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STATEMENT

OF

JOANN JOHNSON, CHAIRMAN

NATIONAL CREDIT UNION ADMINISTRATION

ON

**"tHE Need for CREDIT UNION REGULATORY Relief"**

BEFORE THE

hOUSE fINANCIAL sERVICES COMMITTEE

MARCH 6, 2008

 

 

 

The National Credit Union Administration (NCUA or Board) appreciates
this opportunity to comment on several legislative proposals to provide
regulatory relief for credit unions. H.R. 1537, the Credit Union
Regulatory Improvements Act (CURIA), H.R. 1849, the Credit Union Small
Business Lending Act, H.R. 3113, the Affordable Financial Services
Enforcement Act, and H.R. 5519, the Credit Union Regulatory Relief Act
of 2008, enhance the ability of NCUA to regulate, supervise and insure
the credit union industry, incorporate a variety of improvements to the
statutory regime currently in place, and provide significant benefits to
consumers.  NCUA supports these legislative proposals within a framework
that allows for important regulatory controls.

 

Of particular interest to NCUA are the provisions that:

 

-   Reform the system of Prompt Corrective Action (PCA) and establish a
    risk-based capital regime; and

-   Clarify the ability of NCUA to allow all types of federal credit
    unions to adopt underserved areas.

 

Viewed in their totality, these legislative proposals present Congress
with an opportunity to prudently modernize a variety of elements of the
Federal Credit Union Act (the Act) by enhancing regulatory and
supervisory oversight capabilities of the NCUA and improving the public
benefits of credit unions. 

NCUA's primary missions are to ensure both safety and soundness and
compliance with applicable federal regulations for federally insured
credit unions.  It performs these important public function by examining
all federally chartered credit unions (FCUs), participating in the
supervision of federally insured state-chartered credit unions in
coordination with state regulators, and insuring credit union member
accounts.  In its statutory role as the administrator for the National
Credit Union Share Insurance Fund (NCUSIF), NCUA provides oversight and
supervision to 8101 federally insured credit unions (as of 12/31/07),
representing 98 percent of all credit unions and approximately 87
million members.[^1]

The NCUA regulates and insures all FCUs and insures most state-chartered
credit unions.  Under this framework, NCUA is responsible for enforcing
regulations in FCUs and for evaluating safety and soundness in all
federally insured credit unions.  NCUA is responsible for monitoring and
enforcing compliance with most federal consumer laws and regulations in
FCUs.  In state-chartered credit unions, the appropriate state
supervisory authority has regulatory oversight and enforces state
consumer laws and regulations. 

 

NCUA's testimony will address each provision in the legislative
proposals. 

 

 

Section by Section Review of H.R. 1537 \--

Credit Union Regulatory Improvements Act of 2007

 

**Title I Capital Modernization**

 

[Prompt Corrective Action Reform and Establishment of a Risk-Based
Capital Regime]{.underline}

 

In June 2007, the Board formally introduced a revised plan to enhance
and modernize the system of PCA for credit unions, including significant
proposed improvements to the risk-based capital system. The revised
proposal reflects direct input by the Department of the Treasury and
incorporates developments that have occurred with the adoption of new
capital standards related to BASEL II for FDIC-insured institutions. 
However, it is important to note that while the Board action establishes
a public record about the rationale and basis for the proposed changes,
modification to the Act is necessary to authorize NCUA to adopt the
changes.

 

NCUA is a strong advocate for reform of the PCA system for credit unions
because the current statutory PCA requirements are too rigid and not
tailored to each credit union's individual risk profile in order to
strengthen its safety and soundness. The current system's rigidity and
limited risk orientation:

 

-   create inequities for credit unions with low-risk balance sheets;

-   limit NCUA's ability to have a more relevant risk-based requirement
    without requiring unduly high capital levels; and

-   foster accumulation of capital levels in excess of what is needed
    for most credit unions' safety and soundness and strategic needs.

 

The proposed PCA reforms result in a more fully risk-based system and
are consistent with sound risk management principles.  The shift in
emphasis to the risk-based requirement will promote more active
management of risk in relation to capital levels.  It will also reduce
any competitive disadvantage to credit unions of being held to an
unwarranted higher capital standard than other federally insured
institutions. As the federal bank and thrift regulators are in the
process of modernizing capital standards under which their regulated
institutions operate, it becomes even more important that capital
standards for credit unions be updated.  From both an industry
competition and risk management perspective, it is important for the
capital standards for credit unions to remain comparable and incorporate
the improvements in approaches to measuring risk and allocating capital.

 

The new system of PCA would also provide credit unions with greater
ability to manage compliance through adjustments to their assets and
activities.  If credit unions had more flexibility to manage their
compliance with PCA, they could still maintain an appropriate protective
cushion above regulatory requirements while safely returning more
earnings to the members and/or expanding member services and other
outreach programs.

 

Table 1 below compares the proposed PCA system for credit unions to that
applied by federal banking regulators:

 

  

**Table 1 - Proposed PCA Thresholds for Credit Unions Compared to Bank
PCA Thresholds**

+----------------+----------+---------+-----------+---------+---------+
|                | **Credit |         | **FDIC    |         |         |
|                | Unions** |         | Insu      |         |         |
|                |          |         | red\*\*** |         |         |
+----------------+----------+---------+-----------+---------+---------+
| **PCA          | **       | **Ris   | **Tier 1  | **Tier  | **Total |
| Category**     | Leverage | k-Based | Capital   | 1       | Capital |
|                | Ratio**  | Ratio** | to Total  | Capital | to Risk |
|                |          |         | Assets**  | to Risk | A       |
|                |          |         |           | A       | ssets** |
|                |          |         | **(Le     | ssets** |         |
|                |          |         | verage)** |         |         |
+----------------+----------+---------+-----------+---------+---------+
| Well           | 5.25% or | 10% or  | 5% or     | 6% or   | 10% or  |
| Capitalized    | greater  | greater | greater   | greater | greater |
+----------------+----------+---------+-----------+---------+---------+
| Adequately     | 4.25% to | 8% to   | 4% to \<  | 4% to   | 8% to   |
| Capitalized    |          |         | 5%        |         |         |
|                | \< 5.25% | \< 10%  |           | \< 5%   | \< 10%  |
|                |          |         | \> 3% for |         |         |
|                |          |         | CAMEL 1   |         |         |
+----------------+----------+---------+-----------+---------+---------+
| Un             | 3.25% to | 6% to   | 3% to \<  | 3% to   | 6% to   |
| dercapitalized |          | \< 8%   | 4%        |         | \< 8%   |
|                | \< 4.25% |         |           | \< 4%   |         |
|                |          |         |  or \< 3% |         |         |
|                |          |         | for CAMEL |         |         |
|                |          |         | 1         |         |         |
+----------------+----------+---------+-----------+---------+---------+
| Significantly  | 2% to    | \< 6%   | 2% to \<  | \< 3%   | \< 6%   |
| Un             |          |         | 3%        |         |         |
| dercapitalized | \< 3.25% |         |           |         |         |
+----------------+----------+---------+-----------+---------+---------+
| Critically     | \< 2%    | NA      | \< 2%     | NA      | NA      |
| Un             |          |         | (tangible |         |         |
| dercapitalized |          |         | equity)   |         |         |
+----------------+----------+---------+-----------+---------+---------+

\*\* Source: FDIC Rules and Regulations, 12 C.F.R §325.103

 

As illustrated in Table 2 below (Column B), the proposed leverage ratio
retains the original capital requirement for "significantly
undercapitalized" while raising the capital requirement for "critically
undercapitalized."  For the remaining categories, the actual reduction
from the old to the new leverage ratio requirement is considerably less
than the *prima facie* 175 basis point change in the threshold.  This is
due to the impact of the change in the method of calculating the net
worth ratio that subtracts the NCUSIF deposit from both net worth and
total assets (see Appendix 3).  As Column C of Table 2 shows, the
required average net worth level would only decline by 104 basis points
in the top three PCA categories.  The new calculation method will
actually require 74 basis points more in net worth in the "critically
undercapitalized" category than the existing requirement.[^2]

 

**Table 2 - Current vs. Proposed Leverage Ratio Standard**

+------------------+--------------+---------------+------------------+
| **PCA Category** | **Column A** | **Column B**  | **Column C**     |
|                  |              |               |                  |
|                  | **Current    | **Proposed    | **Net Worth      |
|                  | R            | Requirement** | Required by      |
|                  | equirement** |               | Column B to      |
|                  |              | **(Net Worth  | Total Assets**   |
|                  | **Net Worth  | -- NCUSIF) /  |                  |
|                  | / Total      | (Total Assets | **\[Range\]**    |
|                  | Assets**     | -- NCUSIF)**  |                  |
+------------------+--------------+---------------+------------------+
| Well Capitalized | \> 7%        | \> 5.25%      | 5.96%\*          |
|                  |              |               |                  |
|                  |              |               |                  |
+------------------+--------------+---------------+------------------+
| Adequately       | \< 7%        | \< 5.25%      | 5.96%\*          |
| Capitalized      |              |               |                  |
|                  |              |               |                  |
+------------------+--------------+---------------+------------------+
| Undercapitalized | \< 6%        | \< 4.25%      | 4.96%\*          |
|                  |              |               |                  |
|                  |              |               | \[               |
+------------------+--------------+---------------+------------------+
| Significantly    | \< 4%        | \< 3.25%      | 3.97%\*          |
| Undercapitalized |              |               |                  |
|                  |              |               |                  |
+------------------+--------------+---------------+------------------+
| Critically       | \< 2%        | \< 2%         | 2.74%\*          |
| Undercapitalized |              |               |                  |
|                  |              |               |                  |
+------------------+--------------+---------------+------------------+

\* Calculation based upon the average insured share to asset ratio of
75%.

 

NCUA supports the sections of H.R. 1537 that enhance the operational
efficiency of the system of PCA for credit unions.  Section 103 would
allow the Board to delegate, subject to review, its authority to
reclassify a credit union to a lower net worth category on safety and
soundness grounds to address interest rate risk.  Section 105 would give
the Board additional flexibility to impose PCA in several ways:

-   Allowing a temporary waiver of the requirement to file a Net Worth
    Restoration Plan (NWRP) in the event of a natural or man-made
    disaster;

-   Authorizing the Board, in lieu of the present earnings retention
    requirement, to require a credit union that became less than "well
    capitalized" for safety and soundness reasons to file an NWRP if
    those reasons remain unresolved;

-   Giving the Board discretion to order a "critically undercapitalized"
    credit union to take specific "other corrective action" to achieve
    the purposes of PCA; and

-   Requiring the Board to allow a State Supervisory Authority to impose
    PCA on a state-chartered credit union *only when* the Board
    determines that "such action by the official will carry out the
    purpose of \[PCA\]."

To implement this last modification, section 105(e) requires a technical
correction. To indicate where the quoted language should be inserted
section 216(l)(3)(A)(ii) of the Act, the phrase \"after the words
\'proposed action.\'\" should be added to section 105(e) on page 9 at
the end of line 7.

 

**Title II \-- Economic Growth**

 

As with all federally-insured financial institutions, the general
deterioration in the overall credit markets over the last 18 months has
affected credit union assets.  As a result, NCUA began sometime ago to
focus significantly more attention to active supervision and monitoring
of all types of credit union lending, with a special emphasis on risk
management and due diligence responsibilities.

In response to the changing environment for credit union member business
lending, NCUA has devoted additional resources, special expertise and
the array of supervisory remedies and restrictions it already has to
address problems such as excessive rate of growth, substandard
underwriting standards and criteria, over-concentration in certain
categories of loans, high loan-to-value ratios, poor documentation,
inexperience with MBL standards, violation of loans-to-one-borrower
limits, and insufficient net worth.[^3] Enacting PCA reform as proposed
in Title I would add a critical supervisory tool to those NCUA already
relies upon to ensure safe and sound lending.

 

We are confident that most credit unions involved in member business
lending will be able to adjust to a statutory increase in the individual
and aggregate MBL caps. Regardless of the increased caps and additional
exemptions, however, NCUA is poised to continue its vigilant and
aggressive approach to regulating and supervising these activities. 

 

Section 201 \-- [Limits on MBLs]{.underline}.

 

Section 201 would increase the current cap on Member Business Loans
(MBLs).  This will allow credit unions to accommodate the expansion in
member demand for these loans that has taken place over the last 10
years.  Without this increase, credit unions' ability to offer this
product will be limited, and in some cases eliminated, forcing members
to go elsewhere to meet their MBL needs. While acknowledging the benefit
to credit unions of increased member business lending, NCUA stands ready
to aggressively exercise the regulatory authority it already has to
regulate this type of lending. This means that we will not hesitate to
impose the supervisory remedies and restrictions necessary to prevent
and address problems, such as those described above, that may accompany
an expansion in member business lending.

 

Section 202 \-- [Definition of MBL]{.underline}.

 

Section 202 would amend the definition of "Member Business Loans" to
increase the minimum balance of such loans to one member from \$50,000
to \$100,000.  This increase will allow member business lending to keep
pace with the increase in unit costs, due to inflation and other
factors, of goods and services typically financed with such loans.
Compared to 10 years ago, the 25 percent of credit unions that make MBLs
(as of 12/31/07) has demonstrated on the whole the ability to manage
that activity safely and soundly. As with increasing the credit union
MBL cap, we appreciate the benefit not only to credit unions, but to
their members, of expanding the minimum size of an MBL.  At the same
time, we stand ready to deploy the array of supervisory remedies and
restrictions NCUA already has to address problems.

 

Section 203 \-- [Restriction on MBLs]{.underline}.

 

Section 203 would grant the Board authority to make exceptions to the
freeze on MBLs that applies when a credit union becomes
"undercapitalized" and remains in place until it returns to "adequately
capitalized."  Giving the Board this flexibility acknowledges that
member business lending is not always the problem that causes a credit
union to become "undercapitalized."  In fact, allowing member business
lending to *increase* may sometimes be part of the solution that returns
a credit union to "adequately capitalized."

 

Section 204 \-- [MBL Exclusion for Loans to Non-Profit Religious
Organizations]{.underline}.

 

Section 204 would exempt loans to non-profit religious organizations in
any amount from a credit union's MBL cap. This exemption will enhance
the availability of loans to religious organizations seeking to acquire
or construct a house of worship.  While these loans would be excluded
from the MBL cap, they remain subject to our supervision to ensure their
safety and soundness.

  

Section 205 \-- [CU Leasing of Space in its Office Buildings Located in
Underserved Areas]{.underline}.

 

Section 205 would permit a credit union that is housed in a building it
owns located in an underserved area to lease out space not used for
credit union operations.  This flexibility will allow credit unions to
make productive use of space not used for credit union operations while
at the same time stimulating the economy of the underserved area where
the space is located.  However, the implementation of this shift from
current policy is subject to Board regulation.

 

Sections 206 and 207 \-- [Amendments Relating to CU Service to
Underserved Areas]{.underline}.

 

Sections 206 and 207 would expressly permit all types of federally
chartered credit unions to adopt "underserved areas." Currently, the Act
permits only federal credit unions with *multiple* common bond charters
to add underserved areas into their fields of membership (FOM); it is
silent about *single-group* and *community* charters from doing so. 
NCUA is emphatic in supporting this statutory change because it fully
implements longstanding Congressional intent to give consumers in
economically disadvantaged areas greater access to credit union service.

 

In 1998 Congress passed the Credit Union Membership Access Act (CUMAA)
in order to codify the authority of NCUA to charter multiple common-bond
credit unions. Pub. L. 105-219, 112 Stat. 914 (1998). CUMAA specifically
authorized certain federal credit unions to add geographically based
"underserved areas" to their FOMs. The concept acknowledges that
geographic areas exist in the United States that exhibit certain
criteria, such as a declining population base or increasing rate of
unemployment, that can result in diminished access by residents and
businesses to financial products and services. However, the final
language of CUMAA expressly authorized only multiple common-bond credit
unions to serve persons or organizations within an area that was
underserved. 12 U.S.C. 1759(c)(2). CUMAA also provided a definition of
an "underserved area.\'\'

 

To reflect CUMAA, NCUA changed its FOM regulations to substitute the
term "underserved area\'\' and its definition for the then-existing
language allowing all charter types to serve low-income communities and
associations. Although the "underserved" designation is not strictly a
function of income level of the residents, it is expected that over time
broader demographic representation among the membership will occur in
FCUs that have added underserved areas.

Through outreach efforts and otherwise, NCUA continued to
conscientiously carry out the intent of Congress to maximize credit
union service to underserved areas. This included continuing to allow
*all three* charter types to adopt them\--just as NCUA had been doing
before CUMAA to maximize credit union service to low-income designated
areas and associations. These efforts were brought to a halt by a
banking industry lawsuit challenging the authority of single group and
community charter credit unions to add underserved areas. As a result of
the lawsuit, NCUA amended its FOM regulation in June 2006 to limit
underserved area expansions only to federally chartered credit unions
serving multiple groups. 

NCUA is convinced that CUMAA's omission of express authority for
single-group and community credit union to serve underserved areas was
an oversight. When CUMMA was enacted, Congress was duly focused on
undoing the impact of the Supreme Court's decision affecting multiple
group charters.[^4] As the legislative history indicates, Congress was
nonetheless aware of NCUA\'s long-standing policy of allowing *all*
federal charters to serve low-income communities and associations, which
were the predecessors to underserved areas. Further, to our knowledge,
no objection was made on the record to a provision in CUMAA that would
have allowed *all* federal charters to adopt underserved areas. Sections
206 and 207, by extending to single-group and community charters the
authority to add underserved areas, would finally correct this
oversight.

  

In addition to maximizing credit union service to underserved, sections
206 and 207 of H.R. 1537 would achieve several other objectives without
imposing additional service requirements. They would eliminate
duplicative and superfluous regulatory requirements; refine the
employment of census track data in making a determination about an
underserved area; and codify the requirement that a branch or service
facility must be established in the underserved area within two years. 

 

 

**Title III \-- Regulatory Modernization**

 

Section 301 \-- [Investments in Securities by FCUs]{.underline}.\
\
Section 301 would authorize the Board, by regulation, to allow FCUs to
invest in certain debt obligations (i.e., a bond, note, debenture or
other non-equity \"investment security\")\--provided they meet the
statutory definition of \"investment grade\" securities\--for their own
accounts.  The section imposes prudent limits of an aggregate maximum of
10% of total assets and a single obligor limit of 10% of net worth. 
With these constraints and further regulatory limitations set by the
Board, the authority to add these types of investments provides FCUs
with a safe means of further diversifying their investment portfolios. A
technical correction is needed to implement this new authority. Section
301 must be amended to conform to the long-standing format of current
section 107 of the Act. The present lack of conformity makes it
impossible to determine where in section 107 this new authority is
supposed to be located.

Section 302 \-- [NCUA Authority to Establish Longer Term Maturities for
CU Loans]{.underline}.

 

Section 302 would give the Board the authority, by regulation, to make
exceptions to the present 15-year maximum maturity on loans.  This will
give the Board the flexibility to allow maturities in excess of 15 years
when necessary to ensure parity with other financial institutions that
are permitted to offer longer maturities (e.g., student loans).  Without
this flexibility, credit union members will have no choice but to rely
on these institutions instead of their credit unions when they need
loans with terms of longer than 15 years.

 

Section 303 \-- [Increase in Lending and Investment Limits in
CUSOs]{.underline}.

 

Section 303 would increase the ceiling on both credit union loans to
Credit Union Service Organizations (CUSO), and credit union investments
in them, from\--in each category\--1% to 2% of the credit union's
paid-in and unimpaired capital and surplus, provided the Board also is
authorized to reduce each ceiling on a case-by-case basis when
appropriate to preserve a credit union's safety and soundness. 
Increasing the ceiling on credit union loans to, and investments in,
CUSOs will enhance their capitalization, in turn expanding the
availability of the resources necessary to perform services and
activities that benefit credit unions and their members.  This will
especially benefit small credit unions by providing the opportunity to
diversify their products and services within a safe and sound regulatory
framework.

 

Section 304 \-- [Voluntary Mergers Involving Multiple Common Bond
CUs.]{.underline}

 

Section 304 would add an exemption from the 3000-member limit on group
additions for any group transferred to a multiple group credit union by
a merger approved by the Board on or after August 7, 1998\-\--the date
CUMMA was signed into law.  When a credit union converts to a community
charter, it is unfair to exclude certain groups from its FOM based on
their size when all groups regardless of size were previously admitted
legally to its FOM.

 

Section 305 \-- [Conversions of Certain CUs to a Community
Charter]{.underline}.

 

Section 305 would give the Board the authority, by regulation, to
determine whether a credit union that converts to a community charter
can continue to add new members from its former member groups located
outside the well-defined local community. This will ensure that group
members outside the community (especially those who became group members
*after* the conversion) will be able to obtain credit union service
after the credit union converts to a community charter (i.e., a "once a
group, always a group" policy).

 

Section 306 \-- [Credit Union Governance]{.underline}

 

Section 306 authorizes credit unions, through a by-law amendment, to
expand their authority to expel a member, by a majority vote of the
board of directors, for just cause, including disruption of a credit
union's operations or nonparticipation in its affairs.  In addition, the
provision authorized credit unions, through a by-law amendment, to limit
the number of consecutive terms a person may serve on the board of
directors.  Permitting these by-law amendments promotes the orderly
functioning of credit unions and is consistent with the existing
governance provisions of the Act.

 

Section 307 \-- [Greater Flexibility for NCUA to Respond to Market
Conditions]{.underline}.

 

Section 307 would expand the Board's authority to establish a temporary
interest rate ceiling higher than 15% under *either* of two
events\--when money market interest rates rise over the preceding 6
months *or* when prevailing interest rate levels threaten the safety and
soundness of individual credit unions\--instead of both, as is presently
required.  Untying these two conditions improves the Board's flexibility
to timely respond when an exception to the 15% rate ceiling will ensure
that credit unions remain both safe and sound and competitive with other
financial institutions. 

Section 308 -- [Credit Union Conversion Voting
Requirements]{.underline}.

 

NCUA supports requiring a minimum of 30% membership participation in a
vote to convert to a bank in order for a majority vote of those who
participate to approve the proposal.  We further support requiring a
credit union that proposes to convert to hold a Special Meeting of the
membership at least 30 days prior to issuing members their ballots, and
to give notice of the Special Meeting in the notices the credit union
already is required to send to its members.  Finally, we support a ban
on offering a voting incentive to members in any form in connection with
the membership vote on a conversion proposal.  Given that converting to
a bank is a shift in a credit union's fundamental structure, all three
measures maximize membership representation, awareness, and freedom from
undue influences when members faced with such a crucial proposal.

 

This section requires a technical correction.  Section 308 refers to the
parallel U.S. Code citation for section 205(b)(2) of the Act as \"12
U.S.C. 1785(b)(2)(B)\", when in fact subsection (B) at the end should be
omitted.

 

Section 309 \-- [Exemption from Clayton Act Pre-Merger Notice
Requirement]{.underline}.

 

Section 309 would amend the Clayton Antitrust Act to exclude voluntary
credit union mergers from its pre-merger notification requirement. 
Under this requirement, merging credit unions must file data with the
Federal Trade Commission, at considerable effort and expense, so that
agency can assess the merger's impact on competition in the financial
services market.  Excluding credit unions from the Clayton Act would
relieve them of the need to comply with these burdensome notification
and filing requirements.

Section by Section Review of H.R. 1849 \--

Credit Union Small Business Lending Act

H.R. 1849 would implement the Credit Union Small Business Lending Act.
That statute would amend sections 107 and 107A of the Act, 12 U.S.C.
1757, 1757a, and section 7(a) of the Small Business Act, 15 U.S.C.
636(a), to improve small business lending and cooperation between NCUA
and the Small Business Administration (SBA), as follows:

-   Section 2 excludes from the Act's definition of MBL any loan made in
    cooperation with the SBA under section 7(a) of the Small Business
    Act;

-   Section 3 directs the SBA to implement an outreach program to
    increase credit union participation in the SBA's section 7(a) loan
    program and to simplify the application process for credit unions;

-   Section 4 directs SBA to provide up to an 85% guaranty for loans
    made by a credit union up to \$250,000 to a member residing in an
    underserved area, or where the member's business that is receiving
    assistance is located in an underserved area;

-   Section 5 clarifies that a federal credit union making a loan
    secured by the insurance, guarantee, or advance commitment to
    purchase by the federal government or a state government (or agency
    of either) may make the loan under the terms and conditions
    specified in the law *and applicable regulations* under which the
    insurance, guarantee, or commitment is provided.

This bill will enhance credit unions' ability to serve their members'
small business loan needs in a safe and sound manner.

Finally, a remaining obstacle to credit union participation in the SBA's
Certified Development Company (CDC)/504 loan program (CDC/504 program)
warrants attention. That program is a long-term financing tool for
economic development within a community.  It provides businesses with
long-term, fixed-rate financing for major fixed assets, such as land and
buildings. CDCs, which are non-profit organizations, work with the SBA
and private-sector lenders to provide financing to small businesses.\
\
Typically, a 504 project includes a loan secured with a senior lien from
a private-sector lender covering up to 50 percent of the project cost, a
loan secured with a junior lien from the CDC (backed by a 100 percent
SBA-guaranteed debenture) covering up to 40 percent of the cost, and a
contribution of at least 10 percent equity from the small business being
helped.

 

Credit unions already participate as private-sector lenders in the
CDC/504 program. However, because the credit union's underlying 504
loans are not SBA-guaranteed, credit unions must count its 504 loans
toward its aggregate cap on MBLs. This discourages, and in some cases
precludes, a credit union from making this type of community development
loan.

Review of H.R. 3113\--

Affordable Financial Services Enhancement Act

H.R. 3113 would implement the Affordable Financial Services Enhancement
Act. If enacted, that law would achieve the same purpose as section 206
of H.R. 1537\-- extending to single-group and community charters the
authority to add and serve underserved areas. H.R. 3113 would accomplish
that by amending section 109(c)(2) of the Act, 12 U.S.C. 1759(c)(2), to
exclude the "field of membership category" limitation\--currently
limited to multiple group charters\--thus allowing all credit unions,
regardless of charter type, to serve underserved areas.

Section by Section Review of H.R. 5519 \--

Credit Union Regulatory Relief Act of 2008

Section 2 \-- [Investments in Securities by FCUs]{.underline}.

Same as section 301 of H.R. 1537 discussed above.

Section 3 \-- [Increase in Investment Limit in CUSOs]{.underline}.

Same as section 303 of H.R. 1537 discussed above, except that: (1) the
ceiling on CU loans to, and investments in, CUSOs would each be raised
to from 1 percent to 3 percent of paid-in and unimpaired capital and
surplus (instead of to 2 percent); and (2) the Board would not be given
the authority to reduce each ceiling on a case-by-case basis when
appropriate to preserve a credit union's safety and soundness.

Section 4 \-- [MBL Exclusion for Loans to Non-Profit Religious
Organizations]{.underline}.

Same as section 204 of H.R. 1537 discussed above.

Section 5 \-- [NCUA Authority to Establish Longer Maturities for Certain
CU Loans]{.underline}.

Same as section 302 of H.R. 1537 discussed above, except that the
Board's authority to make exceptions to the present 15-year maximum
maturity on loans would be subject to any provision of the Act that
provides otherwise.

Section 6 \-- [Providing NCUA With Greater Flexibility in Responding to
Market Conditions]{.underline}.

Same as section 307 of H.R. 1537 discussed above.

Section 7 \-- [Conversions Involving Certain CUs to Community
Charter]{.underline}.

Same as section 305 of H.R. 1537 discussed above, except for the
omission of the clarifying phrase "permitting new members to be added to
such groups" (page 17, lines 4-5, of H.R. 1537). NCUA is concerned that
the absence of this phrase may be misinterpreted to mean that a credit
union can serve only those group members who joined prior to its
conversion to a community charter\--a result no different than the Act's
"once a member, always a member" policy already allows.

Section 8 \-- [Credit Union Participation in the SBA Section 504
Program]{.underline}.

Same as section 5 of H.R. 1849 discussed above.

Section 9 \-- [Amendments Relating to CU Service to Underserved
Areas]{.underline}.

Section 9 departs significantly from section 206 of H.R. 1537 discussed
above. Both section 206 and section 9(a) would exclude the "field of
membership category" limitation\--currently limited to multiple group
charters\--for service to underserved areas (as H.R. 3113 also would)
and would impose a 2-year deadline for establishing a credit union
office or facility within the underserved area. If that 2-year deadline
were not met, section 9(a) also would mandate termination of the
approval to serve the underserved area.

But section 9(a) then goes much further, imposing minimum net worth and
underserved area reporting requirements:

-   To serve an underserved area, a credit union must have a net worth
    classification of at least "adequately classified";

-   Once a credit union is approved to serve an underserved area, it
    must annually report to NCUA the number of its underserved members
    and the number of offices and facilities it maintains in its
    underserved area(s);

-   NCUA must annually publish a report listing the underserved area
    applications it has approved, the number and location of underserved
    areas it has taken into account in approving such applications, and
    the total number of all credit union members within underserved
    areas.

While NCUA agrees that it is critically important that credit unions
make every reasonable effort to fully serve their entire FOM, including
underserved areas, we must reserve judgment on the specific requirements
of section 9(a), which were only recently received by NCUA, pending
further analysis and consideration by the NCUA Board.

Section 9(b), which modifies the Act's present definition of
"underserved area," is substantially similar to section 207 of H.R. 1537
and section 4 of H.R. 1849 (which amends the Small Business Act). Each
provision retains the present "investment area" criterion, but replaces
the present "underserved by other depository institutions" criterion
with a "low income community" criterion derived from the Internal
Revenue Code.

Section 10 \-- [Short-Term Payday Loan Alternatives Within the
FOM]{.underline}.

Section 10 gives the Board, in addition to its existing authority to
cash money transfer instruments, 12 U.S.C. 1757(12)(B), the authority,
by regulation, to "provide short-term loans as an alternative to payday
loans."

Section 11 \-- [Credit Union Governance]{.underline}.

Same as section 306 of H.R. 1537 discussed above.

Section 12 \-- [Encouraging Small Business Development in Underserved
Urban and Rural Communities.]{.underline}

Section 12 affects section 2 of H.R. 1849, which would exclude from the
Act's MBL definition any SBA section 7(a) loan. Instead, section 12
excludes from the MBL definition a commercial, corporate, business, farm
or agricultural loan to a member provided any of the following
conditions is met: the member either resides or does business within an
underserved area; the loan is secured by real property located within
such underserved area; or the loan will be used to operate a business
located within such underserved area.

Comparing the difference in scope between the two sections, section 12
excludes more than just SBA loans, but all the loans it excludes must be
tied to an underserved area. Section 2 of H.R. 1849, in contrast,
excludes only one category of loans\--SBA section 7(a) loans\--but they
are excluded without regard to an underserved area. NCUA is concerned
that section 12, as currently written, would unnecessarily sacrifice the
exclusion for Government-guaranteed section 7(a) loans.

Section 13 \-- [Exemption from Pre-Merger Notification Requirement of
Clayton Act]{.underline}.

Same as section 309 of H.R. 1537 discussed above.

[Conclusion]{.underline}

 

NCUA has reviewed the various legislative proposals in the 110^th^
Congress that address the issue of regulatory relief for credit unions.
These proposals contain provisions that represent significant and
positive improvements to NCUA's ability to regulate and supervise credit
unions, and to carry out Congressional intent as expressed in the
Federal Credit Union Act. 

 

In particular, NCUA supports those provisions that grant greater
flexibility to NCUA in the regulation of the capital structure of
federally insured credit unions while at the same time allowing those
credit unions to more accurately assess balance sheet risk.  NCUA also
supports legislation restoring the ability of credit unions to extend
membership in underserved areas, in concert with longstanding
Congressional interest in credit unions having a responsibility to
provide financial services to consumers of modest means.  NCUA supports
legislation that modernizes a wide variety of credit union investment
and lending options within regulatory framework that enables NCUA to
perform the necessary supervision to preserve credit union safety and
soundness.

 

NCUA appreciates this opportunity to present our views to Congress, and
stands ready to answer questions regarding its perspective on these
beneficial and forward looking legislative proposals.

[^1]: Approximately 170 state-chartered credit unions are privately
    insured and are not subject to NCUA oversight.

[^2]: The amount of change in a credit union's leverage ratio between
    the current and proposed calculations is dependent upon the level of
    insured shares.  The new calculation would result in the same
    leverage ratio threshold if a credit union had no insured shares.
    The largest reduction from the current leverage ratio to the
    calculated leverage ratio would occur when a credit union has all
    insured shares.  Under the proposed calculation, over 92 percent of
    credit unions would realize a reduction in the leverage ratio from
    50 basis points to 90 basis points with an average reduction of 75
    basis points.

[^3]: For example, recent guidance in *Letter to Credit Unions CU-07-13*
    emphasizes the importance of credit unions themselves assuming the
    responsibility to conduct its due diligence evaluation of a lending
    activity, even when that activity is otherwise done through a third
    party vendor, to ensure that the credit union fully understands the
    structure, practices and financial condition of the third party.  

[^4]: [NCUA v. First National Bank & Trust Co.]{.underline}, 522 U.S.
    479 (1998).