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THE NEED FOR CREDIT UNION

REGULATORY RELIEF AND IMPROVEMENT

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 6, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–95

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

March 6, 2008 ................................................................................................... 1

Appendix: 

March 6, 2008 ................................................................................................... 57

WITNESSES 

THURSDAY, MARCH 6, 2008

Dorety, Tom, President and Chief Executive Officer, Suncoast Schools Federal 

Credit Union, on behalf of the Credit Union National Association (CUNA) ... 16

Johnson, Hon. JoAnn M., Chairman, National Credit Union Administration ... 12

Lussier, Michael N., President and Chief Executive Officer, Webster First 

Federal Credit Union, on behalf of the National Association of Federal 

Credit Unions (NAFCU) ...................................................................................... 18

Menzies, R. Michael Stewart, Sr., President and Chief Executive Officer, 

Easton Bank and Trust Company, on behalf of the Independent Community 

Bankers of America (ICBA) ................................................................................. 44

Reynolds, George, Senior Deputy Commissioner, Georgia Department of 

Banking and Finance, on behalf of the National Association of State Credit 

Union Supervisors (NASCUS) ............................................................................. 14

Rock, Bradley E., Chairman, President, and Chief Executive Officer, Bank 

of Smithtown, on behalf of the American Bankers Association (ABA) ............ 46

APPENDIX 

Prepared statements: 

Kanjorksi, Hon. Paul E. ................................................................................... 58

Neugebauer, Hon. Randy ................................................................................. 60

Paul, Hon. Ron .................................................................................................. 61

Dorety, Tom ...................................................................................................... 62

Johnson, Hon. JoAnn M. .................................................................................. 78

Lussier, Michael N. .......................................................................................... 94

Menzies, R. Michael Stewart, Sr. .................................................................... 115

Reynolds, George .............................................................................................. 124

Rock, Bradley E. ............................................................................................... 130

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Follow-up information provided by Hon. JoAnn Johnson ............................. 153

CUNA Response to ABA’s ‘‘Top 10 Questions’’ .............................................. 156

(1)

THE NEED FOR CREDIT UNION 

REGULATORY RELIEF AND IMPROVEMENT 

Thursday, March 6, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Sherman, Moore of Kansas, Hinojosa, Clay, Baca, 

Lynch, Miller of North Carolina, Scott, Green, Cleaver, Davis of 

Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter, Donnelly; 

Bachus, Castle, Royce, Lucas, Biggert, Shays, Miller of California, 

Capito, Feeney, Hensarling, Garrett, Pearce, Neugebauer, Price, 

McHenry, Marchant, and Heller. 

The CHAIRMAN. Good morning. This is a hearing of the Financial 

Services Committee on the question of the legislation that should 

govern the activities of credit unions. This has been a subject of 

considerable interest for some time. I’m very proud that, largely 

due to the efforts of the chairman of the Subcommittee on Financial Institutions, my colleague from Pennsylvania, Mr. Kanjorski, 

we are engaged in a serious legislative consideration of this for the 

first time in the memory of a number of people. This is an issue 

that has been before us, and I want to acknowledge that it was Mr. 

Kanjorski’s accession to the chairman of the subcommittee and our 

working together that is the major reason that we are here today. 

And I am hoping that we are not just going to be talking about this 

but legislating. 

I believe that this committee has shown a willingness with regard to all of our financial institutions to do sensible deregulation. 

Now deregulation can be carried too far, as it was in the origination of mortgages. I think it should be noted that the percentage 

of subprime mortgages that have run into difficulty that were originated by credit unions is tiny. The credit unions and the regulators 

who are here are to be congratulated for showing that it is possible 

to lend to people of moderate economic means to help them accede 

to homeownership without irresponsibility and fiscal crisis. 

That is a model to which we want to adhere. That is, yes, we 

want to deregulate because we do not want bureaucratic interference with our ability to help people. But we do not want to take 

that to the point where abuses run rampant. And so our goal is to 

continue a pattern that we think has been manifest in the credit 

2

union sector of sensible regulation that allows consumers to be 

served and helps the economy, but does not lead to abuses. 

I want to make another point. This is one of the issues that I 

intend to deal with as we go forward legislatively, and I hope that 

many of my colleagues will agree. One of the best things we can 

do for lower income people in this country is to get them into the 

depository system—credit unions and community banks. 

People who are outside of that system pay a far higher percentage in the transactions they do of the cost of those transactions 

than any of us here, and I daresay than any of you there. Payday 

lending, check cashing, excessive fees for remittances; those are all 

problems that lower income people face if they do these transactions outside of the system of credit unions and community 

banks. 

One of the things that I hope we will do is to enhance the ability 

of both sets of institutions to offer to people in that economic category an opportunity to save money. And so today we are talking 

about the credit unions that will be particularly our goal; to enhance the ability of credit unions to offer services to people of lower 

income. Because, again, we have the experience that doing it within the appropriate regulatory structure that we have allows this to 

go forward in a reasonable way. 

I also believe that—and it is on the agenda of this committee—

that there are similar deregulatory things we should do with regard to the banking system. I understand that there are conflicts, 

and there will continue to be. But I believe there is also a commonality of interest in both sets of institutions in reducing regulation which gets in the way of serving people, particularly people in 

the lower income category. 

So it is my hope that this committee will be able to come up with 

legislation. And let me say, as I am reminded of the stimulus, if 

we do this well, we will come out with a bill, in my view, that will 

make no one deliriously happy but that I hope will make no one 

delirious. Those are the outer limits of our choices. But I think 

there is room for us to enhance the ability of regulated institutions 

in general to serve the entire economy, and particularly people in 

the lower income area, and that is where we will be proceeding. 

I have other duties that I need to attend to, so I am going to turn 

over the hearing to the second ranking member, the chairman of 

the Financial Institutions Subcommittee, the gentleman from 

Pennsylvania, who is the main sponsor of the CURIA bill and a 

man of significant experience and interest in this. 

I believe we have indicated—the indication I have received is 

that under our rules, as a matter of right, each side is entitled to 

10 minutes, for a total of 20 minutes. Is that correct? No. Each side 

gets 20 minutes. Wishful thinking. And I have used only a little 

over 5 minutes, so I leave my side for the time, and we will proceed 

with opening statements for the full amount of 20 minutes on each 

side, and then we will hear the witnesses, and I thank the witnesses for their attendance. 

We will begin with the ranking member of the full committee, 

the gentleman from Alabama, for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. First of all, I would like 

to associate myself with your remarks. I think the millions of 

3

Americans who are members of credit unions are a testament to 

the important services that credit unions provide to the Nation. I 

think that is particularly true and valuable in some of our underserved communities, where the credit union is really the only financial institution. 

And sometimes those areas, for whatever reason, are overlooked 

by other financial service providers. Because they are nonprofit cooperatives managed by their members, credit unions excel at providing high-quality, low-cost services that are responsive to customer needs. In some underserved and rural areas, a credit union, 

as I said, is the only conventional financial institution to be found. 

Many constituents have told me that they have been able to afford 

their house or repairs to their house, start new businesses or even 

attend colleges because of the help of a credit union loan. 

In addition, I—and I know Mrs. Biggert feels the same way—am 

impressed by credit unions’ commitment to financial literacy. It is 

a well-known fact that credit unions help their members become 

better educated customers or consumers of financial services. 

As we learned during a series of hearings before the Financial 

Institutions Subcommittee, some of the regulations on credit 

unions are overly burdensome, they are unnecessarily costly, and 

they are largely duplicative of other legal requirements. Whenever 

we can identify these examples of regulatory overkill, Congress 

should strive to eliminate them. And I acknowledge the gentleman 

from California, Mr. Royce, for his leadership on these issues. 

With our regulatory reform bill, we built a bipartisan consensus 

last year, and I hope that we can do the same thing this year with 

these regulatory bills. If we’re serious about regulatory relief for 

credit unions, however, our efforts must be directed not only at 

eliminating excessive burdens that currently apply but resisting attempts to impose broad new regulatory mandates. 

For example, there are some on this committee and in Congress 

who argue that CRA should be extended to credit unions that currently fall outside the law’s coverage. On this point, I strongly disagree. Rather than expanding the regulatory dragnet, our focus 

must be on providing appropriate regulatory relief so that the credit unions are free to serve the needs of their communities, and by 

very definition of who they are, they do serve communities. Further, we must ask whether regulatory impositions like CRA would 

be counterproductive and take away from their resources to lend to 

their members. 

In conclusion, we must keep in mind that our goal should be to 

improve the quality and lower the price of financial services for 

consumers. Experience shows that when financial institutions compete for customers, customers benefit. 

Thank you, Mr. Kanjorski. I yield back the balance of my time. 

Mr. KANJORSKI. [presiding] Thank you, Mr. Bachus. I am pleased 

that we meet today to examine the need for making statutory improvements and providing regulatory relief for our Nation’s credit 

unions. Nearly 4 years have passed since the Financial Services 

Committee last met to exclusively examine the many issues of concern to the credit union movement. I therefore commend Chairman 

Frank for convening this long overdue hearing. 

4

I am also optimistic that today’s proceedings will lay the groundwork for swift action on legislation to modify the Federal Credit 

Union Act. The last time we acted on a comprehensive credit union 

legislation occurred a decade ago when the Congress adopted H.R. 

1151, the Credit Union Membership Access Act. For the last 5 

years, we have also worked to craft and build bipartisan support 

for the Credit Union Regulatory Improvements Act, or CURIA. I 

have been a leader in both of these reform efforts. 

CURIA would help to fix several problems created by the rushed 

drafting of H.R. 1151. These fixes including putting in place a modern, risk-based capital system for credit unions, allowing credit 

unions of all types to expand into underserved communities, and 

amending conversion voting standards. 

CURIA also contains a number of provisions to facilitate the ability of credit unions to make business loans. For example, CURIA 

would raise the current asset limit on members’ business loans 

from 12.25 percent to 20 percent, a limit comparable to the current 

one of thrifts for their non-real estate commercial lending. 

Some have suggested that this modest change represents a major 

expansion of business lending authority. I have a different view. 

Prior to the enactment of H.R. 1151, we had no limits on business 

lending activities of credit unions. CURIA would therefore provide 

minor but needed adjustments to the limitations on business lending currently imposed by the law. 

Support for CURIA has steadily grown over time. During the 

108th Congress, we had 69 supporters. In the 109th Congress, we 

garnered 126 supporters. To date, in the 110th Congress, we have 

now gained the endorsement of 147 supporters in the House. Our 

legislation, moreover, no longer has just bipartisan support in the 

House. It now enjoys bicameral support. I am very pleased that 

Senator Mary Landrieu announced that she would introduce 

CURIA in the Senate, along with Senator Joseph Lieberman. Their 

support clearly demonstrates that the momentum of enacting credit 

union statutory reforms is growing. 

Although support for CURIA is building, I recognize that enacting legislation into law is often a multi-stage process. Therefore, in 

order to achieve some progress on these matters, I recently introduced a pared-back credit union bill known as the Credit Union 

Regulatory Relief Act. Like CURIA, Congressman Ed Royce joined 

me in these efforts. H.R. 5519 contains eight noncontroversial provisions found in CURIA and previously passed by the House. 

It also includes language to permit all credit unions to assist 

those living and working in underserved census tracts, help individuals with short-term financial difficulties to obtain loans, and 

expand member business lending activities very modestly, through 

some narrow carveouts and clarifications. 

The swift adoption of H.R. 5519 will allow us to continue to work 

on enacting the many other important legislative reforms contained 

in CURIA but not contained in this new bill. 

Before I close, I would like to strike a cautionary note. At today’s 

hearing, we will hear not only from regulators but also credit 

unions and banks. In the past, banks and credit unions have sometimes found themselves engaged in what might be termed a family 

feud. In reality, credit unions and banks have much in common. I 

5

hope that they realize this fact. In my view, we can work to expand 

the pie for both of them by advancing well-crafted reforms to their 

underlying statutes consistent with safety and soundness objectives. 

In closing, I look forward to hearing from our witnesses and engaging in a thoughtful debate. I also look forward to moving a credit union bill through our committee in the very near future. 

I yield back the balance of my time. And the Chair will now recognize Mrs. Biggert for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman, for holding today’s 

hearing to examine credit union regulations. Like banks, credit 

unions plan an important role in our communities. Credit unions 

serve the financial needs of upwards of 90 million Americans, some 

would say as many as one-third of U.S. citizens. Again, like banks, 

credit unions have provided millions of Americans the credit and 

financial services that they need to buy cars, build homes, and pay 

for education. 

However, unlike banks, credit unions are tax-exempt organizations that are run by their members. Banks serve both customers 

and investors, are required to comply with the Community Reinvestment Act requirements and pay taxes. Back in 1934, in the 

midst of the Great Depression, when banks were failing and credit 

was scarce, Congress passed the Federal Credit Union Act which 

established requirements for chartering credit unions as well as a 

national regulator. Congress revisited this Act a decade ago, and 

here we are again today. 

Based on the written testimony of today’s witnesses, it is clear 

that competition is alive and well in the financial services industry. 

This is a good thing. It points to the success of this sector of our 

Nation’s economy, but more importantly, to the fact that Americans 

benefit from such competition. 

We are here today to examine the playing field for this competition. Is it level? Should it be level? I hope that today we can better 

understand the original intent of Congress for credit unions and 

how that intent holds up in the face of today’s realities. Was it to 

encourage competition with banks? Did Congress intend for credit 

unions to fill the void left by banks in niche markets and underserved communities? What are underserved communities, or who is 

underserved in communities? Are credit unions fulfilling or not fulfilling their congressional directive? 

Is it also important that we flesh out further what, if any, true 

need there is to change the capital system and expand member 

business lending for credit unions, which H.R. 1537 envisions? 

Well, this committee is always up for a good challenge, and with 

that, I thank my colleagues, Congressmen Kanjorski and Royce, for 

presenting us with another challenge, and I look forward to today’s 

discussions. 

Thank you, Mr. Chairman. I yield back. 

Mr. KANJORSKI. Thank you very much, Mrs. Biggert. And now 

the Chair recognizes Mr. Baca for 2 minutes. 

Mr. BACA. Thank you very much, Mr. Chairman. Okay. Remember I have the additional seconds because my clock didn’t start yet. 

[Laughter] 

6

Mr. BACA. Thank you very much, Mr. Chairman, for calling this 

important meeting. I’m proud to be a cosponsor of H.R. 1537, the 

Credit Union Regulatory Improvement Act. I appreciate my colleagues, Representative Kanjorski and Representative Royce, for 

having offered this legislation again, and I look forward to doing 

everything possible to help provide credit unions with the Regulatory Relief and Improvement Act that they need to better serve 

their members. 

I state, to better serve their members, and I think this is what 

it is all about—the quality of service, and how do we serve the 

members as well? There are 13 credit unions headquartered in my 

district that serve one hundred and—I mean, one thousand and 

twelve plus one hundred and twelve credit union members who live 

in my district. I agree that several of them contained by Mr. 

Dorety’s testimony, especially when he talks about the services to 

the underserved. 

And I state to the underserved. This is about the underserved, 

and that’s what this hearing about individuals as well, who are underserved. It’s hard for me to understand how anyone can complain 

that credit unions are not doing enough to serve the underserved, 

given the barriers that credit unions face today. The fact is that 

those who complain the loudest are the ones who fight the hardest 

to keep credit unions out of the underserved areas. And I state out 

of the underserved areas where a lot of us, minorities and others, 

live. 

Mr. Chairman, there are reasons that we call these areas underserved. The banks aren’t there, and most credit unions cannot 

serve these areas. One way that we can provide more services to 

those needs is to allow credit unions to enter the underserved areas 

and provide literally unbanked in our country with mainstream 

and affordable financial services. And this is what we have to do. 

I look forward to hearing from today’s witnesses on how we can 

help credit unions continue to reach the underserved—and I state 

the underserved—in our communities. I yield back the balance of 

my time. 

Mr. KANJORSKI. Thank you very much, Mr. Baca. Now my good 

friend, Mr. Royce of California. 

Mr. ROYCE. Thank you, Chairman Kanjorski. I want to begin just 

by thanking you for your efforts over the years on behalf of credit 

unions. I know their 90 million members across the country very 

much appreciate your efforts. I also want to thank you as a friend 

and colleague for holding this hearing and focusing our attention 

on this important issue. 

I believe, as you do, that priority should be passage of CURIA. 

I think it has been a decade since we had any major credit union 

legislation passed through the Congress, and it is important, I 

think, to modernize the regulations overseeing credit unions. And 

I think putting credit unions, as you say, on a par with other 

FDIC-insured institutions is a good way to do that. 

Let me say that Representative Kanjorski and I introduced H.R. 

5519 in the meantime, the Credit Union Regulatory Relief Act, this 

week. And while this legislation does not go as far as many would 

like, it’s important that we not let the perfect be the enemy of the 

7

good. And as we build momentum and support for CURIA, we are 

now looking at passage of this piece of legislation. 

It does several things. It provides the NCUA with increased flexibility to determine the interest rates on loans from Federal credit 

unions. It authorizes credit unions to invest in non-stock investment grade securities totaling up to 10 percent of the credit union’s 

net worth. It permits all credit unions to expand their services into 

underserved areas, and it exempts business loans made to members within those underserved areas from the lending caps. 

And lastly, the Credit Union Regulatory Relief Act would support 

the community development work of nonprofit religious institutions 

by excluding such loans from credit union business lending caps. 

This is based on legislation I had introduced prior in 2003, and we 

have been trying to advance this particular concept, because this 

provision would close a long-standing liquidity gap between creditors and nonprofit organizations. 

A major priority, by the way, which was left out of this legislation, is the modernization of the current capital requirements for 

credit unions. And as Chairman Paul Kanjorski shared with you, 

CURIA incorporates the net worth and prompt corrective action reform proposals of the National Credit Union Administration, the 

Federal regulator responsible for the safety and soundness of the 

credit union system. 

CURIA would replace the current one-size-fits-all leverage capital requirement for credit unions with a more rigorous two-part 

net worth structure that would more closely monitor actual asset 

risk. The revised credit union capital/PCA structure would incorporate the relevant international risk-based standards for Basel I 

and Basel IA financial institutions, and it would very closely resemble the current risk-based capital standards for FDIC-insured 

banks and thrift institutions in this country. 

So I believe this, along with many of the other provisions found 

in CURIA, but not in H.R. 5519, are important. They should not 

be forgotten as we continue to work toward that goal. We have 145 

Members of Congress who have signed onto the legislation. It is 

going to remain the primary vehicle to modernize regulation of 

credit unions, and of course, it has also been introduced this week 

in the United States Senate. 

So, again, I’d like to thank Chairman Kanjorski for his work on 

this issue. I think we have a good starting point, and as we move 

toward a markup on this legislation, I am hopeful we can gain a 

better perspective and develop a workable solution. I look forward 

to hearing from our extensive panel of witnesses who are with us 

today, and I thank them for making the trip out here. I yield back 

the balance of my time, Mr. Chairman. 

Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Royce. The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Mr. Chairman, if I may, could I just yield to my good 

friend, Mr. Green? He has an appointment. Then I could come after 

him? 

Mr. KANJORSKI. Surely. 

Mr. GREEN. Thank you, sir. Thank you, Mr. Chairman. I thank 

the ranking member as well. I thank the members of the panel who 

8

will appear today. I am honored to be with you and regret that I 

will have to leave. 

I just want to note that we have 8,100 credit unions across the 

length and breadth of the country, serving 90 million members. In 

Texas, we have 603 credit unions, about 6.9 million members. 

Credit unions are making a difference, and sometimes they can be 

the difference in asset acquisition and wealth building. I thank you 

again, and I yield back the balance of my time. 

Mr. KANJORSKI. Thank you very much, Mr. Green. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. I have 89,000 members, credit union members, in my district, and I know how important the credit union movement is to them. I also have noticed in 

my district the important role that credit unions are playing in the 

subprime challenge that we have, given their relatively low exposure to that market, that they are being very helpful in a lot of 

workouts and a lot of financial situations. 

I would also let folks in the credit union movement know, and 

I see several of my friends here today. They may not know it, but 

recently, I became a credit union member myself. But before you 

get too excited, no, I have yet to cosponsor CURIA. I did, however, 

as my friends know, along with the gentleman from Kansas—I do 

not see him here at the moment—Mr. Moore, helped champion regulatory relief in the last several Congresses. Many titles that were 

in our regulatory relief bill are also simultaneously in CURIA. 

I continue to be very concerned about the regulatory burden on 

our financial institutions, and I continue to support regulatory relief that is generally applicable to all financial institutions. I am 

particularly concerned about the burden that the Bank Secrecy Act 

continues to play in our financial system. However, I am also very 

mindful that one person’s regulatory relief is another person’s regulatory advantage. 

We do know that credit unions enjoy certain unique privileges 

within our system. Those privileges I am happy to defend, but 

there was a dramatic change a decade ago when the common bond 

requirements were modified. I believe tradeoffs were had at that 

time with respect to lending caps and capital requirements. Although I have many persuasive friends in the credit union movement, I have yet to be persuaded that balance should be upset. 

Having said that, I continue to have an open mind. It is not an 

empty mind. So I look forward to hearing the testimony, and I am 

very glad to hear my good friend from California, Mr. Royce, talk 

about the ability to perhaps advance H.R. 5519, where we do have 

common ground, in hopes that these other issues may be worked 

out at a later time. 

With that, I yield back. Thank you. 

Mr. KANJORSKI. The gentleman from Georgia now, Mr. Scott, for 

2 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. This is indeed 

a very, very important and timely hearing. And we have what really amounts to a delicate balancing act here to accomplish. 

First of all, we do have a need. The credit unions are there. They 

deserve the attention and relief under this bill, because they do 

serve an underserved community, particularly lower and moderate 

9

income communities and minority communities. And so we need to 

make sure we keep that in mind. 

Now there are four actors here that have to be taken care of. We 

have the regulators. We have the banks. We have the credit 

unions. But the most important part of this is the consumer themselves. We have the banks, the regulators, and the credit unions 

here before us, but we don’t have the consumer. And that is where 

we, who represent the consumers, must take that into consideration. 

But there are areas where we can work together, particularly 

when you take the meltdown in the mortgage markets. There is a 

need that we could have for credit unions to be able to help take 

some of the downward pressure off of banks now that are tightening up on their requirements, to give the consumers another way 

and another resource with which to refinance their homes. That is 

one area that we have to take into consideration. 

Now this is sort of like a ball game. We have to get to several 

bases. We have to compromise. We have to work. Any reform, it 

takes time, it takes patience. But if we understand our mutual 

goal, which is to provide that kind of relief to assist an underserved 

community that needs that service, an unbanked community, then 

I believe we have room for agreement here. 

Today, with this hearing, we will certainly get to first base. Then 

we have to get to second base, third base, and then home. And I 

believe we will be able to score some runs that way. 

I look forward to this hearing. It is a very important hearing. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much, Mr. Scott. We now have 

Mr. Pearce of New Mexico. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate you convening the hearing. New Mexico is very much rural. Some counties 

have more land mass than States back East, and fewer than 1,000 

or 2,000 residents underserved is a very key problem that we face, 

not just available access to lending. 

I understand and appreciate the concerns of the banks. I see the 

large, large growing institutions that look almost like banks and 

have tax advantages, so we are very familiar with those. But at 

some point in our State, we have to address the access to liquidity. 

So we are interested in the hearing on the bill to hear both sides 

and look to see the ways that we can make the system more fair. 

I would encourage the chairman to hold a hearing on the Communities First Act, H.R. 1869. I think that more than regulatory 

relief right now we have to be concerned with the entire aspect of 

our financial institutions. We had a couple of hearings last week 

that raised significant concerns. And so we need to be looking 

through this problem to making all financial institutions more 

sound and more competitive worldwide. So I hope that the chairman would consider that also. 

I look forward to the hearing and appreciate the chairman for 

convening it. Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Pearce. And now 

we’ll have Mr. Cleaver of Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. I appreciate this hearing. It seems as if each hearing this committee participates in is 

10

one that deals with those who hate regulations and those who want 

more. I have twin sons, and when they were smaller—we have a 

huge backyard and they would be riding their bicycle, and one of 

them would say, ‘‘Daddy, would you make him get off so I can 

ride?’’ 

I think that is kind of what we hear when we deal with credit 

unions and banks and other financial institutions. And I think that 

it is our responsibility to protect the consumers while at the same 

time making sure that there are opportunities available to the financial institutions, such as banks, and that we ought to create 

those opportunities with as few barriers as possible. 

But I’m looking forward to getting into the question and answer 

period, because I think that the great conflict is always, you know, 

laissez-faire. And I think if we have laissez-faire, we probably don’t 

need Congress, and I don’t need any response to that. It seems to 

me that we have a responsibility to play this role, and I look forward to playing it. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Mr. KANJORSKI. Thank you very much, Mr. Cleaver. And now we 

will hear from the gentleman from Georgia, Mr. Price, for 1 

minute. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank the chairman and Ranking Member Bachus as well and add my commendation to them for holding this hearing. And I want to commend Congressman Kanjorski and Congressman Royce for their ongoing efforts to spotlight this issue. 

I want to welcome all the members of the panel. I want to particularly welcome Mr. George Reynolds, who is the senior deputy 

commissioner of the Georgia Department of Banking and Finance. 

Welcome. We look forward to your testimony. 

I am interested in a number of issues. One of the provisions of 

H.R. 1537, the CURIA Act, would update the current capital requirements for credit unions addressing some concerns that NCUA 

has that the current capital requirements for credit unions may be 

too inflexible and should become more risk-based. We are all aware 

of the challenges that the housing market is creating for our whole 

economy, and I would be interested in hearing all panel members’ 

thoughts on whether those challenges that we’re facing require or 

would benefit from any legislative or congressional action as it relates to credit unions. 

Additionally, Chairman Kanjorski and Congressman Royce have 

introduced a couple of pieces of legislation on regulatory relief, and 

I am interested in hearing from the panel specifically on those regulatory challenges that you or your clients and those that you represent face during their daily routine. Specifically, are there compliance tasks that you feel are overly burdensome and end up costing more in compliance costs than they’re worth for either the system or for consumers? 

And again, I appreciate each of you coming and look forward to 

your testimony and the Q&A. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Price. And now, we will hear 

from Representative Neugebauer of Texas for 2 minutes. 

Mr. NEUGEBAUER. Thank you. And I thank Chairman Frank for 

calling today’s hearing. It’s good to have all of our friends from the 

11

credit unions in Washington this week. I had several from my district, from Big Spring and Abilene yesterday. And I think it’s important that you come to your Nation’s capital and talk to the people who represent you here and make sure that your views, which 

are the views of your shareholders, your stakeholders, are expressed on this important issue. 

I appreciate the contribution that the many credit unions in my 

district make to the folks in West Texas. They are working very 

hard to make sure that they serve their customers. And one of the 

things that we’re very blessed in our Nation, and particularly in 

our—in Texas is we have a lot of good, healthy financial institutions, banks, thrifts, and credit unions that provide for the financial needs of the folks that we serve. 

I think one of the important things is that whether it is a credit 

union or a bank or a thrift, what I hear over and over again is we 

have to do something about decreasing the amount of regulation 

because they said—what they tell me is they spend more time now 

working for the regulators than they spend time working for the 

people that they serve. And certainly I support additional efforts on 

behalf of this committee to look at ways to reduce the regulatory 

environment and also make sure that we have a streamlined, efficient, 21st Century financial services industry. 

Like many of my other colleagues, I am particularly interested 

in looking at the way that we assess the capital needs of credit 

unions in our country. I think the current system is an antiquated 

system today that we ought to measure the amount of capital that 

a financial institution has not based on what some arbitrary number that we’re going to try to make one size fit all, but with a number that is based on the kinds of loans and lending practices that 

that particular credit union is using, as we do with other financial 

institutions to measure what is the risk that they are taking and 

then make their capital requirements to coincide with that. 

And so I think that’s a system that makes sense. I again thank 

of the panelists for being here today. We look forward to hearing 

from you as we try to make America’s financial institutions a better place and better serve the folks for whom we all work. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much. And now we will hear 

from Mr. Davis of Tennessee for 1 minute. 

Mr. DAVIS OF TENNESSEE. Thank you, Mr. Chairman. Living in 

a rural area as I do, and representing 10,000 of Tennessee’s 40,000 

square miles in the 4th, one of the most rural residential Congressional districts in America, we need every available resource to us 

that we can that will supply credit for those consumers in the 4th 

District to be able to at least access reasonable rates and reasonable terms. 

Since 1934, 8,100 credit unions have been established across the 

State, representing over 90 million people. But in the district I represent, we have small, independent bankers as well. And from my 

perspective, there’s a reason that subprime lending is not damaging our small local banks nor our credit unions. We haven’t gotten involved in that, consumer lender. So I applaud the folks in 

1934 and Congress who saw fit to establish—and saw the need for 

the credit unions. 

12

But I also realize that as I live in a small rural area, I live in 

an area where there were two banks that didn’t close in 1929 during the Great Depression. So I want to be sure that as we navigate 

through the future, we continue to allow credit unions to be able 

to provide the great service they are providing today, but also to 

be sure that our small banks in the district I represent are still 

going to be standing 10 years, 20 years, and 30 years down the 

road. 

Thank you for coming today, and I look forward to the question 

and answer session. I yield back my time. 

Mr. KANJORSKI. Thank you, Mr. Davis. I will now introduce the 

panel. Thank you for appearing before the committee today, and 

without objection, your written statements will be made a part of 

the record. You will each be recognized for 5 minutes for a summary of your testimony. 

First, we have the Honorable JoAnn M. Johnson, Chairman of 

the National Credit Union Administration. 

Ms. Johnson. 

STATEMENT OF THE HONORABLE JOANN M. JOHNSON, 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. I thank you for this opportunity to testify. The variety of proposals before Congress would 

strengthen NCUA’s ability to maximize the safe and sound operations of over 8,000 federally insured credit unions, modernize important aspects of the Federal Credit Union Act, and grant greater 

flexibility to credit unions serving consumers. 

The written statement I have submitted contains analysis of four 

bills: H.R. 1537; H.R. 1849; H.R. 3113; and H.R. 5519. I would like 

to devote most of my statement to two paramount issues—prompt 

corrective action reform, and extension of credit union service to 

consumers in underserved areas. 

I want to thank Chairman Frank for his leadership and Representatives Kanjorski and Royce for their stewardship of the 

issues contained in CURIA, and in a new iteration, H.R. 5519, just 

introduced this week. You have consulted with and advised this 

agency on a number of occasions as you assess possible updates to 

the Federal Credit Union Act, and have led an informed discussion 

of issues that have real world benefits for consumers. 

I also commend Representative Velazquez for her tireless efforts 

to assist credit union efforts to reach out to small business communities, and Representative Serrano for his legislation to improve 

credit union service in disadvantaged communities. 

NCUA currently administers a system of prompt corrective action with the purpose of resolving problems at credit unions at the 

least possible cost to the National Credit Union Share Insurance 

Fund. Our experience in regulating and supervising credit unions 

has shown that a more fully risk-based system, such as the one 

contemplated in H.R. 1537, would improve the regulatory regime 

while at the same time enable credit unions to put more money in 

the hands of their members. 

The legislation mirrors a proposal adopted by NCUA last summer and incorporates substantive and very helpful input from the 

13

Department of the Treasury. It also recognizes developments that 

have occurred with the adoption of the new Basil II capital standards for FDIC-insured institutions. A new risk-based system promotes active management of risk in relation to capital levels. 

By emphasizing risk assessment, credit unions would be able to 

better relate their capital to the risk they are assuming. Cash in 

the vault carries a different degree of risk than a 30-year fixed 

mortgage, and we believe our regulation should be able to recognize 

this. Also, NCUA oversight will be strengthened using additional 

tools to identify each credit union’s risk profile based on their activities. 

It is important to note that the proposed leverage ratio thresholds will in fact result in some credit unions being required to hold 

more capital than under the current system. The proposed system 

would be robust and would promote a regulatory regime that more 

accurately portrays risk. It would reduce regulatory burden on 

credit unions while enhancing their ability to manage their balance 

sheets in a more efficient, effective, and most importantly, safe 

manner. 

What I have just described is an accountant’s-eye view of PCA 

reform. What it means to consumers is more dollars available from 

their credit union for them to save, invest, and put to productive 

use, all in a safe and closely monitored environment. 

Another important feature of my regulatory relief legislation—of 

any regulatory relief legislation—involves modernizing the statute 

to allow all types of federally chartered credit unions to adopt underserved areas. Currently, NCUA can only permit multiple group 

credit unions to add underserved areas in their field of membership. Single group and community chartered credit unions are not 

authorized to adopt these areas. 

All types of federally chartered credit unions should be able to 

improve access, particularly at a time when so many Americans 

have turned to predatory lenders and are suffering the unfortunate 

consequences. Three different bills have language that would address the situation, and NCUA would be supportive of these approaches. 

I do note that H.R. 5519 establishes new standards regarding 

how credit unions are serving consumers when adopting underserved areas. We want to work with Congress to make sure that 

all consumers have choices in financial services. NCUA takes outreach seriously. 

Turning briefly to other issues addressed in regulatory relief proposals, several bills propose to improve the ability of credit unions 

to make member business loans. We support those efforts and note 

that credit union member business lending can be beneficial and 

productive service offered to consumers. We also underscore the importance of strong and active NCUA supervision of these activities. 

NCUA continues to devote significant attention to guidance for all 

credit unions in all types of lending. Irrespective of any statutory 

limits on individual or aggregate credit union member business 

loans, NCUA will continue to be vigilant and aggressive in its supervision. 

H.R. 5519 contains a provision that builds upon the progress 

Congress made 2 years ago in helping consumers find lower-cost alVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
14

ternatives to predatory lenders. Allowing credit unions to provide 

payday loan services within their field of membership makes sense, 

and we commend the approach. 

NCUA believes these modernizations represent significant improvements to our ability to regulate and supervise credit unions. 

We stand ready to work with Congress as you seek ways to improve the delivery of financial services to credit union members, 

and we feel confident that your deliberations will succeed. 

Thank you very much. 

[The prepared statement of Ms. Johnson can be found on page 

78 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Ms. Johnson. As everyone 

knows, we have two votes on the House Floor, and rather than taking any more statements, we have about 6 minutes remaining on 

those votes, so we’re going to recess the committee for about 20 

minutes, and then we will reconvene and take further testimony. 

The committee stands in recess. 

[Recess] 

Mr. KANJORSKI. We will now reconvene. Next, we will hear from 

Mr. George Reynolds, senior deputy commissioner of the Georgia 

Department of Banking and Finance, testifying on behalf of the 

National Association of State Credit Union Supervisors. 

Welcome to the committee. Mr. Reynolds, if you will present your 

testimony? 

STATEMENT OF GEORGE REYNOLDS, SENIOR DEPUTY COMMISSIONER, GEORGIA DEPARTMENT OF BANKING AND FINANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

STATE CREDIT UNION SUPERVISORS (NASCUS) 

Mr. REYNOLDS. Good morning, Chairman Kanjorski, and distinguished members of the House Committee on Financial Services. I 

appear today on behalf of NASCUS, a professional association of 

State credit union regulators. NASCUS believes that H.R. 1537, 

the Credit Union Regulatory Improvement Act of 2007 called 

CURIA, is important legislation. 

As State regulators, we determined our position on the provisions 

in CURIA after reviewing the effect on credit union safety and 

soundness and State law. 

NASCUS supports comprehensive capital reform. First, credit 

unions need to be assessed using risk-based capital standards; and 

second, credit unions should have access to alternative capital. 

From a State regulatory perspective, capital reform that addresses 

these areas makes sense. 

CURIA expands risk-based capital options to all federally insured credit unions. NASCUS has long supported that risk-based 

capital standards are appropriate. We believe it is a sound and logical approach to capital reform for credit unions. The implementation of prompt corrective action for credit unions doesn’t just happen. It requires strong cooperation and consultation between State 

and Federal credit union regulators as provided by the Credit 

Union Membership Access Act. We believe coordination between 

State and Federal regulators is imperative to ensure effective capital reform. 

15

Also, comprehensive capital reform requires more than just riskbased capital. NASCUS believes that CURIA’s capital reform provisions would be enhanced by allowing a provision for the inclusion 

for alternative capital. 

Simply put, credit unions would benefit from alternatives that 

allow them to raise capital other than through retained earnings. 

In fact, low-income and corporate credit unions currently have access to alternative capital. We understand that additional dialogue 

with policymakers, the credit union industry, and NCUA is necessary to reach a consensus on alternative capital. Now is the time 

for dialogue before capital requirements are refute and time sensitive. 

Let me point out a few considerations. First, NASCUS is not the 

only voice advocating access to alternative capital. The Filene Research Institute released a study in November of 2007 entitled, ‘‘Alternative Capital for U.S. Credit Unions: A Review and Extension 

of Evidence Regarding Public Policy Reform.’’ The report concludes 

that it is in the public interest to permit credit unions greater access to alternative capital. It is attached to our testimony. 

Next, while the majority of credit unions were not involved in the 

subprime real estate market problems, all financial institutions are 

experiencing impacts from the residential mortgage market. 

How would alternative capital help? It would allow credit unions, 

as it does other financial institutions, to meet these challenges and 

potentially thrive in an uncertain market environment. 

As regulators, we realize that alternative capital requires solid 

regulation and rigorous regulatory review to ensure that these 

products are properly structured, meet proper disclosure requirements, and do not create any systemic risk. Before a credit union 

would be given access to alternative capital, it must demonstrate 

that it has the resources to properly manage alternative capital. 

NASCUS supports revisions to member business lending. 

Changes will provide an opportunity for credit unions to better 

serve members. With proper underwriting and controls, these 

changes are not believed to be a risk to safety and soundness. 

While NASCUS supports revisions, we recognize that they require proper regulatory oversight through examination and supervision. Credit unions must have a thorough understanding of member business lending and be diligent in their written policies, underwriting, and controls for provisions to be implemented in a safe 

and sound manner. 

CURIA also outlines procedures on conversion voting requirements. NASCUS supports full transparency and disclosure. We believe that any legislation concerning conversion requirements of a 

State-chartered credit union should recognize State law. 

NASCUS appreciates the opportunity to testify. Our discussion 

was limited to those provisions in CURIA that impact State-chartered credit unions. We urge this committee to be watchful of Federal preemption and to protect and enhance the viability of the 

dual chartering system. We welcome questions from committee 

members. 

Thank you. 

[The prepared statement of Mr. Reynolds can be found on page 

124 of the appendix.] 

16

Mr. KANJORSKI. Thank you, Mr. Reynolds. 

We will now hear from Tom Dorety, president and chief executive 

office of the Suncoast Schools Federal Credit Union, testifying on 

behalf of the Credit Union National Association. 

Mr. Dorety? 

STATEMENT OF TOM DORETY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SUNCOAST SCHOOLS FEDERAL CREDIT 

UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION (CUNA) 

Mr. DORETY. Thank you. Chairman Kanjorski and members of 

the committee, on behalf of the Credit Union National Association, 

I appreciate the opportunity to appear before you to express our 

support for H.R. 1537, the Credit Union Regulatory Improvement 

Act. 

CUNA is the largest credit union advocacy organization, representing over 90 percent of our Nation’s 8,400 State and Federal 

credit unions and their 90 million members. I am Tom Doherty, 

CEO of Suncoast Schools Federal Credit Union in Tampa. 

As you are well aware, we are experiencing a credit crunch in 

many sectors of the economy. It is ironic that credit unions are 

ready, willing, and able to help alleviate the problem and promote 

economic growth, and yet we are inhibited from doing so by outmoded laws that protect the narrow self-interests of bankers. 

Mr. Chairman, the last major changes to the Federal Credit 

Union Act were made in 1998. These changes did not provide significant regulatory relief to credit unions. In fact, the opposite is 

the case. The Credit Union Membership Access Act imposed statutory burdens related to business lending and prompt corrective action. 

It is now time for Congress to reconsider the applications of these 

statutory requirements. Credit unions support the provisions of 

H.R. 1537 which would increase the current limit on credit union 

member business loans from 12.25 percent to 20 percent of total assets and permit the NCUA to increase the threshold for defining 

an MBL from $50- to $100,000. 

We hope that Congress will also consider eliminating the statutory business lending cap entirely. There is no economic rationale 

for this cap. Credit unions have been providing these loans safely 

for nearly 100 years. If that broader approach is not approved as 

an alternative, CUNA asks Congress to consider exempting MBLs 

made in underserved areas from that cap. 

Credit unions also seek modernization of the statutory capital requirements Congress enacted in 1998. By law, not regulation as for 

other depository institutions, credit unions must maintain a 7 percent net worth ratio in order to be considered well capitalized. In 

comparison, the current ratio for banks to be well capitalized is 

only 5 percent. 

This capital requirement for credit unions is inefficient. It unnecessarily retards member service and growth and it does not appropriately account for risk of a credit union’s assets. 

Under the proposal in H.R. 1537 which has been endorsed by 

NCUA, the new capital requirements would still be more strenuous 

than bank capital requirements and would accurately account for 

17

the risk for the credit union’s portfolio. A more precise, risk-based 

capital requirement would enable credit unions to do even more to 

help members in these economically stressful times. 

CUNA also supports a statutory clarification that all Federal 

credit unions may apply to NCUA to add underserved areas. This 

provision will enhance the ability of credit unions to assist underserved communities with their economic revitalization efforts. It 

provides all Federal credit unions with an opportunity to expand 

services to individual and groups working or residing in areas that 

meet unemployment and other distress criteria identified by the 

Treasury Department. 

Mr. Chairman, it’s unfortunate that credit unions must come to 

Congress to ask for this clarification. You, yourself, along with several members of this committee thought that had been addressed 

10 years ago. We were forced to ask Congress for this provision because the American Bankers Association sued NCUA in 2005 for 

authorizing single sponsor and community chartered credit unions 

to add underserved areas to their field of membership. 

In a November 2005 hearing before the House Ways and Means 

Committee, the ABA complained that credit unions do not do 

enough to serve people of modest means. Within days, the same 

group took credit unions to court to prevent them from doing so. 

Mr. Chairman, as you know, these areas are called underserved 

with good reason. Banks make a business decision not to operate 

in underserved areas. Credit unions seek to serve the underserved. 

It is not just part of our congressionally mandated mission; it is 

part of our core mission. 

Six years ago my credit union added and opened a branch in an 

underserved area in Immokalee, Florida. The median income in 

this county is $24,000. We currently have over 6,600 members, 

$24,000 million in deposits, and $62 million in loans from this 

area. We are providing quality financial services to an area that 

otherwise would not have it. 

Those living in underserved areas lack access to mainstream financial services. For millions of lower income families, this means 

their only alternative is to use the high cost products provided by 

check cashers, payday lenders, finance companies, and pawn shops. 

CURIA would permit all Federal credit unions to apply to NCUA 

to add underserved areas. This is what many Americans need in 

order to have mainstream financial services. 

Mr. Chairman, my written testimony provides greater detail on 

these and other provisions. I appreciate the opportunity to appear 

before the committee and look forward to any questions the members may have. 

Thank you. 

[The prepared statement of Mr. Dorety can be found on page 62 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Dorety. 

Next we will hear from Mr. Michael N. Lussier, president and 

chief executive officer of the Webster First Federal Credit Union, 

testifying on behalf of the National Association of Federal Credit 

Unions. 

Mr. Lussier? 

18

STATEMENT OF MICHAEL N. LUSSIER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WEBSTER FIRST FEDERAL CREDIT 

UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

FEDERAL CREDIT UNIONS (NAFCU) 

Mr. LUSSIER. Good morning, Mr. Chairman, and members of the 

committee. My name is Michael Lussier, and I am the president 

and CEO of Webster First Federal Credit Union located in Webster, Massachusetts. I’m here today on behalf of the National Association of Federal Credit Unions, where I proudly serve on the 

board of directors. 

We appreciate the opportunity to express our views and the need 

for credit union regulatory relief and improvements. As with all 

credit unions, Webster First is a not-for-profit financial cooperative 

governed by a volunteer board of directors who are elected by our 

members. 

I am pleased to report to you that unlike other types of financial 

institutions that put many people into predatory subprime loans, 

credit unions work with their members to give them responsible 

loans at rates that they can afford. America’s credit unions are vibrant and healthy. Membership in credit unions continues to grow, 

now serving over 90 million Americans. 

According to data obtained from the Federal Reserve Board, in 

terms of financial assets, credit unions have just a 1.1 percent market share and, as a consequence, provide little competitive threat 

to other financial institutions. 

NAFCU would like to thank Representatives Paul Kanjorski and 

Ed Royce for their leadership in introducing H.R. 1537, the Credit 

Union Regulatory Improvements Act; and H.R. 5519, the Credit 

Union Regulatory Relief Act; and the many members of this committee who have cosponsored these important pieces of legislation. 

The facts confirm that credit unions are more heavily regulated 

than other financial institutions. We believe H.R. 5519 is a solid 

and non-controversial bill and urge the committee to take up and 

pass these needed first steps at regulatory relief in a timely manner. 

I want to focus my statement today on two aspects of CURIA 

which are much needed by the credit union community. First, 

Prompt Corrective Action, or PCA reform, would modernize credit 

union capital requirements by redefining the net worth ratio to include risk assets as proposed by the NCUA. This would result in 

a new, more appropriate measure to determine the relative risk of 

a credit union’s balance sheet and also improve the safety and 

soundness of credit unions and our share insurance fund. 

For example, the current capital system treats a new 1-year, unsecured, $10,000 loan the same as a secured, 30-year mortgage that 

is on its last year of repayment; something that just simply makes 

no sense. It is important to note that this proposal would not expand the authority for NCUA to authorize secondary capital accounts. 

Rather, we are moving from a model where one-size-fits-all to a 

model that considers the specific risk posed by each individual 

credit union. This proposal creates a level comparable to but still 

greater than what is required by FDIC insured institutions. 

19

Secondly, NAFCU also asks the committee to refine the member 

business loan cap established as part of the Credit Union Membership Access Act in 1998, replacing the current formula with a flat 

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

At Webster First, we are currently at the cap of 12.25 percent 

and, as a result, each week we must turn away members requesting business loans that cannot be obtained elsewhere. The simple 

modification of the Member Business Lending cap would allow 

Webster First to provide an additional $32 million in small business loans to our members in central Massachusetts. 

There are many credit unions like mine in congressional districts 

across the country that can provide the immediate economic stimulus to their local areas by this simple change that does not cost 

the government a dime. 

We also support revising the definition of a member business loan by giving NCUA the authority to exclude loans of $100,000 or 

less from counting against the cap. The current de minimis level 

of $50,000 was established in 1998 and has been eroded by inflation over the last 10 years. 

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

that a 2001 Treasury Department study entitled, ‘‘Credit Union 

Member Business Lending,’’ concluded that ‘‘credit unions’ business 

lending currently has no effect on the viability and profitability of 

other insured depository institutions.’’ 

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

and the safety and soundness of credit unions is unquestionable. 

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

on credit unions. It has been 10 years since Congress last enacted 

major credit union legislation. 

NAFCU supports H.R. 5519 as important first step in providing 

regulatory relief and urges its passage. Furthermore, we call on the 

committee to follow the lead of the 145 Members of the House who 

are supporting CURIA and pass this important legislation. 

Lastly, we ask that any efforts to provide regulatory relief to financial institutions are balanced and equitable. We look forward to 

working with you on this important matter and I welcome your 

comments and questions. 

Thank you very much. 

[The prepared statement of Mr. Lussier can be found on page 94 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Lussier. And I thank 

the entire panel for their testimony. It was very informative. I certainly have a few questions, as I am sure my colleagues do. 

First and foremost, I am certainly going to reserve some of the 

questions for the banking witnesses, because I am at a loss, honestly, to understand the two elements of H.R. 1537 that I hear the 

most objection to from the banks: the risk-based capital question; 

and the conversion question. 

It would seem to me that it is just good practice to put the credit 

union financial position on the same level with risk as other banking institutions have. It would be good for the system. It is good 

for the credit union movement and it would actually be good for the 

banking system as a whole. So I do not understand their objection 

to that. 

20

Secondly, the conversion problem is almost insulting in terms of 

so few people today can dissolve credit unions and dispose of the 

assets in a favorable way to themselves as opposed to having a recognition of the built-up equity over generations that credit unions 

represent. I find that offensive, if for no other reason than that. 

Rather than having the type of conversion system we have now, 

I would rather a court dispose of the assets and direct the assets 

to a like or similar type of entity to carry on the mission that was 

originally indicated for the to-be dissolved credit union. But we will 

save those questions. 

What do the witnesses have to say in terms of, maybe I will start 

with Ms. Johnson. Why do you think there is such objection to the 

risk-based capital structure that we have put in place, since our 

committee and the Congress have really worked very closely with 

the regulators to take exactly what they have recommended in its 

best regards and try to put it into place and adopt it into law? 

Have you heard any response or comment as to what the objection 

is to everyone else on this point? 

Ms. JOHNSON. Congressman, I think the proposal before you is 

one, on this risk-based capital, is one that is coming from the regulator. It is not coming from the trades. It is not coming from the 

credit unions that have been working on this for over 31⁄2 years. 

I think the opposition that is out there is misleading in that it 

is being sold as an across-the-board reduction in capital for credit 

unions. This is not true. What this is, it is a positive—this will 

have a positive impact on our insurance fund from the standpoint 

that it allows us as the regulator to identify problems more quickly. 

Credit unions will be assessed higher risk levels for riskier activities, or higher capital levels for riskier activities; and it’s actually a tool for us as a regulator. This is not a give-away. In fact, 

for 30 percent of the credit unions it is actually going to raise their 

capital levels, or those standards. 

So I think it has been sold as a give-away, and by all means, it 

is just the opposite. It is a tool for us. It is my number one priority 

of all of the regulatory items that we are addressing today. This 

is probably the one that is most important to me as a regulator and 

so I would really ask for your serious consideration of this proposal 

that it either be included in the legislation, or put back in whatever 

piece might actually pass. 

Mr. KANJORSKI. Well, as you may or may not know, what we 

broke out is H.R. 1537 to stand on its own as it was originally introduced, and maybe modified by H.R. 5519, which we recently introduced this week, which would take the less contentious elements 

so that we can move them through the Congress quickly and get 

them passed. 

But of course, we are not going to accomplish the two most important things there: the conversion correction; and the risk capital 

correction. How can we make this strong issue? 

Maybe I am asking the wrong person on this since you participated as a regulator in adopting this, but I have been sort of frustrated myself over the last several years because I thought we invited everybody’s comment. It was not anything that anyone individually promoted, not the association or the credit union movement themselves, but in fact the regulator. 

21

And we waited, if you recall, until you completed all of your studies before we wrote the bill and then incorporated what the regulator asked us to incorporate in the bill. 

Ms. JOHNSON. Congressman, it is frustrating for me, too, that 

this item is being seen as contentious, because it shouldn’t be. We 

have put over 3 years of work into this. 

Actually I saw written quotes in the media early on from the 

bank and trade associations that they understood that this was 

probably necessary. And then I think as time went along and the 

fires were stoked in a competitive nature, I think it became contentious, but in my belief for the wrong reasons. This is substantive 

and we see it as a necessary tool. 

Mr. KANJORSKI. Now you know we have made some corrections 

in CURIA in terms of conversion. I am just going to take another 

minute. Do you feel that we have made sufficient corrections to 

prevent abuse in conversions that have been occurring over the last 

several years? And as a regulator, are you satisfied with what we 

have done? 

Ms. JOHNSON. Well, from our standpoint, we just recently put out 

a new ANPR that we are continuing to study some of these elements that we still find in conversions, and I think this is probably 

the most important ANPR that we have put out during my tenure 

at the agency and we’re asking for additional ideas. We have been 

doing additional study in areas of conversions, mergers, insurance, 

and so we will continue to work with you. This has been an area 

of concern for us as well. 

Mr. KANJORSKI. I remember particularly conversions so well. It 

had to have been about 11:00 or 12:00 at night when we were in 

the final consideration of H.R. 1151, and I was so frustrated with 

the blowing away of getting reasonable quorums to vote for conversion that I almost decided to oppose H.R. 1151, but I knew how important it was for the membership portions of it that we would 

have destroyed the credit union movement. 

So I accepted thinking—this is 10 years ago—that we would 

never let this happen and continue to go on in Congress. We would 

come back and correct it. I anticipated that we would have a correction in a matter of years. Here we are 10 years later, still fighting the same issue. 

Mr. REYNOLDS. Mr. Chairman, I just wanted to make one comment about the conversion issue from the State perspective. I just 

wanted to make sure that it is understood that there is sensitivity 

to the fact that there are State law issues. 

We do have State laws in place in many of our States that deal 

with conversions. They have very robust disclosure and governance 

provisions in them and whatever solution in this area is considered, we just want to make sure that for State credit unions in particular, there is acknowledgement of the fact that there are State 

law issues that should be considered. 

Mr. KANJORSKI. Have you— 

Mr. REYNOLDS. Yes, I commented on that in our written testimony, and I alluded to it in my oral testimony as well. 

Ms. JOHNSON. Congressman, I would just add that, as you know, 

credit unions are member-owned cooperatives, and our focus has 

been on the members and the transparency in this process. I have 

22

been up here to testify a couple of times on conversions, and that 

has always been our focus and will continue to be the focus. But 

these are member-owned cooperatives, and so the members’ interest is our priority. 

Mr. KANJORSKI. Thank you all, very much. And now, Ms. 

Biggert, if you will? 

Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to thank 

the panel for all of their testimony. And I would also like to recognize the Illinois credit unions that are here to hear your testimony 

and our questions. 

Mr. Dorety, one thing that always bothers me just a little bit is 

that credit unions do enjoy certain advantages, such as the tax-exempt status. But it was because they are established as memberowned financial cooperatives to meet the financial needs of the 

members. 

But given that advantage, shouldn’t Congress make sure that 

whatever regulatory changes we make do not change the fundamental character of credit unions? And when we are taking today 

about raising the business lending cap or expanding into the broadly defined underserved areas, will this invite credit unions to disregard the congressional mandate that credit unions serve people 

of modest means, which is one of your criteria? 

Mr. DORETY. Congresswoman, we totally agree with you that we 

should never get away from the core of who we are, which is a notfor-profit cooperative institution. The things that you refer to can 

only enhance our ability to serve those members that we were 

chartered to serve. 

Underserved communities, an example is we have done five at 

Suncoast. The community I referred to, Immokalee, has a total of 

25,000 individuals in that community. In 6 years time, we now are 

serving 6,600 of those individuals in that community. 

If credit unions are given the ability to expand further into underserved communities, then more people of modest means will in 

fact be served, which is exactly what I think most folks here want 

us to do. 

In the member business lending cap, credit unions serve a number of members and do it very well on the consumer side. Many of 

those members would love to have small business loans from their 

credit unions. But because of the cap and the expense involved in 

putting together a business service program, it costs a lot of money 

to do that. And many small credit unions are not able to fund or 

to spend the money to even start a member business loaning program. 

So I think both of these features of the new bill would certainly 

help credit unions do even more in providing services to folks, and 

ensure that we are doing exactly what you want us to do. 

Mrs. BIGGERT. How do you define what are underserved communities or who is underserved in those communities? 

Mr. DORETY. Our regulator defines who are underserved communities, and it is a certain portion of folks. It has to do with income 

levels, and Chairman Johnson can certainly answer this better 

than I can. It has to do with certain income levels and the availability of services in those communities. 

23

Mrs. BIGGERT. Maybe, Chairman Johnson, could you respond to 

that? 

Ms. JOHNSON. That is correct. It is based on geographic areas 

that meet income standards. It is difficult to say. I think a better 

approach to what is underserved versus what the ability or what 

the number of institutions, etc., might be what is the access to affordable financial services. 

What is the appropriate number of institutions? There is no criteria out there. Is it so many check cashers? Is it so many other 

financial institutions? But having access to affordable financial 

services is what is key. 

We know that when a credit union has access to an underserved 

area, it is offering all of the consumers another option. And that 

is what the goal is. It has to be made available before they can 

take advantage of it. 

Mrs. BIGGERT. Well, we are hearing from banks that credit 

unions are purchasing or participating in business loans to nonmembers. And how many credit unions are making these types of 

loans, or is that true? 

Ms. JOHNSON. Credit unions only make member business loans 

to members. I think the figures that you are referring to, credit 

unions have the option or the opportunity to purchase participations from other credit unions. But these are member business 

loans that have been made by a credit union to a member. So credit unions don’t make business loans to non-members. 

Mrs. BIGGERT. Did you exclude these loans from the aggregate 

business loan cap? 

Ms. JOHNSON. Loans that are $50,000 or less in the amount are 

excluded from the business lending cap. Participations are also excluded from the business lending cap. 

Mrs. BIGGERT. I think that most people would agree that anything that provides lower income Americans with an alternative to 

high-cost short-term loans would be a good thing. Can you tell me 

what impediments currently prevent financial institutions from offering these alternatives, and are the impediments economic or regulatory? 

Ms. JOHNSON. Well, I would say the biggest impediment is having access to the area in order to provide them. 

Mrs. BIGGERT. So is there an economic impediment? That is all 

right. 

Ms. JOHNSON. I guess I am not understanding the question. 

Mrs. BIGGERT. My time is expired, and I will yield back. 

Mr. KANJORSKI. Ms. Biggert, just a little point of information. On 

both bills that are pending, the definition that we are using in both 

bills for ‘‘underserved area’’ have been taken out of the new markets tax credit initiatives, are very restrictive to census track definition, and consistent with the existing definition, and from the 

CDFI definition of underserved areas. And we use in the alternative. But they are much more restrictive than other definitions 

in underserved areas. But it would get us into about 40 percent or 

less of the country of underserved areas. 

Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. I am sorry 

I was not here for an opening statement. We were tied up in anVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
24

other committee. But I would like to ask a question based on an 

anecdote that I would have mentioned in my opening statement, 

namely, a local credit union in my district helping to reach out to 

folks who had previously relied on a check cashing and payday 

lending franchise. 

Mr. Lussier and Mr. Dorety, can you tell me, from a national perspective, what you know or understand that credit unions are doing 

to move people from being unbanked, so to speak, meaning without 

a relationship with a reputable financial institution, and thus reliant on extortionate sources of credit, interrelationships with credit 

unions in particular? Can you share with us something about what 

credit unions may be doing, collectively moving to meeting the 

short-term borrowing needs that many working and poor folks 

need? 

Mr. LUSSIER. Yes. I just want to say that as far as the financial 

literacy programs that are out there—I will address that first—I 

know that our credit union itself has had educational facilities in 

the local high schools as well as branches in the high schools to 

help assist and train the young to become educated financially on 

their responsibilities of what is going to take place in the next few 

years of their lives. 

We have just enhanced our program by having an educational facility within our own new operations center to address just that 

issue, to help financial literacy in both from people from underserved areas in the community as well as minorities and/or people 

who are in high school or even some of the senior citizens. 

So we have gone to great strides to having additional staff put 

onto our staffing to assist just for the financial literacy programs. 

That is what we do regarding that. 

As regarding the payday lending, we actually again go out to give 

many small loans of the $500 to $600 area, and charge no abnormal fees or underwriting costs or anything else, and just do that 

for many, many people within our community to help and assist 

them to get away from some of the payday lenders. 

Ms. WATERS. Thank you very much. And let me just address this 

question to any of you who would like to answer: What will H.R. 

5519, the Credit Union Regulatory Relief Act, which we have been 

discussing—what can happen with the passage of this legislation? 

Will you be able to expand to be of more assistance to our constituents and their ability to borrow? And would this include businesses 

also? 

Mr. DORETY. Congresswoman, really quickly, the national efforts 

on serving the underserved—we have a national program called 

Real Solutions. It is administered by the National Credit Union 

Foundation, and it is in over half of the States. It provides products, services, and guidance to credit unions. It is a very popular 

program. It is being moved out nationally at this time. 

And our State leagues are also getting involved in a program 

called the Real Deal. So there are national efforts on credit unions 

attempting to go out and provide services to the underserved. 

This particular bill that we are talking about would enable more 

credit unions, obviously, to include underserved communities in 

their field of membership. It would also enable more credit unions 

to offer business loans to their small business members. Clearly, it 

25

would help to provide economic stimulus to the constituency that 

you are referring to. 

Ms. WATERS. Simply put, you just would have more resources to 

expand out into these communities that are not available to these 

communities today. Is that correct? 

Mr. DORETY. I couldn’t put it any better myself. 

Ms. WATERS. I like that. Thank you very much. I yield back the 

balance of my time. 

Mr. KANJORSKI. Thank you very much, Ms. Waters. 

And now my friend from California, Mr. Royce. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

I am going to Mr. Dorety with a question first, and that is: Credit unions, by their very nature, are quite risk-averse. By law, they 

lack any access to capital markets. The current prompt corrective 

action rules induce credit unions to maintain capital levels higher 

than those necessary to protect the share insurance fund. 

So I would ask if you would explain why credit unions must 

maintain their current net worth requirements, and how credit 

union members would benefit from modifying these requirements 

proposed by CURIA? 

Mr. DORETY. Congressman, I think the reason that we are required are basically what you suggested. First of all, we have to account for the 1 percent share insurance fund. But also, we do not 

have the availability, or most credit unions don’t have the availability, to go into the area of alternative capital. 

So I think that is probably the basis for why we are where we 

are. The new provisions under prompt corrective action would 

allow credit unions obviously to address some of that. Now, credit 

unions are risk averse, and many credit unions have capital levels 

that are above that level of 7 percent that we consider to be well 

capitalized. 

If we were to enable to move that well-capitalized level still to 

a safe and sound level that our regulators would adhere to, then 

more credit unions would certainly be encouraged to provide more 

capital and spend more money, provide better products and services, and enhance their products and services to members. 

The risk-based side of this provision would certainly help credit 

unions make more loans and allocate risks appropriately towards 

making those loans. The one-size-fits-all, as we heard here earlier 

today, just doesn’t make sense any more. So we really believe that 

would assist credit unions in providing more economic stimulus to 

our membership. 

Mr. ROYCE. So in theory, we have a more rigorous two-part net 

worth structure that is actually going to closely monitor actual 

risk. 

So I will ask Chairwoman Johnson: What type of impact would 

you expect that to have, then, on the national credit union share 

insurance fund when we go to a risk-based capital system? 

Ms. JOHNSON. Congressman, actually it will have a positive impact on our insurance fund because it will allow us to—it accelerates our ability to deal with those thinly capitalized institutions. 

I would also like to point out that the other regulators have the 

ability to adjust their capital levels by regulation. We are held to 

26

statute. And that is why we need action in a bill such as you are 

proposing. 

Mr. ROYCE. Going to another issue, Chairwoman Johnson, with 

the economy continuing to work through some pretty challenging 

and difficult times here, is this the time to be thinking about the 

prompt corrective action reform that is in the CURIA bill? 

Ms. JOHNSON. It is actually the very best time, because the way 

we have seen the economic conditions, although credit unions have 

done a terrific job in the mortgage lending area, and have not gotten themselves into some of these precarious positions, their record 

is very good, but it is because of the focus now on the economy and 

where institutions are and the interest rates, etc. This is the time 

that we should be addressing the issue through this statute. 

Mr. ROYCE. Thank you very much, Chairwoman Johnson. 

I am going to go back to Mr. Dorety. There has been a lot of discussion here today about how the Credit Union Membership Access 

Act of 1998 was the last major piece of credit union legislation that 

we have enacted here in the United States Congress. 

But as I think you pointed out, while this Act certainly saved a 

number of credit unions from disappearing, it was not regulatory 

relief. In fact, the legislation put additional statutory burdens on 

credit unions. 

So the question I would ask you is: When was the last time Congress provided credit unions with change to the Federal Credit 

Union Act that provided some type of regulatory relief, in your 

memory? 

Mr. DORETY. Congressman, it has been over 20 years. It was 

after the Garn-St Germain Depository Institutions Act of 1982, but 

it has been over 20 years since Congress has enabled—has given 

credit unions any meaningful regulatory abilities, in my memory. 

Mr. ROYCE. Well, I thank you all. I thank the witnesses again 

for traveling out here to testify today. And Chairman Kanjorski, I 

yield back the balance of my time. 

Mr. KANJORSKI. Thank you very much, Mr. Royce. 

And now we will hear from our friend from North Carolina, Mr. 

Watt. 

Mr. WATT. Thank you, Mr. Chairman. I want to relate an experience going back, and I am going to assume some risk today, the 

same risk that I did the first time I mentioned this. I will put it 

in context. 

I represented a credit union before I came to Congress, and was 

a member of two credit unions at that time. And about a year or 

two into my service on this committee, after I came to Congress, 

I was at a breakfast and made the political judgment that I had 

enough credibility with credit unions to raise a basic question, and 

have incurred the wrath of some credit unions, especially the larger 

ones, since that. 

The basic question was: What is the dividing line between what 

credit unions do and banks do? What should the appropriate dividing line be, given the fact that credit unions are not taxed and 

other financial institutions are? 

I have found over the years that has been the real undercurrent 

of just about everything that this committee has dealt with, and 

27

continues to be the underlying question. And so I want to put that 

question out here as a general context again. 

I think it raises itself in the context of this proposed legislation, 

especially modifications that may be made to the service of underserved areas. And I want to start with Ms. Johnson because one 

of the concerns I have—I mean, I will do anything to get more financial services access to poor people. And one of the concerns I 

have is that the interpretation of underserved areas may need a lot 

more attention than your office is giving it. 

I am reading here from a report that was done in 2004, which 

says to me, ‘‘Treasury Department Federal Credit Union,’’ and defines its field of membership as ‘‘persons who live, work, or regularly conduct business, worship, or attend school in, and businesses 

and other legal entities located in, Washington, District of Columbia. Underserved addition 12/8/04.’’ 

I am reading a provision that allows JSC, Houston, Texas, if I 

read this correctly, to serve a field of membership ‘‘persons who 

live, work, worship, or attend school in, and businesses or other entities located in Houston, Texas and underserved area.’’ 

Could it possibly be that the whole City of Houston, Texas, is an 

underserved area? Could it possibly be that the whole City of 

Washington, D.C., is an underserved area? Could it possibly be, if 

I look at some of these other descriptions, that the whole City of 

Monterey, California, is an underserved area? 

Is this just a misstatement of this, or do we have a problem? Because I think part of the problem that people are having here is 

that if you define this area as being so broad, people don’t understand what the distinction is any more between a nonprofit credit 

union and a for-profit financial services entity of another kind. 

That is one serious problem that I think needs to be addressed 

here. And it entails more than just a question of serving underserved people. I think everybody is willing to serve underserved 

people, but if the definition is that broad, there are a lot of people 

in these areas who fall in that definition. 

The second question, and giving my speech here, I have run out 

of time. But the same thing applies when you convert out of a credit union because if the owners are the people who are being served 

in a credit union, it is like a mutual insurance company. 

I had some litigation about that before I came here, too. I 

stopped a conversion from a mutual insurance company to a stockbased insurance company because the people who were benefitting 

from the conversion disproportionately were the people at the top 

of that institution. The people at the bottom of that mutual insurance company were getting virtually nothing out of the conversion 

process. That is the issue that Mr. Kanjorski raised. 

I think we have to do more work on these two issues to satisfy 

people that the status of credit unions is not being abused. And 

maybe you can shed some light on the first of those, Ms. Johnson. 

I will shut up and give you an opportunity to respond. 

Ms. JOHNSON. Thank you, Congressman. I would be pleased to 

respond. 

The underserved areas that have been granted do meet the statistical criteria for the definitions of the underserved. And these 

are statistics— 

28

Mr. WATT. You are telling me that the entire City of Washington, 

D.C., and the entire City of Houston, Texas, meet that definition? 

Ms. JOHNSON. Well, I would like to address the example you used 

of the Treasury Department Federal Credit Union. 

Mr. WATT. No. I am asking you that question. Does the entire 

City of Houston, Texas, meet that definition? 

Ms. JOHNSON. Statutorily, yes, it does, by the criteria that is already in—the criteria that we go by, yes. 

Mr. WATT. So a credit union could do—could have a member— 

Ms. JOHNSON. It is based on the investment areas. 

Mr. WATT. —of any business that is located—any person who 

works in the District of Columbia? 

Ms. JOHNSON. It is a consumer choice, yes. If they reside, if they 

are within that underserved area. And I would like to point out— 

Mr. WATT. That underserved area being the entire City of Houston, Texas? 

Ms. JOHNSON. If that meets the statistical criteria for those investment areas, it is anyone residing within that statistical area. 

That isn’t— 

Mr. WATT. What happened to this clear definition of neighborhood that we started out with? Does that not have any bearing any 

more? How is that a clearly defined neighborhood? Isn’t that in the 

statute? Isn’t that in your regulations? 

Ms. JOHNSON. The term ‘‘neighborhood’’ is not used. 

Mr. WATT. I have run out of time, but— 

Ms. JOHNSON. Might I respond, though? 

Mr. WATT. —you see the problem. And I am sure I am going to 

get abuse for even—I got abuse the last time in a private setting 

for putting this discussion in a breakfast setting on the table with 

what I thought were my friends. So I very well anticipate getting 

substantial abuse for putting it in this public setting. 

But I don’t think we need to sweep this concern under the rug. 

And if we don’t address it, I think we are going to have some major 

problems on an ongoing basis really meeting the needs of underserved people. Maybe our definition is too broad now, the way you 

all are defining it. 

Ms. JOHNSON. I would like to point out that I recently personally 

attended the—I wouldn’t call it a grand opening, but the Treasury 

Department Federal Credit Union does serve—they have adopted 

an underserved area. And in cooperation with Operation Hope, 

they are working specifically with these underserved residents, 

these low-income residents in particular, of offering the counseling— 

Mr. WATT. I have no doubt that that is what they are doing. But 

the language that we— 

Ms. JOHNSON. That spreads out. 

Mr. WATT. —that we have here is broad enough to drive megatrucks and planes and tanks and everything else though. The good 

things that they are doing with it are wonderful. But I am telling 

you that this is subject to abuse, and we have to figure out a way 

to find what the appropriate balance is here. Otherwise we are 

going to lose—we will win the battle and lose the war. 

Mr. KANJORSKI. May I just add to this conversation that is going 

on? I think you are talking to cross points. The existing definition 

29

of an underserved area is different and much broader than the definition contained in the two bills presently pending. 

The two bills presently pending adopt the definition used in the 

new markets tax credit, which is highly restrictive. And under the 

new markets tax credit, you could not get a tax credit in any portion of Washington, D.C., only in those census tracks that meet the 

very restricted definition contained in that Act. 

And the same thing goes to Houston, Texas. I know of no city in 

the United States that would fully encompass a credible area of an 

entire community— 

Mr. WATT. I am surprised to read this myself, Mr. Chairman. I 

am reading from the report of the regional director of the National 

Credit Union Administration. That is the way it is defined in the 

report. 

Mr. KANJORSKI. Well, it is defined in that report because you are 

operating under some other definition presently at the credit union 

regulatory level, where this Act— 

Ms. JOHNSON. We are operating under the current congressional— 

Mr. KANJORSKI. Definition. 

Ms. JOHNSON. —definition. Yes. 

Mr. KANJORSKI. And the new definition under the two pending 

acts would be very much more restrictive, and purposefully so. But 

you cannot restrict it to the point that they become nonexistent. I 

know you have worked very closely on the new markets initiative, 

and we are going to be reauthorizing that this year after 5 years. 

That is a very restrictive act. 

I come from a congressional district that is quite on the low side 

of income and level, and yet less than a third of my congressional 

district qualifies for new market tax credits. And I think we are 

probably in the 30 percent range. 

Mr. WATT. I would just tell the chairman that is not the only 

concern I have with the new markets tax credit. We have had a 

hearing about some other concerns with it, too. So I will be looking 

forward to working with the chairman on that. But that is in the 

jurisdiction of the Ways and Means Committee, as I understand it. 

Mr. KANJORSKI. Right. 

Mr. WATT. So we may not get as direct a shot at it as I would 

like to have. 

Mr. KANJORSKI. Well, I think we ought to assume any jurisdiction we possibly have to get a tax credit. 

[Laughter] 

Mr. KANJORSKI. I see Mr. Miller of California has returned, and 

so I recognize Mr. Miller. 

Mr. MILLER OF CALIFORNIA. Mel, you were much easier to get 

along with when you had facial hair. I thought I would point that 

out. He is not even—Mel, you are not paying attention this morning. He is through talking. I can tell. I said, you were much easier 

to get along with when you had facial hair. I want you to know 

that. 

Mr. WATT. Well, I am glad to see you are talking my place in 

being easier to get along with and the facial hair. 

Mr. MILLER OF CALIFORNIA. I have always been easy. 

30

You know, when I was growing up, my parents were retail 

clerks, and I don’t think—if it wasn’t for credit unions, we wouldn’t 

have had sofas and chairs and carpets. So you have done a great 

job. 

Are there any other institutions you are aware of that have a 7 

percent requirement, as you are placed upon in capital requirements? 

Ms. JOHNSON. The risk—or the prompt corrective action that we 

operate under is the highest level of capital that is required. Currently, credit unions have to have 7 percent in order to be considered well capitalized. The proposal that we have before you would 

make it approximately 6 percent, but it would actually raise it at 

the lowest category, and it actually would raise it for about 30 percent of the credit unions. 

The banks currently are required to have 5 percent to be well 

capitalized. 

Mr. MILLER OF CALIFORNIA. And Congress provided the banking 

regulators the flexibility to risk-base capital as they deemed proper. How do you look at that? 

Ms. JOHNSON. Excuse me? I didn’t hear the first part of your 

question. 

Mr. MILLER OF CALIFORNIA. Congress provided the banking regulators the flexibility to risk-base the capital requirements for 

banks. How do you think that would apply to credit unions? 

Ms. JOHNSON. Well, we would like that ability to risk-base the 

capital. They are able to change theirs through regulation, and 

ours is firmly held by statute. And we are very limited. If we had 

this capability, we would be able to identify problems more quickly, 

and credit unions would be able to manage to their risk more successfully. 

Mr. MILLER OF CALIFORNIA. In conversations I have had, I understand that a number of credit unions actually want to help their 

members restructure or refinance troubled mortgage loans that are 

currently existing today, and including loans that their members 

may have gotten elsewhere. How does the NCUA address that 

issue? 

Ms. JOHNSON. Credit unions have addressed the mortgage lending area very well. We have not changed our standards through 

this whole process. We came out with early guidance, going back 

as far as 1995 and addressing some of these types of loans, and 

have continued with strong guidance in the last few years. 

We have maintained our lending guidelines based on the three 

Cs: collateral; character; and the capacity to repay. And we have 

not changed that. Now, we have encouraged credit unions to work 

with their members. We encourage modifications, where possible. 

And credit unions have been very successful in that regard. 

Mr. REYNOLDS. Congressman, can I have a point on that? 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. REYNOLDS. From the perspective of the State system, the 

State regulators have been encouraging their financial institutions, 

including credit unions, to work diligently with consumers to try 

and remediate these types of situations. 

And credit unions, our State-chartered credit unions, have been 

very effective in being able to step forward and help consumers in 

31

some situations where they have gotten themselves into subprime 

lending situations. And they are not always able to extricate consumers, but they are always able to assist them with being an honest broker of information on their options. 

Mr. MILLER OF CALIFORNIA. So you think you can actually help 

your members restructure or refinance some of these troubled 

mortgage loans in a safe and sound fashion where they have no 

place else to go today? 

Ms. JOHNSON. That’s right. 

Mr. REYNOLDS. Absolutely. 

Mr. MILLER OF CALIFORNIA. And you don’t think that would be 

unfairly involving yourself in the marketplace? That is a stupid 

question, but I think I know how you are going to answer that one. 

Should Congress extend the CRA to credit unions? 

Mr. DORETY. I will take that one. The answer is ‘‘no.’’ Congress 

should not extend the CRA to credit unions. CRA was brought to 

banks, I think in 1978, because they were doing bad things. They 

were redlining, and they were doing some of those characteristics 

that credit unions do not do. 

We serve our members. We have a defined membership. There 

is no reason for CRA in credit unions at this time. And if you look 

at what credit unions are doing, and if you allow credit unions the 

ability to add underserved, and if you allow us to do the risk-based 

capital lending, and if you allow us to do the member business 

lending extension, we will still not need CRA. We will still not be 

doing the things that banks were doing which brought CRA upon 

them. 

Mr. MILLER OF CALIFORNIA. Mr. Chairman, I think this is a good 

approach you are taking on this. You know, growing up, in my 

youth I watched my parents, retail clerks, use a credit union. 

I think they are filling a void out there in the marketplace that 

banks really don’t want to get into in many cases. I think they are 

doing a good job. And I think some people out there who benefit 

from the credit unions would have no place else to go in many 

cases. 

I think this is a reasonable approach, and I am glad we are taking it. I wholeheartedly support it, and I yield back my time. 

Mr. KANJORSKI. Thank you very much, Mr. Miller. 

Now the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Mr. Chairman, I hope that when we ultimately 

pass legislation—I do hope we pass legislation this year—that it 

will include a look at the credit union capital structure, the prompt 

corrective action structure, and that we more closely resemble the 

risk-based capital standards that the FDIC uses. I look forward to 

working with you on that. 

Our colleague, Mr. Watt, brought up the interesting issue of 

whether credit unions are doing enough to deal with underserved 

areas. I think he is right that we have to be careful in crafting legislation, and we may end up crafting something more limited than 

the current regulatory definition of what is an underserved area. 

And maybe the Ways and Means Committee did a good job with 

their definition of new markets, but maybe we will do a different 

job here, if they didn’t do a good job. But I think it is important 

that credit unions serve underserved areas, and that we define unVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
32

derserved areas narrowly enough so that, for example, here in 

Washington, we focus their desire to serve the underserved communities to the underserved communities in Washington. We wouldn’t 

say, well, open up a facility in Chevy Chase and you are doing 

something to help the underserved people of the District. 

But I am often asked to define the Yiddish word ‘‘chutzpah.’’ And 

I noticed that a group brought litigation which effectively prohibited well over half of the credit unions, that is to say, those with 

a single group or community charter, from extending credit union 

services to low-income areas and groups not adequately served by 

traditional financial institutions. 

And then this same group, having used the legal system to prevent the majority of credit unions from serving underserved areas, 

has this beautiful ad. I don’t know if you—are you folks familiar 

with this? Have you seen this, maybe, once? And it attacks credit 

unions for not serving underserved areas, having been prohibited 

from doing so by the litigation brought by the same people who 

brought you the ad. 

So Mr. Dorety, I wonder if you happen to have seen this ad—

which I will put into the record without objection—if perhaps you 

could spend a few minutes responding to it. 

Mr. DORETY. Well, it has come to my attention, sir, yes. Our folks 

have shared it with us. And I couldn’t agree with you more that 

the information and the questions—it is a series of 10 questions. 

And we have responded to those questions, and would love to put 

this in the record, our responses to the questions that the bankers 

put forth in this ad in the last couple of days. 

Mr. KANJORSKI. Without objection, the ad in its totality will be 

entered into the record, and the 10-question response by the credit 

union will also be entered into the record. Without objection, it is 

so ordered. 

Mr. SHERMAN. Perhaps you could spend a minute or two highlighting some of those answers. 

Mr. DORETY. Well, I don’t want to go into all 10 questions because it is kind of like a David Letterman Top Ten. The last question is the most interesting one. And they go from 10 to 1, so it 

is a David Letterman thing: ‘‘Why should Members of Congress cosponsor H.R. 1537 if the credit union industry cannot answer these 

questions?’’ 

We have answered the questions right here, and so the answer 

to that question is Congress should cosponsor H.R. 1537. We can 

get into specifics of the others. But there are a lot of issues in 

these, Congressman, and I don’t know that we can get into all of 

them at this time. 

Mr. SHERMAN. Ms. Johnson, perhaps you could highlight what 

would be the effect of going to risk-based capital? As I understand 

it, some credit unions would then have to have more reserves, some 

less. But would we do a better job of protecting the insurance fund 

if, instead of a rigid simple system, we had a more complex and 

more sophisticated formula? 

Ms. JOHNSON. The overall effect is that you would be giving the 

regulator the best tool that we could have in our tool box. The riskbased proposal that we have presented will actually have a positive 

33

impact on the insurance fund because it accelerates our ability to 

deal with those thinly capitalized institutions more quickly. 

The current system does force credit unions to all—it is a onesize-fits-all. And especially in this economy, and with these changing times, and with the different amount of risk that credit unions 

take on, we should be able to measure it according to the risk. 

And so I believe it is imperative. I think if you want to have 

these other regulatory relief items, this is the real tool that allows 

us to have this other regulatory relief. 

Mr. SHERMAN. And it is my understanding—and this, I think, 

differs from banks and thrifts; we all remember the Federal Government having to write a check back in the 1980’s—that if for any 

reason the insurance fund was inadequate, every credit union in 

the country would then have to contribute up to its full net worth 

to the insurance fund. Is that correct? Or if the insurance fund is 

inadequate, is it the Federal Treasury that is on the hook? 

Ms. JOHNSON. Credit unions contribute 1 percent. We have a robust insurance fund. 

Mr. SHERMAN. Well, but if for some reason—and this would be 

a catastrophe none of us would want to see—the fund was inadequate, would it be the taxpayers or the credit unions of the country that would be on the hook? 

Ms. JOHNSON. It is not the taxpayers, Congressman. It is the 

credit unions. You are correct. 

Mr. SHERMAN. So basically, when we change to a different formula, the real parties in interest, the entities that would be on the 

hook if you didn’t have adequate capital, would be first the insurance fund and then all the other credit unions in the country? 

Ms. JOHNSON. You are correct. 

Mr. SHERMAN. And it is my understanding that none of these 

credit unions, who would be ultimately on the hook if one of their 

brother/sister organizations or several of them went under, that 

none of them is opposing this change in the prompt corrective action statute. Is that correct? 

Ms. JOHNSON. No. It is being strongly supported, actually. 

Mr. SHERMAN. So they are putting their capital on the line? 

Ms. JOHNSON. That is right. 

Mr. REYNOLDS. Congressman Sherman, I just wanted to add as 

well that the State regulatory system strongly supports risk-based 

capital. Risk-based capital is being used for other financial institutions, primarily because it is a risk management tool for regulators. 

And so I wanted to add our strong support to that issue. 

Mr. SHERMAN. I thank you for that, and I believe my time has 

expired. 

Mr. KANJORSKI. The gentleman from Florida, Mr. Feeney. 

Mr. FEENEY. Thank you, Mr. Chairman. And thanks to the 

panel. I think that one of the great things about credit unions is 

that there has not been taxpayer money lost in their long years of 

service, and we are very grateful that is one of the things that 

make you unique. 

You know, I got involved in elected politics for the first time in 

1990 in the State legislature in Florida, and as expected, we had 

healthy, interesting debates over welfare reform and tax policy and 

education reform. 

34

But there were very few things as spirited as, say, the fights between the commercial bingo parlors and the local VFWs over who 

got what nights for bingo. The only thing more energized in debate 

was the fights over racing dates for dog tracks in places like South 

Florida, if you could get the prime tourism season. And inevitably, 

those debates resulted in several members having to stand in between and literally stop the outbreak of fisticuffs. 

And turf battles are always interesting. By the way, I never had 

a dog in the dog track day fights, so I just sort of sat back and enjoyed the show. And I will tell you, we have my colleagues on the 

committee that are huge advocates for the banks, and we have colleagues that are huge advocates for the credit unions. I find myself 

as somewhat of an umpire here. 

But I will tell you that we saw the most recent proposal—because this is a line drawing problem. I mean, for example, the issue 

of whether credit unions—to what extent they can loan money to 

members for business enterprises. You know, I think most of us 

feel strongly that if it is a $20- or $30- or $50,000 startup enterprise that your member wants to be engaged in, that is terrific. 

On the other hand, if we are going to get into international financing at a high level, that is another end of the scale. So it becomes a line drawing problem for a lot of us that want to do what 

is right ultimately for your customers. 

I have to tell you, my friends in the banking industry say that 

there ought to be tax parity between credit unions and banks. And 

I may vote for tax parity one day, I tell them, but it would never 

be to levy a tax on the credit unions. It would be to eliminate the 

tax on banks. 

Because ultimately what I am interested in is access to credit, 

on a rationale basis. Your customers and customers of banks and 

my constituents, we have a credit crisis in America right now. I 

think in some ways Congress is dramatically overreacting. 

I am leading the charge to stop the primary foreclosure bankruptcy proposal, which I think would marginally increase the cost 

of credit for everybody and reduce the value of every American’s 

real estate. So it is sort of the forgotten people as we try to do 

things that look sympathetic that I am concerned about, and I appreciate your stand on that. 

But while I am on the subprime and credit—the crisis created 

initially from the subprime effort, Chairman Johnson, what percentage of the mortgages that credit unions nationally make roughly are held in portfolio, and what percent are packaged and sold 

to investors? 

Ms. JOHNSON. Credit unions hold the majority of their mortgages 

in-house. They do sell some into the secondary market, but they 

sell to the GSEs. 

Mr. FEENEY. Well, it is one of the great things credit unions are 

doing as we have this huge credit crisis because they really do fill 

many niches. And this is just one of them. Ben Bernanke testified 

here just the other day. Securitized lenders have gone from putting, annually, $1 trillion into the marketplace for borrowers of 

mortgages, $1 trillion, to $50 million a year; 95 percent of that 

market has dried up. 

35

So credit unions once again are filling a niche and stopping what 

would otherwise be a worse catastrophe in the mortgage loan crisis. 

And as I understand it, credit unions make almost no, if any, 

subprime loans. Is that right, Ms. Johnson? 

Ms. JOHNSON. Credit unions make approximately 2 percent of all 

mortgages throughout the entire country. The percentage of 

subprime is even less than that. I would note there is a difference 

between a subprime loan, which is just to a borrower with lesser 

credit, than some of these exotics and, you know, the mortgages 

that really got people into trouble. And credit unions did a fine job, 

I think, by following our guidance in not putting their members 

into loans that they couldn’t afford. 

Mr. FEENEY. Right. 

Ms. JOHNSON. And so it was that one-on-one with the member 

up front. 

Mr. FEENEY. Well, and I think community banks do that. 

Ms. JOHNSON. Correct. 

Mr. FEENEY. Often very well. But I should say that one of the 

problems we have had in the subprime mess is that we have a total 

disconnect between the people that purchase the scrutinized loans 

by the thousands on one end, and the people that are making 

loans. 

You all are able to evaluate on an individual basis, and therefore 

are making very rational loans throughout a period where there 

have been, unfortunately, huge numbers of irrational loans. And 

now that crisis has bled over and created a credit crisis, not just 

in other markets in the United States but around the world. 

So congratulations for what you are doing. We appreciate the fact 

because to the extent we are hoping for an immediate bottom of the 

real estate market, I think credit unions have been a reliable partner in keeping a bad situation from getting worse. 

With that, I will yield back. 

Mr. KANJORSKI. Thank you very much, Mr. Feeney. 

Now the gentleman from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank you and 

Mr. Royce for focusing on this issue. And I want to thank the witnesses for helping us out. 

I think there has been definitely a reconfiguration of finance in 

a lot of communities. I think with the mergers of a lot of large 

banks, especially in my area, in the City of Boston—we have seen 

six banks become three banks, and then at least the larger ones 

have really consolidated. There have also been, however, I think, 

a growing number of community banks that have tried to fill in 

that void, as well as—and I am blessed with a lot of great credit 

unions in my district. 

Let me go back to that last question. I had a foreclosure prevention workshop in my district a couple of weeks ago, where I rented 

out the cafeteria of a local high school. And to my surprise, I had 

about 400 people show up. And we are getting hit pretty hard with 

foreclosures. 

What can you do—I know you haven’t been guilty of investing, 

and you haven’t been pulled into the whole subprime mess. But for 

instance, at our event we did have a lot of the banks step up and 

36

try to do the right thing and to correct the situation as best they 

could. 

What is the credit union community doing with respect to reaching out? What are the limitations that you have that prevent you 

from doing more of that? And what could we do to help you at least 

address this problem? It looks like it is going to be with us for a 

while. 

Ms. JOHNSON. Well, first of all, I would applaud you for being 

proactive and holding your workshop. There is a need out there. 

And that is what we have done. We are doing the same thing with 

the credit unions in encouraging them, especially with the up-front 

counseling. 

I think the most important thing we can do is to ensure that the 

credit unions are educating their members to the terms of the loan, 

understanding what they are getting into, and then not putting 

them into a loan that they can’t afford in the first place. 

Where we are seeing a little bit of residual damage is they may 

not have gotten their loan, their mortgage, a high risk mortgage 

from the credit union. They may have gotten it somewhere else. I 

think where credit unions have to be particularly careful is in this 

residual damage of their other consumer loans. 

And this is where the counseling again and extending that hand 

to their members and working with them to modify. They have 

their car loans, their credit card loans, etc. And so we are encouraging that, and credit unions are doing so on a member-to-member 

basis. 

As far as limitations, I don’t know—off the top of my head, I 

can’t think of a specific instance that is limiting us other than just 

continuing to put—being able to adopt more underserved areas so 

that these individuals that need this help then have access to the 

credit union itself. 

Mr. DORETY. Congressman, I would like to touch on that if I 

might. 

Mr. LYNCH. Sure. 

Mr. DORETY. You know, the subprime market has touched all of 

us. I happen to live in Tampa, Florida, on the west coast of Florida, 

and we certainly have been impacted by this. We have made no 

subprime loans. We have made loans to people who you might consider to be qualifying for subprime loans, but the loans we make 

are honest, straightforward loans that don’t have any of the escalation, don’t have high interest rates. 

And going forward, we work with all those folks. And we are 

looking at foreclosures. We have been working with them on a oneon-one basis. We are telling our other members that if they have 

one of these toxic loans, that they need to come to us and talk to 

us and see if there is something we can do. 

We are still making mortgage loans. Actually, we have a huge increase in mortgage loan applications recently because of what has 

been going on through the other financial institutions. There are 

credit unions all over the country who are engaged in this type of 

effort, and they are not making those loans that caused the problems to start with. 

37

So I think as a community, credit unions are certainly willing, 

and are, in fact, stepping up to the plate to help try and get us out 

of this mess that so many folks are in. 

Mr. LYNCH. Thanks. 

Yes, sir? 

Mr. LUSSIER. Congressman, I have a comment as well. In Massachusetts, as you know, we have been hit with the economy as well. 

One of the things that I think we just recently got into, and I take 

my hat off to the State of Massachusetts for doing this, they came 

up with some type of special grant funds and so on and so forth—

I think it was the Mass Housing recently, of which we were one 

of the first ones in there to see what we could do to try to take 

some of those funds to put it back to the community to assist the 

people to get them out of some of these subprime mortgage instruments. 

It is extremely expensive for them to—expensive for people to 

even get out of them, if at all possible to get out. I think the State 

of Massachusetts has come to the forefront to try to help and assist—to help them do that as well. 

So we worked with Mass Housing. That was one of the items we 

have done. 

Mr. LYNCH. Mass Housing Finance Agency? 

Mr. LUSSIER. I believe that is right. 

Mr. LYNCH. MHFA? Yes. 

Mr. LUSSIER. I believe that is where it is. Yes. Actually, my vice 

president of real estate lending was just going through that with 

me before I left the other day, so I had the bare minimum. 

But it was a great program that he was trying to get through our 

board meeting this month to get involved with the Mass Housing 

Finance Agency to help and assist in that area, as well as the financial literacy and counseling that we actually try to do and put 

out in the forefront by having some of my senior executives get together if someone does have an issue with one of those loans, which 

I know that we had three people in our office this week that were 

wondering what they could do to get out of it. We brought them 

in personally to discuss the issues, to show them where they were, 

and try to assist them to see what we could do to try to help them 

get out of that problem. 

Mr. LYNCH. Great. Thank you, Mr. Chairman. I see my time is 

expired. I yield back. 

Mr. KANJORSKI. Thank you very much, Mr. Lynch. 

And now the newest member of the committee from the great 

State of Nevada, Mr. Heller. 

Mr. HELLER. Thank you very much, Mr. Chairman. I certainly do 

appreciate your hard work on this particular piece of legislation. I 

appreciate the opportunity for the first time to be able to approach 

the rest of the committee. 

I apologize I was not here for your opening comments, and for 

that reason I may be asking questions or making comments that 

have been repeated before. But I will try anyway. I have a limited 

knowledge of the background and perhaps the scope of what your 

industry does as it is concerned with credit unions. 

I guess my question is: I am confused as to what now is the scope 

of a credit union. I live in northern Nevada. I would love to have 

38

you tour my 110,000 square miles we call a district, but I will tell 

you, you guys play an important role in some of the smaller communities that we have in that State. 

The inability to get financial institutions to come in, but when 

we talk to the larger communities, the scope seems to change pretty dramatically. And it is my understanding that history has told 

us that the purpose of a credit union was to fill a unique niche. 

And I am wondering if that is getting too broad now. That is the 

complaint that I am hearing from the other side, that perhaps you 

are trying to become more and more like other financial institutions, with certain advantages. For example, you want to maintain 

your tax-exempt status, but you don’t want to comply with CRA. 

You want to change your capital requirements in this particular 

piece of legislation, but you want fewer regulatory burdens. 

And the argument is—and again, I haven’t taken sides on this 

particular issue—but what it appears to me is you want the benefits but you don’t want to take the risks. How do I respond to that 

when those questions are asked and I have to answer them? 

Mr. DORETY. Congressman, we happen to be one of those credit 

unions you are talking about. We are a $6 billion credit union located in Tampa, Florida. We started in 1937 as a small teachers’ 

credit union in Hillsborough County. Our board of directors are volunteers. We are a not-for-profit cooperative. That is the reason we 

were granted a credit union charter, and that is the reason we 

have been given a tax exemption. 

If you come into our board meeting today, we are exactly the 

same as we were then. Our structure has not changed. And the 

structure is what has enabled us to have that status. It never 

started as saying a limited field of membership. It never started as 

trying to—there is no size restrictions on this. The fact of the matter is, if you are doing a good job with your members and you are 

providing good services and products to them, you are going to be 

successful, and guess what, you are going to grow. 

Growth is important to financial institutions. Look at the rash of 

mergers. We are a $6 billion—we are the largest financial institution headquartered on the west coast of Florida. Every bank is out 

of Charlotte, out of Birmingham, or out of Atlanta. 

And the fact that we have been successful and grown has not 

changed the basic structure of who we are or what we do. Our entire focus is on our member owners, as opposed to investors. And 

that is the difference, and that is why we deserve the tax exemptions. 

Mr. HELLER. I come from a State—Nevada is in particular probably the largest foreclosure State right now, especially in the southern end of the State. Just to give you an example, I believe our 

foreclosure rate is 3 times higher than the national average; 1 in 

every 154 homes right now are being impacted, whereas I think the 

national average is about 1 in 555. So you can understand my concern over this. 

I just want to make sure that this piece of legislation doesn’t put 

credit union members at risk, more at risk than they were before. 

And can you explain to me why I shouldn’t be concerned that these 

capital requirement changes won’t put your members more at risk? 

39

Mr. DORETY. I will be happy to. I don’t want to try to one-up you, 

but I am in the west coast of Florida. So we have just as many 

issues as you do. Actually, Fort Myers is ranked the worst in foreclosures, and we have a significant presence there. 

Mr. HELLER. You win. 

Mr. DORETY. So I think the new regulations will only help. I 

think two things. One is we have strong regulatory backing, and 

they are going to be able to look at credit unions. As Chairman 

Johnson has explained, they are going to have more tools to help 

develop and estimate risk in credit unions. 

And that is the key. Credit unions are going to be able to have 

the ability to measure risk when we make loans, more so than we 

do today. Today it is a one-size-fits-all. An unsecured credit card 

loan, we have to risk. The assessment is exactly the same as an 

investment in a government-backed security. 

That just doesn’t make any sense. And so when you enable us 

to do these types of things that we will be able to do under the new 

prompt corrective action guidelines that are in this law, we will be 

better served. Our members will be better served, and we will have 

no greater risk than we have today. 

Our regulators—we will be on the exact same footing, well, not 

the exact same. We will actually have higher regulatory restrictions than other financial institutions do, even after this is imposed. 

But credit unions have high capital levels today. We have never 

contributed. We have never had a bailout, as other financial institutions have done. We have always been a safe institution, and this 

particular bill will do nothing to change that. 

Mr. HELLER. Mr. Chairman, I yield back. I went a little bit over 

my time. Please don’t hold it against me in the future. 

Mr. KANJORSKI. No. We welcome contributions from Nevada. 

Mr. HELLER. Thank you. 

Mr. KANJORSKI. The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Yes. Thank you, Mr. Chairman. It has been a very 

informative hearing. 

And I want to talk—first of all, what you are after is—we are 

dealing with two bills here, number one. And I want to get your 

response to find out if you are—which direction you think we ought 

to go on these two bills, and do either or both of them meet your 

primary obligations, your primary objectives? Ms. Johnson? 

Ms. JOHNSON. Congressman, the CURIA bill does contain the element of the risk-based capital. And that has has been dropped from 

the CURIA bill. And for me, that is the priority. I would like to see 

the risk-based capital put into the CURIA bill, or vice versa. That 

is vitally important. 

The underserved, extending the opportunity for all credit unions 

to adopt underserved areas, is vitally important. If I were to list 

two items, however it is combined, those would be my priorities. 

Mr. SCOTT. All right. Now, let me just get it kind of focused here. 

Let’s talk about one of the areas that I think is certainly helpful, 

and that is, you want to raise the limits on how much business 

lending you can do. And I think you stated in your testimony that 

credit union members’ business lending cap is currently the lesser 

of 12.25 percent of total assets or 1.75 times the net worth. 

40

How does this cap compare with other financial institutions, and 

how do credit union members’ business loans compare or differ 

from the business loans made by these other institutions? 

Ms. JOHNSON. I believe the current cap that is in place for the 

thrifts is 20 percent, and there has been legislation proposed that 

would take the cap off completely. When credit unions were first 

formed, there was no cap on business lending. It is only as recent 

as 1998 that there has been any cap in effect at all. 

About 25 percent of the credit unions currently make business loans, and the average is only $190,000. So it about—I mean, it is 

important for those small business in these communities to be able 

to offer these—have access to credit. It will help these communities. And it is a valuable system for the members. 

Mr. REYNOLDS. Congressman Scott, also— 

Mr. SCOTT. Yes, Mr. Reynolds? And welcome up here from Georgia. 

Mr. REYNOLDS. Well, thank you, sir. 

Mr. SCOTT. Glad to have you. 

Mr. REYNOLDS. Thank you, and we appreciate your hospitality. 

From the State perspective, the other point I would like to make 

is that in credit unions, member business lending is looked at very 

carefully in the examination process. We don’t have member business lending being made in every credit union that we go into. 

So we are very diligent. When we go in and do an examination 

in a credit union, we look very carefully at any credit union that 

is making member business loans. We are very careful to review 

the underwriting, the written policies and procedures, and the ability of management to properly manage that function. So it is looked 

at probably more in depth in a credit union than it would be in another financial institution. 

Mr. SCOTT. All right. Let me ask you about prompt corrective action, Ms. Johnson. Credit unions are by nature risk-averse, and by 

law, they lack access to capital markets. It is my understanding 

that the current prompt corrective action rules induce credit unions 

to maintain capital levels higher than those necessary to protect 

the share insurance fund. 

Can you explain why credit unions are forced to maintain excessive net worth requirements, and how credit union members would 

benefit from modifying these requirements as they are proposed in 

CURIA? 

Ms. JOHNSON. Well, the current requirements in place are by 

statute. We don’t have the ability, as the other regulators— 

Mr. SCOTT. I see. 

Ms. JOHNSON. —through regulation. So that is by statute, and 

that is what we are asking to be changed. 

And the second—oh, credit unions are incredibly well capitalized, 

and they are averse to—you know, they are not risky institutions. 

And they have raised, through retained earnings, their capital levels. They are in excess of this required 7 percent. The current average capital is about 11.4 percent. So it demonstrates that credit 

unions are managing effectively. 

Mr. SCOTT. All right. My time is about up. But let me get to this 

question. The three points, of course, you want a more flexible riskbased standard that would be determined and regulated by the regVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
41

ulators. You want to raise the limits on how much business lending 

credit unions can do to business. And you want to get into the underserved areas. Those are the three things I think you are basically asking. 

So the question presents itself to me: How do you respond to the 

banking community’s interest that if we do these three things for 

you, that some kind of way this is going to give you an unfair competitive advantage? That seems to me as what we have to answer. 

Are there legitimate concerns—do they have a point to make 

here? Are you getting an unfair advantage over the banks by getting into this? 

Ms. JOHNSON. I imagine my colleagues would like to jump in on 

this. But I will tell you from a regulator standpoint that this is not 

an unfair advantage in that credit unions are still held to higher 

regulatory requirements than other institutions. They are limited 

in investments. They are limited by field of membership. You 

don’t—I mean, there is—this isn’t a tradeoff. This is just giving the 

credit unions the tools they need to serve their members. 

Mr. DORETY. Credit unions—excuse me. 

Mr. SCOTT. Yes, sir. Please. 

Mr. DORETY. Credit unions, to say we have an unfair advantage 

is—it is an illusion. We are subject to different regulatory restrictions at times. We have a totally different structure. You know, 

banks have the opportunity, if they care to, to change to a credit 

union charter. 

We are a not-for-profit. We send everything back to our members, and if there is an unfair advantage, it is in that structure because we have one audience, our membership. We do not have to 

pay outside investors. That is our choice of charter. Banks’ choice 

of charter is a different choice, so they are established differently 

and they have different economic factors that they are dealing 

with. 

It is simply the choice of charter, and it allows us in some situations—actually, in many situations—to offer far better products 

and services to our members for that one very fact: We are a notfor-profit cooperative. 

Mr. SCOTT. Yes, Mr. Lussier? 

Mr. LUSSIER. Yes. I just want to say that I want to make sure 

that we remind each other that we only represent 1.1 percent of 

the market share out there. And I would just like to say that if 

banks think that it is that unfair, that they can convert to credit 

unions if they so wish as well. 

Mr. SCOTT. All right. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Scott. 

The gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. Let me continue on 

that same line. 

Is it true that there are 123 credit unions with more than a billion dollars in assets, which would mean that they are larger than 

82 percent of the banks? 

Mr. DORETY. It is true, I believe. I am pretty certain that is the 

case that there are 123 credit unions that have a billion dollars in 

assets. All of the assets of the credit unions combined do not equal 

42

either of the three largest banks in the country. So we ought to put 

that in perspective as well. But yes. 

Mr. CLEAVER. Generally, those who talk with us are the smaller 

banks, who come in to talk with us, quite frequently, I might add. 

And the issues, of course—I mean, I understand the two different 

charters and the way the Federal Government is allowing the two 

to exist. 

But it would seem to me that if credit unions are disinterested 

in doing CRA, it seems to me that you have to be careful about how 

you say you are not wanting to do it just because I think the way 

you say you are not wanting—the way you make that statement 

can send the wrong signals. And Mr. Watt was dealing with that 

a little before he left. And so that does trouble me. 

But in the urban core all over this country, and I am not that 

sure about rural areas, but in the urban care—and I represent a 

district that is very urban—we have a potpourri of payday loan operations and ‘‘Jenny’s Come Cash Your Check Quick’’ companies. 

And it would seem to me that one of the things that maybe credit 

unions could do is develop a new product that would allow—that 

would cause the people in those underserved areas to have a service that is desperately needed. 

One of the reasons—I used to have an NPR radio show that I did 

live, and I did a show on these check cashing places. And it was 

a live show. I had a whole group of people who showed up in the 

poor parts of Kansas City, Missouri, angry with me because they 

said they needed those check cashing places. They said, there are 

no banks around. You know, we need a place to cash our checks. 

We need a place where we can get small loans. 

And so, you know, with everyone—with the mantra from banks 

and credit unions, we want no regulations, you know, just leave—

the market will take care of everything. Well, the market is not 

taking care of everything, and the truth is that you could develop 

products that would help, that would really help the community. I 

mean, those people are getting ripped off whether they like it or 

want to or not. They are getting ripped off because there are no institutions around to handle their needs. 

So it seems to me that that ought to be one of the things that 

credit unions would consider. I mean, that is CRA without anybody 

having to ask you to do it. Chairman Johnson? 

Ms. JOHNSON. Congressman, I would like to respond. Congressman Kanjorski’s bill does have a provision in it that would allow 

credit unions to offer check cashing services to non-members within 

their field of membership, which is a good way of getting individuals into these traditional institutions. 

One other thing is that federally chartered credit unions have a 

usury ceiling of 18 percent. And so that is a helpful limitation in 

this sense to these consumers of not being charged with these exorbitant fees. 

Mr. CLEAVER. Yes. Mr. Watt talked about— 

Ms. JOHNSON. Oh, I meant payday lending rather than check 

cashing. Excuse me. 

Mr. CLEAVER. That is fine. They are the same, as far as I am 

concerned. 

43

The neighborhood language that Mr. Watt actually—the word 

neighborhood is in the CRA legislation. And he mentioned neighborhood for yours. It is not, but it is in the CRA for banks, that 

they serve neighborhoods. We don’t have neighborhood banks any 

more. 

And even if credit unions—I mean, I belong to two credit unions. 

I am not anti-credit union; I belong to two. The problem is, the 

credit unions are not located where people need the service. That 

is the problem. 

Mr. DORETY. Congressman, we have—actually, Congressman 

Scott earlier said something about the most important group in 

this discussion is not in this room; it is the consumers. We are 

owned by these consumers. Our credit union has a branch in an 

underserved area in East Tampa. There are four payday loan 

shops; you can walk out the front of our door and look at the four 

payday loan shops. 

There are no banks in that community. We opened that branch 

2 years ago to serve the people that you are talking about. Credit 

unions nationally have a program called Real Solutions which addresses payday loans, check cashing, and a number of products and 

services, exactly the type of thing that you are talking about. 

Mr. CLEAVER. There are two things. 

Mr. DORETY. We do CRA. We just aren’t required—we aren’t 

forced to do CRA. Credit unions are already handling those issues. 

Mr. CLEAVER. Two things. One, your services would be made 

available, I guess, based on the charter only to members. Is that 

right? 

Mr. DORETY. My understanding under this bill is that payday 

loans would be available to folks living—eligible for membership in 

the community who are not members. But yes, today we are. 

Mr. CLEAVER. No. Say that again, if you would, Mr. Dorety? 

Mr. DORETY. Under the new bill, payday loans—the provision in 

the new bill allows credit unions to make payday loans to residents 

who are in an area that they would be eligible for membership but 

they are not members. I believe that is correct. 

Mr. CLEAVER. Eligible? They would be eligible? 

Mr. DORETY. Would be eligible. Right. Therefore, the more underserved communities we were able to have, the more folks would be 

eligible for those payday loans. 

Mr. CLEAVER. Final question: If we have one in Tampa and we 

have 50 States, 300 million people, I mean— 

Mr. DORETY. We have one in St. Petersburg, too, sir. 

Mr. CLEAVER. Okay. We have two. 

[Laughter] 

Mr. DORETY. But the fact of the matter is, I said the national 

program that credit unions are undergoing right now, we are very 

active in very underserved communities and we want to do more. 

So it is— 

Mr. CLEAVER. I want you to do more. The question is, you know, 

will you do more? I mean, the legislation, I think, is good. But will 

you do more? I mean— 

Mr. DORETY. Yes. 

44

Mr. CLEAVER. —people are not standing in line trying to go in 

to serve these people. Now, the payday loan folks are making 

money or they wouldn’t be there. 

Mr. DORETY. Absolutely. 

Mr. CLEAVER. And so, I mean, which would suggest that you can 

make money as well. 

Mr. LUSSIER. Congressman, that is why passage of H.R. 5519 is 

a great start and beginning to what we need to get that job done. 

Credit unions would be out there trying to do it if they were permitted to do so. 

Mr. CLEAVER. So you wouldn’t mind a provision in this legislation that would give you a certain time in which you would have 

a certain number of these facilities located in underserved areas? 

I mean, some kind of provision that would give us some comfort in 

going to our districts and saying, you know, we just passed one or 

two of these bills and that help is on the way. 

Mr. DORETY. Our regulator already requires us to put a branch 

in that community within 2 years of getting our charter. So they 

have the ability—they already are doing that, and they would have 

the ability going forward to require us to put a branch, a full service branch, in that community. 

Mr. CLEAVER. So you want me to support Mr.—I always mess it 

up but— 

Mr. LUSSIER. Yes, sir. We do. 

Mr. CLEAVER. Yes. And then I will be happy at home, telling people that you are coming? 

Mr. LUSSIER. Yes, sir. 

Mr. CLEAVER. And the payday loan people will be angry and 

start fleeing? Thank you. Thank you, Mr. Kanjorski. 

Mr. KANJORSKI. Thank you very much, Mr. Cleaver. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses, and 

to place their responses in the record. This panel is now dismissed, 

and I would like to welcome our second panel. 

I am pleased to welcome our second distinguished panel. First we 

have Mr. R. Michael Stewart Menzies, Sr., president and chief executive officer of Eastern Bank and Trust Company, testifying on 

behalf of the Independent Community Bankers Association. Mr. 

Menzies? 

STATEMENT OF R. MICHAEL STEWART MENZIES, SR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, EASTON BANK AND 

TRUST COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) 

Mr. MENZIES. Mr. Chairman, thank you so much. It’s an honor 

to be here in front of you again. My name is Mike Menzies and I 

am the president and CEO of Easton Bank and Trust in the little 

town of Easton, Maryland, on the Eastern shore of Maryland. 

We’re a $140 million community bank, 14 years old. And it’s also 

my honor to represent the Independent Community Bankers of 

America as the chairman-elect of that trade association of 5,000 

community banks. 

45

We do appreciate the invitation to come before this group. And 

as you would expect, we do strongly oppose this bill, H.R. 1537. 

Congress should not expand credit union powers without addressing first the tax advantage of credit unions and their inability or 

lack of willingness to comply with the Community Reinvestment 

Act. 

I want to make clear that community bankers strongly support 

local, not-for-profit organizations. I’m the chairman of our local hospice. I have been the chairman of our United Way in Talbot County. Over my 38 years of experience in banking, I have always been 

involved with local charities. And community bankers throughout 

the Nation are also fully invested in the charities in their communities. But I believe CURIA is a misnamed, aggressive measure 

disguised as regulatory relief that would give credit unions expanded business lending powers and actually weaken their capital 

standards. It would increase the already unfair competition that 

credit unions currently pose to community banks. 

A Congressional Research Service report notes, if I may quote, 

‘‘Over the past 30 years, most of the distinctions between credit 

unions and other depository institutions have been eliminated or 

reduced because of deregulation. Consequently, the justification for 

the tax exemption for credit unions has been increasingly questioned.’’ 

Credit unions are seeking to expand farther into the core business of community banking, small business lending, and I can assure you, community banks are not afraid of competition. We have 

no shortage of competition when it comes to small business lending. We compete with large banks and finance companies and automobile dealerships, but all of those competitors pay taxes. 

Credit union representatives often claim that they represent such 

a small percentage of the industry, and we heard that again this 

morning. While the banking assets total about $12.7 trillion in assets, and our 5,000 members represent roughly $982 billion, the 

credit union industry has grown to a $753 billion industry. And as 

you heard this morning, over 19 million members, and over 8,000 

credit unions in this country today. We recognize that you, sir, 

have introduced H.R. 5519. And while we haven’t totally analyzed 

that bill, we recognize it is a narrower bill. That’s good. 

Clearly, credit unions want to expand their charter because they 

feel inadequate in serving the needs of their community and their 

customers. For credit unions that truly believe they need to expand 

their powers, there’s a wonderful solution that’s out there—convert 

to a mutual thrift. It’s a wonderful solution, because it allows credit 

unions to go into a business structure where they can expand their 

services dramatically. Unfortunately, NCOA is constantly putting 

up roadblocks to keep credit unions from moving into that mutual 

thrift structure. 

So why should credit unions have to go to a new charter rather 

than just expand their current powers? The answer is really simple. Congress provided credit unions with a substantial tax advantage over community banks and does not require compliance with 

the Community Reinvestment Act. Congress put this basic tradeoff 

in decades ago. Limiting activities, providing credit to individuals 

of modest means, but valuable tax and regulatory benefits. 

46

In 2005, the Tax Foundation calculated the credit union tax subsidy is worth about $2 billion a year and growing. On the average, 

credit unions found little or no effect on deposit rates or other 

costs, so the average member benefit is very little. But these are 

averages. Credit unions can use their subsidies selectively to secure 

business if they want. One of my customers, a retired airline pilot, 

very attractive 7-figure net worth, and a very attractive high-6-figure income, applied to me a year ago for an aircraft loan. I gave 

that individual, who has most of his deposits with us, not with his 

credit union, what I considered to be an extremely competitive rate, 

and the credit union quoted that loan on much more aggressive 

rates to buy a $700,000 airplane at probably a 20 percent discount 

to our pricing. 

Several studies have shown repeatedly that credit unions have 

strayed far beyond their mission to serve individuals of modest 

means. Credit unions involved in last year’s Florida real estate investment scheme, dubbed ‘‘Millionaire University,’’ illustrates just 

how far credit unions have strayed. This scheme, a number of credit unions invested in a speculative land development deal far outside of their marketplace, far outside of the needs of their members, and lost hundreds of millions of dollars, causing the insurance 

fund one of the greatest losses in the history of the insurance fund. 

For these reasons, sir, we urge Congress to reject calls to expand 

their powers. And instead, we hope that you consider true regulatory relief for all financial institutions. 

Thank you, sir. 

[The prepared statement of Mr. Menzies can be found on page 

115 of the appendix.] 

Mr. KANJORSKI. Thank you Mr. Menzies. Next we will hear from 

Mr. Bradley E. Rock, chairman, president, and chief executive officer of the Bank of Smithtown, testifying on behalf of the American 

Bankers Association. 

STATEMENT OF BRADLEY E. ROCK, CHAIRMAN, PRESIDENT, 

AND CHIEF EXECUTIVE OFFICER, BANK OF SMITHTOWN, ON 

BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. ROCK. Thank you, Mr. Chairman. We appreciate the opportunity to comment on expanding the powers of credit unions. These 

issues are sometimes filled with emotion on both sides. The banking industry is sometimes portrayed as attacking the entire credit 

union industry. Let me assure you, Mr. Chairman, this is not our 

goal. 

Most of the credit union industry today continues to focus on 

their mandated mission to serve people of small means. I would 

suppose that most of the credit unions that have been present in 

this room today are these mission-focused credit unions. These institutions are an important part of our financial system. Our issue 

is not with credit unions that are meeting the needs of people of 

modest means, but rather with the new breed of credit unions that 

want to grow aggressively, serve high-income individuals and large 

businesses, and take over small credit unions to expand their charter. These new breed credit unions are the biggest threat to traditional credit unions, as they are fundamentally changing the naVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
47

ture of the business, shunning their core mission to serve those 

people with limited options for financial services. 

It is important to look beyond the rhetoric to the reality of today’s credit union landscape. For example, the reality is that over 

2,000 credit unions have been absorbed by these new breed credit 

unions since 2001. Today there are more than 123 credit unions 

with over $1 billion in assets, which makes them larger than 92 

percent of the tax paying banks in this country. Near where I live, 

Bethpage Federal Credit Union, with more than $3 billion in assets, is nearly 3 times the size of my bank, and 5 times larger than 

the typical community bank on Long Island. And from their advertising, I can tell you that Bethpage is very much focused on serving 

wealthy individuals. 

During this hearing, we have heard about the need for broader 

authority to serve underserved areas. The reality is that there is 

no requirement today that credit unions demonstrate that they are 

meeting the needs of low-income individuals. NCUA’s approval of 

so-called underserved areas does nothing to assure such a requirement. NCUA has declared entire cities to be underserved and allowed credit unions to open branches in high-income areas with no 

requirement, none at all, that they actually serve low-income 

neighborhoods. For example, all of Washington, D.C., has been declared underserved. Under proposals from NCUA and credit union 

groups, every credit union would be eligible to come into Washington, put a branch in wealthy Georgetown, and not make a single 

loan to a low-income person. 

During this hearing, we have also heard about the need to serve 

small businesses. But the reality is that the new breed credit 

unions are hitting the congressionally mandated limits on business 

lending because they are making very large loans to real estate developers and others, including those businesses out of their market 

area. 

For example, consider a $30 million luxury condo loan, which is 

currently in default, made by Eastern Financial Credit Union, or 

the loan for a luxury golf and condominium resort by Twin City Coop’s Federal Credit Union. Or the construction loans by Texans 

Credit Union that average $10 million each. Or the millions of dollars in loans involving a land deal in Florida that caused the recent 

failures of credit unions in Colorado and Michigan. Are these loans 

that the credit union tax exemption was intended for? How many 

loans to low-income people could have been made instead? 

Expanding business lending powers and easing credit union capital rules will only move the new breed of credit unions further 

away from their mandated mission, and encourage them to bulk up 

by acquiring small ones at an even faster pace. Fortunately, for 

those expansion-minded credit unions, there is a very viable option 

for them today—switching to a mutual savings bank charter. This 

charter, which some credit unions have already adopted, provides 

greater flexibility while still preserving the mutual member focus 

that credit unions find desirable. 

Mr. Chairman, there remains an important role for traditional 

credit unions that serve people of modest means. But we see no 

reason for Congress to give authority to expand business lending 

that will only encourage a further departure from this mission. 

48

Thank you very much. 

[The prepared statement of Mr. Rock can be found on page 130 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Rock. And I thank 

the entire panel for waiting this long. Let me make first and foremost a congratulatory note to the community banks and to the average banks in America, and let it be noted for the record that our 

present situation of subprime loan failures is less attributable to 

the regulated national and State banks in this country, and more 

attributable to unregulated institutions in this country. And if we 

had had more of the formal regulated community banks or regular 

banks, although you are both regular banks, we probably would be 

in less difficulty than we are today in the credit markets. So you 

are fulfilling a good function and I want to make sure this committee recognizes that fact. 

Now, with that being said, I think there is probably a fundamental disagreement philosophically between the chair of this committee and yourselves. And we could sit here for hours, and I would 

probably enjoy it, but I doubt whether we would convince each 

other of our mutual positions as being correct. 

Although, I want you to know that prior to my arrival here in 

Congress and my service on this committee, I actually served as a 

board member of a small bank in Pennsylvania, and I think I 

served for about 10 years as a director in that bank. So I understand some of the problems that small banks have, certainly their 

competitive positions that they have. And I empathize, let it be 

said, with the banking community. 

On the other hand, I was not preconceived to sympathize with 

the credit unions prior to my arrival in Congress. I had never been 

a member of a credit union and I knew little about what they did. 

I actually got here in an interesting way. I represented as an attorney the cooperatives, food cooperatives. And I will not say I fell in 

love with, but I became enamored with, the process of cooperatives 

and saw how they could be utilized to work to the benefit of people. 

And when I came to Congress and then studied the credit union 

movement, I became very appreciative of the fact that a cooperative 

effort in banking, removing some of the activities of competition 

and profiteering or profiting from commercial endeavors, actually 

worked to the benefit of people. I do not know how we would ever 

agree that all organizations in the country should be for-profit and 

for nothing else. I think we have a huge number of institutions 

that border on that cooperative area that perform great functions. 

Some abuse their positions. I will concede that. That is not a question. But I can tell you quite frankly, some banks abuse their positions. If we wanted to sit here and go back and forth, I do not know 

who would win that challenge, but some of my best friends, as they 

say, are now residents of Allenwood who used to be in banking institutions. May I just leave it at that—be a little humorous, but 

that happens. That is the— 

Mr. ROCK. None of our members, I hope, Mr. Chairman. 

Mr. KANJORSKI. No what? 

Mr. ROCK. None of our members, I hope. 

Mr. KANJORSKI. Well, I would imagine they at one time or another were your members. They are not anymore. But those are the 

49

foibles of human beings. To look at those excesses or extremes that 

caused those results, and then attribute it to the whole I think is 

somewhat of a mistake. 

What I do not understand, honestly, is we worked very hard on 

putting a new financial structure here in place, a risk management 

tool. And being good businessmen, both you and your institutions; 

your associations being made up of good businessmen, why 

wouldn’t you for the protection of the credit union members and for 

that aspect of the financial service industry and the country, why 

would you not be more in favor or in favor of a risk management 

capital system as opposed to what it is today, which does not really 

meet the needs and protect it against some of the abuses that you 

are actually asking? You heard the regulators say here, you would 

afford the opportunity for better Federal regulation, for better protection for the members, for better protection for society, if we put 

in place a risk management capital system that was not thought 

up by the credit unions, was not thought up by their association, 

was not thought up by the Congress, but actually was developed 

by the regulator. How can you argue against that sort of meritorious position? 

Go to it. Tear me apart, gentlemen. 

Mr. MENZIES. Go ahead. 

Mr. ROCK. Mr. Chairman, credit unions by the nature of their 

structure do not have all of the same means available to them for 

raising capital that banks have available. Credit unions’ only 

means of raising capital is through retained earnings. And history 

has shown that in times of stress when banks or credit unions are 

losing money, they do not have the ability to build capital through 

retained earnings. Therefore, it has always been thought, because 

that’s their only method of raising capital, it has always been 

thought that credit unions therefore need to have higher capital requirements than banks do, because banks have other alternatives 

during those hard times. 

The second reason— 

Mr. KANJORSKI. Okay. But now let me call you on that. This risk 

system that is proposed by the regulators is 1 percent higher than 

what is required of banks. 

Mr. ROCK. No. I believe it’s a quarter— 

Mr. KANJORSKI. It is 6 percent— 

Mr. ROCK. —a quarter of a percent. Five versus five-and-a quarter is what they’re proposing. A quarter of the percent. 

Mr. KANJORSKI. No, I think it’s 6 percent. 

Mr. ROCK. No. It’s 7 now. It’s 7 now, Mr. Chairman. 

Mr. KANJORSKI. And would go down to 6? 

Mr. ROCK. Would go down to—no. Would go down to five-and-aquarter is what they’re proposing. 

Mr. KANJORSKI. I thought I heard 6 in testimony, but I will trust 

you. Still, it is higher than what is required of banks. 

Mr. ROCK. Well, by a quarter of a point. And I think the question 

would be, is that sufficient to protect the depositors? And historically, the answer has been no. 

Mr. KANJORSKI. Well— 

Mr. ROCK. Because when you’re losing money, you can’t build retained earnings. There are no retained earnings. 

50

Mr. KANJORSKI. Look, when banks fail, they go to the insurance 

fund. When the insurance fund does not have enough money, they 

go to the taxpayers. We all know that, and I do not think there is 

anything wrong with that. 

Mr. ROCK. Well, that has never happened, though, Mr. Chairman. It’s theoretical. 

Mr. KANJORSKI. I know. But we have supported that. Never happened, but that is the trail. But if the insurance fund for the credit 

unions fails, they go to the rest of the credit unions throughout the 

country. It does not come to the taxpayers. So they have to have 

an awful lot of faith in the performance of these various credit 

unions to risk all of their capital. I mean, it is really quite a brotherhood; 90,000 people linking together to provide security for their 

needs within their financial services. 

Mr. ROCK. I would say two things to that, Mr. Chairman. First 

of all, it presumes that bank capital doesn’t stand behind those obligations, and I think that’s an incorrect assumption. 

Mr. KANJORSKI. What bank— 

Mr. ROCK. It has never happened. The collective bank capital. 

Yes, you look first to the insurance fund. Then you would look to 

the bank capital, just as you’re hypothesizing for credit unions, and 

only then would you look to the Federal Government, which by the 

way, there is no requirement that the Federal Government stand 

behind. That’s the whole too-big-to-fail argument. 

Mr. KANJORSKI. And maybe you could help me out. Your position 

is that under present banking laws, if there were a failure of banks 

in the country, and the Federal insurance fund fails, they then 

draw on all of the other remaining banks? 

Mr. ROCK. I’m saying that both of your hypotheticals are purely 

hypothetical. It has never happened for credit unions, and it has 

never happened for banks. It’s not a matter of law. 

Mr. KANJORSKI. Well, you know, I agree they may be hypothetical, but I would have to be honest with you and say we may 

get to test that system shortly. According to Mr. Bernanke the 

other day, he thought that there would be about 100 bank failures. 

Now we hope that they are not very large banks, but, you know— 

Mr. ROCK. And there is a $50 billion fund standing there financed through—not through— 

Mr. KANJORSKI. But there is some fear that it may be a too-largeto-fail bank that is involved, which would be incredibly disruptive. 

Mr. ROCK. And that would be unfortunate. 

Mr. KANJORSKI. Very unfortunate. 

Mr. MENZIES. Mr. Chairman, if I could pipe in a little bit. 

Mr. KANJORSKI. Yes. 

Mr. MENZIES. I think the great challenge that you, sir, and this 

committee face is understanding what types of risk you’d really 

want to take with this structure called credit unions. We had the 

great honor of having breakfast with Mr. Bernanke this week in 

Florida and with Chairman Sheila Bair, and with OTS Director 

Reich, and it’s pretty obvious that we’re going through one of the 

most difficult economies in our history. We’re talking about the 

housing stock falling in value from $600 billion to $1 trillion. We’re 

talking about subprime losses that are hard to measure, that are 

estimated by some to equal a couple of trillion dollars. These numVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
51

bers are unbelievable. And then the question is, do you take an industry whose mission is to serve the underserved—to serve the underserved—and do you give them powers that let them convert 

Washington, D.C., and Houston, Texas, into their marketplaces? 

You can go into small business lending. 

Mr. KANJORSKI. Okay. Let us stop right there. 

Mr. MENZIES. Okay. 

Mr. KANJORSKI. I am the author of these two bills— 

Mr. MENZIES. Yes, sir. 

Mr. KANJORSKI. —with Mr. Royce. They do not use the definition 

of underserved that presently is interpreted by the regulator. The 

definition of underserved is greatly restricted from what its present 

definition is to shadow and be consistent with the New Markets 

Initiative definition. 

And to my knowledge—I will not say that there isn’t a community in America that is not in total included in the New Markets 

Initiative, a census tract method of being underserved, but I highly 

doubt it. I certainly have a congressional district that is in the 

lower third economically in the country, and there is no community 

in my district that in totality qualifies as an underserved community. So when Mr. Watts proposed that possibility of Houston and 

Washington, I think that is not the facts. And we are going to 

check into the facts, okay? 

Mr. MENZIES. If in fact it’s driven by economics, then, frankly, I 

would say that makes sense. If the underserved member is eligible 

because of their economic condition, not where they live, then that 

may well make sense if they have a net worth under some number, 

$100,000. If they have an income under some number, that makes 

a great deal of sense. But if it’s geographic and Wal-Mart wants 

to put a store in one of these areas that’s defined geographically 

as eligible, then should Wal-Mart be able to go borrow from a credit union or Home Depot or Lowes or somebody else? 

Mr. ROCK. Mr. Chairman, I would make two points. One, and I 

think this was part of the point Mr. Watt was trying to make before, that would—I agree with what you have said, but that would 

presume that the Cities of Houston, Tucson, Philadelphia, etc., that 

have already been approved by NCUA, the entire city as an underserved area, that those don’t get grandfathered in. 

Mr. KANJORSKI. This Act is only allowing underserved areas to 

be served by credit unions in accordance with the definition here. 

It would be actually restricting what credit unions could do. 

Mr. ROCK. Okay. Including the 641 previous approvals. Is that 

what you’re saying? 

Mr. KANJORSKI. I would think that is how— 

Mr. ROCK. I would think so, too, but I think that’s something 

that’s not clear. 

Mr. KANJORSKI. I am glad you raised the question, and we certainly will look into it. 

Mr. ROCK. And the second point I would make, Mr. Kanjorski, 

and do agree that, as you said to Mr. Watt before, that the proposal 

is more restrictive, and I concur with that. But I would point out 

that in the City of Washington, for example, under the current proposal, almost all of Georgetown and almost the entire area along 

Massachusetts Avenue would qualify as an underserved area. And 

52

I think for any of us who know those areas, those areas are hardly 

comprised of low-income individuals. 

Mr. KANJORSKI. Now wait. Under— 

Mr. ROCK. Under the new proposal. 

Mr. KANJORSKI. All of Georgetown would apply? 

Mr. ROCK. Almost all of Georgetown and almost all of the area 

along Massachusetts Avenue. 

Mr. KANJORSKI. Meaning that Treasury has interpreted the New 

Markets Initiative statute to say that these homes in Georgetown 

and the residents there are underserved? 

Mr. ROCK. That’s the way we read the proposal. We have mapped 

it out, and we look at it, and that’s the way we read the proposal. 

Mr. KANJORSKI. I think we are going to find the old definition. 

We will check it out. 

Mr. ROCK. No. Under the old definition, the entire City of Washington, D.C., has been approved as an underserved area. 

Mr. KANJORSKI. Well, this is very good, because the evidence you 

are giving us we should also transmit to Ways and Means, because 

we are working on the reauthorization of the New Markets Initiative, and I certainly, having been one of the original drafters of 

that piece of legislation some 5 or 6 years ago, never intended, nor 

did the President at the time, ever intend that we finance those tax 

credits for areas like the rich sections of Georgetown. So we will 

certainly check into that. 

Mr. ROCK. Yes. 

Mr. KANJORSKI. I have taken far in excess of my time, and I am 

fearful that the chairman may run down here and dispossess me 

of the chair. So, with that, let me recognize my charming friend 

from Illinois. 

Mrs. BIGGERT. Thank you. I hate to break into that discussion. 

It was, I think, lively and productive. But just a couple of questions. Mr. Menzies, in your statement you referred to a GAO study 

of 2003, and it says that credit union serve a more—the study 

found that credit unions serve a more affluent clientele than banks, 

and the study concluded that credit unions overall served a lower 

percentage of households of modest means than banks. Could you 

expand on that a little bit? 

Mr. MENZIES. Well, you have quoted the GAO study correctly. 

The GAO study says that the community banks have more customers of low and modest income as a percentage of their customers than do credit unions. And that’s because they’re based in 

the community and they need to serve the entire community. 

Mrs. BIGGERT. Now that is a 2003 study. Do you think that 

would still hold true today? 

Mr. MENZIES. Well, that’s a good question, and the question is, 

has the credit union history studied their low- to moderate-income 

statistics and broadcast them so that we can clearly understand 

that a majority of their customers are people of modest means and 

people who need access to credit. 

Mrs. BIGGERT. Well, then, my next question is that—for both of 

you—is that the credit unions said that banks don’t want to make 

small business loans, especially under $100,000. Does your bank? 

Mr. MENZIES. Absolutely. We just participated, 50 ICBA banks, 

just participated in Chairman Bair’s Small Business Loan InitiaVerDate 0ct 09 2002 18:24 May 21, 2008 Jkt 041726 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\41726.TXT TERRIE
53

tive to establish strategies to make small loans, $1,000 and under, 

to individuals. We make $500 and $1,000 loans all the time. We 

lose money on them. We lose a lot of money on them. And we lose 

money because we pay taxes and we have a lot of overheard associated with regulatory burden. But we do it because we have to because they’re members of our community. 

Mr. ROCK. Congressman, we have an entire staff of people in my 

bank, which is a community bank, devoted to finding and making 

small business loans of under $100,000. And we currently, as of the 

date of filing of our last call report, have $95 million of such loans 

outstanding. So we absolutely do. 

Mrs. BIGGERT. Are the business loans under $100,000 less risky 

than business loans over $100,000? 

Mr. MENZIES. I would say no. I would say that business loans 

under $100,000 inherently carry more risk, require more underwriting, require more analysis, and require a closer relationship. 

We have commercial lenders who have significant experience lending into small business. They need to triage whether this is an appropriate FDIC deposit-insured risk or whether we should use the 

SBA or SBA 504 or some other strategy to mitigate risk. 

But my personal perspective would be that loans under $100,000 

can be riskier than the larger loans. 

Mrs. BIGGERT. You said it cost you more. 

Mr. MENZIES. Absolutely it does. 

Mrs. BIGGERT. Would that be true—how different would that be 

for a credit union to make the same loan? 

Mr. MENZIES. How different would— 

Mrs. BIGGERT. Well, would they have the same costs. How would 

the costs be different since they don’t pay taxes on that? 

Mr. MENZIES. I don’t know the exact basis point difference in 

terms of regulatory burden. I do know that the credit union tax advantage gives them 50 basis points or a half a point up to sixtysome basis points of pricing advantage. That’s why a 7 percent 20-

year aircraft loan that I quoted was written at 5.75 for 20 years 

by a competing credit union. So there’s a significant competitive advantage if they’re not paying 35 percent to the Federal Government 

and 7 percent, in our case to the State, of their income. 

Mrs. BIGGERT. Okay. Then Mr. Rock, you testified that in spite 

of the change in the credit unions that kind of metamorphose into 

highly competitive financial institutions that they’re almost indistinguishable from banks, and yet they continue to enjoy the tax exempt status conferred when it was composed of small self-help organizations. 

And if our goal is to foster a healthy competition in the financial 

services industry in order to benefit all the consumers, should we 

try and level the playing field between bank and credit unions? 

Mr. ROCK. I would say yes, absolutely, among the new breed 

credit unions. If a credit union wants to grow to a very large size, 

wants to serve everyone in the community without limitation, if 

they want to offer all the products and services that a bank can 

to all the same customers, then I say I welcome the competition, 

but they should play by the same rules. They should be subject to 

the same regulations. They should pay the same income taxes and 

so on. 

54

I do not think that that would be a wise policy choice for the traditional credit unions. I think the traditional credit unions that 

abide by the original quid pro quo, I think they serve an important 

function in the financial system, and I think they should be continued to allowed to do so. 

Mrs. BIGGERT. Thank you. I yield back. 

Mr. KANJORSKI. Thank you very much, Mrs. Biggert. We are 

pushing up against the votes that have been called, but I think we 

have enough time. Mr. Lucas of Oklahoma. 

Mr. LUCAS. Thank you, Mr. Chairman. One quick question. Gentlemen, obviously you both have a great deal of experience, and 

when I joined this committee 13 years ago, we were still in the 

process of sorting out what remained of the S&L meltdown, a concept basically where short-term money was used to make long-term 

commitments, and when circumstances changed, an entire industry 

went away. 

Tell me from your experience in the financial services industry 

in relation to how things have evolved in the last 20 years, is there 

still a challenge when you use short-term money to make long-term 

obligations? 

Mr. MENZIES. We don’t use short-term money to make long-term 

obligations. We are required by the FDIC to manage our balance 

sheet within an interest rate risk sensitivity that doesn’t put too 

much earnings at risk. And the same is the case with Mr. Rock. 

We can’t just go mismatch our balance sheet. We have a comprehensive management process to make sure we don’t go make 30-

year loans and put them on our books and fund them with savings 

accounts. It’s as simple as that. 

Mr. LUCAS. And do you have concerns about that being done by 

other people? 

Mr. MENZIES. I think it is not a responsible form of financial 

management. I think the reason the savings and loans got into 

trouble is because they had been given exclusive privileges and exclusive powers, and they were funding 30-year assets with savings 

accounts, and the market went upside down, and the government 

deregulated them, and they tumble. 

That is not the case with the thrifts today. The thrifts that are 

in business today are well capitalized and well managed, for the 

most part. They do a good job. But they’re subject to the same 

types of interest rate risk management policies that I’m subject to, 

and I’ve just been through an examination, and they are serious 

about it. 

Mr. ROCK. I would say, Mr. Lucas, yes, I think those continue to 

pose substantial risks. I think that 20 to 25 years ago when those 

events happened that we characterize as the S&L crisis, banks 

were not required to engage in the same level of interest rate risk 

simulation modeling that we are today. 

And I know that our regulator, the FDIC, requires us to engage 

in extensive monitoring. We have special computer programs. We 

do it quarterly. In times of stress, we do it monthly. So, I think 

that has reduced it. 

With regard to how the credit union regulators look at that, and 

whether the same requirements are demanded of them, I really 

don’t know. 

55

Mr. LUCAS. Fair enough. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much, Mr. Lucas. I really have 

to apologize. We have these votes on. I would really love to sit here 

and trade off a lot of questions and answers, because I think we 

would get a lot of the needed information. 

I want to assure you that this committee, and certainly this majority, are not prone to favor one institution over another. What we 

are trying to do is get to risk management, get to firmness in making sure that whatever occurs in our financial service industry is 

well examined and ideal. 

We are also working on regulatory reform for banks. I am going 

to ask my friends in the credit union movement not to get involved 

in being opposed to those deregulations for banks, because we do 

not intend to deregulate anything that would cause greater risk to 

the system, but in fact deregulate those things that are determined 

to be unnecessary or further restrictive or limiting your ability to 

earn. 

In that regard, I hope we come to parity here. We may not. If 

we do not, I don’t want the two of you to get ulcers over it. If we 

do, I want you to realize that then we have all succeeded at our 

chore to get the system to work as best it can. 

With that in mind, we are not going to take any further questions, because we have to make the votes. And I am going to note 

that some Members may have additional questions for this panel, 

which they may wish to submit in writing. Without objection, the 

hearing record will remain open for 30 days for Members to submit 

written questions to these witnesses, and to place their responses 

in the record. 

I want to thank both of you for appearing here today. And we 

did not mean to overwhelm you with time or questions. Certainly 

your statements and your answers will be fully examined and 

taken as seriously as any of the other testimony before this hearing. And with that said, the panel is dismissed, and this hearing 

is adjourned. 

[Whereupon, at 1:35 p.m., the hearing was adjourned.] 

(57)

A P P E N D I X

March 6, 2008

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