SECTION: IN THE NEWS

LENGTH: 3410 words

HEADLINE: PREPARED TESTIMONY OF
NORMAN E. D'AMOURS
CHAIRMAN,
NATIONAL CREDIT UNION ADMINISTRATION
BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER SERVICES
SUBJECT - IMPLEMENTATION OF THE CREDIT UNION MEMBERSHIP
ACCESS ACT

BODY:

Good morning, Chairwoman Roukema and members of the Subcommittee. Thank you for inviting me here today to discuss NCUA's implementation of the Credit Union Membership Access Act ("the Act"). NCUA is very grateful for the Subcommittee's. efforts in passing this law so quickly last year and I thank the members of this Subcommittee for their fine work.
I am happy to report that NCUA is making good progress toward complete implementation of the Act. The final version of the Act had four titles, three of which required detailed, substantive implementation by NCUA. With the approval of Interpretive Ruling and Policy Statement 99-1 (IRPS 99-1) on December 17, 1998, implementation of Title I is complete. Member business loan provisions of Title II were implemented by an interim final rule issued in November. Likewise, the Title II provisions dealing with conversion of credit unions to other types of financial institutions were implemented by an interim final rule issued in September. The NCUA Board issued a proposed rule on the audit requirements in Title II in December. Finally, we issued an Advanced Notice of Proposed Rulemaking for the Prompt Corrective Action provisions of Title III in October, and expect to have proposed and final rules issued well before the statutory deadlines.
For your convenience, I have attached as an appendix to this testimony a chart detailing the NCUA's progress in implementing the Act. As you can see, we are on or ahead of schedule in all cases where Congress imposed deadlines for our regulations. My fellow Board Members and I take great pride in the dedication of NCUA staff, who have worked, and continue to work, long and hard in order to implement this extremely important legislation. I have also attached, as you requested, a chart which provides information about the number of field of membership additions granted since the inception of this rule.
I know the Subcommittee is particularly interested in our interpretation of Title I of the Act, implemented by IRPS 99-1, which became effective January 1. The NCUA Board and staff felt it was necessary to split off Title I of the Act and implement it expeditiously because court decisions had so limited credit union field of membership additions that credit union growth has been seriously impaired since 1996.
The agency staff had the foresight to begin work on the chartering and field of membership portions of the Act even before it was officially enacted. The advance work we did preparing various field of membership rule alternatives was key to our timely promulgation of the proposed and final rules. The NCUA Board and staff felt that we owed credit unions, the American consumer, and Congress, no less.
In my view, IRPS 99-1, as approved by the NCUA Board, will pass judicial review. Differing opinions about policy matters are not uncommon on our Board. Determination of congressional intent is also a matter of informed opinion about which reasonable people can differ.
Beyond the legal questions, however, there are important policy matters that must be addressed in order to present a complete response to the questions this Subcommittee has put to us._ That is why, in my testimony, I talk about the importance of maintaining a balanced, productive and trusting relationship between large and 'small credit unions. Large credit unions play a critically important.role in the credit union system and they must remain an integral part of the movement. However, it is important to also recognize that small credit unions play an equally important role in the credit union movement. Whereas larger credit unions control the vast majority of all credit union assets and wield considerable influence within the movement, nearly 60% of the more than 11,000 credit unions have less than $10 million in assets. Indeed, more than one-quarter of credit unions' (27%) have assets below $2 million. Small credit unions are uniquely suited to the credit union mission of reaching low income people and penetrating underserved areas that may not be practicably accessible to larger credit unions. Fulfilling this mission is not merely a clear statutory requirement under the Federal Credit Union Act, it distinguishes credit unions from all other financial institutions. It is important that the role played by small credit unions be understood if one is to judge the efficacy of our rule and evaluate NCUA's performance in meeting its responsibilities.
I believe that when Congress states its intent to "encourage" the chartering of separate, new credit unions of sufficient size to be viable, Congress is in fact stating its support for the existence of smaller and local credit unions. I also believe that when Congress granted a. special exemption from the prompt corrective action requirements of Title III, it was signaling its appreciation of the special status of small credit unions and its desire to encourage their survival. If we are to succeed in this goal of chartering new, separate and viable credit unions, we must also foster an environment in which such credit unions can comfortably exist and thrive. Such an environment today is threatened.
The reason the credit union system works so well is that people of substantial means are willing to pool their money with people of small means in order to provide the liquidity, mentoring, education, and technology that allows the credit union system to fulfill its statutorily prescribed societal mission. Both large and small credit unions are vital to this system. Unfortunately, however, small credit unions are besieged by several forces. While they constitute a large majority of the credit union system, the prognosis for their survival as a strong sector of the credit union system is not nearly as promising as it should be.
My concern for the maintenance and defense of a strong small credit union sector within the credit union movement is based upon real-world pressures, not only on credit union history and philosophy. In order to give committee members a small flavor of the pressures building to merge small credit unions out of existence, I am enclosing as an addendum to my testimony, a recent and widely distributed article produced by an influential credit union movement opinion leader. His argument that merging small credit unions out of existence is the way to achieve a higher level of service for members is specious. Not all credit unions need or seek a greater diversity of services. And for those who do, there are a variety of means by which small credit unions can cooperate among themselves, or with larger credit unions, to offer their members a wide range of services.
On the plus. side, I find it most encouraging that the largest credit union trade group, the Credit Union National Association, is rededicating itself to a focus on the importance of nurturing smaller credit unions. Just as importantly, if not more so, the Federation of Community Development Credit Unions, a trade group that has been promoting the cause of low income and generally smaller credit unions for many years, is growing in strength and influence within the credit union system. If these efforts to keep a proper balance of trust and cooperation between large and smaller credit unions succeed, the system assures its continuing viability and efficacy. However, by discriminating against smaller credit unions, our new rule unnecessarily upsets this needed balance.With regard to your questions about how NCUA is encouraging the formation of new, separately chartered credit unions, I believe that our new rule, in certain instances, fails in this regard.

It discriminates against, and threatens the existence of, small credit unions, and is contrary to my perception of congressional intent and the history and philosophy of credit unions. Accordingly, I opposed passage of provisions in our new Chartering and Field of Membership Manual that imposed extra burdens on the chartering and application process for credit unions with fewer than 3,000 potential members, and I opposed provisions removing safety and soundness protections from small credit unions that are overlapped by community credit unions.
In implementing the charge to form separate credit unions, IRPS 99-1 essentially uses the 3,000 ceiling, (established by Congress for adding select groups to existing' credit unions) as a presumptive floor for chartering new credit unions. Therefore, NCUA's rule establishes an unnecessary and unwarranted additional burden upon organizers of new small credit unions by requiring groups of less than 3,000 to produce additional documentation to prove their ability to form a viable, separate credit union.
Make no mistake, it is much more difficult for a group to start a new credit union than to join an existing one. The 'incentive for many groups is already weighted toward becoming a select group rather than a freestanding credit union. By requiring extra burdens on groups under 3,000 that want to form their own credit union, we further tip the scales in favor of the easier route -joining an existing credit union rather than establishing a separate credit union.
Approximately 3,100 existing federal credit unions - 45% - currently have potential fields of membership of under 3,000. The great majority of these credit unions are highly rated in terms of their safety and soundness of operation. Yet our rule perversely assumes they are, by definition, of questionable viability. Setting the floor at 3,000 is much too high and discourages the formation of new credit unions.
In another section, the final rule largely eliminates all overlap protection for credit unions (even for safety and soundness reasons) whose fields of membership are included in that of a community credit union. IRPS 99-1 provides only a conditional, temporary overlap protection, for safety and soundness reasons, and only to credit unions chartered less than two years.
This rule thus overturns a decades old practice of giving special protection to smaller credit unions that are overlapped by community charters. Under the present rule, NCUA abandoned the use of exclusionary clauses even if the overlap was found to present a threat to the safe and sound operations of overlapped credit unions. In my view, a disregard of the safety and soundness effects of community overlaps damages the traditional spirit of cooperation among credit unions, discriminates against small, noncommunity credit unions and threatens the viability of the overlapped credit unions.
The Act and the legislative history sheds little illumination on this subject. It merely says that, when adding a group to a credit union, the potential harm to an existing credit union must be outweighed by the benefits to the member group being added. Curiously, Congress chose not to insert this requirement in the case of a credit union seeking a community charter even though overlaps are much more likely to occur in such cases. Overlaps rarely occur when distinct groups are added to existing credit unions.
Madam Chairwoman and members of the subcommittee, I appreciate that Congress recognizes the importance of preserving a vital smaller credit union component in the credit union system. That is not always an easy task because of the natural tendency of all financial organizations and institutions to agglomerate assets and resources. In our modem financial world, institutions face considerable pressure to use technology to expand. Smaller credit unions often do not have the resources to avail themselves of such technology. Some larger credit unions grow impatient with this reality and seek to acquire either the smaller credit union or its membership. This is causing tension within the credit union movement.
I do not want to be misunderstood as saying that small credit unions alone can reflect the proper values of the credit union movement. Nothing could be further from the truth. Size is irrelevant in credit unionism so long as credit unions are working cooperatively and remembering their societal mission. The largest credit union in the United States and, indeed, in the world, is Navy Federal Credit Union. Yet it has placed more than $1 million in deposits in low income designated credit unions in just the past few months and provides flee mentoring assistance to several small credit unions. More than half of the members of Navy Federal have less than $100 in their share savings accounts. The credit union provides free credit counseling, has no minimum monthly balance requirement and charges no fees. As I stated earlier, we need the existence and cooperation of both large and small credit unions for the system to work properly.
In order to help assure a proper balance in NCUA's treatment of large and small credit unions, the Office of Community Development Credit Unions (OCDCU) was created at NCUA in 1994, at my request during my first year at the agency. The OCDCU worked to establish six economic development specialist positions, one in each of NCUA's Regional Offices, as a local source of information and advice for existing small credit unions, and for groups seeking to organize new credit unions. These efforts have helped in chartering, nurturing and preserving many small credit unions. Nonetheless, I have observed a reluctance to involve the Office of Community Development Credit Unions in an effective way in the existing operations of the small credit union programs at the regional levels. A recent proposed role, recommended by the OCDCU, which would have established a national small credit union program that included a significant role for our Office of Community Development Credit Unions, was not adopted. One reason stated for the opposition to this proposed rule was an uncertainty that the our Office of Community Development Credit Unions was only a temporary office. (In fact, the OCDCU is no less permanent an office than our offices of General Counsel, Examination and Insurance, or any other office at NCUA). Moreover, the NCUA Board recently eliminated six sorely needed Economic Development Specialist positions, requested by our OCDCU, that were earlier approved in NCUA's 1999 budget.
I was therefore encouraged by reports from the National Federation of Community Development Credit Unions that an effort is being made to assure the permanency of our OCDCU by legislating.its existence and structuring a small credit union program under its purview. I believe that such a Congressional mandate may be needed to assure a proper and continuing focus on the chartering, health and longevity of small credit unions. For these and other considerations, I would strongly urge your support of legislation that may be introduced to provide for the existence and functions of the Office of Community Development Credit Unions within NCUA.
Next, I would like to respond to your questions about NCUA's definitions of immediate family member, reasonable proximity and local community under our new rule.'The regulation provides, as required by statute, that an individual must be part of the "immediate family or household" of a person eligible for membership in a credit union in order for that individual to be eligible for credit union membership. NCUA was instructed to define immediate family member. The Board defined it as a related person, i.e. blood, marriage, or other recognized family relationship in the same household (under the same roof) or, if not in the same household, as a grandparent, parent, spouse, sibling, child or grandchild. Included in the term household is any person who is a permanent resident of and participates in the maintenance of the household.
Immediate family or household members of primary members may join even if the eligible primary member has not joined. However, the immediate family or household member must actually join the credit union before that person's immediate family member or household member may join the credit union.
Many credit unions have complained that this definition is too restrictive. NCUA acknowledges that this new rule is more restrictive than current practices of many credit unions, but believes that imposing a restriction is in keeping with Congressional intent, indicated by the use of the modifier "immediate" before family.
Under IRPS 99-1, when an existing credit union seeks to add a new group and NCUA determines that the group is unable to form its own credit union, the group must be within reasonable proximity of the applying credit union. NCUA defined reasonable proximity to mean that the group must be within the service area of a service facility of the credit union. As instructed in the legislative history, service facility does not include an ATM, but must be a location where members can deposit funds, apply for loans, and obtain loan disbursements.A service facility includes credit union-owned branches, shared branches, mobile branches, offices operated on a regularly scheduled weekly basis, or credit union-owned electronic facilities.

Because many credit unions lack a "main" or "central" office, or the main office is used for back-room processing and not customer service, NCUA felt it was important to include basic member services in the definition of a service facility around which a credit union may expand. NCUA did not impose a mileage limitation on the group's distance from the service facility, because such a boundary is artificial and leads to unfair results. For example, reasonable proximity could mean very different distances in a rural area than in an urban area.
Under the Act, community credit unions are required to serve a "well- defined local community, neighborhood, or rural district." IRPS 99-1 defines local by establishing a rebuttable presumption that an area is a well-defined local community if it is within or encompasses only one local political jurisdiction and has a population of under 300,000 people, or if it is within or encompasses two or more local political jurisdictions and has a population of 200,000 or less. While I would have preferred a lower number than 300,000, NCUA's interpretation is based on a study of past community chartering practices and is not an unreasonable approach.
With regard to your question on choosing among different credit unions when adding SEGs and seeking out certain credit unions to enhance safety and soundness, I find no such direction or mandate in either the statute or the legislative history. On the contrary, it is clear NCUA should evaluate only those credit unions which actually apply for additional groups.As you requested, I am also attaching a chart listing the number of community charter conversion applications NCUA received in the last year.
In conclusion, I believe it is important that separately chartered smaller "local" credit unions should be encouraged as, in my view, the Act directs. Large credit unions remain uniquely credit unions and are a critically important segment of the credit union system, easily distinguishable from other types of financial institutions. Small credit unions also contribute something special and irreplaceable to the credit union movement and must be empowered to resist recent trends that could seriously decimate their numbers. Small credit unions are uniquely suited to penetrate underserved areas that may not be practicably accessible to larger credit unions. Small credit unions keep us mindful of the fact that not all consumers yet have access to a convenient, reasonably priced and comprehensive source for financial services. And finally, small credit unions prompt us to remember that even the largest credit unions were small at their beginnings. For these reasons, it is important that we preserve a viable small credit union segment within the credit union system as I believe Congress intends.
I appreciate the interest this subcommittee has taken in assuring that Congressional intent will be followed in implementing the Act. I can assure you that our Board is committed to realizing this intent as best we can, and will welcome any clarifications you can give us.
Attachments
1. Chart on Progress in Implementing the CUMAA 2. Chart - Data requested by question #1 in,invitation letter 3. Article: Filson, "The Need for Mergers" 4. Chart - Community charter data requested by question #9 in invitation letter
(NOTE: Charts not transmittable)
END


LOAD-DATE: February 4, 1999