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S. HRG. 111–920 

THE STATE OF THE CREDIT UNION INDUSTRY 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE HEALTH OF THE CREDIT UNION INDUSTRY AS WE 

EMERGE FROM THE FINANCIAL CRISIS AND RECOVER AND GROW 

OUR ECONOMY 

DECEMBER 9, 2010 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

LYNSEY GRAHAM REA, Chief Counsel 

LAURA SWANSON, Professional Staff Member 

ERIN BARRY, Legislative Assistant 

BRIAN FILIPOWICH, Legislative Assistant 

MARK OESTERLE, Republican Chief Counsel 

ANDREW J. OLMEM, JR., Republican Senior Counsel 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

THURSDAY, DECEMBER 9, 2010 

Page 

Opening statement of Senator Johnson ................................................................. 1 

Prepared statement .......................................................................................... 15 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

Senator Hutchison ............................................................................................ 2 

WITNESS 

Deborah Matz, Chairman, National Credit Union Administration ..................... 3 

Prepared statement .......................................................................................... 15 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter Submitted by Fred R. Becker, Jr., President and Chief Executive 

Officer, National Association of Federal Credit Unions .................................... 35 

Letter Submitted by Bill Cheney, President and Chief Executive Officer, 

Credit Union National Association ..................................................................... 37 

Statement Submitted by the Credit Union National Association ........................ 39 

Statement Submitted by the American Bankers Association .............................. 61 

Statement Submitted by Mary Martha Fortney, President and Chief Executive Officer, National Association of State Credit Union Supervisors ............. 66 

(III)

(1) 

THE STATE OF THE CREDIT UNION 

INDUSTRY 

THURSDAY, DECEMBER 9, 2010 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:06 a.m., in room SD–538, Dirksen Senate Office Building, Senator Tim Johnson, presiding. 

OPENING STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. I would like to call this hearing to order. 

Today’s first hearing will examine the current state of the credit 

union industry, including the National Credit Union Administration’s ongoing efforts to stabilize the corporate credit union system. 

As the supervisor of Federal credit unions that insure the deposits 

of over 90 million account holders in all Federal credit unions and 

many State-chartered credit unions, this hearing is an important 

and needed opportunity to explore the health of the credit union industry as we emerge from the financial crisis and recover and grow 

our economy. 

I want to welcome and thank NCUA Chairman Debbie Matz for 

being here today. The NCUA has taken unprecedented steps over 

the past several years to stabilize the credit union system as the 

troubled corporates pulled liquidity and capital out of the natural 

person credit unions. The system has also shared many of the same 

challenges as the FDIC concerning the insurance of Americans’ 

savings and retirement. 

These steps have had a significant impact on thousands of credit 

unions across the country, and I am pleased that we can have a 

serious conversation about the current state of the credit union industry and the impact of increased assessments on credit unions 

that serve millions of Americans across this country. I have certainly heard concerns from my constituents in South Dakota about 

this matter. 

This is not the first, and certainly not the last, hearing on the 

financial condition of specific sectors of our financial services industry. The financial crisis took a toll, and the historic Dodd-Frank 

legislation will bring many additional changes to all sectors of this 

industry. It is very important to me that these types of hearings 

become a common occurrence with all of the financial institutions’ 

regulators. I look forward to your testimony, Chairman Matz, and 

to the question-and-answer period. 

Senator Shelby, your opening statement. 
2 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. I will try to be brief 

here today. This is a very important hearing, I believe. 

Like other financial institutions, credit unions have faced unprecedented challenges from the financial crisis and our weak economy. 

Five of the largest corporate credit unions suffered substantial 

losses on mortgage-backed securities and had to be placed into conservatorship by the National Credit Union Administration. The 

NCUA had to take extraordinary actions to prevent the failure of 

these corporate credit unions from triggering problems with traditional credit unions. Given that these events occurred more than 1 

year ago, an examination by the National Credit Union Administration of our Nation’s credit unions I believe is long overdue. 

Accordingly, I hope that today’s hearing will shed light on the 

reasons for the failure of the corporate credit unions, the adequacy 

of the National Credit Union Administration’s rescue plan, and 

whether these failures pose any risks to our taxpayers. I also hope 

to hear the NCUA’s assessment of what steps need to be taken to 

prevent large-scale failures from happening again. 

Mr. Chairman, there are a number of legislative measures before 

the Committee that have been proposed by the National Credit 

Union Administration. This hearing I hope will provide us with an 

opportunity to discuss their merits and whether they should be enacted into law. 

But because credit unions play a vital role in providing loans to 

American consumers, a strong and vibrant credit union industry 

will be an important participant in any economic recovery in the 

future. Weak and failing credit unions will only further erode our 

Nation’s already struggling economy and prolong unprecedented 

levels of unemployment. 

Thank you for calling this hearing. 

Senator JOHNSON. Senator Reed. 

Senator REED. Mr. Chairman, I just want to thank you for calling the hearing, and I look forward to the witnesses. Thank you. 

Senator JOHNSON. Senator Hutchison. 

STATEMENT OF SENATOR KAY BAILEY HUTCHISON 

Senator HUTCHISON. Well, thank you, Mr. Chairman. I, too, appreciate that she is here to talk about the state of credit unions, 

and I would just say that I think the NCUA has done a great job 

in not burdening taxpayers with help for the credit unions. But I 

also want to hear what she says about the assessments and the 

cost to the credit unions of those assessments, because we do not 

want to hurt their capability to be solvent and successful, too. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Senator Johanns. 

Senator JOHANNS. Mr. Chairman, my time here today is somewhat limited, so I think I will just offer that if I have anything in 

terms of an opening, I will submit it in writing, and we will get 

right to the witness. 

Senator JOHNSON. Mrs. Matz has had a distinguished public and 

private career. She served at the Department of Agriculture where 

she was Deputy Assistant Secretary for Administration and also 

chaired the Loan Resolution Task Force, which was charged with 
3 

the responsibility of resolving over $1 billion in delinquent farm 

loans. Prior to her service at USDA, Mrs. Matz was an economist 

with the Joint Economic Committee of Congress. She served as a 

board member of NCUA from January 2002 to October 2005. In the 

private sector, Mrs. Matz was the executive vice president and 

chief operating officer of a large Federal credit union. She was confirmed as Chairman of the NCUA in August 2009. 

Mrs. Matz, before you begin, please be assured that your written 

statement will be part of the record. If you could confine your remarks to 5 to 8 minutes, that would be greatly appreciated. Any 

other materials we have received will also be added to the record. 

Mrs. Matz, you can begin your statement. 

STATEMENT OF DEBORAH MATZ, CHAIRMAN, NATIONAL 

CREDIT UNION ADMINISTRATION 

Ms. MATZ. Thank you, Mr. Chairman, for inviting me to appear 

before this Committee to discuss the state of the credit union industry. Today I will update you on major developments since I last 

appeared before the full Committee in August 2009 at my confirmation hearing. 

As with other sectors of the financial service industry, the credit 

union industry faced unprecedented threats to its stability in 2008 

and 2009. When the housing bubble burst and the value of mortgage-backed securities plummeted, several of the largest corporate 

credit unions were in danger of insolvency. This posed a grave 

threat to the industry because corporate credit unions provide 

needed liquidity for 7,400 consumer credit unions and process electronic payments for 90 million credit union members. 

Five corporate credit unions held extremely high concentrations 

of what were once highly rated mortgage-backed securities. When 

the market for those securities dried up, it froze their liquidity and 

threatened their operations. If these corporates had been forced to 

sell their assets at that time, at least $30 billion in losses would 

have flowed through the system, causing thousands of consumer 

credit unions to fail. 

From the onset of this crisis, NCUA took decisive actions. We 

worked in consultation with Congress, the Treasury Department, 

and the Fed to design a comprehensive plan to stabilize, resolve, 

and reform the corporate system. On behalf of the NCUA Board, 

I sincerely thank this Committee for the instrumental role you 

played in creating the Temporary Corporate Credit Union Stabilization Fund in 2009. The Stabilization Fund permitted NCUA 

to assess credit unions to cover the costs of corporate losses over 

7 years rather than in one lump sum. 

On September 24, 2010, with concurrence from Treasury Secretary Geithner, NCUA extended the Stabilization Fund through 

June 2021. This means credit unions will reimburse the fund for 

an additional $7 to $9 billion over the next 10 years. Let me emphasize this point. These losses are being paid for entirely by credit 

unions. 

Throughout the fall of 2010, NCUA has taken aggressive actions 

to remove the long-term threats in the corporate system. We conserved three additional corporates that were no longer viable. We 

seized control of over 98 percent of all impaired securities and 
4 

began an orderly disposition. We securitized cash-flows from those 

impaired securities to raise billions of dollars in liquidity. We created four bridge corporates to effect the winding down of the five 

conserved corporates with no interruption in service to consumers. 

And we finalized a new rule to ensure that remaining corporates 

operate with much stronger standards for safety and soundness. 

NCUA’s actions meet the four strategic objectives we set from 

the beginning of the crisis. We prevented any disruption in service 

to 7,400 consumer credit unions and 90 million consumers. We preserved public confidence in the credit union system. We resolved 

the problem at the lowest long-term cost consistent with sound 

public policy, and we facilitated an orderly transition to a new regulatory regime. 

Even as NCUA managed the corporate resolution, we have been 

working diligently to protect the safety and soundness of consumer 

credit unions. Despite the challenging economy, America’s credit 

unions remain strong overall. Total assets are over $900 billion. 

Net worth is holding steady. Delinquencies are showing signs of 

moderating, and charge-offs have inched lower. However, credit 

unions have not escaped the effects of the economic downturn. Millions of credit union members are suffering from falling home values, business failures, unemployment, and bankruptcy. Some credit 

union balance sheets reflect their members’ struggles. 

This situation has caused us to reevaluate our resource needs as 

well as our examination procedures. As a result, since 2009 NCUA 

has hired more than 100 examiners. To be effective, however, the 

field staff needed to be reinforced by more frequent exams. We are, 

therefore, examining credit unions at least annually. By conducting 

more frequent exams and increasing offsite supervision, we are 

identifying issues earlier. 

To this end, NCUA enhanced our red flag early warning system. 

To resolve issues before they become material concerns, examiners 

are reviewing credit union data off-site. When they find credit 

unions holding high concentrations of fixed-rate mortgages, rising 

delinquencies or other red flags, they follow up with immediate corrective actions. We are taking these actions in an effort to save as 

many credit unions as possible. 

NCUA’s increased supervision has contributed significantly to 

the credit unions’ ability to withstand the extraordinary economic 

shocks over the past 2 years. Our experience demonstrates the 

value of rigorous regulation, diligent oversight, and a healthy insurance fund. Equity in the National Credit Union Share Insurance 

Fund is now up to 1.29 percent, near the high end of its normal 

operating range. 

To improve the tools for supervising and insuring credit unions, 

NCUA has a package of three technical amendments that clarify 

important provisions of the Insurance Fund and the Stabilization 

Fund. 

The first amendment would strengthen the ability of NCUA to 

complete emergency mergers. A recent change in merger accounting would dilute the net worth of the recipient credit union, thus 

discouraging the merger. Often, as a result, the troubled credit 

union has to be liquidated. We are requesting that NCUA assistance to the failing credit union be counted as capital by the sur-
5 

viving credit union, as in the past. This would reduce the costs to 

the Insurance Fund and provide members of troubled credit unions 

with continued services from healthy credit unions. 

The second amendment would prevent credit unions from being 

assessed artificially inflated insurance premiums. The language 

clarifies that the equity ratio of the Insurance Fund is based solely 

on its own unconsolidated financial statements. This would eliminate any confusion about whether the Insurance Fund is required 

to consolidate statements with the Stabilization Fund or with credit unions under conservatorship. It would ensure that independent 

accounting would be consistent with the original congressional intent. 

The third amendment would allow NCUA the option of repaying 

expenditures from the Stabilization Fund without having to first 

borrow from Treasury. Current statute requires NCUA to borrow 

from Treasury before making assessments. We are requesting a 

modification to permit NCUA to assess credit unions when necessary and appropriate to satisfy the Stabilization Fund’s obligations, thus avoiding the cost of interest payments. 

With this legislation, America’s credit unions would be even better positioned to help consumers take advantage of opportunities 

that a recovering economy will offer. 

Again, I appreciate this opportunity to come before you and look 

forward to answering your questions. 

Senator JOHNSON. Thank you, Chairman Matz. 

I am going to put 7 minutes on the clock for Members’ questions. 

Also, if Members have additional questions, you can submit them 

for the record, and I ask you, Chairman Matz, to respond in a timely manner. 

Chairman Matz, as you have noted in your testimony, extensive 

losses by some corporate credit unions have led to conservatorships 

and also to significant losses to the National Credit Union Share 

Insurance Fund. What is the extent of the losses to the Share Insurance Fund in 2010? And how did this compare to previous 

years? Also, to what extent do the losses result from corporate failures? 

Ms. MATZ. Thank you, Mr. Chairman. The losses that have occurred in the corporate sector have been separated from the Share 

Insurance Fund, and those are reflected in the Corporate Stabilization Fund. The loss to the Share Insurance Fund this year I believe 

is about $250 million, and the number of failures is not far off from 

what we had last year. 

The Corporate Stabilization Fund is where we realize the losses 

from the corporate credit unions, and overall we expect the losses 

to total about $15 billion. But credit unions have already paid in 

about $7 billion of that through the capital that was in the 

corporates and through two assessments this past year that totaled 

$1.3 billion. So we anticipate that over the next 10 years credit 

unions will be assessed a total of between $7 and $9 billion. 

Senator JOHNSON. What new steps has the NCUA taken to ensure that credit unions do not accumulate a concentration of highrisk assets? 

Ms. MATZ. In terms of the corporates where that was a problem—I should indicate that when we passed the previous corporate 
6 

rule in 2002, I voted against the rule. I was the only Member who 

voted against it because it did not contain limits on concentration 

risk. On September 24, 2010, the NCUA Board approved a new 

rule which has very stringent limits on concentration risk by sector 

and by obligor, and I believe that will satisfy that issue going forward. 

As far as consumer credit unions, we are currently working on 

a proposal that we will likely put out for comment in the first or 

second quarter of next year to address concentration risks in natural person credit unions, and we have already put out guidance 

to credit unions and to examiners dealing with that issue. 

Senator JOHNSON. What will be the ultimate cost to federally insured credit unions from the resolution of problem corporate credit 

unions? 

Ms. MATZ. The ultimate cost we estimate will be between $7 and 

$9 billion paid over the next 10 years. 

Senator JOHNSON. You indicate in your written testimony that 

NCUA has shortened its exam cycle to 12 months from the previous 18-month cycle in order to stay ahead of developing problems 

at Federal credit unions. Has the agency taken any other steps to 

detect problems in the natural person or corporate credit unions in 

a more rapid or effective manner? 

Ms. MATZ. Yes. We have hired 100 additional examiners in the 

past 2 years and are intending to hire 61 more examiners this 

year. In addition to doing the annual exams at federally chartered 

credit unions, we are going to be examining all State-chartered 

credit unions over $250 million every year. We have also enhanced 

our red flag alert system, so we have examiners reviewing quarterly the call reports of credit unions. Those are the reports that 

display all the financial data for credit unions. And if they see any 

aberration, a sharp increase in delinquencies or some other red flag 

that catches their eye, they will not wait for the next exam. Examiners will immediately go into the credit union and address the 

problem. 

In addition, when I came on as chairman, I learned that there 

were some credit unions that were repeatedly being cited for the 

same infractions, through the most benign administrative sanction 

that we utilize, which is called a Document of Resolution. They 

were getting the same Document of Resolution over and over again, 

but that stopped last year at this time. Our examiners were given 

guidance and told that a credit union gets one shot at addressing 

a Document of Resolution. Examiners are to go back very quickly, 

within 90 or 120 days, and if that DOR has not been addressed, 

they will escalate the administrative action. 

So we are working very diligently to address problems as early 

as possible and to keep costs to the system as low as possible. 

Senator JOHNSON. The October NCUA Inspector General report 

said that credit unions’ management’s actions greatly contributed 

to the ten largest credit union failures. Specifically, there were significant actions that management was either unwilling or unable 

to effectively manage or mitigate that exposed these credit unions 

to significant amounts of risk. The Office of the IG also identified 

several shortcomings related to NCUA supervision efforts, specifically examiner deficiencies and quality control efforts in examina-
7 

tion procedures. The OIG reported that had the problems been 

identified sooner, the eventual losses to the NCUSIF could have 

been stopped or mitigated. 

First, do you think this assessment is accurate? 

Ms. MATZ. Yes, I do. 

Senator JOHNSON. Second, what is the NCUA doing to address 

management and risk management within the credit unions and 

deficiencies in supervision and examination at the NCUA? 

Ms. MATZ. First, I would just like to point out that the IG provided material loss reviews on any financial institution that incurs 

losses of more than $10 million to the Share Insurance Fund. So 

just to put it in perspective, over the period studied, which was 

about 24 months, there were 10 such institutions out of over 7,400 

credit unions. I just wanted to put into perspective, that it is really 

a small number of credit unions that actually caused material 

losses. Nonetheless, we are working closely to address those issues. 

I also wanted to point out that the 10 credit unions are all federally insured, but only four of them are federally chartered. The others are State-chartered, and their primary supervisor is the State 

supervisor. So I just wanted to make that distinction. 

The IG had pointed out that the management in the 10 credit 

unions overall lacked strategic decision making and oversight of 

lending and investments, and in several instances there was fraud. 

As far as the examiner supervision, the IG recommended that we 

should be improving our examination and regs as related to concentration risks, third-party vendors, our quality control reviews, 

our examination of new business strategies, and that we should 

step up our administrative actions when Documents of Resolution 

have been issued. 

We have begun to address all of these issues. As I indicated before, we have put out guidance on concentration risks and are 

working on a new reg to address that issue. We do not have authority to examine third-party vendors as all the other FIRREA 

agencies have. So we work with the credit unions to get the data 

that we need, but if we find a problem or suspect there is a problem, we can only request that credit union stop doing business with 

that third-party vendor. We do not have control over the thirdparty vendor. 

We are working to improve our quality control reviews. Those are 

reviews of examinations to make sure that they are being done 

properly and that there is sufficient supporting documentation. 

And the staff for the past year, has been working on reviewing and 

revising our national examination standards, and those should be 

in effect relatively soon. In addition, the IG commented on our examination of new business strategies, when credit unions take on 

a new line of business. We believe that our annual exams will help 

catch any problems that develop with new lines of business. 

So we are pleased that we have such a good relationship with the 

IG. We work very closely with them. And we have already taken 

steps to implement all of their findings. 

Senator JOHNSON. Thank you, Chairman Matz. 

Senator Shelby. 

Senator SHELBY. Thank you. 
8 

I want to continue in the line of questioning that the Chairman 

was into, the Inspector General report. I will try not to replicate 

it all. But I want to just read into the record part of the report, 

and it said, and I am quoting: ‘‘Had examiners acted more aggressively in their supervision actions over these critical issues, the 

looming safety and soundness concerns that were present early on 

in nearly every failed institution could have been identified sooner 

and the eventual losses to the National Credit Union Share Insurance Fund could have been stopped or mitigated.’’ 

I am going to ask you again. Do you agree with that assessment? 

I think you indicated you did. 

Ms. MATZ. Yes, I do. 

Senator SHELBY. I think that is very important. Now, what steps 

specifically have you taken—it has been over a year—to ensure 

that the problems identified by the Inspector General will be corrected? In other words, that we will not go down this road again; 

perhaps we will never visit the taxpayer. 

Ms. MATZ. Probably the biggest change that we have made is 

going from an 18-month exam cycle to an annual exam cycle so 

that we get into the credit unions every 12 months and can catch 

problems earlier. That is probably the single biggest change that 

we have made. Also, not allowing credit unions to receive repeat 

administrative sanctions. Complying with administrative sanctions 

is not optional. They get one shot to comply, and if they do not 

comply within 90 or 120 days, we take more aggressive action. I 

think those two actions in and of themselves will go a long way toward preventing any of these problems in the future, but in addition, we are in the process of overhauling our quality control review 

process. That should be done very soon, and that will make sure 

that all the regions have the same standards for conducting exams 

and for verifying the accuracy of the exams. And we will be putting 

out a new reg on concentration limits for natural person credit 

unions. 

Senator SHELBY. Aren’t the credit unions generally getting more 

and more into—or want to get into commercial loans and small 

business loans and so forth? Is that the trend? 

Ms. MATZ. There are more credit unions making business loans 

today than there were several years ago. 

Senator SHELBY. Is that dangerous to you, I mean from your perspective, because so many of the banks have gotten in trouble with 

lack of supervision, lack of control, quality control and so forth? 

Ms. MATZ. As a regulator, I think all lending is risky. 

Senator SHELBY. Well, we know that, but from your perspective 

to protect that fund. 

Ms. MATZ. I think it is more important how they manage the 

risk. I think business lending is an extremely important service for 

credit unions to offer their members. The average credit union 

business loan is about $250,000, which is a very, very small loan, 

and those are often loans to people who really do not have access 

to capital from other institutions. For example, a credit union business loan might be to open up a car repair shop or a small boutique. So I think it is a very, very important service that they provide, and it just needs to be done carefully. 
9 

Senator SHELBY. Are a lot of these loans that you make to small 

businesses and so forth what we would call in the financial world 

‘‘covered loans’’? Do you do that with part of your capital? Do you 

sell these loans or what do you do? 

Ms. MATZ. Some of them are sold, and some are not. 

Senator SHELBY. I know, but ‘‘some’’ is what percentage? 

Ms. MATZ. I do not know the percentage. 

Senator SHELBY. Can you furnish that for the record? 

Ms. MATZ. I certainly can. 

Senator SHELBY. OK. 

You talked about the assessment as part of the plan to resolve 

the corporate credit union debacle, that you intend to impose assessments on credit unions to pay for the losses you expect to suffer 

on $50 billion in troubled mortgage-backed assets. In your testimony you stated that the National Credit Union Administration expects to levy approximately $8 billion in assessments, which is a 

good bit of money. What impact will these assessments have on 

credit unions? Can they sustain this and still be viable? 

Ms. MATZ. Generally, yes. In the aggregate, the credit union industry is well capitalized. They have capital of about $90 billion, 

and that is just under 10 percent. No doubt the assessments are 

a burden to credit unions, and I hear that all the time, and that 

is why we try to keep the assessments as low as possible. The Corporate Stabilization Fund was one way of doing that. We appreciate your support for that. It allowed us to spread out the costs 

to the credit unions. The assessments will affect the ROA of some 

credit unions, but overall we do feel that because of the significant 

capital credit unions have, they will be able to meet those assessments. 

Senator SHELBY. Your Insurance Fund, what is the value of it 

today? 

Ms. MATZ. It is about $800 billion. 

Senator SHELBY. In other words, you have $800 billion in hand? 

Now, that would be a lot more money than the FDIC ever had— 

surplus, so to speak. 

Ms. MATZ. $8 billion. I am sorry. 

Senator SHELBY. How much? 

Ms. MATZ. $8 billion on hand. 

Senator SHELBY. $8 billion. Now you are coming back—— 

Ms. MATZ. Yes. 

Senator SHELBY. Now, that $8 billion insures how many—the 

value of your accounts right now today roughly, 1st of December? 

Ms. MATZ. The insured shares of the credit unions are about 

$800 billion. 

Senator SHELBY. $8 billion insures the credit, in other words, the 

integrity of $800 billion. Do you think that is adequate? 

Ms. MATZ. Yes, I do. 

Senator SHELBY. Especially in today’s world? 

Ms. MATZ. I do. 

Senator SHELBY. OK. Is that $8 billion shrinking or growing? In 

other words, are your assets shrinking or growing or remaining 

constant? 

Ms. MATZ. It has been pretty constant this year. 
10 

Senator SHELBY. My last area, and I appreciate the Chairman’s 

indulgence here, the National Credit Union Administration’s regulations governing the investments of corporate credit unions, which 

I think is an important area, relied heavily on the use of credit ratings. Specifically, the regulations allowed corporate credit unions to 

invest in securities rated AAA or AA by credit rating agencies. We 

now know that the credit ratings on mortgage-backed securities 

were deeply flawed. In fact, the Dodd-Frank Act requires, as you 

probably know, all Federal agencies, which you are one of them, to 

review and to modify regulations to remove any reference to a requirement of reliance on credit ratings and to substitute a standard 

of creditworthiness. 

What steps are you and your administration taking to ensure 

that credit unions do their own due diligence, so to speak, when 

evaluating investments to make them creditworthy rather than an 

investment based on the opinion or the rating of an agency which 

we know is very flawed? 

Ms. MATZ. When we voted on the rule on September 24, the rule 

had been put out for comment and pretty much finalized before the 

Dodd-Frank Act was passed. The language in the corporate rule 

says that the credit unions need to get ratings from multiple agencies and then to use the least of those—— 

Senator SHELBY. Wait a minute. Say that again. In other words, 

you have ratings—you are going to still get ratings from the agencies that are so flawed? 

Ms. MATZ. No, we will be modifying that rule. 

Senator SHELBY. Are you going to do your own due diligence? 

Ms. MATZ. We do not have the proposed rule out yet, but we are 

going to modify the current rule. 

Senator SHELBY. Well, are you thinking about doing that? I guess 

my question to you, if you look at some of the financial institutions, 

insurance companies, and so forth, all financial, that have weathered the recent debacle—I can name a few, but I will not here on 

the podium—and that are really well done did their own due diligence and are very viable today, did not ask for money from the 

taxpayers, no bailout and so forth. So you, as the administrator of 

the credit unions, I think it is very important for you to do your 

own due diligence. That is my message, and I think that was the 

message of this legislation. 

Do you disagree with that? 

Ms. MATZ. I do not disagree with that, and as I said, we are in 

the process of drafting a revision, so we will certainly—— 

Senator SHELBY. Do you have now or will you have the personnel 

in your administration to evaluate the creditworthiness of your investments? In other words, you have been relying—a lot of people 

have been relying on the credit rating agencies—Moody’s, S&P, 

Fitch, and so forth. Well, we know the history of that. 

Ms. MATZ. Yes. 

Senator SHELBY. Are you going to have the proper people to do 

that? I think this is important, that you have personnel that can 

do this in lieu of outsourcing it to something that we know is a 

dead end. 

Ms. MATZ. We might have to enhance our Office of Capital Markets—— 
11 

Senator SHELBY. What does ‘‘might’’ mean? 

Ms. MATZ. It means that I do not have an answer to your question right now. 

Senator SHELBY. Will you let us know in the Committee? 

Ms. MATZ. Yes. 

Senator SHELBY. We think this is very important because we 

want the credit unions to remain viable and strong and not ever 

visit, to come up here for problems. 

Ms. MATZ. I appreciate that, and we will get back to you on that. 

Senator SHELBY. Thank you, Mr. Chairman. 

Senator JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

thank you, Madam Chairman. 

Does the NCUA have a list of problem credit unions similar to 

what the FDIC does in terms of their watch list, and if so, how 

many of these institutions are on your list? 

Ms. MATZ. We do have a list of credit unions that we watch. 

There are about 2 dozen institutions on the list. 

Senator REED. Which would be roughly what percentage? 

Ms. MATZ. Well, we have over 7,400 institutions that we insure. 

Senator REED. Is there any geographic concentration or business 

model concentration that is more prone on this list than—— 

Ms. MATZ. Yes, credit unions that are located in the States that 

were most distressed. Florida, California, Arizona, Utah, and Nevada have been hit the worst. 

Senator REED. Let me ask a question that parallels some of the 

comments made by both the Chairman and the Ranking Member. 

In your testimony, you indicate that there are a growing level of 

delinquent member business loans—— 

Ms. MATZ. Yes. 

Senator REED. ——and that they are a primary or secondary contributing factor for supervisory concern in many cases. And so the 

first question, are you concerned with this increasing number of 

member business loan delinquencies? 

Ms. MATZ. I am concerned, but it is still a relatively small number of affected credit unions. 

Senator REED. You are aware there are proposals to increase the 

level of lending in member business loans. What would be your 

view on that proposed, or these proposed legislative—— 

Ms. MATZ. I support that. 

Senator REED. And support that given the indication that there 

are increasing, as you would, I think put in context, not as yet decisive but increasing delinquencies in this category? 

Ms. MATZ. Yes, because as I said, I believe that it is still a very 

small number of credit unions. There are 2,200 credit unions that 

make member business loans and there are 270 that fall into the 

category where they are either what we call CAMEL 3 or CAMEL 

4. CAMEL 4 are the troubled ones where the business lending is 

the primary or secondary reason for their being there. So it is a 

manageable number. We do not like to have credit unions in that 

category, period, but we feel that business lending done properly is 

really an important tool for credit unions to have at their disposal 

to serve their members. 
12 

Also, in terms of the legislation, if the cap gets lifted, we would 

anticipate coming through with very rigorous regulations. We 

would not just be opening the flood gates, so all credit unions 

ccould not just go in and make high levels of loans. They would 

have to demonstrate their ability to make a low level of loans, and 

once they demonstrate that, we would increase it by a small 

amount and then keep working with them, supervising them, and 

let them gradually increase to a higher level. 

Senator REED. Do you have a notion of the number of credit 

unions that have already reached their limit? I mean, is this a situation where a huge majority of credit unions have no extra capacity, or is this a few members or concentrated in a few areas? 

Ms. MATZ. It is a small number. 

Senator REED. That have reached—— 

Ms. MATZ. That are at their cap. 

Senator REED. That have reached their cap. 

Ms. MATZ. Yes. 

Senator REED. And is there any particular area of the country 

where the cap is reached, or is it just dispersed somewhat random? 

Ms. MATZ. I am guessing that it is dispersed, but I do not know 

that for sure. We can get back to you on that. 

Senator REED. All right. There is another aspect that I want to 

explore and that is that the NCUA is the only regulator subject to 

FIRREA that does not have the authority to examine vendors that 

provide services to insured institutions. And now with the increasing role of particularly information management systems, computer 

systems, et cetera that are provided to vendors, and concerns about 

money laundering, privacy, a host—I do not have to tell you the 

concerns—are you concerned this lack of authority affects your 

ability to fully implement your statutory responsibilities? 

Ms. MATZ. Absolutely. 

Senator REED. Absolutely. So that you would like to have that 

authority in place? 

Ms. MATZ. Yes. I think we could do a better job of protecting the 

safety and soundness of credit unions if we had that authority. 

Senator REED. Let me ask the question—I think we will get the 

same answer, but are there instances where you have seen significant problems at credit unions causing you to have to step in because of vendor contracts and other arrangements that you might 

have been upset about but could take no effective steps until, in 

fact, the institution became insolvent? 

Ms. MATZ. Yes. 

Senator REED. Yes. Would that apply to the corporate credit 

unions, also? 

Ms. MATZ. Correct. 

Senator REED. Correct. Well, thank you very much, Madam 

Chairman. Thank you. 

Senator JOHNSON. Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Let me, if I might, just get a little perspective here. The institutions that went into conservatorship, basically, their problem was 

real estate lending, would that be the case, or is it—— 

Ms. MATZ. The corporate credit unions? 

Senator JOHANNS. Yes. 
13 

Ms. MATZ. It was an over-concentration of mortgage-backed securities. 

Senator JOHANNS. So it was real estate related? 

Ms. MATZ. Yes. 

Senator JOHANNS. Yes. When you look at the other issues that 

you were talking about, the commercial lending, you said that was 

a relatively small number of credit unions out there that were dealing with that. Let me just ask your opinion on something. Would 

you describe that as something that just normally you would go 

through in a recession, that that is what you are seeing, or are you 

seeing something bigger and greater and more problematic there 

than that description? 

Ms. MATZ. With the business lending? 

Senator JOHANNS. Yes. 

Ms. MATZ. It is probably somewhat higher than it would ordinarily have been because some of the loans were collateralized by 

real estate. 

Senator JOHANNS. Yes. So again, we kind of get back to that—— 

Ms. MATZ. Yes. 

Senator JOHANNS. ——problem that everybody has dealt with. 

Now, the Ranking Member read into the record an IG report that 

basically said, I think, if I could summarize it, that if there had 

been better oversight, a lot of these problems would not have occurred, and you agree with that assessment. 

Ms. MATZ. Yes. 

Senator JOHANNS. I am just going to offer an observation, that 

if the whole system, whether it is banks or credit unions or whatever, if there had been better oversight, we would have avoided a 

lot of these problems. Is that a fair—do you kind of agree with 

that? 

Ms. MATZ. Well, you know, the IG was addressing these 10 credit 

unions—— 

Senator JOHANNS. Yes. 

Ms. MATZ. ——and I certainly agree with it in terms of those 10 

credit unions. You know, I think in terms of the consumer credit 

unions, I think we have done an adequate job. Of course, nobody 

could have foreseen the significant drop in the value of real estate 

and all the havoc that that has created. But, certainly in terms of 

those 10 credit unions, we could have done a better job. 

Senator JOHANNS. As I talk to small businesses that I interface 

with, and we have had small business roundtables and a whole 

host of efforts to try to be attuned to challenges that they are facing, one of the things I hear, and I am sure every Member on the 

Committee is hearing it, whatever State they are in, and that is 

that credit is still very tough for a small business. I was just in a 

small business over Thanksgiving, and boy, that was the message. 

‘‘I cannot get credit.’’ 

And I see your efforts, and I do not disagree with them. I think 

you are trying to make sure that your fund is stable, that—and I 

think you are trying to do those things to kind of rebuild from what 

was a fairly disastrous situation. But it does occur to me that as 

we pull that capital into whatever fund or try to minimize risk by 

requiring margin, et cetera, that capital is not available to be lent. 
14 

What is your observation on that? Does that appear problematic to 

you? 

Ms. MATZ. We encourage credit unions that are interested in 

making business loans to make sure that they have commercial 

lending staff that can do very solid underwriting. We also are concerned that credit unions reserve for losses adequately, and that 

does take capital out of the system. But it protects the Share Insurance Fund, and if it prevents losses, it also prevents additional assessments, ultimately. So we do make sure that credit unions are 

adequately allowing for potential losses. 

Senator JOHANNS. As you should. But that kind of describes 

what small businesses are struggling with. They are struggling to 

find somebody who will be their lender, because the system very, 

very quickly became risk adverse. Would you agree with that? 

Ms. MATZ. I think that credit unions have always been conservative and perhaps they are being more conservative now, but I do 

believe that credit unions are still making business loans. In fact, 

business lending has gone up in the last quarter. Of course, there 

are only 2,200 credit unions making business loans, so it is not a 

lot of capital. But in the communities that they serve, I think they 

make an important difference to the small businesses. 

Senator JOHANNS. Just to wrap up in this vein, just for my education, and, of course, maybe other Members of the Committee 

would also be interested, I would like to see whatever charts or 

analysis you have available of what happened over the last 2, 3 

years relative to lending. Again, I think that would be good information just in terms of trying to work with small businesses who 

are continuing to describe this very difficult problem of getting access to capital. 

Ms. MATZ. Are you interested in lending in general or specifically 

small business lending? 

Senator JOHANNS. Whatever you provide will be helpful. 

Ms. MATZ. Credit union lending has actually grown over the past 

few years, despite the downturn, except for the most recent quarter, where it has leveled off. But that is not specific to business 

lending. 

Senator JOHANNS. Yes. I would be interested in business lending 

if those numbers can be extracted from the whole, if you will. 

Ms. MATZ. We will get that for you. 

Senator JOHANNS. OK. Thank you. Thank you, Mr. Chairman. 

Senator JOHNSON. I would like to thank Chairman Matz for testifying today, and with that, conclude our first hearing today. 

[Whereupon, at 10:54 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 
15 

1The NCUSIF was created by Public Law 91-468 (Title II of the Federal Credit Union Act), 

which was amended in 1984 by Public Law 98-369. The Fund was established as a revolving 

fund in the United States Treasury under the NCUA Board for the purpose of insuring member 

share deposits in all Federal credit unions and in qualifying State credit unions that request 

insurance. 2 Approximately 152 State-chartered credit unions are privately insured and are not subject 

to NCUA oversight. The term ‘‘credit union’’ is used throughout this statement to refer to federally insured credit unions. 3 Corporate credit unions provide necessary liquidity, investment, and payment services to 

consumer credit unions. 4The term ‘‘consumer’’ credit union is used throughout this document to refer to retail ‘‘natural person’’ credit unions which interact with consumers on a daily basis. ‘‘Corporate’’ credit 

Continued 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Today’s first hearing will examine the current state of the credit union industry, 

including the National Credit Union Administration’s ongoing efforts to stabilize the 

corporate credit union system. As the supervisor of Federal credit unions that insure 

the deposits of over 90 million account holders in all Federal credit unions and 

many State-chartered credit unions, this hearing is an important and needed opportunity to explore the health of the credit union industry as we emerge from the financial crisis and recover and grow our economy. 

I want to welcome and thank NCUA chairman Debbie Matz for being here today. 

The NCUA has taken unprecedented steps over the past several years to stabilize 

the credit union system as the troubled corporates pulled liquidity and capital out 

of the natural person credit unions. The system has also shared many of the same 

challenges as the FDIC concerning the insurance of Americans’ savings and retirement. 

These steps have had a significant impact on thousands of credit unions across 

the country, and I am pleased that we can have a serious conversation about the 

current state of the credit union industry and the impact of increased assessments 

on credit unions that serve millions of Americans across this country. I have certainly heard concerns from my constituents in South Dakota about this matter. 

This is not the first, and certainly not the last, hearing on the financial condition 

of specific sectors of our financial services industry. The financial crisis certainly 

took a toll, and the historic Dodd-Frank legislation will bring many additional 

changes to all sectors of this industry. It is very important to me that these types 

of hearings become a common occurrence with all of the financial institutions regulators. I look forward to your testimony, Chairman Matz, and to the question and 

answer period. 

PREPARED STATEMENT OF DEBORAH MATZ 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION

DECEMBER 9, 2010 

I. Introduction 

The National Credit Union Administration (NCUA) appreciates the opportunity to 

provide views on ‘‘The State of the Credit Union Industry.’’ NCUA’s primary mission 

is to ensure the safety and soundness of federally insured credit unions. It performs 

this important public function by examining all Federal credit unions, participating 

in the supervision of federally insured State-chartered credit unions in coordination 

with State regulators, and insuring federally insured credit union members’ accounts. In its statutory role as the administrator for the National Credit Union 

Share Insurance Fund (NCUSIF), 1 NCUA provides oversight and supervision to 

7,402 federally insured credit unions, representing 98 percent of all credit unions 

and 90.8 million members. 2

The severe economic crisis that began in earnest in 2007 has impacted all facets 

of the financial sector. Though credit unions by and large maintained traditional 

standards and risk profiles, they have not been immune to the broad effects of historically high unemployment and severely declining home values. More specifically, 

these national trends systemically affected credit unions in two particular ways. 

First, several of the largest corporate credit unions’ 3 investment portfolios were 

subjected to material losses. 

Second, many consumer credit unions, 4 have experienced increased delinquency 

and loan losses. This is most pronounced in States hardest hit by the economic 
16 

unions provide services to consumer credit unions and process consumer payments, but do not 

interact with consumers directly. 5 Credit unions refer to deposit and savings accounts as share accounts, or ‘‘shares’’ for short. 

downturn, such as Arizona, California, Florida, and Nevada. The combined impact 

of these two occurrences has presented significant financial and operational challenges for both NCUA and credit unions and is discussed in detail in sections II and 

III below. 

Throughout the crisis, NCUA, with the assistance of Congress and the Administration, has taken extraordinary steps to successfully maintain the stability of the 

credit union system for the 90 million Americans who depend on it. 

II. Corporate Credit Union System 

The primary purpose of a corporate credit union is to provide consumer credit 

unions with correspondent banking, liquidity and investment services. Correspondent banking services help financial institutions, including credit unions, to 

process and clear checks, process and settle electronic transactions, and move funds 

through the financial system. 

In the mid-2000s, several of the largest corporate credit unions invested heavily 

in mortgage-backed securities (MBS), which resulted in concentrated exposure to 

the real estate market. Virtually all of the investments were AAA or AA rated when 

purchased. However, their value plummeted when the housing bubble burst. 

In April 2007, several months before the distress in the mortgage market surfaced, NCUA issued Corporate Credit Union Guidance Letter No. 2007-02. This letter addressed credit, liquidity, market, and concentration risks associated with 

MBS. By and large, corporates ceased the purchase of nonagency mortgage-related 

securities by mid-2007. At that time, all investments held by corporate credit 

unions, including MBS, were rated investment grade, and 98 percent were rated AA 

or higher. 

What began as a market disruption thought to stem from concerns with subprime 

products, spread throughout the overall financial and real estate markets sector 

with unprecedented severity. By the time it became apparent that this was not an 

isolated market dislocation, there was no longer an active market for these types 

of securities. Like other financial institutions, the corporates could not have found 

buyers for the volume of these types of investments they held. The declining values 

of these mortgage-backed securities created severe liquidity and capital problems for 

these institutions. 

Five corporate credit unions, which served more than half of the entire credit 

union system, were financially imperiled by the losses in their investment portfolios, 

with a far-reaching effect on the entire credit union industry. The industry has been 

adversely impacted by consumer credit union losses from impaired capital investments held in corporate credit unions. 

Consumer credit unions will continue to face necessary NCUA assessments to resolve the nonfinancially viable corporates. Had the agency not acted to inject liquidity and guarantee deposits in the corporate credit unions in the face of this crisis, 

the costs to the industry would have been far greater—threatening the entire credit 

union system. 

Without NCUA intervention, the losses, in their entirety, from immediate failure 

of large corporates would have cascaded to consumer credit unions via their uninsured shares in the corporates. 5 This would have resulted in the failure of approximately 1,000 consumer credit unions. Consistent with the manner in which deposit 

insurance functions, the costs of resolving these failures would have been borne by 

all remaining federally insured credit unions, generating additional losses and failures. Ultimately, inaction would have resulted in massive disruption to consumer 

services and total costs to any remaining insured credit unions would have been far 

greater than the resolution strategy NCUA employed. 

To address the systemic financial and operational impact of these five troubled 

corporate credit unions, NCUA designed a three-phase strategy to stabilize, resolve, 

and reform the corporate system based on the following guiding principles: 

• Prevent interruption of payments services to consumer credit unions and their 

90 million members; 

• Preserve confidence in the credit union system; 

• Manage to the least long-term cost consistent with sound public policy; and 

• Facilitate an orderly transition to a new regulatory framework for the corporate 

credit union system based on consumer credit union choice. 
17 

6The Central Liquidity Facility was created by Congress in 1978 to improve the general financial stability of the credit union industry by meeting the liquidity needs of individual credit 

unions. 7On May 21, 2009, the TCCULGP was revised to cover unsecured debt obligations issued on 

or before June 30, 2010, and maturing on or before June 2017. 

Specific details of the actions implemented during these three phases are discussed below. 

Stabilization Phase 

Given the deterioration of the corporates’ financial conditions and quality of their 

investment portfolios, their access to external sources of funds was compromised. 

This resulted in consumer credit unions losing confidence in the corporate credit 

unions and starting to withdraw their deposits. These withdrawals, and the prospect 

of a wave of additional withdrawals, placed severe liquidity pressures on the 

corporates, peaking in 2008. The losses and operational impact on the credit union 

system from a nonorderly resolution of this crisis would have been untenable, severely impacting consumer credit unions and their 90 million members. 

Accordingly, in the fall of 2008, it became critical for NCUA to initiate dramatic 

action to bolster confidence in the corporates and ensure the flow of liquidity in the 

credit union system. In the last half of 2008, NCUA began implementing actions to 

stabilize and strengthen the credit union system. The first step in the stabilization 

program was to increase liquidity throughout the entire credit union system, especially within the corporates. 

NCUA’s primary tool to address liquidity concerns in the credit union industry is 

the Central Liquidity Facility (CLF). 6 At the time, the CLF was operating under 

a Congressionally imposed borrowing cap of $1.5 billion. At the NCUA Board’s request, in September 2008, Congress raised the CLF’s borrowing cap to its full statutory limit of approximately $41 billion. Ultimately, lifting the cap proved to be one 

of the primary reasons NCUA could successfully develop and implement a series of 

critical liquidity interventions that served as the foundation for its corporate stabilization efforts. 

With the full borrowing authority of the CLF now available, NCUA began working 

with staff at both the Board of Governors of the Federal Reserve System (FRB) and 

the U.S. Department of the Treasury (U.S. Treasury) to develop tools, such as the 

Credit Union System Investment Program and the Credit Union Homeowners Affordability and Relief Program, to address the liquidity pressures in corporates. 

These two programs enabled consumer credit unions to essentially invest funds borrowed from the CLF into corporate credit union offerings, which raised approximately $8.5 billion in liquidity. 

The NCUA Board approved the ‘‘Temporary Corporate Credit Union Liquidity 

Guarantee Program’’ (TCCULGP) on October 16, 2008. Under the TCCULGP, the 

NCUSIF provided a 100 percent guarantee on new unsecured debt obligations 

issued by eligible corporates on or before June 30, 2009, and maturing on or before 

June 30, 2012. 7 The TCCULGP and the other CLF-based programs were successful 

in restoring credit lines and funding in the corporate system. 

To address the lack of confidence in the corporates and the resulting deposit outflow, the NCUA Board approved the ‘‘Temporary Corporate Credit Union Share 

Guarantee Program’’ (TCCUSGP), which presently guarantees uninsured shares, excluding capital accounts, at participating corporates through December 31, 2012. 

This program was vital in maintaining the confidence of consumer credit unions and 

stabilizing the precarious liquidity situation at the corporates. The TCCUSGP has 

proven very successful in stabilizing liquidity and continues to serve an important 

role in the transition process under the resolution phase discussed later. 

The NCUA Board also issued a $1 billion NCUSIF capital note to U.S. Central 

Federal Credit Union (U.S. Central) to address realized losses on MBS and other 

asset-backed securities. This action was necessary to maintain external sources of 

funding and to preserve confidence in U.S. Central, given its pivotal liquidity and 

payment systems roles as a wholesale service provider to the corporate credit union 

system. 

Creation of the Temporary Corporate Credit Union Stabilization Fund 

The stabilization programs discussed so far came at a significant, but unavoidable, cost to the industry. Given the structure of the NCUSIF and existing law in 

early 2009, NCUA would have been required to assess this cost to consumer credit 

unions in one lump sum. To give the NCUA Board flexibility to manage the impact 

of the costs to consumer credit unions, NCUA requested that Congress establish the 

Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund). On May 
18 

8Public Law 111-22, which was amended in July 2010 by Public Law 111-203. 

9The closing date of the Stabilization Fund can be extended with the concurrence of the U.S. 

Treasury. Subsequently, as part of its plan to reduce the annual burden of assessments on credit 

unions, in September 2010, NCUA requested the concurrence of the U.S. Treasury to extend the 

life of the Stabilization Fund to June 2021; the U.S. Treasury concurred with this request. 10On September 24, 2010, NCUA conserved Constitution Corporate Federal Credit Union, 

Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit 

Union. Western Corporate Federal Credit Union and U.S. Central were conserved on March 20, 

2009. 

20, 2009, the Helping Families Save Their Homes Act of 2009 8 was signed into law 

and created the Stabilization Fund, allowing costs to be assessed over a 7-year period instead of in a lump sum. 9 This is, perhaps, the most critical tool available to 

NCUA to help ease the credit unions’ burden of resolving the corporate crisis. The 

NCUA Board is appreciative that Congress acted so quickly to pass this legislation. 

In addition to the Stabilization Fund provision, the Helping Families Save Their 

Homes Act of 2009 also contains another important provision that assisted NCUA’s 

ability to mitigate the corporate problems. This law increases the NCUSIF’s authority to borrow from the U.S. Treasury from $100 million to $6 billion, an aggregate 

total available to both the Stabilization Fund and the NCUSIF. The Stabilization 

Fund relies on the $6 billion borrowing authority in providing the NCUA Board 

flexibility to manage the impact of the assessments on credit unions. The enhanced 

authorities provided by Congress will permit NCUA to fairly and effectively distribute the insurance costs associated with the current economic downturn, including not just the costs of the corporate losses but also other costs that may arise. 

The Stabilization Fund must repay the U.S. Treasury, with interest, all amounts 

borrowed. As such, the total costs of the corporate stabilization, resolution, and reform will be fully borne by credit unions with the flexibility to absorb those costs 

over a longer time period. 

NCUA’s stabilization efforts were successful in preserving the vital electronic payments and liquidity services that credit unions provide to over 90 million Americans. 

Resolution Phase 

The stabilization phase provided NCUA with the time and resources to design and 

implement a strategy to resolve the troubled corporate credit unions and the distressed securities they held. Collaborating with the FRB and the U.S. Treasury, 

NCUA carefully evaluated a wide range of options to arrive at the least cost, longterm solution consistent with sound public policy. On September 24, 2010, the 

NCUA Board approved a comprehensive strategy to fully resolve the ongoing solvency, liquidity, and reputation risks associated with the nonfinancially viable corporate credit unions. 

NCUA conducted a comprehensive evaluation of the entire corporate system. Of 

the 27 corporates, this evaluation identified five corporates that were not financially 

viable. These five corporates represented approximately 70 percent of the entire corporate system’s assets and 98.6 percent of the investment losses within the system. 

NCUA took direct control of these five institutions through Federal conservatorship. 10 In doing so, NCUA was able to achieve the goals of (1) protecting the vital 

services to the thousands of consumer credit unions that rely on the corporate network and (2) implementing the process to resolve the distressed assets. 

NCUA employed a traditional resolution model used in the financial sector often 

referred to as the ‘‘good bank/bad bank’’ model. The ‘‘good bank/bad bank’’ model 

was necessary given that the conserved corporates were correspondent service providers to thousands of credit unions and no viable acquisition partners were available. This strategy involved the creation of new charters, called ‘‘bridge’’ corporates, 

and transfer of the good assets, deposits, and operations from the conserved 

corporates to these new entities. 

The four bridge corporates are led by chief executive officers selected by NCUA, 

and who report directly to NCUA. Additionally, NCUA maintains control over their 

operations. NCUA has established policies to ensure that the bridge corporates operate soundly, and minimize the long-term costs to the insurance fund. The bridge 

corporates are temporary entities, created to maintain necessary services during the 

transition period. NCUA intends to maintain the bridge corporate operations long 

enough to allow consumer credit unions adequate time to determine their long-term 

service options, perform appropriate due diligence, and implement the necessary 

operational changes. 

Remaining assets in the failed corporate charters were then placed into an inactive status and managed via asset management estates established to house the 
19 

11The term ‘‘legacy assets’’ is used to describe the impaired private-label residential mortgage 

backed securities and other asset-backed securities held by the failed corporates. 12Given the complexity of projecting credit losses, the NCUA has relied on multiple expert 

sources to validate NCUA’s internal results. These external sources include the analysis done 

by the corporates’ external vendors; a detailed, bond-by-bond analysis conducted by the Pacific 

Investment Management Company (PIMCO) expressly for NCUA; and a detailed bond-by-bond 

analysis performed by Barclays Capital, New York, New York, as part of the securitization. 

These analyses incorporate assumptions about future economic events. Hence NCUA relies on 

a range of estimates to project future costs to credit unions. 

‘‘legacy assets’’ 11 With the legacy assets isolated in the asset management estates, 

NCUA is pursuing a least-cost solution for an orderly disposition of these assets. 

After extensive analysis, NCUA determined that the least-cost disposition strategy 

involved holding the distressed assets by obtaining long-term funding. This strategy 

prevents much larger market losses and, in conjunction with the extension of the 

Stabilization Fund, provides credit unions more time to absorb the lower credit 

losses. 

The long-term funding is being obtained through securitizing the legacy assets. 

In summary, the legacy assets are being combined into new structured securities 

that are being issued in the financial markets as NCUA Guaranteed Notes (ticker 

symbol NGN). The new securities have a guarantee on the timely payment of principal and interest from NCUA, which is backed by the full faith and credit of the 

United States. To date, NCUA has finalized four issuances of the structured notes; 

all met with strong investor demand. 

The underlying defaults on distressed legacy assets and other resolution costs are expected to be between $13.9 billion to $16.1 billion. 12 This cost will be borne solely 

by the credit union system. Credit unions that contributed capital to the corporates 

holding these legacy assets bear the first loss, totaling $5.6 billion. The losses above 

$5.6 billion will be borne by all federally insured credit unions through Stabilization 

Fund assessments over time. Currently the expected range of total assessments is 

between $8.3 billion and $10.5 billion. Credit unions have already paid $1.3 billion 

in assessments. Thus, the projected range of remaining assessments is $7.0 billion 

to $9.2 billion to be paid in annual installments through 2021. 

Reform Phase 

On September 24, 2010, NCUA issued a final rule reshaping the regulatory 

framework of corporate credit unions, addressed in Part 704 of NCUA’s rules. 

NCUA’s primary purpose in reforming Part 704 was to prevent catastrophic losses 

from ever recurring. The new corporate regulation is designed to both address the 

cause of the current crisis and to provide stronger protections against future potential risks. 

The major elements of this new corporate rule can be divided into (1) investment 

and asset liability management (ALM) restrictions, (2) capital standards, and (3) 

corporate governance. 

Investment and ALM Restrictions 

Through a series of provisions related to investment suitability and asset liability 

management, NCUA’s new corporate rule will force corporate credit unions to properly diversify their investments and take other steps to minimize potential credit, 

market, and liquidity risk. In short, key provisions: 

• Institute a variety of more stringent standards that each security must pass before a corporate can purchase the investment. 

• Prohibit certain highly complex and leveraged securities. Going forward, a corporate cannot buy a particular security if it is a collateralized debt obligation, 

a net interest margin security, a private-label residential mortgage-backed security, or a security subordinated to any other securities in the issuance. 

• Reduce the single obligor limit. The new rule tightens the existing limit on securities from a single obligor from 50 percent of capital down to 25 percent of 

capital. 

• Establish sector concentration limits. The new rule establishes sector concentration limits to diversify the composition of the investment portfolio. 

• Limit portfolio Weighted Average Life (WAL) to 2 years or less. The WAL limit 

reduces not only market and liquidity risk, but also credit risk, since credit 

fears negatively affect the price of longer-lived assets more severely than shorter-lived assets. 

The new rule contains other ALM measures to reduce risk. For example, to discourage investment arbitrage, the rule tightens a corporate’s borrowing limits. To 
20 

13 Basel 1 is a risk-based capital framework developed by the Basel Committee, a group of 

11 industrialized nations, including the U.S., formed to harmonize banking standards and regulations among member nations. 14 Both the old and new corporate rules also require that a corporate maintain a minimum 

net economic value ratio of 2 percent. 15The disclosure includes the three, four, or five most highly compensated employees at each 

corporate, with the exact number of employees depending on the size of the corporate. The compensation of the corporate credit union’s CEO must also be disclosed, even if the CEO is not 

among the most highly compensated at the corporate. 

reduce the potential for overdependence by a corporate on one member credit union, 

the rule also limits funding from a single member, whether it comes from deposits 

or loans. 

Capital Standards and Prompt Corrective Action 

The new corporate rule strengthens capital requirements including new minimum 

capital ratios, new risk-based capital calculations, and new definitions of capital 

modeled after the Basel I capital requirements. 13 Corporate credit unions will now 

need to satisfy three different minimum capital requirements: a 4 percent leverage 

ratio, a 4 percent tier one risk-based capital ratio, and an 8 percent total risk-based 

capital ratio. 14 The rule also mandates that a certain portion of a corporate’s capital 

consist of retained earnings. 

The rule also contains new Prompt Corrective Action (PCA) standards for enforcement of the capital requirements. The consequences of failing to retain adequate 

capitalization can include restrictions on activities, restrictions on investments and 

asset growth, restrictions on the payment of dividends, restrictions on executive 

compensation, requirements to elect new directors or dismiss management, and the 

possibility of conservatorship, liquidation, or a supervisory merger. These new capital and PCA requirements will ensure that corporates hold adequate capital commensurate with the risks of both their balance sheet assets and off-balance sheet 

activities. 

Corporate Governance Provisions 

As a result of the recent corporate crisis, NCUA identified certain weaknesses in 

corporate governance. The new corporate rule improves upon the existing governance provisions in several ways. All board members will be required to hold either 

a CEO, CFO, or COO position at their member credit union or other member entity. 

A majority of a corporate’s board of directors will have to be representatives of consumer credit unions. No person will be permitted to sit on the boards of two or more 

corporates at the same time, nor will a single organizational member be permitted 

to have more than one individual representative on the board of any given corporate. 

Other governance changes relate to transparency. The new rule requires that each 

corporate disclose to its members the compensation of its most highly compensated 

employees. 15 In the case of merger involving a federally chartered corporate, the 

corporate must disclose to both its members and NCUA any material merger-related 

increase in compensation for any senior executive or director as a result of the merger. 

The new rule also prohibits ‘‘golden parachutes,’’ defined as payments made to an 

institution-affiliated party that are contingent on the termination of that person’s 

employment and received when the corporate making the payment is either troubled, undercapitalized, or insolvent. 

Additional Proposed Amendments to NCUA’s Corporate Rule 

During the rulemaking process leading to NCUA’s recent final amendments to its 

corporate rule, NCUA received many suggestions for further amending the rule that 

deserved consideration. Some of these suggestions were beyond the scope of the proposed rule, and so legally could not be included in the final rule. Other suggestions 

were within the scope of the first proposal, but deserving of additional public comment before adoption. 

Accordingly, on November 18, 2010, NCUA issued seven additional proposed 

amendments to the corporate rule for public comment. Briefly, these proposed 

amendments, if adopted by NCUA, would: 

• Increase the transparency of corporate credit union decision making by requiring corporates conduct all board of director votes as recorded votes and include 

the votes of individual directors in the meeting minutes; 

• Require that corporate credit unions follow certain audit, reporting, and audit 

committee practices required of commercial banks by the Federal Deposit Insur-
21 

16See, 12 C.F.R. Part 702. 

ance Act, Part 363 of the Federal Deposit Insurance Corporation Regulations, 

and the Sarbanes-Oxley Act of 2002; 

• Provide for the equitable sharing of Stabilization Fund expenses among all 

members of corporate credit unions, including both credit union and non– credit 

union members, by establishing procedures for requesting members not insured 

by the NCUSIF to make premium payments to the Stabilization Fund; 

• Protect against unnecessary competition between corporates by limiting consumer credit unions to membership in one corporate of the consumer credit 

union’s choice at any one time; 

• Improve risk management at corporates by requiring corporates to establish enterprise-wide risk management committees staffed with at least one independent risk management expert; 

• Provide corporates with more options to grow retained earnings by allowing 

corporates to charge their members reasonable one-time or periodic membership 

fees; and 

• Require the disclosure of compensation received from a corporate credit union 

service organization (CUSO) by highly compensated corporate credit union executives who are also employees of the CUSO. 

The public comment period on these proposals ends January 28, 2011. 

Current State of Corporate Credit Unions 

The corporate credit union system is in a state of transition, which is going according to plan. To date, that transition process has been extremely successful. The 

four bridge corporates continue to deliver the critical payment and settlement services on which their members depend. The 22 corporates operating independent of 

NCUA control are in the process of implementing critical operational changes to 

conform with the new regulatory framework. 

NCUA’s number one priority in launching the corporate resolution efforts was to 

ensure that the critical payment, settlement, and liquidity services corporates provide their member credit unions would continue uninterrupted. That goal has been 

met. At no time over the past 2 years was there a lapse in services to the 90 million 

consumers served by credit unions. 

The future of the corporate credit union system will ultimately be decided by the 

consumer credit unions they serve. If consumer credit unions are committed to a 

corporate system for their financial service needs, the system must conform to the 

new more rigorous regulatory framework NCUA has established. If credit unions 

choose not to obtain services from corporates going forward, NCUA will ensure an 

orderly transition for credit unions to new service providers. Under either circumstance, NCUA’s primary goal is to ensure uninterrupted financial services to the 

90 million credit union consumers. 

NCUA is working closely with consumer credit unions to provide as much guidance as possible in making the critical decisions related to their future service 

needs. NCUA has assured credit unions that they do not need to make an immediate decision. However, NCUA has also been clear in communicating that the decision process is complex and that credit unions need to begin evaluating their options 

now. 

III. Status of Consumer Credit Unions 

Despite the stresses on credit union earnings, the industry remains very well capitalized. As of September 30, 2010, aggregate net worth totaled $90.6 billion, representing the highest dollar level in credit union history. This equates to a net 

worth ratio of 9.97 percent of total assets. Ninety-eight percent of all credit unions 

were at least ‘‘adequately capitalized’’ or better, with 94.8 percent of all credit 

unions ‘‘well capitalized.’’ 16

During the past several years, credit unions have experienced strong membership 

and deposit growth, indicating they continue to provide valuable services to members. They currently serve 90.8 million members, an increase of 5 million since 

2006. Over the same period, shares have grown by $178 billion, or 30 percent, to 

$780 billion. 

Credit Unions Continue To Meet Member Lending Needs 

Even during the height of the recent recession, credit unions continued to lend 

to their members as demonstrated by 15 percent growth in loans originated since 
22 

17Mortgage Bankers Association Commercial and Multifamily Mortgage Debt Outstanding 

Report as of 6/30/2010. (http://www.mortgagebankers.org/NewsandMedia/PressCenter/ 

74019.htm) 18 Credit unions with a CAMEL rating of 3 have supervisory concerns; credit unions with a 

CAMEL rating of 4 or 5 are considered ‘‘troubled.’’ 

2008. Loans account for 62 percent of all credit union assets, with more than half 

secured by real estate. 

Focusing more closely on credit union mortgage lending, 68 percent of credit 

unions offer mortgage loans to their members, originating $55 billion in first mortgage loans through the third quarter of 2010. In the first nine months of 2010, total 

mortgage loans held on credit union balance sheets increased $667 million, to a new 

high of 54.6 percent of total loans. 

All other consumer loans, such as auto loans and credit cards, make up 40 percent 

of credit unions’ loan portfolios. Used vehicle loans are the fastest-growing segment 

of consumer lending. 

Regarding member business loans (MBLs), currently, 2,210 or approximately 30 

percent of all credit unions offer these types of loans. MBLs comprise 6.5 percent 

of all outstanding loans, or $36.7 billion. The majority of these MBLs are secured 

by real estate. The average size of an MBL is $249,000, indicating credit unions are 

largely serving the needs of small businesses. 

Loan Portfolio Quality 

Despite overall adherence to sound underwriting practices, the credit union industry was not immune to the macroeconomic impact of high unemployment and home 

value declines. Since the end of 2006, the aggregate delinquent loan ratio and net 

charge-off ratios more than doubled to highs of 1.84 percent and 1.21 percent respectively as of year-end 2009. However, aggregate delinquency and net charge-offs have 

stabilized in 2010. While historically high for credit unions, these figures still compare favorably to other types of lenders. 

Real Estate Loan Delinquency 

At more than half of total loans, real estate is the predominant factor in overall 

portfolio performance. Rising delinquency rates and losses present a challenge for 

credit unions. Real estate loan delinquency has been steadily increasing as the economic crisis has unfolded, from 0.34 percent in 2006 to 2.06 percent as of September 

2010. For this same time period, net charge-offs for real estate loans demonstrate 

a similar trend, increasing to 0.63 percent as of the third quarter 2010. 

Loan Modifications and Foreclosures 

NCUA continues to support loan modifications to resolve credit union member 

issues. For borrowers experiencing financial difficulties, in lieu of foreclosures, it 

may be in the best interest of credit unions and their members to develop prudent 

workout arrangements or loan modifications. Credit unions have shown a willingness to work with their members experiencing financial difficulty as noted by the 

rapid growth in loan modifications. They have increased from $1.5 billion in 2008 

to $8.4 billion, which is approximately 2 percent of total real estate loans. 

Foreclosed assets represent only a small fraction (0.49 percent) of total real estate 

loans outstanding in credit unions, but have been rising since 2007. In light of the 

recent concerns over marketwide real estate foreclosure practices and documentation, NCUA is examining a sample of the largest credit unions selling mortgages 

to ensure adequate controls are in place. 

Member Business Loan Delinquency 

While MBLs represent only 4 percent of total credit union industry assets and approximately 1 percent of total commercial loans in the financial markets, 17 the levels of delinquent member business loans have increased from 0.53 percent to 4.29 

percent from 2006 to September 2010 (compared to total loan delinquency of 1.74 

percent). A similar trend during this period was noted in net MBL charge-offs, 

which increased to 0.71 percent. Presently, at 270 of the 633 credit unions which 

have a 3, 4, or 5 CAMEL rating 18 and make member business loans, MBLs are the 

primary or secondary contributing factor for the supervisory concern. 

Investment Portfolio Quality 

Credit union investments account for a third of total assets. These are generally 

short-term in nature, with nearly half maturing in less than 1 year, and the majority are conservatively invested in Federal Government obligations. 
23 

19 NCUA defines a troubled credit union as rated either a CAMEL Code 4 or 5. 

Earnings Have Been Stressed 

Earnings have been depressed over the last several years and will likely continue 

to be stressed in the near future. As of September 2010, credit unions reported a 

return on average assets of 0.45 percent compared to 0.82 percent in 2006. This has 

reduced credit unions’ ability to build net worth. Credit union earnings are under 

stress due to compressed net interest margins in the current interest rate environment, NCUSIF premiums and Stabilization Fund assessments, and higher provision 

for loan loss expenses. Also, any future rise in interest rates will likely further reduce margins. NCUA’s ability to better manage the timing of Stabilization Fund assessments improves the credit union system’s capacity to absorb these costs, continue to provide needed member services, and remain well capitalized. 

The Number of Troubled Credit Unions Is Increasing 

The level of troubled credit unions 19 is highly correlated to the state of the economy. As of October 31, 2010, there were 363 troubled credit unions holding $44.4 

billion in assets and $39.1 billion in shares. These credit unions represent 5.0 percent of all credit unions and total shares. The number of troubled credit unions has 

increased in the current year, from 328 at year-end 2009. 

Similarly, CAMEL code 3 credit unions, which exhibit some degree of supervisory 

concern due to less than satisfactory risk management practices, increased from 

1,648 to 1,779 over the same period. The following charts illustrate the changes in 

the number of troubled and CAMEL code 3 credit unions and the dollars in total 

shares held by these credit unions since year-end 2007. 
24 

20 Equity ratio means the ratio of the amount of NCUSIF’s capitalization, meaning insured 

credit unions’ 1 percent capitalization deposits plus the retained earnings balance of the 

NCUSIF (less contingent liabilities for which no provision for losses has been made) to the aggregate amount of the insured shares in all insured credit unions. 

As Chart 2 illustrates, the majority of shares are held in CAMEL 1 and 2 credit 

unions. While NCUA is working diligently with affected credit unions to resolve 

problems in weaker institutions, the level of troubled credit unions will also depend 

heavily on the pace of the economic recovery. 

Impact on the NCUSIF 

One of the primary factors impacting the NCUSIF equity level is losses due to 

credit union failures. As a result of the above stresses on the credit union system 

and the corresponding increase in troubled credit unions, the NCUSIF has experienced increased losses during the past 2 years. 

For proper financial statement reporting, the shifting of credit union assets to 

more adverse CAMEL codes results in an increase in the amount of NCUSIF reserves for credit union failures. The increase in reserves lowered the equity ratio 20

of the NCUSIF below 1.2 percent during the summer of 2010. Thus, in September 

the NCUA Board approved a restoration plan consisting of a premium of 0.124 percent of insured shares to return the equity ratio to near 1.3 percent. The September 

2010 premium was slightly more than the 2009 premium of 0.10 percent of insured 

shares. As of October 31, 2010, the NCUSIF’s equity ratio was restored to 1.29 percent and is projected to remain above 1.2 percent through at least June 2011. 

NCUA regularly conducts stress tests to measure the resilience of the NCUSIF. 

The most recent tests included analyzing the impact of further declines in real estate values and other economic conditions. The results of this year’s stress tests indicate the risk profile of the NCUSIF has not changed. The amount of losses at 

modeled stress levels remain within the ability of the NCUSIF to absorb. NCUA will 

continue to assess the risk profile of the NCUSIF and take appropriate actions 

based on the results. 

Potential Future Risks 

While credit unions are financially strong and well positioned to weather the continuing impact of the economic recession, NCUA has identified the following potential future risks. 

Interest Rate Risk 

As of September 2010, fixed-rate mortgages represent 63 percent of total mortgage 

loans, indicating a clear preference by credit union members for this product in the 

current economic environment. While NCUA recognizes the benefit to consumers of 

refinancing higher-rate real estate loans into lower fixed-rate loans, NCUA is concerned with the interest rate and liquidity risk associated with a high level of fixedrate, long-term assets should rates rise rapidly. 
25 

21See, 12 C.F.R. Part 712. 22 ASI provides primary insurance directly in nine States (Alabama, California, Idaho, Illinois, 

Indiana, Maryland, Nevada, Ohio, and Texas), excess insurance directly in Arizona and California, and excess insurance indirectly through ESI in 30 other States. ASI and ESI both operate Web sites that list their respective States of operation. 

Credit unions are taking some positive steps to mitigate interest rate risk. Credit 

unions sold $27.6 billion in first mortgage real estate loans to date in 2010. These 

sales represent nearly 50 percent of first mortgages granted. However, significant 

exposure to rapidly rising rates remains. 

Credit Union Service Organizations 

A Credit Union Service Organization (CUSO) is a corporation, limited partnership, or limited liability company that provides services primarily to credit unions 

or members of affiliated credit unions. These entities can be wholly owned by a single credit union or owned by a group of credit unions with or without other investors. A credit union’s invested interest in a CUSO is subject to NCUA regulations. 21

Credit unions are increasingly using CUSOs to perform various functions and 

achieve economies of scale by partnering with other financial institutions. This 

partnering is especially critical to the 2,833 credit unions with less than $10 million 

in assets. Credit unions currently have $1.3 billion invested in CUSOs and approximately 33 percent of all credit unions reported using CUSO services. While this arrangement can be beneficial from an efficiency standpoint, especially for smaller 

credit unions, it places the systemic risk inherent in the delivery of these services 

outside of NCUA’s direct regulatory and supervisory domain. NCUA is the only Federal financial institution regulator that does not have oversight authority of thirdparty vendors. 

Privately Insured Credit Unions 

While NCUA has no regulatory authority over privately insured institutions, they 

do pose a unique reputation risk to federally insured credit unions. All financial institutions have been negatively affected by high unemployment, declines in real estate values, and loan losses all arising from the recent, protracted recession. Consumers do not always differentiate between private share insurance and Federal 

share insurance. As a result, any pervasive problems that may develop with privately insured credit unions could have an impact on federally insured credit 

unions. 

American Mutual Share Insurance Corporation (ASI) is a private share insurer 

incorporated in Ohio. ASI, along with its wholly owned subsidiary Excess Share Insurance Corporation (ESI), provides primary share insurance to 152 credit unions 

in nine States and excess share insurance to several hundred credit unions, including federally insured credit unions, in 32 States. 22 ASI has geographic concentration 

in two States particularly hard hit by the recent recession: California and Nevada. 

IV. NCUA Supervisory Improvements 

The last several years have provided clear evidence of the importance of a strong 

regulatory and supervisory approach. The depth and severity of the recent economic 

crisis has provided new insight to all regulatory agencies. NCUA is committed to 

proactively identifying areas of concern and implementing corrective action in a 

timely manner. 

To better accomplish this, NCUA modified its risk-based examination program to 

require annual examinations of every Federal credit union and increased on-site reviews of State-chartered credit unions. Annual examinations provide more frequent 

onsite contacts at credit unions, enabling NCUA to more effectively stay ahead of 

developing problems than the previous 18-month examination schedule allowed. Full 

implementation of the annual exam cycle is anticipated in 2011 as NCUA hires and 

trains additional staff. 

In addition to more frequent contacts at credit unions, NCUA is also taking 

stronger resolution action earlier in the process when problems are identified. In 

2010 NCUA issued a supervisory letter and increased training for field staff directing more rapid escalation of administrative remedies to resolve problems that had 

been left uncorrected by credit union management. 

NCUA has increased the resources provided for credit union supervision to ensure 

problem areas are brought to a timely and appropriate resolution. A particular focus 

going forward will be strong regulation and supervision relative to interest rate risk 

management. NCUA has also been acquiring additional specialized expertise and incorporating an enhanced training program for examination staff. 
26 

23See, Appendix 1 for applicable proposed legislative text. 24 12 U.S.C. §1787(b)(14) 

NCUA has made necessary adjustments over the past 2 years to address the increased challenges associated with the financial crisis and implement additional 

proactive risk mitigation programs. 

While NCUA remains a highly effective regulator and insurer, NCUA is also oper- ating more efficiently. For every $1,000 in federally insured credit union assets, 

NCUA is currently spending just 22 cents—compared with 31 cents in the year 

2000. 

V. Legislative Remedies 

Current Legislative Requests 

Due to the financial environment and the evolving nature of financial reporting 

rules, NCUA is requesting statutory changes to its enabling statute, the Federal 

Credit Union Act (Act), to enhance its ability to serve as an effective safety and 

soundness regulator of over 7,400 credit unions and deposit insurer for 90 million 

members. While these amendments are technical and noncontroversial, they are 

nonetheless critical to NCUA’s role as regulator and insurer. 23

NCUA requests the following statutory changes to the Act. 

• Change the ‘‘Net Worth’’ definition to allow certain loans and accounts established by the NCUA Board to count as net worth. NCUA’s ability to resolve 

problem credit unions at the least cost to the NCUSIF has been limited by the 

Financial Accounting Standard Board’s changes in accounting standards, in 

combination with the existing statutory definition of net worth. Since NCUA 

does not have the ability to adjust the definition of net worth similar to the Federal Deposit Insurance Corporation’s authority, this results in the dilution of a 

credit union’s net worth when it acquires another credit union, regardless of 

whether or not NCUSIF assistance is provided to facilitate the acquisition. This 

increases costs to resolve failed institutions and necessitates more outright liquidations instead of mergers. Liquidations immediately cut members off from 

credit union services. 

• Amend the Act to clarify that the equity ratio of the NCUSIF is based on 

NCUSIF-only, unconsolidated financial statements. Evolving accounting standards could result in the consolidation of the financial statements of the NCUSIF 

with regulated entities when NCUA exercises its role as the Government regulator and insurer by conserving failed institutions. The requested amendment 

would be consistent with Congress’ original intent in defining the NCUSIF equity ratio, and prevent insured credit unions from being assessed artificially inflated insurance premiums resulting from the consolidation of financial statements with failed institutions. 

• Streamline the operation of the Stabilization Fund. As currently written, the 

Stabilization Fund must borrow from the U.S. Treasury to obtain funds to make 

expenditures related to losses in the corporate credit union system. The Stabilization Fund then assesses federally insured credit unions to repay the U.S. 

Treasury borrowing over time. Relevant amendments to Section 217(d) of the 

Act would give NCUA the option of making premium assessments on federally 

insured credit unions in advance of anticipated expenditures, thereby avoiding 

borrowing directly from the U.S. Treasury. In addition, while the existing statutory language includes the implicit authority for ongoing advances, a clarification of this in the statute is recommended. 

Anticipated Requests for Next Congress 

The following are important legislative initiatives for further improving the regulation of the credit union industry. 

• Statute of Limitations. NCUA proposes that Congress amend the Act to extend 

the statute of limitations 24 provision applicable to actions filed by NCUA as 

conservator/liquidating agent of a credit union. This would provide parity with 

similar authority already provided to FDIC, clarify other ambiguities in the 

statute, and allow the NCUSIF to better mitigate losses. 

• Third-Party Vendor Authority. NCUA is the only regulator subject to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that does not 

have authority to perform examinations of vendors which provide services to insured institutions. Credit unions are increasingly relying on third-party vendors 

to support technology-related functions such as Internet banking, transaction 

processing, and funds transfers. Vendors are also providing important loan un-
27 

derwriting and management services for credit unions. The third-party arrangements present risks such as threats to credit risk, security of systems, availability and integrity of systems, and confidentiality of information. Without vendor examination authority, NCUA has limited authority to minimize risks presented by vendors. 

• Supplemental Capital. Some financially healthy, well-capitalized credit unions 

that offer desirable products and services are discouraged from marketing them 

too vigorously out of concern that attracting share deposits from new and existing members will inflate the credit union’s asset base, thus diluting its net 

worth for purposes of PCA. In effect, the reward for their success in attracting 

new shares is the risk of a demotion to a lower net worth category if accepting 

those shares drives down the credit union’s net worth ratio. NCUA believes two 

legislative remedies would help reverse the disincentive to accept new share deposits—one that addresses the ‘‘total assets’’ denominator of the net worth ratio, 

and another that addresses the ‘‘retained earnings’’ numerator. For more information on the specific remedy proposed, refer to NCUA’s letter to the Honorable 

Barney Frank (appended to this testimony document as Appendix 2). 

• Member Business Lending Statutory Limit. The Act limits the amount of member business loans the vast majority of credit unions can grant to the lesser of 

1.75 percent of net worth or 12.25 percent of assets. NCUA recognizes the importance of small businesses in our Nation’s economy. As such, NCUA supports 

efforts to allow credit unions to provide businesses additional avenues of credit 

when appropriate under a comprehensive regulatory framework, by increasing 

or eliminating the current statutory MBL limitation. Given such a change, 

NCUA would promptly revise MBL regulations to appropriately mitigate any 

additional risk. For more information on the specific remedy proposed, refer to 

NCUA’s letter to the Honorable Timothy Geithner (appended to this testimony 

document as Appendix 3). 

VI. Conclusion 

Over the last 24 months, the credit union industry has faced profound and unprecedented threats to its stability. A steep plunge in global financial markets triggered the most severe economic downturn in recent memory. The resulting cascade 

of job losses, home foreclosures, and bankruptcies exerted significant pressure on 

the entire American financial services sector, including credit unions. 

NCUA’s experience during these years of crisis demonstrated the value of rigorous 

regulation, diligent oversight, and a robust insurance fund. NCUA’s increased supervision contributed significantly to the credit union system’s ability to withstand 

the extraordinary economic shocks over the past 2 years. 

Going forward, NCUA has also implemented proactive measures to address the 

ongoing strains and emerging risks to consumer credit unions. Coming out of this 

extraordinary economic downturn, the credit union industry remains financially stable and well positioned to emerge from the current economic downturn as a leader 

in the delivery of financial products and services to more than 90 million consumers. 
28 
29 
30 
31 
32 
33 
34 
35 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY FRED R. BECKER, JR., PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS 
36 
37 

LETTER SUBMITTED BY BILL CHENEY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION 
38 
39 

STATEMENT SUBMITTED BY THE CREDIT UNION NATIONAL 

ASSOCIATION 
40 
41 
42 
43 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 
61 

1See, Appendix B for details on the taxpayer assistance which benefited the credit union industry. The mission of credit unions to serve people of small means was articulated in the preamble to the 1934 Federal Credit Union Act. 

STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, the 

American Bankers Association appreciates the opportunity to submit this statement 

for the record—for the December 9, 2010, Senate Banking Committee hearing entitled ‘‘The State of the Credit Union Industry.’’ The American Bankers Association 

(ABA) represents banks of all sizes and charters and is the voice for the Nation’s 

$13 trillion banking industry and its two million employees. 

There are several key points we would like to make in this statement: 

• Even though credit unions pay no Federal taxes, the industry received taxpayer 

assistance to resolve insolvent corporate credit unions. 

• Raising the credit unions legal business lending cap is not necessary for credit 

unions to meet members’ credit needs. Moreover, expanding the lending cap is 

inconsistent with the credit union mission and raises serious safety and soundness concerns. 

• Alternative or secondary capital is not appropriate for credit unions. It would 

dramatically change the focus of credit unions away from member-owned to a 

market-driven capital structure, and would force credit unions to generate a 

level of return necessary to attract such capital—all of which will negatively impact credit union members. 

Credit unions, like many in the banking industry, have suffered losses as the recession took hold and unemployment dramatically increased. For the credit union 

industry, several multi- billion-dollar corporate credit unions (which were designed 

to provide investments and financial services to smaller, ‘‘natural person’’ credit 

unions) dramatically increased their level of risk and ended up failing. This caused 

severe losses to the National Credit Union Share Insurance Fund and created an 

environment where many smaller credit unions could fail. Even though credit 

unions pay no Federal taxes—a privilege bestowed on credit unions in order to focus 

their lending on ‘‘people of small means’’—the credit union industry sought taxpayer 

help to facilitate the repayment of these losses. 1

This assistance, like many other special programs related to banking and financial institutions, was appropriate for that time. It appears that now, however, some 

credit unions are using the financial crisis and the recession to argue for more business lending authority and access to alternative sources of capital. Credit unions 

argue that these greater authorities would enable them to meet the needs of small 

businesses seeking credit. Such arguments are simply not true. Under current law, 

business loans under $50,000 do not count against the aggregate business loan cap 

of 12.25 percent of assets. Moreover, the guaranteed portion of Small Business Administration loans does not count against the aggregate business loan limit. Thus, 

there is considerable opportunity under current law for credit unions to meet the 

needs of small business. 

In addition, only a small percentage of credit unions—one-half of one-percent—are 

at or near the congressionally mandated cap. Thus, even for larger business loans 

in excess of $50,000, there is little constraint on credit union lending except for 

these small numbers of large, fast-growing, profit-seeking credit unions. 

The real goal of expanded business lending is for some aggressive credit unions 

to make even more large dollar loans—such as loans for luxury golf and condominium developments. For some aggressive credit unions, it is not unusual for them 

to make multimillion dollar loans. A dramatic example of just how far these credit 

unions have gone is the financing of Thumper Pond, a resort development in Minnesota that went bankrupt. This luxury resort featured a golf course, spa, water 

park, hotels, and a planned condominium community. The resort was financed by 

a large commercial loan made by Spire Federal Credit Union. Not only is this far 

beyond any sensible definition of modest means, but the resort is located over 200 

miles from the credit union’s headquarters. Is this the kind of loan that should be 

tax-subsidized? 

Such loans are clearly counter to the chartered mission of serving people of small 

means. It is leveraging the tax-exemption to provide loans to large businesses that 

have plenty of credit options available through taxpaying banks. This credit union 

tax expenditure is neither focused nor contained; it takes revenue from banks that 

compete for these same loans—revenue that would be taxed and would help to offset 

some of the current Federal budget deficit. 
62 

2 Appendix A provides more details about what the Inspector General discovered. 

3 Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance Oversight and Share Insurance Management. General Accounting Office, October 2003 (GAO-04-91), 

p. 49. 

Lifting the business lending cap also raises serious safety and soundness concerns. As credit unions have aggressively pursued business lending options, business 

loan delinquencies have risen and some credit unions have failed. In fact, just a few 

weeks ago (November 23), the NCUA’s Office of the Inspector General (OIG) released a report summarizing the 10 costliest natural person credit union failures. 

In 7 of these 10 failures, business lending contributed to the failure. 2

Moreover, the General Accountability Office in 2003 warned about the danger of 

business lending by credit unions and it was skeptical that NCUA was up to the 

challenge to monitor the expansion of credit union business lending. 3 It should be 

no surprise that the Inspector General’s Material Loss Review found adequate oversight often missing: business loans were made to nonmembers; credit unions exceeded the legal Member Business Loan cap of 12.25 percent; credit unions violated the 

loan-to-one borrower limit; and credit unions made business loans without a Member Business Loan policy. Expanding credit union business lending only encourages 

larger, riskier loans, without any assurance of adequate oversight. 

Just as business lending is not the answer to the misfortunes of credit unions, 

neither is access to alternative or secondary capital. In fact, it will blur the line between credit unions and other depository institutions. By granting credit unions the 

ability to issue secondary capital, the capital structure of the credit union industry 

would fundamentally change. This would potentially permit any credit union to 

issue secondary capital to members and nonmembers alike. By moving away from 

the concept of ‘‘member-owned’’ equity towards a reliance on capital contributions 

from nonmembers and the broader marketplace, the very essence of a credit union’s 

ownership structure is called into question. It would force credit unions to generate 

a level of returns necessary to attract such capital and therefore would be a costlier 

source of funds. Not only does this dramatically change the focus of credit unions 

away from serving their membership towards a market-driven capital structure, it 

also raises a host of corporate governance concerns, such as voting rights of holders 

of such ownership stakes, board composition, etc. 

Moreover, granting all credit unions the ability to raise alternative capital may 

negatively impact the ability of low-income credit unions to attract capital. Low-income credit unions would have to compete with other credit unions for this additional capital, thus, raising their cost of capital and making it more difficult to fulfill 

their social mission. 

NCUA will point to where credit unions in Australia and Canada have the ability 

to issue alternative capital. It should also be noted that credit unions in Australia 

and Canada are taxed. The lack of taxation of credit unions in the United States 

is the key difference. 

Finally, Congress, Treasury, and the GAO have questioned the need for alternative capital. In 1998, Congress specifically reinforced its view that credit unions, 

in maintaining their distinct character, should rely upon retained earnings to build 

net worth, while not issuing capital stock. For example, the report of the Senate 

Banking Committee [Rept. No. 105-193, p. 12] states that the ‘‘NCUA [National 

Credit Union Administration] must design the system of prompt corrective action 

to take into account that credit unions are not-for-profit cooperatives that (1) do not 

issue capital stock, and (2) must rely on retained earnings to build net worth.’’ This 

was reinforced by Emil Henry, former Assistant Secretary of the Treasury for Financial Institutions, who noted in 2006 that the ability to ‘‘raise equity capital by 

increasing retained earnings . . . is an important feature that is grounded in the 

cooperative nature of credit unions.’’ And in 2004, GAO found that there was no 

compelling evidence for alternative or secondary capital for credit unions. 

In conclusion, while the common perception about credit unions is that they are 

small mom-and-pop operations, the reality is that there are 167 credit unions that 

have over $1 billion in assets. To put that in perspective, these credit unions are 

larger than 91 percent of the taxpaying banks in this country. Moreover, the traditional credit unions are being squeezed out by the invasive tactics of these growthoriented credit unions. It is no surprise that over 2,600 credit unions have been absorbed into larger credit unions since the beginning of 2001. 

While the rhetoric suggests that without greater business lending or capital authority there are no options for these institutions to grow and better serve their customers, the reality is that a very viable option is available today through switching 

to a mutual savings bank charter—a route that some credit unions have already 

taken. This charter provides greater flexibility, still preserves the mutual-member 
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focus that credit unions find desirable, and is accompanied by the effective and experienced supervision of traditional banking regulators. This savings bank charter 

would give these credit unions the ability to expand their business lending and retain their mutual structure. However, NCUA actively impedes the ability of credit 

unions to engage in charter choice. Removal of NCUA’s obstructionism is a far better 

alternative to enabling more business lending and access to alternative capital than 

a wholesale change in powers that will benefit only a small proportion of large credit unions. Facilitating conversion to a mutual savings bank charter will benefit 

those credit unions that have outgrown their charter, and will also improve the fiscal position of the United States as these entities pay their fair share of taxes. 

Congress is rightfully concerned about the state of the corporate credit unions in 

receivership and the significant costs their rescue imposes on the rest of the credit 

union industry. While the taxpayer assistance was appropriate for the circumstances, it is ironic that taxpayer dollars would be used to support an industry 

that has not paid a single dollar in Federal taxes. The answer to the stresses currently suffered by credit unions is not to increase business lending powers or allow 

alternative forms of capital. Nor are these necessary to meet the credit needs of 

businesses. The fact is that there is ample authority under existing law to meet 

credit unions small business member needs. Equally important is that expanding 

the lending cap is inconsistent with the credit union mission and raises serious safety and soundness concerns. Similarly, alternative capital may sound appealing, but 

it would dramatically change the member-owned focus of credit unions to a marketdriven one, which ultimately will negatively impact credit union members. 

Against a backdrop where nontraditional credit unions forsake the common bond 

in favor of fast growth, and where energies are diverted to favoring the well-off and 

businesses rather than meeting their chartered obligation to serve people of modest 

means, it is no surprise that ABA opposes expansion of credit union powers. To 

allow such expansion will only move the new breed of credit unions further and further away from their mandated mission. 
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STATEMENT SUBMITTED BY MARY MARTHA FORTNEY, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF 

STATE CREDIT UNION SUPERVISORS 

The National Association of State Credit Union Supervisors (NASCUS) appreciates the opportunity to provide a submission for the record of the December 9, 

2010, Senate Banking Committee hearing ‘‘The State of the Credit Union Industry.’’ 

NASCUS, the professional association of State credit union regulators, has been 

committed to enhancing State credit union supervision and advocating for a safe 

and sound State credit union system since its inception in 1965. NASCUS and State 

regulators would like to take this opportunity to brief the Committee on a needed 

critical reform: natural person credit union access to supplemental capital. 

As this Committee knows, the credit union capital structure is unique among financial institutions. Credit unions can only rely on retained earnings for capital 

growth, an archaic structure that does not allow credit unions to raise capital in 

times of need. The current economic environment facing credit unions only reinforces NASCUS and State regulators’ steadfast support of supplemental capital access for natural person credit unions. NASCUS and State regulators have believed 

for years that supplemental capital is appropriate for credit unions, a necessary tool 

for safety and soundness and critical to the credit union system’s long term health 

and sustainability. 

In addition to the general economic impact, credit unions are paying for the deterioration of the corporate credit union network through assessments to the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) at an estimated total 

cost of $13.9–16.1 billion spread across 10 years. This is putting additional stress 

on credit union balance sheets already challenged by a restrictive capital regime. 

As evidenced by the development of the third iteration of Basel standards, international regulators are capital planning far into the future and addressing prospective capital considerations for banks and other financial institutions. What are U.S. 

credit unions doing as far as capital planning for the future? Unfortunately, relying 

on just retained earnings for net worth does not provide needed flexibility for capital 

planning. Credit unions cannot thrive and compete under these archaic capital 

standards. 

Non– low income, natural person credit unions remain virtually the only class of 

depository institutions denied access to supplemental capital. This distinction carries enormous implications for natural person credit unions’ ability to manage both 

the current economic climate, but also the eventual economic recovery. Further, 

from a regulatory standpoint, a well managed supplemental capital program can 

provide increased systemic stability, additional balance sheet management tools and 

an extra buffer to mutualized losses. 

NASCUS encourages this Committee to make the necessary changes to the definition of net worth in the Federal Credit Union Act to allow access to supplemental 

capital. Following the legislative change, State and Federal regulators would establish prudent regulatory standards for supplemental capital. However, State and 

Federal regulators would not be starting from scratch—there are supplemental capital models in use around the world, and NCUA and State regulators have studied 

the regulatory considerations for its use in the United States. 

For NASCUS and State regulators (many of whom are familiar with supplemental 

capital through bank regulatory responsibilities) achieving capital reform has long 

been a matter of safety and soundness. Increased capital and investor discipline can 

provide critical buffers during economic downturns. We believe credit unions can 

manage the complexities of supplemental capital. We know that State regulators 

can manage its regulation. 

NASCUS urges this Committee to make credit union access to supplemental capital a priority in the upcoming Congress. NASCUS and State regulators welcome 

questions from the Committee on this issue.