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96–548 PDF 2004

CREDIT UNION REGULATORY IMPROVEMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 20, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–103

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

STEVEN C. LATOURETTE, Ohio, Vice 

Chairman 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

WALTER B. JONES, JR, North Carolina 

JUDY BIGGERT, Illinois 

PATRICK J. TOOMEY, Pennsylvania 

VITO FOSSELLA, New York 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

ARTUR DAVIS, Alabama 

JOE BACA, California 

CHRIS BELL, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

July 20, 2004 ..................................................................................................... 1

Appendix: 

July 20, 2004 ..................................................................................................... 31

WITNESSES 

TUESDAY, JULY 20, 2004

Cheney, Bill, President and CEO, Xerox Federal Credit Union (CA) on behalf 

of the National Association of Federal Credit Unions ...................................... 19

Custer, Sharon, President and CEO, BMI Federal Credit Union (OH), on 

behalf of the Credit Union National Association ............................................... 17

Jackson, William E. III, Associate Professor of Finance and Economics KenanFlager Business School, University of North Carolina, Chapel Hill ................ 21

Johnson, Hon. JoAnn, Chairman, National Credit Union Administration ......... 5

Little, Roger W., Deputy Commissioner of Credit Unions, Michigan Office 

of Financial and Insurance Services, on behalf of the National Association 

of State Credit Union Supervisors ...................................................................... 8

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 32

Oxley, Hon. Michael G. .................................................................................... 35

Gillmor, Hon. Paul E., ...................................................................................... 36

Hinojosa, Hon. Rube ́n ....................................................................................... 38

Paul, Hon. Ron .................................................................................................. 39

Sanders, Hon. Bernard ..................................................................................... 40

Cheney, Bill ....................................................................................................... 44

Custer, Sharon .................................................................................................. 63

Jackson, William E. III .................................................................................... 120

Johnson, Hon. JoAnn ....................................................................................... 139

Little, Roger W. ................................................................................................ 160

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Cheney, Bill: 

Financial Accounting Standards Board letter, April 27, 2004 ...................... 171

Custer, Sharon: 

Written response to questions from Hon. Spencer Bachus ........................... 174

Johnson, Hon. JoAnn: 

Written response to questions from Hon. Judy Biggert ................................ 179

American Bankers Association, letter July 15, 2004 ............................................ 182

America’s Community Bankers, prepared statement ........................................... 185

Independent Community Bankers of America, prepared statement ................... 189

(1)

CREDIT UNION REGULATORY 

IMPROVEMENTS 

Tuesday, July 20, 2004

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to call, at 2:05 p.m., in Room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] Presiding. 

Present: Representatives Bachus, Royce, Biggert, Kennedy, 

Hensarling, Brown-Waite, Sanders, Maloney, Watt, Ackerman, 

Lucas of Kentucky, Sherman and Davis. 

Chairman BACHUS. Good morning, I want to call the Subcommittee on Financial Institutions to order. 

We have a series of votes on the floor, but what hopefully we can 

do to expedite things is to give opening statements; then when we 

come back, we will go right to the testimony. 

I want to start by thanking the witnesses for being here today 

to discuss regulatory improvements to the credit union system. I 

would like to extend a special welcome to NCUA Administrator, 

Chairman Joann Johnson, who is making her first appearance before this subcommittee after taking over leadership at the NCUA 

earlier this year from Chairman Dennis Dollar. And we are excited 

about your chairmanship. 

Credit unions are a vital part of our Nation’s financial service infrastructure. As nonprofit cooperatives managed by their members, 

credit unions excel at providing the services families and small 

businesses need most. 

I have got many constituents who tell me that it was very important for them—their credit union was very important to them in 

being able to afford a new home, a purchase that would allow their 

children to attend college, or to obtain a loan for various and sundry things. 

Not surprisingly, the Nation’s almost 100,000 credit unions consistently rank high in customer satisfaction surveys and play a particularly important role in expanding the financial alternatives 

available in historically underserved urban and rural areas. And a 

member of one of our panels, Bill Cheney’s credit union recently 

reached out to four underserved areas, and I commend you for that, 

Mr. Cheney. 

Under Chairman Oxley’s leadership, this committee has been at 

the forefront of efforts to improve the regulatory environment in 

2

which credit unions operate, thereby enhancing their availability to 

meet the needs of their more than 80 million members nationwide. 

In addition to passing a deposit insurance reform bill out of the 

House that gives credit unions full parity with their bank and 

thrift counterparts, the committee developed bipartisan legislation 

affording significant regulatory relief to credit unions, banks, and 

thrifts. That legislation, H.R. 1375, was spearheaded by two members of the subcommittee, Ms. Capito of West Virginia and Mr. 

Ross of Arkansas. 

It passed the House last March with over 400 votes, thanks in 

no small part to the enthusiastic support and grass-roots efforts of 

the credit union industry. Among other provisions, H.R. 1375 expands credit unions’ investment authority, increases the general 

limit on the limit of credit union loans from 12 to 15 years, authorizes credit unions to provide check cashing and money transfer 

services to nonmembers so long as they are within the credit 

union’s field of membership, permits privately insured credit 

unions to join the Federal Home Loan Bank system, and excludes 

loans made to nonprofit religious organizations from the limits that 

otherwise apply to credit unions’ commercial lending authority. 

The bill also includes a provision that I first offered as an 

amendment when the Judiciary Committee marked up the regulatory relief bill in the 107th Congress granting the credit unions 

the same exemptions from premerger notification requirements 

that banks and thrifts already enjoy under Federal antitrust laws. 

Last November, Congressman Royce and Congressman Kanjorski, two respected members of this subcommittee, introduced 

H.R. 3517, the Credit Union Regulatory Improvement Act, which 

mirrors in many respects the credit union provisions of H.R. 1375 

but also includes several additional regulatory reforms. For example, H.R. 3579 would increase the aggregate level of commercial 

loans that a credit union could make to its members from approximately 12 percent of total assets to 20 percent, as well as establish 

a risk-based approach for measuring credit union capital. 

While action this year on H.R. 3579 is unlikely, given the limited 

amount of time remaining in the congressional calendar, today’s 

hearing will allow the subcommittee to hear the perspectives of 

credit union regulators and industry representatives on the legislation and other proposals for improving credit union regulation. 

Today’s hearing is also an appropriate bookend to a hearing that 

the subcommittee held in May focusing on the crippling regulatory 

burdens faced by America’s small community banks. Taken together, these hearings demonstrate this committee’s continued 

commitment to identifying and eliminating outdated or unnecessary regulatory requirements which will serve ultimately to benefit 

American consumers in the form of more innovative financial products and services offered at more competitive prices. 

At this time, we are going to recess the committee for the floor 

vote. When we get back, we will either hear from the Ranking 

Member of the subcommittee, Mr. Sanders, for any opening statement he may have, or go directly to our first panel. We ask for your 

patience and indulgence. This subcommittee hearing is recessed. 

Thank you. 

[Recess.] 

3

[The prepared statement of Hon. Spencer Bachus can be found 

on page 32 in the appendix.] 

Chairman BACHUS. The Subcommittee on Financial Institutions 

will come to order. At this time, I would like to recognize—I should 

have looked up right away. I would like to recognize Mr. Sanders, 

the Ranking Member, for any opening statement he wishes to 

make. 

Mr. SANDERS. Thank you very much, Mr. Chairman. And thank 

you for holding this important hearing on one of the most significant, I think, and successful and important institutions in the 

United States, and that is our credit unions. And I am proud to be 

a cosponsor of H.R. 3579, the Credit Union Regulatory Improvement Act, and I applaud Congressman Ed Royce and Paul Kanjorski for their leadership in introducing this legislation. 

Mr. Chairman, America’s credit unions are one of the most vital 

and most democratic institutions in a country which in many ways 

is becoming less democratic. Without the need to focus on having 

to make huge profits, without heavy advertising costs, without 

huge bonus packages to corporate executives, credit unions can and 

are providing loans at lower rates than other financial institutions 

and in that way improving the lives of millions of Americans. 

Today I am pleased to report that credit unions are stronger 

than ever and serving more people than ever. There are over 9,000 

credit unions in existence today, serving over 80 million Americans. 

Now, I know, Mr. Chairman, and I am sure this is an issue that 

will come before this committee, that some of our large banking 

friends and their lobbyists here are saying, gee, $627 billion in assets for credit unions; we have got to tax them. It ain’t fair. We are 

paying taxes and these guys are not. 

Well, you know, Mr. Chairman, the truth is that credit unions 

pay property taxes, they pay sales taxes, they pay payroll taxes. 

They are exempt from Federal income taxes for good reasons and 

not because anyone is doing them a special favor. Credit unions are 

tax exempt because they are nonprofits, just like churches and hospitals and libraries and universities and other nonprofit institutions. Federal law exempts credit unions from Federal taxes, and 

in my view we have to maintain that exemption. 

You know, the big banks will then tell us, gee, it is not fair, but 

somehow or another the big banks forget to tell us that the Federal 

Government through the savings and loan bailout, through the financial collapse in Asia, that the taxpayers of this country have 

spent tens and tens of billions of dollars bailing out big banks who 

are investing all over the world, propping up dictatorships, giving 

their CEOs huge compensation packages. I don’t recall that we are 

spending billions of dollars bailing out the Adamant Credit Union 

in Adamant, Vermont. And I don’t recall that we are bailing out 

other credit unions. 

The bottom line here is that credit unions serve the community 

in a nonprofit way to provide inexpensive financial services to the 

people who own the institution. Very different from large banks. 

So, Mr. Chairman, I don’t know which side we are going to be 

on, if we are going to be opposing each other on this issue, but 

when this issue comes before this body, I am going to do everything 

I can to make sure that the credit unions of this country are not 

4

taxed. And with that, I just ask unanimous consent to lay my full 

remarks into the record. 

Chairman BACHUS. Thank you. There is no objection to your unambiguous remarks going into the record. 

[The prepared statement of Hon. Bernard Sanders can be found 

on page 40 in the appendix.] 

Chairman BACHUS. Mr. Royce, do you have an opening statement? 

Mr. ROYCE. I do, Chairman Bachus. I thank you. I thank you for 

the hearing, too. And I appreciate Chairman Oxley, his acquiescence in holding this timely hearing on regulatory challenges that 

face credit unions. Credit unions now serve over 85 million Americans, and this makes that particular industry a very important 

part of our Nation’s financial system. They are an engine of economic activity, an engine of growth for America. They help our constituents finance the purchase of homes and cars and save for college and save for retirement, and, I think, equally as important, 

help access savings for small business investment. The capital they 

provide there is very, very critical. 

Last November, Mr. Kanjorski and I co-authored H.R. 3579, the 

Credit Union Regulatory Improvements Act. They are calling it 

CURIA. This would modernize Federal regulation of chartered 

credit unions, and the legislation is needed to help credit unions 

better serve their members. 

I would like to point out two important provisions of this bill. 

The first is that this would allow the National Credit Union Administration to create a risk-based capital standard for credit 

unions. The National Credit Union Administration could then determine the relative risk of a credit union’s assets and improve the 

safety and soundness of credit unions and the safety of the National Credit Union Share Insurance Fund. 

In addition to that, the bill would eliminate the current asset 

limit on member business loans at a credit union from a lesser of 

1.75 times actual net worth or 1.75 times net worth required for 

well-capitalized credit union, and it would replace that with a flat 

rate of 20 percent of the total assets of the credit union. 

It was important to me that any changes made would satisfy two 

conditions. First, the change would remove unnecessary regulatory 

burdens that inhibit credit unions from serving their members. 

And, two, any changes would not have the potential to put the safety and soundness of the credit union system at risk. Both industry 

and regulatory officials have offered positive feedback on both 

counts, and I look forward to further comments from our distinguished panels of witnesses today. 

And again, Chairman Bachus, thank you for having this hearing, 

and I yield back. 

Chairman BACHUS. I appreciate that, Mr. Royce. 

Mr. Sherman do you have an opening statement? 

Mr. SHERMAN. I have a very brief opening statement, and that 

is that, as other speakers have said, credit unions play a critical 

role. We have to help them play that role more efficiently and to 

meet some financial services needs that are not currently being 

met. And that is why I want to commend Mr. Royce and others for 

5

giving us an opportunity to sweep away some of the regulatory 

problems so they can do that. 

Mr. SANDERS. Chairman, his remarks are too brief. Doesn’t he 

have to go on for 2 more minutes? 

Chairman BACHUS. Go on. 

Mr. SHERMAN. I can prove that this is Brad Sherman and not an 

impostor, although the length of my statement would argue. 

Chairman BACHUS. Are there other members who wish to make 

opening statements? If not, we will go to the introduction of our 

first panel. 

Our first panelist is the Honorable JoAnn Johnson, Chairman of 

the National Credit Union Administration. President George W. 

Bush named Ms. Johnson appointee to the NCUA Board January 

22nd, 2002. That appointment was confirmed by the U.S. Senate 

on March 22, 2002. Senator Johnson was named NCUA Board vice 

chairman in January of 2003 and the agency’s chairman on May 

3, 2004. 

The Board consists of three members appointed by the President 

and confirmed by the Senate. And they regulate all federally chartered credit unions and administer the Federal Insurance Fund for 

approximately 9,500 credit unions nationwide. 

Senator Johnson, elected to the Iowa Senate in 1994, chaired 

both the Senate Ways and Means Committee and the Senate Commerce Committee. As a former teacher, she taught physical education and coached a number of sports, actively involved in family 

farming, and served her community as a 4-H leader, director of the 

local Food Pantry, Economic Development Board member, school 

teacher, library board member, school board member, university 

alumnae board member, received her bachelor’s degree from the 

University of Northern Illinois. She has two adult children, Clint 

and Brooke, you and your husband. So, we welcome you. 

Our next panelist is Deputy Commissioner Roger W. Little, 

Chairman of the National Association of State Credit Union Supervisors. Mr. Little has worked for the Office of Financial and Insurance Services since 1984. He is a Deputy Commissioner and directs 

the Credit Union Division which regulates Michigan’s 268 Statechartered credit unions. 

He began his OFIS career as a credit union examiner, later serving as regional supervisor in both the Credit Union and Bank And 

Trust divisions. He graduated with honors from Central Michigan 

University, and is a CPA. He also completed a graduate School of 

Banking program at Louisiana State University. He currently 

serves as Chairman of the NASCUS Board of Directors. 

He and his wife Linda have been married 32 years, they have 

two daughters and reside in central Michigan. 

Chairman BACHUS. We welcome both of you. And, Chairman 

Johnson, we will start with your testimony. 

STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL 

CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Chairman Bachus, Representative Sanders, and 

members of the subcommittee, thank you for inviting me to appear 

before you today. 

6

On behalf of the National Credit Union Administration, I am 

pleased to provide information on the condition of the credit union 

industry and our agency’s views on regulatory efficiency recommendations and the Credit Union Regulatory Improvements Act 

of 2003. 

My written comments, previously provided to you, cover a number of issues, some of which I will highlight for you today. It is my 

strong belief that effective, not excessive, regulation should be the 

underlying principle supporting NCUA’s critical mission of ensuring the safety and soundness of federally insured credit unions. 

In addition to participating with the other four financial institution regulatory agencies in the review project mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, 

NCUA scrutinizes one-third of NCUA existing regulations annually 

to find ways to simplify or improve any rule that is outdated or in 

need of revision. To date, this internal process has brought about 

important regulatory reform for credit unions in many of NCUA’s 

rules, including those on lending, share accounts, and incidental 

powers. 

I am pleased to report to the subcommittee the state of the credit 

union industry remains strong and healthy. Our indicators show 

that credit unions, which serve nearly 83 million Americans, are 

safe and sound and well positioned for continued strength and vitality in our Nation’s financial marketplace. 

The National Credit Unions Share Insurance fund also remained 

strong as of December 31, 2003. The fund had a ratio of 1.27 percent equity ratio. As of May 31, 2004, the equity ratio grew to 1.29 

percent. 

CURIA addresses some of the most compelling issues being discussed in the credit union industry today, including risk-basing 

credit union net worth for purposes of prompt corrective action. 

Section 301 of CURIA would address inequities in the operation 

of the current system of setting net worth standards by establishing a risk-based system for PCA. 

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 though adjustments to their assets and activities. 

While NCUA is continuing to develop its specific recommendations, we suggest that the leverage ratio below which a credit union 

is critically undercapitalized remain at its current 2 percent and 

that the minimum leverage ratio for a well-capitalized credit union 

be set at 5 percent. 

Federal credit unions have been authorized since 1934 to make 

member business loans and have had a successful record of meeting the small business loan needs of their members. NCUA has 

issued regulations establishing safety and soundness standards for 

member business lending as a result of some losses on business 

lending beginning in the early 1980s. 

Those regulations have been successful in ensuring that credit 

union business lending is carried out in a safe and sound manner 

that does not present undue risk to the National Share Insurance 

Fund. In fact, since the time that NCUA issued its regulation, deVerDate 0ct 09 2002 11:11 Nov 05, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\96548.TXT FIN1 PsN: MICAH
7

faults for member business lending have consistently been lower 

than the ratios for member loans generally. 

In 1998, the Credit Union Membership Access Act established an 

aggregate cap on member business lending of 12.25 percent of total 

assets for well-capitalized credit unions. NCUA continues to believe, as it did in 1998, that a cap on business lending is unwarranted and hampers the ability of individual credit unions to meet 

the varying needs of their membership. However, raising the cap 

to 20 percent of total assets and increasing the threshold below 

which an individual loan is not treated as a business loan for the 

purposes of the cap from the current $50,000 level to that of 

$100,000, as proposed by CURIA, are vast improvements. 

The time-sensitive recommendation in my testimony today stems 

from the Financial Accounting Standards Board proposed change in 

the accounting treatment of credit union mergers. This is a recent 

development; therefore, it has not previously been included in recommendations NCUA has submitted for your review. 

FASB’s change will in effect prevent credit unions from moving 

forward with mergers which are clearly in the best interest of their 

members. Specifically, the change will provide that when two credit 

unions merge, their retained earnings of the discontinuing credit 

union would not be included in the postmerger net worth. FASB 

expects to implement this change as early as January 2006. FASB 

has indicated it supports a legislative solution and that such a solution will not impact their standards-setting activities. NCUA has 

suggested statutory language as well as report language clarifying 

the limited purpose of this amendment to maintain net worth as 

it is. That language is attached to and has been made a part of my 

written testimony for the committee’s consideration. 

An important area where NCUA does not have jurisdiction comparable to the other financial regulators involves third-party vendors. NCUA does not have direct authority to examine third-party 

vendors that provide services to federally insured credit unions. 

Statutory authority previously existed for NCUA, but under a sunset provision expired in 2001, we are currently required to work 

through credit unions to obtain vendor information or seek voluntary cooperation from vendors. We believe that in these times, 

privacy, money laundering, and financing of terrorism are issues of 

paramount national interest as well as general safety and soundness concerns. 

NCUA should have direct examination authority over those vendors providing services for federally insured credit unions. A restoration of NCUA’s examination authority would provide parity 

with other financial regulators and would eliminate the need for us 

to approach the matter indirectly through credit unions, thus providing some measure of regulatory relief. This is consistent with 

the October 2003 GOA report which states that Congress may wish 

to consider granting this authority. 

NCUA has reviewed all of the additional credit union provisions 

included in the House-passed bill, and the agency has no safety 

and soundness concerns with these provisions. 

Mr. Chairman and members of the committee, thank you for allowing me to testify today and address these important regulatory 

reform issues. We hope to gain your support for these recommendaVerDate 0ct 09 2002 11:11 Nov 05, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\96548.TXT FIN1 PsN: MICAH
8

tions, and I would be pleased to assist your further deliberations 

on these in any way. Thank you very much. 

Chairman BACHUS. Thank you. 

[The prepared statement of Hon. JoAnn W. Johnson can be found 

on page 139 in the appendix.] 

Chairman BACHUS. Deputy Commissioner Little. 

STATEMENT OF ROGER W. LITTLE, DEPUTY COMMISSIONER 

OF CREDIT UNIONS, MICHIGAN OFFICE OF FINANCIAL AND 

INSURANCE SERVICES, REPRESENTING THE NATIONAL ASSOCIATION OF STATE CREDIT SUPERVISORS 

Mr. LITTLE. Good afternoon, Chairman Bachus and distinguished 

members of the Financial Institutions and Consumer Credit Subcommittee. Again, I am Roger Little, Deputy Commissioner of 

Credit Unions for the Michigan Office of Financial and Insurance 

Services. I appear today on behalf of the National Association of 

State Credit Union Supervisors, or NASCUS. 

NASCUS applauds the introduction of the proactive credit union 

legislation in H.R. 3579. My written testimony includes our views 

in support of the provisions that affect State-chartered credit 

unions contained in this bill. My comments today focus specifically 

on the importance of capital reform for credit unions. 

NASCUS has studied the risk-based capital reform proposal outlined in H.R. 3579, and NASCUS supports a risk-weighted capital 

regime for credit unions. H.R. 3579 changes the term ‘‘net worth’’ 

in section 216 of the Federal Credit Union Act from being the ratio 

of credit union net worth to total assets of the institutions to being 

the ratio of net worth to risk assets of the credit union. In effect, 

this establishes a risk-based capital system for credit unions. 

The existing PCA and net worth numerical categories in the statute would remain unchanged; however, NCUA would establish the 

new risk-weighting categories hopefully in a manner similar to 

those used by banks and thrifts. 

State regulators would assist the NCUA in crafting these regulations. The existing Credit Union Membership Access Act requires 

the NCUA to consult and cooperate with State regulators in the 

crafting of PCA and member business lending regulations. This cooperation between the NCUA and State agencies, many of whom 

also regulate bank and thrift institutions, will help ensure a safe 

and sound process for determining the risk-weighting categories. 

The proposed bill does not change the definition of net worth to 

permit credit unions to count alternative types of capital for PCA 

purposes, however, and NASCUS believes that it should. NASCUS 

strongly supports alternative capital for credit unions. We believe 

it is complementary to a risk-based capital system and in no way 

conflicts with proposals outlined in H.R. 3579. 

A combination of PCA requirements established by Congress for 

credit unions in 1998 and significant deposit growth has created a 

financial and regulatory dilemma for many State-chartered credit 

unions. With the economic downturn and the flight to safety from 

the stock market, credit union member savings are growing rapidly 

and many credit unions are reporting reduced net worth ratios as 

earnings retention lags growth in assets. Many State-chartered 

9

credit unions will not be able to rely solely on retained earnings to 

meet the capital base required under the current PCA standards. 

As a financial institution’s regulator, it makes no business sense 

to deny credit unions the use of other forms of capital to improve 

their safety and soundness. We should take every financially feasible step to strengthen the capital base of this Nation’s credit 

union system. 

NASCUS also supports amending the definition of net worth to 

cure the unintended consequences for credit unions of business accounting rules the Financial Accounting Standards Board will 

apply to combinations of mutual enterprises. I will refer you to my 

written testimony for more information about these unintended 

consequences of FASB’s rules on credit union mergers. I do note 

that FASB also supports such an amendment. 

NASCUS firmly believes that nonfederally insured credit unions 

should be eligible to join the Federal Home Loan Banks. I note this 

is not a new precedent, since 86 insurance companies, none of 

which are federally insured, are now members of the Federal Home 

Loan Bank system. We would appreciate your support by including 

this proposal in H.R. 3579. 

Finally, recent preemptive actions of the Office of the Comptroller of the Currency have a potentially significant impact on the 

dual-chartering system for commercial banks. We are concerned 

this could open the door to similar actions by the Federal credit 

union regulator unless Congress intervenes. 

Determining the extent to which such additional Federal banking 

power should be granted by the OCC is an important matter for 

all of those who support the dual-chartering system for depository 

institutions. The importance of this matter dictates that Congress 

should resolve these conflicts. 

This concludes my remarks. NASCUS appreciates the opportunity to testify today. We welcome further participation and dialogue. We urge this subcommittee to protect and enhance the viability of the dual-chartering system for America’s credit unions by 

acting favorably on the provisions we have outlined in our written 

and oral testimony. 

I will be happy to respond to any questions the committee may 

have. Thank you. 

Chairman BACHUS. Thank you. 

[The prepared statement of Roger W. Little can be found on page 

160 in the appendix.] 

Chairman BACHUS. I will start out by asking this question. There 

has been quite a lot of discussion by some of the banking organizations over credit unions eating into their market share, taking over 

business. And the reason that I think they have advanced those is 

in resistance to some of these proposals and some of the proposals 

in the Royce bill. 

In reading the testimony of Mr. Cheney about market share, I 

would like to read something from his testimony and ask you to 

comment on that and give me your response to whether you think 

it is accurate or not. 

According to data obtained from the Federal Reserve Board during the 23-year period from 1980 to 2003, the percentage of total 

10

household financial assets held by credit unions increased from 1.4 

to 1.6 percent, or merely 0.2 percent, over the course of 23 years. 

That at least, if that is accurate, that to me gives indication that 

the credit unions are not capturing market share from anyone. 

What is your comment? That is one—Mr. Sanders mentioned the 

whole idea of tax exemptions and that the tax exemption is giving 

an unfair advantage to the credit unions. 

Mr. LITTLE. A couple of comments on that, Mr. Bachus. The evidence as indicated by banks’ continuing reporting of record profits 

quarter after quarter would seem to indicate that they are doing 

relatively well in the markets that they have. My understanding of 

the Federal Tax Code is that the tax exemption for credit unions 

is not based in any way on the products or services or market 

share of credit unions. It is based on the ownership structure and 

the fact that they are cooperatives of a financial nature, rather 

than another nature. As a regulator, we have a neutral position on 

tax policy, but I don’t think the argument is very persuasive in 

terms of market share. 

Ms. JOHNSON. Mr. Chairman, I would like to add just a little bit 

in the area of the member business lending, because I know there 

has been some opposition to raising the limits in the member business lending area in particular. 

Member business loans granted by credit unions currently 

amount to, based on loans to total assets, less than 3 percent. For 

the banking industry, it currently stands at over 20 percent of their 

assets. The number of credit unions, or the percentage of credit 

unions that are currently involved in member business lending is 

approximately 17 percent, a little over 1,600 credit unions. So it is 

actually——

Chairman BACHUS. One in six. 

Ms. JOHNSON. Right. It is a small part of the market. 

Chairman BACHUS. All right. Is your information pretty much in 

keeping with this data and what it seems to indicate; that credit 

unions don’t appear at least to be expanding their market share? 

Ms. JOHNSON. Credit unions continually look for ways to serve 

their members. 

Chairman BACHUS. I understand that. 

Ms. JOHNSON. But the market share is still relatively small compared to——

Chairman BACHUS. It seems like it is almost the status quo. 

Ms. JOHNSON. That’s right. 

Chairman BACHUS. And I will say this, if someone says to me we 

have a problem with credit unions taking our market share, then 

the first response is to find out how much market share they are 

taking. Not analytical information. I have checked auto loans, and, 

actually, the percentage of auto loans by credit unions has actually 

declined——

Mr. LITTLE. Yes. 

Chairman BACHUS.—over the last 10 or 15 years. So I am just 

raising that. I didn’t know if you had any comment on that. 

Secondly, with 45 seconds, I am simply going to make a comment. The accounting treatment for business combinations of FASB 

141, apparently there doesn’t seem to be any dissent by any of the 

11

witnesses that there needs to be some change of definition of net 

worth in the Federal Credit Union Act. 

Ms. JOHNSON. That’s correct. 

Chairman BACHUS. Are you aware of any opposition to this 

change, making that change in definition? 

Ms. JOHNSON. No. We know of none. The Accounting Standards 

Board is favorable to a legislative change. 

Chairman BACHUS. If they are for it, you all are for it. 

Ms. JOHNSON. But it is actually language in the Federal Credit 

Union Act that needs to be changed. It is not accounting standards. 

Chairman BACHUS. That is right. It is a net worth, just changing—but I am saying, do you know of any opposition in the industry, regulators or anyone saying this isn’t a good thing? 

Ms. JOHNSON. No. 

Chairman BACHUS. No reason why that shouldn’t be done? 

Ms. JOHNSON. No reason. 

Chairman BACHUS. Actually, we are going by members who arrived first. Mr. Davis is our first member. 

Mr. DAVIS. Thank you, Mr. Chairman. Let me welcome the witnesses this afternoon and let me try to frame my questions a little 

bit more broadly than some of the previous comments that you may 

have made may have been framed. 

One of the things that is obvious is that we are going through 

a period in our economy when a lot of the banks are consolidating 

and we are having a lot of growth and consolidation among our 

banks. Certainly looking over the next 5 to 10 years, that is likely 

to continue. A lot of our smaller banks are likely to be continued 

to be merged than the larger banks. 

One of the things that I certainly wonder about is how credit 

unions and the nature of credit unions are going to change over 

that period of time. So let me get each of you to comment very 

briefly on where you see the credit union industry in the next 10 

years, and how you see that being affected by the bank consolidations we are witnessing right now. 

Mr. LITTLE. I think it is fair to predict that there will be consolidation in the credit union movement as well. I think that is a natural economic consequence. With regard to the consolidation in the 

banking industry, I can give you a little perspective on what is 

happening in our State back in Michigan. Large banks are buying 

up small banks. 

However, approximately 40 percent of our banks, State-chartered 

banks, have been chartered in the last 10 years. As banks are consolidated and purchased by larger banks, new community banks 

arise to fill the need. And, really, the consolidation just provides 

opportunities for capitalism to work on a local level and new banks 

to arise. 

Mr. DAVIS. Let me ask you this question. Obviously, one of the 

things the chairman was alluding to and one of the things the 

banks regularly raise is whether or not there has been a change 

in market share. Certainly as you put it, Ms. Johnson, credit 

unions are certainly being very aggressive in terms of expanding 

the kinds of services they provide. 

What I want to get a sense of is, are there any outer limits that 

the industry envisions? Is there a certain growth point that you 

12

would reach where you would think that beyond this point, we are 

dramatically changing the nature of what credit unions are? Have 

you looked at that question, whether you have any upper limits to 

what the arc should be? 

Ms. JOHNSON. When I look at the mission that credit unions fulfill, I don’t see any difference in their mission determined by their 

size. They are still to serve the needs of their members. We continue to see mergers and some consolidation as well. 

I believe last year, 2003, we chartered 11 new credit unions. And 

I believe in the 2 years prior to that, combined, there were 11 new 

credit unions chartered. We don’t see many new charters. 

It is difficult to charter a credit union from the get-go, getting 

members to pool their money and to start a credit union from the 

very beginning. But the mission of credit unions continues to be the 

same regardless of whether they are a $1 million credit union or 

a larger credit union. 

Mr. DAVIS. Let me ask you a question that kind of flows out of 

that assumption on your part, that the mission of credit unions is 

not different from the mission of banks, other than just being obviously a different scale of service. The banks’ response to that is 

that if credit unions are going to assume a larger part of the mission and the space that banks have historically occupied, should 

the credit unions come under some of the burden, for example, of 

CRA compliance? 

I know that is something that typically has been a subject of controversy in your industry. I presume that you are opposed to credit 

unions being covered by CRA. So let me ask a better question than 

that. Are there any circumstances or any trade-offs that the industry would be willing to accept to come under the purview of CRA? 

What would credit unions need to garner if you had to talk to 

this body and treat us as a set of rulemakers or lawmakers that 

could affect your industry? What would you want this institution 

to do if it were ever going to provide CRA compliance rules for 

credit unions? 

Ms. JOHNSON. Well, Congress decided as late as 1998 that the 

CRA requirements were not necessary for credit unions because 

they were meeting the needs of their members within the community. We have tried to facilitate that from a regulatory standpoint 

by facilitating and easing restrictions for credit unions to adopt underserved areas and to reach out to their communities more easily. 

So I think I would rather look at it from a positive standpoint, 

of how can we facilitate reaching to the underserved; of being able 

to serve those who are unbanked and who are subject to predatory 

lending, et cetera. 

So I think the focus is still the same, and I think we need to look 

for ways that we can help facilitate that movement into the neighborhoods. 

Mr. DAVIS. I think my time has expired, but if the Chair will give 

me an additional 20 seconds or so, let me try to get a little more 

direct answer. 

Is there anything that CRAs would be willing to accept or anything that you would require, maybe looking at it from that standpoint, if this body were ever to consider making credit unions fall 

13

under the purview of CRA? What would you require if that happened as a trade-off? 

Mr. LITTLE. From a regulatory standpoint, we would require that 

the institutions follow whatever requirements were imposed. My 

understanding of CRA is that it was put in place to identify specifically identified problems in the banking industry. Absent such specifically identified problems in the credit union movement, I guess 

I would recommend that there not be that burden placed on the 

credit unions, unless there is a demonstrated need for it, which, to 

my knowledge, there is not. 

Mr. ROYCE. [Presiding.] Thank you, Mr. Davis. 

Chairman Johnson, one of the issues we have been discussing on 

this committee is following the money in terms of fighting terrorist 

financing and the efforts of credit unions and the NCUA have not 

been widely discussed in this debate at all. I would ask if you could 

elaborate today on efforts being taken in terms of implementing the 

Bank Secrecy Act and implementation of the PATRIOT Act. Can 

you tell us about your enforcement efforts on that front? 

Ms. JOHNSON. Yes, sir. I had the opportunity to testify before the 

Senate Banking Committee on the Bank Secrecy Act hearings, and 

I was pleased to report at that time that we are working very hard 

with the other agencies to comply with all of the requirements. 

At that time I did mention, however, there is one tool which we 

believe would help assist us further in this area, and that would 

be the ability to examine third-party vendors that serve federally 

insured credit unions. Currently, if a problem with a vendor is 

identified, we have to work through the credit union or voluntarily 

with the vendor in order to work through any problems. And we 

believe that, especially with money laundering, terrorism, other 

things that are foremost in the minds of those when we think 

about the Bank Secrecy Act, we believe this ability to go in and examine these third-party vendors, who may hold all of members’ information, would be very helpful. 

Mr. ROYCE. It is helpful for us to know that, and I thank you, 

and we will look into trying to provide you with that ability. 

Ms. JOHNSON. Thank you. 

Mr. ROYCE. I think most of us would agree that capital is a very 

good thing. At the same time, too much capital at times can be a 

detriment to economic growth. There certainly needs to be balance. 

So, in your view, is the credit union industry well capitalized and, 

perhaps, is it over capitalized? 

Ms. JOHNSON. Well, the credit union community is well capitalized, and I believe the current average figure is 10.64 percent, 

which is indeed commendable. But it speaks to the conservative nature of credit unions and their risk-averse management style. 

We believe that the risk basing the capital for PCA purposes 

really deserves a good hard look, and action, hopefully. We believe 

that the 7 percent minimum that is currently in place could be reduced to 5 percent. The excess capital could be put to better use 

to funding new services or reducing rates or fees on existing services. 

It is time consuming to build capital, and so for most credit 

unions we believe they maintain a level higher than that 7 percent 

in order to have that cushion against unexpected growth. 

14

Mr. ROYCE. Another question I have is, as you are aware, the 

legislation I co-authored would slightly increase credit unions’ ability to make member business loans, and I was going to ask you if 

you can assure this committee that the NCUA has the expertise 

and has the resources at its disposal that would be necessary to 

oversee business lending at credit unions? 

Ms. JOHNSON. Indeed, I can assure you of that. I believe we have 

a very good track record. Prior to, I believe, 1998, there was no top 

limit. Through the regulations that have been put into place, we 

know that credit unions are doing a very good job with their member business lending. 

As I mentioned earlier, actually the percentage on defaults is less 

than for other member loans. We are proud of our member business lending regulation. We updated it this last year to better accommodate credit unions so they could better serve the business 

needs of their members, and we are working very hard to make 

sure it is done appropriately and with safety and soundness foremost. 

Mr. ROYCE. Thank you for that response. 

I think is it Mr. Sherman next, I believe. 

Mr. SHERMAN. Thank you. Obviously, with regulatory relief, credit unions will be able to serve communities better. One of those 

areas is in the area of check cashing and remittances, where right 

now people in usually poorer communities have to turn to very expensive financial services. We really need much more competition 

in the area of check cashing, and especially in international remittances, particularly in the greater Pacoima area, I might add. 

If we authorize Federal credit unions to engage in those two activities for anyone eligible to join the credit union, what can we expect of credit unions? Will they step forward and provide competition, particularly in lower-income communities? 

Ms. JOHNSON. Absolutely. We feel having the opportunity to offer 

those services to anyone that is eligible will be that first opportunity to have individuals work with a financial institution and 

begin building a relationship. So I think this is the first way to get 

them in the door and begin building—most of these folks are 

unbanked with a Federally insured or with an insured institution. 

And we believe getting them in the door and beginning the relationship is very key. They will become, hopefully, good members 

and seek other services as well. 

Mr. SHERMAN. Obviously, the bill we are focused on would redefine the net worth ratio to focus on risk assets and risk-based capital, so we would have a better calculation of the amount of capital 

that a particular credit union needs. 

I am part of an entity called the U.S. Government, that got stung 

just a little bit when the thrifts didn’t have enough capital. So I 

have become a real fan of capital. So in addition to calculating the 

amount of capital that a credit union should have, I am in favor 

of giving them all the tools to get as much capital as possible. It 

makes me sleep better at night. 

What do you think of alternative capital, and what would that 

do both to allow credit unions to serve more financial services 

needs and also just to provide more capital to stand between the 

risks of their business and the U.S. taxpayer? 

15

I might add, and this is unique to credit unions, it is not just the 

capital of that institution. If that institution goes under, all the 

other credit unions in the country also have to ante up to the full 

extent of their capital. So it is probably more likely that an undercapitalized credit union costs some of the folks in this room something rather than the Federal Government. 

But either way, capital insulates other credit unions and, ultimately, the Federal Government, from risk, and what do we do to 

get more of it? 

Ms. JOHNSON. Well, Congressman, I think the question on secondary capital has certainly been floating out there for about the 

last year and a half now. The discussions have stepped to the forefront. The jury is still out in a lot of people’s minds. We at the 

agency continue to study the issue. So I don’t have a definitive answer for you today. 

Mr. SHERMAN. Can you think of a disadvantage to having more 

capital in the system? 

Ms. JOHNSON. Well, I think the questions that arise in people’s 

minds are more towards the structure of how to do it. 

Mr. SHERMAN. Yes. I think it is obvious we cannot assign votes 

to those who provide alternative capital. It is one member, one 

vote. And we have to make sure alternative capital is sold in such 

a way so that there is not a single person who thinks they are getting a Federally insured deposit, when in fact they are getting a 

subordinated note. 

Ms. JOHNSON. Yes. But I assume the discussions will continue. 

Mr. SHERMAN. I look forward to hearing about those discussions 

and look forward to ending this one. 

I yield back. 

Mr. ROYCE. Mrs. Maloney of New York. 

Mrs. MALONEY. Very briefly, because we have been called to a 

vote. 

I would like to ask Mr. Little, because he thought that credit 

unions should be allowed to join home loan banks. Would you 

elaborate? What would be the advantage to members of the credit 

union and to the community? 

Mr. LITTLE. Okay. What I specifically commented on was nonFederally insured credit unions. There are approximately 400 credit unions in the country that have a form of member deposit insurance other than that provided by the NCUA. 

Federally insured credit unions can be and are members of the 

Federal Home Loan Bank. Privately insured credit unions cannot. 

The advantage to allowing that would be to provide the members 

of those credit unions the same access to affordable housing lending and the other types of services that the Federal Home Loan 

Bank system offers that are currently not available to that relatively small population of non-Federally insured credit unions. 

As I mentioned, it certainly would not be a new precedent, as 

there are currently 86 insurance companies, none of which are federally insured, that are members of the home loan bank system. 

Mrs. MALONEY. And I would like to ask both of the panelists, and 

I thank you for your testimony today, what are the two main 

things we could do on the Committee on Financial Services to imVerDate 0ct 09 2002 11:11 Nov 05, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\96548.TXT FIN1 PsN: MICAH
16

prove the loan and savings services that credit unions provide to 

their members? 

Ms. JOHNSON. Well, I believe you are taking a step forward with 

your Regulatory Improvements Act and reducing unnecessary burdensome regulation. 

A couple of the things in this particular bill with the risk-based 

capital and the improvements to the member business lending are 

things that will really step forward to help members. 

Mr. LITTLE. Yes. I would certainly agree on the member business 

lending. Removing the cap on business lending would be ideal. Certainly increasing it from the current level would be a good interim 

step. 

As to what could be done on the savings side? Providing forms 

of alternative capital would be one way that members could invest 

in a different manner in their credit union. So I think we would 

be in harmony with the NCUA on those issues. 

Mr. ROYCE. Well, thank you, Mr. Little. 

At this point, we have a series of votes. Two votes on. After those 

votes, Chairman Bachus will be back from his meeting with Chairman Oxley and will reconvene this committee. 

I want to thank our two witnesses for their testimony here today. 

Before we recess here, I would just like to recognize and welcome 

a constituent of ours from California, Bill Cheney, to the committee 

this afternoon. Not only is he the President and CEO of Xerox Federal Credit Union, but equally importantly he is very involved in 

the financial services industry as an active voice on credit union 

issues at the State and national level. He serves as the Legislative 

Committee Chairman and an at-large director and Board Secretary 

for the National Association of Federal Credit Unions. He is a 

member of the Board of Directors of Western Corporate Federal 

Credit Union, WesCorp. He is a member of the Diversity Committee for the California Credit Union League, and, as I mentioned, 

he serves as Chairman of the Board of Xerox Federal Credit 

Union’s Capital Corporation, a broker-dealer owned and controlled 

by 17 credit unions. 

This is his second appearance here before this committee, and we 

look forward to his testimony. 

We will stand in recess until after these votes are over. 

[recess.] 

Chairman BACHUS. Good afternoon. It is my understanding, Mr. 

Cheney, that Mr. Royce introduced you previously, so I would like 

to introduce and welcome Ms. Sharon Custer, President and CEO, 

BMI Federal Credit Union of Ohio, and representing the Credit 

Union National Association. 

We also welcome Dr. William A. Jackson, III, Associate Professor 

of Finance and Economics at the University of North Carolina at 

Chapel Hill. 

Ms. Custer has served as President and CEO of BMI Federal 

Credit Union in Columbus, Ohio, since 1986. Ms. Custer is a graduate of Franklin University, Columbus, Ohio, where she majored in 

business management and received her bachelor’s in business administration. She is a member of the Credit Union National Association and a certified credit union executive. 

17

Past activities include serving as a board member of the Credit 

Union Executive Society, the Credit Union Service Corporation, the 

Corporate One Federal Credit Union, the Member Mortgage Corporation, the World Computer Credit Union Association, and the 

Ohio Central Credit Union. And you are presently the Committee 

Chair of the Ohio Credit Union League. 

Dr. Jackson is an associate professor of finance and economics at 

Kenan-Flagler Business School, University of North Carolina, 

Chapel Hill. He is a recognized expert in the area of financial intermediation and industrial economics. He earned his B.A. In economics and mathematics at Centre College, his MBA at Stanford University, and PhD at the University of Chicago. 

He is the author of numerous articles, with the most recent publishing focused on issues related to small firms’ access to credit 

markets, corporate governance, bank mergers, and risk management. He has published in many journals, held positions with the 

Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Cleveland, the 

Federal Reserve Bank of Atlanta, Boston University, Jackson and 

Company, which is his consulting firm; is that right? 

Mr. JACKSON. Yes, Mr. Chairman 

Chairman BACHUS. Ernst & Young and your alma mater. 

We welcome both of you to today’s hearing. 

Chairman BACHUS. And as is our custom, we will start from my 

left. Ms. Custer, welcome. 

STATEMENT OF SHARON CUSTER, PRESIDENT AND CEO, BMI 

FEDERAL CREDIT UNION, REPRESENTING THE CREDIT 

UNION NATIONAL ASSOCIATION 

Ms. CUSTER. Chairman Bachus, Ranking Member Sanders, and 

members of the subcommittee, on behalf of the Credit Union National Association, I appreciate the opportunity to express the Association’s views on legislation to improve the regulatory environment in which credit unions operate. I also want to express our 

gratitude to Representatives Royce and Kanjorski, as well as 

LaTourette and Maloney, and all the other cosponsors of H.R. 3579, 

the Credit Union Regulatory Improvements Act. 

I am Sharon Custer, President and CEO of BMI Federal Credit 

Union in Columbus, Ohio. 

According to the U.S. Treasury, credit unions are clearly distinguishable from other depository institutions in their structure and 

operational characteristics. And despite the relative small size and 

restricted fields of membership, Federal credit unions operate 

under bank statutes and rules virtually identical to those of banks 

and thrifts. However, Federal credit unions have more limited powers than national banks and Federal savings associations. 

My written statement catalogs and describes the more than 135 

laws and regulations that apply to credit unions, including many 

unique restrictions that are far more stringent and limiting than 

laws applicable to other depository institutions. Given the limited 

time available this afternoon, however, I will devote the rest of my 

statement to describing a few exceptionally important issues for 

credit unions. 

18

As part of our mission, credit unions are devoted to providing affordable services to all our members, including those of modest 

means. One provision pending in both the House and the Senate 

would better enable us to meet that goal. I am referring to legislation to permit credit unions to provide broader check cashing and 

remittance services. 

Many of the individuals who would benefit from this change live 

from paycheck to paycheck and do not have established accounts. 

We know of members who join a credit union one day, deposit their 

necessary share balance, and come in the very next day and withdraw because they need the money. Sometimes a $5 withdrawal 

means the difference between eating or not. 

Accomplishing our mission can also be greatly enhanced by revisiting two major components of the 1998-passed Credit Union Membership Access Act. With 6 years of experience, we have learned 

that what was thought to be good policy at the time actually created new problems that need to be resolved to assure that credit 

unions can continue to meet their mission. 

The first of these issues is the current cap on member business 

loans. There was no safety and soundness reason to impose these 

limits, as the historical record is clear that such loans are not only 

safer than those in the banking industry, but also safer than other 

types over credit union loans. In fact, public policy argues strongly 

in favor of eliminating or increasing the limits from the current 

12.25 percent to the 20 percent suggested in H.R. 3579, the Credit 

Union Regulatory Improvements Act. 

Small business is the backbone of our economy and responsible 

for the vast majority of new jobs in America. Yet a February SBA 

study reveals that small businesses are having greater difficulty in 

getting loans in areas where bank consolidation has taken hold. 

The 1998 law severely restricts small business access to credit and 

impedes economic growth in America. Although few credit unions 

are currently bumping up against the cap, in a few years that is 

likely to change. 

Then there is the case of many small credit unions. Investing in 

the expertise needed to run a member business lending operation 

is a very expensive proposition. With a 12.25 percent cap, they 

could not make up the cost needed to run such an operation. If the 

cap were increased to 20 percent, they could seriously consider entering into this line of lending. 

Furthermore, the NCUA should be given the authority to increase the current $50,000 threshold, as proposed in CURIA, to 

$100,000. This would be especially helpful to smaller credit unions, 

as they would then be able to provide the smallest of these business loans without the expense of setting up a formal program. 

Another critical issue is the prompt corrective action regulations 

governing credit unions. Credit unions have a higher statutory capital requirement than banks. But credit unions’ cooperative structure creates a systemic incentive against excessive risk taking, so 

they may actually require less capital to meet potential losses than 

do other depository institutions. 

Because of their conservative management style, credit unions 

generally seek to always be classified as ‘‘well’’ rather than ‘‘adequately’’ capitalized. To do that, they must maintain a significant 

19

cushion above the 7 percent level. PCA requirements provide a 

powerful incentive for credit unions to operate at ‘‘overcapitalized’’ 

levels. 

CUNA believes that the best way to reform PCA would be to 

transform the system into one that is much more explicitly based 

on risk management. It would place much greater emphasis on ensuring that there is adequate net worth in relation to the risk a 

particular credit union undertakes. 

Reforming PCA along the lines of a risk-based approach would 

preserve and strengthen the National Credit Union Share Insurance Fund. It would more closely tie a credit union’s net worth requirements to exposure to risk. It would also free up more capital 

for making loans to members and putting resources into the economy. 

Finally, I call your attention to two pending issues before the Financial Accounting Standards Board that raise serious concerns for 

credit unions. One involves the issue of the accounting treatment 

of credit union mergers. FASB’s proposed change from the pooling 

method would have the unintended consequence of discouraging, if 

not eliminating, voluntary mergers that would be advantageous to 

credit union members. 

The other issue relates to the accounting treatment of loan participations. They are used increasingly by credit unions to control 

interest rate risk, credit risk, balance sheet growth, and maintain 

net worth ratios. 

In summary, Mr. Chairman, we strongly urge the subcommittee 

to act on this very important issue this year. Credit unions would 

benefit greatly from reducing unnecessary and costly regulatory 

burdens, especially those addressed in CURIA. And, more importantly, so would American consumers benefit from the savings that 

credit unions would pass along to their 85 million members. 

Thank you. 

[The prepared statement of Sharon Custer can be found on page 

63 in the appendix.] 

Chairman BACHUS. Mr. Cheney. Thank you, Ms. Custer. 

STATEMENT OF BILL CHENEY, PRESIDENT AND CEO, XEROX 

FEDERAL CREDIT UNION, REPRESENTING NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS 

Mr. CHENEY. Good afternoon, Chairman Bachus, Ranking Member Sanders, and members of the subcommittee. My name is Bill 

Cheney. I am the President and CEO of Xerox Federal Credit 

Union located in El Segundo, California. I am here today on behalf 

of the National Association of Federal Credit Unions to express our 

views on the need for regulatory relief and reform for credit unions. 

As with all credit unions, Xerox Federal Credit Union is a notfor-profit financial cooperative governed by a volunteer board of directors who are elected by our member-owners. 

America’s credit unions have always remained true to their original mission of promoting thrift and providing a source of credit for 

provident or productive purposes. A 2004 Filene Research Institute 

study entitled ‘‘Who Uses Credit Unions?’’ found that the average 

household income of those who hold accounts solely at a credit 

20

union was less than $43,000, while the average household income 

for those who solely hold accounts at a bank was almost $77,000. 

NAFCU is pleased to report to you today that America’s credit 

unions are vibrant and healthy and that membership in credit 

unions continues to grow, with credit unions serving over 85 million Americans. At the same time, it is important to note that 

while credit union membership is growing, over the past 23 years, 

credit unions have increased their market share only minimally. 

And, as a consequence, provide little competitive threat to other financial institutions. In fact, according to data obtained from the 

Federal Reserve Board, during the 23-year period from 1980 to 

2003, the percentage of total household financial assets held by 

credit unions increased from 1.4 percent to only 1.6 percent. 

Mr. Chairman, as your subcommittee considers regulatory relief 

issues for credit unions, we hope that you will consider supporting 

the Credit Union Regulatory Improvements Act. I would like to 

thank Mr. Royce and Mr. Kanjorski for introducing this vital legislation. The facts confirm that credit unions are more heavily regulated than other consumer financial services providers. Restrictions 

on the operations of credit unions limit not only who can avail 

themselves of credit union services, but also how credit unions can 

raise capital, an issue I know that has been of concern to certain 

members of this subcommittee, particularly Mr. Sherman. 

As members over this subcommittee realize, neither NAFCU nor 

the credit union community at large hesitated from embracing the 

increased regulatory burden imposed upon us with the passage of 

the U.S.A. PATRIOT Act. We willingly and faithfully accepted 

those burdens necessary for our national security. The provisions 

of CURIA, while leaving in place the burdens imposed by the 

U.S.A. PATRIOT Act, would be a positive step in reducing the 

number of unnecessary or outdated regulatory burdens and restrictions currently imposed on Federal credit unions, some of which 

date to the very early days of the Federal Credit Union Act. 

NAFCU is pleased to see the growing support in the House for 

CURIA. This legislation addresses additional key issues for credit 

unions not addressed in the House-passed Financial Services Regulatory Relief Act. As outlined in my written testimony, NAFCU 

supports the 12 credit union regulatory relief provisions included 

in both bills. There are additional provisions in CURIA not included in the regulatory relief bill I would like to highlight, as they 

are needed in the credit union community. 

NAFCU urges you to modernize credit union capital requirements by redefining the net worth ratio to include risk assets. This 

would result in a new more appropriate measurement to determine 

the relative risk of a credit union’s balance sheet, and improvement 

the safety and soundness of credit unions and our share insurance 

fund. 

NAFCU also supports the provisions in CURIA to refine the 

member business loan cap established as part of the Credit Union 

Membership Access Act in 1998, replacing the current formula with 

a flat rate of 20 percent of the total assets of a credit union. We 

support revising the definition of a member business loan by giving 

NCUA the authority to exclude loans of $100,000 or less from 

counting against the cap. These provisions would facilitate member 

21

business lending without jeopardizing the safety and soundness of 

credit unions. 

There is a lot of rhetoric on this issue, but I must note that a 

2001 Treasury Department study entitled ‘‘Credit Union Member 

Business Lending’’ concluded that credit unions’ business lending 

currently has no effect on the viability and profitability of other insured depository institutions. 

Finally, if the subcommittee were to act on credit union regulatory relief legislation, we would urge you to include language that 

would address the strain that could be placed on merging credit 

unions when the Financial Accounting Standards Board changes 

merger accounting rules from the pooling method of accounting to 

the purchase method. 

This can be done through a simple modification of the statutory 

definition of net worth in the Federal Credit Union Act to mean equity rather than the retained earnings balance of the credit union, 

as determined under GAAP. FASB has reviewed this proposed 

change and stated in an April 27 letter to NAFCU that, ‘‘While our 

primary concerns are not regulatory issues, we do have an interest 

in supporting an expedited resolution of this matter. The attached 

proposed amendment proposes a way to resolve this matter.’’

Mr. Chairman, I have a copy of the letter from FASB with me 

and would ask that it be included in the record with my testimony 

at this time. 

[The following information can be found on page 171 in the appendix.] 

In conclusion, the state of the credit union community is strong, 

and the safety and soundness of credit unions is unquestionable. 

Nevertheless, there is a clear need to ease the regulatory burden 

on credit unions as we move forward into the 21st century. NAFCU 

urges this subcommittee to support and pass the CURIA bill and 

the important credit union provisions we have outlined in this testimony. We look forward to working with you on this important 

matter and would welcome your comments or questions. Thank 

you. 

[The prepared statement of Bill Cheney can be found on page 44 

in the appendix.] 

Chairman BACHUS. Thank you. Dr. Jackson. 

STATEMENT OF WILLIAM E. JACKSON III, ASSOCIATE PROFESSOR OF FINANCE AND ECONOMICS, UNIVERSITY OF 

NORTH CAROLINA 

Mr. JACKSON. Good afternoon, Chairman Bachus and other members of this subcommittee. I count it a great honor to have been invited to present a few ideas on the important topic of credit union 

regulation improvements before this distinguished subcommittee. 

Chairman BACHUS. Mr. Jackson, if you could pull that mike a little closer, I think that will help. 

Mr. JACKSON. Is that a little better? 

Chairman BACHUS. Yes. I’m just a little worried about my hearing and the court reporter’s. 

I guess we’re not actually in a court, though, are we? 

Mr. JACKSON. I hope not, Mr. Chairman. 

22

My name is William Jackson, and I am Associate Professor of Finance and Economics at the University of North Carolina at Chapel Hill, and this year I am a visiting research scholar at the Federal Reserve Bank of Atlanta where I conduct research on financial 

institutions and financial markets. 

Also, let me mention that my views or my comments today do not 

represent or necessarily reflect the views of the Federal Reserve 

Bank of Atlanta or the Federal Reserve System. They are my views 

and my views only. I am not sure if anyone is going to take credit 

for them beyond myself today after I present them. 

Last year, a study that I authored was published by the Filene 

Research Institute. The title of that study was ‘‘The Future of 

Credit Unions: Public Policy Issues.’’ It was a very broad-based 

study, but the major research question in the study was: Based on 

sound economic evidence, can we draw any conclusions about 

whether credit unions should receive some form of regulatory relief? 

For my testimony here today, I would like to summarize the conclusions from that study and relate them to the proposed Credit 

Union Regulatory Improvements Act under consideration by this 

subcommittee. 

The four main conclusions from my Filene study were that deregulation of banks, thrifts, and credit unions by Congress over the 

last 15, 20 years was the right thing to do. And today the U.S. financial system is much stronger because of that deregulation and 

other factors. Today, if you look at the U.S. financial system, by 

any reasonable measure it is the biggest and the best in the world. 

And I attribute a lot of the improvements in the financial system 

over the last 20 years to an active reevaluation of regulatory policy, 

and I am a fan of what Congress has done in that area. 

My second conclusion was that credit unions received less deregulation than either banks or thrifts. 

Thirdly, I concluded that more deregulation for credit unions 

would very likely have positive effects on our economy. 

And fourth, and last, that the appropriate level of deregulation 

of credit unions is probably similar to that received by banks, adjusted for the special characteristics of credit unions. 

Now, most of the specific areas of deregulation that I covered in 

my Filene study are addressed in the proposed Credit Union Regulatory Improvements Act. In general, I agree with those areas, especially the areas of member business lending and capital requirements, and my written testimony goes into more detail on those 

particular topics and other areas. But let me just speak for a moment or two about member business loans and about capital requirements. 

To a large extent, credit union member business loans, looking 

at them from the outside as an economist, I see them more as personal loans for business purposes. And that appears to be the way 

that they should be categorized as opposed to the traditional small 

business loans that you would think of held in the loan portfolio 

of a commercial bank. Because of that, they have different risk 

characteristics. To a large extent, I think these loans are less risky 

than a typical commercial loan held in the portfolio of a commercial 

bank. And the idea of expanding the possibilities for credit unions 

23

to make more member business loans, I think, could possibly even 

reduce the overall riskiness of the credit union’s loan portfolio 

through diversification effects. At worst, I would think it would not 

have a significant increase in the overall risk of the credit union 

industry. 

Another issue that is obviously very important in terms of thinking about what happens when you expand the possibilities for more 

member business loans, is who receives these member business 

loans. The loans tend to be very, very small loans, very small businesses, and they tend to go to help improve the credit supply to 

very, very small businesses. Also, it appears from a recent Treasury study in the year 2001, that about one-fourth of member business loans made by credit unions actually go to low- and moderateincome individuals. 

So the supply of very small business loans to very small businesses and the availability of credit to low- and moderate-income 

individuals could be improved by this particular relaxation of the 

current regulations, by allowing credit unions to increase the proportion of member business loans that they are currently making. 

In terms of capital regulations, the idea of instituting a riskbased capital program makes a lot of sense. We have a good prototype from what has been developed in the banking industry. Obviously, that would have to be tweaked in certain ways to make it 

appropriate for credit unions, but I think that it allows for a good 

starting point. 

One thing I would mention is that I think there is good theoretical and empirical evidence that would suggest that credit 

unions are probably less risky for given size and management profile than other types of depository institutions. So we might want 

to keep that in mind as we go through and think about how to develop the proper capital requirements, minimum net worth requirements, and the appropriate weighting system for credit union assets. 

One of the other issues covered in CURIA that I would like to 

mention is nonmember services. I am really, really excited about 

allowing credit unions to get involved in the business of check cashing for nonmembers. And, hopefully, at some point, maybe getting 

more credit unions involved in payday lending. I like the idea of 

getting credit unions involved in those areas. One of the major 

credit unions in my State, the State Employees Credit Union of 

North Carolina, has been actively involved in those areas, and I 

can see that it is making a difference. I have some close friends 

that work with the credit unions and close friends that work with 

the banks too, and they tell me that programs like these are starting to make a difference. 

To just wrap this up, I really think, looking at it from an economic theory standpoint, that what is being done in the proposed 

Credit Union Regulatory Improvements Act allows for the right approach to thinking about the optimal regulation of credit unions. 

And one thing that I will sum up and point to that I really think 

is appropriate is the idea of reducing legislative mandates and allowing the fine regulatory institution that oversees credit unions, 

the NCUA to have more authority and more flexibility to change 

24

its regulations in response to market changes as credit unions obviously have to respond to market changes. 

Thank you very much. 

[The prepared statement of William E. Jackson III can be found 

on page 120 in the appendix.] 

Chairman BACHUS. Thank you, Dr. Jackson. I think my first 

question, I will actually pick up on what you have just talked 

about, and that is check cashing and what we might call payday 

lending. And I will ask any of the panelists. 

Ms. Custer, you mentioned in your testimony, CUNA’s support 

for the ability of credit unions to offer check cashing and, I think, 

remittance services to their members? 

Ms. CUSTER. Yes. 

Chairman BACHUS. How do credit unions use these basic banking 

services as an opportunity to educate the unbanked and the underserved members of the community of the services that are available 

to them in a credit union, including financial literacy programs 

sponsored by the credit unions? 

That will be my first question. My follow up is: What are the 

statutory and regulatory impediments that prevent you from doing 

even more to serve the underserved or to make these payday loans 

or check cashing services or remittance services? 

And I will just start with Ms. Custer and go down the line. 

Ms. CUSTER. The statutory impediment that gives us the restrictions today is that we are limited to providing services to credit 

union members. This expands the ability to credit unions to provide these services to individuals who are in our field of membership, not just those individuals who have account relationships 

with us today. 

This is important, because, for whatever reason, many people do 

not have banking accounts; they do not have relationships with financial institutions. By giving us the ability to provide these services to them, hopefully we can, along with the service, provide the 

incentive to have an account at the credit union and to educate 

them on financial literacy. 

At BMI, I can speak to my own credit union, we have a program 

we call Second Chance Checking. And this is for individuals who 

have had checking accounts, and because they have had difficulty 

handling them in the past, we give them that second chance, and 

have a specific program for them to help them become acclimated 

to handling their personal finances. 

I think credit unions have always been out in the forefront of 

providing financial education to their members and to nonmembers. We have in Columbus, Ohio, I think it is the second largest 

Somali population in the United States. We participate in the Somali Outreach Program. These are individuals who don’t have account relationships at all and are just learning about the American 

financial system. 

So giving us this ability helps us to provide even more services 

to those individuals that are learning to handle their own finances. 

Chairman BACHUS. Okay, thank you. 

Mr. Cheney, I mentioned, and I think you mentioned in your testimony too, that your institution has gone into four or five underserved areas? 

25

Mr. CHENEY. Yes. 

Chairman BACHUS. But I would invite your comment. 

Mr. CHENEY. Sure. We have added underserved communities in 

four different locations where we had existing branches. We have 

not entered new markets, but we happened to have branches in 

those underserved areas, and allowing us to serve our entire field 

of membership in those areas would allow us, as Sharon was saying, to reach out to people who don’t currently have accounts. 

Often, that is an issue of trust. They have an issue of trust with 

a financial institution. So if we can bring them in and offer them 

services and offer them education on financial literacy, then it is 

an opportunity, as she said, to welcome them into our membership 

and to provide them with the full range of products and services. 

And today we are not allowed to serve nonmembers in any fashion. 

Chairman BACHUS. All right. Mr. Jackson, or Dr. Jackson. 

Mr. JACKSON. I think one of the impediments is the cost of actually making loans. There is a certain fixed cost associated with 

making any loan. And if the loan is too small, it is very difficult 

to institute a strategic plan that allows you to make the loan at 

any profit at all. 

With payday lending, that is one of the issues that you run into 

in terms of the very small loans. And in some cases, I guess usury 

laws and regulations also prevent charging a rate or a fixed 

amount that will actually cover the cost of the loan. And kind of 

tweaking those things to allow for a small fee to be associated with 

making the loan, I think, would be very helpful. 

Chairman BACHUS. Okay, thank you. 

Ms. Custer, your testimony touched on the importance to many 

on this subcommittee and goes to the essence of what many of us 

feel is the mission of credit unions, the idea of providing services 

to members of modest means. 

To many of us, modest means is another term for those who are 

poor and those who are underserved. We are aware of a recent 

GAO study—well, I tell you what, I am not going to ask that question. 

In the interest of time, Mr. Cheney, NAFCU has been supportive 

in the past of a provision that is included in both H.R. 1375 and 

H.R. 3579 which gives federally insured credit unions the same exemption from premerger notification requirements imposed by antitrust laws that banks and thrifts already enjoy. 

For those members who might question the wisdom of limiting 

the reach of these antitrust laws, can you explain why it is, in your 

view, that credit unions should be entitled to the same treatment 

as banks and thrifts in this instance? And I am a sponsor of that 

legislation and promoter of it, so I agree with you. 

Mr. CHENEY. I am aware of that. Thank you very much. 

Well, other insured financial institutions have been exempt for 

some time, and I can’t prove it, but I wonder whether credit unions 

were left off merely as an oversight. I don’t think that mergers of 

credit unions present consolidation issues in any markets. 

Typically, as we said, credit unions as an industry hold 1.6 percent of all household assets. So I think it is just, more than anything, a technical correction, which would help with not only the 

cost of mergers, but also the paperwork and regulatory hurdles 

26

that credit unions have to go through when their members and 

boards members decide they want to merge. So we appreciate your 

leadership on that issue. 

Chairman BACHUS. Okay. Let me go back to this question, which 

I have decided I will ask. I keep switching back and forth. 

Ms. Custer, you are aware of the GAO study that suggested that 

you all might not be doing as good a job in the area of people of 

modest means as you could do? 

Ms. CUSTER. Yes. 

Chairman BACHUS. And in your testimony, you provide some interesting reasons for that. For the sake of just hitting that again 

and reemphasizing that, could you repeat those reasons? 

Ms. CUSTER. In serving the individuals of modest means, or giving more data on supporting the fact that those are members of 

modest means, I do have some figures here that may be helpful to 

you, and this goes back to a study done by the Filene Research Institute. They show that the average credit union member is less affluent than the average bank customer. By race and ethnicity, African-American households are more likely to use a credit union than 

any other ethnic group and are more likely to do so as households 

overall. 

It also shows that minority applicants and low-income households have a substantially higher likelihood of obtaining a first 

mortgage with a credit union. So I think these are all very consistent with the cooperative spirit and the fundamental philosophy 

of credit unions in helping all of our members. 

Chairman BACHUS. Okay. Well, I applaud the credit unions for 

their outreach and successful efforts in serving those of modest 

means, which is something that I think members on both sides 

have urged all our financial institutions to do. And in that regard, 

credit unions have an enviable record of accomplishment. 

I am going to ask this question. I really was going to talk to Ms. 

Johnson, but she, in her testimony, recommended that NCUA be 

given statutory authority to examine third-party vendors that provide data processing and other related services to insured credit 

unions. And I think this is actually probably a reversal of their position in the past. I will have to say that I am kind of skeptical 

of giving them this statutory authority. 

Has the absence of that authority or the absence of their ability 

to do that created any problems that you all know of? 

Ms. CUSTER. Not that I am aware of. I know that NCUA had the 

ability to look at third-party vendors in anticipation of Y2K. I think 

at this point, there would have to be more consideration to look at 

the whole issue, because I could not address it any more than that. 

Chairman BACHUS. Yes, and that is the reason they were given 

that limited authority, and at that time, they assured us that 

would sunset and they would not ask that that be extended. I am 

curious to see what the reason is. 

I didn’t know if you all knew of some reason why they should 

have this authority; why maybe not having the authority has created a problem of safety and soundness; or is it something that the 

member institutions are asking them to do? 

Chairman BACHUS. Do you have an opinion on that Mr. Cheney. 

27

Mr. CHENEY. I am not aware of any credit unions that are asking 

NCUA for this authority, and I am not aware of any existing problems. Although I must say that this is an issue we haven’t addressed—the NAFCU board has not addressed in some time, as we 

were certainly involved in support of the sunsetting of the authority, as you know, some time ago. 

Chairman BACHUS. Right. And at least as chairman of the subcommittee I would—without seeing something substantial, I certainly wouldn’t be in favor of granting them that authority. 

I think that basically concludes—I want to ask Dr. Jackson one 

final question, and then we will conclude the hearing. In your testimony you express the view that excessive regulatory burdens are 

not just a minor nuisance for credit unions but have a significant 

impact on credit union customers and local economies. We have 

heard testimony that affirms that compliance burdens divert resources from customer service and community development. Can 

you elaborate on the impact that regulatory burdens on the credit 

unions have on the local economy? 

Mr. JACKSON. In general, when I think about this, the notion of 

regulatory burdens, I usually think of it in a basic cost-benefit 

framework where, when you think of the benefits of regulation, for 

example, in capital regulation, the benefits would be reducing the 

risk of an event that might lead to taxpayers having to inject funds 

into the insurance system. But the whole idea of being able to 

maintain a safe and sound industry and having the regulations in 

place that focus on that issue and allow for that issue would definitely be a benefit in terms of regulation. 

But in my way of thinking, in terms of credit unions, the regulations, the cost side of it in terms of restricting the credit union 

from providing products and services—financial products and services that the customers, their members, demand, it would outweigh 

the benefits from having a slight reduction in the risk of the adverse event for the deposit insurer. 

So that was kind of my framework for thinking about the cost 

and benefits of regulation, and I think that the credit unions are 

basically—their insurance system over time has demonstrated that 

it is in good shape. It is very safe; and the idea of restricting innovation, restricting goods and services flowing to credit union members and not allowing them to have the same types of opportunities 

to utilize modern financial products is a very heavy cost. 

That was kind of the general framework I was thinking of. 

Chairman BACHUS. Thank you. 

I think I do have one other question. Ms. Custer, you mentioned 

in your testimony you endorsed Mr. Royce’s risk-based approach for 

determining capital; and I think, Mr. Cheney, you endorse that as 

well. And I actually think Dr. Jackson favorably endorsed that. 

I know, Ms. Custer, do you—if my recollection serves me correct, 

you also talked about ability to raise secondary capital as maybe 

an appropriate way of addressing problems with a prompt, you 

know, corrective action. Are you—could you elaborate on that? Am 

I making myself clear? 

Ms. CUSTER. I understand. As NCUA Chairman Johnson stated, 

NCUA had looked at the possibility of secondary capital for credit 

unions. It has been discussed within the industry. At this point in 

28

time, I think the general attitude is, at least with CUNA, who I 

represent at this hearing, is that the secondary capital was considered an option that was looked at. It was considered, still is being 

considered, still is being researched. 

The reason that we have looked at risk-based capital as being a 

possibly more appropriate way of addressing the capital situation 

is because it is very fair and it walks or goes hand in hand with 

risk-based examination. NCUA went to risk-based examination a 

couple of years ago, putting more emphasis on the examination 

process where there are riskier elements within the credit union 

operation. 

Risk-based capital does the same thing. If a credit union chooses 

to have more risk, allowable risk within their operation, then it is 

appropriate to have more capital required to cover that risk. Conversely, if a credit union has a more simplistic or less risky operation, then it would require less risk. So it simply seems to be a 

more appropriate way of addressing capital for credit unions. 

Chairman BACHUS. Okay. Miss Custer or Dr. Jackson—I mean, 

I am sorry, Mr. Cheney or Dr. Jackson, do you have any comments 

on that? 

You know, I certainly personally would prefer a risk-based approach; and I am wondering if there are any—I am not seeing any 

objection to that on the merits. I think that everyone agrees, at 

least I think your regulators, the institutions would say that a riskbased approach is really the—it is almost a nondebatable issue, 

that that is—is that a fair assumption? 

Mr. CHENEY. Yes, I agree. NAFCU supports and I do, too, riskbased capital for credit unions. It makes a lot more sense than the 

current one-size-fits-all program that we have for the reasons that 

were just mentioned. NAFCU is looking at alternative sources of 

capital, and we support the concept, although we think there is 

more work that needs to be done on that issue before we would propose anything to this subcommittee. 

Chairman BACHUS. And, Dr. Jackson, has there been any—in the 

academic world, or regulatory—among the regulatory bodies, is 

there a general consensus that risk-based approach makes more 

sense? 

Mr. JACKSON. Mr. Chairman, I think the general consensus in 

the academic community is that it makes more sense, that if you 

think of capital as any other product that has a price and that it 

should be priced appropriately and if the insurance fund’s purpose 

is to price risk and charge those who are imposing more risk on 

the insurance fund the appropriate fee, then there has to be some 

metric that allows you to assess the individual riskiness of each institution. So I think that is the way to go. 

Most people would say that it is better than the alternative of 

a flat fee, that there are still problems even with the risk-based 

system. These problems are being worked on. But, we know much 

more about it now than we did before from banking research. A lot 

of that, I think, can be utilized for developing an appropriate system for credit unions. 

Chairman BACHUS. All right. Thank you. 

This concludes our hearing. I have to read some more words just 

for the record. 

29

First of all, to both panels of witnesses, without objection, written statements will be made a part of the record and each of you 

will—your record will—I mean, your full statement will be put in 

the record. 

The Chair notes that there may be some members that have additional questions to this panel. They may actually have just questions, as opposed to additional questions, for the panel, which they 

may wish to submit in writing; and, without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to these witnesses and to place their responses in the 

record. 

The Chair asks unanimous consent that Mr. Paul, a member of 

the full committee who does not serve on this subcommittee, be 

permitted to submit a statement for inclusion in the hearing 

record. And without objection, hearing none, that is so ordered. 

[The prepared statement of Hon. Ron Paul can be found on page 

39 in the appendix.] 

Chairman BACHUS. With that, this hearing will be concluded. So 

you witnesses are dismissed; and, again, I compliment the credit 

unions of this country for their service to the American public and 

meeting their financial needs. Thank you. 

[Whereupon, at 4:55 p.m., the subcommittee was adjourned.] 

(31)

A P P E N D I X

July 20, 2004

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