[Congressional Record Volume 144, Number 104 (Wednesday, July 29, 1998)]
[Senate]
[Pages S9275-S9278]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




        CONGRESSIONAL BUDGET OFFICE COST ESTIMATE FOR H.R. 1151

 Mr. D'AMATO. Mr. President, I ask that the Congressional 
Budget Office Cost Estimate for H.R. 1151, the Credit Union Membership 
Access Act, be printed in the Record. The Senate completed action on 
H.R. 1151 on July 28, 1998.
  The cost estimate follows:

               Congressional Budget Office Cost Estimate


             H.R. 1151--Credit Union Membership Access Act

       Summary: H.R. 1151 would establish new guidelines governing 
     eligibility for membership in credit unions; establish a 
     framework of safety and soundness regulations for credit 
     unions consistent with that for banks and savings and loans; 
     and allow the National Credit Union Administration (NCUA) to 
     increase assessments that credit unions pay into the National 
     Credit Union Share Insurance Fund (NCUSIF) and to increase 
     the normal operating balance of the fund. CBO estimates that 
     implementing the act would increase net assessments paid to 
     the NCUSIF BY $510 million over the 1999-2003 period, thereby 
     reducing net outlays by that amount. The Joint Committee on 
     Taxation (JCT) estimates that enacting H.R. 1151 would lead 
     to a shift of deposits from financial institutions that pay 
     federal income taxes to credit unions, which are not subject 
     to federal income tax, resulting in revenue losses to the 
     federal government totaling $143 million through 2003.
       Because H.R. 1151 would affect both revenues and direct 
     spending, it would be subject to pay-as-you-go procedures. 
     H.R. 1151 contains intergovernmental mandates as defined in 
     the Unfunded Mandates Reform Act (UMRA) because it would, in 
     certain circumstances, preempt state laws regulating credit 
     unions. CBO estimates that the cost of such mandates would be 
     minimal. Other impacts on states would also not be 
     significant. H.R. 1151 would not impose mandates or have 
     other budgetary impacts on local or tribal governments.
       H.R. 1151 would impose new private-sector mandates, as 
     defined by UMRA, on federally insured credit unions. CBO 
     estimates that the cost of those mandates would not exceed 
     the statutory threshold established in UMRA ($100 million in 
     one year, adjusted annually for inflation). Other provisions 
     of the bill would benefit some credit unions by reversing the 
     effects of a recent Supreme Court Decision, thus allowing 
     federal credit unions to organize with members from unrelated 
     occupational groups.


                    DESCRIPTION OF MAJOR PROVISIONS

       H.R. 1151 would overturn a February 1998 supreme Court 
     decision in National Credit Union Administration v. First 
     National Bank & Trust Co., et al., which--in the absence of 
     legislation such as this--will tighten the limitations on 
     membership in credit unions. The case dealt with a challenge 
     to the NCUA's interpretation of section 109 of the Federal 
     Credit Union Act, which requires that membership in federal 
     credit unions be limited to groups having a common bond of 
     occupation or association, or to groups within a well-defined 
     neighborhood or community. The NCUA ruled in 1982 that a 
     single credit union could serve employees of multiple 
     employers even though not all employers were engaged in the 
     same industrial activity. The Supreme Court has now 
     determined that the NCUA's interpretation was invalid.
       This legislation would amend the Federal Credit Union Act 
     to allow federal credit unions to accept members from 
     unrelated groups--thus forming multiple common bonds--in 
     addition to the current permissible categories of single 
     common bond and community credit unions. The act would 
     grandfather membership status for members of existing credit 
     unions and allow credit unions to solicit members from 
     unrelated groups of up to 3,000 persons.
       Other provisions of the act would: establish new procedures 
     for taking prompt corrective action regarding a troubled 
     credit union and specify capital levels for credit unions, 
     which would be equal to the standards that the banking and 
     thrift regulators now require; require the NCUA to develop 
     risk-based requirements for determining the net worth of 
     certain credit unions that the NCUA determines to be 
     ``complex;'' change the method for calculating the ratio of 
     NCUSIF balances to total credit union deposits; specify a 
     range (between 1.3 percent and 1.5 percent of insured 
     deposits) for the normal balance of the insurance fund; 
     assessments would be triggered if the fund balance falls 
     below 1.2 percent; require an independent financial audit for 
     all credit unions with total assets of $500,000 or more; 
     limit the total volume of commercial loans that can be made 
     by a credit union to the lesser of 1.75 times the actual 
     capital level of the credit union or to 1.75 times the 
     capital level of a well-capitalized credit union with the 
     same amount of assets; require credit unions to serve members 
     of ``modest means,'' and require the NCUA to monitor the 
     lending record of credit unions to ensure compliance with 
     this provision; require the NCUA and the other federal 
     banking agencies to review certain rules and regulations with 
     the goal of streamlining and modifying them, as appropriate, 
     to reduce paperwork and unnecessary costs for insured 
     depository institutions; require the Secretary of the 
     Treasury to prepare several reports, including a study of the 
     difference between credit unions and other financial 
     institutions that are federally insured, and a study 
     outlining recommendations for legislative and administrative 
     actions that would reduce and simplify the tax burden on 
     small insured depository institutions; and simplify the rules 
     allowing credit unions to convert to another insured 
     institution and limit the economic

[[Page S9276]]

     benefit that senior officials of a credit union could gain 
     when converting a credit union to a mutual institution.
       Estimated cost to the Federal Government: The estimated 
     budgetary impact of H.R. 1151 is shown in the following 
     table. Over the 1999-2003 period, CBO estimates that net 
     collections of the NCUSIF would increase by about $510 
     million. The JCT estimates that federal revenues would 
     decline by $6 million in 1999 and $143 million over the 1999-
     2003 period. The outlay effects of this legislation fall 
     within budget function 370 (commerce and housing credit).

 
                                     [By fiscal year, in million of dollars]
----------------------------------------------------------------------------------------------------------------
                                                   1998       1999       2000       2001       2002       2003
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING
 
NCUA spending under current law:
    Estimated budget authority................          0          0          0          0          0          0
    Estimated outlays.........................       -182       -145       -117       -116       -120       -123
Proposed changes:
    Estimated budget authority................          0          0          0          0          0          0
    Estimated outlays \1\.....................          0        -93       -113       -110        -99        -94
NCUA spending under H.R. 1151:
    Estimated budget authority................          0          0          0          0          0          0
    Estimated outlays.........................       -182       -238       -230       -226       -219       -217
 
                                               CHANGES IN REVENUES
 
Estimated revenues \2\........................          0         -6        -16        -27        -40       -54
----------------------------------------------------------------------------------------------------------------
\1\ These amounts exclude changes in NCUA interest income from intragovernmental payments that have no net
  budgetary impact.
\2\ A negative sign indicates a decrease in revenues.

       Basis of estimate: For purposes of this estimate, we assume 
     H.R. 1151 will be enacted by the beginning of fiscal year 
     1999. The provisions of the act that are expected to have a 
     significant budgetary effect are discussed below. The reports 
     to be completed by the Secretary of the Treasury would be 
     funded by discretionary spending, but we estimate that the 
     amounts required would not be significant.
       Direct spending: CBO estimates that, under H.R. 1151, the 
     amount of assessments that credit unions pay to the NCUSIF 
     would increase by about $352 million over the 1999-2003 
     period and that rebates to members from the fund would 
     decline by $185 million over the same period. Together, these 
     changes would reduce federal outlays by $537 million from 
     1999 through 2003. NCUSIF's payments for the NCUA's operating 
     costs would increase by $27 million over the five years, for 
     a net budgetary savings of $510 million through 2003. 
     Finally, we estimate that the operating fund of the NCUA 
     would incur additional administrative costs of $55 million 
     over the 1999-2003 period to carry out the act's provisions 
     related to safety and soundness, and to ensure that credit 
     unions meet the needs of all members of the community. These 
     costs would be offset by additional income from fees and 
     payments from the NCUSIF.
       Assessment income: H.R. 1151 would make three changes that 
     CBO expects would increase assessments paid into the NCUSIF 
     over the next 10 years. It would (1) allow current credit 
     union members whose membership status was nuclear as a result 
     of the Supreme Court ruling to retain their membership and 
     allow credit unions to accept members from unrelated groups; 
     (2) change the formula for calculating the reserve balance in 
     the NCUSIF; and (3) change the frequency with which credit 
     unions pay assessments for deposit insurance. This 
     estimate measures these changes relative to current law, 
     which reflects the Supreme Court decision in the case of 
     National Credit Union Administration v. First National 
     Bank & Trust Co., et al.
       The act would allow for an expansion in credit union 
     memberships by allowing growth in groups with common bonds, 
     including occupational credit unions, where the greatest 
     potential for new deposits exists. Recently, about two-thirds 
     of all net new job creation has been associated with small 
     businesses employing fewer than 500 persons. Although H.R. 
     1151 would encourage the chartering of new credit unions with 
     a common single bond of occupation or association, these 
     groups are often too small to have their own sponsor for a 
     separate credit union. CBO believes that, as a result of this 
     act, such small groups of individuals sharing a common 
     employer or occupation would be more likely to join together 
     to form new credit unions, or to join existing ones, thereby 
     forming credit unions with members having multiple common 
     bonds. Thus, we expect the number of size of credit unions 
     with multiple common bonds to grow faster than under current 
     law. As a result, we expect that enactment of H.R. 1151 would 
     trigger growth of deposits in credit unions of about 5 
     percent annually by 2000, compared to projected annual growth 
     of about 3 percent under current law. With more rapid growth 
     in deposits, CBO expects that insurance assessments collected 
     by the NCUA also would increase because credit unions pay to 
     the NCUSIF an amount equal to 1 percent of the growth in 
     their deposits each year.
       The act would impose some restrictions that could limit the 
     growth of deposits, by narrowing the definition of ``family 
     members'' eligible for membership; limiting conversions to 
     community credit unions; requiring the NCUA to impose tougher 
     capital standards and to close insolvent credit unions 
     promptly; and prohibiting credit unions that are 
     undercapitalized from making new commercial loans. It also 
     would encourage a shift of some deposits from credit unions 
     to thrifts or banks by simplifying the process involved in 
     converting a credit union to another type of insured 
     institution and by allowing some profits from conversions to 
     accrue to individuals. Nevertheless, CBO expects that the 
     effects of other provisions of H.R. 1151, which would lead to 
     more rapid deposit growth, would more than offset thee 
     restrictions.
       The act would change the NCUSIF's normal operating level of 
     reserves by allowing the fund balance to range between $1.30 
     per $100 of insured deposits to as much as $1.50 per $100 of 
     insured deposits. Under current law, the NCUA rebates all 
     balances in excess of 1.3 percent. Under the act, however, 
     CBO expects that the NCUA would continue to provide rebates 
     to members but would limit the amount to one-half the total 
     potentially available for refunding, thereby accumulating 
     higher balances in the insurance fund. CBO estimates that the 
     NCUA would authorize rebates totaling about $465 million over 
     the 1999-2003 period, or about $185 million less than under 
     current law.
       Safety and Soundness: H.R. 1151 also would strengthen the 
     regulatory framework of credit unions, and would specify 
     statutory capital and net worth standards equal to those of 
     other insured financial institutions. The act would authorize 
     the NCUA to take prompt corrective action against credit 
     unions engaged in unsafe practices. Because the act would 
     allow credit unions to diversify their membership among 
     various occupational groups, we expect that the stress on 
     particular credit unions would be reduced in periods of 
     corporate downsizing or closure. As a consequence, the 
     probability of failure of credit unions and of losses to the 
     insurance fund would be lower. At this time, CBO has no basis 
     for estimating the potential savings--if any--to the NCUSIF.
       Other provisions. The act would limit the authority of most 
     credit unions to make business loans exceeding $50,000 to the 
     lesser of 1.75 times the net worth of the institution or 1.75 
     times the minimum net worth for a well-capitalized credit 
     union with the same amount of assets. (A well-capitalized 
     credit union is defined as having a ratio of capital to 
     assets of 7 percent.) Section 203 would allow a transition 
     period of three years to phase in the new restrictions on 
     business loans. In addition, the act would require the NCUA 
     to issue regulations defining permissible membership and 
     boundaries for community credit unions. Title II would 
     require the NCUA to prescribe criteria for annually 
     evaluating the record of any community credit union and to 
     develop procedures for ensuring compliance.
       CBO estimates that the additional cost to the NCUA to 
     undertake the various initiatives required by H.R. 1151 would 
     total approximately $4 million in 1999, and would increase to 
     $17 million by 2003, about 14 percent of its operating 
     budget. The basis for this estimate is the cost of similar 
     activities for the other federal financial regulators. 
     Most of these expenses, which total an estimated $55 
     million through 2003, would be for evaluating the records 
     of all insured credit unions to ensure that they meet the 
     needs of those in the community with modest means. They 
     include costs for training, computer support, and 
     overhead. The operating funds of the NCUA are derived from 
     two sources: examination fees charged to credit unions and 
     transfers of funds from the NCUSIF equal to one-half of 
     the annual expenses associated with operating the NCUA. We 
     expect the NCUA would increase fees and reduce rebates to 
     credit unions in amounts sufficient to recover the 
     increase in administrative costs, resulting in no 
     significant budgetary impact over the next five years.
       Revenues: The Joint Committee on Taxation estimates that 
     enacting H.R. 1151 would result in a loss of governmental 
     receipts because deposits would shift from financial 
     institutions that currently are subject to corporate 
     taxation--primarily banks and thrifts--to credit unions, 
     which are exempt from federal taxation. Assuming that, over 
     time, deposits in credit unions would grow about 2 percent 
     per year faster than under current law, the JCT estimates 
     that the federal government would lose revenues

[[Page S9277]]

     totaling $143 million over the 1999-2003 period.
       Pay-as-you-go considerations: Section 252 of the Balanced 
     Budget and Emergency Deficit Control Act sets up pay-as-you-
     go procedures for legislation affecting direct spending or 
     receipts. The net changes in outlays and governmental 
     receipts that are subject to pay-as-you-go procedures are 
     shown in the following table. For the purposes of enforcing 
     pay-as-you-go procedures, only the effects in the current 
     year, the budget year, and the succeeding four years are 
     counted.

 
                                                        [By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    1998       1999       2000       2001       2002       2003       2004       2005       2006       2007       2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays.............          0          0          0          0          0          0          0          0          0          0          0
Changes in receipts............          0         -6        -16        -27        -40        -54        -70        -87       -106       -127       -151
--------------------------------------------------------------------------------------------------------------------------------------------------------

       The JCT estimates that, under H.R. 1151, there would be 
     more deposits in credit unions and fewer in financial 
     institutions that are subject to federal taxation. Forgone 
     revenues are estimated to total $143 million over the 1999-
     2003 period.
       Under the Balanced Budget and Emergency Deficit Control 
     Act, provisions providing funding necessary to meet the 
     government's deposit insurance commitment are excluded from 
     pay-as-you-go procedures. Therefore, the projected increases 
     in assessment income and decreases in rebates to credit 
     unions would not count for pay-as-you-go purposes. CBO 
     believes that the administrative costs related to safety and 
     soundness, estimated to total about $11 million through 2003, 
     would be excluded as well. In contract, CBO believes that the 
     various costs that the NCUA would incur to ensure that credit 
     unions serve people of modest means would count for pay-as-
     you-go purposes. We estimate that the additional direct 
     spending for the NCUA's supervisory costs associated with 
     activities other than those related to safety and soundness 
     would total about $45 million over the 1999-2003 period. 
     These costs would be fully offset by increases in fees 
     charged to credit unions or reduced rebates, resulting in no 
     significant net budgetary impact.
       Estimated Impact on State, local, and tribal governments: 
     H.R. 1151 contains intergovernmental mandates as defined in 
     UMRA because it would, in certain circumstances, preempt 
     state laws regulating credit unions. Specifically, the act 
     would establish safety, soundness, and audit requirements 
     that are stricter than some state standards. In addition, it 
     would impose limits on the volume of business loans made by 
     credit unions. It could also override state community 
     reinvestment laws that apply to state-chartered credit unions 
     that are federally insured. Under UMRA such preemptions would 
     be mandates. However, because these preemptions would simply 
     limit the application of state law in some circumstances, and 
     because only a few states are likely to be affected, CBO 
     estimates that they would impose only minimal costs on 
     states.
       H.R. 1151 also contains provisions that would increase the 
     workload of state regulators of credit unions. These 
     provisions would not be mandates under UMRA because they are 
     the result of voluntary agreements between state and federal 
     regulators, under which state regulators incorporate federal 
     requirements into their evaluations of state-chartered credit 
     unions. The net effect of these provisions would not be 
     significant because costs incurred by state regulators would 
     be offset by examination fees and assessments levied by the 
     states. Finally, the legislation would not impose mandates or 
     have other budgetary impacts on local or tribal governments.
       Estimated impact on the private sector: H.R. 1151 would 
     impose new private-sector mandates, as defined by UMRA, on 
     federally insured credit unions. CBO estimates that the 
     direct costs of complying with private-sector mandates in 
     H.R. 1151, in the first five years after mandates become 
     effective, would be below the statutory threshold established 
     in UMRA ($100 million in 1996, adjusted annually for 
     inflation). Several provisions in the act would impose 
     restrictions on credit unions that could affect their long-
     term future business potential. CBO expects that those 
     restrictions could limit somewhat the growth of deposits. At 
     the same time, a key provision in H.R. 1151 would benefit 
     federal credit unions by relaxing an existing restriction and 
     allowing occupation-based credit unions to serve multiple 
     unrelated groups. Overall, CBO estimates that total deposits 
     of credit unions would grow faster under H.R. 1151 than under 
     current law.
       Private-sector mandates contained in the bill: H.R. 1151 
     would impose several mandates on federally insured credit 
     unions. The primary mandates in the act would: establish new 
     criteria for credit unions to demonstrate service to low- and 
     moderate-income individuals; limit the amount of business 
     loans that an institution can make to members; establish a 
     system of prompt corrective action that is consistent with 
     the system currently applicable to institutions insured by 
     the Federal Deposit Insurance Corporation; require credit 
     unions having assets greater than $50 million to remit 
     deposits to the NCUSIF semiannually instead of annually; and 
     impose new regulations regarding auditing and accounting 
     procedures for institutions with assets greater than $10 
     million.
       Serving persons of modest means. Section 204 would subject 
     federally insured credit unions to a periodic review by the 
     NCUA of their record in providing affordable credit union 
     services to low- and moderate-income individuals within their 
     membership group. The act would direct the NCUA to develop 
     additional criteria for annual evaluations of the record of 
     community credit unions. Such institutions are usually 
     organized to serve a particular local community, 
     neighborhood, or rural district and are not based on an 
     occupational bond. The act would direct the NCUA to 
     implement regulations that emphasize performance over 
     paperwork.
       Business Loans to Members. Section 203 would put limits on 
     the total amount of business loans that a federally insured 
     credit union could make. Business loans to members would be 
     limited to an amount that is the lesser of 1.75 times a 
     credit union's actual net worth or 1.75 times the statutory 
     requirement for well-capitalized institutions with the same 
     amount of assets. For a well-capitalized credit union, this 
     provision would effectively limit business loans to its 
     members to 12.25 percent of its assets. The act would exempt 
     from this requirement credit unions that have a history of 
     primarily making business loans to members and credit unions 
     that serve predominantly low-income members. Although the 
     limit on business loans would be effective on the date of 
     enactment, H.R. 1151 would allow credit unions with loans 
     over the limit on that date three years to reduce the volume 
     of outstanding loans to a level that is in compliance.
       Safety and Soundness Provisions. Section 301 would require 
     the NCUA to establish a system of prompt corrective action 
     (PCA) for federally insured credit unions within one and one-
     half years after enactment. As a part of the PCA system H.R. 
     1151 would establish statutory capital levels for federally 
     insured credit unions based on an institution's ratio of net 
     worth to assets--well-capitalized, adequately capitalized, 
     undercapitalized, significantly undercapitalized, and 
     critically undercapitalized. (Credit unions that are deemed 
     to have complex portfolios by the NCUA would have additional 
     risk-based capital requirements.) Well-capitalized 
     institutions would have no further restrictions on their 
     activities under PCA. Credit unions that are not well-
     capitalized would have to set aside net worth (usually 
     retained earnings) at a rate of 0.4 percent of assets 
     annually. Undercapitalized institutions would have to (1) 
     create a restoration plan approved by the NCUA, (2) monitor 
     asset growth in compliance with an approved plan, and (3) 
     restrict the growth of business loans to members.
       Semi-Annual Remittance to the Share Insurance Fund. Under 
     current law, each insured credit union maintains on deposit 
     in the NCUSIF an amount equal to 1 percent of the credit 
     union's insured share deposits. Credit unions periodically 
     certify the amount of share deposits and, each April, they 
     adjust their deposit in the fund based on this amount. For 
     credit unions with more than $50 million in assets, this 
     legislation would change the schedule to twice per year for 
     adjusting deposit levels in the fund.
       New Accounting Requirements. Section 201 would require 
     credit unions with assets over $500 million to have an annual 
     independent audit of their financial statement performed in 
     accordance with generally accepted accounting principles 
     (GAAP). H.R. 1151 would also require credit unions with 
     assets over $10 million to use GAAP in all reports required 
     to be filed with the NCUA. Credit unions with assets under 
     $10 million would be allowed to continue to use other methods 
     outlined in NCUA's Accounting Manual, unless GAAP is 
     specifically prescribed for them by NCUA or their state 
     regulator.
       Estimated costs to the private sector: In total, CBO 
     estimates that the cost of mandates in H.R. 1151 would fall 
     below UMRA's threshold for private-sector mandates. Complying 
     with the provisions in section 204, dealing with service to 
     persons of modest means, would be the most costly mandate in 
     the act. The costs of those provisions would range from $25 
     million to $33 million in the first year that the regulations 
     are fully implemented, fall in the next year, and rise 
     somewhat thereafter. The cost to credit unions of limiting 
     business loans to members are not expected to be substantial 
     overall, but some institutions may have to bear significant 
     losses on loans in order to comply with this restriction. The 
     direct costs of other mandates in the legislation would be 
     less than $3 million in any of the five years after mandates 
     would become effective. The safety-and-soundness provisions 
     would increase examination costs incurred by credit unions by 
     about $1 million annually by the year 2001. Lost investment 
     income to credit unions that would have to make additional 
     deposits to the share insurance fund would total between $1.5 
     million and $2 million during each of the first five years 
     after implementation. The costs of complying with the 
     accounting provisions in the act would be negligible because 
     most institutions are already in or near compliance.

[[Page S9278]]

       Serving Persons of Modest Means. The cost of complying with 
     requirements that would result from provisions in section 204 
     are difficult to assess because the NCUA would have to 
     develop a new set of criteria to evaluate a credit union's 
     service to members of modest means. Such rules are likely 
     to differ substantially from those applicable to other 
     depository institutions. Based on information from the 
     NCUA and other regulatory agencies, CBO estimates that the 
     costs of complying with those provisions would range from 
     $25 million to $33 million in the year 2000 and would fall 
     in the next year once the system is in place. Most of the 
     incremental costs to credit unions would be for keeping 
     additional records on member loans and share accounts to 
     assist in monitoring services to low-income persons, 
     marketing to all segments within the membership field, and 
     undergoing more extensive periodic examinations. Costs 
     could be higher if the NCUA determines that additional 
     types of information would be necessary to monitor 
     compliance with these provisions.
       In general, federally insured credit unions would have to 
     record additional information on households with respect to 
     such member services as loans and, possibly, share accounts. 
     The incremental costs of new recordkeeping requirements could 
     range between $17 million and $25 million beginning in the 
     year 2000, and would fall by 20 percent to 30 percent in the 
     next years once the system is fully in place. Costs would 
     then rise over time as the number of loans and share accounts 
     grows. CBO estimates that the costs of marketing to all 
     income strata within the field of membership would increase 
     costs by $4 million to $5 million annually, which is less 
     than 1 percent of the amount that credit unions currently 
     spend on educational and promotional expenses. In addition to 
     those incremental costs, credit unions would have to cover 
     the costs of more extensive examinations by regulators. Based 
     on information from the NCUA and banking regulators, CBO 
     estimates that the increased costs for periodic examinations 
     would be about $3 million a year by the year 2000.
       Business Loans to Members. The restrictions on business 
     loans to members would not impose a significant cost on the 
     industry as a whole. Currently about 1,550 credit unions make 
     business loans to their members. Of that group, only about 
     100 institutions are currently over the limit proposed in the 
     act. According to the latest data, those institutions would 
     be over the limit by almost $870 million in loans. However, 
     many of the institutions that are over the limit would be 
     able to qualify under the act for an exemption based on their 
     history of making such loans. (In over 40 percent of the 
     institutions that are currently over the limit, business 
     loans make up 37 percent or more of their loan portfolio.)
       Credit unions that do not qualify for an exemption would 
     have 3 years to: allow loans to turn over (the turnover rate 
     for all credit union loans averages about 22 months); try to 
     sell loans on the market--only quality loans would attract a 
     high percentage on the dollar; try to engage in 
     ``participating loan'' programs, which allow institutions to 
     share up to 90 percent of their loan portfolio with other 
     credit unions; or try to ``call in'' loans under loan 
     agreements that have a provision allowing such an action. 
     Institutions with nonperforming loans or those that have a 
     slow turnover in their portfolio may have to sell loans at a 
     significant loss or write off loans at a total loss. Even 
     institutions that are able to sell off business loans could 
     experience a loss in interest income if they are unable to 
     invest money from the sale of those loans at comparable 
     interest rates. (Business loans typically garner a higher 
     rate than other loans in a credit union's portfolio.)
       Safety and Soundness Provisions. The near-term costs of new 
     requirements under section 301 should be small for two 
     reasons. First, the NCUA currently monitors the net worth of 
     credit unions and administers several informal policies that 
     are analogous to prompt corrective action procedures 
     applicable to FDIC-insured institutions. Second, about 94 
     percent of all federally insured credit unions are currently 
     well capitalized. Institutions with the lowest composite 
     performance ratings given by regulators have accounted for 
     only 3 percent or less of all credit unions over the last 
     four years.
       Under PCA, institutions that are not well capitalized would 
     have to set aside funds that they could otherwise use to earn 
     interest income. However, according to the NCUA, the .04 
     percent retention requirement is not significantly different 
     from current earnings-retention requirements. The costs of 
     examinations for credit unions would also increase slightly 
     (by $1 million or so by the year 2001) for all credit unions 
     under a system of prompt corrective action.
       Other Mandate Costs. Under section 302, insured credit 
     unions with more than $50 million in assets would have to 
     remit assessments twice a year to the NCUSIF, thus losing the 
     use of $60 million for six months, compared to the current 
     system. Assuming credit unions would earn an annual yield of 
     about 5.5 percent on those funds, they would lose income of 
     $1.5 million to $2 million per year over the 1999-2003 
     period.
       The costs of complying with the accounting provisions in 
     H.R. 1151 would be small. According to recent data from the 
     NCUA, all but one of the credit unions with over $500 million 
     in assets already have an independent outside audit performed 
     each year. The incremental costs of an audit would be less 
     than $30,000 for an institution of that size. The costs of 
     complying with GAAP would also be minor because most credit 
     unions with assets over $10 million use accounting procedures 
     that are largely consistent with GAAP. For institutions that 
     currently use methods that are not consistent with GAAP 
     (mostly cash accounting methods), the additional compliance 
     costs of this mandate could include the costs to train 
     employees in the application of GAAP accounting methods, and 
     the costs of transferring records into a new system of 
     accounting. However, the majority of institutions do not use 
     cash accounting methods and would, therefore, only have to 
     make minor changes to achieve compliance.
       Previous CBO estimate: On June 2, 1998, CBO prepared a cost 
     estimate for H.R. 1151, as passed by the House of 
     Representatives on April 1, 1998. For the House version of 
     H.R. 1151, CBO estimated that deposits in credit unions would 
     grow by 6 percent annually by 2000, compared to projected 
     annual growth of about 3 percent under current law. As a 
     result, CBO estimated that net assessments paid to the NCUSIF 
     would increase by $628 million over the period 1999-2003 
     period, and that the shift in deposits would reduce revenues 
     to the federal government by $217 million through 2003. In 
     contrast, for the Senate version of H.R. 1151, CBO estimates 
     that deposits in credit unions would grow at a rate of about 
     2 percent annually by 2000, that net assessments would 
     increase by $510 million over the 1999-2003 period, and that 
     revenue losses would total $143 million through 2003.
       CBO expects a lower annual rate of growth in deposits under 
     the Senate version of H.R. 1151 for a number of reasons. The 
     Senate version would specify net worth and capital 
     requirements for credit unions and require regulators to 
     restrict the growth of unhealthy institutions. In contrast, 
     the House version would give the NCUA discretion to develop 
     future standards affecting the safety and soundness of credit 
     unions. The Senate version of H.R. 1151 also would simplify 
     and ease procedures for converting a credit union to a mutual 
     institution. Unlike the House version, the Senate provisions 
     would not bar owners and members from earning profits if the 
     newly created mutual institution subsequently converted to a 
     publicly traded financial institution. CBO believes, 
     therefore, that the Senate version of H.R. 1151 would provide 
     a greater incentive to convert a credit union to a mutual or 
     stock institution by allowing participants to realize greater 
     economic benefits. This is consistent with the experience of 
     many small thrifts and banks that recently have converted 
     from mutual to stock ownership, thereby creating substantial 
     value for the new shareholders.
       Estimate prepared by: Federal Costs: Mary Maginniss; 
     Revenues: Mark Booth; Impact on State, Local, and Tribal 
     Governments: Marc Nicole; and Impact on the Private Sector: 
     Patrice Gordon.
       Estimate approved by: Robert A. Sunshine, Deputy Assistant 
     Director for Budget Analysis.

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