.C., and the entire City of Houston, Texas, meet
that definition?
Ms. Johnson. Well, I would like to address the example you
used of the Treasury Department Federal Credit Union.
Mr. Watt. No. I am asking you that question. Does the
entire City of Houston, Texas, meet that definition?
Ms. Johnson. Statutorily, yes, it does, by the criteria
that is already in--the criteria that we go by, yes.
Mr. Watt. So a credit union could do--could have a member--
Ms. Johnson. It is based on the investment areas.
Mr. Watt. --of any business that is located--any person who
works in the District of Columbia?
Ms. Johnson. It is a consumer choice, yes. If they reside,
if they are within that underserved area. And I would like to
point out--
Mr. Watt. That underserved area being the entire City of
Houston, Texas?
Ms. Johnson. If that meets the statistical criteria for
those investment areas, it is anyone residing within that
statistical area. That isn't--
Mr. Watt. What happened to this clear definition of
neighborhood that we started out with? Does that not have any
bearing any more? How is that a clearly defined neighborhood?
Isn't that in the statute? Isn't that in your regulations?
Ms. Johnson. The term ``neighborhood'' is not used.
Mr. Watt. I have run out of time, but--
Ms. Johnson. Might I respond, though?
Mr. Watt. --you see the problem. And I am sure I am going
to get abuse for even--I got abuse the last time in a private
setting for putting this discussion in a breakfast setting on
the table with what I thought were my friends. So I very well
anticipate getting substantial abuse for putting it in this
public setting.
But I don't think we need to sweep this concern under the
rug. And if we don't address it, I think we are going to have
some major problems on an ongoing basis really meeting the
needs of underserved people. Maybe our definition is too broad
now, the way you all are defining it.
Ms. Johnson. I would like to point out that I recently
personally attended the--I wouldn't call it a grand opening,
but the Treasury Department Federal Credit Union does serve--
they have adopted an underserved area. And in cooperation with
Operation Hope, they are working specifically with these
underserved residents, these low-income residents in
particular, of offering the counseling--
Mr. Watt. I have no doubt that that is what they are doing.
But the language that we--
Ms. Johnson. That spreads out.
Mr. Watt. --that we have here is broad enough to drive
mega-trucks and planes and tanks and everything else though.
The good things that they are doing with it are wonderful. But
I am telling you that this is subject to abuse, and we have to
figure out a way to find what the appropriate balance is here.
Otherwise we are going to lose--we will win the battle and lose
the war.
Mr. Kanjorski. May I just add to this conversation that is
going on? I think you are talking to cross points. The existing
definition of an underserved area is different and much broader
than the definition contained in the two bills presently
pending.
The two bills presently pending adopt the definition used
in the new markets tax credit, which is highly restrictive. And
under the new markets tax credit, you could not get a tax
credit in any portion of Washington, D.C., only in those census
tracks that meet the very restricted definition contained in
that Act.
And the same thing goes to Houston, Texas. I know of no
city in the United States that would fully encompass a credible
area of an entire community--
Mr. Watt. I am surprised to read this myself, Mr. Chairman.
I am reading from the report of the regional director of the
National Credit Union Administration. That is the way it is
defined in the report.
Mr. Kanjorski. Well, it is defined in that report because
you are operating under some other definition presently at the
credit union regulatory level, where this Act--
Ms. Johnson. We are operating under the current
congressional--
Mr. Kanjorski. Definition.
Ms. Johnson. --definition. Yes.
Mr. Kanjorski. And the new definition under the two pending
acts would be very much more restrictive, and purposefully so.
But you cannot restrict it to the point that they become
nonexistent. I know you have worked very closely on the new
markets initiative, and we are going to be reauthorizing that
this year after 5 years. That is a very restrictive act.
I come from a congressional district that is quite on the
low side of income and level, and yet less than a third of my
congressional district qualifies for new market tax credits.
And I think we are probably in the 30 percent range.
Mr. Watt. I would just tell the chairman that is not the
only concern I have with the new markets tax credit. We have
had a hearing about some other concerns with it, too. So I will
be looking forward to working with the chairman on that. But
that is in the jurisdiction of the Ways and Means Committee, as
I understand it.
Mr. Kanjorski. Right.
Mr. Watt. So we may not get as direct a shot at it as I
would like to have.
Mr. Kanjorski. Well, I think we ought to assume any
jurisdiction we possibly have to get a tax credit.
[Laughter]
Mr. Kanjorski. I see Mr. Miller of California has returned,
and so I recognize Mr. Miller.
Mr. Miller of California. Mel, you were much easier to get
along with when you had facial hair. I thought I would point
that out. He is not even--Mel, you are not paying attention
this morning. He is through talking. I can tell. I said, you
were much easier to get along with when you had facial hair. I
want you to know that.
Mr. Watt. Well, I am glad to see you are talking my place
in being easier to get along with and the facial hair.
Mr. Miller of California. I have always been easy.
You know, when I was growing up, my parents were retail
clerks, and I don't think--if it wasn't for credit unions, we
wouldn't have had sofas and chairs and carpets. So you have
done a great job.
Are there any other institutions you are aware of that have
a 7 percent requirement, as you are placed upon in capital
requirements?
Ms. Johnson. The risk--or the prompt corrective action that
we operate under is the highest level of capital that is
required. Currently, credit unions have to have 7 percent in
order to be considered well capitalized. The proposal that we
have before you would make it approximately 6 percent, but it
would actually raise it at the lowest category, and it actually
would raise it for about 30 percent of the credit unions.
The banks currently are required to have 5 percent to be
well capitalized.
Mr. Miller of California. And Congress provided the banking
regulators the flexibility to risk-base capital as they deemed
proper. How do you look at that?
Ms. Johnson. Excuse me? I didn't hear the first part of
your question.
Mr. Miller of California. Congress provided the banking
regulators the flexibility to risk-base the capital
requirements for banks. How do you think that would apply to
credit unions?
Ms. Johnson. Well, we would like that ability to risk-base
the capital. They are able to change theirs through regulation,
and ours is firmly held by statute. And we are very limited. If
we had this capability, we would be able to identify problems
more quickly, and credit unions would be able to manage to
their risk more successfully.
Mr. Miller of California. In conversations I have had, I
understand that a number of credit unions actually want to help
their members restructure or refinance troubled mortgage loans
that are currently existing today, and including loans that
their members may have gotten elsewhere. How does the NCUA
address that issue?
Ms. Johnson. Credit unions have addressed the mortgage
lending area very well. We have not changed our standards
through this whole process. We came out with early guidance,
going back as far as 1995 and addressing some of these types of
loans, and have continued with strong guidance in the last few
years.
We have maintained our lending guidelines based on the
three Cs: collateral; character; and the capacity to repay. And
we have not changed that. Now, we have encouraged credit unions
to work with their members. We encourage modifications, where
possible. And credit unions have been very successful in that
regard.
Mr. Reynolds. Congressman, can I have a point on that?
Mr. Miller of California. Yes.
Mr. Reynolds. From the perspective of the State system, the
State regulators have been encouraging their financial
institutions, including credit unions, to work diligently with
consumers to try and remediate these types of situations.
And credit unions, our State-chartered credit unions, have
been very effective in being able to step forward and help
consumers in some situations where they have gotten themselves
into subprime lending situations. And they are not always able
to extricate consumers, but they are always able to assist them
with being an honest broker of information on their options.
Mr. Miller of California. So you think you can actually
help your members restructure or refinance some of these
troubled mortgage loans in a safe and sound fashion where they
have no place else to go today?
Ms. Johnson. That's right.
Mr. Reynolds. Absolutely.
Mr. Miller of California. And you don't think that would be
unfairly involving yourself in the marketplace? That is a
stupid question, but I think I know how you are going to answer
that one. Should Congress extend the CRA to credit unions?
Mr. Dorety. I will take that one. The answer is ``no.''
Congress should not extend the CRA to credit unions. CRA was
brought to banks, I think in 1978, because they were doing bad
things. They were redlining, and they were doing some of those
characteristics that credit unions do not do.
We serve our members. We have a defined membership. There
is no reason for CRA in credit unions at this time. And if you
look at what credit unions are doing, and if you allow credit
unions the ability to add underserved, and if you allow us to
do the risk-based capital lending, and if you allow us to do
the member business lending extension, we will still not need
CRA. We will still not be doing the things that banks were
doing which brought CRA upon them.
Mr. Miller of California. Mr. Chairman, I think this is a
good approach you are taking on this. You know, growing up, in
my youth I watched my parents, retail clerks, use a credit
union.
I think they are filling a void out there in the
marketplace that banks really don't want to get into in many
cases. I think they are doing a good job. And I think some
people out there who benefit from the credit unions would have
no place else to go in many cases.
I think this is a reasonable approach, and I am glad we are
taking it. I wholeheartedly support it, and I yield back my
time.
Mr. Kanjorski. Thank you very much, Mr. Miller.
Now the gentleman from California, Mr. Sherman.
Mr. Sherman. Mr. Chairman, I hope that when we ultimately
pass legislation--I do hope we pass legislation this year--that
it will include a look at the credit union capital structure,
the prompt corrective action structure, and that we more
closely resemble the risk-based capital standards that the FDIC
uses. I look forward to working with you on that.
Our colleague, Mr. Watt, brought up the interesting issue
of whether credit unions are doing enough to deal with
underserved areas. I think he is right that we have to be
careful in crafting legislation, and we may end up crafting
something more limited than the current regulatory definition
of what is an underserved area.
And maybe the Ways and Means Committee did a good job with
their definition of new markets, but maybe we will do a
different job here, if they didn't do a good job. But I think
it is important that credit unions serve underserved areas, and
that we define underserved areas narrowly enough so that, for
example, here in Washington, we focus their desire to serve the
underserved communities to the underserved communities in
Washington. We wouldn't say, well, open up a facility in Chevy
Chase and you are doing something to help the underserved
people of the District.
But I am often asked to define the Yiddish word
``chutzpah.'' And I noticed that a group brought litigation
which effectively prohibited well over half of the credit
unions, that is to say, those with a single group or community
charter, from extending credit union services to low-income
areas and groups not adequately served by traditional financial
institutions.
And then this same group, having used the legal system to
prevent the majority of credit unions from serving underserved
areas, has this beautiful ad. I don't know if you--are you
folks familiar with this? Have you seen this, maybe, once? And
it attacks credit unions for not serving underserved areas,
having been prohibited from doing so by the litigation brought
by the same people who brought you the ad.
So Mr. Dorety, I wonder if you happen to have seen this
ad--which I will put into the record without objection--if
perhaps you could spend a few minutes responding to it.
Mr. Dorety. Well, it has come to my attention, sir, yes.
Our folks have shared it with us. And I couldn't agree with you
more that the information and the questions--it is a series of
10 questions. And we have responded to those questions, and
would love to put this in the record, our responses to the
questions that the bankers put forth in this ad in the last
couple of days.
Mr. Kanjorski. Without objection, the ad in its totality
will be entered into the record, and the 10-question response
by the credit union will also be entered into the record.
Without objection, it is so ordered.
Mr. Sherman. Perhaps you could spend a minute or two
highlighting some of those answers.
Mr. Dorety. Well, I don't want to go into all 10 questions
because it is kind of like a David Letterman Top Ten. The last
question is the most interesting one. And they go from 10 to 1,
so it is a David Letterman thing: ``Why should Members of
Congress cosponsor H.R. 1537 if the credit union industry
cannot answer these questions?''
We have answered the questions right here, and so the
answer to that question is Congress should cosponsor H.R. 1537.
We can get into specifics of the others. But there are a lot of
issues in these, Congressman, and I don't know that we can get
into all of them at this time.
Mr. Sherman. Ms. Johnson, perhaps you could highlight what
would be the effect of going to risk-based capital? As I
understand it, some credit unions would then have to have more
reserves, some less. But would we do a better job of protecting
the insurance fund if, instead of a rigid simple system, we had
a more complex and more sophisticated formula?
Ms. Johnson. The overall effect is that you would be giving
the regulator the best tool that we could have in our tool box.
The risk-based proposal that we have presented will actually
have a positive impact on the insurance fund because it
accelerates our ability to deal with those thinly capitalized
institutions more quickly.
The current system does force credit unions to all--it is a
one-size-fits-all. And especially in this economy, and with
these changing times, and with the different amount of risk
that credit unions take on, we should be able to measure it
according to the risk.
And so I believe it is imperative. I think if you want to
have these other regulatory relief items, this is the real tool
that allows us to have this other regulatory relief.
Mr. Sherman. And it is my understanding--and this, I think,
differs from banks and thrifts; we all remember the Federal
Government having to write a check back in the 1980's--that if
for any reason the insurance fund was inadequate, every credit
union in the country would then have to contribute up to its
full net worth to the insurance fund. Is that correct? Or if
the insurance fund is inadequate, is it the Federal Treasury
that is on the hook?
Ms. Johnson. Credit unions contribute 1 percent. We have a
robust insurance fund.
Mr. Sherman. Well, but if for some reason--and this would
be a catastrophe none of us would want to see--the fund was
inadequate, would it be the taxpayers or the credit unions of
the country that would be on the hook?
Ms. Johnson. It is not the taxpayers, Congressman. It is
the credit unions. You are correct.
Mr. Sherman. So basically, when we change to a different
formula, the real parties in interest, the entities that would
be on the hook if you didn't have adequate capital, would be
first the insurance fund and then all the other credit unions
in the country?
Ms. Johnson. You are correct.
Mr. Sherman. And it is my understanding that none of these
credit unions, who would be ultimately on the hook if one of
their brother/sister organizations or several of them went
under, that none of them is opposing this change in the prompt
corrective action statute. Is that correct?
Ms. Johnson. No. It is being strongly supported, actually.
Mr. Sherman. So they are putting their capital on the line?
Ms. Johnson. That is right.
Mr. Reynolds. Congressman Sherman, I just wanted to add as
well that the State regulatory system strongly supports risk-
based capital. Risk-based capital is being used for other
financial institutions, primarily because it is a risk
management tool for regulators. And so I wanted to add our
strong support to that issue.
Mr. Sherman. I thank you for that, and I believe my time
has expired.
Mr. Kanjorski. The gentleman from Florida, Mr. Feeney.
Mr. Feeney. Thank you, Mr. Chairman. And thanks to the
panel. I think that one of the great things about credit unions
is that there has not been taxpayer money lost in their long
years of service, and we are very grateful that is one of the
things that make you unique.
You know, I got involved in elected politics for the first
time in 1990 in the State legislature in Florida, and as
expected, we had healthy, interesting debates over welfare
reform and tax policy and education reform.
But there were very few things as spirited as, say, the
fights between the commercial bingo parlors and the local VFWs
over who got what nights for bingo. The only thing more
energized in debate was the fights over racing dates for dog
tracks in places like South Florida, if you could get the prime
tourism season. And inevitably, those debates resulted in
several members having to stand in between and literally stop
the outbreak of fisticuffs.
And turf battles are always interesting. By the way, I
never had a dog in the dog track day fights, so I just sort of
sat back and enjoyed the show. And I will tell you, we have my
colleagues on the committee that are huge advocates for the
banks, and we have colleagues that are huge advocates for the
credit unions. I find myself as somewhat of an umpire here.
But I will tell you that we saw the most recent proposal--
because this is a line drawing problem. I mean, for example,
the issue of whether credit unions--to what extent they can
loan money to members for business enterprises. You know, I
think most of us feel strongly that if it is a $20- or $30- or
$50,000 startup enterprise that your member wants to be engaged
in, that is terrific.
On the other hand, if we are going to get into
international financing at a high level, that is another end of
the scale. So it becomes a line drawing problem for a lot of us
that want to do what is right ultimately for your customers.
I have to tell you, my friends in the banking industry say
that there ought to be tax parity between credit unions and
banks. And I may vote for tax parity one day, I tell them, but
it would never be to levy a tax on the credit unions. It would
be to eliminate the tax on banks.
Because ultimately what I am interested in is access to
credit, on a rationale basis. Your customers and customers of
banks and my constituents, we have a credit crisis in America
right now. I think in some ways Congress is dramatically
overreacting.
I am leading the charge to stop the primary foreclosure
bankruptcy proposal, which I think would marginally increase
the cost of credit for everybody and reduce the value of every
American's real estate. So it is sort of the forgotten people
as we try to do things that look sympathetic that I am
concerned about, and I appreciate your stand on that.
But while I am on the subprime and credit--the crisis
created initially from the subprime effort, Chairman Johnson,
what percentage of the mortgages that credit unions nationally
make roughly are held in portfolio, and what percent are
packaged and sold to investors?
Ms. Johnson. Credit unions hold the majority of their
mortgages in-house. They do sell some into the secondary
market, but they sell to the GSEs.
Mr. Feeney. Well, it is one of the great things credit
unions are doing as we have this huge credit crisis because
they really do fill many niches. And this is just one of them.
Ben Bernanke testified here just the other day. Securitized
lenders have gone from putting, annually, $1 trillion into the
marketplace for borrowers of mortgages, $1 trillion, to $50
million a year; 95 percent of that market has dried up.
So credit unions once again are filling a niche and
stopping what would otherwise be a worse catastrophe in the
mortgage loan crisis. And as I understand it, credit unions
make almost no, if any, subprime loans. Is that right, Ms.
Johnson?
Ms. Johnson. Credit unions make approximately 2 percent of
all mortgages throughout the entire country. The percentage of
subprime is even less than that. I would note there is a
difference between a subprime loan, which is just to a borrower
with lesser credit, than some of these exotics and, you know,
the mortgages that really got people into trouble. And credit
unions did a fine job, I think, by following our guidance in
not putting their members into loans that they couldn't afford.
Mr. Feeney. Right.
Ms. Johnson. And so it was that one-on-one with the member
up front.
Mr. Feeney. Well, and I think community banks do that.
Ms. Johnson. Correct.
Mr. Feeney. Often very well. But I should say that one of
the problems we have had in the subprime mess is that we have a
total disconnect between the people that purchase the
scrutinized loans by the thousands on one end, and the people
that are making loans.
You all are able to evaluate on an individual basis, and
therefore are making very rational loans throughout a period
where there have been, unfortunately, huge numbers of
irrational loans. And now that crisis has bled over and created
a credit crisis, not just in other markets in the United States
but around the world.
So congratulations for what you are doing. We appreciate
the fact because to the extent we are hoping for an immediate
bottom of the real estate market, I think credit unions have
been a reliable partner in keeping a bad situation from getting
worse.
With that, I will yield back.
Mr. Kanjorski. Thank you very much, Mr. Feeney.
Now the gentleman from Massachusetts, Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. I want to thank you and
Mr. Royce for focusing on this issue. And I want to thank the
witnesses for helping us out.
I think there has been definitely a reconfiguration of
finance in a lot of communities. I think with the mergers of a
lot of large banks, especially in my area, in the City of
Boston--we have seen six banks become three banks, and then at
least the larger ones have really consolidated. There have also
been, however, I think, a growing number of community banks
that have tried to fill in that void, as well as--and I am
blessed with a lot of great credit unions in my district.
Let me go back to that last question. I had a foreclosure
prevention workshop in my district a couple of weeks ago, where
I rented out the cafeteria of a local high school. And to my
surprise, I had about 400 people show up. And we are getting
hit pretty hard with foreclosures.
What can you do--I know you haven't been guilty of
investing, and you haven't been pulled into the whole subprime
mess. But for instance, at our event we did have a lot of the
banks step up and try to do the right thing and to correct the
situation as best they could.
What is the credit union community doing with respect to
reaching out? What are the limitations that you have that
prevent you from doing more of that? And what could we do to
help you at least address this problem? It looks like it is
going to be with us for a while.
Ms. Johnson. Well, first of all, I would applaud you for
being proactive and holding your workshop. There is a need out
there. And that is what we have done. We are doing the same
thing with the credit unions in encouraging them, especially
with the up-front counseling.
I think the most important thing we can do is to ensure
that the credit unions are educating their members to the terms
of the loan, understanding what they are getting into, and then
not putting them into a loan that they can't afford in the
first place.
Where we are seeing a little bit of residual damage is they
may not have gotten their loan, their mortgage, a high risk
mortgage from the credit union. They may have gotten it
somewhere else. I think where credit unions have to be
particularly careful is in this residual damage of their other
consumer loans.
And this is where the counseling again and extending that
hand to their members and working with them to modify. They
have their car loans, their credit card loans, etc. And so we
are encouraging that, and credit unions are doing so on a
member-to-member basis.
As far as limitations, I don't know--off the top of my
head, I can't think of a specific instance that is limiting us
other than just continuing to put--being able to adopt more
underserved areas so that these individuals that need this help
then have access to the credit union itself.
Mr. Dorety. Congressman, I would like to touch on that if I
might.
Mr. Lynch. Sure.
Mr. Dorety. You know, the subprime market has touched all
of us. I happen to live in Tampa, Florida, on the west coast of
Florida, and we certainly have been impacted by this. We have
made no subprime loans. We have made loans to people who you
might consider to be qualifying for subprime loans, but the
loans we make are honest, straightforward loans that don't have
any of the escalation, don't have high interest rates.
And going forward, we work with all those folks. And we are
looking at foreclosures. We have been working with them on a
one-on-one basis. We are telling our other members that if they
have one of these toxic loans, that they need to come to us and
talk to us and see if there is something we can do.
We are still making mortgage loans. Actually, we have a
huge increase in mortgage loan applications recently because of
what has been going on through the other financial
institutions. There are credit unions all over the country who
are engaged in this type of effort, and they are not making
those loans that caused the problems to start with.
So I think as a community, credit unions are certainly
willing, and are, in fact, stepping up to the plate to help try
and get us out of this mess that so many folks are in.
Mr. Lynch. Thanks.
Yes, sir?
Mr. Lussier. Congressman, I have a comment as well. In
Massachusetts, as you know, we have been hit with the economy
as well. One of the things that I think we just recently got
into, and I take my hat off to the State of Massachusetts for
doing this, they came up with some type of special grant funds
and so on and so forth--I think it was the Mass Housing
recently, of which we were one of the first ones in there to
see what we could do to try to take some of those funds to put
it back to the community to assist the people to get them out
of some of these subprime mortgage instruments.
It is extremely expensive for them to--expensive for people
to even get out of them, if at all possible to get out. I think
the State of Massachusetts has come to the forefront to try to
help and assist--to help them do that as well.
So we worked with Mass Housing. That was one of the items
we have done.
Mr. Lynch. Mass Housing Finance Agency?
Mr. Lussier. I believe that is right.
Mr. Lynch. MHFA? Yes.
Mr. Lussier. I believe that is where it is. Yes. Actually,
my vice president of real estate lending was just going through
that with me before I left the other day, so I had the bare
minimum.
But it was a great program that he was trying to get
through our board meeting this month to get involved with the
Mass Housing Finance Agency to help and assist in that area, as
well as the financial literacy and counseling that we actually
try to do and put out in the forefront by having some of my
senior executives get together if someone does have an issue
with one of those loans, which I know that we had three people
in our office this week that were wondering what they could do
to get out of it. We brought them in personally to discuss the
issues, to show them where they were, and try to assist them to
see what we could do to try to help them get out of that
problem.
Mr. Lynch. Great. Thank you, Mr. Chairman. I see my time is
expired. I yield back.
Mr. Kanjorski. Thank you very much, Mr. Lynch.
And now the newest member of the committee from the great
State of Nevada, Mr. Heller.
Mr. Heller. Thank you very much, Mr. Chairman. I certainly
do appreciate your hard work on this particular piece of
legislation. I appreciate the opportunity for the first time to
be able to approach the rest of the committee.
I apologize I was not here for your opening comments, and
for that reason I may be asking questions or making comments
that have been repeated before. But I will try anyway. I have a
limited knowledge of the background and perhaps the scope of
what your industry does as it is concerned with credit unions.
I guess my question is: I am confused as to what now is the
scope of a credit union. I live in northern Nevada. I would
love to have you tour my 110,000 square miles we call a
district, but I will tell you, you guys play an important role
in some of the smaller communities that we have in that State.
The inability to get financial institutions to come in, but
when we talk to the larger communities, the scope seems to
change pretty dramatically. And it is my understanding that
history has told us that the purpose of a credit union was to
fill a unique niche.
And I am wondering if that is getting too broad now. That
is the complaint that I am hearing from the other side, that
perhaps you are trying to become more and more like other
financial institutions, with certain advantages. For example,
you want to maintain your tax-exempt status, but you don't want
to comply with CRA. You want to change your capital
requirements in this particular piece of legislation, but you
want fewer regulatory burdens.
And the argument is--and again, I haven't taken sides on
this particular issue--but what it appears to me is you want
the benefits but you don't want to take the risks. How do I
respond to that when those questions are asked and I have to
answer them?
Mr. Dorety. Congressman, we happen to be one of those
credit unions you are talking about. We are a $6 billion credit
union located in Tampa, Florida. We started in 1937 as a small
teachers' credit union in Hillsborough County. Our board of
directors are volunteers. We are a not-for-profit cooperative.
That is the reason we were granted a credit union charter, and
that is the reason we have been given a tax exemption.
If you come into our board meeting today, we are exactly
the same as we were then. Our structure has not changed. And
the structure is what has enabled us to have that status. It
never started as saying a limited field of membership. It never
started as trying to--there is no size restrictions on this.
The fact of the matter is, if you are doing a good job with
your members and you are providing good services and products
to them, you are going to be successful, and guess what, you
are going to grow.
Growth is important to financial institutions. Look at the
rash of mergers. We are a $6 billion--we are the largest
financial institution headquartered on the west coast of
Florida. Every bank is out of Charlotte, out of Birmingham, or
out of Atlanta.
And the fact that we have been successful and grown has not
changed the basic structure of who we are or what we do. Our
entire focus is on our member owners, as opposed to investors.
And that is the difference, and that is why we deserve the tax
exemptions.
Mr. Heller. I come from a State--Nevada is in particular
probably the largest foreclosure State right now, especially in
the southern end of the State. Just to give you an example, I
believe our foreclosure rate is 3 times higher than the
national average; 1 in every 154 homes right now are being
impacted, whereas I think the national average is about 1 in
555. So you can understand my concern over this.
I just want to make sure that this piece of legislation
doesn't put credit union members at risk, more at risk than
they were before. And can you explain to me why I shouldn't be
concerned that these capital requirement changes won't put your
members more at risk?
Mr. Dorety. I will be happy to. I don't want to try to one-
up you, but I am in the west coast of Florida. So we have just
as many issues as you do. Actually, Fort Myers is ranked the
worst in foreclosures, and we have a significant presence
there.
Mr. Heller. You win.
Mr. Dorety. So I think the new regulations will only help.
I think two things. One is we have strong regulatory backing,
and they are going to be able to look at credit unions. As
Chairman Johnson has explained, they are going to have more
tools to help develop and estimate risk in credit unions.
And that is the key. Credit unions are going to be able to
have the ability to measure risk when we make loans, more so
than we do today. Today it is a one-size-fits-all. An unsecured
credit card loan, we have to risk. The assessment is exactly
the same as an investment in a government-backed security.
That just doesn't make any sense. And so when you enable us
to do these types of things that we will be able to do under
the new prompt corrective action guidelines that are in this
law, we will be better served. Our members will be better
served, and we will have no greater risk than we have today.
Our regulators--we will be on the exact same footing, well,
not the exact same. We will actually have higher regulatory
restrictions than other financial institutions do, even after
this is imposed.
But credit unions have high capital levels today. We have
never contributed. We have never had a bailout, as other
financial institutions have done. We have always been a safe
institution, and this particular bill will do nothing to change
that.
Mr. Heller. Mr. Chairman, I yield back. I went a little bit
over my time. Please don't hold it against me in the future.
Mr. Kanjorski. No. We welcome contributions from Nevada.
Mr. Heller. Thank you.
Mr. Kanjorski. The gentleman from Georgia, Mr. Scott.
Mr. Scott. Yes. Thank you, Mr. Chairman. It has been a very
informative hearing.
And I want to talk--first of all, what you are after is--we
are dealing with two bills here, number one. And I want to get
your response to find out if you are--which direction you think
we ought to go on these two bills, and do either or both of
them meet your primary obligations, your primary objectives?
Ms. Johnson?
Ms. Johnson. Congressman, the CURIA bill does contain the
element of the risk-based capital. And that has has been
dropped from the CURIA bill. And for me, that is the priority.
I would like to see the risk-based capital put into the CURIA
bill, or vice versa. That is vitally important.
The underserved, extending the opportunity for all credit
unions to adopt underserved areas, is vitally important. If I
were to list two items, however it is combined, those would be
my priorities.
Mr. Scott. All right. Now, let me just get it kind of
focused here. Let's talk about one of the areas that I think is
certainly helpful, and that is, you want to raise the limits on
how much business lending you can do. And I think you stated in
your testimony that credit union members' business lending cap
is currently the lesser of 12.25 percent of total assets or
1.75 times the net worth.
How does this cap compare with other financial
institutions, and how do credit union members' business loans
compare or differ from the business loans made by these other
institutions?
Ms. Johnson. I believe the current cap that is in place for
the thrifts is 20 percent, and there has been legislation
proposed that would take the cap off completely. When credit
unions were first formed, there was no cap on business lending.
It is only as recent as 1998 that there has been any cap in
effect at all.
About 25 percent of the credit unions currently make
business loans, and the average is only $190,000. So it about--
I mean, it is important for those small business in these
communities to be able to offer these--have access to credit.
It will help these communities. And it is a valuable system for
the members.
Mr. Reynolds. Congressman Scott, also--
Mr. Scott. Yes, Mr. Reynolds? And welcome up here from
Georgia.
Mr. Reynolds. Well, thank you, sir.
Mr. Scott. Glad to have you.
Mr. Reynolds. Thank you, and we appreciate your
hospitality. From the State perspective, the other point I
would like to make is that in credit unions, member business
lending is looked at very carefully in the examination process.
We don't have member business lending being made in every
credit union that we go into.
So we are very diligent. When we go in and do an
examination in a credit union, we look very carefully at any
credit union that is making member business loans. We are very
careful to review the underwriting, the written policies and
procedures, and the ability of management to properly manage
that function. So it is looked at probably more in depth in a
credit union than it would be in another financial institution.
Mr. Scott. All right. Let me ask you about prompt
corrective action, Ms. Johnson. Credit unions are by nature
risk-averse, and by law, they lack access to capital markets.
It is my understanding that the current prompt corrective
action rules induce credit unions to maintain capital levels
higher than those necessary to protect the share insurance
fund.
Can you explain why credit unions are forced to maintain
excessive net worth requirements, and how credit union members
would benefit from modifying these requirements as they are
proposed in CURIA?
Ms. Johnson. Well, the current requirements in place are by
statute. We don't have the ability, as the other regulators--
Mr. Scott. I see.
Ms. Johnson. --through regulation. So that is by statute,
and that is what we are asking to be changed.
And the second--oh, credit unions are incredibly well
capitalized, and they are averse to--you know, they are not
risky institutions. And they have raised, through retained
earnings, their capital levels. They are in excess of this
required 7 percent. The current average capital is about 11.4
percent. So it demonstrates that credit unions are managing
effectively.
Mr. Scott. All right. My time is about up. But let me get
to this question. The three points, of course, you want a more
flexible risk-based standard that would be determined and
regulated by the regulators. You want to raise the limits on
how much business lending credit unions can do to business. And
you want to get into the underserved areas. Those are the three
things I think you are basically asking.
So the question presents itself to me: How do you respond
to the banking community's interest that if we do these three
things for you, that some kind of way this is going to give you
an unfair competitive advantage? That seems to me as what we
have to answer.
Are there legitimate concerns--do they have a point to make
here? Are you getting an unfair advantage over the banks by
getting into this?
Ms. Johnson. I imagine my colleagues would like to jump in
on this. But I will tell you from a regulator standpoint that
this is not an unfair advantage in that credit unions are still
held to higher regulatory requirements than other institutions.
They are limited in investments. They are limited by field of
membership. You don't--I mean, there is--this isn't a tradeoff.
This is just giving the credit unions the tools they need to
serve their members.
Mr. Dorety. Credit unions--excuse me.
Mr. Scott. Yes, sir. Please.
Mr. Dorety. Credit unions, to say we have an unfair
advantage is--it is an illusion. We are subject to different
regulatory restrictions at times. We have a totally different
structure. You know, banks have the opportunity, if they care
to, to change to a credit union charter.
We are a not-for-profit. We send everything back to our
members, and if there is an unfair advantage, it is in that
structure because we have one audience, our membership. We do
not have to pay outside investors. That is our choice of
charter. Banks' choice of charter is a different choice, so
they are established differently and they have different
economic factors that they are dealing with.
It is simply the choice of charter, and it allows us in
some situations--actually, in many situations--to offer far
better products and services to our members for that one very
fact: We are a not-for-profit cooperative.
Mr. Scott. Yes, Mr. Lussier?
Mr. Lussier. Yes. I just want to say that I want to make
sure that we remind each other that we only represent 1.1
percent of the market share out there. And I would just like to
say that if banks think that it is that unfair, that they can
convert to credit unions if they so wish as well.
Mr. Scott. All right. Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you, Mr. Scott.
The gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. Let me continue on
that same line.
Is it true that there are 123 credit unions with more than
a billion dollars in assets, which would mean that they are
larger than 82 percent of the banks?
Mr. Dorety. It is true, I believe. I am pretty certain that
is the case that there are 123 credit unions that have a
billion dollars in assets. All of the assets of the credit
unions combined do not equal either of the three largest banks
in the country. So we ought to put that in perspective as well.
But yes.
Mr. Cleaver. Generally, those who talk with us are the
smaller banks, who come in to talk with us, quite frequently, I
might add. And the issues, of course--I mean, I understand the
two different charters and the way the Federal Government is
allowing the two to exist.
But it would seem to me that if credit unions are
disinterested in doing CRA, it seems to me that you have to be
careful about how you say you are not wanting to do it just
because I think the way you say you are not wanting--the way
you make that statement can send the wrong signals. And Mr.
Watt was dealing with that a little before he left. And so that
does trouble me.
But in the urban core all over this country, and I am not
that sure about rural areas, but in the urban care--and I
represent a district that is very urban--we have a potpourri of
payday loan operations and ``Jenny's Come Cash Your Check
Quick'' companies.
And it would seem to me that one of the things that maybe
credit unions could do is develop a new product that would
allow--that would cause the people in those underserved areas
to have a service that is desperately needed.
One of the reasons--I used to have an NPR radio show that I
did live, and I did a show on these check cashing places. And
it was a live show. I had a whole group of people who showed up
in the poor parts of Kansas City, Missouri, angry with me
because they said they needed those check cashing places. They
said, there are no banks around. You know, we need a place to
cash our checks. We need a place where we can get small loans.
And so, you know, with everyone--with the mantra from banks
and credit unions, we want no regulations, you know, just
leave--the market will take care of everything. Well, the
market is not taking care of everything, and the truth is that
you could develop products that would help, that would really
help the community. I mean, those people are getting ripped off
whether they like it or want to or not. They are getting ripped
off because there are no institutions around to handle their
needs.
So it seems to me that that ought to be one of the things
that credit unions would consider. I mean, that is CRA without
anybody having to ask you to do it. Chairman Johnson?
Ms. Johnson. Congressman, I would like to respond.
Congressman Kanjorski's bill does have a provision in it that
would allow credit unions to offer check cashing services to
non-members within their field of membership, which is a good
way of getting individuals into these traditional institutions.
One other thing is that federally chartered credit unions
have a usury ceiling of 18 percent. And so that is a helpful
limitation in this sense to these consumers of not being
charged with these exorbitant fees.
Mr. Cleaver. Yes. Mr. Watt talked about--
Ms. Johnson. Oh, I meant payday lending rather than check
cashing. Excuse me.
Mr. Cleaver. That is fine. They are the same, as far as I
am concerned.
The neighborhood language that Mr. Watt actually--the word
neighborhood is in the CRA legislation. And he mentioned
neighborhood for yours. It is not, but it is in the CRA for
banks, that they serve neighborhoods. We don't have
neighborhood banks any more.
And even if credit unions--I mean, I belong to two credit
unions. I am not anti-credit union; I belong to two. The
problem is, the credit unions are not located where people need
the service. That is the problem.
Mr. Dorety. Congressman, we have--actually, Congressman
Scott earlier said something about the most important group in
this discussion is not in this room; it is the consumers. We
are owned by these consumers. Our credit union has a branch in
an underserved area in East Tampa. There are four payday loan
shops; you can walk out the front of our door and look at the
four payday loan shops.
There are no banks in that community. We opened that branch
2 years ago to serve the people that you are talking about.
Credit unions nationally have a program called Real Solutions
which addresses payday loans, check cashing, and a number of
products and services, exactly the type of thing that you are
talking about.
Mr. Cleaver. There are two things.
Mr. Dorety. We do CRA. We just aren't required--we aren't
forced to do CRA. Credit unions are already handling those
issues.
Mr. Cleaver. Two things. One, your services would be made
available, I guess, based on the charter only to members. Is
that right?
Mr. Dorety. My understanding under this bill is that payday
loans would be available to folks living--eligible for
membership in the community who are not members. But yes, today
we are.
Mr. Cleaver. No. Say that again, if you would, Mr. Dorety?
Mr. Dorety. Under the new bill, payday loans--the provision
in the new bill allows credit unions to make payday loans to
residents who are in an area that they would be eligible for
membership but they are not members. I believe that is correct.
Mr. Cleaver. Eligible? They would be eligible?
Mr. Dorety. Would be eligible. Right. Therefore, the more
underserved communities we were able to have, the more folks
would be eligible for those payday loans.
Mr. Cleaver. Final question: If we have one in Tampa and we
have 50 States, 300 million people, I mean--
Mr. Dorety. We have one in St. Petersburg, too, sir.
Mr. Cleaver. Okay. We have two.
[Laughter]
Mr. Dorety. But the fact of the matter is, I said the
national program that credit unions are undergoing right now,
we are very active in very underserved communities and we want
to do more. So it is--
Mr. Cleaver. I want you to do more. The question is, you
know, will you do more? I mean, the legislation, I think, is
good. But will you do more? I mean--
Mr. Dorety. Yes.
Mr. Cleaver. --people are not standing in line trying to go
in to serve these people. Now, the payday loan folks are making
money or they wouldn't be there.
Mr. Dorety. Absolutely.
Mr. Cleaver. And so, I mean, which would suggest that you
can make money as well.
Mr. Lussier. Congressman, that is why passage of H.R. 5519
is a great start and beginning to what we need to get that job
done. Credit unions would be out there trying to do it if they
were permitted to do so.
Mr. Cleaver. So you wouldn't mind a provision in this
legislation that would give you a certain time in which you
would have a certain number of these facilities located in
underserved areas? I mean, some kind of provision that would
give us some comfort in going to our districts and saying, you
know, we just passed one or two of these bills and that help is
on the way.
Mr. Dorety. Our regulator already requires us to put a
branch in that community within 2 years of getting our charter.
So they have the ability--they already are doing that, and they
would have the ability going forward to require us to put a
branch, a full service branch, in that community.
Mr. Cleaver. So you want me to support Mr.--I always mess
it up but--
Mr. Lussier. Yes, sir. We do.
Mr. Cleaver. Yes. And then I will be happy at home, telling
people that you are coming?
Mr. Lussier. Yes, sir.
Mr. Cleaver. And the payday loan people will be angry and
start fleeing? Thank you. Thank you, Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Cleaver.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. 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. This
panel is now dismissed, and I would like to welcome our second
panel.
I am pleased to welcome our second distinguished panel.
First we have Mr. R. Michael Stewart Menzies, Sr., president
and chief executive officer of Eastern Bank and Trust Company,
testifying on behalf of the Independent Community Bankers
Association. Mr. Menzies?
STATEMENT OF R. MICHAEL STEWART MENZIES, SR., PRESIDENT AND
CHIEF EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON
BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Menzies. Mr. Chairman, thank you so much. It's an honor
to be here in front of you again. My name is Mike Menzies and I
am the president and CEO of Easton Bank and Trust in the little
town of Easton, Maryland, on the Eastern shore of Maryland.
We're a $140 million community bank, 14 years old. And it's
also my honor to represent the Independent Community Bankers of
America as the chairman-elect of that trade association of
5,000 community banks.
We do appreciate the invitation to come before this group.
And as you would expect, we do strongly oppose this bill, H.R.
1537. Congress should not expand credit union powers without
addressing first the tax advantage of credit unions and their
inability or lack of willingness to comply with the Community
Reinvestment Act.
I want to make clear that community bankers strongly
support local, not-for-profit organizations. I'm the chairman
of our local hospice. I have been the chairman of our United
Way in Talbot County. Over my 38 years of experience in
banking, I have always been involved with local charities. And
community bankers throughout the Nation are also fully invested
in the charities in their communities. But I believe CURIA is a
misnamed, aggressive measure disguised as regulatory relief
that would give credit unions expanded business lending powers
and actually weaken their capital standards. It would increase
the already unfair competition that credit unions currently
pose to community banks.
A Congressional Research Service report notes, if I may
quote, ``Over the past 30 years, most of the distinctions
between credit unions and other depository institutions have
been eliminated or reduced because of deregulation.
Consequently, the justification for the tax exemption for
credit unions has been increasingly questioned.''
Credit unions are seeking to expand farther into the core
business of community banking, small business lending, and I
can assure you, community banks are not afraid of competition.
We have no shortage of competition when it comes to small
business lending. We compete with large banks and finance
companies and automobile dealerships, but all of those
competitors pay taxes.
Credit union representatives often claim that they
represent such a small percentage of the industry, and we heard
that again this morning. While the banking assets total about
$12.7 trillion in assets, and our 5,000 members represent
roughly $982 billion, the credit union industry has grown to a
$753 billion industry. And as you heard this morning, over 19
million members, and over 8,000 credit unions in this country
today. We recognize that you, sir, have introduced H.R. 5519.
And while we haven't totally analyzed that bill, we recognize
it is a narrower bill. That's good.
Clearly, credit unions want to expand their charter because
they feel inadequate in serving the needs of their community
and their customers. For credit unions that truly believe they
need to expand their powers, there's a wonderful solution
that's out there--convert to a mutual thrift. It's a wonderful
solution, because it allows credit unions to go into a business
structure where they can expand their services dramatically.
Unfortunately, NCOA is constantly putting up roadblocks to keep
credit unions from moving into that mutual thrift structure.
So why should credit unions have to go to a new charter
rather than just expand their current powers? The answer is
really simple. Congress provided credit unions with a
substantial tax advantage over community banks and does not
require compliance with the Community Reinvestment Act.
Congress put this basic tradeoff in decades ago. Limiting
activities, providing credit to individuals of modest means,
but valuable tax and regulatory benefits.
In 2005, the Tax Foundation calculated the credit union tax
subsidy is worth about $2 billion a year and growing. On the
average, credit unions found little or no effect on deposit
rates or other costs, so the average member benefit is very
little. But these are averages. Credit unions can use their
subsidies selectively to secure business if they want. One of
my customers, a retired airline pilot, very attractive 7-figure
net worth, and a very attractive high-6-figure income, applied
to me a year ago for an aircraft loan. I gave that individual,
who has most of his deposits with us, not with his credit
union, what I considered to be an extremely competitive rate,
and the credit union quoted that loan on much more aggressive
rates to buy a $700,000 airplane at probably a 20 percent
discount to our pricing.
Several studies have shown repeatedly that credit unions
have strayed far beyond their mission to serve individuals of
modest means. Credit unions involved in last year's Florida
real estate investment scheme, dubbed ``Millionaire
University,'' illustrates just how far credit unions have
strayed. This scheme, a number of credit unions invested in a
speculative land development deal far outside of their
marketplace, far outside of the needs of their members, and
lost hundreds of millions of dollars, causing the insurance
fund one of the greatest losses in the history of the insurance
fund.
For these reasons, sir, we urge Congress to reject calls to
expand their powers. And instead, we hope that you consider
true regulatory relief for all financial institutions.
Thank you, sir.
[The prepared statement of Mr. Menzies can be found on page
115 of the appendix.]
Mr. Kanjorski. Thank you Mr. Menzies. Next we will hear
from Mr. Bradley E. Rock, chairman, president, and chief
executive officer of the Bank of Smithtown, testifying on
behalf of the American Bankers Association.
STATEMENT OF BRADLEY E. ROCK, CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, BANK OF SMITHTOWN, ON BEHALF OF THE AMERICAN
BANKERS ASSOCIATION (ABA)
Mr. Rock. Thank you, Mr. Chairman. We appreciate the
opportunity to comment on expanding the powers of credit
unions. These issues are sometimes filled with emotion on both
sides. The banking industry is sometimes portrayed as attacking
the entire credit union industry. Let me assure you, Mr.
Chairman, this is not our goal.
Most of the credit union industry today continues to focus
on their mandated mission to serve people of small means. I
would suppose that most of the credit unions that have been
present in this room today are these mission-focused credit
unions. These institutions are an important part of our
financial system. Our issue is not with credit unions that are
meeting the needs of people of modest means, but rather with
the new breed of credit unions that want to grow aggressively,
serve high-income individuals and large businesses, and take
over small credit unions to expand their charter. These new
breed credit unions are the biggest threat to traditional
credit unions, as they are fundamentally changing the nature of
the business, shunning their core mission to serve those people
with limited options for financial services.
It is important to look beyond the rhetoric to the reality
of today's credit union landscape. For example, the reality is
that over 2,000 credit unions have been absorbed by these new
breed credit unions since 2001. Today there are more than 123
credit unions with over $1 billion in assets, which makes them
larger than 92 percent of the tax paying banks in this country.
Near where I live, Bethpage Federal Credit Union, with more
than $3 billion in assets, is nearly 3 times the size of my
bank, and 5 times larger than the typical community bank on
Long Island. And from their advertising, I can tell you that
Bethpage is very much focused on serving wealthy individuals.
During this hearing, we have heard about the need for
broader authority to serve underserved areas. The reality is
that there is no requirement today that credit unions
demonstrate that they are meeting the needs of low-income
individuals. NCUA's approval of so-called underserved areas
does nothing to assure such a requirement. NCUA has declared
entire cities to be underserved and allowed credit unions to
open branches in high-income areas with no requirement, none at
all, that they actually serve low-income neighborhoods. For
example, all of Washington, D.C., has been declared
underserved. Under proposals from NCUA and credit union groups,
every credit union would be eligible to come into Washington,
put a branch in wealthy Georgetown, and not make a single loan
to a low-income person.
During this hearing, we have also heard about the need to
serve small businesses. But the reality is that the new breed
credit unions are hitting the congressionally mandated limits
on business lending because they are making very large loans to
real estate developers and others, including those businesses
out of their market area.
For example, consider a $30 million luxury condo loan,
which is currently in default, made by Eastern Financial Credit
Union, or the loan for a luxury golf and condominium resort by
Twin City Co-op's Federal Credit Union. Or the construction
loans by Texans Credit Union that average $10 million each. Or
the millions of dollars in loans involving a land deal in
Florida that caused the recent failures of credit unions in
Colorado and Michigan. Are these loans that the credit union
tax exemption was intended for? How many loans to low-income
people could have been made instead?
Expanding business lending powers and easing credit union
capital rules will only move the new breed of credit unions
further away from their mandated mission, and encourage them to
bulk up by acquiring small ones at an even faster pace.
Fortunately, for those expansion-minded credit unions, there is
a very viable option for them today--switching to a mutual
savings bank charter. This charter, which some credit unions
have already adopted, provides greater flexibility while still
preserving the mutual member focus that credit unions find
desirable.
Mr. Chairman, there remains an important role for
traditional credit unions that serve people of modest means.
But we see no reason for Congress to give authority to expand
business lending that will only encourage a further departure
from this mission.
Thank you very much.
[The prepared statement of Mr. Rock can be found on page
130 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Rock. And I thank
the entire panel for waiting this long. Let me make first and
foremost a congratulatory note to the community banks and to
the average banks in America, and let it be noted for the
record that our present situation of subprime loan failures is
less attributable to the regulated national and State banks in
this country, and more attributable to unregulated institutions
in this country. And if we had had more of the formal regulated
community banks or regular banks, although you are both regular
banks, we probably would be in less difficulty than we are
today in the credit markets. So you are fulfilling a good
function and I want to make sure this committee recognizes that
fact.
Now, with that being said, I think there is probably a
fundamental disagreement philosophically between the chair of
this committee and yourselves. And we could sit here for hours,
and I would probably enjoy it, but I doubt whether we would
convince each other of our mutual positions as being correct.
Although, I want you to know that prior to my arrival here
in Congress and my service on this committee, I actually served
as a board member of a small bank in Pennsylvania, and I think
I served for about 10 years as a director in that bank. So I
understand some of the problems that small banks have,
certainly their competitive positions that they have. And I
empathize, let it be said, with the banking community.
On the other hand, I was not preconceived to sympathize
with the credit unions prior to my arrival in Congress. I had
never been a member of a credit union and I knew little about
what they did. I actually got here in an interesting way. I
represented as an attorney the cooperatives, food cooperatives.
And I will not say I fell in love with, but I became enamored
with, the process of cooperatives and saw how they could be
utilized to work to the benefit of people. And when I came to
Congress and then studied the credit union movement, I became
very appreciative of the fact that a cooperative effort in
banking, removing some of the activities of competition and
profiteering or profiting from commercial endeavors, actually
worked to the benefit of people. I do not know how we would
ever agree that all organizations in the country should be for-
profit and for nothing else. I think we have a huge number of
institutions that border on that cooperative area that perform
great functions. Some abuse their positions. I will concede
that. That is not a question. But I can tell you quite frankly,
some banks abuse their positions. If we wanted to sit here and
go back and forth, I do not know who would win that challenge,
but some of my best friends, as they say, are now residents of
Allenwood who used to be in banking institutions. May I just
leave it at that--be a little humorous, but that happens. That
is the--
Mr. Rock. None of our members, I hope, Mr. Chairman.
Mr. Kanjorski. No what?
Mr. Rock. None of our members, I hope.
Mr. Kanjorski. Well, I would imagine they at one time or
another were your members. They are not anymore. But those are
the foibles of human beings. To look at those excesses or
extremes that caused those results, and then attribute it to
the whole I think is somewhat of a mistake.
What I do not understand, honestly, is we worked very hard
on putting a new financial structure here in place, a risk
management tool. And being good businessmen, both you and your
institutions; your associations being made up of good
businessmen, why wouldn't you for the protection of the credit
union members and for that aspect of the financial service
industry and the country, why would you not be more in favor or
in favor of a risk management capital system as opposed to what
it is today, which does not really meet the needs and protect
it against some of the abuses that you are actually asking? You
heard the regulators say here, you would afford the opportunity
for better Federal regulation, for better protection for the
members, for better protection for society, if we put in place
a risk management capital system that was not thought up by the
credit unions, was not thought up by their association, was not
thought up by the Congress, but actually was developed by the
regulator. How can you argue against that sort of meritorious
position?
Go to it. Tear me apart, gentlemen.
Mr. Menzies. Go ahead.
Mr. Rock. Mr. Chairman, credit unions by the nature of
their structure do not have all of the same means available to
them for raising capital that banks have available. Credit
unions' only means of raising capital is through retained
earnings. And history has shown that in times of stress when
banks or credit unions are losing money, they do not have the
ability to build capital through retained earnings. Therefore,
it has always been thought, because that's their only method of
raising capital, it has always been thought that credit unions
therefore need to have higher capital requirements than banks
do, because banks have other alternatives during those hard
times.
The second reason--
Mr. Kanjorski. Okay. But now let me call you on that. This
risk system that is proposed by the regulators is 1 percent
higher than what is required of banks.
Mr. Rock. No. I believe it's a quarter--
Mr. Kanjorski. It is 6 percent--
Mr. Rock. --a quarter of a percent. Five versus five-and-a
quarter is what they're proposing. A quarter of the percent.
Mr. Kanjorski. No, I think it's 6 percent.
Mr. Rock. No. It's 7 now. It's 7 now, Mr. Chairman.
Mr. Kanjorski. And would go down to 6?
Mr. Rock. Would go down to--no. Would go down to five-and-
a-quarter is what they're proposing.
Mr. Kanjorski. I thought I heard 6 in testimony, but I will
trust you. Still, it is higher than what is required of banks.
Mr. Rock. Well, by a quarter of a point. And I think the
question would be, is that sufficient to protect the
depositors? And historically, the answer has been no.
Mr. Kanjorski. Well--
Mr. Rock. Because when you're losing money, you can't build
retained earnings. There are no retained earnings.
Mr. Kanjorski. Look, when banks fail, they go to the
insurance fund. When the insurance fund does not have enough
money, they go to the taxpayers. We all know that, and I do not
think there is anything wrong with that.
Mr. Rock. Well, that has never happened, though, Mr.
Chairman. It's theoretical.
Mr. Kanjorski. I know. But we have supported that. Never
happened, but that is the trail. But if the insurance fund for
the credit unions fails, they go to the rest of the credit
unions throughout the country. It does not come to the
taxpayers. So they have to have an awful lot of faith in the
performance of these various credit unions to risk all of their
capital. I mean, it is really quite a brotherhood; 90,000
people linking together to provide security for their needs
within their financial services.
Mr. Rock. I would say two things to that, Mr. Chairman.
First of all, it presumes that bank capital doesn't stand
behind those obligations, and I think that's an incorrect
assumption.
Mr. Kanjorski. What bank--
Mr. Rock. It has never happened. The collective bank
capital. Yes, you look first to the insurance fund. Then you
would look to the bank capital, just as you're hypothesizing
for credit unions, and only then would you look to the Federal
Government, which by the way, there is no requirement that the
Federal Government stand behind. That's the whole too-big-to-
fail argument.
Mr. Kanjorski. And maybe you could help me out. Your
position is that under present banking laws, if there were a
failure of banks in the country, and the Federal insurance fund
fails, they then draw on all of the other remaining banks?
Mr. Rock. I'm saying that both of your hypotheticals are
purely hypothetical. It has never happened for credit unions,
and it has never happened for banks. It's not a matter of law.
Mr. Kanjorski. Well, you know, I agree they may be
hypothetical, but I would have to be honest with you and say we
may get to test that system shortly. According to Mr. Bernanke
the other day, he thought that there would be about 100 bank
failures. Now we hope that they are not very large banks, but,
you know--
Mr. Rock. And there is a $50 billion fund standing there
financed through--not through--
Mr. Kanjorski. But there is some fear that it may be a too-
large-to-fail bank that is involved, which would be incredibly
disruptive.
Mr. Rock. And that would be unfortunate.
Mr. Kanjorski. Very unfortunate.
Mr. Menzies. Mr. Chairman, if I could pipe in a little bit.
Mr. Kanjorski. Yes.
Mr. Menzies. I think the great challenge that you, sir, and
this committee face is understanding what types of risk you'd
really want to take with this structure called credit unions.
We had the great honor of having breakfast with Mr. Bernanke
this week in Florida and with Chairman Sheila Bair, and with
OTS Director Reich, and it's pretty obvious that we're going
through one of the most difficult economies in our history.
We're talking about the housing stock falling in value from
$600 billion to $1 trillion. We're talking about subprime
losses that are hard to measure, that are estimated by some to
equal a couple of trillion dollars. These numbers are
unbelievable. And then the question is, do you take an industry
whose mission is to serve the underserved--to serve the
underserved--and do you give them powers that let them convert
Washington, D.C., and Houston, Texas, into their marketplaces?
You can go into small business lending.
Mr. Kanjorski. Okay. Let us stop right there.
Mr. Menzies. Okay.
Mr. Kanjorski. I am the author of these two bills--
Mr. Menzies. Yes, sir.
Mr. Kanjorski. --with Mr. Royce. They do not use the
definition of underserved that presently is interpreted by the
regulator. The definition of underserved is greatly restricted
from what its present definition is to shadow and be consistent
with the New Markets Initiative definition.
And to my knowledge--I will not say that there isn't a
community in America that is not in total included in the New
Markets Initiative, a census tract method of being underserved,
but I highly doubt it. I certainly have a congressional
district that is in the lower third economically in the
country, and there is no community in my district that in
totality qualifies as an underserved community. So when Mr.
Watts proposed that possibility of Houston and Washington, I
think that is not the facts. And we are going to check into the
facts, okay?
Mr. Menzies. If in fact it's driven by economics, then,
frankly, I would say that makes sense. If the underserved
member is eligible because of their economic condition, not
where they live, then that may well make sense if they have a
net worth under some number, $100,000. If they have an income
under some number, that makes a great deal of sense. But if
it's geographic and Wal-Mart wants to put a store in one of
these areas that's defined geographically as eligible, then
should Wal-Mart be able to go borrow from a credit union or
Home Depot or Lowes or somebody else?
Mr. Rock. Mr. Chairman, I would make two points. One, and I
think this was part of the point Mr. Watt was trying to make
before, that would--I agree with what you have said, but that
would presume that the Cities of Houston, Tucson, Philadelphia,
etc., that have already been approved by NCUA, the entire city
as an underserved area, that those don't get grandfathered in.
Mr. Kanjorski. This Act is only allowing underserved areas
to be served by credit unions in accordance with the definition
here. It would be actually restricting what credit unions could
do.
Mr. Rock. Okay. Including the 641 previous approvals. Is
that what you're saying?
Mr. Kanjorski. I would think that is how--
Mr. Rock. I would think so, too, but I think that's
something that's not clear.
Mr. Kanjorski. I am glad you raised the question, and we
certainly will look into it.
Mr. Rock. And the second point I would make, Mr. Kanjorski,
and do agree that, as you said to Mr. Watt before, that the
proposal is more restrictive, and I concur with that. But I
would point out that in the City of Washington, for example,
under the current proposal, almost all of Georgetown and almost
the entire area along Massachusetts Avenue would qualify as an
underserved area. And I think for any of us who know those
areas, those areas are hardly comprised of low-income
individuals.
Mr. Kanjorski. Now wait. Under--
Mr. Rock. Under the new proposal.
Mr. Kanjorski. All of Georgetown would apply?
Mr. Rock. Almost all of Georgetown and almost all of the
area along Massachusetts Avenue.
Mr. Kanjorski. Meaning that Treasury has interpreted the
New Markets Initiative statute to say that these homes in
Georgetown and the residents there are underserved?
Mr. Rock. That's the way we read the proposal. We have
mapped it out, and we look at it, and that's the way we read
the proposal.
Mr. Kanjorski. I think we are going to find the old
definition. We will check it out.
Mr. Rock. No. Under the old definition, the entire City of
Washington, D.C., has been approved as an underserved area.
Mr. Kanjorski. Well, this is very good, because the
evidence you are giving us we should also transmit to Ways and
Means, because we are working on the reauthorization of the New
Markets Initiative, and I certainly, having been one of the
original drafters of that piece of legislation some 5 or 6
years ago, never intended, nor did the President at the time,
ever intend that we finance those tax credits for areas like
the rich sections of Georgetown. So we will certainly check
into that.
Mr. Rock. Yes.
Mr. Kanjorski. I have taken far in excess of my time, and I
am fearful that the chairman may run down here and dispossess
me of the chair. So, with that, let me recognize my charming
friend from Illinois.
Mrs. Biggert. Thank you. I hate to break into that
discussion. It was, I think, lively and productive. But just a
couple of questions. Mr. Menzies, in your statement you
referred to a GAO study of 2003, and it says that credit union
serve a more--the study found that credit unions serve a more
affluent clientele than banks, and the study concluded that
credit unions overall served a lower percentage of households
of modest means than banks. Could you expand on that a little
bit?
Mr. Menzies. Well, you have quoted the GAO study correctly.
The GAO study says that the community banks have more customers
of low and modest income as a percentage of their customers
than do credit unions. And that's because they're based in the
community and they need to serve the entire community.
Mrs. Biggert. Now that is a 2003 study. Do you think that
would still hold true today?
Mr. Menzies. Well, that's a good question, and the question
is, has the credit union history studied their low- to
moderate-income statistics and broadcast them so that we can
clearly understand that a majority of their customers are
people of modest means and people who need access to credit.
Mrs. Biggert. Well, then, my next question is that--for
both of you--is that the credit unions said that banks don't
want to make small business loans, especially under $100,000.
Does your bank?
Mr. Menzies. Absolutely. We just participated, 50 ICBA
banks, just participated in Chairman Bair's Small Business Loan
Initiative to establish strategies to make small loans, $1,000
and under, to individuals. We make $500 and $1,000 loans all
the time. We lose money on them. We lose a lot of money on
them. And we lose money because we pay taxes and we have a lot
of overheard associated with regulatory burden. But we do it
because we have to because they're members of our community.
Mr. Rock. Congressman, we have an entire staff of people in
my bank, which is a community bank, devoted to finding and
making small business loans of under $100,000. And we
currently, as of the date of filing of our last call report,
have $95 million of such loans outstanding. So we absolutely
do.
Mrs. Biggert. Are the business loans under $100,000 less
risky than business loans over $100,000?
Mr. Menzies. I would say no. I would say that business
loans under $100,000 inherently carry more risk, require more
underwriting, require more analysis, and require a closer
relationship. We have commercial lenders who have significant
experience lending into small business. They need to triage
whether this is an appropriate FDIC deposit-insured risk or
whether we should use the SBA or SBA 504 or some other strategy
to mitigate risk.
But my personal perspective would be that loans under
$100,000 can be riskier than the larger loans.
Mrs. Biggert. You said it cost you more.
Mr. Menzies. Absolutely it does.
Mrs. Biggert. Would that be true--how different would that
be for a credit union to make the same loan?
Mr. Menzies. How different would--
Mrs. Biggert. Well, would they have the same costs. How
would the costs be different since they don't pay taxes on
that?
Mr. Menzies. I don't know the exact basis point difference
in terms of regulatory burden. I do know that the credit union
tax advantage gives them 50 basis points or a half a point up
to sixty-some basis points of pricing advantage. That's why a 7
percent 20-year aircraft loan that I quoted was written at 5.75
for 20 years by a competing credit union. So there's a
significant competitive advantage if they're not paying 35
percent to the Federal Government and 7 percent, in our case to
the State, of their income.
Mrs. Biggert. Okay. Then Mr. Rock, you testified that in
spite of the change in the credit unions that kind of
metamorphose into highly competitive financial institutions
that they're almost indistinguishable from banks, and yet they
continue to enjoy the tax exempt status conferred when it was
composed of small self-help organizations.
And if our goal is to foster a healthy competition in the
financial services industry in order to benefit all the
consumers, should we try and level the playing field between
bank and credit unions?
Mr. Rock. I would say yes, absolutely, among the new breed
credit unions. If a credit union wants to grow to a very large
size, wants to serve everyone in the community without
limitation, if they want to offer all the products and services
that a bank can to all the same customers, then I say I welcome
the competition, but they should play by the same rules. They
should be subject to the same regulations. They should pay the
same income taxes and so on.
I do not think that that would be a wise policy choice for
the traditional credit unions. I think the traditional credit
unions that abide by the original quid pro quo, I think they
serve an important function in the financial system, and I
think they should be continued to allowed to do so.
Mrs. Biggert. Thank you. I yield back.
Mr. Kanjorski. Thank you very much, Mrs. Biggert. We are
pushing up against the votes that have been called, but I think
we have enough time. Mr. Lucas of Oklahoma.
Mr. Lucas. Thank you, Mr. Chairman. One quick question.
Gentlemen, obviously you both have a great deal of experience,
and when I joined this committee 13 years ago, we were still in
the process of sorting out what remained of the S&L meltdown, a
concept basically where short-term money was used to make long-
term commitments, and when circumstances changed, an entire
industry went away.
Tell me from your experience in the financial services
industry in relation to how things have evolved in the last 20
years, is there still a challenge when you use short-term money
to make long-term obligations?
Mr. Menzies. We don't use short-term money to make long-
term obligations. We are required by the FDIC to manage our
balance sheet within an interest rate risk sensitivity that
doesn't put too much earnings at risk. And the same is the case
with Mr. Rock. We can't just go mismatch our balance sheet. We
have a comprehensive management process to make sure we don't
go make 30-year loans and put them on our books and fund them
with savings accounts. It's as simple as that.
Mr. Lucas. And do you have concerns about that being done
by other people?
Mr. Menzies. I think it is not a responsible form of
financial management. I think the reason the savings and loans
got into trouble is because they had been given exclusive
privileges and exclusive powers, and they were funding 30-year
assets with savings accounts, and the market went upside down,
and the government deregulated them, and they tumble.
That is not the case with the thrifts today. The thrifts
that are in business today are well capitalized and well
managed, for the most part. They do a good job. But they're
subject to the same types of interest rate risk management
policies that I'm subject to, and I've just been through an
examination, and they are serious about it.
Mr. Rock. I would say, Mr. Lucas, yes, I think those
continue to pose substantial risks. I think that 20 to 25 years
ago when those events happened that we characterize as the S&L
crisis, banks were not required to engage in the same level of
interest rate risk simulation modeling that we are today.
And I know that our regulator, the FDIC, requires us to
engage in extensive monitoring. We have special computer
programs. We do it quarterly. In times of stress, we do it
monthly. So, I think that has reduced it.
With regard to how the credit union regulators look at
that, and whether the same requirements are demanded of them, I
really don't know.
Mr. Lucas. Fair enough. Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you very much, Mr. Lucas. I really
have to apologize. We have these votes on. I would really love
to sit here and trade off a lot of questions and answers,
because I think we would get a lot of the needed information.
I want to assure you that this committee, and certainly
this majority, are not prone to favor one institution over
another. What we are trying to do is get to risk management,
get to firmness in making sure that whatever occurs in our
financial service industry is well examined and ideal.
We are also working on regulatory reform for banks. I am
going to ask my friends in the credit union movement not to get
involved in being opposed to those deregulations for banks,
because we do not intend to deregulate anything that would
cause greater risk to the system, but in fact deregulate those
things that are determined to be unnecessary or further
restrictive or limiting your ability to earn.
In that regard, I hope we come to parity here. We may not.
If we do not, I don't want the two of you to get ulcers over
it. If we do, I want you to realize that then we have all
succeeded at our chore to get the system to work as best it
can.
With that in mind, we are not going to take any further
questions, because we have to make the votes. And I am going to
note that some Members may have additional questions for this
panel, which they may wish to submit in writing. 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.
I want to thank both of you for appearing here today. And
we did not mean to overwhelm you with time or questions.
Certainly your statements and your answers will be fully
examined and taken as seriously as any of the other testimony
before this hearing. And with that said, the panel is
dismissed, and this hearing is adjourned.
[Whereupon, at 1:35 p.m., the hearing was adjourned.]
A P P E N D I X
March 6, 2008
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