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Committee on Financial Services

United States House of Representatives

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MARCH 11, 1998


Mr. Chairman and Members of the Committee: The Independent Bankers Association of America (IBAA) welcomes this hearing and appreciates the opportunity to state its views on what Congress should do now that the Supreme Court has ruled on the credit union common bond issue. My name is K. Reid Pollard, and I am President and CEO of Randolph Bank and Trust Company, a community bank in Asheboro, North Carolina. Our bank was one of the original plaintiffs against the AT & T Family Federal Credit Union in 1990 in the case the Court decided on February 25th.

In our view, the primary theater of credit union competition has been, and will continue to be, between the 3,600 larger, aggressive federal credit unions that are the subject of the Court's decision, and the small and mid-sized banks, typical of those represented by the IBAA. Both of these sets of institutions have the same core businesses of making local consumer loans, and are increasingly competing for the same deposit and loan customers, especially as credit unions expand into business lending.

In these daily contests, credit unions have manifold advantages over community banks including, but not limited to, exemption from federal (and generally state) taxes that over the course of the next five years is worth $5.8 billion according to the OMB, less restrictive regulations and capital requirements, including an exemption from the Community Reinvestment Act (CRA) which continues to be a tremendous cost burden on community banks, and a promotional posture by their regulatory authority, the NCUA, that sometimes acts more like a cheerleader than a regulator.


IBAA thus believes that to restore the legal right for the 3,600 most aggressive credit unions to admit members without any limitation -- as is the goal of H.R. 1151 -- is not desirable public policy, particularly since there are reasonable alternatives.

The IBAA applauds the decision by the Supreme Court which held that multioccupational credit unions were in violation of the law, and has taken a strong position against H.R. 1 151, the credit union industry's legislative proposal that would reverse this landmark decision. Importantly, the Supreme Court was unanimous on the merits of the case. H.R. 1 151 would allow credit unions unrestricted growth, perpetuating their tax and regulatory advantages, deepening the competitive disadvantages for community banks, and exacerbating the spiraling cost to taxpayers.


Six of the leading banking and thrift trade associations (IBAA, ABA, ACB, NBA, NAMBA and ALFI) have been working together in a Credit Union Coordinating Committee, which IBAA is pleased to chair this year on a rotating basis. On behalf of this broad industry coalition, the Committee has advanced compromise proposals on both judicial remedy and legislation that protects current credit union members and preserves choice for both credit unions and their customers within the framework of the Federal Credit Union Act of 1934.

Our statement discusses these proposals in detail. In brief, the banking industry is united in not wishing to expel current credit union members from their present credit unions, even though their recruitment was in violation of the law. This week, the three associations that are named parties in the lawsuit known as NCUA II -- the ABA, the ACB and the IBAA -- formally amended their complaint before Judge Jackson to demonstrate clearly that it is not our intent to make widows or orphans out of any current credit union customer. Our statement will spell this out clearly.

Finally, we feel this is the time for all concerned to closely and objectively analyze the positions of all of the parties to this debate, and attempt to reach a compromise that preserves the openness that is the best feature of the American financial system, without giving undue regulatory advantages or taxpayer subsidies to particular participants in that system.

Let us now spell out the concerns of community banks, our recommendations and the industry compromise proposals for the Committee's consideration.


The enactment of H.R. 1151 would give the 3,600 largest, most aggressive federal credit unions, the legal right to add members from any group without any limitation. The majority opinion of the Supreme Court declared that under NCUA's 1982 interpretation of the statute, every employee in the nation could be a member of a single occupational credit union. The legislation sought by the credit union industry would reopen the door to this kind of abuse. IBAA contends that this would not be desirable public policy, especially when there are reasonable alternatives.


Following the Supreme Court decision, the banking industry sent a letter to Members of Congress designed to ease the anxiety among those credit union customers who were concerned about losing their accounts, and offering to meet with Members of Congress and the credit union industry to discuss possible long term solutions to this issue. The banking industry announced that it did not intend to seek any solution that would cause any credit union customer to lose his or her account, and that it would not seek in forthcoming lower court proceedings a remedy that would force these consumers out of credit unions membership, or require them to give up accounts or pay off loans, or cause injury to them in any way.

In an amended complaint filed yesterday (March 10) by the three named parties in NCUA II, the IBAA, the ABA and the ACB recommended a broad grandfathering of all members of all groups added through the effective date of the enforcement order. This would mean that every credit union member who joined any credit union up to a date certain at some point in the future, would be held harmless according to the terms of the District Court's order.

Let me repeat this statement for emphasis, and to attempt to put to rest statements by some in the credit union industry that the status of 10 million or 20 million credit union members is in peril: A united banking industry has agreed that it will not pursue any remedy that will injure any member of a credit union that is impacted by the Supreme Court decision.

However, credit unions would not be permitted to grow grandfathered groups.

A status conference with Judge Thomas Penfield Jackson is scheduled for April 15, and Judge Jackson may take up the recommendation of the banking industry at that time.


The banking industry believes in healthy competition, and in that spirit, the Credit Union Coordinating Committee is recommending a legislative compromise that would allow small, traditional credit unions to continue to operate as they always have, provided that they in the future comply with the requirements of a single common bond, no commercial accounts, and do not advertise to the general public. Such credit unions would be able to maintain their tax exemption and favored regulatory and capital treatment.

Larger credit unions, however, that want to have multiple employer groups, maintain commercial accounts (both loan and deposit) and advertise to the general public -- in other words become the functional equivalent of banks -- would have to make a choice. They could either retain their credit union status but come under banking laws and regulations, including taxation and CRA; or they could convert to a mutual savings bank charter, thus maintaining their cooperative structure while engaging in banking activities.


IBAA and the Credit Union Coordinating Committee also has developed proposed language to deal with the emerging issue of community based credit unions. Many people expect a run on community charters (as well as state charters in those states that do not have "wild card" statutes which track Federal law) by credit unions seeking to circumvent the common bond restrictions imposed by the Courts. In fact, IBAA, ABA and ACB have joined with the California Bankers Association in a lawsuit filed against the NCUA in the Point Magu Federal Credit Union case. In this case, we are challenging the NCUA's approval of Point Magu's application to convert from an occupation-based credit union to a community-based credit union taking in all of Ventura County, California. There are about 225 similar applications now pending at the NCUA.

We are arguing in this case that NCUA's approval of this application violates the requirement of the Federal Credit Union Act that limits community based credit unions to "groups within a well-defined neighborhood? community or rural district." Ventura County is not a single, well-defined community as required by the Act.

Under a compromise proposal the banking industry is advancing, community based credit unions would be limited to a community which is compact and contiguous and consists of persons or families of limited means or is under-served by banks or thrifts. Community development credit unions, however, would be treated the same as small occupation based credit unions.

The banking industry feels that both the judicial remedy proposal and the legislative proposal are fair, reasonable, and indeed, generous, given the potential remedy that the court could impose.


Contrary to the rhetoric of the credit union industry, financial consumers have ample choices of credit union membership now, under the Supreme Court's decision. They can join an occupational credit union -- federal or state -- if they are eligible. They can join an associationbased or community credit union. The Supreme Court decision does not foreclose these choices. They exist just as they were on February 24, 1998, the day before the Supreme Court's decision.

Some credit union spokesmen have stated that the law prohibits companies of less than 500 from joining an occupational credit union, and thus all employees of small businesses would forever be precluded from joining an occupational credit union, unless all federal occupational credit union possessed unlimited membership rights, as they did before the Courts ruled. As we read the Federal Credit Union Act of 1934, any 7 persons can form an occupational credit union. In addition, employees of small businesses, like all other consumers, also have a choice of joining existing state, associational, or community credit unions.


In accordance with these positions, the legislative proposal of the banking industry also gives credit unions a choice: If they are larger credit unions and wish to add membership groups, or continue operating commercial accounts or business loans, they should adopt a charter that legally permits them to engage in these operations. The combined banking committee legislative proposal is attached, and we would be glad to respond to questions about it.


If larger credit unions are acting in every way like commercial banks or thrifts, IBAA believes they should be required to pay taxes like commercial banks or thrifts. We would emphasize that such a decision is up to them. If the Congress is not willing to require bank-like credit unions to pay bank-like taxes, then Congress should consider granting community banks tax relief comparable to that enjoyed by credit unions.

The current credit union tax subsidy is worth more than $1 billion a year in lost tax revenue. The Of fice of Management and Budget, in its fiscal year 1999 tax estimates, forecast that the cost of the credit union tax subsidy will total $5.8 billion over the next five years. In addition, there is an undetermined tax loss to the states. This twin revenue drain is likely to increase rapidly if the 3,600 aggressive credit unions are restored unlimited growth of membership and allowed to continue unrestricted and expanding business lending. The longer such a permissive posture is maintained, the more significant will be the tranche of commerce that is removed from federal and state taxation.


IBAA recommends that this Committee, and the Congress, take a close look at the actual financial competition that is taking place throughout the country, and to assess the impact on this competition if the larger, conglomerate, aggressive credit unions maintain their federal and state tax and multiple regulatory advantages, and then regain the legal authority to add members without any limits. Our point is that we are not talking about "Mom & Pop" credit unions, rather large federal credit unions that are professionally managed and staffed, extremely well organized and capitalized. They have proven themselves very capable of competing in their chosen markets already, as evidenced by the fact that between 1977 and 1997, credit union membership grew to 43.5 million from 20.4 million, their assets grew to $215 billion from $30 billion, and their outstanding loans grew to $140 billion from $23 billion.

They have outgrown their original purposes and it is time they lost their special subsidies. As the popular saying goes, "If you want to run with the big dogs, you have to get yourself off the porch" defined as the public trough.

The Washington Times recently printed the following list of the largest 10 federal credit unions, based upon their total assets as of September 1997. These credit unions are more than 20 times larger than the average IBAA member bank that pays taxes and is under CRA.

Credit Union Headquarters Total Assets
Navy Federal Merrifield, Virginia $9.9 billion
Pentagon Federal Alexandria, Virginia $2.7 billion
American Airlines FCU Dallas, Texas $2.0 billion
Orange County Teachers FCU Santa Ana, California $1.8 billion
Alaska USA FCU Anchorage, Alaska $1.7 billion
Hughes Aircraft Employees FCU Manhattan Beach, CA $1.7 billion
Citizens Equity FCU Peoria, Illinois $1.6 billion
Sunset Schools FCU Tampa, Florida $1.6 billion
Star One FCU Sunnyvale, California $1.4 billion
Security Service FCU San Antonio, Texas $1.3 billion

The AT & T Family Federal Credit Union, subject of the Supreme Court case, is reported to have 164,000 members from 328 employee groups, in many states of the union, and assets of more than one-half billion dollars ("Court curbs credit unions," USA TODAY, Feb. 26, 1998).


Credit unions also have the advantage of having a more select membership -- a higher percentage of employment, home ownership, a higher level of education and of income than the general public ("The Credit Union Industry: Trends, Structure and Competitiveness," The Secura Group, Washington, D.C., Nov. 10, 1989, Chapter II, page 29, et. seq.). This explodes the careful myth creation that they serve under-banked markets. Another study, by the credit union industry, concluded that credit unions had fewer lower income customers (defined as income of less than less than $ 15,000) and more higher income customers (defined as income of $50,000 or more) than did banks ("Study of Consumer Reaction to Changes in Federal Deposit Insurance," 1989). From the available evidence, it appears that banks tend to serve a greater spectrum of the general public, including, specifically, lower income citizens, than do credit unions.


Although the Federal Credit Union Act of 1934 says nothing whatever about business loans, the friendly regulations of the National Credit Union Administration created authority for this type of lending in 1987 by regulation (12 CFR 701.212(h)), without a statutory basis. Business lending by credit unions is directly competitive with one of the most important specialties of community banks. This, too, in our judgement, takes such credit unions beyond their original purposes, justifying a change in their tax and regulatory subsidies.

By the end of 1995, NCUA reported 17,795 business loans for "federally insured" credit unions in the amount of $881.9 million. Moreover, there appears to be a category of loans to individual members "for business purposes" that blurs these totals. The CEO of the State Bank of Colwich, Kansas reported that two of his customers paid off business loans at his bank "in the high five figures" with credit union financing ("Credit Unions Expand into Commercial Loans, American Banker, Aug. 5, 1996, page 27).

The American Banker story noted that almost half of the larger credit unions with assets of more than $200 million (45.5 percent) were making business loans. Some of these are trying to become primarily business lenders, like the Citizens Equity Federal Credit Union of Peoria, Illinois (Interview with John Siefkin, Interbusiness Issues, December, 1996). The Banker estimated that credit unions had, by late 1996, had made $2 billion in business loans.

Over the past two years, the major banking associations, including IBAA, have complained to NCUA (Letter to the Chairman of NCUA by the ABA, ACB, and IBAA, November 12, 1996) and the Treasury Department (Letter from IBAA, April 30, 1997), and the response of NCUA has been to expand its business loan authority further. IBAA maintains that concentration on business lending introduces risks unforseen by the 1934 Act or the credit union insurance funds, and that neither credit union executives nor examiners are trained in assessing and monitoring such risks. Thus, IBAA believes that business lending by credit unions is not only unauthorized, but is a source of potential systemic problems, especially over the business cycle ("Credit Union Study," Letter from IBAA to the Department of the Treasury, April 30, 1997, pages 6-7).


In conclusion, Mr. Chairman, the IBAA welcomes healthy competition. Indeed, the strength of our financial services system is an open, competitive and diverse marketplace. Community bankers thrive on it, and we believe consumers benefit from it. But the question Congress must consider is whether or not American taxpayers should continue to subsidize those credit unions that have evolved into highly profitable, multi-million dollar financial conglomerates. The question also is why such institutions aren't under the consumer compliance regulations that are applicable to banks.

The thousands of credit unions that have remained faithful to their original mission should be allowed to continue to operate like they always have. They add to the diversity of our financial services marketplace. But conglomerates like the AT&T Family Federal Credit Union, and the 3,600 others that the Supreme Court has found to be in violation of Federal law, can no longer justify a free tax ride.

Thank you again for this opportunity to express our views on these issues of vital importance to community banks, to all financial institutions, consumers and to the U.S. financial services industry.




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