[Senate Hearing 111-920]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-920

 
                 THE STATE OF THE CREDIT UNION INDUSTRY

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING THE HEALTH OF THE CREDIT UNION INDUSTRY AS WE EMERGE FROM THE 
           FINANCIAL CRISIS AND RECOVER AND GROW OUR ECONOMY

                               __________

                            DECEMBER 9, 2010

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                    Lynsey Graham Rea, Chief Counsel

                Laura Swanson, Professional Staff Member

                   Erin Barry, Legislative Assistant

                Brian Filipowich, Legislative Assistant

                Mark Oesterle, Republican Chief Counsel

            Andrew J. Olmem, Jr., Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                       THURSDAY, DECEMBER 9, 2010

                                                                   Page

Opening statement of Senator Johnson.............................     1
    Prepared statement...........................................    15

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Hutchison............................................     2

                                WITNESS

Deborah Matz, Chairman, National Credit Union Administration.....     3
    Prepared statement...........................................    15

              Additional Material Supplied for the Record

Letter Submitted by Fred R. Becker, Jr., President and Chief 
  Executive Officer, National Association of Federal Credit 
  Unions.........................................................    35
Letter Submitted by Bill Cheney, President and Chief Executive 
  Officer, Credit Union National Association.....................    37
Statement Submitted by the Credit Union National Association.....    39
Statement Submitted by the American Bankers Association..........    61
Statement Submitted by Mary Martha Fortney, President and Chief 
  Executive Officer, National Association of State Credit Union 
  Supervisors....................................................    66

                                 (iii)


                 THE STATE OF THE CREDIT UNION INDUSTRY

                              ----------                              


                       THURSDAY, DECEMBER 9, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:06 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Tim Johnson, presiding.

            OPENING STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. I would like to call this hearing to 
order.
    Today's first hearing will examine the current state of the 
credit union industry, including the National Credit Union 
Administration's ongoing efforts to stabilize the corporate 
credit union system. As the supervisor of Federal credit unions 
that insure the deposits of over 90 million account holders in 
all Federal credit unions and many State-chartered credit 
unions, this hearing is an important and needed opportunity to 
explore the health of the credit union industry as we emerge 
from the financial crisis and recover and grow our economy.
    I want to welcome and thank NCUA Chairman Debbie Matz for 
being here today. The NCUA has taken unprecedented steps over 
the past several years to stabilize the credit union system as 
the troubled corporates pulled liquidity and capital out of the 
natural person credit unions. The system has also shared many 
of the same challenges as the FDIC concerning the insurance of 
Americans' savings and retirement.
    These steps have had a significant impact on thousands of 
credit unions across the country, and I am pleased that we can 
have a serious conversation about the current state of the 
credit union industry and the impact of increased assessments 
on credit unions that serve millions of Americans across this 
country. I have certainly heard concerns from my constituents 
in South Dakota about this matter.
    This is not the first, and certainly not the last, hearing 
on the financial condition of specific sectors of our financial 
services industry. The financial crisis took a toll, and the 
historic Dodd-Frank legislation will bring many additional 
changes to all sectors of this industry. It is very important 
to me that these types of hearings become a common occurrence 
with all of the financial institutions' regulators. I look 
forward to your testimony, Chairman Matz, and to the question-
and-answer period.
    Senator Shelby, your opening statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. I will try to be 
brief here today. This is a very important hearing, I believe.
    Like other financial institutions, credit unions have faced 
unprecedented challenges from the financial crisis and our weak 
economy. Five of the largest corporate credit unions suffered 
substantial losses on mortgage-backed securities and had to be 
placed into conservatorship by the National Credit Union 
Administration. The NCUA had to take extraordinary actions to 
prevent the failure of these corporate credit unions from 
triggering problems with traditional credit unions. Given that 
these events occurred more than 1 year ago, an examination by 
the National Credit Union Administration of our Nation's credit 
unions I believe is long overdue.
    Accordingly, I hope that today's hearing will shed light on 
the reasons for the failure of the corporate credit unions, the 
adequacy of the National Credit Union Administration's rescue 
plan, and whether these failures pose any risks to our 
taxpayers. I also hope to hear the NCUA's assessment of what 
steps need to be taken to prevent large-scale failures from 
happening again.
    Mr. Chairman, there are a number of legislative measures 
before the Committee that have been proposed by the National 
Credit Union Administration. This hearing I hope will provide 
us with an opportunity to discuss their merits and whether they 
should be enacted into law.
    But because credit unions play a vital role in providing 
loans to American consumers, a strong and vibrant credit union 
industry will be an important participant in any economic 
recovery in the future. Weak and failing credit unions will 
only further erode our Nation's already struggling economy and 
prolong unprecedented levels of unemployment.
    Thank you for calling this hearing.
    Senator Johnson. Senator Reed.
    Senator Reed. Mr. Chairman, I just want to thank you for 
calling the hearing, and I look forward to the witnesses. Thank 
you.
    Senator Johnson. Senator Hutchison.

           STATEMENT OF SENATOR KAY BAILEY HUTCHISON

    Senator Hutchison. Well, thank you, Mr. Chairman. I, too, 
appreciate that she is here to talk about the state of credit 
unions, and I would just say that I think the NCUA has done a 
great job in not burdening taxpayers with help for the credit 
unions. But I also want to hear what she says about the 
assessments and the cost to the credit unions of those 
assessments, because we do not want to hurt their capability to 
be solvent and successful, too.
    Thank you, Mr. Chairman.
    Senator Johnson. Senator Johanns.
    Senator Johanns. Mr. Chairman, my time here today is 
somewhat limited, so I think I will just offer that if I have 
anything in terms of an opening, I will submit it in writing, 
and we will get right to the witness.
    Senator Johnson. Mrs. Matz has had a distinguished public 
and private career. She served at the Department of Agriculture 
where she was Deputy Assistant Secretary for Administration and 
also chaired the Loan Resolution Task Force, which was charged 
with the responsibility of resolving over $1 billion in 
delinquent farm loans. Prior to her service at USDA, Mrs. Matz 
was an economist with the Joint Economic Committee of Congress. 
She served as a board member of NCUA from January 2002 to 
October 2005. In the private sector, Mrs. Matz was the 
executive vice president and chief operating officer of a large 
Federal credit union. She was confirmed as Chairman of the NCUA 
in August 2009.
    Mrs. Matz, before you begin, please be assured that your 
written statement will be part of the record. If you could 
confine your remarks to 5 to 8 minutes, that would be greatly 
appreciated. Any other materials we have received will also be 
added to the record.
    Mrs. Matz, you can begin your statement.

  STATEMENT OF DEBORAH MATZ, CHAIRMAN, NATIONAL CREDIT UNION 
                         ADMINISTRATION

    Ms. Matz. Thank you, Mr. Chairman, for inviting me to 
appear before this Committee to discuss the state of the credit 
union industry. Today I will update you on major developments 
since I last appeared before the full Committee in August 2009 
at my confirmation hearing.
    As with other sectors of the financial service industry, 
the credit union industry faced unprecedented threats to its 
stability in 2008 and 2009. When the housing bubble burst and 
the value of mortgage-backed securities plummeted, several of 
the largest corporate credit unions were in danger of 
insolvency. This posed a grave threat to the industry because 
corporate credit unions provide needed liquidity for 7,400 
consumer credit unions and process electronic payments for 90 
million credit union members.
    Five corporate credit unions held extremely high 
concentrations of what were once highly rated mortgage-backed 
securities. When the market for those securities dried up, it 
froze their liquidity and threatened their operations. If these 
corporates had been forced to sell their assets at that time, 
at least $30 billion in losses would have flowed through the 
system, causing thousands of consumer credit unions to fail.
    From the onset of this crisis, NCUA took decisive actions. 
We worked in consultation with Congress, the Treasury 
Department, and the Fed to design a comprehensive plan to 
stabilize, resolve, and reform the corporate system. On behalf 
of the NCUA Board, I sincerely thank this Committee for the 
instrumental role you played in creating the Temporary 
Corporate Credit Union Stabilization Fund in 2009. The 
Stabilization Fund permitted NCUA to assess credit unions to 
cover the costs of corporate losses over 7 years rather than in 
one lump sum.
    On September 24, 2010, with concurrence from Treasury 
Secretary Geithner, NCUA extended the Stabilization Fund 
through June 2021. This means credit unions will reimburse the 
fund for an additional $7 to $9 billion over the next 10 years. 
Let me emphasize this point. These losses are being paid for 
entirely by credit unions.
    Throughout the fall of 2010, NCUA has taken aggressive 
actions to remove the long-term threats in the corporate 
system. We conserved three additional corporates that were no 
longer viable. We seized control of over 98 percent of all 
impaired securities and began an orderly disposition. We 
securitized cash-flows from those impaired securities to raise 
billions of dollars in liquidity. We created four bridge 
corporates to effect the winding down of the five conserved 
corporates with no interruption in service to consumers. And we 
finalized a new rule to ensure that remaining corporates 
operate with much stronger standards for safety and soundness.
    NCUA's actions meet the four strategic objectives we set 
from the beginning of the crisis. We prevented any disruption 
in service to 7,400 consumer credit unions and 90 million 
consumers. We preserved public confidence in the credit union 
system. We resolved the problem at the lowest long-term cost 
consistent with sound public policy, and we facilitated an 
orderly transition to a new regulatory regime.
    Even as NCUA managed the corporate resolution, we have been 
working diligently to protect the safety and soundness of 
consumer credit unions. Despite the challenging economy, 
America's credit unions remain strong overall. Total assets are 
over $900 billion. Net worth is holding steady. Delinquencies 
are showing signs of moderating, and charge-offs have inched 
lower. However, credit unions have not escaped the effects of 
the economic downturn. Millions of credit union members are 
suffering from falling home values, business failures, 
unemployment, and bankruptcy. Some credit union balance sheets 
reflect their members' struggles.
    This situation has caused us to reevaluate our resource 
needs as well as our examination procedures. As a result, since 
2009 NCUA has hired more than 100 examiners. To be effective, 
however, the field staff needed to be reinforced by more 
frequent exams. We are, therefore, examining credit unions at 
least annually. By conducting more frequent exams and 
increasing offsite supervision, we are identifying issues 
earlier.
    To this end, NCUA enhanced our red flag early warning 
system. To resolve issues before they become material concerns, 
examiners are reviewing credit union data off-site. When they 
find credit unions holding high concentrations of fixed-rate 
mortgages, rising delinquencies or other red flags, they follow 
up with immediate corrective actions. We are taking these 
actions in an effort to save as many credit unions as possible.
    NCUA's increased supervision has contributed significantly 
to the credit unions' ability to withstand the extraordinary 
economic shocks over the past 2 years. Our experience 
demonstrates the value of rigorous regulation, diligent 
oversight, and a healthy insurance fund. Equity in the National 
Credit Union Share Insurance Fund is now up to 1.29 percent, 
near the high end of its normal operating range.
    To improve the tools for supervising and insuring credit 
unions, NCUA has a package of three technical amendments that 
clarify important provisions of the Insurance Fund and the 
Stabilization Fund.
    The first amendment would strengthen the ability of NCUA to 
complete emergency mergers. A recent change in merger 
accounting would dilute the net worth of the recipient credit 
union, thus discouraging the merger. Often, as a result, the 
troubled credit union has to be liquidated. We are requesting 
that NCUA assistance to the failing credit union be counted as 
capital by the surviving credit union, as in the past. This 
would reduce the costs to the Insurance Fund and provide 
members of troubled credit unions with continued services from 
healthy credit unions.
    The second amendment would prevent credit unions from being 
assessed artificially inflated insurance premiums. The language 
clarifies that the equity ratio of the Insurance Fund is based 
solely on its own unconsolidated financial statements. This 
would eliminate any confusion about whether the Insurance Fund 
is required to consolidate statements with the Stabilization 
Fund or with credit unions under conservatorship. It would 
ensure that independent accounting would be consistent with the 
original congressional intent.
    The third amendment would allow NCUA the option of repaying 
expenditures from the Stabilization Fund without having to 
first borrow from Treasury. Current statute requires NCUA to 
borrow from Treasury before making assessments. We are 
requesting a modification to permit NCUA to assess credit 
unions when necessary and appropriate to satisfy the 
Stabilization Fund's obligations, thus avoiding the cost of 
interest payments.
    With this legislation, America's credit unions would be 
even better positioned to help consumers take advantage of 
opportunities that a recovering economy will offer.
    Again, I appreciate this opportunity to come before you and 
look forward to answering your questions.
    Senator Johnson. Thank you, Chairman Matz.
    I am going to put 7 minutes on the clock for Members' 
questions. Also, if Members have additional questions, you can 
submit them for the record, and I ask you, Chairman Matz, to 
respond in a timely manner.
    Chairman Matz, as you have noted in your testimony, 
extensive losses by some corporate credit unions have led to 
conservatorships and also to significant losses to the National 
Credit Union Share Insurance Fund. What is the extent of the 
losses to the Share Insurance Fund in 2010? And how did this 
compare to previous years? Also, to what extent do the losses 
result from corporate failures?
    Ms. Matz. Thank you, Mr. Chairman. The losses that have 
occurred in the corporate sector have been separated from the 
Share Insurance Fund, and those are reflected in the Corporate 
Stabilization Fund. The loss to the Share Insurance Fund this 
year I believe is about $250 million, and the number of 
failures is not far off from what we had last year.
    The Corporate Stabilization Fund is where we realize the 
losses from the corporate credit unions, and overall we expect 
the losses to total about $15 billion. But credit unions have 
already paid in about $7 billion of that through the capital 
that was in the corporates and through two assessments this 
past year that totaled $1.3 billion. So we anticipate that over 
the next 10 years credit unions will be assessed a total of 
between $7 and $9 billion.
    Senator Johnson. What new steps has the NCUA taken to 
ensure that credit unions do not accumulate a concentration of 
high-risk assets?
    Ms. Matz. In terms of the corporates where that was a 
problem--I should indicate that when we passed the previous 
corporate rule in 2002, I voted against the rule. I was the 
only Member who voted against it because it did not contain 
limits on concentration risk. On September 24, 2010, the NCUA 
Board approved a new rule which has very stringent limits on 
concentration risk by sector and by obligor, and I believe that 
will satisfy that issue going forward.
    As far as consumer credit unions, we are currently working 
on a proposal that we will likely put out for comment in the 
first or second quarter of next year to address concentration 
risks in natural person credit unions, and we have already put 
out guidance to credit unions and to examiners dealing with 
that issue.
    Senator Johnson. What will be the ultimate cost to 
federally insured credit unions from the resolution of problem 
corporate credit unions?
    Ms. Matz. The ultimate cost we estimate will be between $7 
and $9 billion paid over the next 10 years.
    Senator Johnson. You indicate in your written testimony 
that NCUA has shortened its exam cycle to 12 months from the 
previous 18-month cycle in order to stay ahead of developing 
problems at Federal credit unions. Has the agency taken any 
other steps to detect problems in the natural person or 
corporate credit unions in a more rapid or effective manner?
    Ms. Matz. Yes. We have hired 100 additional examiners in 
the past 2 years and are intending to hire 61 more examiners 
this year. In addition to doing the annual exams at federally 
chartered credit unions, we are going to be examining all 
State-chartered credit unions over $250 million every year. We 
have also enhanced our red flag alert system, so we have 
examiners reviewing quarterly the call reports of credit 
unions. Those are the reports that display all the financial 
data for credit unions. And if they see any aberration, a sharp 
increase in delinquencies or some other red flag that catches 
their eye, they will not wait for the next exam. Examiners will 
immediately go into the credit union and address the problem.
    In addition, when I came on as chairman, I learned that 
there were some credit unions that were repeatedly being cited 
for the same infractions, through the most benign 
administrative sanction that we utilize, which is called a 
Document of Resolution. They were getting the same Document of 
Resolution over and over again, but that stopped last year at 
this time. Our examiners were given guidance and told that a 
credit union gets one shot at addressing a Document of 
Resolution. Examiners are to go back very quickly, within 90 or 
120 days, and if that DOR has not been addressed, they will 
escalate the administrative action.
    So we are working very diligently to address problems as 
early as possible and to keep costs to the system as low as 
possible.
    Senator Johnson. The October NCUA Inspector General report 
said that credit unions' management's actions greatly 
contributed to the ten largest credit union failures. 
Specifically, there were significant actions that management 
was either unwilling or unable to effectively manage or 
mitigate that exposed these credit unions to significant 
amounts of risk. The Office of the IG also identified several 
shortcomings related to NCUA supervision efforts, specifically 
examiner deficiencies and quality control efforts in 
examination procedures. The OIG reported that had the problems 
been identified sooner, the eventual losses to the NCUSIF could 
have been stopped or mitigated.
    First, do you think this assessment is accurate?
    Ms. Matz. Yes, I do.
    Senator Johnson. Second, what is the NCUA doing to address 
management and risk management within the credit unions and 
deficiencies in supervision and examination at the NCUA?
    Ms. Matz. First, I would just like to point out that the IG 
provided material loss reviews on any financial institution 
that incurs losses of more than $10 million to the Share 
Insurance Fund. So just to put it in perspective, over the 
period studied, which was about 24 months, there were 10 such 
institutions out of over 7,400 credit unions. I just wanted to 
put into perspective, that it is really a small number of 
credit unions that actually caused material losses. 
Nonetheless, we are working closely to address those issues.
    I also wanted to point out that the 10 credit unions are 
all federally insured, but only four of them are federally 
chartered. The others are State-chartered, and their primary 
supervisor is the State supervisor. So I just wanted to make 
that distinction.
    The IG had pointed out that the management in the 10 credit 
unions overall lacked strategic decision making and oversight 
of lending and investments, and in several instances there was 
fraud. As far as the examiner supervision, the IG recommended 
that we should be improving our examination and regs as related 
to concentration risks, third-party vendors, our quality 
control reviews, our examination of new business strategies, 
and that we should step up our administrative actions when 
Documents of Resolution have been issued.
    We have begun to address all of these issues. As I 
indicated before, we have put out guidance on concentration 
risks and are working on a new reg to address that issue. We do 
not have authority to examine third-party vendors as all the 
other FIRREA agencies have. So we work with the credit unions 
to get the data that we need, but if we find a problem or 
suspect there is a problem, we can only request that credit 
union stop doing business with that third-party vendor. We do 
not have control over the third-party vendor.
    We are working to improve our quality control reviews. 
Those are reviews of examinations to make sure that they are 
being done properly and that there is sufficient supporting 
documentation. And the staff for the past year, has been 
working on reviewing and revising our national examination 
standards, and those should be in effect relatively soon. In 
addition, the IG commented on our examination of new business 
strategies, when credit unions take on a new line of business. 
We believe that our annual exams will help catch any problems 
that develop with new lines of business.
    So we are pleased that we have such a good relationship 
with the IG. We work very closely with them. And we have 
already taken steps to implement all of their findings.
    Senator Johnson. Thank you, Chairman Matz.
    Senator Shelby.
    Senator Shelby. Thank you.
    I want to continue in the line of questioning that the 
Chairman was into, the Inspector General report. I will try not 
to replicate it all. But I want to just read into the record 
part of the report, and it said, and I am quoting: ``Had 
examiners acted more aggressively in their supervision actions 
over these critical issues, the looming safety and soundness 
concerns that were present early on in nearly every failed 
institution could have been identified sooner and the eventual 
losses to the National Credit Union Share Insurance Fund could 
have been stopped or mitigated.''
    I am going to ask you again. Do you agree with that 
assessment? I think you indicated you did.
    Ms. Matz. Yes, I do.
    Senator Shelby. I think that is very important. Now, what 
steps specifically have you taken--it has been over a year--to 
ensure that the problems identified by the Inspector General 
will be corrected? In other words, that we will not go down 
this road again; perhaps we will never visit the taxpayer.
    Ms. Matz. Probably the biggest change that we have made is 
going from an 18-month exam cycle to an annual exam cycle so 
that we get into the credit unions every 12 months and can 
catch problems earlier. That is probably the single biggest 
change that we have made. Also, not allowing credit unions to 
receive repeat administrative sanctions. Complying with 
administrative sanctions is not optional. They get one shot to 
comply, and if they do not comply within 90 or 120 days, we 
take more aggressive action. I think those two actions in and 
of themselves will go a long way toward preventing any of these 
problems in the future, but in addition, we are in the process 
of overhauling our quality control review process. That should 
be done very soon, and that will make sure that all the regions 
have the same standards for conducting exams and for verifying 
the accuracy of the exams. And we will be putting out a new reg 
on concentration limits for natural person credit unions.
    Senator Shelby. Aren't the credit unions generally getting 
more and more into--or want to get into commercial loans and 
small business loans and so forth? Is that the trend?
    Ms. Matz. There are more credit unions making business 
loans today than there were several years ago.
    Senator Shelby. Is that dangerous to you, I mean from your 
perspective, because so many of the banks have gotten in 
trouble with lack of supervision, lack of control, quality 
control and so forth?
    Ms. Matz. As a regulator, I think all lending is risky.
    Senator Shelby. Well, we know that, but from your 
perspective to protect that fund.
    Ms. Matz. I think it is more important how they manage the 
risk. I think business lending is an extremely important 
service for credit unions to offer their members. The average 
credit union business loan is about $250,000, which is a very, 
very small loan, and those are often loans to people who really 
do not have access to capital from other institutions. For 
example, a credit union business loan might be to open up a car 
repair shop or a small boutique. So I think it is a very, very 
important service that they provide, and it just needs to be 
done carefully.
    Senator Shelby. Are a lot of these loans that you make to 
small businesses and so forth what we would call in the 
financial world ``covered loans''? Do you do that with part of 
your capital? Do you sell these loans or what do you do?
    Ms. Matz. Some of them are sold, and some are not.
    Senator Shelby. I know, but ``some'' is what percentage?
    Ms. Matz. I do not know the percentage.
    Senator Shelby. Can you furnish that for the record?
    Ms. Matz. I certainly can.
    Senator Shelby. OK.
    You talked about the assessment as part of the plan to 
resolve the corporate credit union debacle, that you intend to 
impose assessments on credit unions to pay for the losses you 
expect to suffer on $50 billion in troubled mortgage-backed 
assets. In your testimony you stated that the National Credit 
Union Administration expects to levy approximately $8 billion 
in assessments, which is a good bit of money. What impact will 
these assessments have on credit unions? Can they sustain this 
and still be viable?
    Ms. Matz. Generally, yes. In the aggregate, the credit 
union industry is well capitalized. They have capital of about 
$90 billion, and that is just under 10 percent. No doubt the 
assessments are a burden to credit unions, and I hear that all 
the time, and that is why we try to keep the assessments as low 
as possible. The Corporate Stabilization Fund was one way of 
doing that. We appreciate your support for that. It allowed us 
to spread out the costs to the credit unions. The assessments 
will affect the ROA of some credit unions, but overall we do 
feel that because of the significant capital credit unions 
have, they will be able to meet those assessments.
    Senator Shelby. Your Insurance Fund, what is the value of 
it today?
    Ms. Matz. It is about $800 billion.
    Senator Shelby. In other words, you have $800 billion in 
hand? Now, that would be a lot more money than the FDIC ever 
had--surplus, so to speak.
    Ms. Matz. $8 billion. I am sorry.
    Senator Shelby. How much?
    Ms. Matz. $8 billion on hand.
    Senator Shelby. $8 billion. Now you are coming back----
    Ms. Matz. Yes.
    Senator Shelby. Now, that $8 billion insures how many--the 
value of your accounts right now today roughly, 1st of 
December?
    Ms. Matz. The insured shares of the credit unions are about 
$800 billion.
    Senator Shelby. $8 billion insures the credit, in other 
words, the integrity of $800 billion. Do you think that is 
adequate?
    Ms. Matz. Yes, I do.
    Senator Shelby. Especially in today's world?
    Ms. Matz. I do.
    Senator Shelby. OK. Is that $8 billion shrinking or 
growing? In other words, are your assets shrinking or growing 
or remaining constant?
    Ms. Matz. It has been pretty constant this year.
    Senator Shelby. My last area, and I appreciate the 
Chairman's indulgence here, the National Credit Union 
Administration's regulations governing the investments of 
corporate credit unions, which I think is an important area, 
relied heavily on the use of credit ratings. Specifically, the 
regulations allowed corporate credit unions to invest in 
securities rated AAA or AA by credit rating agencies. We now 
know that the credit ratings on mortgage-backed securities were 
deeply flawed. In fact, the Dodd-Frank Act requires, as you 
probably know, all Federal agencies, which you are one of them, 
to review and to modify regulations to remove any reference to 
a requirement of reliance on credit ratings and to substitute a 
standard of creditworthiness.
    What steps are you and your administration taking to ensure 
that credit unions do their own due diligence, so to speak, 
when evaluating investments to make them creditworthy rather 
than an investment based on the opinion or the rating of an 
agency which we know is very flawed?
    Ms. Matz. When we voted on the rule on September 24, the 
rule had been put out for comment and pretty much finalized 
before the Dodd-Frank Act was passed. The language in the 
corporate rule says that the credit unions need to get ratings 
from multiple agencies and then to use the least of those----
    Senator Shelby. Wait a minute. Say that again. In other 
words, you have ratings--you are going to still get ratings 
from the agencies that are so flawed?
    Ms. Matz. No, we will be modifying that rule.
    Senator Shelby. Are you going to do your own due diligence?
    Ms. Matz. We do not have the proposed rule out yet, but we 
are going to modify the current rule.
    Senator Shelby. Well, are you thinking about doing that? I 
guess my question to you, if you look at some of the financial 
institutions, insurance companies, and so forth, all financial, 
that have weathered the recent debacle--I can name a few, but I 
will not here on the podium--and that are really well done did 
their own due diligence and are very viable today, did not ask 
for money from the taxpayers, no bailout and so forth. So you, 
as the administrator of the credit unions, I think it is very 
important for you to do your own due diligence. That is my 
message, and I think that was the message of this legislation.
    Do you disagree with that?
    Ms. Matz. I do not disagree with that, and as I said, we 
are in the process of drafting a revision, so we will 
certainly----
    Senator Shelby. Do you have now or will you have the 
personnel in your administration to evaluate the 
creditworthiness of your investments? In other words, you have 
been relying--a lot of people have been relying on the credit 
rating agencies--Moody's, S&P, Fitch, and so forth. Well, we 
know the history of that.
    Ms. Matz. Yes.
    Senator Shelby. Are you going to have the proper people to 
do that? I think this is important, that you have personnel 
that can do this in lieu of outsourcing it to something that we 
know is a dead end.
    Ms. Matz. We might have to enhance our Office of Capital 
Markets----
    Senator Shelby. What does ``might'' mean?
    Ms. Matz. It means that I do not have an answer to your 
question right now.
    Senator Shelby. Will you let us know in the Committee?
    Ms. Matz. Yes.
    Senator Shelby. We think this is very important because we 
want the credit unions to remain viable and strong and not ever 
visit, to come up here for problems.
    Ms. Matz. I appreciate that, and we will get back to you on 
that.
    Senator Shelby. Thank you, Mr. Chairman.
    Senator Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, Madam Chairman.
    Does the NCUA have a list of problem credit unions similar 
to what the FDIC does in terms of their watch list, and if so, 
how many of these institutions are on your list?
    Ms. Matz. We do have a list of credit unions that we watch. 
There are about 2 dozen institutions on the list.
    Senator Reed. Which would be roughly what percentage?
    Ms. Matz. Well, we have over 7,400 institutions that we 
insure.
    Senator Reed. Is there any geographic concentration or 
business model concentration that is more prone on this list 
than----
    Ms. Matz. Yes, credit unions that are located in the States 
that were most distressed. Florida, California, Arizona, Utah, 
and Nevada have been hit the worst.
    Senator Reed. Let me ask a question that parallels some of 
the comments made by both the Chairman and the Ranking Member. 
In your testimony, you indicate that there are a growing level 
of delinquent member business loans----
    Ms. Matz. Yes.
    Senator Reed. ----and that they are a primary or secondary 
contributing factor for supervisory concern in many cases. And 
so the first question, are you concerned with this increasing 
number of member business loan delinquencies?
    Ms. Matz. I am concerned, but it is still a relatively 
small number of affected credit unions.
    Senator Reed. You are aware there are proposals to increase 
the level of lending in member business loans. What would be 
your view on that proposed, or these proposed legislative----
    Ms. Matz. I support that.
    Senator Reed. And support that given the indication that 
there are increasing, as you would, I think put in context, not 
as yet decisive but increasing delinquencies in this category?
    Ms. Matz. Yes, because as I said, I believe that it is 
still a very small number of credit unions. There are 2,200 
credit unions that make member business loans and there are 270 
that fall into the category where they are either what we call 
CAMEL 3 or CAMEL 4. CAMEL 4 are the troubled ones where the 
business lending is the primary or secondary reason for their 
being there. So it is a manageable number. We do not like to 
have credit unions in that category, period, but we feel that 
business lending done properly is really an important tool for 
credit unions to have at their disposal to serve their members.
    Also, in terms of the legislation, if the cap gets lifted, 
we would anticipate coming through with very rigorous 
regulations. We would not just be opening the flood gates, so 
all credit unions ccould not just go in and make high levels of 
loans. They would have to demonstrate their ability to make a 
low level of loans, and once they demonstrate that, we would 
increase it by a small amount and then keep working with them, 
supervising them, and let them gradually increase to a higher 
level.
    Senator Reed. Do you have a notion of the number of credit 
unions that have already reached their limit? I mean, is this a 
situation where a huge majority of credit unions have no extra 
capacity, or is this a few members or concentrated in a few 
areas?
    Ms. Matz. It is a small number.
    Senator Reed. That have reached----
    Ms. Matz. That are at their cap.
    Senator Reed. That have reached their cap.
    Ms. Matz. Yes.
    Senator Reed. And is there any particular area of the 
country where the cap is reached, or is it just dispersed 
somewhat random?
    Ms. Matz. I am guessing that it is dispersed, but I do not 
know that for sure. We can get back to you on that.
    Senator Reed. All right. There is another aspect that I 
want to explore and that is that the NCUA is the only regulator 
subject to FIRREA that does not have the authority to examine 
vendors that provide services to insured institutions. And now 
with the increasing role of particularly information management 
systems, computer systems, et cetera that are provided to 
vendors, and concerns about money laundering, privacy, a host--
I do not have to tell you the concerns--are you concerned this 
lack of authority affects your ability to fully implement your 
statutory responsibilities?
    Ms. Matz. Absolutely.
    Senator Reed. Absolutely. So that you would like to have 
that authority in place?
    Ms. Matz. Yes. I think we could do a better job of 
protecting the safety and soundness of credit unions if we had 
that authority.
    Senator Reed. Let me ask the question--I think we will get 
the same answer, but are there instances where you have seen 
significant problems at credit unions causing you to have to 
step in because of vendor contracts and other arrangements that 
you might have been upset about but could take no effective 
steps until, in fact, the institution became insolvent?
    Ms. Matz. Yes.
    Senator Reed. Yes. Would that apply to the corporate credit 
unions, also?
    Ms. Matz. Correct.
    Senator Reed. Correct. Well, thank you very much, Madam 
Chairman. Thank you.
    Senator Johnson. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Let me, if I might, just get a little perspective here. The 
institutions that went into conservatorship, basically, their 
problem was real estate lending, would that be the case, or is 
it----
    Ms. Matz. The corporate credit unions?
    Senator Johanns. Yes.
    Ms. Matz. It was an over-concentration of mortgage-backed 
securities.
    Senator Johanns. So it was real estate related?
    Ms. Matz. Yes.
    Senator Johanns. Yes. When you look at the other issues 
that you were talking about, the commercial lending, you said 
that was a relatively small number of credit unions out there 
that were dealing with that. Let me just ask your opinion on 
something. Would you describe that as something that just 
normally you would go through in a recession, that that is what 
you are seeing, or are you seeing something bigger and greater 
and more problematic there than that description?
    Ms. Matz. With the business lending?
    Senator Johanns. Yes.
    Ms. Matz. It is probably somewhat higher than it would 
ordinarily have been because some of the loans were 
collateralized by real estate.
    Senator Johanns. Yes. So again, we kind of get back to 
that----
    Ms. Matz. Yes.
    Senator Johanns. ----problem that everybody has dealt with.
    Now, the Ranking Member read into the record an IG report 
that basically said, I think, if I could summarize it, that if 
there had been better oversight, a lot of these problems would 
not have occurred, and you agree with that assessment.
    Ms. Matz. Yes.
    Senator Johanns. I am just going to offer an observation, 
that if the whole system, whether it is banks or credit unions 
or whatever, if there had been better oversight, we would have 
avoided a lot of these problems. Is that a fair--do you kind of 
agree with that?
    Ms. Matz. Well, you know, the IG was addressing these 10 
credit unions----
    Senator Johanns. Yes.
    Ms. Matz. ----and I certainly agree with it in terms of 
those 10 credit unions. You know, I think in terms of the 
consumer credit unions, I think we have done an adequate job. 
Of course, nobody could have foreseen the significant drop in 
the value of real estate and all the havoc that that has 
created. But, certainly in terms of those 10 credit unions, we 
could have done a better job.
    Senator Johanns. As I talk to small businesses that I 
interface with, and we have had small business roundtables and 
a whole host of efforts to try to be attuned to challenges that 
they are facing, one of the things I hear, and I am sure every 
Member on the Committee is hearing it, whatever State they are 
in, and that is that credit is still very tough for a small 
business. I was just in a small business over Thanksgiving, and 
boy, that was the message. ``I cannot get credit.''
    And I see your efforts, and I do not disagree with them. I 
think you are trying to make sure that your fund is stable, 
that--and I think you are trying to do those things to kind of 
rebuild from what was a fairly disastrous situation. But it 
does occur to me that as we pull that capital into whatever 
fund or try to minimize risk by requiring margin, et cetera, 
that capital is not available to be lent. What is your 
observation on that? Does that appear problematic to you?
    Ms. Matz. We encourage credit unions that are interested in 
making business loans to make sure that they have commercial 
lending staff that can do very solid underwriting. We also are 
concerned that credit unions reserve for losses adequately, and 
that does take capital out of the system. But it protects the 
Share Insurance Fund, and if it prevents losses, it also 
prevents additional assessments, ultimately. So we do make sure 
that credit unions are adequately allowing for potential 
losses.
    Senator Johanns. As you should. But that kind of describes 
what small businesses are struggling with. They are struggling 
to find somebody who will be their lender, because the system 
very, very quickly became risk adverse. Would you agree with 
that?
    Ms. Matz. I think that credit unions have always been 
conservative and perhaps they are being more conservative now, 
but I do believe that credit unions are still making business 
loans. In fact, business lending has gone up in the last 
quarter. Of course, there are only 2,200 credit unions making 
business loans, so it is not a lot of capital. But in the 
communities that they serve, I think they make an important 
difference to the small businesses.
    Senator Johanns. Just to wrap up in this vein, just for my 
education, and, of course, maybe other Members of the Committee 
would also be interested, I would like to see whatever charts 
or analysis you have available of what happened over the last 
2, 3 years relative to lending. Again, I think that would be 
good information just in terms of trying to work with small 
businesses who are continuing to describe this very difficult 
problem of getting access to capital.
    Ms. Matz. Are you interested in lending in general or 
specifically small business lending?
    Senator Johanns. Whatever you provide will be helpful.
    Ms. Matz. Credit union lending has actually grown over the 
past few years, despite the downturn, except for the most 
recent quarter, where it has leveled off. But that is not 
specific to business lending.
    Senator Johanns. Yes. I would be interested in business 
lending if those numbers can be extracted from the whole, if 
you will.
    Ms. Matz. We will get that for you.
    Senator Johanns. OK. Thank you. Thank you, Mr. Chairman.
    Senator Johnson. I would like to thank Chairman Matz for 
testifying today, and with that, conclude our first hearing 
today.
    [Whereupon, at 10:54 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Today's first hearing will examine the current state of the credit 
union industry, including the National Credit Union Administration's 
ongoing efforts to stabilize the corporate credit union system. As the 
supervisor of Federal credit unions that insure the deposits of over 90 
million account holders in all Federal credit unions and many State-
chartered credit unions, this hearing is an important and needed 
opportunity to explore the health of the credit union industry as we 
emerge from the financial crisis and recover and grow our economy.
    I want to welcome and thank NCUA chairman Debbie Matz for being 
here today. The NCUA has taken unprecedented steps over the past 
several years to stabilize the credit union system as the troubled 
corporates pulled liquidity and capital out of the natural person 
credit unions. The system has also shared many of the same challenges 
as the FDIC concerning the insurance of Americans' savings and 
retirement.
    These steps have had a significant impact on thousands of credit 
unions across the country, and I am pleased that we can have a serious 
conversation about the current state of the credit union industry and 
the impact of increased assessments on credit unions that serve 
millions of Americans across this country. I have certainly heard 
concerns from my constituents in South Dakota about this matter.
    This is not the first, and certainly not the last, hearing on the 
financial condition of specific sectors of our financial services 
industry. The financial crisis certainly took a toll, and the historic 
Dodd-Frank legislation will bring many additional changes to all 
sectors of this industry. It is very important to me that these types 
of hearings become a common occurrence with all of the financial 
institutions regulators. I look forward to your testimony, Chairman 
Matz, and to the question and answer period.

                                 ______
                                 
                   PREPARED STATEMENT OF DEBORAH MATZ
             Chairman, National Credit Union Administration
                            December 9, 2010

I. Introduction
    The National Credit Union Administration (NCUA) appreciates the 
opportunity to provide views on ``The State of the Credit Union 
Industry.'' NCUA's primary mission is to ensure the safety and 
soundness of federally insured credit unions. It performs this 
important public function by examining all Federal credit unions, 
participating in the supervision of federally insured State-chartered 
credit unions in coordination with State regulators, and insuring 
federally insured credit union members' accounts. In its statutory role 
as the administrator for the National Credit Union Share Insurance Fund 
(NCUSIF), \1\ NCUA provides oversight and supervision to 7,402 
federally insured credit unions, representing 98 percent of all credit 
unions and 90.8 million members. \2\
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     \1\ The NCUSIF was created by Public Law 91-468 (Title II of the 
Federal Credit Union Act), which was amended in 1984 by Public Law 98-
369. The Fund was established as a revolving fund in the United States 
Treasury under the NCUA Board for the purpose of insuring member share 
deposits in all Federal credit unions and in qualifying State credit 
unions that request insurance.
     \2\ Approximately 152 State-chartered credit unions are privately 
insured and are not subject to NCUA oversight. The term ``credit 
union'' is used throughout this statement to refer to federally insured 
credit unions.
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    The severe economic crisis that began in earnest in 2007 has 
impacted all facets of the financial sector. Though credit unions by 
and large maintained traditional standards and risk profiles, they have 
not been immune to the broad effects of historically high unemployment 
and severely declining home values. More specifically, these national 
trends systemically affected credit unions in two particular ways. 
First, several of the largest corporate credit unions' \3\ investment 
portfolios were subjected to material losses.
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     \3\ Corporate credit unions provide necessary liquidity, 
investment, and payment services to consumer credit unions.
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    Second, many consumer credit unions, \4\ have experienced increased 
delinquency and loan losses. This is most pronounced in States hardest 
hit by the economic downturn, such as Arizona, California, Florida, and 
Nevada. The combined impact of these two occurrences has presented 
significant financial and operational challenges for both NCUA and 
credit unions and is discussed in detail in sections II and III below.
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     \4\ The term ``consumer'' credit union is used throughout this 
document to refer to retail ``natural person'' credit unions which 
interact with consumers on a daily basis. ``Corporate'' credit unions 
provide services to consumer credit unions and process consumer 
payments, but do not interact with consumers directly.
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    Throughout the crisis, NCUA, with the assistance of Congress and 
the Administration, has taken extraordinary steps to successfully 
maintain the stability of the credit union system for the 90 million 
Americans who depend on it.

II. Corporate Credit Union System
    The primary purpose of a corporate credit union is to provide 
consumer credit unions with correspondent banking, liquidity and 
investment services. Correspondent banking services help financial 
institutions, including credit unions, to process and clear checks, 
process and settle electronic transactions, and move funds through the 
financial system.
    In the mid-2000s, several of the largest corporate credit unions 
invested heavily in mortgage-backed securities (MBS), which resulted in 
concentrated exposure to the real estate market. Virtually all of the 
investments were AAA or AA rated when purchased. However, their value 
plummeted when the housing bubble burst.
    In April 2007, several months before the distress in the mortgage 
market surfaced, NCUA issued Corporate Credit Union Guidance Letter No. 
2007-02. This letter addressed credit, liquidity, market, and 
concentration risks associated with MBS. By and large, corporates 
ceased the purchase of nonagency mortgage-related securities by mid-
2007. At that time, all investments held by corporate credit unions, 
including MBS, were rated investment grade, and 98 percent were rated 
AA or higher.
    What began as a market disruption thought to stem from concerns 
with subprime products, spread throughout the overall financial and 
real estate markets sector with unprecedented severity. By the time it 
became apparent that this was not an isolated market dislocation, there 
was no longer an active market for these types of securities. Like 
other financial institutions, the corporates could not have found 
buyers for the volume of these types of investments they held. The 
declining values of these mortgage-backed securities created severe 
liquidity and capital problems for these institutions.
    Five corporate credit unions, which served more than half of the 
entire credit union system, were financially imperiled by the losses in 
their investment portfolios, with a far-reaching effect on the entire 
credit union industry. The industry has been adversely impacted by 
consumer credit union losses from impaired capital investments held in 
corporate credit unions.
    Consumer credit unions will continue to face necessary NCUA 
assessments to resolve the nonfinancially viable corporates. Had the 
agency not acted to inject liquidity and guarantee deposits in the 
corporate credit unions in the face of this crisis, the costs to the 
industry would have been far greater--threatening the entire credit 
union system.
    Without NCUA intervention, the losses, in their entirety, from 
immediate failure of large corporates would have cascaded to consumer 
credit unions via their uninsured shares in the corporates. \5\ This 
would have resulted in the failure of approximately 1,000 consumer 
credit unions. Consistent with the manner in which deposit insurance 
functions, the costs of resolving these failures would have been borne 
by all remaining federally insured credit unions, generating additional 
losses and failures. Ultimately, inaction would have resulted in 
massive disruption to consumer services and total costs to any 
remaining insured credit unions would have been far greater than the 
resolution strategy NCUA employed.
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     \5\ Credit unions refer to deposit and savings accounts as share 
accounts, or ``shares'' for short.
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    To address the systemic financial and operational impact of these 
five troubled corporate credit unions, NCUA designed a three-phase 
strategy to stabilize, resolve, and reform the corporate system based 
on the following guiding principles:

    Prevent interruption of payments services to consumer 
        credit unions and their 90 million members;

    Preserve confidence in the credit union system;

    Manage to the least long-term cost consistent with sound 
        public policy; and

    Facilitate an orderly transition to a new regulatory 
        framework for the corporate credit union system based on 
        consumer credit union choice.

    Specific details of the actions implemented during these three 
phases are discussed below.

Stabilization Phase
    Given the deterioration of the corporates' financial conditions and 
quality of their investment portfolios, their access to external 
sources of funds was compromised. This resulted in consumer credit 
unions losing confidence in the corporate credit unions and starting to 
withdraw their deposits. These withdrawals, and the prospect of a wave 
of additional withdrawals, placed severe liquidity pressures on the 
corporates, peaking in 2008. The losses and operational impact on the 
credit union system from a nonorderly resolution of this crisis would 
have been untenable, severely impacting consumer credit unions and 
their 90 million members.
    Accordingly, in the fall of 2008, it became critical for NCUA to 
initiate dramatic action to bolster confidence in the corporates and 
ensure the flow of liquidity in the credit union system. In the last 
half of 2008, NCUA began implementing actions to stabilize and 
strengthen the credit union system. The first step in the stabilization 
program was to increase liquidity throughout the entire credit union 
system, especially within the corporates.
    NCUA's primary tool to address liquidity concerns in the credit 
union industry is the Central Liquidity Facility (CLF). \6\ At the 
time, the CLF was operating under a Congressionally imposed borrowing 
cap of $1.5 billion. At the NCUA Board's request, in September 2008, 
Congress raised the CLF's borrowing cap to its full statutory limit of 
approximately $41 billion. Ultimately, lifting the cap proved to be one 
of the primary reasons NCUA could successfully develop and implement a 
series of critical liquidity interventions that served as the 
foundation for its corporate stabilization efforts.
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     \6\ The Central Liquidity Facility was created by Congress in 1978 
to improve the general financial stability of the credit union industry 
by meeting the liquidity needs of individual credit unions.
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    With the full borrowing authority of the CLF now available, NCUA 
began working with staff at both the Board of Governors of the Federal 
Reserve System (FRB) and the U.S. Department of the Treasury (U.S. 
Treasury) to develop tools, such as the Credit Union System Investment 
Program and the Credit Union Homeowners Affordability and Relief 
Program, to address the liquidity pressures in corporates. These two 
programs enabled consumer credit unions to essentially invest funds 
borrowed from the CLF into corporate credit union offerings, which 
raised approximately $8.5 billion in liquidity.
    The NCUA Board approved the ``Temporary Corporate Credit Union 
Liquidity Guarantee Program'' (TCCULGP) on October 16, 2008. Under the 
TCCULGP, the NCUSIF provided a 100 percent guarantee on new unsecured 
debt obligations issued by eligible corporates on or before June 30, 
2009, and maturing on or before June 30, 2012. \7\ The TCCULGP and the 
other CLF-based programs were successful in restoring credit lines and 
funding in the corporate system.
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     \7\ On May 21, 2009, the TCCULGP was revised to cover unsecured 
debt obligations issued on or before June 30, 2010, and maturing on or 
before June 2017.
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    To address the lack of confidence in the corporates and the 
resulting deposit outflow, the NCUA Board approved the ``Temporary 
Corporate Credit Union Share Guarantee Program'' (TCCUSGP), which 
presently guarantees uninsured shares, excluding capital accounts, at 
participating corporates through December 31, 2012. This program was 
vital in maintaining the confidence of consumer credit unions and 
stabilizing the precarious liquidity situation at the corporates. The 
TCCUSGP has proven very successful in stabilizing liquidity and 
continues to serve an important role in the transition process under 
the resolution phase discussed later.
    The NCUA Board also issued a $1 billion NCUSIF capital note to U.S. 
Central Federal Credit Union (U.S. Central) to address realized losses 
on MBS and other asset-backed securities. This action was necessary to 
maintain external sources of funding and to preserve confidence in U.S. 
Central, given its pivotal liquidity and payment systems roles as a 
wholesale service provider to the corporate credit union system.

            Creation of the Temporary Corporate Credit Union 
                    Stabilization Fund

    The stabilization programs discussed so far came at a significant, 
but unavoidable, cost to the industry. Given the structure of the 
NCUSIF and existing law in early 2009, NCUA would have been required to 
assess this cost to consumer credit unions in one lump sum. To give the 
NCUA Board flexibility to manage the impact of the costs to consumer 
credit unions, NCUA requested that Congress establish the Temporary 
Corporate Credit Union Stabilization Fund (Stabilization Fund). On May 
20, 2009, the Helping Families Save Their Homes Act of 2009 \8\ was 
signed into law and created the Stabilization Fund, allowing costs to 
be assessed over a 7-year period instead of in a lump sum. \9\ This is, 
perhaps, the most critical tool available to NCUA to help ease the 
credit unions' burden of resolving the corporate crisis. The NCUA Board 
is appreciative that Congress acted so quickly to pass this 
legislation.
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     \8\ Public Law 111-22, which was amended in July 2010 by Public 
Law 111-203.
     \9\ The closing date of the Stabilization Fund can be extended 
with the concurrence of the U.S. Treasury. Subsequently, as part of its 
plan to reduce the annual burden of assessments on credit unions, in 
September 2010, NCUA requested the concurrence of the U.S. Treasury to 
extend the life of the Stabilization Fund to June 2021; the U.S. 
Treasury concurred with this request.
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    In addition to the Stabilization Fund provision, the Helping 
Families Save Their Homes Act of 2009 also contains another important 
provision that assisted NCUA's ability to mitigate the corporate 
problems. This law increases the NCUSIF's authority to borrow from the 
U.S. Treasury from $100 million to $6 billion, an aggregate total 
available to both the Stabilization Fund and the NCUSIF. The 
Stabilization Fund relies on the $6 billion borrowing authority in 
providing the NCUA Board flexibility to manage the impact of the 
assessments on credit unions. The enhanced authorities provided by 
Congress will permit NCUA to fairly and effectively distribute the 
insurance costs associated with the current economic downturn, 
including not just the costs of the corporate losses but also other 
costs that may arise. The Stabilization Fund must repay the U.S. 
Treasury, with interest, all amounts borrowed. As such, the total costs 
of the corporate stabilization, resolution, and reform will be fully 
borne by credit unions with the flexibility to absorb those costs over 
a longer time period.
    NCUA's stabilization efforts were successful in preserving the 
vital electronic payments and liquidity services that credit unions 
provide to over 90 million Americans.

Resolution Phase
    The stabilization phase provided NCUA with the time and resources 
to design and implement a strategy to resolve the troubled corporate 
credit unions and the distressed securities they held. Collaborating 
with the FRB and the U.S. Treasury, NCUA carefully evaluated a wide 
range of options to arrive at the least cost, long-term solution 
consistent with sound public policy. On September 24, 2010, the NCUA 
Board approved a comprehensive strategy to fully resolve the ongoing 
solvency, liquidity, and reputation risks associated with the 
nonfinancially viable corporate credit unions.
    NCUA conducted a comprehensive evaluation of the entire corporate 
system. Of the 27 corporates, this evaluation identified five 
corporates that were not financially viable. These five corporates 
represented approximately 70 percent of the entire corporate system's 
assets and 98.6 percent of the investment losses within the system. 
NCUA took direct control of these five institutions through Federal 
conservatorship. \10\ In doing so, NCUA was able to achieve the goals 
of (1) protecting the vital services to the thousands of consumer 
credit unions that rely on the corporate network and (2) implementing 
the process to resolve the distressed assets.
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     \10\ On September 24, 2010, NCUA conserved Constitution Corporate 
Federal Credit Union, Members United Corporate Federal Credit Union, 
and Southwest Corporate Federal Credit Union. Western Corporate Federal 
Credit Union and U.S. Central were conserved on March 20, 2009.
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    NCUA employed a traditional resolution model used in the financial 
sector often referred to as the ``good bank/bad bank'' model. The 
``good bank/bad bank'' model was necessary given that the conserved 
corporates were correspondent service providers to thousands of credit 
unions and no viable acquisition partners were available. This strategy 
involved the creation of new charters, called ``bridge'' corporates, 
and transfer of the good assets, deposits, and operations from the 
conserved corporates to these new entities.
    The four bridge corporates are led by chief executive officers 
selected by NCUA, and who report directly to NCUA. Additionally, NCUA 
maintains control over their operations. NCUA has established policies 
to ensure that the bridge corporates operate soundly, and minimize the 
long-term costs to the insurance fund. The bridge corporates are 
temporary entities, created to maintain necessary services during the 
transition period. NCUA intends to maintain the bridge corporate 
operations long enough to allow consumer credit unions adequate time to 
determine their long-term service options, perform appropriate due 
diligence, and implement the necessary operational changes.
    Remaining assets in the failed corporate charters were then placed 
into an inactive status and managed via asset management estates 
established to house the ``legacy assets'' \11\ With the legacy assets 
isolated in the asset management estates, NCUA is pursuing a least-cost 
solution for an orderly disposition of these assets. After extensive 
analysis, NCUA determined that the least-cost disposition strategy 
involved holding the distressed assets by obtaining long-term funding. 
This strategy prevents much larger market losses and, in conjunction 
with the extension of the Stabilization Fund, provides credit unions 
more time to absorb the lower credit losses.
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     \11\ The term ``legacy assets'' is used to describe the impaired 
private-label residential mortgage backed securities and other asset-
backed securities held by the failed corporates.
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    The long-term funding is being obtained through securitizing the 
legacy assets. In summary, the legacy assets are being combined into 
new structured securities that are being issued in the financial 
markets as NCUA Guaranteed Notes (ticker symbol NGN). The new 
securities have a guarantee on the timely payment of principal and 
interest from NCUA, which is backed by the full faith and credit of the 
United States. To date, NCUA has finalized four issuances of the 
structured notes; all met with strong investor demand.
    The underlying defaults on distressed legacy assets and other 
resolution costs are expected to be between $13.9 billion to $16.1 
billion. \12\ This cost will be borne solely by the credit union 
system. Credit unions that contributed capital to the corporates 
holding these legacy assets bear the first loss, totaling $5.6 billion. 
The losses above $5.6 billion will be borne by all federally insured 
credit unions through Stabilization Fund assessments over time. 
Currently the expected range of total assessments is between $8.3 
billion and $10.5 billion. Credit unions have already paid $1.3 billion 
in assessments. Thus, the projected range of remaining assessments is 
$7.0 billion to $9.2 billion to be paid in annual installments through 
2021.
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     \12\ Given the complexity of projecting credit losses, the NCUA 
has relied on multiple expert sources to validate NCUA's internal 
results. These external sources include the analysis done by the 
corporates' external vendors; a detailed, bond-by-bond analysis 
conducted by the Pacific Investment Management Company (PIMCO) 
expressly for NCUA; and a detailed bond-by-bond analysis performed by 
Barclays Capital, New York, New York, as part of the securitization. 
These analyses incorporate assumptions about future economic events. 
Hence NCUA relies on a range of estimates to project future costs to 
credit unions.
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Reform Phase
    On September 24, 2010, NCUA issued a final rule reshaping the 
regulatory framework of corporate credit unions, addressed in Part 704 
of NCUA's rules. NCUA's primary purpose in reforming Part 704 was to 
prevent catastrophic losses from ever recurring. The new corporate 
regulation is designed to both address the cause of the current crisis 
and to provide stronger protections against future potential risks.
    The major elements of this new corporate rule can be divided into 
(1) investment and asset liability management (ALM) restrictions, (2) 
capital standards, and (3) corporate governance.

            Investment and ALM Restrictions
    Through a series of provisions related to investment suitability 
and asset liability management, NCUA's new corporate rule will force 
corporate credit unions to properly diversify their investments and 
take other steps to minimize potential credit, market, and liquidity 
risk. In short, key provisions:

    Institute a variety of more stringent standards that each 
        security must pass before a corporate can purchase the 
        investment.

    Prohibit certain highly complex and leveraged securities. 
        Going forward, a corporate cannot buy a particular security if 
        it is a collateralized debt obligation, a net interest margin 
        security, a private-label residential mortgage-backed security, 
        or a security subordinated to any other securities in the 
        issuance.

    Reduce the single obligor limit. The new rule tightens the 
        existing limit on securities from a single obligor from 50 
        percent of capital down to 25 percent of capital.

    Establish sector concentration limits. The new rule 
        establishes sector concentration limits to diversify the 
        composition of the investment portfolio.

    Limit portfolio Weighted Average Life (WAL) to 2 years or 
        less. The WAL limit reduces not only market and liquidity risk, 
        but also credit risk, since credit fears negatively affect the 
        price of longer-lived assets more severely than shorter-lived 
        assets.

    The new rule contains other ALM measures to reduce risk. For 
example, to discourage investment arbitrage, the rule tightens a 
corporate's borrowing limits. To reduce the potential for 
overdependence by a corporate on one member credit union, the rule also 
limits funding from a single member, whether it comes from deposits or 
loans.

            Capital Standards and Prompt Corrective Action
    The new corporate rule strengthens capital requirements including 
new minimum capital ratios, new risk-based capital calculations, and 
new definitions of capital modeled after the Basel I capital 
requirements. \13\ Corporate credit unions will now need to satisfy 
three different minimum capital requirements: a 4 percent leverage 
ratio, a 4 percent tier one risk-based capital ratio, and an 8 percent 
total risk-based capital ratio. \14\ The rule also mandates that a 
certain portion of a corporate's capital consist of retained earnings.
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     \13\ Basel 1 is a risk-based capital framework developed by the 
Basel Committee, a group of 11 industrialized nations, including the 
U.S., formed to harmonize banking standards and regulations among 
member nations.
     \14\ Both the old and new corporate rules also require that a 
corporate maintain a minimum net economic value ratio of 2 percent.
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    The rule also contains new Prompt Corrective Action (PCA) standards 
for enforcement of the capital requirements. The consequences of 
failing to retain adequate capitalization can include restrictions on 
activities, restrictions on investments and asset growth, restrictions 
on the payment of dividends, restrictions on executive compensation, 
requirements to elect new directors or dismiss management, and the 
possibility of conservatorship, liquidation, or a supervisory merger. 
These new capital and PCA requirements will ensure that corporates hold 
adequate capital commensurate with the risks of both their balance 
sheet assets and off-balance sheet activities.

            Corporate Governance Provisions
    As a result of the recent corporate crisis, NCUA identified certain 
weaknesses in corporate governance. The new corporate rule improves 
upon the existing governance provisions in several ways. All board 
members will be required to hold either a CEO, CFO, or COO position at 
their member credit union or other member entity. A majority of a 
corporate's board of directors will have to be representatives of 
consumer credit unions. No person will be permitted to sit on the 
boards of two or more corporates at the same time, nor will a single 
organizational member be permitted to have more than one individual 
representative on the board of any given corporate.
    Other governance changes relate to transparency. The new rule 
requires that each corporate disclose to its members the compensation 
of its most highly compensated employees. \15\ In the case of merger 
involving a federally chartered corporate, the corporate must disclose 
to both its members and NCUA any material merger-related increase in 
compensation for any senior executive or director as a result of the 
merger.
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     \15\ The disclosure includes the three, four, or five most highly 
compensated employees at each corporate, with the exact number of 
employees depending on the size of the corporate. The compensation of 
the corporate credit union's CEO must also be disclosed, even if the 
CEO is not among the most highly compensated at the corporate.
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    The new rule also prohibits ``golden parachutes,'' defined as 
payments made to an institution-affiliated party that are contingent on 
the termination of that person's employment and received when the 
corporate making the payment is either troubled, undercapitalized, or 
insolvent.
            Additional Proposed Amendments to NCUA's Corporate Rule
    During the rulemaking process leading to NCUA's recent final 
amendments to its corporate rule, NCUA received many suggestions for 
further amending the rule that deserved consideration. Some of these 
suggestions were beyond the scope of the proposed rule, and so legally 
could not be included in the final rule. Other suggestions were within 
the scope of the first proposal, but deserving of additional public 
comment before adoption.
    Accordingly, on November 18, 2010, NCUA issued seven additional 
proposed amendments to the corporate rule for public comment. Briefly, 
these proposed amendments, if adopted by NCUA, would:

    Increase the transparency of corporate credit union 
        decision making by requiring corporates conduct all board of 
        director votes as recorded votes and include the votes of 
        individual directors in the meeting minutes;

    Require that corporate credit unions follow certain audit, 
        reporting, and audit committee practices required of commercial 
        banks by the Federal Deposit Insurance Act, Part 363 of the 
        Federal Deposit Insurance Corporation Regulations, and the 
        Sarbanes-Oxley Act of 2002;

    Provide for the equitable sharing of Stabilization Fund 
        expenses among all members of corporate credit unions, 
        including both credit union and non- credit union members, by 
        establishing procedures for requesting members not insured by 
        the NCUSIF to make premium payments to the Stabilization Fund;

    Protect against unnecessary competition between corporates 
        by limiting consumer credit unions to membership in one 
        corporate of the consumer credit union's choice at any one 
        time;

    Improve risk management at corporates by requiring 
        corporates to establish enterprise-wide risk management 
        committees staffed with at least one independent risk 
        management expert;

    Provide corporates with more options to grow retained 
        earnings by allowing corporates to charge their members 
        reasonable one-time or periodic membership fees; and

    Require the disclosure of compensation received from a 
        corporate credit union service organization (CUSO) by highly 
        compensated corporate credit union executives who are also 
        employees of the CUSO.

    The public comment period on these proposals ends January 28, 2011.

Current State of Corporate Credit Unions
    The corporate credit union system is in a state of transition, 
which is going according to plan. To date, that transition process has 
been extremely successful. The four bridge corporates continue to 
deliver the critical payment and settlement services on which their 
members depend. The 22 corporates operating independent of NCUA control 
are in the process of implementing critical operational changes to 
conform with the new regulatory framework.
    NCUA's number one priority in launching the corporate resolution 
efforts was to ensure that the critical payment, settlement, and 
liquidity services corporates provide their member credit unions would 
continue uninterrupted. That goal has been met. At no time over the 
past 2 years was there a lapse in services to the 90 million consumers 
served by credit unions.
    The future of the corporate credit union system will ultimately be 
decided by the consumer credit unions they serve. If consumer credit 
unions are committed to a corporate system for their financial service 
needs, the system must conform to the new more rigorous regulatory 
framework NCUA has established. If credit unions choose not to obtain 
services from corporates going forward, NCUA will ensure an orderly 
transition for credit unions to new service providers. Under either 
circumstance, NCUA's primary goal is to ensure uninterrupted financial 
services to the 90 million credit union consumers.
    NCUA is working closely with consumer credit unions to provide as 
much guidance as possible in making the critical decisions related to 
their future service needs. NCUA has assured credit unions that they do 
not need to make an immediate decision. However, NCUA has also been 
clear in communicating that the decision process is complex and that 
credit unions need to begin evaluating their options now.

III. Status of Consumer Credit Unions
    Despite the stresses on credit union earnings, the industry remains 
very well capitalized. As of September 30, 2010, aggregate net worth 
totaled $90.6 billion, representing the highest dollar level in credit 
union history. This equates to a net worth ratio of 9.97 percent of 
total assets. Ninety-eight percent of all credit unions were at least 
``adequately capitalized'' or better, with 94.8 percent of all credit 
unions ``well capitalized.'' \16\
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     \16\ See, 12 C.F.R. Part 702.
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    During the past several years, credit unions have experienced 
strong membership and deposit growth, indicating they continue to 
provide valuable services to members. They currently serve 90.8 million 
members, an increase of 5 million since 2006. Over the same period, 
shares have grown by $178 billion, or 30 percent, to $780 billion.

Credit Unions Continue To Meet Member Lending Needs
    Even during the height of the recent recession, credit unions 
continued to lend to their members as demonstrated by 15 percent growth 
in loans originated since 2008. Loans account for 62 percent of all 
credit union assets, with more than half secured by real estate.
    Focusing more closely on credit union mortgage lending, 68 percent 
of credit unions offer mortgage loans to their members, originating $55 
billion in first mortgage loans through the third quarter of 2010. In 
the first nine months of 2010, total mortgage loans held on credit 
union balance sheets increased $667 million, to a new high of 54.6 
percent of total loans.
    All other consumer loans, such as auto loans and credit cards, make 
up 40 percent of credit unions' loan portfolios. Used vehicle loans are 
the fastest-growing segment of consumer lending.
    Regarding member business loans (MBLs), currently, 2,210 or 
approximately 30 percent of all credit unions offer these types of 
loans. MBLs comprise 6.5 percent of all outstanding loans, or $36.7 
billion. The majority of these MBLs are secured by real estate. The 
average size of an MBL is $249,000, indicating credit unions are 
largely serving the needs of small businesses.

            Loan Portfolio Quality
    Despite overall adherence to sound underwriting practices, the 
credit union industry was not immune to the macroeconomic impact of 
high unemployment and home value declines. Since the end of 2006, the 
aggregate delinquent loan ratio and net charge-off ratios more than 
doubled to highs of 1.84 percent and 1.21 percent respectively as of 
year-end 2009. However, aggregate delinquency and net charge-offs have 
stabilized in 2010. While historically high for credit unions, these 
figures still compare favorably to other types of lenders.

            Real Estate Loan Delinquency
    At more than half of total loans, real estate is the predominant 
factor in overall portfolio performance. Rising delinquency rates and 
losses present a challenge for credit unions. Real estate loan 
delinquency has been steadily increasing as the economic crisis has 
unfolded, from 0.34 percent in 2006 to 2.06 percent as of September 
2010. For this same time period, net charge-offs for real estate loans 
demonstrate a similar trend, increasing to 0.63 percent as of the third 
quarter 2010.

            Loan Modifications and Foreclosures
    NCUA continues to support loan modifications to resolve credit 
union member issues. For borrowers experiencing financial difficulties, 
in lieu of foreclosures, it may be in the best interest of credit 
unions and their members to develop prudent workout arrangements or 
loan modifications. Credit unions have shown a willingness to work with 
their members experiencing financial difficulty as noted by the rapid 
growth in loan modifications. They have increased from $1.5 billion in 
2008 to $8.4 billion, which is approximately 2 percent of total real 
estate loans.
    Foreclosed assets represent only a small fraction (0.49 percent) of 
total real estate loans outstanding in credit unions, but have been 
rising since 2007. In light of the recent concerns over marketwide real 
estate foreclosure practices and documentation, NCUA is examining a 
sample of the largest credit unions selling mortgages to ensure 
adequate controls are in place.

            Member Business Loan Delinquency
    While MBLs represent only 4 percent of total credit union industry 
assets and approximately 1 percent of total commercial loans in the 
financial markets, \17\ the levels of delinquent member business loans 
have increased from 0.53 percent to 4.29 percent from 2006 to September 
2010 (compared to total loan delinquency of 1.74 percent). A similar 
trend during this period was noted in net MBL charge-offs, which 
increased to 0.71 percent. Presently, at 270 of the 633 credit unions 
which have a 3, 4, or 5 CAMEL rating \18\ and make member business 
loans, MBLs are the primary or secondary contributing factor for the 
supervisory concern.
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     \17\ Mortgage Bankers Association Commercial and Multifamily 
Mortgage Debt Outstanding Report as of 6/30/2010. (http://
www.mortgagebankers.org/NewsandMedia/PressCenter/74019.htm)
     \18\ Credit unions with a CAMEL rating of 3 have supervisory 
concerns; credit unions with a CAMEL rating of 4 or 5 are considered 
``troubled.''
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Investment Portfolio Quality
    Credit union investments account for a third of total assets. These 
are generally short-term in nature, with nearly half maturing in less 
than 1 year, and the majority are conservatively invested in Federal 
Government obligations.

Earnings Have Been Stressed
    Earnings have been depressed over the last several years and will 
likely continue to be stressed in the near future. As of September 
2010, credit unions reported a return on average assets of 0.45 percent 
compared to 0.82 percent in 2006. This has reduced credit unions' 
ability to build net worth. Credit union earnings are under stress due 
to compressed net interest margins in the current interest rate 
environment, NCUSIF premiums and Stabilization Fund assessments, and 
higher provision for loan loss expenses. Also, any future rise in 
interest rates will likely further reduce margins. NCUA's ability to 
better manage the timing of Stabilization Fund assessments improves the 
credit union system's capacity to absorb these costs, continue to 
provide needed member services, and remain well capitalized.

The Number of Troubled Credit Unions Is Increasing
    The level of troubled credit unions \19\ is highly correlated to 
the state of the economy. As of October 31, 2010, there were 363 
troubled credit unions holding $44.4 billion in assets and $39.1 
billion in shares. These credit unions represent 5.0 percent of all 
credit unions and total shares. The number of troubled credit unions 
has increased in the current year, from 328 at year-end 2009.
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     \19\ NCUA defines a troubled credit union as rated either a CAMEL 
Code 4 or 5.
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    Similarly, CAMEL code 3 credit unions, which exhibit some degree of 
supervisory concern due to less than satisfactory risk management 
practices, increased from 1,648 to 1,779 over the same period. The 
following charts illustrate the changes in the number of troubled and 
CAMEL code 3 credit unions and the dollars in total shares held by 
these credit unions since year-end 2007.





    As Chart 2 illustrates, the majority of shares are held in CAMEL 1 
and 2 credit unions. While NCUA is working diligently with affected 
credit unions to resolve problems in weaker institutions, the level of 
troubled credit unions will also depend heavily on the pace of the 
economic recovery.

            Impact on the NCUSIF
    One of the primary factors impacting the NCUSIF equity level is 
losses due to credit union failures. As a result of the above stresses 
on the credit union system and the corresponding increase in troubled 
credit unions, the NCUSIF has experienced increased losses during the 
past 2 years.
    For proper financial statement reporting, the shifting of credit 
union assets to more adverse CAMEL codes results in an increase in the 
amount of NCUSIF reserves for credit union failures. The increase in 
reserves lowered the equity ratio \20\ of the NCUSIF below 1.2 percent 
during the summer of 2010. Thus, in September the NCUA Board approved a 
restoration plan consisting of a premium of 0.124 percent of insured 
shares to return the equity ratio to near 1.3 percent. The September 
2010 premium was slightly more than the 2009 premium of 0.10 percent of 
insured shares. As of October 31, 2010, the NCUSIF's equity ratio was 
restored to 1.29 percent and is projected to remain above 1.2 percent 
through at least June 2011.
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     \20\ Equity ratio means the ratio of the amount of NCUSIF's 
capitalization, meaning insured credit unions' 1 percent capitalization 
deposits plus the retained earnings balance of the NCUSIF (less 
contingent liabilities for which no provision for losses has been made) 
to the aggregate amount of the insured shares in all insured credit 
unions.
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    NCUA regularly conducts stress tests to measure the resilience of 
the NCUSIF. The most recent tests included analyzing the impact of 
further declines in real estate values and other economic conditions. 
The results of this year's stress tests indicate the risk profile of 
the NCUSIF has not changed. The amount of losses at modeled stress 
levels remain within the ability of the NCUSIF to absorb. NCUA will 
continue to assess the risk profile of the NCUSIF and take appropriate 
actions based on the results.

Potential Future Risks
    While credit unions are financially strong and well positioned to 
weather the continuing impact of the economic recession, NCUA has 
identified the following potential future risks.

            Interest Rate Risk
    As of September 2010, fixed-rate mortgages represent 63 percent of 
total mortgage loans, indicating a clear preference by credit union 
members for this product in the current economic environment. While 
NCUA recognizes the benefit to consumers of refinancing higher-rate 
real estate loans into lower fixed-rate loans, NCUA is concerned with 
the interest rate and liquidity risk associated with a high level of 
fixed-rate, long-term assets should rates rise rapidly.
    Credit unions are taking some positive steps to mitigate interest 
rate risk. Credit unions sold $27.6 billion in first mortgage real 
estate loans to date in 2010. These sales represent nearly 50 percent 
of first mortgages granted. However, significant exposure to rapidly 
rising rates remains.

            Credit Union Service Organizations
    A Credit Union Service Organization (CUSO) is a corporation, 
limited partnership, or limited liability company that provides 
services primarily to credit unions or members of affiliated credit 
unions. These entities can be wholly owned by a single credit union or 
owned by a group of credit unions with or without other investors. A 
credit union's invested interest in a CUSO is subject to NCUA 
regulations. \21\
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     \21\ See, 12 C.F.R. Part 712.
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    Credit unions are increasingly using CUSOs to perform various 
functions and achieve economies of scale by partnering with other 
financial institutions. This partnering is especially critical to the 
2,833 credit unions with less than $10 million in assets. Credit unions 
currently have $1.3 billion invested in CUSOs and approximately 33 
percent of all credit unions reported using CUSO services. While this 
arrangement can be beneficial from an efficiency standpoint, especially 
for smaller credit unions, it places the systemic risk inherent in the 
delivery of these services outside of NCUA's direct regulatory and 
supervisory domain. NCUA is the only Federal financial institution 
regulator that does not have oversight authority of third-party 
vendors.

            Privately Insured Credit Unions
    While NCUA has no regulatory authority over privately insured 
institutions, they do pose a unique reputation risk to federally 
insured credit unions. All financial institutions have been negatively 
affected by high unemployment, declines in real estate values, and loan 
losses all arising from the recent, protracted recession. Consumers do 
not always differentiate between private share insurance and Federal 
share insurance. As a result, any pervasive problems that may develop 
with privately insured credit unions could have an impact on federally 
insured credit unions.
    American Mutual Share Insurance Corporation (ASI) is a private 
share insurer incorporated in Ohio. ASI, along with its wholly owned 
subsidiary Excess Share Insurance Corporation (ESI), provides primary 
share insurance to 152 credit unions in nine States and excess share 
insurance to several hundred credit unions, including federally insured 
credit unions, in 32 States. \22\ ASI has geographic concentration in 
two States particularly hard hit by the recent recession: California 
and Nevada.
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     \22\ ASI provides primary insurance directly in nine States 
(Alabama, California, Idaho, Illinois, Indiana, Maryland, Nevada, Ohio, 
and Texas), excess insurance directly in Arizona and California, and 
excess insurance indirectly through ESI in 30 other States. ASI and ESI 
both operate Web sites that list their respective States of operation.
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IV. NCUA Supervisory Improvements
    The last several years have provided clear evidence of the 
importance of a strong regulatory and supervisory approach. The depth 
and severity of the recent economic crisis has provided new insight to 
all regulatory agencies. NCUA is committed to proactively identifying 
areas of concern and implementing corrective action in a timely manner.
    To better accomplish this, NCUA modified its risk-based examination 
program to require annual examinations of every Federal credit union 
and increased on-site reviews of State-chartered credit unions. Annual 
examinations provide more frequent onsite contacts at credit unions, 
enabling NCUA to more effectively stay ahead of developing problems 
than the previous 18-month examination schedule allowed. Full 
implementation of the annual exam cycle is anticipated in 2011 as NCUA 
hires and trains additional staff.
    In addition to more frequent contacts at credit unions, NCUA is 
also taking stronger resolution action earlier in the process when 
problems are identified. In 2010 NCUA issued a supervisory letter and 
increased training for field staff directing more rapid escalation of 
administrative remedies to resolve problems that had been left 
uncorrected by credit union management.
    NCUA has increased the resources provided for credit union 
supervision to ensure problem areas are brought to a timely and 
appropriate resolution. A particular focus going forward will be strong 
regulation and supervision relative to interest rate risk management. 
NCUA has also been acquiring additional specialized expertise and 
incorporating an enhanced training program for examination staff.
    NCUA has made necessary adjustments over the past 2 years to 
address the increased challenges associated with the financial crisis 
and implement additional proactive risk mitigation programs.
    While NCUA remains a highly effective regulator and insurer, NCUA 
is also operating more efficiently. For every $1,000 in federally 
insured credit union assets, NCUA is currently spending just 22 cents--
compared with 31 cents in the year 2000.

V. Legislative Remedies

Current Legislative Requests
    Due to the financial environment and the evolving nature of 
financial reporting rules, NCUA is requesting statutory changes to its 
enabling statute, the Federal Credit Union Act (Act), to enhance its 
ability to serve as an effective safety and soundness regulator of over 
7,400 credit unions and deposit insurer for 90 million members. While 
these amendments are technical and noncontroversial, they are 
nonetheless critical to NCUA's role as regulator and insurer. \23\
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     \23\ See, Appendix 1 for applicable proposed legislative text.
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    NCUA requests the following statutory changes to the Act.

    Change the ``Net Worth'' definition to allow certain loans 
        and accounts established by the NCUA Board to count as net 
        worth. NCUA's ability to resolve problem credit unions at the 
        least cost to the NCUSIF has been limited by the Financial 
        Accounting Standard Board's changes in accounting standards, in 
        combination with the existing statutory definition of net 
        worth. Since NCUA does not have the ability to adjust the 
        definition of net worth similar to the Federal Deposit 
        Insurance Corporation's authority, this results in the dilution 
        of a credit union's net worth when it acquires another credit 
        union, regardless of whether or not NCUSIF assistance is 
        provided to facilitate the acquisition. This increases costs to 
        resolve failed institutions and necessitates more outright 
        liquidations instead of mergers. Liquidations immediately cut 
        members off from credit union services.

    Amend the Act to clarify that the equity ratio of the 
        NCUSIF is based on NCUSIF-only, unconsolidated financial 
        statements. Evolving accounting standards could result in the 
        consolidation of the financial statements of the NCUSIF with 
        regulated entities when NCUA exercises its role as the 
        Government regulator and insurer by conserving failed 
        institutions. The requested amendment would be consistent with 
        Congress' original intent in defining the NCUSIF equity ratio, 
        and prevent insured credit unions from being assessed 
        artificially inflated insurance premiums resulting from the 
        consolidation of financial statements with failed institutions.

    Streamline the operation of the Stabilization Fund. As 
        currently written, the Stabilization Fund must borrow from the 
        U.S. Treasury to obtain funds to make expenditures related to 
        losses in the corporate credit union system. The Stabilization 
        Fund then assesses federally insured credit unions to repay the 
        U.S. Treasury borrowing over time. Relevant amendments to 
        Section 217(d) of the Act would give NCUA the option of making 
        premium assessments on federally insured credit unions in 
        advance of anticipated expenditures, thereby avoiding borrowing 
        directly from the U.S. Treasury. In addition, while the 
        existing statutory language includes the implicit authority for 
        ongoing advances, a clarification of this in the statute is 
        recommended.

Anticipated Requests for Next Congress

    The following are important legislative initiatives for further 
improving the regulation of the credit union industry.

    Statute of Limitations. NCUA proposes that Congress amend 
        the Act to extend the statute of limitations \24\ provision 
        applicable to actions filed by NCUA as conservator/liquidating 
        agent of a credit union. This would provide parity with similar 
        authority already provided to FDIC, clarify other ambiguities 
        in the statute, and allow the NCUSIF to better mitigate losses.
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     \24\ 12 U.S.C. 1787(b)(14)

    Third-Party Vendor Authority. NCUA is the only regulator 
        subject to the Financial Institutions Reform, Recovery and 
        Enforcement Act of 1989 that does not have authority to perform 
        examinations of vendors which provide services to insured 
        institutions. Credit unions are increasingly relying on third-
        party vendors to support technology-related functions such as 
        Internet banking, transaction processing, and funds transfers. 
        Vendors are also providing important loan underwriting and 
        management services for credit unions. The third-party 
        arrangements present risks such as threats to credit risk, 
        security of systems, availability and integrity of systems, and 
        confidentiality of information. Without vendor examination 
        authority, NCUA has limited authority to minimize risks 
---------------------------------------------------------------------------
        presented by vendors.

    Supplemental Capital. Some financially healthy, well-
        capitalized credit unions that offer desirable products and 
        services are discouraged from marketing them too vigorously out 
        of concern that attracting share deposits from new and existing 
        members will inflate the credit union's asset base, thus 
        diluting its net worth for purposes of PCA. In effect, the 
        reward for their success in attracting new shares is the risk 
        of a demotion to a lower net worth category if accepting those 
        shares drives down the credit union's net worth ratio. NCUA 
        believes two legislative remedies would help reverse the 
        disincentive to accept new share deposits--one that addresses 
        the ``total assets'' denominator of the net worth ratio, and 
        another that addresses the ``retained earnings'' numerator. For 
        more information on the specific remedy proposed, refer to 
        NCUA's letter to the Honorable Barney Frank (appended to this 
        testimony document as Appendix 2).

    Member Business Lending Statutory Limit. The Act limits the 
        amount of member business loans the vast majority of credit 
        unions can grant to the lesser of 1.75 percent of net worth or 
        12.25 percent of assets. NCUA recognizes the importance of 
        small businesses in our Nation's economy. As such, NCUA 
        supports efforts to allow credit unions to provide businesses 
        additional avenues of credit when appropriate under a 
        comprehensive regulatory framework, by increasing or 
        eliminating the current statutory MBL limitation. Given such a 
        change, NCUA would promptly revise MBL regulations to 
        appropriately mitigate any additional risk. For more 
        information on the specific remedy proposed, refer to NCUA's 
        letter to the Honorable Timothy Geithner (appended to this 
        testimony document as Appendix 3).

VI. Conclusion
    Over the last 24 months, the credit union industry has faced 
profound and unprecedented threats to its stability. A steep plunge in 
global financial markets triggered the most severe economic downturn in 
recent memory. The resulting cascade of job losses, home foreclosures, 
and bankruptcies exerted significant pressure on the entire American 
financial services sector, including credit unions.
    NCUA's experience during these years of crisis demonstrated the 
value of rigorous regulation, diligent oversight, and a robust 
insurance fund. NCUA's increased supervision contributed significantly 
to the credit union system's ability to withstand the extraordinary 
economic shocks over the past 2 years.
    Going forward, NCUA has also implemented proactive measures to 
address the ongoing strains and emerging risks to consumer credit 
unions. Coming out of this extraordinary economic downturn, the credit 
union industry remains financially stable and well positioned to emerge 
from the current economic downturn as a leader in the delivery of 
financial products and services to more than 90 million consumers.















              Additional Material Supplied for the Record

LETTER SUBMITTED BY FRED R. BECKER, JR., PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS





LETTER SUBMITTED BY BILL CHENEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

                   CREDIT UNION NATIONAL ASSOCIATION





      STATEMENT SUBMITTED BY THE CREDIT UNION NATIONAL ASSOCIATION













































        STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
the American Bankers Association appreciates the opportunity to submit 
this statement for the record--for the December 9, 2010, Senate Banking 
Committee hearing entitled ``The State of the Credit Union Industry.'' 
The American Bankers Association (ABA) represents banks of all sizes 
and charters and is the voice for the Nation's $13 trillion banking 
industry and its two million employees.
    There are several key points we would like to make in this 
statement:

    Even though credit unions pay no Federal taxes, the 
        industry received taxpayer assistance to resolve insolvent 
        corporate credit unions.

    Raising the credit unions legal business lending cap is not 
        necessary for credit unions to meet members' credit needs. 
        Moreover, expanding the lending cap is inconsistent with the 
        credit union mission and raises serious safety and soundness 
        concerns.

    Alternative or secondary capital is not appropriate for 
        credit unions. It would dramatically change the focus of credit 
        unions away from member-owned to a market-driven capital 
        structure, and would force credit unions to generate a level of 
        return necessary to attract such capital--all of which will 
        negatively impact credit union members.

    Credit unions, like many in the banking industry, have suffered 
losses as the recession took hold and unemployment dramatically 
increased. For the credit union industry, several multi- billion-dollar 
corporate credit unions (which were designed to provide investments and 
financial services to smaller, ``natural person'' credit unions) 
dramatically increased their level of risk and ended up failing. This 
caused severe losses to the National Credit Union Share Insurance Fund 
and created an environment where many smaller credit unions could fail. 
Even though credit unions pay no Federal taxes--a privilege bestowed on 
credit unions in order to focus their lending on ``people of small 
means''--the credit union industry sought taxpayer help to facilitate 
the repayment of these losses. \1\
---------------------------------------------------------------------------
     \1\ See, Appendix B for details on the taxpayer assistance which 
benefited the credit union industry. The mission of credit unions to 
serve people of small means was articulated in the preamble to the 1934 
Federal Credit Union Act.
---------------------------------------------------------------------------
    This assistance, like many other special programs related to 
banking and financial institutions, was appropriate for that time. It 
appears that now, however, some credit unions are using the financial 
crisis and the recession to argue for more business lending authority 
and access to alternative sources of capital. Credit unions argue that 
these greater authorities would enable them to meet the needs of small 
businesses seeking credit. Such arguments are simply not true. Under 
current law, business loans under $50,000 do not count against the 
aggregate business loan cap of 12.25 percent of assets. Moreover, the 
guaranteed portion of Small Business Administration loans does not 
count against the aggregate business loan limit. Thus, there is 
considerable opportunity under current law for credit unions to meet 
the needs of small business.
    In addition, only a small percentage of credit unions--one-half of 
one-percent--are at or near the congressionally mandated cap. Thus, 
even for larger business loans in excess of $50,000, there is little 
constraint on credit union lending except for these small numbers of 
large, fast-growing, profit-seeking credit unions.
    The real goal of expanded business lending is for some aggressive 
credit unions to make even more large dollar loans--such as loans for 
luxury golf and condominium developments. For some aggressive credit 
unions, it is not unusual for them to make multimillion dollar loans. A 
dramatic example of just how far these credit unions have gone is the 
financing of Thumper Pond, a resort development in Minnesota that went 
bankrupt. This luxury resort featured a golf course, spa, water park, 
hotels, and a planned condominium community. The resort was financed by 
a large commercial loan made by Spire Federal Credit Union. Not only is 
this far beyond any sensible definition of modest means, but the resort 
is located over 200 miles from the credit union's headquarters. Is this 
the kind of loan that should be tax-subsidized?
    Such loans are clearly counter to the chartered mission of serving 
people of small means. It is leveraging the tax-exemption to provide 
loans to large businesses that have plenty of credit options available 
through taxpaying banks. This credit union tax expenditure is neither 
focused nor contained; it takes revenue from banks that compete for 
these same loans--revenue that would be taxed and would help to offset 
some of the current Federal budget deficit.
    Lifting the business lending cap also raises serious safety and 
soundness concerns. As credit unions have aggressively pursued business 
lending options, business loan delinquencies have risen and some credit 
unions have failed. In fact, just a few weeks ago (November 23), the 
NCUA's Office of the Inspector General (OIG) released a report 
summarizing the 10 costliest natural person credit union failures. In 7 
of these 10 failures, business lending contributed to the failure. \2\
---------------------------------------------------------------------------
     \2\ Appendix A provides more details about what the Inspector 
General discovered.
---------------------------------------------------------------------------
    Moreover, the General Accountability Office in 2003 warned about 
the danger of business lending by credit unions and it was skeptical 
that NCUA was up to the challenge to monitor the expansion of credit 
union business lending. \3\ It should be no surprise that the Inspector 
General's Material Loss Review found adequate oversight often missing: 
business loans were made to nonmembers; credit unions exceeded the 
legal Member Business Loan cap of 12.25 percent; credit unions violated 
the loan-to-one borrower limit; and credit unions made business loans 
without a Member Business Loan policy. Expanding credit union business 
lending only encourages larger, riskier loans, without any assurance of 
adequate oversight.
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     \3\ Credit Unions: Financial Condition Has Improved, but 
Opportunities Exist to Enhance Oversight and Share Insurance 
Management. General Accounting Office, October 2003 (GAO-04-91), p. 49.
---------------------------------------------------------------------------
    Just as business lending is not the answer to the misfortunes of 
credit unions, neither is access to alternative or secondary capital. 
In fact, it will blur the line between credit unions and other 
depository institutions. By granting credit unions the ability to issue 
secondary capital, the capital structure of the credit union industry 
would fundamentally change. This would potentially permit any credit 
union to issue secondary capital to members and nonmembers alike. By 
moving away from the concept of ``member-owned'' equity towards a 
reliance on capital contributions from nonmembers and the broader 
marketplace, the very essence of a credit union's ownership structure 
is called into question. It would force credit unions to generate a 
level of returns necessary to attract such capital and therefore would 
be a costlier source of funds. Not only does this dramatically change 
the focus of credit unions away from serving their membership towards a 
market-driven capital structure, it also raises a host of corporate 
governance concerns, such as voting rights of holders of such ownership 
stakes, board composition, etc.
    Moreover, granting all credit unions the ability to raise 
alternative capital may negatively impact the ability of low-income 
credit unions to attract capital. Low-income credit unions would have 
to compete with other credit unions for this additional capital, thus, 
raising their cost of capital and making it more difficult to fulfill 
their social mission.
    NCUA will point to where credit unions in Australia and Canada have 
the ability to issue alternative capital. It should also be noted that 
credit unions in Australia and Canada are taxed. The lack of taxation 
of credit unions in the United States is the key difference.
    Finally, Congress, Treasury, and the GAO have questioned the need 
for alternative capital. In 1998, Congress specifically reinforced its 
view that credit unions, in maintaining their distinct character, 
should rely upon retained earnings to build net worth, while not 
issuing capital stock. For example, the report of the Senate Banking 
Committee [Rept. No. 105-193, p. 12] states that the ``NCUA [National 
Credit Union Administration] must design the system of prompt 
corrective action to take into account that credit unions are not-for-
profit cooperatives that (1) do not issue capital stock, and (2) must 
rely on retained earnings to build net worth.'' This was reinforced by 
Emil Henry, former Assistant Secretary of the Treasury for Financial 
Institutions, who noted in 2006 that the ability to ``raise equity 
capital by increasing retained earnings . . . is an important feature 
that is grounded in the cooperative nature of credit unions.'' And in 
2004, GAO found that there was no compelling evidence for alternative 
or secondary capital for credit unions.
    In conclusion, while the common perception about credit unions is 
that they are small mom-and-pop operations, the reality is that there 
are 167 credit unions that have over $1 billion in assets. To put that 
in perspective, these credit unions are larger than 91 percent of the 
taxpaying banks in this country. Moreover, the traditional credit 
unions are being squeezed out by the invasive tactics of these growth-
oriented credit unions. It is no surprise that over 2,600 credit unions 
have been absorbed into larger credit unions since the beginning of 
2001.
    While the rhetoric suggests that without greater business lending 
or capital authority there are no options for these institutions to 
grow and better serve their customers, the reality is that a very 
viable option is available today through switching to a mutual savings 
bank charter--a route that some credit unions have already taken. This 
charter provides greater flexibility, still preserves the mutual-member 
focus that credit unions find desirable, and is accompanied by the 
effective and experienced supervision of traditional banking 
regulators. This savings bank charter would give these credit unions 
the ability to expand their business lending and retain their mutual 
structure. However, NCUA actively impedes the ability of credit unions 
to engage in charter choice. Removal of NCUA's obstructionism is a far 
better alternative to enabling more business lending and access to 
alternative capital than a wholesale change in powers that will benefit 
only a small proportion of large credit unions. Facilitating conversion 
to a mutual savings bank charter will benefit those credit unions that 
have outgrown their charter, and will also improve the fiscal position 
of the United States as these entities pay their fair share of taxes.
    Congress is rightfully concerned about the state of the corporate 
credit unions in receivership and the significant costs their rescue 
imposes on the rest of the credit union industry. While the taxpayer 
assistance was appropriate for the circumstances, it is ironic that 
taxpayer dollars would be used to support an industry that has not paid 
a single dollar in Federal taxes. The answer to the stresses currently 
suffered by credit unions is not to increase business lending powers or 
allow alternative forms of capital. Nor are these necessary to meet the 
credit needs of businesses. The fact is that there is ample authority 
under existing law to meet credit unions small business member needs. 
Equally important is that expanding the lending cap is inconsistent 
with the credit union mission and raises serious safety and soundness 
concerns. Similarly, alternative capital may sound appealing, but it 
would dramatically change the member-owned focus of credit unions to a 
market-driven one, which ultimately will negatively impact credit union 
members.
    Against a backdrop where nontraditional credit unions forsake the 
common bond in favor of fast growth, and where energies are diverted to 
favoring the well-off and businesses rather than meeting their 
chartered obligation to serve people of modest means, it is no surprise 
that ABA opposes expansion of credit union powers. To allow such 
expansion will only move the new breed of credit unions further and 
further away from their mandated mission.





    STATEMENT SUBMITTED BY MARY MARTHA FORTNEY, PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF STATE CREDIT UNION 
                              SUPERVISORS

    The National Association of State Credit Union Supervisors (NASCUS) 
appreciates the opportunity to provide a submission for the record of 
the December 9, 2010, Senate Banking Committee hearing ``The State of 
the Credit Union Industry.''
    NASCUS, the professional association of State credit union 
regulators, has been committed to enhancing State credit union 
supervision and advocating for a safe and sound State credit union 
system since its inception in 1965. NASCUS and State regulators would 
like to take this opportunity to brief the Committee on a needed 
critical reform: natural person credit union access to supplemental 
capital.
    As this Committee knows, the credit union capital structure is 
unique among financial institutions. Credit unions can only rely on 
retained earnings for capital growth, an archaic structure that does 
not allow credit unions to raise capital in times of need. The current 
economic environment facing credit unions only reinforces NASCUS and 
State regulators' steadfast support of supplemental capital access for 
natural person credit unions. NASCUS and State regulators have believed 
for years that supplemental capital is appropriate for credit unions, a 
necessary tool for safety and soundness and critical to the credit 
union system's long term health and sustainability.
    In addition to the general economic impact, credit unions are 
paying for the deterioration of the corporate credit union network 
through assessments to the Temporary Corporate Credit Union 
Stabilization Fund (TCCUSF) at an estimated total cost of $13.9-16.1 
billion spread across 10 years. This is putting additional stress on 
credit union balance sheets already challenged by a restrictive capital 
regime.
    As evidenced by the development of the third iteration of Basel 
standards, international regulators are capital planning far into the 
future and addressing prospective capital considerations for banks and 
other financial institutions. What are U.S. credit unions doing as far 
as capital planning for the future? Unfortunately, relying on just 
retained earnings for net worth does not provide needed flexibility for 
capital planning. Credit unions cannot thrive and compete under these 
archaic capital standards.
    Non- low income, natural person credit unions remain virtually the 
only class of depository institutions denied access to supplemental 
capital. This distinction carries enormous implications for natural 
person credit unions' ability to manage both the current economic 
climate, but also the eventual economic recovery. Further, from a 
regulatory standpoint, a well managed supplemental capital program can 
provide increased systemic stability, additional balance sheet 
management tools and an extra buffer to mutualized losses.
    NASCUS encourages this Committee to make the necessary changes to 
the definition of net worth in the Federal Credit Union Act to allow 
access to supplemental capital. Following the legislative change, State 
and Federal regulators would establish prudent regulatory standards for 
supplemental capital. However, State and Federal regulators would not 
be starting from scratch--there are supplemental capital models in use 
around the world, and NCUA and State regulators have studied the 
regulatory considerations for its use in the United States.
    For NASCUS and State regulators (many of whom are familiar with 
supplemental capital through bank regulatory responsibilities) 
achieving capital reform has long been a matter of safety and 
soundness. Increased capital and investor discipline can provide 
critical buffers during economic downturns. We believe credit unions 
can manage the complexities of supplemental capital. We know that State 
regulators can manage its regulation.
    NASCUS urges this Committee to make credit union access to 
supplemental capital a priority in the upcoming Congress. NASCUS and 
State regulators welcome questions from the Committee on this issue.
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