United States General Accounting Office 

GAO Report to the Ranking Minority Member, 

Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate 

October 2003 CREDIT UNIONS 

Financial Condition 

Has Improved, but 

Opportunities Exist to 

Enhance Oversight 

and Share Insurance 

Management 

GAO-04-91


a
Highlights of GAO-04-91, a report to the 

Ranking Minority Member, Committee on 

Banking, Housing, and Urban Affairs, U.S. 

Senate. 

Recent legislative and regulatory 

changes have blurred some 

distinctions between credit unions 

and other depository institutions 

such as banks. The 1998 Credit 

Union Membership Access Act 

(CUMAA) allowed for an expansion 

of membership and mandated 

safety and soundness controls 

similar to those of other depository 

institutions. In light of these 

changes and the evolution of the 

credit union industry, GAO 

evaluated (1) the financial 

condition of the industry and the 

deposit (share) insurance fund, (2) 

the impact of CUMAA on the 

industry, and (3) how the National 

Credit Union Administration 

(NCUA) had changed its safety and 

soundness processes. 

With respect to the share insurance 

fund, GAO recommends that the 

Chairman of NCUA explore 

developing a risk-based funding 

system, improve the process for 

allocating overhead expenses, and 

refine the process for estimating 

future losses. To improve 

reporting, the Chairman should 

also use tangible indicators to 

determine whether credit unions 

are serving people in underserved 

areas. To help ensure safety and 

soundness, Congress may wish to 

consider making credit unions 

subject to internal control 

reporting and attestation 

requirements applicable to banks 

and thrifts and providing NCUA 

legislative authority to examine 

third-party vendors. 

www.gao.gov/cgi-bin/getrpt?GAO-04-91. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J. 

Hillman at (202) 512-9073 or 

hillmanr@gao.gov. 

October 2003 

CREDIT UNIONS 

Financial Condition Has Improved, but 

Opportunities Exist to Enhance Oversight 

and Share Insurance Management 

The financial condition of the credit union industry has improved since 

GAO’s last report in 1991, and the federal share insurance fund appears 

financially stable. However, a growing concentration of industry assets in 

large credit unions creates the need for greater risk management on the part 

of NCUA. The question of who benefits from credit unions’ services has also 

been widely debated. While it has been generally accepted that credit unions 

have a historical emphasis on serving people of modest means, our analysis 

of limited available data suggested that credit unions served a slightly lower 

proportion of low- and moderate-income households than banks. 

CUMAA and subsequent NCUA regulations enabled federally chartered 

credit unions to expand their membership, serve larger geographic areas, 

and add underserved areas. According to NCUA officials, these changes 

were necessary to maintain the competitiveness of the federal charter with 

respect to state-chartered credit unions. While NCUA has stated its 

commitment to ensuring that credit unions provide financial services to all 

segments of society, NCUA has not developed indicators to determine if 

credit union services have reached the underserved. 

In response to the growing concentration of industry assets and increased 

services offered by credit unions, NCUA recently adopted a risk-focused 

examination and supervision program but still faces a number of challenges, 

including lack of access to third-party vendors that are providing more 

services to credit unions. Further, credit unions are not subject to internal 

control and attestation reporting requirements applicable to banks and 

thrifts. GAO also found that the insurance fund’s rate structure does not 

reflect risks that individual credit unions pose to the fund, and NCUA’s 

estimation of fund losses is based on broad historical analysis rather than a 

current risk profile of insured institutions. 

Mortgages Made by Credit Unions and Banks, by Income Level of Purchaser, 2001 
Contents


Letter


Results in Brief 


Background 


Financial Condition of the Credit Union Industry Has Improved 


Since 1991 

Limited Comprehensive Data Are Available to Evaluate Income of 

Credit Union Members 

CUMAA Authorized NCUA to Continue Preexisting Policies That 

Expanded Field of Membership 

NCUA Adopted Risk-Focused Examination and Supervision 

Program, but Faces Challenges in Implementation 

NCUSIF’s Financial Condition Appears Satisfactory, but 

Methodologies for Overhead Transfer Rate, Insurance Pricing, 

and Estimated Loss Reserve Need Improvement 

System Risk That May Be Associated with Private Share Insurance 

Appears to Have Decreased, but Some Concerns Remain 

Conclusions 

Recommendations for Executive Action 

Matters for Congressional Consideration 

Agency Comments and Our Evaluation 

1 

4 

8 

10 

16 

29 

42 

56 

66 

80 

82 

83 

84 

Appendixes 

Appendix I: 

Appendix II: 

Appendix III: 

Appendix IV: 

Appendix V: 

Appendix VI: 

Appendix VII: 

Appendix VIII: 

Appendix IX: 

Appendix X: 

Appendix XI: 

Appendix XII: 

Objectives, Scope, and Methodology 90 

Status of Recommendations from GAO’s 1991 Report 101 

Financial Condition of Federally Insured Credit Unions 113 

Comparison of Bank and Credit Union Distribution of 


Assets 121


Credit Union Services, 1992–2002 128


Characteristics of Credit Union and Bank Users 140


Key Changes in NCUA Rules and Regulations, 1992–2003 144


NCUA’s Budget Process and Industry Role 146


NCUA’s Implementation of Prompt Corrective Action 150


Accounting for Share Insurance 159


Comments from the National Credit Union 


Administration 162


Comments from American Share Insurance 168


Page i GAO-04-91 Changes in Credit Union Industry 
Contents 

Appendix XIII:	 GAO Contacts and Staff Acknowledgments 174 

GAO Contacts 174 

Staff Acknowledgments 174 

Tables	 Table 1: 

Table 2: 

Table 3: 

Table 4: 

Table 5: 

Table 6: 

Table 7: 

Table 8: 

Table 9: 

Regulatory Definitions of Local Community, 2000 and 


2003


Federally Insured Credit Unions Were Similar to Banks and


Thrifts with Respect to Capital Categories, as of December


31, 2002


Peer Group Definitions


Definition of Income Categories


Status of GAO Recommendations to NCUA and Congress, 


as of August 31, 2003


Federally Insured Credit Union Growth in Assets and 


Shares, 1992–2002


Distribution of Credit Unions by Asset Size, 1992 and


2002


Asset Composition of Credit Unions as a Percentage of 


Total Assets, 1992–2002


Comparison of the Loan Portfolios of Federally Insured 


Credit Unions with Peer Group Banks and Thrifts, as of 


2002


34 

54 

92 

93 

103 

115 

116 

117 

118 

144 

151 

153 

154 

Table 10: Timeline of Key Changes to NCUA Rules and Regulations, 

January 1992–September 2003 

Table 11: CUMAA Mandates and NCUA Actions on PCA Regulation 

Implementation 

Table 12: Discretionary Supervisory Actions 

Table 13: Net Worth Category Classification for New Credit 

Unions 

Figures	 Figure 1: 

Figure 2: 

Figure 3: 

Figure 4: 

Figure 5: 

Comparison of Credit Union and Bank Capital Ratios, 

1992–2002 11 

Credit Union Industry Size and Total Assets Distribution, 

as of December 31, 2002 15 

Income Characteristics of Households Using Credit 

Unions versus Banks, Low and Moderate Income versus 

Middle and High Income 21 

Income Characteristics of Households Using Credit 

Unions versus Banks, by Four Income Categories 22 

Mortgages Made by Credit Unions and Banks, by Income 

Level of Purchaser, 2001 24 

Page ii GAO-04-91 Changes in Credit Union Industry 
Contents 

Figure 6: Loans Made by Credit Unions and Banks, by Average 


Income in the Purchased Home’s Census Tract, 2001 25


Figure 7: Percentage of Federally Chartered Credit Unions, by 


Charter Type, 2000–2003 31


Figure 8: Actual and Potential Members in Federally Chartered 


Credit Unions, by Charter Type, 2000–2003 36


Figure 9: Actual and Potential Members in Federally and


State-chartered Credit Unions, 1990–2003 37


Figure 10: Underserved Areas Added before and after CUMAA, by 


Federal Charter Type, 1997–2002 40


Figure 11: Credit Union Mortgage Loans Have Grown Significantly 


Since 1992 43


Figure 12: NCUSIF’s Equity Ratio, 1991–2002 57


Figure 13: Equity to Insured Shares or Deposits of the Various 


Insurance Funds 58


Figure 14: Net Income of NCUSIF, 1990–2002 59


Figure 15: Financing Sources of NCUSIF and NCUA’s Operating 


Fund 60


Figure 16: Share Payouts and Reserve Balance, 1990–2002 65


Figure 17: States Permitting Private Share Insurance (March 2003) 


and Number of Privately Insured Credit Unions 


(December 2002) 68


Figure 18: Capital Ratios in Federally Insured Credit Unions, 1992–


2002 114


Figure 19: Profitability of Federally Insured Credit Unions, 1992–


2002 119


Figure 20: Federally Insured Credit Unions, by CAMEL Rating, 


1992–2002 120


Figure 21: Total Assets of All Credit Unions and All Banks, as of 


2002 121


Figure 22: Total Assets of Credit Unions and Banks with Less Than


$100 Million in Assets, as of 2002 122


Figure 23: Total Assets of Credit Unions with Less Than $5 Million in


Assets, as of 2002 123


Figure 24: Percentage of All Credit Unions and All Banks Holding 


Various Loans, as of 2002 124


Figure 25: Percentage of Credit Unions and Banks with Assets of 


$100 Million or Less Holding Various Loans, as of 


2002 125


Figure 26: Percentage of Credit Unions and Banks with Assets 


between $1 Billion and $18 Billion Holding Various Loans, 


as of 2002 126


Page iii GAO-04-91 Changes in Credit Union Industry 
Contents 

Figure 27: Percentages of Credit Unions and Banks Holding Various 


Loans, by Institution Size, as of 2002 127


Figure 28: Percentage of Credit Unions Holding Various Loans, 


1992–2002 129


Figure 29: Percentage of Assets Held in Various Loans by All Credit 


Unions, 1992-2002 131


Figure 30: Percentage of Credit Unions Offering Various Accounts,


1992–2002 133


Figure 31: Credit Union Employees and Number of Credit Unions, 


1992–2002 134


Figure 32: Percentage of Credit Unions, Smallest versus Largest, 


Holding Various Loans, 1992–2002 136


Figure 33: Percentage of Assets Held in Various Loans, Smallest 


versus Largest Credit Unions, 1992–2002 137


Figure 34: Differences among Services Offered by Smaller and


Larger Credit Unions, as of 2002 138


Figure 35: Credit Union Size and Offerings of More Sophisticated 


Services, as of 2002 139


Figure 36: Households Using Credit Unions and Banks, by 


Education Level, 2001 140


Figure 37: Households Using Credit Unions and Banks, by Age 


Group, 2001 141


Figure 38: Households Using Credit Unions and Banks, by Race and 


Ethnicity, 2001 142


Figure 39: Mortgages Made by Credit Unions and Banks, by Race 


and ethnicity, 2001 143


Figure 40: NCUA Budget Levels, 1992–2004 148


Figure 41: NCUA-authorized Staffing Levels, 1992–2003 149


Abbreviations 

ASI American Share Insurance


ATM Automatic Teller Machines


BIF Bank Insurance Fund


BSA Bank Secrecy Act


CLF Central Liquidity Facility 


CPA Certified Public Accountant


CRA Community Reinvestment Act


CUIC Credit Union Insurance Corporation


CUMAA Credit Union Membership Access Act of 1998


Page iv GAO-04-91 Changes in Credit Union Industry 
Contents 

CUNA Credit Union National Association


CUSO Credit Union Service Organization


FCUA Federal Credit Union Act


FDIA Federal Deposit Insurance Act


FDIC Federal Deposit Insurance Corporation


FDICIA Federal Deposit Insurance Corporation Improvement Act of 


1991 

FFIEC Federal Financial Institutions Examination Council 

FRC Financial Risk Committee 

FTC Federal Trade Commission 

HMDA Home Mortgage Disclosure Act 

HUD Department of Housing and Urban Development 

IRPS Interpretive Ruling and Policy Statement 

LAR Loan Application Records 

MCIC Metro Chicago Information Center 

MSA Metropolitan Statistical Area 

NCUA National Credit Union Administration 

NCUSIF National Credit Union Share Insurance Fund 

NFCDCU National Federation of Community Development Credit 

Unions 

OCC Office of the Comptroller of the Currency 

OTS Office of Thrift Supervision 

PCA Prompt Corrective Action 

RISDIC Rhode Island Share and Depositors Indemnity 

Corporation 

SAIF Savings Association Insurance Fund 

SCF Survey of Consumer Finances 

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

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Page v GAO-04-91 Changes in Credit Union Industry 
Page 1 GAO-04-91 Changes in Credit Union Industry 

A

United States General Accounting Office 

Washington, D.C. 20548 

October 27, 2003 

The Honorable Paul S. Sarbanes 

Ranking Minority Member 

Committee on Banking, Housing, 

and Urban Affairs 

United States Senate 

Dear Senator Sarbanes: 

Credit unions have historically occupied a unique niche among depository 

institutions. Credit unions are not-for-profit, member-owned cooperatives 

that are exempt from paying federal income taxes on their earnings. Unlike 

banks, credit unions are subject to limits on their membership because 

members must have a “common bond”—for example, working for the same 

employer or living in the same community. However, over the years, these 

membership requirements have loosened considerably and credit unions 

have received expanded powers, which have raised questions about the 

extent that credit unions remain unique and serve a different population 

than banks. We last conducted a comprehensive review of the credit union 

industry, including the National Credit Union Administration (NCUA), in 

1991.

1

 Since that time, the credit union industry has experienced 

substantial growth and expansion of activities. In addition, recent 

legislative and regulatory changes have blurred some distinctions between 

credit unions and other depository institutions—banks and thrifts. For 

example, the 1998 Credit Union Membership Access Act (CUMAA) 

expanded the definition of common bond and provided for reforms 

intended to strengthen the safety and soundness of credit unions, including 

instituting procedures for prompt corrective action (PCA) when credit 

unions’ capital levels fall below a certain threshold.2 

In 2002, there were about 10,000 credit unions with approximately 82 

million members. Credit unions, like banks and thrifts, are chartered by 

both the federal government and state governments, also referred to as the 

dual-chartering system. NCUA has oversight authority for federally 

1

U.S. General Accounting Office, Credit Unions: Reforms for Ensuring Future Soundness, 

GAO/GGD-91-85 (Washington, D.C.: July 10, 1991). This report contained a variety of 

recommendations to Congress and NCUA. See appendix II for information on the 

implementation of these recommendations. 

2

See Pub. L. No. 105-219 (Aug. 7, 1998). 

Page 1 GAO-04-91 Changes in Credit Union Industry 
chartered credit unions and requires its credit unions to obtain federal 

share (deposit) insurance for their members’ deposits from the National 

Credit Union Share Insurance Fund (NCUSIF). This fund, administered by 

NCUA, also provides share insurance to most state-chartered credit unions. 

Some states permit their credit unions to purchase private share insurance 

as an alternative to federal insurance. 

In light of the evolution of the credit union industry and the passage of 

CUMAA, you asked us to review a variety of issues involving the credit 

union industry and NCUA. In response, we provided your staff information 

on how NCUA responded to recommendations made in our 1991 report and 

conducted preliminary research on the industry and NCUA.3

 After 

discussing this information with your staff, we agreed that the objectives of 

this study were to evaluate (1) the financial condition of the credit union 

industry; (2) the extent to which credit unions “make more available to 

people of small means credit for provident purposes”;4

 (3) the impact, if 

any, of CUMAA on credit union field of membership requirements for 

federally chartered credit unions; (4) how NCUA’s examination and 

supervision processes have changed in response to changes in the industry; 

(5) the financial condition of NCUSIF; and (6) the risks associated with the 

use of private share insurance. You also asked us to review issues 

associated with corporate credit unions, which we plan to address in a 

separate report.5 

3

In addition, we recently completed a separate review of private insurance issues. See U.S. 

General Accounting Office, Federal Deposit Insurance Act: FTC Best Among Candidates to 

Enforce Consumer Protection Provisions, GAO-03-971 (Washington, D.C.: Aug. 20, 2003). 

4

This quotation is taken from the title of the Federal Credit Union Act of June 26, 1934. In 

addition, in CUMAA the congressional findings stated among other things that credit unions 

“have the specified mission of meeting the credit and savings needs of consumers, 

especially persons of modest means (Pub. L. No. 105-219 § 2 (1998)). While these statutes 

have used “small means” and “modest means” to describe the type of people who credit 

unions might serve, in this report we used “low- and moderate-income,” as defined by 

banking regulators. 

5

A corporate credit union is one whose members are credit unions, not individuals. 

Corporate credit unions provide credit unions with services, investment opportunities, 

loans, and other forms of credit should credit unions face liquidity problems. See 12 C.F.R. 

Part 704 (2003). 

Page 2 GAO-04-91 Changes in Credit Union Industry 
To evaluate the financial condition of the credit union industry we 

performed quantitative analyses on credit union call report data for 1992– 

2002.

6

 Since NCUA lacked readily available data to assess the extent to 

which credit unions serve people of low and moderate incomes, we 

analyzed data from the 2001 Federal Reserve Survey of Consumer Finances 

(SCF) to identify the characteristics of credit union members. This survey 

is the only comprehensive source of publicly available data on financial 

institutions and consumer demographics that we could identify that is 

national in scope. We also analyzed 2001 mortgage data from the Home 

Mortgage Disclosure Act (HMDA) database, which allowed us to categorize 

the income levels of households receiving mortgages from credit unions 

and banks, and reviewed other industry studies. To determine how CUMAA 

affected field of membership requirements for federally chartered credit 

unions, we analyzed NCUA regulations and obtained data on field of 

membership trends from NCUA. In addition, we surveyed state regulators 

to obtain information about their chartering provisions, particularly for 

credit unions serving geographic areas. To determine how NCUA’s 

examination and supervision process has changed, we reviewed NCUA 

documentation on its risk-focused program and conducted structured 

interviews of NCUA regional directors and examiners, as well as selected 

state credit union supervisors. We also analyzed NCUA data on examiner 

resources provided to states and progress in implementing PCA. To 

determine the financial condition of NCUSIF, we obtained and analyzed 

key financial data about the fund from NCUA’s annual audited financial 

statements for 1991–2002. Finally, to assess the risks associated with the 

use of private share insurance, we identified and analyzed relevant federal 

and state statutes and regulations and surveyed the 50 state credit union 

regulators to determine which states permitted private share insurance. In 

addition, we conducted interviews with state supervisors from states 

where credit unions are permitted to choose private insurance—Alabama, 

California, Idaho, Illinois, Indiana, Maryland, Nevada, and Ohio. We also 

interviewed and obtained relevant documentation from representatives of 

American Share Insurance (ASI)—the remaining provider of private share 

insurance. Appendix I provides additional details on our scope and 

6

We only reviewed federally insured credit unions—about 98 percent of all credit unions— 

because they were all required to submit call report data to NCUA, while not all privately 

insured credit union call report data were reported to NCUA. Call reports are submitted by 

credit unions to NCUA and contain data on a credit union’s financial condition and other 

operating statistics. Throughout the report, when we use the term “industry,” we are 

referring to federally insured credit unions and exclude the 212 privately insured credit 

unions. 

Page 3 GAO-04-91 Changes in Credit Union Industry 
methodology. We conducted our review from August 2002 through 

September 2003 in accordance with generally accepted government 

auditing standards. 

Results in Brief	 The overall financial condition of the credit union industry, as measured by 

capital ratios, asset growth, and regulatory ratings, has improved since our 

last report in 1991. An example of the improved condition of the credit 

union industry is the decline in the number of credit unions identified by 

NCUA as being in weak or unsatisfactory condition—578 (about 5 percent 

of all credit unions) in 1992 compared with 211 (about 2 percent of all 

credit unions) in 2002.7

 While credit union profitability, as measured by the 

return on assets ratio, generally declined between 1992 and 1999, it has 

since stabilized. The number of credit unions declined between 1992 and 

2002 while total industry assets have grown. This has resulted in two 

distinct groups of credit unions—larger credit unions, which are fewer in 

number and provide a wider range of services that more closely resemble 

those offered by banks, and smaller credit unions, which are greater in 

number and provide more basic financial services. Credit unions with over 

$100 million in assets represented about 4 percent of all credit unions and 

52 percent of total credit union assets in 1992 compared with about 11 

percent of all credit unions and 75 percent of total credit union assets in 

2002. These larger credit unions were more likely to provide sophisticated 

financial services, such as Internet banking and electronic loan 

applications, and engage in mortgage lending than smaller credit unions. 

As credit unions have become larger and expanded the range of services 

they offer, the question of who receives services from credit unions has 

been widely debated. While it has been generally accepted that credit 

unions have a historical emphasis on serving people of modest means, 

limited data exist that can be used to assess the income characteristics of 

credit union members. Our analysis of available data suggested that the 

income of credit union members is similar to that of bank customers; 

although credit unions may serve a slightly lower proportion of low- and 

moderate-income households than banks. Our analysis of the Federal 

Reserve’s 2001 Survey of Consumer Finances indicates that 36 percent of 

households that primarily or only used credit unions had low and moderate 

7

NCUA rates credit unions using the CAMEL system, which stands for capital adequacy, 

asset quality, management, earnings, and liquidity. The ratings are 1 (strong), 2 

(satisfactory), 3 (flawed), 4 (poor), and 5 (unsatisfactory). 

Page 4 GAO-04-91 Changes in Credit Union Industry 
incomes compared with 42 percent of households that used banks. Our 

analysis of HMDA 2001 loan application records indicated that credit 

unions provided a slightly lower percentage of their mortgages to low- and 

moderate-income households than banks—27 percent compared with 34 

percent—of comparable asset size. However, relying on HMDA data to 

evaluate credit union service to low- and moderate-income households has 

limitations because most credit unions are (1) small and, therefore, not 

required to report HMDA data and (2) generally make more consumer 

loans (for example, for cars) than residential mortgage loans. An analysis 

of consumer loans or other services by household income would provide a 

more complete picture of credit union service to low- and moderateincome households. Other industry studies concluded that credit union 

members tended to have higher incomes than nonmembers, but indicated 

that this was likely due to credit union membership being primarily 

occupationally based. 

CUMAA authorized preexisting NCUA policies that had enabled federally 

chartered credit unions to expand their membership over the last two 

decades. In response to a Supreme Court decision, Congress enacted 

provisions of CUMAA permitting federally chartered credit unions to form 

multiple-bond credit unions—consisting of groups, such as for 

employment, each with their own distinguishing characteristics—and 

permitted these credit unions to add communities underserved by financial 

institutions to their membership. NCUA permitted single- and communitybond, federally chartered credit unions to add underserved communities to 

their field of membership as well. CUMAA also amended a chartering 

provision authorizing community credit unions by specifying that the area 

in which their members are located should be “local.” However, NCUA 

regulations have made it easier for credit unions to qualify to serve larger 

geographic areas (for example, entire cities). According to NCUA officials, 

these changes were necessary to maintain the competitiveness of the 

federal charter with respect to what they perceived as less restrictive field 

of membership requirements allowed for state-chartered credit unions in 

some states. While CUMAA permitted multiple-bond credit unions to add 

underserved areas, and NCUA has stated its commitment to ensuring that 

credit unions provide financial services to all segments of society, NCUA 

has not developed indicators to determine if credit union services have 

reached the underserved. Instead, NCUA uses “potential membership,” the 

number of people who could join credit unions, as an indirect measure of 

credit union success in penetrating these areas. 

Page 5 GAO-04-91 Changes in Credit Union Industry 
In response to the growing concentration of assets in the credit union 

industry and increased services and activities offered by credit unions, 

NCUA adopted a risk-focused examination and supervision program 

similar to that of other depository institution regulators. While NCUA has 

taken a number of steps to ensure the successful implementation of its riskfocused program, it faces a number of challenges. NCUA has met with the 

other depository institution regulators, such as the Federal Deposit 

Insurance Corporation (FDIC), to learn about how they implemented their 

risk-focused programs. However, opportunities exist to further leverage the 

experiences of other depository institution regulators to more effectively 

deal with ongoing challenges such as ensuring that examiners have 

sufficient training and expertise to evaluate the more sophisticated 

activities of credit unions, such as Internet banking and member business 

lending. Furthermore, unlike the other depository institution regulators, 

NCUA lacks authority to review the operations of third-party vendors, 

which credit unions increasingly rely on to provide services such as 

Internet banking. However, these third-party arrangements present risks 

such as threats to security of information systems, availability and integrity 

of systems, and confidentiality of information. In addition, credit unions 

are not subject to the internal control reporting requirements that the 

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 

imposed on banks and thrifts. NCUA implemented PCA, in 2000 as 

mandated by CUMAA, as another control for safety and soundness of the 

industry. To date, there have been very few credit unions subject to PCA 

partially because of a generally favorable economic climate for credit 

unions. 

Indicators of the financial condition and performance of NCUSIF have 

generally been stable over the past decade. For example, the ratio of fund 

equity to insured shares—a measure of the fund’s equity available to cover 

losses on insured deposits—was within statutory requirements at 

December 31, 2002, as it has been over the past decade. While NCUSIF’s net 

income has remained positive through 2002, it experienced significant 

declines in 2001 and 2002 due to decreased yields from the investment 

portfolio, increases in the amount paid to NCUA’s Operating Fund for 

administrative expenses (overhead transfer rate), and increasing insurance 

losses on failed credit unions. NCUA’s external auditors reviewed the basis 

on which the transfer rate was determined and made several 

recommendations for improvement that, according to NCUA officials, are 

being assessed and implemented. While financial indicators have generally 

remained satisfactory, NCUSIF is the only share or deposit insurance fund 

that has not adopted a risk-based insurance structure. Currently, credit 

Page 6 GAO-04-91 Changes in Credit Union Industry 
unions are assessed a flat rate that does not reflect the risk that individual 

credit unions pose to the fund. Moreover, NCUA’s process for estimating 

anticipated losses to the fund lacks precision, as it does not identify 

specific historical failure rates and related loss rates for the group of credit 

unions that have been identified as being in troubled condition. As a result, 

NCUA may be over or underestimating probable losses to the fund. 

The overall system risk to the credit union industry that may be created by 

private primary share insurance appears to have decreased since 1990, 

although some concerns remain. The number of privately insured credit 

unions and providers of private primary share insurance have declined 

significantly since 1990. Specifically, in 1990, there were 1,462 privately 

insured credit unions—with $18.6 billion in insured shares—compared 

with 212 privately insured credit unions—with about $10.8 billion in 

insured shares, as of December 2002. This represented a 42 percent 

decrease in privately insured shares. Moreover, during the same period the 

number of private primary share insurers decreased from 10 to 1—ASI. 

Although the use of private share insurance has declined, some 

circumstances of the remaining private insurer raise concerns. First, ASI’s 

insured risks are overly concentrated in a few large credit unions and in 

certain states. Second, ASI may have a limited ability to absorb 

catastrophic losses because it does not have the backing of any 

governmental entity and its lines of credit are limited. However, ASI has 

implemented a number of risk-management strategies, including increased 

monitoring of its largest credit unions to help mitigate concentration risk. 

In addition, state regulation of ASI and the privately insured credit unions it 

insures provides some additional assurance that ASI and the credit unions 

operate in a safe and sound manner. One additional concern, as we recently 

reported, is that many privately insured credit unions failed to make 

required disclosures about not being federally insured and, therefore, the 

members of these credit unions may not have been adequately informed 

that their deposits lacked federal deposit insurance. 

This report contains recommendations to NCUA and matters for 

congressional consideration that, if implemented, would better ensure 

NCUA’s ability to achieve its goal of ensuring that credit unions can safely 

provide financial services to all segments of society, promote greater 

consistency in federal oversight of depository institutions, and enhance 

share insurance management. 

We requested comments on a draft of this report from the Chairman of the 

National Credit Union Administration and the President and Chief 

Page 7 GAO-04-91 Changes in Credit Union Industry 
Executive Officer of American Share Insurance. We received written 

comments from NCUA and ASI that are discussed in this report and 

reprinted in appendixes XI and XII respectively. NCUA generally agreed 

with most of the report’s assessment regarding the challenges facing NCUA 

and credit unions since 1991 and planned to implement the majority of the 

report’s recommendations. In commenting on a draft of the private share 

insurance section, ASI stated that this report did not adequately assess the 

private share insurance industry and objected to our conclusions that ASI’s 

risks are concentrated in a few large credit unions and a few states; it has 

limited ability to absorb large losses because it does not have the backing 

of any governmental agency; and its lines of credit are limited in the 

aggregate as to amount and available collateral. In response, we considered 

ASI’s positions and materials provided, including ASI’s actuarial 

assumptions and ASI’s past performance, and believe our report addresses 

these issues correctly as originally presented. 

Background	 Credit unions differ from other depository institutions because of their 

cooperative structure and tax exemption. Credit unions are member-owned 

cooperatives run by boards elected by their members. They do not issue 

capital stock; rather, they are not-for-profit entities that build capital by 

retaining earnings. However, like banks and thrifts, credit unions have 

either federal or state charters. Federal charters have been available since 

1934 when the Federal Credit Union Act was passed. States have their own 

chartering requirements. As of December 2002, the federal government 

chartered about 60 percent of the nearly 10,000 credit unions, and about 40 

percent were chartered by their respective states. Both federally and statechartered credit unions are exempt from federal income taxes, with 

federally chartered and most state-chartered credit unions also exempt 

from state income and franchise taxes. 

Another distinguishing feature of credit unions is that they may serve only 

an identifiable group of people with a common bond. A common bond is 

the characteristic that distinguishes a particular group from the general 

public. For example, a group of people with a common profession or living 

in the same community could share a common bond. Over the years, 

common-bond requirements at the state and federal levels have become 

less restrictive, permitting credit unions consisting of more than one group 

Page 8 GAO-04-91 Changes in Credit Union Industry 
having a common bond to form “multiple-bond” credit unions.8

 The term 

“field of membership” is used to describe all the people, including 

organizations, that a credit union is permitted to accept for membership. As 

previously noted, the loosening of common-bond restrictions, as well as 

expanded powers, have brought credit unions into more direct competition 

with other depository institutions, such as banks. In addition, credit unions 

can offer members additional services made available by third-party 

vendors and by certain profit-making entities with which they are 

associated, referred to as credit union service organizations (CUSO).9 

CUMAA was the last statute that enacted major provisions affecting, 

among other things, how federally chartered credit unions could define 

their fields of membership and how federally insured credit unions 

demonstrate the safety and soundness of their operations. In February 

1998, the Supreme Court ruled that NCUA lacked authority to permit 

federal credit unions to serve multiple membership groups.10 In response, 

CUMAA authorized multiple-group chartering, subject to limitations NCUA 

must consider when granting charters. Also, the act limited new 

community charter applications to well-defined “local” communities. 

Moreover, CUMAA placed several additional restrictions on federally 

insured credit unions. It tightened audit requirements, established PCA 

requirements when capital standards were not met, and placed a cap on the 

percentage of funds that a credit union could expend for member business 

loans. 

NCUA has oversight responsibility for federally chartered credit unions and 

has issued regulations that, among other things, guide their field of 

membership and the scope of services they can offer. NCUA also has 

responsibility for overseeing the safety and soundness of federally insured 

credit unions through examinations and off-site monitoring. In addition, 

8

See GAO/GGD-91-85 for additional background on the history of NCUA and state field of 

membership regulatory policies. 

9

A CUSO is a corporation, limited liability corporation, or limited partnership that provides 

services such as insurance, securities, or real estate brokerage, primarily to credit unions or 

members of affiliated credit unions. NCUA specifies which types of activities a CUSO may 

undertake. Credit unions can invest up to 1 percent of paid–in and unimpaired capital and 

surplus in CUSOs. Credit unions can loan up to an aggregate of 1 percent of paid–in and 

unimpaired capital and surplus to CUSOs. The CUSO must maintain a separate identity from 

the credit union. See 12 C.F.R. Part 712 (2003). 

10National Credit Union Administration v. First National Bank & Trust Co., 522 U.S. 479 

(1998). 

Page 9 GAO-04-91 Changes in Credit Union Industry 
NCUA administers NCUSIF, which provides primary share (deposit) 

insurance for 98 percent of the nation’s credit unions.11 NCUA, in its role as 

administrator of NCUSIF, is responsible for overseeing federally insured, 

state-chartered credit unions to ensure that they pose no risk to NCUSIF. 

State governments have responsibility for regulating state-chartered credit 

unions. State regulators oversee the safety and soundness of statechartered credit unions; although, as mentioned above, NCUA also has 

responsibility for ensuring that state-chartered credit unions that are 

federally insured pose no risk to NCUSIF. States set their own rules 

regarding field of membership and the services credit unions can provide. 

In addition, some states allow the credit unions in their states the option of 

obtaining private primary share insurance. Currently, 212 credit unions in 

eight states have primary share insurance from a private company, ASI, 

located in Ohio. Primary share insurance for these privately insured credit 

unions covers up to $250,000. 

Financial Condition of 

the Credit Union 

Industry Has Improved 

Since 1991 

Between 1992 and 2002, the capital ratios of federally insured credit unions 

improved and remained higher than those of other depository institutions. 

The industry’s assets also grew over this period, coincident with an 

increased emphasis on mortgage loans. Credit union industry profitability, 

after declining from 1992 to 1999, has since stabilized. In addition, since 

1991 there has been a significant drop in the number of problem credit 

unions as measured by regulatory ratings. Consolidation in the industry has 

continued while total industry assets have grown, which has in part 

resulted in two distinct groups of federally insured credit unions—larger 

credit unions, which are fewer in number and provide a wider range of 

services that more closely resemble those offered by banks, and smaller 

credit unions, which are larger in number and provide more basic financial 

services. 

11Generally, primary deposit insurance covers the first portion of members' deposits up to a 

specified amount. For example, NCUSIF provides primary deposit insurance up to $100,000 

per member per qualifying account. In contrast, excess deposit insurance is optional 

coverage above the amount provided by primary deposit insurance that credit unions may 

purchase from private insurers. 

Page 10 GAO-04-91 Changes in Credit Union Industry 
Credit Union Capital Ratios 

Have Improved Since 1991 

and Remain Higher Than 

Those of Banks 

The capital of federally insured credit unions as a percent of total industry 

assets—the capital ratio—increased steadily between 1992 and 1997 and 

has since remained mostly level. As shown in figure 1, the capital ratio of 

the industry was 8.1 percent in 1992, increased to 11.1 percent in 1997, and 

was 10.9 percent in 2002. As a point of comparison, the capital ratio of 

credit unions has remained higher than that of banks and thrifts since 

1992.

12 As a result, credit unions have a greater proportion of assets 

available to cover potential losses than banks and thrifts. This may be 

appropriate since credit unions, unlike banks, are unable to raise capital in 

the capital markets but must instead rely on retained earnings to build and 

maintain their capital levels. 

Figure 1: Comparison of Credit Union and Bank Capital Ratios, 1992–2002 

Capital ratio 

12 

10 

8 

6 

4 

2 

0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Credit unions 

Banks and thrifts 

Source: Call report data. 

Note: Bank and thrift data are from all FDIC-insured institutions filing call reports, excluding insured 

branches of foreign institutions. 

12Throughout the report we use the terms “banks,” “banks and thrifts,” and “FDIC-insured 

institutions” interchangeably. 

Page 11 GAO-04-91 Changes in Credit Union Industry 
Industry Assets Have Grown 

and Asset Composition Has 

Changed 

Total loans as a percent of total assets of federally insured credit unions 

grew between 1992 and 2002. In 1992, 54 percent of credit union assets 

were made up of loans and 16 percent were in U.S. government and agency 

securities, while in 2002 loans represented 62 percent of industry assets, 

and U.S. government and agency securities represented 14 percent of total 

assets. The largest category of credit union loans was consumer loans (a 

broad category consisting of unsecured credit card loans, new and used 

vehicle loans, and certain other loans to members, but excluding real estate 

loans such as mortgage or home equity loans), followed by real estate 

loans. For example, in 2002, 31 percent of credit union total assets were 

classified as consumer loans and 26 percent were classified as real estate 

loans. 

However, over time, holdings of real estate loans have grown more than 

holdings of consumer loans. For example, real estate loans grew from 19 

percent of total assets in 1992 to 26 percent in 2002, while consumer loans 

grew from 30 percent to 31 percent over the same period. Despite a larger 

increase in real estate lending relative to consumer lending, credit unions 

still had a significantly larger percentage of consumer loans relative to total 

assets compared with their peer group banks and thrifts: consumer loan 

balances of peer group banks and thrifts were less than 8 percent of total 

assets in 2002. To provide context, in terms of dollar amounts, credit 

unions had $175 billion in consumer loans while peer group banks and 

thrifts had $190 billion in consumer loans. However, these banks and thrifts 

held a greater percentage of real estate loans than credit unions. See 

appendix III for additional details. 

Credit Union Profitability 

Has Been Relatively Stable 

in Recent Years 

The profitability of credit unions, as measured by the return on average 

assets, has been relatively stable in recent years.13 The industry’s return on 

average assets was higher in the early to mid-1990s than in the late 1990s 

and early 2000s. While declining from 1.39 in 1993 to 0.94 in 1999, the return 

on average assets has since stabilized. It has generally hovered around 1, 

which, by historical banking standards, is a performance benchmark, and it 

was reported at 1.07 as of December 31, 2002. For comparative purposes, 

the return on average assets for peer group banks and thrifts was 1.24 in 

2002. Earnings, or profits, are an important source of capital for financial 

13The return on average assets is calculated as the current period’s net income divided by the 

average of current period assets and prior year-end assets. 

Page 12 GAO-04-91 Changes in Credit Union Industry 
institutions in general and are especially important for credit unions, as 

they are mutually owned institutions that cannot sell equity to raise capital. 

As previously mentioned, credit unions create capital, or net worth, by 

retaining earnings. Most credit unions begin with no net worth and 

gradually build it over time. 

Regulatory Ratings Have 

Improved 

Since we last reported on the financial condition of credit unions, there has 

been a significant drop in the number of problem credit unions as 

measured by the regulatory ratings of individual credit unions. Regulatory 

ratings are a measure of the safety and soundness of credit union 

operations, and credit unions with an overall CAMEL rating of 4 (poor) or 5 

(unsatisfactory) are considered problem credit unions. The number of 

problem credit unions declined by 63 percent from 578 (5 percent of all 

credit unions) in 1992 to 211 (2 percent of total) in 2002. 

Consolidation in Industry 

Has Widened the Gap 

between Larger and Smaller 

Credit Unions 

Total assets in federally insured credit unions grew from $258 billion in 

1992 to $557 billion in 2002, an increase of 116 percent. During this same 

period, total member shares in these credit unions grew from $233 billion 

to $484 billion, an increase of 108 percent. At the same time, the number of 

federally insured credit unions fell from 12,595 to 9,688. As a result of the 

increase in total assets and the decline in the number of federally insured 

credit unions, the credit union industry has seen an increase in the average 

size of its institutions and a slight increase in the concentration of assets. 

At year-end 1992, credit unions with more than $100 million in assets 

represented 4 percent of all credit unions and 52 percent of total assets; at 

year-end 2002, credit unions with more than $100 million in assets 

represented about 11 percent of all credit unions and 75 percent of total 

assets. From 1992 to 2002, the 50 largest credit unions by asset size went 

from holding around 18 percent of industry assets to around 23 percent of 

industry assets. Despite the slight increase in concentration of assets in the 

credit union industry, it was neither as concentrated as the banking 

industry, nor did it witness the same degree of increased concentration. 

From 1992 to 2002, the 50 largest banks by asset size went from holding 

around 34 percent of industry assets to around 58 percent of industry 

assets. Appendix IV has additional information on assets in federally 

insured credit unions and banks. 

This consolidation in the credit union industry has in part widened the gap 

between two distinct groups of federally insured credit unions—larger 

credit unions, which are relatively few in number and provide a wider 

Page 13 GAO-04-91 Changes in Credit Union Industry 
range of services, and smaller credit unions, which are greater in number 

and provide more basic banking services. Figure 2 illustrates institution 

size and asset distribution in the credit union industry as of 2002, with 

institutions classified by asset ranges; smaller credit unions are captured in 

the first category, while credit unions with assets in excess of $100 million 

are separated into additional asset ranges for illustrative purposes. For 

example, as of December 31, 2002, the 8,642 smaller credit unions—those 

with $100 million or less in total assets—constituted nearly 90 percent of all 

credit unions but held only 25 percent of the industry’s total assets (see 

right-hand axis of fig. 2). Conversely, the 71 credit unions with assets of 

between $1 billion and $18 billion, held 27 percent of total industry assets 

(see right-hand axis of fig. 2) but represented less than 1 percent of all 

credit unions.14 

14There were 68 credit unions with assets between $1 billion and $5 billion, which held 21 

percent of industry assets, and three credit unions with assets in excess of $5 billion, which 

held 6 percent of industry assets. As of December 31, 2002, the largest credit union held 

$17.6 billion in assets. 

Page 14 GAO-04-91 Changes in Credit Union Industry 
Figure 2: Credit Union Industry Size and Total Assets Distribution, as of December 

31, 2002 

Number of credit unions Percentage of total assets 

10,000 30 

8,642 

25 

8,000 

20 

6,000 

15 

4,000 

10 

2,000 

5 

0

602 

240 133 71 

0 

$100 $250 $500 $1,000 $18,000 

Total assets (in millions) 

Number of credit unions 

Percentage of total assets 

Source: Call report data. 

Note: This figure depicts credit union industry distribution both in terms of the number of federally 

insured institutions in a particular size category as well as the percentage of industry assets that are 

held by institutions in that category. Group I credit unions had assets of $100 million or less; Group II 

credit unions had assets greater than $100 million and less than or equal to $250 million; Group III 

credit unions had assets greater than $250 million and less than or equal to $500 million; Group IV 

credit unions had assets greater than $500 million and less than or equal to $1 billion; and Group V 

credit unions had assets greater than $1 billion and less than or equal to $18 billion, which is the asset 

size, rounded up to the nearest billion dollars, of the largest credit union as of December 31, 2002. 

Thus, Group I represents smaller credit unions and Groups II, III, IV, and V represent larger credit 

unions. 

We observed that larger credit unions tended to hold a wider variety of 

loans than did smaller credit unions, and larger credit unions emphasized 

different loan types than smaller credit unions. For example, new and used 

vehicle loans have represented a relatively greater proportion of total 

assets for smaller credit unions, and nearly all smaller credit unions held 

such loans. However, while nearly all of the larger credit unions held new 

and used car loans, first mortgage loans represented a relatively greater 

proportion of total assets for larger credit unions. In fact, nearly all larger 

credit unions held first mortgage loans, junior mortgage and home equity 

Page 15 GAO-04-91 Changes in Credit Union Industry 
loans, and credit card loans, while in general less than half of the smaller 

credit unions held these loans. Larger credit unions also tended to be more 

likely to provide more sophisticated services, such as financial services 

through the Internet and electronic applications for new loans. While 

nearly all larger credit unions offered automatic teller machines, less than 

half of smaller credit unions did. In fact, when compared with similarly 

sized peer group banks and thrifts, larger credit unions tended to appear 

very similar to their bank peers in terms of loan holdings. Appendixes IV 

and V provide further details. 

Limited 

Comprehensive Data 

Are Available to 

Evaluate Income of 

Credit Union Members 

As credit unions have become larger and offer a wider variety of services, 

questions have been raised about whether credit unions are more likely to 

serve households with low and moderate incomes than banks. However, 

limited comprehensive data are available to evaluate income of credit 

union members. Our assessment of available data—the Federal Reserve’s 

2001 SCF, 2001 HMDA data, and other studies—provided some indication 

that credit unions served a slightly lower proportion of households with 

low and moderate incomes than banks. Industry experts suggested that 

credit union membership characteristics—occupationally based fields of 

membership and traditionally full-time employment status—could have 

contributed to this outcome. However, limitations in the available data 

preclude drawing definite conclusions about the income characteristics of 

credit union members. Additional information, especially with respect to 

the income levels of credit unions’ members receiving consumer loans, 

would be required to assess more completely whom credit unions serve. 

Data Lacking on Income 

Characteristics of Credit 

Union Members and Users 

It has been generally accepted, particularly by NCUA and credit union 

trade groups, that credit unions have a historical emphasis of serving 

people with modest means. However, there are currently no 

comprehensive data on the income characteristics of credit union 

members, particularly those who actually receive loans and other services. 

As credit unions have become larger and expanded their offerings of 

financial services, industry groups, as well as consumer advocates, have 

debated which economic groups benefit from credit unions’ services. 

Additionally, questions have been raised about credit unions’ exemption 

from federal income taxes. As stated in our 1991 report, and still true, none 

of the common-bond criteria available to federally chartered credit unions 

refers to the economic status of their members or potential members. 

Page 16 GAO-04-91 Changes in Credit Union Industry 
Information on the extent to which credit unions are lending and providing 

services to households with various incomes is scarce because NCUA, 

industry trade groups, and most states (with the exception of 

Massachusetts and Connecticut) have not collected specific information 

describing the economic status of credit union members who obtain loans 

or benefit from other credit union services.15 Credit unions, even those 

serving geographic areas, are not subject to the federal Community 

Reinvestment Act (CRA), which requires banking regulators to examine 

and rate banks and thrifts on lending and service to low- and moderateincome neighborhoods in their assessment area.16 As a consequence, credit 

unions are not required by NCUA or other regulators to maintain data on 

the extent to which loans and other services are being provided to 

households with various incomes. 

However, two states—Massachusetts and Connecticut—collect 

information on the distribution of credit union lending by household 

income and the availability of services because their state-chartered credit 

unions are subject to examinations similar to those of federally regulated 

institutions. Modeled on the federal examination procedures for large 

banks, the state regulators apply lending and service tests to assess 

whether credit unions are meeting the needs of the communities they have 

set out to serve, including low- and moderate-income neighborhoods. 

Massachusetts established its examination procedures in 1982, and 

15The Credit Union National Association (CUNA) collects information about the 

characteristics (for example, income, race, and age) of credit union members but not 

specifically the income levels of members who actually receive mortgage and consumer 

loans or use other services. 

16The CRA requires all federal bank and thrift regulators to encourage depository 

institutions under their jurisdiction to help meet the credit needs of the local communities in 

which they are chartered, consistent with safe and sound operations. See 12 U.S.C. §§ 2901, 

2903, and 2906 (2000). CRA requires that the appropriate federal supervisory authority 

assess the institution’s record of meeting the credit needs of its entire community, including 

low- and moderate-income areas. Federal bank and thrift regulators perform what are 

commonly known as CRA examinations to evaluate services to low- and-moderate income 

neighborhoods. Assessment areas, also called delineated areas, represent the communities 

for which the regulators are to evaluate an institution’s CRA performance. 

Page 17 GAO-04-91 Changes in Credit Union Industry 
Connecticut in 2001.17 All credit unions in Massachusetts are subject to 

these examinations, including those whose field of membership is 

community-based.

18 In contrast, in Connecticut, only state-chartered credit 

unions serving communities with more than $10 million in assets are 

subject to the examination. According to a Connecticut state official, the 

Connecticut legislature established its examination due to an increasing 

trend of multiple-bond credit unions to convert to community-chartered 

bonds, and the $10-million threshold was chosen because the legislature 

believed credit unions of that size would normally have the personnel and 

technological resources to appropriately identify and serve their market. In 

May 2003, Connecticut started to examine community-chartered credit 

unions with assets of more than $10 million. 

Consumer and industry groups have debated if information that 

demonstrates whether credit unions serve low- and-moderate income 

households is necessary. Some consumer groups believe that credit unions 

should supply information that indicates they serve all segments of their 

potential membership. The Woodstock Institute—an organization whose 

purpose is to promote community reinvestment and economic 

development in lower-income and minority communities—recommended, 

among other things, that the CRA requirement should be extended to 

include credit unions, based on a study they believe demonstrated that 

credit unions are not adequately serving low-income households.

19 

Woodstock Institute officials noted that they would prefer to see CRA 

requirements applied to larger credit unions, those with assets over $10 

million. The National Federation of Community Development Credit 

Unions (NFCDCU) has recommended that credit unions whose fields of 

17Overall, State officials reported that credit union examination ratings have been similar to 

those of banks, except that credit unions have received a somewhat lower percentage of 

“outstanding,” the highest rating. As of July 2003, no Massachusetts credit union had a rating 

lower than “satisfactory” for Massachusetts’s version of the CRA examination. The officials 

also noted that analysis of HMDA data by itself is inadequate because loan application 

records do not capture all the information available in an application. 

18The State of Massachusetts permits a credit union not serving geographic areas to 

designate its membership as its assessment area. For example, one credit union, serving a 

major communications company, designated its membership as those who are employees or 

retired employees of the credit union itself; retirees and employees of other communication 

companies, including their affiliates and subsidiaries; and family members of eligible 

employees and retirees. 

19Woodstock Institute, “Rhetoric and Reality: An Analysis of Mainstream Credit Unions’ 

Record of Serving Low Income People” (Chicago: February 2002). 

Page 18 GAO-04-91 Changes in Credit Union Industry 
membership cover large communities should be affirmatively held 

accountable for providing services to all segments of those communities, 

and that NCUA publish annual reports on the progress and status of these 

expanded credit unions.20 In contrast, NCUA and industry trade groups 

have opposed these and related requirements largely because they state 

that no evidence suggests that credit unions do not serve their members.21 

Federal Reserve Board Data 

Suggest That Credit Unions 

Serve a Slightly Lower 

Proportion of Low- and 

Moderate-income 

Households 

Our analysis of the Federal Reserve Board’s 2001 SCF suggested that credit 

unions overall served a lower percentage of households of modest means 

(low- and moderate-income households combined) than banks.22 More 

specifically, while credit unions served a slightly higher percentage of 

moderate-income households than banks, they served a much lower 

percentage of low-income households. The SCF is an interview survey of 

U.S. households conducted by the Federal Reserve Board that includes 

questions about household income and specifically asks whether 

households use credit unions or banks. Our analysis of the SCF indicated 

the following percentages for those households that used a financial 

institution:23 

• 8 percent of households only used credit unions, 

20NFCDCU represents and provides, among other things, financial assistance, technical 

assistance, and human resources to about 215 community development credit unions for the 

purpose of reaching low-income consumers. 

21In 2000, NCUA required that any type of application related to expanding, converting, or 

chartering a community credit union include information known as a “community action 

plan,” which described the credit union’s plan for serving the entire community. In interim 

rules issued in December 2001 and final rules adopted in May 2002, NCUA repealed this 

requirement. In discussion of the final rule, NCUA stated: “It is an unreasonable practice to 

require only certain credit unions to adopt specific written policies addressing service to the 

entire community, without any evidence that these credit unions are failing to serve their 

entire communities.” CUNA and the National Federation of Credit Unions concurred with 

this decision. CUNA further noted that the imposition of this requirement could encourage 

federally chartered credit unions to convert to a state charter. 

22The SCF is conducted every 3 years and is intended to provide detailed information on the 

balance sheet, pension, income, and other demographic characteristics of U.S. households 

and their use of financial institutions. See appendix I for details. 

23These percentages reflect the percent of households using financial institutions as a 

percent of all financial institution users and does not include those households that are 

sometime referred to as unbanked. 

Page 19 GAO-04-91 Changes in Credit Union Industry 
• 13 percent of households primarily used credit unions,24 

• 17 percent of households primarily used banks, and 

• 62 percent of households only used banks. 

To provide a more consistent understanding of our survey results, we used 

the same income categories used by financial regulators—low, moderate, 

middle, and upper—in their application of federal CRA examinations.25 

To determine the extent to which credit unions served people of “modest 

means,” we first combined households with low or moderate incomes into 

one group and combined households with middle or upper incomes into 

another group. We then combined the SCF data into two main groups— 

households that only and primarily used credit unions versus households 

that only and primarily used banks. As shown in figure 3, this analysis 

indicated that about 36 percent of households that only or primarily used 

credit unions had low or moderate incomes, compared with 42 percent of 

households that used banks. Moreover, our analysis suggested that a 

greater percentage of households that only and primarily used credit 

unions were in the middle- and upper-income grouping than the proportion 

of households that only and primarily used banks. 

24Those who “primarily” used credit unions placed more than 50 percent of their assets in 

credit unions and those who “primarily” used banks placed more than 50 percent of their 

assets in banks. The term “use” refers to a household’s placement of assets in a checking, 

savings, or money market account. Our methodology for determining these classifications 

was based on work performed by Dr. Jinkook Lee, a professor and researcher at Ohio State 

University. See Jinkook Lee and William A. Kelly Jr., in “Who Uses Credit Unions?” 

(Prepared for the Filene Research Institute and the Center for Credit Union Research, 1999, 

2001). 

25See appendix I for the income category definitions. 

Page 20 GAO-04-91 Changes in Credit Union Industry 
Figure 3: Income Characteristics of Households Using Credit Unions versus Banks, 

Low and Moderate Income versus Middle and High Income 

Percentage of households 

70 

64 

60 

50 

40 

30 

20 

10 

0 

42 

58 

36 

Households Households 

only and primarily only and primarily 

using credit unions using banks 

Low and moderate income 

Middle and upper income 

Source: 2001 SCF. 

To better understand the distribution of households by income category, 

we also looked at each of the four income categories separately. As shown 

in figure 4, this analysis suggested that the percentage of households that 

only and primarily used credit unions in the low-income category was 

lower than the percentage of households that used banks in the same 

category (16 percent versus 26 percent). In contrast, households that only 

and primarily used credit unions were more likely to be moderate- and 

middle-income (19 percent and 22 percent) than those that only and 

primarily used banks (16 and 17 percent). Given that credit union 

membership has traditionally been tied to occupational- or employer-based 

fields of membership, the higher percentage of moderate- and middleincome households served by credit unions is not surprising. 

Page 21 GAO-04-91 Changes in Credit Union Industry 
Figure 4: Income Characteristics of Households Using Credit Unions versus Banks, 

by Four Income Categories 

Percentage 

50 

43 

40 

30 

20 

10 

0 

Households only and Households only and 

primarily using credit unions primarily using banks 

16 

26 

19 

16 

22 

17 

41 

Low income 

Moderate income 

Middle income 

Upper income 

Source: 2001 SCF. 

Note: We found no statistical difference in the percentage of upper-income households when the only 

and primarily using credit union group and the only and primarily using bank group were compared. 

We also attempted to further explore the income distribution of credit 

unions’ members by separately analyzing households that only used credit 

unions or banks from those that primarily used credit unions or banks. 

However, the results were subject to multiple interpretations due to 

characteristics of the households in the SCF database. For example, when 

user groups are combined and compared, the results may look different 

than when the groups are separated and compared. Because such a high 

percentage of the U.S. population only uses banks (62 percent), the data 

obtained from the SCF is particularly useful for describing characteristics 

of bank users but much less precise for describing smaller population 

groups, such as those that only used credit unions (8 percent). 

Page 22 GAO-04-91 Changes in Credit Union Industry 
In addition to assessing the income characteristics of households using 

credit unions and banks, we also performed additional analysis by 

education, race, and age. The results of these analyses can be found in 

appendix VI. 

Credit Unions Made a 

Slightly Lower Proportion of 

Mortgage Loans to 

Households with Low and 

Moderate Incomes Than 

Banks 

As an indicator of the income levels of households that utilize credit union 

services, we used 2001 HMDA loan application records to analyze the 

income of households receiving mortgages for the purchase of one-to-four 

family homes from credit unions and peer-group banks.26 Our analysis 

indicated that credit unions reporting HMDA data made a lower proportion 

of mortgage loans to households with low and moderate incomes than 

peer group banks reporting HMDA data—27 percent compared with 

34 percent.27 More specifically, credit unions made 7 percent of their loans 

to low-income households compared with 12 percent for banks, and credit 

unions made 20 percent of their loans to moderate-income households 

compared with 22 percent for banks (see fig. 5).

28 

26HMDA, 12 U.S.C. §§ 2801-2811 (2000), was enacted to provide regulators and the public 

with information on home mortgage lending so that both could determine whether 

institutions were serving the credit needs of their communities. As required by the Federal 

Reserve Board's Regulation C (12 C.F.R. Part 203), lenders subject to HMDA are required to 

collect data containing information about the loan and the loan applicant. This information 

is submitted on files known as loan application registers (loan records). HMDA-reportable 

mortgages include those for home purchase, home improvement, and refinancing of home 

purchase loans, but we analyzed only those made for home purchases because these loans 

are a gateway to homeownership and other loans are easier to obtain. See appendix I for 

more information. 

27We created a bank peer group that consisted of financial institutions with less than $16 

billion in assets because the largest credit union held assets between $15 billion and $16 

billion as of December 2001. We excluded financial institutions that only made mortgages. 

Our analysis included 4,195 peer group banks. 

28To categorize the home purchaser’s income, we used the 2001 HUD-estimated median 

income estimates for each Metropolitan Statistical Area (MSA) based on the 1990 U.S. 

Census, as supplied by the Federal Reserve Board. Results may have been more accurate if 

these estimates were based on the 2000 U.S. Census. In 2003, HUD must begin basing their 

median income estimates on the 2000 U.S. Census. 

Page 23 GAO-04-91 Changes in Credit Union Industry 
Figure 5: Mortgages Made by Credit Unions and Banks, by Income Level of 

Purchaser, 2001 

Percentage of loans 

50 

44 

40 

30 

20 

10 

0 

Credit unions Peer group banks 

7 

12 

20 

22 

30 

27 

39 

Low-income purchasers 

Moderate-income purchasers 

Middle-income-purchasers 

Upper-income purchasers 

Source: 2001 HMDA database. 

Note: About 16 percent of all credit union and peer group bank loans reported to HMDA were excluded 

from this analysis because their loan records did not identify the MSA of the purchased property. 

Because we did not know the MSA, we could not calculate a MSA median income to categorize the 

loan. HMDA reporting requirements allow for the omission of the MSA when the property is not located 

in an MSA where the institution has a home or branch office. Also, percentages of loans made by 

credit unions do not add up to 100 percent due to rounding. 

We also analyzed and compared the proportion of mortgage loans reported 

by peer group banks and credit unions for the purchase of homes by the 

median family income of the census tracts in which the homes were 

located. We found that credit unions made roughly the same proportion of 

loans for the purchase of homes, by census tract income category, as 

banks. For example, we found that both credit unions and banks made 1 

percent of their loans for the purchase of homes in low-income census 

tracts and that credit unions made 9 percent of their loans for the purchase 

of properties in moderate-income census tracts compared with 10 percent 

by banks (see fig. 6). In addition, we found that both credit unions and 

banks made 54 percent of their loans for the purchase of homes in middlePage 24 GAO-04-91 Changes in Credit Union Industry 
income census tracts, and that credit unions made about 37 percent of their 

loans in upper-income census tracts compared with 35 percent by banks. 

This analysis is a measure of whether all neighborhoods (census tracts 

within an assessment area) are receiving financial services, including lowand moderate-income ones. 

Figure 6: Loans Made by Credit Unions and Banks, by Average Income in the 

Purchased Home's Census Tract, 2001 

Percentage of loans 

60 

50 

40 

30 

20 

10 

0 

54 54 

1 

9 10 

37 

35 

1 

Credit unions Peer group banks 

Low-income tract 

Moderate-income tract 

Middle-income-tract 

Upper-income tract 

Source: 2001 HMDA database. 

Note: About 16 percent of the credit union and peer group bank loans reported to HMDA were 

excluded from this analysis because their loan records did not identify the census tract of the 

purchased property. Because we did not know the census tract, no census tract median income was 

available to categorize the loan. HMDA reporting requirements allow for the omission of the census 

tract locations under certain conditions; for example, when the property did not have an identified 

census tract for the 1990 census or was located in a county with a population of 30,000 or less. Also, 

percentages of loans made by credit unions do not add up to 100 percent due to rounding. 

Because each HMDA loan record identified the income of the mortgage 

loan recipient and the location of the property, the HMDA database allowed 

us to determine the proportion of mortgages made within the four income 

Page 25 GAO-04-91 Changes in Credit Union Industry 
categories—low, moderate, middle, and upper—used by financial 

regulators for CRA examinations. However, not all financial institutions are 

required to report HMDA data—for example, depository institutions were 

exempt from reporting data in 2001 if they had assets less than $31 million 

as of December 31, 2000, and if they did not have a home or branch office in 

an MSA. Further, not all credit unions, including those that had more than 

$31 million in assets, made home purchase loans.29 As a result, most credit 

unions did not meet HMDA’s reporting criteria—only about 14 percent of all 

credit unions submitted data included in our analysis.30 On the other hand, 

the credit unions that did report their loans to HMDA held about 70 percent 

of credit union assets and included about 62 percent of all credit union 

members. 

HMDA Analysis Has Certain 

Limitations 

Our analysis of HMDA data allowed us to determine the overall proportion 

of mortgage loans credit unions and peer group banks made to households 

and neighborhoods with low and moderate incomes. However, we would 

need information on the proportion of low- and moderate-income 

households within credit union fields of membership to actually make an 

evaluation of whether credit unions, collectively or individually, have met 

the credit needs of their entire field of membership. Similar to analyses 

used in federal CRA lending tests, this information could then be used as a 

baseline from which to evaluate an individual credit union’s actual lending 

record.31 In addition, information on factors (for example, a community’s 

economic condition, local housing costs) that could affect the ability of a 

29Our analysis of NCUA call report data indicated that 93 percent of credit unions with more 

than $31 million in assets, as of December 31, 2000, made first mortgage loans, loans that 

include home purchase loans, compared with only 34 percent of credit unions with fewer 

assets. 

30In total, for 2001, 1,717 credit unions reported data to HMDA, but our analyses only 

included the 1,446 that made mortgage loans that met our criteria. For example, we only 

included mortgage loans for home purchases rather than refinancing. 

31For larger institutions, those with more than $250 million in assets, CRA examinations 

generally consist of three parts—a lending test, a service test, and an investment test. The 

lending test entails a review of an institution’s lending record, including originations and 

purchases of home mortgages, small business, small farm, and, at the institution’s option, 

consumer loans throughout the institution's assessment area, including low- and moderateincome areas. The lending test is weighted more heavily than the investment and service 

tests in the institution’s overall CRA rating. The service test requires the examiner to analyze 

an institution’s system for delivering retail banking services and the extent and 

innovativeness of its community development services. The investment test evaluates an 

institution’s investment in community development activities. 

Page 26 GAO-04-91 Changes in Credit Union Industry 
credit union to make loans consistent with safe and sound lending would 

be necessary to evaluate an institution’s lending record. If regulators were 

to make these types of evaluations for credit unions, they would be easier 

to implement for those serving geographic areas because demographic 

information (for example, on census tract median income levels) would be 

available to describe credit union field of membership. For credit unions 

with an occupational or associational membership, other ways of 

characterizing their field of membership would need to be determined. 

In addition, as previously mentioned, using HMDA data to analyze credit 

union mortgage lending to members does not provide any information on 

smaller credit unions, because in 2001 credit unions with less than $31 

million in assets as of December 31, 2000, were not required to report 

HMDA data. Because smaller credit unions did not report HMDA data, one 

group of credit unions—the roughly 3,800 credit unions that qualified for 

NCUA’s Small Credit Union Program in December 2002—were largely 

excluded from our HMDA analysis. Credit unions qualifying for assistance 

from this program must have less than $10 million in assets or have 

received a “low-income” designation from NCUA.32 In addition, low-income 

credit unions must demonstrate that more than half of their current 

members meet one of NCUA’s low-income criteria.33 Further, smaller credit 

unions are more likely than larger credit unions to make consumer loans 

than mortgages, making an evaluation of mortgage lending more relevant 

to larger credit unions than smaller ones. Because most credit unions can 

be classified as small, analyzing the distribution of consumer loans by 

household income would provide a more complete picture of credit union 

lending.34 

32These credit unions receive special help from NCUA regional staff, including assistance in 

completing business plans and maintaining financial records. Low-income credit unions 

also qualify for low-interest loans and technical assistance grants and are permitted to 

accept nonmember deposits and secondary capital accounts. According to NCUA estimates, 

as of December 31, 2002, the median asset level of these credit unions was about $3.4 

million. About 107 of these credit unions had more than $32 million in assets, the threshold 

for reporting lending data to HMDA in 2003. 

33As of December 31, 2002, there were 907 low-income credit unions. Credit unions can use a 

number of methods to document their low-income eligibility, such as reviewing loans to 

identify members’ wages or household incomes, or written membership surveys that 

request the members’ total household income and annual wages. 

34See appendix V for more detailed information on credit union services by asset size. 

Page 27 GAO-04-91 Changes in Credit Union Industry 
Other Studies Indicate That 

Credit Unions Serve 

Households with Higher 

Incomes Than Banks 

Other recently published studies—CUNA and the Woodstock Institute— 

generally concluded that credit unions served a somewhat higher-income 

population. The studies noted that the higher income levels could be due to 

the full-time employment status of credit union members. 

The CUNA 2002 National Member Survey reported that credit union 

members had higher average income households than nonmembers— 

$55,000 compared with $46,000.

35 The report provided several reasons for 

the income differential, including the full-time employment status of credit 

union members, credit union affiliation with businesses or companies, and 

weak credit union penetration among some of the lowest-income age 

groups—18 to 24 and 65 and older. However, the report noted that 

additional analyses, specifically those grouping consumers based on the 

extent to which they rely on banks and credit unions as their primary 

provider should also be considered.36 In addition, a study sponsored by the 

Woodstock Institute, based on an analysis of 1999 and 2000 survey 

responses obtained from households in the Chicago, Illinois, metropolitan 

area concluded that credit unions in the Chicago region served a lower 

percentage of lower-income households than they did middle- and upperincome ones.37 For example, while 40 percent of surveyed households with 

incomes between $60,000–$70,000 contained a credit union member, only 

23 percent of households earning between $30,000–$40,000 contained a 

35CUNA 2002 National Member Survey and research and information from CUNA and 

affiliates. CUNA based its statistics on average household income on a survey of 1,000 

randomly selected households conducted in February 2002. The data from this survey were 

weighted to accurately represent U.S. consumers age 18 and older. 

36CUNA supplemented its average income analysis of members and nonmembers with one 

that divided consumers into four institution user groups—as similarly done by Jinkook Lee, 

in “Who Uses Credit Unions” in her analysis of the SCF and in our previous analysis—and 

calculated the average household income of each institution user group. CUNA determined 

that consumers who only used banks and only used credit unions had a lower average 

income than consumers who used both institutions. In addition, when comparing the 

average income of consumers who used both institutions, the analysis concluded that those 

who primarily used credit unions had a slightly lower average income than those who 

primarily used banks. 

37The study cited is “Rhetoric and Reality: An Analysis of Mainstream Credit Unions’ Record 

of Serving Low Income People” (February 2002). To determine the characteristics of credit 

union members, the Woodstock Institute analyzed 1999 and 2000 survey data collected by 

the Metro Chicago Information Center (MCIC). MCIC surveyed roughly 3,000 households in 

the Chicago area and asked respondents whether they were members of a credit union. 

However, the survey did not specifically ask whether the respondents held accounts at a 

bank or credit union. 

Page 28 GAO-04-91 Changes in Credit Union Industry 
credit union member. The study also noted that household members 

working for larger firms, and those who were members of a labor union, 

were significantly more likely to be credit union members. 

Officials from NCUA and the Federal Reserve Board also noted that credit 

union members were likely to have higher incomes than nonmembers 

because credit unions are occupationally based. An NFCDCU 

representative noted that because credit union membership is largely 

based on employment, relatively few credit unions are located in lowincome communities. However, without additional research, especially on 

the extent to which credit unions with a community base serve all of their 

potential members, it is difficult to know whether full-time employment is 

the sole explanatory factor. 

CUMAA Authorized 

NCUA to Continue 

Preexisting Policies 

That Expanded Field of 

Membership 

The Credit Union Membership Access Act of 1998 authorized preexisting 

NCUA policies that had allowed credit unions to expand field of 

membership. In 1998, the Supreme Court ruled against NCUA’s practice of 

permitting federally chartered credit unions to consist of more than one 

common bond.38 In CUMAA, Congress specifically permitted credit unions 

to form multiple-bond credit unions and allowed these credit unions to 

serve underserved areas.39 CUMAA also specified that communitychartered credit unions serve a “local” area.

40 However, after the passage of 

CUMAA, NCUA revised its regulations to make it easier for credit unions to 

serve communities larger than before CUMAA. To some extent, these 

NCUA policies appear to have been triggered by concerns about competing 

with the states to charter credit unions. While CUMAA permitted multiplebond credit unions to add underserved areas to their membership, the 

impact of this provision will be difficult to assess because NCUA does not 

track credit union progress in extending service to these communities. 

38National Credit Union Administration v. First National Bank & Trust Co., 522 U.S. 479 

(1998). 

39Pub. L. No. 105-219 § 101(2). 

40Id. 

Page 29 GAO-04-91 Changes in Credit Union Industry 
CUMAA Permitted NCUA 

Policies Expanding Field of 

Membership 

CUMAA authorized several preexisting NCUA field of membership policies 

that had enabled federally chartered credit unions to expand their fields of 

membership. These policies had allowed credit unions to consist of more 

than one membership group and expand their membership to include 

underserved areas. In addition, CUMAA permitted credit unions to retain 

their existing membership. 

Specifically, CUMAA affirmed NCUA’s 1982 policy of permitting credit 

unions to form multiple-bond credit unions, allowing these credit unions to 

retain their current membership and authorizing their future formation.41 A 

credit union with a single common bond has members sharing a single 

characteristic, for example, employment by the same company. In contrast, 

multiple-bond credit unions consist of more than one distinct group. 

42 

Congressional affirmation of NCUA’s policy of permitting multiple-bond 

credit unions was important because earlier in 1998 the Supreme Court had 

ruled that federally chartered, occupationally based credit unions were 

required to consist of a single common bond.43 Figure 7 provides additional 

information since 2000 on the percent of federally chartered credit unions 

by charter type.44 

41CUMAA permitted the following common bonds: (1) the single common bond, defined as 

one group with a common bond of occupation or association; (2) the multiple common 

bond, defined as including more than one group, each with a common bond of occupation 

or association; and (3) the community bond, defined as persons or organizations within a 

well-defined local community, neighborhood, or rural district. Formation of multiple 

common-bond credit unions is limited to groups having fewer than 3,000 members unless 

NCUA grants an exception based on criteria contained in CUMAA. See 12 U.S.C. § 1759(b), 

(d), as amended. 

42According to NCUA officials, single-bond credit unions are more susceptible to failure 

because they are reliant on one type of occupational group. For example, if an occupational 

group were subject to layoffs, the credit union could lose its membership base or 

experience a decline in assets. 

43National Credit Union Administration v. First National Bank & Trust Co., 522 U.S. 479 

(1998). 

44Although single-bond credit unions included about 38 to 40 percent of all federally 

chartered credit unions between 2000 and March 2003, during this time period they only 

held about 18 percent of all assets of federally chartered credit unions. In contrast, federally 

chartered multiple-bond credit unions held about 70 percent of federal assets in March 2000, 

and this percentage dropped to about 65 percent in 2003. Federally chartered community 

credit unions held about 13 percent of federal assets in 2000, and this percentage increased 

to about 17 percent of assets in March 2003. 

Page 30 GAO-04-91 Changes in Credit Union Industry 
Figure 7: Percentage of Federally Chartered Credit Unions, by Charter Type, 2000–


2003


Percentage of credit unions


50 48 48 48 47 

40 

30 

20 

10 

0 

12 

40 

13 

39 

14 

38 

15 

38 

2000 2001 2002 2003 

(through March) 

Community 

Single bond 

Multiple bond 

Source: NCUA. 

Note: With the exception of the statistics provided for multiple-bond credit unions for 1996, NCUA 

cannot provide us data on federal chartering trends before 2000. However, NCUA was able to report 

that by 1996, about half of all federally chartered credit unions were multiple-bond credit unions. 

In addition, CUMAA affirmed other preexisting NCUA policies. For 

example, CUMAA authorized multiple-bond credit unions to add 

individuals or organizations in “underserved areas” to their field of 

membership. This provision was similar to an NCUA policy that permitted 

multiple-bond credit unions, as well other federally chartered, single-bond, 

and community-chartered credit unions, to add low-income communities 

Page 31 GAO-04-91 Changes in Credit Union Industry 
 to their field of membership.

45 In addition, CUMAA affirmed NCUA’s “once 

a member, always a member policy,” which had been in effect since 1968. 

CUMAA authorized this policy such that credit union members may retain 

their membership even after the basis for the original bond ended.46 

However, CUMAA still contained provisions encouraging the creation of 

new credit unions whenever possible.47 

NCUA Eased Requirements 

for Permitting Credit Unions 

to Serve Larger Geographic 

Areas 

Despite the qualification in CUMAA that a community-chartered credit 

union’s members be within a well-defined “local” community, 

neighborhood, or rural district, NCUA eased requirements for permitting 

credit unions to serve larger geographic areas. CUMAA added the word 

“local” to the preexisting requirement that community-chartered credit 

unions serve a “well-defined community, neighborhood, or rural district,” 

but provided no guidance with respect to how the word “local” or any other 

part of this requirement should be defined.48 

45In 1994, NCUA’s Interpretive Ruling and Policy Statement (IRPS) 94-1 authorized all 

federally chartered credit unions, regardless of bond, to include in their membership, 

without regard to location, communities and associational groups satisfying the definition 

of low income. This program should not be confused with NCUA’s “low-income designated 

program,” which permits credit unions who exclusively serve low-income areas to maintain 

secondary capital and accept nonmember deposits. 

46Pub. L. No. 105-219 § 101 (2), 12 U.S.C. § 1759 (e)(2), as amended. Under this provision, 

once a person becomes a member of a credit union, that person or organization may remain 

a member of that credit union until the person or organization chooses to withdraw from 

membership in the credit union. 

47The Federal Credit Union Act requires NCUA to encourage the formation of separately 

chartered credit unions instead of approving the inclusion of an additional common-bond 

group within the field of membership of an existing credit union. 12 U.S.C. § 1759(f)(1). 

From 1991 to March 2003, only 143 new federally insured credit unions were chartered, an 

average of about 11 to 12 new credit unions per year. NCUA said that small groups are 

generally not economically sustainable and prefer to join multiple-bond credit unions. 

48Pub. L. No. 105-219 § 101; See 12 U.S.C. § 1759(c)(2), as amended. 

Page 32 GAO-04-91 Changes in Credit Union Industry 
Following passage of CUMAA, NCUA expanded the ability of credit unions 

to serve larger geographic areas through its regulatory rulings.

49 

Interpretive Ruling and Policy Statement (IRPS) 99-1, issued soon after 

CUMAA, was the first regulation to set standards for what could be 

considered a “local” area. It required credit unions to document that 

residents of a proposed community area interact or have common 

interests. Credit unions seeking to serve a single political jurisdiction (for 

example, a city or a county) with more than 300,000 residents were 

required to submit more extensive documentation than jurisdictions with 

fewer than 300,000 residents.50 However, IRPS 03-1, which replaced IRPS 

99-1, eliminated these documentation requirements, regardless of the 

number of residents. Further, IRPS 03-1 allowed credit unions to propose 

MSAs with less than 1 million residents for qualification as local areas. See 

table 1 for changes in “local” requirements. NCUA adopted these 

definitions of local community based on its experience in determining what 

constituted a local community charter. 

49Prior to CUMAA, NCUA regulations did not limit the size of the community a credit union 

could serve. However, NCUA required extensive documentation to establish the existence 

of a community. For example, up until March 1, 1998, credit unions were required to provide 

written evidence of community support for their applications, such as letters of support, 

petitions, or surveys. In March 1998, in IRPS 98-1, NCUA deleted the information 

requirement but noted that credit unions still had to demonstrate that residents of the 

proposed community interacted. 

50For example, in IRPS 99-1, if the population of a single political jurisdiction was less than 

300,000, the credit union was only obligated to submit a letter describing how the area met 

standards for community interaction or common interests. However, if the population 

exceeded 300,000, the credit union would have to submit additional documentation; 

demonstrating, for example, the existence of major trade areas or shared facilities (such as 

educational). 

Page 33 GAO-04-91 Changes in Credit Union Industry 
Table 1: Regulatory Definitions of Local Community, 2000 and 2003 

IRPS 99-1, effective in November 2000, 


(as amended by IRPS 00-1) IRPS 03-1, effective in May 2003


1. Areas in single political jurisdictions (for 

example, counties or cities) qualified as a 

local community if the number of residents 

did not exceed 300,000. 

2. States, noncontiguous jurisdictions, and 

MSAs did not meet the definition of a local 

community. 

3. Contiguous political jurisdictions qualified 

as a local community if they contained 

200,000 or fewer residents. 

4. A letter describing community interaction 

or common interests was required for 

conditions (1) and (3) above. Otherwise, the 

credit union had to provide additional 

documentation. 

1. Any city, county, or political equivalent in 

a single political jurisdiction, regardless of 

population size, automatically meets the 

definition of a local community. 

2. MSAs may meet the definition of local 

community provided the population does 

not exceed 1 million. 

3. Contiguous political jurisdictions qualify 

as a local community if they contain 

500,000 or fewer residents. 

4. A letter describing community interaction 

or common interests is required for 

conditions (2) and (3) above. Otherwise, the 

credit union must provide additional 

documentation. 

Source: IRPS 99-1 and IRPS 03-1. 

Note: NCUA amended IRPS 99-1, the first field of membership regulation issued by NCUA after 

CUMAA, several times (IRPS 00-1 on Oct. 27, 2000; IRPS 01-1 on March 2001; and IRPS 02-2 on 

April 24, 2002.) This table only highlights key changes pertaining to the geographic and population 

criteria used by NCUA to approve community charters. 

Specifically, NCUA officials said that they decided single political 

jurisdictions should automatically qualify as “local” areas based on their 

review of applications by credit unions for community charters. They 

reported that they came to this conclusion because credit unions 

converting to a community charter or expanding their service areas had 

generally been able to successfully supply the documentation required by 

NCUA. We asked NCUA officials what kind of relationships communitychartered credit union members could have if, for example, a local 

community were to be defined as all of New York City. NCUA officials said 

that the defining factors for them were that people lived in the same 

political jurisdiction—thus providing, for example, a common government 

and educational system—and noted that credit unions applying to serve 

these larger jurisdictions still had to meet other requirements related to 

safety and soundness. The officials also said that had CUMAA not 

introduced the word “local,” NCUA could have considered providing credit 

unions permission to expand their field of memberships statewide. 

Page 34 GAO-04-91 Changes in Credit Union Industry 
The regulatory changes in IRPS-03-1 pertaining to the definition of local 

community have made it easier for federally chartered credit unions to 

serve larger communities. Under IRPS-03-1, NCUA approved the largest 

community yet—the 2.3 million residents of Miami-Dade County, Florida.51 

NCUA had disapproved this same credit union’s request about 2 years 

earlier, under IRPS 99-1, as amended by IRPS 01-1. Prior to IRPS-03-1, some 

of the largest community field of memberships approved by NCUA 

included service to 836,231 residents on Oahu, Hawaii, and service to 

710,540 residents in Montgomery County and Greene County, Ohio.52 In 

addition, over the last 3 years, potential membership––an estimate of the 

maximum number of members that could join a credit union––in 

community-chartered credit unions has come to exceed that in multiplebond credit unions.53 According to NCUA estimates, in March 2003, 

community-chartered credit unions had 98 million potential members 

compared with multiple-bond credit unions with 92 million potential 

members (see fig. 8). 

51This multiple-bond credit union, located in Miami, Florida, originally applied to serve 

Miami-Dade County, Florida, in April 2001. However, NCUA officials denied both the 

original application and subsequent appeal on the grounds that the residents of this area 

(including two large cities and 28 other municipalities) did not have common interests or 

interactions. As required by IRPS 99-1 (as amended by IRPS 01-1), the credit union was 

required to supply documentation that residents within this area interacted but the 

evidence, while described as “voluminous” by NCUA officials, did not meet with their 

approval. Under the new rule (IRPS 03-1), approved in May 2003, this level of evidence was 

no longer required. 

52While the examples in this paragraph represent some of the largest community-charter 

field of memberships approved by NCUA, the population sizes of these communities can 

vary tremendously. For example, in 2002, NCUA field of membership approvals ranged from 

a population of 695 in Delta County, Colorado, to a population of 1.1 million residents in the 

area surrounding Maple Grove, Minnesota. Since 1999, the average population of approved 

communities has increased—in 1999, this average was 134,000 and as of June 25, 2003, 

357,000. 

53Federally insured credit unions are required to report their potential membership on 

NCUA’s call report. This number is expected to include current membership as well as 

potential members. While the instructions require that the estimates must be reasonable and 

supportable, no further instructions are provided. Two or more credit unions whose field of 

membership overlaps can count the same person as a potential member. 

Page 35 GAO-04-91 Changes in Credit Union Industry 
Figure 8: Actual and Potential Members in Federally Chartered Credit Unions, by 

Charter Type, 2000–2003 

Number of members in millions 

100 

80 

60 

40 

20 

0 

Actual Potential

Single-bond charter 

Actual Potential

Community charter 

Actual Potential

Multiple-bond charter 

According to NCUA, a major reason for NCUA’s recent regulatory changes 

was to maintain the competitiveness of the federal charter in a dual 

chartering system. They also characterized NCUA’s field of membership 

regulations as more restrictive than those in some states. Officials in three 

of the states in which we conducted interviews—California, Texas, and 

Washington—said that the ability to expand field of membership more 

readily under state rules was a reason that federally chartered credit unions 

had converted to state charters. 

Consistent with this assertion, we found that state-chartered credit unions 

have experienced greater membership growth, although federally 

chartered credit unions still had more members. Between 1990 and March 

2003, state-chartered credit union membership increased by 88 percent, 

2000 

2001 

2002


2003 (through March)


Source: NCUA. 

Dual Chartering System May 

Have Created Pressure for 

Less Restrictive Field of 

Membership Regulations 

Page 36 GAO-04-91 Changes in Credit Union Industry 
from 19.5 million to 36.6 million, while membership in federally chartered 

credit unions increased by 24 percent, from 36.2 million to 44.9 million. In 

addition, if estimates of potential membership serve even as an 

approximation of future membership, state-chartered credit unions could 

be positioned to experience greater growth (see fig. 9). In March 2003, 

state-chartered credit unions had about 405 million potential members, 

almost twice the 208 million for federally chartered credit unions. 

Figure 9: Actual and Potential Members in Federally and State-chartered Credit 

Unions, 1990–2003 

Number of members in millions 

450 

400 

350 

300 

250 

200 

150 

100 

50 

0 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 

(through 

March) 

State actual membership 

Federal actual membership 

State potential membership 

Federal potential membership 

Source: NCUA. 

Note: In 2001, the total population of the United States was about 285 million people. In contrast, 

between 2001 and 2003, the total number of potential credit union members ranged from 446 million to 

about 613 million. The total number of potential members exceeds the total population of the United 

States because credit unions can count the same individuals as potential members when their field of 

membership overlaps. 

Page 37 GAO-04-91 Changes in Credit Union Industry 
We also found that states had chartered a higher percentage of their credit 

unions to serve geographic areas (communities) than NCUA.54 In 2002, we 

estimated that about 1,146 state-chartered credit unions, 30 percent of all 

state-chartered credit unions, served geographic areas compared with 848 

federally chartered credit unions, 14 percent of all federally chartered 

credit unions.55 However, this number increases to 1,096, 18 percent of all 

federally chartered credit unions, once federally chartered credit unions 

serving underserved areas are included. State-chartered credit unions 

serving geographic areas held about 59 percent of state-chartered credit 

unions assets compared with 17 percent held by federally chartered credit 

union serving geographic areas, or 29 percent when the assets of credit 

unions with underserved areas were included.56 

Credit Unions Have Added 

Underserved Areas, but No 

Information Available to 

Evaluate Actual Service 

An NCUA objective is to ensure that credit unions provide financial 

services to all segments of society, including the underserved, but NCUA 

has not developed indicators to evaluate credit union progress in reaching 

the underserved.57 This type of evaluation could require information similar 

54We use the term “serving geographic areas” because some states (for example, California 

and Texas) permit their credit unions to serve a mix of occupational and associational 

groups and communities. Because NCUA could not provide us information on the number 

of state-chartered credit unions serving communities, we surveyed state regulators to obtain 

this information. 

55The number of credit unions serving geographic areas varied by state. For example, in 

California, state-chartered credit unions serving geographic areas represented about 48 

percent of state-chartered credit unions and held about 82 percent of state-chartered assets. 

In comparison, in New York, state-chartered credit unions serving geographic areas 

represented about 5 percent of state-chartered credit unions and held about 11 percent of 

state-chartered assets. 

56Because chartering provisions among the states and the federal government vary, we 

would like to emphasize that these numbers are estimates only. For example, we had no way 

of knowing, short of contacting individual credit unions, whether state-chartered credit 

unions relied more extensively on a community or an occupational group for their 

membership. In addition, some state-chartered credit unions were excluded from our 

calculations, including those that were privately insured, because we could not identify 

them in the NCUA call report data. 

57Part of NCUA’s vision statement, included as part of its 2003-2008 Strategic Plan, is: 

“Ensure the cooperative credit union movement can safely provide financial services to all 

segments of American society.” Further, in NCUA’s 2003 Annual Performance Plan, NCUA 

states as a specific goal that it plans to “Facilitate credit union efforts to increase credit 

union membership and accessibility to continue to serve the underserved, and enhance 

financial services.” 

Page 38 GAO-04-91 Changes in Credit Union Industry 
to that provided as part of CRA examinations—for example, information 

on the distribution of loans made by the income levels of households 

receiving mortgage and consumer loans—and provide comprehensive 

information on how credit unions have utilized opportunities to extend 

their services to underserved areas, including low- and moderate-income 

households. 58 CUMAA had specifically provided that multiple-bond credit 

unions could serve underserved areas, and NCUA permitted single-bond 

and community-bond credit unions to add them as well. However, neither 

CUMAA nor NCUA required that credit unions report on services to these 

areas once they had been added. Figure 10 shows the number of 

underserved areas added before and after CUMAA. 

58The Federal Credit Union Act, as amended by CUMAA, provides NCUA criteria to use to 

determine if an area is “underserved.” See 12 U.S.C. § 1759 (c)(2). Among other things, these 

areas must qualify as “investment areas” as defined by section 103 (16) of the Community 

Development Banking and Financial Institutions Act of 1994 (12 U.S.C. § 4703(16)). Areas 

could qualify, for example, by having at least 20 percent of their population living in poverty. 

Second, areas must qualify as underserved based on data from the NCUA board and the 

federal banking agencies. NCUA officials, however, apply only the first criterion, presuming 

that areas qualifying as an investment area automatically qualify as underserved. 

Page 39 GAO-04-91 Changes in Credit Union Industry 
Figure 10: Underserved Areas Added before and after CUMAA, by Federal Charter 

Type, 1997–2002 

Number of underserved areas 

350 

300 

250 

200 

150 

100 

50 

0 

1997 1998 1999 2000 2001 2002 

CUMAA enacted 

in August 1998 

Single bond 

Multiple bond 

Community 

Source: NCUA. 

Note: Between 1997 and 1999, credit unions were adding communities under NCUA's low income 

standards. While CUMAA did not specifically permit single-bond and community-chartered credit 

unions to add underserved areas, NCUA permitted them to do so. 

Instead of developing indicators to evaluate credit union progress in 

reaching the underserved, NCUA officials have claimed success based on 

the increase in the number of potential members added by credit unions in 

underserved areas and, recently, on the membership growth rate of 

federally chartered credit unions that have added underserved areas. As of 

March 2003, credit unions had added 48 million potential members in 

underserved areas. As noted previously, potential membership is an 

estimate of the maximum number of people who could be eligible to join a 

credit union. However, NCUA officials believe that potential membership is 

an appropriate measure because they view NCUA’s role as expanding 

membership opportunities for credit unions as opposed to the credit 

Page 40 GAO-04-91 Changes in Credit Union Industry 
unions’ role of actually extending services to new members.59 In addition, 

in June 2003, NCUA claimed success based on estimates indicating that 

annual membership growth in credit unions that expanded into 

underserved areas has been higher than that of all federally chartered 

credit unions—4.8 percent compared with 2.49 percent. However, they 

could not identify whether the increase in membership actually came from 

the underserved areas or provide any descriptive information (for example, 

the income level) about the new members. 

Because NCUA does not collect information on credit union service to 

underserved areas, it would be difficult for NCUA or others to demonstrate 

that these credit unions are actually extending their services to those who 

have lower incomes or do not have access to financial services.60 As the 

number of credit unions adding underserved areas increases, this question 

becomes more important. For example, in 1999, the year after CUMAA, 13 

credit unions added 16 underserved areas to their membership. In 2002, 223 

credit unions added about 424 underserved areas. Further, the size of these 

communities can be substantial. For example, in May 2003, NCUA 

permitted one multiple-bond credit union to add an additional 300,000 

residents within Los Angeles County, California, for a total of almost 1 

million added residents in the last 2 years. In the same month, NCUA also 

approved a multiple-bond credit union’s (headquartered in Dallas, Texas) 

addition of 600,000 residents in underserved communities in Louisiana. 

59To promote adoption of these areas, NCUA developed a public relations program called 

“Access to America” that promotes awareness of NCUA programs that provide resources, or 

other support, to credit unions to expand their financial services to the underserved. 

60CUNA published a study, 2003 “Serving Members of Modest Means” Survey Report, on 

how credit unions served consumers having annual household incomes of $40,000 or less. 

While the survey findings cannot be generalized to all credit unions, the survey results 

indicated that most credit unions responding to the survey targeted at least one service (for 

example, money orders, check-cashing services) to lower- and moderate-income members, 

and that credit unions with underserved areas were likely to offer more of these services. 

About 35 percent of the credit unions responding to the survey indicated they would grant a 

loan for $100 or less and about 30 percent indicated they would open a certificate account 

for less than $100. The study noted that credit unions had difficulty responding to questions 

that asked them to estimate members’ or potential members’ income distributions. 

Page 41 GAO-04-91 Changes in Credit Union Industry 
NCUA Adopted Riskfocused Examination 

and Supervision 

Program, but Faces 

Challenges in 

Implementation 

Industry consolidation and changes in products and services offered by 

credit unions prompted NCUA to move from an examination and 

supervision approach that was primarily focused on reviewing transactions 

to an approach that focuses NCUA resources on high-risk areas within a 

credit union. Prior to implementing its risk-focused program in August 

2002, NCUA sought guidance from other depository institution regulators 

that had several years of experience with risk-focused programs. While this 

consultative approach helped NCUA, it still faces a number of challenges 

that create additional opportunities for NCUA to leverage off the 

experience of the other depository institution regulators. These challenges 

include ensuring that examiners have sufficient expertise in areas such as 

information systems, monitoring the risks posed by expansion into 

nontraditional credit union activities such as business lending, and 

monitoring the risks posed to the federal deposit (share) insurance fund by 

institutions for which states are the primary regulator. Moreover, unlike 

other depository institution regulators, NCUA currently lacks authority to 

inspect third-party vendors, which credit unions increasingly rely on to 

provide services such as electronic banking. Further, credit unions are not 

subject to the internal control reporting requirements that banks and thrifts 

are subject to under FDICIA.61 NCUA adopted prompt corrective action, a 

system of supervisory actions tied to the capital levels of an institution, in 

August 2000, as required by CUMAA; few actions have been taken to date 

due to a generally favorable economic climate for credit unions. 

Changes in the Credit Union 

Industry Prompted NCUA to 

Revise Its Approach to 

Examination and 

Supervision 

The credit union industry has undergone a variety of changes that 

prompted NCUA to revise its approach to examining and supervising credit 

unions. As described earlier, the credit union industry is consolidating, and 

more industry assets are concentrated in larger credit unions, those with 

assets in excess of $100 million. For example, in December 1992, credit 

unions with over $100 million in assets held 52 percent of total industry 

assets, but by December 2002, they held 75 percent of total industry assets. 

Furthermore, credit unions are providing more complex electronic services 

such as Internet account access and on-line loan applications to meet the 

demands of their members. Thirty-five percent of the industry offered 

financial services through the Internet as of December 2002; however, the 

rate increased to over 90 percent for larger credit unions. In addition, the 

composition of credit union assets has changed over time, with credit 

61Pub. L. No. 102-242 § 112, 12 U.S.C. § 1831m (2000). 

Page 42 GAO-04-91 Changes in Credit Union Industry 
unions engaging in more real estate loans (see fig. 11). For example, the 

number of first mortgage loans about doubled from 589,000 loans as of 

December 1992 to 1.2 million loans as of December 2002. During this same 

period, the amount of first mortgage loans more than tripled from $29 

billion to $101 billion. From 1992 to 2002, the percentage of real estate 

loans to total assets grew from 19 percent to 26 percent, a greater rate of 

growth than that of consumer loans over the same time period. The longerterm real estate loans introduced a greater level of interest rate risk than 

that introduced through the shorter-term consumer loans credit unions 

traditionally made.62 

Figure 11: Credit Union Mortgage Loans Have Grown Significantly Since 1992 

Number of loans (in millions) Amount of loans held (dollars in billions) 

1.2 100 

1.0 

80 

0.8 

60 

0.6 

40 

0.4 

20 

0.2 

0.0 0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Number of loans 

Total dollar amount of loans 

Source: Call report data. 

Note: Only first mortgage loans represented. 

62Interest rate risk is the risk that changes in market rates will have a negative impact on 

capital and earnings. In September 2003, NCUA issued Letter to Credit Unions 03-CU-15, 

which discusses the interest rate risk for credit unions with large concentrations of fixedrate mortgages. 

Page 43 GAO-04-91 Changes in Credit Union Industry 
As a result of these changes, NCUA found that its old approach of 

reviewing the entire operation of credit unions and conducting extensive 

transaction testing no longer sufficed, particularly for larger credit unions, 

because of the number of transactions in which they engaged and the 

variety of products and services they tended to provide. In contrast, under 

the risk-focused approach, NCUA examiners are expected to identify those 

activities that pose the highest risk to a credit union and to concentrate 

their efforts on those activities. For example, as credit unions engage in 

more complex electronic services, examiners are to focus their efforts on 

reviewing information systems and technology to ensure that credit unions 

have sufficient controls in place to manage operations risk.63 In addition, as 

credit unions engage in more real estate lending, examiners are to focus on 

ensuring that these credit unions have sophisticated asset-liability 

management models in place to properly manage interest rate risk.64 When 

transaction testing is used under the risk-focused approach, it is used to 

validate the effectiveness of internal control and other risk-management 

systems. Further, the risk-focused approach places more emphasis on 

preplanning and off-site monitoring of credit union activities, which helps 

ensure that once examiners arrive on site, they already will have identified 

those areas of the greatest risk in a credit union and where to focus their 

resources. 

To compliment the risk-focused approach and allow NCUA to better 

allocate its resources, the agency adopted a risk-based examination 

program in July 2001. This program eliminates the requirement to perform 

annual examinations on low-risk credit unions, replacing annual exams 

with two examinations in a 3-year period.

65 

63Operations risk is the risk that fraud or operational problems could result in an inability to 

deliver products, remain competitive, or manage information. 

64Asset-liability management is the process of evaluating balance sheet risk (interest rate 

and liquidity risk) and making prudent decisions, which enable a credit union to remain 

financially viable as economic conditions change. 

65These credit unions are defined as those with a CAMEL rating of 1 or 2 for the prior two 

examinations, and those exhibiting additional characteristics, such as having been in 

operation for at least 10 years, having a positive return on assets, having adequate internal 

controls, and having added no recent high-risk programs. 

Page 44 GAO-04-91 Changes in Credit Union Industry 
NCUA Took Various Steps 

to Ensure Successful 

Implementation of the Riskfocused Program 

NCUA consulted with its Office of Corporate Credit Unions to inquire 

about their experiences with their risk-focused program that was 

implemented in 1998. As a result of this consultation, NCUA incorporated a 

greater level of examiner judgment in its risk-focused approach, 

specifically allowing examiners to determine the appropriate level of onsite versus off-site supervision. For example, if an examiner discovered a 

problem during off-site monitoring of a credit union, the examiner might 

adjust the schedule of the on-site examination to directly address the 

problem. In addition, in recognition that examiners would be required to 

assess the future risks that credit unions might be undertaking, NCUA, 

after consulting with its Office of Corporate Credit Unions, required that 

examiners review information beyond the financial statements. For 

example, under the risk-focused program, examiners might analyze due 

diligence reviews by management for new and existing products and 

services, internal controls, and measurements of actual performance 

against forecasted results, to determine what future risks a particular 

credit union might be undertaking. 

NCUA’s consultations with FDIC and its review of two FDIC Inspector 

General reports prompted NCUA to develop programs to address 

challenges that FDIC experienced in implementing its risk-focused 

program. For example, according to NCUA, FDIC did not conduct much 

training for its examiners prior to implementing its risk-focused program. 

NCUA, on the other hand, held training for all examiners, including state 

examiners, and once the risk-focused program was implemented, NCUA 

also provided additional training to help examiners assess risks more 

effectively. NCUA’s review of the FDIC Inspector General reports found 

that some FDIC examiners resisted the move to the risk-focused program. 

NCUA’s response was to develop a quality control program to ensure that 

examiners and supervisors were adopting the risk-focused approach and 

that documentation was completed consistently across NCUA’s regions. 

Under the quality control program, NCUA officials reviewed a sample of 

examinations from each region for scope, conciseness of reports, 

appropriateness of completed work papers and application of risk-focused 

concepts. NCUA’s development of the quality control program was timely 

and appropriate, because we found some NCUA examiners and state 

supervisors were reluctant to move to the risk-focused program. The 

examiners and supervisors were concerned that they would be blamed if a 

credit union later had a problem in an area they had not initially identified 

as high-risk. 

Page 45 GAO-04-91 Changes in Credit Union Industry 
NCUA’s consultations with the Office of the Comptroller of the Currency 

(OCC) enabled NCUA to consider a different approach to improve its 

oversight of large credit unions under the risk-focused program. OCC had 

implemented a large bank program in recognition of the need for an 

alternative approach to oversight of large and sophisticated banks. NCUA 

likewise found the need for an alternative approach to oversight of large 

credit unions because its examiners traditionally examined a large number 

of small credit unions and very few larger ones and, thus, had been unable 

to gain sufficient comfort and expertise in examining the larger, more 

complex institutions. As a result of consultations with OCC, NCUA 

implemented its Large Credit Union Pilot Program in January 2003 to, 

among other things, develop a core of examiners with experience 

overseeing these larger credit unions. Under this program, NCUA has also 

experimented with different examination approaches, including targeted 

examinations, which focus on certain aspects of credit union operations 

such as the loans, investments, or asset-liability management. NCUA 

officials told us that they received some preliminary feedback from credit 

unions that found the pilot to be beneficial. However, because the pilot 

ended recently, NCUA officials stressed that it was too early to tell how 

effective this program will be in helping NCUA improve its examinations of 

large credit unions. 

In recognition that the risk-focused program was a significant departure 

from NCUA’s old approach to examination and supervision, NCUA also 

sought feedback from the industry on the risk-focused program by 

developing a survey for credit unions to complete once they had gone 

through their first risk-focused examination. NCUA reported that it had 

received preliminary results from the survey that indicated that the riskfocused program has been well received. Specifically, NCUA received the 

highest marks for examiners’ courteous and professional conduct, effective 

overall examination process, and effective communication with 

management and officials throughout the examination. Officials from some 

of the large credit unions we interviewed were pleased with the program 

because they felt that the examination was focused on the high-risk areas 

that credit union officials needed to monitor. Likewise, examiners with 

whom we spoke told us that adopting a risk-focused approach had made a 

bigger difference in their oversight activities at the larger credit unions 

because they could focus their resources on the high-risk areas of these 

institutions. In contrast, the examiners relied on the old approach of 

extensive transaction testing at the smaller credit unions that lacked 

sufficient resources to implement robust internal control structures and 

Page 46 GAO-04-91 Changes in Credit Union Industry 
tended to limit their activities to the basic or traditional services offered by 

credit unions. 

NCUA Has Further 

Opportunities to Leverage 

the Experiences of Other 

Regulators to Address 

Existing Challenges 

NCUA Faces Challenges in 

Ensuring That Examiners Are 

Adequately Trained to Assess 

Changing Technology 

NCUA faces a number of challenges in implementing its risk-focused 

approach that create additional opportunities for it to leverage the 

experiences of the other regulators that have been using risk-focused 

programs for several years. These challenges include ensuring that 

examiners have sufficient training to keep pace with changes in industry 

technologies and methods, adequately preparing for monitoring credit 

unions as they expand more heavily into nontraditional credit union 

activities such as business lending, and overseeing state-chartered 

institutions in states that lack sufficient examiner resources and expertise. 

According to NCUA examiners who had recently implemented the riskfocused program, NCUA faces challenges in training its examiners in 

specialized areas such as information systems and technology. Likewise, as 

we found in prior reviews, other depository institution regulators also 

faced these challenges in implementing risk-focused programs.66 Some 

NCUA examiners with whom we spoke indicated that NCUA’s formal and 

on-the-job training of subject matter examiners, particularly in the areas of 

information systems and technology, payment systems, and specialized 

lending, was insufficient and did not help them keep pace with the 

changing technology in the industry.

67 As a result, some examiners were not 

confident that they could assess the adequacy of information systems that 

were vital to the operations of some credit unions. 

NCUA officials sought to address concerns about specialist training by 

modifying their training manual to more clearly state what classes were 

appropriate for the different specialized areas. Further, as a member of the 

Federal Financial Institutions Examination Council (FFIEC), NCUA was 

aware of specialized training offered by other depository institution 

regulators under the auspices of FFIEC, and encouraged NCUA examiners 

66U.S. General Accounting Office, Risk-focused Bank Examinations: Regulators of Large 

Banking Organizations Face Challenges, GAO/GGD-00-48 (Washington, D.C.: Jan. 24, 

2000). 

67NCUA’s subject matter examiner program was created in February 2002 to train 

experienced and knowledgeable examiners in specialized areas, such as capital markets and 

information systems, to help examiners assess risks more effectively. The program also was 

designed to augment NCUA’s existing core of specialist examiners. 

Page 47 GAO-04-91 Changes in Credit Union Industry 
to take advantage of this training.

68 However, NCUA had not specifically 

consulted with other depository institution regulators on how these 

regulators addressed the challenge of training their specialists as banks and 

thrifts had become more complex over time. 

NCUA Faces Challenge of NCUA’s revised regulation on member business loans also presents NCUA 

Ensuring That It Is Adequately with the challenge of ensuring that it is adequately prepared to monitor this 

Prepared to Monitor Credit growing area of lending. A recent NCUA final rule on member business 

Unions as They Expand into loans relaxed certain requirements (allowing well-capitalized, federally 

Nontraditional Activities insured credit unions to offer unsecured business loans) and introduced a 

new risk area for NCUA to monitor.

69 (Appendix VII provides a detailed 

description of changes to this and other NCUA rules and regulations since 

1992.) 

While member business loans are still a relatively small percentage of 

credit union loans (2 percent) and there are statutory limits placed on these 

loans, NCUA’s recently revised rules could result in credit unions making 

more of these loans.70 The Department of the Treasury has raised concerns 

that allowing credit unions to engage in unsecured member business loans 

68FFIEC is a formal interagency body empowered to prescribe uniform principles, 

standards, and report forms for the federal examination of financial institutions by the 

Board of Governors of the Federal Reserve System, the Federal Deposit Insurance 

Corporation, the National Credit Union Administration, the Office of the Comptroller of the 

Currency, and the Office of Thrift Supervision. FFIEC also serves to make recommendations 

to promote uniformity in the supervision of financial institutions. 

69See 68 Fed. Reg. 56537 (Oct. 1, 2003). Under NCUA’s prior regulations, all business loans to 

members had to be secured by collateral. Under the revised rule, NCUA now allows wellcapitalized credit unions that have addressed unsecured loans in their member business 

loan policies to make unsecured business loans to members. These loans are subject to the 

limit that (1) the aggregate unsecured business loans to one borrower not exceed the lesser 

of $100,000 or 2.5 percent of a credit union’s net worth and (2) the aggregate of all unsecured 

business loans not exceed 10 percent of a credit union’s net worth. The revised rule also 

permits the exclusion of participation interests—credit union purchases of an interest in a 

loan originated by another credit union—in member business loans from the aggregate 

business loan limit, provided that the loan was for a nonmember of the purchasing credit 

union. However, the total of nonmember and member business loans may only exceed the 

aggregate business loan limit if approved by NCUA regional directors. Finally, the revised 

rule expands preapproved CUSO activities to include business loan originations. 

70Under CUMAA, credit unions had an aggregate business loan limit of the lesser of 1.75 

times the credit union’s net worth or 12.25 percent of the credit union’s total assets. 

Page 48 GAO-04-91 Changes in Credit Union Industry 
Variability in State Oversight May 

Constrain NCUA’s Ability to 

Monitor Risks to NCUSIF Posed 

by Federally Insured, Statechartered Credit Unions 

would increase risks to safety and soundness.71 Since member business 

loans constitute only a small percentage of credit union lending, most 

NCUA examiners will not have significant experience looking at this type 

of lending activity. In contrast, banks and thrifts offer these loans to a much 

greater extent than credit unions and their regulators do have experience in 

this area. 

Due to variability in levels of state oversight and resources, NCUA may face 

challenges in implementing the risk-focused program at the state level. 

Lack of examiner resources and expertise in some states, high state 

examiner turnover, and weakness of enforcement by some state regulators 

may affect oversight of federally insured, state-chartered credit unions, 

according to NCUA officials. 

While state officials with whom we met had adopted NCUA’s risk-focused 

program and indicated they were generally pleased with NCUA’s support, 

some of these officials indicated that they faced challenges related to 

oversight of their credit unions. For example, they indicated that budget 

problems had made it difficult to hire additional staff. In addition, some 

state officials indicated that they could not compete on pay with the 

industry, which led to high examiner turnover. A state official from a large 

state indicated that the increase in credit unions converting from federal to 

state charters had stretched her examiner resources. 

The challenges faced by states are of particular concern given that state 

supervisors have primary responsibility for examining federally insured, 

state-chartered credit unions, which as of December 31, 2002, held 46 

percent of industry assets. Inadequate oversight of these state-chartered 

institutions could have a negative impact on the financial condition of 

NCUSIF. The FDIC and Federal Reserve share oversight responsibility with 

state supervisors for state-chartered banks, and these regulators also face 

challenges similar to those faced by NCUA with regard to variability in 

state oversight. 

71Department of the Treasury comment letter concerning NCUA’s proposed rule on member 

business lending, dated June 2, 2003. Further, Treasury stated that excluding business 

participation loans and business loans originated by CUSOs from member business loan 

limits would undermine the intent of congressional limitations on credit union business 

loans established in CUMAA. 

Page 49 GAO-04-91 Changes in Credit Union Industry 
In commenting on how it addressed some of the issues facing states, NCUA 

officials told us that in cases where states lacked examiner resources or 

expertise, NCUA provided its own staff to ensure that federally insured, 

state-chartered credit unions were adequately examined. In addition, 

NCUA conducted joint examinations with state supervisors on selected 

federally insured, state-chartered credit unions to assess the risk they 

posed to NCUSIF. Some state officials with whom we met raised concerns 

over joint examinations, claiming that NCUA examiners tried to impose 

federal regulations on these state-chartered credit unions. These state 

officials also expressed concern over NCUA’s process for developing its 

overhead transfer rate, which they claimed was not transparent.72 We 

discuss the overhead transfer rate more fully later in this report. 

NCUA Lacks Authority to 

Examine Third-party 

Vendors 

As we reported in July 1999, NCUA does not have the third-party oversight 

authority provided to other federal banking regulators, and the lack of such 

authority could limit NCUA’s effectiveness in ensuring the safety and 

soundness of credit unions.73 Credit unions are increasingly relying on 

third-party vendors to support technology-related functions such as 

Internet banking, transaction processing, and funds transfers. While these 

third-party arrangements can help credit unions manage costs, provide 

expertise, and improve services to members, they also present risks such 

as threats to security of systems, availability and integrity of systems, and 

confidentiality of information. With greater reliance on third-party vendors, 

credit unions subject themselves to operational and reputation risks if they 

do not manage these vendors appropriately. Although NCUA received 

authority to examine third-party vendors as part of the year 2000 readiness 

effort, this authority was temporary and expired on December 31, 2001. 

While NCUA has issued guidance regarding due diligence that credit unions 

should be applying to third-party vendors, NCUA must ask for permission 

to examine third-party vendors. Without vendor examination authority, 

NCUA has no enforcement powers to ensure full and accurate disclosure. 

For instance, in one case NCUA was denied access by a third-party vendor 

that provides record-keeping services for 99 federally insured credit unions 

72The overhead transfer rate is the percentage of NCUA’s share insurance fund (NCUSIF) 

that is transferred to support the agency’s expenses (operating fund). 

73U.S. General Accounting Office, Electronic Banking: Enhancing Oversight of Internet 

Banking Activities, GAO/GGD-99-91 (Washington, D.C.: July 6, 1999). 

Page 50 GAO-04-91 Changes in Credit Union Industry 
with $1.4 billion in assets. NCUA notified the credit unions to heighten their 

due diligence to ensure that appropriate controls were in place at the thirdparty vendor. In another case, NCUA was given access to a third-party 

vendor, but the vendor withheld financial statements from NCUA 

examiners. The third-party vendor served 113 credit unions representing 

almost $750 million in assets. 

Credit Unions Not Subject 

to Internal Control 

Reporting Requirements of 

FDICIA 

Credit unions with assets over $500 million are required to obtain an annual 

independent audit of financial statements by an independent certified 

public accountant, but unlike banks and thrifts, these credit unions are not 

required to report on the effectiveness of their internal controls for 

financial reporting. Under FDICIA and its implementing regulations, banks 

and thrifts with assets over $500 million are required to prepare an annual 

management report that contains 

•	 a statement of management’s responsibility for preparing the 

institution’s annual financial statements, for establishing and 

maintaining an adequate internal control structure and procedures for 

financial reporting, and for complying with designated laws and 

regulations relating to safety and soundness; and 

•	 management’s assessment of the effectiveness of the institution’s 

internal control structure and procedures for financial reporting as of 

the end of the fiscal year and the institution’s compliance with the 

designated safety and soundness laws and regulations during the fiscal 

74 year. 

Additionally, the institution’s independent accountants are required to 

attest to management’s assertions concerning the effectiveness of the 

institution’s internal control structure and procedures for financial 

reporting. The institution’s management report and the accountant’s 

attestation report must be filed with the institution’s primary federal 

regulator and any appropriate state depository institution supervisor and 

must be available for public inspection. These reports allow depository 

institution regulators to gain increased assurance about the reliability of 

financial reporting. 

74See 12 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003). 

Page 51 GAO-04-91 Changes in Credit Union Industry 
Banks reporting requirements under FDICIA are similar to the reporting 

requirement included in the Sarbanes-Oxley Act of 2002. Under SarbanesOxley, public companies are required to establish and maintain adequate 

internal control structures and procedures for financial reporting and the 

company’s auditor is required to attest to, and report on, the assessment 

made by company management on the effectiveness of internal controls. 

As a result of FDICIA and Sarbanes-Oxley, reports on management’s 

assessment of the effectiveness of internal controls over financial reporting 

and the independent auditor’s attestation on management’s assessment 

have become normal business practice for financial institutions and many 

companies. Extension of the internal control reporting requirement to 

credit unions with assets over $500 million could provide NCUA with an 

additional tool to assess the reliability of internal controls over financial 

reporting. 

NCUA Implemented PCA as 

Mandated by CUMAA, but 

Few Actions Taken to Date 

In August 2000, NCUA initially implemented PCA for credit unions. CUMAA 

mandated that NCUA implement a PCA program in order to minimize 

losses to NCUSIF. Under the program, credit unions and NCUA are to take 

certain actions based on a credit union’s net worth.75 Other depository 

institution regulators were required to implement PCA in December 1992. 

PCA was intended to be an additional tool in NCUA’s arsenal and did not 

preclude NCUA from taking administrative actions, such as cease and 

desist orders, civil money penalties, conservatorship, or liquidation of 

credit unions. 

CUMAA requires credit unions to take up to four mandatory supervisory 

actions—an earnings transfer, submission of an acceptable net worth 

restoration plan, a restriction on asset growth, and a restriction on member 

business lending—depending on their net worth ratios.

76 Credit unions that 

are adequately capitalized (net worth ratio from 6.0 to 6.99 percent) are 

75A credit union’s net worth represents the sum of the various reserve accounts—undivided 

earnings, regular reserves, and any other appropriations designated by management or 

regulatory authorities—and reflect the cumulative net retained earnings of the credit union 

since its inception. 

76The net worth ratio is defined as net worth divided by total assets. 

Page 52 GAO-04-91 Changes in Credit Union Industry 
required to take an earnings transfer.

77 Credit unions that are 

undercapitalized (net worth ratio from 4.0 to 5.99 percent), significantly 

undercapitalized (net worth ratio from 2.0 to 3.99 percent), or critically 

undercapitalized (net worth ratio of less than 2 percent) are required to 

take all four mandatory supervisory actions.78 

CUMAA also required NCUA to develop discretionary supervisory actions, 

such as dismissing officers or directors of an undercapitalized credit union, 

to complement the prescribed actions under the PCA program. CUMAA 

also authorized NCUA to implement an alternative system for new credit 

unions in recognition that these credit unions typically start off with zero 

net worth and gradually build their net worth through retained earnings.79 

Appendix IX provides more detail on NCUA’s implementation of PCA. 

To date, NCUA has taken few actions against credit unions under the PCA 

program due to a generally favorable economic climate for credit unions. 

As of December 31, 2002, NCUA took mandatory supervisory actions 

against 2.8 percent (276 of 9,688) of federally insured credit unions. Of 

these credit unions, the vast majority—92 percent or 253—had under $50 

million in assets. Further, 41 percent (113 of 276) of these credit unions 

were required to develop net worth restoration plans. However, it is too 

early to tell how effective these plans will be in improving the condition of 

the credit unions or minimizing losses to NCUSIF. 

Credit unions were similar to banks and thrifts with respect to PCA capital 

categorization with 97.6 percent of credit unions considered wellcapitalized compared to 98.5 percent of banks and thrifts (see table 2). 

However, a slightly higher percentage of credit unions were 

undercapitalized, significantly undercapitalized, and critically 

undercapitalized than banks and thrifts. 

77Credit unions that are less than well-capitalized—that is, have less than a 7.0 percent net 

worth ratio—are required to increase the dollar amount of their net worth quarterly by 

transferring at least 0.1 percent of their total assets to the regular reserve account. These 

credit unions must meet applicable risk-based net worth requirements if they are complex, 

which under PCA is defined as a credit union having more than $10 million in assets and a 

risk-based net worth ratio that exceeds 6.0 percent. The ratio is a calculation that assigns 

risk weightings to different types of assets and investments. 

78The net worth restoration plan is a blueprint for credit union officials and staff for 

restoring the credit union’s net worth ratio to 6.0 percent or higher. 

79Credit unions are defined as new if they have been in operation for less than 10 years and 

have less than $10 million in assets. 

Page 53 GAO-04-91 Changes in Credit Union Industry 
Table 2: Federally Insured Credit Unions Were Similar to Banks and Thrifts with 

Respect to Capital Categories, as of December 31, 2002 

Credit Banks/ 

unions thrifts 

Capital categorya (number)b Percent (number) Percent 

Well-capitalized 9,363 97.6 9,210 98.5 

Adequately capitalized 153 1.6 134 

Undercapitalized 61 0.6 6 

Significantly undercapitalized 10 0.1 2 

Critically undercapitalized 10 0.1 2 

Total 9,597 100.0 9,354 100.0 

Sources: NCUA and FDIC. 

Note: Does not include new credit unions. 

a

Although the categories triggering PCA actions are the same for both the bank regulators and NCUA, 

the capital requirements underlying these categories are different. 

b

Numbers reported by NCUA as of May 2003. 

Some NCUA, state, and industry officials claimed that PCA was beneficial 

because it provided standard criteria for taking supervisory actions and 

was a good way to restrain rapid growth of assets relative to capital. 

However, many state officials expressed concern over PCA due to the 

limited ability of credit unions to increase their net worth quickly, because 

they can only do so through retained earnings. They indicated that if a 

credit union were subject to PCA, it would be difficult for that credit union, 

particularly a smaller one, to increase capital and graduate out of PCA. In 

contrast, other financial institutions are able to raise capital more quickly 

through the sale of stock. 

Some of these state officials raised the issue of whether credit unions 

should likewise have a means to raise capital quickly by allowing credit 

unions to use secondary capital toward their capital requirement under 

PCA.80 Texas allowed its state-chartered credit unions to raise secondary 

capital even though the secondary capital could not count towards PCA.81 

80Secondary capital can take the form of investments in an institution by nonmembers. The 

investments are subordinated to all other credit union debt. Currently, only credit unions 

designated as “low-income” by NCUA are eligible to raise secondary capital. 

81This secondary capital must be in accordance with generally accepted accounting 

principles. 

Page 54 GAO-04-91 Changes in Credit Union Industry 

1.4 

0.1 

0.0 

0.0 
According to the Texas credit union regulator, no credit unions had taken 

advantage of the state’s secondary capital provision. Currently there is a 

debate in the industry on whether secondary capital is appropriate for 

credit unions. While some in the industry favor secondary capital as a way 

to help credit union avoid actions under PCA, others have raised the 

concern that allowing credit unions to raise secondary capital (for 

example, in the form of nonmember deposits) could change the structure 

and character of credit unions by changing the mutual ownership. As of 

September 2003, NCUA had not taken a position on secondary capital. 

Another concern raised by NCUA officials is in regard to the most 

appropriate measure of the net worth ratio for PCA purposes. NCUA 

officials have suggested using risk-based assets, rather than total assets, to 

calculate the net worth ratio of credit unions because they believe riskbased assets more clearly reflect the risks inherent in credit unions’ 

portfolios. NCUA officials recognize that, similar to banks, a minimum net 

worth ratio based on total assets (tangible equity for banks and thrifts) 

would still be needed for those institutions that are critically 

undercapitalized. For most credit unions, risk-based assets are less than 

total assets; therefore, a given amount of capital would have a higher net 

worth ratio if risk-based assets were used. While there may be some merit 

in using risk-based assets, credit unions have been subject to PCA 

programs for a short time, and the advantages and disadvantages of the 

current programs are not yet evident. 

Finally, some NCUA officials raised the concern that PCA has led to more 

liquidations of problem credit unions. In the past, NCUA sought merger 

partners for problem credit unions. However, NCUA officials told us that it 

was more difficult to find merger partners because stronger credit unions 

were concerned that their net worth ratio would be lowered by merging 

with problem credit unions, thereby putting them closer to the 7.0 percent 

net worth ratio that triggers PCA. As a result, the cost of mergers has 

increased under PCA because NCUA would have to provide greater 

incentives to a potential partner, and that has forced the agency to liquidate 

credit unions to a greater extent than prior to PCA. While the initial costs of 

liquidations appear to be high, the purpose of PCA is to reduce the 

likelihood of regulatory forbearance and protect the federal deposit (share) 

Page 55 GAO-04-91 Changes in Credit Union Industry 
insurance funds through early resolution of problem institutions; thus, in 

the long run, the overall costs to NCUSIF should be less because of PCA.82 

NCUSIF’s Financial 

Condition Appears 

Satisfactory, but 

Methodologies for 

Overhead Transfer 

Rate, Insurance 

Pricing, and Estimated 

Loss Reserve Need 

Improvement 

NCUSIF appears to be in satisfactory financial condition. For most of the 

past 10 years, NCUSIF’s financial condition has been stable as indicated by 

the fund’s equity ratio, earnings, and net income. However, while remaining 

positive as of December 31, 2002, NCUSIF’s net income declined in 2001 

and 2002. Among the factors contributing to the decline was a drop in 

investment revenues, a sharp increase in the overhead transfer rate, which 

is the amount paid to NCUA’s Operating Fund for administrative expenses, 

and an increase in losses to the insurance fund. Moreover, NCUA’s methods 

for pricing NCUSIF insurance and for estimating losses to the fund did not 

consider important factors such as current credit union risk. NCUA’s flatrate insurance pricing does not allow for the fact that some credit unions 

are at greater risk of failure than others, and the historical analysis NCUA 

uses for determining estimated losses does not reflect current economic 

conditions or consider the loss exposure of credit unions with varying risk. 

As a result of the current weaknesses in the methodologies used by NCUA, 

information reported on the financial condition of the fund may not 

accurately reflect the current risks to the fund. 

NCUSIF Has Met Statutory 

Fund Equity Ratio 

Requirements, but Concerns 

Exist over Transfers of 

Expenses to the Fund 

Indicators of the financial condition and performance of NCUSIF have 

generally been stable over the past decade. NCUSIF’s fund equity ratio—a 

measure of the fund’s equity available to cover losses on insured deposits— 

was within statutory requirements at December 31, 2002, as it has been 

over the past decade.83 

CUMAA defines the “normal operating level” for the fund’s equity ratio as a 

range from 1.20 percent to 1.50 percent. CUMAA has designated the NCUA 

board to evaluate and set the specific operating level for the fund equity 

ratio. In setting the level, the board considers current industry and fund 

conditions, as well as the future economic outlook. For 2002, NCUA’s board 

82Regulatory forbearance occurs when regulators delay taking corrective action, assuming 

that problems will not occur in the short-term, or that economic conditions may change in a 

way favorable to the troubled institution. 

83The ratio is calculated as the fund balance (assets minus liabilities) of NCUSIF divided by 

the sum of all credit union members’ shares insured by the fund. 

Page 56 GAO-04-91 Changes in Credit Union Industry 
set the specific operating level at 1.30 percent. If the equity ratio exceeds 

the board’s determined operating level, CUMAA requires NCUA to 

distribute to contributing credit unions an amount sufficient to reduce the 

equity ratio to the operating level. Also, should the equity ratio fall below 

the minimum rate of 1.20 percent, under CUMAA, NCUA’s board must 

assess a premium until the equity ratio is restored to and can be maintained 

at 1.20 percent. (See appendix X for a more detailed discussion of the 

funding process and accounting for NCUSIF.) 

Between 1991 and 2002, the equity ratio has fluctuated between 1.23 

percent and 1.30 percent, a rate that has remained in line with legal 

requirements (see fig. 12). As of December 31, 2002, the ratio of fund equity 

to insured shares for NCUSIF as reported by NCUA was 1.27 percent. 

Figure 12: NCUSIF’s Equity Ratio, 1991–2002 

Equity ratio 

1.30 

1.28 

1.26 

1.24 

1.22 

1.20 

1.18 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Statutory minimum 

Source: NCUA. 

NCUSIF’s ratio can be usefully compared with the only other share or 

deposit insurance funds in the United States currently—FDIC’s Bank 

Insurance Fund (BIF), which insures banks, and its Savings Association 

Insurance Fund (SAIF), which insures thrifts; and ASI, which insures statechartered credit unions that are not federally insured. The NCUSIF ratio 

Page 57 GAO-04-91 Changes in Credit Union Industry 
was comparable with the other share and deposit insurance funds as of 

December 31, 2002 (see fig. 13). 

Figure 13: Equity to Insured Shares or Deposits of the Various Insurance Funds 

Percentage equity to insured shares or deposits 

1.5 

1.0 

0.5 

0.0 

NCUSIF BIF SAIF ASI 

1.27 1.27 

1.37 

1.31 

Sources: NCUA, FDIC, and ASI. 

NCUSIF’s earnings—principally derived from its investment portfolio, 

which has increased significantly since 1991—have been sufficient to 

• cover operating expenses and losses from insured credit union failures; 

•	 make additions to its equity with the net income that is retained by the 

fund; 

• maintain its equity in accordance with legal requirements; 

• maintain its allowance for anticipated losses on insured deposits; 

• avoid assessing premiums, except for 1991 and 1992; and 

• make, in some years, distributions to insured credit unions. 

NCUSIF’s net income has remained positive through 2002 and had 

generally been increasing since 1993, until significant declines occurred in 

2001 and 2002 (see fig. 14). The declines were due to a combination of 

Page 58 GAO-04-91 Changes in Credit Union Industry 
decreased yields from the investment portfolio, an increase in the overhead 

transfer rate, and larger insurance losses on failed credit unions. The 

investment portfolio of NCUSIF consists entirely of U.S. Treasury 

securities. Yields on these securities have declined—for example, from 6.07 

percent in 2000 to 5.10 percent in 2001 and to 3.18 percent in 2002 on its 1-

to 5-year maturities—following similar general declines in market yields for 

Treasury securities. Of the $40.2 million net income decline between 2000 

and 2001, $22.2 million of the decline was attributable to increases in the 

overhead transfer rate, and $15.3 million was attributable to declines in 

investment income. Of the $47.5 million decline in net income between 

2001 and 2002, $39.6 million was attributable to declines in investment 

income, while $12.5 million was attributable to provision for insurance 

losses. At the same time, operating expenses decreased by $5.1 million. For 

2003, interest rates have continued to decline, which will likely continue to 

negatively affect investment earnings. 

Figure 14: Net Income of NCUSIF, 1990–2002 

Dollars in thousands 

250,000 

200,000 

150,000 

100,000 

50,000 

0 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Source: NCUA. 

The sharp increase in the overhead transfer rate and its negative impact on 

NCUSIF’s net income have raised questions about NCUA’s process for 

determining the transfer rate. The Federal Credit Union Act of 1934 created 

the Operating Fund for the purpose of providing administration and service 

Page 59 GAO-04-91 Changes in Credit Union Industry 
to the credit union system—for example, the supervision and regulation of 

the federally chartered credit unions. 

NCUA’s Operating Fund is financed through assessment of annual fees to 

federally chartered credit unions as well as the overhead transfer from 

NCUSIF (see fig. 15). Federally chartered credit unions are assessed an 

annual fee by the Operating Fund based on the credit union’s asset size as 

of the prior December 31. The fee is designed to cover the costs of 

providing administration and service, as well as regulatory examinations to 

the Federal Credit Union System. NCUA’s board reviews the fee structure 

annually. The overhead transfer from NCUSIF for administrative services 

provides a substantial portion of funding for the Operating Fund. The 

annual rate for the overhead transfer is set by NCUA’s board based on 

periodic surveys of NCUA staff time spent on insurance-related activities 

compared with noninsurance-related, or regulatory, activities. An amount 

of overhead or administrative expense is transferred to NCUSIF in 

proportion to staff time spent on insurance-related activities. The overhead 

transfer is intended to account for NCUA staff being responsible for both 

insurance and supervisory-related activities. 

Figure 15: Financing Sources of NCUSIF and NCUA’s Operating Fund 

NCUA 

Operating 

Fund 

Federally 

chartered 

credit unions 

State-chartered, 

federally insured 

credit unions 

NCUSIF 

Annual 

operating 

fee assessed 

Deposit of 1% 

of insured shares 

(premium, if needed) 

Overhead transfer rate 

Source: NCUA. 

Between 1986 and 2000, the transfer rate was 50 percent, which, according 

to NCUA management, was based on surveys that indicated staff time was 

equally split between insurance and regulatory activities. For example, 50 

Page 60 GAO-04-91 Changes in Credit Union Industry 
percent of the Operating Fund’s $127.6 million, or $63.8 million, in expenses 

for 2000 were allocated to and paid by NCUSIF. For 2001, NCUA’s Board of 

Directors increased the overhead transfer rate to 67 percent on the basis 

that Operating Fund staff had increased their insurance-related activities. 

This resulted in a $24.7 million increase (almost 40 percent) from 2000 in 

the amount being allocated to NCUSIF. For 2002 and 2003, the NCUA board 

lowered the 67-percent overhead transfer rate to 62 percent by adjusting 

downward its allocation of what it considered “nonproductive” time factors 

such as employee administrative and education time used in the 2001 

survey because it was reflective of regulatory rather than insurance-related 

activities. 

In September 2001, NCUA management engaged its financial audit firm, 

Deloitte & Touche, to review the basis on which the transfer rate was 

determined. The auditor’s report contained several recommendations that 

indicated that NCUA’s 2001 survey of staff time spent on insurance-related 

functions—the primary basis on which NCUA allocates administrative 

expenses—may not have resulted in an accurate allocation. The lack of a 

clear separation of the insurance and supervisory functions had also been 

the focus of a recommendation in our 1991 report (still unimplemented) 

that NCUA should establish separate supervision and insurance offices.84 

The 2001 recommendations from NCUA’s financial audit firm included 

improvements in communication with staff on the survey process and 

results, frequency and timing of the survey, methods of survey distribution, 

and updated documentation of survey definitions and purpose. The 

auditors also noted that individuals were allocating time after the fact, 

when recollection may have been faulty, rather than tracking their time 

concurrently as would be possible if provided the survey and guidelines 

prior to an assignment. Additionally, the auditors reported that, to provide 

reliable results, the survey should cover a greater period of time. The 

limited period used could significantly skew the resulting proportion of 

activities devoted to insurance versus regulatory activities. The auditor’s 

recommendations indicated that the survey’s lack of consistency and 

reliability may have resulted in a misallocation of overhead expenses 

between the operating and insurance funds. Any misallocation would affect 

NCUSIF’s financial condition because any increase in the overhead transfer 

rate results in a decrease of NCUSIF’s net income. Misallocations also can 

significantly affect the financial results of the Operating Fund. In addition 

to the auditor’s findings, some federally insured, state-chartered credit 

84GAO/GGD-91-85, p. 197. 

Page 61 GAO-04-91 Changes in Credit Union Industry 
unions and trade groups have expressed concerns about NCUA’s 

calculation of its overhead transfer rate. Primarily, they say that NCUA has 

not clearly defined insurance and regulatory functions, and its 

methodology for determining the overhead transfer rate is not transparent 

or understandable to participating credit unions. 

According to NCUA’s management, NCUA has begun implementing 

Deloitte & Touche’s recommendations. For example, selected field 

examiners are now completing surveys in a timely manner for periods 

covering a full year. However, headquarters staff are not required to 

complete the surveys as management asserts the split of their time mirrors 

that of field examiners. In addition, the transfer rate is calculated and 

approved by management every few years. However conditions can change 

that may result in the transfer rate not representing the current condition. 

Changing workloads and conditions can also cause a significant change in 

future rates. 

Federal Credit Union 

Insurance Pricing Is Not 

Based on Risk to Insurer 

The Federal Credit Union Act requires all federally insured credit unions to 

allocate 1 percent of their insured shares to NCUSIF. This flat rate does not 

take into consideration variations in risk posed by individual credit unions. 

Although FDIC had implemented a version of risk-based pricing in 1993, 

FDIC has continued to study options for improving deposit insurance 

funding. FDIC’s suggestions for improvement were issued in a 2001 report 

that noted the cost of insurance, regardless of type (property, casualty, or 

life), in the private sector is priced based upon the risk assumed by the 

insurer.

85 Premiums and loss experience are generally actuarially 

determined, such that increased risk equates to increased cost. Since 

passage of FDICIA in 1991, deposit insurance for banks and thrifts are 

adjusted for some risk, and since December 31, 2000, private-sector 

insurance for credit union shares has been adjusted for risk. (See 

appendix X for additional information on accounting for insurance.) While 

BIF and SAIF are adjusted for some risk, FDIC has made additional 

proposals for enhancing the risk-based nature of its insurance pricing. For 

instance, the current BIF and SAIF funding does not require a fast-growing 

institution to pay premiums if it is well capitalized and CAMEL-rated 1 or 2. 

As a result, FDIC has proposed that the pricing structure for BIF and SAIF 

85Federal Deposit Insurance Corporation, Keeping the Promise: Recommendations for 

Deposit Insurance Reform (Washington, D.C.: April 2001). 

Page 62 GAO-04-91 Changes in Credit Union Industry 
be amended so that fast-growing institutions would be required to pay 

premiums. 

NCUSIF is the only share or deposit insurer that has not adopted a riskbased insurance structure. Therefore, some credit unions could be 

overpaying while others could be underpaying if their current rates were 

compared to their risk profiles—with the cost of insurance not being 

equitable based on the level of risk posed to NCUSIF by individual credit 

unions. In contrast, FDIC’s BIF and SAIF and ASI currently operate on a 

risk-based capitalization structure. Depository institutions insured by BIF 

and SAIF pay a premium twice a year based upon their capital levels and 

supervisory ratings, with institutions with the lowest capital levels and 

worst supervisory ratings paying higher premiums. ASI’s insurance fund 

requires its insured credit unions to maintain deposits between 1.0 and 1.3 

percent of their insured shares. The amount for each credit union is 

determined based upon its supervisory rating, with lower-rated credit 

unions maintaining higher deposits. 

The risk-based structure has certain advantages. First, by varying pricing 

according to risk, more of the burden is distributed to those members that 

put an insurance fund at greater risk of loss. Second, risk-based pricing 

provides an incentive for member owners and managers of credit unions to 

control their risk. Finally, risk-based pricing helps regulators focus on 

higher-risk credit unions by enabling them to allocate their insurance 

activities in proportion to the price charged. During our review, members 

of NCUA’s management told us that they believe that risk-based pricing 

would adversely affect small credit unions and suggested that an option 

would be to add risk-based pricing only for credit unions over a certain 

size. By not having risk-based insurance structure, NCUSIF puts a 

disproportionate share of the pricing burden on less-risky credit unions and 

does not provide an incentive through pricing for owners and managers to 

control their risk. 

Management’s Estimation of 

Insured Share Losses Does 

Not Reflect Specific Loss 

Rates 

NCUA’s process for determining estimated losses from insured credit 

unions—the largest potential liability of the fund—does not reflect current 

economic conditions and loss exposures of credit unions with varying risk. 

The estimated liability balance is established to cover probable and 

estimable losses as a result of federally insured credit union failures. The 

estimated liability balance is reduced when the insurance claims are 

actually paid. NCUSIF’s estimated liability for losses was $48 million at 

December 31, 2002. 

Page 63 GAO-04-91 Changes in Credit Union Industry 
In 2002, NCUA’s management analyzed historical loss trends over varying 

periods of time in order to assess whether the estimated liability for losses 

was adequate. It analyzed historical rates of insurance payouts for the past 

3-year, 5-year, 10-year, and 15-year averages. The 15-year analysis 

encompassed an economic period of dramatic losses, which management 

contends may be cyclical and indicative of future exposure, although not 

necessarily indicative of current economic conditions. As a result of this 

analysis, in July 2002, management began building the estimated losses 

account balance by $1.5 million a month to $60 million (from $48 million at 

December 31, 2002), the amount the analysis determined would be needed 

to cover identified and anticipated losses. 

NCUA’s estimation method does not identify specific historical failure rates 

and related loss rates for the group of credit unions that had been identified 

as troubled, but instead specifically calculates expected losses for each 

problem credit union, if it is determined that a particular credit union is 

likely to fail. This methodology essentially assigns a probability of failure of 

either zero or 100 percent to each individual credit union considered to be 

troubled. By not considering specific historical failure rates and loss rates 

in its methodology, NCUA is using an over-simplified estimation method. As 

a result, NCUA may not be achieving the best estimate of probable losses. 

Therefore, NCUA may be over or underestimating its probable losses 

because it does not apply more targeted and specific loss rates to currently 

identified problem institutions, but instead, makes a determination that 

essentially selects from two probabilities: zero or 100-percent probability 

of failure. 

From 2000 to 2002, the amount of insured shares in problem credit unions 

doubled, going from $1.5 billion insured shares in 2000 to nearly $3 billion 

insured shares in 2002. The increase in insured shares of problem credit 

unions may be an indicator of larger future losses to the fund, since 

problem credit unions are more likely to fail. In addition, recent increases 

the share payouts show that the insurance fund is suffering from increasing 

losses that totaled $40 million in 2002. At the same time, the estimated loss 

reserve, which is intended to cover actual losses, has been declining since 

1994. As a result the cushion between payouts for insurance losses and the 

reserve balance became increasingly smaller between 2001 and 2002 (see 

fig. 16). Given the recent trends, it is especially important to utilize specific 

data on failure rates for troubled institutions. 

Page 64 GAO-04-91 Changes in Credit Union Industry 
Figure 16: Share Payouts and Reserve Balance,1990–2002 

Dollars in millions 

0.15 

0.12 

0.09 

0.06 

0.03 

0.00 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Share payouts 

Reserves 

Sources: Call report data. 

In contrast to NCUA’s method, FDIC’s method records estimated bank and 

thrift insurance losses based on a detailed analysis of institutions in five 

risk-based groups. The first group consists of institutions classified as 

having a 100-percent expected failure rate. This determination is based on 

the scheduled closing date for the institution, the classification of the 

institution as “critically undercapitalized,” or identification of the 

institution as an imminent failure. The remaining four risk groups are based 

on federal and state supervisory ratings and the institutions’ projected 

capitalization levels. Every quarter, FDIC meets with representatives from 

other federal financial regulatory agencies to discuss these groupings and 

ensure that each institution is appropriately grouped based on the most 

recent supervisory information. Also on a quarterly basis, FDIC’s Financial 

Risk Committee (FRC), an interdivisional committee, meets to discuss and 

determine the appropriate projected failure rates to be applied to each of 

Page 65 GAO-04-91 Changes in Credit Union Industry 
the four remaining risk-based groups.86 The projected failure rate for each 

risk-based group is multiplied by the assets of each institution in that 

group, which results in expected failed assets. Expected failed assets are 

then multiplied by an expected loss experience rate, the product of which 

results in the loss estimate for anticipated failures. The projected failure 

rates for the remaining four risk-based groups are based on historical 

failure rates for those categories. However, FRC has the responsibility for 

determining if the historical failure rates for each group are appropriate 

given the current and expected condition of the industry and may adjust 

failure rates, if necessary. The expected loss experience rates have been 

based on asset size and reflect FDIC’s historical loss experience for banks 

of different sizes. FRC may also use loss rates based on institution-specific 

supervisory information rather than the historical rates. This process, as 

implemented by FDIC, results in a more targeted estimation process that 

specifically captures current changes in the risk profile of insured 

institutions. 

System Risk That May 

Be Associated with 

Private Share 

Insurance Appears to 

Have Decreased, but 

Some Concerns 

Remain 

The amount of insured shares and the number of privately insured credit 

unions and providers of private primary share insurance have declined 

significantly since 1990. Specifically, 1,462 credit unions purchased private 

share insurance in 1990 compared with 212 credit unions as of December 

2002. During the same period, the total amount of privately insured shares 

decreased by 42 percent ($18.6 billion to about $10.8 billion). Although the 

use of private share insurance has declined, some circumstances of the 

remaining private insurer, ASI, raise concerns. First, ASI’s risks are 

concentrated in a few large credit unions and in certain states. Second, ASI 

has a limited ability to absorb catastrophic losses because it does not have 

the backing of any governmental entity and its lines of credit are limited in 

the aggregate as to the amount and available collateral. To mitigate its 

risks, ASI has implemented a number of risk-management strategies, such 

as increased monitoring of its largest credit unions. State oversight 

mechanisms of the remaining private share insurer and privately insured 

credit unions also provide some additional assurance that ASI and the 

86The Financial Risk Committee consists of representatives from four divisions within FDIC: 

Insurance and Research, Resolutions and Receiverships, Supervision and Consumer 

Protection, and Finance. FDIC maintains statistics on the percentage of institutions within 

different risk categories that fail based on the ratio of failed institutions’ assets to total 

assets. For purposes of this report the term “failure rate” is used to describe this statistic. A 

100-percent projected failure rate is always applied to the first risk-based group. 

Page 66 GAO-04-91 Changes in Credit Union Industry 
credit unions it insures operate in a safe and sound manner. One additional 

concern, as we recently reported, is that many privately insured credit 

unions failed to make required disclosures about not being federally 

insured and, therefore, the members of these credit unions may not have 

been adequately informed that their deposits lacked federal deposit 

insurance. 

Few Credit Unions Are 

Privately Insured 

Compared with federally insured credit unions, relatively few credit unions 

are privately insured. As of December 2002, 212 credit unions—about 2 

percent of all credit unions—chose to purchase private primary share 

insurance.87 These privately insured credit unions were located in eight 

states and had about 1.1 million members with shares totaling about $10.8 

billion, as of December 2002—a little over 1 percent of all credit union 

members and 2 percent of all credit union shares. In contrast, as of 

December 2002, there were 9,688 federally insured credit unions with about 

81 million members and shares totaling $483 billion. 

Through a survey of 50 state regulators and related follow-on discussions 

with the regulators, we identified nine additional states that could permit 

credit unions to purchase private share insurance.

88 Figure 17 illustrates 

the states that permit or could permit private share insurance as of March 

2003 and the number of privately insured credit unions as of December 

2002. 

87Our review focuses on primary share insurance. Generally, primary share (or deposit) 

insurance is mandatory for all depository institutions and covers members’ deposits up to a 

specified amount. Excess share (deposit) insurance is optional coverage above the amount 

provided by primary share insurance. NCUSIF provides primary share insurance up to 

$100,000 per member; while ASI provides primary share insurance up to $250,000 per 

account and excess share insurance. ASI is chartered by Ohio statute. ASI’s coverage is 

subject to a $250,000 statutory cap under Ohio law. Ohio Rev. Code Ann. § 1761.09(A), 

(Anderson, 2003). 

88States that “could permit” private share insurance include those with state laws permitting 

credit unions to purchase private share insurance, but that have no credit unions in the state 

that currently carry private share insurance. 

Page 67 GAO-04-91 Changes in Credit Union Industry 
Page 68 GAO-04-91 Changes in Credit Union Industry

Figure 17: States Permitting Private Share Insurance (March 2003) and Number of Privately Insured Credit Unions (December 

2002)

The number of privately insured credit unions and private share insurers 

has declined significantly since 1990. In 1990, 1,462 credit unions in 23

states purchased private share insurance from 10 different nonfederal, 

private insurers, with shares at these credit unions totaling $18.6 billion. 

Between 1990 and 2002, the amount of privately insured shares decreased 

42 percent to about $10.8 billion. Shortly after the failure of Rhode Island

Share and Depositors Indemnity Corporation (RISDIC), a private share

insurer in Rhode Island in 1991, almost half of all privately insured credit 

unions converted to federal share insurance voluntarily or by state

Sources: GAO and state regulators.

States that have credit unions that purchase private share insurance

States that permit private share insurance but do not have privately insured credit unions

22

93

Number of credit unions that

purchase private share insurance

3 5 8

20 21

40

0

20

40

60

80

100

Ohio

Illinois

Calif

Idaho

ornia

Ne

Indiana

vada

Maryland 

Alabama
mandate.89 As a result of the conversions from private to federal share 

insurance, most private share insurers have gone out of business due to the 

loss of their membership since 1990; only one company, ASI, currently 

offers private primary share insurance.

90 

In states that currently permit private share insurance, a comparable 

number of credit unions have converted from federal to private share 

insurance and from private to federal share insurance since 1990—31 and 

26, respectively. Most of the conversions from federal to private share 

insurance (26 of 31) occurred since 1997. According to management at 

many privately insured credit unions, they converted to private share 

insurance to obtain higher coverage and avoid federal rules and regulation. 

Additionally, management at these credit unions noted that they were 

satisfied with the service they received from the private share insurer and 

all but one planned to remain privately insured. According to NCUA—in 

states that currently permit private share insurance—since 1990, 26 credit 

unions converted from private to federal share insurance; the majority did 

so in the early 1990s, following the RISDIC failure and widespread concern 

over the safety and soundness of private share insurance.

91 Most of the 26 

credit unions planned to continue to purchase federal share insurance 

89Several factors precipitated the closure of RISDIC in 1991. For example, weaknesses 

existed in the Rhode Island bank regulator’s and RISDIC’s oversight of institutions. 

Furthermore, some of the institutions insured by RISDIC engaged in high-risk activities. In 

1991, RISDIC depleted its reserves because of the failure of one institution. As a result, runs 

occurred at several other institutions insured by RISDIC; it was not able to meet its 

insurance obligations and was forced to call in a conservator. The Governor of Rhode Island 

closed all institutions insured by RISDIC and required institutions to purchase federal 

deposit insurance. According to NCUA, it did not insure all Rhode Island credit unions 

following the Governor’s closure of institutions insured by RISDIC. 

90As of December 2002, we identified two companies that provided private primary share 

insurance in the 50 states and the District of Columbia—ASI and Credit Union Insurance 

Corporation (CUIC) in Maryland. However, CUIC was in the process of dissolution and, 

therefore, we did not include it in our analysis. As of August 2003, of the five credit unions 

that CUIC insured, four purchased private share insurance from ASI, and one converted to 

federal share insurance. 

91Generally, credit unions that converted from federal to private share insurance since 1990 

were larger than credit unions that switched from private to federal share insurance during 

the same period. Specifically, as of December 2002, about a third of the credit unions that 

converted to private insurance had shares between $100 and $500 million; on the other 

hand, the majority of credit unions that converted to federal insurance had shares totaling 

up to $50 million. Only two of the 26 conversions occurred since 1995—one because the 

private insurer went out of business and the other because of a merger with a federally 

insured credit union. 

Page 69 GAO-04-91 Changes in Credit Union Industry 
either because they were reasonably satisfied or because they viewed 

having their share insurance backed by the federal government as a benefit. 

Risks Exist at Remaining 

Private Share Insurer, but 

Certain Factors Help to 

Mitigate Concerns 

Risks of Remaining Private 

Insurer Concentrated in a Few 

Credit Unions and States 

Although the use of private share insurance has declined, we found two 

aspects of the remaining private insurer that raise potential safety and 

soundness concerns. First, ASI faces a concentration of risk in a few large 

credit unions and certain states. Second, ASI has limited borrowing 

capacity and could find it difficult to cover catastrophic losses under 

extreme economic conditions because it does not have the backing of any 

governmental agency, its lines of credit are limited in the aggregate as to 

the amount and available collateral, and it has no reinsurance for its 

primary share insurance. To help mitigate these risks, ASI has taken steps 

to increase its monitoring of its largest credit unions and is using other 

strategies to limit its risks. In addition, as a regulated entity, state regulation 

of ASI and the credit unions it insures provides some additional assurance 

that ASI and the credit unions operate in a safe and sound manner. 

ASI is chartered in Ohio statute as a credit union share guaranty 

corporation.

92 As specified in Ohio statute, the purpose of such a 

corporation includes guaranteeing payment of all or a part of a 

participating credit union share account.93 Although ASI is commonly 

referred to as a provider of insurance, it is not subject to all of Ohio’s 

insurance laws.94 For example, ASI is not subject to Ohio’s insurance law 

that limits the risk exposure of an insurance company. Specifically, while 

Ohio insurance companies are subject to a “maximum single risk” 

requirement—“no insured institution’s coverage should comprise more 

than 20 percent of the admitted assets, or three times the average risk or 1 

92Ohio Rev. Code Ann. Oh. 1761. 

93Ohio Rev. Code Ann. § 1761.03. Under Ohio law, other purposes of a credit union share 

guaranty corporation are to (1) aid and assist any participating credit union that is in 

liquidation or incurs financial difficulty in order that the credit union share accounts are 

protected or guaranteed against losses, and (2) cooperate with participating credit unions, 

the superintendent of credit unions, the appropriate credit union supervisory authorities, 

and the NCUA for the purpose of advancing the general welfare of credit unions in Ohio and 

in other states where participating credit unions operate. 

94In Ohio, credit union guaranty corporations are subject to many Ohio insurance laws; 

however, they apply only to the extent that such laws are otherwise applicable and are not 

in conflict with Ohio laws for credit union guaranty corporations. See Ohio Rev. Code Ann. 

1761.04(A). 

Page 70 GAO-04-91 Changes in Credit Union Industry 
percent of insured shares, whichever is greater”—Ohio has not imposed 

this requirement on ASI.

95 Although ASI is not subject to this requirement, 

we found that ASI exceeded this concentration limit. For example, one 

credit union made up about 25 percent of ASI’s total insured shares, as of 

December 2002. In contrast, the largest federally insured credit union 

accounted for only 3 percent of NCUSIF’s total insured shares. Other 

concentration risks exist; for example, we found that 45 percent of ASI’s 

total insured shares were located in one state (California). Further, all of 

ASI’s insured credit unions were located in only eight states, with almost 

half being located in one state (Ohio), which represents 14 percent of all 

ASI-insured shares. In contrast, 14.3 percent of federally insured credit 

union shares were located in one state (California). The credit unions that 

NCUSIF insures are located in 50 states and the District of Columbia, with 

the largest percentage (8 percent) of credit unions located in one state 

(Pennsylvania), which represents about 4 percent of NCUSIF’s insured 

shares. 

While we remain concerned about ASI’s concentration of risks, ASI 

employs a number of risk-management strategies—intended to mitigate its 

risk exposure in individual institutions—including being selective about 

which credit unions it insures, conducting regular on- and off-site 

monitoring of all its insured institutions, implementing a partially adjusted, 

risk-based insurance pricing policy, and establishing a 30-day termination 

policy. More specifically, ASI employs the following risk-management 

strategies: 

•	 To qualify for primary share insurance with ASI, a credit union must 

meet ASI’s insurance eligibility criteria, which include an analysis of the 

financial performance of the credit union over a 3-year period and an 

evaluation of the institution’s operating policies. For example, to qualify 

for ASI coverage, a credit union’s fixed assets must be limited to 5 

percent of the institution’s total assets or the amount permitted by its 

supervisory authority, whichever is greater, and credit unions must 

maintain a minimum net capital-to-asset ratio of 4 percent of total 

assets.96 In contrast, federal PCA requirements compel federally insured 

credit unions to maintain a minimum capital to assets ratio of 7 percent 

95Under Ohio law, insurers licensed by the state are subject to a “maximum single risk” 

requirement. See Ohio Rev. Code Ann. § 3941.06(B). 

96According to ASI, the average net capital-to-assets ratio of all ASI’s primary insured credit 

unions was 10.88 percent, as of December 31, 2002. 

Page 71 GAO-04-91 Changes in Credit Union Industry 
of total assets.97 The credit union also must submit its investment, assetliability management, and loan policies for ASI’s review. In addition, ASI 

obtains and reviews the most recent reports from the credit union’s 

regulator and certified public accountant (CPA) or supervisory 

committee. Between 1994 and July 2003, ASI denied share insurance 

coverage to eight credit unions while approving coverage for 31 credit 

unions.98 

•	 ASI also regularly monitors all credit unions it insures. ASI routinely 

conducts off-site monitoring and conducts on-site examinations of 

privately insured credit unions at least once every 3 years. It also 

reviews state examination reports for the credit unions it insures and 

imposes strict audit requirements. For example, ASI requires an annual 

CPA audit for credit unions with $20 million or more in assets, while 

NCUA only requires the annual CPA audit for credit unions with more 

than $500 million in assets. Further, after insuring a large credit union, 

ASI implemented a special monitoring plan for its largest credit unions 

in light of its increased risk exposure. For larger credit unions (those 

with more than 10 percent of ASI’s total insured shares or the top 5 

credit unions in asset size), ASI increased its monitoring by conducting 

semiannual, on-site examinations, as well as monthly and quarterly offsite monitoring, which included a review of the credit unions’ most 

recent audits (monthly) and financial information (quarterly). ASI also 

annually reviews the audited financial statements of these large credit 

unions. In January 2003, five credit unions with about 40 percent of ASI’s 

total insured assets qualified for this special monitoring.

99 ASI also 

began a monitoring strategy intended to increase its oversight of smaller 

credit unions, due in part to experiencing larger-than-expected losses at 

97For example, federal PCA regulations require supervisory action when federally insured 

credit unions’ capital to assets ratio is less than 6 percent of total assets. 

98Twenty-eight of these credit unions converted from federal insurance, while two were 

newly chartered credit unions and one was an uninsured credit union. 

99As of June 2003, the total shares of these credit unions ranged from $297.6 million to $2.5 

billion. Though the plan targeted only ASI’s five largest credit unions, ASI may increase the 

number of monitored credit unions at any time so that it continually reviews at least 25 

percent of total insured shares. 

Page 72 GAO-04-91 Changes in Credit Union Industry 
 a small credit union in 2002.100 ASI determined that 98 smaller credit 

unions qualified for increased monitoring, with shares from the largest 

of these smaller credit unions totaling about $23 million. 

•	 ASI also has implemented a partially adjusted, risk-based insurance 

pricing policy, which produces an incentive for the institutions insured 

by ASI to obtain a better CAMEL rating, which in turn lowers the risk to 

ASI’s insurance fund. Like NCUSIF, ASI’s insurance fund is depositbased; that is, ASI requires credit unions it insures to deposit a specified 

amount with ASI.101 As of December 2002, these deposits with ASI 

totaled $112 million. Unlike NCUSIF, ASI’s insurance fund is partially 

adjusted for risk, which acts as a positive, risk-management strategy to 

mitigate against losses. Specifically, a credit union with a higher, or 

worse, CAMEL rating is required to deposit more into ASI’s insurance 

fund.

102 Conversely, NCUA requires federally insured credit unions to 

deposit 1.0 percent of insured shares into NCUSIF regardless of their 

CAMEL ratings.103 According to ASI, it also has the contractual ability to 

reassess all member credit unions up to 3 percent of their total assets to 

raise additional funds to cover catastrophic loss. 

•	 ASI’s credit union termination policy provides another risk-mitigating 

strategy that ASI can use to manage its risk exposure to an individual 

credit union. ASI’s insurance contract identifies several circumstances 

that would enable ASI to terminate insurance coverage. For example, 

ASI may terminate a credit union’s insurance with 30 days notice to the 

100ASI assigned a risk level to the credit unions it insured (low, moderate, or high) and then 

used this assessment to determine the extent of oversight at the credit union, which might 

include conducting face-to-face interviews with the chair of the supervisory audit 

committee, confirming checks over $1,000 have cleared, or verifying the value of loans, 

investments, and share accounts with credit union members in writing or over the phone. 

101ASI deposit-based insurance fund is funded through capital contributions to ASI from 

member credit unions. The member credit unions record this capital contribution as a 

deposit (asset) on their financial statements. 

102ASI’s insurance fund is funded through the credit unions it insures depositing between 1.0 

and 1.3 percent of a credit union’s insured shares with ASI. The credit unions’ CAMEL 

ratings determine the rate at which credit unions are assessed (the ratings are 1-strong, 2-

satisfactory, 3-flawed, 4-poor, and 5-unsatisfactory). For example, credit unions with a 

CAMEL score of 1 must deposit 1.0 percent of total insured shares into ASI’s insurance fund; 

credit unions with a CAMEL score of 4 or 5 must deposit 1.3 percent of their total insured 

shares. 

10312 U.S.C. § 1782a(c). 

Page 73 GAO-04-91 Changes in Credit Union Industry 
Remaining Private Insurer Has 

Limited Borrowing Capacity and 

May Find It Difficult to Cover 

Losses from Its Largest Insured 

Credit Unions under Extreme 

Economic Conditions 

credit union and its state regulator, if the credit union fails to comply 

with ASI requirements to remedy any unsafe or unsound conditions or 

remedy an audit qualification in a timely manner. According to ASI 

management, it has not terminated a credit union’s share insurance, 

although ASI has used its termination policy as leverage to force 

changes at a credit union.

104 

When its largest insured credit union applied for primary share insurance, 

ASI undertook an assessment of its financial and underwriting 

considerations for insuring this institution.105 ASI had previously provided 

excess share insurance to the credit union and was familiar with its 

financial condition. ASI’s independent actuaries determined that the ASI 

fund could withstand losses sustained during adverse economic conditions 

for up to 5 years, with or without insuring this large credit union. 

Ultimately, ASI’s assessment concluded that the credit union’s financial 

condition was strong and, although it would increase ASI’s concentration 

of risks, insuring the credit union would have a favorable financial impact 

on ASI. According to regulators from the Ohio Department of Commerce, 

Division of Financial Institutions (Ohio Division of Financial Institutions), 

they did not take exception to ASI insuring the large credit union and had 

reviewed ASI’s underwriting assessment and asked to be updated 

periodically. 

Unlike federal share insurance, which is backed by the full faith and credit 

of the United States, ASI’s insurance fund is not backed by any government 

entity. Therefore, losses on member deposits in excess of available cash, 

investments, and other assets of ASI-insured institutions would only be 

covered up to ASI’s available resources and its secured lines of credit, 

which serve as a back-up source of funds. According to ASI documents, the 

terms of ASI’s secured lines of credit required collateralization between 80 

and 115 percent of current market value of the U.S. government or agency 

104ASI’s involuntary termination procedure, unlike NCUA’s, does not require a credit union to 

notify its members that its share insurance has been terminated. According to ASI, because 

states generally prohibit credit unions from operating without share insurance, the states 

would require notification to credit union members of the change in the credit union’s 

insured status. NCUA’s involuntary termination policy, on the other hand, requires 30 days 

notice and also requires a credit union to issue “prompt and reasonable” notice to its 

members that it will cease to be insured. 12 U.S.C. §§1786(b), (c). 

105According to ASI documents, this credit union would have represented 22 percent of ASI’s 

insured shares; at the time of the assessment, ASI’s largest credit union represented only 6 

percent of the fund’s insured shares. 

Page 74 GAO-04-91 Changes in Credit Union Industry 
securities ASI holds. As a result, ASI’s borrowing capacity is essentially 

limited to the securities it holds. ASI officials also explained that due to the 

high cost of reinsurance, it has not purchased reinsurance on its primary 

share insurance, although it has reinsurance for its excess share insurance. 

ASI has not had large losses since 1975. ASI has expended funds for 118 

claims and its loss experience—from the credit unions that have made 

claims—has averaged 3.95 percent of the total assets of these credit unions. 

If ASI’s historical loss average of 3.95 percent was tested and proved true 

for a failure at the largest credit union ASI insured, as of December 2002, 

the loss amount would be about $119 million.106 While this would be a 

major loss, ASI would most likely be able to sustain this loss. ASI’s 

historical loss rate is nearly 60 percent less than the loss rate experienced 

by NCUSIF for the same period. However, under more stressful conditions, 

ASI could have difficulty fulfilling its obligations. For example, ASI’s five 

largest credit unions represent nearly 40 percent of insured shares, for 

which a collective loss at 3.95 percent of the assets of these credit unions 

would exceed ASI’s equity by approximately $30 million. According to ASI, 

it could raise additional funds to cover catastrophic loss by reassessing all 

member credit unions up to 3 percent of their total assets, which excluding 

the top five credit unions, would generate approximately $214 million of 

additional capital, while maintaining minimum capital levels at 4 percent of 

total assets. Further, by Ohio statute, the Superintendent of the Division of 

Financial Institutions can order ASI to reassess its insured credit unions up 

to the full amount of their capital, which, excluding the top five credit 

unions, would generate approximately $794 million of funds for ASI with 

which to pay claims. This recapitalization process is generally similar to 

that required of NCUSIF before accessing its Treasury line of credit. 

However, if ASI reassessed its member credit unions during a catastrophic 

failure, it would further negatively affect these credit unions at a time that 

they were already facing stressful economic conditions. 

State Oversight of ASI and the State regulation of ASI and the privately insured credit unions it insures 

Credit Unions It Insures Provides provides some additional assurance that ASI and privately insured credit 

Additional Assurance unions operate in a safe and sound manner. As a share guaranty 

106This estimate is based on using December 2002 financial data on the largest credit union 

insured by ASI. According to a capital adequacy analysis performed for ASI, ASI’s 

independent actuaries determined that the ASI fund could withstand losses sustained during 

adverse economic conditions for up to 5 years, with or without insuring this large credit 

union. 

Page 75 GAO-04-91 Changes in Credit Union Industry 
corporation, ASI is subject to state oversight and regulation in those states 

where ASI insures credit unions. ASI was chartered in Ohio statute, with 

the Ohio Division of Financial Institutions and the Ohio Department of 

Insurance dually regulating it. ASI is licensed by the Ohio Superintendent 

of Insurance and is subject to routine oversight by that department and 

Ohio’s Superintendent of Credit Unions.107 The Ohio Division of Financial 

Institutions conducts annual assessments of ASI, which evaluate ASI’s 

underwriting and monitoring procedures, financial soundness, and 

compliance with Ohio laws. Under Ohio law, its Department of Insurance 

also is required to examine ASI at least once every 5 years. The last Ohio 

Department of Insurance exam of ASI was completed in March 1999, which 

covered January 1995 through December 1997. When we met with Ohio 

officials in June 2003, they told us that the Ohio Department of Insurance 

planned to examine ASI in the third quarter of calendar year 2003. ASI is 

also required to submit annual audited financial statements, including 

management’s attestation, and quarterly unaudited financial statements to 

Ohio insurance and credit union regulators.108

 Ohio law also requires ASI to 

provide copies of written communication with regulatory significance to 

Ohio regulators, obtain the opinion of an actuary attesting to the adequacy 

of loss reserves established, and apply annually for a license to do business 

in Ohio. In our discussions with officials from the Ohio Division of 

Financial Institutions and the Ohio Department of Insurance, we found 

that, to date, ASI has complied with all requirements and regulations, and 

no regulators have taken corrective actions against ASI or limited ASI’s 

ability to do business in Ohio. 

Generally, state financial regulators have taken the primary lead for 

monitoring ASI’s actions, while state insurance regulators were not as 

involved in overseeing ASI’s operations. All states where ASI insures credit 

unions have, at some point, formally certified ASI to conduct business in 

that state.109 Ohio and Maryland have certified ASI in the past year—as 

required by governing statutes in those states. Regarding the other states in 

which ASI operates, while they have not formally recertified ASI, Ohio’s 

107See Ohio Rev. Code Ann. Ch. 1761. 

108While Ohio law requires ASI to submit annual audited financial statements, Ohio law 

permits the superintendent of insurance to require the submission of quarterly reports. The 

superintendent of insurance imposes this requirement on ASI. See Ohio Rev. Code Ann. §§ 

1761.16 and 3901.42. 

109The states are Alabama, California, Idaho, Illinois, Indiana, Maryland, Nevada, and Ohio. 

Page 76 GAO-04-91 Changes in Credit Union Industry 
annual examination process of ASI involves regulators from most states. 

State credit union regulators from Idaho, Illinois, Indiana, and Nevada 

commonly participate in this assessment; according to ASI officials, their 

acceptance of the final examination report infers that they approve of ASI’s 

continuing operation in their respective states. State credit union 

regulators from California and Alabama, however, have not participated in 

the annual on-site assessment of ASI. Regarding monitoring efforts by state 

insurance regulators, according to ASI, the Ohio Department of Insurance 

is the only state insurance department that imposes requirements and 

insurance regulators from Idaho, Illinois, and Nevada only request 

information. 

Most state credit union regulators with whom we met told us they had 

regular communication with ASI about the credit unions ASI insured. ASI 

officials reported that they commonly conducted joint, on-site exams of 

credit unions with state regulators. State credit union regulators imposed 

safety and soundness standards and carried out examinations of statechartered credit unions in a way similar to how the federal government 

oversees federally insured credit unions. According to state regulators, 

state regulations, standards, and examinations apply to all state-chartered 

credit unions, regardless of their insurance status (whether federal, private, 

or noninsured). State credit union regulators reported that they had 

adopted NCUA’s examination program, and their examiners had received 

training from NCUA. However, as previously discussed, some state officials 

with whom we met indicated that they faced challenges related to oversight 

of their credit unions; for example, some states lacked examiner resources 

and had high examiner turnover. 

Additionally, privately insured credit unions—as compared with federally 

insured credit unions—are not subject to identical requirements and 

regulations. For example, while federally insured, state-chartered credit 

unions are subject to PCA—as discussed earlier, privately insured, statechartered credit unions are not subject to these federally mandated 

supervisory actions. Although, as a matter of practice, many state 

regulators reported that they have the authority to impose capital 

requirements on privately insured credit unions and could take action 

when a credit union’s capital levels are not safe and sound. However, state 

officials in California, Idaho, Illinois, Indiana, Ohio, and Nevada said that 

their states required privately insured credit unions to maintain specified 

reserve levels, which were codified in statute or regulation. Additionally, 

Alabama requires credit unions seeking private insurance to meet certain 

capital levels. 

Page 77 GAO-04-91 Changes in Credit Union Industry 
While some states had specific requirements for credit unions seeking to 

purchase private share insurance, many states regulators reported that 

they have the authority to “not approve” the conversion of credit unions to 

private share insurance. Alabama, Illinois, and Ohio have written guidelines 

for credit unions seeking to purchase private share insurance and 

regulators reported that they have the authority to “not approve” a credit 

union’s purchase of private insurance. The other five states that permitted 

private share insurance do not have written guidelines for credit unions 

seeking to purchase private share insurance, but Idaho, Indiana, and 

Nevada state regulators also noted that they have the authority to “not 

approve” a credit union’s purchase of private share insurance. 

Moreover, NCUA supervised the conversions of federally insured credit 

unions to private share insurance. Specifically, NCUA has imposed 

notification requirements on federally insured credit unions seeking to 

convert to private share insurance and requires an affirmative vote of a 

majority of the credit union members on the conversion from federal to 

private share insurance. NCUA has required these credit unions to notify 

their members, in a disclosure, that if the conversion were approved, the 

federal government would not insure shares.110 We reviewed six recent 

conversions to private share insurance, and found that, prior to NCUA’s 

termination of the credit union’s federal share insurance, these credit 

unions, including the large credit union that recently converted to ASI, had 

generally complied with NCUA’s notification requirements for conversion. 

Members of Many Privately Although actions taken by ASI and some state regulators provide some 

Insured Credit Unions Are assurances that ASI is operating in a safe and sound manner, ASI’s 

Not Receiving Required concentration risks and limited borrowing capacity raise concerns that 

under stressful economic conditions it may not be able to fulfill its Disclosures about the Lack responsibilities to its membership. Congress determined that it was

of Federal Share Insurance important for members of privately insured credit unions to be informed 

110Specifically, under the Federal Credit Union Act, if a federally insured credit union 

terminates federal share insurance or converts to nonfederal (private) insurance, the 

institution must give its members “prompt and reasonable notice” that the institution has 

ceased to be federally insured. 12 U.S.C. § 1786(c). NCUA rules implement these provisions 

by prescribing language to be used in (1) the notices of the credit union’s proposal to 

terminate federal share insurance or convert to nonfederal (private) insurance, (2) an 

acknowledgement on the voting ballot of the member’s understanding that federal share 

insurance will terminate, and (3) the notice of the termination or conversion. See 12 C.F.R. 

Part 708b (2003). 

Page 78 GAO-04-91 Changes in Credit Union Industry 
that their deposits in such institutions were not federally insured. 

Specifically, among other things, section 43 of the Federal Deposit 

Insurance Act requires depository institutions lacking federal deposit 

insurance, which includes privately insured credit unions, to conspicuously 

disclose to their membership that deposits at these institutions are (1) not 

federally insured and (2) if the institution fails, the federal government 

does not guarantee that depositors will get back their money.

111 These 

institutions are required to conspicuously disclose this information on 

periodic statements of account, signature cards, and passbooks, and on 

certificates of deposit, or instruments evidencing a deposit (deposit slips). 

These institutions are also required to conspicuously disclose that the 

institution is not federally insured at places where deposits are normally 

received (lobbies) and in advertising (brochures and newsletters). 

The Federal Trade Commission (FTC) is responsible for enforcing 

compliance with section 43.

112 However, FTC has never taken action to 

enforce these requirements, and has sought and obtained in its 

appropriations authority a prohibition against spending appropriated funds 

to carry out these provisions. We recently reported that because of a lack of 

federal enforcement of this section, many privately insured credit unions 

did not always make required disclosures.113 We conducted unannounced 

site visits to 57 locations of privately insured credit unions (49 main and 8 

branch locations) in five states—Alabama, California, Illinois, Indiana, and 

Ohio and found that 37 percent of the locations we visited did not 

conspicuously post signage in the lobby of the credit union. During these 

site visits, we also obtained other available credit union materials 

(brochures, membership agreements, signature cards, deposit slips, and 

newsletters) that did not include language to notify consumers that the 

credit union was not federally insured—as required by section 43. Overall, 

134 of the 227 pieces of materials we obtained from 57 credit union 

locations—or 59 percent—did not include specified language. As part of 

our review, we also reviewed 78 Web sites of privately insured credit 

unions and found that many Web sites were not fully compliant with 

section 43 disclosure requirements. For example, 39 of the 78 sites 

11112 U.S.C. § 1831t (b). 

11212 U.S.C. § 1831t (g). 

113U.S. General Accounting Office, Federal Deposit Insurance Act: FTC Best Among 

Candidates to Enforce Consumer Protection Provisions, GAO-03-971 (Washington, D.C.: 

Aug. 20, 2003). 

Page 79 GAO-04-91 Changes in Credit Union Industry 
reviewed had not included language to notify consumers that the credit 

union was not federally insured. 

Our primary concern, resulting from the lack of enforcement of section 43 

provisions, was the possibility that members of privately insured, statechartered credit unions might not be adequately informed that their 

deposits are not federally insured and should their institution fail, the 

federal government does not guarantee that they will get their money back. 

The fact that many privately insured credit unions we visited did not 

conspicuously disclose this information raised concerns that the 

congressional interest in this regard was not being fully satisfied. In our 

August 2003 report, we concluded that FTC was the best among candidates 

to enforce and implement section 43 and provided suggestions on how to 

provide additional flexibility to FTC to enforce section 43 disclosure 

requirements. The House Committee on Appropriations, Subcommittee on 

Commerce, Justice, State, the Judiciary, and Related Agencies, is currently 

considering adding language in FTC’s 2004 appropriations bill that would 

require FTC to enforce and implement section 43 disclosure provisions. 

Conclusions	 The financial condition of the credit union industry has improved since 

1991. Between 1992 and 2002, changes in the industry have resulted in two 

distinct groups of credit unions—smaller credit unions providing their 

members with basic banking services and larger credit unions that seek to 

provide their members with a full range of financial services similar to 

other depository institutions. These larger credit unions control a larger 

percent of industry assets than they did in 1991. This concentration of 

industry assets creates the need for greater risk management on the part of 

credit union management and NCUA with respect to monitoring and 

controlling risks to the federal share insurance fund. 

Among the more significant changes that have occurred in the credit union 

industry over the past two decades have been the weakening or blurring of 

the common bond that traditionally existed between credit union 

members. The movement toward geographic-based fields of membership, 

and other expansions of the common-bond restrictions in conjunction with 

expanded lines of financial services, have made credit unions more 

competitive with banks. These changes have raised questions about the 

extent to which credit unions are fulfilling their perceived historic mission 

of serving individuals of modest means. However, no comprehensive data 

are available to determine the income characteristics of those who receive 

credit unions services, especially with respect to consumer loans and other 

Page 80 GAO-04-91 Changes in Credit Union Industry 
financial services. Available data, such as that provided by the SCF and 

HMDA, provide some indication that credit unions serve low- and 

moderate-income households but not to the same extent as banks. If credit 

unions, as indicated by NCUA and the credit union industry, place a special 

emphasis on serving low- and moderate-income households, more 

extensive data would be needed to support this conclusion. These data 

would need to include information on the distribution of consumer loans 

because smaller credit unions are more likely to make consumer than 

mortgage loans. Lack of data especially impairs NCUA’s ability to 

determine if credit unions that have adopted underserved areas are 

reaching the households in the communities most in need of financial 

services. 

As the industry has changed and larger credit unions have become more 

like banks in the services they have provided, NCUA has adopted a 

supervisory and examination approach that more closely parallels that of 

the other depository institution regulators. While it is too soon to 

determine whether the risk-focused approach being implemented by NCUA 

will allow it to more effectively monitor and control the risks being 

assumed by credit unions, our work suggests that further opportunities 

exist for NCUA to further leverage off the approaches and experiences of 

the other federal depository institution regulators. For example, as NCUA 

is addressing challenges in implementation of its risk-focused program, it 

has the opportunity to use forums such as the FFIEC to learn how other 

depository institution regulators dealt with similar challenges in 

implementing their risk-focused programs. Also, NCUA might gain an 

evaluation of an institution’s internal controls, comparable to other 

depository institution regulators, if credit unions were required, like banks 

and thrifts, to provide management evaluations of internal controls and 

their auditor’s assessments of such evaluations. Finally, NCUA could gain 

better oversight of third-party vendors if it had the same ability to examine 

the activities of third-party vendors as do other depository institution 

regulators. 

As of December 2002, NCUSIF’s financial condition appeared satisfactory 

based on its fund-equity ratio and positive net income. However, it is not 

clear whether or to what extent NCUSIF’s recent decline in net income will 

continue. Improvements in NCUA’s processes for determining the overhead 

transfer rate, pricing, and estimated losses could help to promote future 

financial stability by providing more accurate information for financial 

management. As currently determined by NCUA, the overhead transfer rate 

may not have accurately reflected the actual time spent by NCUA staff on 

Page 81 GAO-04-91 Changes in Credit Union Industry 
insurance-related activities. Recent fluctuations are the result of 

adjustments being made because of surveys that had not been conducted 

regularly or over sufficient periods of time. In addition, NCUSIF’s pricing 

for federal share insurance coverage does not reflect the risk that an 

individual credit union poses to the fund. Moreover, the process used by 

NCUA to estimated losses to the insurance fund—the fund’s most 

significant liability and management estimate—has been based on overly 

broad historical analysis. The risk-based pricing structure that is the norm 

across the insurance industry and, for loss estimates, the more detailed, 

risk-based historical analysis used by FDIC in insuring banks and thrifts 

may provide useful lessons for NCUA in improving its management of 

insurance for credit unions. 

While systemic risks that might be created by private share insurance 

appear to have decreased since 1990, the recent conversion of a large credit 

union from federal to private share insurance has introduced new 

concerns. Because the remaining private insurer’s (ASI) insured shares are 

overly concentrated in one large credit union and in certain states, and 

because it does not have the backing of any governmental entity and it has 

limited borrowing capacity, ASI may have a limited ability to absorb 

catastrophic losses. This raises questions about the ability of ASI, under 

severe economic conditions, to fulfill its obligations if its largest credit 

unions were to fail. Given this risk, we believe it is important that the 

members of privately insured credit unions are made aware that their 

shares are not federally insured. As we previously reported, since no 

federal entity currently enforces compliance with federal disclosure 

requirements for privately insured credit unions, and with the high level of 

noncompliance that we found in on-site visits to privately insured credit 

unions, we believe that members of privately insured credit unions might 

not be adequately informed that their shares are not federally insured. As a 

result, we have previously recommended that Congress consider providing 

additional flexibility to FTC to ensure compliance with the federal 

disclosure requirements.114 

Recommendations for 	 To promote NCUA’s ability to meet its goal of assisting credit unions in 

safely providing financial services to all segments of society, to enable Executive Action more consistent federal oversight of financial institutions, and to enhance 

114 GAO-03-971. 

Page 82 GAO-04-91 Changes in Credit Union Industry 
share insurance management (for example, improving allocation costs, 

providing insurance according to risk, and improving the loss estimation 

process), we recommend that the Chairman of the National Credit Union 

Administration 

•	 use tangible indicators, other than “potential membership,” to determine 

whether credit unions have provided greater access to credit union 

services in underserved areas; 

•	 consult with other regulators through FFIEC more consistently about 

risk-focused programs to learn how these regulators have dealt with 

past challenges (for example, training of information technology 

specialists); 

•	 continuously improve the process for and documentation of the 

overhead transfer rate by consistently calculating and applying those 

rates, updating the rates annually, and completing the survey with full 

representation; 

•	 evaluate options for implementing risk-based insurance pricing. In its 

evaluation, the NCUA Chairman should consider the potential impact of 

risk-based insurance pricing to the ability of credit unions to provide 

services to various constituencies; and 

•	 evaluate options for stratifying the industry by risk profile and applying 

probable failure rates and loss rates, based in part on historical data, for 

each risk profile category when estimating future losses from 

institutions. 

Matters for 

Congressional 

Consideration 

Should Congress be concerned that federally insured credit unions, 

especially those serving geographical areas, are not adequately serving lowand moderate-income households, Congress may wish to consider 

requiring NCUA to obtain data on the proportion of mortgage and 

consumer loans provided to low- and moderate-income households within 

each federally insured credit union’s field of membership and obtain 

descriptions of services specifically targeted to low- and moderate-income 

households. 

To ensure the safety and soundness of the credit union industry, Congress 

may wish to consider making credit unions with assets of $500 million or 

more subject to the FDICIA requirement that management and external 

Page 83 GAO-04-91 Changes in Credit Union Industry 
auditors report on the internal control structure and procedures for 

financial reporting, as well as compliance with designated safety and 

soundness laws. 

To improve oversight of third-party vendors, Congress may wish to 

consider granting NCUA legislative authority to examine third-party 

vendors that provide services to credit unions and are not examined 

through FFIEC. 

Agency Comments and 

Our Evaluation 

We requested comments on a draft of this report from the Chairman of the 

National Credit Union Administration and the President and Chief 

Executive Officer of American Share Insurance. We received written 

comments from NCUA and ASI that are summarized below and reprinted in 

appendixes XI and XII respectively. In addition, we received technical 

comments from NCUA and ASI that we incorporated into the report as 

appropriate. 

NCUA concurred with most of the report’s assessment regarding the 

challenges facing NCUA and credit unions since 1991. For example, NCUA 

concurred with the report’s assessment that overall the financial health and 

stability of the credit union industry has improved since 1991. NCUA also 

agreed with our recommendation to consult with other regulators through 

FFIEC more consistently to leverage the knowledge and experience the 

other regulators have gained in administering risk-focused programs. 

NCUA stated that it plans to continue its coordination with its FFIEC 

counterparts as it makes ongoing improvements to its approach to 

supervising federally insured credit unions. 

NCUA also concurred with our matter for congressional consideration that 

credit unions with assets of $500 million or more should provide annual 

management reports assessing the effectiveness of their internal controls 

over financial reporting and their external auditor’s attestation to 

management’s assertions. NCUA stated that it is providing guidance for 

credit unions on the principles of the Sarbanes-Oxley Act that will, among 

other things, strongly encourage large credit unions to voluntarily provide 

this reporting on internal controls. However, NCUA believed that 

legislation was not necessary because NCUA has the authority to 

implement regulations requiring credit unions to provide these reports 

should it become necessary. While we acknowledge NCUA’s authority to 

issue regulations on this issue, we note that regulations can be changed 

unilaterally by the agency, whereas legislation is binding unless changed by 

Page 84 GAO-04-91 Changes in Credit Union Industry 
Congress. Our intent in developing this matter for congressional 

consideration was to ensure parity between credit unions, banks, and 

thrifts with regard to internal control reporting requirements; therefore, we 

have left this as a matter for congressional consideration in our report. 

NCUA also indicated that it did not oppose our recommendation that it be 

given statutory authority to examine third-party vendors that provide 

services to credit unions and are not examined through FFIEC, provided 

that appropriate discretion was extended to the agency in the allocation of 

agency resources and evaluation of risk parameters in using this authority. 

NCUA stated that given that many of these third-party vendors service 

numerous credit unions, a failure of a vendor poses systemic risk issues. 

However, NCUA suggested that it be changed to a matter for congressional 

consideration because it was a statutory issue rather than one involving the 

use of existing NCUA regulatory authority. We agreed with NCUA’s 

assessment and have modified the report accordingly. 

NCUA concurred with the report’s recommendation to make improvements 

to the process for determining the overhead transfer rate and indicated that 

management is in the process of improving the methodology for calculating 

this rate. NCUA also concurred in part with our report’s conclusion that the 

NCUSIF loss reserve methodology warrants study, in order to further refine 

NCUSIF’s estimates. Regarding our recommendation that NCUA study 

options for improving its estimates of future insurance losses, NCUA stated 

that it is awaiting the receipt of recommendations that FDIC received on 

revising its insurance process, and NCUA will review the details of the 

revised FDIC process and how to integrate those practices within NCUA’s 

system. 

In its response, NCUA proposed an alternative to risk-based insurance 

pricing by using the adoption of a PCA approach where required net worth 

levels would be tied to an institution’s risk profile. While NCUA’s proposal 

may be one option to consider, we continue to recommend that NCUA 

evaluate and study various options for achieving a risk-based pricing of 

insurance to fairly distribute risk, provide incentives for member credit 

unions to control their risk, and focus regulators on higher-risk credit 

unions. While it is possible that the option suggested by NCUA would 

achieve the objectives, we believe that NCUA should study the costs, 

benefits, and risks associated with various options in order to determine 

the most effective and cost-beneficial means of achieving a risk-based 

system of insurance. 

Page 85 GAO-04-91 Changes in Credit Union Industry 
NCUA disagreed with our recommendation that it should use indicators, 

other than “potential membership,” to determine whether credit unions 

have provided greater access to credit union services in underserved areas. 

NCUA officials stated that they believe that their data indicated that credit 

unions have reached out to underserved communities; implementation of 

this recommendation could result in significant and unnecessary data 

collection; and Congress has not imposed CRA-like requirements on credit 

unions in the past. We agree that federally chartered credit unions have 

added underserved areas in record numbers, increasing the numbers of 

potential members in these areas, and that membership growth in credit 

unions with underserved areas has been greater than for credit unions 

overall. However, this information does not indicate whether underserved 

individuals or households have received greater access to services (for 

example, by using check-cashing services, opening no-fee checking 

accounts, or receiving loans) as a result of these field of membership 

expansions. Further, while we agree that documenting service to the 

underserved would result in additional administrative requirements, the 

magnitude and scale of this effort does not necessarily require imposition 

of CRA as implemented for banks and thrifts, and could result in 

information benefitting future credit union expansion efforts. At a 

minimum, it would be useful to know whether membership growth in 

credit unions that have added underserved areas has come from the 

underserved areas themselves and the extent to which those census tracts 

within these areas have been identified as low- or moderate-income. This 

type of information, collected uniformly by a federal agency like NCUA, 

could serve as first step towards documenting the extent to which credit 

unions have reached for members outside of their traditional membership 

base. Finally, without this information, it will be difficult for NCUA or 

others that are interested to determine whether credit unions have 

extended services of any kind to underserved individuals as authorized in 

CUMAA. 

Finally, NCUA also concurred with the report’s identification of possible 

systemic risk that could be associated with private share insurance that 

lacks the full faith and credit backing of a state or the federal government. 

NCUA believed that the asset concentration, limited borrowing capacity, 

and the lack of any reinsurance of the private insurer present unique 

challenges for the eight state supervisory authorities where private 

insurance exists today. 

In commenting on the private share insurance section of a draft of this 

report, ASI stated that we failed to adequately assess the private share 

Page 86 GAO-04-91 Changes in Credit Union Industry 
insurance industry. In summary, as discussed below, ASI raised objections 

to the report statements that ASI’s risks are concentrated in a few large 

credit unions and a few states; ASI has limited ability to absorb large losses 

because it does not have the backing of any governmental agency; and 

ASI’s lines of credit are limited in the aggregate as to amount and available 

collateral. In response, we considered ASI’s positions and materials 

provided, including ASI’s actuarial assumptions and ASI’s past 

performance, and believe our report addresses these issues correctly as 

originally presented. 

First, in regard to ASI’s concentration risks, ASI stated that the inclusion of 

a single large, high-quality credit union provided financial resources that 

improved, not diminished, the financial integrity of ASI. Our report 

acknowledges this fact. However, our report also notes that this credit 

union made up about 25 percent of ASI’s total insured shares, and that ASI’s 

five largest credit unions represent nearly 40 percent of ASI’s insured 

shares, as of December 2002. While not disputing that the large credit union 

would improve ASI’s current financial position, we continue to believe that 

this level of concentration in a few credit unions, under adverse economic 

conditions, could expose ASI to a potentially high level of losses. ASI also 

stated that ASI’s coverage and the geographic distribution of ASI’s insured 

credit unions is a matter of state law. The report points out this fact, and we 

acknowledge that it limits ASI’s ability to diversify its risks. However, the 

fact remains that ASI’s risks are currently concentrated in eight states. 

Second, in response to our report’s assessment of ASI’s limited ability to 

absorb catastrophic losses, ASI noted “its sound private deposit insurance 

program builds on a solid foundation of careful underwriting, continuous 

risk management and the financial backing of its mutual member credit 

unions, capable of absorbing large (catastrophic) losses.” In addition, ASI 

noted that over its 29-year history, it has paid over 110 claims on failed 

credit unions, and that no member of an ASI-insured credit union has ever 

lost money. ASI also noted that it could assess its member credit unions up 

to 3 percent of their total assets in order to obtain more capital. We 

acknowledge these facts in this report; however, our point remains that ASI 

has limited borrowing capacity and, under stressful economic conditions, 

may have difficulty securing funds from others to meet its obligations. ASI 

also objected to the report’s comparison of private share insurance to the 

federal insurance program. As the last remaining private share insurer, ASI 

has no peer on which to base a comparison and the only alternative to 

private share insurance for credit unions is NCUSIF. 

Page 87 GAO-04-91 Changes in Credit Union Industry 
Third, ASI commented that the draft report incorrectly views the 

company’s lines of credit as a source of capital. ASI noted that their lines of 

credit are solely in place to provide emergency liquidity. We do not disagree 

with ASI’s statement. When incorporating ASI’s previously received 

technical comments, we clarified in the report that losses on member 

deposits, in excess of available cash, investments, and other assets of ASIinsured institutions, would only be covered up to ASI’s available resources 

and its secured lines of credit, which serve as a back-up source of funds. 

Further, the report notes that ASI’s lines of credit required collaterization 

between 80 and 115 percent of current market value of the U.S. government 

or agency securities ASI holds. As a result, ASI’s borrowing capacity is 

essentially limited to the securities it holds and therefore, in a time of 

stressful economic conditions, ASI may have difficulty maintaining its own 

liquidity if its insured credit unions were failing and unable to meet the 

withdrawal requests of depositors. 

Lastly, ASI supported our previous conclusion that FTC is the appropriate 

agency for monitoring and defining private share insurance consumer 

disclosure requirements and believed that privately insured credit unions 

would benefit from FTC’s enforcement of such provisions. In our 

concluding discussions with ASI officials, they emphasized that they were 

undertaking efforts to educate their member credit unions on the required 

consumer disclosures and taking steps, in conjunction with state credit 

union leagues, to ensure compliance. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the Chairman 

of the Senate Committee on Banking, Housing, and Urban Affairs, the 

Chairman and Ranking Minority Member of the House Committee on 

Financial Services, and other congressional committees. We also will send 

copies to the National Credit Union Administration and American Share 

Insurance and make copies available to others upon request. In addition, 

the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

Page 88 GAO-04-91 Changes in Credit Union Industry 
This report was prepared under the direction of Debra R. Johnson and 

Harry Medina, Assistant Directors. If you or your staff have any questions 

regarding this report, please contact the Assistant Directors or me at 

(202) 512-8678. Key contributors are acknowledged in appendix XIII. 

Sincerely yours, 

Richard J. Hillman 

Director, Financial Markets 

and Community Investment 

Page 89 GAO-04-91 Changes in Credit Union Industry 
Appendix I 

Objectives, Scope, and Methodology


Our report objectives were evaluate (1) the financial condition of the credit 

union industry; (2) the extent to which credit unions “make more available 

to people of small means credit for provident purposes;”1

 (3) the impact, if 

any, of the Credit Union Membership Access Act of 1998 (CUMAA) on the 

credit union industry with respect to membership provisions; (4) how the 

National Credit Union Administration’s (NCUA) examination and 

supervision processes have changed in response to changes in the industry; 

(5) the financial condition of the National Credit Union Share Insurance 

Fund (NCUSIF); and (6) issues concerning the use of private share 

(deposit) insurance. 

Financial Condition of 

Industry 

To assess the financial condition of the credit union industry, we obtained 

and analyzed annual call report financial data (Form 5300) and regulatory 

ratings (CAMEL scores) for all federally insured credit unions from 1992 to 

2002.

2

 NCUA requires federally insured credit unions to submit a quarterly 

call report, which contains information on the financial condition and 

operations of the institution. Using the call reports, we calculated 

descriptive statistics and key financial ratios and determined trends in 

financial performance. NCUA provided us with a copy of the electronic 

Form 5300 database for our analysis. The database contained year-end 

information for December 1992–December 2002. We reviewed NCUA 

established procedures for verifying the accuracy of the Form 5300 

database and found that the data that forms this database are verified on an 

annual basis, either during each credit union’s examination, or through offsite supervision. We determined that the data were sufficiently reliable for 

the purposes of this report. In addition we received a database of 

regulatory ratings (CAMEL) from NCUA for 1992–2002, on which we (1) 

reviewed the data by performing electronic testing of required data 

elements, (2) reviewed existing information about the data and the system 

that produced them, and (3) interviewed agency officials knowledgeable 

1

While credit union legislation (see the Federal Credit Union Act at 12 U.S.C. § 1751) uses 

“small means” and the credit union industry has not defined the term, in this report, we used 

“low- and moderate-income,” as defined by banking regulators, to describe the type of 

people who credit unions might serve. 

2

As do banking regulators, NCUA and state regulators use the “CAMEL” rating system, a 

composite score, to help evaluate the safety and soundness of institutions. CAMEL scores 

rate capital adequacy (C), asset quality (A), management (M), earnings (E), liquidity (L), and 

overall condition. 

Page 90 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


about the data. We determined that the data were sufficiently reliable for 

the purposes of this report. 

In addition to using call report data for credit unions, we also used data 

collected by the Federal Financial Institutions Examination Council 

(FFIEC) and Office of Thrift Supervision (OTS) to compare the financial 

condition of and services offered by credit unions with those of other 

depository institutions insured by the Federal Deposit Insurance 

Corporation (FDIC).3

 We used call report (reporting forms FFIEC 031 and 

FFIEC 041 for banks and OTS Form 1313 for thrifts) data obtained from 

FDIC’s Statistics on Depository Institutions Web site, which contains 

consolidated bank and thrift data stored on FDIC’s Research Information 

System database.4

 To assess the reliability of these data, we randomly 

cross-checked selected data obtained from this Web site with selected 

individual call reports and compared our calculations with aggregate 

figures provided by FDIC. Given the context of the analyses, we 

determined that these data were sufficiently reliable for the purposes of 

our report. For broad, industrywide comparisons with banks involving 

industry concentration and capital ratios, we used total assets and equity 

capital data for all FDIC-insured institutions, excluding insured branches of 

foreign-chartered banks. In order to determine bank and thrift institutions 

for our more detailed review, we constructed five peer groups in terms of 

institution size as measured by total assets, reported as of December 31, 

2002. See table 3 for the definitions we used to create peer groups. 

3

FDIC is responsible for overseeing insured financial institution adherence to FFIEC’s 

reporting requirements, including the observance of all bank regulatory agency rules and 

regulations, accounting principles, and pronouncements adopted by the Financial 

Accounting Standards Board and all other matters relating to call report submission. Call 

reports are required by statute and collected by FDIC under the provision of Section 

1817(a)(1) of the Federal Deposit Insurance Act. FDIC collects, corrects, updates, and 

stores call report data submitted to it by all insured national and state nonmember 

commercial banks and state-chartered savings banks on a quarterly basis. Throughout the 

report, we use the terms, “banks,” “banks and thrifts,” and “FDIC-insured institutions” 

interchangeably. 

4

As of August 31, 2003, the address for this Web site was www3.fdic.gov/sdi/. 

Page 91 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


Table 3: Peer Group Definitions 

Group Asset size of institution 

I Total assets of $100 million or less 

II	 Total assets greater than $100 million, but less than or equal to $250 

million 

III	 Total assets greater than $250 million, but less than or equal to $500 

million 

IV Total assets greater than $500 million, but less than or equal to $1 billion 

V	 Total assets greater than $1 billion, but less than or equal to the asset 

size, rounded up to the nearest billion dollars, of the largest credit union 

(for example, $16 billion for 2001 and $18 billion for 2002) 

Source: GAO. 

We specified the maximum total assets of $18 billion by rounding up the 

total assets of the largest credit union in our database as of December 31, 

2002, to the nearest billion dollars. We also classified bank and thrift 

institutions as to whether they emphasized credit card or mortgage loans; 

this was done by determining if a given bank had (1) a total loans to total 

assets ratio of at least 0.5 and (2) either a credit card loans to total loans 

ratio of at least 0.5 or a mortgage loans to total loans ratio of at least 0.5. 

The call report data that we used for our financial condition and services 

analyses consisted of information on total assets and total loans, as well as 

more specific loan holdings data (for example, consumer loans and real 

estate loans). We also obtained additional data to calculate bank capital 

ratios and return on average assets, including equity capital, net income, 

and average assets. 

Service to People with Low 

and Moderate Incomes 

To evaluate the extent to which credit unions serve people with low and 

moderate incomes, we analyzed existing data on the income levels of credit 

union members, reviewed available literature, and interviewed regulatory 

and industry officials. We analyzed 2001 Home Mortgage Disclosure Act 

(HMDA) data, the Federal Reserve’s 2001 Survey of Consumer Finances 

(SCF), NCUA program literature, and statistical reports of industry trade 

and consumer groups. To present our findings, we relied on the combined 

message of all these studies and data sources because we found no single 

source that contained data on the incomes of credit union and other 

depository institution consumers. To compare the income characteristics 

of households and neighborhoods that obtain mortgages from credit unions 

and banks, we used four income categories—-low, moderate, middle, and 

Page 92 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


upper—used by financial regulators as part of the Community 

Reinvestment Act (CRA) exams.5

 See table 4 for definitions. 

Table 4: Definition of Income Categories 

Categories Definitions 

Low income	 For an individual income, when income is less than 50 percent of 

the metropolitan statistical area’s (MSA) median family income, 

and for a geographic area, when the median family income is 

less than 50 percent 

Moderate income	 For an individual income, when income is at least 50 percent and 

less than 80 percent of the MSA's median family income, and for 

a geographic area, when the median family income is at least 50 

percent and less than 80 percent 

Middle income	 For an individual income, when income is at least 80 percent and 

less than 120 percent of the MSA's median family income, and 

for a geographic area, when the median family income is at least 

80 percent and less than 120 percent 

Upper income	 For an individual income, when income is at least 120 percent or 

more of the MSA's median family income, and for a geographic 

area, when the median family income is 120 percent or more 

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

We analyzed loan application records (LAR) from the HMDA database to 

compare the proportion of mortgage loans made by credit unions and peer 

group banks with households and communities with various income levels. 

We used 2001 HMDA data, the most recent data set available from the 

Federal Reserve Bank at the time of our review. For the purposes of 

comparing credit union lending with that of banks, we included only those 

banks with assets of $16 billion or less on December 31, 2001, which was 

the size of the largest credit union in 2001, rounded up to the nearest 

billion. In addition, we excluded lending institutions that only made 

mortgages. Our HMDA analysis included records from 4,195 peer group 

banks. We obtained the asset size and total membership for credit unions 

reporting to HMDA from NCUA's 2001 call report database and obtained 

the asset size of other lenders (to identify the peer group banks) from the 

5

In passing the CRA, Congress required federal financial supervisory agencies, except 

NCUA, to assess an institution’s record of helping to meet the credit needs of the local 

communities in which the institution is chartered. 

Page 93 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


HMDA Lender File, which contains data on the characteristics of 

institutions reporting to HMDA, supplied to us by the Federal Reserve. 

Our HMDA analysis did not include all credit unions and banks because 

only institutions that meet HMDA’s reporting criteria, such as having a 

certain amount of assets, must report their mortgage loans to HMDA. For 

example, in 2001, depository institutions with more than $31 million in 

assets as of December 31, 2000, were required to report loans to HMDA. 

Largely because of this criterion, most credit unions—86 percent—were 

not required to report mortgage loans to HMDA and, thus, were excluded 

from our analysis. However, we believe our analysis is still of value 

because, in 2001, reporting credit unions held about 70 percent of credit 

union assets and included 62 percent of credit unions’ members. 

For our analysis, we only analyzed LARs for originated loans for the 

purchase of one-to-four family homes that served as the purchaser’s 

primary dwelling. Our analysis included about 71,000 loans reported by 

credit unions and about 807,000 loans reported by peer group banks. We 

determined that the data were sufficiently reliable for the purposes of this 

report by performing electronic testing of the required data elements, 

reviewing existing information about the data and the system that 

produced them, and interviewing agency officials knowledgeable about the 

data. We did not independently verify the accuracy of the contents of the 

LARs reported to the HMDA database or the accompanying lender file. 

After selecting the records, we determined what proportion of credit union 

and bank loans were made to purchasers with low, moderate, middle, and 

upper incomes. To do so, we categorized the purchaser's gross annual 

income, as identified on the LAR, into one of four income categories based 

on the median family income of the MSA in which the purchased home was 

located. We did this by matching the Metropolitan Statistical Area (MSA) 

on the HMDA LAR with the appropriate Department of Housing and Urban 

Development (HUD)-estimated 2001 median family income. We used SAS 

version 8.02 version, which is a computer-based data analysis and reporting 

software application, to perform all of these analyses. We did not analyze 

about 16 percent of the credit union and bank LARs because they did not 

contain a MSA. While it is possible that this information was simply not 

recorded, lenders must only report MSAs for properties located in MSAs 

where their institution has a home or branch office. 

In addition, we determined what proportion of credit union and bank loans 

were made for the purchase of properties in census tracts by the median 

Page 94 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


family income of the census tract. The Federal Reserve Board, in 

categorizing each census tract level, used the four income categories used 

by the financial regulators (low, moderate, middle, and upper) and used 

definitions corresponding to the ones identified in table 4. Because the 

median income of each census tract is labeled within HMDA, we did not 

have to determine the income category ourselves. We did not analyze about 

16 percent of the credit union and bank LARs because they did not contain 

a census tract. While it is possible that this information was simply not 

recorded, lenders are not responsible for identifying census tract 

information if the property is located in a county with less than 30,000 

people or if the property was located in an area that did not have census 

tracts for the 1990 census. 

Finally, we analyzed the race and ethnicity data in HMDA to compare the 

lending records of credit unions and banks whose loans met our criteria. As 

noted in appendix VI, about 15 percent of records for credit unions lacked 

race and ethnicity data and 6 percent of records for banks. While it is 

possible that this information was simply not recorded, applicants filing 

loan applications by mail or by telephone are not obligated to provide this 

information. 

We also analyzed the Federal Reserve’s 2001 SCF, a triennial survey of U.S. 

households sponsored by the Board of Governors of the Federal Reserve 

System with the cooperation of Treasury, and reviewed secondary sources 

to identify the characteristics of credit union members. We analyzed the 

SCF because it is a respected source of publicly available data on financial 

institution and consumer demographics that is nationally representative 

and because it was the only comprehensive source of publicly available 

data with information on financial institutions and consumer demographics 

that we could identify. We analyzed the SCF to develop statistics on the 

income, race, age, and education of credit union members and bank 

customers. Because some customers use both credit unions and banks, we 

performed our income analysis based on the assumption that households 

can be divided into four user categories—those who use credit unions only, 

those who primarily use credit unions, those who use banks only, and those 

who primarily use banks. Dr. Jinkook Lee of Ohio State University 

developed these categories. In addition, to identify existing research on 

credit union research, we asked officials at NCUA and industry groups (for 

example, the Credit Union National Association (CUNA) to identify 

relevant studies and performed a literature search. 

Page 95 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


Impact of CUMAA	 To study the impact of CUMAA on credit union field of membership 

regulations, we reviewed and analyzed CUMAA and compared its 

provisions with NCUA interpretive rulings and policy statements (IRPS) in 

effect before and after CUMAA. In addition, we interviewed NCUA officials 

and industry representatives to obtain their viewpoints on how NCUA 

interpreted CUMAA's membership provisions. To obtain information about 

state field of membership regulations in general and how many statechartered credit unions serve geographical areas, we surveyed regulators 

in the 50 states and received responses from the 46 that actively charter 

credit unions. This allowed us to compare the number of federally 

chartered and state-chartered credit unions serving geographical areas. 

Finally, we obtained historical trend data from NCUA on the charter types 

of federally chartered credit unions, “potential” (that is, people within a 

credit union’s field of membership but not members of the credit union) 

and actual membership, and service to underserved areas. 

Regulatory Oversight	 To evaluate how NCUA’s supervision and examination of credit unions has 

evolved in response to changes in the industry since 1991, we identified 

changes in the types of products, services, and activities in which credit 

unions engage as well as key changes to NCUA regulations. We also 

identified changes to NCUA’s examination and supervision approach, and 

evaluated oversight procedures of federally insured, state-chartered credit 

unions. Finally, we studied NCUA’s implementation of prompt corrective 

action (PCA). 

To identify changes in the types of products, services, and activities in 

which credit unions engage, we analyzed 1992–2002 Form 5300 call report 

data and conducted structured interviews with NCUA examiners, state 

supervisory officials, and officials from seven large credit unions. To 

identify key regulatory changes, we (1) reviewed the Federal Credit Union 

Act and amendments made by Congress since 1991; (2) interviewed NCUA 

officials, including NCUA’s General Counsel and officials from NCUA’s 

Division of Examination and Insurance, NCUA and state examiners, and 

officials from seven large credit unions; (3) reviewed NCUA legal opinions 

and letters to credit unions; and (4) reviewed final rules published in the 

Federal Register. 

To identify changes to NCUA’s examination and supervision approach, we 

reviewed NCUA’s examiner guide for key elements of the risk-focused 

examination approach and compared current exam documentation 

Page 96 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


requirements with previous requirements. We conducted structured 

interviews with six of NCUA’s regional directors, 23 NCUA examiners 

covering all NCUA regions, and 13 state supervisory officials from 

Alabama, California, Idaho, Illinois, Indiana, Maryland, Massachusetts, 

Michigan, Nevada, Ohio, Texas, Washington, and Wisconsin. These states 

contained 51 percent of the total number of federally insured, statechartered credit unions and 58 percent of the total assets of federally 

insured, state-chartered credit unions as of December 31, 2002. In addition, 

we interviewed officials from seven large credit unions; selecting at least 

one credit union from NCUA’s six regions. To obtain information on the 

experiences of other depository institution regulators with the risk-focused 

examination and supervision approach, we interviewed officials from the 

FDIC, OTS, Office of the Comptroller of the Currency, and the Federal 

Reserve Bank. Finally, to obtain information on other NCUA initiatives 

intended to compliment the risk-focused program, we reviewed NCUA 

documents on the large credit union pilot program, and the subject matter 

examiner program. 

To evaluate oversight procedures of federally insured, state-chartered 

credit unions, we obtained information about the oversight procedures 

during our structured interviews with the 13 states supervisory officials 

and NCUA examiners. We also reviewed NCUA’s examiner guide and 

memorandum of understanding between NCUA and states describing 

NCUA’s procedures for conducting joint examinations of federally insured, 

state-chartered credit unions with state regulators. 

Finally, to study NCUA’s implementation of PCA, we reviewed CUMAA, 

NCUA rules and regulations pertaining to PCA, and NCUA’s examiner 

guide. We also analyzed data from NCUA on the number of credit unions 

subject to PCA as of December 31, 2002. We interviewed agency officials 

knowledgeable about this data and found that NCUA headquarters, as well 

as the region, conducted reasonableness checks against the Form 5300 

database, which contains the net-worth ratio used for PCA. When data 

outliers were found, examiners were required to review the data for 

accuracy and make any necessary corrections. We determined that the data 

were sufficiently reliable for the purposes of this report. In addition, we 

interviewed NCUA officials and examiners, state supervisory officials, 

credit union officials, and officials of other federal financial regulatory 

agencies to obtain their perspectives on PCA. 

Page 97 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


Status of NCUSIF	 To evaluate the financial condition of NCUSIF, we obtained key financial 

data about the fund from NCUA’s annual audited financial statements for 

1991–2002. For 2002, we compared NCUSIF’s key performance measure, 

which is the ratio of fund equity to insured shares (deposits), to key 

performance measures of the Bank Insurance Fund, Savings Association 

Insurance Fund, and American Share Insurance, the remaining private 

insurer. We also reviewed NCUSIF’s estimated loss and overhead 

administrative expenses transfer process and applicable internal controls. 

We reviewed other relevant industry studies on deposit-insurance pricing 

and loan-loss allowance. In addition, we interviewed NCUA officials, 

industry trade groups, and officials of other federal financial regulatory 

agencies to obtain their perspectives on the funding of NCUSIF, the 

overhead transfer rate, and the loan-loss allowance. 

Private Share Insurance	 To better understand the issues around share (deposit) insurance, we 

reviewed and analyzed relevant studies on federal and private insurers for 

both credit unions and other depository institutions.6 In addition, we 

interviewed officials at NCUA, the Department of the Treasury, and FDIC to 

obtain perspectives specific to private share insurance. We also obtained 

views from credit union industry groups including the National Association 

of Federal Credit Unions, National Association of State Credit Union 

Supervisors, and CUNA. 

To determine the extent to which private share insurance is permitted and 

utilized by state-chartered credit unions, we conducted a survey of state 

credit union regulators in all 50 states. Our survey had a 100-percent 

response rate. In addition to the survey, we obtained and analyzed financial 

and membership data of privately insured credit unions from a variety of 

sources (NCUA, Credit Union Insurance Corporation, CUNA, and ASI—the 

only remaining provider of primary share insurance). We found this 

universe difficult to confirm because in our discussions with state 

regulators, NCUA and ASI officials, and our review of state laws, we 

identified other states that could permit credit unions to purchase private 

share insurance. 

6

The scope of our work was limited to primary share insurance, which is generally 

mandatory for all credit unions (whereas excess share insurance is optional coverage above 

primary share insurance). 

Page 98 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


To determine the regulatory differences between privately insured credit 

unions and federally insured, state-chartered credit unions, we identified 

and analyzed statutes and regulations related to share insurance at the 

state and federal levels.7

 In addition, we interviewed officials at NCUA and 

conducted interviews with officials at the state credit union regulatory 

agencies from Alabama, California, Idaho, Indiana, Illinois, Maryland, 

Nevada, New Hampshire, and Ohio. Finally, we analyzed NCUA’s 

application of its conversion policies and looked at the cases of six credit 

unions that terminated their federal share insurance and converted to 

private share insurance in 2002 and 2003. 

To identify factors influencing a credit union's decision to obtain private or 

federal share insurance, we conducted structured interviews with officials 

of both federally insured and privately insured credit unions. Specifically, 

we interviewed management at 29 credit unions that, since 1990, had 

converted from federal to private share insurance and management at 26 

credit unions that had converted from private to federal share insurance. 

We did not interview credit union management in states that did not permit 

private insurance. 

To determine the extent to which privately insured credit unions met 

federal disclosure requirements, we identified and analyzed federal 

consumer disclosure provisions in section 43 of the Federal Deposit 

Insurance Act, as amended, and conducted unannounced site visits to 57 

privately insured credit unions (49 main and 8 branch locations) in 

Alabama, California, Illinois, Indiana, and Ohio.8

 The credit union locations 

were selected based on a convenience sample using state and city location 

coupled with random selection of main or branch locations within each 

city. About 90 percent of the locations we visited were the main institution 

rather than a branch institution. This decision was based on the 

assumption that if the main locations were not in compliance, then the 

branch locations would probably not be in compliance either. Although 

neither these site visits, nor the findings they produced, render a 

statistically valid sample of all possible main and branch locations of 

privately insured credit unions necessary in order to determine the “extent” 

of compliance, we believe that what we found is robust enough, both in the 

7

We limited our analysis to those states with privately insured credit unions—Alabama, 

California, Idaho, Indiana, Illinois, Maryland, Nevada, and Ohio. 

8

12 U.S.C. § 1831t. 

Page 99 GAO-04-91 Changes in Credit Union Industry 
Appendix I


Objectives, Scope, and Methodology


aggregate and within each state, to raise concern about lack of disclosure 

in privately insured credit unions. During each site visit, using a systematic 

check sheet, we noted whether or not the credit union had conspicuously 

displayed the fact that the institution was not federally insured (on signs or 

stickers, for example). 

In addition, from these same 57 sites visited, we collected a total of 227 

credit union documents that we analyzed for disclosure compliance. While 

section 43 requires depository institutions lacking federal deposit 

insurance to disclose they are not federally insured in personal documents, 

such as periodic statements, we did not collect them. We also conducted an 

analysis of the Web sites of 78 privately insured credit unions, in all eight 

states where credit unions are privately insured, to determine whether 

disclosures required by section 43 were included. To identify these Web 

sites, we conducted a Web search. We attempted to locate Web sites for all 

212 privately insured credit unions; however, we were able to identify only 

78 Web sites. We analyzed all Web sites identified. Finally, we interviewed 

FTC staff to understand their role in enforcement of requirements of 

section 43 for depository institutions lacking federal deposit insurance. 

To understand how private share insurers operate, we conducted 

interviews with officials at three private share insurers for credit unions— 

ASI (Ohio), Credit Union Insurance Corporation (Maryland), and 

Massachusetts Credit Union Share Insurance Corporation (Massachusetts). 

Because ASI was the only fully operating provider of private primary share 

insurance, ASI was the focus of our review.

9

 We obtained documents 

related to ASI operations such as financial statements and annual audits 

and analyzed them for the auditor’s opinion noting adherence with 

accounting principles generally accepted in the United States. Additionally, 

to understand the state regulatory framework for this remaining private 

share insurer, we interviewed officials at the Ohio Department of 

Insurance. 

9

As of December 2002, we identified two entities that provide private primary share 

insurance to credit unions in the 50 states and the District of Columbia—ASI and Credit 

Union Insurance Corporation (CUIC). However, CUIC in Maryland was in the process of 

dissolution and, therefore, we did not include it in our analysis. During our review, we 

learned that Massachusetts Credit Union Share Insurance Corporation only provides excess 

deposit insurance, and therefore we did not include it in our analysis. 

Page 100 GAO-04-91 Changes in Credit Union Industry 
Appendix II 

Status of Recommendations from GAO’s 1991 

Report 

We made 52 recommendations to Congress and the National Credit Union 

Administration (NCUA) in our 1991 report on the credit union industry and 

NCUA1 Of these, 28 were made to Congress, of which 8 were implemented 

or partially implemented as of September 2003. We made 24 

recommendations to NCUA, and 19 were implemented as of September 

2003. In addition, we issued one matter for congressional consideration. 

Congress partially addressed this matter. 

Our recommendations spanned the range of issues addressed in our 1991 

report, including 

•	 the condition of the credit union industry and the National Credit Union 

Share Insurance Fund (NCUSIF), 

• credit union law and regulation, 

• supervision of credit unions, 

• NCUA’s management of failed credit unions, 

• corporate credit unions, 

• share insurance issues, 

• structural changes in NCUA, and 

• the evolution of credit unions’ role in the financial marketplace. 

NCUA implemented most of our recommendations to the agency. The key 

changes implemented by NCUA affected (1) corporate credit unions, (2) 

reporting requirements for credit unions, and (3) supervision of statechartered credit unions. With respect to corporate credit unions, NCUA 

implemented various recommendations that established minimum capital 

requirements, limited investment powers of state-chartered corporate 

credit unions, increased detail and frequency of reporting requirements, 

and established a new unit in NCUA that is responsible for oversight, 

examination, and enforcement of corporate credit unions. We expect to 

review corporate credit unions following this study and to report in greater 

1

U.S. General Accounting Office, Credit Unions: Reforms for Ensuring Future Soundness, 

GAO/GGD-91-85 (Washington, D.C.: July 10, 1991). 

Page 101 GAO-04-91 Changes in Credit Union Industry 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


depth on issues affecting corporate credit unions. In the area of reporting 

requirements, NCUA implemented a requirement in 1993 that all federally 

insured credit unions with assets greater than $50 million file financial and 

statistical reports (call reports) on a quarterly basis and as of July 1, 2002, 

required all federally insured credit unions to file quarterly call reports. 

Finally, NCUA affirmed its supervision of state-chartered and federally 

insured credit unions by establishing examination goals, as well as 

conducting examinations, at almost 16 percent of all state-chartered and 

federally insured credit unions in 2002. 

NCUA told us that it chose not to implement five of our recommendations 

because it either disagreed with the recommendations (see 

recommendation 24 in table 5), or believed it had already addressed the 

recommendations (see recommendations 9, 11, 16, 17 in table 5). For 

example, NCUA disagreed with our recommendation to separate its 

supervision and insurance functions (see recommendation 24) and 

believed it was unnecessary for credit unions to submit copies of their 

supervisory committee audit reports to NCUA, as NCUA examiners 

routinely review the reports as part of the examination process (see 

recommendation 9). 

Congress implemented or partially implemented 8 of the 28 

recommendations we made, which (1) established minimum capital levels 

for credit unions, (2) tightened commercial lending, and (3) established 

annual audit requirements for credit unions with assets greater than $500 

million. As discussed in table 5, among those not implemented are 

recommendations dealing with NCUA’s Central Liquidity Facility (CLF) 

(see recommendations 49-52) and the structure of NCUA (see 

recommendations 43-48).2 

See table 5 for our recommendations to NCUA and Congress and their 

status as of August 31, 2003. 

2

CLF was created in 1978 to improve the general financial stability of credit unions by 

serving as a liquidity lender to credit unions experiencing unusual or unexpected liquidity 

shortfalls. The NCUA board oversees the CLF. 

Page 102 GAO-04-91 Changes in Credit Union Industry 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


Table 5: Status of GAO Recommendations to NCUA and Congress, as of August 31, 2003 

Issue GAO Recommendation to NCUA Status Comments 

Condition of Require credit unions with assets greater Implemented Implemented in the March 31, 1993, 

credit unions than $50 million to file financial and quarterly call reports for federally insured 

and NCUSIF statistical reports quarterly. credit unions with assets greater than $50 

million. Effective July 1, 2002, NCUA 

expanded rule to cover all federally insured 

credit unions. 

Expand the information required from credit 

unions with assets greater than $50 million 

on the financial and statistical reports in the 

areas of asset quality, interest rate 

sensitivity, management, and common 

bond. 

Implemented	 According to NCUA, it established a 

reporting system for common bond data in 

January 2002. The system monitors the 

approvals of field of membership and is 

called Generated Efficient National 

Information System for Insurances Services. 

Also, NCUA investment rules require credit 

unions that make certain investments to 

perform shock tests on interest rate 

sensitivity. According to NCUA, it performs 

shock tests of credit unions using call report 

data and expects examiners to make contact 

with credit unions if potential problems are 

identified. 

Law and Assess its real estate regulation and Implemented In June 1991, NCUA issued comprehensive 

regulation strengthen it to help ensure the sound guidelines and since then issued a series of 

underwriting of loans and their suitability for letters to credit unions to address this issue. 

sale in the secondary market. 

Restrict the exclusions from its commercial Implemented A final rule addressing all of our concerns 

lending limit established in 1987 to help and recommendations went into effect in 

ensure that credit unions are not used as January 1992. The rule established a limit on 

vehicles underwriting large commercial the amount of loans that may be made to 

ventures. one borrower to the greater of 15 percent of 

reserves or $75,000. 

Supervision Clarify the purposes, unique values, and Implemented According to NCUA, the Office of 

requirements for use of each of its off-site Examination and Insurance completed the 

monitoring tools. Determine the appropriate requirements for the use of off-site 

recipients of the tools and distribute them monitoring tools, such as the use of risk 

accordingly, within each region. reports, in fiscal year 1995. Since then, 

NCUA has adopted additional off-site 

monitoring tools, such as the consolidated 

balance sheet and scope workbook. 

6 Require documentation at the regional Implemented NCUA requires this review as part of the 

office level of examiners’ reviews of all examination process and requires 

credit union call reports. documentation of the review in the 

examination report. 

Page 103 GAO-04-91 Changes in Credit Union Industry 

1 

2 

3 

4 

5 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to NCUA Status Comments 

Invoke its statutory authority to refuse to 

accept state supervisors’ examinations 

when a state regulatory authority lacks 

adequate independence from the credit 

union industry. Examine all NCUSIFinsured credit unions in such states. 

Implemented	 According to NCUA, its examiner guide 

addresses oversight of federally insured, 

state-chartered credit unions, including 

processes to make an independent 

assessment of these credit unions. NCUA 

affirms it is empowered by the Federal Credit 

Union Act to examine any federally insured 

credit union, including those where 

questions are raised regarding the 

independence of the state from the industry. 

NCUA claims that use of this authority is 

evidenced by having conducted exams at 

15.6 percent of all federally insured, statechartered credit unions in 2002. 

Establish a policy goal for examination Implemented NCUA affirms that its regions have 

frequency of state-chartered credit unions.	 established goals that include monitoring the 

examination cycles and supervision efforts of 

each state. State examinations not 

conducted within 18 months are tracked and 

agreements are made and followed to bring 

the state into compliance. 

Require all credit unions to submit copies of Not implemented This recommendation pertains to federally 

their supervisory committee audit reports to insured credit unions with less than $500 

NCUA upon completion.	 million in assets. NCUA believes that the 

1991 recommendation is unnecessary. 

NCUA claims it reviews the supervisory 

committee audits as a required step during 

the risk-focused examination process. 

Conduct an Inspector General review Implemented The Inspector General completed quality 


focusing on NCUA’s handling of problem assurance reviews of each NCUA region as 


credit unions since mid-1990, specifically its of July 1994.


use of enforcement powers, and submit a 


report to the NCUA board.


NCUA’s Require that waivers and special charges 

management of be authorized by the Director of the Office 

failed credit of Examination and Insurance, the General 

unions Counsel, and the regional director. 

Not implemented	 Under prompt corrective action, NCUA is 

required to take various mandatory 

supervisory actions against credit unions 

depending on their net worth ratio, including 

requiring earnings transfers for credit unions 

that are less than well capitalized—7 percent 

net worth ratio or less. NCUA has 

established guidelines under which regional 

directors can grant earnings retention 

waivers as well as charges to the reserve. 

NCUA claims that its regional offices track 

approval of waivers and charges. 

12	 Develop policy guidance concerning the Implemented NCUA maintains rules regarding waivers and 

use of these provisions and monitor their special charges in Section 702 of its rules 

use. and regulations. 

Page 104 GAO-04-91 Changes in Credit Union Industry 

7 

8 

9 

10 

11 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to NCUA Status Comments 

Adhere to the criteria for assisting credit 

unions. 

Implemented	 NCUA claims that the implementation of 

prompt corrective action in February 2000 

greatly changed its ability to assist credit 

unions. To address the issue of assistance to 

credit unions, NCUA affirms that the board 

approved a Special Assistance Program in 

February 2001, and that it maintains a 

Special Assistance Manual regarding the 

documentation and quality of requests for 

assistance. Finally, NCUA claims it has 

implemented an approval process for 

different levels of assistance to credit unions. 

Corporate 

credit unions 

Establish minimum capital requirements for 

corporate credit unions and U.S. Central 

Credit Union, taking all risks into account.a 

Implemented Section 704 of NCUA regulations requires a 

minimum 4 percent capital ratio for retail, as 

well as wholesale, corporate credit unions, 

In the interim, establish a minimum level such as U.S. Central Credit Union. 

based on assets, and set a time frame for 

achieving this level. This could be achieved 

by increasing reserving requirements and 

using subordinated debt arrangements, 

such as membership capital share 

deposits. 

Restrict the investment powers of state- Implemented NCUA’s corporate credit union rules apply to 

chartered corporate credit unions to the all federally insured corporate credit unions. 

limits imposed on federal corporate credit NCUA requires all nonfederally insured 

unions. corporate credit unions to adhere to the 

same rules as a condition of receiving 

shares or deposits from federally insured 

credit unions. 

Limit the investments of corporate credit Not implemented NCUA believes it is more appropriate to


unions and U.S. Central Credit Union in a establish concentration limits on capital 


single obligor to 1 percent of the investor’s rather than assets and established a 


total assets. Exceptions should include regulation limiting aggregate investments in


obligations of the U.S. Government, any single obligor to the greater of 50 


repurchase agreements that equal up to 2 percent of capital or $5 million.


percent of assets, and all investments by


corporate credit unions in U.S. Central 


Credit Union.


17 Limit loans to one borrower by corporate Not implemented NCUA believes it is more appropriate to set 

credit unions and U.S. Central Credit Union limits based on capital instead of assets. In 

to 1 percent of the lender’s assets. NCUA October 1997, the loan limit was 10 percent 

should be authorized to make exceptions of capital—an amount we determined could 

on a loan-by-loan basis. exceed 1 percent of assets. As of January 

2003, NCUA rules capped the maximum 

aggregate loan amount to any one member 

to 50 percent of capital for unsecured loans, 

and 100 percent of capital for secured loans, 

with exceptions. We view this as a departure 

from the 1991 recommendation. 

Page 105 GAO-04-91 Changes in Credit Union Industry 

13 

14 

15 

16 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to NCUA Status Comments 

Obtain more complete and timely Implemented According to NCUA, it requires corporate 

information about corporate financial credit unions to submit monthly call reports 

operations. to NCUA as well as information to 

examiners. Also, NCUA affirms that it revises 

the corporate call reports annually to ensure 

proper supervision of corporate credit 

unions. 

Establish a unit at NCUA headquarters that Implemented According to NCUA, the NCUA board 

would be responsible for corporate separated corporate credit union supervisory 

oversight, examination, and enforcement responsibility from the Office of Examination 

actions. and Insurance and created the Office of 

Corporate Credit Unions in August 1994. 

Review the CAMEL rating system for Implemented In January 1999, NCUA implemented a 

corporate credit unions to reduce the system for evaluating the risk associated 

inconsistencies and focus more clearly on with corporate credit unions that is different 

the component being rated. from the CAMEL ratings used for other credit 

unions. The system, known as the Corporate 

Risk Information System, has 12 component 

ratings regarding financial risk and risk 

management. 

Share Place NCUSIF’s fiscal year on a calendar Implemented In November 1993, the NCUA Board of 

insurance year. Directors approved the change to a fiscal 

year based on the calendar year (January– 

December), which became effective January 

1, 1995. 

Reduce the time lag in adjusting NCUSIF’s Implemented According to NCUA, establishing a fiscal 

financing.	 year based on the calendar year for NCUSIF 

reduced time lags in collection of 

assessments from 7 to 3 months. 

Require credit unions to exclude their 1 Implemented Action taken by Congress addressed our 


percent deposit in NCUSIF from both sides concern. Minimum net worth ratios


of their balance sheet when assessing established in the 1998 Credit Union


capital adequacy. Then, that amount would Membership Access Act (CUMAA), which is 


not be counted as credit union capital. 7 percent for well-capitalized credit unions,


compensated for the NCUSIF deposit (1 

percent of assets) that credit unions account 

for on their balance sheet. The minimum 

capital ratio for banks insured by FDIC is 6 

percent. 

24	 NCUA Immediately establish separate supervision Not implemented NCUA disagrees with this recommendation. 

structural and insurance offices that report directly to 

changes the board. 

Page 106 GAO-04-91 Changes in Credit Union Industry 

18 

19 

20 

21 

22 

23 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

Condition of Hold annual oversight hearings at which the Not implemented As of September 1994, the Senate did not 

credit unions NCUA board testifies on the condition of hold hearings, but the House Banking 

and NCUSIF credit unions and NCUSIF and assesses Committee had. NCUA has no objections to 

risk areas and reports on NCUA’s this recommendation. 

responses. 

Law and Amend Federal Credit Union Act (FCUA) to Implemented Implemented as part of prompt corrective 

regulation require NCUA to establish minimum capital action in CUMAA (August 1998) and 

levels for credit unions no less stringent promulgated as NCUA regulation in 

than those applicable to other insured February 2000. 

depository institutions, providing for an 

appropriate phase-in period. 

Amend the FCUA to limit the amount that 

credit unions can loan or invest in a single 

obligor, other than investments in direct or 

guaranteed obligations of the U.S. 

Government or in the credit union’s 

corporate credit union, to not more than 1 

percent of the credit union’s total assets. 

Limits permitted in 1991 with respect to 

credit union service organizations should 

continue, and exposures of not more than 2 

percent of assets should be provided for in 

repurchase agreement transactions. 

Authorize NCUA to set a higher limit for 

secured consumer loans made by small 

credit unions and for overnight funds 

deposited with correspondent institutions. 

Not implemented	 NCUA’s position has changed since 1994, 

when it believed a 5 percent of assets 

limitation on exposure to single obligors 

would be satisfactory. According to NCUA, 

the 5-percent limitation is too restrictive for 

some credit unions, especially for smaller 

credit unions. According to NCUA, its 

current regulations for credit unions do not 

provide specific limits, but provides flexibility 

to well-run and managed credit unions. 

NCUA believes that setting obligor limitations 

is better handled through the agency’s 

regulation process because it permits 

prompt changes, is considerate of the fluid 

financial environment, and maintains 

emphasis on overall risk. 

Amend the FCUA to require NCUA to Implemented Implemented as part of CUMAA in 1998 and 

tighten the commercial lending regulation promulgated as NCUA regulation in May 

and include an overall limit. 1999. NCUA established the aggregate limit 

on a credit union’s outstanding member 

business loans to the lesser of 1.75 times the 

credit unions’ net worth or 12.25 percent of 

total assets. 

Amend the FCUA to modify borrowing 

authority and specify that credit unions may 

not borrow for the purpose of growth, 

unless prior approval of NCUA is obtained. 

Not implemented	 NCUA believes that this recommendation is 

not necessary because Congress indirectly 

addressed this issue through PCA provisions 

in CUMAA in 1998. According to NCUA, if a 

credit union is undercapitalized under PCA, 

then growth can be restricted. Also 

according to NCUA, PCA requirements 

indirectly influence borrowing because 

borrowing could impact net worth 

classification. 

For clarification, we intended this 

recommendation to apply to all credit unions, 

not just those under PCA. 

Page 107 GAO-04-91 Changes in Credit Union Industry 

25 

26 

27 

28 

29 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

Amend the FCUA to require credit unions to Implemented Implemented as part of comprehensive


adequately disclose that dividends on banking reforms in 1991. NCUA issued a 


shares and other accounts cannot be regulation under the Truth in Savings Act.


guaranteed in advance but are dependent 


on earnings.


Amend the FCUA to require all insured Not implemented NCUA is opposed to this recommendation 

credit unions to obtain NCUA permission and believes that current regulations are 

before opening a new branch.	 appropriate. NCUA’s regulations require 

federally insured credit unions with over $1 

million in assets to obtain NCUA approval to 

invest in fixed assets, including branch 

offices, if the aggregate of all such 

investments exceeds 5 percent of shares 

and retained earnings. Credit unions eligible 

under NCUA’s Regulatory Flexibility 

Program are exempt from this requirement. 

Amend the FCUA to require credit unions Partially Implemented as part of CUMAA in 1998 and 

above a minimum size to obtain annual implemented promulgated as NCUA regulation in July 

independent certified public accountant 1999. Credit unions with assets greater than 

audits and to make annual management $500 million are required to obtain annual 

reports on internal controls and compliance independent certified public accountant 

with laws and regulations. audits. However, no requirement has been 

made requiring annual management reports 

on internal controls and compliance with 

laws and regulations. 

Amend the FCUA to authorize and require Not implemented NCUA agrees with this recommendation.


NCUA to compel a federally insured, state-


chartered union to follow the federal


regulations in any area in which the credit 


union’s powers go beyond those permitted


federally chartered credit unions and are 


considered to constitute a safety and 


soundness risk.


NCUA’s Amend FCUA to authorize NCUA to provide Not implemented According to NCUA, it maintains a policy of 

management of assistance in resolving a failing credit union assisting failing credit unions at the least 

failures only when it is less costly than liquidation or cost. Also, NCUA believes that changes to 

essential to provide adequate depository the FCUA are unnecessary because NCUA 

services in the community. has enough flexibility to assist failing credit 

unions when the benefits of preserving the 

credit union outweigh the cost. 

35 Require NCUA to maintain documentation Not implemented According to NCUA, its policies and 

supporting its resolution decisions, practices emphasize the importance of 

including the statistical and economic maintaining documentation of resolutions 

assumptions made. and that decisions are supported. In 

addition, and according to NCUA, it actively 

updates expectations and processes for 

retrieving and maintaining data through the 

revision of the Examiner’s Guide, Accounting 

Manual, Directives, Special Actions Manual, 

and Guidance to Credit Unions. 

Page 108 GAO-04-91 Changes in Credit Union Industry 

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31 

32 

33 

34 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

Corporate Amend the FCUA to confine insured credit Not implemented While not expressly implemented, NCUA has 

credit unions union investments in corporate credit taken some action in this area. NCUA 

unions and U.S. Central Credit Union to regulations require nonfederally insured 

those that have obtained deposit insurance corporate credit unions to agree to adhere to 

from NCUSIF. its corporate credit union rule and to submit 

to NCUA examinations as a condition of 

receiving shares or deposits from federally 

insured credit unions. According to NCUA, 

there is only one corporate credit union that 

is not federally insured. 

Require NCUA to establish a program to 

promptly increase the capital of corporate 

credit unions and establish minimum capital 

standards. 

Implemented	 NCUA’s regulations require corporate credit 

unions to maintain a minimum capital ratio of 

4 percent. In addition, NCUA may issue a 

capital directive to corporate credit unions to 

achieve adequate capitalization within a 

specified time frame by taking any action 

deemed necessary, including increasing the 

amount of capital to specific levels. NCUA’s 

corporate credit union rule also imposes an 

earnings retention requirement of either 10 

or 15 basis points per annum if a corporate 

credit union’s retained earnings ratio falls 

below 2 percent. 

Share 

insurance 

Require credit unions to expense the 1 

percent deposit in NCUSIF over a 

reasonable period of time—to be 

determined by NCUA. At the same time, 

emphasize that the assets represented by a 

failed credit union’s insurance deposit 

should be available first to NCUSIF. This 

action should be coordinated with and 

consistent with any legislation to 

recapitalize the Bank Insurance Fund in 

order to avoid placing credit unions at a 

competitive disadvantage. 

Implemented	 We determined that Congress’ passage of 

CUMAA, which set net worth levels for credit 

unions 1 percent higher to compensate for 

NCUSIF’s accounting of the deposit as an 

asset, addressed our concerns about the 

double counting of capital at NCUSIF and 

credit unions. We determined that the 

recommendation regarding NCUSIF’s 

access to the assets of a failed credit union 

has not been implemented, but we 

determined that this recommendation is 

implemented because our greatest concern 

was addressed regarding the double 

counting of capital between NCUSIF and 

credit unions. 

Page 109 GAO-04-91 Changes in Credit Union Industry 

36 

37 

38 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

Amend the FCUA to establish an available 

assets ratio for NCUSIF. 

Implemented	 In passing CUMAA in August 1998, 

Congress amended the FCUA to establish a 

minimum 1.0 percent available assets ratio 

for NCUSIF. In addition, the NCUA board is 

to make a distribution to insured credit 

unions after each calendar year if, at the end 

of the calendar year: the NCUSIF’s available 

assets ratio exceeds 1.0 percent, any loans 

from the federal government as well as 

interest on those loans have been repaid, 

and NCUSIF’s equity ratio exceeds the 

normal operating level. 

Amend the FCUA to authorize NCUA to 

raise the basic NCUSIF equity ratio, 

available assets ratio, and premiums, and 

delete NCUSIF ability to set a normal 

operating level below the statutory 

minimum. 

Implemented	 Under CUMAA, Congress authorized NCUA 

to assess a premium charge on insured 

credit unions if NCUSIF’s equity ratio was 

less than 1.3 percent and the premium 

charge would not exceed the amount 

necessary to restore the equity ratio to 1.3 

percent. Congress also defined NCUSIF’s 

normal operating level as an equity ratio to 

be specified by the NCUA board between 1.2 

and 1.5 percent. However, Congress set the 

available assets ratio at 1.0 percent with no 

authority given to NCUA to change it. 

Amend the FCUA to provide for additional Not implemented NCUA believes that borrowing authority is 

NCUA borrowing from Treasury on behalf of appropriate so long as the CLF and NCUSIF 

NCUSIF. continue to have borrowing authority. 

Amend the FCUA to place NCUSIF in a Not implemented NCUA sees no compelling reason to make


position second to general creditors but this change.


rank this position ahead of uninsured


shares.


NCUA Amend the FCUA to require that NCUA, in Not implemented NCUA believes there is no need for 

structural consultation with Congress and the credit legislative change, as PCA provisions in 

changes union industry, to identify specific unsafe CUMAA address declining net worth levels in 

and unsound practices and conditions that credit unions. 

merit enforcement action, identify the 

appropriate corrective action, and 

promulgate these requirements by 

regulation. 

44 Amend the FCUA to require NCUA to take Not implemented Same as above. 

appropriate enforcement action when 

unsafe and unsound conditions or 

practices, as specified in law or NCUA 

regulations, are identified. 

Page 110 GAO-04-91 Changes in Credit Union Industry 

39 

40 

41 

42 

43 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

Amend the FCUA to provide for a five- Not implemented NCUA is opposed to this recommendation.


member NCUA board, with two members 


ex officio, (the Chairman of the Federal


Reserve Board and the Secretary of the


Treasury). Authorize the two ex officio 


members to delegate their authority to 


another member of the Federal Reserve 


Board or to another official of the


Department of the Treasury who is 


appointed by the President with the advice 


and consent of the Senate.


Consider placing credit union’s examination Not implemented NCUA opposes this recommendation 


and supervision functions under a single because it believes the change would affect 


federal regulator once such an entity is the identity of credit unions, limit the financial


operating effectively, if there is broad reform choices for consumers, create competing 


of the depository institution regulatory and conflicting priorities for the single 


structure. The insurance function could regulator, and stifle the financial


then be placed under FDIC or under a marketplace.


separate entity.


Remove the power of federally chartered Not implemented NCUA has no objection to this 

credit unions to borrow from Farm Credit recommendation. 

Banks, as provided for in FCUA. 

Amend the Community Development Credit Not implemented NCUA opposes this recommendation 

Union Revolving Fund Transfer Act to because such a change would create 

designate an entity other than NCUA as additional bureaucratic requirements for 

administrator of the revolving fund.	 small financial institutions. According to 

NCUA, the agency does not receive 

appropriations for administering the program 

and funds the program through the operating 

and overhead transfer fees collected from 

both federally chartered and federally 

insured credit unions. 

Dissolve the CLF, as established by Title III Not implemented NCUA opposes this recommendation. 

of the FCUA. 

If CLF continues to operate, sharply reduce Not implemented NCUA opposes this recommendation and 


CLF borrowing authority from the current believes that restricting CLF’s capacity could 


level of 12 times subscribed capital and undermine its purpose.


surplus.


51 If CLF continues to operate, require the Not implemented NCUA believes that the rates of CLF loans 

terms and conditions of CLF loans to be no are prudent. According to NCUA, rates on 

more liberal than those made by the CLF loans to credit unions are based on the 

Federal Reserve. Federal Financing Bank (FFB) fixed rate, as 

the CLF borrows from the FFB. Furthermore, 

according to NCUA, FFB rates are related to 

U.S. Treasury rates. 

Page 111 GAO-04-91 Changes in Credit Union Industry 

45 

46 

47 

48 

49 

50 
Appendix II


Status of Recommendations from GAO’s 1991 


Report


(Continued From Previous Page) 

Issue GAO Recommendation to Congress Status Comments 

If CLF continues to operate, prohibit CLF Not implemented According to NCUA, CLF and NCUSIF are 


loans or guarantees of any kind to NCUSIF, distinct entities and CLF does not extend


and, in the event the NCUA board certifies loans or guarantees to NCUSIF.


that CLF does not have sufficient funds to 


meet liquidity needs of credit unions, 


authorize the Department of the Treasury to 


lend to NCUSIF, rather than to CLF, in order 


to meet such needs.


Matter for congressional consideration 

Credit unions’ 

role in the 

financial 

marketplace 

If credit unions are to remain distinct from Partially 


other depository institutions because, in implemented


part, of their common-bond membership 


requirement, and if this requirement is 


intended to further the safe and sound 


operation of credit unions, consider stating


this general intent in legislation and 


establish guidelines on the limits of 


occupational, associational, and community 


common bonds as well as the purpose and 


limits of multiple group charters. These 


guidelines should apply to all federally 


insured credit unions.


In passing CUMAA in August 1998, 

Congress established membership limits for 

federally chartered credit unions with respect 

to common-bond and community-chartered 

credit unions. Furthermore, Congress 

established numerical limitations for groups 

to be eligible for inclusion in multiple 

common-bond credit unions and established 

geographical guidelines for community credit 

unions. 

However, the legislation only applied to 

federally chartered credit unions. It did not 

apply to federally insured,state-chartered 

credit unions, which held 46 percent of total 

industry assets as of December 31, 2002. 

Therefore, this recommendation is partially 

implemented. 

Sources: GAO; NCUA; Department of Treasury; Federal Register; CUMAA. 

a

U.S. Central Credit Union, founded in 1974, solely assists corporate credit unions with financial 

services, including investment, liquidity, and cash management products and services; risk 

management and analytic capabilities; settlement, funds transfer and payment services; and 

safekeeping and custody services. It is owned and directed by its member corporate credit unions. 

Page 112 GAO-04-91 Changes in Credit Union Industry 

52 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

As we reported earlier, the financial condition of federally insured credit 

unions—the industry—has improved since 1991, based on various 

measures such as capital ratios, assets, and regulatory ratings. This 

appendix provides greater detail on these measures. We used annual call 

reports from December 31, 1992, to December 31, 2002, as well as a 

database of regulatory ratings from the National Credit Union 

Administration (NCUA) for the same time period. In addition, we used 

consolidated data based on annual call reports for banks and thrifts in 

order to compare them with credit unions. 

Industry Capital Ratios The capital of federally insured credit unions as a percentage of total 

Have Increased over Time	 industry assets—the capital ratio—grew from 8.10 to 10.86 percent from 

December 31, 1992, to December 31, 2002 (see fig. 18). Over this period, 

larger credit unions had consistently higher capital ratios than smaller 

credit unions. 

Page 113 GAO-04-91 Changes in Credit Union Industry 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Figure 18: Capital Ratios in Federally Insured Credit Unions, 1992–2002 

Capital ratios 

16 

14 

12 

10 

8 

6 

4 

2 

0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Small 

Medium 

Large 

All credit unions 

Source: Call report data. 

Note: In this figure, small credit unions are defined as those with less than $10 million in assets; 

medium credit unions are those with assets ranging from $10 million to less than $50 million in assets; 

and large credit unions are those with $50 million or more in assets. The capital ratio of a given size 

category is calculated as the total equity of all credit unions in that size category divided by the total 

assets of all credit unions in that size category. 

Growth of the Industry	 The credit union industry grew dramatically since December 31, 1992, as 

measured by assets and the value of shares (see table 6). From December 

31, 1992, to December 31, 2002, assets in federally insured credit unions 

increased from $258 billion to $557 billion, or 116 percent, while shares 

increased from $233 billion to $484 billion, or 108 percent. From December 

31, 1992, to December 31, 2000, the annual percentage growth rates of 

assets and shares generally fluctuated from around 3 percent to around 7 

percent, with a significant rise in 1998 to over 10 percent. In the last 2 years 

(2001–2002), however, the annual percentage growth in assets and shares 

again rose sharply. According to NCUA officials, the more recent growth in 

assets and shares reflected a “flight to safety” on the part of consumers 

Page 114 GAO-04-91 Changes in Credit Union Industry 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

seeking low-risk investments in reaction to the generally depressed 

condition of the securities market. 

Table 6: Federally Insured Credit Union Growth in Assets and Shares, 1992–2002 

Dollars in billions 

Assets Shares 

Percentage Percentage 

December 31 Dollar value growth Dollar value growth 

1992 $258.37 $233.01 

1993 277.13 7.26 246.96 5.99 

1994 289.45 4.45 255.02 3.26 

1995 306.64 5.94 270.14 5.93 

1996 326.89 6.60 286.71 6.13 

1997 351.17 7.43 307.18 7.14 

1998 388.70 10.69 340.00 10.68 

1999 411.42 5.84 356.92 4.98 

2000 438.22 6.51 379.24 6.25 

2001 501.54 14.45 437.13 15.27 

2002 557.07 11.07 484.19 10.77 

Source: Call report data. 

As noted earlier, the industry has consolidated and become slightly more 

concentrated. As of December 31, 1992, there were 12,595 credit unions, 

but by December 31, 2002, that number had declined to 9,688 (see table 7). 

The number of credit unions with less than $10 million in assets declined 

during this period, while the number of credit unions with more than $30 

million in assets grew. Those credit unions with over $100 million in assets 

had around 52 percent of total industry assets as of December 31, 1992, but 

by December 31, 2002, credit unions of this size had around 75 percent of 

total industry assets. The 50 largest credit unions held 18 percent of 

industry assets in 1992, but by 2002 the 50 largest credit unions held 23 

percent of industry assets. 

Page 115 GAO-04-91 Changes in Credit Union Industry 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Table 7: Distribution of Credit Unions by Asset Size, 1992 and 2002 

Asset size (dollars in millions) 

December Less than .5 to less 2 to less 10 to less 30 to less 50 to less 100 

.5 than 2 than 10 than 30 than 50 than 100 or more Total 

Number of 

credit unions 1,696 2,818 4,304 2,121 625 519 512 12,595 

Percent of 

credit unions 13.47 22.37 34.17 16.84 4.96 4.12 4.07 

Total assets 


(dollars in


millions) $433,203 $3,243,850 $21,230,518 $37,355,589 $24,331,358 $36,133,301 $135,637,393 $258,365,211


Percent of 


total assets 0.17 1.26 8.22 14.46 9.42 13.99 52.50


Number of 

credit unions 620 1,327 3,022 2,121 801 751 1,046 9,688 

Percent of 

credit unions 6.40 13.70 31.19 21.89 8.27 7.75 10.80 

Total assets 


(dollars in


millions) $165,054 $1,543,306 $16,181,104 $37,913,707 $31,135,123 $52,762,245 $417,374,026 $557,074,565


Percent of 


total assets 0.03 0.28 2.9 6.81 5.59 9.47 74.92


Source: Call report data. 

As industry assets have increased, the composition of these assets has 

changed. Total loans as a percentage of total assets increased from 54 

percent as of December 31, 1992, to 62 percent as of December 31, 2002 

(see table 8). While consumer loans, which broadly consist of unsecured 

credit card loans, new and used vehicle loans, and certain other loans to 

members, remained the largest category of credit union loans, the most 

significant growth in credit union loan portfolios was in real estate loans. 

These loans grew from 19 percent of total assets as of December 31, 1992, 

to 26 percent of total assets as of December 31, 2002. 

Page 116 GAO-04-91 Changes in Credit Union Industry 

31 

1992 

100 

100 

2002 

100 

100 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Table 8: Asset Composition of Credit Unions as a Percentage of Total Assets, 1992–2002 

Figures in percent 

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec.31, Dec. 31, 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Cash 2.42 2.27 2.18 2.32 2.22 2.25 2.28 6.39 7.64 10.09 9.62 

Consumer 

loans 29.77 31.35 35.83 37.70 39.01 38.57 35.59 36.31 37.61 33.91 31.47 

Real estate 

loans 19.05 18.67 19.96 20.14 21.63 22.92 23.35 25.28 26.61 26.27 26.41 

Other loans 5.19 4.94 4.97 4.82 4.76 4.66 4.30 4.43 4.55 4.11 3.63 

Total loans 54.01 54.96 60.76 62.66 65.40 66.15 63.24 66.02 68.77 64.29 61.51 

U.S.


government 


and agency 


securities 16.26 18.05 18.33 16.41 15.63 14.52 13.67 13.19 11.99 12.32 13.89


Investments in 


corporate credit


unions 13.33 11.41 8.28 8.07 6.97 7.41 9.29 5.15 3.36 3.85 4.77


Bank and thrift 


deposits 0.00 0.00 5.52 5.43 4.87 4.71 5.46 3.78 2.85 3.71 4.18


Other 


investments 1.05 1.13 1.08 1.02 0.85 0.92 1.29 1.44 1.35 1.47 1.56


Fixed and other 


assets 12.93 12.17 3.85 4.09 4.06 4.04 4.77 4.03 4.04 4.27 4.47


Total assets ($ 


in billions) $258.37 $277.13 $289.45 $306.64 $326.89 $351.17 $388.70 $411.42 $438.22 $501.54 $557.07


Source: Call report data. 

Page 117 GAO-04-91 Changes in Credit Union Industry 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Despite the growth in credit union real estate loans, credit unions had a 

lower percentage of real estate loans to total assets (26 percent) than their 

peer group banks and thrifts, which had 37 percent of real estate loans to 

total assets (see table 9). Credit unions had a significantly higher 

percentage of consumer loans to total assets (31 percent) compared with 

their peer group banks and thrifts (8 percent). These banks and thrifts, 

however, had a significantly higher percentage of agricultural and 

commercial loans to total assets (12 percent) compared with credit unions 

(slightly more than 1 percent). 

Table 9: Comparison of the Loan Portfolios of Federally Insured Credit Unions with Peer Group Banks and Thrifts, as of 2002 

Credit unions Banks 

Loan types Dollar value Percent Dollar value Percent 

Consumer loans $175,300,187,240 31.47 $189,841,654,000 

Real estate loans 147,131,474,868 26.41 944,031,005,000 37.44 

Agricultural and commercial 

loans 6,644,982,024 1.19 303,205,739,000 12.03 

Other loans 13,571,878,174 2.44 65,472,408,000 

Total loans $342,648,522,306 61.51 $1,502,550,806,000 59.60 

Other assets 214,426,042,531 38.49 1,018,695,188,000 40.40 

Total assets $557,074,564,837 100 $2,521,245,994,000 100 

Number of institutions 9,688 7,829 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions and 

banks and thrifts filing call reports. Insured U.S. branches of foreign-chartered banks, banks with more 

than $18 billion in assets, and banks we determined had emphases in credit card or mortgage loans 

are excluded. 

Credit Union Profits Have 

Been Relatively Stable in 

Recent Years 

The profitability of credit unions, as measured by the return on average 

assets, has been relatively stable in recent years. According to this 

measure, credit union profitability was higher in the early to mid-1990s 

than in the late 1990s and early 2000s. While declining from 1993 through 

1999, the return on average assets has since stabilized. It has generally 

hovered around 1 percent, which, by historical banking standards, is a 

performance benchmark, and it was reported at 1.07 as of December 31, 

2002 (see fig. 19). Profits are an especially important source of capital for 

credit unions because they are mutually owned institutions that cannot sell 

equity to raise capital. 

Page 118 GAO-04-91 Changes in Credit Union Industry 

7.53 

2.60 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Figure 19: Profitability of Federally Insured Credit Unions, 1992–2002 

Percentage 

1.6 

1.4 

1.2 

1.0 

0.8 

0.6 

0.4 

0.2 

0.0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Source: Call report data. 

Notes: Profitability is measured by the return on average assets, in which average assets are the 

simple average of total assets as of the current period and prior yearend. The return on average assets 

was not available for 1992 since we did not have 1991 total assets data. 

Credit Unions’ Regulatory The number of credit unions with a CAMEL rating of 1 (strong) increased 

Ratings Have Improved from 1,082 (9 percent) in 1992 to 2,186 (23 percent) in 2002 (see fig. 20). 

Since December 1992 During the same time period, institutions classified as problem credit 

unions—those with CAMEL ratings of 4 (poor) or 5 (unsatisfactory)— 

decreased from 578 (5 percent) in 1992 to 211 (2 percent) in 2002. 

Page 119 GAO-04-91 Changes in Credit Union Industry 
Appendix III 

Financial Condition of Federally Insured 

Credit Unions 

Figure 20: Federally Insured Credit Unions, by CAMEL Rating, 1992–2002 

Strong Satisfactory Flawed Poor Unsatisfactory

CAMEL rating 

2002 

2001 

2000 

1999 

1998 

1997 

1996 

1995 

1994 

1993 

1992 

Year 

0.11 

0.06 

0.14 

0.11 

0.10 

0.16 

0.20 

0.09 

0.08 

0.41 

0.10 

29.87 

27.1 

25.10 

22.00 

20.62 

20.26 

19.87 

17.61 

18.04 

32.17 

19.58 

57.42 

58.86 

58.9 

57.63 

56.15 

55.85 

56.51 

57.54 

55.74 

54.65 

55.67 

9.46 

11.53 

13.69 

17.91 

20.44 

21.17 

20.56 

22.91 

24.17 

8.59 

22.57 

3.14 

2.45 

2.18 

2.34 

2.7 

2.57 

2.86 

1.85 

1.97 

4.18 

2.08 

Source: NCUA. 

Page 120 GAO-04-91 Changes in Credit Union Industry 
Appendix IV 

Comparison of Bank and Credit Union 

Distribution of Assets 

Figures 21, 22, and 23 illustrate the marked size disparity between credit 

unions and institutions insured by the Federal Deposit Insurance 

Corporation (FDIC), with figure 21 highlighting how small most credit 

unions are.1

 At the end of 2002, the largest credit union had less than $18 

billion in assets, while the largest bank, with over $600 billion in assets, was 

larger than the entire credit union industry. 

Figure 21: Total Assets of All Credit Unions and All Banks, as of 2002 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

$0.1 $0.25 $0.5 $1 $5 $10 $15 $20 $50 $100 $500 $750 

Total assets (in billions) 

Number of institutions 

8,642 

4,681 

602 

2,538 

240 

1,073 

133 

506 

68 

383 

2 67 0 29 1 16 0 37 0 14 0 8 0 2 

2 

67 

0 

29 

1 

16 

0 

37 

0 

14 

0 

8 

0 2 

0 

10 

20 

30 

40 

50 

60 

70 

$10 $15 $20 $50 $100 $500 $750 

Institutions with more than $5 billion in total assets 

credit unions- 3 

banks- 173 

Source: Call report data. 

Credit unions 

Banks 

Note: Data are as of December 31, 2002, and include all federally insured credit unions and banks and 

thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions are excluded. This 

figure depicts the number of institutions in a particular asset size category. Each category represents a 

range—for example, the first category includes all institutions with assets of $100 million or less, while 

the second category includes all institutions with assets greater than $100 million and less than or 

equal to $250 million, up to the last category, which includes all institutions with assets greater than 

$500 million and less than or equal to $750 billion. 

1

Throughout the report, we refer to institutions insured by the FDIC interchangeably as 

“banks,” “banks and thrifts,” and “FDIC-insured institutions.” 

Page 121 GAO-04-91 Changes in Credit Union Industry 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


Figure 22: Total Assets of Credit Unions and Banks with Less Than $100 Million in Assets, as of 2002 

Number of institutions 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

$5,000 

$10,000 

$15,000 $20,000 

$25,000 

$30,000 $35,000 

$40,000 

$45,000 

$50,000 

$55,000 

$60,000 

$65,000 

$70,000 

$75,000 

$80,000 

$85,000 

$90,000 

$95,000 

$100,000 

Total assets (in thousands) 

Source: Call report data. 

Credit unions 

Banks 

Note: Data are as of December 31, 2002, and include all federally insured credit unions and banks and 

thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions are excluded. This 

figure depicts the number of institutions in a particular asset size category. Each category represents a 

range—for example, the first category includes all institutions with assets of $5 million or less, while the 

second category includes all institutions with assets greater than $5 million and less than or equal to 

$10 million, up to the last category, which includes all institutions with assets greater than $95 million 

and less than or equal to $100 million. 

Page 122 GAO-04-91 Changes in Credit Union Industry 

500 

0 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


Figure 23: Total Assets of Credit Unions with Less Than $5 Million in Assets, as of 2002 

Number of credit unions 

350 

300 

250 

200 

150 

100 

50 

0 

$250,000 

$500,000 

$750,000 

$1,000,000 

$1,250,000 

$1,500,000 

$1,750,000 $2,000,000 $2,250,000 $2,500,000 

$2,750,000 $3,000,000 

$3,250,000 $3,500,000 

$3,750,000 $4,000,000 

$4,250,000 

$4,500,000 $4,750,000 

$5,000,000 

Total assets 

Source: Call report data. 

Note: Data are as of December 31, 2002, and include all federally insured credit unions filing call 

reports. This figure depicts the number of institutions in a particular asset size category. Each category 

represents a range—for example, the first category includes all institutions with assets of $250,000 or 

less, while the second category includes all institutions with assets greater than $250,000 and less 

than or equal to $500,000, up to the last category, which includes all institutions with assets greater 

than $4.75 million and less than or equal to $5 million. 

Given the disproportionate size of the banking industry relative to the 

credit union industry, peer groups were defined to mitigate the effects of 

this discrepancy. Therefore, for our more detailed reviews, we constructed 

five peer groups in terms of institution size as measured by total assets, 

reported as of December 31, 2002. We further refined the sample of FDICinsured institutions to exclude those banks and thrifts we determined had 

emphases in credit card or mortgage loans. The largest bank included in 

our analyses had total assets of nearly $18 billion in 2002. See appendix I 

for details. 

Figures 24, 25, 26, and 27 illustrate that differences in services (as 

measured by the number of institutions holding various consumer, 

mortgage, and business loans) between credit unions and peer group banks 

Page 123 GAO-04-91 Changes in Credit Union Industry 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


are manifested in terms of institution size. Overall, the credit union 

industry in aggregate did not appear to be that similar to the banking 

industry (as captured by our sample of peer group banks) in terms of 

services; however, when broken out by size, the larger credit unions (those 

with more than $100 million in assets, or credit unions in Groups II, III, IV, 

and V) appeared to be offering very similar services to peer banks. 

Moreover, as nearly 90 percent of all credit unions had less than $100 

million in assets as of December 31, 2002, the results depicted in Figure 24 

are influenced more heavily by these institutions. 

Figure 24: Percentage of All Credit Unions and All Banks Holding Various Loans, as 

of 2002 

Percentage of institutions 

100 

50 

59 

86 

50 

29 

16 

98 100 98 98 

80 

60 

40 

20 

0 

First Junior mortgage Credit Other Agricultural 

mortgage and home card consumer and business 

loans equity loans loans loans loans 

Credit unions 

Banks 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions and 

banks and thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions and banks 

we determined had emphases in credit card or mortgage loans are excluded. Bank data on mortgages 

exclude thrifts. Credit union data on other consumer loans may include member business and 

agricultural loans. 

Page 124 GAO-04-91 Changes in Credit Union Industry 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


Figure 25: Percentage of Credit Unions and Banks with Assets of $100 Million or 

Less Holding Various Loans, as of 2002 

Percentage of institutions 

100 

100 

80 

60 

40 

20 

0 

44 

97 

55 

78 

45 

18 

97 

12 

96 

First Junior mortgage Credit Other Agricultural 

mortgage and home card consumer and business 

loans equity loans loans loans loans 

Credit unions 

Banks 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions and 

banks and thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions and banks 

we determined had emphases in credit card or mortgage loans are excluded. Bank data on mortgages 

exclude thrifts. Credit union data on other consumer loans may include member business and 

agricultural loans. 

Page 125 GAO-04-91 Changes in Credit Union Industry 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


Figure 26: Percentage of Credit Unions and Banks with Assets between $1 Billion 

and $18 Billion Holding Various Loans, as of 2002 

Percentage of institutions 

100 100 100 

100 

80 

60 

40 

20 

0 

96 95 

90 

52 

97 

76 

96 

First Junior mortgage Credit Other Agricultural 

mortgage and home card consumer and business 

loans equity loans loans loans loans 

Credit unions 

Banks 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions and 

banks and thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions and banks 

we determined had emphases in credit card or mortgage loans are excluded. Bank data on mortgages 

exclude thrifts. Credit union data on other consumer loans may include member business and 

agricultural loans. 

Page 126 GAO-04-91 Changes in Credit Union Industry 
Appendix IV


Comparison of Bank and Credit Union 


Distribution of Assets


Figure 27: Percentages of Credit Unions and Banks Holding Various Loans, by Institution Size, as of 2002 

Group Number Total 

assets 

(dollars 

in billions) 

Percentage of institutions with the following holdings: 

I 

II 

III 

Total 

V 

IV 

8,642 $139.70 

4,083 $205.98 

602 

2,086 

$93.57 

$327.96 

240 

858 

$83.83 

$297.79 

133 

418 

$89.73 

$289.54 

71 

384 

$150.24 

$1,399.98 

9,688 

7,829 

$557.07 

$2,521.25 

First mortgage loans 

Junior mortgage 

and home equity loans Credit card loans Other consumer loans 

Agricultural and 

business loans 

43.6% 

97.3% 

97.2% 98.5% 91.7% 43.5%

77.6% 17.5% 97.5% 96.3%

54.5% 44.7% 99.9% 12.3%

100% 

98.9% 95.9% 35.7% 98.8% 97.4%

99.2% 98.3% 91.3% 100% 57.1%

97.8% 96.9% 45.8% 98.1% 97.1%

100% 99.2% 93.2% 100% 57.1%

97.6% 97.6% 44.5% 98.1% 96.7%

100% 100% 90.1% 100% 76.1%

96.2% 94.8% 51.8% 96.9% 95.8%

49.5% 59.3% 49.8% 99.9% 16.4%

97.7% 86.4% 28.6% 97.9% 97.5%

Source: Call report data. 

Credit unions 

Banks 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions and 

banks and thrifts filing call reports. Insured U.S. branches of foreign-chartered institutions and banks 

we determined had emphases in credit card or mortgage loans are excluded. Bank data on mortgages 

exclude thrifts. Credit union data on other consumer loans may include member business and 

agricultural loans. Group I credit unions had assets of $100 million or less; Group II credit unions had 

assets greater than $100 million and less than or equal to $250 million; Group III credit unions had 

assets greater than $250 million and less than or equal to $500 million; Group IV credit unions had 

assets greater than $500 million and less than or equal to $1 billion; and Group V credit unions had 

assets greater than $1 billion and less than or equal to $18 billion, which is the asset size, rounded up 

to the nearest billion dollars, of the largest credit union as of December 31, 2002. 

Page 127 GAO-04-91 Changes in Credit Union Industry 
Appendix V 

Credit Union Services, 1992–2002


In the absence of detailed time series data on the provision of services by 

credit unions, we used holdings of various loans, including mortgage and 

consumer loans, as well as other variables, as rough measures of credit 

union services over time. We also separated credit unions by asset size to 

illustrate any differences in provision of services by this criterion. For 

illustrative purposes, we compared the smallest credit unions (those with 

assets of $100 million or less) with the largest credit unions (those with 

more than $1 billion in assets). 

The percentage of all credit unions holding first mortgage loans has 

increased every year since 1992 (see fig. 28). However, nearly twice as 

many credit unions hold new and used vehicle loans as first mortgage 

loans. 

Page 128 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Figure 28: Percentage of Credit Unions Holding Various Loans, 1992–2002 

Percentage of credit unions New vehicle loans

0 

20 

40 

60 

80 

100 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Other real estate loans 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

Credit card loans 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

First mortgage loans 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

Percentage of credit unions Used vehicle loans

0 

20 

40 

60 

80 

100 

Member business loans 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. 

Page 129 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Calculating the percentage of loan amounts held to total assets can reveal 

the relative importance of each type of loan to credit unions. Figure 29 

shows that first mortgage loans have increased in importance, surpassing 

each of the other loan holdings. 

Page 130 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Figure 29: Percentage of Assets Held in Various Loans by All Credit Unions, 1992–2002 

First mortgage loans 

Other real estate loans 

Credit card loans 

Used vehicle loans 

New vehicle loans 

Member business loans 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

0 

5 

10 

15 

20 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

Percentage of total credit union assets Percentage of total credit union assets 

0 

5 

10 

15 

20 

Percentage of total credit union assets Percentage of total credit union assets 

0 

5 

10 

15 

20 

0 

5 

10 

15 

20 

25 25 

25 

25 25 

25 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. 

Page 131 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Although nearly all credit unions have offered regular shares (savings 

accounts), over the years, the percentage of those offering share drafts 

(checking accounts) and money market shares has increased, as illustrated 

in figure 30. 

Page 132 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Figure 30: Percentage of Credit Unions Offering Various Accounts, 1992–2002 

Regular shares 

Share drafts 

Money market shares 

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. Regular shares are savings accounts and share drafts are checking accounts. 

Page 133 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


The number of employees could have an effect on the provision of services 

as well. Figure 31 shows that industry consolidation has not adversely 

affected employment. Even though the industry shrank in terms of the 

number of institutions from 12,595 in 1992 to 9,688 in 2002, a decline of 23 

percent, the number of full-time employees went from 119,480 in 1992 to 

180,401 in 2002, an increase of 51 percent. 

Figure 31: Credit Union Employees and Number of Credit Unions, 1992–2002 

Number of credit unions Full-time employees 

15,000 200,000 

175,000 

12,000 

150,000 

9,000 125,000 

100,000 

6,000 75,000 

50,000 

3,000 

25,000 

0 0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Number of credit unions 

Full-time employees 

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. 

The differences between the smallest credit unions (those with $100 

million or less in assets) and the largest credit unions (those with more 

than $1 billion in assets) are also apparent in the types of loans held and 

their relative importance for each group over time (see figs. 32 and 33). 

Nearly all of the smallest credit unions have emphasized new and used 

vehicle loans, but typically less than one-half of these credit unions have 

held other loan types. As of December 31, 2002, used vehicle loans were the 

relatively most important loan holding for the smallest credit unions, 

surpassing new vehicle loans. Almost all of the largest credit unions have 

Page 134 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


held most types of loans over the past decade, with the exception of 

member business loans—but the percentage of the largest credit unions 

holding these has been steadily growing and, as of December 31, 2002, 

roughly three out of four of these credit unions held them. First mortgage 

loans have consistently been the most important loan holding of the largest 

credit unions, and they now represent nearly one-quarter of the asset mix 

of these credit unions. 

Page 135 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Figure 32: Percentage of Credit Unions, Smallest versus Largest, Holding Various Loans, 1992–2002 

New vehicle loans 

Other real estate loans 

Credit card loans 

First mortgage loans 

Used vehicle loans 

Member business loans 

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percentage of credit unions 

0 

20 

40 

60 

80 

100 

Percentage of credit unions 

0 

20 

40 

60 

80 

100 Group I credit unions 

Group V credit unions 

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. The smallest credit unions (Group I) are those with $100 million or less in assets while the 

largest credit unions (Group V) are those with more than $1 billion in assets. 

Page 136 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


Figure 33: Percentage of Assets Held in Various Loans, Smallest versus Largest Credit Unions, 1992–2002 

New vehicle loans 

First mortgage loans 

Credit card loans 

Other real estate loans 

Used vehicle loans 

Member business loans 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percentage of total credit union assets 

0 

5 

10 

15 

20 

25 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

Percentage of total credit union assets 

0 

5 

10 

15 

20 

25 

25 

25 

25 

25 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Group I credit unions 

Group V credit unions 

Source: Call report data. 

Note: Data are as of December 31 and are based on all federally insured credit unions filing call 

reports. The smallest credit unions (Group I) are those with $100 million or less in assets while the 

largest credit unions (Group V) are those with more than $1 billion in assets. 

Page 137 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


As of December 31, 2002, we observed a gap in services offered by smaller 

credit unions and larger credit unions (see fig. 34). While larger credit 

unions—those with assets of more than $100 million—accounted for just 

over 10 percent of all credit unions, they offered more services than smaller 

credit unions. For example, nearly all of the larger credit unions held 

mortgage loans and credit card loans, while only around one-half of the 

smaller credit unions held these loans. 

Figure 34: Differences among Services Offered by Smaller and Larger Credit 

Unions, as of 2002 

Percentage of institutions


100 

43.6 44.7 

91.7 

12.3 

47.7 

54.5 

98.2 98.7 99.9 100


80


60


40


20


0 

First Junior mortgage Credit Other Agricultural 

mortgage and home card consumer and business 

loans equity loans loans loans loans 

Smaller credit unions 

Larger credit unions 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions filing call 

reports. In this figure, larger credit unions are those with more than $100 million in assets while smaller 

credit unions are those with $100 million or less in assets. 

The discrepancy in the services offered by smaller and larger credit unions 

is more accurately illustrated through an analysis of more recently 

collected data on more sophisticated product and service offerings, such as 

the availability of automatic teller machines (ATM) and electronic banking 

(see fig. 35). While less than half of the smallest credit unions offered ATMs 

Page 138 GAO-04-91 Changes in Credit Union Industry 
Appendix V


Credit Union Services, 1992–2002


and one-third offered financial services through the Internet, nearly all 

larger credit unions offered these services. 

Figure 35: Credit Union Size and Offerings of More Sophisticated Services, as of 2002 

Group Number of 

credit 

unions in 

the sample 

Percentage of credit unions in the sample offering: 

I 

II 

III 

IV 

V 

Entire 

sample 

8,642 

(89.2% of 

entire sample) 

602 

(6.2% of 

entire sample) 

240 

(2.5% of 

entire sample) 

133 

(1.4% of 

entire sample) 

71 

(0.7% of 

entire sample) 

9,688 

Financial services 

through the Internet 

Financial services through audio 

responses or phone-based system ATMs 

Electronic 

applications for new loans 

28.4% 41.5% 45.2% 19.7% 

98.6% 

35.5% 47.6% 50.9% 26.6% 

91.7% 97.7% 96.7% 79.1% 

97.1% 

97.7% 

100% 98.6% 94.4% 

100% 88.0% 

97.5% 

98.5% 

98.8% 88.3% 

Source: Call report data. 

Note: Data are as of December 31, 2002, and are based on all federally insured credit unions filing call 

reports. Group I credit unions had assets of $100 million or less; Group II credit unions had assets 

greater than $100 million and less than or equal to $250 million; Group III credit unions had assets 

greater than $250 million and less than or equal to $500 million; Group IV credit unions had assets 

greater than $500 million and less than or equal to $1 billion; and Group V credit unions had assets 

greater than $1 billion and less than or equal to $18 billion, which is the asset size, rounded up to the 

nearest billion dollars, of the largest credit union as of December 31, 2002. 

Page 139 GAO-04-91 Changes in Credit Union Industry 
Appendix VI 

Characteristics of Credit Union and Bank 

Users 

This appendix provides additional information on the characteristics—age, 

education, and race/ethnicity—of households that use banks and credit 

unions. For figures 36, 37, and 38, we analyzed data from the Federal 

Reserve's 2001 Survey of Consumer Finances (SCF). The categories we 

used to describe these households—credit union users and bank users— 

included those who only and primarily used each of these institutions. To 

supplement our analyses of households by race, we also analyzed 2001 loan 

application records from the Home Mortgage Disclosure Act database 

(HMDA) (see fig. 39). As we did with our analysis of HMDA income data, 

we only analyzed records for home purchase loans actually made for the 

purchase of one-to-four family homes. 

Figure 36: Households Using Credit Unions and Banks, by Education Level, 2001 

Percentage of households 

35 34 

30 

25 

20 

15 

10 

5 

0 

8 

27 

31 

18 

28 

23 

31 

Households only and Households only and 

primarily using credit unions primarily using banks 

Less than high school 

High school graduate 

Some college 

College/graduate degree 

Source: 2001 SCF. 

Page 140 GAO-04-91 Changes in Credit Union Industry 
Appendix VI


Characteristics of Credit Union and Bank


Users


Figure 37: Households Using Credit Unions and Banks, by Age Group, 2001


Percentage of households


50


46


40


30


20


10


0 

Households only and Households only and 

primarily using credit unions primarily using banks 

24 

22 

9 

19 

33 

24 24 

Ages 18-33


Ages 34-49


Ages 50-65


Age 66+


Source: 2001 SCF. 

Note: Percentages do not add to 100 percent due to rounding. 

Page 141 GAO-04-91 Changes in Credit Union Industry 
Appendix VI


Characteristics of Credit Union and Bank


Users


Figure 38: Households Using Credit Unions and Banks, by Race and Ethnicity, 2001 

Percentage of households 

79 80 

70 

60 

50 

40 

30 

20 

10 

0 

3 4 

16 

76 

3 

7 

11 

Households only and Households only and 

primarily using credit unions primarily using banks 

Other 

Hispanic 

Black 

White 

Source: 2001 SCF. 

Note: Percentages do not add to 100 percent due to rounding. 

Page 142 GAO-04-91 Changes in Credit Union Industry 
Appendix VI


Characteristics of Credit Union and Bank


Users


Figure 39: Mortgages Made by Credit Unions and Banks, by Race and Ethnicity, 


2001


Percentage


80 77 

70 

60 

50 

40 

30 

20 

10 

0 

Other Black Hispanic White Not provided 

Race 

4 3 5 4 

7 

73 

15 

6 4 

Loans made by credit unions 

Loans made by peer group banks 

Source: 2001 HMDA database. 

Notes: The “other” category includes data reported for American Indians, Alaskan natives, Asian or 

Pacific islanders, and those from the HMDA “other” category. We collapsed these categories to create 

groups similar to the ones used by the SCF. However, in our HMDA analysis, we only included 

mortgages made by peer group banks (banks with less than $16 billion in assets) whereas the SCF did 

not exclude households using banks with more than $16 billion in assets. 

Fifteen percent of the HMDA data reported by credit unions and 6 percent 

of the HMDA data reported by banks lacked race and ethnicity data. As 

such, the data in this figure may not represent the exact proportion of 

mortgage loans by race. We also found that the proportion of loans without 

data varied by the asset size of institutions. For example, race data were 

missing for 23 percent of credit unions with assets of more than $500 

million compared with about 3 percent for credit unions with less than $50 

million in assets. Similarly, race data were missing for about 8 percent of 

peer group banks with more than $500 million in assets compared with 

about 4 percent of banks with less than $50 million in assets. However, 

since these larger institutions made most of the loans, missing data from 

these institutions account for more than 80 percent of all the missing data. 

Page 143 GAO-04-91 Changes in Credit Union Industry 
Appendix VII 

Key Changes in NCUA Rules and Regulations, 

1992–2003 

Since 1992, changes to the National Credit Union Administration’s (NCUA) 

rules and regulations governing credit unions generally expanded the 

powers of credit unions to offer products and services, and broadened the 

activities in which they could engage. With the exception of member 

business lending, which NCUA constrained during the 1990s, federally 

chartered credit unions gained authority to, among other things, (1) invest 

in a wider variety of financial instruments, (2) offer services through the 

Internet, and (3) profit from referring members to products, such as 

insurance and investments, sold by third parties. Also, NCUA increased the 

number of activities in which credit union service organizations (CUSO) 

could engage, including student loan and business loan origination. In 

September 2003, NCUA expanded credit union powers in member business 

lending to permit well-capitalized credit unions to make unsecured 

member business loans within certain limits, among other things. See table 

10 for a timeline of key changes to NCUA rules and regulations. 

Table 10: Timeline of Key Changes to NCUA Rules and Regulations, January 1992–September 2003 

Effective date Key change 

January 1992	 NCUA limited member business loans in response to losses to credit unions, their members, and the 

National Credit Union Share Insurance Fund. NCUA established loan security requirements, limits on 

loans to one borrower, and an aggregate portfolio cap on construction and development loans at 15 

percent of reserves for federally insured credit unions. 

September 1996	 NCUA allowed credit unions serving predominantly low-income members to raise secondary capital 

from foundations and other philanthropic-minded institutional investors, to help credit unions make 

mo a re loans, and improve services to low-income members. NCUA required credit unions to establish 

certain uninsured or other form of nonshare accounts for secondary capital. 

January 1998	 NCUA codified additional powers of federally chartered credit unions to act as trustees and custodians 

of Roth Individual Retirement Accounts (IRA) and Education IRAs, which is in addition to those trustee 

and custodian services they had been authorized to provide for other kinds of pension and retirement 

plans for approximately the previous 23 years. 

NCUA changed its investment rule to focus on risk management (previous focus was on specific 

financial instruments for federal credit unions). NCUA established new requirements for assessing 

and managing risk associated with federally chartered credit union investment activities. 

April 1998	 NCUA codified additional preapproved CUSO activities to include student loan origination, disaster 

recovery services, additional checking and currency services, and electronic income tax filing 

services, among others. 

August 1998	 Credit Union Membership Access Act (CUMAA) became law. CUMAA provisions cap the aggregate 

portfolio amount of member business loans for federally insured credit unions, with exceptions. 

March 2000	 NCUA allowed federally chartered credit unions in specified locations outside the United States to 

offer trustee or custodian services for IRAs. 

Page 144 GAO-04-91 Changes in Credit Union Industry 
Appendix VII


Key Changes in NCUA Rules and Regulations, 


1992–2003


(Continued From Previous Page) 

Effective date Key change 

August 2001	 NCUA issued legal opinion that permitted a federally chartered credit union employee to be a shared 

employee with a third party and, while acting in the capacity of an employee of the third party, to sell 

nondeposit investment products and provide investment advice. NCUA continued to restrict federally 

chartered credit union employees, acting as an employee of the credit union, from selling nondeposit 

investment products or providing investment advice. 

September 2001	 NCUA’s Incidental Powers Regulation became effective. This rule codified a broad range of activities, 

products, and services that federally chartered credit unions could offer directly to members, and 

which NCUA had previously recognized in legal opinions or had recognized in other regulations. One 

change, which permits federally chartered credit unions to earn income directly from finder activities 

(the referral of members to outside vendors, such as investment and insurance brokers), had the 

effect of making it unnecessary to use a CUSO in third-party networking arrangements in order to 

receive income. Key powers codified in the regulation include: electronic financial services, finder 

activities, loan-related products, such as debt suspension agreements, and trustee services.

b There is 

overlap of the activities in which federally chartered credit unions and CUSOs may engage (for 

example, consumer mortgage origination), but there are also activities only permissible for CUSOs 

(for example, general trust services and travel agency services). 

February 2002	 NCUA issued a legal opinion on how federally chartered credit unions can provide nonmembers, such 

as agricultural workers with familial ties to foreign countries, with wire transfer services. While 

expressly restricting unlimited services to nonmembers, NCUA permitted federally chartered credit 

unions to (1) establish nondividend-bearing accounts for people within its field of membership, (2) 

provide wire transfer services as a promotional activity on a limited basis, and (3) provide services as 

a charitable activity, so long as the recipients of the charitable services were within the credit union’s 

field of membership. 

March 2002	 NCUA’s Regulatory Flexibility Program became effective. NCUA relieved eligible federally and statechartered credit unions from certain NCUA regulations relating to permissible investments and 

investment management requirements, limits on share deposits from public entities and nonmembers, 

approval processes for charitable contributions, and limits on ownership of fixed assets. 

July 2003	 NCUA expanded investment powers of certain federally chartered credit unions to allow them to 

purchase financial instruments that were previously prohibited, including commercial mortgage- c related securities and equity options. 

NCUA permitted federally insured credit unions to open branches in foreign countries, with conditions. 

September 2003 NCUA amended its CUSO rule to permit CUSOs to originate business loans. 

NCUA amended its member business loan rule to allow eligible federally insured credit unions to make 

unsecured member business loans, with limits, and to permit the exclusion of purchased nonmember 

loans and nonmember participation interests from the aggregate business loan limit, among other 

things. 

Sources: GAO, NCUA, Federal Register. 

Note: 

a

Secondary capital can take the form of investments into an institution by nonmembers, such as 

foundations, corporations, and other financial institutions. The investments are subordinated to all 

other credit union debt, and are used to absorb losses. 

b

Debt suspension agreements are contracts between a lender and a borrower where the lender agrees 

to suspend scheduled installment payments for an agreed period in the event the borrower 

experiences financial hardship. 

c

Equity options are limited to those that would be purchased for the sole purpose of offering dividends 

based on the performance of an equity index. 

Page 145 GAO-04-91 Changes in Credit Union Industry 
Appendix VIII 

NCUA’s Budget Process and Industry Role


The National Credit Union Administration (NCUA) changed its budget 

process in 2001 to allow outside parties, including credit unions and trade 

organizations, to submit comments on the budget. While outside parties 

can submit their budget suggestions and concerns at any time, NCUA has a 

formal budget briefing where these parties can officially submit their 

comments. This briefing takes place at the latter stage of NCUA’s budget 

process. The changes NCUA has made to its budget process come during a 

period in which NCUA has been reducing the growth in its budgets. 

NCUA has two main sources of funding for its operating costs. According 

to NCUA, 62 percent of the funds for operating costs in their 2002 budget 

came from the National Credit Union Share Insurance Fund (NCUSIF), 

administered by NCUA. NCUSIF is principally financed from earnings 

(income) on investments purchased using the deposits of federally insured 

credit unions. Funds are transferred from the insurance fund through a 

monthly accounting procedure known as the overhead transfer to cover 

costs associated with ensuring that insured deposits are safe and sound. 

The remaining 38 percent of NCUA’s funds for its operating costs came 

primarily from operating fees assessed on federally chartered credit 

unions, for which NCUA has oversight responsibility. 

NCUA Budget Process Now 

Includes Step for Outside 

Parties to Submit 

Comments 

NCUA budgets on a calendar-year basis, and its board sets the policies and 

overall direction for the budget. In July and August prior to the next budget 

year, the NCUA regional offices submit their workload and program needs. 

NCUA’s examination and insurance officials in headquarters assess the 

information and formulate proposed program hours, which along with 

historical actual expenditures are the basis for the proposed budget. In 

September and October, the Chief Financial Officer (CFO) reviews and 

analyzes the figures, conducts briefings with office directors, and makes 

adjustments. In November, NCUA holds a public briefing where interested 

parties, including credit unions and trade associations, have the 

opportunity to comment. Later in November, the CFO briefs the board prior 

to final budget adjustments. Additionally, in July of the budget year, there is 

a midyear budget review to determine if any adjustments need to be made 

to the budget. According to NCUA officials, NCUA also conducts a variance 

analysis on the budget on a monthly basis and a more comprehensive 

review at the end of the year. 

According to NCUA, credit unions and other stakeholders can submit their 

budget suggestions and concerns at any time. Normally, suggestions come 

between August and November while NCUA is working on the budget. For 

Page 146 GAO-04-91 Changes in Credit Union Industry 
Appendix VIII 

NCUA’s Budget Process and Industry Role 

the public budget hearing, credit unions can address the board for 5 

minutes or submit a written document. 

Recent budget concerns by credit unions have centered on lessening the 

costs to credit unions for NCUA oversight. Credit unions have raised 

specific concerns about the number of NCUA staff or full-time equivalents, 

the salaries of NCUA staff, and the overhead transfer rate from the 

insurance fund. According to NCUA data, its average full-time equivalent 

cost is less than that of the Federal Deposit Insurance Corporation (FDIC) 

and the Office of the Comptroller of the Currency (OCC) and equal to that 

of the Office of Thrift Supervision (OTS). Nevertheless, NCUA has 

responded to concerns over its salary levels by deciding to undertake a pay 

study. 

NCUA Has Reduced Its 

Budget Growth in Recent 

Years 

In recent years, NCUA has been successful in slowing its budget growth. 

After 10-percent annual growth from 1998 to 2000, NCUA budget growth 

has decreased to an average of about 3 percent in 2000–2003 (see fig. 40). 

The NCUA board’s budget priorities have been to streamline business 

processes, increase efficiencies, control budget growth, and match 

resources to mission requirements, while maintaining effective 

examination processes and products. NCUA is seeking budget savings by 

adopting a risk-focused examination approach, extending the examination 

cycle, adopting more flexible rules and regulations, increasing efficiencies 

from technology (such as videoconferencing), and consolidating two of 

their regions into one. 

Page 147 GAO-04-91 Changes in Credit Union Industry 
Appendix VIII 

NCUA’s Budget Process and Industry Role 

Figure 40: NCUA Budget Levels, 1992–2004 

Percentage change Dollars in millions 

12 150 

10 120 

8 

90 

6 

60 

4 

30 

2 

0 0 

-2 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 

(projected) 

Percentage change 

Total dollars 

Source: NCUA. 

Note: The 2004 projected budget is expected to increase between 4.0 and 4.5 percent from the 2003 

budget level. 

NCUA’s authorized full-time equivalent staff level decreased over 7 percent 

from 1,049 in 2000 to 971 in 2003 (see fig. 41). This level of staff reductions 

has been partly in response to changes in the industry. Since 1998, the 

number of federally insured credit unions has decreased steadily by about 3 

percent per year. 

Page 148 GAO-04-91 Changes in Credit Union Industry 
Appendix VIII 

NCUA’s Budget Process and Industry Role 

Figure 41: NCUA-authorized Staffing Levels, 1992–2003 

Number of staff 

1,200 

1,042 1,049 1,029 

1,000 

800


600


400


200


0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


995 1,013 

944 951 953 978 996 996 971 

Source: NCUA. 

Page 149 GAO-04-91 Changes in Credit Union Industry 
Appendix IX 

NCUA’s Implementation of Prompt Corrective 

Action 

Section 301 of the Credit Union Membership Access Act (CUMAA) 

amended the Federal Credit Union Act to require the National Credit Union 

Administration (NCUA) to adopt a system of prompt corrective action 

(PCA) for use on credit unions experiencing capitalization problems.1

 The 

goal of requiring PCA is to resolve the problems of insured credit unions 

with the least possible long-term loss to the National Credit Union Share 

Insurance Fund (NCUSIF). In that regard, NCUA was required to prescribe 

a system of PCA consisting of three principal components: (1) a 

comprehensive framework of mandatory supervisory actions and 

discretionary supervisory actions, (2) an alternative system of PCA for 

“new” credit unions, and (3) a risk-based net worth (RBNW) requirement 

for “complex” credit unions.2

 Furthermore, section 301 also required NCUA 

to report to Congress on how PCA was implemented and how PCA for 

credit unions differs from PCA for other depository institutions. NCUA 

submitted this report in May 2000. In addition, NCUA submitted a further 

report to Congress that described how NCUA carried out the RBNW 

requirements for credit unions and how these requirements differed from 

RBNW requirements of other depository institutions (see table 11). 

1

Pub. L. No. 105-219 (Aug. 7, 1998). 

2

CUMAA defines a “new” credit union as one that has been in operation for less than 10 

years and having less than $10 million in assets. 12 C.F.R. §702.2(h). NCUA defines a credit 

union as “complex” when its total assets at the end of a quarter exceed $10 million and its 

RBNW calculation exceeds 6 percent net worth. 12 C.F.R. §702.103. 

Page 150 GAO-04-91 Changes in Credit Union Industry 
Appendix IX 

NCUA’s Implementation of Prompt 

Corrective Action 

Table 11: CUMAA Mandates and NCUA Actions on PCA Regulation Implementation 

CUMAA 

CUMAA mandates to NCUA deadlines NCUA action dates 

PCA actions: 

Issue PCA proposed rule May 1999 Issued May 1999 

Issue the PCA final rule February 2000 Issued February 2000 

Issue PCA report to Congress February 2000 Issued May 2000 

Implement PCA August 2000 Implemented August 2000 a 

RBNW requirements actions: 

Issue RBNW requirements February 1999 Issued October 1998


(Advance Notice of Proposed 


Rulemaking) 


c Issue RBNW requirements Issued February 2000 

proposed ruleb 

Issue RBNW requirements final August 2000 Issued July 2000 

rule 

c Issue RBNW requirements report Issued November 2000 

to Congress b 

Implement RBNW requirements January 2001 Implemented January 2001 

final rule 

Sources: Federal Register 64, no. 95 (18 May 1999): 27090; Federal Register 65, no. 34 (18 February 2000): 8560; Federal Register 63, 

no. 209 (29 October 1998): 57938; Federal Register 65, no. 34 (18 February 2000): 8597; Federal Register 65, no. 140 (20 July 2000): 

44950; and NCUA reports to Congress. 

Note: 

a

The PCA final rule applied to credit unions beginning in the fourth quarter of 2000. 

b

CUMAA did not set any deadline for NCUA to issue the RBNW requirement proposed rule and did not 

require NCUA to issue a RBNW report to Congress. 

c

Not mandated by CUMAA. 

After NCUA implemented the initial PCA and RBNW regulations, it formed 

a PCA Oversight Task Force to review at least a full year of PCA 

implementation and recommend necessary modifications.

3

 The task force 

reviewed the first six quarters of PCA implementation. It made several 

recommendations to improve PCA, including revising definitions of terms 

and clarifying implementation issues. In June 2002, NCUA issued a 

proposed rule setting forth revisions and adjustments to improve and 

simplify PCA. In November 2002, after incorporating public comments on 

the proposed rule, NCUA issued the final PCA rule adopting the proposed 

3

NCUA established a PCA Oversight Task Force in February 2000. This task force consisted 

of NCUA staff and state regulators. See Federal Register 65, no. 140 (20 July 2000): 44964. 

Page 151 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

revisions and adjustments.4 The final rule became effective on January 1, 

2003. 

PCA Incorporates a 

Comprehensive Framework 

of Mandatory and 

Discretionary Supervisory 

Actions 

The PCA rule consists of a comprehensive framework of mandatory and 

discretionary supervisory actions for all federally insured credit unions 

except “new” credit unions.5

 The PCA system includes the following five 

statutory categories and their associated net worth ratios: 

• well-capitalized—7.0 percent or greater net worth, 

• adequately capitalized—6.0 to 6.99 percent net worth, 

• undercapitalized—4.0 to 5.99 percent net worth, 

• significantly undercapitalized—2.0 to 3.99 percent net worth, and 

• critically undercapitalized—less than 2.0 percent net worth. 

As noted earlier in the report, mandatory supervisory actions apply to 

credit unions that are classified adequately capitalized or lower. The PCA 

system also includes conditions triggering mandatory conservatorship and 

liquidation. 

CUMAA also authorized NCUA to develop a comprehensive series of 

discretionary supervisory actions to complement the mandatory 

supervisory actions. Some or all of these 14 discretionary supervisory 

actions can be applied to credit unions that are classified undercapitalized 

or lower (see table 12). 

4

The final PCA rule contains 17 revisions and adjustments. See Federal Register 67, no. 230 

(29 November 2002): 71078. 

5

NCUA issued staff instructions on discretionary supervisory actions in April 2003, but has 

yet to impose a discretionary supervisory action against any credit union. 

Page 152 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

Table 12: Discretionary Supervisory Actions 

Discretionary supervisory actions Statutory net worth category 

Require NCUA prior approval for acquisitions, “Undercapitalized” and lower 

branching, new lines of business 

Restrict transactions with and ownership of CUSOs “Undercapitalized” and lower 

Restrict dividends paid “Undercapitalized” and lower 

Prohibit or reduce asset growth “Undercapitalized” and lower 

Alter, reduce, or terminate any activity by credit union “Undercapitalized” and lower 

or its CUSO 

Prohibit nonmember deposits “Undercapitalized” and lower 

Other actions to further the purpose of part 702 “Undercapitalized” and lower 

Order new election of board of directors “Undercapitalized” and lower 

Dismiss directors or senior executive officers “Undercapitalized” and lower 

Employ qualified senior executive officers “Undercapitalized” and lower 

Restrict senior executive officers’ compensation and 

bonus 

“Significantly Undercapitalized” 

and lower 

Require merger if grounds exist for conservatorship or “Significantly Undercapitalized” 

liquidation and lower 

Restrict payments on uninsured secondary capital “Critically Undercapitalized” 

Require NCUA prior approval for certain actions “Critically Undercapitalized” 

Source: Federal Register 64, no. 95 (18 May 1999): 27096-27098. 

The discretionary supervisory actions are tailored to suit the distinctive 

characteristics of credit unions. 

An Alternative System for 

New Credit Unions 

CUMAA required NCUA to develop an alternative PCA system for “new” 

credit unions. In doing so, NCUA recognized that new credit unions (1) 

initially have no net worth, (2) need reasonable time to accumulate net 

worth, and (3) need incentives to become adequately capitalized by the 

time they are no longer new. Accordingly, the PCA system for new credit 

unions has relaxed net worth ratios, allows regulatory forbearance, and 

offers incentives to build net worth. The PCA system for new credit unions 

includes six net worth categories and their associated net worth ratios (see 

table 13). 

Page 153 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

Table 13: Net Worth Category Classification for New Credit Unions 

New credit union net worth category Net worth ratio (Percent) 

“Well-Capitalized” 7.0 or above 

“Adequately Capitalized” 6.0 to 6.99 

“Moderately Capitalized” 3.5 to 5.99 

“Marginally Capitalized” 2.0 to 3.49 

“Minimally Capitalized” 0.0 to 1.99 

“Uncapitalized” Less than 0 

Source: Federal Register 64, no. 95 (18 May 1999): 27099. 

Risk-based Net Worth CUMAA also required NCUA to formulate the definition of a “complex” 

Requirement for “Complex” credit union according to the risk level of its portfolios of assets and 

Credit Unions liabilities. Well-capitalized and adequately capitalized credit unions 

classified as complex are subject to an additional RBNW requirement to 

compensate for material risks against which a 6.0 percent net worth ratio 

may not provide adequate protection. (We describe the RBNW requirement 

in more detail elsewhere in this appendix.) 

NCUA Submitted Required 

PCA Report to Congress 

CUMAA mandated that NCUA submit a report to Congress addressing PCA. 

The report, dated May 22, 2000, explains how the new PCA rules account 

for the cooperative character of credit unions and how the PCA rules differ 

from the Federal Deposit Insurance Act’s (FDIA) “discretionary 

safeguards” for other depository institutions as well as the reasons for the 

differences. 

The report discusses how the PCA rules account for credit unions’ 

cooperative character in three areas: their not-for-profit nature, their 

inability to issue stock, and their board of directors consisting primarily of 

volunteers.6

 First, the final rule accounts for credit unions’ not-for-profit 

nature by permitting a less-than-well-capitalized credit union to seek a 

reduction in the statutory earnings retention requirement to allow the 

continued payment of dividends sufficient to discourage an outflow of 

shares. In addition, a well-capitalized credit union whose earnings are 

6

Credit unions cannot issue capital stock and, therefore, must rely on retained earnings to 

build net worth. 

Page 154 GAO-04-91 Changes in Credit Union Industry 
Appendix IX 

NCUA’s Implementation of Prompt 

Corrective Action 

depleted may be permitted to pay dividends from its regular reserve 

provided that such payment would not cause the credit union to fall below 

the adequately capitalized level. Secondly, to account for the inability of 

credit unions to issue capital stock, the final rule relies on the Net Worth 

Restoration Plan, which must be submitted by credit unions classified as 

undercapitalized or lower. Finally, to recognize that credit unions’ boards 

of directors consist primarily of volunteers, the rule exempts credit unions 

that are near to being adequately capitalized from the discretionary 

supervisory action authorizing NCUA to order a new election of the board 

of directors. 

NCUA reported that the final rule established discretionary supervisory 

actions that are essentially comparable to section 38 of FDIA, which 

specifies “discretionary safeguards” for other depository institutions. The 

report notes that NCUA adopted discretionary supervisory actions that are 

similar to all but two of FDIA’s 14 discretionary safeguards. 

NCUA did not adopt FDIA’s safeguards requiring selling new shares of 

stock and prior approval of capital distributions by a bank holding 

company. NCUA’s rationale for these exclusions was that, unlike banks, 

credit unions cannot sell stock to raise capital and are not controlled by 

holding companies. 

NCUA departed from FDIA discretionary safeguards in fashioning three of 

the discretionary supervisory actions: (1) dismissals of senior officers or 

directors, (2) exemption of officers from discretionary supervisory actions, 

and (3) ordering a new election of the boards of directors. NCUA reported 

that the discretionary supervisory action for director dismissals departs 

significantly from its FDIA counterpart. The FDIA safeguard protects from 

dismissal of officials with office tenures of 180 days or less, when an 

institution becomes undercapitalized. In contrast, NCUA contends that 

such a “safe harbor” is unnecessary for credit unions. Moreover, NCUA 

field experience supports the view that short-tenured officers can be as 

responsible as others for rapidly declining net worth. 

With regard to exempting officers from discretionary supervisory actions, 

NCUA provides conditional relief to credit unions in contrast to the FDIA. 

For example, the report notes that FDIA allows 11 discretionary safeguards 

to be imposed on undercapitalized institutions. On the other hand, NCUA’s 

comparable discretionary supervisory actions can be imposed against 

undercapitalized credit unions in the first tier of that category only when 

they fail to comply with any of CUMAA’s four mandatory supervisory 

Page 155 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

actions or fail to implement an approved Net Worth Restoration Plan.

7 

NCUA’s rationale for granting relief from the relevant discretionary 

supervisory actions is to avoid treating credit unions that are just short of 

adequately capitalized as harshly as those that are almost significantly 

undercapitalized. 

NCUA’s report states that it modified the discretionary supervisory action 

ordering a new election of the board of directors. Specifically, NCUA 

excludes undercapitalized credit unions from this requirement but applies 

it to significantly undercapitalized and critically undercapitalized credit 

unions. NCUA’s exception was based on the belief that the safeguard would 

undermine a defining characteristic of credit unions—membership election 

of directors—and possibly discourage members from volunteering to serve 

as directors. Moreover, NCUA noted that its discretionary supervisory 

action does not compel a credit union to replace its board with a NCUAdesignated slate; it simply requires the membership to reconsider its 

original choice of directors. Finally, the report states that ordering a 

wholesale election of the board of directors may be an overreaction when a 

credit union’s net worth is within reach of becoming adequately capitalized. 

NCUA Submitted RBNW 

Report to Congress 

NCUA submitted a report to Congress addressing its RBNW provisions on 

November 3, 2000. In general, the report describes NCUA’s comprehensive 

approach to evaluating a credit union’s individual risk exposure. It explains 

the RBNW requirement that applies to complex credit unions. The RBNW 

requirement takes into account whether credit unions classified as 

adequately capitalized provide adequate protection against risks posed by 

contingent liabilities, among other risks. According to the RBNW report, 

NCUA’s approach (1) targets credit unions that carry an above-average 

level of exposure to material risk, (2) allows an alternative method to 

calculate the amount of net worth needed to remain adequately capitalized 

or well-capitalized, and (3) makes available a risk mitigation credit to 

reflect quantitative evidence of risk mitigation. 

NCUA reported that its final rule targets credit unions that have higher 

material risk levels, thus warranting an extra measure of capital to protect 

them and NCUSIF from losses. As noted previously, credit unions do not 

7

The net worth ratio of credit unions in the undercapitalized category is 4.0-5.99 percent. 

The first tier of the undercapitalized net worth category is 5.0-5.99 percent, and the second 

tier of that net worth category is 4.0-4.99 percent. 

Page 156 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

issue stocks that create shareholder equity. Without shareholder equity to 

absorb losses, the RBNW requirement serves to mitigate most forms of risk 

in a complex credit union’s portfolio. Specifically, the RBNW measures the 

risk level of on- and off-balance sheet items in the credit union’s “risk 

portfolios.”8 The requirement applies only if a credit union’s total assets at 

the end of a quarter exceed $10 million, and its RBNW requirement under 

the standard calculation exceeds 6 percent. The $10 million asset floor 

eliminates the burden on credit unions that are unlikely to impose a 

material risk.9 

NCUA uses two methods to determine whether a complex credit union 

meets its RBNW requirement. Under the “standard calculation,” each of 

eight risk portfolios is multiplied by one or more corresponding risk 

weightings to produce eight “standard components.”10 The sum of the eight 

standard components yields the RBNW requirement that the credit union’s 

net worth ratio must meet for it to remain either adequately capitalized or 

well-capitalized. If the RBNW requirement is not met, the credit union falls 

into the undercapitalized net worth category. NCUA allows a credit union 

that does not meet its RBNW requirement under the standard calculation to 

substitute for any of the three standard components, a corresponding 

“alternative component” that may reduce the RBNW requirement. The 

alternative components recognize finer increments of risk in real estate 

loans, member business loans, and investments. 

Finally, in reporting on the RBNW requirement, NCUA recognized that 

credit unions, which failed under the standard calculation and with the 

alternative components, nonetheless might individually be able to mitigate 

material risk. In such instances, a risk mitigation credit is available to credit 

unions that succeed in demonstrating mitigation of interest rate or 

8

The RBNW report notes that the “risk portfolios” of balance sheet assets consist of longterm real estate loans, member business loans outstanding, investments, low-risk assets, 

and average-risk assets. The “risk portfolios” of off-balance sheet assets are loans sold with 

recourse and unused member business loan commitments. 

9

According to the report, the principal banking industry trade association advocated $10 

million as an appropriate minimum asset “floor.” 

10Risk portfolios include real estate loans, member business loans (MBL) outstanding, 

investments, low-risk assets, average-risk assets, loans sold with recourse, unused MBL 

commitments, and allowances. See Federal Register 65, no. 34 (18 February 2000): 8606. 

Page 157 GAO-04-91 Changes in Credit Union Industry 
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NCUA’s Implementation of Prompt 

Corrective Action 

credit risk.11 If approved, a risk mitigation credit will reduce the RBNW 

requirement a credit union must satisfy to remain classified as adequately 

capitalized or above. 

11According to NCUA data, as of May 2003, no credit union failed to meet an RBNW 

requirement under the standard calculation and with the alternative component, and so 

none has applied for a risk mitigation credit to date. 

Page 158 GAO-04-91 Changes in Credit Union Industry 
Appendix X 

Accounting for Share Insurance


The National Credit Union Share Insurance Fund (NCUSIF) capitalizes its 

insurance fund differently than the Federal Deposit Insurance Corporation 

(FDIC) capitalizes the Bank Insurance Fund (BIF) and the Savings 

Association Insurance Fund (SAIF). For NCUSIF, a cash deposit in the fund 

equal to 1 percent of insured shares, adjusted at least annually, must remain 

on deposit with the fund for the period a credit union remains federally 

insured. This deposit is treated as an asset on the credit union’s financial 

statements, and as part of equity on NCUSIF’s financial statements in an 

account entitled “Insured credit unions’ accumulated contributions.” If a 

credit union leaves federal insurance, for example to become privately 

insured, the deposit with NCUSIF is refunded. However, if the National 

Credit Union Administration’s (NCUA) board assesses additional premiums 

in order to maintain the minimum required equity ratio, the premiums are 

treated as an operating expense on the credit unions’ financial statements 

and would not be refunded. Since 2000, NCUA has not made any 

distributions to contributing credit unions because the fund did not exceed 

the NCUA board’s specific operating level. And, between 1990 and 2002, 

federally insured credit unions were assessed premiums only in 1991 and 

1992, when the fund’s equity declined below the mandated minimum 

1 normal o p erating l evel of 1.20 percent of insured shares. 

However, unlike federally insured credit unions, federally insured banks 

and thrifts operate exclusively under a premium-based insurance system. 

This system requires banks and thrifts to remit a premium payment of a 

specified percent of their balance of insured deposits twice a year to FDIC 

to obtain federal deposit insurance. Each bank or thrift treats the premium 

as an expense in its financial statements, while FDIC recognizes the 

premium as income in its financial statements. If a bank or thrift elects to 

not continue its federal deposit insurance, its premiums are, unlike the 

NCUSIF insurance deposit, nonrefundable. 

The Federal Deposit Insurance Corporation Improvement Act (FDICIA), 

enacted in December 1991, contained some important provisions including 

risk-based premiums for BIF and SAIF. FDIC developed and then 

implemented the risk-based premium system on January 1, 1993. Under the 

system, institutions were categorized according to a capital subgroup (1, 2, 

1

Federal Credit Union Act. 

Page 159 GAO-04-91 Changes in Credit Union Industry 
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Accounting for Share Insurance 

or 3) and a supervisory subgroup (A, B, or C).2 This resulted in the bestrated institutions being categorized as 1-A and the worst institutions as 3-C. 

These categorizations result in a range of premium costs, with the bestrated institutions paying the lowest premium and the worst-rated 

institutions paying the highest premium. 

In August 2000, FDIC issued a report that discussed the current deposit 

insurance system, including the existence of two separate funds, an 

insurance pricing system that may provide inappropriate incentives for risk 

and growth, and issues of fairness and equitable insurance coverage, and 

offered possible solutions. The report warned that this system might 

require banks to fund insurance losses when they can least afford it. 

Solutions offered in the report included (1) merging BIF and SAIF, (2) 

improving the pricing of insurance premiums through a number of options, 

and (3) setting a “soft” target for the reserve ratio, which would allow the 

deposit insurance fund balances to grow during favorable economic 

periods, thereby smoothing premium costs over a longer period of time. As 

a result of FDIC’s report, legislation is pending that may provide additional 

reforms of the deposit insurance system, including pricing of insurance. 

As did BIF and SAIF, American Share Insurance (ASI), the private primary 

share insurer, adopted a form of risk-based insurance plan at the end of 

2000. As does NCUSIF, ASI’s member credit unions pay a deposit rather 

than an annual premium assessment to purchase their insurance coverage. 

Prior to December 31, 2000, all of ASI’s insured credit unions were required 

to maintain a deposit of 1.3 percent of each member’s total insured share 

amounts, compared with 1.0 percent that federally insured credit unions 

maintain with NCUSIF. With its change to a risk-based system, ASI’s 

insurance coverage now requires a range—a minimum deposit of 1.0 

2

The capital subgroup is assigned on the basis of the institution’s total risk-based capital 

ratio, tier 1 risk-based capital ratio, and tier 1 leverage capital ratio. The institutions report 

this data quarterly to FDIC on their Report of Income and Condition (call report). For 

instance, according to FDIC Risk-Based Assessment System – Overview, Group 1 (“WellCapitalized”) has a “Total Risk-Based Capital Ratio equal to or greater than 10 percent, and 

Tier 1 Risk-Based Capital Ratio equal to or greater than 6 percent, and Tier 1 Leverage 

Capital Ratio equal to or greater than 5 percent.” Each semiannual period, FDIC assigns the 

supervisory subgroup based on various factors including results of the most recent 

examination report, the amount of time since the last examination, and statistical analysis of 

call report data. For example, according to the FDIC’s Risk-Based Assessment SystemOverview, a subgroup A institution is “financially sound institution with only a few minor 

weaknesses and generally corresponds to the primary federal regulator’s composite rating 

of ‘1’or ‘2’.” 

Page 160 GAO-04-91 Changes in Credit Union Industry 
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Accounting for Share Insurance 

percent up to a maximum of 1.3 percent for each credit union depending on 

the credit union’s CAMEL rating.3 

The FDIC study of risk-based pricing indicated that one of the negative 

aspects of not pricing to risk is that new institutions and fast-growing 

institutions are benefiting at the expense of their older and slower-growing 

competitors. Rapid deposit growth lowers a fund’s equity ratio and 

increases the probability that additional failures will push a fund’s equity 

ratio below the minimum requirements, resulting in a rapid increase in 

premiums for all institutions. 

3

Credit unions are rated on their condition by NCUA and state regulators using a “CAMEL” 

system that evaluates their capital adequacy (C), asset quality (A), management (M), 

earnings (E), liquidity (L), and their overall condition. 

Page 161 GAO-04-91 Changes in Credit Union Industry 
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Comments from the National Credit Union 

Administration 

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Comments from the National Credit Union


Administration


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Comments from the National Credit Union


Administration


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Comments from the National Credit Union


Administration


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Comments from the National Credit Union


Administration


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Comments from the National Credit Union


Administration


Page 167 GAO-04-91 Changes in Credit Union Industry 
Appendix XII 

Comments from American Share Insurance 


Page 168 GAO-04-91 Changes in Credit Union Industry 
Appendix XII


Comments from American Share Insurance 


Mr. Richard J. Hillman 


October 14, 2003 


Page 2 


B. 	 ASI has limited ability to absorb large (catastrophic) losses because it does not have the 

backing of any government entity. 

In its 29-year history, ASI has paid over 110 claims on failed credit unions, and more importantly, no 

member of a privately insured credit union has ever lost money in an ASI-insured account. Also, ASI’s 

statutory ability to reassess its member credit unions provides a significant amount of committed equity 

for catastrophic losses. Further, the company employs numerous programs to mitigate the risk of large 

losses and field examines more than 60% of its insured risk annually. Therefore, a sound private deposit 

insurance program, built upon a solid foundation of careful underwriting, continuous risk management 

and the financial backing of its mutual member credit unions, can absorb large (catastrophic) losses. 

With regard to the government backing, the GAO fails to consider that ASI is a private business, licensed 

at the state level; owned by the credit unions it insures; and, managed by a board of directors elected by 

such member credit unions. Private share insurance was never intended to have any state or federal 

guarantees. 

C. ASI’s lines of credit are limited in the aggregate as to amount and available collateral. 

The Study Section erroneously views the company’s lines of credit as a source of capital, when they are 

solely in place to provide emergency liquidity. Proportionately, ASI’s committed lines of credit with third 

parties, as a percentage of fund assets, are greater than that of the federal share insurer. Comparisons 

throughout the Study Section are often provided on an absolute basis, not a proportionate basis, which we 

believe skews many of the results included in the Study Section. 

D. 	 Many privately insured credit unions have failed to make required consumer disclosures 

about the absence of federal insurance of member accounts as required under the Federal 

Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the Federal Trade 

Commission (FTC) is the appropriate federal agency to enforce such compliance. 

FDICIA was passed in December 1991, and not long thereafter, the FTC sought and received an 

exemption from Congress from enforcing the consumer disclosure provisions of FDICIA. We concur 

with the Study Section’s observations in this regard, and believe privately insured credit unions would 

benefit from FTC’s enforcement of such provisions. 

Detailed comments supporting and supplementing our above comments are attached as Exhibit A. 

Very truly yours, 

DENNIS R. ADAMS 

President/CEO 

DRA/krb 

Attachment 

Page 169 GAO-04-91 Changes in Credit Union Industry 
Appendix XII


Comments from American Share Insurance 


EXHIBIT A 

DETAILED COMMENTS ON THE GAO’S DRAFT STUDY OF PRIVATE SHARE INSURANCE 

A Component of the GAO’s Study Titled: 

Credit Unions: Financial Condition Has Improved But Opportunities Exist 

To Enhance Oversight and Share Insurance Management 

Submitted By: 


American Share Insurance 


October 14, 2003 


A. ASI’s risks are concentrated in a few large credit unions and in certain states. 

All businesses face some degree of concentration risk. For example, 55% of all federally insured shares are on 

deposit at only 230 NCUSIF-insured credit unions -- this represents less than 3% of all federally insured credit 

unions nationally. Despite this natural phenomena, the GAO proceeds to raise concern over ASI’s risk distribution. 

Geographic Risk 

The Study Section states that compared to federally insured credit unions, “...relatively few credit unions are 

privately insured.” As of December 31, 2002, about 2% of all credit unions are privately insured. ASI is currently 

authorized in nine states and insuring credit unions in eight nationally, and is limited to insuring only statechartered credit unions in those states in which the company is authorized to do business. In its current states of 

operation, the company insures 212 credit unions, comprising $10.8 billion in insured shares. What the Study 

Section fails to report is that these credit unions represent 19% of all 1,095 state-chartered credit unions within that 

limited market, and 13.67% of the $80 billion in shares in those same 1,095 credit unions. Clearly, private share 

insurance is more significant to those affected states than the Study Section’s 2% statistic infers. 

The Study Section also reports that 45% of all shares insured by ASI are in credit unions chartered in California, as 

compared to 14.7% for the NCUSIF. These facts can be misleading given that ASI has a limited market, and the 

NCUSIF operates in all 50 states. An entirely different, but more comparable, result is achieved when one isolates 

the relative risk in these eight states only. Under an assumption that both entities are limited to doing business in 

just the eight ASI states, ASI’s 45% concentration in California looks significantly less daunting when compared to 

55% for the NCUSIF. This should offer evidence that when placed on equal footing, the relative risk concentration 

variances are reduced materially. 

While eight states represent a limited market, they do not necessarily represent a geographic concentration risk, as 

inferred by the Study Section. We argue that the company’s states of operation represent a diverse cross-section of 

our nation, for example: East Coast – Maryland; Midwest – Ohio, Indiana and Illinois; West Coast – California and 

Nevada; Northwest – Idaho; and, Southeast – Alabama. 

Statutory Factors 

As a private company, ASI faces various admission obstacles when seeking new markets. First, a state must have a 

state statute that allows for an option in share insurance. According to the Study Section, a total of approximately 

20 state statutes currently allow for the share insurance option for their state-chartered credit unions. Based on this 

data, ASI is operating in about 40%-50% of the available markets. Furthermore, the actual power to approve such 

coverage, when permitted by statute, is generally resident with the specific state’s credit union supervisory 

authority. So, as a private company, to do business in any state requires that three basic conditions exist: (1) credit 

union demand; (2) a permissible statute; and, (3) regulatory acceptance of the option. 

Page 1 of 4 

Page 170 GAO-04-91 Changes in Credit Union Industry 
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Comments from American Share Insurance 


Based on these legislative and regulatory barriers, we take exception to the GAO constantly using the federal share 

insurer, the NCUSIF, as a benchmark in evaluating a private company’s geographic concentration risk. Due to the 

agency’s federal franchise, none of the above conditions need be present for the NCUSIF to do business in a state. 

Mitigating Concentration Risk 

The business of insuring credit union member deposits is a business of risk assumption. Accordingly, the type of 

risk one assumes drives the cost of the program and the risk of ultimate loss to the fund. ASI has been very 

selective in assuming the risk it underwrites, and does a thorough job of monitoring and field examining its insured 

institutions on a recurring basis as reported in the Study Section. In addition, the Study Section reports that the 

company has denied insurance coverage to certain credit unions representing inordinate risk to the fund, and 

conversely has approved many that satisfy the company’s Risk Eligibility Standards. Of the 29 credit unions that 

have converted to private share insurance during the past decade, all were at the time, and are now, safe and sound 

credit unions, and all strictly complied with the federal requirements to convert insurance. These were not problem 

credit unions fleeing federal supervision. Included in these federal requirements is a mail ballot vote of the credit 

union’s entire membership. 

Risk in a Few Large Credit Unions 

The Study Section reports that ASI has one insured institution that represents approximately 25% of its total insured 

shares, and that its “Top Five” credit unions represent 40% of total insured shares. The first statistic compares 

unfavorably to the NCUSIF’s reported concentration risk in a single institution of 3%, to which we take no 

exception. The risk of a single institution, however, has been significantly misrepresented in the Study Section. A 

large, well managed credit union contributes significantly to the financial stability of a share insurance program. 

When underwriting its current largest institution in 2002, ASI considered several risk-mitigating factors, and, as 

with all applicant credit unions, performed a careful analysis of the institution. First, the subject institution received 

(and continues to receive) the highest rating available for credit unions. Second, ASI’s independent actuaries 

evaluated the adequacy of ASI’s capital prior to, and following, the underwriting of this credit union, and 

determined that ASI would continue to have a sufficiently high probability of sustaining runs even with this credit 

union in its insurance fund. Lastly, the federal insurer and state regulator both approved of the credit union’s 

insurance conversion, but only after the credit union took a full mail ballot vote of its almost 200,000 members and 

agreed to satisfy all the requirements of consumer disclosure under FDICIA. 

With regard to the risk concentrated in a few large credit unions, the Study Section fails to report the concentration 

risk in what would be the equivalent of the NCUSIF’s “Top Five” federally insured credit unions. Proportionately, 

this would equate to the NCUSIF’s top 230 federally insured credit unions. In terms of asset size, this group of 230 

credit unions represents 45% of the NCUSIF’s total insured shares. Clearly, the two funds compare on this statistic, 

when measured on a proportionate, not absolute basis. 

B. 	 ASI has limited ability to absorb large (catastrophic) losses because it does not have the backing of 

any government entity. 

The credit union movement introduced share insurance on the state level long before Title II of the Federal Credit 

Union Act was enacted in 1971, providing the first federal deposit insurance for credit unions. However, private 

share insurance didn’t come of age until the mid 1970s, as states began to realize the loss of sovereignty in a state 

charter under an all-federal insurance setting. 

Page 2 of 4 

Page 171 GAO-04-91 Changes in Credit Union Industry 
Appendix XII


Comments from American Share Insurance 


It was never envisioned that private share insurance would seek, or need, any guarantee from a state or federal 

government to operate. In the cooperative spirit of the credit union movement, private share insurance was designed 

to be a credit union-owned and credit union-operated private fund. Nor was it ever the intent of the framers of 

private share insurance for it to operate without supervision, or financial capacity. Accordingly, various state laws 

were proactively sought and passed to permit the private share insurance option, subject to admission standards and 

required approvals. Private share insurance was designed to provide credit unions with a comparable – not identical 

-- alternative means for protecting member share accounts. Accordingly, a government backing for private share 

insurance was never anticipated, and to use the lack of such a guarantee as a criticism of private share insurance 

does not take into account its legislative intent, past performance or founding principles. 

To our knowledge, no private insurance company, licensed by individual states, has a guarantee from the federal 

government. Further, no private insurance company in the U.S. would be able to meet the “deep pockets” test of the 

federal or state governments inferred in the Study Section. As evidence of this, the largest insurance company in the 

country reports just under $32 billion in capital from all of its various insurance product lines. This is barely 50% of 

the aggregate capital available to the NCUSIF. (Note: This amount is the estimated sum of the NCUSIF’s balance 

sheet capital plus the off-balance sheet recapitalization liability of its insured credit unions). 

Credit union-only insurance funds have a stable history that does not track with insurers of thrifts or a combination 

of thrifts and credit unions. Funds that have insured only credit unions (like ASI and the NCUSIF) have had very 

successful track records when it comes to loss and risk management. In over 29 years, ASI’s loss ratio has been 

significantly below that of its federal counterpart, and ASI has never had a year with an operating loss, nor has it 

ever had to seek any form of recapitalization from its member credit unions to bolster the fund due to losses. 

The reality is that a sound deposit insurance program, built upon a solid foundation of careful underwriting, 

continuous risk management and the financial backing of its mutual member credit unions, can exist as long as 

consideration is given to an actuarial analysis of the capital adequacy of the program in terms of sufficiently high 

probabilities (over 90%) of being able to withstand runs and multiple runs on the system. This is a common 

analysis that is accepted in the insurance industry for various kinds of low frequency, high-severity risk programs 

and is the foundation that the ASI insurance program is built upon. Our actuarial analyses and independent 

actuarial reports were provided to the GAO during its investigation. Alternative share insurance can be comparable 

to the NCUSIF, and still not have a government backing. 

C. ASI’s lines of credit are limited in the aggregate as to amount and available collateral. 

With regard to ASI’s committed bank lines of credit, the Study Section infers that ASI’s ability to absorb losses is 

reduced since its lines of credit are limited in the aggregate as to amount and available collateral. We disagree with 

this inference. The company’s lines of credit are designed to be solely a liquidity facility. The committed lines 

ensure liquidity of ASI’s invested funds; i.e., they provide a mechanism for ASI to quickly generate cash to meet 

liquidity needs, without having to liquidate the portfolio. Resources available for funding losses are not the same as 

resources available for providing liquidity. Lines of credit are not intended to be a source for funding insurance 

losses. In fact, banks would not provide a loan for such a purpose. ASI’s assets and its off-balance sheet sources of 

funding (i.e., the power to recapitalize the fund by insured credit unions under the ASI’s governing statute and 

insurance policy) are its capital sources for funding losses, not the bank lines of credit. 

Proportionately, ASI’s lines of credits are greater than that of the NCUSIF. ASI’s $90 million in committed lines 

of credit equates to approximately 47% of the company’s total assets. NCUSIF’s $1.6 billion maximum borrowing 

capacity ($100 million from the U.S. Treasury and $1.5 billion from the Central Liquidity Facility, as disclosed in 

the NCUSIF’s and CLF’s audited financial statements for the year ended December 31, 2002), equates to 

approximately 28% of its total assets. 

Page 3 of 4 

Page 172 GAO-04-91 Changes in Credit Union Industry 
Appendix XII


Comments from American Share Insurance 


ASI has other sources of liquidity when it liquidates a credit union -- that is the credit union’s own liquid assets. 

Approximately 42% of ASI’s primary insured credit unions’ total assets are comprised of cash and investments – 

we believe this is significant. In addition, the non-liquid assets (namely loans and fixed assets) of a failed 

institution can be pledged as collateral for additional borrowings to generate short-term liquidity until such loans 

and other assets can be collected and/or sold. In essence, a failed credit union’s total assets over time often 

generate sufficient liquidity to pay shareholders. Any shortage (historically less than 4% of total assets of the failed 

institution) is usually funded as a loss by ASI’s assets. This is the same principle under which NCUSIF operates. 

D. 	 Many privately insured credit unions have failed to make required consumer disclosures about the 

absence of federal insurance of member accounts as required under the Federal Deposit Insurance 

Corporation Improvement Act of 1991 (FDICIA), and the Federal Trade Commission (FTC) is the 

appropriate federal agency to enforce such compliance. 

The Study Section reference to the GAO’s August 20, 2003 study titled: Federal Deposit Insurance Act: FTC Best 

Among Candidates to Enforce Consumer Protection Provisions (GAO-03-971) reiterates the GAO’s earlier concern 

that “...members of privately insured credit unions might not be adequately informed that their deposits are not 

federally insured...” 

Although the statement may be accurate, any implication that ASI and its member credit unions are purposefully 

misleading consumers fails to directly implicate the Federal Trade Commission (FTC) who, with the concurrence 

of Congress, has totally disregarded its statutory responsibility to regulate the disclosure requirements as defined by 

Section 151 (g) of FDICIA, codified at 12 U.S.C. § 1831 (t)(g). 

We believe that the GAO’s earlier study brought to light the problems that arise when a federal law effectively 

lacks an enforcement agency, and we support the GAO’s previous conclusion that the FTC is the appropriate 

agency for monitoring and defining private share insurance consumer disclosure requirements. 

This concludes ASI’s detailed comments in response to the GAO’s draft report on its study of private share 

insurance in the credit union movement -- a component of the GAO’s broader study titled, Credit Unions: 

Financial Condition Has Improved But Opportunities Exist to Enhance Oversight and Share Insurance 

Management. 

Page 4 of 4 

Page 173 GAO-04-91 Changes in Credit Union Industry 
Appendix XIII 

GAO Contacts and Staff Acknowledgments


GAO Contacts	 Richard J. Hillman (202) 512-8678 

Debra R. Johnson (202) 512-8678 

Harry Medina (415) 904-2220 

Staff 

Acknowledgments 

(250097) 

In additional to those named in the body of this report, the following 


individuals made key contributions.


William Bates


Sonja Bensen


Anne Cangi


Theresa L. Chen


William Chatlos


Jeanette Franzel


Charla Gilbert


Paul Kinney


Jennifer Lai


May Lee


Kimberley McGatlin


Grant Mallie


José R. Peña


Donald Porteous


Mitch Rachlis


Emma Quach


Barbara Roesmann


Nicholas Satriano


Kathryn Supinski


Paul Thompson


Richard Vagnoni


Page 174 GAO-04-91 Changes in Credit Union Industry 
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