Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements
Published: 2006-11-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Legislative and regulatory changes have blurred distinctions between credit unions and other depository institutions and raised questions about the tax-exempt status of credit unions. This report (1) assesses the effect of the Credit Union Membership Access Act on credit union membership and charters, (2) reviews the National Credit Union Administration's (NCUA) efforts to expand services to low- and moderate-income individuals, (3) compares rates offered by credit unions with comparably sized banks, (4) discusses unrelated business income tax issues, and (5) assesses transparency of credit union senior executive compensation. To address our objectives, we obtained NCUA data on credit union membership, charter changes, efforts to target those of modest means, and executive disclosure requirements. We also analyzed Federal Reserve Board's Survey of Consumer Finances and Internal Revenue Service data.
section_title: What GAO Found
paragraphs: Since the passage of the Credit Union Membership Access Act (CUMAA) in 1998, larger community-based credit unions have constituted a much greater proportion of the industry. NCUA has approved federal community charters with increasingly larger geographic areas and potential for economically diverse membership. Much of the shift toward the larger community-based credit unions was due to conversions from other charters. NCUA's approval of these charters appears to have been triggered by changes in the economic environment and financial services industry and to diversify membership to accomplish goals such as increasing service to those of modest means. NCUA has established the low-income credit union program and allowed adoption of "underserved areas" to increase credit union services to individuals of modest means. Despite increased credit union participation in these programs and the expansion of community charters, the 2004 and 2001 Survey of Consumer Finances indicated that credit unions lagged behind banks in serving low- and moderate-income households. NCUA officials told GAO that, given the nascent nature of its two initiatives and the relatively recent shift to community charters, they did not yet expect observable changes in the data. Also, NCUA recently has undertaken a pilot effort to collect data on the income characteristics of credit union members. Because limited data exist on the extent to which credit unions serve those of modest means, any assessment would be enhanced if NCUA were to move beyond its pilot and systematically collect income data. Based on GAO analysis, credit unions typically had more favorable rates than banks, particularly for consumer loans. For example, credit unions auto loans were 1 to 2 percentage points lower than similarly sized banks, on average. However, it was not clear the extent that the more favorable rates fully reflected the tax subsidy that credit unions receive by tax-exemption. The Internal Revenue Service (IRS) has been reviewing state-chartered credit union activities (federal credit unions are exempt) to determine compliance with unrelated business income tax (UBIT) requirements, but such determinations are difficult due to complicated criteria and because many credit unions file group rather than individual returns. IRS stated that it plans to issue technical guidance in the first quarter of 2007 that the agency believes will help ensure credit union compliance with UBIT. Finally, credit union executive compensation is not transparent. Federal credit unions, unlike other tax-exempt organizations, do not file information returns, which contain data on executive compensation, with IRS. NCUA is collecting compensation data as part of its pilot, but it is unclear whether NCUA will conduct future reviews. NCUA officials noted a number of alternatives that could be used to increase transparency, such as requiring federal credit unions to provide compensation information in call reports or require that credit unions disclose compensation data at annual meetings.

section_title: Letter
paragraphs: Changes in credit union membership restrictions and the blurring of  distinctions in the products and services offered by credit unions and other  depository institutions, as well as concerns about the extent to which  credit unions are serving people of modest means, have resulted in  questions about the tax-exempt status of credit unions. Unlike banks,  credit unions are (1) not-for-profit entities that build capital by retaining  earnings (they do not issue capital stock); (2) member-owned cooperatives  run by boards elected by the membership; (3) subject to field of  membership requirements that limit membership to persons sharing  certain circumstances, such as a common bond of occupation or  association; and (4) exempt from federal income tax. As a result of recent  legal and regulatory developments, the National Credit Union  Administration (NCUA) has approved progressively larger geographic- based fields of membership for federal credit unions, including areas as  large as whole counties or major metropolitan areas. Additionally, credit  unions are increasingly offering products and services similar to those  provided by banks, such as real estate and business loans. With the  expansion of credit union membership and products, concerns have been  raised whether the tax- exempt status of credit unions provides an unfair  competitive advantage over comparably sized banks and the extent to  which credit unions remain unique in terms of the population they serve  versus that served by other depository institutions.
Credit unions can be chartered by the federal government or by a state  government. NCUA has oversight authority for federally chartered credit  unions; the states have primary oversight responsibility for state-chartered  credit unions. NCUA also provides share insurance to all federally  chartered and most state-chartered credit unions. As of December 2005,  there were nearly 8,700 federally insured credit unions—about 5,400 federally chartered and 3,300 state-chartered—with about $679 billion in  total assets.
Under the Federal Credit Union Act, federal charters are subject to a field  of membership requirement. The act provides for three types of federal  credit union charter—single common bond, multiple common bond, and  community. A single common-bond credit union has a field of membership  that comprises one group having a common bond of occupation or  association. In a multiple common-bond charter, the field of membership  comprises more than one group, with each group having a common bond of  occupation or association (within the group). In a community charter, the  membership comprises persons or organizations within a “well-defined  local community, neighborhood, or rural district.”
Although they are exempt from federal income tax, both federally and  state-chartered credit unions do pay other taxes at the federal and state  levels. For example, both types of credit unions pay federal employment  taxes such as social security tax on behalf of their employees. According to  the National Association of State Credit Union Supervisors (NASCUS),  most states impose real property taxes on state-chartered credit unions; and in a few states, federally chartered credit unions are subject to state  real property taxes.
As part of the House Ways and Means Committee’s continuing oversight of  the tax-exempt sector, you asked us to review a variety of credit union  issues. The objectives of this study were to (1) assess the effect of the 1998  Credit Union Membership Access Act (CUMAA) on federal credit union  membership and charter expansion; (2) review NCUA’s efforts to expand  credit union services to low- and moderate-income individuals; (3)  compare rates offered by credit unions with rates at comparably sized  banks, as one indicator of how tax-exemption might benefit credit union  members; (4) discuss issues associated with the application of the federal  unrelated business income tax (UBIT) to credit unions; and (5) assess the  transparency of credit union executives and board member compensation.
To assess the effect of CUMAA on federal credit union membership and  charter expansion, we obtained data from NCUA regarding charter types  and membership, including data on recent new charter approvals,  conversions, and expansions. To review NCUA efforts to expand credit  union services to low- and moderate-income individuals, we obtained  information from NCUA on its low-income credit union program and recent  underserved area expansions. We also obtained and analyzed the Board of  Governors of the Federal Reserve System’s (Federal Reserve) 2004 Survey  of Consumer Finances (SCF) to assess the extent to which credit union  members were of low- and moderate-income households and discussed  with NCUA officials their effort to measure the income levels of credit  union members. To compare rates offered by credit unions with those of  comparably sized banks, we obtained and reviewed rate data on more than  15 loan and savings products to identify any systematic differences. To  facilitate our discussion of issues related to the application of UBIT to  credit unions, we reviewed provisions of the Internal Revenue Code,  Federal Credit Union Act, judicial decisions, and Internal Revenue Service  (IRS) documents concerning the unrelated business income tax (UBIT) and  the taxation of credit unions. We also obtained and analyzed IRS data  regarding its activities to identify state-chartered credit union activities  subject to UBIT. To provide information on transparency of compensation  of credit union executives and board members, we discussed  compensation reporting requirements of credit unions with IRS and  obtained publicly available data regarding the compensation of board  members and senior executives of credit unions and banks. Appendix I  provides additional information about our scope and methodology. We  conducted our work in Washington, D.C., and San Francisco from  November 2005 through November 2006 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: Both federally and state-chartered credit unions are exempt from federal  income taxes. However, their exempt status arises from different  provisions of federal law. Federal credit unions are specifically exempt  from federal and state income taxes under a provision of the Federal Credit Union Act. State-chartered credit unions are exempt under a provision of  the Internal Revenue Code that describes as exempt, “Credit unions  without capital stock organized and operated for mutual purposes and  without profit.” The code also imposes UBIT on state-chartered credit  unions, but not on their federally chartered counterparts.
The tax-exempt status of credit unions originally was predicated on the  similarity of credit unions and mutual financial institutions. Section  11(a)(4) of the Revenue Act of 1916, the statutory forerunner of section  501(c)(14)(A), exempted from federal income tax “cooperative banks  without capital stock organized and operated for mutual purposes and  without profit.” The exemption of credit unions stems from an opinion of  the Attorney General,  31 O.A.G. 176 (1917), holding that credit unions  organized under the laws of Massachusetts were so similar to cooperative  banks as to come within the scope of section 11(a)(4).  IRS regulations  subsequently applied this ruling to credit unions generally.
While other institutions lost their exemption in the Revenue Act of 1951,  Congress specifically retained the exemption for credit unions by removing  cooperative banks, savings and loan societies, and building and loan  associations from exemption and inserting credit unions in their place.   The Senate Finance Committee report accompanying the Revenue Act of  1951 stated that the exemption of mutual savings banks was repealed to  establish parity with other banking institutions because the savings banks had become functionally similar to those other institutions. According to  the Senate report, tax-exempt status gave mutual savings banks the  advantage of being able to finance growth out of untaxed retained earnings,  while competing corporations (commercial banks) paid tax on income  retained by the corporation. The report stated that the exemptions for  savings and loan associations had been repealed on the same ground. The  report did not state why the tax-exempt status of credit unions was  preserved.
Credit unions are an important, but relatively small segment of the financial  industry. According to NCUA and Federal Deposit Insurance Corporation  data, federally and state-chartered credit unions represented 7.5 percent of  all deposits and shares insured by the federal government as of December  31, 2005. Additionally, credit unions typically are much smaller than banks  and thrifts in terms of total assets. For example, NCUA data indicated that  approximately 88 percent of federally chartered credit unions had $100  million or less in assets with 83 percent having assets less than $50 million  as of September 30, 2005. According to NCUA, the average size of a  federally chartered credit union was $73.2 million in total assets and the  median asset size was $11 million.
section_title: NCUA Rules Interpreting CUMAA Appear to Have Fueled Expansion of Community-Chartered Credit Unions
paragraphs: Since the passage of CUMAA in 1998 and subsequent NCUA rule changes,  NCUA has approved community charters with increasingly larger  geographic fields of membership—for example, covering entire cities or  multiple counties. Since 2000, community-chartered credit unions have  nearly tripled their membership and nearly quadrupled their assets. Most of  the new community charters approved between 2000 and 2005 were  charter conversions by multiple-bond credit unions rather than new credit  unions. According to NCUA, community charters offer credit unions  greater opportunity than single- and multiple-bond credit unions to  diversify their membership base, thereby contributing to the institution’s  economic viability and ability to serve all segments of the community,  including those of modest means.
subsections: section_title: NCUA Regulations Interpreting CUMAA Set the Stage for Growth of Community Charter Credit Unions
paragraphs: CUMAA is the most recent statute affecting field of membership  requirements of federally chartered credit unions. In 1998, the Supreme  Court determined that NCUA had erroneously interpreted the Federal  Credit Union Act to permit federally chartered credit unions to have  multiple common bonds. In response, Congress passed a provision in  CUMAA to specifically permit multiple-bond credit unions subject to a  general limitation on the number of members sharing a particular common  bond. Also in CUMAA, Congress amended the provision of the act  permitting the federal community charter by changing the description of its  field of membership from “groups within a well-defined neighborhood,  community, or rural district” to “persons or organizations within a well- defined local community, neighborhood, or rural district.”
Subsequent to the passage of CUMAA, NCUA revised its regulations to  approve community charters consisting of larger geographic areas of  coverage and potential members. For example, NCUA recently approved  one credit union for a community charter covering the entirety of Los  Angeles County. Thus, an estimated 9.6 million persons who live, worship,  and go to school or work in the county and businesses and other legal  entities within county boundaries qualify for membership in this credit  union. We reported in 2003 that previous NCUA regulations required  credit unions to document that residents of a proposed community area  interacted or had common interests. Credit unions seeking to serve a  single political jurisdiction (e.g., a city or a county) with more than 300,000  residents were required to submit more extensive paper work. However,  NCUA revised its regulations in 2003, defining a local community as any  city, county, or political equivalent in a single political jurisdiction,  regardless of population size and eliminated the documentation  requirements.
As shown in table 1, the number of community-chartered federal credit  unions doubled from 2000 through 2005, while the number of multiple-bond  credit unions declined by about 22 percent. In spite of the recent decline,  multiple-bond credit unions remain the largest group of federally chartered  credit unions in number and in total membership and assets. However,  community-chartered credit unions overtook multiple-bond credit unions  as the largest of the three federal charter types in terms of average  membership and average size in terms of assets beginning in 2003.
section_title: Growth of Federal Community Charter Credit Unions Has Been the Result of Charter Conversions Rather than New Credit Union Charter Approvals
paragraphs: To a large degree, the increase in number, membership, and assets of  community charter credit unions can be attributed to charter conversions  rather than to new credit union charter approvals. Between 2000 and 2005,  NCUA approved 616 applications for federal community charters. Of these  616 approved federal community charters, 600 were conversions from  single- or multiple-bond credit unions while only 16 were for new credit  union charters. As shown in table 2, the vast majority of the conversions to  community charters—549 or about 92 percent—involved multiple-bond  credit unions.
section_title: According to NCUA, Community Charters Allow Federal Charters to Remain Viable and Can Provide Opportunities to Diversify Membership
paragraphs: NCUA officials indicated that changes in chartering policy have been  triggered by factors such as the continued viability of federal credit unions  in a changing economic environment and financial industry developments.  NCUA believes that community charter expansion allows federal credit  unions to attract a more diverse membership base. According to the  officials, this in turn can enhance a credit union’s economic viability, safety  and soundness, as well as provide greater opportunities to serve members  of modest means. For example, officials explained that single- and  multiple-bond credit unions often tend to be organized around employer or  occupationally based associations, which in turn creates greater economic  risk exposure since the membership base is intertwined with the economic  cycles of a particular employer or occupation. Additionally, NCUA  officials noted that employer or occupational bonds result in a greater  concentration of members with middle rather than lower incomes. Since  community charters are organized around geographically based  associations, credit unions would be able to provide individuals from a  broad range of occupations and income levels in these communities with  access to their products and services. However, community based credit  unions would be vulnerable to regional downturns in the economy.
section_title: NCUA Programs Target Individuals of Low- and Moderate-Income, but Limited Data Preclude an Evaluation of Actual Service to Those Individuals
paragraphs: NCUA has established and increased participation in two programs and  policies that are specifically designed to make credit union services more  available to individuals of low- and moderate-income. NCUA’s Low Income  Credit Union (LICU) program is designed to assist credit unions that can  demonstrate that a majority of their members have a median household  income less than 80 percent of the national household income or make less  than 80 percent of the average for all wage earners. NCUA also has made it  easier for federal credit unions, regardless of location, to expand their  fields of membership into underserved areas (areas experiencing economic  difficulty). Although federal credit unions increasingly have participated in  these efforts in recent years, lack of data on the income levels of credit  union members has made it difficult to determine how effective these  programs have been in providing services to individuals of modest means.  But, the limited existing data on income levels of credit union customers  suggest that credit unions continue to lag behind banks in the proportion of  customers that are of low- and moderate-income. NCUA has undertaken a  pilot effort to capture information on the income characteristics of credit  union members, but the data will not allow NCUA to reach statistically  valid conclusions by charter type.
subsections: section_title: NCUA Encouraged Growth of Low Income Credit Unions and Adoption of Underserved Areas, but Cannot Quantify Impact of Programs on Use of Credit Union Services by Individuals of Modest Means
paragraphs: As we reported in 2003, it has been generally accepted that credit unions  have a historical emphasis on serving people with “small” or “modest”  means. Congressional findings contained in CUMAA linked the tax-exempt  status of credit unions, in part, to their “specified mission of meeting the  credit and savings needs of consumers, especially persons of modest  means.” NCUA incorporated this emphasis into its current strategic plan,  which gives its mission as “facilitating the availability of credit union  services to all eligible consumers, especially those of modest means  through a regulatory environment that fosters a safe and sound credit  union system.” According to NCUA officials, the changes in chartering  requirements should allow credit unions to serve a more diverse  membership, including those of modest means.
In addition to approving more community charters, NCUA has encouraged  credit union activity in other areas in an attempt to make credit union  services more available to low-income individuals and underserved areas.  According to NCUA, its LICU program is designed to assist credit unions  serving predominantly low-income members in obtaining technical and  financial services. Credit unions that receive a low-income designation  receive certain opportunities, such as the following:  greater authority to accept deposits from nonmembers such as  voluntary health and welfare organizations;  access to low-interest loans, deposits, and technical assistance through  participation in NCUA’s Community Development Revolving Loan Fund;  ability to offer uninsured secondary capital accounts and include these  accounts in the credit union’s net worth for the purposes of meeting its  regulatory capital requirements; and  a waiver of the aggregate loan limit for member business loans.
From 2000 through 2005, the number of LICUs grew from 632 to 1,032, an  increase of more than 63 percent (see fig. 1).
Credit union expansion into underserved areas also has increased in recent  years. From 1994 through 1998, NCUA rules permitted federal credit  unions, regardless of charter type, to include residents in low-income  communities and associations in their fields of membership.
In 1998, CUMAA expressly recognized that multiple-bond credit unions  would be authorized to serve persons or organizations within an area that  was underserved. The Federal Credit Union Act defines an underserved  area as a local community, neighborhood, or rural district that is an  “investment area” as defined by the Community Development Banking and  Financial Institutions Act of 1994—that is, experiencing poverty, low  income, or unemployment. NCUA’s Chartering and Field of Membership  Manual (Interpretive Ruling and Policy Statement 03-1 or IRPS 03-1)  allowed credit unions to include underserved areas in their fields of  membership, without regard to location or changes to their charter type.   For example, NCUA recently approved a credit union in the state of  Maryland to serve residents within an area of Washington, D.C., determined  to be “underserved.” Between 2000 and 2005, the number of credit unions  receiving NCUA approval to adopt underserved areas grew from 40 to 641.  As shown in table 3, the largest proportion of the 641 credit unions  approved through year-end 2005 were multiple-bond credit unions (410 or  64 percent), followed by community-chartered credit unions (196 or 31  percent).
However, recent changes in NCUA policies may limit the growth of the  underserved areas program. In connection with a lawsuit instituted in  November 2005, NCUA stopped permitting single-bond and community  federal credit unions to include underserved areas in their fields of  membership. This had the effect of allowing access only for multiple-bond  credit unions, which is permitted specifically in a provision of the Federal  Credit Union Act. In the lawsuit, the American Banker’s Association  (ABA) challenged NCUA’s approval of community-chartered credit unions  adding underserved areas to their field of membership. ABA argued that  NCUA misinterpreted the Federal Credit Union Act by allowing a  community federal credit union to expand into several communities in  Utah. ABA contended that the Federal Credit Union Act allows multiple- bond credit unions, but not community-chartered credit unions, to add  underserved areas to their fields of membership. In response, NCUA  subsequently amended its chartering regulations to limit the adoption of  underserved areas to multiple-bond credit unions. NCUA’s final rule,  incorporating these amendments, took effect on July 28, 2006. On July 20,  2006, ABA announced that it had agreed to dismiss its lawsuit.
Despite the expansion into underserved areas and the LICU program,  NCUA cannot specifically quantify the extent to which these programs  have increased use of credit union services by individuals of modest  means. As we reported in 2003 and will discuss in the following sections,  limited data are available that specifically measure the income levels of  credit union members and the services used by individuals of modest  means. As a result, although NCUA data indicate increased adoption of  underserved areas and increased participation in the LICU program, data  do not exist to specifically show the extent to which these programs have  increased services provided to individuals of modest means.
section_title: Federal Reserve Survey Data Suggest that Credit Unions Continued to Serve a Lower Proportion of Low- and Moderate-Income Households than Banks
paragraphs: Despite the shift toward community charters and the increase in the  number of credit unions participating in NCUA’s low-income and  underserved programs, our analysis of data from the Federal Reserve’s  2004 Survey of Consumer Finances (SCF) indicated that credit unions had  a lower proportion of customers who were of low- and moderate-income  than did banks. These results were similar to the results of our analysis of  the Federal Reserve’s 2001 SCF data, which we discussed in our 2003  report.
We combined the 2004 SCF data into two main groups—households that  only and primarily used credit unions (credit union customers) and  households that only and primarily used banks (bank customers). We  then computed the proportions of credit union customers and bank  customers in each of these four income categories—low, moderate, middle,  and upper. We based our income categories on criteria that financial  regulators use to assess compliance with the Community Reinvestment  Act, which is intended to encourage depository institutions to help meet  the credit needs of the communities that they serve. Specifically, (1) a low- income household had less than 50 percent of the national median  household income; (2) a moderate-income household had an income of at  least 50 percent, but less than 80 percent, of the national median household  income; (3) a middle-income household had an income of at least 80  percent, but less than 120 percent, of the national median household  income; and (4) an upper-income household had an income of at least 120  percent of the national median household income. We estimated that 14  percent of credit union customers were of low-income and 17 percent were  of moderate-income, compared with 24 percent and 16 percent for banks.  We found the difference between the proportion of low-income customers  at banks and credit unions to be statistically significant (that is, the  evidence suggested that the difference between the two was not simply the  result of chance). Moreover, we estimated that 20 percent of credit union  customers were of middle-income and 49 percent were of upper-income,  compared with 18 percent and 41 percent for banks. We found the  difference between the proportion of upper-income customers at banks  and credit unions to be statistically significant as well.
In an effort to assess the extent to which credit unions served people of  “modest means,” we combined households with low- or moderate-incomes  into one group (as a proxy for modest means) and combined households with middle or upper incomes into another group. We found that 31  percent of credit union customers were of “modest means,” compared with  41 percent of bank customers, suggesting that banks served a higher  proportion of people of “modest means.” The difference between banks  and credit unions was statistically significant.
As shown in figure 2, the proportion of credit union customers that were in  the upper-income category grew from 2001 to 2004. This increase, from 43  percent to 49 percent, was statistically significant. Thus, the statistically  significant difference between banks and credit unions in serving people of  “modest means” that we documented in our 2003 report using 2001 data  appears to have persisted in the 2004 data. Moreover, we found the decline  from 2001 to 2004 in the proportion of credit union customers in the  “modest means” category to be statistically significant. Additionally, the  relatively high percentage of households in the moderate- and middle- income categories that used credit unions (37 percent) in the 2004 SCF may  be reflective of credit union membership traditionally being based on  occupational- or employer-based fields of membership.
However, NCUA officials told us that since growth in the agency’s  programs to expand services to lower-income persons and undeserved  areas are relatively recent, it was probably too soon to expect any changes  in the SCF data, with respect to customer income. Further, NCUA felt that  it would take time for any results to appear in the data, as credit unions  seeking to expand into new areas and reaching new types of customers  would face a learning curve in their efforts. Additionally, NCUA officials  stated that since most of the conversions to the community charter  occurred within the last 5 years, within a reasonable period they expected  to see a change in the customers these credit unions were serving. It should  also be kept in mind that the latest available data from SCF are 2-years old,  so any more recent changes would not be reflected in our analysis.
As we noted in our 2003 report, limitations in SCF data preclude its use in  drawing definitive conclusions about the income characteristics of credit  union members. Additional information—especially about the income  levels of credit union members receiving consumer loans and other credit  union services—would be required to assess more completely whom credit  unions serve. As further noted in our 2003 report, NCUA has noted that  credit union members were likely to have higher incomes than  nonmembers because credit unions are occupationally based. As NCUA  and others have noted—because of the statutory limitations on who can  join federal credit unions—credit union membership is largely based on  employment, and credit unions are restricted to the income composition of  the individuals within fields of membership containing employed  individuals. However, as we noted earlier, SCF provides the best data  currently available regarding the income characteristics of credit union  members.
To determine how sensitive our results were to our income categorization,  we used median family income in addition to median household income to  analyze the 2001 and 2004 SCF data. We found similar results using both  median family and household income. Recognizing the limitations of the  SCF and other available data, our 2003 report suggested that Congress  consider requiring NCUA to obtain data on the extent that credit unions  provided loans and other services to low- and moderate-income  households within each federally insured credit union’s field of  membership.
section_title: NCUA Has Pilot Survey to Measure Income of Credit Union Members, but Will Not Be Able to Use Results to Determine What Services Members at Various Income Levels Receive
paragraphs: In response to your Committee’s concerns regarding the lack of available  information to evaluate credit union member income and services, NUCA  undertook a data collection effort to profile federal credit union member  income information, identify the credit union services offered to credit  union members, and provide information on the compensation of credit  union executives. (We discuss executive compensation in more detail later  in this report). As of August 31, 2006, NCUA had completed its data  collection phase, as agreed with the Office of Management and Budget  under the Paperwork Reduction Act, which is intended to minimize the  paperwork burden for nonprofit institutions.
NCUA took a random sample of 481 federal credit unions and relied on two  different data collection methods to determine member incomes. NCUA  officials told us they intended to compare the results of the two methods to  determine the extent of any income differences and identify which of the  two approaches might be relied upon in the future. One method involved  obtaining information such as a credit union member’s zip code from  NCUA’s Automated Integrated Regulatory Examination System to make  projections of median household income. The other method involved using  the street address and zip codes of credit union members and applying a  software package that uses geo-coding to determine median family income  averages. The officials told us that the software package is widely used in  the banking industry to help make income determinations for fair lending  examinations.
NCUA also gathered information from the credit unions on the type of  services the institutions offer to their members, including services that may  be of value to members with lower incomes or little financial experience.  Using the same sample of credit unions, NCUA collected information on  whether or not certain services are provided by the credit union. For  example, NCUA gathered information on the extent to which the sampled  credit unions offer low-balance checking accounts and whether they offer  some type of financial literacy training.
NCUA officials stated to us that there are limitations of the data collection  effort. First, although the information collected represents a statistically  valid random sample of the federal credit union population and will provide  information on the income levels of overall federal credit union members,  the data will not enable NCUA to make statistically valid conclusions by  charter type or make conclusions about the extent of credit union services  being provided to various income levels. The officials explained that to do  so would require a larger and more time-consuming data collection effort,  requiring an increase in sample from the current effort of 481 to a sample of  almost 1,200 credit unions. According to the officials, a larger sample  would not allow them to meet their goal to report results by year-end 2006.
NCUA indicated that despite these limitations, the data collected will add  to the agency’s knowledge and should be valuable in deciding what actions,  if any, might be appropriate over the longer term. At the time of our  discussions, NCUA had not developed benchmarks to use as a measure for  a “modest means” category related to member income data. NCUA  indicated that its data collection effort will help the agency better  understand the concept of “modest means” in relation to geographically  dispersed, limited, and diverse fields of membership. NCUA’s data  collection effort represents 61 percent of all credit unions because the  regulator has oversight authority for federally chartered credit unions,  while state governments have responsibility for overseeing the remaining  39 percent of the credit unions (state-chartered credit unions). Finally,  while NCUA’s data collection effort will be useful for establishing a  baseline, NCUA officials stated that there are no plans to gather the  information on a continual or routine basis.
In response to a March 2006 congressional request, National Association of  State Credit Union Supervisors (NASCUS) officials told us they and state  regulatory agencies have initiated a data collection effort for state- chartered credit unions. NASCUS will collect some information similar to  that collected in the NCUA pilot, such as membership income and  executive compensation. However, NASCUS also will collect data in two  additional areas: credit union service organizations (CUSO) and UBIT.   NASCUS is using a methodology similar to NCUA’s to determine member  income levels. According to NASCUS, they have developed a representative  sample by applying different weights to unique state credit union  characteristics, including size, field of membership, and charter type.  Credit unions selected in the representative sample will respond to a  questionnaire developed by state regulatory agencies. The questionnaire  addresses membership, CUSOs, UBIT and executive compensation. As of  September 2006, the officials indicated that the data collection effort had  started, and that they expected the results to be available in the first  quarter of 2007.
section_title: Credit Unions Offered Better Interest Rates on Some Products, but the Extent to Which the Benefits of Tax- Exempt Status Have Been Passed to Members Is Unclear
paragraphs: Our analysis showed that credit unions tended to offer better interest rates  than similarly sized banks for a variety of products and loans, but rate data  alone cannot be used to determine the extent to which the benefits of tax  exemption have been passed to members. We obtained and analyzed rate  data for various savings products offered by credit unions and banks from  2000 through 2005 and found that credit unions on average offered higher  rates than comparably sized banks. Similarly, the rate data that we  obtained for various loan products indicated that on average credit unions  tended to offer lower interest rates than comparably sized banks,  particularly for consumer loans such as automobile loans. However, it is  important to note that interest rates during the period covered by our  analysis were at historic lows.
As seen in figure 3, rates offered by credit unions from 2000 through 2005  on regular savings accounts on average were higher than those offered by  similarly sized banks. However, the differences among the rates of  comparably sized credit unions and banks tended to get larger as the size of  the institutions increased. For example, for institutions with assets of less  than $100 million, the difference between credit unions and banks averaged  about 0.15 of a percentage point in this period, while the difference for  institutions with assets greater than $1 billion averaged almost 0.7 of a  percentage point. More recently, the gap in rates between larger credit  unions and banks closed considerably; in the greater than $1 billion asset  range, the gap was more than 1 percentage point in 2000, but about one-half  of 1 percent in 2005. We observed similar trends throughout the period for  other savings products such as money market accounts and certificates of  deposit (see app. III).
The difference between credit unions and banks was more pronounced for  consumer loans. For example, over the 6-year period, the rates that credit  unions charged for 60-month new car loans tended to be lower than the  rates charged by similarly sized banks, by 1 or 2 percentage points. As  shown in figure 4, the trend was consistent for the larger asset category as  well. However, unlike savings products, the rate differences between credit  unions and banks for car loans widened in 2005. These trends held true for  rates for other consumer products such as credit cards.
Although credit unions charged lower interest rates for consumer loans,  similarly sized credit unions and banks charged virtually identical rates on  larger loans such as mortgages, from 2000 through 2005 (see fig. 5). In some  limited instances, banks offered lower rates than similarly sized credit  unions. Also, larger institutions in general offered lower rates than smaller  institutions.
Our analysis of deposit and loan rate data for credit unions and banks does  not fully identify how the tax-exemption of credit unions might benefit  credit union members. First, there may be other reasons for differences in  rates beside tax differences. For example, loan rates may differ because of  differences in borrower characteristics, such as creditworthiness, or  because of geographic market differences. In addition, tax-exemption may  benefit members in other ways than through loan and deposit rates. Credit  unions might also charge lower fees than they otherwise would for services  and products provided to members. We did not identify any comprehensive  studies or data sources that addressed differences in fees charged by credit  union and banks on a national basis. Unlike banks, credit unions can  finance additional services and add to desired or required reserves through  untaxed retained income. As a result of tax-exemption, credit unions may  retain more income to add to reserves or to finance additional services than  they would if they were taxed.
section_title: Lack of Guidance and Criteria for Applying UBIT to State Credit Union Activities Makes Determining Compliance with the Requirement Difficult
paragraphs: As stated earlier, state-chartered credit unions are subject to tax on  unrelated business income while federal credit unions specifically are  exempt. IRS has several ongoing examinations of state-chartered credit  unions to determine which of their activities are subject to UBIT. Credit  union trade groups have stated the need for guidance regarding the  activities that IRS has determined to be subject to UBIT; IRS has stated that  it plans to issue technical advice in 2007 after completing its reviews.  Furthermore, the practice of allowing group statewide filings has made it  more difficult for the IRS to scrutinize the activities of individual  institutions to ensure compliance with the UBIT statute. IRS officials  asserted that the agency plans to issue technical advice on the application  of UBIT to state credit union activities, which they stated should improve  credit union compliance with the statute.
subsections: section_title: IRS Has Questioned Which State Credit Union Activities Should Be Subject to UBIT
paragraphs: UBIT is a tax on income derived by a tax-exempt entity from a trade or  business that is regularly carried on and not substantially related to the  exercise or performance of the purpose or function constituting the basis  for the entity’s exemption. Under the Internal Revenue Code, state- chartered credit unions are subject to UBIT, but federal credit unions are  not subject to the tax because they are exempt federal instrumentalities under a provision of the code. As shown in table 4, the amount of income  subject to UBIT reported by state-chartered credit unions and the related  taxes paid nearly doubled from 2000 through 2004 and totaled more than $5  million over this period.
As credit unions have increased the types of products and services that  they offer, certain product offerings by state-chartered credit unions have  resulted in IRS examining whether state-chartered credit unions are using  their tax-exempt status to conduct business unrelated to their exempt  purposes. In November 2005, an IRS commissioner informed the Congress  of an IRS review of certain activities of state-chartered credit unions for  purposes of UBIT.The IRS has been reviewing activities that included the  following:  the sale of optional credit life insurance and credit disability insurance  to members that would pay off the loan balances with the organization,  if the borrower died or became disabled;  the sale of “guaranteed auto protection” insurance, which pays the  automobile loan balance in the event of loss or destruction of a vehicle  to the extent it exceeds the value of the vehicle;  the sale of automobile warranties;   the sale of cancer insurance;  the sale of accidental death and dismemberment insurance;  ATM fees charged to nonmembers;  the sale of health or dental insurance;  the marketing of mutual funds to members; and  the marketing of other insurance and financial products.
According to IRS officials, the agency had 50 ongoing examinations of  state-chartered credit unions for UBIT purposes as of September 2006.
Determining the applicability of UBIT to state credit union activities is a  complicated proposition because it depends on the relationship of the  activities to credit unions’ tax-exempt purposes or functions. However, as  IRS stated in a Technical Advice Memorandum, neither the Internal  Revenue Code nor IRS regulations enumerate the functions of a credit  union exempt under section 501(c)(14) of the code. The tax-exemption is  based on what can be described as structural features, specifically the  institution’s mutuality and nonprofit operations, whether it is organized  and operated in accordance with state law, and whether its members share  a common bond.
Groups Representing state-chartered credit unions and the Credit Union  National Association have stated that IRS has not provided sufficient  guidance on which credit union activities are or are not subject to UBIT.  According to IRS officials, IRS is planning to issue specific information in  the form of Technical Advice Memoranda as a result of its examination of credit union UBIT activities in the first quarter of 2007. IRS believes that  the Technical Advice Memoranda will more clearly articulate specific  activities of state-chartered credit unions that can be subject to the tax and  improve compliance with the statute.
section_title: Group Filings Make It More Difficult for IRS to Scrutinize the Activities of Individual Credit Unions
paragraphs: Not-for-profit entities that generate more than $1,000 in unrelated business  income are required to disclose on Form 990 that they have generated such  income and whether they have filed an Exempt Organization Business  Income Tax Return (Form 990-T) with IRS declaring the income and related  UBIT liability. State-chartered credit unions are required to file Form 990,  and Form 990-T if they generate unrelated business income in excess of  $1,000. However, according to IRS officials, an IRS ruling allows state  regulatory authority in some states to file forms 990 on a groupwide basis;  that is; one form can be filed on behalf of all state-chartered credit unions  in a particular state. Thus, a state-chartered credit union located in one of  those states could generate taxable unrelated business income without  having to file a Form 990, individually.  According to IRS officials, the group  ruling applies to 34 states, and group returns in about 21 of those states  have been filed in recent years. Of the 21 states, only 1 has asserted on the  Form 990 that UBIT was generated in that state.
IRS stated it would be able to positively verify if an individual credit union  declaring unrelated business income in excess of $1,000 on its Form 990  also filed a Form 990-T. However, the agency currently does not have a  process in place to review group returns to ensure that the credit unions  filed the Form 990-T. As a result, IRS cannot systematically determine if  credit unions that were included in group returns and generated unrelated  business income properly filed a Form 990-T declaring such income and  paid UBIT. According to IRS officials, the group exemption process was  instituted to relieve IRS of the burden of individually processing a large  number of applications from organizations sharing a common affiliation  and that are operated for the same general purpose. For example, IRS  noted that some organizations, including churches and veterans  organizations, have a great number of subordinate organizations that are  similarly situated. IRS officials agreed that requiring all state-chartered  credit unions to file an individual Form 990 could enhance the agency’s  ability to scrutinize the activities of individual credit unions to determine  whether they were subject to UBIT. However, officials also noted that it  was not clear if the benefits of eliminating the group filing exemption  would exceed the costs—both to IRS as well as to the individual credit  unions. Specifically, officials noted that credit unions that are currently  included in group returns would each need to file for recognition as a tax- exempt organization and incur annual costs to prepare and file individual  Form 990. Moreover, IRS officials noted that they expect that the Technical  Advice Memoranda that the agency is planning to issue in early 2007 would  improve credit union compliance with UBIT filing requirements.
section_title: Alternatives Exist to Improve the Transparency of Credit Union Executive and Director Compensation
paragraphs: Federal credit union executive compensation is not transparent. Federal  credit unions are not required to file reports, including the IRS Form 990  required for most other tax-exempt organizations that would provide  information on executive and director compensation. NCUA legal opinions  have stated that member access to credit union records is generally a  matter of state law but that federal credit union members “have inspection  rights similar to those enjoyed by a shareholder in a corporation” and that  “the general rule in most jurisdictions is that a shareholder is entitled to  inspect corporate minutes and other records as long as he has a proper,  nonvexatious purpose.” However, we could not determine to what extent  credit unions and credit union members were aware of this information.  We identified a number of credit union and bank executive compensation  surveys, but data and methodological limitations precluded us from making  direct comparisons of executive compensation. NCUA has collected  executive compensation information for federal credit unions as part of its  efforts to assess who credit unions serve.
subsections: section_title: Public Reporting of Executive Compensation for Federal Credit Unions Is Limited and Regulator Scrutiny of Compensation Is Primarily Reviewed for Safety and Soundness Concerns
paragraphs: The issue of transparency and disclosure of executive compensation has  become an important topic, both for tax-exempt entities and publicly held  companies. Credit union members bear some similarity to public company  shareholders in that they are “owners” and vote for boards of directors that  are entrusted to oversee executive compensation. The importance of  disclosure of executive and director compensation was illustrated in recent  changes adopted by SEC in July 2006 to increase transparency and  disclosure by public companies and reflect the increasing focus on  corporate governance and director independence. According to SEC, the  objective was to provide investors with a clearer and more complete  picture of the compensation earned by a company’s principal executive  officer, principal financial officer, highest paid executive officers, and  members of its board of directors.
In contrast, credit union executive compensation is not transparent  because credit unions are not required to file publicly available reports  such as the IRS Form 990 that disclose executive compensation data. For  tax-exempt organizations, IRS has noted that some members of the public  rely on Form 990 as the primary or sole source of information about a  particular organization. Most tax-exempt organizations with gross receipts  that are normally more than $25,000 are required to file the Form 990  annually. IRS also uses these forms to select organizations for  examinations. Figure 6 shows the compensation information collected on  the Form 990.
On August 23, 1988, IRS issued a determination that federal credit unions  are not required to annually file a Form 990 because of their status as tax- exempt instrumentalities under section 501(c)(1) of the Internal Revenue  Code. Also, as noted previously, some state-chartered credit unions file  through a group filing process (21 states in 2004). For these states, IRS  receives only the name and addresses of individual credit unions. As a  result, scrutiny of the compensation of credit union executives and other  key personnel is limited.
Additionally, boards of directors of credit unions receive limited  compensation because the directors serve in nonpaid positions. According  to the Federal Credit Union Act, no member of a federal credit union board  may be compensated; however, a federal credit union may compensate one  individual who serves as an officer of the board. Although the credit union  may not pay its board of directors a salary, it may provide or reimburse  directors for such things as mileage; insurance, including life, health, and  accident insurance; and travel expenses. In contrast, bank boards of  directors may receive fees such as an annual retainer for serving on the  board, profit sharing, professional fees, and other bonuses. Also, according  to one bank survey, about half of the banks that responded indicated that  their compensation fees were based strictly upon attendance.
According to NCUA, executive compensation is assessed during the credit  union’s examination to determine its reasonableness as it relates to safety  and soundness concerns. As stated in our 2003 report, NCUA recently  moved from an examination and supervision approach that primarily was  focused on reviewing transactions to an approach that focuses resources  on high-risk areas within a credit union. To complement the risk-focused  approach and allow NCUA to better allocate its resources, the agency  adopted a risk-based examination program in July 2001. NCUA officials  explained that supervisory examinations, including reviews of credit union  executive compensation, follow a risk-focused approach. The officials told  us that examiners would review executive compensation in instances of  safety or soundness concerns, such as compensation arrangements that  significantly exceeded compensation paid to persons with similar  responsibilities in credit unions of similar size and in similar locations.  NCUA also stated that since it has not found a systemwide issue with  executive compensation, it has not considered it necessary to collect or  aggregate executive compensation data. Additionally, we found NCUA’s guidance on compensation similar in content with the Federal Financial  Institutions Examination Council’s (FFIEC) Interagency Guidelines  Establishing Standards for Safety and Soundness.
At various times, credit unions and others have questioned whether  members have the right to obtain and inspect credit union information,  including salary data. NCUA legal opinions have stated that member access  to credit union records is generally a matter of state law, and federal credit  unions should look to the appropriate state corporate law. In a letter dated  June 14, 1996, NCUA’s Associate General Counsel said that federal credit  union members “have inspection rights similar to those enjoyed by a  shareholder in a corporation” and that “state law determines the types of  information and documents, and the degree of access, available to  shareholders/members.” The letter stated that “the general rule in most  jurisdictions is that a shareholder is entitled to inspect corporate minutes  and other records as long as he has a proper, nonvexatious purpose.”   However, it is unclear to what extent federal credit union members and  credit union personnel are aware of a member’s right to inspect records, or  how difficult or easy it would be for credit union members to obtain  information such as salaries.
section_title: Industry Surveys That Address Executive Compensation Are Limited, and NCUA Has Released Its Compensation Data
paragraphs: We could not identify any surveys or studies that directly compared credit  union executive compensation with compensation provided by similarly  sized banks. However, we did identify a few credit union and bank trade  group surveys that address executive compensation for their respective  industries. Credit union and bank trade group officials told us that these  surveys generally are used to help their industries gauge comparable pay by  job title and an institution’s asset size.
Several limitations exist that preclude us from directly comparing credit  union and bank executive compensation. While these surveys provided  information on the cash compensation by job title, institution, and asset  size, the surveys did not provide detailed information on the other forms of  compensation received to allow a direct comparison of credit union and  bank executive compensation. Some benefits include items such as  retirement plans, stock options (for bank executives), employment  contracts, severance pay, and perks such as vehicle allowances. Due to the  lack of consistency and availability of data beyond cash compensation in  these surveys, it is difficult to make any overall comparisons between  credit union and bank executive compensation. Other limitations to these  surveys include, in some instances, low response rates for the three  executive positions (chief executive officer, chief financial officer, and  chief operating officer). Further, the data collected in these surveys were  based on self-reported information from the survey participants. Appendix  IV provides more detail on the survey limitations and the results of  executive compensation for credit unions and banks that responded to  their respective surveys.
As mentioned previously, NCUA has collected credit union executive  compensation data and reported compensation information on the top- three executive positions—chief executive officer, chief financial officer,  and chief operating officer. NCUA collected 2005 compensation  information from the IRS Form 1099 and Form W-2 (wages and salary  data). NCUA officials told us that the sample size will enable them to  project industry averages for the federal credit union population and be  stratified into two statistically valid subsets based on the asset size of the  credit unions surveyed. However, the NCUA effort provides a snapshot of  federal credit union compensation for a single year, 2005, and it is unclear  whether NCUA will conduct future reviews of credit union executive  compensation.
NCUA also suggested alternative methods of collecting compensation  information and increasing the transparency of the information. During our  review, NCUA indicated that it was considering amending the quarterly  “call reports” that all federally insured credit unions are required to submit  to NCUA to include compensation and benefit data for senior executive  officers. Call reports are available for public inspection, and NCUA  routinely reviews them. Currently, the call report collects only aggregate  data on employee compensation and benefits. Additionally, NCUA officials  indicated that requiring credit unions to disclose credit union salary  information to members during public meetings would be another  alternative for increasing the transparency of executive and director  compensation.
section_title: Conclusions
paragraphs: Since the passage of CUMAA and subsequent changes to NCUA regulations  that permitted credit unions to serve larger geographic areas and enlarged  fields of membership, community-chartered federal credit unions have  grown in number and asset size. As a result, the common bonds of  occupation or employment that traditionally existed between credit union  members have become attenuated, blurring one of the historical  distinctions between credit unions and other depository institutions. But,  credit unions do retain distinctions in terms of structure and governance,  and they retain their tax-exempt status.
One perceived rationale for the credit union tax exemption, expressed by  Congress, is the notion that credit unions serve individuals of small or  modest means. Yet, it is difficult to determine to what extent credit unions  actually serve individuals of modest means. Although NCUA has  established programs to expand services to this group, the relative  newness of the programs, combined with the absence of long-term,  continuing, and systematic collection of data on the income of credit union  members, currently preclude an assessment both of the programs’  effectiveness and overall industry performance. However, limited data  (SCF) suggest that in both 2001 and 2004, credit unions had a smaller  proportion of low- and moderate-income customers than banks. NCUA  officials have noted that it may be too soon for data to fully reflect NCUA  initiatives and industry activities and that growth in the community charter  will allow credit unions to draw members from larger and more diverse  populations, including people of modest means.
While NCUA has taken steps to identify the income levels of credit union  members, several limitations in NCUA’s data collection effort will make it  difficult to fully assess the extent to which credit unions have been serving  low- and moderate-income populations. Notably, the data will not stratify  information about member incomes by specific charter types or identify  the specific financial services that credit union members have been using.  Obtaining more detailed information on credit union member income and  the financial services they used could help NCUA track the performance of  credit unions and help monitor progress over time. Furthermore, this  information would provide Congress and the public with clear evidence  that, as CUMAA notes, credit unions were accomplishing their “specified  mission” of “meeting the credit and savings needs of consumers, especially  persons of modest means.”  However, the NCUA effort, while laudable,  currently is confined to a pilot project. The value and utility of the  information collected would be greatly enhanced if NCUA were to move  beyond a pilot and continue the data collection effort and address some of  the limitations of the pilot.
Although state-chartered credit unions have increased the amount of UBIT  paid in recent years, determining which credit union activities are subject  to the UBIT is difficult. IRS is currently conducting examinations of state- chartered credit unions and plans to release technical advice early in 2007  that the agency believes will more clearly explain which credit union  activities are subject to the UBIT. While state-chartered credit unions are  required to file information returns (Form 990), the group that are filed  constrain IRS’s ability to scrutinize credit union activities related to UBIT  because they convey little information about individual credit unions.  However, IRS is planning to issue technical advice describing specific state  credit union activities that may be subject to the UBIT to help ensure state  credit union payment of the tax.
Finally, the transparency of executive compensation is an important issue  for private and public companies alike. In the private sector, SEC’s recent  efforts to increase the transparency of publicly held companies underscore  the importance of enhancing accountability and greater disclosure of  information. In contrast, credit union executive compensation is not  transparent due to the lack of information available to the public. Increased  public opportunities to review executive salaries would promote greater  credit union accountability, similar to requirements for publicly held  companies. While the Form 990 is an avenue for increasing both the  quantity and transparency of publicly available information about  executive compensation at credit unions, federal credit unions are not  required to file the form. However, the public could be given other  opportunities to review credit union activities. For example, NCUA could  require all federally insured credit unions to include compensation and  benefit data for senior executive officers in the call reports that are  submitted on a quarterly basis—an option that NCUA officials indicated  was under current consideration. Or, NCUA could require federal credit  unions to disclose or make available credit union records, such as senior  executive salary information, to members during annual meetings.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that credit unions are fulfilling their tax-exempt mission of  providing financial services to their members, especially those of low or  moderate incomes, we recommend that the Chairman of NCUA  systematically obtain information on the income levels of federal credit  union members to allow NCUA to track and monitor the progress of credit  unions in serving low- and moderate-income populations. NCUA’s recent  pilot survey to measure the income of credit union members could serve as  a starting point to obtain more detailed information on credit union  member income. Ideally, NCUA should expand its survey to allow the  agency to monitor member income characteristics by credit union charter  type, obtain information on the financial services that low- and moderate- income members actually use, and monitor progress over time.
To increase the transparency of executive compensation and enhance  accountability of credit unions, we recommend that the Chairman of NCUA  take action to ensure that information on federal credit union executive  compensation is available to credit union members and the public for  review and inspection. To achieve this, NCUA may want to consider  options such as requiring federal credit unions to include specific  information on executive compensation in call reports or issuing  regulations that would require all federal credit unions to make executive  compensation information available to members of credit unions at annual  meetings.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Chairman of NCUA and the  Commissioner of IRS for their review and comment. We received written  comments from NCUA that are summarized below and reprinted in  appendix V. In addition, we received technical comments from IRS that  have been incorporated into this report as appropriate.
In its comment letter, NCUA indicated that the agency’s staff have  recommended that the NCUA board consider taking actions consistent  with the recommendations made in our report. NCUA, however, expressed  concerns with certain important aspects of the draft report. In particular,  NCUA stated in its letter that a meaningful comparison between federally  chartered credit unions and other financial institutions should include an  in-depth assessment of their structural and governance differences. NCUA  also noted that the substantive differences among federal credit unions in  charter types and fields of membership significantly impact, among other  things, who credit unions serve and how they operate and provide services.
We agree that there are important structural and governance differences  between credit unions and other depository institutions, which are  highlighted in the report. For example, page one of the draft and current  report notes that credit unions, unlike banks, are (1) not-for-profit entities  that build capital by retaining earnings (they do not issue capital stock); (2)  member-owned cooperatives run by boards elected by the membership; (3)  subject to field of membership requirements that limit membership to  persons sharing certain circumstances, such as a common bond of  occupation or association; and (4) exempt from federal income tax.  Additionally, we agree that differences in charter types and fields of  membership are important factors that should be considered in assessing  who credit unions serve. However, as we note in the report, statistically  reliable data on credit union members by charter type and field of  membership were not available at the time of our review. The lack of this  type of data was the primary basis for the report’s recommendation that  NCUA systematically obtain information on the income levels of federal  credit union members. We are encouraged by NCUA’s pilot effort to obtain  information on the income levels of federal credit union members and  continue to believe the value of the information collected would be greatly  enhanced if NCUA were to continue its data collection efforts and address  some of the limitations of the pilot. Specifically, NCUA’s data collection  efforts could be strengthened by (1) providing benchmark data, such as  general population income statistics or other appropriate measures, to  allow comparisons with the data collected on the income levels of credit  union members; (2) obtaining data on the extent of services offered by  credit unions (e.g., free checking accounts, no charge ATMs, low-cost wire  transfers, etc.) are being used by income category; (3) expanding the data  collection effort to allow the results to be projectable by charter type; and  (4) conducting the study on a systematic or periodic basis to assess the  extent of progress over time.
NCUA’s letter also stated that it was inaccurate and inappropriate to  measure the success of federally chartered credit unions in serving persons  of modest means by reference only to the low- and moderate-income  categories associated with the Community Reinvestment Act. Specifically,  NCUA noted that there was legal and historical evidence that the term  modest means, as used by Congress in the context of the Federal Credit  Union Act, is intended to include a broader range of individuals than those  in low- and moderate-income categories. As we noted in the report, neither  the Federal Credit Union Act nor NCUA have established definitions as to  what constitutes modest means. Thus, we used the group consisting of low-  and moderate-income households as a proxy for persons of modest means  for the purposes of our analysis. This allowed us to use the definitions  established for the Community Reinvestment Act as the basis for income  categories used on our analysis. Our analysis not only included  comparisons between credit unions and banks of low- and moderate- income households but also middle and upper income households for both  the 2001 and 2004 SCF. This analysis shows that between 2001 and 2004  credit unions continued to serve a higher proportion of middle- and upper- income households and a smaller proportion of low- and moderate-income  households than did banks.
In its letter, NCUA noted that our income category benchmarks were  inconsistent with the specific definitions of the CRA categories the other  federal financial regulators used—specifically the use of national versus  local median income for our benchmarks. Because the most  comprehensive and statistically reliable data available on the income  characteristics of credit union and bank customers at the time of our  review—the Federal Reserve’s Survey of Consumer Finances—were  nationally representative, we used national median income measures as the  basis for our income categories whereas the categories used for the  Community Reinvestment Act are based on more local measures.
NCUA’s letter also expressed concerns about the reliability of conclusions  reached using the Federal Reserve’s Survey of Consumer Finances data.  Specifically, NCUA noted that the SCF was not designed for reliable  income comparisons between credit union members and bank customers.  As we noted in our draft and current report, we agree that the SCF was not  specifically designed to conduct comparative analyses of income levels of  bank and credit union customers; however, SCF provides the best data  currently available to undertake such a comparison. As we reported in  2003, we analyzed the SCF because it is a respected source of publicly  available data on financial institution and consumer demographics that is  nationally representative and because it was the only comprehensive  source of publicly available data that we could identify with information on  financial institutions and consumer demographics. Moreover, our draft and  current report noted limitations in SCF data that preclude drawing  definitive conclusions about the income characteristics of credit union  members. NCUA also provided additional detailed written comments as an  enclosure to its letter, which we have reprinted in appendix V with our  responses.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution until 30 days from the  date of this letter. At that time, we will send copies of the report to the  Ranking Member, House Committee on Ways and Means; other interested  congressional committees and subcommittees; the Chairman, NCUA; and  the Commissioner, IRS. We will make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact Yvonne D.  Jones at (202) 512-8678. Contact points for our Office of Congressional  Relations and Public Affairs may be found on the last page of this report.  See appendix VI for a list of other staff who contributed to the report.
section_title: Objectives, Scope, and Methodology
paragraphs: Our report objectives were to (1) assess the effect of the 1998 Credit Union  Membership Access Act (CUMAA) on federal credit union membership and  charter expansion, (2) review the National Credit Union Administration’s  (NCUA) efforts to expand credit union services to low- and moderate- income individuals, (3) compare rates offered by credit unions to  comparably sized banks as one indicator of how tax-exemption might  benefit credit union members, (4) discuss issues associated with the  application of the federal unrelated business income tax (UBIT) to credit  unions, and (5) assess the transparency of credit union executives and  board member compensation.
subsections: section_title: Effects of CUMAA and NCUA Regulations and NCUA Efforts to Serve Low- and Moderate- Income Individuals
paragraphs: To study the impact of CUMAA on federal credit union membership and  charter expansion, we reviewed and analyzed the legislative history for  CUMAA and compared its provisions with NCUA interpretive rulings and  policy statements in effect before and after the enactment of CUMAA. In  addition, we interviewed NCUA officials and industry representatives and  met with credit union and banking trade groups including the National  Association of Federal Credit Unions, National Association of State Credit  Union Supervisors (NASCUS), Credit Union National Association,  America’s Community Bankers, and Independent Community Bankers to  obtain their viewpoints on how CUMAA and NCUA regulation affected  credit union chartering and field of membership. To obtain information  about state credit union chartering and fields of membership, we held  discussions and reviewed documentation provided by NASCUS. Finally, we  obtained electronic files from NCUA that contained annual call report  financial data (Form 5300) of all federally chartered credit unions for year- ends 2000 through 2005. The information included the number of credit  unions, actual and “potential” membership (that is, people within a credit  union’s field of membership but not members of the credit union), assets,  charter approvals, charter conversions, and charter expansions.
To identify the results of NCUA programs intended to expand credit union  services to low- and moderate-income individuals and underserved areas,  we analyzed NCUA call report data for the low-income-designated credit  unions and credit unions that expanded into underserved areas for year- ends 2000 through 2005. The data included information on the number of  credit unions participating in these programs, their asset size, and their  membership.
We reviewed NCUA-established procedures for verifying the accuracy of  the Form 5300 database and found that the data are verified on a yearly  basis, either during each credit union’s examination or through off-site  supervision. In addition, we cross checked the December 2000 to  December 2002 data that we recently received with the same data in our  2003 report. We determined that the data were sufficiently reliable for the  purposes of this report.
Further, we analyzed existing data on the income levels of credit union  customers. Specifically, we analyzed both the 2001 and 2004 releases of the  Board of Governors of the Federal Reserve System’s (Federal Reserve)  Survey of Consumer Finances (SCF). The SCF is conducted every 3 years  and is intended to provide detailed information on the balance sheets,  pension, incomes, and demographics of U.S. households and their use of  financial institutions. Because some households use both banks and credit  unions, we performed our analyses based on the assumption that  households can be divided into four user categories—those who use credit  unions only, those who primarily use credit unions, those who use banks  only, and those who primarily use banks. “Primarily use” banks (or credit  unions) means placing more than 50 percent of a household’s assets in  banks (or credit unions). As in our prior report, we created four income  categories that are based on those used by financial regulators as part of  Community Reinvestment Act examinations—low, moderate, middle, and  upper—to classify these households (see table 5). As in our 2003 report,  we were unable to find a definition of “modest means”; thus, to assess the  extent to which credit unions served people of “modest means,” we  combined households with low- or moderate-incomes into one group as a  proxy for modest means.
Finally we discussed with NCUA officials the design and methodology of its  ongoing pilot project to measure the income levels of federal credit union  members. We also discussed with NASCUS officials their effort to measure  the income levels of state-chartered credit union members.
section_title: Comparison of Interest Rates Offered by Credit Unions With Those at Comparably Sized Banks
paragraphs: To compare the rates of credit unions with those at comparably sized  banks, we engaged the services of Datatrac Corporation—a market  research, information technology company specializing in the financial  services industry—to provide data on 15 loan and savings products offered  by credit unions and banks. Datatrac calculated the average rates for each  of these products by five distinct peer groups for asset size, for about 2,000  credit unions and 4,000 banks (see table 6).
We established the peer groups based on the institution’s size as measured  by total assets for banks and credit unions. Datatrac obtained asset  information for each institution by combining information in its database  with call report data for each institution. Datatrac computed average rates  for institutions overall and for all institutions within analysis groups. In  computing these simple averages, individual institution rates were not  weighted to reflect loan volume or other measures of size.
Datatrac provided us with an electronic file containing information for 2000  through 2005. The information included (1) institution type, (2) average  rate, (3) maximum rate, (4) minimum rate, (5) standard deviations, (6)  product name, (7) quarter and year, and (8) institution counts. We  interviewed Datatrac officials to confirm that they followed industry  accepted protocols to ensure data integrity, including input and processing  controls. We also reviewed Datatrac’s methodological documentation. In  addition, we conducted reasonableness checks on the data we received  and identified data gaps in the year-end 2003 information. Datatrac  examined its processing procedures and explained to us that its cut-off  date was incorrectly designated 1 week later than planned. At the same  time, Datatrac also verified that the same problem did not exist in any other  quarters of the years 2000 through 2005. Datatrac provided us an updated  electronic file reflecting the corrections. We determined that the revised  data were sufficiently reliable for the purposes of this report.
section_title: Issues Related to the Application of UBIT to Credit Unions
paragraphs: To review issues related to the application of UBIT to credit unions, we  reviewed the legislative history of UBIT and the historical basis for the tax- exempt status of credit unions and met with representatives of the Internal  Revenue Service (IRS) to discuss UBIT filing and reporting requirements.  We also discussed with IRS officials their examinations of unrelated  business activity at state-chartered credit unions and development of  policies and procedures in this area. We also obtained information from  IRS on the number and types (group versus individual) of Return of  Organization Exempt from Income Tax (Form 990) and Exempt  Organization Business Income Tax Return (Form 990T) filings by state- chartered credit unions and the amount of unrelated business income  reported and taxes paid by state-chartered credit unions for tax years from  2000 through 2004.
section_title: Information on Transparency and Compensation of Executive Compensation
paragraphs: To provide information on the transparency and compensation of credit  union executives and board members, including an assessment of the  availability of compensation data to credit union members and a  comparison of executive compensation at credit unions and comparably  sized banks, we interviewed officials at NCUA and IRS to discuss executive  compensation reporting requirements. We obtained and analyzed examiner  guidance on compensation from NCUA and the other federal banking  regulators—the Federal Deposit Insurance Corporation, Federal Reserve,  Office of the Comptroller of the Currency, and Office of Thrift Supervision.  We also met with credit union and banking trade groups including the  National Association of Federal Credit Unions, NASCUS, Credit Union  National Association, America’s Community Bankers, and Independent  Community Bankers to identify publicly available data regarding the  compensation of credit union and bank senior executives. We reviewed and  analyzed selected credit union and bank compensation surveys. For more  information on the surveys and our analysis, see appendix IV. We also met  with NCUA to discuss their efforts to collect federal credit union executive  compensation.
section_title: Analyses of Survey of Consumer Finances Data, 2001 and 2004
paragraphs: Using the methodology that we employed in our prior report, data from the  2001 and 2004 releases of the Federal Reserve SCF that we analyzed  indicated that credit unions continued to serve a lower proportion of low- income households than banks for the years analyzed. As we reported in  2003, we analyzed the SCF because it is a respected source of publicly  available data on financial institution and consumer demographics that is  nationally representative and because it was the only comprehensive  source of publicly available data with information on financial institutions  and consumer demographics that we could identify. While it is the best  publicly available data that we could identify, there are limitations in SCF  data that preclude drawing definitive conclusions about the income  characteristics of credit union members. In an effort to provide greater  context, in this appendix, we also present the results of additional analyses  of the 2001 and 2004 SCF data that we conducted.
The SCF is conducted every 3 years and is intended to provide detailed  information on the balance sheet, pension, income, and other  demographics of U.S. households and their use of financial institutions.  The survey is based on approximately 4,500 interviews and represents a  sample of more than 100 million households. For each of the 2001 and 2004  SCF releases, we combined the SCF data into two main groups— households that only and primarily used credit unions (credit union  customers) and households that only and primarily used banks (bank  customers). Our analyses of 2001 and 2004 SCF data indicated that, among  households that used a financial institution, those households that we  identified as being bank customers outnumbered those that we identified  as being credit union customers by a large margin (see table 7). Because  such a high percentage of the U.S. population represented by the SCF only  used banks, the data obtained from the SCF are particularly useful for  describing characteristics of bank users but much less precise for  describing smaller population groups, such as those that only used credit  unions. It should be noted that SCF was not specifically designed to  conduct comparative analyses of income levels of bank and credit union  customers, and the pool of bank customers is not necessarily comparable  to the pool of credit union customers.
We found that credit union customers had a higher median income than  bank customers in both the 2001 and 2004 SCF releases. In the 2001 SCF,  the median income of all households was $39,000; bank customers had a  median income of $40,000 and credit union customers had a median  income of $44,000. In the 2004 SCF, the median income of all households  was $42,000; bank customers had a median income of $43,000 and credit  union customers had a median income of $50,000.
We computed the proportions of credit union customers and bank  customers in each of four income categories—low, moderate, middle, and  upper. As in our 2003 report, we based our income groups on income  categories used by financial regulators for federal Community  Reinvestment Act examinations in an effort to provide a consistent  framework given that “modest means” is not clearly defined. For our  primary analysis of 2001 and 2004 SCF data, we used 2000 and 2003 median  household income as reported by the U.S. Census Bureau; for our  additional analyses of 2001 and 2004 SCF data, we used 2000 and 2003  median family income as reported by the U.S. Census Bureau (see tables 8  and 9). It should be noted that the categories that we use here, which we  introduced in our 2003 report, are based on a national median income  measure whereas the categories used for Community Reinvestment Act are  based on more local measures.
As noted earlier in the report, our (primary) analysis of 2004 SCF data  suggested that credit unions served a lower proportion of households of  modest means (low- and moderate-income households, collectively) than  banks, a result consistent with the finding in our 2003 report analyzing the  2001 SCF data (see tables 10 and 11).
In an effort to determine how sensitive these results were to our income  categorization, we also used the median family income for 2000 and 2003 to  analyze the 2001 and 2004 SCF data. As shown in tables 12 and 13, the  results from our additional analyses were similar to those of our primary  analysis. While the median family income was higher than the median  household income in each year, the results continue to suggest that a  greater proportion of bank than credit union customers were of modest  means. This difference between banks and credit unions was statistically  significantly different from zero in the 2004 SCF; there was also a  statistically significant decline in the proportion of credit union customers  of modest means between the 2001 and 2004 SCF data. Thus, while the  results of our analyses should not be considered definitive, they do suggest  that any impact from the recent efforts by NCUA to increase credit union  membership among the underserved and low- and moderate-income  households have not yet appeared in the data.
We also considered the median income of bank and credit union customers  within each of our income categories for both the primary and additional  analyses to assess whether there were any notable differences between  credit union and bank customers (see tables 14 through 17). We found that  the income characteristics of the customers tended to be similar; however,  the median income in the upper-income category tended to be higher for  bank customers.
section_title: Comparison of Interest Rates at Credit Unions and Banks
paragraphs: Data that we obtained indicate that credit unions offer more favorable rates  on average than similarly sized banks for a number of savings products and  consumer loans. However, similarly sized credit unions and banks  appeared to offer virtually the same rates on mortgage loans, such as 15-  and 30-year fixed-rate mortgages. We engaged the services of Datatrac  Corporation—a market research and information technology company,  specializing in the financial services industry—to gather and analyze data  on loan and savings rates for 15 loan and savings products (5 consumer  loan, 3 mortgage loan, and 7 savings products) that were offered from 2000  through 2005 at about 2,000 credit unions and 4,000 banks. Financial  institutions voluntarily provide data to Datatrac on a weekly basis for  inclusion in the company’s database. Therefore, information presented is  not necessarily statistically representative of the entire banking and credit  union industry.
Datatrac calculated the average rates for each of these products by five  distinct asset size peer groups:  total assets of $100 million or less;  total assets greater than $100 million, but less than or equal to $250   total assets greater than $250 million, but less than or equal to $500   total assets greater than $500 million, but less than or equal to $1 billion;   total assets greater than $1 billion, but less than or equal to the asset  size, rounded up to the nearest billion dollars, of the largest credit  union.
Datatrac computed average rates for institutions overall and for all  institutions within analysis groups. In computing these simple averages,  individual institution rates were not weighted to reflect loan volume or  other measures of size. While Datatrac Corporation’s database contained  data provided by about 2,000 credit unions and 4,000 banks, data were not  always obtained from all the credit unions and banks for every product  and/or time period in each of the five asset groupings. We identify all  instances in which the information presented was based on rate data  provided by less than 10 institutions. Additionally, because averages based  on a small number of institutions may be unreliable, we did not report  instances when rate data was provided by less than 5 institutions.
Figures 7 through 23 provide a detailed comparison of rates on savings and  loan products offered by credit unions to those at similarly sized banks for  the 6-year period spanning from 2000 to 2005.
section_title: Selected Salary Surveys for Credit Union and Bank Executives
paragraphs: Credit union and bank survey information we obtained provides an  indication of executive base salaries for the respective industries.  The  credit union and bank salary survey data we identified had a key  limitation—the information was not directly comparable because of  differences in the underlying sampling strategies and data gathering  methodologies.  Also, while both surveys report the types of cash  compensation received for their industry executives (i.e., salary and  bonuses), we were not able to identify and compare other forms of benefits  that an executive might typically receive in a compensation package.
There were a number of other limitations in the data that we identified.  In  some instances, the information collected for each of the surveys involved  a sample of members belonging to their respective trade group  associations.  The data collection periods for each of the surveys were  different.  For instance, the credit union survey collected salary  information between January and May 2005, while the bank survey  collected information during 2004.  The bank survey also provides general  information on other benefits such as savings incentive plans, pension  plans, and paid time off benefits for which we do not have comparable  information in the credit union survey.  Also, cash compensation reported  for the credit union survey includes base salary, incentives, and bonuses,  while the bank survey reported base salary, bonus, and profit sharing  compensation.  Finally, the cash compensation information presented for  these surveys are grouped in different asset size ranges. The credit union  survey presents information based on 13 asset size categories, while the  bank survey presents information based on 7 asset size categories.
subsections: section_title: Credit Union Salary and Other Cash Compensation Data
paragraphs: According to the Credit Union National Association’s 2005 to 2006  Complete Credit Union Staff Salary Survey, the average base salary of  credit union presidents, chief executive officers (CEO), and managers for  those credit unions responding increased 4.8 percent from the previous  year’s survey.  In addition to base salary, more than half (55 percent) of  credit union presidents, CEOs, and managers also received other forms of  cash compensation such as incentives or bonuses.  For CEOs, incentives  averaged $9,634, while bonuses averaged $4,993.  The survey also noted  that bonuses continue to be more common than incentives (45 percent  compared with 5 percent receiving these payments, respectively in 2004).   As shown in figure 25, the average credit union base salary for the CEO  position was about $78,000 while the average base salaries for the chief  financial officers (CFO) and chief operations officers (COO) was  approximately $73,000 and $64,000, respectively.  However, national  averages should be viewed with care since executive salaries also vary by  region and the size of the credit union.
Similarly, according to the survey for those credit unions responding, credit  union executives, including CFOs and COOs, experienced about a 2  percent increase in average salary over the previous year.  Of those that  responded to the survey, approximately 27 percent of CFOs received  incentives, which averaged $5,963, and 38 percent received a bonus which  averaged $4,650.  Additionally, approximately 21 percent of COOs received  incentives which averaged $5,678, while 47 percent received a bonus that  averaged $3,578.
The number of responses for the survey questions on the three credit union  executive positions also varied from question to question and across the  different asset categories.  For instance, a total of 773 credit unions  responded to the president/CEO question, but the responses by asset  category ranged from a low of 16 responses by credit unions with assets of  $1 to $2 million to a high of 113 responses by credit unions with assets of  $100 to $200 million. A total of 330 credit unions responded to the CFO  question, while the responses by asset category ranged from a low of 2  responses by credit unions with assets of $5 to $10 million to a high of 74  responses by credit unions with assets of $100 to $200 million.  Finally, 268  credit unions responded to the COO question, while the responses by asset  category ranged from a low of 2 responses by credit unions with assets of  $5 to $10 million to a high of 65 responses by credit unions with assets of  $100 to $200 million.
section_title: Bank Salary and Other Cash Compensation Data
paragraphs: According to America’s Community Bankers 2005 Compensation Survey,  the national average base salary for those banks responding to the survey  for CEOs was up 13.2 percent from the 2004 reported average.  The average  bonus/profit sharing payment for CEOs was $73,129.  Similarly, the national  average base salary for those banks responding for CFOs was up 10.8  percent from 2004, while the average bonus/profit sharing compensation  was $28,700.  The base salary for those banks responding for COOs was up  8.8 percent from 2004, while the average bonus/profit sharing  compensation was $32,697.  As shown in figure 26, the average bank base  salary for the CEO position was about $213,000 while the average base  salaries for the CFO and COO was approximately $121,000 and $141,000  respectively.  As mentioned previously, national averages should be viewed  with care since executive salaries also vary by region and by asset size.
The bank executive survey responses also varied by the total number of  respondents and by the different asset categories. For instance, a total of  358 banks responded to the president/CEO question, while the responses  by asset category ranged from a low of 16 banks with assets up to $50  million to a high of 74 banks with assets of $101 to $200 million.  A total of  256 banks responded to the CFO question, while the number of responses  by asset category ranged from a low of 2 banks with assets up to $50  million to a high of 49 responses by banks with assets of $501 million to $1  billion.  Finally, 187 banks responded to the COO question, while the  response rates by asset category ranged from a low of 8 banks with assets  up to $50 million to a high of 38 banks in both the $101 to $200 million and  $501 million to $1 billion categories.  Due to the small number of responses  in some instances, the results of this data should be viewed with caution.
section_title: Comments from the National Credit Union Administration
paragraphs: 441 G St., NW Thank you for the opportunity to review and comment on the draft GAO Report (Report) entitled “Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements.”  On behalf of the National Credit Union Administration (NCUA), I would like to express our appreciation for the professionalism of your staff and our gratitude for the dialogue that occurred through the course of GAO’s study.  NCUA believes that dialogue was helpful in developing a better mutual understanding of the complexity of the issues addressed in the Report and the conflicts that arise when considering the mission and purpose of federal credit unions (FCU) in the context of today’s financial marketplace.
It is unfortunate GAO did not have available at the time of drafting the Report the results of NCUA’s Member Service Assessment Pilot Program (MSAP) (Enclosure 1), since MSAP includes significant new data on FCUs.  Importantly, MSAP provides meaningful and accurate information on FCU membership profiles, as well as an assessment of the data collected.  This assessment is critical for an objective analysis of the data.  It also demonstrates any conclusions reached must consider FCU structure and operations, and the significant differences between other financial institutions and FCU charter types.
As outlined in greater detail in the enclosed response to the Report (Enclosure 2), NCUA does have continued concerns with certain important aspects of the Report.  NCUA believes that a meaningful comparison between FCUs and other financial institutions must include an in-depth assessment of their structural and governance differences.  Furthermore, comparisons among FCUs must consider charter types and field of membership differences.  These substantive differences significantly impact who credit unions serve, how they operate and provide services, how they develop and maintain their net worth and working capital, and how they affect the continued viability of the FCU system.  Such a framework is missing in the Report, thus limiting its reliability. moderate-income categories associated with the Community Reinvestment Act  (CRA), as these categories only extend to families at or below 80 percent of the  median income.  There is ample legal and historical evidence that the term  modest means, as used by Congress in the context of the FCU Act, is intended  to include both below average wage earners and a broader class of working  individuals generally.  Further, GAO elected to use income category benchmarks  that are inconsistent with the specific definitions of the CRA categories used by  the other federal financial regulators.  Using broad income categories and  equating modest means to low- and moderate-income individuals precludes a  valid assessment of the economic demographics of FCU membership.
Additionally, NCUA has serious concerns about the reliability of conclusions  reached using the Federal Reserve’s Survey of Consumer Finance (SCF) data. The SCF was not designed for reliable income comparisons between credit union  members and bank customers.  Other concerns, addressed in Enclosure 2,  include the importance of credit union membership limits, the effects of recent  trends in community chartering, and proper recognition of NCUA’s efforts to  target services to lower income individuals.
Regarding the recommendations made in the Report, NCUA staff recommended  in MSAP that the NCUA Board consider whether it is appropriate to gather  additional membership data to further enhance NCUA’s efforts in expanding  credit union service to low- and moderate-income individuals.  NCUA staff also  recommended that the NCUA Board consider evaluating alternative approaches  to collecting and aggregating executive compensation on an FCU system basis.
Notwithstanding the continued concerns listed above and described in greater  detail in Enclosure 2, I again want to emphasize our great appreciation for the  efforts of your staff and their willingness to consider our concerns and engage in  open and meaningful dialogue.
J. Leonard Skiles  Executive Director  Enclosures:  1. Report to the NCUA Board on the Member Service Assessment       Pilot Program (MSAP), dated November 3, 2006    2. NCUA’s Detailed Response to GAO’s Draft Report GAO-07-29  NCUA’s Detailed Response to GAO Draft Report GAO-07-29 “Greater  Transparency Needed on Who Credit Unions Serve and on Senior  Executive Compensation Arrangements”
The following discussion addresses our primary concerns with the GAO Draft  Report, GAO-07-29 (Report).  These concerns include: (1) inaccurate use of low-  and moderate-income as a proxy for modest means; (2) inappropriate use of  income categories ostensibly based on CRA categories; (3) improper reliance on  the Federal Reserve’s Survey of Consumer Finance; (4) insufficient discussion of  the structure and framework of FCUs; (5) insufficient discussion of NCUA’s  efforts to enhance service to low- and moderate-income individuals; and (6)  incomplete data on executive compensation.  1.  GAO’s Definition of “modest means”
It is inaccurate for GAO to define the term modest means as only including low-  and moderate-income individuals.  To use a proxy definition for modest means,  although convenient for drafting the Report, contradicts clear congressional intent  and disregards important statutory mandates on whom FCUs can serve.  NCUA  strongly believes that using the terms modest means and low- and moderate- income individuals interchangeably creates confusion and a perception  inconsistent with statutory intent and regulatory policies put in place to achieve  that intent.
While the Report recognizes in footnote 30 on page 26 that there is no commonly  accepted definition of modest means, the following statement on page 6 equates  low- and moderate-income to modest means:  he Federal Reserve’s 2004 Survey of Consumer Finance (SCF) - - indicates that credit unions continued to lag behind banks in the  percentage of their customers or members that were of low- and  moderate-income households.  Our analysis of the 2004 SCF  indicated that 32 percent of households that only and primarily used  credit unions were of modest means (emphasis added). . . . .
The history of the Credit Union Membership Access Act of 1998 (CUMAA)demonstrates congressional intent when the term “modest means” was used. This term was first introduced in proposed amendments to the FCU Act in 1998  describing the mission of credit unions.  Although these amendments were not  adopted in the final version of CUMAA, the House Report accompanying the  proposed bill noted: “Section 204 reaffirms the continuing and affirmative  obligation of insured credit unions to meet the financial services needs of persons  of modest means, including those with low- and moderate-incomes,  consistent with safe and sound operation.”
The Senate Report followed a similar usage in referring to section 204 of the bill. Specifically, the Senate Report also discussed the calling of credit unions to  serve the entire range of membership and to provide “affordable credit union  services to all individuals of modest means, including those with low- and  moderate-incomes, within the field of membership of such credit union.”
These congressional views reflect the clear understanding that the term modest  means indicates a meaning broader than individuals with low- and moderate- income, and those that meet the definition of modest means must also be within  the field of membership (FOM).  In this respect, the term, though not specifically  defined, conforms explicitly with its earlier counterpart, “small means,” as a  shorthand reference to members of the broad working class.
CUMAA also served notice that outreach programs to reach low- and moderate- income individuals, and the support for credit unions designated to serve low- income memberships, should still continue.  Additional authorities granted to low- income designated credit unions, and the ability for multiple common bond FCUs  to adopt underserved areas are also consistent with a more expansive definition  for modest means.  2.  Use of CRA-type definitions for income levels  The Report, in footnote 27 on page 24, provides an explanation for the use of the  Federal Reserve’s Survey of Consumer Finance (SCF) and income categories,  and states:  We  based our groups on income categories used by  financial regulators for federal Community Reinvestment Act  examinations intended to encourage depository institutions to help  meet credit needs in all areas of the communities that they serve:  (1) a low-income household had an income of less than 50 percent  of the national median household income; (2) a moderate-income  had an income of at least 50 percent of but less than 80 percent of  the national median household income; (3) a middle-income  household had an income of at least 80 percent of but less than  120 percent of the national median household income; and (4) an  upper-income household had an income of at least 120 percent of  the national median household income.
H.R. REP. NO. 105-472, at 22 (1998)(emphasis added).
S. REP. NO. 105-193, at 11 (1998)(emphasis added).
Enclosure 2  This footnote does not accurately reflect the income categories established by  the federal financial regulators for CRA examinations and contradicts Table 5 in  Appendix I of the Report.  The income categories identified in the Code of  Federal Regulations for CRA purposes are based on median family income as a  percent of metropolitan statistical area (local area) median family income.  The  income categories utilized in the Report use median household income as a  percent of national (not local area) median household income.  Although the  Report utilizes median family income in its additional analysis, this not only  contradicts the SCF’s methodology, but also does not correct for CRA  inconsistency.  Consequently, the statement that the income levels used are  similar to those used in other governmental programs is misleading and implies  the analyses are based on CRA income categories when, in fact, the income  categories are GAO-defined.
Additionally, footnote 27 illustrates CRA is intended to “encourage depository  institutions to help meet credit needs in all areas of the communities that they  serve. . .”  Given 80 percent of FCUs are occupational or associational based,  the CRA-type categories have limited, if any, applicability for the assessment of  FCUs. 3.  Basing Assessment on the Federal Reserve’s Survey of Consumer  NCUA recognizes the lack of reliable data to serve as a basis for valid  conclusions regarding income distribution of FCU members at the time of the  drafting of the Report.  NCUA also accepts that the SCF was the only source of  data available that provided income figures, albeit of limited application, for FCU  members.  As correctly pointed out by GAO, the SCF was not designed to  analyze credit union member income distribution or make comparisons between  credit union members and bank customers.  For example, the SCF does not  provide proportional representation of credit union members and bank customers  necessary to develop valid conclusions pertaining to income distribution. Notwithstanding these known deficiencies, the SCF is the primary source for the  conclusions reached in the Report, which has the potential for misleading  assessments about whom credit unions serve compared to banks.
See 12 C.F.R. §§ 228.12(b) and (m)(Federal Reserve), 345.12(b) and (m)(FDIC), 25.12(b) and (m)(OCC), and  563e.12(b) and (m)(OTS).
The number of households primarily using credit unions included in the 2004 SCF is only 14 percent of those surveyed.   The number of FCU member households included in this small number is unknown.  See page 63 of the Report.
Enclosure 2  comparisons, they are also insufficient for providing a comprehensive view of  member incomes.
The use of additional tables, in the body of the report, depicting the same data in  various ways would have allowed a more complete view of member incomes. For example, the Federal Reserve uses income percentiles in its assessment of  the SCF, which provides a more objective presentation of income distribution  than the broad income categories used in the Report.  Table 1 presents the data  used in the Report based on these income percentiles.
Banks  19.2%  20.0%  20.7%  20.2%  $89,301 to $129,400  11.5%  18.8%  23.2%  24.8%  13.2%  Further, including both average and median incomes for comparative purposes,  rather than using only median as reflected in the Report, provides for a more  complete view of member incomes.  According the SCF results and as  demonstrated in Table 2, while credit union members have the highest median  income, bank customers have the highest average income.
Table compiled by NCUA to illustrate other alternatives for SCF data analysis.
Table compiled by NCUA to illustrate other alternatives for SCF data analysis using the median income included in the  Report.
Enclosure 2  family income for comparison is inconsistent with the SCF methodology, which  utilized median household income.  Therefore, this comparison does not add  validity to the results of the study since it only changes the comparative  benchmark. 4.  Providing a limited framework for credit union membership assessment  Although the Report correctly recognizes that credit unions retain their distinction  in terms of structure and governance, it does not provide a framework that would  allow for an appropriate interpretation of the assessments presented.  For  example, factual background information about credit unions and their important  differences from banks, which is vital for an understanding of this issue, is not  adequately addressed.  To fully understand and assess any data that attempts to  compare credit union members with depositors in other types of financial  institutions, the Report should include discussion of the following:  A.  Statutory limitations on FCU membership  MSAP data confirms the importance of the statutory mandate concerning  common bond when assessing membership profiles.  It also confirms that  comparisons with other financial institutions, as well as among different charter- types of FCUs, are difficult.  FCUs are chartered as cooperatives to serve  individuals only within their FOM.  They are, therefore, limited in whom they can  serve and are restricted to the income composition of the individuals within their  allowed FOM.  It is misleading to draw definitive conclusions about the success  of FCUs in serving individuals and groups outside their traditional membership  base without fully focusing on their authorized FOMs.  This is particularly  important in view of the fact that, as of December 2005, approximately 80  percent of all FCUs had single-or multiple-common bond charter types based on  occupation or association.  The implication of this FOM concentration, based  primarily on working individuals, is far reaching within the context of assessing  the membership profile of FCUs.
Understanding statutory limitations on who can join FCUs is critical in conducting  an objective assessment of the FCU system membership profile, any policy  consideration on who benefits from credit union services, and the impact of FCUs  on the financial sector.  The statutory limitations also emphasize the differences  between FCUs and banks and draw into question the reasonableness of any  general comparison between income distribution of FCU members and bank  customers.  To conduct a reasonable comparative assessment of whom FCUs  and banks serve, both types of institutions would need to have a similar structure  and other characteristics.  Although community-chartered FCUs and community  banks may share some similarities relative to location, structurally, community- chartered FCUs remain cooperatives with the limitations of building capital/net  worth, geographic constraints, and numerous other restrictions.
B.  Composition of the FCUs  The Report provides an extensive review of the characteristics and growth  patterns of community-chartered FCUs. However, the proportion of FCUs that  are community-chartered, the need for charter conversions to ensure continued  viability, and the challenges community-chartered FCUs face when converting  from a single or multiple common bond charter, as well as other issues, are not  thoroughly addressed.  For example: 1.  Despite recent growth in FCU community charters, they still only represent  approximately 20 percent of FCUs and 30 percent of FCU membership. This is a significant portion of the FCU system, but, as noted in the Report,  this growth has primarily been within the last five years.  Additionally, it  should be emphasized that much of this growth is a result of FCUs  converting from an already existing occupational or associational FOM. Instead, the Report concentrates on the growth of this subset when  characterizing the entire FCU system, in particular the perceived “blurring”  of the distinction between FCUs and other depository institutions. 2.  A thorough assessment of the causes for the recent community charter  conversions is not provided.  The primary reason for these conversions  has been to ensure continued viability of FCUs in changing economic and  financial industry environments.  A review of several examples documents  this point.  Clearview FCU (formally US Airways); Bethpage FCU (formally  Grumman); JAX FCU (formally Jacksonville Naval Base); and New  Cumberland FCU (formally New Cumberland Army Depot Defense  Distribution Center) all converted to community charters in response to  changes in their primary sponsors. 3.  The time necessary to successfully implement a different business model  when converting to a community charter is not adequately addressed. This is critical since the cutoff for the SCF data is 2003, yet the period  under review extends to and includes 2005.  Consequently, the SCF does  not allow for an assessment of any appreciable changes based on the  recent growth of FCU community charters, as the majority of the  conversions to a community charter have occurred since 2000, and 192  have occurred since 2003.  Since the growth of community charters is  discussed at length, it should also be fully explained that relative to the  overall issue of reaching out to low- and moderate-income individuals, the  impact of this growth can not be expected to be represented in the SCF  data.  Because the SCF does not overlay the time period of the review, its  relevance is further diminished.  4.  The intent of NCUA’s regulations pertaining to community charters is not  accurately described.  On page 1 the Report states:  “As a result of recent  Enclosure 2  legal and regulatory developments, field of membership requirements for  credit unions have been relaxed – member groups now can include  anyone who lives, works, worships, or attends school in areas as large as  whole counties or major metropolitan areas.” This statement suggests  that the affinity requirement (lives, works, worships…) of NCUA’s field of  membership rules and the geographic limits on community charters are  recent developments.  That suggestion is not accurate.  Both of these  NCUA regulatory policies predate CUMAA.  NCUA did grant community  charters prior to CUMAA that encompassed whole counties and  metropolitan areas.  It is true that the documentation requirements for  single political jurisdictions were reduced through regulatory amendments  that post-dated CUMAA, but that change was based on NCUA’s  experience in chartering communities constituting a single political  jurisdiction. 5.  The size and extent of the community charters approved by NCUA are not  appropriately represented.  By using the approval of Los Angeles County,  on page 13, as an example of a community charter conversion, it  misrepresents the size of the community charter conversions commonly  authorized.  The data provided to GAO reflects the average population  size for those community charter conversions approved during the period  from 2000 to 2005 was 304,886, and the median size was 125,000.  6.  The Report states in the Highlights, as well as on page 6 and elsewhere,  that NCUA’s change in chartering policy is “triggered partly by concerns  about competing with states with more expansive credit union chartering  rules. . .”  It is inaccurate to indicate that FOM parity with state-chartered  credit unions is a primary objective when revising FOM policies for FCUs. Although this issue has surfaced during the regulatory comment period on  proposed policy changes, it has not been a factor in NCUA’s policy  making.
C.  The size and market share comparison of credit unions and banks  Although the Report attempts to compare credit unions to banks, it does not  provide a framework for an objective analysis, which, in addition to the  membership limitations discussed above, should reflect the relative industry  position of the two types of financial institutions.
As with all institutions in the financial industry, FCUs have evolved to ensure their  continued viability.  Since 1934, dramatic changes in the overall economic  environment in which FCUs must operate have occurred.  These changes have  required that FCUs adapt in order to meet the financial needs and expectations  of their members.  Specifically, in the last forty years, changing demographics in  the United States were characterized both by the loss of numerous well-paying  blue collar jobs in the manufacturing sector and an increasing disparity in the  Enclosure 2  income range between persons in the working class and the upper class. Operational evolution can be seen at several levels, including the offering of a  wider range of services to a more broadly defined FOM.  Fundamentally,  however, even though some FOMs are broader today, FCUs have adhered to  and preserved the integrity of both the common bond and their cooperative  structure, which is reflected in regulatory policies.
In addition, the types of services FCUs now increasingly offer have changed.  As  with the common bond, FCUs have found it necessary to adapt in order to meet  member expectations and demand for products and services.  On page 1 the  Report states “credit unions are now allowed to offer many products and services  similar to those provided by banks, such as real estate and business loans.” Such a conclusion, however, fails to adequately assess the changing economic  environment.  Further, this statement misrepresents the services credit unions  have historically provided.  FCUs, for example, have been offering member  business loans since their inception, often providing loans to entrepreneurs  initiating a small business.  As to the issue of mortgage lending, the FCU Act first  authorized mortgage lending for FCUs in 1978.  State-chartered credit unions in  several states, most notably in the New England area, have provided this type of  lending since the 1950s.
In regard to rate comparisons, the Report recognizes the rate differences  between banks and credit unions on savings and lending products.  However, it  should further recognize the interest rate environment during the period of the  GAO review when interest rates were at historic lows.  An assessment of the  interest rate environment alone may have explained the reason for the  decreasing gap in the rate paid on savings.  This analysis is also crucial in  assessing the mortgage rates since these loans of long-term maturity  significantly affect the asset/liability management and ultimately the safety and  soundness of a financial institution.
Additionally, as shown in Table 3, credit unions are an important, but relatively  small, segment of the financial industry.  This size disparity draws into question  the appropriateness of the comparison and conclusions in the Report.
Credit Unions Insured by NCUSIF (Federally-Insured Credit Unions)
NCUA also has concerns relating to the asset groups used in the Report for the comparison between banks and credit unions.  The smallest group size used for comparative purposes in the Report is $100 million or less in assets.  It is not disclosed, however, that approximately 88 percent of FCUs fall into that category, with 80 percent having assets less than $50 million as of September 30, 2005.  It should also be noted that the average asset size of FCUs is $73.2 million with the median asset size just $11 million. 5. NCUA’s efforts to target credit union services to low- and moderate- One of GAO’s stated objectives was to review NCUA’s efforts to expand credit union services to individuals of low- and moderate-income.  The Report correctly focuses on two principal programs in this context:  (1) NCUA’s Low-Income Credit Union (LICU) program; and (2) NCUA’s strategic efforts to encourage FCUs to expand services into specifically designated underserved areas.  It also correctly notes that NCUA’s support for these programs has resulted in increased participation in both programs by FCUs in recent years.
Information obtained from FDIC Statistics on Banking: A Statistical Profile of the United States Banking Industry as published by FDIC, Division of Insurance and Research, for 2003, 2004, and 2005.
Information obtained from Yearend Statistics for FICUs as published by the National Credit Union Administration for  2003, 2004, and 2005.   115 Cong. Rec. S13997 (May 27, 1969) (statement of Sen. Scott). membership base must necessarily be different, and broader.  Although  Congress recognized the difference, it did not believe an amendment to the  overall statutory purpose for FCUs, which at that time was service to persons of  “small means,” was required.
Instead, Congress implicitly endorsed FCU service to the traditional membership  base and specifically directed that NCUA should supply its own definition of low  income for purposes of implementing the provisions of the new law.  By  regulation, NCUA did so, specifying that the term low income means individuals  who make less than either 80 percent of the average for all wage earners, as  established by the Bureau of Labor Statistics, or whose household income is at  or below 80 percent of the national median household income as established by  the Census Bureau.
To qualify for low-income designation, a credit union must have more than 50  percent of its membership consisting of individuals defined as low income.  This  was a specific initiative by NCUA to recognize credit unions that predominately  served a low-income population but were challenged in providing additional  services and/or programs to their members.  This initiative opened opportunities  for these credit unions to obtain additional capital from philanthropic  organizations and assistance from the Department of the Treasury’s Community  Development Financial Institution Fund (CDFI), the NCUA’s Community  Development Revolving Loan Fund (CDRLF), and other organizations to  enhance and expand services to the low-income population.
Page 20 of the Report accurately describes the other unique characteristics of  LICUs and correctly notes LICUs grew in number between 2000 and 2005, from  632 to 1,032, a 63 percent increase.  This result was achieved with NCUA’s  vigorous encouragement and evidences dramatic success in NCUA’s effort to  increase service to low-income members.  Although NCUA has not collected  income and service usage data, the descriptive analyses conducted by NCUA on  the data collected in MSAP reflect LICUs and FCUs with underserved areas are  serving a relatively greater proportion of low- and moderate-income individuals  than the FCU system as a whole.
12 C.F.R. § 701.34(a)(2).  As originally implemented, NCUA’s rule used 70 percent of median as the relevant  percentage indicator of “low income.”  The rule was changed to its current usage of 80 percent in 1993.
Enclosure 2  is contrary to congressional intent, inhibits the ability of both types of FCUs to  increase service to low- and moderate-income individuals who are outside the  credit union’s FOM.
In addition, the Report on page 22 uses Washington, D.C. as an example of an  underserved area approved by NCUA without regard to location.  This  presentation is misleading.  It is not explained that once an FCU identifies an  area meeting the underserved requirement, as defined in Section 103(16) of the  Community Development Banking and Financial Institutions Act of 1994, it must  apply to NCUA to add the area to its field of membership.  A detailed marketing  plan, emphasizing how the FCU plans to reach out and serve all individuals in the  underserved area, must be submitted.  A detailed business plan must also be  submitted indicating how the FCU will meet the needs of the individuals in the  underserved area by describing the products (e.g., free checking, micro-credit  loans) and services (e.g., bilingual staff, financial education seminars) the credit  union offers or is planning to offer.  Once approved to serve a specific  underserved area, the credit union must maintain or open an office or service  facility in the underserved area within two years.
Other outreach initiatives by NCUA to increase service to underserved individuals  have not been sufficiently acknowledged or described.  NCUA has initiated  several programs focused on assisting LICUs and on providing all credit unions  with best practices to consider when converting to community charters or adding  underserved areas.  Since 1987, NCUA has administered the CDRLF, which was  established by Congress, to provide technical assistance grants and low-cost  loans for any LICU interested in enhancing service to its membership.  Under  NCUA’s auspices, the CDRLF has granted 273 loans totaling $40.5 million, and  1,923 grants totaling $5.8 million.
In addition to the CDRLF, the Access Across America initiative, announced in  February of 2002, incorporated NCUA’s activities for small and low-income  designated credit unions, as well as those FCUs adopting underserved areas. The program was designed to partner with federal government agencies and  other organizations to identify and facilitate use of resources available for credit  unions to assist in their efforts to serve low- and moderate-income individuals. Workshops continue to provide partnering opportunities with federal government  agencies, as well as non-profit and private organizations.  This initiative has  resulted in NCUA entering into Memoranda of Agreement with the Internal  Revenue Service, Operation Hope, and the Department of Agriculture, each of  which committed to provide assistance in sharing opportunities with participating  credit unions.  Moreover, NCUA maintains a working relationship with the  Department of Health and Human Services, CDFI, and Fannie Mae to provide  opportunities for credit unions to expand the products and services particularly  useful to those members with low- and moderate-incomes.
Pub. L. 103-325, 108 Stat. 2163 (Sept. 23, 1994)(codified at 12 U.S.C. §§ 4701 et seq.).
Enclosure 2  As an adjunct to the Access Across America initiative, the Partnering and  Leadership Successes program was introduced in 2003 to provide best practices  in serving members and marketing to potential members in all credit unions,  especially in underserved areas and communities.  The agency coordinates  widely attended workshops where a mix of credit unions present programs  focused on serving low- and moderate-income individuals.  A few of these  programs include partnering opportunities with the Neighborhood Reinvestment  Corporation, Latino outreach, and micro-business lending opportunities with the  Small Business Administration.
In conjunction with these workshops, numerous Letters to Credit Unions have  been published that augment the workshops, providing information to the credit  union system about opportunities available to enhance service and marketing to  individuals in underserved areas.  Two early examples of these letters include  the February 2002 Letter to Federal Credit Unions, Letter No. 02-FCU-02 titled  Partnership Opportunities with IRS, which introduced the credit union system to  the Volunteer Income Tax Assistance program, and the September 2001 Letter  to Federal Credit Unions, Letter No. 01-FCU-06 titled Financial Education  Curriculum, which announced FDIC’s new Money Smart Financial Education  Curriculum.
The overall objective of NCUA’s initiatives is to provide increased opportunities  for FCUs to diversify their membership profile and to assist small and low-income  designated credit unions as they manage their operations in compliance with the  increasing number of complex laws and regulations.  If successful, the viability of  some low-income designated FCUs will be preserved, thus further enhancing the  opportunity for low- and moderate-income individuals in their FOM to join and  participate in the financial services offered by small and low-income designated  FCUs.
Each of these initiatives was in direct response to CUMAA.  But these types of  initiatives have long been a part of NCUA’s, or its predecessor agency’s,  regulatory fabric.  There have been others, such as the 1960s era initiative,  undertaken jointly with the Office of Economic Opportunity, to establish FCUs to  serve low-income communities, the drive to increase the number of LICUs, and  the regulatory encouragement to add underserved areas.
More recently, in 1993, NCUA created the Office of Community Development  Credit Unions which is dedicated to ensuring the long-term viability of small and  low-income designated credit unions.  Today this activity is handled by the Office  of Small Credit Union Initiatives (OSCUI), which has expanded considerably in  terms of staff, resources, and programs.
NCUA Home Page – http://www.ncua.gov – Letters to Credit Unions, 2001 to 2005.
Enclosure 2  2006 to date, OSCUI has held fifteen national workshops covering subjects such  as establishing financial literacy programs, disaster recovery planning, and  compliance with the Bank Secrecy Act.  In addition to the national workshops,  OSCUI coordinates with NCUA’s regional offices to conduct smaller roundtable  training sessions focused on the needs of small and low-income designated  credit union officials.  6.  Transparency of Executive Compensation  NCUA agrees with the conclusion that credit union executive compensation is not  readily transparent.  Absent compensation information captured by IRS Form  990, it can be difficult for FCU members to ascertain the exact compensation and  benefits received by their executives.  In the past, NCUA, while not objecting to  disclosure of this information, has deferred to applicable state law on whether  compensation and benefit information should be disclosed.
As the Report points out, staff have indicated more efficient methods to capture  and disseminate executive compensation information in lieu of filing Form 990. Such methods include: (1) amending NCUA’s regulations to require FCUs to  include executive compensation information in their annual reports; (2) requiring  the reporting of such information in NCUA’s quarterly call reports; or (3)  amending the standard FCU Bylaws to require disclosure of compensation  information during an FCU’s annual membership meeting.  These and other  methods may be considered by the NCUA Board in evaluating the transparency  of executive compensation.
While NCUA agrees FCU executive compensation is not readily transparent,  several matters in the Report warrant clarification.  They include:  1.  Despite the absence of a standardized reporting mechanism, NCUA does  not ignore the issue of executive compensation.  Contrary to the  implication on page 45, NCUA does assess executive compensation  during the examination process primarily to determine its reasonableness  as it relates to safety and soundness.  There has never been a system- wide issue relating to executive compensation.  As such, NCUA has not  considered it necessary to collect or aggregate executive compensation  data. 2.  On Page 42, it is implied that MSAP is deficient because it does not collect  executive compensation information for banks, thereby preventing a direct  comparison between FCUs and banks.  However, it is not within NCUA’s  authority to collect data from banks or thrifts.  Additionally, since this is not  a safety and soundness issue for the credit union system, NCUA’s  authority to collect executive compensation extends only to FCUs. 3.  Comparing executive compensation of FCUs and banks was not a stated  objective for GAO’s study.  Attempting to make a direct comparison is not  Enclosure 2  only irrelevant to the issue of transparency, but is impossible given the  differences in the forms of compensation available to FCU versus bank  executives.  For example, as the Report notes, stock options and stock  bonuses are routinely paid to bank executives, but are unavailable to  credit union executives.  Nevertheless, the discussion of this matter  seems to imply that somehow credit union executive compensation may  be askew.  Only by delving into the data provided in Appendix IV of the  Report is it clear that credit union executives on average make  significantly less than their banking counterparts. 4.  Since the Report addressed comparisons between senior officers of credit  unions and banks, it should have also included a more detailed  comparison between directors of credit unions and banks.  It neither  discusses nor includes any data regarding the compensation paid to  directors of banks, which in some instances can be rather lucrative.  At  least some discussion would have been appropriate, especially since FCU  boards are comprised of volunteers.  Including such data and discussion  would have made for a more thorough and accurate comparison of  executive compensation.  5.  The Report states on page 48 that MSAP will not stratify executive  compensation by asset size of credit unions.  This is not accurate.  MSAP  compensation data can be stratified into two statistically valid subsets  based on asset size of the credit unions surveyed.  In addition, limited  descriptive conclusions can be derived from the data about other asset  subgroups.
As referenced in MSAP and this response, NCUA recognizes the difficulty in  addressing the issues of membership profiles and the transparency of executive  compensation in the absence of comprehensive data.  NCUA also understands  that the time allotted for completion of the Report did not allow for consideration  of the MSAP data and similar data being compiled by NASCUS.  Although the  Report includes significant new detail and qualifies its reliance on the SCF,  NCUA anticipates the general conclusions reached will be reported without the  appropriate qualifiers.  In order to assure a complete and thorough understanding  of the FCU system, NCUA suggests that GAO include in its Report the  information and data contained in MSAP.  It is also suggested that the  completeness of the Report would be further enhanced by inclusion of the data  now being collected by NASCUS, thus allowing for a thorough assessment of the  entire credit union system.
Pursuant to the FCU Act, no member of an FCU board may be compensated; however, an FCU may compensate one  individual who serves as an officer of the board.  For example, if the credit union’s paid CEO is also a member of the  board.  See 12 U.S.C. §§ 1761(c) and 1761a.
The following are GAO’s comments on the National Credit Union  Administration’s letter dated November 14, 2006.
subsections: section_title: GAO Comments
paragraphs: 1. As noted in NCUA’s letter, we did not receive the results of its pilot  survey on the membership profile of federal credit unions (Member  Service Assessment Pilot Program) in time to include it as part of our  study. The report can be found at NCUA’s website www.ncua.gov. 2. NCUA questioned GAO’s use of low- and moderate-income as a proxy  for the term modest means. As we note in our 2003 and current report,  neither the legislative history of the Federal Credit Union Act, as  amended, nor NCUA have established definitions as to what constitutes  modest means. As a result, we used the low- and moderate-income  categories that we defined in our 2003 report, which are based on what  the other federal financial regulators use for Community Reinvestment  Act purposes, as a proxy for modest means. Moreover, both citations  identified by NCUA in the House and Senate reports for the bill that  ultimately was enacted as CUMAA specifically identify low- and  moderate-income as components of what is referred to as modest  means. We agree that the term modest means also indicates a meaning  broader than individuals with low- and moderate-income. Further, our  analysis included comparisons between credit unions and banks of  households with middle- or upper-incomes. This analysis showed that  between 2001 and 2004 credit unions continued to serve a higher  proportion of middle- and upper-income households and a smaller  proportion of low- and moderate-income households than did banks.  3. NCUA stated that the text in footnote 27 of the draft report did not  accurately reflect the income categories that the federal financial  regulators established for CRA examinations. The text in question has  been moved up into the body of the report and modified to more clearly  state that our categories were based on, but not identical to, that used  by the other federal financial regulators for CRA purposes. The primary  difference between our income categories and those used for CRA  purposes was the use of national median income rather than local  metropolitan statistical area median income as a benchmark for the  various income categories. We use the national measure since the SCF  is a national survey. Further, we agree with NCUA’s assertion that  occupational and associational based credit unions have restricted  membership bases, which limit their ability to serve all income  categories. However, as we note in the report, although the number of  credit unions with single or multiple common bonds have been  decreasing since 2000 and the number of credit unions with more  inclusive community charters have been increasing, 2001 and 2004 SCF  data indicated that credit unions continue to serve a higher proportion  of middle- and upper-income households than banks.  4. NCUA questioned our use of SCF data as the primary source for  conclusions reached in the report regarding the income characteristics  of credit union members. We believe that the report as stated clearly  outlines the limitations of SCF data in conducting the analysis, but as  we noted in our prior report, the SCF is the only source of  comprehensive data to conduct such an analysis. We agree that there  are other ways of analyzing and presenting these data. However, we  believe that figure 2 in our report provides a valid comparison of bank  and credit union customers in the SCF data. In addition, it uses the  methodology of our 2003 report, which allows us to directly compare  the results of our 2003 report with our current report. We focus on the  median income, as we did in our prior report, since this measure is less  susceptible to the influence of extreme values than the mean. As noted  in the report, we performed an additional analysis using the median  family income to provide additional context to our analysis within the  same methodological framework. 5. NCUA suggested that our report does not provide a framework for  understanding the effect of statutory limitations on federal credit  unions when comparing the income distribution of federal credit union  members and bank customers. We explicitly acknowledged the  importance of these limitations in our 2003 report and have added some  additional text to reflect these limitations in our current report.  Nevertheless, we believe that our analysis of SCF data on the income  levels of credit union members versus bank customers provides  important contextual information on the extent, if any, that credit union  members are different from individuals that use banks. The lack of data  on the income distribution of credit union members by charter type  was one of the primary factors behind our recommendation that NCUA  expand its pilot survey to allow the agency to systematically obtain and  monitor credit union member income data by charter type. 6. NCUA stated that the report does not thoroughly address the  proportion of federal credit unions that are community chartered. We  believe our report addresses this issue correctly, as originally  presented. Both in table 1 of our report and the related text, we note  that despite the growth in community charters, multiple-bond credit  unions remain the largest group of federally chartered credit unions in  number, total membership, and assets. However, as we noted in our  report, it is important to emphasize that community-chartered credit  unions overtook multiple-bond credit unions as the largest of the three  federal charter types, in terms of average membership and average size  in terms of assets, beginning in 2003. 7. NCUA stated that the report does not thoroughly address the agency’s  position on the need for charter conversions to ensure continued  viability. We believe our report addresses this issue correctly, as  originally presented.  As noted in our report, we attributed to NCUA  some of the causes for growth in the community charter, including the  agency’s belief that community charter expansion allows federal credit  unions to attract a more diverse membership base that can enhance a  credit union’s economic viability or safety and soundness as well as  provide greater opportunities to serve members of modest means. We  further note in our report that NCUA explained that single- and  multiple-bond credit unions often tend to be organized around  employer or occupationally based associations, which in turn creates  greater economic risk exposure since the membership base is  intertwined with the economic cycles of a particular employer or  occupation. Finally, we cite a Federal Reserve Bank of Atlanta research  paper, which concluded that there are material benefits of credit union  membership diversification and that these benefits derive from  expanded investment opportunities and reduced concentration risk. 8. NCUA stated that the time necessary to successfully implement a  different business model when converting to a community charter is  not adequately addressed. We believe our report addresses this issue  correctly, as originally presented.  Specifically, the report cites NCUA’s  belief that it would take time for any results to appear in the SCF data  as credit unions seeking to expand into new areas and reaching new  types of customers would face a learning curve in their efforts. Our  report further notes that the latest available data from SCF are 2-years  old, so any more recent changes would not be reflected in our analysis.  9. NCUA stated that the intent of NCUA’s regulations pertaining to  community charters was not accurately described. Specifically, NCUA  stated that introductory text in the draft report suggested that the  affinity requirements of NCUA’s field of membership rules and the  geographic limits on community charters are recent developments.
NCUA noted that both of these regulatory policies predated CUMAA.  We have clarified the text of our report to reduce the potential for  confusion by stating that since the passage of CUMAA, NCUA has  approved progressively larger geographic-based fields of membership.  10. Text has been added to reflect the average and median population size  of community charter conversions approved from 2000 to 2005.  11. NCUA stated that we inaccurately attributed its change in chartering  policy as being triggered partly by concerns about competing with  states having more expansive credit union chartering rules. As we  reported in 2003, NCUA stated to us at that time that a major reason for  its regulatory changes was to maintain the competitiveness of the  federal charter in a dual (federal and state) chartering system. In  subsequent discussions with NCUA they indicated that it would be  more accurate to attribute changes in chartering policy to factors such  as the continued viability of federal credit unions in changing economic  and financial industry developments. We have modified the text of our  report to reflect the influence of these factors.  12. Text has been added to reflect that credit unions historically have had  the ability to offer real estate and business loans. 13. Text has been added to the report to recognize that interest rates during  the period of our credit union and bank rate analysis were at historic  lows.  14. Text has been added to the background section of the report based on  the information provided by NCUA in its comment letter regarding the  proportion size of the credit union industry in comparison with other  federally insured depository institutions and the relatively small size of  most federally chartered credit unions. However, it is important to note  that the disparity in size between the credit union and banking  industries does not affect our rate analysis methodology or our  conclusions since that analysis is broken out by asset groupings,  starting with institutions with assets of $100 million or less. 15. NCUA stated that it was inaccurate and inappropriate to use its Low- Income Credit Union program and underserved area expansion  program to define and assess service to people of modest means. As  noted previously, we used low- and moderate-income as a proxy for  modest means due to a lack of a legislative or regulatory definition or  other criteria. Moreover, we note that NCUA’s regulations for its  underserved program includes criteria (area in a metropolitan area  where the median family income is at or below 80 percent of the  metropolitan area median family income or the national metropolitan  area median family income) that is roughly similar to that used to  define low- and moderate-income for CRA purposes (less than 80  percent of the median family income for the Metropolitan Statistical  Area).  16. We clarified in the report that both single-bond and community credit  unions are currently not permitted to include underserved areas in their  fields of membership. As noted in the report, the American Bankers  Association contended that the Federal Credit Union Act allows  multiple-bond credit unions, but it does not specifically identify single  or community credit unions to add underserved areas to their field of  membership. 17. We added additional information in the report on NCUA’s criteria for  federal credit unions applying to include underserved areas in the  credit union’s field of membership. However, we disagree with NCUA’s  assertion that the example we provided in our report is misleading.  18. We clarified in the report that NCUA examiners assess executive  compensation during the examination process primarily to determine  its reasonableness as it relates to safety and soundness, but that since it  has not found a systemwide issue with executive compensation, NCUA  has not considered it necessary to collect or aggregate executive  compensation data. 19. NCUA noted that our characterization of NCUA’s Member Service  Assessment Pilot implies that the pilot is deficient because it does not  collect executive compensation information for banks; thereby,  preventing a direct comparison between federal credit unions and  banks. It also noted that it is not within NCUA’s authority to collect data  from banks or thrifts and that its authority to collect executive  compensation data extends only to federal credit unions in the context  of credit union safety and soundness issues. We do not intend to imply  that collecting compensation data from banks is the responsibility of  NCUA but point out the lack of available data that would allow a direct  comparison of credit union and bank executive compensation. 20. NCUA indicated that comparing executive compensation of federal  credit unions and banks was not a stated objective for our study and  that attempting to make a direct comparison is impossible, given the  differences in the forms of compensation available to federal credit  unions versus bank executives. We acknowledge that comparing  executive compensation of federal credit unions and banks was not a  stated objective for this study. Our report text merely points out that  due to the lack of consistent, available, and transparent compensation  data for credit unions, any overall comparison is difficult. For this  reason, we did not provide bank executive compensation data in the  main body of the report or make any direct comparisons between  credit union and bank executive compensation. However, we believe  that inclusion of bank executive compensation data in the appendix  provides a useful benchmark on selected executive positions.  21. NCUA noted that the report neither discusses nor includes any data  regarding the compensation paid to directors of banks and that  including such data and discussion would make a more thorough and  accurate comparison of executive compensation. We acknowledge this  point and added some additional discussion on bank director  compensation for context.  22. Our original characterization of NCUA’s Member Service Assessment  Pilot was based on a discussion with NCUA officials. We have revised  the text of the report to reflect that compensation data that NCUA  obtained can be stratified into two statistically valid subsets based on  the asset size of the credit unions surveyed.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the above contact, Harry Medina, Assistant Director; Janet  Fong; May Lee; John Lord; Donald Marples; Edward Nannenhorn; Jasminee  Persaud; Carl Ramirez; Barbara Roesmann; Paul Thompson; and Richard  Vagnoni made key contributions to this report.