[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                   H.R. 2351, THE CREDIT UNION SHARE 
                      INSURANCE STABILIZATION ACT 

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 20, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-35

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida                   KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio              BILL POSEY, Florida
ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina       J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York           MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California             PETER T. KING, New York
DENNIS MOORE, Kansas                 EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania      WALTER B. JONES, Jr., North 
MAXINE WATERS, California                Carolina
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
CAROLYN McCARTHY, New York               Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
AL GREEN, Texas                      JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri              RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina          TOM PRICE, Georgia
DAVID SCOTT, Georgia                 PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois            KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota             CHRISTOPHER LEE, New York
RON KLEIN, Florida                   ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio              LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho

























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 20, 2009.................................................     1
Appendix:
    May 20, 2009.................................................    29

                               WITNESSES
                        Wednesday, May 20, 2009

Bedinger, Jim, Chief Operations Officer, Chicago Patrolmen's 
  Federal Credit Union, on behalf of the National Association of 
  Federal Credit Unions (NAFCU)..................................    20
Fryzel, Hon. Michael E., Chairman, National Credit Union 
  Administration (NCUA)..........................................     7
Lavage, William, President and Chief Executive Officer, Service 
  1st Federal Credit Union, on behalf of the Credit Union 
  National Association (CUNA)....................................    22
Reynolds, George, Chairman, National Association of State Credit 
  Union Supervisors (NASCUS), and Senior Deputy Commissioner, 
  Georgia Department of Banking and Finance......................     8

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    30
    Bedinger, Jim................................................    31
    Fryzel, Hon. Michael E.......................................    46
    Lavage, William..............................................    68
    Reynolds, George.............................................    83

              Additional Material Submitted for the Record

Lavage, William:
    Comment letter to the National Credit Union Administration, 
      dated April 6, 2009........................................    92


                   H.R. 2351, THE CREDIT UNION SHARE
                      INSURANCE STABILIZATION ACT

                              ----------                              


                        Wednesday, May 20, 2009

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 2128, Rayburn House Office Building, Hon. Luis V. 
Gutierrez [chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Sherman, 
Kanjorski, McCarthy of New York, Baca, Green, Scott; 
Hensarling, Royce, Neugebauer, Marchant, Paulsen, and Lance.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Financial Institutions and Consumer Credit will come to order.
    Good afternoon and thanks to all of the witnesses for 
agreeing to appear before the subcommittee today.
    Today's hearing is a legislative hearing on a piece of 
legislation that is vital to maintaining the safety and 
soundness of our financial system, H.R. 2351, the Credit Union 
Share Insurance Stabilization Act.
    The subcommittee has asked our witnesses to discuss recent 
developments in the seizures of U.S. Central Federal Credit 
Union and Western Corporate Federal Credit Union in March, as 
well as the stability of the National Credit Union Share 
Insurance Fund.
    We will be limiting opening statements to 10 minutes per 
side, but without objection, all members' opening statements 
will be made a part of the record.
    I yield myself 5 minutes.
    The 4,900 Federal credit unions and almost 3,000 federally-
insured, State-chartered credit unions in the United States 
play a vital role in our economy by providing access to credit 
for nearly 82 million Americans with the total credit union 
assets exceeding $800 billion. Maintaining the continuous 
stability of these institutions is vital to the economic health 
of the Nation and even that of the global financial systems.
    Congress acted recently to increase the amount of an 
insured deposit at these institutions from $100,000 to 
$250,000, but we must also take steps to maintain the health of 
the insurance funds themselves.
    On March 20, 2009, the National Credit Union Administration 
seized controls of U.S. Central Corporate Federal Credit Union 
and Western Corporate Federal Credit Union, one of the largest 
wholesale credit unions in the Nation. The NCUA made its 
decision based on mounting losses at the two corporate credit 
unions from their investments in mortgage-backed securities. 
The combined weight of the $57 billion in assets of the two 
credit unions forced a substantial drawdown in the National 
Credit Union Share Insurance Fund, which now must be re-
capitalized at a cost of nearly $6 billion. However, attempts 
to re-capitalize this fund by immediately increasing 
assessments on retail credit unions would constrain lending at 
these institutions at a time when the exact opposite is what is 
needed.
    To address the re-capitalization and continued health of 
the Share Insurance Fund, Representative Kanjorski, along with 
myself and Representatives LaTourette, Royce, and Scott 
introduced the Credit Union Share and Stabilization Act. This 
legislation would authorize the NCUA to establish a 
stabilization fund which would allow the credit unions to pay 
back the nearly $6 billion over 8 years and eventually merge 
this fund with the Share Insurance Fund. The legislation would 
also permanently increase the Fund's borrowing authority from 
its current $100 million to $6 billion and allow for up to $30 
billion in emergency circumstances.
    While similar language was included in S. 896, which passed 
the House yesterday and is scheduled to be signed into law 
today, this legislative hearing is necessary to establish a 
legislative record on this issue in the House. Additionally, I 
believe that this committee should hear from the stakeholders 
about the steps that they are taking to ensure--and this I 
think is vitally important--that similar losses to the Share 
Insurance Fund can be avoided in the future.
    I believe this legislation is vital to maintaining the 
health and stability of our financial systems, and I am proud 
to be an original cosponsor. I commend Mr. Kanjorski for his 
work on this bipartisan legislation and I look forward to 
hearing from our witnesses.
    I yield 5 minutes to the ranking member, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. In a complete 
breach of tradition, I do not intend to take the full 5 
minutes, but I thank you for yielding the time nonetheless. I 
want to thank you for holding this hearing. I want to thank the 
gentleman from Pennsylvania and the gentlemen from California, 
Mr. Royce, and Mr. LaTourette, for their participation and I 
thank you for your leadership, Mr. Chairman, for your work on 
the bill and for your work on this matter.
    It is important I think that we establish for the record 
that the failures we are discussing today are of corporate 
credit unions and not the natural-person credit unions that 
serve so many of our constituents each and everyday.
    Credit unions, along with community banks, play an 
incredibly important role in the communities they serve. I know 
how they important they are in the Fifth District of Texas. And 
along with you, Mr. Chairman, I believe it is critical that we 
keep them lending at this challenging period in our Nation's 
economic history.
    Clearly, without the benefit of the underlying legislation, 
our credit unions would be forced to need a very heavy and 
immediate assessment that one could argue ultimately subsidizes 
their competitors' failures. And so I think it is important 
that at this time of a national credit crunch, that certainly 
not be done.
    As important as this legislation is though, it does remind 
us of another important fundamental concern about our financial 
markets and that is the Federal Government cannot continue 
making great promises of funding guarantees to everyone who has 
or expects to have a funding problem. We have already extended 
funding promises to banks via the FDIC, banks via the Fed, 
banks via TARP, life insurance via TARP, ABS lending via TARP, 
automakers via the TARP, homeowners via FHA, not to mention our 
liabilities under the Federal Flood Insurance Program, TRIA, 
and the list goes on and on and on.
    After passing a budget that will triple our national debt 
in just 10 years, and create more debt in the next 10 years 
than was created in the previous 220, as we look at 
legislation, we need to always be very, very mindful about the 
implications of future generations, and we must be looking to 
create more economic opportunity and competitiveness in our 
land because the greatest anecdote to our funding problems is 
certainly a robust and healthy economy.
    Again, Mr. Chairman, I thank you for your leadership on 
this issue, and I thank you for holding this hearing. I yield 
back the balance of my time.
    Chairman Gutierrez. I thank the ranking member. Mr. Sherman 
is recognized for 3 minutes.
    Mr. Sherman. Thank you, Mr. Chairman. As a result of 
legislation that has passed the Senate, I know this hearing is 
a little broader than originally conceived. And I want to focus 
on an effort of mine for a long time to allow credit unions to 
issue alternative capital.
    Now, let's look at other sectors of the banking and 
depository world. We are now begging the banks to issue 
preferred stock and common stock. We wanted the big banks to 
issue preferred stock so much, we bought it. Credit unions also 
need capital. With capital, they can achieve the purposes, 
including lending to their members and to business members. 
Instead of talking about how much money are we going to spend 
or risk, the first thing we should do is say, why don't we 
allow the credit unions to issue alternative capital, 
subordinated debt, whatever term you want to use for it. Allow 
them to go to investors and say, ``You invest, you take a 
risk.'' With that risk, we can then accept deposits without 
that risk falling onto the Federal Government or onto the 
stabilization fund or insurance entity.
    We ought to allow this. It is the one thing we can do to 
help the economy now at zero risk to the Federal Government and 
at zero cost to the Federal Government. And I, for the life of 
me, cannot figure out why we have not done so promptly.
    Now, if credit unions were allowed to issue subordinated 
debt, that debt could be purchased with TARP funds. Whether 
that is a good idea or not, a better way to ask it is, is that 
a better use of TARP funds than anything else that might be 
used with them? But my proposal to allow credit unions to raise 
capital by issuing alternative capital is independent of the 
existence of TARP and was made long before anybody imagined 
that the Federal Government would be investing in the capital 
of depository institutions.
    I look forward to the credit unions being in a position to 
help us get out of this mess and the least we ought to do is 
untie their hands. It is a lot cheaper than anything else that 
is being suggested.
    I yield back.
    Chairman Gutierrez. Mr. Royce is recognized for 3 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Gutierrez. You are welcome, sir.
    Mr. Royce. Since the 108th Congress, Representative 
Kanjorski and I have co-authored the Credit Union Regulatory 
Improvements Act, and last week, I was pleased to once again 
join the chairman in introducing legislation, H.R. 2351, the 
Credit Union Share Insurance Stabilization Act. As has been 
noted, this legislation increases the NCUA's borrowing capacity 
with the Treasury, it extends the repayment plan for natural-
person credit unions, and it creates a temporary corporate 
credit union stabilization fund as put forward in a proposal by 
the NCUA in March of this year.
    With headlines over the last couple of years focused on 
those financial institutions that were highly leveraged and 
quick to underwrite risky loans, for the most part the natural-
person credit unions were conservative in loans they 
originated, holding most of their mortgages they made on their 
balance sheets. Clearly, however, there was a problem 
experienced at the corporate credit union level. The exact 
structure and function of the corporate credit union system is 
not widely understood. The various corporate credit unions 
throughout the country are owned in a cooperative fashion by 
the natural-person credit unions. These corporate credit unions 
supply liquidity to their members, as well as provide everyday 
services, such as wire transfers, ATM processing, and bill 
payment services for the natural-person credit unions.
    The failures that led to this request for expanded 
authority by the NCUA must be fully vetted. I believe 
significant changes need to occur at the corporate level to 
ensure future actions taken are consistent with the mission of 
the credit union model. As this legislation moves closer to 
becoming law, I am hopeful that this authority will be enough 
to stabilize and in fact strengthen the broader credit union 
system.
    And, again, I thank you for holding this hearing, Mr. 
Chairman. I look forward to hearing from our witnesses.
    Chairman Gutierrez. Thank you very much, Mr. Royce, for 
your work on the legislation and our joint efforts. And now to 
my friend and senior colleague on this committee, on the full 
committee, and the co-author, Mr. Kanjorski, for 3 minutes. 
Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Chairman. And thank 
you for convening this hearing to examine H.R. 2351, the Credit 
Union Share Insurance Stabilization Act. Our bipartisan bill 
allows the managers of retail credit unions to focus on their 
most important mission--providing credit--to their members 
rather than worrying about how they will pay for an excessive 
one-time charge to rebuild deposit insurance reserves and 
paring back lending during these difficult economic times.
    As you know, Mr. Chairman, we first planned to convene this 
hearing about 2 months ago. At the time, we had expected to 
consider the legislative proposals to create a Temporary 
Corporate Credit Union Stabilization Fund and adopt other 
needed deposit insurance reforms. These plans respond to the 
recent $5.9 billion rescue of the corporate credit unions by 
permitting the re-capitalization of the credit union deposit 
insurance system to occur over several years, rather than in a 
matter of months. We have, however, been overtaken by events.
    Several weeks ago, Mr. Chairman, you joined Chairman Frank 
and me in sending a letter to Senator Dodd urging him to 
incorporate the plan to create a Credit Union Stabilization 
Fund into S. 896, the Helping Families Save Their Homes Act, a 
bill that contains many important deposit insurance reforms. I 
am pleased that Senator Dodd did as we asked. The House and 
Senate have now passed the bill and President Obama will sign 
it into law later today.
    As a result of these events, the focus of today's hearing 
has shifted from the need for this bill to ensuring the 
efficient implementation of this law. Without this law, two-
thirds of the credit unions would have had negative earnings in 
2009, as a result of the need to rebuild deposit insurance 
reserves. Moreover, around 225 credit unions, through no fault 
of their own, would have fallen below limits where they would 
be deemed adequately capitalized.
    As members of a cooperative movement, credit unions are 
willing to help one another and to pay their fair share to 
recapitalize their deposit insurance system. The provisions 
found in H.R. 2351 and incorporated in S. 896 represent a 
viable and appropriate response to the problems now facing the 
credit union movement. The National Credit Union Administration 
must tell us today how it will swiftly and effectively 
implement this new law.
    Mr. Chairman, I am particularly pleased Mr. William Lavage, 
the president and CEO of Service 1st Federal Credit Union in 
Danville, Pennsylvania, will testify today. I have worked 
closely with him in the past and Service 1st has developed a 
unique model program of educating school children about 
financial matters. I look forward to his participation.
    In sum, I am very pleased that our bill will become law 
within a matter of hours and that we are convening this hearing 
today to examine how the National Credit Union Administration 
will work to implement these reforms quickly. The fact that we 
have considered and resolved these problems within a matter of 
weeks demonstrates that the Congress and the Administration can 
work together to solve problems facing the American people in a 
pragmatic way.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Gutierrez. Thank you, Mr. Kanjorski. Now, we have 
Congressman Paulsen for 2 minutes.
    Mr. Paulsen. Thank you, Mr. Chairman. It is abundantly 
clear that the current financial crisis has exposed a number of 
issues within deposit insurance that do need to be dealt with. 
Credit unions provide an extremely valuable service to their 
members and to all of our communities. Unfortunately, some 
credit unions, just like some banks, have made some bad bets on 
mortgage-backed securities. We need to make sure that the 
credit unions which were more prudent are not unfairly 
penalized from the resolution of those seized firms and 
subsequent re-capitalization of the insurance fund. In this 
time of very tight credit, it is important for Congress to act 
quickly and swiftly and effectively in response to the problems 
facing the credit unions so they can also stop worrying about 
the losses resulting from premium increases and start extending 
the badly needed credit to our small businesses again and 
retaining the confidence of their membership.
    So I thank you, Mr. Chairman, for holding this hearing 
today, and I do look forward to hearing the witnesses' 
testimony. I yield back.
    Chairman Gutierrez. Thank you. Thank you very much, 
Congressman Paulsen. Next, we have--let's see who is on the 
list, my friend, Congressman Green, for 1 minute.
    Mr. Green. Thank you, Mr. Chairman. I would like to 
associate myself with the comments of the chairman as well as 
Chairman Kanjorski. Credit unions do play a vital role in our 
communities, especially in my community in Houston, Texas, and 
I think that this legislation was absolutely needed to give 
credit unions the boost that they need so that they can 
continue to fulfill their role.
    Credit unions across the length and breadth of the country 
have been a lifeline for many persons who were not able to 
access the assets that they need or the financing that they 
need from other sources. I am honored to say that I gladly 
support this effort and look forward to the bill being signed 
today. I yield back.
    Chairman Gutierrez. Mr. Scott, you are recognized for 1 
minute.
    Mr. Scott. Thank you very much, Mr. Chairman. First of all, 
I want to welcome from the State of Georgia, Mr. George 
Reynolds, who is the commissioner of our banking system in 
Georgia. It is good to have you here with us, and I look 
forward to your testimony.
    I do want to also add that I am pleased to be a co-sponsor 
with Chairman Kanjorski on his bill, H.R. 2351, the Credit 
Union Share Insurance Stabilization Act. This measure is 
necessary and it is very important. Increasing the amount the 
National Credit Union Administration may borrow from the 
Treasury to $6 billion from $100 million is an effective way to 
make sure credit unions are increasingly viable and that they 
have the tools they need in these uncertain economic times.
    These are indeed tough, trying economic times, and we have 
to give our financial institutions the tools they need to 
weather the storm and come out strong in the end. Of course, 
there are many issues we will need to work on together in the 
future, but I believe this measure is a good measure and it is 
a strong measure that we can all agree on. And I look forward 
to hearing the views and concerns of our distinguished 
witnesses.
    Thank you, Mr. Chairman.
    Chairman Gutierrez. Thank you very much. And now we will go 
to our witnesses. Mr. Michael Fryzel is the chairman of the 
National Credit Union Administration. Mr. Fryzel has been 
chairman since July of 2008. Prior to that appointment, he has 
served in both private practice and in numerous capacities for 
the State of Illinois.
    Mr. George Reynolds is the chairman of the National 
Association of State Credit Union Supervisors. And, as we heard 
earlier from Mr. Scott, he is senior deputy commissioner of the 
George Department of Banking and Finance.
    I thank you both for appearing before the committee, and I 
would like to ask Mr. Fryzel to begin his testimony. Each of 
you will be limited to 5 minutes. The light will turn--when you 
have 30 seconds left, it will turn yellow, and then red means 
stop, like in most other situations. I really do not mind using 
this gavel with that side of that aisle, much more with this 
side, so watch the clock.
    Thank you so much for coming.

    STATEMENT OF THE HONORABLE MICHAEL E. FRYZEL, CHAIRMAN, 
          NATIONAL CREDIT UNION ADMINISTRATION (NCUA)

    Mr. Fryzel. Thank you, Chairman Gutierrez, Ranking Member 
Hensarling, and members of the subcommittee. I appreciate this 
opportunity to provide the NCUA's views on H.R. 2351, the 
Credit Union Share Insurance Stabilization Act, and the 
situation in the corporate credit union system in general.
    The 28 corporate credit unions have been a vehicle for 
investments, liquidity, and payment system services for retail 
credit unions for 3 decades. They were created and directed by 
the credit unions themselves and are a valuable component of 
the overall industry.
    Beginning last summer, unrealized losses from investments 
in mortgage-backed securities placed significant pressure on 
corporate liquidity. I had just taken office as NCUA chairman 
in late July and had begun a review of all NCUA activities. 
When the seriousness of this situation became apparent, as a 
first step, I immediately asked Congress for full borrowing 
authority from the Central Liquidity Facility, a seldom-used 
liquidity backstop administered by NCUA.
    In the last 7 years, the CLF had made $20 million in loans 
to credit unions. In September 2008 alone, the CLF received 
requests for almost $2 billion. Congress granted our request to 
have full CLF borrowing authority of approximately $41.5 
billion and in turn, NCUA has infused almost $21 billion into 
the credit union system, stabilizing a very tenuous situation.
    The good news was that the liquidity situation had been 
addressed. The bad news was that the distressed investments 
remained on the corporate books and continued to deteriorate. 
In January, the declining financial condition of U.S. Central, 
the wholesale corporate that provides services to other 
corporates, prompted the NCUA board to infuse $1 billion into 
that corporate, and guarantee deposits in all corporates 
through at least September 2011. Without swift and direct 
action, the corporate system would have been placed in jeopardy 
and service to members throughout the system would have been 
disrupted.
    It has always been my objective to do everything necessary 
to protect the nearly 90 million consumers who are members of 
credit unions. I could not permit the corporate system to cease 
functioning, for the impact on retail credit unions and 
consumers would have been devastating.
    In March, NCUA placed U.S. Central and West Corp., the 
second largest corporate, into conservatorship. This action 
preserved retail credit union deposits, enabled NCUA to gain 
more information about the portfolios at these two 
institutions, and allowed us to take necessary steps to 
mitigate future losses.
    The impact of these stabilizing actions on the Credit Union 
Insurance Fund was considerable. The cost of the Fund is $5.9 
billion, which translates to a 99 basis point assessment for 
each natural-person credit union. While industry capital stands 
at over 10 percent, it is undeniable that this cost, taken all 
at once, would come at a time of economic difficulty, a time 
when Americans need the kind of fairly priced financial 
services that credit unions provide.
    Recognizing this, NCUA developed a plan to replenish the 
Fund over 7 years. The plan, which was incorporated in the 
recently passed legislation and is now the heart of H.R. 2351, 
represents a real solution to the problem: It preserves the 
strong and well-capitalized insurance fund that Congress, NCUA, 
and the public demand. It enables credit unions to bear the 
cost in a more manageable way and it complies with GAAP 
accounting, which is mandated by the Federal Credit Union Act 
and which must be adhered to if we are to maintain public 
confidence in the industry.
    This proposal also relies on increased borrowing authority 
from the Treasury and it changes the time period on collection 
of a premium, both of which are included in the bill.
    I welcome and appreciate your support for this plan. 
Congress has been a very responsive partner to NCUA during this 
time of financial difficulty. And I am grateful that the House 
and Senate have approved the plan and sent it to President 
Obama for his signature. But this is not the end of the story. 
NCUA has embarked on a broad set of corporate reforms that will 
address such issues as: investment authority; risk 
concentration; corporate governance; and other aspects of 
corporate credit union operations. This new rule will yield a 
stronger, more doable corporate network that will better serve 
the needs of credit union members.
    My commitment to you is to make certain that NCUA puts the 
hard lessons we have learned to good use. I will look to the 
industry for their input. I will look to the Congress for your 
input. I will incorporate the best ideas that we, as the 
Federal regulator, have at our disposal. Above all, I will keep 
a clear focus on the central mission of protecting credit union 
members. I appreciate this opportunity to provide testimony and 
would be pleased to answer any questions.
    [The prepared statement of Mr. Fryzel can be found on page 
46 of the appendix.]
    Chairman Gutierrez. Thank you very much.
    Commissioner Reynolds, you are recognized for 5 minutes, 
sir.

STATEMENT OF GEORGE REYNOLDS, CHAIRMAN, NATIONAL ASSOCIATION OF 
  STATE CREDIT UNION SUPERVISORS (NASCUS), AND SENIOR DEPUTY 
    COMMISSIONER, GEORGIA DEPARTMENT OF BANKING AND FINANCE

    Mr. Reynolds. Thank you. Good afternoon, Chairman 
Gutierrez, Ranking Member Hensarling, and distinguished members 
of the subcommittee. I appear on behalf of NASCUS, the 
professional association of State credit union supervisors.
    We are pleased that Congress passed S. 896. The provisions 
are consistent with the priority of State credit union 
regulators to mitigate the impact of corporate credit union 
losses on natural-person credit unions.
    The NASCUS' testimony today will focus on four key points: 
the State credit union system and its relationship to corporate 
credit unions; mitigating the impact of corporate losses on 
natural-person credit unions; preventing the current situation 
from occurring again; and the future of corporate credit 
unions.
    State regulators monitor the corporate credit union system 
and conduct ongoing dialogue with the NCUA. State regulators 
are confident that by continuing to work closely with NCUA, we 
will address the problems in the corporate credit union system 
and ensure a vibrant, healthy, safe, and sound credit union 
system in the future. Transparency between State and Federal 
regulators is key to this relationship.
    We support establishing a restoration plan period for 
NCUSIF as provided in the legislation. Allowing 8 years would 
provide the flexibility to credit unions that they need to re-
capitalize the NCUSIF, as well as continue to serve their 
members. This provision also provides parity with the FDIC 
Act's proposed 8 year restoration authority.
    In addition, the legislation provides for the creation of a 
Temporary Corporate Credit Union Stabilization Fund and other 
provisions that allow solutions for credit unions to mitigate 
the impact of the dislocated credit markets. This allows credit 
unions to protect capital and liquidity so they can continue to 
serve member needs.
    Going forward, we must analyze the situation and seek ways 
to ensure that it will not occur again. First, to identify 
factors that resulted in material losses that led to the NCUA's 
recapitalizing U.S. Central and then to the conservatorship of 
U.S. Central and WesCorp, the NCUA inspector general should 
conduct a material loss review. A review would provide 
meaningful data for both State and Federal regulators. It would 
suggest needed regulatory and supervisory changes and identify 
weaknesses in the system.
    Next, we want to ensure that NCUA and State regulators 
share real time information to manage this fluid situation. We 
encourage greater transparency between NCUA and State 
regulators, the primary regulators of State-chartered 
corporates. Furthermore, NASCUS proposes a process for NCUA to 
work cooperatively with State regulators to identify corporates 
that pose material systemic risk and jointly examine them. This 
would help identify risk in an economic situation that is still 
unfolding.
    We must look beyond the structure of corporate credit 
unions. We do not believe that structural issues caused the 
conservatorship of U.S. Central and WesCorp. The problems at 
these institutions centered on risk management, risk 
mitigation, and supervisory issues. From a regulatory 
perspective, we must identify contributing factors and 
critically analyze each regulation to ensure proper policies 
and procedures.
    NCUA should work with NASCUS and State regulators to 
develop more comprehensive capital requirements, including 
risk-based capital. NASCUS has urged Congress, the NCUA, and 
the credit union system that supplemental capital should be 
enacted for natural-person credit unions. During the corporate 
stabilization process, supplemental capital might have 
mitigated some of the unintended consequences to net worth 
categories and natural-person credit unions. Natural-person 
credit unions would benefit from a risk-based capital system as 
well.
    In closing, we encourage Congress to consider the following 
points: Improve regulatory oversight and require more prudent 
risk management expertise for corporate credit unions; 
recognize State authority and encourage transparency between 
State and Federal credit union regulators; and improve capital 
standards for credit unions by allowing supplemental capital 
for all credit unions.
    NASCUS appreciates the opportunity to testify, and we 
welcome questions from subcommittee members.
    [The prepared statement of Mr. Reynolds can be found on 
page 83 of the appendix.]
    Chairman Gutierrez. Thank you very much, Mr. Reynolds. 
Chairman Fryzel, you state in your testimony that corporate 
credit unions were allowed under NCUA rules to invest in 
riskier mortgage-backed securities but that those corporates 
with expanded corporate risk authority rarely exercised it. 
Does not the seizure and subsequent rescue of both U.S. Central 
and WesCorp, as a result of their exposure to mortgage-back 
securities show that the NCUA has allowed corporates to hold 
more high-risk investments than they should? And are you 
evaluating and reconsidering this policy?
    Mr. Fryzel. Mr. Chairman, at the time these investments 
were made by U.S. Central and WesCorp, they were considered to 
be sound and good investments. They were mortgage-backed 
securities, and at that time, mortgage-backed securities were 
yielding a good return on the investments. I think the major 
problem occurred when these corporates were allowed to invest 
too heavily in those mortgage-backed securities. They did not 
diversify their investments as they should have, and perhaps if 
that would have been picked up earlier and perhaps the 
regulators would have said, ``Start to diversify,'' some of 
these problems would not have occurred.
    Chairman Gutierrez. So picking up on--so I grant you that 
point, that no one might have been able to foresee that. So 
what are you doing to make sure that things that look good 
today, that turn out to be really bad tomorrow in terms of 
regulation that you were talking about, that they bought too 
much and that their portfolio was not balanced, explain that, 
what steps you are taking there?
    Mr. Fryzel. Congressman, what we have asked is we have 
asked the industry and interested individuals to come to us to 
provide the changes that they believe will be needed in the 
corporate system going forward. We put out a request for 
rulemaking, and we have had almost 500 responses to that 
request, which we are now going through. And it varied from one 
end of the spectrum to the other in regards to what corporates 
should be doing in the future, what type of services they 
should provide for the credit unions, the natural-person credit 
unions.
    And certainly one of the major things we will be looking at 
is the type of investments that they will be allowed to make. 
And, again, that will probably be a limitation that will be 
placed at some point in time on the corporates as to just what 
they could invest in so that we do not get into these 
situations where we have the high concentration in one end that 
there could be a problem occur and, as a result, we will be 
faced with what we are facing with today.
    Chairman Gutierrez. So, Mr. Reynolds, in your view, what 
changes in the NCUA regulatory structure should be made so that 
we prevent this situation from happening again?
    Mr. Reynolds. Well, I have to agree with Chairman Fryzel, I 
think we need to look at the concentration limitations on 
investments. We need to look at the possibility of establishing 
limitations in terms of individual types of investments, 
obligor type limits. We need to look at the reliance on 
external rating agencies. Like a lot of other financial 
institutions, U.S. Central relied extensively on credit rating 
agencies that turned out to be overly optimistic. We need to 
look at the use of credit enhancement features in insurance 
products that were used to make mortgage-backed investments 
that had underlying subprime mortgages, into higher rate 
investments. And I think we need to also look at the internal 
risk management processes in place at corporates, including--
all corporates--and also corporate governance procedures in 
place at those institutions. All those areas need to be a part 
of a comprehensive analysis as one of the reasons I think that 
we think there needs to be a thorough independent review of 
this issue.
    Chairman Gutierrez. Thank you. I see my time--just so at 
least I follow my own instructions to the panelists, I see my 
time is coming up, so I will wrap up. Chairman Fryzel, we will 
not have another--unless it is unnecessary--the subcommittee 
will not have another hearing around the credit unions so I 
will be calling you and members of your board to come in so we 
can talk a few months from now and see how things are going and 
follow up because I think it is very, very important that we 
have some continuity and oversight in terms of just how the 
regulations and the changes that you are going to be making, 
regulatory decisions are made.
    Thank you both so much for coming this afternoon.
    Mr. Fryzel. Thank you.
    Mr. Reynolds. Thank you.
    Chairman Gutierrez. My colleague, the ranking member, Mr. 
Hensarling, is recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Commissioner 
Reynolds, in answer to Chairman Gutierrez's question, you 
mentioned the role of the rating agencies. Can you go into a 
little more detail as far as your opinion on precisely what 
role they played in the demise of these corporate credit 
unions, if you had to rate it on a scale of 1 to 10, and what 
do you do going forward?
    Mr. Reynolds. Well, personally, I think it was a fairly 
significant issue. In my experience, and I regulate different 
types of financial institutions, a number of which have 
invested in private label CMO type securities, and a lot of 
them have bought investments based on the rating of the 
particular security. If it was rated a triple A or a double A 
rating, they considered it to be a safe investment. And one of 
the things that we found in the current environment with the 
changes in the residential real estate market is that the 
security that was initially rated a triple A or a double A can 
drop to a sub-investment grade security with changes in the 
marketplace, increasing defaults, and other changes in terms of 
the portfolio composition. And I think what is needed is more 
stress testing of the underlying security, not taking for 
granted the rating that is assigned, but looking at the 
underlying composition of the mortgages that back up that 
security.
    Mr. Hensarling. Chairman Fryzel, the same question for you, 
the role credit rating agencies played in the demise of these 
corporate credit unions and what do we do going forward?
    Mr. Fryzel. Well, Congressman, as I said previously, all of 
these securities when purchased were highly rated and sound 
investments at the time. I agree with Chairman Reynolds in 
regards to the fact that perhaps the corporates, the investing 
firms have to do a little more due diligence in regards to 
accepting whether or not these ratings are true, looking at the 
securities in a little more detail and going deeper as to just 
what they are all about. I think if we have those type of 
regulations in place, we are not going to experience and we are 
not going to have worry about what the rating companies say if 
the due diligence is done by the corporate investment firm.
    Mr. Hensarling. Another question, Chairman Fryzel, do you 
see any correlation between the national field of memberships 
and increased risk-taking by the corporate credit unions?
    Mr. Fryzel. Congressman, I think that the theory behind the 
national fields of membership was basically for competition, in 
order for the corporates to compete against one another to 
obtain the natural-person credit unions. Now, certainly when 
you get that type of competition, you get corporates going for 
the higher rate to get the greater number of natural-person 
credit unions coming to them for their investments, so we do 
face that problem. But I think if we have in place the proper 
regulations to monitor the corporates, a national field of 
membership should not be a problem.
    Mr. Hensarling. Have there been any actual--what are the 
actual losses incurred to date on the securities of these two 
corporate credit unions?
    Mr. Fryzel. Well, the actual number, Congressman, is 
actually a moving number and that is based on what occurs in 
the economy over time as to whether or not these investments 
could get better or perhaps could get worse. With our best 
calculations, and this is why we asked for the amount of $5.9 
billion, that is the best estimate as to what we are going to 
have to deal with. Now, there could be a lower or there could 
be a higher estimate, and that could fluctuate over time, but 
that is what we are looking at right now.
    Mr. Hensarling. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    Chairman Gutierrez. You are very welcome. Mr. Sherman, you 
are recognized for 5 minutes.
    Mr. Sherman. Thank you. I may have to disagree slightly 
with our witness on credit unions--credit rating agencies 
because we had hearings in this room of another subcommittee 
just yesterday, and there was a division of opinion. There were 
some who said, ``Well, just don't rely on the credit rating 
agency,'' and there were others who thought, well, maybe you 
ought to make the credit rating agencies more reliable. I do 
not think there is ever going to be a way that you are going to 
tell people not to rely on the credit rating agencies because 
if one bond analyst puts together a portfolio and says, ``My 
yield is 3.8 percent and my average rating is double A,'' that 
person is going to look better to their boss than somebody who 
comes in and says, ``My average rating is lower than double A 
and my interest rate is the same.'' I would hope that we would 
move toward credit rating agencies that are selected from a 
panel by the SEC, so you would not have credit rating agencies 
having to lean a little bit to the left for the issuer's 
benefit in order to get the next issuer to pay them another 
half million or $1 million.
    A lot of disputes about TARP, but I would think sitting 
where you do, Mr. Chairman, that you would want credit unions 
not to be the only part of the depository institutional world 
that does not benefit from TARP. Now, it is my understanding 
that even if the Treasury deposited money with credit unions 
for the purpose of supporting their capital, you would not 
count it as capital. So I would like to know what interaction 
your agencies had with the Treasury Department in support of 
what I think was congressional intent and that is that credit 
unions would be included along with the other depository 
institutions? Did you meet with Treasury Department officials 
in the past Administration or the current Administration to 
facilitate credit union participation? And can you share with 
the committee your correspondence with Treasury? And are you 
going to change your rules so that if Treasury puts in money at 
risk for the purpose of serving as capital for a credit union, 
that you will count it as capital?
    Mr. Fryzel. Thank you, Congressman. We have always felt 
that it was congressional intent that credit unions be allowed 
into the TARP program, and we have asked for that since the day 
that legislation passed from former Secretary Paulsen. We wrote 
numerous letters to him but Secretary Paulsen did not believe 
apparently that credit unions should be included in that 
program. But that did not stop us from continuing to ask for 
it. We have asked now Secretary Geithner and we met with 
Treasury last week, and it appears that credit unions may be 
eligible to participate in the Troubled Asset Purchase Program, 
which is now being developed.
    Mr. Sherman. But not the capital infusion?
    Mr. Fryzel. Not the capital infusion.
    Mr. Sherman. Is that a matter of your rules blocking your 
intent, that is, if the Federal Government put some money into 
a credit union and said, ``We mean this to be risk capital,'' 
would you count it as capital?
    Mr. Fryzel. We interact frequently with Treasury, 
Congressman. We have to consult with them on a number of things 
that NCUA does before we can move forward, so if Treasury--
    Mr. Sherman. I was asking a simple yes/no question.
    Mr. Fryzel. If Treasury says to us, ``Here is a bundle of 
money, use it for what you want.''
    Mr. Sherman. No, no, they would invest in the credit unions 
obviously, they would expect to get it back but they would want 
you to count it as capital.
    Mr. Fryzel. Well, actually, that is what we are going to be 
doing with these loans they are going to be giving us. They are 
going to be getting money back, they are going to be getting 
interest back with the Corporate Stabilization Plan, but they 
have not told us that they are ready to give us money to invest 
into credit unions.
    Mr. Sherman. If they were, would you count it as capital? 
If they put the money in the credit union, it is supposed to be 
capital, would you count it as capital?
    Mr. Fryzel. I do not believe the Credit Union Act allows us 
to do that at this time, Congressman.
    Mr. Sherman. I would hope that you would immediately submit 
whatever statutory language you would think is necessary to 
achieve that goal.
    Now, you took into conservatorship the two corporate credit 
unions, and I have a number of questions for the record that I 
will be asking you about that, but one to ask orally is, given 
that there were NCUA examiners stationed permanently at both 
U.S. Central and WesCorp well before the credit unions were 
taken into conservatorship, why did not the agency take the 
action sooner to forestall the problems and possibly prevent 
the conservatorship?
    Mr. Fryzel. Congressman, the last thing any Federal agency 
wants to do is place an institution into conservatorship, so 
that is a decision that is not made very easily. We had been 
monitoring U.S. Central and WesCorp for a long period of time 
with always the consideration being that if at any point in 
time we had to take that action, we would be prepared to do so. 
Again, like I had mentioned, when these investments were 
originally made--
    Mr. Sherman. Excuse me, my time has expired. I hope you 
would answer for the record, and I am sorry I did not leave you 
enough time to answer the question.
    Chairman Gutierrez. The chairman should know before I touch 
this, it was 38 seconds over, I want to make sure that all the 
members of the committee. And I would ask that the members also 
look at the colors, so you ask your last question when we are 
in yellow, that way the witnesses do not have to be called out 
of order.
    Mr. Neugebauer, for 5 minutes, sir, you are recognized.
    Mr. Neugebauer. I thank the chairman. We have had a lot of 
people come and testify about banks and now for credit unions 
and many of those were people responsible for regulating and 
overseeing those entities, and the overriding term that keeps 
being used, ``Well, if we had known this, if we had known that, 
we would have done things differently.'' I think the American 
people are kind of to the point that, well, why did you not 
know? Who was watching? Who was asleep at the switch? And I 
think they are ready for Donald Trump to come over and say to 
most of them, ``You are fired,'' because what has happened is 
the American taxpayers are going to have to pick up the tab for 
those people who did not know or did not do their jobs.
    Many of my colleagues, we are going to start down a road of 
looking at major regulatory reform. Well, I thought we had 
regulators in place, and I thought those regulators were 
supposed to be doing their job. And so before we add another 
layer of regulators to this process, I think what we do owe the 
American people is a pretty thorough vetting of exactly what 
happened and whose responsibility it was to be watching this. 
That is the editorial part.
    But the question I have, I guess for both of our witnesses, 
is do we need to look at the way we restructure the capital 
requirements of these corporate credit unions? We use risk-
based capital structure for other financial institutions, and 
that has not always worked, obviously, but is it time to 
possibly, as part of this process, think about how we ask these 
entities to be capitalized? Chairman, I will start with you?
    Mr. Fryzel. Congressman, I think you are 100 percent right, 
now is the time to ask those questions, now is the time to look 
at how they are capitalized and what they should look like 
moving forward, and that is what our intention is going to be 
with the corporate stabilization plan in place and moving ahead 
with the new rules pertaining to corporates. We are going to 
look at everything. And you are 100 percent right; now is the 
time for that to be asked.
    Mr. Neugebauer. Commissioner?
    Mr. Reynolds. Congressman, I would echo those comments. 
NASCUS has testified previously that we are in support of 
comprehensive capital reform for natural-person credit unions, 
including risk-based capital, and including supplemental 
capital. I think we also need capital reform for the corporate 
system. We need to look not only at risk-based capital but also 
ask if we need to increase core capital in corporates, and 
increase the basic leverage capital for corporates. But we are 
very much in support of that.
    Mr. Neugebauer. I have actually had that same conversation 
basically for the entire industry because I have a lot of 
credit unions that come in and say, ``We have a much more 
conservative portfolio, but we are being treated the same as 
other credit unions that maybe have taken a more aggressive 
approach.'' So if that is good for the corporates, is that 
something--I know that is not the focus of this hearing today, 
but I think the focus of this hearing, and hopefully in every 
hearing we have in here, is how do we make this better? Is that 
something that needs to be a part of the total industry?
    Mr. Reynolds. Absolutely. I think it works both ways. For 
institutions that have riskier loan portfolios, you have higher 
capital requirements. For institutions that are plain vanilla 
type institutions that do not take as many risks with their 
lending and their investments, it is appropriate to recognize 
that in terms of the capital requirements.
    Mr. Neugebauer. Chairman?
    Mr. Fryzel. I agree.
    Mr. Neugebauer. What about the role of these corporates 
with what I call the ``bread and butter credit unions,'' the 
ones that are actually dealing with customers, the exposure 
that some of those credit unions had with some of those 
corporate entities, can you kind of walk me through what was--
have you observed something there that we need to think about, 
making sure that we need to protect the assets or the 
investments or the relationships that some of these smaller 
credit unions have with the corporate ones?
    Mr. Fryzel. Congressman, I think what we have seen at work 
here is the Share Insurance Fund which Congress had put in 
place to prevent a failure of the credit union system, and it 
has worked. The smaller credit unions, the natural-person 
credit unions were at risk certainly of the loss of their 
capital that they had invested in the corporate credit unions 
but that is the purpose of the fund, to protect that. And that 
is the purpose of credit unions building up capital. And what 
the credit unions have now said of course is that we are going 
to solve this problem within the system.
    We are going to borrow from the Treasury, we are going to 
pay it back, and we are going to pay it back with interest, and 
we do not need the capital infusion, we do not need a bailout 
of any type. We are going to solve it within the system, and we 
are going to go forward from there.
    Chairman Gutierrez. Thank you. The time of the gentleman 
has expired. The gentlelady from New York, Congresswoman 
McCarthy, is recognized for 5 minutes.
    Ms. McCarthy. Thank you, Mr. Chairman. I appreciate it, and 
I thank the witnesses for testifying. A couple of things, under 
the bill, the provision of S. 896 that are headed to the 
President for his signature, many credit unions have spread out 
insurance costs over several years, but some credit unions may 
want to write down all of the expenses now, while others may 
have already written down the expenses. When these provisions 
become law, will credit unions that want to write down all of 
the expenses right away, will they be permitted to do that? And 
will credit unions that have recorded the expenses be able to 
avail themselves of the new legislation? And I guess one of the 
other questions too from what I had heard from my credit union 
guys is, are you able to give the bridge loans to small 
businesses, have your credit unions been doing that?
    Mr. Fryzel. Congresswoman, to answer the first part of your 
question, under GAAP accounting rules, once you write it off, 
it is written off, so you can never get it back. And that is 
why we have instructed credit unions to speak to their CPAs and 
discuss with them how it is best to be handled for that 
particular credit union.
    In regards to member business loans, credit unions are 
involved in member business loans, and some of them very 
successfully, some of them not successfully. It is a very tight 
field where you need expertise to know what type of businesses 
to lend to and, unfortunately, some of our credit unions do not 
have that expertise in-house and run into problems. But for 
some of them, it has been very, very good.
    Ms. McCarthy. And the second part as far as small business 
loans?
    Mr. Fryzel. Right.
    Ms. McCarthy. Thank you.
    Mr. Fryzel. Correct.
    Chairman Gutierrez. Mr. Marchant is recognized for 5 
minutes. Congressman?
    Mr. Marchant. Thank you, Mr. Chairman. Commissioner, what 
has been the reaction of the credit unions to the NCUA's 
handling of the corporate credit union crisis?
    Mr. Fryzel. In all frankness, I have to admit the reaction 
has been mixed in terms of my credit unions. I think most of 
them recognize that NCUA had some extremely serious issues to 
deal with in the corporate system. They had some difficult 
choices to make, but some of them are a little unhappy that the 
natural-person credit unions are having to pay higher premiums 
as a result of actions that did not occur in natural-person 
credit unions. That being said, I think they are very much in 
support of S. 896 and the relief that is provided there to give 
them additional flexibility to write that expense off over an 
extended period.
    Mr. Marchant. Chairman, what motivates or drives a 
corporate credit union, would you expand on an earlier comment 
that you made that the corporate credit unions compete for 
customers, so is this what drives or motivates them to chase a 
rate or try to buy an investment that will bring a higher 
yield? What is the incentive of an ostensibly nonprofit, 
people-helping-people kind of industry that in my State are the 
most conservative of all of the financial institutions, what 
motivates this group of credit unions to have these kinds of 
assets on their books?
    Mr. Fryzel. Congressman, I think every financial 
institution, a bank or a credit union, attempts to earn income 
and for different reasons, certainly bank for their 
stockholders. Credit unions earn the income so that they are 
able to provide better services for their members, offer 
services at cheaper rates than they could get elsewhere. In 
order to do that, you have to have money and you have to earn 
money to do that.
    Mr. Marchant. Let's talk about the corporates now.
    Mr. Fryzel. Well, the corporates do the investments for the 
natural-person credit unions. So many of the natural credit 
unions invest into corporates who then invest in the high-yield 
returns so that they can get better returns for the natural-
person credit unions. And here again the natural credit unions 
would be looking for the corporate that provides them the 
greatest return so that they could do more things for their 
members.
    Mr. Marchant. So the corporates are competing with each 
other constantly for customers among these 7,000 credit unions?
    Mr. Fryzel. That is right, sir.
    Mr. Marchant. Is it your view that there are an adequate 
number of corporates or too many corporates?
    Mr. Fryzel. Well, there are 28 corporates now, and that is 
one of the things we have asked the credit union industry, is 
that too many, is that too little, how many do you think there 
should be? And, of course, we have gotten a variety of 
different answers as to the answer there should be, and I think 
over time that is going to all shake out with the new rules and 
determination as to the economics of whether or not a 
particular corporate can live within those rules and whether or 
not they want to continue to provide some of the products that 
they are providing. So I think that is all going to over the 
next year shake out as to just what the corporate structure 
will look like.
    Mr. Marchant. Is there any incentive for NCUA to liquidate 
the assets of these corporate credit unions at any price above 
the insurance fund exposure and allow the recovery of the 
assets to the credit unions themselves?
    Mr. Fryzel. Congressman, it is our plan to hold these 
securities until such time as the disposition of them becomes a 
viable alternative, for however how long that may take. We want 
to make sure that we get the best dollar for these assets, so 
we are not going to be in any hurry to sell these securities.
    Mr. Marchant. Okay, thank you.
    Mr. Reynolds. Congressman, can I make one comment too?
    Mr. Marchant. Sure.
    Mr. Reynolds. I want to make sure that people understand 
that not all corporates are identical in terms of the function 
and composition. We have a small corporate in the State of 
Georgia. It has between $2- and $3 billion in total assets. It 
has no asset-backed securities on its portfolio, and is very 
conservatively run. I think it is important that the credit 
unions in our State that capitalize that institution, that 
utilize that institution, have the right to determine what 
happens to that institution in terms of a future. And I just 
want to make sure that everyone understands that there is that 
variation among corporates.
    Chairman Gutierrez. And another turn on this side. 
Congressman Royce, you are recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. The first question I 
would ask of Mr. Fryzel, should the provisions within this bill 
not become law, can you explain what steps the NCUA would be 
forced to take?
    Mr. Fryzel. Congressman, if this bill did not become law, 
the natural-person credit unions would have to absorb this loss 
this year all at once. There would be no provision to spread it 
out over time. In turn, as it was previously stated, a number 
of credit unions would fall below the required capital limit 
and would be put on a prompt corrective action, and we would 
have to monitor them very carefully. It is our intention, even 
with the spreading out over this cost, to work with the credit 
unions to make sure that they all can continue to survive and 
provide the services that they do to their members, but it 
would be very, very difficult for NCUA to work with the credit 
unions if we did not have the stabilization in place.
    Mr. Royce. Now, are you confident that the authority 
contained in this bill is going to be sufficient to stabilize 
the credit union system and that of course assumes that the 
necessary changes are enacted on your end in terms of oversight 
and regulation but give me your suggestions?
    Mr. Fryzel. Yes, Congressman, I do. I believe the way the 
bill is set up, it will enable us to provide the necessary 
oversight to stabilize the corporate credit union system and 
enable us to move forward to make the required changes in the 
rules to make sure that this does not happen again.
    Mr. Royce. You note in your testimony that over a 4-year 
period, the percentage of corporate credit unions investments 
in mortgage-backed securities grew from 24 percent to 37 
percent. Looking forward, what is going to be done to ensure 
that investments taken by the corporate credit unions are 
better aligned with the cooperative, conservative nature that 
we see in the credit union by the individual credit union 
members?
    Mr. Fryzel. Congressman, I think we have to look at 
limitations on the investments as to where they can be placed. 
We have to look at diversification of investments, and we have 
to make sure, again, that the corporates do not place all their 
eggs in one basket, as they did, so we do not have this 
situation in the future.
    Mr. Royce. Yesterday, the committee held a hearing on the 
rating agencies. I think the main take-away from that was the 
over-reliance on NRSROs, especially by the regulators. Do you 
believe the NCUA relied too heavily on credit rating agencies?
    Mr. Fryzel. I think, as you pointed out, Congressman, 
everybody relied heavily on the rating industries, probably to 
a greater degree than everyone should have. And I think going 
forward in the future, I had mentioned earlier that in addition 
to looking at whatever rates have been placed on investments, 
the corporates need to do greater due diligence in regards to 
whether or not these investments are everything they are 
supposed to be.
    Mr. Royce. Let me ask a question of you in terms of, again, 
how you are going to rectify that problem, and maybe ask 
Commissioner Reynolds as well?
    Mr. Reynolds. Well, I think, as I mentioned earlier, one of 
the things that can be done is to make a greater reliance on 
risk management and risk mitigation procedures in the 
institution. We need higher expectations for management in 
terms of what they do, and greater reliance on stress testing 
of individual securities. And I think, like one of my 
colleagues said recently, regulators sort of planned on the 50- 
to 100-year flood, and what we had was the 500-year flood. So 
we need to do stress testing, but at higher levels of stress, 
to make sure that we predict when those types of things happen.
    Mr. Royce. Let me quickly ask you a transparency question, 
Commissioner. How aware are the natural-person credit unions, 
do you think, how cognizant were they of the risks taken by the 
corporate credit unions?
    Mr. Reynolds. Well, speaking from personal experience as 
far as the credit unions in my State, I think they were very 
aware of what was going on in their corporate. They were less 
aware perhaps of what was going on at U.S. Central. And 
obviously, since not many of them are members of WesCorp, they 
would have had limited knowledge of that corporate credit 
union. I think that is one of the issues that I hear a lot from 
my credit unions is they want to see greater transparency in 
the process. This is a cooperative system, they are members of 
the corporate, and their corporate are members of U.S. Central, 
and they think there needs to be more transparency for all 
stakeholders in the system.
    Mr. Royce. Thank you. Commissioner, thank you. My time has 
expired, Mr. Chairman. Thank you very much.
    Chairman Gutierrez. Thank you. I would like to thank you 
both for coming before the committee. We will be inviting Mr. 
Hensarling and other members of the Minority in the fall to try 
to get together with Chairman Fryzel to see how things are 
going. And I just wanted to add that most of the members, as I 
talk to them, they come here knowing and recognizing natural-
person institutions and there is a growing concern about the 
corporate institutions, so bear that in mind in terms of the 
level of support that exists here and the traditions that exist 
here and kind of who we meet with when the Chamber of Commerce 
gets together.
    We kind of meet with the Ukranian and the Polish, the local 
credit unions that people are members of and those are the kind 
of people we know. So that into consideration. And thank you 
both so much, chairman, for your work. And, commissioner, for 
coming down--or coming up from Georgia to see us. Thank you so 
much.
    Mr. Fryzel. Thank you, Mr. Chairman.
    Chairman Gutierrez. Now, we have our two remaining 
witnesses for panel number two. Mr. Jim Bedinger is the chief 
operations officer of the Chicago Patrolmen's Federal Credit 
Union from my City of Chicago, and he is testifying on behalf 
of the National Association of Federal Credit Unions. Jim has 
been working in the credit union industry for the past 15 
years. He has been with Chicago Patrolmen's for over 12 years, 
with over 9 of them being in senior management. He is currently 
the chief operations officer, a position that he has held for 
the last 4 years. We welcome you.
    And Mr. William Lavage, is that correct? Mr. William Lavage 
is the president and chief executive officer of Service 1st 
Federal Credit Union, and he is testifying on behalf of the 
Credit Union National Association. He has been with Service 1st 
since 1981. In 2001, he received the William S. Pratt Lifetime 
Achievement Award for being the outstanding credit union 
professional of 2000.
    I want to share with everybody that I have not smoked a 
cigarette for like 11 days, and I thought that was supposed to 
clear my mind.
    [laughter]
    Chairman Gutierrez. I think it takes a while, so excuse me 
if there is any lack--some fogginess there. Thank you so much.
    Please begin. You each have 5 minutes.
    Mr. Bedinger?

 STATEMENT OF JIM BEDINGER, CHIEF OPERATIONS OFFICER, CHICAGO 
  PATROLMEN'S FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL 
          ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)

    Mr. Bedinger. Thank you. Good afternoon, Chairman 
Gutierrez, Ranking Member Hensarling, and members of the 
subcommittee. My name is Jim Bedinger, and I am testifying 
today on behalf of the National Association of Federal Credit 
Unions or NAFCU. I serve as chief operations officer of Chicago 
Patrolmen's Federal Credit Union, which is headquartered in 
Chicago, Illinois. I have been COO of the Chicago Patrolmen's 
Federal Credit Union for the last 4 years, have worked at the 
credit union for the last 12 years, and have been in the credit 
union community for the last 15 years.
    Chicago Patrolmen's Federal Credit Union field of 
membership includes all Chicago police officers, regardless of 
their rank, all full-time civilian employees of the Chicago 
Police Department and the Office of Emergency Management or the 
911 center, and all employees of the credit union.
    NAFCU and the entire credit union community appreciate the 
opportunity to participate in this discussion regarding share 
insurance and corporate credit union issues for America's 
credit unions.
    While the credit union industry has fared much better than 
most financial institutions in these turbulent times, many 
individual credit unions have been impacted, through no fault 
of their own, by the current economic environment. In 
particular, the corporate credit union system has felt the 
biggest impact, leading NCUA, starting in January, to take a 
series of steps using the National Credit Union Share Insurance 
Fund to help stabilize the system.
    In March, the NCUA placed two corporate credit unions, U.S. 
Central Federal Credit Union and Western Corporate Federal 
Credit Union, into conservatorship. An independent third party 
analysis of the portfolios of these two credit unions led the 
NCUA to estimate that the resulting impact of the Insurance 
Fund will be approximately $5.9 billion, dropping the Fund's 
equity ratio to an estimated 0.31 percent.
    Because credit unions follow GAAP accounting, there is an 
immediate impairment to the one percent deposit credit unions 
must hold for the insurance fund. Federally-insured credit 
unions have to recognize this impairment by setting aside 
enough money in a contingency liability account to bring the 
deposit fund back to the one percent level.
    The Federal Credit Union Act also requires the NCUA to 
assess a premium when the fund's equity ratio drops below 1.2 
percent. The impairment and the premium combined would have an 
approximately 99 basis point impact on all natural-person 
credit unions in 2009, absent the creation of a stabilization 
fund.
    We are pleased that the House yesterday acted to support 
the provisions of H.R. 2351 by passing S. 896, the Helping 
Families Save Their Homes Act of 2009. We applaud 
Representatives Kanjorski, Scott, Royce, LaTourette, and you, 
Mr. Chairman, for your leadership in getting this done.
    Enactment of this legislation and creation of the 
stabilization fund will allow credit unions to have billions 
more to lend to consumers and small businesses in the current 
economy. At Chicago Patrolmen's, we estimate that the expense 
that we were facing was approximately $2.24 million, meaning 
that we would have the potential for nearly $14 million in 
decreased lending capacity to our members in the Chicago area 
this year.
    Looking ahead, NAFCU believes that it is imperative that 
the NCUA provide full and open transparency about its actions 
leading up to, and throughout, the resolution of the current 
situation. We also believe that it is important that the NCUA 
provide clarification on how credit unions would treat or 
reverse the present write-down resulting from the impairment of 
the one percent deposit if, and when, the fund is no longer 
impaired.
    The corporate credit union system is an important resource 
for natural-person credit unions. At Chicago Patrolmen's, we 
are members of two corporate credit unions. We use over two 
dozen corporate services that are key to providing many of the 
services that we offer to our membership.
    NAFCU believes that the NCUA and Congress should work to 
find additional ways to help stabilize and strengthen the 
corporate credit union system as well. Going forward, other 
changes, such as modernizing the Central Liquidity Facility, or 
CLF, should be examined. The CLF provides loans to natural-
person credit unions to meet their liquidity needs in turbulent 
times, but cannot loan directly to corporate credit unions. We 
believe some changes to the Federal Credit Union Act to 
modernize the CLF and allow it to directly help the corporate 
credit union system could help address future challenges when 
they occur.
    As the NCUA looks to reform the corporate credit union 
system, the NAFCU board has outlined a series of three 
principles that we believe should be adhered to:
    Number one, corporate credit unions should continue to 
serve the liquidity and operational payment system needs of 
natural-person credit unions. Number two, corporate credit 
unions should operate under a risk-based capital system. And, 
number three, corporate credit unions should operate under 
corporate governance standards created and policed within the 
industry.
    In conclusion, NAFCU thanks you for your leadership with 
H.R. 2351 and your support for its important provisions 
contained in S. 896. The NCUA should provide clarification 
again on how credit unions would treat or reverse the present 
write-down resulting from the impairment of the one percent 
deposit if and when the fund is no longer impaired.
    Maintaining a healthy and well-regulated corporate credit 
union system, as many natural-person credit unions rely on 
corporates for essential services. Additional legislative 
changes to the CLF and action by NCUA to reform the corporate 
credit union system are important steps to make sure that 
future crises can be avoided.
    Thank you for the opportunity to appear before the 
subcommittee today, and I welcome any questions.
    [The prepared statement of Mr. Bedinger can be found on 
page 31 of the appendix.]
    Chairman Gutierrez. Thank you for being here.
    Mr. Lavage?

  STATEMENT OF WILLIAM LAVAGE, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, SERVICE 1ST FEDERAL CREDIT UNION, ON BEHALF OF THE 
            CREDIT UNION NATIONAL ASSOCIATION (CUNA)

    Mr. Lavage. Chairman Gutierrez and Ranking Member 
Hensarling, thank you for inviting me to appear before the 
subcommittee today on behalf of the Credit Union National 
Association to discuss H.R. 2351. I am Bill Lavage, president 
and CEO of Service 1st Federal Credit Union in Danville, 
Pennsylvania. My credit union has $140 million in assets, and 
we serve 18,000 members.
    CUNA is the Nation's largest credit union advocacy 
organization, representing about 90 percent of our Nation's 
approximately 8,000 State- and federally-charted credit unions 
and their 92 million members. We want to thank Representatives 
Kanjorski, Royce, Scott, LaTourette, and you, Mr. Chairman, for 
introducing H.R. 2351. CUNA, its member credit unions, State 
leagues, and the Association of Corporate Credit Unions 
strongly support this critical and timely legislation. We also 
appreciate that the House and Senate both passed S. 896 
yesterday, which includes the provisions of H.R. 2351.
    I want to emphasize that CUNA supports rigorous supervision 
and balanced regulation for all credit unions to promote safety 
and soundness and the interests of credit unions members. We 
also continue to urge Congress as it reviews regulatory reform 
to maintain NCUA as an independent regulatory agency for credit 
unions, for which Chairman Frank has indicated his support.
    Even while we support NCUA's independence as the only 
regulatory framework to ensure that the unique cooperative 
nature of credit unions will be preserved, we also feel it is 
fair and appropriate to bring to this subcommittee the serious 
concerns federally-insured credit unions have about the 
handling of the assistance for the corporate credit unions.
    I also want it to be very clear that credit unions 
understand there are critical problems within the corporate 
credit union system that must be addressed expeditiously. We 
want to work with NCUA in that endeavor.
    Mr. Chairman, I would like to ask permission to submit our 
comment letter to NCUA for the record.
    Chairman Gutierrez. Without objection, it is so ordered.
    Mr. Lavage. Two major concerns of credit unions and NCUA's 
handling of the corporate stabilization are the lack of 
transparency of its process and an apparent unwillingness to 
make the most of regulatory authority to manage and minimize 
what has become the largest single shock ever to the Share 
Insurance Fund.
    Credit unions face substantial future losses on securities 
held by corporate credit unions and these losses may have been 
absorbed by the Share Insurance Fund. That much is certain. 
What is not certain is the amount of those losses and how they 
will be managed, minimized, and borne. In this world of 
uncertainty, the more transparent NCUA's processes and actions, 
the better for all involved. So far, that transparency has been 
lacking.
    NCUA initially engaged a bond firm, PIMCO, to analyze 
potential credit losses in the securities held by corporate 
credit unions. PIMCO's loss estimates range from a low of $6 
billion to a high of $16 billion, with the most likely estimate 
of $10.6 billion. This served as the basis for NCUA's judgment 
that total cost to the Share Insurance Fund would be $5.9 
billion. Since then, most recent loss estimates from Clayton 
Fixed Income Services suggest that the losses may be much less. 
Clearly, the estimates are highly sensitive to a number of 
varying assumptions and NCUA has not shared them with credit 
unions. Fully recognizing the current expensed amount is just 
an estimate requires the actions that follow to take into 
account the uncertain future.
    In the case of credit unions' impaired capital in corporate 
credit unions, the agency has not been willing to exercise 
sufficient flexibility in dealing with these very complicated 
issues. Facing similarly trying circumstances, the FDIC has 
shown greater creativity in responding to and managing the 
crisis in a responsible manner, presumably consistent with 
GAAP.
    Going forward, CUNA encourages the agency to provide more 
information to credit unions on the condition of the corporate 
credit unions and their conservatorship, on the condition of 
the securities held by these credit unions, on how the agency 
is dealing with these issues, and on how these actions will 
affect credit unions.
    We further request the subcommittee and encourage the 
agency to develop a mechanism whereby a credit union whose 
capital deposits in WesCorp and U.S. Central, which may soon be 
impaired, have the possibility of recovering their capital if 
the ultimate losses on the securities turn out to be 
significantly less than expected. Let me emphasize this point: 
The capital of some credit unions is being wiped out on the 
basis of estimates. We need a mechanism that if the estimates 
are wrong, the capital can be returned.
    Another concern is the agency set in place mechanisms to 
ensure the management of the portfolio of mortgage- and asset-
backed securities is handled in such a manner so as to minimize 
losses on the portfolio. The expected losses are driven by two 
factors, the estimated credit losses on the underlying 
securities and market losses that would result from selling 
them before they mature or are amortized.
    Currently, NCUA has insufficient reserves to sell the 
portfolio at current market values. The agency has assured 
credit unions it has no intention of selling the securities in 
the near future. However, in a few years, the market values of 
the securities are likely to move closer to the underlying 
credit losses. There is concern among credit unions, NCUA will 
sell the securities once the remaining market losses fall below 
the funds the agency is accumulating from credit unions to 
cover those losses.
    CUNA encourages NCUA to establish portfolio management 
guidelines for the portfolios to be managed for a long enough 
period that essentially only credit losses are incurred and 
further to engage a portfolio manager to follow these 
guidelines.
    Mr. Chairman, in closing, we appreciate your working with 
Representatives Kanjorski, Royce, Scott, and LaTourette on 
these issues and for the opportunity to express our concerns 
regarding the corporate credit union situation. I look forward 
to your questions.
    [The prepared statement of Mr. Lavage can be found on page 
68 of the appendix.]
    Chairman Gutierrez. Number one, you are both welcome. I am 
happy to work with you and with credit unions. I just have one 
question for both of you, and it is from Mr. Bedinger's 
testimony. And you correct me if I am wrong, okay, just say, 
``Luis, you got it wrong.'' You distinguish, you say that 
natural-person credit unions are different than corporate to 
the extent of the risk that they take, that maybe they should 
pay different amounts of money into the pool, the insurance 
pool. Fix it if I did not put it right?
    Mr. Bedinger. Well, I think if I understand what you are 
saying, on natural-person credit unions, it is different in the 
regulation thereof.
    Chairman Gutierrez. And in the insurance that they should 
pay into the fund, the amount of insurance they should pay into 
their fund, is that right?
    Mr. Bedinger. Well, yes, the way that the natural-person 
credit unions are doing it right now obviously is what the one 
percent.
    Chairman Gutierrez. Yes, do you think it should be 
different?
    Mr. Bedinger. Well, the corporate credit unions right now 
do operate a little differently. They have a different capital 
requirement than we have at natural-person credit unions and 
maybe that would have mitigated some of this had their capital 
requirement been a little higher or if there was at least some 
flexibility in it. I think that is where some of us as natural 
credit unions have a little frustration. We are footing the 
bill and yet they were making different types of investments 
maybe than we would have made and those types of things. So 
there are some differences there. I think being a cooperative 
movement, certainly we are trying to figure this out ourselves 
and do it altogether. It does not mean we are happy about it, 
it is our members' money, it is the police officers' money that 
we have to send the check for to shore them up, but they should 
be playing by the same rules I think that natural-person credit 
unions should.
    Chairman Gutierrez. They should be playing by the same 
rules, but is it your testimony here today that they are 
different to the extent that they should have different rules?
    Mr. Bedinger. Well, no, they are different in the sense 
that they service natural-person credit unions, we service 
actual people out on the streets. So by what they do, obviously 
if they are more complex, and in the way that they are set up 
now, they are more complex than we are at natural-person credit 
unions.
    Chairman Gutierrez. So you do not feel, representing your 
association, that there should be any difference in terms of 
future liabilities or insurance risks. We have heard from 
community bankers, for example, why should we pay into the FDIC 
fund when indeed we are solvent, make good loans, we are good 
members of our community. It is the big shots that had all the 
losses.
    Mr. Bedinger. Right.
    Chairman Gutierrez. So do you think there should be a 
difference in terms--so if you even look at our regular banking 
institutions, they are all FDIC insured but they are kind of 
saying we are different. You do not see a difference?
    Mr. Bedinger. Well, NAFCU, I think, feels that the NCUA 
should look into them, on how they invest in their corporate--I 
mean into the Insurance Fund, at least in how they are paying 
into it as opposed to the natural-person credit unions. So if 
the risk is there, maybe it should be risk-based, in the sense 
that if they are riskier, pay more into it. That is one of the 
things I think, as the NCUA goes through it and looks at all 
different possibilities, is their restructuring.
    Chairman Gutierrez. Let me ask you something, so how is the 
policemen's credit union doing?
    Mr. Bedinger. We are doing very well, actually, I am very 
happy to say. Obviously, by passing this yesterday, that was a 
big, big help to us.
    Chairman Gutierrez. Did you have any losses last year like 
the corporate ones?
    Mr. Bedinger. No, no, we are actually very well 
capitalized. We have over 9 percent capital in our credit union 
right now. We make very, very good loans. Just to give you an 
example, we have over 600 mortgages that we have put on the 
books since we started our mortgage program, since mortgages 
kind of caused this problem, and we have currently one that is 
going into default over the history of that loan period.
    Mr. Lavage. Mr. Chairman?
    Chairman Gutierrez. Mr. Lavage?
    Mr. Lavage. Yes, I would like to answer that too. Service 
1st is very strong and well-capitalized. Obviously, if we did 
not have this problem, we would be happier and ready to move on 
even more expeditiously. As far as the corporate credit unions, 
they differ in that they serve credit unions where as we serve 
natural persons. CUNA and other credit unions are willing to 
work with NCUA to look at ways to restructure the corporate 
system, possibly including the insurance involved.
    Chairman Gutierrez. Okay, I think that is a logical step 
that maybe we should look at. If you are different, you are 
different. Again, thank you both for being here.
    Mr. Bedinger. Thank you.
    Mr. Lavage. Thank you.
    Chairman Gutierrez. My time has expired. My friend, Mr. 
Hensarling, is recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Mr. Lavage, did I 
understand in your testimony that you advocated that TARP funds 
be made available for the NCUSIF, is that correct?
    Mr. Lavage. On a borrowed basis, and they would be repaid.
    Mr. Hensarling. Well, supposedly, most of the TARP funds 
are to be repaid. We will see ultimately how the taxpayer comes 
out on that deal.
    Mr. Lavage. Right.
    Mr. Hensarling. I have high hopes and low expectations 
myself. Your organization's understanding of the TARP Act, its 
purposes, its legislative language, how do you see that to be 
consistent with the TARP statute, potential loans to the fund?
    Mr. Lavage. We differ, as you are probably aware, from 
other financial institutions in that we are member-owned and 
therefore nonprofit, so I am not in-depth aware of all of the 
guidelines of TARP as it stands. My understanding is that 
credit unions are not eligible for those funds at this time.
    Mr. Hensarling. But you are advocating that they be made 
available to the fund?
    Mr. Lavage. Yes, yes.
    Mr. Hensarling. Okay. Mr. Chairman, I think I am going to 
follow your lead and restrict myself to one question. With 
that--
    Chairman Gutierrez. Thank you very much, Mr. Hensarling.
    Mr. Bedinger. Could I answer that as well?
    Chairman Gutierrez. One additional minute to Mr. Bedinger.
    Mr. Bedinger. Sorry, I just wanted to say, obviously, 
speaking on behalf of the Chicago police officers, whom I 
represent at the credit union, we are not really for that. We 
actually have members who come in and say, ``Hey, did you take 
TARP funds?'' And we are like, ``No, we did not. There is no 
need to.'' And they actually bring money to our financial 
institution. But if that were to ever be the case, where TARP 
would be required or something that would be needed down the 
road, at least have parity with it. Obviously, one of the 
things that makes us unique is the fact that our capital comes 
from our members, and you do not want undue influence coming 
from the outside from somebody who is giving that in there, it 
just kind of opens things up. Parity, if it is allowed to other 
financial institutions, okay, fine, it may be good, but we view 
it individually at our credit union as probably not a very good 
thing.
    Mr. Hensarling. Mr. Chairman, could I ask for unanimous 
consent for 30 seconds?
    Chairman Gutierrez. Absolutely.
    Mr. Hensarling. I would point out to both our panelists 
that of all the financial institutions, the banks who took the 
TARP money, there is now a fairly long line of those wishing to 
pay it back. You may learn something from that. Thank you, Mr. 
Chairman.
    Mr. Lavage. If I could add one more comment just to 
clarify, CUNA is not suggesting all credit unions use TARP, a 
few do, and should have access.
    Chairman Gutierrez. Thank you very much. We are going to 
spend an additional 5 minutes. We gave you the time and the 
Congressman showed up, so you are recognized for 5 minutes, 
sir.
    Mr. Sherman. Yes, I would point out that the reason some 
Wall Street banks want to give back the money is that they feel 
that holding onto their fleet of private jets or paying bonuses 
of over $2- or $3 million to any one person is a bit 
inconsistent with continuing to hold TARP funds, or at least 
they get criticized. Do your members have any of these fleets 
of private planes or give out bonuses of over a couple million 
dollars to any particular employee? I will ask each witness for 
a yes or no?
    Mr. Bedinger. No.
    Mr. Lavage. No, sir.
    Mr. Sherman. Okay. Mr. Lavage, have you heard personally, 
or have you heard from other credit unions, that their 
examiners are forcing them to develop net worth restoration 
plans if their capital had been reduced because of share 
insurance costs even if the institution is well capitalized and 
why is this a concern?
    Mr. Lavage. Coincidentally, our NCUA examiner has just 
concluded his exam and the exit interview is Tuesday. I will be 
anxious to hear after my testimony how that goes. But, yes, I 
have heard of credit unions who are above the limit, still well 
capitalized, even after the corporate stabilization program 
costs, have been asked by their examiner to develop a capital 
restoration plan and that is a concern.
    Mr. Sherman. So they used to be very, very well 
capitalized. They have suffered some declines. Now, they are 
still well capitalized, and they are being told that being 
well-capitalized is not good enough?
    Mr. Lavage. That is correct. It is almost like they are 
ignoring the costs of the corporate stabilization program 
caused the drop in the capital/net worth and are asking them to 
develop a plan to restore it.
    Mr. Sherman. Okay. I agree that the corporate credit 
unions' financial challenges should not be permitted to 
interfere with the mission of member credit unions, to provide 
low-cost lending and services to their members. In this 
challenging economic climate, we cannot allow credit union 
lending to decrease by over $46 billion in response to a $5.9 
billion reduction in capital. How do you think NCUA should 
permit credit unions to reverse the present write-down and is 
there a way to get through this that is both financially stable 
and allows you to continue your mission? When I say, 
``financially stable,'' provides enough capital to protect the 
fund and ultimately the taxpayers?
    Mr. Lavage. I think that the bill that was passed provides 
NCUA that flexibility when it allows us to write off this 
expense over up to 7 to 8 years, so that is a flexibility 
needed.
    Mr. Sherman. I will ask the other witness as well. Mr. 
Bedinger?
    Mr. Bedinger. I agree exactly with what he was saying. I 
think by allowing us to spread it over time, we can actually 
manage that, rather than taking it all at once, and actually 
try to budget for it because we do budgets every year obviously 
looking forward to see what we have, and try to figure out 
exactly how we are going to cover that expense. And with it 
being a smaller expense, it will be a lot easier to do over 
that time period.
    Mr. Sherman. Mr. Chairman, let the record show that for the 
first time, I can yield back before the light is red.
    [laughter]
    Chairman Gutierrez. So recognized, and it will be made a 
part of our record.
    I want to thank the witnesses and all of the members for 
their participation in the hearing. The Chair notes that some 
members may have additional questions for the witnesses, which 
they may wish to submit in writing. Therefore, without 
objection, the hearing record will remain open for 30 days for 
members to submit written questions to the witnesses and to 
place their responses in the record.
    This subcommittee is now adjourned. Thank you.
    [Whereupon, at 4:07 p.m., the hearing was adjourned.]













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                              May 20, 2009

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