Harold E. Feeney
Chairman of the National Association of
State Credit Union Supervisors
Commissioner, Credit Union Department, State of Texas
Before the House Committee on Banking and Financial Services
Hearing on Supreme Court Decision Regarding
the Credit Union Common Bond Requirement, the Appropriate
Congressional Response to the Courts Ruling
and Related Issues
March 11, 1998
Mr. Chairman, distinguished Members of the House Committee on Banking and Financial Services, I appreciate being invited to testify today.
As Chairman of the National Association of State Credit Union Supervisors which is the professional association which represents the credit union regulators from 47 state governments and the Territory of Puerto Rico, I am pleased to have the opportunity to provide Congress with the state regulators perspective on the Supreme Court decision regarding the credit union common bond requirement, the appropriate congressional response to the Courts ruling and related issues facing the credit union movement.
Not only do I serve as association Chairman, I am also the Commissioner of the Texas Credit Union Department. By law, my responsibility is to promote the lawful, safe and sound operations of state chartered credit unions in order to protect the deposits of Texas residents.
Collectively, the nations state credit union regulators supervise nearly 5,000 of the nations 12,000 credit unions.
Like my counterparts in other state governments, the Texas Credit Union Department is obligated by statute to effectively charter, regulate and supervise Texas state chartered credit unions. The sovereign State of Texas holds the Texas Credit Union Department singularly responsible for the supervision of Texas Credit Unions and charges my agency with the vigorous enforcement of state laws.
Having said that, the Committee may wonder why I, the Texas State Credit Union Commissioner and the Chairman of the National Association of State Credit Union Supervisors, have come before you to discuss the Supreme Courts February 25th decision in NCUA v. First National Bank & Trust Co., et al.
After all, this is a case which challenged the National Credit Union Administrations (NCUAs) interpretation of the Federal Credit Union Act and its policy which permitted multiple groups, each having a separate common bond, to be part of a single Federal credit union.
The fact is that the particulars of the Court decision are not in anyway transferable to state credit union acts. That is because state credit union laws apply singularly to state chartered credit unions and the 48 state credit union acts are very different from the Federal Credit Union Act.
Ladies and gentlemen, I am here because I bring the Committee information about the issue which is the subject of this Committee hearing. I am able to share with you information about 48 different public policy perspectives regarding field of membership requirements and I bring information about 48 different bodies of law under which credit unions function.
I am of the opinion that the nations state credit union regulators are uniquely positioned to provide specific input on the issue now before this Committee.
Let me begin by making this observation.
The Court decision has major implications for federal credit unions and their members but of concern to state credit union regulators is the fact that the decision seriously impacts the credit union dual chartering system.
For this reason, NASCUS filed an amicus curiae with the Supreme Court on behalf of the NCUA to help the Court understand that the NCUAs interpretation of the federal statute is consistent with field of membership determinations and public policy direction established by a majority of state legislatures which have made an informed decision to allow and promote multiple groups within a single credit unions field of membership.
By illustrating the existing multiple group field of membership interpretations prevalent in the states, NASCUS showed the Court that the NCUAs select employee group policy is consistent with the widely accepted approach taken by state legislatures and state credit union regulators and that the NCUAs conclusions were certainly not arbitrary.
We think that the evolution of the credit union system supports a contention that it is all right for the Court to look to the state system when trying to test evaluations in the Federal system, too.
As many of you are aware, credit unions have been providing cooperative financial services for more than 150 years. The idea of credit unions was originally developed in Germany in the 1840s and spread to North America at the beginning of this century. The credit union movement began in the United States when two Americans became profoundly interested in credit union development -- Massachusetts Banking Commissioner Pierre Jay and Boston merchant Edward A. Filene. In April of 1909, enabling credit union statutes were enacted in New Hampshire and Massachusetts; by 1915, credit union acts were approved in New York, New Jersey, Connecticut, Rhode Island, Texas, Nebraska, Wisconsin and Oregon. By 1920, state legislatures were approving enabling statutes with considerable speed, and just twenty years after the enactment of laws in New Hampshire and Massachusetts, credit unions were in evidence throughout the entire nation.
By 1934, when the FCUA was enacted, 38 states had credit union laws and more than 3,000 credit unions were serving Americans.
The point we made is that 48 state legislatures have been, and still are, responsible for defining the services which these credit unions will offer to their members. That helps to explain why the state credit union system is viewed as a laboratory for change and why the Congress has is in the past tapped those experiences in modernizing the Federal Credit Union Act.
It also explains why the Congress should look at the state experience in making its decision about Federal Credit Unions.
That said, let me tell you that in Texas and across the nation, state legislatures have been clear with regard to the purpose and definition of a credit union and whom their members can be.
That is noteworthy because, over the past decades, state legislatures in a large majority of states have adopted multiple common bond policies to permit greater access to credit unions and to strengthen those credit unions.
At the time NCUA adopted its multiple common bond policy, a significant number of states already permitted multiple common bond membership. By adopting this policy, NCUA was merely following the regulatory lead of the states. In 1979, a total of 19 states reported having field of membership policies that were more expansive than the existing federal policy. States began to adjust credit union membership policies to the changing workplace long before the federal government did.
Michigan is one state that preceded NCUA in permitting multiple common bonds. Michigans credit union statute opens credit union membership to "groups, of both large and small membership, having a common bond of occupation or association..." (Michigan Comp. Laws 490.5 - 1977). The Texas statute stipulates that membership in a Texas credit union is limited to the incorporators and other persons who share a definable community of interest, in accordance with the articles of incorporation or bylaws of the credit union, including a community of interest based on occupation, association, or residence."
In Colorado, the statute stipulates that membership in a Colorado credit union "shall be limited to groups which reside within a well-defined neighborhood, community, or rural district having a population of no more than twenty-five thousand or as otherwise authorized by the board."
Further, the Colorado state legislature added specific language which empowers the Commissioner to include in the field of membership of any credit union, people who are employed by an employer whom the state regulator decides cannot sustain a separate credit union.
Likewise, state laws in many other states allow employees of different employers to be members of one credit union.
The words which the legislators have chosen are different in nearly every state. For example, the New York State Legislature allows employees of unlike employers to join the same occupational based credit union. Indiana accomplishes the same construction with different words as do 42 other states.
I suspect the rationale for the approval of these common bond concepts is as varied as are the state legislatures. In my mind, though, regardless of what drove the lawmakers to the conclusion they made, the conclusion is especially sound. Let me tell you why.
Just as farmers have warned us about putting all of our eggs in one basket, regulators have come to understand that there is generally value in mixing employers in the field of membership of credit unions. Diverse employers help ensure the economic viability of credit unions and their local economies -- an observation which probably prompted the NCUA to approve small employer groups for federal credit unions during the economic downturns of the early 1980s.
Let me be especially clear. There is evidence that this public policy strengthens the economic elasticity of credit unions rather than diminishing their long term viability.
When evaluating a credit unions field of membership, regulators assess the economic impact associated with the field of membership. For example, regulators ask themselves how changing economic conditions will impact the credit union and they test member attrition rates -- factoring in the ability to replenish members lost to shrinking employment, aging membership, retirees from sponsor groups, etc. as part of the scenario. State regulators must consider how that credit union can add new members to its membership as members leave due to any of the above reasons.
Accordingly, then, a credit unions field of membership can be a safety and soundness issue.
Beyond this implication, though, there is another disconcerting aspect to the Supreme Courts decision about the Federal Credit Union Act.
It is that the decision will actually financially burden the state credit union system. Let me explain.
The state credit union system is comprised of nearly 5,000 state chartered credit unions operating in the 47 states and in Puerto Rico. The federal system is comprised of nearly 7,000 credit unions.
If economically strained by the inability to add unrelated employer groups to the field of membership, relief is within the reach of many federally chartered credit unions. That relief takes the form of converting from federal charter to state charter.
The April 1, 1997 membership survey of NASCUS members reports that approximately 200 federally chartered credit unions had contacted their state regulatory agency to inquire about the conversion process in their state. Of those inquiries, 96 federally chartered credit unions had actually asked the NCUA to approve a conversion to state charter. This figure is nearly three times the total number of charter conversion requests for the past decade. These conversions are occurring in a number of states, including Washington, Texas, Ohio, New Hampshire, Illinois and Colorado, to name a few.
While the thought of having federally chartered credit unions convert to state charters sounds as though it would be appealing to state regulators, it is not as appealing as one might believe. There are serious financial consequences of these charter conversions.
The application process can be quite time consuming. The conversion process requires the careful analysis of the credit unions financial standing and appropriate evaluations can require months of regulatory work. Several states even require hearings for charter applications.
The costs of the process must be borne by state regulators and all state chartered credit unions. In the end, the whole credit union system is burdened. Federal Credit Union members lose due to the substantial costs related to converting the credit unions charter. Members of state chartered credit unions lose, too, though because the increased costs of state regulation are passed on to the state chartered credit unions in the form of supervision fees.
But, the most disconcerting of all is that the Supreme Court decision undermines the credit union dual chartering system.
Federal Reserve Board Chairman Alan Greenspan has frequently told audiences that a strong dual chartering system for the nations financial system provides essential insulation from the unexpected and we agree. Undermining dual chartering is just bad public policy but, unfortunately, the dual chartering system will be the first casualty if the Courts decision is left to stand.
An exodus from Federal charter to state charter could so weaken the Federal system that a Federal charter is no longer a viable option for large credit unions. If that happens, healthy regulatory competition would disappear and with it would go the opportunity for innovation which has kept the credit union system both modern and viable.
As if all of the reasons I have already discussed are not enough to encourage the Congress to act quickly and decisively, let me add two.
First, the Court decision obviously creates some uncertainty at the state level even though there are significant differences between the federal act and state credit union statutes. That is unfortunate but the Congress is in a position to set aside that uncertainty.
Second, some Federal credit unions may experience serious problems because state charter conversion is not an economically viable option. Liquidation or insolvency could become the fall-out for Federal credit unions with multiple common bonds and with operations in states that either 1) do not authorize out-of-state branches; 2) do not permit multiple common bonds; or 3) have no state credit union law at all, as is the case of Delaware, South Dakota and Wyoming. The Congress is in a position to set aside that risk.
The Supreme Court decided that the FCUA does not expressly permit multiple group credit unions due to the common bond construction of the FCUA. In 45 states, the common bond provisions are absolutely unlike the federal provisions. In fact, a laymans reading of the common bond provisions would lead you to conclude that occupational credit unions in many of these states can specifically serve people who work for different employers. The language is so specific that one can only assume the issue was openly debated in state legislatures and that state legislatures made an informed decision to distinguish the state act from the federal act.
As mentioned earlier, in Colorado, the legislature decided that the Commissioner may include in the field of membership of any credit union, groups whom he determines cannot support a credit union on their own.
In California, the legislature acted to require common bond only for organizing the credit union. Thereafter, people with an interest in joining the credit union are simply elected to membership by those who are members.
In Indiana, the state legislature concluded that various common bonds may make up the membership of a credit union.
In New York, the state legislature has chosen not to restrict the regulatory interpretation of the appropriate field of membership. Unlike the Federal act and most of the state acts, the law of New York grants regulatory discretion over field of membership issues.
In Iowa, the regulator may include employer groups which are too small to support a credit union and the legislature specifically excludes the requirement for the existence of a common bond in those instances.
The strength of our credit union system comes from having a viable state system and a viable federal system of chartering and supervising credit unions. Such a dual system ensures that credit unions can evolve by implementing new services or trying new systems -- usually within a single state or region and always without posing risk to the entire system.
We need a strong state system but we need a strong Federal system too, and an exodus from the Federal system would disadvantage the entire credit union system.
While I continually draw the Committees attention to the fact that the decision does not impact state chartered credit unions, per se, I also want to draw Congress attention to the fact that states have approached this issue in a manner which is consistent with the way the federal regulator has approached it for federal credit unions.
There are important lessons to be learned from the states. The overall message is that state legislatures have analyzed the needs of their constituencies, effectively responded and crafted credit union statutes that are responsive, modern and significantly different from the Federal act. These are important distinctions to remember. Of the 49 regulatory models, one is Federal and 48 are state. All play a significant role in our dual chartering system.
The fundamental point to remember is that a viable dual chartering system is critical for consumers and for the citizens of our nation. Years ago, the founders of our great nation made the choice to break away from England and become the United States. The ability to choose is paramount and undeniable.
To take away dual chartering of credit unions has serious ramifications on all Americans. I urge the Congress to make the choice to bolster the Federal chartering of credit unions.
In closing, I would like to emphasize several key points for the Committees attention.
First, the dual chartering system is of paramount importance to credit unions and other financial institutions today. Speaking on behalf of state credit union regulators, I emphasize the importance of recognizing the experience and the contributions of states during debates which occur in Washington on financial regulation. State legislatures have served as the laboratories for innovation and development of products and services for the citizens of their states. They have debated and considered many of the same issues which are presently facing the Congress today, issues surrounding credit unions and others in the financial industry.
Second, the overall health of credit unions is excellent, on both the state and federal level. Further, an analysis of key categories such as delinquency, capital to assets, member growth and loan growth shows state chartered credit unions are outpacing or matching the performance of their federal counterparts in these areas.
Charged with supervising state credit unions, state regulators have contributed to the strong credit union performance of today and yesterday, and are committed to doing their part to promote strong performance tomorrow as well.
NASCUS, the association of 48 state regulators, looks forward to continuing to provide the information necessary to recognize the distinctions of the state credit union system, to understand the safe and sound condition of state chartered credit unions, and to illustrate how state legislatures have deliberated on similar issues being debated today.
Credit unions have been successful, in large part, because of a healthy dual chartering system of federal and state credit unions. This healthy system has led to improvements for each system. The Supreme Court decision weakens the federal system, will cause it harm, threatens grave harm to the parallel state system and to the competitive vibrancy of the dual chartering system itself.
We believe Congress should act quickly and decisively.
Thank you for the opportunity to participate at the hearing on the Supreme Court decision. NASCUS urges Congress to clarify federal law and allow federal credit unions to continue to serve their members.
We appreciate presenting our comments and testimony for the record, and will be pleased to respond to any questions.