SECTION: IN THE NEWS

LENGTH: 10002 words

HEADLINE: PREPARED TESTIMONY OF
J. RAYMOND CURTIN
PRESIDENT/CEO OF EMPIRE FEDERAL CREDIT UNION
BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
SUBJECT - IMPLEMENTATION OF THE CREDIT UNION MEMBERSHIP ACCESS ACT

BODY:
The National Association of Federal Credit Unions (NAFCU) is the only national organization exclusively representing the interests of our nation's federally chartered credit unions. NAFCU is comprised of nearly 1,100 federal credit unions -- financial cooperatives from across the nation -that collectively hold approximately 70 percent of total federal credit union assets; NAFCU represents the interests of approximately 25 million individual credit union members. NAFCU and the entire credit union community appreciate this opportunity to participate in these vitally important hearings regarding the current and future field of membership policies of the National Credit Union Administration (NCUA) and other important issues affecting credit unions.
Officially established by an act of Congress in 1934, the federal credit union system was recognized as a way to make financial services available to people of small means and to promote thrift and extend credit. Congress established credit unions as a financial alternative to banks and to fill a precise public need -- a niche that credit unions still fill for over 75 million Americans. Every credit union is, by statute and practice, a cooperative association organized "for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes." ( 12 USC 1752(1))While more than 60 years have passed since the Federal Credit Union Act was signed into law, two fundamental principles regarding the operation of credit unions remain every bit as important today as they were when Congress first authorized the establishment of federal credit unions:
- Credit unions remain totally committed to providing their members with efficient, low cost personal service; and,
- Credit unions continue to emphasize traditional cooperative values, such as democracy and volunteerism.
As owners of not-for-profit, cooperative financial institutions united by a common bond, all credit union members have an equal say in the operation of their credit union -- regardless of the amount they have on account at the credit union. These singular rights extend all the way from making basic operating decisions to electing the board of directors. Unlike banks and thrifts, federal credit union directors, motivated by an altruistic desire to be of service to others, serve without remuneration -- a fact that epitomizes the true "volunteer spirit" that permeates the credit union community.
Credit unions play an important role in the financial lives of more than 75 million Americans from all walks of life who have chosen the convenient and low-cost financial services provided by credit unions. As the package of services offered by various types of financial institutions becomes more homogenized, the emphasis shifts from the type of service offered to the quality and cost of service provided. Historically, credit unions have been second to none in providing their members with quality personalized service at the lowest possible cost. According to an annual survey conducted by the American Banker newspaper, 1997 was the thirteenth consecutive year in which credit unions have rated higher than all other financial institutions in overall service quality and this trend shows no sign of change.
Credit unions are not banks. The nation's 11,200 credit unions -- 7,000 chartered by the federal government and 4,200 chartered by the various state governments -- serve a unique purpose and accordingly have a fundamentally different structure. Credit unions are not-for- profit cooperative institutions that serve the public good. They are owned by their members and managed by a democratically elected, unpaid board of directors. Regardless of the amount of money a member has in his or her account, he or she has an equal say in the management of the credit union. Membership in a credit union is not open to the general public; a credit union may only serve those individuals within its field of membership (as approved by the NCUA). Federal credit unions have an independent federal regulator (NCUA) and an insurance fund (the National Credit Union Share Insurance Fund (NCUSIF)) separate from the bank and thrift funds managed by the Federal Deposit Insurance Corporation. Credit unions are prohibited from using their members' funds to make foreign loans or to engage in speculative ventures: just two of the many benefits enjoyed by the banking industry.
Ironically, banks are calling for greater regulation of credit unions, while demanding fewer regulations for themselves, so that they may enjoy more benefits of being a bank. Credit unions are not banks and never have been. Credit unions exist solely for the purpose of providing financial services to their members. Banks exist primarily to provide a return on investment for stockholders; providing financial services is the method banks use to generate the profit necessary to provide that return on investments to stockholders, but it is not the raison d'etre of the institution -- as is the case with credit unions.
Empire Federal Credit Union was chartered in 1950. We were originally chartered to serve the employees of the Syracuse District of the New York Telephone Company. Over the course of time, our credit union has grown; today, we are a $175 million credit union serving the borrowing and savings needs of approximately 40,000 members. In my capacity as President and CEO of Empire Federal Credit Union, I understand and appreciate how NCUA's multiple group chartering policy is able to assist individuals who otherwise would be denied credit union services, and in some cases financial services of any type. It is an unfortunate fact that in some cases credit union membership may be the only opportunity an individual might have to access financial services.
Empire Federal Credit Union believes in the principles reflected in NCUA's select employee group (SEG) policy. We serve approximately 325 different SEGs. Since Congress passed H.R. 1151, the Credit Union Membership Access Act and NCUA promulgated its revised Chartering and Field of Membership Manual,.(Interpretive Ruling and Policy Statement(IRPS) 99-1) implementing the Act, Empire Federal Credit Union has submitted 15 applications to serve additional groups. Nine of those applications have been approved since the first of this year. Most of our current SEGs are quite small and clearly unable to qualify for an independent credit union charter in their own right.
The driving force behind Empire Federal Credit Union's growth has always been our members. We have grown in response to our members' desire to have an increasing array of services. We have also grown in order to meet the demands for financial services from groups who, for a variety of reasons, felt that they could not get the quality of financial services offered by Empire Federal Credit Union from the commercial banking sector. In all candor I must say that the leadership of Empire Federal Credit Union takes pride in the good we have been able to accomplish for so many people over the course of our first 50 years. NAFCU wishes to thank the Chairwoman for affording NAFCU the opportunity to appear before the Subcommittee. During your lengthy and distinguished tenure in the House of Representatives, you and your staff have always gone out of your way to make yourself available whenever we have sought your assistance and guidance.

We fully realize that were it not for your active involvement and strong commitment to credit unions -- along with that of Chairman Leach; the ranking Democrats on both the full committee and subcommittees, Representatives LaFalce and Vento; the original authors of the Credit Union Membership Access Act, Representatives LaTourette and Kanjorski; and scores of other members of the House, the 105th Congress never would have enacted H.R. 1151 by the margin of support it did, in the swift time frame it did, using the terms and provisions it did. Credit unions throughout the nation owe you and your colleagues a deep debt of gratitude.
NAFCU believes that the members of the 105th Congress deserve that vote of "thanks" because they were willing to tackle the difficult issues brought to a head by the banking industry's lawsuits against credit unions and NCUA, and revisit the membership criteria set forth in the Federal Credit Union Act. Congress did its job. But as with any policy decision, not everyone agreed with the outcome. While H.R. 1151 passed the House of Representatives by a vote of 411-8 and the United States Senate by a vote of 92-6, we knew then just as we know now, that not every member of Congress who voted for this legislation was satisfied with every provision. Some members of Congress thought the bill went too far in one area or another; others not far enough. But they recognized that, on balance, it was sound and necessary legislation, and it made for good public policy.
Similarly, some in the credit union community, while overall pleased with the legislation, would have liked to have seen various provisions fine-tuned. Yet when viewed in a macro-context, they realized then as they do now, that Congress did an outstanding job in crafting the legislation and sending it to the White House to be signed into law.Just as it was the responsibility of Congress to fashion the terms and conditions of the Credit Union Membership Access Act, it fell upon the shoulders of the three NCUA Board members to fashion the rules and regulations to implement the new law. Once again, some thought the agency's regulation (IRPS 99-1) went too far in one area or another; others not far enough. As was the case when Congress enacted H.R. 1151, some in the credit union community, while generally supportive of the regulation, would have liked to have seen various provisions fine-tuned one way or another. But, like Congress, NCUA did its job.
One common thread ran through both the legislative and regulatory process: credit unions made sure that the concerns of their more than 75 million members were heard both by lawmakers and regulators, but at the end of both the legislative and regulatory processes it was the judgment of public officials -- either those elected to Congress or those confirmed by the Congress -- that ultimately determined the scope of the statute and the breadth of the regulations. NCUA was created by Congress to be an independent agency, and independent it remains; it was the independent judgment of your former colleague on this Committee, NCUA Board Chairman Norman D'Amours, and NCUA Board Members Yolanda Townsend Wheat and Dennis Dollar that determined the final parameters of lRPS 99-1.
Congress did its job on August 4, 1998, when it sent H.R. 1151 to the White House to be signed into law; NCUA did its job on December 17, 1998, when it promulgated IRPS 99-1 implementing Public Law 105-219; and now credit unions are trying their best to do their jobs of promoting thrift and providing credit to their members.
It is clearly the prerogative of this Subcommittee to review how NCUA has implemented the Credit Union Membership Access Act. NAFCU pledges its complete cooperation in that effort. However, just as it was litigation initiated by the banking industry that led to enactment of H.R. 1151, litigation again initiated by the banking industry has set in motion a process where a federal judge now has the ultimate responsibility of determining whether or not NCUA fulfilled its statutory mandate in implementing the Credit Union Membership Access Act. In this statement, we share with the Subcommittee NAFCU's opinion concerning many aspects of NCUA's handling of the implementation, but the opinion that will ultimately count will be that written by Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia.
The Credit Union Membership Access Act was critically important legislation that addressed a broad range of issues. What started out as a bill that fit on a single page, not only resolved uncertainties that had arisen as a result of legal challenges brought by the banking industry over the course of a decade to NCUA's regulatory authority, but ultimately went well beyond that issue. One page swelled to scores of pages, as H.R. '1151 was modified to include stiff new standards recommended by the U.S. Department of the Treasury regarding the proper level of capitalization of both credit unions and the credit union insurance fund, the National Credit Union Share Insurance Fund (NCUSIF). It placed constraints on the ability of credit unions to extend loans to meet the needs of their members who would like to borrow for business purposes -- in many cases forcing members to borrow at substantially higher rates from the commercial banking industry, despite the fact that the banking industry oftentimes finds that the applications for loans for such low amounts are themselves a bother and the borrower an inconvenience.
For the past ten years the banking industry has persistently challenged credit unions in the Congress and in the Courts. In fact, bankers or their representatives have initiated at least twenty-two lawsuits challenging credit union growth in the past ten years. Quite frankly, we have great difficulty in sorting out what really is driving the banking industry in its aggressive and relentless assaults on credit unions. Representatives of the banking industry say that member-owned credit unions have an unfair competitive advantage over stock-owned banks, yet the consumer installment credit market-share of credit unions declined from 13% to 12% during the fifteen-year period from 1980 to 1995, while the banks' market-share actually increased from 50% to 56% during that same period. That time period is particularly significant, because it bridges the 1982 date when NCUA introduced the multiple-group common bond/SEG policy.
Americans from all over the country are puzzled, as we are sure many members of this Subcommittee are puzzled, by the banking industry's obsession with inflicting harm on the working class citizens of this country who simply want to conduct their financial affairs at a financial cooperative where their voice can be heard and their needs can be met without paying exorbitant rates and fees for services. Many of us in the credit union community -- and we are sure many of you as well -- are puzzled by the contradictory statements made repeatedly by the banking industry's representatives in Washington. The fact of the matter is that in some forums the bankers say one thing, while in other forums they say just the opposite.
Let me provide you with a few examples:
- Last year, while Congress was considering various approaches toward resolving the credit union field of membership matter, the banking groups continuously insisted that it was never their intent that any existing credit union member should be required to sever his or her relationship with his or her credit union as a result of the Court's decision invalidating NCUA's multiple group field of membership policy. Yet all the while lawyers for the American Bankers Association (ABA) had a motion pending before the Court asking the Court to order "NCUA to cause all occupational credit federal unions...to reduce their existing membership...". (emphasis added). Should we believe what the ABA told Congress? Or what it told the Court?
- The ABA filed briefs with the U.S. District Court on January 8, 1999, stating that: "The CUMAA (Credit Union Membership Access Act) was compromise legislation designed to mitigate the impact of the First National Bank decision." Yet when the ABA's Deputy General Counsel for Litigation Michael Crotty -- whose name is on those ABA briefs -- was interviewed by the publication Credit Union Times on January 14 and asked: "Were you upset with the passage of (H.R.) 1151, or were you satisfied with the compromise that was reached?" he replied: "We didn't see much of a compromise in that bill...". Are we to believe what the ABA said to the Court on January 8th (that the bill was a compromise) or what it said to the press on January 14th (that it was not a compromise)?- In the January 26, 1999 issue of the ABA's Bankers News, ABA President Scott Jones asserts that: "Size is properly a function of the marketplace, not a role for government." Yet in materials filed with the Court the ABA asserts that: "IRPS 99-1 damages the interests of ABA members by allowing for an expansion in the number and size of multiple common bond credit union(s)." (emphasis added). What should we believe? What the bankers said to their members in their newsletter or what they said to the Court?
- On January 7, 1999 the ABA distributed a memorandum to all members of the House of Representatives announcing that it was about to go to Court to challenge NCUA's rules and regulations implementing H.R. 1151. In that memo the ABA claimed it was "forced" to file suit against NCUA because the agency's rule "encourages and promotes large, geographically expansive, multiple group credit unions...".

Yet on April 2, 1998 the ABA, America's Community Bankers, the Independent Bankers Association of America, the American League of Financial Institutions, the Association of Military Banks of America and the National Bankers Association, sent a joint memorandum addressed to members of the U.S. Senate in which they conceded that "...H.R. 1151 has no meaningful limits on credit union expansion. Federal credit unions would be allowed to link together an unlimited number of common bonds." Which version of the bankers' story do you want to accept?
These are but a few of the troubling aspects of the banking industry's public posturing over what they characterize as the "threat" posed to the future of their prosperous industry by our nation's approximately 11,000 credit unions -- whose aggregate member savings are dwarfed by the assets of our nation's single largest bank.
The true threat to the future well being of the banking industry comes from within that industry itself. In fact, the real threat to the very survival of small banks is not posed by credit unions but by other banks. On January 22,1998, in an article that ran in the American Banker newspaper (see Appendix "A"), under the headline U.S. Bancorp CEO: Big Banks To Steal Small Ones' Lunch, John F. Grundhofer, President and CEO of Bancorp was reported to have told a group of bank presidents here (in Santa Barbara) last week that big banks -- like his -- are expanding in California and aiming to steal business from community banks. As a result, he said, there will be "significantly fewer community banks in California" 10 years from now.
Turning to the eight specific topics and questions that Chairwoman Roukema's letter of invitation asked NAFCU to address, we provide our response to each those questions in the order presented.
1. Please discuss your group's understanding of the NCUA Board's duty to encourage the formation of new, separately chartered credit unions and discuss what actions NCUA has taken to fulfill this duty. In your view how does the Board's duty to encourage the formation of new, separately chartered credit unions apply to the applications to add a group to a credit union's field of membership?
NAFCU fully supports any and all efforts to charter new credit unions, provided the organizers demonstrate a sufficient level of commitment and the demographics indicate a likelihood of long-term success. We agree with the former chairman of the House Banking Committee, Representative Wright Patman (D-TX) -- after whom the Committee's hearing room is named-- who has often been quoted as saying: "Other than the Church no single organization has done more good for more people than credit unions."The NCUA Board clearly has a duty to encourage the formation of new, separately chartered credit unions. The language of the Credit Union Membership Access Act appears to be clear on this point:
IN GENERAL -- The Board shall --
(A) encourage the formation of separately chartered credit unions instead of approving an application to include an additional group within the field of membership of an existing credit union...
The language of the statute up to that point seems clear and unambiguous; however, the situation is made murky due to the fact that the statutory provision does not conclude at that point. It continues by clarifying that NCUA's obligation to "encourage the formation of separately chartered credit unions" is not an absolute obligation that the agency should adhere to without qualification. Rather, Congress conditioned NCUA' s duty to encourage the formation of new, separately chartered credit unions upon a variety of factors. The statute continues by stating that NCUA should encourage the formation of separately chartered credit unions... whenever practicable and consistent with reasonable standards for the safe and sound operation of the credit union...
Congress' insistence that NCUA temper its efforts to encourage the formation of separately chartered credit unions with safety and soundness considerations reflects prudent judgment upon the part of Congress, a prudent judgment that NCUA has a statutory obligation to replicate.Not all groups that would like to avail themselves of credit union services possess all the elements necessary to sustain their own credit union. Some might have the knowledge and expertise necessary, but lack sufficient numbers of potential members. Others might have sufficient numbers, but lack the. necessary level of knowledge or expertise. Still others might have the numbers, and the knowledge, and the expertise but lack sufficient financial resources or sponsor support. It is for that reason that the flexibility Congress provided NCUA to exercise prudential judgment in determining whether to encourage a group to form a new, separately chartered credit union or to add that group to an existing credit union's field of membership makes sense.
One theme reflected throughout the Credit Union Membership Access Act is an emphasis on safety and soundness considerations. In fact, the fifth of five "findings" contained in Section 2 of the law is that:
Improved credit union safety and soundness provisions will enhance the public benefit that citizens receive from these cooperative financial services institutions. When considering an application to add a new group to a credit union's field of membership, and weighing that against its companion obligation to encourage the formation of new, separately chartered credit unions, it is of paramount importance that NCUA have sufficient regulatory discretion to allow it to exercise prudential judgment. Indeed, the House Banking Committee Report makes it clear that NCUA has an affirmative obligation to:"determine that a group has sufficient financial and operational resources to form a separate credit union and to operate it in a safe and sound manner... ". (H. Rpt. 105-472 at 19).
The Subcommittee has also inquired into what actions NCUA has taken to fulfill its duty to charter new credit unions. While NCUA is in a better position than any other witness to respond in detail to that question, it should be noted for the hearing record that NCUA awarded a new credit union charter last November for the establishment of a credit union to serve the 657 members of the Gideon Baptist Church in Waukegan, Illinois. This action clearly suggests both a willingness and a flexibility on the part of NCUA to assess each group's potential for sustaining their own credit union on a case by-case basis.
NAFCU believes that there are additional steps NCUA can take to encourage the formation of new, separately chartered credit unions, and NAFCU would be pleased to work with NCUA in pursuit of that goal. For example:
- In recent years we have witnessed a significant increase in the number of authorized positions in NCUA's examiner corps. The number of examiners has gone up, while the number of credit unions to be examined has declined sharply. While we do not want to divert examiner resources from addressing necessary safety and soundness issues, we do believe that at the appropriate time it would make sense for NCUA to reassess the manner in which it allocates staff resources. It may be feasible to reinstitute NCUA's former practice from years gone by of utilizing its examiner corps to serve as credit union "organizers" as well.
- NCUA could re-publish its now out-of-print and outdated Credit Union Organizer's Manual and make that publication broadly available.
- NCUA could encourage other government agencies such as the Small Business Administration (SBA), the Department of Labor (DOL) and the Department of Housing and Urban Development (HUD) to periodically join with them in encouraging the formation of new, separately chartered credit unions. Perhaps this could be done on an annual basis during National Cooperative Month or Credit Union Week.
- Members of Congress in general, and the members of this Subcommittee in particular, could assist in this effort by convening town meetings and providing information to your constituents specifically tailored to encourage the formation of new, separately chartered credit unions.
2. The NCUA's final rule on economic advisability provides as a general matter groups should have at least 3,000 members if they are to form a new credit union. NCUA's policy on' economic advisability prior to the enactment of CUMAA had been that groups should have at least 500 members. Please discuss whether, in your opinion, the NCUA's revision of the economic advisability level is consistent with Congress' intent to encourage the formation of new, separately chartered credit unions for groups with less than 3,000 members.


NCUA's decision to increase the economic advisability level from 500 to 3,000 potential members makes good sense and is supported by the marketplace experience of newly chartered credit unions over the course of the past decade. It is important to note, however, that NCUA has not imposed any minimal threshold figure in order to qualify for a separate charter.
NCUA itself emphasized this point in the preamble to IRPS 99-1. The preamble states very clearly that:
This threshold (3,OOO potential primary members) is not intended to undermine the statutory requirement to encourage the formation of new credit unions. Rather, it has been established to provide potential new charters necessary advice and guidance to charter a successful credit union. Any group desiring to form its own credit union will be given every opportunity to demonstrate it has met the economic advisability requirements. Additionally, any group not desiring to charter its own credit union will be reviewed to determine if in fact it can be separately chartered ....
The (NCUA) Board's view is that the 3, 000 primary potential membership threshold is an economically advisable number for potential new charters, but not an absolute requirement. This distinction is important. For example, there are approximately 3,1O0 federal credit unions with primary potential members of less than 3,000. Approximately 700 of those have primary potential members of 400 or less. For the most part, however, at the time of their charter, economic conditions and the financial service expectations of the credit union members were different. These differences provided the credit unions an opportunity to become established and develop a loyalty base under marketplace expectations that significantly differ from those of today. The Board must consider the evolving nature of the financial marketplace. It would be remiss simply to say that, since a lower threshold number worked in the past, there is no need to change the economic advisability number requirement today. (emphasis added)NAFCU's independent research confirms the prudence of NCUA's decision in this regard. Research conducted by NAFCU's Director of Research and Analysis, Dr. Tun A. Wai, indicates that the average membership size of credit unions that "survive" over time is much larger than the average membership size of credit unions that do not survive in the long run. For example, of the 18 federal credit unions that were chartered in 1987, a total of nine continue as viable credit unions today. Those nine have an average potential membership of 26,737. On the other hand, the nine credit unions that disappeared had an average potential membership of 3,713. This is actual empirical data. This data, an objective analysis of what has happened over the span of years in the marketplace, is the best indicator that membership size for newly formed credit unions is an important factor in forecasting the likely survivability of the credit union over a ten year period.
Another indication of the importance of potential membership to the long-term survivability of a credit union is found in what can be referred to as the "failed" credit union data. During 1998 there were 18 federally insured credit unions that were either liquidated or merged with assistance. Sixteen of those 18 credit unions (89%) had potential memberships of less than 3,000.
It is important to recognize that the number of potential members in a credit union's field of membership does not necessarily translate into the number of people who will ultimately join the credit union any more than the number of eligible voters in a member of Congress' home district or state translates into the number of people who will exercise their right to vote. The ultimate number of voters in any election will be a subset of potential voters, just as the number of people who will join any credit union will be a subset of potential members.
It is also important to note that many aspects of American life have changed dramatically with the passage of time, not the least of which is what American consumers expect from their financial services providers. When NCUA initially used the 500 potential member figure as a guide for assessing the potential viability of proposed credit unions, that number worked. People were looking for a safe place to save and a convenient place to borrow. Economic and demographic conditions at the time, coupled with the lack of technological sophistication in the financial services marketplace allowed groups of 500 or even fewer to successfully start a number of credit unions. But economic conditions, demographics and technology have all changed to such a degree that the number 500 must be recognized as being reflective of a past era, an era that did not contemplate many of the basic financial services that are taken for granted today, such as share draft accounts, credit and debit cards, automated teller machines and internet access to account information. Those types of services are viewed by many as "basics" today, and they require a significantly larger membership base than 500 potential members in order to make them available to members.
The members of the Subcommittee may be interested to know that NAFCU's research revealed that of the approximately 3,100 credit unions in existence today that have 3,000 or fewer members, approximately 2,900 (or 94%) were chartered before 1982; that is, before most of the developments in the electronic delivery of financial services of the past two decades. Many of these credit unions, while vitally important to their members, are not necessarily their members' primary financial institutions. NAFCU can honestly testify to the Subcommittee that it is virtually impossible for any financial institution -- credit union, bank or thrift -- to absorb the requisite start-up costs needed to equip itself to offer financial services in this electronic age so that it would be viewed as a "primary" financial institution if it were constrained to serving no more than 500 people.
3. The NCUA has indicated that among the other factors they will consider in determining whether a large group can be added to an existing credit union is the "desire" of the group to be added to an existing credit union. In your opinion is consideration of the group's "desire" by the NCUA consistent with Congressional intent?
In enacting the Credit Union Membership Access Act, Congress expressed an unmistakable preference for the chartering of new credit unions whenever possible. However, Congress was equally explicit in instructing NCUA to consider a variety of factors in making the determination as to whether or not a particular group could sustain their own credit union. Among the criteria delineated by the statute is a determination whether or not the group "lacks sufficient volunteer and other resources to support the efficient and effective operation of a credit union" and whether "the group would be unlikely to operate a safe and sound credit union."Volunteerism is the backbone of the credit union community. It has been so from the beginning and it remains so today. In fact, volunteerism is so much a part of the underlying nature of federal credit unions that the Federal Credit Union Act specifically stipulates that, unlike their counterparts in the commercial banking industry: "No member of the board or of any other committee shall, as such, be compensated...". (12 USC 1761(c)).
This prohibition on compensation and fees for credit union directors and committee members remains in place, despite the fact that credit union directors and committee members are subject to the same extensive personal liability as their counterparts in the commercial banking industry, who, according to a study conducted by Korn/Ferry International and cited in the December 9, 1996 edition of the San Jose and Silicon Valley Business Journal (see Appendix "B") places "the average compensation for U.S. bank directors at $31,716 for approximately four weeks of work a year." The same article also cited a survey of 2,000 banks and thrifts by the Bethesda, Maryland-based American Association of Bank Directors. That survey concluded that:
... board compensation ranges from $23,000 at banks with assets of $1 billion to $5 billion to an average of $3,478 for banks with assets of less than $50 million.
Granted, some banks pay significantly less or even no directors' fees. But, in such cases directors typically do receive compensation in other forms. For example, the San Jose and Silicon Valley Business Journal article cited above notes that:At the other end of the scale, directors at Heritage Bank of Commerce in San Jose receive no direct compensation at all. Instead, they are awarded stock options. Committee chairs qualify for options on 6,000 shares and other directors 5,000 shares over a three-year period.
This discussion of compensation and directors' fees is directly relevant, since the Credit Union Membership Access Act specifically requires NCUA to consider whether "the group lacks sufficient volunteer.., resources to support the efficient and effective operation of a credit union." Against that backdrop it seems not only reasonable for NCUA to consider the "desire" of the group to be added to an existing credit union in reaching an informed judgment, but essential.

NCUA would be remiss if it failed to do so, since without ample volunteer support the credit union would in the short-term become the source of safety and soundness concerns, and in the long-term would be destined to fail.
4. Please discuss whether, in your opinion, the NCUA's final rule favors the addition of groups to large credit unions as opposed to small local credit unions. In this regard, please discuss what impact the NCUA's policy on overlapping fields of membership may have on smaller credit unions.
In our opinion NCUA's final rule on its face seems to favor neither large nor small local credit unions when determining the appropriateness of adding additional groups to existing credit unions. Any credit union, regardless of size, is free to submit an Application for Field of Membership Amendment (NCUA Form 4015 or NCUA Form 4015 EZ) whenever it believes it has an application that meets the necessary criteria contained in IRPS 99-1.
It is important to recognize that two willing partners are needed for the successful addition of a select employee group (SEG) to an existing credit union. If either the SEG or the credit union does not think the "fit" is right, for whatever reason, it is unlikely that NCUA will ever see that application submitted. Many "small local credit unions" have made the deliberate decision that they want to preserve the membership profile they have already attained. They may not want to add additional groups because of the impact it could have on their established membership profile. Should they be required to add new groups? NAFCU does not believe that they should; neither does the Credit Union Membership Access Act nor NCUA's IRPS 99-1 require that result.
Overlaps may occur when a group is eligible for membership in two or more credit unions. In the summary section of NCUA's final rule for the "Organization and Operation of Federal Credit Unions" (12 CFR Part 701), NCUA explains just why it took the steps it did in chartering new credit unions that may contain overlapping membership groups. NCUA stated:
In the internal review of 58 overlapped credit unions, no long-term adverse financial trends were discovered. The information tended to support the contention that overlaps have not caused any credit union to fail, even though there was, in a limited number of cases, a temporary loss in market share. This finding was consistent with other studies on overlaps, including a recent analysis by the Office of Examination and Insurance on overlapped credit unions where the original recommendation to include an exclusionary clause was not approved by the Board.
Overall, the overlapped credit unions did not suffer any harm and reported positive financial trends. Most credit unions experienced an increase in shares, assets, and loans. Delinquency declined and share and loan growth improved. The earlier research was supplemented by a random survey of federally insured credit unions that obtained a response rate of 57 percent. Of the 642 responding credit unions, 284 were overlapped and 34 overlapped other credit unions. In summary, 52 percent of the responding credit unions viewed field of membership overlaps as harmful for credit unions while 48 percent reported overlaps were beneficial. Interestingly, however, when viewed as harmful or beneficial for the credit union members, the opinions were decidedly different. In response to this issue, 82 percent indicated that overlaps benefit members.
NAFCU approves of NCUA's current treatment of overlapping fields of membership. It is our understanding that, as a general rule, NCUA will allow overlaps where the convenience and needs of the groups involved clearly outweighs any adverse effect on the overlapped credit union. This careful balancing of what at times may be competing interests is consistent with the goal of"enhance(ing) the public benefit that citizens receive from these cooperative financial institutions." (CUMAA Sec. 2(5)).
5. Please discuss whether, in your opinion, the NCUA's final rule implements Congressional intent with respect to the reasonable geographic proximity requirement for adding groups to existing credit unions. In particular, please discuss the NCUA's definitions of "service facility" and "service area."Section 1759(0(1)(B) on the Federal Credit Union Act as amended by the Credit Union Membership Access Act provides that NCUA shall:
If the formation of a separate credit union by the group is not practicable or consistent with the standards referred to in subparagraph (A) (referring to formation of separately chartered credit unions), require the inclusion of the group in the field of membership of a credit union that is within reasonable proximity to the location of the group whenever practicable and consistent with reasonable standards for the safe and sound operation of the credit union. (Emphasis added).
The Credit Union Membership Access Act does not expressly define the phrase "reasonable proximity". Since the term "reasonable proximity" does not have a single unambiguous meaning NCUA must use its informed judgment and discretion in defining the term. The phrase "reasonable proximity" does not appear in the Credit Union Membership Access Act in isolation. It is modified by two phrases -- "whenever practicable" and "consistent with reasonable standards for the safe and sound operation of the credit union." These modifying phrases are themselves open-ended and ambiguous; in other words, they also require the application of agency judgment and discretion.
NAFCU believes that the NCUA Board acted appropriately when it defined a "service area" as:
The area that can reasonably be served by the service facilities accessible to the groups within the field of membership.Similarly, NAFCU also believes that the NCUA Board acted appropriately when it defined "service facility" as:
A place where shares are accepted for members' accounts, loan applications are accepted, and loans are disbursed.
It is important to note that while NCUA's definition of service area includes a credit union owned branch, a shared branch, or a credit union owned electronic facility that meets, at-a minimum, these requirements, it does not -- as some have erroneously reported -- include an ATM.
6. Please discuss whether, in your opinion, the NCUA has an obligation under CUMAA to place a group with the local credit union which would most benefit in terms of safety and soundness even if such credit union did not file the application.
The Credit Union Membership Access Act states that:
(B) if the formation of a separate credit union by the group is not practicable or consistent with standards referred to in subparagraph (A), require the inclusion of the group in the field of membership of a credit union that is within reasonable proximity to the location of the group whenever practicable and consistent NAFCU believes that NCUA is under no obligation
The statute does not impose upon NCUA an affirmative obligation to serve as a "clearing house" for applications submitted by groups that would like to obtain credit union services but are unable to meet the necessary requirements to obtain a credit union charter in their own right. It may be a useful function for NCUA to perform, but it is not a statutorily mandated function.
The nearly fifteen years of experience NCUA and the credit union community had in dealing with the extension of credit union services to groups through multiple group field of membership policy NCUA had in place prior to the Court's decision in the AT&T Family Federal Credit Union case suggests that the function of."matching" groups seeking credit union services with credit unions interested in offering services to a larger membership base can best be accomplished in the marketplace itself. Private sector interest and initiatives seem well-equipped to meet this need, provided the process is not disrupted by further litigation by the banking industry. The "match" between a select employee group and a credit union involves a number of factors, some of which are tangible and others that are intangible. The underlying need is a recognition on the part of both parties that, indeed, the "match" is a "good fit" for both.
7. Please provide your views regarding how zthe NCUA's final rule defines the terms "family member" and "member of household."
Section 101 (e)(1) of the Credit Union Membership Access Act gave NCUA the responsibility for defining the terms "immediate family" and "household" in regard to who is eligible for credit union membership. The Act states:
(1) MEMBERSHIP ELIGIBILITY LIMITED TO IMMEDIATE FAMILY OR HOUSEHOLD MEMBERS.

-- No individual shall be eligible for membership in a credit union on the basis of the relationship of the individual to another person who is eligible for membership in the credit union, unless the individual is a member of the immediate family or household (as those terms are defined by the Board, by regulation) of the other person.
The NCUA Board had initially proposed combining the eligibility requirements for the immediate family and household members into one inclusive definition based on traditional relationships of blood, marriage or other recognized family relationship. In other words, NCUA initially proposed reading the terms "immediate family" and "household" conjunctively rather than "disjunctively".
However, the language of the Credit Union Membership Access Act is very clear in stating that membership in a federal credit union may be based upon an applicant's status as a member of the "immediate family OR household (as those terms are defined by the (NCUA) Board, by regulation)". (emphasis added).
NAFCU thoroughly researched how the terms "immediate family" and "household" are defined in other federal statutes, rules and regulations, as well as how those terms are defined by the rules of the United States House of Representatives and the United States Senate. A matrix showing the results of that research is attached as Appendix "C".An objective analysis of NCUA's definition of the terms "immediate family" and "household" juxtaposed with the definitions used in other federal contexts reveals that NCUA has selected modest definitions of those terms; some statutes, rules and regulations utilize broader definitions of both those terms while some provide narrower definitions of one or the other. Against that backdrop, NCUA's definitions of the terms "immediate family" and "household" seem to be reasonable and appropriate.
8. Please provide your views regarding the NCUA's final rules regarding community credit union charters and expansion. Please discuss the geographic and population limits which the final rule places on community charters.
By its very nature, the term "community" defies the imposition of a bright-line definition. No objective test exists that will adequately measure the true nature of community -- that sense of cohesiveness which brings groups of people together. Under the direction of Congress, however, NCUA was tasked with articulating the parameters of what constitutes a "well-defined, local community, neighborhood or rural district."
Input NAFCU received from member credit unions during NCUA's rule- making process emphasized one point more than any other when it came to NCUA's final definition of the term "well-defined, local community, neighborhood or rural district." NAFCU member credit unions expressed a grave concern that, in the interest of regulatory expediency, NCUA not ignore the true nature of communities -- specifically, that NCUA should focus on the bonds that connect people rather than the geography that separates them.NAFCU thought it would be helpful to the members of the Subcommittee in assessing the validity of NCUA's approach to the definition of "well-defined, local community, neighborhood or rural district" if we were to investigate how other federal agencies - including other federal financial regulatory agencies -- define that same term. In researching how other federal regulators define "well-defined, local community, neighborhood or rural district," NAFCU discovered that some regulatory definitions that are broader than that which NCUA established in IRPS 99-1, while others are narrower.
For example, the term "local community" is defined by the Office of Thrift Supervision (OTS) for purposes of conversions from mutual to stock form as follows:
Local Community. The term local community includes all counties in which the converting association has its home office or a branch office, all zip code areas corresponding to the converting association's delineated Community Reinvestment Act service area, each county's metropolitan statistical area and/or such other area or category as delineated by the savings association and provided for in the plan of conversion, as approved by the OTS. (12 CFR 563b.2)
The Department of Agriculture defines the term "community" for purposes of National Flood Insurance as follows:
(c) Community means any state or political subdivision thereof, such as county, parish, township, city or other local government which has zoning and building code jurisdiction over a particular area having special flood hazards. (7 CFR 1806.23)
The Comptroller of the Currency defines the term "community" for purposes a variety of purposes as follows:
(d) Community means a city, town, or village, and contiguous or adjacent cities, towns, or villages.
(e) Contiguous or adjacent cities, towns, or villages means cities, towns, or villages whose borders touch each other or whose borders are within 10 road miles of each other at their closest points. The property line of an office located in an unincorporated city, town, or village is the boundary line of that city, town or village for the purpose of this definition. ( 12 CFR 26.2) For purposes of Tribal Government the Bureau of Indian Affairs defines community as:
... any group of people which can demonstrate that consistent interactions and significant social relationships exist within its membership and that its members are differentiated from and identified as distinct from non-members. Community must be understood in the context of the history, geography, culture and social organization of the group. (25 CFR 83.1)
For purposes of pensions, bonuses and veterans' relief the term "community" means:
... a political subdivision or contiguous political subdivisions (such as precinct, ward, borough, city, county, State, Congressional district, etc.) with a separately identifiable population of homeless veterans. (38 CFR 17.701 )Finally, for purposes of the administration of Project Head Start grants, the term "community" is defined to mean:
... a city, county, a multi-city or multi-county unit within a state, an Indian reservation, or any neighborhood or other geographic area (irrespective of boundaries or political subdivisions) which provides a suitable organizational base and possesses the commonality of interest needed to operate a Head Start program. (45 CR 1301.2)
As is the case with most if not all of the elements of NCUA's IRPS 991, the diversity of opinions and approaches among the three NCUA Board members and the hundreds of individuals and groups who participated in the public rule-making process through the submission of comment letters resulted in the NCUA Board taking a moderate, middle-of-the-road approach to its definition of "well-defined, local community, neighborhood or rural district."
NCUA's final rule recognizes four types of affinity on which a community charter can be based. They are:
- Persons who live in the same community - Persons who worship in the same community - Persons who attend school in the same community - Persons who work in the same community.
NCUA has also established additional requirements for community charters:
- The geographic areas boundaries must be clearly defined- The charter applicant must establish that the area is a "well-defined local, community, neighborhood, or rural district" - The residents must have common interests or interact
NCUA recognizes that:
... population and geographic size are significant factors in determining whether the area is local in nature... (and that a) large population in a small geographic area or a small population in a large geographic area, may meet NCUA community chartering requirements.


The approach NCUA ultimately adopted seems to be consistent with the underlying Congressional intent of limiting community charters to serving populations that have a meaningful bond.
Conclusion
NAFCU would once again like to thank Chairwoman Roukema for the opportunity to participate in these important hearings concerning the National Credit Union Administration's promulgation of Rules and Regulations implementing the Credit Union Membership Access Act. If NAFCU can assist you by providing additional information concerning this matter or any other issue affecting our nation's federal credit unions please let us know. Thank you.
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Summary of the Testimony of J. Raymond Curtin
President & CEO of Empire Federal Credit Union
On behalf of the National Association of Federal Credit Unions (NAFCU)
Regarding Implementation of the Credit Union Membership Access Act
Before the House Banking Subcommittee on Financial Institutions & Consumer Credit
February 3, 1999
NAFCU is the only national organization exclusively representing federally chartered credit unions.
Empire FCU, chartered in 1950, is a $175 million credit union serving 40,000 members, including 325 "select employee groups" or "SEGs".
NAFCU realizes that Chairwoman Roukema and other members of the House - particularly Reps. Leach, LaFalce, Vento, LaTourette and Kanjorski - accelerated final action on H.R. 1151.
Not every member of Congress was satisfied with every provision in H.R. 1151; some thought the bill went too far while others not far enough.
Congress gave NCUA responsibility for implementing the Credit Union Membership Access Act. Some thought the agency's regulation (IRPS 99- 1) went too far; others not far enough.
It is the prerogative of this Subcommittee to review how NCUA has implemented the Credit Union Membership Access Act and NAFCU pledges its complete cooperation in that effort.
Litigation initiated by the banks means that a federal judge now has the final responsibility of determining whether NCUA fulfilled its statutory mandate in implementing H.R. 1151.
Banks claim credit unions have a competitive advantage, yet the consumer installment credit marketshare of credit unions declined from 13% to 12% during the fifteen-year period from 1980 to 1995, while the banks' market-share actually increased from 50% to 56% during that same period.
People are puzzled by the bankers' obsession with inflicting harm on American workers who want to conduct their financial affairs at credit unions.
Contradictory statements made repeatedly by the bankers' representatives in Washington puzzle people; in some forums the bankers say one thing, while in other forums they say just the opposite.The threat to the banking industry comes from within that industry. The President and CEO of Bancorp reportedly told a group of bank presidents last year that big banks are expanding in California and aiming to steal business from community banks.
NAFCU fully supports efforts to charter new credit unions, provided the organizers demonstrate a sufficient level of commitment and the demographics indicate a likelihood of long-term success.
NCUA has a duty to encourage new, separately chartered credit unions; but this obligation is not an absolute obligation. Congress conditioned NCUA's obligation upon a variety of factors, including safety and soundness considerations.
NAFCU believes that there are additional steps NCUA can take to encourage the formation of new, separately chartered credit unions For example: --reinstitute NCUA's former practice of utilizing examiners as credit union "organizers". --NCUA could re-publish and broadly distribute its Credit Union Organizer's Manual. --NCUA could ask other government agencies to encourage the formation of credit unions.
NCUA's decision to increase from 500 to 3,000 the economic advisability level for potential members makes sense; it is supported 10 years of empirical data.
NAFCU's research shows that the average membership size of credit unions that "survive" over time is much larger than the average membership size of credit unions that do not survive in the long run. Of the 18 federal credit unions chartered in 1987, 9 continue as credit unions today. Those 9 have an average potential membership of 26,737. On the other hand, the 9 that disappeared had an average potential membership of 3,713.
During 1998 there were 18 federally insured credit unions that were either liquidated or merged with assistance.- Sixteen of those 18 credit unions (89%) had potential memberships of less than 3,000.
Economic conditions, demographics and technology have all changed to such a degree that the number 500 must be recognized as being reflective of a past era.
While 3,100 credit unions in existence today that have 3,000 or fewer members, approximately 2,900 (or 94%) were chartered before 1982 -- before most of the developments in the electronic delivery of financial services of the past two decades and are not their members' primary financial institutions.
Volunteerism is the backbone of the credit union community. The Federal Credit Union Act stipulates: "No member of the board or of any other committee shall, as such, be compensated...".
According to Korn/Ferry, average compensation for U.S. bank directors is $31,716 a year.
According to the American Association of Bank Directors, board compensation ranges from $23,000 at banks with assets of $1 B to $5 B to an average of $3,478 for banks with assets of less than $50 M.3
Against that backdrop it seems both reasonable and necessary for NCUA to consider the "desire" of the group to be added to an existing credit union, since without volunteer support the credit union would become the source of safety and soundness concerns, and likely fail.
NCUA's final rule does not favor either large or small local credit unions when determining the appropriateness of adding additional groups to existing credit unions.
Many "small local credit unions" do not want to add additional groups because of the impact it could have on their established membership profile.
In an NCUA study of the impact of overlaps at 58 overlapped credit unions, no long-term adverse financial trends were discovered.
NAFCU approves of NCUA's current treatment of overlapping fields of membership since this balancing of interests is consistent with the goal of"enhance(ing) the public benefit that citizens receive from these cooperative financial institutions." (CUMAA Sec. 2(5)).
The phrase "reasonable proximity" is not used in the Credit Union Membership Access Act in isolation. It is modified by two phrases -- "whenever practicable" and "consistent with reasonable standards for the safe and sound operation of the credit union." These modifying phrases are open-ended and ambiguous and accordingly require the agency to use its judgment and discretion.
NAFCU believes that NCUA acted appropriately when it defined a "service area" as "the area that can reasonably be served by the service facilities accessible to the groups within the field of membership".
NAFCU also believes that NCUA acted appropriately when it defined "service facility" as "a place where shares are accepted for members' accounts, loan applications are accepted, and loans are disbursed".
NCUA's definition of "service area" does not -- as some have reported -- include an ATM.
The statute does not impose upon NCUA an obligation to serve as a "clearing house" for applications submitted by groups that would like to obtain credit union. Private sector interest and initiatives seem well equipped to meet this need.
The Credit Union Membership Access Act is clear in stating that membership in a federal credit union may be based upon an applicant's status as a member of the "immediate family OR household (as those terms are defined by the (NCUA) Board, by regulation)".
Some federal statutes, rules and regulations utilize broader definitions of the terms "immediate family" and "household" than NCUA did, while others provide narrower definitions.
NAFCU investigated how other agencies define that term "local community, neighborhood, or rural district" and found that some regulatory definitions are broader than NCUA's while others are narrower.
END


LOAD-DATE: February 5, 1999