[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.