    Credit Unions: Greater Transparency Needed on Who Credit Unions
    Serve and on Senior Executive Compensation Arrangements
    (30-NOV-06, GAO-07-29).

    Legislative and regulatory changes have blurred distinctions
    between credit unions and other depository institutions and
    raised questions about the tax-exempt status of credit unions.
    This report (1) assesses the effect of the Credit Union
    Membership Access Act on credit union membership and charters,
    (2) reviews the National Credit Union Administration's (NCUA)
    efforts to expand services to low- and moderate-income
    individuals, (3) compares rates offered by credit unions with
    comparably sized banks, (4) discusses unrelated business income
    tax issues, and (5) assesses transparency of credit union senior
    executive compensation. To address our objectives, we obtained
    NCUA data on credit union membership, charter changes, efforts to
    target those of modest means, and executive disclosure
    requirements. We also analyzed Federal Reserve Board's Survey of
    Consumer Finances and Internal Revenue Service data.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-29
        ACCNO:   A63824
      TITLE:     Credit Unions: Greater Transparency Needed on Who Credit
    Unions Serve and on Senior Executive Compensation Arrangements
         DATE:   11/30/2006
      SUBJECT:   Banking regulation
    	     Credit unions
    	     Economically depressed areas
    	     Executive compensation
    	     Financial analysis
    	     Income statistics
    	     Income taxes
    	     Internal controls
    	     Lending institutions
    	     Loans
    	     Tax exempt organizations
    	     Tax exempt status
    	     Transparency

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    GAO-07-29

         * [1]Report to the Chairman, Committee on Ways and Means, House of
           Representatives

              * [2]November 2006

         * [3]CREDIT UNIONS

              * [4]Greater Transparency Needed on Who Credit Unions Serve and on
                Senior Executive Compensation Arrangements

         * [5]Contents

              * [6]Results in Brief
              * [7]Background
              * [8]NCUA Rules Interpreting CUMAA Appear to Have Fueled Expansion
                of Community-Chartered Credit Unions

                   * [9]NCUA Regulations Interpreting CUMAA Set the Stage for
                     Growth of Community Charter Credit Unions
                   * [10]Growth of Federal Community Charter Credit Unions Has
                     Been the Result of Charter Conversions Rather than New
                     Credit Union Charter Approvals
                   * [11]According to NCUA, Community Charters Allow Federal
                     Charters to Remain Viable and Can Provide Opportunities to
                     Diversify Membership

              * [12]NCUA Programs Target Individuals of Low- and Moderate-Income,
                but Limited Data Preclude an Evaluation of Actual Service to
                Those Individuals

                   * [13]NCUA Encouraged Growth of Low Income Credit Unions and
                     Adoption of Underserved Areas, but Cannot Quantify Impact of
                     Programs on Use of Credit Union Services by Individuals of
                     Modest Means
                   * [14]Federal Reserve Survey Data Suggest that Credit Unions
                     Continued to Serve a Lower Proportion of Low- and
                     Moderate-Income Households than Banks
                   * [15]NCUA Has Pilot Survey to Measure Income of Credit Union
                     Members, but Will Not Be Able to Use Results to Determine
                     What Services Members at Various Income Levels Receive

              * [16]Credit Unions Offered Better Interest Rates on Some Products,
                but the Extent to Which the Benefits of Tax- Exempt Status Have
                Been Passed to Members Is Unclear
              * [17]Lack of Guidance and Criteria for Applying UBIT to State
                Credit Union Activities Makes Determining Compliance with the
                Requirement Difficult

                   * [18]IRS Has Questioned Which State Credit Union Activities
                     Should Be Subject to UBIT
                   * [19]Group Filings Make It More Difficult for IRS to
                     Scrutinize the Activities of Individual Credit Unions

              * [20]Alternatives Exist to Improve the Transparency of Credit
                Union Executive and Director Compensation

                   * [21]Public Reporting of Executive Compensation for Federal
                     Credit Unions Is Limited and Regulator Scrutiny of
                     Compensation Is Primarily Reviewed for Safety and Soundness
                     Concerns
                   * [22]Industry Surveys That Address Executive Compensation Are
                     Limited, and NCUA Has Released Its Compensation Data

              * [23]Conclusions
              * [24]Recommendations for Executive Action
              * [25]Agency Comments and Our Evaluation

         * [26]Objectives, Scope, and Methodology

              * [27]Effects of CUMAA and NCUA Regulations and NCUA Efforts to
                Serve Low- and Moderate- Income Individuals
              * [28]Comparison of Interest Rates Offered by Credit Unions With
                Those at Comparably Sized Banks
              * [29]Issues Related to the Application of UBIT to Credit Unions
              * [30]Information on Transparency and Compensation of Executive
                Compensation

         * [31]Analyses of Survey of Consumer Finances Data, 2001 and 2004
         * [32]Comparison of Interest Rates at Credit Unions and Banks
         * [33]Selected Salary Surveys for Credit Union and Bank Executives

              * [34]Credit Union Salary and Other Cash Compensation Data
              * [35]Bank Salary and Other Cash Compensation Data

         * [36]Comments from the National Credit Union Administration

              * [37]GAO Comments

         * [38]GAO Contact and Staff Acknowledgments

                     United States Government Accountability Office

    Report to the Chairman, Committee on Ways and Means, House of
    Representatives

    November 2006

    CREDIT UNIONS

     Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive
                               Compensation Arrangements

                                           a

    [39]GAO-07-29

    CREDIT UNIONS

    Greater Transparency Needed on Who Credit Unions Serve and on Senior
    Executive Compensation Arrangements

      What GAO Found

    Since the passage of the Credit Union Membership Access Act (CUMAA) in
    1998, larger community-based credit unions have constituted a much greater
    proportion of the industry. NCUA has approved federal community charters
    with increasingly larger geographic areas and potential for economically
    diverse membership. Much of the shift toward the larger community-based
    credit unions was due to conversions from other charters. NCUA's approval
    of these charters appears to have been triggered by changes in the
    economic environment and financial services industry and to diversify
    membership to accomplish goals such as increasing service to those of
    modest means.

    NCUA has established the low-income credit union program and allowed
    adoption of "underserved areas" to increase credit union services to
    individuals of modest means. Despite increased credit union participation
    in these programs and the expansion of community charters, the 2004 and
    2001 Survey of Consumer Finances indicated that credit unions lagged
    behind banks in serving low- and moderate-income households. NCUA
    officials told GAO that, given the nascent nature of its two initiatives
    and the relatively recent shift to community charters, they did not yet
    expect observable changes in the data. Also, NCUA recently has undertaken
    a pilot effort to collect data on the income characteristics of credit
    union members. Because limited data exist on the extent to which credit
    unions serve those of modest means, any assessment would be enhanced if
    NCUA were to move beyond its pilot and systematically collect income data.

    Based on GAO analysis, credit unions typically had more favorable rates
    than banks, particularly for consumer loans. For example, credit unions
    auto loans were 1 to 2 percentage points lower than similarly sized banks,
    on average. However, it was not clear the extent that the more favorable
    rates fully reflected the tax subsidy that credit unions receive by
    tax-exemption.

    The Internal Revenue Service (IRS) has been reviewing state-chartered
    credit union activities (federal credit unions are exempt) to determine
    compliance with unrelated business income tax (UBIT) requirements, but
    such determinations are difficult due to complicated criteria and because
    many credit unions file group rather than individual returns. IRS stated
    that it plans to issue technical guidance in the first quarter of 2007
    that the agency believes will help ensure credit union compliance with
    UBIT.

    Finally, credit union executive compensation is not transparent. Federal
    credit unions, unlike other tax-exempt organizations, do not file
    information returns, which contain data on executive compensation, with
    IRS. NCUA is collecting compensation data as part of its pilot, but it is
    unclear whether NCUA will conduct future reviews. NCUA officials noted a
    number of alternatives that could be used to increase transparency, such
    as requiring federal credit unions to provide compensation information in
    call reports or require that credit unions disclose compensation data at
    annual meetings.

                     United States Government Accountability Office

                                        Contents

    Letter                                                                   1
                                    [40]Results in Brief                        4
                                    [41]Background                              8
                                    [42]NCUA Rules Interpreting CUMAA Appear
                                    to Have Fueled Expansion
                                    [43]of Community-Chartered Credit Unions   10
                                    [44]NCUA Programs Target Individuals of
                                    Low- and Moderate-Income,
                                    but Limited Data Preclude an Evaluation
                                    of Actual Service to
                                    [45]Those Individuals                      14
                                    Credit Unions Offered Better Interest
                                    Rates on Some Products, but
                                      [46]the Extent to Which the Benefits of
                                                  Tax-Exempt Status Have Been
                                    [47]Passed to Members Is Unclear           26
                                    [48]Lack of Guidance and Criteria for
                                    Applying UBIT to State Credit
                                    Union Activities Makes Determining
                                    Compliance with the
                                    [49]Requirement Difficult                  29
                                    [50]Alternatives Exist to Improve the
                                    Transparency of Credit Union
                                    [51]Executive and Director Compensation    33
                                    [52]Conclusions                            39
                                    [53]Recommendations for Executive Action   41
                                    [54]Agency Comments and Our Evaluation     41
    [55]Appendixes
                        Appendix I: [56]Objectives, Scope, and Methodology     45
                                    [57]Effects of CUMAA and NCUA Regulations
                                    and NCUA Efforts to
                                    [58]Serve Low- and Moderate-Income         45
                                    Individuals
                                    [59]Comparison of Interest Rates Offered
                                    by Credit Unions With Those
                                    [60]at Comparably Sized Banks              47
                                    [61]Issues Related to the Application of   49
                                    UBIT to Credit Unions
                                    [62]Information on Transparency and
                                    Compensation of Executive
                                    [63]Compensation                           49
                      Appendix II:  [64]Analyses of Survey of Consumer
                                    Finances Data, 2001 and
                                    [65]2004                                   50
                      Appendix III: [66]Comparison of Interest Rates at        57
                                    Credit Unions and Banks
                      Appendix IV:  [67]Selected Salary Surveys for Credit
                                    Union and Bank
                                    [68]Executives                             76
                        Appendix V: [69]Comments from the National Credit      81
                                    Union Administration
                                    [70]GAO Comments                           97
                      Appendix VI:  [71]GAO Contact and Staff Acknowledgments 103

                                         Tables

                                        Contents

    Table 1: [72]Number, Members, and Assets of Federal Credit Unions by
                [73]Charter Type, from 2000 through 2005                       12
    Table 2: [74]Federal Credit Union Conversions to Community Charters,
                [75]from 2000 through 2005                                     13
    Table 3: [76]Number of Credit Unions Approved to Expand into
                [77]Underserved Areas, 2000-2005                               18
    Table 4: [78]UBIT Income Declared and Taxes Paid by State-Chartered
                [79]Credit Unions, 2000-2004                                   30
    Table 5: [80]Definition of Income Categories Used for Community
                [81]Reinvestment Act Examinations                              47
    Table 6: [82]Peer (Asset) Group Definitions, Used in Comparisons of
                [83]Interest Rates between Credit Unions and Banks             48
    Table 7: [84]Percentages of Households Classified as Using Banks or
                [85]Credit Unions, 2001 and 2004                               51
    Table 8: [86]Median Income Benchmarks Used for Primary
                   (Household) and Additional (Family) Analyses of 2001 and
    [87]2004 SCF Data                                                       52
    Table 9: [88]Income Categories for Primary (Household) and
                Additional (Family) Analyses of 2001 and 2004 SCF
    [89]Data                                                                53
    [90]Table 10: Percentages in Each Income Category for Primary
                 (Household) Analysis by Customer Type, 2001 SCF
    [91]Data                                                                53
    [92]Table 11: Percentages in Each Income Category for Primary
                 (Household) Analysis by Customer Type, 2004 SCF
    [93]Data                                                                54
    [94]Table 12: Percentages in Each Income Category for Additional
              [95](Family) Analysis by Customer Type, 2001 SCF Data            54
    [96]Table 13: Percentages in Each Income Category for Additional
              [97](Family) Analysis by Customer Type, 2004 SCF Data            55
    [98]Table 14: Median Income within Each Income Category for Primary
                 (Household) Analysis by Customer Type, 2001 SCF
    [99]Data                                                                55
    [100]Table 15: Median Income within Each Income Category for Primary
                 (Household) Analysis by Customer Type, 2004 SCF
    [101]Data                                                               56
    [102]Table 16: Median Income within Each Income Category for
                    Additional (Family) Analysis by Customer Type, 2001 SCF
    [103]Data                                                               56

    Figures

    Contents

    [104]Table 17: Median Income within Each Income Category for

                Additional (Family) Analysis by Customer Type, 2004 SCF

    Data 56

    [105]Figure 1: Low Income Credit Union Growth, 2000-2005 16 [106]Figure 2:
    Comparison of Income Levels of Credit Union and Bank

    Customers, from 2001 and 2004 SCF  Data[107] 22 Figure 3: Regular  Savings
    Account Rates of Credit Unions and

    Banks with Assets of $100 Million or Less and Assets

    Greater than  $1  Billion,  from  2000  through  2005[108]  27  Figure  4:
    Sixty-Month New Car Loan Rates of Credit Unions and

    Banks with Assets of $100 Million or Less and Assets

    Greater than  $1  Billion,  from  2000  through  2005[109]  28  Figure  5:
    Thirty-Year Mortgage Loan Fixed Rates of Credit Unions

    and Banks with Assets of $100 Million or Less and Assets

    Greater than  $1  Billion,  from  2000  through  2005  28  [110]Figure  6:
    Compensation  Information  Filed  in  IRS  Form  990  35  [111]Figure   7:
    Comparison of Interest Rates for Savings Products at

    December 31, 2000, by Asset Size 58 [112]Figure 8: Comparison of  Interest
    Rates for Savings Products at

    December 31, 2001, by Asset Size 59 [113]Figure 9: Comparison of  Interest
    Rates for Savings Products at

    December 31, 2002, by Asset Size 60 [114]Figure 10: Comparison of Interest
    Rates for Savings Products at

    December 31, 2003, by Asset Size 61 [115]Figure 11: Comparison of Interest
    Rates for Savings Products at

    December 31, 2004, by Asset Size 62 [116]Figure 12: Comparison of Interest
    Rates for Savings Products at

    December 31, 2005, by Asset Size 63 [117]Figure 13: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2000, by Asset Size 64 [118]Figure 14: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2001, by Asset Size 65 [119]Figure 15: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2002, by Asset Size 66 [120]Figure 16: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2003, by Asset Size 67 [121]Figure 17: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2004, by Asset Size 68 [122]Figure 18: Comparison of Interest
    Rates of Consumer Loans at

    December 31, 2005, by Asset Size 69

    Contents

    [123]Figure 19: Comparison of Interest Rates of Mortgage Products at
    [124]December 31, 2000, by Asset Size 70 [125]Figure 20: Comparison of
    Interest Rates of Mortgage Products at [126]December 31, 2001, by Asset
    Size 71 [127]Figure 21: Comparison of Interest Rates of Mortgage Products
    at [128]December 31, 2002, by Asset Size 72 [129]Figure 22: Comparison of
    Interest Rates of Mortgage Products at [130]December 31, 2003, by Asset
    Size 73 [131]Figure 23: Comparison of Interest Rates of Mortgage Products
    at [132]December 31, 2004, by Asset Size 74 [133]Figure 24: Comparison of
    Interest Rates of Mortgage Products at [134]December 31, 2005, by Asset
    Size 75 [135]Figure 25: Credit Union Executive Average Base Salaries for
    [136]2005 77 Figure 26: Bank Executive Average Base Salaries in 2004 79

                                     Abbreviations

         ABA          American Banker's Association
         CRA          Community Reinvestment Act
         CUMAA        Credit Union Membership Access Act
         CUSO         credit union service organizations
         FFIEC        Federal Financial Institutions Examination Council
         IRS          Internal Revenue Service
         LICU         Low Income Credit Union
         MSA          Metropolitan Statistical Area
         NASCUS       National Association of State Credit Union Supervisors
         NCUA         National Credit Union Administration
         SCF          Survey of Consumer Finances
         SEC          Securities and Exchange Commission
         UBIT         unrelated business income tax

    This is a work of the U.S. government and is not subject to copyright
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    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    November 30, 2006

    The Honorable William M. Thomas Chairman Committee on Ways and Means House
    of Representatives

    Dear Mr. Chairman:

    Changes in credit union membership restrictions and the blurring of
    distinctions in the products and services offered by credit unions and
    other depository institutions, as well as concerns about the extent to
    which credit unions are serving people of modest means, have resulted in
    questions about the tax-exempt status of credit unions. Unlike banks,
    credit unions are (1) not-for-profit entities that build capital by
    retaining earnings (they do not issue capital stock); (2) member-owned
    cooperatives run by boards elected by the membership; (3) subject to field
    of membership requirements that limit membership to persons sharing
    certain circumstances, such as a common bond of occupation or association;
    and (4) exempt from federal income tax. As a result of recent legal and
    regulatory developments, the National Credit Union Administration (NCUA)
    has approved progressively larger geographicbased fields of membership for
    federal credit unions, including areas as large as whole counties or major
    metropolitan areas. Additionally, credit unions are increasingly offering
    products and services similar to those provided by banks, such as real
    estate and business loans. With the expansion of credit union membership
    and products, concerns have been raised whether the tax- exempt status of
    credit unions provides an unfair competitive advantage over comparably
    sized banks and the extent to which credit unions remain unique in terms
    of the population they serve versus that served by other depository
    institutions.

    Credit unions can be chartered by the federal government or by a state
    government. NCUA has oversight authority for federally chartered credit
    unions; the states have primary oversight responsibility for
    state-chartered credit unions. NCUA also provides share insurance to all
    federally chartered and most state-chartered credit unions. As of December
    2005, there were nearly 8,700 federally insured credit unions--about 5,400
    federally chartered and 3,300 state-chartered--with about $679 billion in
    total assets.^1

    Under the Federal Credit Union Act, federal charters are subject to a
    field of membership requirement.^2 The act provides for three types of
    federal credit union charter--single common bond, multiple common bond,
    and community.^3 A single common-bond credit union has a field of
    membership that comprises one group having a common bond of occupation or
    association. In a multiple common-bond charter, the field of membership
    comprises more than one group, with each group having a common bond of
    occupation or association (within the group).^4 In a community charter,
    the membership comprises persons or organizations within a "well-defined
    local community, neighborhood, or rural district."

    Although they are exempt from federal income tax, both federally and
    state-chartered credit unions do pay other taxes at the federal and state
    levels. For example, both types of credit unions pay federal employment
    taxes such as social security tax on behalf of their employees. According
    to the National Association of State Credit Union Supervisors (NASCUS),
    most states impose real property taxes on state-chartered credit unions;

    ^1According to NCUA, there are fewer than 500 nonfederally insured
    (privately insured or uninsured) state-chartered credit unions.
    Nonfederally insured credit unions are not subject to NCUA regulation.
    This report focuses strictly on federally and state-chartered credit
    unions that have member deposits insured by the National Credit Union
    Share Insurance Fund.

    ^212 U.S.C. S 1759 (2000). State credit union chartering acts typically
    include similar field of membership restrictions. For example, see Tex.
    Fin. Code Ann. 122.051 (Vernon 2005).

    ^3The Credit Union Membership Access Act of 1998, Public Law 105-219 (Aug.
    7, 1998), 112 STAT. 914, amended the Federal Credit Union Act to allow
    multiple-group chartering, subject to limitations that NCUA must consider
    when granting charters, and limited new community charter applications to
    well-defined local communities.

    ^4In a multiple-bond credit union, the original number of members in each
    group must be fewer than 3,000, unless a statutory exception applies. 12
    U.S.C. S 1759(b), (d). The numerical requirement does not apply to persons
    or organizations within an underserved local community, neighborhood, or
    rural district. 12 U.S.C. S 1759(c)(2). The act also contains other
    exceptions to the numerical requirement, as well as a grandfather
    provision. See 12 U.S.C. SS 1759(d)(2), (c)(1).

    and in a few states, federally chartered credit unions are subject to
    state real property taxes.^5

    As part of the House Ways and Means Committee's continuing oversight of
    the tax-exempt sector, you asked us to review a variety of credit union
    issues.^6 The objectives of this study were to (1) assess the effect of
    the 1998 Credit Union Membership Access Act (CUMAA) on federal credit
    union membership and charter expansion; (2) review NCUA's efforts to
    expand credit union services to low- and moderate-income individuals; (3)
    compare rates offered by credit unions with rates at comparably sized
    banks, as one indicator of how tax-exemption might benefit credit union
    members; (4) discuss issues associated with the application of the federal
    unrelated business income tax (UBIT) to credit unions; and (5) assess the
    transparency of credit union executives and board member compensation.

    To assess the effect of CUMAA on federal credit union membership and
    charter expansion, we obtained data from NCUA regarding charter types and
    membership, including data on recent new charter approvals, conversions,
    and expansions.^7 To review NCUA efforts to expand credit union services
    to low- and moderate-income individuals, we obtained information from NCUA
    on its low-income credit union program and recent underserved area
    expansions.^8 We also obtained and analyzed the Board of Governors of the
    Federal Reserve System's (Federal Reserve) 2004 Survey of Consumer
    Finances (SCF) to assess the extent to which credit union members were of
    low- and moderate-income households and discussed with NCUA officials
    their effort to measure the income levels of credit union members. To
    compare rates offered by credit unions with those of

    ^5NASCUS Profile Credit Union Supervisory and State Regulatory Structures,
    2005-2006 Edition. NASCUS represents the 48 state governmental agencies
    and U.S. territorial agencies that charter, regulate, and examine the
    nation's state-chartered credit unions.

    ^6On November 3, 2005, the House Ways and Means Committee held a hearing
    to review the credit union tax exemption in which GAO discussed issues
    regarding the tax-exempt status of credit unions. See GAO, Financial
    Institutions: Issues Regarding the Tax-Exempt Status of Credit Unions,
    [137]GAO-06-220T (Washington, D.C.: Nov. 3, 2005).

    ^7Federally insured credit unions are required to report their potential
    as well as actual membership to NCUA. Potential membership is an estimate
    of the maximum number of members that could join a credit union.
    Throughout this report, the term membership refers to actual credit union
    members unless otherwise noted.

    ^8As discussed previously, CUMAA permits federal multiple-bond credit
    unions to include underserved areas in their field of membership,
    regardless of size and location.

    comparably sized banks, we obtained and reviewed rate data on more than 15
    loan and savings products to identify any systematic differences. To
    facilitate our discussion of issues related to the application of UBIT to
    credit unions, we reviewed provisions of the Internal Revenue Code,
    Federal Credit Union Act, judicial decisions, and Internal Revenue Service
    (IRS) documents concerning the unrelated business income tax (UBIT) and
    the taxation of credit unions. We also obtained and analyzed IRS data
    regarding its activities to identify state-chartered credit union
    activities subject to UBIT. To provide information on transparency of
    compensation of credit union executives and board members, we discussed
    compensation reporting requirements of credit unions with IRS and obtained
    publicly available data regarding the compensation of board members and
    senior executives of credit unions and banks. Appendix I provides
    additional information about our scope and methodology. We conducted our
    work in Washington, D.C., and San Francisco from November 2005 through
    November 2006 in accordance with generally accepted government auditing
    standards.

      Results in Brief

    Since the passage of CUMAA in 1998 and subsequent changes in NCUA
    regulations, the credit union industry has experienced dramatic growth in
    the number of credit unions with community-based charters. NCUA revised
    its regulations after the passage of CUMAA, making it easier for federal
    credit unions to qualify for community charters that served large
    geographic areas such as entire counties. From 2000 through 2005, the
    overall number of federally chartered credit unions declined, but the
    number of federal community-chartered credit unions more than doubled
    (from 523 to 1,115). The assets of all three types of federal credit
    unions grew by about $140 billion between 2000 and 2005, and the assets
    held by community credit unions nearly quadrupled (from $27.1 to $104.4
    billion). Charter conversions largely drove the increase in numbers of
    community credit unions, with more than 90 percent of the growth in
    community charters resulting from conversions by multiple-bond credit
    unions. According to NCUA officials, the changes were necessary to
    maintain competitiveness against more expansive membership regulations in
    some state charters, enhance the safety and soundness of credit unions,
    and allow credit unions to serve more diverse memberships, including
    individuals of modest means.

    Although NCUA has taken actions to make credit union services available to
    individuals of modest means, information that directly measures the income
    levels of credit union members continues to be limited. In addition to
    looking at community chartering as a way to serve those of modest means,
    NCUA has established two initiatives to enhance the availability of credit
    union services to individuals of modest means--the low-income credit union
    program and permitting the adoption by credit unions of "underserved
    areas," regardless of the credit union's location. Federal credit union
    participation in both of the initiatives has risen since 2000--for
    example, federal credit unions receiving NCUA approval to expand into
    underserved areas increased from 40 in 2000 to 641 at the end of 2005.
    However, the most recent available information on the income of credit
    union members--the Federal Reserve's 2004 SCF--indicated that credit
    unions continued to lag behind banks in the percentage of their customers
    or members that were of low- and moderate-income households. Our analysis
    of the 2004 SCF indicated that 31 percent of households that only and
    primarily used credit unions were of modest means versus 41 percent for
    households that only and primarily used banks. As an approximation of
    income levels, SCF data have certain limitations for measuring the income
    characteristics of credit union members and should be interpreted with
    caution. NCUA commented that because of the relative newness of community
    charter expansion and observed increase in participation of the low-income
    and underserved area efforts, it would take time before changes in the
    income profiles of credit union members could be reflected in the data.
    Because of the limitations of available data such as the SCF, NCUA has
    undertaken a pilot program to estimate the income levels of credit union
    members. However, because of limitations in the sample size, the survey
    will not allow NCUA to make statistically valid conclusions on member
    income by specific charter type or about specific services provided to
    members of various incomes.

    Our analysis of interest rates for 15 loan and savings products indicated
    that credit unions seem to offer more favorable rates than those of
    comparably sized banks, particularly for consumer loans. For example,
    rates that credit unions charged for car loans averaged about 1 to 2
    percentage points lower than rates offered by similarly sized banks, and
    credit union rates averaged 0.4 percentage points higher for regular
    savings accounts. This difference was slightly more pronounced as the size
    of the institutions increased. In contrast, rates that credit unions and
    banks charged for mortgage loans were virtually the same; and, in limited
    cases, banks offered better mortgage rates on average than similarly sized
    credit unions. However, our analysis of deposit and loan rate data does
    not fully identify how the tax-exemption of credit unions might benefit
    credit union members. For example, tax-exemption may enable credit unions
    to reduce fees they charge for services provided to members. In addition,
    credit unions can finance additional services and add to desired or
    required reserves through untaxed retained income.

    IRS has been reviewing many types of state-chartered credit union
    activities to determine if they should be subject to UBIT. Groups
    representing state-chartered credit unions and the Credit Union National
    Association have stated that IRS has not provided sufficient guidance on
    what credit union activities are or are not subject to UBIT. According to
    IRS officials, IRS is planning to issue technical advice on credit union
    activities subject to UBIT. State-chartered credit unions paid more UBIT
    in 2004 than in 2000, but many state-chartered credit unions are permitted
    to be included in a group rather than an individual information
    return--Return of Organization Exempt from Income Tax (Form 990). The
    practice of providing aggregate returns effectively makes it more
    difficult for IRS to scrutinize state-chartered credit union operations to
    determine whether they are subject to UBIT. However, IRS officials told us
    that the additional technical advice the agency will be providing will
    specify its position on credit union activites that are subject to UBIT
    and should improve credit union compliance with the statute.

    Executive compensation for federal credit unions is not transparent,
    largely because federal credit unions are not required to publicly file
    information on executive compensation. The importance of transparency and
    disclosure of executive compensation have become an important topic as
    highlighted by the Securities and Exchange Commission's (SEC) recent rule
    making for publicly held companies.^9 Similarly, for not-for-profits, the
    disclosure of such information helps support oversight of these tax-exempt
    entities. However, unlike most other tax-exempt organizations, federal
    credit unions are not required to provide IRS with Form 990s that contain
    publicly disclosed information such as executive compensation. NCUA legal
    opinions have stated that member access to credit union records is
    generally a matter of state law. In those opinions, NCUA observed that
    members of federal credit unions are owners of the institution, similar to
    shareholders of corporations, so the members should look to state
    corporate law on matters such as access to federal credit union records.
    In one opinion, the NCUA attorney referred to the general rule in most
    states that shareholders are entitled to inspect corporate minutes and
    other records for appropriate purposes. However, it was not clear to what
    extent

    ^9SEC Final Rule, 17 C.F.R.  Parts 228, 229, 232,  239, 240, 245, 249  and
    274, Release Nos. 338732; 34-54302; IC-27444; File No. S7-03-06.

    Page 6 GAO-07-29 Credit Union Membership and Executive Compensation

    credit unions or their members were aware of this general right or how
    difficult or easy it would be for credit union members to obtain executive
    compensation data. We identified a few credit union and bank trade group
    surveys that address executive compensation for their respective
    industries. While these surveys provided an indication of compensation
    patterns, the surveys generally had methodological
    limitations--self-selected samples, small sample sizes, or incomplete
    information on total compensation and benefits--that precluded a direct
    comparison of credit union executive compensation with that of similarly
    sized banks. As part of its pilot program to obtain information on the
    income characteristics of credit union customers, NCUA has also collected
    data on credit union executive compensation and has reported the average
    salaries of specific positions with the credit union industry. However,
    the information, which is stratified into two subsets, reported salary
    information for (1) credit unions with assets less than $50 million and
    (2) credit unions with assets greater than $50 million. Additionally, this
    information only provides a snapshot of executive compensation for a
    single time period. Finally, NCUA officials told us that they are
    exploring various options to provide greater transparency in credit union
    executive compensation, such as amending NCUA's call report data to
    require federal credit unions to submit compensation and benefit data for
    senior executive officers or requiring that credit unions make credit
    union salary information available to their members for inspection at
    their public meetings.

    This report includes two recommendations to NCUA's Chairman to
    systematically track the performance of federal credit unions in providing
    financial services to members of modest means and improve the transparency
    of credit union executive compensation to enhance accountability of credit
    unions to the public and to their members.

    We provided a draft of this report to the Chairman of NCUA and the
    Commissioner of IRS for their review and comment. We received written
    comments from NCUA that are summarized below and reprinted in appendix V.
    In addition, we received technical comments from IRS that have been
    incorporated into this report as appropriate. In its written comments,
    NCUA indicated that the agency's staff have recommended that the NCUA
    board consider taking actions consistent with the recommendations made in
    our report. However, NCUA indicated in its comment letter that it had
    concerns with certain aspects of the draft report. Specifically, NCUA's
    letter stated that it was inaccurate and inappropriate to measure the
    success of federally chartered credit unions in serving persons of modest
    means by reference only to the low- and moderate-income categories
    associated with the Community Reinvestment Act (CRA). Additionally, NCUA's
    letter stated that our income category benchmarks were inconsistent with
    the specific definitions used by the other federal financial regulators
    for CRA compliance. NCUA's letter also stated that the SCF was not
    designed for reliable income comparisons between credit union members and
    bank customers. As we noted in the report, neither the Federal Credit
    Union Act nor NCUA have established definitions as to what constitutes
    modest means. Thus, consistent with our 2003 report, we used low- and
    moderate-income households as a proxy for persons of modest means for the
    purposes of our analysis. Our analysis not only included comparisons
    between credit unions and banks of low- and moderate-income households but
    also middle and upper income households for both the 2001 and 2004 SCF.
    This analysis shows that between 2001 and 2004 credit unions continued to
    serve a higher proportion of middle- and upper-income households and a
    smaller proportion of low- and moderate-income households than did banks.
    The primary difference between our income categories and those used for
    CRA purposes was the use of national rather than local Metropolitan
    Statistical Area (MSA) median income as a benchmark for the various income
    categories. We use the national measure since the SCF is a national
    survey, and we did not have sufficient geographic information to conduct a
    MSAlevel analysis. While we agree that the SCF was not specifically
    designed to conduct comparative analyses of income levels of bank and
    credit union customers, the SCF provides the best data currently available
    to undertake such a comparison. SCF is a respected source of publicly
    available data on financial institution and consumer demographics that is
    nationally representative and was the only comprehensive source of
    publicly available data that we could identify with information on
    financial institutions and consumer demographics. Additional NCUA comments
    are discussed at the end of this report and in appendix V.

      Background
    Both federally and state-chartered credit unions are exempt from federal
    income taxes.^10 However, their exempt status arises from different
    provisions of federal law. Federal credit unions are specifically exempt
    from federal and state income taxes under a provision of the Federal
    Credit

    ^10As previously noted in the introductory paragraphs of this report,
    federally and most statechartered credit unions are also exempt from state
    income and franchise taxes and pay other taxes at the federal and state
    levels.

    Page 8 GAO-07-29 Credit Union Membership and Executive Compensation

    Union Act.^11 State-chartered credit unions are exempt under a provision
    of the Internal Revenue Code that describes as exempt, "Credit unions
    without capital stock organized and operated for mutual purposes and
    without profit."^12 The code also imposes UBIT on state-chartered credit
    unions, but not on their federally chartered counterparts.^13

    The tax-exempt status of credit unions originally was predicated on the
    similarity of credit unions and mutual financial institutions. Section
    11(a)(4) of the Revenue Act of 1916, the statutory forerunner of section
    501(c)(14)(A), exempted from federal income tax "cooperative banks without
    capital stock organized and operated for mutual purposes and without
    profit." The exemption of credit unions stems from an opinion of the
    Attorney General, 31 O.A.G. 176 (1917), holding that credit unions
    organized under the laws of Massachusetts were so similar to cooperative
    banks as to come within the scope of section 11(a)(4). IRS regulations
    subsequently applied this ruling to credit unions generally.^14

    While other institutions lost their exemption in the Revenue Act of 1951,
    Congress specifically retained the exemption for credit unions by removing
    cooperative banks, savings and loan societies, and building and loan
    associations from exemption and inserting credit unions in their place.^15
    The Senate Finance Committee report accompanying the Revenue Act of 1951
    stated that the exemption of mutual savings banks was repealed to
    establish parity with other banking institutions because the savings banks

    ^1112 U.S.C. S 1768.

    ^1226 U.S.C. S 501(c)(14)(A).

    ^1326 U.S.C. S 511(a)(2); see also 26 U.S.C. S 501(c)(1), which, in
    combination with the exemption for federal credit unions under the Federal
    Credit Union Act, excludes them from UBIT.

    ^14See also T.D. 3179, which amended Art. 515(3), section 231, Regs. 45,
    Revenue Act of 1918 to read:

    "Cooperative banks without capital stock organized and operated for mutual
    purposes and without profit are exempt. Credit unions, such as those
    organized under the laws of Massachusetts, being in substance and in fact
    the same as cooperative banks, are likewise exempt from tax."

    ^15Pub. L. No. 82-183 S 313.

    had become functionally similar to those other institutions.^16 According
    to the Senate report, tax-exempt status gave mutual savings banks the
    advantage of being able to finance growth out of untaxed retained
    earnings, while competing corporations (commercial banks) paid tax on
    income retained by the corporation. The report stated that the exemptions
    for savings and loan associations had been repealed on the same ground.
    The report did not state why the tax-exempt status of credit unions was
    preserved.

    Credit unions are an important, but relatively small segment of the
    financial industry. According to NCUA and Federal Deposit Insurance
    Corporation data, federally and state-chartered credit unions represented
    7.5 percent of all deposits and shares insured by the federal government
    as of December 31, 2005. Additionally, credit unions typically are much
    smaller than banks and thrifts in terms of total assets. For example, NCUA
    data indicated that approximately 88 percent of federally chartered credit
    unions had $100 million or less in assets with 83 percent having assets
    less than $50 million as of September 30, 2005. According to NCUA, the
    average size of a federally chartered credit union was $73.2 million in
    total assets and the median asset size was $11 million.

      NCUA Rules Interpreting CUMAA Appear to Have Fueled Expansion of
      Community-Chartered Credit Unions

    Since the passage of CUMAA in 1998 and subsequent NCUA rule changes, NCUA
    has approved community charters with increasingly larger geographic fields
    of membership--for example, covering entire cities or multiple counties.
    Since 2000, community-chartered credit unions have nearly tripled their
    membership and nearly quadrupled their assets. Most of the new community
    charters approved between 2000 and 2005 were charter conversions by
    multiple-bond credit unions rather than new credit unions. According to
    NCUA, community charters offer credit unions greater opportunity than
    single- and multiple-bond credit unions to diversify their membership
    base, thereby contributing to the institution's economic viability and
    ability to serve all segments of the community, including those of modest
    means.

    ^16S. Rep. No. 82-781 (1951) at 22, 25.

        NCUA Regulations Interpreting CUMAA Set the Stage for Growth of Community
        Charter Credit Unions

    CUMAA is the most recent statute affecting field of membership
    requirements of federally chartered credit unions. In 1998, the Supreme
    Court determined that NCUA had erroneously interpreted the Federal Credit
    Union Act to permit federally chartered credit unions to have multiple
    common bonds.^17 In response, Congress passed a provision in CUMAA to
    specifically permit multiple-bond credit unions subject to a general
    limitation on the number of members sharing a particular common bond. Also
    in CUMAA, Congress amended the provision of the act permitting the federal
    community charter by changing the description of its field of membership
    from "groups within a well-defined neighborhood, community, or rural
    district" to "persons or organizations within a welldefined local
    community, neighborhood, or rural district."^18

    Subsequent to the passage of CUMAA, NCUA revised its regulations to
    approve community charters consisting of larger geographic areas of
    coverage and potential members. For example, NCUA recently approved one
    credit union for a community charter covering the entirety of Los Angeles
    County. Thus, an estimated 9.6 million persons who live, worship, and go
    to school or work in the county and businesses and other legal entities
    within county boundaries qualify for membership in this credit union.^19
    We reported in 2003 that previous NCUA regulations required credit unions
    to document that residents of a proposed community area interacted or had
    common interests.^20 Credit unions seeking to serve a single political
    jurisdiction (e.g., a city or a county) with more than 300,000 residents
    were required to submit more extensive paper work. However, NCUA revised
    its regulations in 2003, defining a local community as any city, county,
    or political equivalent in a single political jurisdiction,

    ^17National Credit Union Administration v. First National Bank & Trust
    Company 522

    U.S. 479 (1998).

    ^18Pub. L. No. 105-219 S 101(b)(3); see 12 U.S.C. S 1759 (1994).

    ^19According to NCUA officials, the 9.6 million potential membership
    figure for this credit union was based on the 2001 Census Bureau estimate
    of the population of Los Angeles County. Potentially, the credit union's
    membership could be larger than the population of Los Angeles County since
    individuals who live outside the county but worship or work in the county
    would be eligible to join the credit union.

    ^20See GAO, Credit Unions: Financial Condition Has Improved, but
    Opportunities Exist to Enhance Oversight and Share Insurance Management,
    [138]GAO-04-91 (Washington, D.C.: Oct. 27, 2003).

    regardless of population size and eliminated the documentation
    requirements.

    As shown in table 1, the number of community-chartered federal credit
    unions doubled from 2000 through 2005, while the number of multiple-bond
    credit unions declined by about 22 percent. In spite of the recent
    decline, multiple-bond credit unions remain the largest group of federally
    chartered credit unions in number and in total membership and assets.
    However, community-chartered credit unions overtook multiple-bond credit
    unions as the largest of the three federal charter types in terms of
    average membership and average size in terms of assets beginning in 2003.

     Table 1: Number, Members, and Assets of Federal Credit Unions by Charter Type,
                                 from 2000 through 2005

    Federal Credit Unions       2000    2001    2002    2003    2004      2005
    Number
    Multiple Single            3,045   2,933   2,842   2,684   2,534   2,385
                                  2,512   2,401   2,256   2,106   1,987   1,893
    Community                    523     783     855     986    1,051    1,115
    All charters                6,080   6,117   5,953   5,776   5,572    5,393
    Actual members (in
    millions)
    Single                       7.0     7.1     7.0     7.0     6.8       7.3
    Multiple                    30.8    29.5    29.1    27.8    26.8      26.0
    Community                    5.2     7.2     8.4    11.4    13.3      14.6
    All charters                42.9    43.8    44.6    46.2    46.9      47.9
    Assets (in billions)
    Single                      $43.3   $49.4   $54.4   $58.9   $62.1    $70.8
    Multiple                   $168.8  $180.2  $196.6  $202.2  $204.7   $202.6
    Community                   $27.1   $40.5   $50.3   $75.4   $91.9   $104.4
    All charters               $239.2  $270.1  $301.2  $336.6  $358.7   $377.8
    Average membership (in
    thousands)
    Single                       2.8     2.9     3.1     3.3     3.4       3.9
    Multiple                    10.1    10.1    10.3    10.3    10.6      10.9
    Community                    9.9     9.2     9.8    11.6    12.6      13.1
    All charters                 7.1     7.2     7.5     8.0     8.4       8.9
    Average assets (in
    millions)
    Single                      $17.3   $20.6   $24.1   $28.0   $31.3    $37.4
    Multiple                    $55.4   $61.4   $69.2   $75.3   $80.8    $85.0

    (Continued From Previous Page)
    Federal Credit Unions      2000     2001    2002    2003    2004      2005
    Community                 $51.8    $51.8    $58.8   $76.5   $87.5    $93.6
    All charters              $39.3    $44.2    $50.6   $58.3   $64.4    $70.1

                                     Source: NCUA.

        Growth of Federal Community Charter Credit Unions Has Been the Result of
        Charter Conversions Rather than New Credit Union Charter Approvals

    To a large degree, the increase in number, membership, and assets of
    community charter credit unions can be attributed to charter conversions
    rather than to new credit union charter approvals. Between 2000 and 2005,
    NCUA approved 616 applications for federal community charters. Of these
    616 approved federal community charters, 600 were conversions from single-
    or multiple-bond credit unions while only 16 were for new credit union
    charters. As shown in table 2, the vast majority of the conversions to
    community charters--549 or about 92 percent--involved multiple-bond credit
    unions.

    Table 2: Federal Credit Union Conversions to Community Charters, from 2000
    through 2005

    Year                From single-bond From multiple-bond              Total
    2000                                       8        81                  89
    2001                                      10        83                  93
    2002                                       5        86                  91
    2003                                      14        121                135
    2004                                       5        75                  80
    2005                                       9        103                112
    Total                                     51        549                600

                                     Source: NCUA.

        According to NCUA, Community Charters Allow Federal Charters to Remain
        Viable and Can Provide Opportunities to Diversify Membership

    NCUA officials indicated that changes in chartering policy have been
    triggered by factors such as the continued viability of federal credit
    unions in a changing economic environment and financial industry
    developments. NCUA believes that community charter expansion allows
    federal credit unions to attract a more diverse membership base. According
    to the officials, this in turn can enhance a credit union's economic
    viability, safety and soundness, as well as provide greater opportunities
    to serve members of modest means. For example, officials explained that
    single- and
    multiple-bond credit unions often tend to be organized around employer or
    occupationally based associations, which in turn creates greater economic
    risk exposure since the membership base is intertwined with the economic
    cycles of a particular employer or occupation.^21 Additionally, NCUA
    officials noted that employer or occupational bonds result in a greater
    concentration of members with middle rather than lower incomes. Since
    community charters are organized around geographically based associations,
    credit unions would be able to provide individuals from a broad range of
    occupations and income levels in these communities with access to their
    products and services. However, community based credit unions would be
    vulnerable to regional downturns in the economy.

      NCUA Programs Target Individuals of Low- and Moderate-Income, but Limited Data
      Preclude an Evaluation of Actual Service to Those Individuals

    NCUA has established and increased participation in two programs and
    policies that are specifically designed to make credit union services more
    available to individuals of low- and moderate-income. NCUA's Low Income
    Credit Union (LICU) program is designed to assist credit unions that can
    demonstrate that a majority of their members have a median household
    income less than 80 percent of the national household income or make less
    than 80 percent of the average for all wage earners. NCUA also has made it
    easier for federal credit unions, regardless of location, to expand their
    fields of membership into underserved areas (areas experiencing economic
    difficulty). Although federal credit unions increasingly have participated
    in these efforts in recent years, lack of data on the income levels of
    credit union members has made it difficult to determine how effective
    these programs have been in providing services to individuals of modest
    means. But, the limited existing data on income levels of credit union
    customers suggest that credit unions continue to lag behind banks in the
    proportion of customers that are of low-and moderate-income. NCUA has
    undertaken a pilot effort to capture information on the income
    characteristics of credit union members, but the data will not allow NCUA
    to reach statistically valid conclusions by charter type.

    ^21For example, a Federal Reserve Bank of Atlanta research paper concluded
    that "there are material benefits of credit union membership
    diversification and that these benefits derive from expanded investment
    opportunities and reduced concentration risk." See W. Scott Frame, Gordon
    V. Karels, and Christine McClatchey, "The Effect of the Common Bond and
    Membership Expansion on Credit Union Risk," Federal Reserve Bank Atlanta
    Working Paper No. 2001-10, April 2001.

    Page 14 GAO-07-29 Credit Union Membership and Executive Compensation

        NCUA Encouraged Growth of Low Income Credit Unions and Adoption of
        Underserved Areas, but Cannot Quantify Impact of Programs on Use of Credit
        Union Services by Individuals of Modest Means

    As we reported in 2003, it has been generally accepted that credit unions
    have a historical emphasis on serving people with "small" or "modest"
    means. Congressional findings contained in CUMAA linked the tax-exempt
    status of credit unions, in part, to their "specified mission of meeting
    the credit and savings needs of consumers, especially persons of modest
    means."^22 NCUA incorporated this emphasis into its current strategic
    plan, which gives its mission as "facilitating the availability of credit
    union services to all eligible consumers, especially those of modest means
    through a regulatory environment that fosters a safe and sound credit
    union system." According to NCUA officials, the changes in chartering
    requirements should allow credit unions to serve a more diverse
    membership, including those of modest means.

    In addition to approving more community charters, NCUA has encouraged
    credit union activity in other areas in an attempt to make credit union
    services more available to low-income individuals and underserved areas.
    According to NCUA, its LICU program is designed to assist credit unions
    serving predominantly low-income members in obtaining technical and
    financial services.^23 Credit unions that receive a low-income designation
    receive certain opportunities, such as the following:

         o greater authority to accept deposits from nonmembers such as voluntary
           health and welfare organizations;
         o access to low-interest loans, deposits, and technical assistance
           through participation in NCUA's Community Development Revolving Loan
           Fund;

    ^22Pub. L. No. 105-219 S 2(4).

    ^23Section 701.34 of NCUA's Rules and Regulations defines the term
    "low-income members" as those members who make less than 80 percent of the
    average for all wage earners as established by the Bureau of Labor
    Statistics or whose annual household income falls at or below 80 percent
    of the median household income for the nation as established by the Census
    Bureau.

    Page 15 GAO-07-29 Credit Union Membership and Executive Compensation

         o ability to offer uninsured secondary capital accounts and include
           these accounts in the credit union's net worth for the purposes of
           meeting its regulatory capital requirements;^24 and
         o a waiver of the aggregate loan limit for member business loans.

    From 2000 through 2005,  the number of  LICUs grew from  632 to 1,032,  an
    increase of more than 63 percent (see fig. 1).

          Figure 1: Low Income Credit Union Growth, 2000-2005

    Number of credit unions1,200

    600

    400

    200

            0 2000 2001 2002 20032004 2005 Year

    Source: NCUA.

    Credit union expansion into underserved areas also has increased in recent
    years. From 1994 through 1998, NCUA rules permitted federal credit unions,
    regardless of charter type, to include residents in low-income communities
    and associations in their fields of membership.

    ^24A "secondary capital instrument" is either unsecured debt or debt that
    has a lower priority than that of another debt on the same asset. These
    subordinated debt instruments are not backed or guaranteed by the federal
    share insurance funds.

    Page 16 GAO-07-29 Credit Union Membership and Executive Compensation

    In 1998, CUMAA expressly recognized that multiple-bond credit unions would
    be authorized to serve persons or organizations within an area that was
    underserved. The Federal Credit Union Act defines an underserved area as a
    local community, neighborhood, or rural district that is an "investment
    area" as defined by the Community Development Banking and Financial
    Institutions Act of 1994--that is, experiencing poverty, low income, or
    unemployment.^25 NCUA's Chartering and Field of Membership Manual
    (Interpretive Ruling and Policy Statement 03-1 or IRPS 03-1) allowed
    credit unions to include underserved areas in their fields of membership,
    without regard to location or changes to their charter type.^26 For
    example, NCUA recently approved a credit union in the state of Maryland to
    serve residents within an area of Washington, D.C., determined to be
    "underserved." Between 2000 and 2005, the number of credit unions
    receiving NCUA approval to adopt underserved areas grew from 40 to 641. As
    shown in table 3, the largest proportion of the 641 credit unions approved
    through year-end 2005 were multiple-bond credit unions (410 or 64
    percent), followed by community-chartered credit unions (196 or 31
    percent).

    ^25Section 103(16) of the 1994 act defines "investment area" as follows:
    "The term `investment area' means a geographic area (or areas) including
    an Indian reservation that--

    (A) (i) meets objective criteria of economic distress developed by the
    Fund, which may include the percentage of low-income families or the
    extent of poverty, the rate of unemployment or underemployment, rural
    population outmigration, lag in population growth, and extent of blight
    and disinvestment; and (ii) has significant unmet needs for loans or
    equity investments; or (B) encompasses or is located in an empowerment
    zone or enterprise community designated under section 1391 of title 26."
    12 U.S.C. S 4702(16).

    ^26According to NCUA's Chartering and Field of Membership Manual, a
    federal credit union that desires to include an underserved community in
    its field of membership must first develop a business plan specifying how
    it will serve the community. At a minimum, the business plan, must
    identify the credit and depository needs of the community and detail how
    the credit union plans to serve those needs. The credit union will be
    expected to regularly review the business plan to determine if the
    community is being adequately served. The regional director may require
    periodic service status reports from a credit union about the underserved
    area to ensure that the needs of the community are being met as well as
    requiring such reports before NCUA allows a federal credit union to add an
    additional underserved area.

      Table 3: Number of Credit Unions Approved to Expand into Underserved Areas,
                                       2000-2005

        Multiple-bond federal   Community-chartered  Single-bond    Total federal
                                                         federal    credit unions
                                                          credit
           credit unions with federal credit unions  unions with with approved
                              with                   underserved underserved
    Year-end   underserved     underserved areas        areas           areasa
                        areas
    2000                22                    17            0               40
    2001               120                    66            6              196
    2002               238                   127           14              386
    2003               314                   150           18              489
    2004               369                   170           24              570
    2005               410                   196           28              641

    Source: NCUA.

    ^aAs of December 2005, seven state-chartered credit unions formerly had
    been federally chartered and had approved underserved areas.

    However, recent changes in NCUA policies may limit the growth of the
    underserved areas program. In connection with a lawsuit instituted in
    November 2005, NCUA stopped permitting single-bond and community federal
    credit unions to include underserved areas in their fields of membership.
    This had the effect of allowing access only for multiple-bond credit
    unions, which is permitted specifically in a provision of the Federal
    Credit Union Act.^27 In the lawsuit, the American Banker's Association
    (ABA) challenged NCUA's approval of community-chartered credit unions
    adding underserved areas to their field of membership. ABA argued that
    NCUA misinterpreted the Federal Credit Union Act by allowing a community
    federal credit union to expand into several communities in Utah. ABA
    contended that the Federal Credit Union Act allows multiplebond credit
    unions, but not community-chartered credit unions, to add underserved
    areas to their fields of membership. In response, NCUA subsequently
    amended its chartering regulations to limit the adoption of underserved
    areas to multiple-bond credit unions. NCUA's final rule, incorporating
    these amendments, took effect on July 28, 2006.^28 On July 20, 2006, ABA
    announced that it had agreed to dismiss its lawsuit.

    ^2712 U.S.C. S 1759(c)(2). ^2871 Fed. Reg. 36667 (Jun. 28, 2006).

    Page 18 GAO-07-29 Credit Union Membership and Executive Compensation

    Despite the expansion into underserved areas and the LICU program, NCUA
    cannot specifically quantify the extent to which these programs have
    increased use of credit union services by individuals of modest means. As
    we reported in 2003 and will discuss in the following sections, limited
    data are available that specifically measure the income levels of credit
    union members and the services used by individuals of modest means. As a
    result, although NCUA data indicate increased adoption of underserved
    areas and increased participation in the LICU program, data do not exist
    to specifically show the extent to which these programs have increased
    services provided to individuals of modest means.

        Federal Reserve Survey Data Suggest that Credit Unions Continued to Serve a
        Lower Proportion of Lowand Moderate-Income Households than Banks

    Despite the shift toward community charters and the increase in the number
    of credit unions participating in NCUA's low-income and underserved
    programs, our analysis of data from the Federal Reserve's 2004 Survey of
    Consumer Finances (SCF) indicated that credit unions had a lower
    proportion of customers who were of low- and moderate-income than did
    banks.^29 These results were similar to the results of our analysis of the
    Federal Reserve's 2001 SCF data, which we discussed in our 2003 report.^30

    29The SCF is conducted every 3 years and is intended to provide detailed
    information on the balance sheet, pension, income, and other demographic
    characteristics of U.S. households and their use of financial
    institutions. We used the term "household" rather than "family," since the
    reporting unit of SCF more closely resembles the Census Bureau's
    definition of "household" than its definition of "family." It should be
    noted that SCF was not specifically designed to conduct comparative
    analyses of income levels of bank and credit union customers; however, SCF
    provides the best data currently available to undertake such a comparison.
    See appendix II for more information on our methodology and analysis of
    the SCF.

    ^30GAO, Credit Unions: Financial Condition Has Improved, but Opportunities
    Exist to Enhance Oversight and Share Insurance Management, [139]GAO-04-91
    (Washington, D.C.: Oct. 27, 2003). The analysis presented in this section
    employs the same methodology as in our 2003 report.

    We combined the 2004 SCF data into two main groups--households that only
    and primarily used credit unions (credit union customers) and households
    that only and primarily used banks (bank customers).^31 We then computed
    the proportions of credit union customers and bank customers in each of
    these four income categories--low, moderate, middle, and upper. We based
    our income categories on criteria that financial regulators use to assess
    compliance with the Community Reinvestment Act, which is intended to
    encourage depository institutions to help meet the credit needs of the
    communities that they serve. Specifically, (1) a lowincome household had
    less than 50 percent of the national median household income; (2) a
    moderate-income household had an income of at least 50 percent, but less
    than 80 percent, of the national median household income; (3) a
    middle-income household had an income of at least 80 percent, but less
    than 120 percent, of the national median household income; and (4) an
    upper-income household had an income of at least 120 percent of the
    national median household income. We estimated that 14 percent of credit
    union customers were of low-income and 17 percent were of moderate-income,
    compared with 24 percent and 16 percent for banks. We found the difference
    between the proportion of low-income customers at banks and credit unions
    to be statistically significant (that is, the evidence suggested that the
    difference between the two was not simply the result of chance). Moreover,
    we estimated that 20 percent of credit union customers were of
    middle-income and 49 percent were of upper-income, compared with 18
    percent and 41 percent for banks. We found the difference between the
    proportion of upper-income customers at banks and credit unions to be
    statistically significant as well.

    In an effort to assess the extent to which credit unions served people of
    "modest means," we combined households with low- or moderate-incomes into
    one group (as a proxy for modest means) and combined households

    ^31We based our methodology for determining these classifications on work
    that Jinkook Lee, a professor and researcher at Ohio State University,
    performed. See Jinkook Lee and William A. Kelly Jr., "Who Uses Credit
    Unions?" (Prepared for the Filene Research Institute and the Center for
    Credit Union Research, 1999, 2001). Individuals who "primarily" used
    credit unions placed more than 50 percent of their assets in credit unions
    and those who "primarily" used banks placed more than 50 percent of their
    assets in banks. The term "use" refers to a household's placement of
    assets in a checking, savings, or money market account.

    with middle or upper incomes into another group.^32 We found that 31
    percent of credit union customers were of "modest means," compared with 41
    percent of bank customers, suggesting that banks served a higher
    proportion of people of "modest means." The difference between banks and
    credit unions was statistically significant.

    As shown in figure 2, the proportion of credit union customers that were
    in the upper-income category grew from 2001 to 2004. This increase, from
    43 percent to 49 percent, was statistically significant. Thus, the
    statistically significant difference between banks and credit unions in
    serving people of "modest means" that we documented in our 2003 report
    using 2001 data appears to have persisted in the 2004 data. Moreover, we
    found the decline from 2001 to 2004 in the proportion of credit union
    customers in the "modest means" category to be statistically significant.
    Additionally, the relatively high percentage of households in the
    moderate- and middleincome categories that used credit unions (37 percent)
    in the 2004 SCF may be reflective of credit union membership traditionally
    being based on occupational- or employer-based fields of membership.

    ^32As in our 2003 report, we were unable to find a definition of "modest
    means." Thus, we used the group consisting of low- and moderate-income
    households as a proxy for the purposes of our analysis.

    Page 21 GAO-07-29 Credit Union Membership and Executive Compensation

    Figure 2: Comparison of Income Levels of Credit Union and Bank  Customers,
    from 2001 and 2004 SCF Data

          Percentage

    Upper income

    Middle income

    Moderate income

    Low income Sources: GAO and Federal Reserve.

    Note: Totals may not equal 100 percent due to rounding.

    However, NCUA officials told us that since growth in the agency's programs
    to expand services to lower-income persons and undeserved areas are
    relatively recent, it was probably too soon to expect any changes in the
    SCF data, with respect to customer income. Further, NCUA felt that it
    would take time for any results to appear in the data, as credit unions
    seeking to expand into new areas and reaching new types of customers would
    face a learning curve in their efforts. Additionally, NCUA officials
    stated that since most of the conversions to the community charter
    occurred within the last 5 years, within a reasonable period they expected
    to see a change in the customers these credit unions were serving. It
    should also be kept in mind that the latest available data from SCF are
    2-years old, so any more recent changes would not be reflected in our
    analysis.

    As we noted in our 2003 report, limitations in SCF data preclude its use
    in drawing definitive conclusions about the income characteristics of
    credit union members. Additional information--especially about the income
    levels of credit union members receiving consumer loans and other credit
    union services--would be required to assess more completely whom credit
    unions serve. As further noted in our 2003 report, NCUA has noted that
    credit union members were likely to have higher incomes than nonmembers
    because credit unions are occupationally based. As NCUA and others have
    noted--because of the statutory limitations on who can join federal credit
    unions--credit union membership is largely based on employment, and credit
    unions are restricted to the income composition of the individuals within
    fields of membership containing employed individuals. However, as we noted
    earlier, SCF provides the best data currently available regarding the
    income characteristics of credit union members.

    To determine how sensitive our results were to our income categorization,
    we used median family income in addition to median household income to
    analyze the 2001 and 2004 SCF data.^33 We found similar results using both
    median family and household income. Recognizing the limitations of the SCF
    and other available data, our 2003 report suggested that Congress consider
    requiring NCUA to obtain data on the extent that credit unions provided
    loans and other services to low- and moderate-income households within
    each federally insured credit union's field of membership.^34

        NCUA Has Pilot Survey to Measure Income of Credit Union Members, but Will
        Not Be Able to Use Results to Determine What Services Members at Various
        Income Levels Receive

    In response to your Committee's concerns regarding the lack of available
    information to evaluate credit union member income and services, NUCA
    undertook a data collection effort to profile federal credit union member
    income information, identify the credit union services offered to credit
    union members, and provide information on the compensation of credit union
    executives. (We discuss executive compensation in more detail later in
    this report). As of August 31, 2006, NCUA had completed its data
    collection phase, as agreed with the Office of Management and Budget

    ^33See appendix II for greater detail on the SCF analyses we performed. In
    SCF, a household unit is divided into a ``primary economic unit'' (PEU)
    and everyone else in the household unit. The PEU is intended to be the
    economically dominant single individual or couple (whether married or
    living together as partners) and all other persons in the household unit
    who are financially interdependent with that economically dominant person
    or couple. The Census Bureau's definition of "family" excludes the
    possibility of one-person household units, but its definition of
    "household" allows for them.

    ^34 [140]GAO-04-91 , p. 83.

    under the Paperwork Reduction Act, which is intended to minimize the
    paperwork burden for nonprofit institutions.^35

    NCUA took a random sample of 481 federal credit unions and relied on two
    different data collection methods to determine member incomes. NCUA
    officials told us they intended to compare the results of the two methods
    to determine the extent of any income differences and identify which of
    the two approaches might be relied upon in the future. One method involved
    obtaining information such as a credit union member's zip code from NCUA's
    Automated Integrated Regulatory Examination System to make projections of
    median household income. The other method involved using the street
    address and zip codes of credit union members and applying a software
    package that uses geo-coding to determine median family income averages.
    The officials told us that the software package is widely used in the
    banking industry to help make income determinations for fair lending
    examinations.

    NCUA also gathered information from the credit unions on the type of
    services the institutions offer to their members, including services that
    may be of value to members with lower incomes or little financial
    experience. Using the same sample of credit unions, NCUA collected
    information on whether or not certain services are provided by the credit
    union. For example, NCUA gathered information on the extent to which the
    sampled credit unions offer low-balance checking accounts and whether they
    offer some type of financial literacy training.

    NCUA officials stated to us that there are limitations of the data
    collection effort. First, although the information collected represents a
    statistically valid random sample of the federal credit union population
    and will provide information on the income levels of overall federal
    credit union members, the data will not enable NCUA to make statistically
    valid conclusions by charter type or make conclusions about the extent of
    credit union services being provided to various income levels. The
    officials explained that to do so would require a larger and more
    time-consuming data collection effort, requiring an increase in sample
    from the current effort of 481 to a sample of almost 1,200 credit unions.
    According to the officials, a larger sample would not allow them to meet
    their goal to report results by year-end 2006.

    ^35The Paperwork Reduction Act of 1995 (Pub. L. 104-13, 44 U.S.C. Chapter
    35) was intended, among other things, to minimize the paperwork burden for
    nonprofit institutions that results from the collection of information by
    or for the federal government.

    Page 24 GAO-07-29 Credit Union Membership and Executive Compensation

    NCUA indicated that despite these limitations, the data collected will add
    to the agency's knowledge and should be valuable in deciding what actions,
    if any, might be appropriate over the longer term. At the time of our
    discussions, NCUA had not developed benchmarks to use as a measure for a
    "modest means" category related to member income data. NCUA indicated that
    its data collection effort will help the agency better understand the
    concept of "modest means" in relation to geographically dispersed,
    limited, and diverse fields of membership. NCUA's data collection effort
    represents 61 percent of all credit unions because the regulator has
    oversight authority for federally chartered credit unions, while state
    governments have responsibility for overseeing the remaining 39 percent of
    the credit unions (state-chartered credit unions). Finally, while NCUA's
    data collection effort will be useful for establishing a baseline, NCUA
    officials stated that there are no plans to gather the information on a
    continual or routine basis.

    In response to a March 2006 congressional request, National Association of
    State Credit Union Supervisors (NASCUS) officials told us they and state
    regulatory agencies have initiated a data collection effort for
    statechartered credit unions. NASCUS will collect some information similar
    to that collected in the NCUA pilot, such as membership income and
    executive compensation.^36 However, NASCUS also will collect data in two
    additional areas: credit union service organizations (CUSO) and UBIT.^37
    NASCUS is using a methodology similar to NCUA's to determine member income
    levels. According to NASCUS, they have developed a representative sample
    by applying different weights to unique state credit union
    characteristics, including size, field of membership, and charter type.
    Credit unions selected in the representative sample will respond to a
    questionnaire developed by state regulatory agencies. The questionnaire
    addresses membership, CUSOs, UBIT and executive compensation. As of
    September 2006, the officials indicated that the data collection effort
    had started, and that they expected the results to be available in the
    first quarter of 2007.

    ^36To determine executive compensation for state-chartered credit unions,
    NASCUS is requesting information from credit unions in the states that
    file a consolidated IRS Form 990. State-chartered credit unions are
    required to file this form, which includes executive compensation
    information.

    ^37A credit union service organization is a corporation, a limited
    liability corporation, or limited partnership owned by one or more credit
    unions that provides services such as insurance, securities, or real
    estate brokerage, primarily to credit unions or members of affiliated
    credit unions.

      Credit Unions Offered Better Interest Rates on Some Products, but the Extent
      to Which the Benefits of Tax-Exempt Status Have Been Passed to Members Is
      Unclear

    Our analysis showed that credit unions tended to offer better interest
    rates than similarly sized banks for a variety of products and loans, but
    rate data alone cannot be used to determine the extent to which the
    benefits of tax exemption have been passed to members. We obtained and
    analyzed rate data for various savings products offered by credit unions
    and banks from 2000 through 2005 and found that credit unions on average
    offered higher rates than comparably sized banks.^38 Similarly, the rate
    data that we obtained for various loan products indicated that on average
    credit unions tended to offer lower interest rates than comparably sized
    banks, particularly for consumer loans such as automobile loans. However,
    it is important to note that interest rates during the period covered by
    our analysis were at historic lows.

    As seen in figure 3, rates offered by credit unions from 2000 through 2005
    on regular savings accounts on average were higher than those offered by
    similarly sized banks. However, the differences among the rates of
    comparably sized credit unions and banks tended to get larger as the size
    of the institutions increased. For example, for institutions with assets
    of less than $100 million, the difference between credit unions and banks
    averaged about 0.15 of a percentage point in this period, while the
    difference for institutions with assets greater than $1 billion averaged
    almost 0.7 of a percentage point. More recently, the gap in rates between
    larger credit unions and banks closed considerably; in the greater than $1
    billion asset range, the gap was more than 1 percentage point in 2000, but
    about one-half of 1 percent in 2005. We observed similar trends throughout
    the period for other savings products such as money market accounts and
    certificates of deposit (see app. III).

    ^38We engaged Datatrac Corporation--a market research and information
    technology company specializing in the financial services industry--to
    gather and analyze data on loan and savings products that thousands of
    credit unions and banks offered from 2000 through 2005. Datatrac
    calculated average rates for each of the products for all institutions
    (divided into five distinct asset classes) over this period. See appendix
    III for more information on our rate analysis methodology and results.

    Page 26 GAO-07-29 Credit Union Membership and Executive Compensation

    Figure 3: Regular Savings  Account Rates of Credit  Unions and Banks  with
    Assets of $100 Million  or Less and Assets  Greater than $1 Billion,  from
    2000 through 2005

    Sources: GAO and Datatrac.

    The difference between credit unions and banks was more pronounced for
    consumer loans. For example, over the 6-year period, the rates that credit
    unions charged for 60-month new car loans tended to be lower than the
    rates charged by similarly sized banks, by 1 or 2 percentage points. As
    shown in figure 4, the trend was consistent for the larger asset category
    as well. However, unlike savings products, the rate differences between
    credit unions and banks for car loans widened in 2005. These trends held
    true for rates for other consumer products such as credit cards.

    Figure 4: Sixty-Month New Car Loan  Rates of Credit Unions and Banks  with
    Assets of $100 Million  or Less and Assets  Greater than $1 Billion,  from
    2000 through 2005

    Sources: GAO and Datatrac.

    Although credit unions charged lower interest rates for consumer loans,
    similarly sized credit unions and banks charged virtually identical rates
    on larger loans such as mortgages, from 2000 through 2005 (see fig. 5). In
    some limited instances, banks offered lower rates than similarly sized
    credit unions. Also, larger institutions in general offered lower rates
    than smaller institutions.

    Figure 5: Thirty-Year Mortgage Loan Fixed Rates of Credit Unions and Banks
    with Assets of $100  Million or Less and  Assets Greater than $1  Billion,
    from 2000 through 2005

    Sources: GAO and Datatrac.

    ^aData based on responses of less than 10 institutions.

    Our analysis of deposit and loan rate data for credit unions and banks
    does not fully identify how the tax-exemption of credit unions might
    benefit credit union members. First, there may be other reasons for
    differences in rates beside tax differences. For example, loan rates may
    differ because of differences in borrower characteristics, such as
    creditworthiness, or because of geographic market differences. In
    addition, tax-exemption may benefit members in other ways than through
    loan and deposit rates. Credit unions might also charge lower fees than
    they otherwise would for services and products provided to members. We did
    not identify any comprehensive studies or data sources that addressed
    differences in fees charged by credit union and banks on a national basis.
    Unlike banks, credit unions can finance additional services and add to
    desired or required reserves through untaxed retained income. As a result
    of tax-exemption, credit unions may retain more income to add to reserves
    or to finance additional services than they would if they were taxed.

      Lack of Guidance and Criteria for Applying UBIT to State Credit Union
      Activities Makes Determining Compliance with the Requirement Difficult

    As stated earlier, state-chartered credit unions are subject to tax on
    unrelated business income while federal credit unions specifically are
    exempt. IRS has several ongoing examinations of state-chartered credit
    unions to determine which of their activities are subject to UBIT. Credit
    union trade groups have stated the need for guidance regarding the
    activities that IRS has determined to be subject to UBIT; IRS has stated
    that it plans to issue technical advice in 2007 after completing its
    reviews. Furthermore, the practice of allowing group statewide filings has
    made it more difficult for the IRS to scrutinize the activities of
    individual institutions to ensure compliance with the UBIT statute. IRS
    officials asserted that the agency plans to issue technical advice on the
    application of UBIT to state credit union activities, which they stated
    should improve credit union compliance with the statute.

    IRS Has Questioned Which State Credit Union Activities Should Be Subject to UBIT

    UBIT is a tax on income derived by a tax-exempt entity from a trade or
    business that is regularly carried on and not substantially related to the
    exercise or performance of the purpose or function constituting the basis
    for the entity's exemption. Under the Internal Revenue Code,
    statechartered credit unions are subject to UBIT, but federal credit
    unions are not subject to the tax because they are exempt federal
    instrumentalities under a provision of the code.^39 As shown in table 4,
    the amount of income subject to UBIT reported by state-chartered credit
    unions and the related taxes paid nearly doubled from 2000 through 2004
    and totaled more than $5 million over this period.

    Table 4: UBIT  Income Declared  and Taxes Paid  by State-Chartered  Credit
    Unions, 2000-2004

    Tax year                            Total UBIT incomea    Total taxes paid
    2000                                        $2,565,056            $691,094
    2001                                         3,642,903             927,896
    2002                                         9,820,709           1,281,938
    2003                                         3,788,412           1,050,767
    2004                                         4,646,782           1,377,726
    Total                                      $24,463,862          $5,329,421

    Source: IRS.

    ^aNegative income (UBIT losses) are not included in the UBIT income
    figures.

    As credit unions have increased the types of products and services that
    they offer, certain product offerings by state-chartered credit unions
    have resulted in IRS examining whether state-chartered credit unions are
    using their tax-exempt status to conduct business unrelated to their
    exempt purposes. In November 2005, an IRS commissioner informed the
    Congress of an IRS review of certain activities of state-chartered credit
    unions for purposes of UBIT.^40 The IRS has been reviewing activities that
    included the following:

         o the sale of optional credit life insurance and credit disability
           insurance to members that would pay off the loan balances with the
           organization, if the borrower died or became disabled;
         o the sale of "guaranteed auto protection" insurance, which pays the
           automobile loan balance in the event of loss or destruction of a
           vehicle to the extent it exceeds the value of the vehicle;

    ^39See 26 U.S.C. SS 501, 511; 12 U.S.C. S 1768.

    ^40Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government
    Entities Division, Internal Revenue Service, in testimony before the full
    committee of the House Committee on Ways and Means (Nov. 3, 2005).

    Page 30 GAO-07-29 Credit Union Membership and Executive Compensation

         o the sale of automobile warranties;
         o the sale of cancer insurance;
         o the sale of accidental death and dismemberment insurance;
         o ATM fees charged to nonmembers;
         o the sale of health or dental insurance;
         o the marketing of mutual funds to members; and
         o the marketing of other insurance and financial products.^41

    According to IRS officials, the agency had 50 ongoing examinations of
    state-chartered credit unions for UBIT purposes as of September 2006.

    Determining the applicability of UBIT to state credit union activities is
    a complicated proposition because it depends on the relationship of the
    activities to credit unions' tax-exempt purposes or functions. However, as
    IRS stated in a Technical Advice Memorandum, neither the Internal Revenue
    Code nor IRS regulations enumerate the functions of a credit union exempt
    under section 501(c)(14) of the code.^42 The tax-exemption is based on
    what can be described as structural features, specifically the
    institution's mutuality and nonprofit operations, whether it is organized
    and operated in accordance with state law, and whether its members share a
    common bond.^43

    Groups Representing state-chartered credit unions and the Credit Union
    National Association have stated that IRS has not provided sufficient
    guidance on which credit union activities are or are not subject to UBIT.
    According to IRS officials, IRS is planning to issue specific information
    in the form of Technical Advice Memoranda as a result of its examination
    of

    ^41Statement of Steven T. Miller. ^42Technical Advise Memorandum 9548001
    (Mar. 23, 1995). ^43See G.C.M. 34612, Exempt Status of State Chartered
    Credit Unions (Sept. 14, 1971); see also

    G.C.M.
               37467Exemption from Tax On Corporations - Credit Unions (Mar. 21,
               1978),

    G.C.M.
               38348.

    Page 31 GAO-07-29 Credit Union Membership and Executive Compensation

    credit union UBIT activities in the first quarter of 2007.^44 IRS believes
    that the Technical Advice Memoranda will more clearly articulate specific
    activities of state-chartered credit unions that can be subject to the tax
    and improve compliance with the statute.

        Group Filings Make It More Difficult for IRS to Scrutinize the Activities of
        Individual Credit Unions

    Not-for-profit entities that generate more than $1,000 in unrelated
    business income are required to disclose on Form 990 that they have
    generated such income and whether they have filed an Exempt Organization
    Business Income Tax Return (Form 990-T) with IRS declaring the income and
    related UBIT liability. State-chartered credit unions are required to file
    Form 990, and Form 990-T if they generate unrelated business income in
    excess of $1,000. However, according to IRS officials, an IRS ruling
    allows state regulatory authority in some states to file forms 990 on a
    groupwide basis; that is; one form can be filed on behalf of all
    state-chartered credit unions in a particular state.^45 Thus, a
    state-chartered credit union located in one of those states could generate
    taxable unrelated business income without having to file a Form 990,
    individually. According to IRS officials, the group ruling applies to 34
    states, and group returns in about 21 of those states have been filed in
    recent years. Of the 21 states, only 1 has asserted on the Form 990 that
    UBIT was generated in that state.

    IRS stated it would be able to positively verify if an individual credit
    union declaring unrelated business income in excess of $1,000 on its Form
    990 also filed a Form 990-T. However, the agency currently does not have a
    process in place to review group returns to ensure that the credit unions
    filed the Form 990-T. As a result, IRS cannot systematically determine if
    credit unions that were included in group returns and generated unrelated
    business income properly filed a Form 990-T declaring such income and paid
    UBIT. According to IRS officials, the group exemption process was
    instituted to relieve IRS of the burden of individually processing a large
    number of applications from organizations sharing a common affiliation

    ^44Technical Advice Memoranda are issued in response to technical or
    procedural question that develop during proceedings on the interpretation
    and proper application of tax law, tax treaties, regulations, revenue
    rulings, notices, or other precedents published by the Office of Chief
    Counsel. Proceedings include the examination of a taxpayer's return.

    ^45IRS requires that every year, each local organization (in this case,
    credit union) authorize in writing the central organization that prepares
    the group return to include it in the group return and must declare, under
    penalty of perjury, that the information it submits to be included in the
    group return is true and complete.

    and that are operated for the same general purpose. For example, IRS noted
    that some organizations, including churches and veterans organizations,
    have a great number of subordinate organizations that are similarly
    situated. IRS officials agreed that requiring all state-chartered credit
    unions to file an individual Form 990 could enhance the agency's ability
    to scrutinize the activities of individual credit unions to determine
    whether they were subject to UBIT. However, officials also noted that it
    was not clear if the benefits of eliminating the group filing exemption
    would exceed the costs--both to IRS as well as to the individual credit
    unions. Specifically, officials noted that credit unions that are
    currently included in group returns would each need to file for
    recognition as a taxexempt organization and incur annual costs to prepare
    and file individual Form 990. Moreover, IRS officials noted that they
    expect that the Technical Advice Memoranda that the agency is planning to
    issue in early 2007 would improve credit union compliance with UBIT filing
    requirements.

      Alternatives Exist to Improve the Transparency of Credit Union Executive and
      Director Compensation

    Federal credit union executive compensation is not transparent. Federal
    credit unions are not required to file reports, including the IRS Form 990
    required for most other tax-exempt organizations that would provide
    information on executive and director compensation. NCUA legal opinions
    have stated that member access to credit union records is generally a
    matter of state law but that federal credit union members "have inspection
    rights similar to those enjoyed by a shareholder in a corporation" and
    that "the general rule in most jurisdictions is that a shareholder is
    entitled to inspect corporate minutes and other records as long as he has
    a proper, nonvexatious purpose."^46 However, we could not determine to
    what extent credit unions and credit union members were aware of this
    information. We identified a number of credit union and bank executive
    compensation surveys, but data and methodological limitations precluded us
    from making direct comparisons of executive compensation. NCUA has
    collected executive compensation information for federal credit unions as
    part of its efforts to assess who credit unions serve.

     ^46NCUA Letters 06-0127B (Feb. 6, 2006); 96-0541 (Jun. 14, 1996); and 89-0525
                                    (Jun. 8, 1989).

          Page 33 GAO-07-29 Credit Union Membership and Executive Compensation

        Public Reporting of Executive Compensation for Federal Credit Unions Is
        Limited and Regulator Scrutiny of Compensation Is Primarily Reviewed for
        Safety and Soundness Concerns

    The issue of transparency and disclosure of executive compensation has
    become an important topic, both for tax-exempt entities and publicly held
    companies. Credit union members bear some similarity to public company
    shareholders in that they are "owners" and vote for boards of directors
    that are entrusted to oversee executive compensation. The importance of
    disclosure of executive and director compensation was illustrated in
    recent changes adopted by SEC in July 2006 to increase transparency and
    disclosure by public companies and reflect the increasing focus on
    corporate governance and director independence. According to SEC, the
    objective was to provide investors with a clearer and more complete
    picture of the compensation earned by a company's principal executive
    officer, principal financial officer, highest paid executive officers, and
    members of its board of directors.

    In contrast, credit union executive compensation is not transparent
    because credit unions are not required to file publicly available reports
    such as the IRS Form 990 that disclose executive compensation data. For
    tax-exempt organizations, IRS has noted that some members of the public
    rely on Form 990 as the primary or sole source of information about a
    particular organization. Most tax-exempt organizations with gross receipts
    that are normally more than $25,000 are required to file the Form 990
    annually. IRS also uses these forms to select organizations for
    examinations. Figure 6 shows the compensation information collected on the
    Form 990.

    Figure 6: Compensation Information Filed in IRS Form 990

    Source: IRS.

    On August 23, 1988, IRS issued a determination that federal credit unions
    are not required to annually file a Form 990 because of their status as
    taxexempt instrumentalities under section 501(c)(1) of the Internal
    Revenue Code. Also, as noted previously, some state-chartered credit
    unions file through a group filing process (21 states in 2004). For these
    states, IRS receives only the name and addresses of individual credit
    unions. As a result, scrutiny of the compensation of credit union
    executives and other key personnel is limited.

    Additionally, boards of directors of credit unions receive limited
    compensation because the directors serve in nonpaid positions. According
    to the Federal Credit Union Act, no member of a federal credit union board
    may be compensated; however, a federal credit union may compensate one
    individual who serves as an officer of the board.^47 Although the credit
    union may not pay its board of directors a salary, it may provide or
    reimburse directors for such things as mileage; insurance, including life,
    health, and accident insurance; and travel expenses. In contrast, bank
    boards of directors may receive fees such as an annual retainer for
    serving on the board, profit sharing, professional fees, and other
    bonuses. Also, according to one bank survey, about half of the banks that
    responded indicated that their compensation fees were based strictly upon
    attendance.

    According to NCUA, executive compensation is assessed during the credit
    union's examination to determine its reasonableness as it relates to
    safety and soundness concerns. As stated in our 2003 report, NCUA recently
    moved from an examination and supervision approach that primarily was
    focused on reviewing transactions to an approach that focuses resources on
    high-risk areas within a credit union.^48 To complement the risk-focused
    approach and allow NCUA to better allocate its resources, the agency
    adopted a risk-based examination program in July 2001. NCUA officials
    explained that supervisory examinations, including reviews of credit union
    executive compensation, follow a risk-focused approach. The officials told
    us that examiners would review executive compensation in instances of
    safety or soundness concerns, such as compensation arrangements that
    significantly exceeded compensation paid to persons with similar
    responsibilities in credit unions of similar size and in similar
    locations. NCUA also stated that since it has not found a systemwide issue
    with executive compensation, it has not considered it necessary to collect
    or aggregate executive compensation data. Additionally, we found NCUA's

    ^4712 U.S.C. SS1761(c) and 1761a. ^48 [141]GAO-04-91 , p. 42.

    Page 36 GAO-07-29 Credit Union Membership and Executive Compensation

    guidance on compensation similar in content with the Federal Financial
    Institutions Examination Council's (FFIEC) Interagency Guidelines
    Establishing Standards for Safety and Soundness.^49

    At various times, credit unions and others have questioned whether members
    have the right to obtain and inspect credit union information, including
    salary data. NCUA legal opinions have stated that member access to credit
    union records is generally a matter of state law, and federal credit
    unions should look to the appropriate state corporate law. In a letter
    dated June 14, 1996, NCUA's Associate General Counsel said that federal
    credit union members "have inspection rights similar to those enjoyed by a
    shareholder in a corporation" and that "state law determines the types of
    information and documents, and the degree of access, available to
    shareholders/members."^50 The letter stated that "the general rule in most
    jurisdictions is that a shareholder is entitled to inspect corporate
    minutes and other records as long as he has a proper, nonvexatious
    purpose." However, it is unclear to what extent federal credit union
    members and credit union personnel are aware of a member's right to
    inspect records, or how difficult or easy it would be for credit union
    members to obtain information such as salaries.

        Industry Surveys That Address Executive Compensation Are Limited, and NCUA
        Has Released Its Compensation Data

    We could not identify any surveys or studies that directly compared credit
    union executive compensation with compensation provided by similarly sized
    banks. However, we did identify a few credit union and bank trade group
    surveys that address executive compensation for their respective
    industries.^51 Credit union and bank trade group officials told us that
    these surveys generally are used to help their industries gauge comparable
    pay by job title and an institution's asset size.

    ^49According to its Web site, FFIEC is a formal interagency body empowered
    to prescribe uniform principles, standards, and report forms for the
    federal examination of financial institutions by the Federal Reserve, the
    Federal Deposit Insurance Corporation, NCUA, the Office of the Comptroller
    of the Currency, and the Office of Thrift Supervision and to make
    recommendations to promote uniformity in the supervision of financial
    institutions.

    ^50Letter from Richard S. Schulman, NCUA Associate General Counsel, Re:
    Aberdeen Proving Ground Federal Credit Union, NCUA 96-0541 (Jun. 14,
    1996).

    ^51Credit Union National Association, 2005-2006 Complete Credit Union
    Staff Salary Survey and America's Community Bankers, 2005 32^nd Annual
    Compensation Survey.

    Several limitations exist that preclude us from directly comparing credit
    union and bank executive compensation. While these surveys provided
    information on the cash compensation by job title, institution, and asset
    size, the surveys did not provide detailed information on the other forms
    of compensation received to allow a direct comparison of credit union and
    bank executive compensation. Some benefits include items such as
    retirement plans, stock options (for bank executives), employment
    contracts, severance pay, and perks such as vehicle allowances. Due to the
    lack of consistency and availability of data beyond cash compensation in
    these surveys, it is difficult to make any overall comparisons between
    credit union and bank executive compensation. Other limitations to these
    surveys include, in some instances, low response rates for the three
    executive positions (chief executive officer, chief financial officer, and
    chief operating officer). Further, the data collected in these surveys
    were based on self-reported information from the survey participants.
    Appendix IV provides more detail on the survey limitations and the results
    of executive compensation for credit unions and banks that responded to
    their respective surveys.

    As mentioned previously, NCUA has collected credit union executive
    compensation data and reported compensation information on the topthree
    executive positions--chief executive officer, chief financial officer, and
    chief operating officer. NCUA collected 2005 compensation information from
    the IRS Form 1099 and Form W-2 (wages and salary data). NCUA officials
    told us that the sample size will enable them to project industry averages
    for the federal credit union population and be stratified into two
    statistically valid subsets based on the asset size of the credit unions
    surveyed. However, the NCUA effort provides a snapshot of federal credit
    union compensation for a single year, 2005, and it is unclear whether NCUA
    will conduct future reviews of credit union executive compensation.

    NCUA also suggested alternative methods of collecting compensation
    information and increasing the transparency of the information. During our
    review, NCUA indicated that it was considering amending the quarterly
    "call reports" that all federally insured credit unions are required to
    submit to NCUA to include compensation and benefit data for senior
    executive officers. Call reports are available for public inspection, and
    NCUA routinely reviews them. Currently, the call report collects only
    aggregate data on employee compensation and benefits. Additionally, NCUA
    officials indicated that requiring credit unions to disclose credit union
    salary information to members during public meetings would be another
    alternative for  increasing the  transparency  of executive  and  director
    compensation.

                                      Conclusions

    Since the passage of CUMAA and subsequent changes to NCUA regulations that
    permitted credit unions to serve larger geographic areas and enlarged
    fields of membership, community-chartered federal credit unions have grown
    in number and asset size. As a result, the common bonds of occupation or
    employment that traditionally existed between credit union members have
    become attenuated, blurring one of the historical distinctions between
    credit unions and other depository institutions. But, credit unions do
    retain distinctions in terms of structure and governance, and they retain
    their tax-exempt status.

    One perceived rationale for the credit union tax exemption, expressed by
    Congress, is the notion that credit unions serve individuals of small or
    modest means. Yet, it is difficult to determine to what extent credit
    unions actually serve individuals of modest means. Although NCUA has
    established programs to expand services to this group, the relative
    newness of the programs, combined with the absence of long-term,
    continuing, and systematic collection of data on the income of credit
    union members, currently preclude an assessment both of the programs'
    effectiveness and overall industry performance. However, limited data
    (SCF) suggest that in both 2001 and 2004, credit unions had a smaller
    proportion of low- and moderate-income customers than banks. NCUA
    officials have noted that it may be too soon for data to fully reflect
    NCUA initiatives and industry activities and that growth in the community
    charter will allow credit unions to draw members from larger and more
    diverse populations, including people of modest means.

    While NCUA has taken steps to identify the income levels of credit union
    members, several limitations in NCUA's data collection effort will make it
    difficult to fully assess the extent to which credit unions have been
    serving low- and moderate-income populations. Notably, the data will not
    stratify information about member incomes by specific charter types or
    identify the specific financial services that credit union members have
    been using. Obtaining more detailed information on credit union member
    income and the financial services they used could help NCUA track the
    performance of credit unions and help monitor progress over time.
    Furthermore, this information would provide Congress and the public with
    clear evidence that, as CUMAA notes, credit unions were accomplishing
    their "specified mission" of "meeting the credit and savings needs of
    consumers, especially persons of modest means." However, the NCUA effort,
    while laudable, currently is confined to a pilot project. The value and
    utility of the information collected would be greatly enhanced if NCUA
    were to move beyond a pilot and continue the data collection effort and
    address some of the limitations of the pilot.

    Although state-chartered credit unions have increased the amount of UBIT
    paid in recent years, determining which credit union activities are
    subject to the UBIT is difficult. IRS is currently conducting examinations
    of statechartered credit unions and plans to release technical advice
    early in 2007 that the agency believes will more clearly explain which
    credit union activities are subject to the UBIT. While state-chartered
    credit unions are required to file information returns (Form 990), the
    group that are filed constrain IRS's ability to scrutinize credit union
    activities related to UBIT because they convey little information about
    individual credit unions. However, IRS is planning to issue technical
    advice describing specific state credit union activities that may be
    subject to the UBIT to help ensure state credit union payment of the tax.

    Finally, the transparency of executive compensation is an important issue
    for private and public companies alike. In the private sector, SEC's
    recent efforts to increase the transparency of publicly held companies
    underscore the importance of enhancing accountability and greater
    disclosure of information. In contrast, credit union executive
    compensation is not transparent due to the lack of information available
    to the public. Increased public opportunities to review executive salaries
    would promote greater credit union accountability, similar to requirements
    for publicly held companies. While the Form 990 is an avenue for
    increasing both the quantity and transparency of publicly available
    information about executive compensation at credit unions, federal credit
    unions are not required to file the form. However, the public could be
    given other opportunities to review credit union activities. For example,
    NCUA could require all federally insured credit unions to include
    compensation and benefit data for senior executive officers in the call
    reports that are submitted on a quarterly basis--an option that NCUA
    officials indicated was under current consideration. Or, NCUA could
    require federal credit unions to disclose or make available credit union
    records, such as senior executive salary information, to members during
    annual meetings.

      Recommendations for Executive Action

    To help ensure that credit unions are fulfilling their tax-exempt mission
    of providing financial services to their members, especially those of low
    or moderate incomes, we recommend that the Chairman of NCUA systematically
    obtain information on the income levels of federal credit union members to
    allow NCUA to track and monitor the progress of credit unions in serving
    low- and moderate-income populations. NCUA's recent pilot survey to
    measure the income of credit union members could serve as a starting point
    to obtain more detailed information on credit union member income.
    Ideally, NCUA should expand its survey to allow the agency to monitor
    member income characteristics by credit union charter type, obtain
    information on the financial services that low- and moderateincome members
    actually use, and monitor progress over time.

    To increase the transparency of executive compensation and enhance
    accountability of credit unions, we recommend that the Chairman of NCUA
    take action to ensure that information on federal credit union executive
    compensation is available to credit union members and the public for
    review and inspection. To achieve this, NCUA may want to consider options
    such as requiring federal credit unions to include specific information on
    executive compensation in call reports or issuing regulations that would
    require all federal credit unions to make executive compensation
    information available to members of credit unions at annual meetings.

      Agency Comments and Our Evaluation

    We provided a draft of this report to the Chairman of NCUA and the
    Commissioner of IRS for their review and comment. We received written
    comments from NCUA that are summarized below and reprinted in appendix V.
    In addition, we received technical comments from IRS that have been
    incorporated into this report as appropriate.

    In its comment letter, NCUA indicated that the agency's staff have
    recommended that the NCUA board consider taking actions consistent with
    the recommendations made in our report. NCUA, however, expressed concerns
    with certain important aspects of the draft report. In particular, NCUA
    stated in its letter that a meaningful comparison between federally
    chartered credit unions and other financial institutions should include an
    in-depth assessment of their structural and governance differences. NCUA
    also noted that the substantive differences among federal credit unions in
    charter types and fields of membership significantly impact, among other
    things, who credit unions serve and how they operate and provide services.

    We agree that there are important structural and governance differences
    between credit unions and other depository institutions, which are
    highlighted in the report. For example, page one of the draft and current
    report notes that credit unions, unlike banks, are (1) not-for-profit
    entities that build capital by retaining earnings (they do not issue
    capital stock); (2) member-owned cooperatives run by boards elected by the
    membership; (3) subject to field of membership requirements that limit
    membership to persons sharing certain circumstances, such as a common bond
    of occupation or association; and (4) exempt from federal income tax.
    Additionally, we agree that differences in charter types and fields of
    membership are important factors that should be considered in assessing
    who credit unions serve. However, as we note in the report, statistically
    reliable data on credit union members by charter type and field of
    membership were not available at the time of our review. The lack of this
    type of data was the primary basis for the report's recommendation that
    NCUA systematically obtain information on the income levels of federal
    credit union members. We are encouraged by NCUA's pilot effort to obtain
    information on the income levels of federal credit union members and
    continue to believe the value of the information collected would be
    greatly enhanced if NCUA were to continue its data collection efforts and
    address some of the limitations of the pilot.^52 Specifically, NCUA's data
    collection efforts could be strengthened by (1) providing benchmark data,
    such as general population income statistics or other appropriate
    measures, to allow comparisons with the data collected on the income
    levels of credit union members; (2) obtaining data on the extent of
    services offered by credit unions (e.g., free checking accounts, no charge
    ATMs, low-cost wire transfers, etc.) are being used by income category;
    (3) expanding the data collection effort to allow the results to be
    projectable by charter type; and

    (4) conducting the study on a systematic or periodic basis to assess the
    extent of progress over time.

    NCUA's letter also stated that it was inaccurate and inappropriate to
    measure the success of federally chartered credit unions in serving
    persons of modest means by reference only to the low- and moderate-income
    categories associated with the Community Reinvestment Act. Specifically,
    NCUA noted that there was legal and historical evidence that the term
    modest means, as used by Congress in the context of the Federal Credit
    Union Act, is intended to include a broader range of individuals than
    those

    ^52See NCUA, Member Service Assessment  Pilot Program, A Study of  Federal
    Credit Union  Service  (Washington,  D.C.: Nov.  3,  2006),  available  at
    www.ncua.gov .

    Page 42 GAO-07-29 Credit Union Membership and Executive Compensation

    in low- and moderate-income categories. As we noted in the report, neither
    the Federal Credit Union Act nor NCUA have established definitions as to
    what constitutes modest means. Thus, we used the group consisting of low-
    and moderate-income households as a proxy for persons of modest means for
    the purposes of our analysis. This allowed us to use the definitions
    established for the Community Reinvestment Act as the basis for income
    categories used on our analysis. Our analysis not only included
    comparisons between credit unions and banks of low- and moderateincome
    households but also middle and upper income households for both the 2001
    and 2004 SCF. This analysis shows that between 2001 and 2004 credit unions
    continued to serve a higher proportion of middle- and upperincome
    households and a smaller proportion of low- and moderate-income households
    than did banks.

    In its letter, NCUA noted that our income category benchmarks were
    inconsistent with the specific definitions of the CRA categories the other
    federal financial regulators used--specifically the use of national versus
    local median income for our benchmarks. Because the most comprehensive and
    statistically reliable data available on the income characteristics of
    credit union and bank customers at the time of our review--the Federal
    Reserve's Survey of Consumer Finances--were nationally representative, we
    used national median income measures as the basis for our income
    categories whereas the categories used for the Community Reinvestment Act
    are based on more local measures.

    NCUA's letter also expressed concerns about the reliability of conclusions
    reached using the Federal Reserve's Survey of Consumer Finances data.
    Specifically, NCUA noted that the SCF was not designed for reliable income
    comparisons between credit union members and bank customers. As we noted
    in our draft and current report, we agree that the SCF was not
    specifically designed to conduct comparative analyses of income levels of
    bank and credit union customers; however, SCF provides the best data
    currently available to undertake such a comparison. As we reported in
    2003, we analyzed the SCF because it is a respected source of publicly
    available data on financial institution and consumer demographics that is
    nationally representative and because it was the only comprehensive source
    of publicly available data that we could identify with information on
    financial institutions and consumer demographics. Moreover, our draft and
    current report noted limitations in SCF data that preclude drawing
    definitive conclusions about the income characteristics of credit union
    members. NCUA also provided additional detailed written comments as an
    enclosure to its letter, which we have reprinted in appendix V with our
    responses.

    As we agreed with your office, unless you publicly announce the contents
    of this report earlier, we plan no further distribution until 30 days from
    the date of this letter. At that time, we will send copies of the report
    to the Ranking Member, House Committee on Ways and Means; other interested
    congressional committees and subcommittees; the Chairman, NCUA; and the
    Commissioner, IRS. We will make copies available to others upon request.
    In addition, the report will be available at no charge on the GAO Web site
    at http://www.gao.gov.

    If you have any questions concerning this report, please contact Yvonne D.
    Jones at (202) 512-8678. Contact points for our Office of Congressional
    Relations and Public Affairs may be found on the last page of this report.
    See appendix VI for a list of other staff who contributed to the report.

    Sincerely yours,

    Yvonne D. Jones
    Director, Financial Markets and Community Investment

         Appendix I
         Objectives, Scope, and Methodology

    Our report objectives were to (1) assess the effect of the 1998 Credit
    Union Membership Access Act (CUMAA) on federal credit union membership and
    charter expansion, (2) review the National Credit Union Administration's
    (NCUA) efforts to expand credit union services to low- and moderateincome
    individuals, (3) compare rates offered by credit unions to comparably
    sized banks as one indicator of how tax-exemption might benefit credit
    union members, (4) discuss issues associated with the application of the
    federal unrelated business income tax (UBIT) to credit unions, and (5)
    assess the transparency of credit union executives and board member
    compensation.

      Effects of CUMAA and NCUA Regulations and NCUA Efforts to Serve Low- and
      Moderate-Income Individuals

    To study the impact of CUMAA on federal credit union membership and
    charter expansion, we reviewed and analyzed the legislative history for
    CUMAA and compared its provisions with NCUA interpretive rulings and
    policy statements in effect before and after the enactment of CUMAA. In
    addition, we interviewed NCUA officials and industry representatives and
    met with credit union and banking trade groups including the National
    Association of Federal Credit Unions, National Association of State Credit
    Union Supervisors (NASCUS), Credit Union National Association, America's
    Community Bankers, and Independent Community Bankers to obtain their
    viewpoints on how CUMAA and NCUA regulation affected credit union
    chartering and field of membership. To obtain information about state
    credit union chartering and fields of membership, we held discussions and
    reviewed documentation provided by NASCUS. Finally, we obtained electronic
    files from NCUA that contained annual call report financial data (Form
    5300) of all federally chartered credit unions for yearends 2000 through
    2005. The information included the number of credit unions, actual and
    "potential" membership (that is, people within a credit union's field of
    membership but not members of the credit union), assets, charter
    approvals, charter conversions, and charter expansions.

    To identify the results of NCUA programs intended to expand credit union
    services to low- and moderate-income individuals and underserved areas, we
    analyzed NCUA call report data for the low-income-designated credit unions
    and credit unions that expanded into underserved areas for yearends 2000
    through 2005. The data included information on the number of credit unions
    participating in these programs, their asset size, and their membership.

    We reviewed NCUA-established procedures for verifying the accuracy of the
    Form 5300 database and found that the data are verified on a yearly

    Appendix I Objectives, Scope, and Methodology

    basis, either during each credit union's examination or through off-site
    supervision. In addition, we cross checked the December 2000 to December
    2002 data that we recently received with the same data in our 2003 report.
    We determined that the data were sufficiently reliable for the purposes of
    this report.

    Further, we analyzed existing data on the income levels of credit union
    customers. Specifically, we analyzed both the 2001 and 2004 releases of
    the Board of Governors of the Federal Reserve System's (Federal Reserve)
    Survey of Consumer Finances (SCF). The SCF is conducted every 3 years and
    is intended to provide detailed information on the balance sheets,
    pension, incomes, and demographics of U.S. households and their use of
    financial institutions.^1 Because some households use both banks and
    credit unions, we performed our analyses based on the assumption that
    households can be divided into four user categories--those who use credit
    unions only, those who primarily use credit unions, those who use banks
    only, and those who primarily use banks.^2 "Primarily use" banks (or
    credit unions) means placing more than 50 percent of a household's assets
    in banks (or credit unions). As in our prior report, we created four
    income categories that are based on those used by financial regulators as
    part of Community Reinvestment Act examinations--low, moderate, middle,
    and upper--to classify these households (see table 5).^3 As in our 2003
    report, we were unable to find a definition of "modest means"; thus, to
    assess the extent to which credit unions served people of "modest means,"
    we combined households with low- or moderate-incomes into one group as a
    proxy for modest means.

    ^1We use the term, "household," rather than "family," since the subject
    group of the SCF more closely resembles the U.S. Census Bureau's
    definition of "household" than its definition of "family."

    ^2Our analysis was based on an approach developed by Jinkook Lee of Ohio
    State University. See Jinkook Lee and William A. Kelly Jr., "Who Uses
    Credit Unions?" (Prepared for the Filene Research Institute and the Center
    for Credit Union Research, 1999, 2001).

    ^3The Community Reinvestment Act is intended to encourage depository
    institutions to help meet the credit needs of the communities in which
    they operate, including low- and moderate-income neighborhoods, consistent
    with safe and sound banking operations. It was enacted by the Congress in
    1977 (12 U.S.C. 2901).

                     Appendix I Objectives, Scope, and Methodology

    Table 5: Definition of Income  Categories Used for Community  Reinvestment
    Act Examinations

                                 Categories Definitions

    Low income Income  less than  50 percent of  the Metropolitan  Statistical
    Area's (MSA) median income

    Moderate income Income at least 50 percent and less than 80 percent of the
    MSA''s median income

    Middle income Income at least 80 percent and less than 120 percent of  the
    MSA's median income

    Upper income  Income at  least 120  percent or  more of  the MSA's  median
    income

    Source: 12 C.F.R. 228.12(n).

    Finally we discussed with NCUA officials the design and methodology of its
    ongoing pilot project to measure the income levels of federal credit union
    members. We also discussed with NASCUS officials their effort to measure
    the income levels of state-chartered credit union members.

      Comparison of Interest Rates Offered by Credit Unions With Those at Comparably
      Sized Banks

    To compare the rates of credit unions with those at comparably sized
    banks, we engaged the services of Datatrac Corporation--a market research,
    information technology company specializing in the financial services
    industry--to provide data on 15 loan and savings products offered by
    credit unions and banks.^4 Datatrac calculated the average rates for each
    of these products by five distinct peer groups for asset size, for about
    2,000 credit unions and 4,000 banks (see table 6).

    ^4Datatrac is a privately held company that specializes in financial
    industry research. Specifically, Datatrac monitors and analyzes rate
    trends on popular deposit and lending products for thousands of financial
    institutions nationwide. Institutions voluntarily provide data to Datatrac
    on a weekly basis for inclusion in the company's database.

    Page 47 GAO-07-29 Credit Union Membership and Executive Compensation
    Appendix I Objectives, Scope, and Methodology

    Table 6: Peer (Asset) Group  Definitions, Used in Comparisons of  Interest
    Rates between Credit Unions and Banks

    Group Asset size of institution
    I     Total assets of $100 million or less
    II    Total assets greater than $100 million, but less than or equal to
             $250 million
    III   Total assets greater than $250 million, but less than or equal to
             $500 million
    IV    Total assets greater than $500 million, but less than or equal to $1
             billion
    V     Total assets greater than $1 billion, but less than or equal to the
             asset size,
             rounded up to the nearest billion dollars, of the largest credit
             union

    Source: GAO.

    We established the peer groups based on the institution's size as measured
    by total assets for banks and credit unions. Datatrac obtained asset
    information for each institution by combining information in its database
    with call report data for each institution. Datatrac computed average
    rates for institutions overall and for all institutions within analysis
    groups. In computing these simple averages, individual institution rates
    were not weighted to reflect loan volume or other measures of size.

    Datatrac provided us with an electronic file containing information for
    2000 through 2005. The information included (1) institution type, (2)
    average rate, (3) maximum rate, (4) minimum rate, (5) standard deviations,
    (6) product name, (7) quarter and year, and (8) institution counts. We
    interviewed Datatrac officials to confirm that they followed industry
    accepted protocols to ensure data integrity, including input and
    processing controls. We also reviewed Datatrac's methodological
    documentation. In addition, we conducted reasonableness checks on the data
    we received and identified data gaps in the year-end 2003 information.
    Datatrac examined its processing procedures and explained to us that its
    cut-off date was incorrectly designated 1 week later than planned. At the
    same time, Datatrac also verified that the same problem did not exist in
    any other quarters of the years 2000 through 2005. Datatrac provided us an
    updated electronic file reflecting the corrections. We determined that the
    revised data were sufficiently reliable for the purposes of this report.

                     Appendix I Objectives, Scope, and Methodology

      Issues Related to the Application of UBIT to Credit Unions

    To review issues related to the application of UBIT to credit unions, we
    reviewed the legislative history of UBIT and the historical basis for the
    taxexempt status of credit unions and met with representatives of the
    Internal Revenue Service (IRS) to discuss UBIT filing and reporting
    requirements. We also discussed with IRS officials their examinations of
    unrelated business activity at state-chartered credit unions and
    development of policies and procedures in this area. We also obtained
    information from IRS on the number and types (group versus individual) of
    Return of Organization Exempt from Income Tax (Form 990) and Exempt
    Organization Business Income Tax Return (Form 990T) filings by
    statechartered credit unions and the amount of unrelated business income
    reported and taxes paid by state-chartered credit unions for tax years
    from 2000 through 2004.

      Information on Transparency and Compensation of Executive Compensation

    To provide information on the transparency and compensation of credit
    union executives and board members, including an assessment of the
    availability of compensation data to credit union members and a comparison
    of executive compensation at credit unions and comparably sized banks, we
    interviewed officials at NCUA and IRS to discuss executive compensation
    reporting requirements. We obtained and analyzed examiner guidance on
    compensation from NCUA and the other federal banking regulators--the
    Federal Deposit Insurance Corporation, Federal Reserve, Office of the
    Comptroller of the Currency, and Office of Thrift Supervision. We also met
    with credit union and banking trade groups including the National
    Association of Federal Credit Unions, NASCUS, Credit Union National
    Association, America's Community Bankers, and Independent Community
    Bankers to identify publicly available data regarding the compensation of
    credit union and bank senior executives. We reviewed and analyzed selected
    credit union and bank compensation surveys. For more information on the
    surveys and our analysis, see appendix IV. We also met with NCUA to
    discuss their efforts to collect federal credit union executive
    compensation.

    Appendix II
    Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Using the methodology that we employed in our prior report, data from the
    2001 and 2004 releases of the Federal Reserve SCF that we analyzed
    indicated that credit unions continued to serve a lower proportion of
    lowincome households than banks for the years analyzed.^1 As we reported
    in 2003, we analyzed the SCF because it is a respected source of publicly
    available data on financial institution and consumer demographics that is
    nationally representative and because it was the only comprehensive source
    of publicly available data with information on financial institutions and
    consumer demographics that we could identify. While it is the best
    publicly available data that we could identify, there are limitations in
    SCF data that preclude drawing definitive conclusions about the income
    characteristics of credit union members. In an effort to provide greater
    context, in this appendix, we also present the results of additional
    analyses of the 2001 and 2004 SCF data that we conducted.

    The SCF is conducted every 3 years and is intended to provide detailed
    information on the balance sheet, pension, income, and other demographics
    of U.S. households and their use of financial institutions.^2 The survey
    is based on approximately 4,500 interviews and represents a sample of more
    than 100 million households. For each of the 2001 and 2004 SCF releases,
    we combined the SCF data into two main groups-- households that only and
    primarily used credit unions (credit union customers) and households that
    only and primarily used banks (bank customers).^3 Our analyses of 2001 and
    2004 SCF data indicated that, among households that used a financial
    institution, those households that we

    ^1See GAO, Credit Unions: Financial Condition Has Improved, but
    Opportunities Exist to Enhance Oversight and Share Insurance Management,
    [145]GAO-04-91 (Washington, D.C.: Oct. 27, 2003).

    ^2We use the term "household" rather than "family" since the reporting
    unit of the SCF more closely resembles the U.S. Census Bureau's definition
    of "household" than its definition of "family." The Census Bureau's
    definition of "family" excludes the possibility of one-person household
    units, but its definition of "household" allows for them. See Brian K.
    Bucks, Arthur B. Kennickell, and Kevin B. Moore, "Recent Changes in U.S.
    Family Finances: Evidence from the 2001 and 2004 Survey of Consumer
    Finances," Federal Reserve Bulletin, Mar. 22, 2006, A3.

    ^3Those who "primarily" used credit unions placed more than 50 percent of
    their assets in credit unions, and those who "primarily" used banks placed
    more than 50 percent of their assets in banks. The term "use" refers to a
    household's placement of assets in a checking, savings, or money market
    account. Our methodology for determining these classifications was based
    on work that Jinkook Lee, a professor and researcher at Ohio State
    University, performed. See Jinkook Lee and William A. Kelly Jr., "Who Uses
    Credit Unions?" (Prepared for the Filene Research Institute and the Center
    for Credit Union Research, 1999, 2001).

    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    identified as being bank customers outnumbered those that we identified as
    being credit union customers by a large margin (see table 7).^4 Because
    such a high percentage of the U.S. population represented by the SCF only
    used banks, the data obtained from the SCF are particularly useful for
    describing characteristics of bank users but much less precise for
    describing smaller population groups, such as those that only used credit
    unions. It should be noted that SCF was not specifically designed to
    conduct comparative analyses of income levels of bank and credit union
    customers, and the pool of bank customers is not necessarily comparable to
    the pool of credit union customers.

    Table 7: Percentages  of Households  Classified as Using  Banks or  Credit
    Unions, 2001 and 2004

                                   Percentage of households (among all households
                                                   using a financial institution)
    Financial institution usage         2001 SCF data            2004 SCF data
    Only used credit unions                                8                 8
    Primarily used credit unions                          13                14
    Primarily used banks                                  17                15
    Only used banks                                       62                63

    Sources: GAO and Federal Reserve.

    We found that credit union customers had a higher median income than bank
    customers in both the 2001 and 2004 SCF releases. In the 2001 SCF, the
    median income of all households was $39,000; bank customers had a median
    income of $40,000 and credit union customers had a median income of
    $44,000. In the 2004 SCF, the median income of all households was $42,000;
    bank customers had a median income of $43,000 and credit union customers
    had a median income of $50,000.

    We computed the proportions of credit union customers and bank customers
    in each of four income categories--low, moderate, middle, and upper. As in
    our 2003 report, we based our income groups on income categories used by
    financial regulators for federal Community

    ^4In our analyses of SCF data, we specify banks to include both commercial
    banks and savings and loan institutions. Percentages reflect the
    households using financial institutions as a percentage of all financial
    institution users and exclude those households that did not use a
    financial institution (sometimes referred to as "unbanked").

    Page 51 GAO-07-29 Credit Union Membership and Executive Compensation
    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Reinvestment Act examinations in an effort to provide a consistent
    framework given that "modest means" is not clearly defined.^5 For our
    primary analysis of 2001 and 2004 SCF data, we used 2000 and 2003 median
    household income as reported by the U.S. Census Bureau; for our additional
    analyses of 2001 and 2004 SCF data, we used 2000 and 2003 median family
    income as reported by the U.S. Census Bureau (see tables 8 and 9). It
    should be noted that the categories that we use here, which we introduced
    in our 2003 report, are based on a national median income measure whereas
    the categories used for Community Reinvestment Act are based on more local
    measures.

    Table 8:  Median  Income  Benchmarks  Used  for  Primary  (Household)  and
    Additional (Family) Analyses of 2001 and 2004 SCF Data

                                          2001 median SCF             2004 median
                                         household income 2004 median         SCF
                  2001 median SCF                          SCF family   household
    Analysis     family income                              income      income
    Primary                N/A                 $42,151         N/A     $43,318
    Additional         $50,890                     N/A     $52,680         N/A

                          Sources: GAO and U.S. Census Bureau.

    ^5See appendix I for more information.

    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Table 9: Income Categories for Primary (Household) and Additional (Family)
    Analyses of 2001 and 2004 SCF Data

    Income category           Primary analysis       Additional analysis
    Low                       Income less than 50    Income less than 50
                                 percent of the median  percent of the median
                                 household income       family income (2001: less
                                 (2001: less than       than $25,445; 2004: less
                                 $21,076; 2004: less    than $26,340)
                                 than $21,659)
    Moderate                  Income at least 50
                                 percent and less than  Income at least 50
                                 80 percent of the      percent and less than 80
                                 median household       percent of the median
                                 income (2001: at least family income (2001: at
                                 $21,076 but less than  least $25,445 but less
                                 $33,721; 2004: at      than $40,712; 2004; at
                                 least                  least $26,340
    Middle     $21,659 but less than $34,654)  but less than $42,114) Income
                  Income at least 80 percent and  at least 80 percent and less
                  less than 120 percent of the    than 120 percent of the median
                  median household income (2001:  family income (2001: at least
                  at least $33,721 but less than  $40,712 but less than $61,068;
                  $50,581; 2004: at least         2004: at least $42,144
                   $34,654 but less than $51,982) but less than $63,216)
    Upper      Income at least 120 percent or  Income at least 120 percent or
                  more of the median household    more of the median family
                  income (2001: at least $50,581; income (2001: at least $61,068;
                  2004: at least $51,982)         2004: at least $63,216)

    Source: GAO.

    As noted earlier in the report, our (primary) analysis of 2004 SCF data
    suggested that credit unions served a lower proportion of households of
    modest means (low- and moderate-income households, collectively) than
    banks, a result consistent with the finding in our 2003 report analyzing
    the 2001 SCF data (see tables 10 and 11).

    Table 10:  Percentages in  Each Income  Category for  Primary  (Household)
    Analysis by Customer Type, 2001 SCF Data

                                              All SCF  Credit union          Bank
    Income category                    respondents    customers      customers
    Low                                       27.0            16.4        25.7
    Moderate                                  16.6            19.3        16.1
    Middle                                    17.6            21.7        17.5
    Upper                                     38.9            42.6        40.7

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median household income for 2000.

    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Table 11:  Percentages in  Each Income  Category for  Primary  (Household)
    Analysis by Customer Type, 2004 SCF Data

                                          All SCF    Credit union            Bank
    Income category           respondents          customers         customers
    Low                                   24.9               14.5         24.2
    Moderate                              16.6               16.6         16.4
    Middle                                17.8               20.2         18.1
    Upper                                 40.7               48.8         41.3

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median household income for 2003.

    In an effort to determine how sensitive these results were to our income
    categorization, we also used the median family income for 2000 and 2003 to
    analyze the 2001 and 2004 SCF data. As shown in tables 12 and 13, the
    results from our additional analyses were similar to those of our primary
    analysis. While the median family income was higher than the median
    household income in each year, the results continue to suggest that a
    greater proportion of bank than credit union customers were of modest
    means. This difference between banks and credit unions was statistically
    significantly different from zero in the 2004 SCF; there was also a
    statistically significant decline in the proportion of credit union
    customers of modest means between the 2001 and 2004 SCF data. Thus, while
    the results of our analyses should not be considered definitive, they do
    suggest that any impact from the recent efforts by NCUA to increase credit
    union membership among the underserved and low- and moderate-income
    households have not yet appeared in the data.

    Table 12:  Percentages in  Each Income  Category for  Additional  (Family)
    Analysis by Customer Type, 2001 SCF Data

                                             All SCF   Credit union          Bank
    Income category                   respondents    customers       customers
    Low                                      33.8             23.2        32.3
    Moderate                                 18.6             23.6        18.2
    Middle                                   16.7             21.6        16.5
    Upper                                    30.9             31.7        33.1

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median family income for 2000.

    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Table 13:  Percentages in  Each Income  Category for  Additional  (Family)
    Analysis by Customer Type, 2004 SCF Data

                                             All SCF   Credit union          Bank
    Income category                   respondents    customers       customers
    Low                                      31.6             20.2        31.0
    Moderate                                 18.6             21.1        18.3
    Middle                                   18.1             20.6        18.6
    Upper                                    31.7             38.2        32.2

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median family income for 2003.

    We also considered the median income of bank and credit union customers
    within each of our income categories for both the primary and additional
    analyses to assess whether there were any notable differences between
    credit union and bank customers (see tables 14 through 17). We found that
    the income characteristics of the customers tended to be similar; however,
    the median income in the upper-income category tended to be higher for
    bank customers.

    Table  14:  Median  Income  within   Each  Income  Category  for   Primary
    (Household) Analysis by Customer Type, 2001 SCF Data

                                                    Median income within category
    Income category            Credit union customers           Bank customers
    Low                                            $13,000             $13,000
    Moderate                                        28,000              27,000
    Middle                                          40,000              41,000
    Upper                                           74,000              83,000

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median household income for 2000.

    Appendix II Analyses of Survey of Consumer Finances Data, 2001 and 2004

    Table  15:  Median  Income  within   Each  Income  Category  for   Primary
    (Household) Analysis by Customer Type, 2004 SCF Data

                                                    Median income within category
    Income category            Credit union customers           Bank customers
    Low                                            $13,000             $13,000
    Moderate                                        28,000              28,000
    Middle                                          42,000              43,000
    Upper                                           86,000              86,000

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median household income for 2003.

    Table 16:  Median  Income  within  Each  Income  Category  for  Additional
    (Family) Analysis by Customer Type, 2001 SCF Data

                                                    Median income within category
    Income category            Credit union customers           Bank customers
    Low                                            $16,000             $15,000
    Moderate                                        33,000              33,000
    Middle                                          51,000              50,000
    Upper                                           83,000              98,000

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median family income for 2000.

    Table 17:  Median  Income  within  Each  Income  Category  for  Additional
    (Family) Analysis by Customer Type, 2004 SCF Data

                                                    Median income within category
    Income category            Credit union customers           Bank customers
    Low                                            $17,000             $15,000
    Moderate                                        34,000              34,000
    Middle                                          52,000              51,000
    Upper                                           97,000             101,000

    Sources: GAO and Federal Reserve.

    Note: Income benchmark is the median family income for 2003.

    Appendix III

    Comparison of Interest Rates at Credit Unions and Banks

    Data that we obtained indicate that credit unions offer more favorable
    rates on average than similarly sized banks for a number of savings
    products and consumer loans. However, similarly sized credit unions and
    banks appeared to offer virtually the same rates on mortgage loans, such
    as 15- and 30-year fixed-rate mortgages. We engaged the services of
    Datatrac Corporation--a market research and information technology
    company, specializing in the financial services industry--to gather and
    analyze data on loan and savings rates for 15 loan and savings products (5
    consumer loan, 3 mortgage loan, and 7 savings products) that were offered
    from 2000 through 2005 at about 2,000 credit unions and 4,000 banks.^1
    Financial institutions voluntarily provide data to Datatrac on a weekly
    basis for inclusion in the company's database. Therefore, information
    presented is not necessarily statistically representative of the entire
    banking and credit union industry.

    Datatrac calculated the average rates for each of these products by five
    distinct asset size peer groups:

         o total assets of $100 million or less;
         o total assets greater than $100 million, but less than or equal to $250
           million;
         o total assets greater than $250 million, but less than or equal to $500
           million;
         o total assets greater than $500 million, but less than or equal to $1
           billion; and
         o total assets greater than $1 billion, but less than or equal to the
           asset size, rounded up to the nearest billion dollars, of the largest
           credit union.

    Datatrac computed average rates for institutions overall and for all
    institutions within analysis groups. In computing these simple averages,
    individual institution rates were not weighted to reflect loan volume or
    other measures of size. While Datatrac Corporation's database contained

    ^1Datatrac is a privately held company that specializes in financial
    industry research. Specifically, Datatrac monitors and analyzes rate
    trends on popular deposit and lending products for thousands of financial
    institutions nationwide.

    Page 57 GAO-07-29 Credit Union Membership and Executive Compensation

          Appendix III Comparison of Interest Rates at Credit Unions and Banks

    data provided by about 2,000 credit unions and 4,000 banks, data were not
    always obtained from all the credit unions and banks for every product
    and/or time period in each of the five asset groupings. We identify all
    instances in which the information presented was based on rate data
    provided by less than 10 institutions. Additionally, because averages
    based on a small number of institutions may be unreliable, we did not
    report instances when rate data was provided by less than 5 institutions.

    Figures 7 through 23 provide a detailed comparison of rates on savings and
    loan products offered by credit unions to those at similarly sized banks
    for the 6-year period spanning from 2000 to 2005.

      Figure 7: Comparison of Interest Rates for Savings Products at December 31,
                                  2000, by Asset Size

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

      Figure 8: Comparison of Interest Rates for Savings Products at December 31,
                                  2001, by Asset Size

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

      Figure 9: Comparison of Interest Rates for Savings Products at December 31,
                                  2002, by Asset Size

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

          Appendix III Comparison of Interest Rates at Credit Unions and Banks

    Sources: GAO and Datatrac.

    Note: Data is not reported for  credit card (classic) and banks with  $100
    million or less due  to an insufficient  number of reporting  institutions
    (less than 5).

    ^aData is based on responses of less than 10 institutions.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

    Institution assets range

                               Sources: GAO and Datatrac.

    Appendix III Comparison of Interest Rates at Credit Unions and Banks

    Sources: GAO and Datatrac.

    ^aData is based on responses of less than 10 institutions.

    Appendix IV
    Selected Salary Surveys for Credit Union and Bank Executives

      Credit Union Salary and Other Cash Compensation Data

    Credit union and bank survey information we obtained provides an
    indication of executive base salaries for the respective industries. The
    credit union and bank salary survey data we identified had a key
    limitation--the information was not directly comparable because of
    differences in the underlying sampling strategies and data gathering
    methodologies. Also, while both surveys report the types of cash
    compensation received for their industry executives (i.e., salary and
    bonuses), we were not able to identify and compare other forms of benefits
    that an executive might typically receive in a compensation package.

    There were a number of other limitations in the data that we identified.
    In some instances, the information collected for each of the surveys
    involved a sample of members belonging to their respective trade group
    associations. The data collection periods for each of the surveys were
    different. For instance, the credit union survey collected salary
    information between January and May 2005, while the bank survey collected
    information during 2004. The bank survey also provides general information
    on other benefits such as savings incentive plans, pension plans, and paid
    time off benefits for which we do not have comparable information in the
    credit union survey. Also, cash compensation reported for the credit union
    survey includes base salary, incentives, and bonuses, while the bank
    survey reported base salary, bonus, and profit sharing compensation.
    Finally, the cash compensation information presented for these surveys are
    grouped in different asset size ranges. The credit union survey presents
    information based on 13 asset size categories, while the bank survey
    presents information based on 7 asset size categories.

    Credit Union Salary and Other Cash Compensation Data

    According to the Credit Union National Association's 2005 to 2006 Complete
    Credit Union Staff Salary Survey, the average base salary of credit union
    presidents, chief executive officers (CEO), and managers for those credit
    unions responding increased 4.8 percent from the previous year's survey.
    In addition to base salary, more than half (55 percent) of credit union
    presidents, CEOs, and managers also received other forms of cash
    compensation such as incentives or bonuses. For CEOs, incentives averaged
    $9,634, while bonuses averaged $4,993. The survey also noted that bonuses
    continue to be more common than incentives (45 percent compared with 5
    percent receiving these payments, respectively in 2004). As shown in
    figure 25, the average credit union base salary for the CEO position was
    about $78,000 while the average base salaries for the chief financial
    officers (CFO) and chief operations officers (COO) was approximately
    $73,000 and $64,000, respectively. However, national

        Appendix IV Selected Salary Surveys for Credit Union and Bank Executives

    averages should be viewed with care since executive salaries also vary  by
    region and the size of the credit union.

    Figure 25: Credit Union Executive Average Base Salaries for 2005

    President/CEO/Manager salariesChief financial officer salariesChief
    operating officer salaries

    Dollars in thousandsDollars in thousandsDollars in thousands350 350

    Source: GAO analysis of CUNA survey data.

    Similarly, according to the survey for those credit unions responding,
    credit union executives, including CFOs and COOs, experienced about a 2
    percent increase in average salary over the previous year. Of those that
    responded to the survey, approximately 27 percent of CFOs received
    incentives, which averaged $5,963, and 38 percent received a bonus which
    averaged $4,650. Additionally, approximately 21 percent of COOs received
    incentives which averaged $5,678, while 47 percent received a bonus that
    averaged $3,578.

    The number of responses for the survey questions on the three credit union
    executive positions also varied from question to question and across the
    different asset categories. For instance, a total of 773 credit unions

        Appendix IV Selected Salary Surveys for Credit Union and Bank Executives

      Bank Salary and Other Cash Compensation Data

    responded to the president/CEO question, but the responses by asset
    category ranged from a low of 16 responses by credit unions with assets of
    $1 to $2 million to a high of 113 responses by credit unions with assets
    of $100 to $200 million.^1 A total of 330 credit unions responded to the
    CFO question, while the responses by asset category ranged from a low of 2
    responses by credit unions with assets of $5 to $10 million to a high of
    74 responses by credit unions with assets of $100 to $200 million.
    Finally, 268 credit unions responded to the COO question, while the
    responses by asset category ranged from a low of 2 responses by credit
    unions with assets of $5 to $10 million to a high of 65 responses by
    credit unions with assets of $100 to $200 million.

    Bank Salary and Other Cash Compensation Data

    According to America's Community Bankers 2005 Compensation Survey, the
    national average base salary for those banks responding to the survey for
    CEOs was up 13.2 percent from the 2004 reported average. The average
    bonus/profit sharing payment for CEOs was $73,129. Similarly, the national
    average base salary for those banks responding for CFOs was up 10.8
    percent from 2004, while the average bonus/profit sharing compensation was
    $28,700. The base salary for those banks responding for COOs was up
    8.8 percent from 2004, while the average bonus/profit sharing compensation
    was $32,697. As shown in figure 26, the average bank base salary for the
    CEO position was about $213,000 while the average base salaries for the
    CFO and COO was approximately $121,000 and $141,000 respectively. As
    mentioned previously, national averages should be viewed with care since
    executive salaries also vary by region and by asset size.

    ^1According to the Credit Union National Association's salary survey, as
    part of the methodology, nearly all affiliated credit unions with $100
    million or more in assets were sent a survey. Stratified random samples of
    credit unions with $1 million to $100 million in assets were also sent the
    survey. Thus, larger credit unions were given a greater chance of being
    selected for the survey to ensure a high degree of accuracy for these
    credit unions and weighted to adjust for the overrepresentation of the
    larger credit unions. Weighting is a standard survey analysis procedure
    designed to adjust estimates to account for different rates of selection
    within sample strata, which ensures that results are not biased by a
    specific group of credit unions.

        Appendix IV Selected Salary Surveys for Credit Union and Bank Executives

        President/CEO/Manager salaries Chief financial officer salaries Chief
        operating officer salaries

    Dollars in thousands Dollars in thousands Dollars in thousands 450 450 450

    400

                                        400 400

    350

                                        350 350

    300

                                        300 300

    250

                                        250 250

    200

    200

    200

    150

    150

    150

    100

    100

    100

    50

    50

    50

    0

    0

    0

    [50 or  less] ^51-100  301-500201-300  101-200 [501-1,000]^1,000+  [50  or
    less] ^51-100  301-500201-300  101-200  [501-1,000]^1,000+  [50  or  less]
    ^51-100 301-500201-300 101-200 [501-1,000]^1,000+

    Bank asset  size  (dollars  in  millions)  Bank  asset  size  (dollars  in
    millions) Bank asset size (dollars in millions) Average

    Source: GAO analysis of ACB survey data.

    The bank executive survey responses also varied by the total number of
    respondents and by the different asset categories.^2 For instance, a total
    of 358 banks responded to the president/CEO question, while the responses
    by asset category ranged from a low of 16 banks with assets up to $50
    million to a high of 74 banks with assets of $101 to $200 million. A total
    of 256 banks responded to the CFO question, while the number of responses
    by asset category ranged from a low of 2 banks with assets up to $50
    million to a high of 49 responses by banks with assets of $501 million to
    $1 billion. Finally, 187 banks responded to the COO question, while the
    response rates by asset category ranged from a low of 8 banks with assets

    ^2The America's Community Bankers survey cautions against comparing peer
    group data among the various asset sizes due to the differences in bank
    types. That is, banks with assets up to $50 million disproportionately are
    mutual institutions, while banks with assets of more than $1 billion
    disproportionately are stock banks.

          Page 79 GAO-07-29 Credit Union Membership and Executive Compensation

    Appendix IV Selected Salary Surveys for Credit Union and Bank Executives

    up to $50 million to a high of  38 banks in both the $101 to $200  million
    and $501 million  to $1  billion categories. Due  to the  small number  of
    responses in some  instances, the results  of this data  should be  viewed
    with caution.

    Appendix V

    Comments from the National Credit Union Administration

    See comment 1.

                                   November 14, 2006

    Yvonne D. Jones Director, Financial Markets

    and Community Investments Government Accountability Office 441 G St., NW
    Washington, DC 20548

    Dear Ms. Jones:

    Thank you for the opportunity to review and comment on the draft GAO
    Report (Report) entitled "Greater Transparency Needed on Who Credit Unions
    Serve and on Senior Executive Compensation Arrangements." On behalf of the
    National Credit Union Administration (NCUA), I would like to express our
    appreciation for the professionalism of your staff and our gratitude for
    the dialogue that occurred through the course of GAO's study. NCUA
    believes that dialogue was helpful in developing a better mutual
    understanding of the complexity of the issues addressed in the Report and
    the conflicts that arise when considering the mission and purpose of
    federal credit unions (FCU) in the context of today's financial
    marketplace.

    It is unfortunate GAO did not have available at the time of drafting the
    Report the results of NCUA's Member Service Assessment Pilot Program
    (MSAP) (Enclosure 1), since MSAP includes significant new data on FCUs.
    Importantly, MSAP provides meaningful and accurate information on FCU
    membership profiles, as well as an assessment of the data collected. This
    assessment is critical for an objective analysis of the data. It also
    demonstrates any conclusions reached must consider FCU structure and
    operations, and the significant differences between other financial
    institutions and FCU charter types.

    As outlined in greater detail in the enclosed response to the Report
    (Enclosure 2), NCUA does have continued concerns with certain important
    aspects of the Report. NCUA believes that a meaningful comparison between
    FCUs and other financial institutions must include an in-depth assessment
    of their structural and governance differences. Furthermore, comparisons
    among FCUs must consider charter types and field of membership
    differences. These substantive differences significantly impact who credit
    unions serve, how they operate and provide services, how they develop and
    maintain their net worth and working capital, and how they affect the
    continued viability of the FCU system. Such a framework is missing in the
    Report, thus limiting its reliability.

    NCUA also believes it is inaccurate and inappropriate to measure the
    success of FCUs in serving persons of modest means by reference only to
    the low-and

    Appendix V Comments from the National Credit Union Administration

    moderate-income categories associated with the Community Reinvestment Act
    (CRA), as these categories only extend to families at or below 80 percent
    of the median income. There is ample legal and historical evidence that
    the term modest means, as used by Congress in the context of the FCU Act,
    is intended to include both below average wage earners and a broader class
    of working individuals generally. Further, GAO elected to use income
    category benchmarks that are inconsistent with the specific definitions of
    the CRA categories used by the other federal financial regulators. Using
    broad income categories and equating modest means to low- and
    moderate-income individuals precludes a valid assessment of the economic
    demographics of FCU membership.

    Additionally, NCUA has serious concerns about the reliability of
    conclusions reached using the Federal Reserve's Survey of Consumer Finance
    (SCF) data. The SCF was not designed for reliable income comparisons
    between credit union members and bank customers. Other concerns, addressed
    in Enclosure 2, include the importance of credit union membership limits,
    the effects of recent trends in community chartering, and proper
    recognition of NCUA's efforts to target services to lower income
    individuals.

    Regarding the recommendations made in the Report, NCUA staff recommended
    in MSAP that the NCUA Board consider whether it is appropriate to gather
    additional membership data to further enhance NCUA's efforts in expanding
    credit union service to low- and moderate-income individuals. NCUA staff
    also recommended that the NCUA Board consider evaluating alternative
    approaches to collecting and aggregating executive compensation on an FCU
    system basis.

    Notwithstanding the continued concerns listed above and described in
    greater detail in Enclosure 2, I again want to emphasize our great
    appreciation for the efforts of your staff and their willingness to
    consider our concerns and engage in open and meaningful dialogue.

                                       Sincerely,

                          J. Leonard Skiles Executive Director

     Enclosures:

    1. Report to the NCUA Board on the Member Service Assessment Pilot
                         Program (MSAP), dated November 3, 2006

    2. NCUA's Detailed Response to GAO's Draft Report GAO-07-29

                                           2

    See comment 2.

    Appendix V Comments from the National Credit Union Administration

    NCUA's Detailed Response to GAO Draft Report GAO-07-29 "Greater
    Transparency Needed on Who Credit Unions Serve and on Senior Executive
    Compensation Arrangements"

    The following discussion addresses our primary concerns with the GAO Draft
    Report, GAO-07-29 (Report). These concerns include: (1) inaccurate use of
    low-and moderate-income as a proxy for modest means; (2) inappropriate use
    of income categories ostensibly based on CRA categories; (3) improper
    reliance on the Federal Reserve's Survey of Consumer Finance; (4)
    insufficient discussion of the structure and framework of FCUs; (5)
    insufficient discussion of NCUA's efforts to enhance service to low- and
    moderate-income individuals; and (6) incomplete data on executive
    compensation.

    1. GAO's Definition of "modest means"

    It is inaccurate for GAO to define the term modest means as only including
    low- and moderate-income individuals. To use a proxy definition for modest
    means, although convenient for drafting the Report, contradicts clear
    congressional intent and disregards important statutory mandates on whom
    FCUs can serve. NCUA strongly believes that using the terms modest means
    and low- and moderateincome individuals interchangeably creates confusion
    and a perception inconsistent with statutory intent and regulatory
    policies put in place to achieve that intent.

    While the Report recognizes in footnote 30 on page 26 that there is no
    commonly accepted definition of modest means, the following statement on
    page 6 equates low- and moderate-income to modest means:

    [T]he Federal Reserve's 2004 Survey of Consumer Finance (SCF)

    -indicates that credit unions continued to lag behind banks in the
    percentage of their customers or members that were of low- and
    moderate-income households. Our analysis of the 2004 SCF indicated that 32
    percent of households that only and primarily used credit unions were of
    modest means (emphasis added). . . . .

    The history of the Credit Union Membership Access Act of 1998 (CUMAA)^1
    demonstrates congressional intent when the term "modest means" was used.
    This term was first introduced in proposed amendments to the FCU Act in
    1998 describing the mission of credit unions. Although these amendments
    were not adopted in the final version of CUMAA, the House Report
    accompanying the proposed bill noted: "Section 204 reaffirms the
    continuing and affirmative obligation of insured credit unions to meet the
    financial services needs of persons

    1

    Pub. L. No. 105-219, 112 Stat. 913 (August 7, 1998).

    -1 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

    of modest means, including those with low- and moderate-incomes,
    consistent with safe and sound operation."^2

    The Senate Report followed a similar usage in referring to section 204 of
    the bill. Specifically, the Senate Report also discussed the calling of
    credit unions to serve the entire range of membership and to provide
    "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."^3

    These congressional views reflect the clear understanding that the term
    modest means indicates a meaning broader than individuals with low- and
    moderateincome, and those that meet the definition of modest means must
    also be within the field of membership (FOM). In this respect, the term,
    though not specifically defined, conforms explicitly with its earlier
    counterpart, "small means," as a shorthand reference to members of the
    broad working class.

    CUMAA also served notice that outreach programs to reach low- and
    moderateincome individuals, and the support for credit unions designated
    to serve lowincome memberships, should still continue. Additional
    authorities granted to lowincome designated credit unions, and the ability
    for multiple common bond FCUs to adopt underserved areas are also
    consistent with a more expansive definition for modest means.

    2. Use of CRA-type definitions for income levels

    The Report, in footnote 27 on page 24, provides an explanation for the use
    of the Federal Reserve's Survey of Consumer Finance (SCF) and income
    categories, and states:

    We [GAO] based our groups on income categories used by financial
    regulators for federal Community Reinvestment Act examinations intended to
    encourage depository institutions to help meet credit needs in all areas
    of the communities that they serve:

    (1) a low-income household had an income of less than 50 percent of the
    national median household income; (2) a moderate-income had an income of
    at least 50 percent of but less than 80 percent of the national median
    household income; (3) a middle-income household had an income of at least
    80 percent of but less than 120 percent of the national median household
    income; and (4) an upper-income household had an income of at least 120
    percent of the national median household income.

    2

    H.R.
               REP. NO. 105-472, at 22 (1998)(emphasis added).

    S.
               REP. NO. 105-193, at 11 (1998)(emphasis added).

    3

                                    -2 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                     See comment 3.

                                     See comment 4.

    This footnote does not accurately reflect the income categories
    established by the federal financial regulators for CRA examinations and
    contradicts Table 5 in Appendix I of the Report. The income categories
    identified in the Code of Federal Regulations for CRA purposes are based
    on median family income as a percent of metropolitan statistical area
    (local area) median family income. ^4 The income categories utilized in
    the Report use median household income as a percent of national (not local
    area) median household income. Although the Report utilizes median family
    income in its additional analysis, this not only contradicts the SCF's
    methodology, but also does not correct for CRA inconsistency.
    Consequently, the statement that the income levels used are similar to
    those used in other governmental programs is misleading and implies the
    analyses are based on CRA income categories when, in fact, the income
    categories are GAO-defined.

    Additionally, footnote 27 illustrates CRA is intended to "encourage
    depository institutions to help meet credit needs in all areas of the
    communities that they serve. . ." Given 80 percent of FCUs are
    occupational or associational based, the CRA-type categories have limited,
    if any, applicability for the assessment of FCUs.

    3. Basing Assessment on the Federal Reserve's Survey of Consumer Finance

    NCUA recognizes the lack of reliable data to serve as a basis for valid
    conclusions regarding income distribution of FCU members at the time of
    the drafting of the Report. NCUA also accepts that the SCF was the only
    source of data available that provided income figures, albeit of limited
    application, for FCU members.^5 As correctly pointed out by GAO, the SCF
    was not designed to analyze credit union member income distribution or
    make comparisons between credit union members and bank customers. For
    example, the SCF does not provide proportional representation of credit
    union members and bank customers necessary to develop valid conclusions
    pertaining to income distribution. Notwithstanding these known
    deficiencies, the SCF is the primary source for the conclusions reached in
    the Report, which has the potential for misleading assessments about whom
    credit unions serve compared to banks.

    Additionally, throughout this study NCUA discussed with GAO various means
    of presenting the SCF data. In NCUA's view, the use of a single chart, on
    page 27 in the body of the Report, using broad income categories, limits
    the reader's ability to draw objective conclusions. Although Appendix I
    includes additional

    ^4 See 12 C.F.R. SS 228.12(b) and (m)(Federal Reserve), 345.12(b) and
    (m)(FDIC), 25.12(b) and (m)(OCC), and 563e.12(b) and (m)(OTS).

    5

    The number of households primarily using credit unions included in the
    2004 SCF is only 14 percent of those surveyed. The number of FCU member
    households included in this small number is unknown. See page 63 of the
    Report.

    -3 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

    comparisons, they are also insufficient for providing a comprehensive view
    of member incomes.

    The use of additional tables, in the body of the report, depicting the
    same data in various ways would have allowed a more complete view of
    member incomes. For example, the Federal Reserve uses income percentiles
    in its assessment of the SCF, which provides a more objective presentation
    of income distribution than the broad income categories used in the
    Report. Table 1 presents the data used in the Report based on these income
    percentiles.

                                       Table 1^6

               Percentage of Members/Customers within Income Percentile
                  Primary and Only Users                           2003
    Percentile of Income   Annual Income Ranges   Credit Unions      Banks
    Income pct < 20            $0 to $18,900          11.5%          19.2%
    Income pct: 20-39.9     $18,901 to $33,900        18.8%          20.0%
    Income pct: 40-59.9     $33,901 to $53,600        23.2%          20.7%
    Income pct: 60-79.9     $53,601 to $89,300        24.8%          20.2%
    Income pct: 80-89.9     $89,301 to $129,400       13.2%          9.4%
    Income pct: 90-100          > $129,400             8.5%          10.6%

    Further, including both average and median incomes for comparative
    purposes, rather than using only median as reflected in the Report,
    provides for a more complete view of member incomes. According the SCF
    results and as demonstrated in Table 2, while credit union members have
    the highest median income, bank customers have the highest average income.

                                       Table 2^7

                      Median and Average Income Comparison
                                          2003
                           Total SCF         Credit Union           Banks
           Median           $42,000            $50,000              $43,000
          Average           $68,778            $62,572              $74,211

    There are also technical inconsistencies in the Report's methodology. For
    example, as stated on page 28: "To determine how sensitive our [GAO's]
    results were to our income categorization, we used median family income in
    addition to median household income to analyze the 2001 and 2004 SCF data.
    We found similar results using both median family and household income."
    However, this comparison does not accomplish its stated objective. The use
    of the median

    6

    Table compiled by NCUA to illustrate other alternatives for SCF data
    analysis.

    7

    Table compiled by NCUA to illustrate other alternatives for SCF data
    analysis using the median income included in the Report.

    -4 -Enclosure 2

    See comment 5.

    Appendix V Comments from the National Credit Union Administration

    family income for comparison is inconsistent with the SCF methodology,
    which utilized median household income. Therefore, this comparison does
    not add validity to the results of the study since it only changes the
    comparative benchmark.

    4. Providing a limited framework for credit union membership assessment

    Although the Report correctly recognizes that credit unions retain their
    distinction in terms of structure and governance, it does not provide a
    framework that would allow for an appropriate interpretation of the
    assessments presented. For example, factual background information about
    credit unions and their important differences from banks, which is vital
    for an understanding of this issue, is not adequately addressed. To fully
    understand and assess any data that attempts to compare credit union
    members with depositors in other types of financial institutions, the
    Report should include discussion of the following:

    A. Statutory limitations on FCU membership

    MSAP data confirms the importance of the statutory mandate concerning
    common bond when assessing membership profiles. It also confirms that
    comparisons with other financial institutions, as well as among different
    chartertypes of FCUs, are difficult. FCUs are chartered as cooperatives to
    serve individuals only within their FOM. They are, therefore, limited in
    whom they can serve and are restricted to the income composition of the
    individuals within their allowed FOM. It is misleading to draw definitive
    conclusions about the success of FCUs in serving individuals and groups
    outside their traditional membership base without fully focusing on their
    authorized FOMs. This is particularly important in view of the fact that,
    as of December 2005, approximately 80 percent of all FCUs had single-or
    multiple-common bond charter types based on occupation or association. The
    implication of this FOM concentration, based primarily on working
    individuals, is far reaching within the context of assessing the
    membership profile of FCUs.

    Understanding statutory limitations on who can join FCUs is critical in
    conducting an objective assessment of the FCU system membership profile,
    any policy consideration on who benefits from credit union services, and
    the impact of FCUs on the financial sector. The statutory limitations also
    emphasize the differences between FCUs and banks and draw into question
    the reasonableness of any general comparison between income distribution
    of FCU members and bank customers. To conduct a reasonable comparative
    assessment of whom FCUs and banks serve, both types of institutions would
    need to have a similar structure and other characteristics. Although
    community-chartered FCUs and community banks may share some similarities
    relative to location, structurally, communitychartered FCUs remain
    cooperatives with the limitations of building capital/net worth,
    geographic constraints, and numerous other restrictions.

    -5 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                     See comment 6.

                                     See comment 7.

                                     See comment 8.

    B. Composition of the FCUs

    The Report provides an extensive review of the characteristics and growth
    patterns of community-chartered FCUs. However, the proportion of FCUs that
    are community-chartered, the need for charter conversions to ensure
    continued viability, and the challenges community-chartered FCUs face when
    converting from a single or multiple common bond charter, as well as other
    issues, are not thoroughly addressed. For example:

        1. Despite recent growth in FCU community charters, they still only
           represent approximately 20 percent of FCUs and 30 percent of FCU
           membership. This is a significant portion of the FCU system, but, as
           noted in the Report, this growth has primarily been within the last
           five years. Additionally, it should be emphasized that much of this
           growth is a result of FCUs converting from an already existing
           occupational or associational FOM. Instead, the Report concentrates on
           the growth of this subset when characterizing the entire FCU system,
           in particular the perceived "blurring" of the distinction between FCUs
           and other depository institutions.
        2. A thorough assessment of the causes for the recent community charter
           conversions is not provided. The primary reason for these conversions
           has been to ensure continued viability of FCUs in changing economic
           and financial industry environments. A review of several examples
           documents this point. Clearview FCU (formally US Airways); Bethpage
           FCU (formally Grumman); JAX FCU (formally Jacksonville Naval Base);
           and New Cumberland FCU (formally New Cumberland Army Depot Defense
           Distribution Center) all converted to community charters in response
           to changes in their primary sponsors.
        3. The time necessary to successfully implement a different business
           model when converting to a community charter is not adequately
           addressed. This is critical since the cutoff for the SCF data is 2003,
           yet the period under review extends to and includes 2005.
           Consequently, the SCF does not allow for an assessment of any
           appreciable changes based on the recent growth of FCU community
           charters, as the majority of the conversions to a community charter
           have occurred since 2000, and 192 have occurred since 2003. Since the
           growth of community charters is discussed at length, it should also be
           fully explained that relative to the overall issue of reaching out to
           low- and moderate-income individuals, the impact of this growth can
           not be expected to be represented in the SCF data. Because the SCF
           does not overlay the time period of the review, its relevance is
           further diminished.
        4. The intent of NCUA's regulations pertaining to community charters is
           not accurately described. On page 1 the Report states: "As a result of
           recent

    -6 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                     See comment 9.

                                    See comment 10.

                                    See comment 11.

    legal and regulatory developments, field of membership requirements for
    credit unions have been relaxed - member groups now can include anyone who
    lives, works, worships, or attends school in areas as large as whole
    counties or major metropolitan areas." This statement suggests that the
    affinity requirement (lives, works, worships...) of NCUA's field of
    membership rules and the geographic limits on community charters are
    recent developments. That suggestion is not accurate. Both of these NCUA
    regulatory policies predate CUMAA. NCUA did grant community charters prior
    to CUMAA that encompassed whole counties and metropolitan areas. It is
    true that the documentation requirements for single political
    jurisdictions were reduced through regulatory amendments that post-dated
    CUMAA, but that change was based on NCUA's experience in chartering
    communities constituting a single political jurisdiction.

        1. The size and extent of the community charters approved by NCUA are not
           appropriately represented. By using the approval of Los Angeles
           County, on page 13, as an example of a community charter conversion,
           it misrepresents the size of the community charter conversions
           commonly authorized. The data provided to GAO reflects the average
           population size for those community charter conversions approved
           during the period from 2000 to 2005 was 304,886, and the median size
           was 125,000.
        2. The Report states in the Highlights, as well as on page 6 and
           elsewhere, that NCUA's change in chartering policy is "triggered
           partly by concerns about competing with states with more expansive
           credit union chartering rules. . ." It is inaccurate to indicate that
           FOM parity with state-chartered credit unions is a primary objective
           when revising FOM policies for FCUs. Although this issue has surfaced
           during the regulatory comment period on proposed policy changes, it
           has not been a factor in NCUA's policy making.

    C. The size and market share comparison of credit unions and banks

    Although the Report attempts to compare credit unions to banks, it does
    not provide a framework for an objective analysis, which, in addition to
    the membership limitations discussed above, should reflect the relative
    industry position of the two types of financial institutions.

    As with all institutions in the financial industry, FCUs have evolved to
    ensure their continued viability. Since 1934, dramatic changes in the
    overall economic environment in which FCUs must operate have occurred.
    These changes have required that FCUs adapt in order to meet the financial
    needs and expectations of their members. Specifically, in the last forty
    years, changing demographics in the United States were characterized both
    by the loss of numerous well-paying blue collar jobs in the manufacturing
    sector and an increasing disparity in the

    -7 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                    See comment 12.

                                    See comment 13.

    income range between persons in the working class and the upper class.
    Operational evolution can be seen at several levels, including the
    offering of a wider range of services to a more broadly defined FOM.
    Fundamentally, however, even though some FOMs are broader today, FCUs have
    adhered to and preserved the integrity of both the common bond and their
    cooperative structure, which is reflected in regulatory policies.

    In addition, the types of services FCUs now increasingly offer have
    changed. As with the common bond, FCUs have found it necessary to adapt in
    order to meet member expectations and demand for products and services. On
    page 1 the Report states "credit unions are now allowed to offer many
    products and services similar to those provided by banks, such as real
    estate and business loans." Such a conclusion, however, fails to
    adequately assess the changing economic environment. Further, this
    statement misrepresents the services credit unions have historically
    provided. FCUs, for example, have been offering member business loans
    since their inception, often providing loans to entrepreneurs initiating a
    small business. As to the issue of mortgage lending, the FCU Act first
    authorized mortgage lending for FCUs in 1978. State-chartered credit
    unions in several states, most notably in the New England area, have
    provided this type of lending since the 1950s.

    In regard to rate comparisons, the Report recognizes the rate differences
    between banks and credit unions on savings and lending products. However,
    it should further recognize the interest rate environment during the
    period of the GAO review when interest rates were at historic lows. An
    assessment of the interest rate environment alone may have explained the
    reason for the decreasing gap in the rate paid on savings. This analysis
    is also crucial in assessing the mortgage rates since these loans of
    long-term maturity significantly affect the asset/liability management and
    ultimately the safety and soundness of a financial institution.

    Additionally, as shown in Table 3, credit unions are an important, but
    relatively small, segment of the financial industry. This size disparity
    draws into question the appropriateness of the comparison and conclusions
    in the Report.

                                    -8 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                    See comment 14.

                                    See comment 15.

                                        Table 3

                        Banks and Other Financial       Credit Unions Insured by
                     Institutions Insured by Federal    NCUSIF (Federally-Insured
         Total        Deposit Insurance Corporation8    Credit Unions)9
         Federally                        Total         Federal  State   Total
          Insured  Commercial  Savings    FDIC     %of  Credit  Credit  NCUSIF   %of
    Year Deposits    Banks      Banks    Insured  Total  Union   Union  Insured Total
    2005 7,718,597 6,073,333  1,067,845 7,141,178 92.5% 321,831 255,588 577,419 7.5%
    2004 7,140,323 5,592,825    991,376 6,584,201 92.2% 308,318 247,804 556,122 7.8%
    2003 6,482,630 5,028,866   925,423  5,954,289 91.8% 291,485 236,856 528,341 8.2%
                                Dollars shown in millions

    NCUA also has concerns relating to the asset groups used in the Report for
    the comparison between banks and credit unions. The smallest group size
    used for comparative purposes in the Report is $100 million or less in
    assets. It is not disclosed, however, that approximately 88 percent of
    FCUs fall into that category, with 80 percent having assets less than $50
    million as of September 30, 2005. It should also be noted that the average
    asset size of FCUs is $73.2 million with the median asset size just $11
    million.

    5. NCUA's efforts to target credit union services to low-and
    moderateincome individuals

    One of GAO's stated objectives was to review NCUA's efforts to expand
    credit union services to individuals of low-and moderate-income. The
    Report correctly focuses on two principal programs in this context: (1)
    NCUA's Low-Income Credit Union (LICU) program; and (2) NCUA's strategic
    efforts to encourage FCUs to expand services into specifically designated
    underserved areas. It also correctly notes that NCUA's support for these
    programs has resulted in increased participation in both programs by FCUs
    in recent years.

    It is, however, inaccurate and inappropriate to use these programs to
    define and assess service to people of modest means as they are
    specifically targeted to low-income individuals. The legislative history
    of the law creating the LICU program indicates that its purpose was "to
    encourage saving and provide access to credit for low-income persons, and
    to bring consumer education into poverty areas.. . ."^10 This
    congressional action reflects recognition that the low-income segment of
    the community is less financially capable, without assistance or special
    consideration, of supporting a credit union bound by the traditional
    constraints of common bond and cooperative structure. With its focus on
    the new term "low income," Congress acknowledged that the traditional FCU

    8

    Information obtained from FDIC Statistics on Banking: A Statistical
    Profile of the United States Banking Industry as published by FDIC,
    Division of Insurance and Research, for 2003, 2004, and 2005.

    9

    Information obtained from Yearend Statistics for FICUs as published by the
    National Credit Union Administration for 2003, 2004, and 2005.

    10

    115 Cong. Rec. S13997 (May 27, 1969) (statement of Sen. Scott).

    -9- Enclosure 2

    See comment 16.

    Appendix V Comments from the National Credit Union Administration

    membership base must necessarily be different, and broader. Although
    Congress recognized the difference, it did not believe an amendment to the
    overall statutory purpose for FCUs, which at that time was service to
    persons of "small means," was required.

    Instead, Congress implicitly endorsed FCU service to the traditional
    membership base and specifically directed that NCUA should supply its own
    definition of low income for purposes of implementing the provisions of
    the new law. By regulation, NCUA did so, specifying that the term low
    income means individuals who make less than either 80 percent of the
    average for all wage earners, as established by the Bureau of Labor
    Statistics, or whose household income is at or below 80 percent of the
    national median household income as established by the Census Bureau.^11

    To qualify for low-income designation, a credit union must have more than
    50 percent of its membership consisting of individuals defined as low
    income. This was a specific initiative by NCUA to recognize credit unions
    that predominately served a low-income population but were challenged in
    providing additional services and/or programs to their members. This
    initiative opened opportunities for these credit unions to obtain
    additional capital from philanthropic organizations and assistance from
    the Department of the Treasury's Community Development Financial
    Institution Fund (CDFI), the NCUA's Community Development Revolving Loan
    Fund (CDRLF), and other organizations to enhance and expand services to
    the low-income population.

    Page 20 of the Report accurately describes the other unique
    characteristics of LICUs and correctly notes LICUs grew in number between
    2000 and 2005, from 632 to 1,032, a 63 percent increase. This result was
    achieved with NCUA's vigorous encouragement and evidences dramatic success
    in NCUA's effort to increase service to low-income members. Although NCUA
    has not collected income and service usage data, the descriptive analyses
    conducted by NCUA on the data collected in MSAP reflect LICUs and FCUs
    with underserved areas are serving a relatively greater proportion of low-
    and moderate-income individuals than the FCU system as a whole.

    A more comprehensive analysis of the reasons that underlie NCUA's recent
    policy change concerning expansion into underserved areas is warranted.
    The American Bankers Association sued NCUA, challenging the decision to
    allow a community based FCU to expand its service into an underserved
    area. The fundamental issue in the case was the authority of NCUA to
    authorize any FCU, regardless of charter type, to expand into underserved
    areas. The Report should explain that settlement of the lawsuit resulted
    in the prohibition of single-bond and community FCUs from adopting
    underserved areas. This prohibition, which

    11

    12 C.F.R. S 701.34(a)(2). As originally implemented, NCUA's rule used 70
    percent of median as the relevant percentage indicator of "low income."
    The rule was changed to its current usage of 80 percent in 1993.

    -10 -Enclosure 2

    See comment 17.

    Appendix V Comments from the National Credit Union Administration

    is contrary to congressional intent, inhibits the ability of both types of
    FCUs to increase service to low- and moderate-income individuals who are
    outside the credit union's FOM.

    In addition, the Report on page 22 uses Washington, D.C. as an example of
    an underserved area approved by NCUA without regard to location. This
    presentation is misleading. It is not explained that once an FCU
    identifies an area meeting the underserved requirement, as defined in
    Section 103(16) of the Community Development Banking and Financial
    Institutions Act of 1994,^12 it must apply to NCUA to add the area to its
    field of membership. A detailed marketing plan, emphasizing how the FCU
    plans to reach out and serve all individuals in the underserved area, must
    be submitted. A detailed business plan must also be submitted indicating
    how the FCU will meet the needs of the individuals in the underserved area
    by describing the products (e.g., free checking, micro-credit loans) and
    services (e.g., bilingual staff, financial education seminars) the credit
    union offers or is planning to offer. Once approved to serve a specific
    underserved area, the credit union must maintain or open an office or
    service facility in the underserved area within two years.

    Other outreach initiatives by NCUA to increase service to underserved
    individuals have not been sufficiently acknowledged or described. NCUA has
    initiated several programs focused on assisting LICUs and on providing all
    credit unions with best practices to consider when converting to community
    charters or adding underserved areas. Since 1987, NCUA has administered
    the CDRLF, which was established by Congress, to provide technical
    assistance grants and low-cost loans for any LICU interested in enhancing
    service to its membership. Under NCUA's auspices, the CDRLF has granted
    273 loans totaling $40.5 million, and 1,923 grants totaling $5.8 million.

    In addition to the CDRLF, the Access Across America initiative, announced
    in February of 2002, incorporated NCUA's activities for small and
    low-income designated credit unions, as well as those FCUs adopting
    underserved areas. The program was designed to partner with federal
    government agencies and other organizations to identify and facilitate use
    of resources available for credit unions to assist in their efforts to
    serve low- and moderate-income individuals. Workshops continue to provide
    partnering opportunities with federal government agencies, as well as
    non-profit and private organizations. This initiative has resulted in NCUA
    entering into Memoranda of Agreement with the Internal Revenue Service,
    Operation Hope, and the Department of Agriculture, each of which committed
    to provide assistance in sharing opportunities with participating credit
    unions. Moreover, NCUA maintains a working relationship with the
    Department of Health and Human Services, CDFI, and Fannie Mae to provide
    opportunities for credit unions to expand the products and services
    particularly useful to those members with low- and moderate-incomes.

    12

    Pub. L. 103-325, 108 Stat. 2163 (Sept. 23, 1994)(codified at 12 U.S.C. SS
    4701 et seq.).

    -11 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

    As an adjunct to the Access Across America initiative, the Partnering and
    Leadership Successes program was introduced in 2003 to provide best
    practices in serving members and marketing to potential members in all
    credit unions, especially in underserved areas and communities. The agency
    coordinates widely attended workshops where a mix of credit unions present
    programs focused on serving low- and moderate-income individuals. A few of
    these programs include partnering opportunities with the Neighborhood
    Reinvestment Corporation, Latino outreach, and micro-business lending
    opportunities with the Small Business Administration.

    In conjunction with these workshops, numerous Letters to Credit Unions
    have been published that augment the workshops, providing information to
    the credit union system about opportunities available to enhance service
    and marketing to individuals in underserved areas.^13 Two early examples
    of these letters include the February 2002 Letter to Federal Credit
    Unions, Letter No. 02-FCU-02 titled Partnership Opportunities with IRS,
    which introduced the credit union system to the Volunteer Income Tax
    Assistance program, and the September 2001 Letter to Federal Credit
    Unions, Letter No. 01-FCU-06 titled Financial Education Curriculum, which
    announced FDIC's new Money Smart Financial Education Curriculum.

    The overall objective of NCUA's initiatives is to provide increased
    opportunities for FCUs to diversify their membership profile and to assist
    small and low-income designated credit unions as they manage their
    operations in compliance with the increasing number of complex laws and
    regulations. If successful, the viability of some low-income designated
    FCUs will be preserved, thus further enhancing the opportunity for low-
    and moderate-income individuals in their FOM to join and participate in
    the financial services offered by small and low-income designated FCUs.

    Each of these initiatives was in direct response to CUMAA. But these types
    of initiatives have long been a part of NCUA's, or its predecessor
    agency's, regulatory fabric. There have been others, such as the 1960s era
    initiative, undertaken jointly with the Office of Economic Opportunity, to
    establish FCUs to serve low-income communities, the drive to increase the
    number of LICUs, and the regulatory encouragement to add underserved
    areas.

    More recently, in 1993, NCUA created the Office of Community Development
    Credit Unions which is dedicated to ensuring the long-term viability of
    small and low-income designated credit unions. Today this activity is
    handled by the Office of Small Credit Union Initiatives (OSCUI), which has
    expanded considerably in terms of staff, resources, and programs.

    OSCUI conducts regional and national training workshops on a variety of
    topics to help small and low-income designated credit unions succeed. For
    example, in

    NCUA Home Page - http://www.ncua.gov - Letters to Credit Unions, 2001 to
    2005.

                                    -12 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                    See comment 18.

                                    See comment 19.

    2006 to date, OSCUI has held fifteen national workshops covering subjects
    such as establishing financial literacy programs, disaster recovery
    planning, and compliance with the Bank Secrecy Act. In addition to the
    national workshops, OSCUI coordinates with NCUA's regional offices to
    conduct smaller roundtable training sessions focused on the needs of small
    and low-income designated credit union officials.

    6. Transparency of Executive Compensation

    NCUA agrees with the conclusion that credit union executive compensation
    is not readily transparent. Absent compensation information captured by
    IRS Form 990, it can be difficult for FCU members to ascertain the exact
    compensation and benefits received by their executives. In the past, NCUA,
    while not objecting to disclosure of this information, has deferred to
    applicable state law on whether compensation and benefit information
    should be disclosed.

    As the Report points out, staff have indicated more efficient methods to
    capture and disseminate executive compensation information in lieu of
    filing Form 990. Such methods include: (1) amending NCUA's regulations to
    require FCUs to include executive compensation information in their annual
    reports; (2) requiring the reporting of such information in NCUA's
    quarterly call reports; or (3) amending the standard FCU Bylaws to require
    disclosure of compensation information during an FCU's annual membership
    meeting. These and other methods may be considered by the NCUA Board in
    evaluating the transparency of executive compensation.

    While NCUA agrees FCU executive compensation is not readily transparent,
    several matters in the Report warrant clarification. They include:

        1. Despite the absence of a standardized reporting mechanism, NCUA does
           not ignore the issue of executive compensation. Contrary to the
           implication on page 45, NCUA does assess executive compensation during
           the examination process primarily to determine its reasonableness as
           it relates to safety and soundness. There has never been a systemwide
           issue relating to executive compensation. As such, NCUA has not
           considered it necessary to collect or aggregate executive compensation
           data.
        2. On Page 42, it is implied that MSAP is deficient because it does not
           collect executive compensation information for banks, thereby
           preventing a direct comparison between FCUs and banks. However, it is
           not within NCUA's authority to collect data from banks or thrifts.
           Additionally, since this is not a safety and soundness issue for the
           credit union system, NCUA's authority to collect executive
           compensation extends only to FCUs.
        3. Comparing executive compensation of FCUs and banks was not a stated
           objective for GAO's study. Attempting to make a direct comparison is
           not

    -13 -Enclosure 2

    Appendix V Comments from the National Credit Union Administration

                                    See comment 20.

                                    See comment 21.

                                    See comment 22.

    only irrelevant to the issue of transparency, but is impossible given the
    differences in the forms of compensation available to FCU versus bank
    executives. For example, as the Report notes, stock options and stock
    bonuses are routinely paid to bank executives, but are unavailable to
    credit union executives. Nevertheless, the discussion of this matter seems
    to imply that somehow credit union executive compensation may be askew.
    Only by delving into the data provided in Appendix IV of the Report is it
    clear that credit union executives on average make significantly less than
    their banking counterparts.

        1. Since the Report addressed comparisons between senior officers of
           credit unions and banks, it should have also included a more detailed
           comparison between directors of credit unions and banks. It neither
           discusses nor includes any data regarding the compensation paid to
           directors of banks, which in some instances can be rather lucrative.
           At least some discussion would have been appropriate, especially since
           FCU boards are comprised of volunteers.^14 Including such data and
           discussion would have made for a more thorough and accurate comparison
           of executive compensation.
        2. The Report states on page 48 that MSAP will not stratify executive
           compensation by asset size of credit unions. This is not accurate.
           MSAP compensation data can be stratified into two statistically valid
           subsets based on asset size of the credit unions surveyed. In
           addition, limited descriptive conclusions can be derived from the data
           about other asset subgroups.

    7. Conclusion

    As referenced in MSAP and this response, NCUA recognizes the difficulty in
    addressing the issues of membership profiles and the transparency of
    executive compensation in the absence of comprehensive data. NCUA also
    understands that the time allotted for completion of the Report did not
    allow for consideration of the MSAP data and similar data being compiled
    by NASCUS. Although the Report includes significant new detail and
    qualifies its reliance on the SCF, NCUA anticipates the general
    conclusions reached will be reported without the appropriate qualifiers.
    In order to assure a complete and thorough understanding of the FCU
    system, NCUA suggests that GAO include in its Report the information and
    data contained in MSAP. It is also suggested that the completeness of the
    Report would be further enhanced by inclusion of the data now being
    collected by NASCUS, thus allowing for a thorough assessment of the entire
    credit union system.

    14

    Pursuant to the FCU Act, no member of an FCU board may be compensated;
    however, an FCU may compensate one individual who serves as an officer of
    the board. For example, if the credit union's paid CEO is also a member of
    the board. See 12 U.S.C. SS 1761(c) and 1761a.

    -14 -Enclosure 2

           Appendix V Comments from the National Credit Union Administration

    The  following  are   GAO's  comments   on  the   National  Credit   Union
    Administration's letter dated November 14, 2006.

    1. As noted in NCUA's letter, we did not receive the results of its pilot

      GAO Comments

    survey on the membership profile of federal credit unions (Member Service
    Assessment Pilot Program) in time to include it as part of our study. The
    report can be found at NCUA's website www.ncua.gov.

        1. NCUA questioned GAO's use of low-and moderate-income as a proxy for
           the term modest means. As we note in our 2003 and current report,
           neither the legislative history of the Federal Credit Union Act, as
           amended, nor NCUA have established definitions as to what constitutes
           modest means. As a result, we used the low- and moderate-income
           categories that we defined in our 2003 report, which are based on what
           the other federal financial regulators use for Community Reinvestment
           Act purposes, as a proxy for modest means. Moreover, both citations
           identified by NCUA in the House and Senate reports for the bill that
           ultimately was enacted as CUMAA specifically identify low- and
           moderate-income as components of what is referred to as modest means.
           We agree that the term modest means also indicates a meaning broader
           than individuals with low- and moderate-income. Further, our analysis
           included comparisons between credit unions and banks of households
           with middle- or upper-incomes. This analysis showed that between 2001
           and 2004 credit unions continued to serve a higher proportion of
           middle- and upper-income households and a smaller proportion of low-
           and moderate-income households than did banks.
        2. NCUA stated that the text in footnote 27 of the draft report did not
           accurately reflect the income categories that the federal financial
           regulators established for CRA examinations. The text in question has
           been moved up into the body of the report and modified to more clearly
           state that our categories were based on, but not identical to, that
           used by the other federal financial regulators for CRA purposes. The
           primary difference between our income categories and those used for
           CRA purposes was the use of national median income rather than local
           metropolitan statistical area median income as a benchmark for the
           various income categories. We use the national measure since the SCF
           is a national survey. Further, we agree with NCUA's assertion that
           occupational and associational based credit unions have restricted
           membership bases, which limit their ability to serve all income
           categories. However, as we note in the report, although the number of

    Appendix V Comments from the National Credit Union Administration

    credit unions with single or multiple common bonds have been decreasing
    since 2000 and the number of credit unions with more inclusive community
    charters have been increasing, 2001 and 2004 SCF data indicated that
    credit unions continue to serve a higher proportion of middle- and
    upper-income households than banks.

        1. NCUA questioned our use of SCF data as the primary source for
           conclusions reached in the report regarding the income characteristics
           of credit union members. We believe that the report as stated clearly
           outlines the limitations of SCF data in conducting the analysis, but
           as we noted in our prior report, the SCF is the only source of
           comprehensive data to conduct such an analysis. We agree that there
           are other ways of analyzing and presenting these data. However, we
           believe that figure 2 in our report provides a valid comparison of
           bank and credit union customers in the SCF data. In addition, it uses
           the methodology of our 2003 report, which allows us to directly
           compare the results of our 2003 report with our current report. We
           focus on the median income, as we did in our prior report, since this
           measure is less susceptible to the influence of extreme values than
           the mean. As noted in the report, we performed an additional analysis
           using the median family income to provide additional context to our
           analysis within the same methodological framework.
        2. NCUA suggested that our report does not provide a framework for
           understanding the effect of statutory limitations on federal credit
           unions when comparing the income distribution of federal credit union
           members and bank customers. We explicitly acknowledged the importance
           of these limitations in our 2003 report and have added some additional
           text to reflect these limitations in our current report. Nevertheless,
           we believe that our analysis of SCF data on the income levels of
           credit union members versus bank customers provides important
           contextual information on the extent, if any, that credit union
           members are different from individuals that use banks. The lack of
           data on the income distribution of credit union members by charter
           type was one of the primary factors behind our recommendation that
           NCUA expand its pilot survey to allow the agency to systematically
           obtain and monitor credit union member income data by charter type.
        3. NCUA stated that the report does not thoroughly address the proportion
           of federal credit unions that are community chartered. We believe our
           report addresses this issue correctly, as originally presented. Both
           in table 1 of our report and the related text, we note

    Appendix V Comments from the National Credit Union Administration

    that despite the growth in community charters, multiple-bond credit unions
    remain the largest group of federally chartered credit unions in number,
    total membership, and assets. However, as we noted in our report, it is
    important to emphasize that community-chartered credit unions overtook
    multiple-bond credit unions as the largest of the three federal charter
    types, in terms of average membership and average size in terms of assets,
    beginning in 2003.

        1. NCUA stated that the report does not thoroughly address the agency's
           position on the need for charter conversions to ensure continued
           viability. We believe our report addresses this issue correctly, as
           originally presented. As noted in our report, we attributed to NCUA
           some of the causes for growth in the community charter, including the
           agency's belief that community charter expansion allows federal credit
           unions to attract a more diverse membership base that can enhance a
           credit union's economic viability or safety and soundness as well as
           provide greater opportunities to serve members of modest means. We
           further note in our report that NCUA explained that single- and
           multiple-bond credit unions often tend to be organized around employer
           or occupationally based associations, which in turn creates greater
           economic risk exposure since the membership base is intertwined with
           the economic cycles of a particular employer or occupation. Finally,
           we cite a Federal Reserve Bank of Atlanta research paper, which
           concluded that there are material benefits of credit union membership
           diversification and that these benefits derive from expanded
           investment opportunities and reduced concentration risk.
        2. NCUA stated that the time necessary to successfully implement a
           different business model when converting to a community charter is not
           adequately addressed. We believe our report addresses this issue
           correctly, as originally presented. Specifically, the report cites
           NCUA's belief that it would take time for any results to appear in the
           SCF data as credit unions seeking to expand into new areas and
           reaching new types of customers would face a learning curve in their
           efforts. Our report further notes that the latest available data from
           SCF are 2-years old, so any more recent changes would not be reflected
           in our analysis.
        3. NCUA stated that the intent of NCUA's regulations pertaining to
           community charters was not accurately described. Specifically, NCUA
           stated that introductory text in the draft report suggested that the
           affinity requirements of NCUA's field of membership rules and the
           geographic limits on community charters are recent developments.

    Appendix V Comments from the National Credit Union Administration

    NCUA noted that both of these regulatory policies predated CUMAA. We have
    clarified the text of our report to reduce the potential for confusion by
    stating that since the passage of CUMAA, NCUA has approved progressively
    larger geographic-based fields of membership.

        1. Text has been added to reflect the average and median population size
           of community charter conversions approved from 2000 to 2005.
        2. NCUA stated that we inaccurately attributed its change in chartering
           policy as being triggered partly by concerns about competing with
           states having more expansive credit union chartering rules. As we
           reported in 2003, NCUA stated to us at that time that a major reason
           for its regulatory changes was to maintain the competitiveness of the
           federal charter in a dual (federal and state) chartering system. In
           subsequent discussions with NCUA they indicated that it would be more
           accurate to attribute changes in chartering policy to factors such as
           the continued viability of federal credit unions in changing economic
           and financial industry developments. We have modified the text of our
           report to reflect the influence of these factors.
        3. Text has been added to reflect that credit unions historically have
           had the ability to offer real estate and business loans.
        4. Text has been added to the report to recognize that interest rates
           during the period of our credit union and bank rate analysis were at
           historic lows.
        5. Text has been added to the background section of the report based on
           the information provided by NCUA in its comment letter regarding the
           proportion size of the credit union industry in comparison with other
           federally insured depository institutions and the relatively small
           size of most federally chartered credit unions. However, it is
           important to note that the disparity in size between the credit union
           and banking industries does not affect our rate analysis methodology
           or our conclusions since that analysis is broken out by asset
           groupings, starting with institutions with assets of $100 million or
           less.
        6. NCUA stated that it was inaccurate and inappropriate to use its
           Low-Income Credit Union program and underserved area expansion program
           to define and assess service to people of modest means. As noted
           previously, we used low- and moderate-income as a proxy for modest
           means due to a lack of a legislative or regulatory definition or

    Appendix V Comments from the National Credit Union Administration

    other criteria. Moreover, we note that NCUA's regulations for its
    underserved program includes criteria (area in a metropolitan area where
    the median family income is at or below 80 percent of the metropolitan
    area median family income or the national metropolitan area median family
    income) that is roughly similar to that used to define low- and
    moderate-income for CRA purposes (less than 80 percent of the median
    family income for the Metropolitan Statistical Area).

        1. We clarified in the report that both single-bond and community credit
           unions are currently not permitted to include underserved areas in
           their fields of membership. As noted in the report, the American
           Bankers Association contended that the Federal Credit Union Act allows
           multiple-bond credit unions, but it does not specifically identify
           single or community credit unions to add underserved areas to their
           field of membership.
        2. We added additional information in the report on NCUA's criteria for
           federal credit unions applying to include underserved areas in the
           credit union's field of membership. However, we disagree with NCUA's
           assertion that the example we provided in our report is misleading.
        3. We clarified in the report that NCUA examiners assess executive
           compensation during the examination process primarily to determine its
           reasonableness as it relates to safety and soundness, but that since
           it has not found a systemwide issue with executive compensation, NCUA
           has not considered it necessary to collect or aggregate executive
           compensation data.
        4. NCUA noted that our characterization of NCUA's Member Service
           Assessment Pilot implies that the pilot is deficient because it does
           not collect executive compensation information for banks; thereby,
           preventing a direct comparison between federal credit unions and
           banks. It also noted that it is not within NCUA's authority to collect
           data from banks or thrifts and that its authority to collect executive
           compensation data extends only to federal credit unions in the context
           of credit union safety and soundness issues. We do not intend to imply
           that collecting compensation data from banks is the responsibility of
           NCUA but point out the lack of available data that would allow a
           direct comparison of credit union and bank executive compensation.

    Appendix V Comments from the National Credit Union Administration

        1. NCUA indicated that comparing executive compensation of federal credit
           unions and banks was not a stated objective for our study and that
           attempting to make a direct comparison is impossible, given the
           differences in the forms of compensation available to federal credit
           unions versus bank executives. We acknowledge that comparing executive
           compensation of federal credit unions and banks was not a stated
           objective for this study. Our report text merely points out that due
           to the lack of consistent, available, and transparent compensation
           data for credit unions, any overall comparison is difficult. For this
           reason, we did not provide bank executive compensation data in the
           main body of the report or make any direct comparisons between credit
           union and bank executive compensation. However, we believe that
           inclusion of bank executive compensation data in the appendix provides
           a useful benchmark on selected executive positions.
        2. NCUA noted that the report neither discusses nor includes any data
           regarding the compensation paid to directors of banks and that
           including such data and discussion would make a more thorough and
           accurate comparison of executive compensation. We acknowledge this
           point and added some additional discussion on bank director
           compensation for context.
        3. Our original characterization of NCUA's Member Service Assessment
           Pilot was based on a discussion with NCUA officials. We have revised
           the text of the report to reflect that compensation data that NCUA
           obtained can be stratified into two statistically valid subsets based
           on the asset size of the credit unions surveyed.

    Appendix VI

                         GAO Contact and Staff Acknowledgments

      GAO Contact

    Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov

      Staff

    In addition to the above contact, Harry Medina, Assistant Director; Janet
    Fong; May Lee; John Lord; Donald Marples; Edward Nannenhorn; Jasminee
    Persaud; Carl Ramirez; Barbara Roesmann; Paul Thompson; and Richard
    Vagnoni made key contributions to this report.

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    References

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