[Senate Report 105-193]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 384

105th Congress                   SENATE                          Report
 2d Session                                                     105-193
_______________________________________________________________________


 
                   CREDIT UNION MEMBERSHIP ACCESS ACT

                                _______
                                

                  May 21, 1998.--Ordered to be printed

                                _______


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 1151]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill (H.R. 1151), having considered the 
same, reports favorably thereon with an amendment and 
recommends that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     2
Purpose and Summary of Legislation...............................     3
Summary of Legislation...........................................     3
Section-by-Section Analysis......................................     6
Regulatory Impact Statement......................................    23
Congressional Budget Office Cost Estimate........................    23
Changes in Existing Law (Cordon Rule)............................    23
Additional Views.................................................    24

                              Introduction

    On April 30, 1998, the Senate Committee on Banking, 
Housing, and Urban Affairs (the ``Committee'') marked up and 
ordered to be reported a committee substitute for H.R. 1151, 
the ``Credit Union Membership Access Act,'' a bill to amend the 
Federal Credit Union Act to clarify existing law with regard to 
the field of membership of Federal credit unions, to preserve 
the integrity and purpose of Federal credit unions, to enhance 
supervisory oversight of federally insured credit unions, and 
for other purposes. The Committee reports the bill favorably 
with an amendment in the nature of a substitute, and recommends 
that the bill as amended do pass.

                       History of the Legislation

    On April 20, 1998, H.R. 1151, the ``Credit Union Membership 
Access Act'' was referred to the Committee after passage in the 
House of Representatives on April 1, 1998 by a vote of 411 to 
8. The Committee held two hearings on the impact of the Supreme 
Court decision of February 25, 1998, National Credit Union 
Administration v. First National Bank & Trust Co. et al., 118 
S. Ct. 927 (1998), on federal credit unions. At the first 
hearing, on March 26, 1998 the Committee received testimony 
from John D. Hawke, Under Secretary for Domestic Finance at the 
Department of Treasury and Richard S. Carnell, Assistant 
Secretary for Financial Institutions at the Department of 
Treasury; Norman E. D'Amours, Chairman, Yolanda Townsend Wheat 
and Dennis Dollar, Board Members of the National Credit Union 
Administration (``NCUA''); and Bruce O. Jolly, Esquire, of 
Shook, Hardy & Bacon in Washington, D.C.
    At the second hearing, on April 2, 1998, the Committee 
received testimony from Congressman Steven C. LaTourette and 
Congressman Paul E. Kanjorski; Michael S. Vadala who testified 
on behalf of National Association of Federal Credit Unions, 
Peggy Lents who testified on behalf of Credit Union National 
Association, Reid K. Pollard who testified on behalf of 
Independent Bankers Association of America, Neil Mahoney who 
testified on behalf of America's Community Bankers, and R. 
Scott Jones who testified on behalf of American Bankers 
Association.
    On April 30, 1998, the Committee met in Executive Session 
to markup H.R. 1151. The Committee considered and adopted, 
without objection, an amendment in the nature of a substitute 
that was offered by Chairman D'Amato and Ranking Member 
Sarbanes that incorporated amendments by other Committee 
members. During the markup, the Committee adopted, by voice 
vote, an amendment concerning the conversion of insured credit 
unions to mutual savings banks or savings associations, offered 
by Senator Shelby for himself and Senator Bennett. Senator 
Gramm offered an amendment to strike Section 204 of Title II, 
the section of the bill requiring NCUA to periodically assess 
the record of credit unions in providing affordable credit 
union services to all individuals of modest means (including 
low- and moderate-income individuals) within the credit union's 
field of membership. Senator Shelby then offered a second 
degree amendment to the amendment offered by Senator Gramm. 
Senator Shelby's amendment would have exempted small banks from 
Community Reinvestment Act requirements. The second degree 
amendment failed by a vote of 9 to 9. Senators D'Amato, 
Sarbanes, Dodd, Kerry, Bryan, Boxer, Moseley-Braun, Johnson and 
Reed voted against the amendment. Senators Gramm, Shelby, Mack, 
Faircloth, Bennett, Grams, Allard, Enzi, and Hagel voted in 
favor of the amendment. Senator Gramm then withdrew his 
amendment.
    The Committee then voted 16-2 to report H.R. 1151 to the 
Senate for consideration. Senators Mack and Hagel voted against 
the motion to report the bill from the Committee.

                   Purpose and Summary of Legislation

    The purpose of H.R. 1151, the Credit Union Membership 
Access Act, as reported from the Committee, is to amend 
existing law with regard to the field of membership of federal 
credit unions, to preserve the integrity and purpose of federal 
credit unions and to enhance supervisory oversight of federally 
insured credit unions.
    Credit unions are the only federally insured depository 
institutions not currently subject to capital requirements and 
a system of prompt corrective action. H.R. 1151 incorporates 
recommendations from the Treasury Department's 1997 study of 
credit unions and establishes capital standards and a system of 
prompt corrective action for federally insured credit unions 
that takes into account that credit unions are not-for-profit, 
member owned cooperatives that do not issue capital stock and 
must rely on retained earnings to build net worth. The bill 
significantly strengthens the prudential safeguards applicable 
to federally insured credit unions and makes the credit union 
system safer, sounder and more resilient.

                         Summary of Legislation

                                Title I

    Title I of the bill establishes three distinct types of 
common bond membership field categories for federal credit 
unions: single common-bond, multiple common-bond, and community 
credit unions. For multiple common-bond credit unions, each 
separate group must have its own common bond of occupation or 
association and less than 3,000 members at the time the group 
joins an existing credit union. The NCUA Board (``Board'') 
shall encourage the formation of a separately chartered credit 
union instead of approving an additional group within the field 
of membership of an existing multiple common-bond or single 
common-bond credit union. Before a credit union adds a new 
group to its field of membership, the Board must determine in 
writing that the credit union meets specific criteria. If NCUA 
determines that the formation of a separate credit union is not 
practicable or consistent with the criteria, the NCUA is 
required to include the group in the field of membership of a 
credit union in reasonable proximity to the group where 
practicable and consistent with safety and soundness.
    For multiple common-bond credit unions, there are 
exceptions to the numerical limit for including additional 
groups within the field of membership. Groups with 3,000 or 
more members are eligible to join an existing credit union if 
the NCUA determines in writing in accordance with guidelines 
and regulations required by the bill that the group would not 
be financially viable and is unlikely to succeed as a new 
single common-bond credit union. Another exception involves 
transactions for supervisory reasons.
    Title I contains a grandfather provision for all persons 
and organizations who could be forced out of credit unions as a 
result of the February 25, 1998 Supreme Court decision. The 
title grandfathers all current members as well as current 
groups contained within the field of membership of a federal 
credit union as of the date of enactment of this legislation. 
The grandfather provision also permits such groups to continue 
adding new members. In addition, persons or organizations 
located in an area underserved by financial institutions may be 
included in the field of membership of a multiple common-bond 
credit union which will establish and maintain an office or 
facility in that underserved area.
    This Title also addresses membership eligibility for family 
or household members. The section provides that membership in 
federal credit unions based on relationship shall be limited to 
individuals who are members of the ``immediate family or 
household'' of eligible members. The NCUA is directed to define 
these terms by regulation.
    Title I provides that once a person becomes a member of a 
credit union, that person may remain a member until the person 
chooses to withdraw from the membership of the credit union.
    Title I also includes a requirement that NCUA, by 
regulation, establish a definition for the term ``well defined 
local community, neighborhood, or rural district'' that will 
apply to applications to form a new credit union or alter or 
expand the field of membership of an existing community credit 
union.

                                Title II

    Title II provides that the accounting principles used for 
reports or statements of insured credit unions required to be 
filed with the NCUA are to be uniform and consistent with 
generally accepted accounting principles. Insured credit unions 
with less than $10 million in total assets are exempt from this 
requirement unless otherwise directed by the NCUA or a State 
credit union supervisor. Credit unions with $500 million or 
more in total assets must obtain annual audits performed in 
accordance with generally accepted auditing standards by an 
independent certified public accountant or public accountant 
licensed by the appropriate State or jurisdiction. If a credit 
union with assets of more than $10 million, but less than $500 
million, elects to conduct an audit using an independent 
auditor who is compensated, the audit must be performed in a 
manner that is consistent with the accountancy laws of the 
appropriate State or jurisdiction, including licensing 
requirements.
    Title II provides that insured credit unions may convert to 
a mutual savings bank or mutual savings association without the 
prior approval of the NCUA. Credit unions that propose to 
convert to a mutual savings bank or mutual savings association 
must submit notices to each member eligible to vote at 90, 60, 
and 30 days before the member vote on conversion. Approval of 
the proposed conversion requires the affirmative vote of a 
majority of the members who vote on the proposal. The vote on a 
conversion proposal is administered by the NCUA and verified by 
the Federal or State regulatory agency that would have 
jurisdiction after the conversion. If either the NCUA or the 
other regulatory agency disapproves of the voting methods or 
procedures, the vote must be re-taken. In addition, the title 
limits the compensation of directors and senior management 
officials of converted credit unions to director's fees and 
compensation and other benefits paid in the ordinary course of 
business in connection with the conversion from a credit union 
to a mutual savings bank or mutual savings association.
    Title II places, for the first time, significant 
restrictions on member business loans of federally insured 
credit unions. The total amount of outstanding member business 
loans of an insured credit union cannot exceed the lesser of 
1.75 times the minimum net worth required for a well 
capitalized credit union (7 percent net worth ratio), or 1.75 
times the actual net worth of the credit union. Insured credit 
unions that have a total amount of outstanding member business 
loans exceeding the limit on the date of enactment, are 
required to come into compliance with these restrictions within 
three years. This title provides exceptions for insured credit 
unions that are chartered for, or that have a history of 
primarily making member business loans to their members, such 
as members who are of a specialized vocation, for example: 
fishermen, farmers, truck drivers and taxi cab drivers. Credit 
unions that serve predominantly low income members or that are 
community development financial institutions are exempted. In 
addition, member business loan exemptions are codified as they 
appear in NCUA regulations currently in effect, including loans 
totaling $50,000 or less to any one borrower or associated 
member. Credit unions that exceed the member business loan 
limit are given three years to come into compliance with these 
limits.
    Title II reaffirms that insured credit unions have a 
continuing obligation to meet the financial services needs of 
persons of modest means, including low- and moderate-income 
individuals. The NCUA is required to review each credit union's 
record of meeting the financial service needs of itsentire 
field of membership. Title II establishes new appointment criteria for 
NCUA Board membership.

                               Title III

    Title III establishes a new system of prompt corrective 
action and capital requirements for insured credit unions and 
requires an alternative prompt corrective action system for new 
credit unions. The section defines five net worth categories 
and allows for adjusting net worth levels if Federal banking 
agencies increase or decrease required minimum levels for other 
institutions. The section also prescribes net worth retention 
requirements and net worth restoration plans. The section 
repeals section 116 of the Federal Credit Union Act.
    The section requires the NCUA to take prompt corrective 
action to resolve the problems of insured credit unions. The 
NCUA is required to report to Congress on the implementation of 
regulations for prompt corrective action and how the 
regulations differ from section 38 of the Federal Deposit 
Insurance Act and the reasons for these differences.
    Title III prohibits credit unions that become 
undercapitalized from making new commercial loans that would 
result in an increase of the total amount of member business 
loans outstanding at that credit union. The prohibition remains 
in effect until the credit union becomes adequately 
capitalized.
    Title III also affects the reporting of and calculation of 
the National Credit Union Share Insurance Fund equity ratio, 
available assets ratio, and standby premium charge.

                                Title IV

    Title IV requires a study and report on differing 
regulatory treatment between credit unions and other federally 
insured depository institutions, including a review of the 
potential effect of applying Federal tax laws to credit unions. 
Title IV also requires review and report of regulations and 
policies to reduce unnecessary costs and the paperwork burden 
for insured depository institutions. The title also requires a 
report with recommendations to reduce and simplify the tax 
burden for small banks.

                      Section-by-Section Analysis

Section 1. Short title

    Section 1 designates the act as the ``Credit Union 
Membership Act'' (the Act).

Section 2. Findings

    Section 2 lists five Congressional findings related to the 
credit union movement and its beginning, the public purposes of 
credit unions, and the importance of the common bond 
requirement. The section also addresses findings regarding the 
nature of credit unions and their tax exempt status as well as 
the need for improved safety and soundness.

                    Title I--Credit Union Membership

Section 101. Fields of membership

    Section 101 provides that the membership of federal credit 
unions shall be limited to the three following categories: 
single common-bond, multiple common-bond, and community credit 
unions. Single common-bond credit unions shall consist of one 
group that has a single common bond of occupation or 
association. Multiple common-bond credit unions shall consist 
of more than one group, each of which has (within such group) a 
common bond of occupation or association, and the number of 
members of which does not exceed 3,000 persons at the time the 
group is included in the field of membership of the credit 
union. The 3,000 person limitation applies only to the size of 
the group at the time of their inclusion within the field of 
membership of a credit union. The limit is not intended to 
restrict the growth of such groups after they are added to the 
credit union. Multiple common bonds are designated as such in 
response to the Supreme Court's February 25, 1998 decision on 
the common bond issue in National Credit Union Administration 
v. First National Bank & Trust Co., et al., 118 S. Ct. 927 
(1998).
    The Committee has determined that it is appropriate to 
amend existing law and specifically authorize multiple common 
bond federal credit unions, subject to additional group size 
and geographical expansion limits. The current law regarding 
community credit unions is modified by providing that these 
institutions shall consist of persons or organizations within a 
well-defined local community, neighborhood, or rural district.
    This section also grandfathers all persons or organizations 
who are members of Federal credit unions on the date of 
enactment of the Act. Furthermore, any individual member of a 
group that is part of a credit union shall continue to be 
eligible to become a member of that credit union and any new 
member of such group is also eligible. The successor to any 
particular organization or business entity that belongs to a 
credit union shall be allowed to continue its membership.
    An additional exception exists for persons or organizations 
within a local community, neighborhood or rural district that 
is underserved by other depository institutions. These persons 
or organizations may join an existing credit union provided 
that the credit union establishes a service facility in that 
area. The term ``facility'' is meant as it is defined by the 
NCUA. An automatic teller machine or similar device does not 
qualify as a service facility.
    The 3,000 member limitation is intended as the maximum size 
of an additional group that can be eligible to be included 
within an existing credit union, unless a specified exemption 
applies. The NCUA may permit groups with over 3,000 members to 
join an existing credit union after the Board determines in 
writing that the group lacks sufficient financial resources, 
volunteers or operational capacity to establish and operate a 
new single common-bond credit union, or if the group would be 
unlikely to operate a safe and sound credit union. The Board 
may merge or consolidate a group with over 3,000 members into 
another credit union for supervisory reasons. In addition, a 
narrow exception applies to any group transferred in connection 
with a voluntary merger which was approved by the NCUA prior to 
October 25, 1996.
    The Committee does not intend for these exceptions to 
provide the Board with broad discretion to permit larger groups 
to be included in other credit unions. These exceptions are 
intended to apply where the Board has sufficient evidence to 
support a finding that creation of a separately chartered 
credit union, or the continued operation of an existing credit 
union presents safety and soundness concerns.
    This section also provides that membership eligibility is 
extended only to individuals who are members of an ``immediate 
family or household'' of a credit union member. The NCUA is 
directed to define these terms by regulation. Until the 
regulation becomes effective, the current NCUA policy with 
respect to immediate family members will remain in effect. In 
addition, once a member joins a credit union, that person or 
organization may remain a member until they choose to withdraw, 
unless credit unions use provisions in current law to remove 
them.

Section 102. Criteria for approval of expansion of membership of 
        multiple common-bond credit unions

    This section provides for the NCUA to encourage the 
formation of separately chartered credit unions wherever 
possible, consistent with safety and soundness, instead of 
including an additional group within an existing credit union's 
field of membership. If the formation of a separate credit 
union by such group is not practicable or consistent with 
safety and soundness standards, then the inclusion of that 
group is required to be in a credit union within reasonable 
proximity to the location of the group.
    Section 102 requires multiple common-bond credit unions and 
single common-bond credit unions to apply to NCUA each time 
they choose to add a new group to their field of membership. 
The NCUA must determine in writing that specific approval 
criteria have been met. Specifically, the NCUA must find that a 
multiple common-bond credit union has not engaged in any unsafe 
or unsound practice that is material for a year before applying 
to add the new group; the credit union is adequately 
capitalized; the credit union has the administrative capability 
and financial resources to serve the new group; the credit 
union has been evaluated as satisfactorily providing affordable 
services to all individuals of modest means within its field of 
membership; and that the probable beneficial effect of the 
expansion clearly outweighs in the public interest, any 
potential harm to other insured credit unions. Credit unions 
seeking to add new groups must also meet any other requirements 
prescribed by the Board by regulation.

Section 103. Geographical guidelines for community credit unions

    Section 103 requires the Board to define by regulation the 
criteria it will use in determining the meaning of the term 
``well-defined local community, neighborhood, or rural 
district'' for purposes of evaluating charter applications by 
community credit unions. The term shall only apply to 
applications for new credit unions and applications to alter 
the membership of existing credit unions submitted after the 
date of enactment.

                 Title II--Regulation of Credit Unions

Section 201. Financial statement and audit requirements

    Section 201 provides that accounting principles applicable 
to reports or statements required to be filed with the Board 
shall be uniform and consistent with generally accepted 
accounting principles, unless the Board determines that such 
application is not appropriate, in which case the Board may 
prescribe principles that are no less stringent than generally 
accepted accounting principles. Credit unions with assets below 
$10 million are exempt from this provision, unless the Board or 
an appropriate State supervisor prescribes otherwise. This 
section requires insured credit unions with $500 million or 
more in assets to have an annual independent audit of their 
financial statements performed in accordance with generally 
accepted accounting principles by an independent certified 
public accountant or public accountant licensed by the 
appropriate State or jurisdiction to perform such services. 
This section also requires that accountancy laws of the 
appropriate State or jurisdiction, including licensing 
requirements, are to be followed when any credit union with 
assets greater than $10 million and less than $500 million, 
chooses to conduct a voluntary audit for any purpose using an 
independent auditor who is compensated for his or her audit 
services.

Section 202. Conversion of insured credit unions

     Section 202 authorizes the conversion of insured credit 
unions to mutual savings banks or mutual savings associations 
without the prior approval of the Board. The proposal for such 
conversion shall be first approved by a majority of the 
directors of the credit union who shall set a date for a vote 
by members of the credit union either at a meeting on that date 
or by written ballot. Approval of the proposal for conversion 
shall be by the affirmative vote of a majority of the members 
of the credit union who vote. The first notice of the proposal 
shall be given to each member who is eligible to vote, 90 days 
prior to the date of the vote on conversion. Additional notices 
must be given to each member eligible to vote, 60 days prior to 
the vote and again at 30 days prior to the vote. The Board may 
require an insured credit union that proposes to convert to a 
mutual savings bank or mutual savings association to submit a 
notice of its intent to convert during the 90 day period before 
the completion of the conversion. Upon completion of the 
conversion, the credit union will no longer be subject to any 
provisions of the Federal Credit Union Act. The vote on the 
conversion proposal by the members of the credit union shall be 
administered by the NCUA and verified by the Federal or State 
regulatory agency that would have jurisdiction over the 
institution after the conversion. If either the NCUA or that 
regulatory agency disapproves of the methods or procedures of 
the vote, it will be repeated.
    Section 202 also limits the economic compensation of any 
director or senior management official of an insured credit 
union that converts to a mutual savings bank or mutual savings 
association to director fees and compensation and other 
benefits paid in the ordinary course of business in connection 
with the conversion from a credit union to a mutual savings 
bank or mutual savings association. The term ``senior 
management official'' is defined for purposes of this section 
and includes a chief executive officer, an assistant chief 
executive officer, a chief financial officer, and any other 
senior executive officer as defined by the appropriate Federal 
banking agency pursuant to section 32(f) of the Federal Deposit 
Insurance Act.
    In addition, this section requires the NCUA to promulgate 
rules, within 6 months of enactment, applicable to charter 
conversions that are consistent with rules promulgated by other 
financial regulators including the Office of Thrift Supervision 
and the Office of the Comptroller of the Currency. The rules 
for charter conversions by insured credit unions must be no 
more or less restrictive than those rules that apply to charter 
conversions by other financial institutions. In the case of 
conversions after the enactment of this act, but prior to the 
promulgation of rules for this section by the NCUA, the 
Committee intends for the NCUA to evaluate and review such 
conversions in a manner consistent with the provisions of 
section 202.

Section 203. Limitation on member business loans

    In new section 107A(a) the Committee has imposed 
substantial new restrictions on commercial business lending by 
insured credit unions. Those restrictions are intended to 
ensure that credit unions continue to fulfill their specified 
mission of meeting the credit and savings needs of consumers, 
especially persons of modest means, through an emphasis on 
consumer rather than business loans. The Committee action will 
prevent significant amounts of credit union resources from 
being allocated in the future to large commercial loans that 
may present additional safety and soundness concerns for credit 
unions, and that could potentially increase the risk of 
taxpayer losses through the National Credit Union Share 
Insurance Fund (``Fund'').
    The intent of the Committee in this section is to further 
clarify and define business lending by insured credit unions. 
While the Committee acknowledges that consumer loans make up 
nearly 99 percent of all credit union lending, the Committee 
appreciates the necessity to minimize additional risk to the 
safety and soundness of insured credit unions through the 
extensive growth of commercial lending activity. An exception 
was included to recognize the expertise developed in 
specialized credit unions, such as those that serve members of 
specific vocations, the religious community and members of the 
agricultural community.
    Section 203 provides that no insured credit union may make 
any member business loan that would result in a total amount of 
such loans outstanding at that credit union at any one time 
that exceeds the lesser of (1) 1.75 times the actual net worth 
of the credit union, or (2) 1.75 times the minimum net worth 
required for a well capitalized credit union as described in 
new section 216(c)(1)(A) of title III. There are exceptions 
from the limit on member business loans for insured credit 
unions that are chartered for the purpose of, or that have a 
history of primarily making member business loans to members, 
as determined by the Board; or for insured credit unions that 
serve predominantly low-income members; or for credit unions 
that are community development financial institutions as 
defined in section 103 of the Community Development Banking and 
Financial Institutions Act of 1994.
    The Committee intends for the Board to interpret the 
exceptions under new section 107A(b), to permit worthy projects 
access to affordable credit union financing. Loans for such 
purposes as agriculture, self-employment, small business 
establishment, large up-front investment or maintenance of 
equipment such as fishing or shrimp boats, taxi cab medallions, 
tractor trailers, or church construction should not be unduly 
constricted as a result of the Board's actions.
    This section defines a member business loan as any loan, 
line of credit, or letter of credit the proceeds of which will 
be used for a commercial, corporate or other business 
investment property or venture, or agricultural purpose. The 
definition codifies current NCUA exceptions at 12 CFR 701.21.
    In addition, section 203 defines the term ``net worth'' 
with respect to an insured credit union to be the credit 
union's retained earnings balance as determined under generally 
accepted accounting principles. With respect to insured credit 
unions that serve predominantly low-income members, in addition 
to the earnings balance, net worth includes secondary capital 
accounts that are uninsured and subordinate to all other claims 
against the credit union. The term ``associated member'' is 
defined by this section as any member having a shared 
ownership, investment, or other pecuniary interest in a 
business or commercial endeavor with the borrower. Section 203 
also requires insured credit unions whose total member business 
loans exceed the permitted amount to come into compliance with 
these business loan restrictions within three years.

Section 204. Serving persons of modest means within the field of 
        membership of credit unions

    Section 204 reaffirms the continuing and affirmative 
obligation of insured credit unions to meet the financial 
services needs of persons of modest means, consistent with safe 
and sound operation. The section also requires the Board, after 
consultation with the State credit union supervisors, to 
prescribe criteria, within one year of the date of enactment, 
for periodically reviewing the record of each insured credit 
union in providing affordable credit union services to all 
individuals of modest means, including those with low- and 
moderate-incomes, within the field of membership of such credit 
union, and to make the results of such review publicly 
available.
    This section also requires the NCUA to prescribe additional 
criteria for annually evaluating the record of any insured 
credit union organized to serve a well defined local community, 
neighborhood, or rural district in meeting the credit needs and 
credit union service needs of its entire field of membership. 
The Board shall also prescribe procedures for remedying the 
failure of any community credit union to meet the credit needs 
of its entire field of membership. Such remedies would include 
the disapproval of any application by such credit union to 
expand its field of membership.
    The NCUA, in evaluating insured credit unions under this 
section, shall focus on the actual performance of such credit 
union and not impose burdensome paperwork or record keeping 
requirements. In its annual report to Congress for the first 
five years following enactment the NCUA Board shall include a 
report on the progress of implementing this section.

Section 205. National Credit Union Administration Board membership

    Section 205 establishes new criteria for membership and 
appointment of the NCUA Board. The section directs the 
President, in appointing members to the Board, to consider 
individuals who are especially qualified to serve on the Board, 
by virtue of their education, training, or experience relating 
to a broad range of financial services, financial services 
regulation, or financial policy. Not more than one member of 
the Board may be appointed to the Board from among individuals 
who, at the time of such appointment, are, or have recently 
been, involved with any insured credit union as a 
committeemember, director, officer, employee, or other institution-
affiliated party.

Section 206. Report and review requirement for certain regulations

    Section 206 provides that any regulation prescribed by the 
Board to define or amend the definition of ``immediate family 
or household'' and to define or amend the definition of ``well-
defined local community, neighborhood, or rural district'' 
shall be treated as a major rule for purposes of chapter 8 of 
title 5 of the U.S. Code.

        Title III--Capitalization and Net Worth of Credit Unions

Section 301. Prompt and corrective action

    This section adds a new section 216 to the Federal Credit 
Union Act, establishing a system of prompt corrective action 
for federally insured credit unions. Under this system, as a 
credit union's net worth declines below minimum requirements, 
the credit union faces progressively more stringent safeguards. 
The goal is to resolve net worth deficiencies promptly, before 
they become more serious, and in any event before they cause 
losses to the National Credit Union Share Insurance Fund 
(``Fund'). New section 216 is intended to ensure that federally 
insured credit unions and the NCUA have incentives compatible 
with the interests of the Fund. It also sets forth the NCUA's 
duty to take prompt corrective action to resolve the problems 
of federally insured credit unions to avoid or minimize loss to 
the Fund.
    New section 216 is modeled on section 38 of the Federal 
Deposit Insurance Act, which has applied to all FDIC-insured 
depository institutions since 1992. (12 U.S.C. Sec. 1831o.) New 
section 216 is specifically tailored to credit unions as not-
for-profit, member-owned cooperatives.
    New section 216(b) of the bill requires the NCUA to 
prescribe, by regulation, a system of prompt corrective action 
for federally insured credit unions that is consistent with the 
specific restrictions and requirements of new section 216 and 
comparable to section 38 of the Federal Deposit Insurance Act. 
``Comparable'' here means parallel in substance (though not 
necessarily identical in detail) and equivalent in rigor. The 
NCUA 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, (2) must rely on retained 
earnings to build net worth, and (3) have boards of directors 
that consist primarily of volunteers.
    New section 216(b)(2) requires the NCUA to prescribe, by 
regulation, a system of prompt corrective action for new credit 
unions, which shall apply in lieu of the system applicable to 
federally insured credit unions generally. This alternative 
system of prompt corrective action must (1) carry out the 
purpose of section 216; (2) recognize that credit unions (as 
cooperatives that do not issue capital stock) initially have no 
net worth, and give new credit unions reasonable time to 
accumulate net worth; (3) create adequate incentives for new 
credit unions to become adequately capitalized by the time that 
they reach the age or asset size at which the regular prompt 
corrective action system becomes applicable; (4) impose 
appropriate restrictions and requirements on new credit unions 
that do not make sufficient progress towards becoming 
adequately capitalized; and (5) prevent evasion of the purpose 
of this section (such as would occur, for example, if a long-
established credit union sought to avoid this section by 
merging with a smaller new credit union and then calling itself 
a new credit union).
    This section classifies federally insured credit unions 
into one or more of five categories, based on their net worth. 
These categories are--well capitalized, adequately capitalized, 
undercapitalized, significantly undercapitalized, and 
critically undercapitalized.
    This section provides that for a credit union to be ``well 
capitalized,'' it must have a net worth ratio of at least 7 
percent. To be ``adequately capitalized,'' a credit union must 
have a net worth ratio of at least 6 percent. In addition, in 
order to be well capitalized or adequately capitalized, a 
complex credit union must meet any applicable risk-based net 
worth requirement prescribed in this section.
    A credit union with less than 6 percent net worth is 
``undercapitalized.'' In addition, a complex credit union is 
undercapitalized if it fails to meet any applicable risk-based 
net worth requirement.
    A credit union is ``significantly undercapitalized'' if it 
has a net worth ratio of less than 4 percent. A credit union is 
also ``significantly undercapitalized'' if it has a net worth 
ratio of less than 5 percent and it (1) fails to submit an 
acceptable net worth restoration plan within the time allowed 
under section 216(f), or (2) materially fails to implement a 
plan accepted by the NCUA.
    A credit union is ``critically undercapitalized'' if it has 
less than 2 percent net worth (or such higher level, not 
exceeding 3 percent, as the NCUA may prescribe by regulation).
    These net worth categories overlap to some degree, as they 
do under section 38(b)(1) of the Federal Deposit Insurance Act. 
A significantly undercapitalized or critically undercapitalized 
credit union is also, by definition, undercapitalized (in that 
it has less than 6 percent net worth). A critically 
undercapitalized credit union is also significantly 
undercapitalized (in that it has less than 4 percent net 
worth). Accordingly, the rules for undercapitalized credit 
unions also apply to a significantly undercapitalized or 
critically undercapitalized credit union, and the rules for 
significantly undercapitalized credit unions also apply to a 
critically undercapitalized credit union.
    The NCUA has some discretion to adjust the relevant net 
worth ratios for the four net worth categories in light of 
changes in the capital standards applicable to FDIC-insured 
depository institutions. Section 38(c) of the Federal Deposit 
Insurance Act requires all such institutions to meet two 
capital standards: a leverage limit, which the federal banking 
agencies have set at 4 percent of total assets; and a risk-
based capital requirement, which the agencies have set at 8 
percent of risk-adjusted assets. If the federal banking 
agencies increase or decrease the required minimum level for 
the leverage limit, the NCUA may, if two conditions are 
satisfied, correspondingly increase or decrease the net worth 
ratios for a credit union to be well capitalized, adequately 
capitalized, undercapitalized, or significantly 
undercapitalized. To make such an adjustment, the NCUA must 
first determine, in consultation with the federal banking 
agencies, that the reason why the banking agencies increased or 
decreased in the required minimum level for the leverage limit 
also justifies the proposed adjustment innet worth ratios for 
credit unions. The NCUA must also determine that the resulting net 
worth ratios for credit unions are sufficient to carry out the purpose 
of new section 216. The adjustment in a net worth ratio cannot exceed 
the difference between 4 percent of total assets (the current required 
minimum level for the leverage limit) and the required minimum level 
most recently established by the federal banking agencies. Thus, for 
example, if the federal banking agencies were to decrease the required 
minimum level for the leverage limit to 3.5 percent, the NCUA could (if 
the two conditions were satisfied) decrease any or all of the 7, 6, 5, 
and 4 percent net worth ratios by 0.5 percentage point (4.0 percent 
minus 3.5 percent). Likewise, if the federal banking agencies were to 
increase the required minimum level to 4.4 percent, the NCUA could (if 
the two conditions were satisfied) increase the 7, 6, 5, and 4 percent 
net worth ratios by 0.4 percentage point (4.4 percent minus 4.0 
percent). If the NCUA increases any net worth ratio for credit unions, 
it must give credit unions reasonable time to meet the increased ratio.
    New section 216(d) requires the NCUA, by regulation, to 
prescribe a risk-based net worth requirement for federally 
insured credit unions that are complex, as defined by the NCUA. 
For purposes of section 216(d), ``complex'' refers to credit 
unions' portfolios of assets and liabilities; it does not 
involve credit unions' field of membership. The NCUA must 
design the risk-based net worth requirement to take into 
account any material risks against which the 6 percent net 
worth ratio required for an insured credit union to be 
adequately capitalized may not provide adequate protection. 
Thus the NCUA should, for example, consider whether the 6 
percent requirement provides adequate protection against 
interest-rate risk and other market risks, credit risk, and the 
risks posed by contingent liabilities, as well as other 
relevant risks. The design of the risk-based net worth 
requirement should reflect a reasoned judgment about the actual 
risks involved.
    Other provisions of section 301 are intended to encourage 
the NCUA, in designing the risk-based capital requirement, to 
seek and receive broad input--to help assure that the 
requirement is workable, fair, and effective. Section 
301(d)(2)(A) requires the NCUA Board to publish an advance 
notice of proposed rulemaking not later than 180 days after the 
date of enactment. Section 301(c) requires the Board to consult 
with the Secretary of the Treasury, the federal banking 
agencies, and state credit union supervisors. Although section 
301 does not set a deadline for publishing in the Federal 
Register proposed regulations implementing the risk-based net 
worth requirement, it nonetheless contemplates that the Board 
would publish such regulations for public comment, as required 
by the Administrative Procedure Act. 5 U.S.C. Sec. 552(a). 
Section 301(d)(2)(B) gives the Board a full two years to 
promulgate final regulations for risk-based capital 
requirement--six months longer than under section 216 
generally. And to accommodate the extended rulemaking process, 
section 301(e)(2) provides for the effective date of the risk-
based capital requirement to be January 1, 2001.
    New section 216(e)(1) requires a federally insured credit 
union that is not well capitalized, (i.e., is adequately 
capitalized, undercapitalized, significantly undercapitalized, 
or critically under-capitalized) to set aside as net worth a 
certain percentage of its annual gross income. The amount to be 
set aside annually shall equal not less than 0.4 percent of a 
credit union's total assets. This earnings-retention 
requirement is the only prompt corrective action rule 
applicable to credit unions that are adequately capitalized, 
but not well capitalized. This subsection replaces the 
earnings-retention requirement now in section 116 of the 
Federal Credit Union Act (12 U.S.C. Sec. 1762), and section 
301(g) of the bill repeals section 116.
    Under new section 216(e)(2), the NCUA may, case by case, 
decrease the 0.4 percent requirement if the facts justify two 
determinations by the NCUA. First, the NCUA must determine that 
the decrease in the requirement is necessary to avoid 
curtailing a credit union's dividends to such a degree that the 
credit union would suffer a significant redemption of shares. 
And second, the NCUA must determine that the decrease would 
further the purpose of new section 216. The NCUA may not 
decrease the requirement below zero, and must periodically 
review any decrease that is in effect.
    Furthermore, new section 216(f) requires an insured credit 
union that becomes undercapitalized to submit a timely and 
acceptable net worth restoration plan to the NCUA. The section 
requires the credit union to confront its problems in a timely 
manner, and to develop and submit an acceptable net worth 
restoration plan for remedial action. The NCUA's staff must, 
upon timely request by an insured credit union with total 
assets of less than $10 million, assist the credit union in 
preparing a net worth restoration plan.
    The NCUA must, by regulation, establish deadlines that give 
insured credit unions reasonable time to submit net worth 
restoration plans and that require the NCUA to act on net worth 
restoration plans expeditiously. If a credit union fails to 
submit a net worth restoration plan within the time allowed, 
the NCUA must promptly notify the credit union of that failure, 
and give the credit union a reasonable opportunity to submit a 
plan.
    If a credit union submits a timely plan but the NCUA 
determines that the plan is not acceptable, the NCUA must 
promptly notify the credit union of why the plan is not 
acceptable, and give the credit union a reasonable opportunity 
to submit a revised plan. The NCUA may accept a credit union's 
net worth restoration plan only if the NCUA determines that the 
plan is based on realistic assumptions and is likely to succeed 
in restoring the credit union's net worth.
    New section 216(g) provides that an undercapitalized 
federally insured credit union shall not generally permit its 
average total assets to increase unless (1) the NCUA has 
accepted the credit union's net worth restoration plan; (2) any 
increase in total assets is consistent with the plan; and (3) 
the credit union's net worth ratio increases at a rate 
consistent with the plan. The term ``generally'' allows the 
NCUA to make carefully delineated exceptions to the asset-
growth restrictions if the exceptions are consistent with the 
purpose of new section 216. The requirement that the credit 
union's net worth ratio increase at a rate consistent with the 
plan is intended to help assure that growth strengthens the 
credit union rather than exacerbates its problems.
    In addition, an undercapitalized federally insured credit 
union is prohibited in this section from making new commercial 
loans that would result in a increase in the total amount of 
member business loans outstanding at that credit union. The 
prohibition remains in effect until the credit union becomes 
adequately capitalized.
    Because book-value net worth is a lagging indicator of 
problems, section 38(g) of the Federal Deposit Insurance Act 
(in tandem with section 8(b)(8) of that Act) permits the 
appropriate federal banking agency, under certain 
circumstances, to treat an FDIC-insured depository institution 
as if it were in the next lower net worth category (or, if the 
institution is well capitalized, to reclassify it as adequately 
capitalized). The agency may take such action if the depository 
institution, when most recently examined, received an 
unsatisfactory rating for any of the noncapital components of 
its examination rating and has not corrected the deficiency.
    New section 216(h) imposes two restrictions on the NCUA's 
exercise of authority under regulations comparable to section 
38(g) of the Federal Deposit Insurance Act. First, the NCUA 
cannot treat a credit union as if it were in a lower net worth 
category (or reclassify a credit union into a lower net worth 
category) for reasons not pertaining to the safety and 
soundness of that credit union. Second, the NCUA cannot 
delegate its authority to treat a credit union as if it were in 
a lower net worth category (or reclassify the credit union into 
such a category).
    New section 216(i) requires the NCUA, within 90 days after 
a federally insured credit union becomes critically 
undercapitalized, to either (1) appoint a conservator or 
liquidating agent for the credit union; or (2) take such other 
action as the NCUA determines would better achieve the purpose 
of section 216, after documenting why the action would better 
achieve that purpose. A determination to take alternative 
action expires after 180 days, and the NCUA must then renew the 
determination or appoint a conservator or liquidating agent.
    The NCUA must generally appoint a liquidating agent for a 
credit union that remains critically undercapitalized on 
average during the calendar quarter beginning 18 months after 
the credit union became critically undercapitalized, unless the 
Board determines that the credit union (a) has substantially 
complied with an approved net worth restoration plan requiring 
consistent improvement in the credit union's net worth, and (b) 
has positive net income or an upward trend in earnings that the 
NCUA projects as sustainable; and the Board certifies that the 
critically undercapitalized credit union is viable and not 
expected to fail.
    The NCUA Board generally cannot delegate its authority 
under new section 216(i). But in the case of credit unions that 
have less than $5 million in total assets, the Board may 
delegate such authority if the Board permits the credit union 
to appeal any adverse action to the Board.
    Under section 38(k) of the Federal Deposit Insurance Act, 
if an FDIC-insured depository institution causes a material 
loss to the deposit insurance fund, the appropriate federal 
banking agency's inspector general must review the agency's 
supervision of the institution and make a written report to the 
agency. For purposes of determining whether the Fund has 
incurred a material loss with respect to a federally insured 
credit union--such that the inspector general of the NCUA must 
make a report--a loss is material if it exceeds the sum of $10 
million and an amount equal to 10 percent of the credit union's 
total assets at the time the NCUA initiated assistance under 
section 208 of the Federal Credit Union Act or was appointed 
liquidating agent.
    New section 216(k) specifies that material supervisory 
determinations made under section 216 (including decisions to 
require prompt corrective action) made by NCUA officials other 
than the Board may be appealed to the Board pursuant to the 
independent internal appellate process required under section 
309 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (or, if the Board so specifies, 
pursuant to separate procedures specified by regulation).
    Under new section 216(l), the NCUA must consult and seek to 
work cooperatively with state credit union supervisors. In 
addition, when evaluating any net worth restoration plan 
submitted by a state-chartered, federally insured credit union, 
the NCUA must seek the views of the state credit union 
supervisor.
    As the NCUA Board decides whether to appoint a conservator 
or liquidating agent for a state-chartered, federally insured 
credit union, several specific restrictions and requirements 
apply. The Board must seek the views of the state credit union 
supervisor, and give the supervisor an opportunity to take the 
proposed action. The Board must, upon timely request by the 
supervisor, promptly give the supervisor a written statement of 
the reasons for the proposed action, and reasonable time to 
respond to that statement. If the supervisor makes a timely 
written response disagreeing with the proposed action and 
giving reasons for that disagreement, the NCUA Board cannot 
appoint a conservator or liquidating agent for the credit union 
unless the Board, after considering the supervisor's views, has 
made two determinations: first, that the Share Insurance Fund 
faces a significant risk of loss if a conservator or 
liquidating agent is not appointed for the credit union; and 
second, that the appointment is necessary to reduce the risk or 
magnitude of the loss. The NCUA Board cannot delegate either of 
those determinations.
    Other provisions of the bill also clarify state credit 
union supervisors' role. Section 301(c) of the bill requires 
the NCUA, in developing regulations to implement new section 
216, to consult with state credit union supervisors. Moreover, 
as specified in new section 216(n), section 216 does not limit 
state credit union supervisors' authority to take action in 
addition to (but not in derogation of) that required under 
section 216.
    New section 216(m) exempts an insured corporate credit 
union from section 216(a). To qualify for the exemption, the 
entity in question must (1) operate primarily for the purpose 
of serving credit unions, and (2) permit individuals to be 
members only to the extent that applicable law requires that 
such persons own shares (e.g., directors' qualifying shares).
    New section 216(n) does not limit any authority of the NCUA 
or a state to take action in addition to that required under 
section 216. Thus, for example, section 216 in no way limits 
any existing authority of the NCUA to deal with problems in 
their incipiency, before they manifest themselves in net worth 
deficiencies. Nor, for example, does it limit a state credit 
union supervisor's authority to appoint a conservator or 
liquidating agent for a state-chartered, federally insured 
credit union or to accept such an appointment from the NCUA.
    New section 216(o) defines ``Federal banking agency,'' 
``net worth,'' ``net worth ratio,'' and ``newcredit union.'' 
``Federal banking agency'' means the Comptroller of the Currency, the 
Director of the Office of Thrift Supervision, the Federal Reserve 
Board, and the FDIC. (12 U.S.C. Sec. 1813(z))
    A credit union's ``net worth'' is its retained earnings, as 
determined under generally accepted accounting principles. 
Under those principles, a credit union subtracts its allowance 
for loan losses from total assets in the course of calculating 
net worth. In the case of a low income credit union, ``net 
worth'' also includes uninsured secondary capital accounts that 
are subordinate to all other claims against the credit union, 
including the claims of creditors, shareholders, and the Share 
Insurance Fund.
    A credit union's ``net worth ratio'' is the ratio of the 
credit union's net worth to the credit union's total assets.
    A ``new credit union'' is a federally insured credit union 
that has been in operation for less than 10 years, and has not 
more than $10 million in total assets. A credit union ceases to 
be new when it reaches either the age or the asset-size 
threshold, whichever comes first.
    Section 301(b) of the bill makes changes in laws relating 
to conservatorship or liquidation of federally insured credit 
unions that are necessary to effectuate prompt corrective 
action. Section 301(b) derives from section 133 of the Federal 
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), 
which made similar amendments to effectuate prompt corrective 
action under section 38 of the Federal Deposit Insurance Act. 
Pub. L. No. 102-242, Sec. 133, 105 Stat. 2236, 2270-73 (1991).
    Section 301(b) expands the grounds for appointing a 
conservator or liquidating agent for a federally insured credit 
union. First, the Board is authorized to take such action when 
a credit union is significantly undercapitalized and has no 
reasonable prospect of becoming adequately capitalized. This 
ground permits the NCUA to act before such a credit union's net 
worth and franchise value erode further. Second, the Board is 
authorized to take such action when the credit union is 
critically undercapitalized. Section 301(b) codifies the two 
new grounds in sections 206(h)(1) (conservatorship) and 207(a) 
(liquidation) of the Federal Credit Union Act. (12 U.S.C. 
Sec. Sec. 1786(h)(1), 1787(a))
    Section 301(c) provides that the Board shall consult with 
the Secretary of the Treasury, the Federal banking agencies, 
and State credit union supervisors in developing regulations to 
implement new section 216 of the Federal Credit Union Act.
    Section 301(d) requires the Board to publish in the Federal 
Register, within 270 days after the date of enactment, proposed 
regulations implementing the provisions of new section 216 
other than the risk-based capital requirement. Furthermore, the 
Board must promulgate final implementing regulations within 18 
months after the date of enactment. In the case of the risk-
based net worth requirement, the Board must publish in the 
Federal Register an advance notice of proposed rulemaking 
within 180 days after the date of enactment. The Board shall 
promulgate final regulations for risk-based net worth 
requirement within two years after the date of enactment.
    Section 301(e) provides that new section 216 as provided by 
this bill shall become effective two years after the date of 
enactment of the Act, except for the risk-based net worth 
requirement as provided for in new section 216(d) which becomes 
effective on January 1, 2001.
    Section 301(f) requires the NCUA to submit a report to 
Congress--when publishing proposed regulations, or promulgating 
final regulations to implement new section 216 (other than the 
risk-based net worth requirement)--that specifically explains 
(1) how the regulations carry out section 216(b)(2) (relating 
to the cooperative character of credit unions); and (2) how the 
regulations differ from section 38 of the Federal Deposit 
Insurance Act, and the reasons for such differences.
    Section 301(g) specifies that the NCUA can enforce orders 
issued under new section 216 of the Federal Credit Union Act. 
New section 216(e) supersedes the earnings-retention 
requirement now in section 116 of the Federal Credit Union Act. 
(12 U.S.C. Sec. 1762) Accordingly, section 301(g) of the bill 
repeals section 116.

Section 302. National Credit Union Share Insurance Fund equity ratio, 
        available assets ratio, and standby premium charge

    Section 302 makes a series of amendments to section 202 of 
the Federal Credit Union Act (12 U.S.C. Sec. 1782) in order to 
further strengthen the Share Insurance Fund. The amendments 
include six key changes (which, together with other aspects of 
section 302, are discussed more fully below). The first 
requires more timely and accurate calculation of the Fund's 
``equity ratio''--i.e., the ratio of the Fund's reserves to the 
total amount of the shares (deposits) that the Fund insures. 
The second requires a federally insured credit union with more 
than $50 million in total assets to adjust its 1 percent 
deposit in the Fund semi-annually. The third does not permit 
distributions to dissipate the Fund's reserves when the Fund's 
``available-assets ratio''--i.e., the ratio of high-quality, 
liquid net reserves to the total shares that the Fund insures--
falls below 1 percent. The fourth, in place of the current rule 
that fixes any insurance premium at \1/12\ of 1 percent of 
insured shares, gives the NCUA discretion to adjust the premium 
rate according to the Fund's financial needs. The fifth imposes 
a premium if the Fund's equity ratio falls below 1.2 percent, 
in keeping with the NCUA's longstanding practice. The sixth 
gives the NCUA discretion to let interest on the Fund's 
reserves increase the Fund's equity ratio to 1.5 percent.
    Section 302(a)(1) of the bill amends section 202(b)(1) of 
the Federal Credit Union Act to require an insured credit union 
with more than $50 million in total assets to make a certified 
statement semi-annually. Section 202(b) of the Federal Credit 
Union Act currently requires each insured credit union to file 
annually a certified statement containing information about the 
credit union's insured shares and the credit union's own 1 
percent deposit in the Share Insurance Fund. This information 
enables the credit union and the NCUA to calculate adjustments 
needed in the 1 percent deposit.
    In addition, section 302(a)(1) contains an exception for 
newly insured credit unions that became insured during the 
reporting period. This provision is implicit in the phrasing of 
current section 202(b)(1) (requiring certified statements only 
from ``each insured credit union which became insured prior to 
the beginning of that year'').
    Section 302(a)(2) of the bill amends section 
202(c)(1)(A)(iii) of the Federal Credit Union Act to require an 
insured credit union with more than $50 million in total assets 
to adjust its 1 percent deposit in the Fund semi-annually. 
Section 202(c)(1)(A)(iii) of the Federal Credit Union Act 
currently requires an insured credit union to adjust its 1 
percent deposit in the Share Insurance Fund annually. Credit 
unions with more than $50 million in assets hold the vast 
majority of insured shares. Requiring such credit unions to 
adjust their 1 percent deposit semi-annually will ensure that 
the 1 percent deposit accounts in a timely fashion for such 
credit unions' insured share growth.
    Section 302(a)(3) of the bill amends section 202(c)(2) of 
the Federal Credit Union Act to give the NCUA discretion to 
adjust the premium rate according to the Share Insurance Fund's 
financial needs. Section 202(c)(2) of the Federal Credit Union 
Act currently gives the NCUA discretion to require each insured 
credit union to pay an insurance premium, and fixes the premium 
rate at \1/12\ of 1 percent of the credit union's insured 
shares. Furthermore under amended section 202(c)(2), the NCUA 
may assess a premium only if (1) the Fund's equity ratio is 
less than 1.3 percent; and (2) the premium does not exceed the 
amount necessary to restore the equity ratio to 1.3 percent. If 
the Fund's equity ratio is less than 1.2 percent, the NCUA is 
required to assess a premium to restore the equity ratio to 
(and maintain it at) 1.2 percent. This provision in effect 
partially codifies the NCUA's longstanding practice of not 
permitting the Fund's equity ratio to fall below 1.25 percent.
    Section 302(a)(3) of the bill also amends section 202(c)(3) 
of the Federal Credit Union Act, which governs distributions 
(often referred to as dividends) from the Share Insurance Fund. 
The NCUA is required under amendments to section 202(c)(3) to 
make a pro rata distribution to insured credit unions after 
each calendar year if, as of the end of that calendar year: (1) 
any loans to the Fund from the federal government, and any 
interest on those loans, have been repaid; (2) the Fund's 
equity ratio exceeds the normal operating level; and (3) the 
Fund's available assets ratio exceeds 1.0 percent. If these 
three conditions are satisfied, the NCUA is required to 
distribute the maximum possible amount that (1) does not reduce 
the Fund's equity ratio below the normal operating level; and 
(2) does not reduce the Fund's available assets ratio below 1.0 
percent.
    Section 302(a)(3) also directs the NCUA, in calculating the 
Fund's equity ratio and available assets ratio for purposes of 
the pro rata distribution, to use credit unions' certified 
statements from the final reporting period of the year in 
question to determine the total amount of shares that the Fund 
insures. Section 302(a)(4) requires the Board to use the most 
current and accurate data reasonably available. The term 
``reasonably available'' is intended to strike a balance 
between the costs and benefits of obtaining more current and 
accurate data.
    The provisions of 302(a)(3) differ from current law in (1) 
not requiring the NCUA to make distributions that would reduce 
the Fund's available assets ratio below 1 percent; (2) avoiding 
any possible implication that the NCUA must or should pay any 
distribution before the end of the year in question, even at 
the cost of basing the distribution on outdated data; and (3) 
requiring the NCUA to use data from credit unions' most recent 
certified statements in calculating the relevant Fund ratios. 
It also changes ``insurance year'' to ``calendar year.'' 
Current law defines the ``insurance year'' as the calendar year 
unless the NCUA prescribes otherwise. In fact, the Fund 
operates on a calendar year basis.
    Section 302(a)(5) of the bill recodifies the definitions in 
section 202(h) of the Federal Credit Union Act, adding 
definitions of ``available assets ratio,'' ``equity ratio'' and 
``insured shares,'' setting new parameters for the ``normal 
operating level.''
    The Fund's ``available assets ratio'' means the ratio of 
(1) the sum of the Fund's cash and the market value of the 
Fund's unencumbered securities investments under section 
203(c), minus the Fund's direct liabilities and any contingent 
liabilities for which no provision for losses has been made, to 
(2) the aggregate amount of the insured shares in all insured 
credit unions.
    The Fund's ``equity ratio'' means the ratio of (1) the 
amount of the Fund's capitalization, including insured credit 
unions' 1 percent capitalization deposits and the Fund's 
retained earnings balance (net of the Fund's direct liabilities 
and contingent liabilities for which no provision for losses 
has been made), to (2) the aggregate amount of the insured 
shares in all insured credit unions.
    The definition of ``insured shares'' is substantively 
identical to that in current law.
    Current law defines the Fund's ``normal operating level'' 
as ``an amount equal to 1.3 per centum of the aggregate amount 
of the insured shares in all insured credit unions, or such 
lower level as the Board may determine.'' Section 302(a)(5) 
defines the ``normal operating level'' as an equity ratio 
specified by the NCUA, which must be between 1.2 percent and 
1.5 percent. This revised definition (1) gives the NCUA 
discretion to let interest on the Fund's reserves increase the 
Fund's equity ratio to 1.5 percent; and (2) prevents the NCUA 
from making distributions from the Fund if the equity ratio is 
less than 1.2 percent. It is shorter than the current 
definition because the term ``equity ratio'' incorporates the 
concept of ``the aggregate amount of the insured shares in all 
insured credit unions,'' which therefore need not be repeated 
in the definition of ``normal operating level.''
    Although the revised definition permits the Fund's equity 
ratio to rise above 1.3 percent, such an increase cannot occur 
through premiums. Under new section 202(c)(2)(B) of the Federal 
Credit Union Act, the NCUA can assess a premium only if the 
equity ratio is less than 1.3 percent, and then only in the 
amount necessary to restore the equity ratio to 1.3 percent.
    Section 302 becomes effective on January 1 of the first 
calendar year beginning more than 180 days after the date of 
enactment of this Act.

Section 303. Access to liquidity

    Section 303 adds two new subsections to section 204 of the 
Federal Credit Union Act. (12 U.S.C. Sec. 1784) New section 
204(f) requires the NCUA to (1) periodically assess the 
potential liquidity needs of each federally insured credit 
union, and the options that the credit union has available for 
meeting those needs; and (2) periodically assess the potential 
liquidity needs of insured credit unions as a group, and the 
options that those credit unions have available for meeting 
their liquidity needs. New section 204(g) requires the NCUA to 
make available to the Federal Reserve banks (subject to 
appropriate assurances of confidentiality) information relevant 
to making discount-window advances to federally insured credit 
unions, including the NCUA's reports of examination.

                   Title IV--Miscellaneous Provisions

Section 401. Study and report on differing regulatory treatment

     Section 401 requires the Secretary of the Treasury to 
conduct a study of the differences between credit unions and 
other federally insured financial institutions, including 
regulatory differences, and including the potential effects of 
applying Federal laws and Federal tax laws to credit unions in 
the same manner as such laws are applied to other federally 
insured financial institutions. This section also requires the 
Secretary to report to Congress within 1 year after enactment 
on the results of the study.

Section 402. Review of regulations and paperwork reductions

    Section 402 amends section 303 of the Riegle Community 
Development and Regulatory Act of 1994 which required a two 
year review of regulations by each of the banking agencies for 
the purpose of streamlining rules and regulations. This section 
requires that each Federal banking agency and the NCUA conduct 
a review of the regulations and written policies of each such 
agency for the purposes of streamlining and modifying these 
regulations to improve efficiency, reduce unnecessary costs, 
reduce the paperwork burden for insured depository 
institutions, and to remove inconsistencies, outmoded and 
duplicative requirements. The review is to be conducted during 
the 1-year period following the date of enactment.

Section 403. Treasury report on reduced taxation and viability of small 
        banks

    Section 403 requires the Secretary of the Treasury to 
submit a report to Congress, within one year of the date of 
enactment, containing recommendations for legislative and 
administrative action that the Secretary deems appropriate that 
would reduce and simplify the tax burden for insured depository 
institutions with less than $1 billion in assets and banks 
having total assets of not less than $1 billion and not more 
than $10 billion. The report shall include any other 
recommendations that the Secretary deems appropriate to 
preserve the viability and growth of small banks in the United 
States.

                      Regulatory Impact Statement

    This legislation was designed to strengthen the safety and 
soundness of federally insured credit unions at the least 
possible loss to the National Credit Union Share Insurance 
Fund, while allowing the multiple common-bond field of 
membership category along with limitations on commercial 
lending by credit unions. Because H.R. 1151 seeks to strengthen 
the safety and soundness of insured credit unions by providing 
express and specific regulatory guidance, the Committee 
believes that this legislation will have a minimal regulatory 
impact.

               Congressional Budget Office Cost Estimate

    Senate rule XXVI, section 11(b) of the Standing Rules of 
the Senate, and section 403 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill containing a statement estimating the cost of the 
proposed legislation, which was prepared by the Congressional 
Budget Office. This statement has been requested from the 
Congressional Budget Office, but it was not available at the 
date of filing this report. When the information is made 
available to the Committee, it will be placed in the 
Congressional Record.

                        Changes in Existing Law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of subsection 12 of rule XXVI of 
the Standing Rules of the Senate in order to expedite the 
business of the Senate.

                   ADDITIONAL VIEWS OF SENATOR HAGEL

    During the Committee's negotiations on H.R. 1151 there was 
considerable discussion over the role of credit unions in 
commercial lending. I believe the language does not adequately 
ensure that credit unions remain focused on their primary 
mission--consumer lending.
    H.R. 1151 needs to ensure that credit unions remain strong, 
healthy, and committed to serving their members. Unfortunately 
it fails to do so. Since passage of the Federal Credit Union 
Act in the early 1930s, credit unions have been an important 
provider of basic financial services to the millions of 
Americans who rely on them for checking, savings, and small 
consumer loans. We need to make sure credit unions retain the 
special membership services that set them apart from banks and 
other financial institutions so they can fulfill their core 
mission of consumer lending and serving members' basic 
financial needs.
    I'm concerned that, as currently written, H.R. 1151 would 
have unintended negative consequences for credit union members 
and taxpayers. The legislation is risky for credit union 
members who rely on their credit union for small, consumer 
loans because it would allow credit unions to shift their focus 
from consumer service to large-scale commercial lending. 
Congress should place limits on commercial lending by credit 
unions--and those limits should be real.
    The Banking Committee attempted to address this problem by 
including a cap on credit unions' commercial lending 
activities--but unfortunately the limit is far too weak. First, 
the cap in the bill stands at 1.75 times the minimum net worth 
required for a well capitalized credit union. If a credit union 
were to reach this cap, it would represent more commercial 
lending than is generally done by the average community bank. 
Clearly, this would represent a shift away from its primary 
mission of consumer lending
    Second, H.R. 1151 doesn't count loans to one borrower that 
total under $50,000 toward the commercial lending cap. Even if 
I were comfortable with the 1.75 times net worth cap, the under 
$50,000 loophole renders the cap meaningless. Unfortunately, 
this loophole reflects current NCUA policy. I question the 
wisdom of the regulator's current policy.
     It is a generally accepted notion that commercial lending 
is riskier than consumer lending. It is crucial for the 
regulator and the public to be aware of the risk profile of the 
loan portfolio of each and every credit union. All loans that 
go for supporting commercial ventures, no matter how small 
these loans are, should be counted as such.
    In sum, while the Committee-passed version of H.R. 1151 
contains important improvements to the safety and soundness of 
the credit union industry, in the area of commercial lending 
the bill raises the risk to taxpayers and depositors. Have we 
really forgotten the disastrous lesson of the 1980s, when 
Congress and thrift regulators permitted the savings and loan 
institutions to stray from their primary mission and allowed 
riskier lending activities? Taxpayers continue to pay heavily 
for that mistake. It is my intention to address these concerns 
once the bill reaches the Senate floor.

                                                       Chuck Hagel.

 ADDITIONAL VIEWS OF SENATORS GRAMM, SHELBY, MACK, FAIRCLOTH, BENNETT, 
                     GRAMS, ALLARD, ENZI, AND HAGEL

    The legislation, as reported by the Committee, fails to 
change certain provisions of the bill as adopted by the House, 
costly mandates that are contrary to the very concept of credit 
unions. These would for the first time treat credit unions as 
public utilities and impose upon them unfunded mandates similar 
to the Community Reinvestment Act (CRA) requirements imposed on 
banks. We believe that these mandates should be removed from 
the bill.
    Some have described these provisions as ``CRA-lite.'' When 
CRA was first imposed upon banks, it was described as a light 
burden, merely encouraging banks to do what they should do. 
Unfortunately, and predictably, these reassurances turned out 
to be false, and the burden has been anything but light. We see 
no reason to believe that history would not repeat itself were 
this burden also imposed on credit unions.
    At best, these provisions are inconsistent with the nature 
of credit unions and would result in expensive and wasteful 
record-keeping and examination costs. More significantly, 
because they fundamentally change the nature of credit unions, 
the CRA-style provisions would ensnare credit unions in a 
regulatory trap from which they could only find temporary 
release by financing the agendas of non-members at the expense 
of members.
    Credit unions are financial cooperatives organized by 
private individuals to assist the members of the cooperative to 
save and invest, so it is hard to imagine forcing them to begin 
serving needs of non-members. But these CRA-style provisions in 
the bill would treat credit unions like public utilities, 
compelled by law to provide financial services to favored 
persons identified by the government. This mandate would 
require that these cooperatives of equal members give special 
treatment to some who would become more equal than others, or 
it would insist that credit unions use their resources to serve 
the wants of those who are not members at all. Frankly, these 
CRA-style provisions of the bill would likely lead to both 
outcomes, and neither one is acceptable to us.
    Here is just one example of how the CRA-style provisions of 
the bill would likely operate. Suppose that a credit union 
wants to expand its field of membership, as allowed under the 
bill. That credit union would first have to prove to the 
regulators that it is already providing, in a ``satisfactory'' 
and ``affordable'' manner, credit union services to all 
individuals of modest means within the credit union's field of 
membership. The credit union verifies that it is offering loans 
at prime rate to all of its members. Offering? No, that would 
not qualify. The credit union has to be providing, and prime 
rate may not be affordable for some of these people. And what 
about those people of ``modest means'' who are eligible for 
membership but have not yet joined? After all, credit unions 
are not usually successful in enrolling more than a third of 
the people in their field of membership. The mandate, though, 
would require that the credit union serve all those people, 
whether members of the credit union or not, whether they have 
put money into a credit union or not. The requirement, in 
short, is open-ended and pernicious, leaving credit unions at 
the mercy of regulators and the activist groups that have 
already made such a practice of using CRA against community 
banks. These provisions should be stricken from the bill.
    In addition, we believe that rather than imposing new CRA 
mandates on credit unions, the burden of CRA should be lifted 
from the shoulders of small, community banks. CRA preempts the 
free market lending criteria of the small community banks. CRA 
is nothing less than government mandated credit allocation, the 
form of credit allocation that has proven disastrous most 
recently in east Asia. It is ridiculous to assume that small 
community banks would not serve local financial needs. That is 
their franchise, their bread and butter. The CRA mandates 
impose on community banks an intrusive regulatory structure in 
the name of ensuring that these banks do what they would do 
anyway.
    These regulatory burdens do not come cheap. According to a 
new Federal Reserve study, entitled ``The Cost of Banking 
Regulation: A Review of the Evidence,'' regulatory costs 
account for up to ``13 percent of noninterest expenses'' of 
banks. In addition, the study concluded that ``(A)verage 
compliance costs for regulations are substantially greater for 
banks at low levels of output than for banks at moderate or 
high levels of output.'' In other words, compliance costs are 
higher for small banks than for large banks.
    For these reasons, we supported in committee an amendment 
to exempt community banks, with less than $250 million in 
assets, from the Community Reinvestment Act. That amendment was 
not adopted, with a tie vote of nine to nine. We believe that 
it would be wise to review this issue when the bill is brought 
before the full Senate.

                                   Phil Gramm.
                                   Richard Shelby.
                                   Connie Mack.
                                   Lauch Faircloth.
                                   Robert F. Bennett.
                                   Rod Grams.
                                   Wayne Allard.
                                   Mike Enzi.
                                   Chuck Hagel.

                    ADDITIONAL VIEWS OF SENATOR ENZI

    Commercial lending has generally been considered riskier 
business than consumer lending. From this notion comes the 
premise of restricting the amount of lending that can be used 
for commercial purposes. Even though H.R.1151 limits commercial 
lending activity, the restriction in my belief is dubious at 
best.
    Currently, the regulator of federally chartered credit 
unions, NCUA, does not designate an extension of credit which 
is less than $50,000 as a commercial or ``member business'' 
loan. If H.R. 1151 as passed by the Committee becomes law, 
NCUA's rule exempting any credit union loan less than $50,000 
as being defined as a member business loan would be codified. I 
am concerned about the consequences this action may bring.
    I place great emphasis and value on the accuracy of records 
of financial institutions. If a credit union does not count a 
loan which is less than $50,000 as a member business loan, even 
though the loan is used 100 percent for commercial purposes, it 
will never be known exactly how much of its loan portfolio is 
used for commercial purposes. The most stringent safety and 
soundness provisions are ineffective if accurate recordkeeping 
practices do not exist.
    I feel it is of utmost importance to require all member 
business loans, at any amount, to be designated as such. Our 
markets and financial institutions perform best when there is 
transparency and accuracy of information. The United States has 
become the model for financial markets, in part because of the 
transparent accounting methods required of publicly traded 
companies. I believe credit unions should be obligated to be 
transparent in their loan activities. Credit unions should be 
required to accurately define every loan.

                                                   Michael B. Enzi.

                    ADDITIONAL VIEWS OF SENATOR REED

    I am supportive of the substitute amendment to H.R. 1151 
adopted by the Committee. Yet, I also have several concerns 
about the commercial lending provisions included in the bill.
    As a general matter, I support the ability of credit unions 
to engage in commercial lending. I am keenly aware that for 
some members, credit union loans are the only available sources 
of capital for business investment. However, such lending can 
significantly increase the risk profile of credit unions. This 
is evidenced by recent National Credit Union Administration 
(NCUA) data which illustrates that the delinquency rate on 
credit union business loans (3.1 percent) is more than three 
times the delinquency rate on credit unions' overall loan 
portfolio (0.97 percent). More importantly, in 1991, my home 
state of Rhode Island experienced a credit union crisis that 
resulted from the failure of a state-chartered private deposit 
insurance corporation. This crisis affected one in five 
citizens and was predicated in part on excessive and risky 
commercial lending by insured institutions. Indeed, 13 of the 
state's credit unions were permanently closed, and the state 
had to seek federal assistance to repay depositors.
    In view of these facts, I believe that commercial lending 
by credit unions should be limited. As such, I supported 
provisions in H.R. 1151 that imposed an aggregate cap on 
commercial lending by credit unions of 12.25 percent of 
outstanding loans. However, I am concerned that this cap is too 
permissive and could have adverse safety and soundness 
implications in the future.
    First, the 12.25 percent commercial lending cap in the bill 
is significantly higher than the level of commercial lending 
that credit unions are currently engaged in. According to NCUA 
Call Report data, federal credit unions' commercial loans 
totaled 0.75 percent of outstanding loans at the end of 1997. 
In view of this fact, it is apparent that the commercial 
lending cap in the bill does not bear a rational relationship 
to the actual levels of commercial lending by credit unions. In 
fact, by establishing a statutory commercial lending cap that 
is substantially higher than existing commercial loan levels, 
Congress may encourage credit unions to engage in additional 
commercial lending. Also, given the limited experience of 
credit unions in commercial lending, I am concerned about their 
ability to underwrite commercial loans in a safe and sound 
manner. Finally, I am concerned that loans under $50,000 would 
not be counted toward the 12.25 percent cap. As a result, it is 
possible that credit unions could engage in commercial lending 
to a much greater extent than the limit imposed in the bill.
    When H.R. 1151 is debated on the floor and in conference, I 
would hope that my colleagues give serious consideration to 
these concerns and would limit commercial lending to an amount 
that bears a closer relationship to existing levels.
                                                         Jack Reed.

                                
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