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STATEMENT

OF

THE HONORABLE JOANN M. JOHNSON

CHAIRMAN

NATIONAL CREDIT UNION ADMINISTRATION

"THE CONSIDERATION OF REGULATORY RELIEF PROPOSALS"

BEFORE THE

COMMITTEE

ON

BANKING, HOUSING AND URBAN AFFAIRS

UNITED STATES SENATE

March 1, 2006

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee:
on behalf of the National Credit Union Administration (NCUA) I am
pleased to be here today to present our agency's views on regulatory
relief initiatives being considered by Congress. NCUA's longstanding
view on this issue is that enactment will provide a tangible benefit to
America's consumers by giving them access to more modern, up to date and
efficient financial institutions. An equally important benefit will be
an overall improvement in regulatory efficiency by removing outmoded,
duplicative, and unnecessary regulations while maintaining a focus on
the primary safety and soundness responsibility that Congress has
conferred on the Agency.

**REGULATORY RELIEF AND EFFICIENCY**

In June of 2005 I testified before this Committee and presented several
legislative proposals NCUA recommended for your consideration. NCUA
continues to recommend these provisions as desirable components of
regulatory reform:

-   Permit federal credit unions to cash checks and money transfer
    services for individuals in their field of membership but not yet
    members. This is particularly important to federal credit unions in
    furthering their efforts to serve those of limited income or means
    in their field of membership. These individuals, in many instances,
    do not have mainstream financial services available to them and are
    often forced to pay excessive fees for check cashing, wire transfer
    and other services. The House of Representatives has taken this up
    as H.R. 749, amended it to include international remittances and
    passed the bill. Section 3 of S. 31, introduced by Senator Sarbanes
    and other Members of the Committee includes a similar provision;

-   Increase the allowable maturity on federal credit union loans from
    12 to 15 years. Federal credit unions should be able to make loans
    for second homes, recreational vehicles and other purposes in
    accordance with conventional maturities that are commonly accepted
    in the market today;

-   Increase the investment limit in credit union service organizations
    (CUSO's) from one percent to three percent. The one percent
    aggregate investment limit is unrealistically low and forces credit
    unions to either bring services in-house, thus potentially
    increasing risk to the credit union and the NCUSIF, or turn to
    outside providers and lose control;

-   Safely increase options for credit unions to invest their funds by
    expanding authority beyond loans, government securities, deposits in
    other financial institutions and certain other very limited
    investments. The recommendation is to permit additional investments
    in corporate debt securities (as opposed to equity) and further
    establish specific percentage limitations and investment grade
    standards;

-   Alleviate NCUA from the process now required that it consider a
    spin-off of any group of over 3,000 members in the merging credit
    union when two credit unions merge voluntarily. A spin-off would
    most likely undermine financial services to the affected group and
    may create safety and soundness concerns;

-   Provide relief for credit unions from a requirement that they
    register with the SEC as broker-dealers when engaging in certain de
    minimums securities activities. The principle established by the
    present bank exemption, and a similar exemption sought by thrifts,
    is that securities activities of an incidental nature to the
    financial institutions do not have to be placed into a separate
    affiliate;

-   Make needed technical corrections to the Federal Credit Union Act.

These NCUA recommendations are more fully described on the following
pages.

Additionally, NCUA encourages this Committee to consider changes to the
current credit union member business lending regimen that would improve
the ability of credit unions to provide a source of needed credit to
small businesses.

NCUA has also reviewed the following additional credit union provisions
included in the matrix circulated by Senator Crapo in anticipation of
this hearing. We have carefully examined each and have determined that
these provisions present no safety and soundness concerns for the credit
unions we regulate and/or insure: leases of land on federal facilities
for credit unions; exclusion of member business loans to non-profit
religious organizations; criteria for continued membership of certain
member groups in community charter conversions; credit union governance
provisions; providing NCUA with greater flexibility to adjust the
federal usury ceiling for federal credit unions; and an exemption from
the pre-merger notification requirements of the Clayton Act.

**PRESERVING THE NET WORTH OF CREDIT UNIONS IN MERGERS**

NCUA is aware that the Financial Accounting Standards Board (FASB) has
extended its expected date to publish a final rule requiring the
acquisition method of accounting for mergers of credit unions to 2007. 
This new rule would eliminate the "pooling" method and require the
"acquisition" or "purchase" method to be used. [^1] When this change to
accounting rules is implemented it will require that, in a merger, the
net assets on a fair value basis of the merging credit union as a whole
be carried over as "acquired equity." The Federal Credit Union Act does
not recognize "acquired equity" as part of capital rather defining
capital in terms of "retained earnings". Retained earnings does not
include acquired equity. This FASB policy has been in place since
mid-2001 for most business combinations and the delay by FASB in
implementing it for credit unions, as well as other cooperative
organizations, has allowed all of us to explore how credit unions could
conform to the new financial reporting standards.

 

Without the changes to the Federal Credit Union Act, only "retained
earnings" of the continuing credit union will count as net worth after a
merger. This result would seriously reduce the post-merger net worth
ratio of a federally insured credit union, because this ratio is the
retained earnings of only the continuing credit union stated as a
percentage of the combined assets of the two institutions. Not only
would this inaccurately depict the actual net worth of the new, merged
credit union, a lower net worth ratio also has adverse implications
under the statutory "prompt corrective action" (PCA) regulation. This
result will discourage voluntary mergers and on occasion make NCUA
assisted mergers more difficult and costly to the National Credit Union
Share Insurance Fund (NCUSIF).  Absent a legislative remedy, an
important NCUA tool for reducing costs and efficiently managing the fund
will be unavailable.  NCUA encourages this Committee to include language
in legislation to allow NCUA to redefine "net worth" to include the
pre-merger retained earnings of the merging credit union for purposes of
regulatory capital calculation and prompt corrective action.   Credit
unions would continue to be required to prepare financial reports
consistent with generally accepted accounting principles including FAS
141.

A solution was passed unanimously by the House last June, H.R. 1042, the
"Net Worth for Credit Unions Act," and I strongly encourage this
Committee to include that bill language in any regulatory relief
legislation that you introduce.

**REFORM OF PROMPT CORRECTIVE ACTION SYSTEM FOR FEDERALLY INSURED CREDIT
UNIONS**

The Credit Union Membership Access Act of 1998 mandated a system of
Prompt Corrective Action (PCA) for credit unions designed to ensure
problems in federally insured credit unions are resolved at the least
long-term cost to the NCUSIF. PCA, and the focus it creates on active
management of capital levels, has proven very valuable to NCUA's
management of the National Credit Union Share Insurance Fund (NCUSIF)
and the overall health of the credit union system. NCUA continues to
strongly support a robust, statutorily mandated PCA system that fosters
healthy capitalization levels and effective capital management in
federally insured credit unions.

However, the current statutory requirements for credit unions are too
inflexible and establish a structure based primarily on a "one-size-fits
all" approach, relying largely on a high leverage requirement of net
worth to total assets. This creates inequities for credit unions with
low-risk balance sheets, limits NCUA's ability to have a risk-based
requirement that governs more often, without requiring unduly high
capital levels, and fosters accumulation of capital levels well in
excess of what is needed for most credit unions' safety and soundness
and strategic needs.

Credit unions enjoy very strong capital levels, with 98% of credit
unions categorized as well capitalized under PCA. Credit unions'
conservative nature and limited ability to manage compliance with
capital standards has resulted in their accumulating a cushion of
capital well in excess of PCA requirements, with the aggregate level of
capital at 11.24% of total assets. Though high capital levels afford the
insurance fund with additional protection and the institution with
various benefits, it does not come without a cost. Consider that 85% of
credit unions maintain a leverage ratio (net worth to total assets) in
excess of 9%. As the table below illustrates, this results in net worth
in the credit union system of \$15.2 billion above this level. If credit
unions had more flexibility to manage their compliance with PCA, they
could still maintain a good cushion above regulatory requirements while
safely returning more earnings to the members and expanding member
services and other outreach programs.

  ------------------------------------------------------- ---------------
  **Based on December 31, 2005, Data**                    

  Total Federally-Insured Credit Unions (FICUs)           8,965

  Number of FICUs with Net Worth Ratio \> 9%              7,604

  \% of FICUs with Net Worth Ratio \> 9%                  84.8%

  Total Net Worth at 11.24% of assets (billions)          \$76.3

  Amount of Net Worth in Excess of 9% of assets           \$15.2
  (billions)                                              
  ------------------------------------------------------- ---------------

Further, as the federal bank and thrift regulators are in the process of
implementing changes to the capital standards their regulated
institutions operate under, it becomes even more important that capital
standards for credit unions are able to be updated to remain comparable
and incorporate relevant improvements in approaches to measuring risk
and allocating capital. Thus, reform of PCA standards for federally
insured credit union remains a vital issue.

NCUA's purposes in seeking PCA reform is to achieve greater
comparability with other federally insured financial institutions,
provide a good balance between sound protection for the insurance fund
and reasonable constraints on insured institutions, and to make our
capital requirements more risk-sensitive. We recognize that some credit
unions will be provided with greater flexibility in managing capital
levels as a result, which is largely a function of their relatively low
risk profiles and strong capital levels. On the whole we believe reforms
to our system can strike an effective balance between maintaining robust
standards while providing additional flexibility where warranted. Also,
we very much appreciate that there are inherent limitations in
risk-based capital techniques, and thus the leverage ratio plays an
important part in a good regulatory capital system given. It is
important to have the right interaction between the leverage and
risk-based requirements to ensure the risk-based requirement is
effective in influencing risk management decisions of institutions and
more closely relates required capital levels to institution specific
risk profiles.

In March 2005, NCUA published specific PCA reform recommendations
designed to achieve these goals. The reform proposal is intended to
provide enough details to enable a thoughtful consideration of the
impact of any such reform, as well as to establish a basis for specific
statutory language that would be needed to accomplish our reform
objectives. In order to achieve greater comparability and a more
risk-based system, we have proposed some reduction in the standard net
worth (i.e., leverage) ratio requirement for credit unions. Adjustment
of the leverage ratio for credit unions will enable it to effectively
complement the risk-based requirement, not overshadow it. Credit unions
will have to more actively manage the risk they take in relation to
their capital levels. It will reduce any competitive disadvantage that
results from being held to a higher capital standard than other
federally insured institutions when the higher standard is not
warranted.

NCUA recognizes that there are some differences between the types of
federally insured financial institutions that need to be taken into
account, and we will continue to consult with the Department of Treasury
on comparability issues. For example, credit unions do have limitations
on their ability to raise capital. However, they also have a relatively
low risk profile given greater restrictions on powers compared to other
financial institutions, as evidenced by their low loss history. We
recognize the need to account for the 1% deposit method of capitalizing
the NCUSIF given its effect on the overall capital in the share
insurance fund and the credit union system. Thus, our reform proposal
incorporates a revised method for calculating the net worth ratio for
PCA purposes by adjusting for the deposit credit unions maintain in the
share insurance fund. Our proposed treatment of the NCUSIF deposit for
purposes of regulatory capital standards in no way alters its treatment
as an asset under generally accepted accounting principles, or NCUA's
steadfast support of the mutual, deposit-based nature of the NCUSIF.

This reform proposal also outlines improvements we believe are needed to
make our risk-based net worth requirement more risk-sensitive and
relevant. We intend to have a well designed risk-based system that
maintains comparability with FDIC's risk-based capital requirements for
non-BASEL II insured institutions. For potential impact analysis
purposes, we designed a risk-based model using elements of BASEL I and
the standard approach of BASEL II. However, since we issued our
proposal, there have been further developments related to risk-based
capital standards for other federally insured financial institutions. We
continue to closely monitor developments in risk-based capital standards
for other insured financial institutions and will modify our risk-based
requirement model and impact analysis as needed.

As there are limitations in any regulatory capital scheme, NCUA's reform
proposal also includes recommendations to address these other forms of
risk under the second pillar of the supervisory framework, a robust
supervisory review process. Through our examination and supervision
process, NCUA will continue to analyze each credit union's capital
position in relation to the overall risk of the institution, which will
at times reflect a need for capital levels higher than regulatory
minimums.

Enabling NCUA to adopt a PCA system that remains relevant and up-to-date
with emerging trends in credit unions and the marketplace provides
safety, efficiency, and benefits to the credit union consumer. I believe
our reform proposal achieves a much needed balance between enabling
credit unions to utilize capital efficiently to better serve their
members while maintaining safety and soundness and protecting the share
insurance fund. A well-designed risk based system would alleviate
regulatory concerns by not penalizing low risk activities and by
providing credit union management with the ability to manage their
compliance through adjustments to their assets and activities. A PCA
system that is more fully risk-based would better achieve the objectives
of PCA and is consistent with sound risk management principles.

**REFORM OF CREDIT UNION MEMBER BUSINESS LENDING**

NCUA recommends improvements in the current credit union member business
lending regimen that would provide an enhanced ability to make those
loans while maintaining a strong focus on safety and soundness.

Specifically, NCUA would support legislative changes that would:

> -    remove the limit on assets a credit union can place in member
> business loans, currently calculated at 1.75 times actual net worth,
> and substitute a flat rate of 20% of the credit union's total assets.
>
> -     eliminate the current \$50,000 threshold for defining a loan as
> a MBL, and grant NCUA authority to exclude member business loans under
> \$100,000.
>
> Given the extensive regulations under which credit union member
> business lending is done, NCUA believes that both the 12.25% cap and
> the \$50,000 limit present an unnecessary barrier to a type of lending
> that experience has shown to be exceptionally safe and sound.

**EXPLANATION OF NCUA RECOMMENDED PROVISIONS FOR CONSIDERATION BY THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS**

#### Check Cashing and Money Transfer Services Offered within the

#### Field of Membership of the Credit Union

### Current Law

Section 107 of the Federal Credit Union Act authorizes federal credit
unions to provide check cashing and money transfer services to members.

### 

### Proposed Amendment

This amendment permits federal credit unions to offer these same
services to persons eligible to be members of the credit union, defined
as those that fall within the field of membership of the credit union.

### Reasons for Change

-   Congress and the Administration are asking financial institutions to
    do more to reach the "unbanked."

-   Credit unions are constrained from extending the most basic
    financial transaction (check cashing) to those who have avoided
    traditional financial institutions.

-   Expanding check cashing, wire transfer, and similar services to
    non-members within a credit union's field of membership would
    provide an introduction to reliable low-cost financial services
    which can provide a viable alternative to less savory practices
    while at the same time increase confidence in traditional financial
    organizations.

-   With more and more credit unions adopting underserved areas, these
    services become especially important in reaching out to the
    underserved.

**Eliminate the 12-year Limit on Term of Federal Credit Union Loans**

### Current Law

The Federal Credit Union Act imposes a 12-year loan maturity limit on
most credit union loans. Principal residence loans have maturities up to
30 years, and principal mobile home loans have maturities of 15 years.

### 

### Proposed Amendment

The proposed amendment permits the NCUA Board to provide for maturity
limits up to 15 years, or longer, as the NCUA Board may allow by
regulation.

[Reasons for Change]{.underline}

-   The current restriction placed on federal credit unions is outdated
    and unnecessarily restricts a credit union's lending terms to its
    members.

-   Members of Federal credit unions should be able to obtain loans for
    second homes, recreational vehicles, and other purposes in
    accordance with conventional maturities that are commonly accepted
    in the market today.

**Increase in 1 percent Investment Limit in CUSOs**

### Current Law

The Federal Credit Union Act permits federal credit unions to invest in
Credit Union Service Organizations (CUSOs)\--organizations providing
services to credit unions and credit union members. An individual credit
union, however, may invest in aggregate no more than 1% of its shares
and undivided earning in these organizations.

[Proposed Amendment]{.underline}

The provision increases the permissible credit union investment in
CUSO's from 1% to 3% of its shares and undivided earnings.

### Reasons for Change

-   CUSOs are frequently established by several credit unions to provide
    important services to credit unions, such as check clearing and data
    processing, which can be done more efficiently for a group.

-   When these services are provided through a CUSO, any financial risks
    are isolated from the credit union while allowing the credit unions
    to retain quality control over the services offered and the prices
    paid by the credit unions or their members.

-   An increase in the CUSO investment to 3% allows the CUSO to continue
    servicing its credit union members without having to bring services
    back in-house or engage outside providers. This controls risk and
    expense to the credit union.

-   The 1% limit has not been updated since its inception in 1977.

**Investments in Securities by Federal Credit Unions**

# Current Law

The Federal Credit Union Act authorizes federal credit unions to invest
in loans, obligations of the United States, or securities fully
guaranteed as to principal and interest by the U.S. government, deposits
in other financial institutions, and certain other limited investments,
such as obligations of federal home loan banks, wholly-owned government
corporations, or in obligations, participations or other instruments
issued by, or fully guaranteed by FNMA, GNMA, or FHLMC.

### Proposed Amendment

This amendment would provide authority for federal credit unions to
purchase and hold for their own account "investment securities" if they
are in one of the four highest investment rating categories \-- subject
to further definition and qualification by NCUA rulemaking.

The amendment limits federal credit unions' investments in investment
securities in two ways. First, a statutory "single obligor" percentage
limitation is established, such that the total amount of investment
securities of any single obligor or maker held by the federal credit
union for the credit union's own account cannot exceed 10% of the net
worth of the credit union. Second, the aggregate amount of investments
held by the federal credit union for its own account cannot exceed 10%
of the assets of the credit union.

# Reasons for Change

-   A number of private debt instruments such as highly rated commercial
    paper, corporate notes, and asset-backed securities would be
    appropriate investments for federal credit unions.

-   Other federally regulated and state regulated financial institutions
    have a proven track record with these limited investments.

-   Allowing such investments would give credit unions more asset
    liability management options.

-   NCUA implementing regulations will further address appropriate
    investment gradings, possible minimum credit union net worth
    requirements, and other safety and soundness requirements.

-   With a percentage limitation of 10% of net worth per single obligor,
    this modest increase in investment flexibility will not subject
    credit unions to undue risk.

-   The 10% limitation language parallels the limitation applicable to
    national banks when applied to the "net worth" measurement for
    credit unions.

-   The prohibition against investment in equity securities is
    maintained.

**Voluntary Merger Authority**

[Current Law]{.underline}

Section 109 of the Federal Credit Union Act requires NCUA to engage in
an analysis of every voluntary merger of healthy federal credit unions
to determine whether a spin-off of any select employee group (SEG) of
over 3,000 members in the merging credit union can be effectively
accomplished.

[Proposed Amendment]{.underline}

The recommendation is to eliminate the requirement that NCUA engage in
an analysis of every voluntary merger to determine whether a select
employee group over 3,000 can be spun-off into a separate credit union.

[Reasons for Change]{.underline}

-   Requiring NCUA to engage in an analysis of every voluntary merger of
    healthy federal credit unions to consider a spin-off from the
    merging credit union of any select employee group (SEG) of over
    3,000 is cumbersome and provides little practical benefit or
    purpose. There are about 300 a year.

-   When two healthy multiple bond credit unions pursue a merger, it
    increases their financial strength and member service is enhanced,
    as well as their long-term safety and soundness.

-   Member employee (or other) groups over 3,000 are already included in
    a multiple group credit union in accordance with statutory
    standards.

**Treatment of Credit Unions as Depository Institutions**

**Under Securities Laws**

[Current Law]{.underline}

Section 201 and 202 of the Gramm Leach Bliley Act, enacted in 1999,
created specific exemptions from broker-dealer registration requirements
of the Bank Exchange Act of 1934 for certain bank securities activities.
Banks are also exempt from the registration and other requirements of
the Investment Advisors Act of 1940. The principle established in these
laws is that securities activities of an incidental nature to the bank
do not have to be placed into a separate affiliate and functionally
regulated.

[Proposed Amendment]{.underline}

This provision would provide a statutory exemption for credit unions
similar to that already provided banks and allow credit unions, like
banks, to avoid complicated filings with the Securities and Exchange
Commission for incidental activities.

[Reasons for Change]{.underline}

-   Federal credit unions are empowered to engage in specific activities
    enumerated in the FCUA and any other activities incidental to the
    enumerated activities. Among the specific broker-related activities
    currently authorized are third-party brokerage arrangements, sweep
    accounts, safekeeping and custodial activities. Among the
    dealer-related activities are the purchase and sale of particular
    securities, including but not limited to municipal securities and
    "Identified Banking Products" for the credit union's own account.

-   These incidental activities might trigger SEC registration if not
    exempted by law.

-   This important regulatory relief and efficiency provision would
    reduce the cost and complication to credit unions having to approach
    the SEC on a case-by-case basis or through regulation -- the only
    avenues now available to them for relief.

-   While a federal or state chartered credit union might be granted
    authority to engage in otherwise lawful activities, the credit union
    might have to abandon the activity or outsource it to a third party
    at increased expense if this exemption is not provided.

-   This exemption would not expand the types of securities activities
    that credit unions are authorized to engage in. It simply serves to
    provide parity with banks and thrifts regarding an exemption from
    SEC registration for the limited securities activities credit unions
    are authorized to engage in.

**Technical Corrections to the Federal Credit Union Act**

[Explanation of Proposed Amendment]{.underline}

28 purely technical and clerical corrections to the Federal Credit Union
Act have been identified as needed.

[Reasons for Change]{.underline}

To make the Federal Credit Union Act accurate and correct.

**NCUA's Viewpoint Regarding Other Items Under Consideration**

NCUA has reviewed additional items in order to determine whether it
would also be advisable to maintain parallel treatment under the Federal
Credit Union Act with our fellow financial regulators should the
Committee include any of these suggestions in a legislative proposal.
The proposals where NCUA would seek parallel treatment, and language to
achieve that, follows.

**Item 144: Technical Amendment to Section 8(i) of the FDI Act**

This item clarifies that a Federal banking agency may take enforcement
action against a person for conduct that occurred during his or her
affiliation with a banking organization even if the person resigns from
the organization, regardless of whether the enforcement action is
initiated through a notice or an order.

Section 206(k)(3) of the FCU Act parallels §8(i) of the FDI Act. If
§8(i) is amended, we recommend the same amendment to the FCU Act.

*Suggested Language:*

*Section 206(k)(3) of the Federal Credit Union Act (12 U.S.C.
1786(k)(3)) is amended by inserting "or order" after "notice" each place
such term appears.*

**Item 147. Clarification that Change in Control Conditions are
Enforceable**

This item amends section 8 of the FDI Act (12 U.S.C. 1818) to clarify
the appropriate Federal banking agencies' authority to take enforcement
action against the institutions they supervise based on violations of
conditions imposed in writing in connection with any action by the
agency on an application, notice, or other request by an insured
depository institution or institution-affiliated party (IAP).

Section 206 of the FCU Act has parallel sections to the portions of §8
of the FDI Act this amendment changes. If the FDI Act is amended in this
way, we recommend the same amendment to the FCU Act.

*Suggested language:*

*Section 206 of the Federal Credit Union Act (12 U.S.C. 1786) is
amended---*

\(a\) in subsection (b) (1), in the first sentence, by striking "the
granting of any application or other request by the credit union" and
inserting "any action on any application, notice, or other request by
the credit union or institution-affiliated party,";

\(b\) in subsection (g)(1)(A)(i)(III), by striking "the grant of any
application or other request by such credit union" and inserting "any
action on any application, notice, or request by such credit union or
institution-affiliated party"; and

\(c\) in subsection (k)(2)(A)(iii), by striking "the grant of any
application or other request by such credit union" and inserting "any
action on any application, notice, or other request by the credit union
or institution-affiliated party".

**Item 153. Parity in Standards for Institution-Affiliated Parties**

This item deletes the phrase "knowingly or recklessly" from the
definition of "institution-affiliated party" in the Federal Deposit
Insurance Act (12 U.S.C. 1813(u)(4)). The FCU Act has an identical
definition section, which should be similarly amended.

*Suggested language:*

*Section 206(r)(3) of the Federal Credit Union Act (12 U.S.C.
1786(r)(3)) is amended by striking "knowingly or recklessly".*

**Item 155. Receiver's or Conservator's Consent Requirement**

This item would require the consent of the receiver or conservator
before a party to a contract to which the depository institution is a
party could exercise any right or power to terminate, accelerate, or
declare a default under any contract, or to obtain possession of or
exercise control over any property of the institution or affect any
contractual rights of the institution.

Section 207(c)(12) of the FCU Act (12 U.S.C. 1787(c)(12)) parallels the
section of the FDI Act this amendment changes. If the FDI Act is amended
in this way, we recommend similar changes to the FCU Act.

*Suggested language:*

*Section 207(c)(12) of the Federal Credit Union Act (12 U.S.C.
1787(c)(12)) is amended by adding the following new subparagraph \--*

*"(C) Consent Requirement. \--*

*(i) In general. \--*

> *Except as otherwise provided by this section, no person may exercise
> any right or power to terminate, accelerate, or declare a default
> under any contract to which the credit union is a party, or to obtain
> possession of or exercise control over any property of the credit
> union or affect any contractual rights of the credit union, without
> the consent of the conservator or liquidating agent, as appropriate,
> for a period of 45 days from the date of the appointment of the
> conservator, or for a period of 90 days from the date of the
> appointment of the liquidating agent.*

*(ii) Certain exceptions. \--*

> *No provision of this subparagraph shall apply to a director\'s or
> officer\'s liability insurance contract or a credit union bond, or to
> the rights of parties to certain qualified financial contracts
> pursuant to subsection (c)(8), or shall be construed as permitting the
> conservator or liquidating agent to fail to comply with otherwise
> enforceable provisions of such contract.*
>
> *(iii) Rule of Construction. \--*
>
> *Nothing in this subparagraph shall be construed to limit or otherwise
> affect the applicability of title 11 of the United States Code.\".*

**Item 156. Acquisition of FICO Scores**

This item would amend the FCRA to define an FDIC request for FICO scores
as part of its preparation for a resolution as a permissible purpose,
enabling the FDIC to obtain FICO scores of bank borrowers by contacting
credit reporting agencies and to obtain current consumer credit reports.
The explanation states that this power is necessary so that FDIC can
gain access to information that is helpful in evaluating the asset
portfolios of troubled institutions.

Although this has not yet been an issue for NCUA, we believe it would be
helpful to include NCUA in this amendment.

*Suggested language: (additions to FDIC language bolded)*

*Section 604(a) of the Fair Credit Reporting Act (15 U.S.C. 1681b(a)) is
amended by adding a new paragraph after paragraph (5) as follows:*

*"(6) To the Federal Deposit Insurance Corporation **or the National
Credit Union Administration** as part of its preparation for its
appointment or as part of its exercise of powers as conservator**,**
\[or\] receiver **or liquidating agent** for an insured depository
institution **or insured credit union** under the Federal Deposit
Insurance Act **or the Federal Credit Union Act** or other applicable
Federal or State law or in connection with the resolution or liquidation
of a failed or failing insured depository institution **or insured
credit union**.".*

**Item 157. Elimination of Criminal Indictments Against Receiverships**

This item would amend the Federal Deposit Insurance Act to require that
any criminal indictment against a bank be dismissed, if the FDIC is
appointed receiver of that bank.

This has not yet been an issue for NCUA but it would be prudent to have
a similar amendment to the FCU Act. The FCU Act does not have a parallel
section to the section of the FDI Act being amended in this item, but we
suggest adding similar language to the end of §206.

*Suggested language:*

*Section 206 of the Federal Credit Union Act (12 U.S.C. 1786) is amended
by adding the following new subsection after subsection (v):*

*"(w) The Administration shall be exempt from all prosecution by the
United States, any State, county, municipality, or local authority for
any criminal offense arising under Federal, State, county, municipal, or
local law, which was allegedly committed by a credit union, or persons
acting on behalf of a credit union, prior to the appointment of the
Administration as liquidating agent.".*

**Item 158. Resolution of Deposit Insurance Disputes**

This item would amend §11(f) of the FDI Act to clarify that the APA
standard of review, the 60-day limitation period, and U.S. district
court jurisdiction apply to the FDIC's final determination of insurance
coverage whether made pursuant to procedural regulations or not. The
explanation states that the current version of the statute creates
uncertainty about whether the statute of limitations applies in the
absence of FDIC regulations and whether appellate or district courts
have original jurisdiction to review FDIC's decisions about insurance
coverage.

Section 207(f) of the FCU Act (12 U.S.C. 1787(f)) parallels §11(f) of
the FDI Act. If §11(f) is amended, we recommend a similar amendment to
the FCU Act.

*Suggested language:*

*Paragraphs (3), (4), and (5) of section 207(f) of the Federal Credit
Union Act (12 U.S.C. 1787(f)(3)) are amended to read as follows:*

> *"(3) RESOLUTION OF DISPUTES. ‑‑ The Administration's determination
> regarding any claim for insurance coverage shall be treated as a final
> determination for purposes of this section. In its discretion, the
> Board may promulgate regulations prescribing procedures for resolving
> any disputed claim relating to any insured deposit or any
> determination of insurance coverage with respect to any deposit.*
>
> *(4) REVIEW OF BOARD\'S DETERMINATION. ‑‑ A final determination made
> by the Board shall be a final agency action reviewable in accordance
> with chapter 7 of title 5, United States Code, by the United States
> district court for the Federal judicial district where the principal
> place of business of the credit union is located.*
>
> *(5) STATUTE OF LIMITATIONS. -- Any request for review of a final
> determination by the Board shall be filed with the appropriate United
> States district court not later than 60 days after such determination
> is issued.".*

**Item 160. Recordkeeping Amendment**

This item would permit the FDIC to destroy records that are 10 or more
years old at the time of its appointment as receiver, unless directed
not to do so by a court or a government agency or prohibited by law.

This provision amends section 11(d)(15)(D) of the FDI Act, which
parallels section 207(b)(15)(D) of the FCU Act. If the FDI Act is
amended in this way, we recommend similar changes to the FCU Act.

*Suggested language*:

*Section 207(b)(15)(D) of the Federal Credit Union Act (12 U.S.C.
1787(b)(15)(D)) is amended---*

*(1) by striking "Recordkeeping requirement.---After the end of the
6-year period" and inserting*

> *"(i) In general.---Except as provided in clause (ii), after the end
> of the 6-year period'; and*

*(2) by adding at the end the following new clause:*

> *"(ii) Old records.\-\--In the case of records of an insured credit
> union which are at least 10 years old as of the date the Board is
> appointed as liquidating agent of such credit union, the Board may
> destroy such records in accordance with clause (i) any time after such
> appointment is final without regard to the 6-year period of limitation
> contained in such clause.".*

**Item 161. Preservation of Records by Optical Imaging and Other Means**
(§ 605 of H.R. 1375)

This item would allow FDIC to rely upon records preserved
electronically, such as optically imaged or computer scanned images.

This has not yet been an issue, but if FDIC has this option, we
recommend explicitly granting this option to NCUA as well in case
electronic imaging becomes more cost-effective. The provision of the FDI
Act being amended does not have an exact parallel in the FCU Act. Our
suggested language adds the new provision to section 206(s) of the FCU
Act.

*Suggested language:*

*Section 206(s) of the Federal Credit Union Act (12 U.S.C. 1786(s)) is
amended*

*by inserting at the end the following new paragraph:*

*"(9) Preservation of Records.---*

*"(A) In general.---The Board my cause any and all records, papers, or
documents kept by the Administration or in the possession or custody of
the Administration to be---*

*"(i) photographed or micrographed or otherwise reproduced upon film;
or*

*"(ii) preserved in any electronic medium or format which is capable of*

> *"(a) being read or scanned by computer; and*
>
> *"(b) being reproduced from such electronic medium or format by
> printing or any other form of reproduction of electronically stored
> data.*

*"(B) Treatment as original records.---Any photographs, micrographs, or
photographic film or copies thereof described in clause (A)(i) or
reproduction of electronically stored data described in clause (A)(ii)
shall be deemed to be an original record for all purposes, including
introduction in evidence in all State and Federal courts or
administrative agencies and shall be admissible to prove any act,
transaction, occurrence, or event therein recorded.*

*"(C) Authority of the Administration.---Any photographs,
microphotographs, or photographic film or copies thereof described in
paragraph (9)(A) or reproduction of electronically stored data described
in paragraph (9)(B) shall be preserved in such manner as the
Administration shall prescribe and the original records, papers, or
documents may be destroyed or otherwise disposed of as the
Administration may direct.".*

**Item 164. Issue of more than one NCUA Board Member with credit union
experience**

This not strictly a regulatory matter in that it does not involve
specific functions of the NCUA as they relate to credit union
supervision or insurance.  NCUA does note, however, that it is the only
federal financial regulator with this restriction on board members with
industry experience.  This could be interpreted as a negative assessment
of the ability of an individual with credit union experience to perform
the duties of an NCUA board member in a fair and impartial manner. 

**Conclusion**

Thank you for the opportunity to appear before you today on behalf of
NCUA to discuss these important and needed regulatory enhancements
efficiency for NCUA, credit unions and 85 million credit union members
across America. I am pleased to respond to any questions the Committee
may have or to be a source of any additional information that may assist
you in this worthwhile endeavor.

\###

[^1]: Statement of Financial Accounting Standard (SFAS) No. 141,
    Business Combinations, requiring the acquisition method for business
    combinations and effectively eliminating the pooling method. The
    pooling method has typically been used by credit unions to account
    for credit union mergers. The standards became effective for
    combinations initiated after June 30, 2001. Paragraph 60 of the
    standard deferred the effective date for mutual enterprises (i.e.,
    credit unions) until the FASB could develop purchase method
    procedures for those combinations. In the interim, credit unions
    have continued to account for mergers as poolings (simple
    combination of financial statement components).