SECTION: IN THE NEWS

LENGTH: 5401 words

HEADLINE: PREPARED TESTIMONY OF
STUART PERLITSH
CEO OF GLENDALE AREA SCHOOLS FEDERAL CREDIT UNION
BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
SUBJECT - HEARING ON NCUA'S IMPLEMENTATION OF
H.R. 1151, THE "CREDIT UNION MEMBERSHIP ACCESS ACT"

BODY:

Summary
When H.R. 1151, the Credit Union Membership Access Act (CUMAA), was passed by Congress last year, most members of the credit union community felt that the issues raised during the debate over H.R. 1151 were resolved. Credit unions are grateful of the overwhelming support they received in Congress.
The House of Representatives vote of 411-8 and the Senate vote of 92-6 was a ringing endorsement of credit unions and consumer choice. In light of the mandate reflected by the overwhelming bipartisan vote and the fact that the members of this body as well as the full House and Senate, had a vigorous and lengthy debate on credit union-related issues, credit unions are surprised to be back before the Congress. My written testimony details my answers to the Subcommittee Chairwoman's questions. In brief:
- I believe the NCUA has an obligation to promote the chartering of new credit unions and should consider working with other federal agencies to promote credit unions.
- NCUA should be flexible with any numerical threshold. Groups of less than 3,000 may be viable as independent credit unions.
- NCUA should provide a potential group as many choices in credit union service as possible.
- The regulation does not seem to favor one size credit union over another. Regardless of size, all credit unions share a common mission.
- Finite limitations, such as mileage, are not appropriate. The potential group should be within the service area of the credit union--the service area should be defined by the NCUA on a case-by- case basis.- NCUA has an obligation to provide the potential group with a list of compatible credit unions to join. It is poor public policy for the NCUA to dictate the choice of credit union to the group. American democracy and H.R. 1151 are about preserving choice.
- If Congressional intent was to allow all of America's consumers a choice in financial services, an expansive membership definition is required.
- The NCUA must not unfairly create a population threshold that does not meet the needs of local communities or federal credit unions.
While we have no quarrel with the banking industry, we are at a loss to explain why they are so relentless in their attacks to undermine the nation's 11,000 credit unions with over 70 million members. We believe that if banks spent more time focused on their customers and less time focused on credit unions, they would see the value in helping people--a value that has been the bedrock principle of credit unions since their creation.
The CUMAA was passed by Congress in 1998 following serious debate on most of the issues raised at this hearing. Congress acted, the President acted and now the regulator has acted. The regulation implementing the CUMAA is not perfect, but it is workable. Credit unions are ready to get back to work under the new rule.
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Testimony of Stuart Perlitsh CEO of Glendale Area Schools Federal Credit Union
Introduction
To the members of the Subcommittee on Financial Institutions and Consumer Credit, thank you for the gracious invitation extended to me to testify before you regarding the National Credit Union Administration's (NCUA) implementation of H.R. 1151, the "Credit Union Membership Access Act."
I am the Chief Executive Officer of Glendale Area Schools Federal Credit Union in Glendale,' California. Chartered in 1937, the credit union is a full service financial institution serving 10,500 members with assets totaling $88,500,000. The management and staff is proud of the credit union's "5 Star Rating" from Bauer Financial. This high award indicates that the credit union is one of the safest and most sound credit unions in the United States. Additionally, it holds a SUPERIOR rating from IDC Financial-the highest rating awarded by IDC.
My background is credit unions. Since 1974, I have worked or volunteered at credit unions. I assisted in establishing the first student credit union west of the Mississippi while a sophomore at Burbank High School in Burbank, California (the credit union is still operating). While in high school I served on the credit union's Supervisory and Credit Committee and in my senior year served as the treasurer/manager. During my college years, I continued my credit union service by working at many local credit unions. I served on the Board of Directors of the California Credit Union League in the late 1970s and early 1980s.
Prior to Glendale Area Schools FCU, I served in executive positions at two California credit unions--Olive View FCU in Sylmar ($3 million in assets at the time I joined the staff), and SSP FCU in Burbank ($1.5 million in assets at the time I joined the staff). I became the CEO of Glendale Area Schools FCU in 1995.
When H.R. 1151 was passed by Congress last year, most members of the credit union community felt that the issues raised during the debate over H.R. 1151 were resolved. Credit unions are grateful of the overwhelming support they received in Congress. The House of Representatives vote of 411-8 and the Senate vote of 92-6 was a ringing endorsement of credit unions and consumer choice. In light of the mandate reflected by the overwhelming bipartisan vote and the fact that the members of this body as well as the full House and Senate, had a vigorous and lengthy debate on credit union related issues, credit unions are surprised to be back before the Congress.
During 1997 and 1998, we fought a challenging battle in Congress--a battle to protect credit unions' special qualities, our members, consumers and small businesses. From my perspective, consumers are supportive of credit unions' philosophy. They are especially appreciative that credit unions offer a choice to the for-profit banking industry--the personal visits, thousands of letters, telephone calls, faxes and e-mails that came to Congress during the last session indicate the strong level of support.The Subcommittee chair, Representative Roukema, has raised many interesting and thoughtful questions about NCUA's implementation of H.R. 1151. Question 1
NCUA Board Chairman Norman D'Amours has invested his time in office, over five years now, on a crusade for community development credit unions. Chairman D'Amours has been supporting such low income credit unions since his appointment to the NCUA Board.


Credit union services will play a significant role in increasing economic opportunities in these areas. It is not-for-profit credit unions that will best develop these communities because the credit unions will be a financial institution controlled by the community and investing in the community.
Funds invested in these economically challenged communities must be re-invested in these communities and not drained off to stock-holders. Credit unions are the avenue to make this happen.
The NCUA Board owes a fiduciary duty to encourage the formation of new viable credit unions. This is in keeping with the credit union philosophy of people helping people, not-for-profit, but for service. It would be easy to place vast numbers of people into existing financially sound credit unions that offer a full plate of financial products and services like audio-response, credit cards, debit cards, ATM cards, consumer and real estate loans, home-branching (a.k.a. home-banking), etc. The real challenge is to start up a credit union in 1999 and beyond.
It was far easier in the 1930s and 1940s for credit unions to get started. There was no demand in the 1930s like there is in the 1990s from credit union members for real estate loans, ATM cards, audio response, credit cards, debit cards, internet access, home-branching, etc. In 1999 and beyond credit unions that desire to be their members' primary financial institution must position themselves to provide these services. For a credit union to start up without these products and services they will find themselves at a distinct disadvantage from those existing credit unions that are out there today delivering them.
That is not to say it is impossible to start a credit union--but the challenge exists. In today's society of instant gratification it will take a patient membership to wait for these products and services to be delivered to them from scratch. California has seen four new federal credit unions chartered since 1992. They are:
South Central Peoples FCU with assets of $1.6 million and 2,058 members (50,000 potential);Ko-Am FCU with assets of $1.9 million and 850 members (3,000 potential);
Hanin FCU with assets of $4.7 million and 950 members (2,500 potential); and,
Episcopal Community FCU with assets of $2.9 million and 2,100 members (21,000 potential).
These credit unions are excellent examples of the difficulty in starting a cooperative member-owned financial institution from ground zero. In fact, South Central Peoples FCU merged into Watts United FCU in 1996.
Credit unions are doing a fine job promoting community development credit unions. We are going where the profit-driven banks dare not go. We are providing credit unions to communities that banks have abandoned because these economically challenged communities could not deliver the profits to the banks' bottom line that their directors and stock-holders have come to expect. That is the bottom line. And this is what separates democratic credit unions from all the other financial institutions. We want to help people to improve their lot in life. We are not profit driven. Profits are not our motive.
Can the NCUA do more to promote the development of new credit unions? Absolutely. The NCUA must be willing to identify areas that would support the development of viable credit unions. And the NCUA should be willing to make an investment in the formation of these credit unions. The NCUA could help to facilitate this new credit union formation by making the process streamlined. That is to say, there should be a streamlined application process that can be accomplished by these new "promoters." The process should not be so exhausting that by the time the application to form a new credit union is accepted, the promoters have not been physically exhausted filling out the forms to create the new credit union. It is only after the new charter is granted that the real work for the new credit union begins.
Additionally, the NCUA could work with the Small Business Administration, the Department of Labor and the Department of Commerce in soliciting and promoting new credit unions among the nation's employers. As part of the NCUA federal examiner training process, the agency would send its examiners into these newly formed credit unions to assist in setting policies and procedures, administering the general ledger, and otherwise providing on the job training to these newly formed credit unions and their staff and management. The potential for a new generation of credit unions promoted and encouraged not only by Congress but our federal regulators and agencies would be most welcome.
I am sure that there are credit unions in the credit union community of 11,000 that would be ready, willing and able to assist in these start up credit unions from formation to creation to training to education, etc. Because that too is part of the cooperative philosophy of credit unions. We help each other. Occasionally, we compete with each other, but more frequently than not we help each other. Lockheed Federal Credit Union in Burbank, California is such an example. They are over $1 billion in assets, yet they offer mentoring programs to credit unions that ask for their assistance. They offer the use of their training facilities at no expense to the credit unions as a regional credit union learning center. They offer their expertise to credit unions that lack resources-such as South Central Peoples FCU where they provided accounting and collection experts as part of their contribution to the credit union community. Additionally, Lockheed FCU is active in both the state and federal credit union trade associations. And most recently they have offered to invest in a credit union that is not yet chartered.
Question 2
The NCUA's final rule on economic advisability provides that as a general matter groups should have at least 3,000 potential (emphasis added) members to start a credit union. Previously, the number was 500. The NCUA rationale was that "experience has suggested" such an increase. This absolute number requirement is wrong. The NCUA should be flexible in determining how many people are necessary to start a new credit union. The 3,000 potential member requirement is meaningless in today's economy.
Today's consumers, insistent on instant gratification, are not going to patiently sit around and wait for a credit union to grow to a certain economy of scale to offer certain financial-services. VISA International will not administer its VISA program to credit unions with less than 3,000 existing members. So a credit union that forms with 100 members will have a long wait before it hits the VISA International number of 3,000 actual members before VISA will even consider making its VISA cards available to such a credit union and its members.
Instead, NCUA should be flexible with any numerical number threshold. If a group less than 3,000 in number is viable, NCUA should charter the credit union.
The analysis of forming a new credit union must take into consideration the members' reasonable expectations of financial services offered. If financial services are restricted or limited, it may fail to meet the membership's expectations and therefore will lack member support. As the financial marketplace continues to grow increasingly technologically complex, holding true to a number that has worked in the past (500) is not practical in today's financial marketplace.
The focus should be on VIABILITY. Will it have the ability to grow and develop? Does it possess the diversity required of a credit union to succeed? Are there sufficient numbers of debtors and depositors? The NCUA needs to examine the Business Plan submitted before approving the franchise (charter request). The focus should not be on the numbers either 500 or 3,000. The focus should be on the Business Plan. Can the Business Plan demonstrate the credit union's viability to be successful in attracting and serving the members of the group it seeks to franchise and represent in the financial marketplace? In California (using Third quarter 1997 statistics from the California Employment Development Department), there were 931,875 business entities reporting employment statistics. Those with 1,000 or more employees accounted were 992. Under this rule a vast number of businesses will be denied the opportunity to form their own credit union because they lack the 3,000 potential members.


Question 3
By its very nature, the "Credit Union Membership Access Act" (CUMMA) suggests that a large group ought to have the access to join a credit- union of its choice or desire. That is, after all, what democracy is all about. Freedom of choice, freedom of access. But let us not kid ourselves. It is not uncommon for credit unions to solicit groups and offer them credit union access. The agency, in reviewing requests from groups to join a specific credit union, ought to advise the groups that they have other options. There might exist other credit unions for these groups to join. In fact, there may be other credit unions in the group's community that may be more "geographically desirable" than the credit union that made the initial solicitation. The NCUA would be remiss not to make this information available to the group applicant. There should be a full and fair disclosure to the group being solicited that they have choices.
The underlying intent of the CUMAA is to promote credit union membership. And it may be to the benefit of the group to join a credit union that did not make the initial solicitation. There may exist certain credit unions that are aggressive in soliciting groups for their credit union. These credit unions may in fact be geographically undesirable to the groups that they are soliciting. But if the group is not aware, and has not been informed of their "choices" in joining a geographically desirable credit union, that would be unfortunate and it would be a disservice to the group. It would in fact be no choice at all. It would be a disservice to the geographically desirable credit union, too.
Question 4
The Regulatory Flexibility Act requires the NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small credit unions (primarily those under $1 million in assets). Because that is the only definition published, I do not see where the final rule (IRPS 99-1) favors large as opposed to small credit unions. The groups seeking admission to a credit union will be the deciding factor as to which credit union is favored. Realistically, it is the larger credit unions that offer a full plate of financial products and services and if that is what the group is seeking--a full service financial institution-then it would seem the larger credit unions will dominate under the rule.
However, as previously discussed, the NCUA could do a far greater service to all the credit unions in the country by making a full and fair disclosure to the applicant group of their choices before making a final decision as to which credit union they wish to join. Credit unions interested in promoting membership to those not represented in a credit union could advise the NCUA that they are willing to entertain new groups within their particular parameters (certain employer groups, associations, etc.) The agency could maintain this on their database and offer a "match-up" to the groups.
All things being equal, if a new private or parochial school was to open within the community and was solicited by another credit union, it would seem only fair for the agency to advise this group being solicited by another credit union that they in fact would be a perfect match for Glendale Area Schools FCU based on our affinity for academic employer groups. Not making this information available to these new groups denies them of a choice and again that is no choice at all.
Question 5
I can not speak on behalf of Congress regarding their intent with respect to the reasonable geographic proximity requirement for adding groups to existing credit unions. But l can say this:
The American Bankers Association (ABA) brought suit against the NCUA regarding credit unions providing financial services to multiple groups within a single credit union. The banks won in the courts, and the Supreme Court affirmed. The banks accomplished in the judicial courts what they could not accomplish in the capitalist free marketplace.
The credit unions in turn sought and obtained from Congress legislative relief. That relief is now being challenged by the ABA. The ABA if nothing else is relentless. It appears they are not contented with the rules as promulgated by the NCUA. The fact of the matter is that the ability of credit unions to grow is restricted compared to that of banks because the competitive playing field is tilted in favor of banking institutions.
First, each credit union is restricted to serving a limited field of membership. Even with multiple groups, for all but community credit unions, the majority of residents in a credit union's service area are not eligible to join the credit union.
Second, credit unions are prohibited from issuing stock, thus restricted access to capital and growth.
Third, credit unions can not offer stock options to senior management, thus restricting their ability to attract high-priced talent.Fourth, credit unions' inability to remunerate almost all board members limits access to talent. Fifth, credit unions have limited or nonexistent access to many powers of banks: commercial lending, trust services, ownership of mutual funds, securities services and some insurance activities.
Sixth, credit unions face more restrictive investment regulation.
Credit union growth has not exploded since the NCUA's adoption of a multiple group policy for federal credit unions. Credit union membership growth has slowed since the multiple group policy was adopted. It averaged 6% annually in the 15 years prior to the change but just 3% annually in the 15 years after the 1982 change.
Reasonable proximity should not be a finite geographic limitation-- mileage limitations are inappropriate. The group to be added must be within "reasonable proximity" to the credit union's service area. The service area means that a member can reasonably access the service facility. In rural areas this may include distances encompassing several counties. In a major metropolitan area it may be a portion of the city.
The advantages acquired from advancing technologies do not undermine what the Board considers is the congressionally mandated requirement that the group to be added must be within "reasonable proximity" to the credit union.
Question 6
As previously discussed in this testimony, the NCUA has an obligation to disclose, but not an obligation to dictate. That is, when a group is seeking to join a credit union the NCUA should as a matter of full and fair disclosure provide the group seeking a credit union with a listing of credit unions that are receptive to taking in such groups that are within a reasonable proximity. There could exist in a major metropolitan area multiple credit unions that may be geographically desirable and receptive to adding new groups in keeping with the CUMAA.
Groups should have the option in selecting which credit union to join. It would be bad public policy for the NCUA to place a group with a specific local credit union where more than one exists without taking into account the group's choice and desire of credit union membership.
Question 7
The Bureau of the Census (Statistical Abstract of the United States 1997, Department of Commerce) defines a household as:all persons who occupy a "housing unit," that it, a house, an apartment or other group of rooms, or a single room that constitutes "separate living quarters." A household includes the related family members and all the unrelated persons, if any, such as lodgers, foster children, wards, or employees who share the housing unit. A person living alone or a group of unrelated persons sharing the same housing unit is also counted as a household. If the Congressional intent is to provide America's consumers with real access to federal credit unions, then it would be well advised to honor the expansive definition of the Census Bureau of household as previously defined.
But what will this mean to the banks? How might the banks be adversely affected by such an expansive definition? In spite of the ABA's relentless attacks on the credit union movement we do not suggest to stoop to their level.

-Let's be fair. We are after all a cooperative movement and in keeping with our philosophy of people helping people let me offer these observations:
Banks and credit unions compete in limited markets, but credit unions remain a tiny portion of the market. According to Federal Reserve "Flow of Funds" data, as of September 1998, commercial banks had $5.5 trillion in financial assets. (This figure does not account for almost two trillion dollars under management in off-balance sheet holdings such as personal trusts and estates and proprietary mutual funds.) Savings institutions (savings & loans and savings banks) had $1.1 trillion in financial assets and credit unions had $0.38 trillion. Thus, banks and thrifts have a whooping 94.6% share of depository financial assets (79.3% for banks and 15.3% for savings institutions) and credit unions have only 5.5%
Banks have been enjoying historically high profits. Banking industry profits reached a record high of $59 billion in 1997, according to the FDIC's "Statistics on Banking" publication, more than twice the amount recorded in any year during the entire decade of the 1980s. Even the rate of profit at banks is at record levels. The 1.23% return on assets recorded (ROA) at banks in 1997 is the highest since the FDIC began reporting such data in 1934. Bank ROA exceeded 1% for all five years from 1993 to 1997. ROA had never exceeded 1% in any year prior to 1993. But what about the little banks? Banks with less than $100 million in assets have also enjoyed ROAs of over 1% for each of the five years ending in 1997.
The intent of Congress in passing HR 1151 was to enable the NCUA to enact rules that would afford America's citizens the opportunity to choose where they will conduct their financial business. The bottom line to this madness is that the average credit union has less than $28 million in assets--the average bank is 16 times larger.
I submit the credit unions in this country do not pose a threat to the health, safety, or general welfare of this nation's great banks. I am curious as to why they think we do.But, I must confess I know the answer. In a recent survey by the ABA, credit unions once again finished number one in member satisfaction, with a 73% rating...20 points higher than the bank's 53% rating. The banks are their own worse enemy. Maybe if they quit wasting their money suing credit unions and invested it instead on developing quality service they might improve their lousy rating. It is worth a try. Question 8
The NCUA must not unfairly create a population threshold that does not meet the needs of local communities or federal credit unions.
The NCUA must consider the differences between regions of the country and how this rule will impact local communities. In California, for example, counties can contain thousands of square miles. California has 39 counties that each have more land within their borders than the state of Rhode Island (1,045 square miles). California, the third largest state in terms of area (222,636 square miles), has 58 counties, the state of Tennessee has 95 counties representing 41,220 square miles and Iowa's 99 counties represent that state's 55,875 square miles. In Iowa and Tennessee, no county has more than 1,000 square miles within its territory while California has 42 counties with over 1,000 square miles of land.
Still, California's counties otherwise have the same characteristics that are found in other counties around the nation. The citizens of these counties elect county supervisors, use county services for their voting and public records, and participate in county fairs among other unifying activities.
As the most populous state in the nation, California has many cities with populations larger than most cities elsewhere in the United States. Our communities should not be discriminated against because of population. Of the 44 California cities with more than 100,000 people (as measured by the 1990 Census), eight have more than 300,000 people with a ninth (Santa Ana) reaching that threshold since 1990.
Within our largest cities, there are communities that would meet the criteria proposed by the agency to implement the CUMAA but would be forced to meet additional requirements simply based upon population. Well-defined areas should not be required by a federal agency to be divided just to meet some definition limit created that discriminates against citizens in the western United States. Population should not be the criteria as suggested by those in the for-profit banking industry. Any population limitation would eliminate almost every city in California from being served by a federal community credit union.
The 300,000 threshold used for community credit unions is arbitrary. Credit unions seeking a community charter based on a county or smaller political subdivision should be deemed to be seeking a "local, well- defined community." Any application for such an area should be entitled to use the streamlined approach for community charter approval regardless of population.
Furthermore, federal credit unions must be given the opportunity to serve a number of smaller political subdivisions within a community charter. HR 1151 expressly permits this as local communities and neighborhoods can be used to define a community for a federal credit union. This is especially true in our rural communities. Rural communities should not be denied credit union services because of federal regulations.
This approach is consistent with Congressional intent as stated by Representative Patsy Mink (D-Hawaii). On page H7051 of the Congressional Record of August 4, 1998, Representative Mink stated:
Financial institution options are often limited in rural communities; this bill will help assure that individuals and families in rural communities have access to credit union alternatives.
In fact, some regional offices have reportedly been encouraging federal credit unions seeking smaller political subdivisions as the base for their proposed community charter to go beyond cities and towns and just seek the entire county. The rationale from the regional office has been that it would be easier to administer. I believe that volunteer boards of directors, members and staffs best make the decision to seek a specific community, rather than the regional bureaucracy located some distance away.
Conclusion
I have testified at length on what credit unions are doing to serve your constituents. The members of this great body have served their constituents by enacting H.R. 1151. Because of your support, your constituents now have the choice of where they may go for their financial needs: to the for-profit bank or thrift, or to the not-for- profit, member owned, cooperative credit union.
But, perhaps the greatest concern is what role the nation's banks are playing today and will play in the future for you and your constituents. As mentioned above, banks own approximately 97% of marketshare. Yet, they are demanding that Congress grant them the remaining 3% by unfairly limiting the ability of credit unions to grow and offer services to members, while at the same time encouraging Congress to enact financial modernization legislation and increase the opportunities for tax exempt "Subchapter S" status.
Just consider what the marketplace would be like without credit unions. The banking industry is on the verge of a total marketplace monopoly. I worry about the future financial well-being of my children; I worry what their choices will be if banks were the only choice. What will they have to pay for loans? How many more fees will they have to pay? How much will they pay to speak to a teller?
If credit unions, as the banking industry contends, have so many unfair competitive advantages, I would invite them to trade in their bank charter and apply for a federal credit union charter. Of course, such a conversion would mean the bank would be forced to: eliminate their stock options, recruit a volunteer board, live under more stringent regulations, most CEOs would have to take a drastic pay cut, adopt a democratic system of governance (such as credit unions' "one member, one vote policy") and go from a potential membership of over 270 million (the U.S. population) to a limited and restricted field within their community--subject to approval by a federal regulator. 'These are a few of the "competitive advantages" enjoyed by credit unions.
While we have no quarrel with the banking industry, we are at a loss to explain why they are so relentless in their attacks to undermine the nation's 11,000 credit unions with over 70 million members. We believe that if banks spent more time focused on their customers and less time focused on credit unions, they would see the value in helping people--a value that has been the bedrock principle of credit unions since their creation.
The CUMAA was passed by Congress in 1998 following serious debate on most of the issues raised at this hearing. Congress acted, the President acted, and now the NCUA has acted. The regulation implementing the CUMAA is not perfect, but it is workable. Credit unions are ready to get back to work under the new rule. I encourage the members of this Subcommittee to take a close look at how the banking industry is attacking your constituents by their repeated assaults on credit unions. Permit us to focus on your constituents and their financial needs.
END


LOAD-DATE: February 4, 1999