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Committee on Financial Services

United States House of Representatives

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MARCH 11, 1998


Good morning, Chairman Leach and members of the Committee. I am pleased to be here this morning on behalf of the NCUA Board in order to discuss the urgent need for legislation codifying the National Credit Union Administration’s policies on credit union field of membership.

As the Committee knows, on February 25, the Supreme Court decided against credit unions in the AT&T case. The five Justices on the majority opinion held both that banks had standing to challenge NCUA’s interpretation of the Federal Credit Union Act, and that this interpretation, which permitted occupationally-based credit unions to have multiple fields of membership, was not permissible. The four dissenting Justices were of the view that banks lacked standing to challenge the NCUA’s interpretation of the Federal Credit Union Act.

Should the District Court ultimately decide to force a complete roll-back of our 1982 policy by ordering credit unions to divest existing members from unrelated groups, the potential for substantial losses would be significant and immediate for the 3,427 federally chartered credit unions that serve these members through approximately 158,000 employee groups. The vast majority of these groups – 94.2 percent of them -- have fewer than the 500 potential members needed, as an absolute minimum, to organize and maintain a viable credit union. These groups represent ten million federal credit union members. This means that ten million hard-working Americans would be deprived of the financial services they have chosen, financial services Congress has for 64 years directed NCUA and its predecessors to make available to them.

The assets, shares and loans of the 3,427 multiple-group federal credit unions that would be affected by this ruling comprise a substantial portion of the industry’s total:

Assets: $163.4 billion (approximately 76% of $215.1 billion in total assets held by federal credit unions.)

Loans: $108.0 billion (approximately 77% of $140.1 billion in total federal credit union loans.)

Shares: $143.4 billion (approximately 76% of $187.8 billion in total shares held by federal credit unions.)

Even if it does not result in an order to divest, the Supreme Court ruling will, over time, affect the safety and soundness of the federal credit union system. The ruling will also immediately limit access to credit unions for employees of small businesses and low-income people.

Credit unions have a statutory mission to provide access to fairly priced financial services to all consumers. The structure of credit unions ensures this access, regardless of the size and membership of a particular credit union. Every credit union is a member-owned, democratically-controlled, not-for-profit cooperative. This structure, combined with the goal of providing access, is what makes credit unions unique, whatever their size. Accordingly, the logical test for Congress and the American people to apply in deciding if credit unions are continuing to fulfill their original statutory mission is one of structure and accessibility, not size.

NCUA will proceed in due course to implement the limited regulatory alternatives that are available to us to alleviate some of the problems the Supreme Court ruling poses. However, at this point, only legislation can effectively resolve this issue and preserve access to credit unions for millions of Americans.

We are therefore recommending quick passage of H.R. 1151, the bipartisan "Credit Union Membership Access Act," which had in excess of 180 cosponsors as of March 10.


NCUA’s evolving field of membership policy has promoted credit union safety and soundness and enabled credit unions to better fulfill the mission of the Federal Credit Union Act to make credit more available to people of small means. The NCUA Board is firmly committed to following this legislative mandate by helping to ensure that our nation’s low- and moderate-income workers and communities are afforded access to the fairly priced financial services provided by strong and viable credit unions. The NCUA field of membership policy adopted in 1982 provides this access, preserves financial choice for consumers and promotes a safe and sound credit union system by assuring diverse fields of membership which are not overly dependent on the good fortune of a single employer.

Whatever the exact shape the lower court gives to the Supreme Court ruling in its final order, the outcome is certain to inhibit credit unions’ ability to achieve the purposes of the Federal Credit Union Act in the following ways.

1. Credit Union Safety and Soundness Would Suffer

As we enter the 21st century, the changing nature of our national and world economies make it reasonable to expect continued downsizing, mergers and the elimination of companies and whole industries. Occupational credit unions, particularly those dependent on a single employer, remain extremely susceptible to these economic changes.

Federal credit unions have remained healthy and have grown because they invested substantial capital in achieving economic strength and diversity through the addition of select groups of members. Deprived of this option, and even without a draconian court order to divest existing groups, many credit unions over time will suffer unsustainable losses and millions of credit union members will lose needed services. The resulting liquidation or merger of these credit unions would significantly affect the federal insurance fund and the health of the entire industry.

As stated above, more than three quarters of federal credit union assets, loans and shares are held by multiple-group credit unions. If federal credit unions are not permitted to add new members from existing groups or add new groups, the financial viability of a large proportion of federally-chartered credit unions is questionable. Viability is even more doubtful if the court order prohibits federal credit unions from continuing to serve members and their financial needs from existing select groups.

Financial institutions require a constant influx of new customers due to lifetime saving and borrowing patterns. We know that as people age, they borrow less and save more. Without younger customers in the borrowing phase of life, financial institutions lose the higher earnings generated from loans. For credit unions, earnings generated from loans are the best and primary source of income. Without newer, younger members, credit unions will have less and less loan revenue, making it difficult to maintain existing rates paid on shares (savings). As members shift their money to other institutions in response to decreased share earnings, their credit unions could be left with a fatal asset/liability mismatch.

Moreover, in reliance on NCUA’s 16-year multiple-group field of membership policy, many federal credit unions have invested substantial sums to create an infrastructure to support select group expansion. These credit unions have spent million of dollars on branch offices, data processing, personnel and other enhancements that allow them to serve the additional members from select employee groups. If credit unions are prevented from adding additional members or groups as they lose members to job changes, moves, retirement and death, they will be unable to recoup the costs of these enhancements, increasing the pressure on an already deteriorating income stream.

2. Employees of Small Businesses Would Have Less Access to Credit Unions

Small businesses are usually defined as those having fewer than 500 employees. Coincidentally, this number has been determined by NCUA to be the critical mass needed to sustain credit union viability. Small businesses represent the largest and fastest growing segment of the United States economy. According to data from the Small Business Administration, 99.7 percent of businesses employ fewer than 500 people. Small business employees comprise more than 52 percent of the private sector workforce. Thus, without NCUA’s multiple group policy, more than half the workers in the country, a total of 52.7 million workers, would lack access to federal credit union membership through their place of employment.

A policy which prevents small business employees from joining existing credit unions would preclude credit unions from providing financial services to a significant portion of the people of small and moderate means credit unions are mandated to serve under the Act. The average salary of workers in businesses with less than 500 employees in 1995 was $23,780, while the average salary for workers in larger firms was $29,662. As employees of small businesses are, on average, likely to have fewer financial resources than employees of larger companies, prohibiting credit unions from serving employees of small businesses would contradict the statutory concern for providing service to people of small means.

Since 94.2 percent of the employee groups currently served by multiple-group credit unions have fewer than 500 employees, it is clear that NCUA’s multiple-group policy allows credit unions to serve groups who might otherwise be unable to access credit union services.

3. Credit Unions Would be Unable to Expand into Low-Income Areas

NCUA and the credit union system have continually searched for ways to bring credit union services to areas that are not served by depository institutions. The Interpretative Ruling and Policy Statement adopted by the NCUA Board in July, 1994 (IRPS 94-1) was one of the more important initiatives this agency has taken in this regard. This policy allowed larger, healthy credit unions to directly reach out into low-income inner-city and rural areas by adding these communities to their field of membership. Our goal was to give residents of low-income areas an opportunity to obtain fairly priced financial services and provide an alternative to loan sharks, pawn brokers, check cashing outlets, and rent-to-own stores. This policy was invalidated by the Court of Appeals in 1996 and remains invalid under the Supreme Court’s ruling.

The invalidation of NCUA’s low-income expansion policy is unfortunate because we were having a good deal of success in increasing credit union access in poor communities until the District Court injunction forced us to suspend this policy in October, 1996. As of the date of the injunction, NCUA had granted authority to 76 federal credit unions to open branches in distressed neighborhoods and make their services available to a potential 1.4 million low-income residents. Several of these credit unions refurbished empty buildings and moved into abandoned bank buildings. The injunction has forced NCUA to place further applications for expansion into low-income communities on hold for multiple-group credit unions.

NCUA implemented its low-income expansion policy with rigorous procedural requirements. Our procedures required a federal credit union applying to add a low-income community to its existing membership to document that the annual income of the majority of households in such area is at or below 80 percent of the national average (according to US Census Bureau standards), and that the community actively desires credit union services. The credit union also had to submit business plans detailing how the existing credit union or a new branch will provide the needed services. These procedures were designed to ensure both that the community needed financial services and that the credit union had the ability to offer actual services to residents.

NCUA is greatly concerned that access to fairly priced financial services, an essential element of our country’s free enterprise system, will continue to be denied to those most in need of it without expeditious passage of legislation such as H.R. 1151. H.R. 1151 would restore NCUA’s policy, allowing credit unions to serve residents of carefully delineated underserved areas.


We need not, however, rely solely on projections and conjecture to assess the impact of the Court’s ruling. A brief examination of the history leading to NCUA’s multiple-group policy demonstrates the extent of the threat credit unions now face.

The recession of the early 1980’s fueled massive downsizings, closures and relocations at thousands of companies. Employees were laid off or fired. Since the federal credit unions affiliated with these companies did not have a diverse membership base, they quickly experienced viability problems. Many struggled with high loan delinquencies as out of work members could not repay loans on time. At the same time, shares (savings) decreased as members withdrew money to pay living expenses. This loss of income and shares hampered the ability of these federal credit unions to adequately serve those members when their need was greatest.

As a result, numerous federal credit unions closed, causing a significant and dangerous drain on the National Credit Union Share Insurance Fund. In 1982, under revised policies implementing the common bond section of the Federal Credit Union Act, NCUA began to merge and transfer assets and members of failed or failing federal credit unions into healthier federally-insured credit unions. In 1981, 222 federal credit unions failed. With the revised policy in effect, failures dropped to 112 in 1982 and 40 in 1983.

When a credit union added other groups after the loss or downsizing of its sponsor, it helped assure the viability of the credit union, reduce losses to the National Credit Union Share Insurance Fund and the guarantee the continuation of services to existing members who might otherwise have lost access. The revised policy also allowed employees of businesses too small to sponsor credit unions on their own to join with other small groups and achieve the critical mass needed to establish a viable credit union. Moreover, this policy has made it possible for low-income people to gain fairly priced access to the American free enterprise system and achieve economic empowerment that is otherwise unavailable.


It is important to understand that credit union uniqueness is based not on whom a particular credit union is able to serve, but on the structure and mission of credit unions. Credit unions are unique because they are not-for-profit, member-owned and member-controlled democratic cooperatives. Their policies are set by unpaid board members, elected by the membership. Each credit union member has one vote, regardless of how many shares he or she has. Credit unions are the only financial institutions chartered with the express social mission of making loans available to people of small means and teaching the benefits of thrift. Under this statutory mandate, their guiding principle is "people helping people." Credit unions are also the only type of depository institutions that have never turned to the Federal Treasury for any type of assistance.

In contrast, banks are for-profit institutions. Banks’ boards of directors are paid. The bank board represents the stockholders, and makes decisions to further the interests and profits of the stockholders. These directors and stockholders need not live in the service area of the bank or depend on it services, and therefore may not be affected by the decisions they make.

Credit unions’ unique structure remains the same regardless of an individual credit union’s size or number of members. The very largest credit union is subject to the same democratic principles as the very smallest. The credit union with many select employee groups is owned and controlled by its members, just like a credit union with one employee group. Nor are credit unions with multiple employee groups necessarily the largest – in fact, the largest credit union in our country serves only one employee group.

NCUA’s multiple-group policy has not affected the uniqueness of credit unions. It has simply allowed them to achieve the safety of diversity and enabled them to offer low-cost financial services to a greater number of working and low-income Americans from all segments of our society. Codifying this policy is absolutely necessary in light of the Supreme Court decision and would not in any way alter credit unions’ unique nature and social mission.


An examination of the development and usage of the common bond concept demonstrates that it was not intended to limit who could belong to credit unions, but was simply a convenient organizing tool and an early proxy for safety and soundness assessments.

The earliest credit unions in Canada and the United States were mostly based on geographic boundaries, not on occupational or associational common bonds. The New Hampshire state charter granted to the St. Mary’s Bank Credit Union in 1908 permitted statewide membership. The Massachusetts Credit Union Act of 1909, the first credit union act in the United States, also did not limit membership. Instead, the Massachusetts law laid out these basic organizing principles: 1) at least seven individuals were needed to apply for a charter; 2) democratic control (one member, one vote); and 3) directors were to be uncompensated volunteers. Thus, common bond was not mentioned in either the first credit union charter granted or the first state-level credit union statute. The basic tenets of credit union organization and structure have remained constant from 150 years ago to the present.

As they sought to organize credit unions nationwide, credit union pioneers discovered that as a practical matter organizing credit unions along community lines was slow and tedious. It was simply easier to organize credit unions within factories or associations because those units were already defined and, to some extent, organized. Many of these groups already had a commonality of needs. Narrow common bonds also helped promote safety and soundness at that time. People working together knew each other and were usually aware of a colleague’s ability or disposition to repay a loan. Accordingly, much credit union organizing after the initial wave proceeded along employment, rather than community, lines.

Common bond was thus an organizing mechanism for credit unions and an early standard of safety and soundness. While important as a tool, common bond was never the defining characteristic of a credit union. Rather, the defining characteristics of a credit union are: the social mission of empowering people of small means; the cooperative structure within its membership and among fellow credit unions; democratic control by all members, with one vote per member; not-for-profit status; and a volunteer board of directors who make policy decisions free from personal or institutional profit motives.

In drafting the Federal Credit Union Act in 1934, Congress took account of the technological state of credit unions at that time and included common bond provisions. The language of the 1934 Act, which remains today, recognizes three types of fields of credit union membership: 1) occupational; 2) associational; and 3) community-based.

Just as the common bond provisions of the Federal Credit Union Act reflected contemporary understandings of what helped to promote safety and soundness in the 1930’s, NCUA’s 1982 revision to its chartering and field of membership policy promoted safety and soundness by adapting these provisions to America’s changing economic structure. Societal changes and advances in technology both required and permitted new ways to assure safety and soundness. In the highly mobile and technocratic society of our times, where businesses are constantly changing, downsizing or moving to new areas, it would be fundamentally unsafe and unsound to limit credit unions to shrinking or static memberships. By enacting H.R. 1151, Congress would be modernizing the common bond provisions to reflect new realities and understandings of factors that contribute to safety and soundness. Enactment of H.R. 1151, however, would not in any way change the fundamental differences between credit unions and other types of financial institutions.


At a time when rapid diversification of other segments of the American financial industry is proceeding through regulatory rather than legislative changes, Congress might question whether legislation is really needed to address this problem. It is. While NCUA is committed to doing everything within our power to assist multiple-group federal credit unions to adjust to the ruling, even our best efforts will not be enough to resolve the serious effects noted above.

Multiple-group federal credit unions now have two options if they want to attempt to continue serving their current membership as a democratic, financial cooperative. They can: 1) convert to a state charter if their state has accommodative field of membership policies; or 2) convert to a federal community charter.

As of the end of 1997, 106 federal credit unions had applied to convert to state credit unions and 239 federal credit unions had applied to convert to community credit unions. Despite NCUA’s efforts to expedite the conversion process, 28 state charter applications and 155 community charter applications remain outstanding. The backlog of community charter applications is due to the enormous staff time and effort required to ensure that the proposed community credit union will in fact serve the "well-defined community" required by the Federal Credit Union Act. This process cannot be rushed. I fully expect that NCUA will be deluged with community charter conversion applications in the next several weeks, lengthening the current backlog.

Even those credit unions that are pursuing the charter conversion option face the prospect of being unable to continue serving current members and groups. The time required for NCUA and the state regulators to process charter conversion applications may preclude many federal credit unions from offering continuous service to all current members and groups, thus threatening credit unions’ ability to serve those groups in the future. If groups are evicted from credit unions, or credit unions cannot add new members from existing groups while awaiting action on their charter conversion applications, it may be difficult for credit unions that subsequently obtain a state or community charter including these groups to reverse the perception that credit union services are unavailable . Also, in some cases, a community charter will not accommodate all the groups a credit union currently serves, if certain employee groups find themselves outside the credit union’s "well-defined community."

Another option some have suggested is to revise NCUA regulations in order to permit multiple-employee group credit unions that include only members of a particular trade, industry or profession. This is an option that seems to be consistent with the Court’s opinion. However, such a change would help only a very few of the multiple-employee group credit unions. These credit unions would also be susceptible to the same industry-specific downturns as are single group credit unions. Accordingly, the trade, industry or profession multiple-group model, while appropriate in some cases, is not a realistic option for effectively preserving credit union access and safety and soundness.

In summary, regulatory revisions alone will be insufficient to protect the vast majority of all multiple-employee group federal credit unions. Charter conversions are slow and are no guarantee that a credit union will maintain uninterrupted access for all its current members and groups; pending litigation adds to the uncertainty of the community charter option. The only regulatory revision available to NCUA has an extraordinarily limited scope. Legislation is necessary in order to maintain credit union services, ensure safety and soundness and preserve consumer choice.


The 1982 decision by NCUA that allowed federal credit unions to diversify their fields of membership has increased the safety and soundness of the credit union system, allowed credit unions to adapt to profound changes in the American economic landscape, and given many more Americans the freedom to choose to receive their financial services from these member-owned cooperatives.

Congress now has the opportunity to further the purposes of the Federal Credit Union Act by enacting legislation to codify NCUA’s multiple-group interpretation of the common bond. Such legislation would promote the safety and soundness concerns reflected in the original Act by allowing diversification of credit union membership in order to safeguard against economic conditions that affect specific groups or industries. This legislation would also facilitate the availability of fairly priced financial services to individuals who otherwise may not have access to credit union services, in keeping with the Act’s mandate to provide credit to people of small means. Finally, this legislation would defend the quintessential American principle of freedom to choose.

In 1934, Congress enacted the Federal Credit Union Act to promote a safe and sound credit union system that would flourish and provide low-cost financial services to people of small means or anyone else desiring such services. Credit unions should not be punished or criticized for their success in fulfilling this mission. We believe that the evolution of credit unions, including modifications in the common bond, is perfectly in sync with this congressional intent. In fact, Congress, through prudent and infrequent amendments, has significantly contributed to the extraordinary success of credit unions. NCUA has carried out its fiduciary responsibility to provide flexible regulation, faithful to the Act, through changing economic times. Working together, Congress and the agency have assured safe and sound credit union operations. Today, we have another such opportunity, and millions of credit union members are depending on us.

I urge the quick enactment of H.R. 1151 to allow consumers the freedom to choose credit union service. I urge the quick enactment of H.R. 1151 to alleviate uncertainty and ensure a continued safe and sound credit union system. Most of all, I urge the quick enactment of H.R. 1151 to restore NCUA’s policies allowing access to credit union services for employees of small businesses and residents of low-income neighborhoods.

I thank the Committee for its attention to this issue and I would be happy to answer any questions.


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