[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]

                       THE NEED FOR CREDIT UNION




                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                             MARCH 6, 2008


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-95

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma                  KEVIN McCARTHY, California
                                     DEAN HELLER, Nevada

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    March 6, 2008................................................     1
    March 6, 2008................................................    57

                        Thursday, March 6, 2008

Dorety, Tom, President and Chief Executive Officer, Suncoast 
  Schools Federal Credit Union, on behalf of the Credit Union 
  National Association (CUNA)....................................    16
Johnson, Hon. JoAnn M., Chairman, National Credit Union 
  Administration.................................................    12
Lussier, Michael N., President and Chief Executive Officer, 
  Webster First Federal Credit Union, on behalf of the National 
  Association of Federal Credit Unions (NAFCU)...................    18
Menzies, R. Michael Stewart, Sr., President and Chief Executive 
  Officer, Easton Bank and Trust Company, on behalf of the 
  Independent Community Bankers of America (ICBA)................    44
Reynolds, George, Senior Deputy Commissioner, Georgia Department 
  of Banking and Finance, on behalf of the National Association 
  of State Credit Union Supervisors (NASCUS).....................    14
Rock, Bradley E., Chairman, President, and Chief Executive 
  Officer, Bank of Smithtown, on behalf of the American Bankers 
  Association (ABA)..............................................    46


Prepared statements:
    Kanjorksi, Hon. Paul E.......................................    58
    Neugebauer, Hon. Randy.......................................    60
    Paul, Hon. Ron...............................................    61
    Dorety, Tom..................................................    62
    Johnson, Hon. JoAnn M........................................    78
    Lussier, Michael N...........................................    94
    Menzies, R. Michael Stewart, Sr..............................   115
    Reynolds, George.............................................   124
    Rock, Bradley E..............................................   130

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Follow-up information provided by Hon. JoAnn Johnson.........   153
    CUNA Response to ABA's ``Top 10 Questions''..................   156

                       THE NEED FOR CREDIT UNION



                        Thursday, March 6, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Sherman, Moore of Kansas, Hinojosa, Clay, Baca, 
Lynch, Miller of North Carolina, Scott, Green, Cleaver, Davis 
of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter, 
Donnelly; Bachus, Castle, Royce, Lucas, Biggert, Shays, Miller 
of California, Capito, Feeney, Hensarling, Garrett, Pearce, 
Neugebauer, Price, McHenry, Marchant, and Heller.
    The Chairman. Good morning. This is a hearing of the 
Financial Services Committee on the question of the legislation 
that should govern the activities of credit unions. This has 
been a subject of considerable interest for some time. I'm very 
proud that, largely due to the efforts of the chairman of the 
Subcommittee on Financial Institutions, my colleague from 
Pennsylvania, Mr. Kanjorski, we are engaged in a serious 
legislative consideration of this for the first time in the 
memory of a number of people. This is an issue that has been 
before us, and I want to acknowledge that it was Mr. 
Kanjorski's accession to the chairman of the subcommittee and 
our working together that is the major reason that we are here 
today. And I am hoping that we are not just going to be talking 
about this but legislating.
    I believe that this committee has shown a willingness with 
regard to all of our financial institutions to do sensible 
deregulation. Now deregulation can be carried too far, as it 
was in the origination of mortgages. I think it should be noted 
that the percentage of subprime mortgages that have run into 
difficulty that were originated by credit unions is tiny. The 
credit unions and the regulators who are here are to be 
congratulated for showing that it is possible to lend to people 
of moderate economic means to help them accede to homeownership 
without irresponsibility and fiscal crisis.
    That is a model to which we want to adhere. That is, yes, 
we want to deregulate because we do not want bureaucratic 
interference with our ability to help people. But we do not 
want to take that to the point where abuses run rampant. And so 
our goal is to continue a pattern that we think has been 
manifest in the credit union sector of sensible regulation that 
allows consumers to be served and helps the economy, but does 
not lead to abuses.
    I want to make another point. This is one of the issues 
that I intend to deal with as we go forward legislatively, and 
I hope that many of my colleagues will agree. One of the best 
things we can do for lower income people in this country is to 
get them into the depository system--credit unions and 
community banks.
    People who are outside of that system pay a far higher 
percentage in the transactions they do of the cost of those 
transactions than any of us here, and I daresay than any of you 
there. Payday lending, check cashing, excessive fees for 
remittances; those are all problems that lower income people 
face if they do these transactions outside of the system of 
credit unions and community banks.
    One of the things that I hope we will do is to enhance the 
ability of both sets of institutions to offer to people in that 
economic category an opportunity to save money. And so today we 
are talking about the credit unions that will be particularly 
our goal; to enhance the ability of credit unions to offer 
services to people of lower income. Because, again, we have the 
experience that doing it within the appropriate regulatory 
structure that we have allows this to go forward in a 
reasonable way.
    I also believe that--and it is on the agenda of this 
committee--that there are similar deregulatory things we should 
do with regard to the banking system. I understand that there 
are conflicts, and there will continue to be. But I believe 
there is also a commonality of interest in both sets of 
institutions in reducing regulation which gets in the way of 
serving people, particularly people in the lower income 
    So it is my hope that this committee will be able to come 
up with legislation. And let me say, as I am reminded of the 
stimulus, if we do this well, we will come out with a bill, in 
my view, that will make no one deliriously happy but that I 
hope will make no one delirious. Those are the outer limits of 
our choices. But I think there is room for us to enhance the 
ability of regulated institutions in general to serve the 
entire economy, and particularly people in the lower income 
area, and that is where we will be proceeding.
    I have other duties that I need to attend to, so I am going 
to turn over the hearing to the second ranking member, the 
chairman of the Financial Institutions Subcommittee, the 
gentleman from Pennsylvania, who is the main sponsor of the 
CURIA bill and a man of significant experience and interest in 
    I believe we have indicated--the indication I have received 
is that under our rules, as a matter of right, each side is 
entitled to 10 minutes, for a total of 20 minutes. Is that 
correct? No. Each side gets 20 minutes. Wishful thinking. And I 
have used only a little over 5 minutes, so I leave my side for 
the time, and we will proceed with opening statements for the 
full amount of 20 minutes on each side, and then we will hear 
the witnesses, and I thank the witnesses for their attendance.
    We will begin with the ranking member of the full 
committee, the gentleman from Alabama, for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman. First of all, I would 
like to associate myself with your remarks. I think the 
millions of Americans who are members of credit unions are a 
testament to the important services that credit unions provide 
to the Nation. I think that is particularly true and valuable 
in some of our underserved communities, where the credit union 
is really the only financial institution.
    And sometimes those areas, for whatever reason, are 
overlooked by other financial service providers. Because they 
are nonprofit cooperatives managed by their members, credit 
unions excel at providing high-quality, low-cost services that 
are responsive to customer needs. In some underserved and rural 
areas, a credit union, as I said, is the only conventional 
financial institution to be found. Many constituents have told 
me that they have been able to afford their house or repairs to 
their house, start new businesses or even attend colleges 
because of the help of a credit union loan.
    In addition, I--and I know Mrs. Biggert feels the same 
way--am impressed by credit unions' commitment to financial 
literacy. It is a well-known fact that credit unions help their 
members become better educated customers or consumers of 
financial services.
    As we learned during a series of hearings before the 
Financial Institutions Subcommittee, some of the regulations on 
credit unions are overly burdensome, they are unnecessarily 
costly, and they are largely duplicative of other legal 
requirements. Whenever we can identify these examples of 
regulatory overkill, Congress should strive to eliminate them. 
And I acknowledge the gentleman from California, Mr. Royce, for 
his leadership on these issues.
    With our regulatory reform bill, we built a bipartisan 
consensus last year, and I hope that we can do the same thing 
this year with these regulatory bills. If we're serious about 
regulatory relief for credit unions, however, our efforts must 
be directed not only at eliminating excessive burdens that 
currently apply but resisting attempts to impose broad new 
regulatory mandates.
    For example, there are some on this committee and in 
Congress who argue that CRA should be extended to credit unions 
that currently fall outside the law's coverage. On this point, 
I strongly disagree. Rather than expanding the regulatory 
dragnet, our focus must be on providing appropriate regulatory 
relief so that the credit unions are free to serve the needs of 
their communities, and by very definition of who they are, they 
do serve communities. Further, we must ask whether regulatory 
impositions like CRA would be counterproductive and take away 
from their resources to lend to their members.
    In conclusion, we must keep in mind that our goal should be 
to improve the quality and lower the price of financial 
services for consumers. Experience shows that when financial 
institutions compete for customers, customers benefit.
    Thank you, Mr. Kanjorski. I yield back the balance of my 
    Mr. Kanjorski. [presiding] Thank you, Mr. Bachus. I am 
pleased that we meet today to examine the need for making 
statutory improvements and providing regulatory relief for our 
Nation's credit unions. Nearly 4 years have passed since the 
Financial Services Committee last met to exclusively examine 
the many issues of concern to the credit union movement. I 
therefore commend Chairman Frank for convening this long 
overdue hearing.
    I am also optimistic that today's proceedings will lay the 
groundwork for swift action on legislation to modify the 
Federal Credit Union Act. The last time we acted on a 
comprehensive credit union legislation occurred a decade ago 
when the Congress adopted H.R. 1151, the Credit Union 
Membership Access Act. For the last 5 years, we have also 
worked to craft and build bipartisan support for the Credit 
Union Regulatory Improvements Act, or CURIA. I have been a 
leader in both of these reform efforts.
    CURIA would help to fix several problems created by the 
rushed drafting of H.R. 1151. These fixes including putting in 
place a modern, risk-based capital system for credit unions, 
allowing credit unions of all types to expand into underserved 
communities, and amending conversion voting standards.
    CURIA also contains a number of provisions to facilitate 
the ability of credit unions to make business loans. For 
example, CURIA would raise the current asset limit on members' 
business loans from 12.25 percent to 20 percent, a limit 
comparable to the current one of thrifts for their non-real 
estate commercial lending.
    Some have suggested that this modest change represents a 
major expansion of business lending authority. I have a 
different view. Prior to the enactment of H.R. 1151, we had no 
limits on business lending activities of credit unions. CURIA 
would therefore provide minor but needed adjustments to the 
limitations on business lending currently imposed by the law.
    Support for CURIA has steadily grown over time. During the 
108th Congress, we had 69 supporters. In the 109th Congress, we 
garnered 126 supporters. To date, in the 110th Congress, we 
have now gained the endorsement of 147 supporters in the House. 
Our legislation, moreover, no longer has just bipartisan 
support in the House. It now enjoys bicameral support. I am 
very pleased that Senator Mary Landrieu announced that she 
would introduce CURIA in the Senate, along with Senator Joseph 
Lieberman. Their support clearly demonstrates that the momentum 
of enacting credit union statutory reforms is growing.
    Although support for CURIA is building, I recognize that 
enacting legislation into law is often a multi-stage process. 
Therefore, in order to achieve some progress on these matters, 
I recently introduced a pared-back credit union bill known as 
the Credit Union Regulatory Relief Act. Like CURIA, Congressman 
Ed Royce joined me in these efforts. H.R. 5519 contains eight 
noncontroversial provisions found in CURIA and previously 
passed by the House.
    It also includes language to permit all credit unions to 
assist those living and working in underserved census tracts, 
help individuals with short-term financial difficulties to 
obtain loans, and expand member business lending activities 
very modestly, through some narrow carveouts and 
    The swift adoption of H.R. 5519 will allow us to continue 
to work on enacting the many other important legislative 
reforms contained in CURIA but not contained in this new bill.
    Before I close, I would like to strike a cautionary note. 
At today's hearing, we will hear not only from regulators but 
also credit unions and banks. In the past, banks and credit 
unions have sometimes found themselves engaged in what might be 
termed a family feud. In reality, credit unions and banks have 
much in common. I hope that they realize this fact. In my view, 
we can work to expand the pie for both of them by advancing 
well-crafted reforms to their underlying statutes consistent 
with safety and soundness objectives.
    In closing, I look forward to hearing from our witnesses 
and engaging in a thoughtful debate. I also look forward to 
moving a credit union bill through our committee in the very 
near future.
    I yield back the balance of my time. And the Chair will now 
recognize Mrs. Biggert for 5 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman, for holding today's 
hearing to examine credit union regulations. Like banks, credit 
unions plan an important role in our communities. Credit unions 
serve the financial needs of upwards of 90 million Americans, 
some would say as many as one-third of U.S. citizens. Again, 
like banks, credit unions have provided millions of Americans 
the credit and financial services that they need to buy cars, 
build homes, and pay for education.
    However, unlike banks, credit unions are tax-exempt 
organizations that are run by their members. Banks serve both 
customers and investors, are required to comply with the 
Community Reinvestment Act requirements and pay taxes. Back in 
1934, in the midst of the Great Depression, when banks were 
failing and credit was scarce, Congress passed the Federal 
Credit Union Act which established requirements for chartering 
credit unions as well as a national regulator. Congress 
revisited this Act a decade ago, and here we are again today.
    Based on the written testimony of today's witnesses, it is 
clear that competition is alive and well in the financial 
services industry. This is a good thing. It points to the 
success of this sector of our Nation's economy, but more 
importantly, to the fact that Americans benefit from such 
    We are here today to examine the playing field for this 
competition. Is it level? Should it be level? I hope that today 
we can better understand the original intent of Congress for 
credit unions and how that intent holds up in the face of 
today's realities. Was it to encourage competition with banks? 
Did Congress intend for credit unions to fill the void left by 
banks in niche markets and underserved communities? What are 
underserved communities, or who is underserved in communities? 
Are credit unions fulfilling or not fulfilling their 
congressional directive?
    Is it also important that we flesh out further what, if 
any, true need there is to change the capital system and expand 
member business lending for credit unions, which H.R. 1537 
envisions? Well, this committee is always up for a good 
challenge, and with that, I thank my colleagues, Congressmen 
Kanjorski and Royce, for presenting us with another challenge, 
and I look forward to today's discussions.
    Thank you, Mr. Chairman. I yield back.
    Mr. Kanjorski. Thank you very much, Mrs. Biggert. And now 
the Chair recognizes Mr. Baca for 2 minutes.
    Mr. Baca. Thank you very much, Mr. Chairman. Okay. Remember 
I have the additional seconds because my clock didn't start 
    Mr. Baca. Thank you very much, Mr. Chairman, for calling 
this important meeting. I'm proud to be a cosponsor of H.R. 
1537, the Credit Union Regulatory Improvement Act. I appreciate 
my colleagues, Representative Kanjorski and Representative 
Royce, for having offered this legislation again, and I look 
forward to doing everything possible to help provide credit 
unions with the Regulatory Relief and Improvement Act that they 
need to better serve their members.
    I state, to better serve their members, and I think this is 
what it is all about--the quality of service, and how do we 
serve the members as well? There are 13 credit unions 
headquartered in my district that serve one hundred and--I 
mean, one thousand and twelve plus one hundred and twelve 
credit union members who live in my district. I agree that 
several of them contained by Mr. Dorety's testimony, especially 
when he talks about the services to the underserved.
    And I state to the underserved. This is about the 
underserved, and that's what this hearing about individuals as 
well, who are underserved. It's hard for me to understand how 
anyone can complain that credit unions are not doing enough to 
serve the underserved, given the barriers that credit unions 
face today. The fact is that those who complain the loudest are 
the ones who fight the hardest to keep credit unions out of the 
underserved areas. And I state out of the underserved areas 
where a lot of us, minorities and others, live.
    Mr. Chairman, there are reasons that we call these areas 
underserved. The banks aren't there, and most credit unions 
cannot serve these areas. One way that we can provide more 
services to those needs is to allow credit unions to enter the 
underserved areas and provide literally unbanked in our country 
with mainstream and affordable financial services. And this is 
what we have to do.
    I look forward to hearing from today's witnesses on how we 
can help credit unions continue to reach the underserved--and I 
state the underserved--in our communities. I yield back the 
balance of my time.
    Mr. Kanjorski. Thank you very much, Mr. Baca. Now my good 
friend, Mr. Royce of California.
    Mr. Royce. Thank you, Chairman Kanjorski. I want to begin 
just by thanking you for your efforts over the years on behalf 
of credit unions. I know their 90 million members across the 
country very much appreciate your efforts. I also want to thank 
you as a friend and colleague for holding this hearing and 
focusing our attention on this important issue.
    I believe, as you do, that priority should be passage of 
CURIA. I think it has been a decade since we had any major 
credit union legislation passed through the Congress, and it is 
important, I think, to modernize the regulations overseeing 
credit unions. And I think putting credit unions, as you say, 
on a par with other FDIC-insured institutions is a good way to 
do that.
    Let me say that Representative Kanjorski and I introduced 
H.R. 5519 in the meantime, the Credit Union Regulatory Relief 
Act, this week. And while this legislation does not go as far 
as many would like, it's important that we not let the perfect 
be the enemy of the good. And as we build momentum and support 
for CURIA, we are now looking at passage of this piece of 
    It does several things. It provides the NCUA with increased 
flexibility to determine the interest rates on loans from 
Federal credit unions. It authorizes credit unions to invest in 
non-stock investment grade securities totaling up to 10 percent 
of the credit union's net worth. It permits all credit unions 
to expand their services into underserved areas, and it exempts 
business loans made to members within those underserved areas 
from the lending caps.
    And lastly, the Credit Union Regulatory Relief Act would 
support the community development work of nonprofit religious 
institutions by excluding such loans from credit union business 
lending caps. This is based on legislation I had introduced 
prior in 2003, and we have been trying to advance this 
particular concept, because this provision would close a long-
standing liquidity gap between creditors and nonprofit 
    A major priority, by the way, which was left out of this 
legislation, is the modernization of the current capital 
requirements for credit unions. And as Chairman Paul Kanjorski 
shared with you, CURIA incorporates the net worth and prompt 
corrective action reform proposals of the National Credit Union 
Administration, the Federal regulator responsible for the 
safety and soundness of the credit union system.
    CURIA would replace the current one-size-fits-all leverage 
capital requirement for credit unions with a more rigorous two-
part net worth structure that would more closely monitor actual 
asset risk. The revised credit union capital/PCA structure 
would incorporate the relevant international risk-based 
standards for Basel I and Basel IA financial institutions, and 
it would very closely resemble the current risk-based capital 
standards for FDIC-insured banks and thrift institutions in 
this country.
    So I believe this, along with many of the other provisions 
found in CURIA, but not in H.R. 5519, are important. They 
should not be forgotten as we continue to work toward that 
goal. We have 145 Members of Congress who have signed onto the 
legislation. It is going to remain the primary vehicle to 
modernize regulation of credit unions, and of course, it has 
also been introduced this week in the United States Senate.
    So, again, I'd like to thank Chairman Kanjorski for his 
work on this issue. I think we have a good starting point, and 
as we move toward a markup on this legislation, I am hopeful we 
can gain a better perspective and develop a workable solution. 
I look forward to hearing from our extensive panel of witnesses 
who are with us today, and I thank them for making the trip out 
here. I yield back the balance of my time, Mr. Chairman.
    Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Royce. The 
gentleman from Georgia, Mr. Scott.
    Mr. Scott. Mr. Chairman, if I may, could I just yield to my 
good friend, Mr. Green? He has an appointment. Then I could 
come after him?
    Mr. Kanjorski. Surely.
    Mr. Green. Thank you, sir. Thank you, Mr. Chairman. I thank 
the ranking member as well. I thank the members of the panel 
who will appear today. I am honored to be with you and regret 
that I will have to leave.
    I just want to note that we have 8,100 credit unions across 
the length and breadth of the country, serving 90 million 
members. In Texas, we have 603 credit unions, about 6.9 million 
members. Credit unions are making a difference, and sometimes 
they can be the difference in asset acquisition and wealth 
building. I thank you again, and I yield back the balance of my 
    Mr. Kanjorski. Thank you very much, Mr. Green. The 
gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. I have 89,000 
members, credit union members, in my district, and I know how 
important the credit union movement is to them. I also have 
noticed in my district the important role that credit unions 
are playing in the subprime challenge that we have, given their 
relatively low exposure to that market, that they are being 
very helpful in a lot of workouts and a lot of financial 
    I would also let folks in the credit union movement know, 
and I see several of my friends here today. They may not know 
it, but recently, I became a credit union member myself. But 
before you get too excited, no, I have yet to cosponsor CURIA. 
I did, however, as my friends know, along with the gentleman 
from Kansas--I do not see him here at the moment--Mr. Moore, 
helped champion regulatory relief in the last several 
Congresses. Many titles that were in our regulatory relief bill 
are also simultaneously in CURIA.
    I continue to be very concerned about the regulatory burden 
on our financial institutions, and I continue to support 
regulatory relief that is generally applicable to all financial 
institutions. I am particularly concerned about the burden that 
the Bank Secrecy Act continues to play in our financial system. 
However, I am also very mindful that one person's regulatory 
relief is another person's regulatory advantage.
    We do know that credit unions enjoy certain unique 
privileges within our system. Those privileges I am happy to 
defend, but there was a dramatic change a decade ago when the 
common bond requirements were modified. I believe tradeoffs 
were had at that time with respect to lending caps and capital 
requirements. Although I have many persuasive friends in the 
credit union movement, I have yet to be persuaded that balance 
should be upset.
    Having said that, I continue to have an open mind. It is 
not an empty mind. So I look forward to hearing the testimony, 
and I am very glad to hear my good friend from California, Mr. 
Royce, talk about the ability to perhaps advance H.R. 5519, 
where we do have common ground, in hopes that these other 
issues may be worked out at a later time.
    With that, I yield back. Thank you.
    Mr. Kanjorski. The gentleman from Georgia now, Mr. Scott, 
for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. This is 
indeed a very, very important and timely hearing. And we have 
what really amounts to a delicate balancing act here to 
    First of all, we do have a need. The credit unions are 
there. They deserve the attention and relief under this bill, 
because they do serve an underserved community, particularly 
lower and moderate income communities and minority communities. 
And so we need to make sure we keep that in mind.
    Now there are four actors here that have to be taken care 
of. We have the regulators. We have the banks. We have the 
credit unions. But the most important part of this is the 
consumer themselves. We have the banks, the regulators, and the 
credit unions here before us, but we don't have the consumer. 
And that is where we, who represent the consumers, must take 
that into consideration.
    But there are areas where we can work together, 
particularly when you take the meltdown in the mortgage 
markets. There is a need that we could have for credit unions 
to be able to help take some of the downward pressure off of 
banks now that are tightening up on their requirements, to give 
the consumers another way and another resource with which to 
refinance their homes. That is one area that we have to take 
into consideration.
    Now this is sort of like a ball game. We have to get to 
several bases. We have to compromise. We have to work. Any 
reform, it takes time, it takes patience. But if we understand 
our mutual goal, which is to provide that kind of relief to 
assist an underserved community that needs that service, an 
unbanked community, then I believe we have room for agreement 
    Today, with this hearing, we will certainly get to first 
base. Then we have to get to second base, third base, and then 
home. And I believe we will be able to score some runs that 
    I look forward to this hearing. It is a very important 
hearing. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you very much, Mr. Scott. We now have 
Mr. Pearce of New Mexico.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate you 
convening the hearing. New Mexico is very much rural. Some 
counties have more land mass than States back East, and fewer 
than 1,000 or 2,000 residents underserved is a very key problem 
that we face, not just available access to lending.
    I understand and appreciate the concerns of the banks. I 
see the large, large growing institutions that look almost like 
banks and have tax advantages, so we are very familiar with 
those. But at some point in our State, we have to address the 
access to liquidity. So we are interested in the hearing on the 
bill to hear both sides and look to see the ways that we can 
make the system more fair.
    I would encourage the chairman to hold a hearing on the 
Communities First Act, H.R. 1869. I think that more than 
regulatory relief right now we have to be concerned with the 
entire aspect of our financial institutions. We had a couple of 
hearings last week that raised significant concerns. And so we 
need to be looking through this problem to making all financial 
institutions more sound and more competitive worldwide. So I 
hope that the chairman would consider that also.
    I look forward to the hearing and appreciate the chairman 
for convening it. Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Pearce. And now 
we'll have Mr. Cleaver of Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I appreciate this 
hearing. It seems as if each hearing this committee 
participates in is one that deals with those who hate 
regulations and those who want more. I have twin sons, and when 
they were smaller--we have a huge backyard and they would be 
riding their bicycle, and one of them would say, ``Daddy, would 
you make him get off so I can ride?''
    I think that is kind of what we hear when we deal with 
credit unions and banks and other financial institutions. And I 
think that it is our responsibility to protect the consumers 
while at the same time making sure that there are opportunities 
available to the financial institutions, such as banks, and 
that we ought to create those opportunities with as few 
barriers as possible.
    But I'm looking forward to getting into the question and 
answer period, because I think that the great conflict is 
always, you know, laissez-faire. And I think if we have 
laissez-faire, we probably don't need Congress, and I don't 
need any response to that. It seems to me that we have a 
responsibility to play this role, and I look forward to playing 
    Thank you, Mr. Chairman. I yield back the balance of my 
    Mr. Kanjorski. Thank you very much, Mr. Cleaver. And now we 
will hear from the gentleman from Georgia, Mr. Price, for 1 
    Mr. Price. Thank you, Mr. Chairman. I want to thank the 
chairman and Ranking Member Bachus as well and add my 
commendation to them for holding this hearing. And I want to 
commend Congressman Kanjorski and Congressman Royce for their 
ongoing efforts to spotlight this issue.
    I want to welcome all the members of the panel. I want to 
particularly welcome Mr. George Reynolds, who is the senior 
deputy commissioner of the Georgia Department of Banking and 
Finance. Welcome. We look forward to your testimony.
    I am interested in a number of issues. One of the 
provisions of H.R. 1537, the CURIA Act, would update the 
current capital requirements for credit unions addressing some 
concerns that NCUA has that the current capital requirements 
for credit unions may be too inflexible and should become more 
risk-based. We are all aware of the challenges that the housing 
market is creating for our whole economy, and I would be 
interested in hearing all panel members' thoughts on whether 
those challenges that we're facing require or would benefit 
from any legislative or congressional action as it relates to 
credit unions.
    Additionally, Chairman Kanjorski and Congressman Royce have 
introduced a couple of pieces of legislation on regulatory 
relief, and I am interested in hearing from the panel 
specifically on those regulatory challenges that you or your 
clients and those that you represent face during their daily 
routine. Specifically, are there compliance tasks that you feel 
are overly burdensome and end up costing more in compliance 
costs than they're worth for either the system or for 
    And again, I appreciate each of you coming and look forward 
to your testimony and the Q&A. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Price. And now, we will hear 
from Representative Neugebauer of Texas for 2 minutes.
    Mr. Neugebauer. Thank you. And I thank Chairman Frank for 
calling today's hearing. It's good to have all of our friends 
from the credit unions in Washington this week. I had several 
from my district, from Big Spring and Abilene yesterday. And I 
think it's important that you come to your Nation's capital and 
talk to the people who represent you here and make sure that 
your views, which are the views of your shareholders, your 
stakeholders, are expressed on this important issue.
    I appreciate the contribution that the many credit unions 
in my district make to the folks in West Texas. They are 
working very hard to make sure that they serve their customers. 
And one of the things that we're very blessed in our Nation, 
and particularly in our--in Texas is we have a lot of good, 
healthy financial institutions, banks, thrifts, and credit 
unions that provide for the financial needs of the folks that 
we serve.
    I think one of the important things is that whether it is a 
credit union or a bank or a thrift, what I hear over and over 
again is we have to do something about decreasing the amount of 
regulation because they said--what they tell me is they spend 
more time now working for the regulators than they spend time 
working for the people that they serve. And certainly I support 
additional efforts on behalf of this committee to look at ways 
to reduce the regulatory environment and also make sure that we 
have a streamlined, efficient, 21st Century financial services 
    Like many of my other colleagues, I am particularly 
interested in looking at the way that we assess the capital 
needs of credit unions in our country. I think the current 
system is an antiquated system today that we ought to measure 
the amount of capital that a financial institution has not 
based on what some arbitrary number that we're going to try to 
make one size fit all, but with a number that is based on the 
kinds of loans and lending practices that that particular 
credit union is using, as we do with other financial 
institutions to measure what is the risk that they are taking 
and then make their capital requirements to coincide with that.
    And so I think that's a system that makes sense. I again 
thank of the panelists for being here today. We look forward to 
hearing from you as we try to make America's financial 
institutions a better place and better serve the folks for whom 
we all work.
    Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you very much. And now we will hear 
from Mr. Davis of Tennessee for 1 minute.
    Mr. Davis of Tennessee. Thank you, Mr. Chairman. Living in 
a rural area as I do, and representing 10,000 of Tennessee's 
40,000 square miles in the 4th, one of the most rural 
residential Congressional districts in America, we need every 
available resource to us that we can that will supply credit 
for those consumers in the 4th District to be able to at least 
access reasonable rates and reasonable terms.
    Since 1934, 8,100 credit unions have been established 
across the State, representing over 90 million people. But in 
the district I represent, we have small, independent bankers as 
well. And from my perspective, there's a reason that subprime 
lending is not damaging our small local banks nor our credit 
unions. We haven't gotten involved in that, consumer lender. So 
I applaud the folks in 1934 and Congress who saw fit to 
establish--and saw the need for the credit unions.
    But I also realize that as I live in a small rural area, I 
live in an area where there were two banks that didn't close in 
1929 during the Great Depression. So I want to be sure that as 
we navigate through the future, we continue to allow credit 
unions to be able to provide the great service they are 
providing today, but also to be sure that our small banks in 
the district I represent are still going to be standing 10 
years, 20 years, and 30 years down the road.
    Thank you for coming today, and I look forward to the 
question and answer session. I yield back my time.
    Mr. Kanjorski. Thank you, Mr. Davis. I will now introduce 
the panel. Thank you for appearing before the committee today, 
and without objection, your written statements will be made a 
part of the record. You will each be recognized for 5 minutes 
for a summary of your testimony.
    First, we have the Honorable JoAnn M. Johnson, Chairman of 
the National Credit Union Administration.
    Ms. Johnson.


    Ms. Johnson. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee. I thank you for this 
opportunity to testify. The variety of proposals before 
Congress would strengthen NCUA's ability to maximize the safe 
and sound operations of over 8,000 federally insured credit 
unions, modernize important aspects of the Federal Credit Union 
Act, and grant greater flexibility to credit unions serving 
    The written statement I have submitted contains analysis of 
four bills: H.R. 1537; H.R. 1849; H.R. 3113; and H.R. 5519. I 
would like to devote most of my statement to two paramount 
issues--prompt corrective action reform, and extension of 
credit union service to consumers in underserved areas.
    I want to thank Chairman Frank for his leadership and 
Representatives Kanjorski and Royce for their stewardship of 
the issues contained in CURIA, and in a new iteration, H.R. 
5519, just introduced this week. You have consulted with and 
advised this agency on a number of occasions as you assess 
possible updates to the Federal Credit Union Act, and have led 
an informed discussion of issues that have real world benefits 
for consumers.
    I also commend Representative Velazquez for her tireless 
efforts to assist credit union efforts to reach out to small 
business communities, and Representative Serrano for his 
legislation to improve credit union service in disadvantaged 
    NCUA currently administers a system of prompt corrective 
action with the purpose of resolving problems at credit unions 
at the least possible cost to the National Credit Union Share 
Insurance Fund. Our experience in regulating and supervising 
credit unions has shown that a more fully risk-based system, 
such as the one contemplated in H.R. 1537, would improve the 
regulatory regime while at the same time enable credit unions 
to put more money in the hands of their members.
    The legislation mirrors a proposal adopted by NCUA last 
summer and incorporates substantive and very helpful input from 
the Department of the Treasury. It also recognizes developments 
that have occurred with the adoption of the new Basil II 
capital standards for FDIC-insured institutions. A new risk-
based system promotes active management of risk in relation to 
capital levels.
    By emphasizing risk assessment, credit unions would be able 
to better relate their capital to the risk they are assuming. 
Cash in the vault carries a different degree of risk than a 30-
year fixed mortgage, and we believe our regulation should be 
able to recognize this. Also, NCUA oversight will be 
strengthened using additional tools to identify each credit 
union's risk profile based on their activities.
    It is important to note that the proposed leverage ratio 
thresholds will in fact result in some credit unions being 
required to hold more capital than under the current system. 
The proposed system would be robust and would promote a 
regulatory regime that more accurately portrays risk. It would 
reduce regulatory burden on credit unions while enhancing their 
ability to manage their balance sheets in a more efficient, 
effective, and most importantly, safe manner.
    What I have just described is an accountant's-eye view of 
PCA reform. What it means to consumers is more dollars 
available from their credit union for them to save, invest, and 
put to productive use, all in a safe and closely monitored 
    Another important feature of my regulatory relief 
legislation--of any regulatory relief legislation--involves 
modernizing the statute to allow all types of federally 
chartered credit unions to adopt underserved areas. Currently, 
NCUA can only permit multiple group credit unions to add 
underserved areas in their field of membership. Single group 
and community chartered credit unions are not authorized to 
adopt these areas.
    All types of federally chartered credit unions should be 
able to improve access, particularly at a time when so many 
Americans have turned to predatory lenders and are suffering 
the unfortunate consequences. Three different bills have 
language that would address the situation, and NCUA would be 
supportive of these approaches.
    I do note that H.R. 5519 establishes new standards 
regarding how credit unions are serving consumers when adopting 
underserved areas. We want to work with Congress to make sure 
that all consumers have choices in financial services. NCUA 
takes outreach seriously.
    Turning briefly to other issues addressed in regulatory 
relief proposals, several bills propose to improve the ability 
of credit unions to make member business loans. We support 
those efforts and note that credit union member business 
lending can be beneficial and productive service offered to 
consumers. We also underscore the importance of strong and 
active NCUA supervision of these activities. NCUA continues to 
devote significant attention to guidance for all credit unions 
in all types of lending. Irrespective of any statutory limits 
on individual or aggregate credit union member business loans, 
NCUA will continue to be vigilant and aggressive in its 
    H.R. 5519 contains a provision that builds upon the 
progress Congress made 2 years ago in helping consumers find 
lower-cost alternatives to predatory lenders. Allowing credit 
unions to provide payday loan services within their field of 
membership makes sense, and we commend the approach.
    NCUA believes these modernizations represent significant 
improvements to our ability to regulate and supervise credit 
unions. We stand ready to work with Congress as you seek ways 
to improve the delivery of financial services to credit union 
members, and we feel confident that your deliberations will 
    Thank you very much.
    [The prepared statement of Ms. Johnson can be found on page 
78 of the appendix.]
    Mr. Kanjorski. Thank you very much, Ms. Johnson. As 
everyone knows, we have two votes on the House Floor, and 
rather than taking any more statements, we have about 6 minutes 
remaining on those votes, so we're going to recess the 
committee for about 20 minutes, and then we will reconvene and 
take further testimony.
    The committee stands in recess.
    Mr. Kanjorski. We will now reconvene. Next, we will hear 
from Mr. George Reynolds, senior deputy commissioner of the 
Georgia Department of Banking and Finance, testifying on behalf 
of the National Association of State Credit Union Supervisors.
    Welcome to the committee. Mr. Reynolds, if you will present 
your testimony?


    Mr. Reynolds. Good morning, Chairman Kanjorski, and 
distinguished members of the House Committee on Financial 
Services. I appear today on behalf of NASCUS, a professional 
association of State credit union regulators. NASCUS believes 
that H.R. 1537, the Credit Union Regulatory Improvement Act of 
2007 called CURIA, is important legislation.
    As State regulators, we determined our position on the 
provisions in CURIA after reviewing the effect on credit union 
safety and soundness and State law.
    NASCUS supports comprehensive capital reform. First, credit 
unions need to be assessed using risk-based capital standards; 
and second, credit unions should have access to alternative 
capital. From a State regulatory perspective, capital reform 
that addresses these areas makes sense.
    CURIA expands risk-based capital options to all federally 
insured credit unions. NASCUS has long supported that risk-
based capital standards are appropriate. We believe it is a 
sound and logical approach to capital reform for credit unions. 
The implementation of prompt corrective action for credit 
unions doesn't just happen. It requires strong cooperation and 
consultation between State and Federal credit union regulators 
as provided by the Credit Union Membership Access Act. We 
believe coordination between State and Federal regulators is 
imperative to ensure effective capital reform.
    Also, comprehensive capital reform requires more than just 
risk-based capital. NASCUS believes that CURIA's capital reform 
provisions would be enhanced by allowing a provision for the 
inclusion for alternative capital.
    Simply put, credit unions would benefit from alternatives 
that allow them to raise capital other than through retained 
earnings. In fact, low-income and corporate credit unions 
currently have access to alternative capital. We understand 
that additional dialogue with policymakers, the credit union 
industry, and NCUA is necessary to reach a consensus on 
alternative capital. Now is the time for dialogue before 
capital requirements are refute and time sensitive.
    Let me point out a few considerations. First, NASCUS is not 
the only voice advocating access to alternative capital. The 
Filene Research Institute released a study in November of 2007 
entitled, ``Alternative Capital for U.S. Credit Unions: A 
Review and Extension of Evidence Regarding Public Policy 
Reform.'' The report concludes that it is in the public 
interest to permit credit unions greater access to alternative 
capital. It is attached to our testimony.
    Next, while the majority of credit unions were not involved 
in the subprime real estate market problems, all financial 
institutions are experiencing impacts from the residential 
mortgage market.
    How would alternative capital help? It would allow credit 
unions, as it does other financial institutions, to meet these 
challenges and potentially thrive in an uncertain market 
    As regulators, we realize that alternative capital requires 
solid regulation and rigorous regulatory review to ensure that 
these products are properly structured, meet proper disclosure 
requirements, and do not create any systemic risk. Before a 
credit union would be given access to alternative capital, it 
must demonstrate that it has the resources to properly manage 
alternative capital.
    NASCUS supports revisions to member business lending. 
Changes will provide an opportunity for credit unions to better 
serve members. With proper underwriting and controls, these 
changes are not believed to be a risk to safety and soundness.
    While NASCUS supports revisions, we recognize that they 
require proper regulatory oversight through examination and 
supervision. Credit unions must have a thorough understanding 
of member business lending and be diligent in their written 
policies, underwriting, and controls for provisions to be 
implemented in a safe and sound manner.
    CURIA also outlines procedures on conversion voting 
requirements. NASCUS supports full transparency and disclosure. 
We believe that any legislation concerning conversion 
requirements of a State-chartered credit union should recognize 
State law.
    NASCUS appreciates the opportunity to testify. Our 
discussion was limited to those provisions in CURIA that impact 
State-chartered credit unions. We urge this committee to be 
watchful of Federal preemption and to protect and enhance the 
viability of the dual chartering system. We welcome questions 
from committee members.
    Thank you.
    [The prepared statement of Mr. Reynolds can be found on 
page 124 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Reynolds.
    We will now hear from Tom Dorety, president and chief 
executive office of the Suncoast Schools Federal Credit Union, 
testifying on behalf of the Credit Union National Association.
    Mr. Dorety?


    Mr. Dorety. Thank you. Chairman Kanjorski and members of 
the committee, on behalf of the Credit Union National 
Association, I appreciate the opportunity to appear before you 
to express our support for H.R. 1537, the Credit Union 
Regulatory Improvement Act.
    CUNA is the largest credit union advocacy organization, 
representing over 90 percent of our Nation's 8,400 State and 
Federal credit unions and their 90 million members. I am Tom 
Doherty, CEO of Suncoast Schools Federal Credit Union in Tampa.
    As you are well aware, we are experiencing a credit crunch 
in many sectors of the economy. It is ironic that credit unions 
are ready, willing, and able to help alleviate the problem and 
promote economic growth, and yet we are inhibited from doing so 
by outmoded laws that protect the narrow self-interests of 
    Mr. Chairman, the last major changes to the Federal Credit 
Union Act were made in 1998. These changes did not provide 
significant regulatory relief to credit unions. In fact, the 
opposite is the case. The Credit Union Membership Access Act 
imposed statutory burdens related to business lending and 
prompt corrective action.
    It is now time for Congress to reconsider the applications 
of these statutory requirements. Credit unions support the 
provisions of H.R. 1537 which would increase the current limit 
on credit union member business loans from 12.25 percent to 20 
percent of total assets and permit the NCUA to increase the 
threshold for defining an MBL from $50- to $100,000.
    We hope that Congress will also consider eliminating the 
statutory business lending cap entirely. There is no economic 
rationale for this cap. Credit unions have been providing these 
loans safely for nearly 100 years. If that broader approach is 
not approved as an alternative, CUNA asks Congress to consider 
exempting MBLs made in underserved areas from that cap.
    Credit unions also seek modernization of the statutory 
capital requirements Congress enacted in 1998. By law, not 
regulation as for other depository institutions, credit unions 
must maintain a 7 percent net worth ratio in order to be 
considered well capitalized. In comparison, the current ratio 
for banks to be well capitalized is only 5 percent.
    This capital requirement for credit unions is inefficient. 
It unnecessarily retards member service and growth and it does 
not appropriately account for risk of a credit union's assets.
    Under the proposal in H.R. 1537 which has been endorsed by 
NCUA, the new capital requirements would still be more 
strenuous than bank capital requirements and would accurately 
account for the risk for the credit union's portfolio. A more 
precise, risk-based capital requirement would enable credit 
unions to do even more to help members in these economically 
stressful times.
    CUNA also supports a statutory clarification that all 
Federal credit unions may apply to NCUA to add underserved 
areas. This provision will enhance the ability of credit unions 
to assist underserved communities with their economic 
revitalization efforts. It provides all Federal credit unions 
with an opportunity to expand services to individual and groups 
working or residing in areas that meet unemployment and other 
distress criteria identified by the Treasury Department.
    Mr. Chairman, it's unfortunate that credit unions must come 
to Congress to ask for this clarification. You, yourself, along 
with several members of this committee thought that had been 
addressed 10 years ago. We were forced to ask Congress for this 
provision because the American Bankers Association sued NCUA in 
2005 for authorizing single sponsor and community chartered 
credit unions to add underserved areas to their field of 
    In a November 2005 hearing before the House Ways and Means 
Committee, the ABA complained that credit unions do not do 
enough to serve people of modest means. Within days, the same 
group took credit unions to court to prevent them from doing 
    Mr. Chairman, as you know, these areas are called 
underserved with good reason. Banks make a business decision 
not to operate in underserved areas. Credit unions seek to 
serve the underserved. It is not just part of our 
congressionally mandated mission; it is part of our core 
    Six years ago my credit union added and opened a branch in 
an underserved area in Immokalee, Florida. The median income in 
this county is $24,000. We currently have over 6,600 members, 
$24,000 million in deposits, and $62 million in loans from this 
area. We are providing quality financial services to an area 
that otherwise would not have it.
    Those living in underserved areas lack access to mainstream 
financial services. For millions of lower income families, this 
means their only alternative is to use the high cost products 
provided by check cashers, payday lenders, finance companies, 
and pawn shops. CURIA would permit all Federal credit unions to 
apply to NCUA to add underserved areas. This is what many 
Americans need in order to have mainstream financial services.
    Mr. Chairman, my written testimony provides greater detail 
on these and other provisions. I appreciate the opportunity to 
appear before the committee and look forward to any questions 
the members may have.
    Thank you.
    [The prepared statement of Mr. Dorety can be found on page 
62 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Dorety.
    Next we will hear from Mr. Michael N. Lussier, president 
and chief executive officer of the Webster First Federal Credit 
Union, testifying on behalf of the National Association of 
Federal Credit Unions.
    Mr. Lussier?


    Mr. Lussier. Good morning, Mr. Chairman, and members of the 
committee. My name is Michael Lussier, and I am the president 
and CEO of Webster First Federal Credit Union located in 
Webster, Massachusetts. I'm here today on behalf of the 
National Association of Federal Credit Unions, where I proudly 
serve on the board of directors.
    We appreciate the opportunity to express our views and the 
need for credit union regulatory relief and improvements. As 
with all credit unions, Webster First is a not-for-profit 
financial cooperative governed by a volunteer board of 
directors who are elected by our members.
    I am pleased to report to you that unlike other types of 
financial institutions that put many people into predatory 
subprime loans, credit unions work with their members to give 
them responsible loans at rates that they can afford. America's 
credit unions are vibrant and healthy. Membership in credit 
unions continues to grow, now serving over 90 million 
    According to data obtained from the Federal Reserve Board, 
in terms of financial assets, credit unions have just a 1.1 
percent market share and, as a consequence, provide little 
competitive threat to other financial institutions.
    NAFCU would like to thank Representatives Paul Kanjorski 
and Ed Royce for their leadership in introducing H.R. 1537, the 
Credit Union Regulatory Improvements Act; and H.R. 5519, the 
Credit Union Regulatory Relief Act; and the many members of 
this committee who have cosponsored these important pieces of 
    The facts confirm that credit unions are more heavily 
regulated than other financial institutions. We believe H.R. 
5519 is a solid and non-controversial bill and urge the 
committee to take up and pass these needed first steps at 
regulatory relief in a timely manner.
    I want to focus my statement today on two aspects of CURIA 
which are much needed by the credit union community. First, 
Prompt Corrective Action, or PCA reform, would modernize credit 
union capital requirements by redefining the net worth ratio to 
include risk assets as proposed by the NCUA. This would result 
in a new, more appropriate measure to determine the relative 
risk of a credit union's balance sheet and also improve the 
safety and soundness of credit unions and our share insurance 
    For example, the current capital system treats a new 1-
year, unsecured, $10,000 loan the same as a secured, 30-year 
mortgage that is on its last year of repayment; something that 
just simply makes no sense. It is important to note that this 
proposal would not expand the authority for NCUA to authorize 
secondary capital accounts.
    Rather, we are moving from a model where one-size-fits-all 
to a model that considers the specific risk posed by each 
individual credit union. This proposal creates a level 
comparable to but still greater than what is required by FDIC 
insured institutions.
    Secondly, NAFCU also asks the committee to refine the 
member business loan cap established as part of the Credit 
Union Membership Access Act in 1998, replacing the current 
formula with a flat rate of 20 percent of the total assets of a 
credit union.
    At Webster First, we are currently at the cap of 12.25 
percent and, as a result, each week we must turn away members 
requesting business loans that cannot be obtained elsewhere. 
The simple modification of the Member Business Lending cap 
would allow Webster First to provide an additional $32 million 
in small business loans to our members in central 
    There are many credit unions like mine in congressional 
districts across the country that can provide the immediate 
economic stimulus to their local areas by this simple change 
that does not cost the government a dime.
    We also support revising the definition of a member 
business loan by giving NCUA the authority to exclude loans of 
$100,000 or less from counting against the cap. The current de 
minimis level of $50,000 was established in 1998 and has been 
eroded by inflation over the last 10 years.
    There is a lot of rhetoric out there on this issue, but I 
must note that a 2001 Treasury Department study entitled, 
``Credit Union Member Business Lending,'' concluded that 
``credit unions' business lending currently has no effect on 
the viability and profitability of other insured depository 
    In conclusion, the state of the credit union community is 
strong and the safety and soundness of credit unions is 
unquestionable. Nevertheless, there is a clear need to ease the 
regulatory burden on credit unions. It has been 10 years since 
Congress last enacted major credit union legislation.
    NAFCU supports H.R. 5519 as important first step in 
providing regulatory relief and urges its passage. Furthermore, 
we call on the committee to follow the lead of the 145 Members 
of the House who are supporting CURIA and pass this important 
    Lastly, we ask that any efforts to provide regulatory 
relief to financial institutions are balanced and equitable. We 
look forward to working with you on this important matter and I 
welcome your comments and questions.
    Thank you very much.
    [The prepared statement of Mr. Lussier can be found on page 
94 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Lussier. And I 
thank the entire panel for their testimony. It was very 
informative. I certainly have a few questions, as I am sure my 
colleagues do.
    First and foremost, I am certainly going to reserve some of 
the questions for the banking witnesses, because I am at a 
loss, honestly, to understand the two elements of H.R. 1537 
that I hear the most objection to from the banks: the risk-
based capital question; and the conversion question.
    It would seem to me that it is just good practice to put 
the credit union financial position on the same level with risk 
as other banking institutions have. It would be good for the 
system. It is good for the credit union movement and it would 
actually be good for the banking system as a whole. So I do not 
understand their objection to that.
    Secondly, the conversion problem is almost insulting in 
terms of so few people today can dissolve credit unions and 
dispose of the assets in a favorable way to themselves as 
opposed to having a recognition of the built-up equity over 
generations that credit unions represent. I find that 
offensive, if for no other reason than that.
    Rather than having the type of conversion system we have 
now, I would rather a court dispose of the assets and direct 
the assets to a like or similar type of entity to carry on the 
mission that was originally indicated for the to-be dissolved 
credit union. But we will save those questions.
    What do the witnesses have to say in terms of, maybe I will 
start with Ms. Johnson. Why do you think there is such 
objection to the risk-based capital structure that we have put 
in place, since our committee and the Congress have really 
worked very closely with the regulators to take exactly what 
they have recommended in its best regards and try to put it 
into place and adopt it into law? Have you heard any response 
or comment as to what the objection is to everyone else on this 
    Ms. Johnson. Congressman, I think the proposal before you 
is one, on this risk-based capital, is one that is coming from 
the regulator. It is not coming from the trades. It is not 
coming from the credit unions that have been working on this 
for over 3\1/2\ years.
    I think the opposition that is out there is misleading in 
that it is being sold as an across-the-board reduction in 
capital for credit unions. This is not true. What this is, it 
is a positive--this will have a positive impact on our 
insurance fund from the standpoint that it allows us as the 
regulator to identify problems more quickly.
    Credit unions will be assessed higher risk levels for 
riskier activities, or higher capital levels for riskier 
activities; and it's actually a tool for us as a regulator. 
This is not a give-away. In fact, for 30 percent of the credit 
unions it is actually going to raise their capital levels, or 
those standards.
    So I think it has been sold as a give-away, and by all 
means, it is just the opposite. It is a tool for us. It is my 
number one priority of all of the regulatory items that we are 
addressing today. This is probably the one that is most 
important to me as a regulator and so I would really ask for 
your serious consideration of this proposal that it either be 
included in the legislation, or put back in whatever piece 
might actually pass.
    Mr. Kanjorski. Well, as you may or may not know, what we 
broke out is H.R. 1537 to stand on its own as it was originally 
introduced, and maybe modified by H.R. 5519, which we recently 
introduced this week, which would take the less contentious 
elements so that we can move them through the Congress quickly 
and get them passed.
    But of course, we are not going to accomplish the two most 
important things there: the conversion correction; and the risk 
capital correction. How can we make this strong issue?
    Maybe I am asking the wrong person on this since you 
participated as a regulator in adopting this, but I have been 
sort of frustrated myself over the last several years because I 
thought we invited everybody's comment. It was not anything 
that anyone individually promoted, not the association or the 
credit union movement themselves, but in fact the regulator.
    And we waited, if you recall, until you completed all of 
your studies before we wrote the bill and then incorporated 
what the regulator asked us to incorporate in the bill.
    Ms. Johnson. Congressman, it is frustrating for me, too, 
that this item is being seen as contentious, because it 
shouldn't be. We have put over 3 years of work into this.
    Actually I saw written quotes in the media early on from 
the bank and trade associations that they understood that this 
was probably necessary. And then I think as time went along and 
the fires were stoked in a competitive nature, I think it 
became contentious, but in my belief for the wrong reasons. 
This is substantive and we see it as a necessary tool.
    Mr. Kanjorski. Now you know we have made some corrections 
in CURIA in terms of conversion. I am just going to take 
another minute. Do you feel that we have made sufficient 
corrections to prevent abuse in conversions that have been 
occurring over the last several years? And as a regulator, are 
you satisfied with what we have done?
    Ms. Johnson. Well, from our standpoint, we just recently 
put out a new ANPR that we are continuing to study some of 
these elements that we still find in conversions, and I think 
this is probably the most important ANPR that we have put out 
during my tenure at the agency and we're asking for additional 
ideas. We have been doing additional study in areas of 
conversions, mergers, insurance, and so we will continue to 
work with you. This has been an area of concern for us as well.
    Mr. Kanjorski. I remember particularly conversions so well. 
It had to have been about 11:00 or 12:00 at night when we were 
in the final consideration of H.R. 1151, and I was so 
frustrated with the blowing away of getting reasonable quorums 
to vote for conversion that I almost decided to oppose H.R. 
1151, but I knew how important it was for the membership 
portions of it that we would have destroyed the credit union 
    So I accepted thinking--this is 10 years ago--that we would 
never let this happen and continue to go on in Congress. We 
would come back and correct it. I anticipated that we would 
have a correction in a matter of years. Here we are 10 years 
later, still fighting the same issue.
    Mr. Reynolds. Mr. Chairman, I just wanted to make one 
comment about the conversion issue from the State perspective. 
I just wanted to make sure that it is understood that there is 
sensitivity to the fact that there are State law issues.
    We do have State laws in place in many of our States that 
deal with conversions. They have very robust disclosure and 
governance provisions in them and whatever solution in this 
area is considered, we just want to make sure that for State 
credit unions in particular, there is acknowledgement of the 
fact that there are State law issues that should be considered.
    Mr. Kanjorski. Have you--
    Mr. Reynolds. Yes, I commented on that in our written 
testimony, and I alluded to it in my oral testimony as well.
    Ms. Johnson. Congressman, I would just add that, as you 
know, credit unions are member-owned cooperatives, and our 
focus has been on the members and the transparency in this 
process. I have been up here to testify a couple of times on 
conversions, and that has always been our focus and will 
continue to be the focus. But these are member-owned 
cooperatives, and so the members' interest is our priority.
    Mr. Kanjorski. Thank you all, very much. And now, Ms. 
Biggert, if you will?
    Mrs. Biggert. Thank you, Mr. Chairman. I would like to 
thank the panel for all of their testimony. And I would also 
like to recognize the Illinois credit unions that are here to 
hear your testimony and our questions.
    Mr. Dorety, one thing that always bothers me just a little 
bit is that credit unions do enjoy certain advantages, such as 
the tax-exempt status. But it was because they are established 
as member-owned financial cooperatives to meet the financial 
needs of the members.
    But given that advantage, shouldn't Congress make sure that 
whatever regulatory changes we make do not change the 
fundamental character of credit unions? And when we are taking 
today about raising the business lending cap or expanding into 
the broadly defined underserved areas, will this invite credit 
unions to disregard the congressional mandate that credit 
unions serve people of modest means, which is one of your 
    Mr. Dorety. Congresswoman, we totally agree with you that 
we should never get away from the core of who we are, which is 
a not-for-profit cooperative institution. The things that you 
refer to can only enhance our ability to serve those members 
that we were chartered to serve.
    Underserved communities, an example is we have done five at 
Suncoast. The community I referred to, Immokalee, has a total 
of 25,000 individuals in that community. In 6 years time, we 
now are serving 6,600 of those individuals in that community.
    If credit unions are given the ability to expand further 
into underserved communities, then more people of modest means 
will in fact be served, which is exactly what I think most 
folks here want us to do.
    In the member business lending cap, credit unions serve a 
number of members and do it very well on the consumer side. 
Many of those members would love to have small business loans 
from their credit unions. But because of the cap and the 
expense involved in putting together a business service 
program, it costs a lot of money to do that. And many small 
credit unions are not able to fund or to spend the money to 
even start a member business loaning program.
    So I think both of these features of the new bill would 
certainly help credit unions do even more in providing services 
to folks, and ensure that we are doing exactly what you want us 
to do.
    Mrs. Biggert. How do you define what are underserved 
communities or who is underserved in those communities?
    Mr. Dorety. Our regulator defines who are underserved 
communities, and it is a certain portion of folks. It has to do 
with income levels, and Chairman Johnson can certainly answer 
this better than I can. It has to do with certain income levels 
and the availability of services in those communities.
    Mrs. Biggert. Maybe, Chairman Johnson, could you respond to 
    Ms. Johnson. That is correct. It is based on geographic 
areas that meet income standards. It is difficult to say. I 
think a better approach to what is underserved versus what the 
ability or what the number of institutions, etc., might be what 
is the access to affordable financial services.
    What is the appropriate number of institutions? There is no 
criteria out there. Is it so many check cashers? Is it so many 
other financial institutions? But having access to affordable 
financial services is what is key.
    We know that when a credit union has access to an 
underserved area, it is offering all of the consumers another 
option. And that is what the goal is. It has to be made 
available before they can take advantage of it.
    Mrs. Biggert. Well, we are hearing from banks that credit 
unions are purchasing or participating in business loans to 
non-members. And how many credit unions are making these types 
of loans, or is that true?
    Ms. Johnson. Credit unions only make member business loans 
to members. I think the figures that you are referring to, 
credit unions have the option or the opportunity to purchase 
participations from other credit unions. But these are member 
business loans that have been made by a credit union to a 
member. So credit unions don't make business loans to non-
    Mrs. Biggert. Did you exclude these loans from the 
aggregate business loan cap?
    Ms. Johnson. Loans that are $50,000 or less in the amount 
are excluded from the business lending cap. Participations are 
also excluded from the business lending cap.
    Mrs. Biggert. I think that most people would agree that 
anything that provides lower income Americans with an 
alternative to high-cost short-term loans would be a good 
thing. Can you tell me what impediments currently prevent 
financial institutions from offering these alternatives, and 
are the impediments economic or regulatory?
    Ms. Johnson. Well, I would say the biggest impediment is 
having access to the area in order to provide them.
    Mrs. Biggert. So is there an economic impediment? That is 
all right.
    Ms. Johnson. I guess I am not understanding the question.
    Mrs. Biggert. My time is expired, and I will yield back.
    Mr. Kanjorski. Ms. Biggert, just a little point of 
information. On both bills that are pending, the definition 
that we are using in both bills for ``underserved area'' have 
been taken out of the new markets tax credit initiatives, are 
very restrictive to census track definition, and consistent 
with the existing definition, and from the CDFI definition of 
underserved areas. And we use in the alternative. But they are 
much more restrictive than other definitions in underserved 
areas. But it would get us into about 40 percent or less of the 
country of underserved areas.
    Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman. I am sorry I 
was not here for an opening statement. We were tied up in 
another committee. But I would like to ask a question based on 
an anecdote that I would have mentioned in my opening 
statement, namely, a local credit union in my district helping 
to reach out to folks who had previously relied on a check 
cashing and payday lending franchise.
    Mr. Lussier and Mr. Dorety, can you tell me, from a 
national perspective, what you know or understand that credit 
unions are doing to move people from being unbanked, so to 
speak, meaning without a relationship with a reputable 
financial institution, and thus reliant on extortionate sources 
of credit, interrelationships with credit unions in particular? 
Can you share with us something about what credit unions may be 
doing, collectively moving to meeting the short-term borrowing 
needs that many working and poor folks need?
    Mr. Lussier. Yes. I just want to say that as far as the 
financial literacy programs that are out there--I will address 
that first--I know that our credit union itself has had 
educational facilities in the local high schools as well as 
branches in the high schools to help assist and train the young 
to become educated financially on their responsibilities of 
what is going to take place in the next few years of their 
    We have just enhanced our program by having an educational 
facility within our own new operations center to address just 
that issue, to help financial literacy in both from people from 
underserved areas in the community as well as minorities and/or 
people who are in high school or even some of the senior 
    So we have gone to great strides to having additional staff 
put onto our staffing to assist just for the financial literacy 
programs. That is what we do regarding that.
    As regarding the payday lending, we actually again go out 
to give many small loans of the $500 to $600 area, and charge 
no abnormal fees or underwriting costs or anything else, and 
just do that for many, many people within our community to help 
and assist them to get away from some of the payday lenders.
    Ms. Waters. Thank you very much. And let me just address 
this question to any of you who would like to answer: What will 
H.R. 5519, the Credit Union Regulatory Relief Act, which we 
have been discussing--what can happen with the passage of this 
legislation? Will you be able to expand to be of more 
assistance to our constituents and their ability to borrow? And 
would this include businesses also?
    Mr. Dorety. Congresswoman, really quickly, the national 
efforts on serving the underserved--we have a national program 
called Real Solutions. It is administered by the National 
Credit Union Foundation, and it is in over half of the States. 
It provides products, services, and guidance to credit unions. 
It is a very popular program. It is being moved out nationally 
at this time.
    And our State leagues are also getting involved in a 
program called the Real Deal. So there are national efforts on 
credit unions attempting to go out and provide services to the 
    This particular bill that we are talking about would enable 
more credit unions, obviously, to include underserved 
communities in their field of membership. It would also enable 
more credit unions to offer business loans to their small 
business members. Clearly, it would help to provide economic 
stimulus to the constituency that you are referring to.
    Ms. Waters. Simply put, you just would have more resources 
to expand out into these communities that are not available to 
these communities today. Is that correct?
    Mr. Dorety. I couldn't put it any better myself.
    Ms. Waters. I like that. Thank you very much. I yield back 
the balance of my time.
    Mr. Kanjorski. Thank you very much, Ms. Waters.
    And now my friend from California, Mr. Royce.
    Mr. Royce. Thank you very much, Mr. Chairman.
    I am going to Mr. Dorety with a question first, and that 
is: Credit unions, by their very nature, are quite risk-averse. 
By law, they lack any access to capital markets. The current 
prompt corrective action rules induce credit unions to maintain 
capital levels higher than those necessary to protect the share 
insurance fund.
    So I would ask if you would explain why credit unions must 
maintain their current net worth requirements, and how credit 
union members would benefit from modifying these requirements 
proposed by CURIA?
    Mr. Dorety. Congressman, I think the reason that we are 
required are basically what you suggested. First of all, we 
have to account for the 1 percent share insurance fund. But 
also, we do not have the availability, or most credit unions 
don't have the availability, to go into the area of alternative 
    So I think that is probably the basis for why we are where 
we are. The new provisions under prompt corrective action would 
allow credit unions obviously to address some of that. Now, 
credit unions are risk averse, and many credit unions have 
capital levels that are above that level of 7 percent that we 
consider to be well capitalized.
    If we were to enable to move that well-capitalized level 
still to a safe and sound level that our regulators would 
adhere to, then more credit unions would certainly be 
encouraged to provide more capital and spend more money, 
provide better products and services, and enhance their 
products and services to members.
    The risk-based side of this provision would certainly help 
credit unions make more loans and allocate risks appropriately 
towards making those loans. The one-size-fits-all, as we heard 
here earlier today, just doesn't make sense any more. So we 
really believe that would assist credit unions in providing 
more economic stimulus to our membership.
    Mr. Royce. So in theory, we have a more rigorous two-part 
net worth structure that is actually going to closely monitor 
actual risk.
    So I will ask Chairwoman Johnson: What type of impact would 
you expect that to have, then, on the national credit union 
share insurance fund when we go to a risk-based capital system?
    Ms. Johnson. Congressman, actually it will have a positive 
impact on our insurance fund because it will allow us to--it 
accelerates our ability to deal with those thinly capitalized 
    I would also like to point out that the other regulators 
have the ability to adjust their capital levels by regulation. 
We are held to statute. And that is why we need action in a 
bill such as you are proposing.
    Mr. Royce. Going to another issue, Chairwoman Johnson, with 
the economy continuing to work through some pretty challenging 
and difficult times here, is this the time to be thinking about 
the prompt corrective action reform that is in the CURIA bill?
    Ms. Johnson. It is actually the very best time, because the 
way we have seen the economic conditions, although credit 
unions have done a terrific job in the mortgage lending area, 
and have not gotten themselves into some of these precarious 
positions, their record is very good, but it is because of the 
focus now on the economy and where institutions are and the 
interest rates, etc. This is the time that we should be 
addressing the issue through this statute.
    Mr. Royce. Thank you very much, Chairwoman Johnson.
    I am going to go back to Mr. Dorety. There has been a lot 
of discussion here today about how the Credit Union Membership 
Access Act of 1998 was the last major piece of credit union 
legislation that we have enacted here in the United States 
    But as I think you pointed out, while this Act certainly 
saved a number of credit unions from disappearing, it was not 
regulatory relief. In fact, the legislation put additional 
statutory burdens on credit unions.
    So the question I would ask you is: When was the last time 
Congress provided credit unions with change to the Federal 
Credit Union Act that provided some type of regulatory relief, 
in your memory?
    Mr. Dorety. Congressman, it has been over 20 years. It was 
after the Garn-St Germain Depository Institutions Act of 1982, 
but it has been over 20 years since Congress has enabled--has 
given credit unions any meaningful regulatory abilities, in my 
    Mr. Royce. Well, I thank you all. I thank the witnesses 
again for traveling out here to testify today. And Chairman 
Kanjorski, I yield back the balance of my time.
    Mr. Kanjorski. Thank you very much, Mr. Royce.
    And now we will hear from our friend from North Carolina, 
Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I want to relate an 
experience going back, and I am going to assume some risk 
today, the same risk that I did the first time I mentioned 
this. I will put it in context.
    I represented a credit union before I came to Congress, and 
was a member of two credit unions at that time. And about a 
year or two into my service on this committee, after I came to 
Congress, I was at a breakfast and made the political judgment 
that I had enough credibility with credit unions to raise a 
basic question, and have incurred the wrath of some credit 
unions, especially the larger ones, since that.
    The basic question was: What is the dividing line between 
what credit unions do and banks do? What should the appropriate 
dividing line be, given the fact that credit unions are not 
taxed and other financial institutions are?
    I have found over the years that has been the real 
undercurrent of just about everything that this committee has 
dealt with, and continues to be the underlying question. And so 
I want to put that question out here as a general context 
    I think it raises itself in the context of this proposed 
legislation, especially modifications that may be made to the 
service of underserved areas. And I want to start with Ms. 
Johnson because one of the concerns I have--I mean, I will do 
anything to get more financial services access to poor people. 
And one of the concerns I have is that the interpretation of 
underserved areas may need a lot more attention than your 
office is giving it.
    I am reading here from a report that was done in 2004, 
which says to me, ``Treasury Department Federal Credit Union,'' 
and defines its field of membership as ``persons who live, 
work, or regularly conduct business, worship, or attend school 
in, and businesses and other legal entities located in, 
Washington, District of Columbia. Underserved addition 12/8/
    I am reading a provision that allows JSC, Houston, Texas, 
if I read this correctly, to serve a field of membership 
``persons who live, work, worship, or attend school in, and 
businesses or other entities located in Houston, Texas and 
underserved area.''
    Could it possibly be that the whole City of Houston, Texas, 
is an underserved area? Could it possibly be that the whole 
City of Washington, D.C., is an underserved area? Could it 
possibly be, if I look at some of these other descriptions, 
that the whole City of Monterey, California, is an underserved 
    Is this just a misstatement of this, or do we have a 
problem? Because I think part of the problem that people are 
having here is that if you define this area as being so broad, 
people don't understand what the distinction is any more 
between a nonprofit credit union and a for-profit financial 
services entity of another kind.
    That is one serious problem that I think needs to be 
addressed here. And it entails more than just a question of 
serving underserved people. I think everybody is willing to 
serve underserved people, but if the definition is that broad, 
there are a lot of people in these areas who fall in that 
    The second question, and giving my speech here, I have run 
out of time. But the same thing applies when you convert out of 
a credit union because if the owners are the people who are 
being served in a credit union, it is like a mutual insurance 
    I had some litigation about that before I came here, too. I 
stopped a conversion from a mutual insurance company to a 
stock-based insurance company because the people who were 
benefitting from the conversion disproportionately were the 
people at the top of that institution. The people at the bottom 
of that mutual insurance company were getting virtually nothing 
out of the conversion process. That is the issue that Mr. 
Kanjorski raised.
    I think we have to do more work on these two issues to 
satisfy people that the status of credit unions is not being 
abused. And maybe you can shed some light on the first of 
those, Ms. Johnson. I will shut up and give you an opportunity 
to respond.
    Ms. Johnson. Thank you, Congressman. I would be pleased to 
    The underserved areas that have been granted do meet the 
statistical criteria for the definitions of the underserved. 
And these are statistics--
    Mr. Watt. You are telling me that the entire City of 
Washington, D.C., and the entire City of Houston, Texas, meet 
that definition?
    Ms. Johnson. Well, I would like to address the example you 
used of the Treasury Department Federal Credit Union.
    Mr. Watt. No. I am asking you that question. Does the 
entire City of Houston, Texas, meet that definition?
    Ms. Johnson. Statutorily, yes, it does, by the criteria 
that is already in--the criteria that we go by, yes.
    Mr. Watt. So a credit union could do--could have a member--
    Ms. Johnson. It is based on the investment areas.
    Mr. Watt. --of any business that is located--any person who 
works in the District of Columbia?
    Ms. Johnson. It is a consumer choice, yes. If they reside, 
if they are within that underserved area. And I would like to 
point out--
    Mr. Watt. That underserved area being the entire City of 
Houston, Texas?
    Ms. Johnson. If that meets the statistical criteria for 
those investment areas, it is anyone residing within that 
statistical area. That isn't--
    Mr. Watt. What happened to this clear definition of 
neighborhood that we started out with? Does that not have any 
bearing any more? How is that a clearly defined neighborhood? 
Isn't that in the statute? Isn't that in your regulations?
    Ms. Johnson. The term ``neighborhood'' is not used.
    Mr. Watt. I have run out of time, but--
    Ms. Johnson. Might I respond, though?
    Mr. Watt. --you see the problem. And I am sure I am going 
to get abuse for even--I got abuse the last time in a private 
setting for putting this discussion in a breakfast setting on 
the table with what I thought were my friends. So I very well 
anticipate getting substantial abuse for putting it in this 
public setting.
    But I don't think we need to sweep this concern under the 
rug. And if we don't address it, I think we are going to have 
some major problems on an ongoing basis really meeting the 
needs of underserved people. Maybe our definition is too broad 
now, the way you all are defining it.
    Ms. Johnson. I would like to point out that I recently 
personally attended the--I wouldn't call it a grand opening, 
but the Treasury Department Federal Credit Union does serve--
they have adopted an underserved area. And in cooperation with 
Operation Hope, they are working specifically with these 
underserved residents, these low-income residents in 
particular, of offering the counseling--
    Mr. Watt. I have no doubt that that is what they are doing. 
But the language that we--
    Ms. Johnson. That spreads out.
    Mr. Watt. --that we have here is broad enough to drive 
mega-trucks and planes and tanks and everything else though. 
The good things that they are doing with it are wonderful. But 
I am telling you that this is subject to abuse, and we have to 
figure out a way to find what the appropriate balance is here. 
Otherwise we are going to lose--we will win the battle and lose 
the war.
    Mr. Kanjorski. May I just add to this conversation that is 
going on? I think you are talking to cross points. The existing 
definition of an underserved area is different and much broader 
than the definition contained in the two bills presently 
    The two bills presently pending adopt the definition used 
in the new markets tax credit, which is highly restrictive. And 
under the new markets tax credit, you could not get a tax 
credit in any portion of Washington, D.C., only in those census 
tracks that meet the very restricted definition contained in 
that Act.
    And the same thing goes to Houston, Texas. I know of no 
city in the United States that would fully encompass a credible 
area of an entire community--
    Mr. Watt. I am surprised to read this myself, Mr. Chairman. 
I am reading from the report of the regional director of the 
National Credit Union Administration. That is the way it is 
defined in the report.
    Mr. Kanjorski. Well, it is defined in that report because 
you are operating under some other definition presently at the 
credit union regulatory level, where this Act--
    Ms. Johnson. We are operating under the current 
    Mr. Kanjorski. Definition.
    Ms. Johnson. --definition. Yes.
    Mr. Kanjorski. And the new definition under the two pending 
acts would be very much more restrictive, and purposefully so. 
But you cannot restrict it to the point that they become 
nonexistent. I know you have worked very closely on the new 
markets initiative, and we are going to be reauthorizing that 
this year after 5 years. That is a very restrictive act.
    I come from a congressional district that is quite on the 
low side of income and level, and yet less than a third of my 
congressional district qualifies for new market tax credits. 
And I think we are probably in the 30 percent range.
    Mr. Watt. I would just tell the chairman that is not the 
only concern I have with the new markets tax credit. We have 
had a hearing about some other concerns with it, too. So I will 
be looking forward to working with the chairman on that. But 
that is in the jurisdiction of the Ways and Means Committee, as 
I understand it.
    Mr. Kanjorski. Right.
    Mr. Watt. So we may not get as direct a shot at it as I 
would like to have.
    Mr. Kanjorski. Well, I think we ought to assume any 
jurisdiction we possibly have to get a tax credit.
    Mr. Kanjorski. I see Mr. Miller of California has returned, 
and so I recognize Mr. Miller.
    Mr. Miller of California. Mel, you were much easier to get 
along with when you had facial hair. I thought I would point 
that out. He is not even--Mel, you are not paying attention 
this morning. He is through talking. I can tell. I said, you 
were much easier to get along with when you had facial hair. I 
want you to know that.
    Mr. Watt. Well, I am glad to see you are talking my place 
in being easier to get along with and the facial hair.
    Mr. Miller of California. I have always been easy.
    You know, when I was growing up, my parents were retail 
clerks, and I don't think--if it wasn't for credit unions, we 
wouldn't have had sofas and chairs and carpets. So you have 
done a great job.
    Are there any other institutions you are aware of that have 
a 7 percent requirement, as you are placed upon in capital 
    Ms. Johnson. The risk--or the prompt corrective action that 
we operate under is the highest level of capital that is 
required. Currently, credit unions have to have 7 percent in 
order to be considered well capitalized. The proposal that we 
have before you would make it approximately 6 percent, but it 
would actually raise it at the lowest category, and it actually 
would raise it for about 30 percent of the credit unions.
    The banks currently are required to have 5 percent to be 
well capitalized.
    Mr. Miller of California. And Congress provided the banking 
regulators the flexibility to risk-base capital as they deemed 
proper. How do you look at that?
    Ms. Johnson. Excuse me? I didn't hear the first part of 
your question.
    Mr. Miller of California. Congress provided the banking 
regulators the flexibility to risk-base the capital 
requirements for banks. How do you think that would apply to 
credit unions?
    Ms. Johnson. Well, we would like that ability to risk-base 
the capital. They are able to change theirs through regulation, 
and ours is firmly held by statute. And we are very limited. If 
we had this capability, we would be able to identify problems 
more quickly, and credit unions would be able to manage to 
their risk more successfully.
    Mr. Miller of California. In conversations I have had, I 
understand that a number of credit unions actually want to help 
their members restructure or refinance troubled mortgage loans 
that are currently existing today, and including loans that 
their members may have gotten elsewhere. How does the NCUA 
address that issue?
    Ms. Johnson. Credit unions have addressed the mortgage 
lending area very well. We have not changed our standards 
through this whole process. We came out with early guidance, 
going back as far as 1995 and addressing some of these types of 
loans, and have continued with strong guidance in the last few 
    We have maintained our lending guidelines based on the 
three Cs: collateral; character; and the capacity to repay. And 
we have not changed that. Now, we have encouraged credit unions 
to work with their members. We encourage modifications, where 
possible. And credit unions have been very successful in that 
    Mr. Reynolds. Congressman, can I have a point on that?
    Mr. Miller of California. Yes.
    Mr. Reynolds. From the perspective of the State system, the 
State regulators have been encouraging their financial 
institutions, including credit unions, to work diligently with 
consumers to try and remediate these types of situations.
    And credit unions, our State-chartered credit unions, have 
been very effective in being able to step forward and help 
consumers in some situations where they have gotten themselves 
into subprime lending situations. And they are not always able 
to extricate consumers, but they are always able to assist them 
with being an honest broker of information on their options.
    Mr. Miller of California. So you think you can actually 
help your members restructure or refinance some of these 
troubled mortgage loans in a safe and sound fashion where they 
have no place else to go today?
    Ms. Johnson. That's right.
    Mr. Reynolds. Absolutely.
    Mr. Miller of California. And you don't think that would be 
unfairly involving yourself in the marketplace? That is a 
stupid question, but I think I know how you are going to answer 
that one. Should Congress extend the CRA to credit unions?
    Mr. Dorety. I will take that one. The answer is ``no.'' 
Congress should not extend the CRA to credit unions. CRA was 
brought to banks, I think in 1978, because they were doing bad 
things. They were redlining, and they were doing some of those 
characteristics that credit unions do not do.
    We serve our members. We have a defined membership. There 
is no reason for CRA in credit unions at this time. And if you 
look at what credit unions are doing, and if you allow credit 
unions the ability to add underserved, and if you allow us to 
do the risk-based capital lending, and if you allow us to do 
the member business lending extension, we will still not need 
CRA. We will still not be doing the things that banks were 
doing which brought CRA upon them.
    Mr. Miller of California. Mr. Chairman, I think this is a 
good approach you are taking on this. You know, growing up, in 
my youth I watched my parents, retail clerks, use a credit 
    I think they are filling a void out there in the 
marketplace that banks really don't want to get into in many 
cases. I think they are doing a good job. And I think some 
people out there who benefit from the credit unions would have 
no place else to go in many cases.
    I think this is a reasonable approach, and I am glad we are 
taking it. I wholeheartedly support it, and I yield back my 
    Mr. Kanjorski. Thank you very much, Mr. Miller.
    Now the gentleman from California, Mr. Sherman.
    Mr. Sherman. Mr. Chairman, I hope that when we ultimately 
pass legislation--I do hope we pass legislation this year--that 
it will include a look at the credit union capital structure, 
the prompt corrective action structure, and that we more 
closely resemble the risk-based capital standards that the FDIC 
uses. I look forward to working with you on that.
    Our colleague, Mr. Watt, brought up the interesting issue 
of whether credit unions are doing enough to deal with 
underserved areas. I think he is right that we have to be 
careful in crafting legislation, and we may end up crafting 
something more limited than the current regulatory definition 
of what is an underserved area.
    And maybe the Ways and Means Committee did a good job with 
their definition of new markets, but maybe we will do a 
different job here, if they didn't do a good job. But I think 
it is important that credit unions serve underserved areas, and 
that we define underserved areas narrowly enough so that, for 
example, here in Washington, we focus their desire to serve the 
underserved communities to the underserved communities in 
Washington. We wouldn't say, well, open up a facility in Chevy 
Chase and you are doing something to help the underserved 
people of the District.
    But I am often asked to define the Yiddish word 
``chutzpah.'' And I noticed that a group brought litigation 
which effectively prohibited well over half of the credit 
unions, that is to say, those with a single group or community 
charter, from extending credit union services to low-income 
areas and groups not adequately served by traditional financial 
    And then this same group, having used the legal system to 
prevent the majority of credit unions from serving underserved 
areas, has this beautiful ad. I don't know if you--are you 
folks familiar with this? Have you seen this, maybe, once? And 
it attacks credit unions for not serving underserved areas, 
having been prohibited from doing so by the litigation brought 
by the same people who brought you the ad.
    So Mr. Dorety, I wonder if you happen to have seen this 
ad--which I will put into the record without objection--if 
perhaps you could spend a few minutes responding to it.
    Mr. Dorety. Well, it has come to my attention, sir, yes. 
Our folks have shared it with us. And I couldn't agree with you 
more that the information and the questions--it is a series of 
10 questions. And we have responded to those questions, and 
would love to put this in the record, our responses to the 
questions that the bankers put forth in this ad in the last 
couple of days.
    Mr. Kanjorski. Without objection, the ad in its totality 
will be entered into the record, and the 10-question response 
by the credit union will also be entered into the record. 
Without objection, it is so ordered.
    Mr. Sherman. Perhaps you could spend a minute or two 
highlighting some of those answers.
    Mr. Dorety. Well, I don't want to go into all 10 questions 
because it is kind of like a David Letterman Top Ten. The last 
question is the most interesting one. And they go from 10 to 1, 
so it is a David Letterman thing: ``Why should Members of 
Congress cosponsor H.R. 1537 if the credit union industry 
cannot answer these questions?''
    We have answered the questions right here, and so the 
answer to that question is Congress should cosponsor H.R. 1537. 
We can get into specifics of the others. But there are a lot of 
issues in these, Congressman, and I don't know that we can get 
into all of them at this time.
    Mr. Sherman. Ms. Johnson, perhaps you could highlight what 
would be the effect of going to risk-based capital? As I 
understand it, some credit unions would then have to have more 
reserves, some less. But would we do a better job of protecting 
the insurance fund if, instead of a rigid simple system, we had 
a more complex and more sophisticated formula?
    Ms. Johnson. The overall effect is that you would be giving 
the regulator the best tool that we could have in our tool box. 
The risk-based proposal that we have presented will actually 
have a positive impact on the insurance fund because it 
accelerates our ability to deal with those thinly capitalized 
institutions more quickly.
    The current system does force credit unions to all--it is a 
one-size-fits-all. And especially in this economy, and with 
these changing times, and with the different amount of risk 
that credit unions take on, we should be able to measure it 
according to the risk.
    And so I believe it is imperative. I think if you want to 
have these other regulatory relief items, this is the real tool 
that allows us to have this other regulatory relief.
    Mr. Sherman. And it is my understanding--and this, I think, 
differs from banks and thrifts; we all remember the Federal 
Government having to write a check back in the 1980's--that if 
for any reason the insurance fund was inadequate, every credit 
union in the country would then have to contribute up to its 
full net worth to the insurance fund. Is that correct? Or if 
the insurance fund is inadequate, is it the Federal Treasury 
that is on the hook?
    Ms. Johnson. Credit unions contribute 1 percent. We have a 
robust insurance fund.
    Mr. Sherman. Well, but if for some reason--and this would 
be a catastrophe none of us would want to see--the fund was 
inadequate, would it be the taxpayers or the credit unions of 
the country that would be on the hook?
    Ms. Johnson. It is not the taxpayers, Congressman. It is 
the credit unions. You are correct.
    Mr. Sherman. So basically, when we change to a different 
formula, the real parties in interest, the entities that would 
be on the hook if you didn't have adequate capital, would be 
first the insurance fund and then all the other credit unions 
in the country?
    Ms. Johnson. You are correct.
    Mr. Sherman. And it is my understanding that none of these 
credit unions, who would be ultimately on the hook if one of 
their brother/sister organizations or several of them went 
under, that none of them is opposing this change in the prompt 
corrective action statute. Is that correct?
    Ms. Johnson. No. It is being strongly supported, actually.
    Mr. Sherman. So they are putting their capital on the line?
    Ms. Johnson. That is right.
    Mr. Reynolds. Congressman Sherman, I just wanted to add as 
well that the State regulatory system strongly supports risk-
based capital. Risk-based capital is being used for other 
financial institutions, primarily because it is a risk 
management tool for regulators. And so I wanted to add our 
strong support to that issue.
    Mr. Sherman. I thank you for that, and I believe my time 
has expired.
    Mr. Kanjorski. The gentleman from Florida, Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman. And thanks to the 
panel. I think that one of the great things about credit unions 
is that there has not been taxpayer money lost in their long 
years of service, and we are very grateful that is one of the 
things that make you unique.
    You know, I got involved in elected politics for the first 
time in 1990 in the State legislature in Florida, and as 
expected, we had healthy, interesting debates over welfare 
reform and tax policy and education reform.
    But there were very few things as spirited as, say, the 
fights between the commercial bingo parlors and the local VFWs 
over who got what nights for bingo. The only thing more 
energized in debate was the fights over racing dates for dog 
tracks in places like South Florida, if you could get the prime 
tourism season. And inevitably, those debates resulted in 
several members having to stand in between and literally stop 
the outbreak of fisticuffs.
    And turf battles are always interesting. By the way, I 
never had a dog in the dog track day fights, so I just sort of 
sat back and enjoyed the show. And I will tell you, we have my 
colleagues on the committee that are huge advocates for the 
banks, and we have colleagues that are huge advocates for the 
credit unions. I find myself as somewhat of an umpire here.
    But I will tell you that we saw the most recent proposal--
because this is a line drawing problem. I mean, for example, 
the issue of whether credit unions--to what extent they can 
loan money to members for business enterprises. You know, I 
think most of us feel strongly that if it is a $20- or $30- or 
$50,000 startup enterprise that your member wants to be engaged 
in, that is terrific.
    On the other hand, if we are going to get into 
international financing at a high level, that is another end of 
the scale. So it becomes a line drawing problem for a lot of us 
that want to do what is right ultimately for your customers.
    I have to tell you, my friends in the banking industry say 
that there ought to be tax parity between credit unions and 
banks. And I may vote for tax parity one day, I tell them, but 
it would never be to levy a tax on the credit unions. It would 
be to eliminate the tax on banks.
    Because ultimately what I am interested in is access to 
credit, on a rationale basis. Your customers and customers of 
banks and my constituents, we have a credit crisis in America 
right now. I think in some ways Congress is dramatically 
    I am leading the charge to stop the primary foreclosure 
bankruptcy proposal, which I think would marginally increase 
the cost of credit for everybody and reduce the value of every 
American's real estate. So it is sort of the forgotten people 
as we try to do things that look sympathetic that I am 
concerned about, and I appreciate your stand on that.
    But while I am on the subprime and credit--the crisis 
created initially from the subprime effort, Chairman Johnson, 
what percentage of the mortgages that credit unions nationally 
make roughly are held in portfolio, and what percent are 
packaged and sold to investors?
    Ms. Johnson. Credit unions hold the majority of their 
mortgages in-house. They do sell some into the secondary 
market, but they sell to the GSEs.
    Mr. Feeney. Well, it is one of the great things credit 
unions are doing as we have this huge credit crisis because 
they really do fill many niches. And this is just one of them. 
Ben Bernanke testified here just the other day. Securitized 
lenders have gone from putting, annually, $1 trillion into the 
marketplace for borrowers of mortgages, $1 trillion, to $50 
million a year; 95 percent of that market has dried up.
    So credit unions once again are filling a niche and 
stopping what would otherwise be a worse catastrophe in the 
mortgage loan crisis. And as I understand it, credit unions 
make almost no, if any, subprime loans. Is that right, Ms. 
    Ms. Johnson. Credit unions make approximately 2 percent of 
all mortgages throughout the entire country. The percentage of 
subprime is even less than that. I would note there is a 
difference between a subprime loan, which is just to a borrower 
with lesser credit, than some of these exotics and, you know, 
the mortgages that really got people into trouble. And credit 
unions did a fine job, I think, by following our guidance in 
not putting their members into loans that they couldn't afford.
    Mr. Feeney. Right.
    Ms. Johnson. And so it was that one-on-one with the member 
up front.
    Mr. Feeney. Well, and I think community banks do that.
    Ms. Johnson. Correct.
    Mr. Feeney. Often very well. But I should say that one of 
the problems we have had in the subprime mess is that we have a 
total disconnect between the people that purchase the 
scrutinized loans by the thousands on one end, and the people 
that are making loans.
    You all are able to evaluate on an individual basis, and 
therefore are making very rational loans throughout a period 
where there have been, unfortunately, huge numbers of 
irrational loans. And now that crisis has bled over and created 
a credit crisis, not just in other markets in the United States 
but around the world.
    So congratulations for what you are doing. We appreciate 
the fact because to the extent we are hoping for an immediate 
bottom of the real estate market, I think credit unions have 
been a reliable partner in keeping a bad situation from getting 
    With that, I will yield back.
    Mr. Kanjorski. Thank you very much, Mr. Feeney.
    Now the gentleman from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank you and 
Mr. Royce for focusing on this issue. And I want to thank the 
witnesses for helping us out.
    I think there has been definitely a reconfiguration of 
finance in a lot of communities. I think with the mergers of a 
lot of large banks, especially in my area, in the City of 
Boston--we have seen six banks become three banks, and then at 
least the larger ones have really consolidated. There have also 
been, however, I think, a growing number of community banks 
that have tried to fill in that void, as well as--and I am 
blessed with a lot of great credit unions in my district.
    Let me go back to that last question. I had a foreclosure 
prevention workshop in my district a couple of weeks ago, where 
I rented out the cafeteria of a local high school. And to my 
surprise, I had about 400 people show up. And we are getting 
hit pretty hard with foreclosures.
    What can you do--I know you haven't been guilty of 
investing, and you haven't been pulled into the whole subprime 
mess. But for instance, at our event we did have a lot of the 
banks step up and try to do the right thing and to correct the 
situation as best they could.
    What is the credit union community doing with respect to 
reaching out? What are the limitations that you have that 
prevent you from doing more of that? And what could we do to 
help you at least address this problem? It looks like it is 
going to be with us for a while.
    Ms. Johnson. Well, first of all, I would applaud you for 
being proactive and holding your workshop. There is a need out 
there. And that is what we have done. We are doing the same 
thing with the credit unions in encouraging them, especially 
with the up-front counseling.
    I think the most important thing we can do is to ensure 
that the credit unions are educating their members to the terms 
of the loan, understanding what they are getting into, and then 
not putting them into a loan that they can't afford in the 
first place.
    Where we are seeing a little bit of residual damage is they 
may not have gotten their loan, their mortgage, a high risk 
mortgage from the credit union. They may have gotten it 
somewhere else. I think where credit unions have to be 
particularly careful is in this residual damage of their other 
consumer loans.
    And this is where the counseling again and extending that 
hand to their members and working with them to modify. They 
have their car loans, their credit card loans, etc. And so we 
are encouraging that, and credit unions are doing so on a 
member-to-member basis.
    As far as limitations, I don't know--off the top of my 
head, I can't think of a specific instance that is limiting us 
other than just continuing to put--being able to adopt more 
underserved areas so that these individuals that need this help 
then have access to the credit union itself.
    Mr. Dorety. Congressman, I would like to touch on that if I 
    Mr. Lynch. Sure.
    Mr. Dorety. You know, the subprime market has touched all 
of us. I happen to live in Tampa, Florida, on the west coast of 
Florida, and we certainly have been impacted by this. We have 
made no subprime loans. We have made loans to people who you 
might consider to be qualifying for subprime loans, but the 
loans we make are honest, straightforward loans that don't have 
any of the escalation, don't have high interest rates.
    And going forward, we work with all those folks. And we are 
looking at foreclosures. We have been working with them on a 
one-on-one basis. We are telling our other members that if they 
have one of these toxic loans, that they need to come to us and 
talk to us and see if there is something we can do.
    We are still making mortgage loans. Actually, we have a 
huge increase in mortgage loan applications recently because of 
what has been going on through the other financial 
institutions. There are credit unions all over the country who 
are engaged in this type of effort, and they are not making 
those loans that caused the problems to start with.
    So I think as a community, credit unions are certainly 
willing, and are, in fact, stepping up to the plate to help try 
and get us out of this mess that so many folks are in.
    Mr. Lynch. Thanks.
    Yes, sir?
    Mr. Lussier. Congressman, I have a comment as well. In 
Massachusetts, as you know, we have been hit with the economy 
as well. One of the things that I think we just recently got 
into, and I take my hat off to the State of Massachusetts for 
doing this, they came up with some type of special grant funds 
and so on and so forth--I think it was the Mass Housing 
recently, of which we were one of the first ones in there to 
see what we could do to try to take some of those funds to put 
it back to the community to assist the people to get them out 
of some of these subprime mortgage instruments.
    It is extremely expensive for them to--expensive for people 
to even get out of them, if at all possible to get out. I think 
the State of Massachusetts has come to the forefront to try to 
help and assist--to help them do that as well.
    So we worked with Mass Housing. That was one of the items 
we have done.
    Mr. Lynch. Mass Housing Finance Agency?
    Mr. Lussier. I believe that is right.
    Mr. Lynch. MHFA? Yes.
    Mr. Lussier. I believe that is where it is. Yes. Actually, 
my vice president of real estate lending was just going through 
that with me before I left the other day, so I had the bare 
    But it was a great program that he was trying to get 
through our board meeting this month to get involved with the 
Mass Housing Finance Agency to help and assist in that area, as 
well as the financial literacy and counseling that we actually 
try to do and put out in the forefront by having some of my 
senior executives get together if someone does have an issue 
with one of those loans, which I know that we had three people 
in our office this week that were wondering what they could do 
to get out of it. We brought them in personally to discuss the 
issues, to show them where they were, and try to assist them to 
see what we could do to try to help them get out of that 
    Mr. Lynch. Great. Thank you, Mr. Chairman. I see my time is 
expired. I yield back.
    Mr. Kanjorski. Thank you very much, Mr. Lynch.
    And now the newest member of the committee from the great 
State of Nevada, Mr. Heller.
    Mr. Heller. Thank you very much, Mr. Chairman. I certainly 
do appreciate your hard work on this particular piece of 
legislation. I appreciate the opportunity for the first time to 
be able to approach the rest of the committee.
    I apologize I was not here for your opening comments, and 
for that reason I may be asking questions or making comments 
that have been repeated before. But I will try anyway. I have a 
limited knowledge of the background and perhaps the scope of 
what your industry does as it is concerned with credit unions.
    I guess my question is: I am confused as to what now is the 
scope of a credit union. I live in northern Nevada. I would 
love to have you tour my 110,000 square miles we call a 
district, but I will tell you, you guys play an important role 
in some of the smaller communities that we have in that State.
    The inability to get financial institutions to come in, but 
when we talk to the larger communities, the scope seems to 
change pretty dramatically. And it is my understanding that 
history has told us that the purpose of a credit union was to 
fill a unique niche.
    And I am wondering if that is getting too broad now. That 
is the complaint that I am hearing from the other side, that 
perhaps you are trying to become more and more like other 
financial institutions, with certain advantages. For example, 
you want to maintain your tax-exempt status, but you don't want 
to comply with CRA. You want to change your capital 
requirements in this particular piece of legislation, but you 
want fewer regulatory burdens.
    And the argument is--and again, I haven't taken sides on 
this particular issue--but what it appears to me is you want 
the benefits but you don't want to take the risks. How do I 
respond to that when those questions are asked and I have to 
answer them?
    Mr. Dorety. Congressman, we happen to be one of those 
credit unions you are talking about. We are a $6 billion credit 
union located in Tampa, Florida. We started in 1937 as a small 
teachers' credit union in Hillsborough County. Our board of 
directors are volunteers. We are a not-for-profit cooperative. 
That is the reason we were granted a credit union charter, and 
that is the reason we have been given a tax exemption.
    If you come into our board meeting today, we are exactly 
the same as we were then. Our structure has not changed. And 
the structure is what has enabled us to have that status. It 
never started as saying a limited field of membership. It never 
started as trying to--there is no size restrictions on this. 
The fact of the matter is, if you are doing a good job with 
your members and you are providing good services and products 
to them, you are going to be successful, and guess what, you 
are going to grow.
    Growth is important to financial institutions. Look at the 
rash of mergers. We are a $6 billion--we are the largest 
financial institution headquartered on the west coast of 
Florida. Every bank is out of Charlotte, out of Birmingham, or 
out of Atlanta.
    And the fact that we have been successful and grown has not 
changed the basic structure of who we are or what we do. Our 
entire focus is on our member owners, as opposed to investors. 
And that is the difference, and that is why we deserve the tax 
    Mr. Heller. I come from a State--Nevada is in particular 
probably the largest foreclosure State right now, especially in 
the southern end of the State. Just to give you an example, I 
believe our foreclosure rate is 3 times higher than the 
national average; 1 in every 154 homes right now are being 
impacted, whereas I think the national average is about 1 in 
555. So you can understand my concern over this.
    I just want to make sure that this piece of legislation 
doesn't put credit union members at risk, more at risk than 
they were before. And can you explain to me why I shouldn't be 
concerned that these capital requirement changes won't put your 
members more at risk?
    Mr. Dorety. I will be happy to. I don't want to try to one-
up you, but I am in the west coast of Florida. So we have just 
as many issues as you do. Actually, Fort Myers is ranked the 
worst in foreclosures, and we have a significant presence 
    Mr. Heller. You win.
    Mr. Dorety. So I think the new regulations will only help. 
I think two things. One is we have strong regulatory backing, 
and they are going to be able to look at credit unions. As 
Chairman Johnson has explained, they are going to have more 
tools to help develop and estimate risk in credit unions.
    And that is the key. Credit unions are going to be able to 
have the ability to measure risk when we make loans, more so 
than we do today. Today it is a one-size-fits-all. An unsecured 
credit card loan, we have to risk. The assessment is exactly 
the same as an investment in a government-backed security.
    That just doesn't make any sense. And so when you enable us 
to do these types of things that we will be able to do under 
the new prompt corrective action guidelines that are in this 
law, we will be better served. Our members will be better 
served, and we will have no greater risk than we have today.
    Our regulators--we will be on the exact same footing, well, 
not the exact same. We will actually have higher regulatory 
restrictions than other financial institutions do, even after 
this is imposed.
    But credit unions have high capital levels today. We have 
never contributed. We have never had a bailout, as other 
financial institutions have done. We have always been a safe 
institution, and this particular bill will do nothing to change 
    Mr. Heller. Mr. Chairman, I yield back. I went a little bit 
over my time. Please don't hold it against me in the future.
    Mr. Kanjorski. No. We welcome contributions from Nevada.
    Mr. Heller. Thank you.
    Mr. Kanjorski. The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Yes. Thank you, Mr. Chairman. It has been a very 
informative hearing.
    And I want to talk--first of all, what you are after is--we 
are dealing with two bills here, number one. And I want to get 
your response to find out if you are--which direction you think 
we ought to go on these two bills, and do either or both of 
them meet your primary obligations, your primary objectives? 
Ms. Johnson?
    Ms. Johnson. Congressman, the CURIA bill does contain the 
element of the risk-based capital. And that has has been 
dropped from the CURIA bill. And for me, that is the priority. 
I would like to see the risk-based capital put into the CURIA 
bill, or vice versa. That is vitally important.
    The underserved, extending the opportunity for all credit 
unions to adopt underserved areas, is vitally important. If I 
were to list two items, however it is combined, those would be 
my priorities.
    Mr. Scott. All right. Now, let me just get it kind of 
focused here. Let's talk about one of the areas that I think is 
certainly helpful, and that is, you want to raise the limits on 
how much business lending you can do. And I think you stated in 
your testimony that credit union members' business lending cap 
is currently the lesser of 12.25 percent of total assets or 
1.75 times the net worth.
    How does this cap compare with other financial 
institutions, and how do credit union members' business loans 
compare or differ from the business loans made by these other 
    Ms. Johnson. I believe the current cap that is in place for 
the thrifts is 20 percent, and there has been legislation 
proposed that would take the cap off completely. When credit 
unions were first formed, there was no cap on business lending. 
It is only as recent as 1998 that there has been any cap in 
effect at all.
    About 25 percent of the credit unions currently make 
business loans, and the average is only $190,000. So it about--
I mean, it is important for those small business in these 
communities to be able to offer these--have access to credit. 
It will help these communities. And it is a valuable system for 
the members.
    Mr. Reynolds. Congressman Scott, also--
    Mr. Scott. Yes, Mr. Reynolds? And welcome up here from 
    Mr. Reynolds. Well, thank you, sir.
    Mr. Scott. Glad to have you.
    Mr. Reynolds. Thank you, and we appreciate your 
hospitality. From the State perspective, the other point I 
would like to make is that in credit unions, member business 
lending is looked at very carefully in the examination process. 
We don't have member business lending being made in every 
credit union that we go into.
    So we are very diligent. When we go in and do an 
examination in a credit union, we look very carefully at any 
credit union that is making member business loans. We are very 
careful to review the underwriting, the written policies and 
procedures, and the ability of management to properly manage 
that function. So it is looked at probably more in depth in a 
credit union than it would be in another financial institution.
    Mr. Scott. All right. Let me ask you about prompt 
corrective action, Ms. Johnson. Credit unions are by nature 
risk-averse, and by law, they lack access to capital markets. 
It is my understanding that the current prompt corrective 
action rules induce credit unions to maintain capital levels 
higher than those necessary to protect the share insurance 
    Can you explain why credit unions are forced to maintain 
excessive net worth requirements, and how credit union members 
would benefit from modifying these requirements as they are 
proposed in CURIA?
    Ms. Johnson. Well, the current requirements in place are by 
statute. We don't have the ability, as the other regulators--
    Mr. Scott. I see.
    Ms. Johnson. --through regulation. So that is by statute, 
and that is what we are asking to be changed.
    And the second--oh, credit unions are incredibly well 
capitalized, and they are averse to--you know, they are not 
risky institutions. And they have raised, through retained 
earnings, their capital levels. They are in excess of this 
required 7 percent. The current average capital is about 11.4 
percent. So it demonstrates that credit unions are managing 
    Mr. Scott. All right. My time is about up. But let me get 
to this question. The three points, of course, you want a more 
flexible risk-based standard that would be determined and 
regulated by the regulators. You want to raise the limits on 
how much business lending credit unions can do to business. And 
you want to get into the underserved areas. Those are the three 
things I think you are basically asking.
    So the question presents itself to me: How do you respond 
to the banking community's interest that if we do these three 
things for you, that some kind of way this is going to give you 
an unfair competitive advantage? That seems to me as what we 
have to answer.
    Are there legitimate concerns--do they have a point to make 
here? Are you getting an unfair advantage over the banks by 
getting into this?
    Ms. Johnson. I imagine my colleagues would like to jump in 
on this. But I will tell you from a regulator standpoint that 
this is not an unfair advantage in that credit unions are still 
held to higher regulatory requirements than other institutions. 
They are limited in investments. They are limited by field of 
membership. You don't--I mean, there is--this isn't a tradeoff. 
This is just giving the credit unions the tools they need to 
serve their members.
    Mr. Dorety. Credit unions--excuse me.
    Mr. Scott. Yes, sir. Please.
    Mr. Dorety. Credit unions, to say we have an unfair 
advantage is--it is an illusion. We are subject to different 
regulatory restrictions at times. We have a totally different 
structure. You know, banks have the opportunity, if they care 
to, to change to a credit union charter.
    We are a not-for-profit. We send everything back to our 
members, and if there is an unfair advantage, it is in that 
structure because we have one audience, our membership. We do 
not have to pay outside investors. That is our choice of 
charter. Banks' choice of charter is a different choice, so 
they are established differently and they have different 
economic factors that they are dealing with.
    It is simply the choice of charter, and it allows us in 
some situations--actually, in many situations--to offer far 
better products and services to our members for that one very 
fact: We are a not-for-profit cooperative.
    Mr. Scott. Yes, Mr. Lussier?
    Mr. Lussier. Yes. I just want to say that I want to make 
sure that we remind each other that we only represent 1.1 
percent of the market share out there. And I would just like to 
say that if banks think that it is that unfair, that they can 
convert to credit unions if they so wish as well.
    Mr. Scott. All right. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Scott.
    The gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman. Let me continue on 
that same line.
    Is it true that there are 123 credit unions with more than 
a billion dollars in assets, which would mean that they are 
larger than 82 percent of the banks?
    Mr. Dorety. It is true, I believe. I am pretty certain that 
is the case that there are 123 credit unions that have a 
billion dollars in assets. All of the assets of the credit 
unions combined do not equal either of the three largest banks 
in the country. So we ought to put that in perspective as well. 
But yes.
    Mr. Cleaver. Generally, those who talk with us are the 
smaller banks, who come in to talk with us, quite frequently, I 
might add. And the issues, of course--I mean, I understand the 
two different charters and the way the Federal Government is 
allowing the two to exist.
    But it would seem to me that if credit unions are 
disinterested in doing CRA, it seems to me that you have to be 
careful about how you say you are not wanting to do it just 
because I think the way you say you are not wanting--the way 
you make that statement can send the wrong signals. And Mr. 
Watt was dealing with that a little before he left. And so that 
does trouble me.
    But in the urban core all over this country, and I am not 
that sure about rural areas, but in the urban care--and I 
represent a district that is very urban--we have a potpourri of 
payday loan operations and ``Jenny's Come Cash Your Check 
Quick'' companies.
    And it would seem to me that one of the things that maybe 
credit unions could do is develop a new product that would 
allow--that would cause the people in those underserved areas 
to have a service that is desperately needed.
    One of the reasons--I used to have an NPR radio show that I 
did live, and I did a show on these check cashing places. And 
it was a live show. I had a whole group of people who showed up 
in the poor parts of Kansas City, Missouri, angry with me 
because they said they needed those check cashing places. They 
said, there are no banks around. You know, we need a place to 
cash our checks. We need a place where we can get small loans.
    And so, you know, with everyone--with the mantra from banks 
and credit unions, we want no regulations, you know, just 
leave--the market will take care of everything. Well, the 
market is not taking care of everything, and the truth is that 
you could develop products that would help, that would really 
help the community. I mean, those people are getting ripped off 
whether they like it or want to or not. They are getting ripped 
off because there are no institutions around to handle their 
    So it seems to me that that ought to be one of the things 
that credit unions would consider. I mean, that is CRA without 
anybody having to ask you to do it. Chairman Johnson?
    Ms. Johnson. Congressman, I would like to respond. 
Congressman Kanjorski's bill does have a provision in it that 
would allow credit unions to offer check cashing services to 
non-members within their field of membership, which is a good 
way of getting individuals into these traditional institutions.
    One other thing is that federally chartered credit unions 
have a usury ceiling of 18 percent. And so that is a helpful 
limitation in this sense to these consumers of not being 
charged with these exorbitant fees.
    Mr. Cleaver. Yes. Mr. Watt talked about--
    Ms. Johnson. Oh, I meant payday lending rather than check 
cashing. Excuse me.
    Mr. Cleaver. That is fine. They are the same, as far as I 
am concerned.
    The neighborhood language that Mr. Watt actually--the word 
neighborhood is in the CRA legislation. And he mentioned 
neighborhood for yours. It is not, but it is in the CRA for 
banks, that they serve neighborhoods. We don't have 
neighborhood banks any more.
    And even if credit unions--I mean, I belong to two credit 
unions. I am not anti-credit union; I belong to two. The 
problem is, the credit unions are not located where people need 
the service. That is the problem.
    Mr. Dorety. Congressman, we have--actually, Congressman 
Scott earlier said something about the most important group in 
this discussion is not in this room; it is the consumers. We 
are owned by these consumers. Our credit union has a branch in 
an underserved area in East Tampa. There are four payday loan 
shops; you can walk out the front of our door and look at the 
four payday loan shops.
    There are no banks in that community. We opened that branch 
2 years ago to serve the people that you are talking about. 
Credit unions nationally have a program called Real Solutions 
which addresses payday loans, check cashing, and a number of 
products and services, exactly the type of thing that you are 
talking about.
    Mr. Cleaver. There are two things.
    Mr. Dorety. We do CRA. We just aren't required--we aren't 
forced to do CRA. Credit unions are already handling those 
    Mr. Cleaver. Two things. One, your services would be made 
available, I guess, based on the charter only to members. Is 
that right?
    Mr. Dorety. My understanding under this bill is that payday 
loans would be available to folks living--eligible for 
membership in the community who are not members. But yes, today 
we are.
    Mr. Cleaver. No. Say that again, if you would, Mr. Dorety?
    Mr. Dorety. Under the new bill, payday loans--the provision 
in the new bill allows credit unions to make payday loans to 
residents who are in an area that they would be eligible for 
membership but they are not members. I believe that is correct.
    Mr. Cleaver. Eligible? They would be eligible?
    Mr. Dorety. Would be eligible. Right. Therefore, the more 
underserved communities we were able to have, the more folks 
would be eligible for those payday loans.
    Mr. Cleaver. Final question: If we have one in Tampa and we 
have 50 States, 300 million people, I mean--
    Mr. Dorety. We have one in St. Petersburg, too, sir.
    Mr. Cleaver. Okay. We have two.
    Mr. Dorety. But the fact of the matter is, I said the 
national program that credit unions are undergoing right now, 
we are very active in very underserved communities and we want 
to do more. So it is--
    Mr. Cleaver. I want you to do more. The question is, you 
know, will you do more? I mean, the legislation, I think, is 
good. But will you do more? I mean--
    Mr. Dorety. Yes.
    Mr. Cleaver. --people are not standing in line trying to go 
in to serve these people. Now, the payday loan folks are making 
money or they wouldn't be there.
    Mr. Dorety. Absolutely.
    Mr. Cleaver. And so, I mean, which would suggest that you 
can make money as well.
    Mr. Lussier. Congressman, that is why passage of H.R. 5519 
is a great start and beginning to what we need to get that job 
done. Credit unions would be out there trying to do it if they 
were permitted to do so.
    Mr. Cleaver. So you wouldn't mind a provision in this 
legislation that would give you a certain time in which you 
would have a certain number of these facilities located in 
underserved areas? I mean, some kind of provision that would 
give us some comfort in going to our districts and saying, you 
know, we just passed one or two of these bills and that help is 
on the way.
    Mr. Dorety. Our regulator already requires us to put a 
branch in that community within 2 years of getting our charter. 
So they have the ability--they already are doing that, and they 
would have the ability going forward to require us to put a 
branch, a full service branch, in that community.
    Mr. Cleaver. So you want me to support Mr.--I always mess 
it up but--
    Mr. Lussier. Yes, sir. We do.
    Mr. Cleaver. Yes. And then I will be happy at home, telling 
people that you are coming?
    Mr. Lussier. Yes, sir.
    Mr. Cleaver. And the payday loan people will be angry and 
start fleeing? Thank you. Thank you, Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Cleaver.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses, and to place their responses in the record. This 
panel is now dismissed, and I would like to welcome our second 
    I am pleased to welcome our second distinguished panel. 
First we have Mr. R. Michael Stewart Menzies, Sr., president 
and chief executive officer of Eastern Bank and Trust Company, 
testifying on behalf of the Independent Community Bankers 
Association. Mr. Menzies?


    Mr. Menzies. Mr. Chairman, thank you so much. It's an honor 
to be here in front of you again. My name is Mike Menzies and I 
am the president and CEO of Easton Bank and Trust in the little 
town of Easton, Maryland, on the Eastern shore of Maryland. 
We're a $140 million community bank, 14 years old. And it's 
also my honor to represent the Independent Community Bankers of 
America as the chairman-elect of that trade association of 
5,000 community banks.
    We do appreciate the invitation to come before this group. 
And as you would expect, we do strongly oppose this bill, H.R. 
1537. Congress should not expand credit union powers without 
addressing first the tax advantage of credit unions and their 
inability or lack of willingness to comply with the Community 
Reinvestment Act.
    I want to make clear that community bankers strongly 
support local, not-for-profit organizations. I'm the chairman 
of our local hospice. I have been the chairman of our United 
Way in Talbot County. Over my 38 years of experience in 
banking, I have always been involved with local charities. And 
community bankers throughout the Nation are also fully invested 
in the charities in their communities. But I believe CURIA is a 
misnamed, aggressive measure disguised as regulatory relief 
that would give credit unions expanded business lending powers 
and actually weaken their capital standards. It would increase 
the already unfair competition that credit unions currently 
pose to community banks.
    A Congressional Research Service report notes, if I may 
quote, ``Over the past 30 years, most of the distinctions 
between credit unions and other depository institutions have 
been eliminated or reduced because of deregulation. 
Consequently, the justification for the tax exemption for 
credit unions has been increasingly questioned.''
    Credit unions are seeking to expand farther into the core 
business of community banking, small business lending, and I 
can assure you, community banks are not afraid of competition. 
We have no shortage of competition when it comes to small 
business lending. We compete with large banks and finance 
companies and automobile dealerships, but all of those 
competitors pay taxes.
    Credit union representatives often claim that they 
represent such a small percentage of the industry, and we heard 
that again this morning. While the banking assets total about 
$12.7 trillion in assets, and our 5,000 members represent 
roughly $982 billion, the credit union industry has grown to a 
$753 billion industry. And as you heard this morning, over 19 
million members, and over 8,000 credit unions in this country 
today. We recognize that you, sir, have introduced H.R. 5519. 
And while we haven't totally analyzed that bill, we recognize 
it is a narrower bill. That's good.
    Clearly, credit unions want to expand their charter because 
they feel inadequate in serving the needs of their community 
and their customers. For credit unions that truly believe they 
need to expand their powers, there's a wonderful solution 
that's out there--convert to a mutual thrift. It's a wonderful 
solution, because it allows credit unions to go into a business 
structure where they can expand their services dramatically. 
Unfortunately, NCOA is constantly putting up roadblocks to keep 
credit unions from moving into that mutual thrift structure.
    So why should credit unions have to go to a new charter 
rather than just expand their current powers? The answer is 
really simple. Congress provided credit unions with a 
substantial tax advantage over community banks and does not 
require compliance with the Community Reinvestment Act. 
Congress put this basic tradeoff in decades ago. Limiting 
activities, providing credit to individuals of modest means, 
but valuable tax and regulatory benefits.
    In 2005, the Tax Foundation calculated the credit union tax 
subsidy is worth about $2 billion a year and growing. On the 
average, credit unions found little or no effect on deposit 
rates or other costs, so the average member benefit is very 
little. But these are averages. Credit unions can use their 
subsidies selectively to secure business if they want. One of 
my customers, a retired airline pilot, very attractive 7-figure 
net worth, and a very attractive high-6-figure income, applied 
to me a year ago for an aircraft loan. I gave that individual, 
who has most of his deposits with us, not with his credit 
union, what I considered to be an extremely competitive rate, 
and the credit union quoted that loan on much more aggressive 
rates to buy a $700,000 airplane at probably a 20 percent 
discount to our pricing.
    Several studies have shown repeatedly that credit unions 
have strayed far beyond their mission to serve individuals of 
modest means. Credit unions involved in last year's Florida 
real estate investment scheme, dubbed ``Millionaire 
University,'' illustrates just how far credit unions have 
strayed. This scheme, a number of credit unions invested in a 
speculative land development deal far outside of their 
marketplace, far outside of the needs of their members, and 
lost hundreds of millions of dollars, causing the insurance 
fund one of the greatest losses in the history of the insurance 
    For these reasons, sir, we urge Congress to reject calls to 
expand their powers. And instead, we hope that you consider 
true regulatory relief for all financial institutions.
    Thank you, sir.
    [The prepared statement of Mr. Menzies can be found on page 
115 of the appendix.]
    Mr. Kanjorski. Thank you Mr. Menzies. Next we will hear 
from Mr. Bradley E. Rock, chairman, president, and chief 
executive officer of the Bank of Smithtown, testifying on 
behalf of the American Bankers Association.

                   BANKERS ASSOCIATION (ABA)

    Mr. Rock. Thank you, Mr. Chairman. We appreciate the 
opportunity to comment on expanding the powers of credit 
unions. These issues are sometimes filled with emotion on both 
sides. The banking industry is sometimes portrayed as attacking 
the entire credit union industry. Let me assure you, Mr. 
Chairman, this is not our goal.
    Most of the credit union industry today continues to focus 
on their mandated mission to serve people of small means. I 
would suppose that most of the credit unions that have been 
present in this room today are these mission-focused credit 
unions. These institutions are an important part of our 
financial system. Our issue is not with credit unions that are 
meeting the needs of people of modest means, but rather with 
the new breed of credit unions that want to grow aggressively, 
serve high-income individuals and large businesses, and take 
over small credit unions to expand their charter. These new 
breed credit unions are the biggest threat to traditional 
credit unions, as they are fundamentally changing the nature of 
the business, shunning their core mission to serve those people 
with limited options for financial services.
    It is important to look beyond the rhetoric to the reality 
of today's credit union landscape. For example, the reality is 
that over 2,000 credit unions have been absorbed by these new 
breed credit unions since 2001. Today there are more than 123 
credit unions with over $1 billion in assets, which makes them 
larger than 92 percent of the tax paying banks in this country. 
Near where I live, Bethpage Federal Credit Union, with more 
than $3 billion in assets, is nearly 3 times the size of my 
bank, and 5 times larger than the typical community bank on 
Long Island. And from their advertising, I can tell you that 
Bethpage is very much focused on serving wealthy individuals.
    During this hearing, we have heard about the need for 
broader authority to serve underserved areas. The reality is 
that there is no requirement today that credit unions 
demonstrate that they are meeting the needs of low-income 
individuals. NCUA's approval of so-called underserved areas 
does nothing to assure such a requirement. NCUA has declared 
entire cities to be underserved and allowed credit unions to 
open branches in high-income areas with no requirement, none at 
all, that they actually serve low-income neighborhoods. For 
example, all of Washington, D.C., has been declared 
underserved. Under proposals from NCUA and credit union groups, 
every credit union would be eligible to come into Washington, 
put a branch in wealthy Georgetown, and not make a single loan 
to a low-income person.
    During this hearing, we have also heard about the need to 
serve small businesses. But the reality is that the new breed 
credit unions are hitting the congressionally mandated limits 
on business lending because they are making very large loans to 
real estate developers and others, including those businesses 
out of their market area.
    For example, consider a $30 million luxury condo loan, 
which is currently in default, made by Eastern Financial Credit 
Union, or the loan for a luxury golf and condominium resort by 
Twin City Co-op's Federal Credit Union. Or the construction 
loans by Texans Credit Union that average $10 million each. Or 
the millions of dollars in loans involving a land deal in 
Florida that caused the recent failures of credit unions in 
Colorado and Michigan. Are these loans that the credit union 
tax exemption was intended for? How many loans to low-income 
people could have been made instead?
    Expanding business lending powers and easing credit union 
capital rules will only move the new breed of credit unions 
further away from their mandated mission, and encourage them to 
bulk up by acquiring small ones at an even faster pace. 
Fortunately, for those expansion-minded credit unions, there is 
a very viable option for them today--switching to a mutual 
savings bank charter. This charter, which some credit unions 
have already adopted, provides greater flexibility while still 
preserving the mutual member focus that credit unions find 
    Mr. Chairman, there remains an important role for 
traditional credit unions that serve people of modest means. 
But we see no reason for Congress to give authority to expand 
business lending that will only encourage a further departure 
from this mission.
    Thank you very much.
    [The prepared statement of Mr. Rock can be found on page 
130 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Rock. And I thank 
the entire panel for waiting this long. Let me make first and 
foremost a congratulatory note to the community banks and to 
the average banks in America, and let it be noted for the 
record that our present situation of subprime loan failures is 
less attributable to the regulated national and State banks in 
this country, and more attributable to unregulated institutions 
in this country. And if we had had more of the formal regulated 
community banks or regular banks, although you are both regular 
banks, we probably would be in less difficulty than we are 
today in the credit markets. So you are fulfilling a good 
function and I want to make sure this committee recognizes that 
    Now, with that being said, I think there is probably a 
fundamental disagreement philosophically between the chair of 
this committee and yourselves. And we could sit here for hours, 
and I would probably enjoy it, but I doubt whether we would 
convince each other of our mutual positions as being correct.
    Although, I want you to know that prior to my arrival here 
in Congress and my service on this committee, I actually served 
as a board member of a small bank in Pennsylvania, and I think 
I served for about 10 years as a director in that bank. So I 
understand some of the problems that small banks have, 
certainly their competitive positions that they have. And I 
empathize, let it be said, with the banking community.
    On the other hand, I was not preconceived to sympathize 
with the credit unions prior to my arrival in Congress. I had 
never been a member of a credit union and I knew little about 
what they did. I actually got here in an interesting way. I 
represented as an attorney the cooperatives, food cooperatives. 
And I will not say I fell in love with, but I became enamored 
with, the process of cooperatives and saw how they could be 
utilized to work to the benefit of people. And when I came to 
Congress and then studied the credit union movement, I became 
very appreciative of the fact that a cooperative effort in 
banking, removing some of the activities of competition and 
profiteering or profiting from commercial endeavors, actually 
worked to the benefit of people. I do not know how we would 
ever agree that all organizations in the country should be for-
profit and for nothing else. I think we have a huge number of 
institutions that border on that cooperative area that perform 
great functions. Some abuse their positions. I will concede 
that. That is not a question. But I can tell you quite frankly, 
some banks abuse their positions. If we wanted to sit here and 
go back and forth, I do not know who would win that challenge, 
but some of my best friends, as they say, are now residents of 
Allenwood who used to be in banking institutions. May I just 
leave it at that--be a little humorous, but that happens. That 
is the--
    Mr. Rock. None of our members, I hope, Mr. Chairman.
    Mr. Kanjorski. No what?
    Mr. Rock. None of our members, I hope.
    Mr. Kanjorski. Well, I would imagine they at one time or 
another were your members. They are not anymore. But those are 
the foibles of human beings. To look at those excesses or 
extremes that caused those results, and then attribute it to 
the whole I think is somewhat of a mistake.
    What I do not understand, honestly, is we worked very hard 
on putting a new financial structure here in place, a risk 
management tool. And being good businessmen, both you and your 
institutions; your associations being made up of good 
businessmen, why wouldn't you for the protection of the credit 
union members and for that aspect of the financial service 
industry and the country, why would you not be more in favor or 
in favor of a risk management capital system as opposed to what 
it is today, which does not really meet the needs and protect 
it against some of the abuses that you are actually asking? You 
heard the regulators say here, you would afford the opportunity 
for better Federal regulation, for better protection for the 
members, for better protection for society, if we put in place 
a risk management capital system that was not thought up by the 
credit unions, was not thought up by their association, was not 
thought up by the Congress, but actually was developed by the 
regulator. How can you argue against that sort of meritorious 
    Go to it. Tear me apart, gentlemen.
    Mr. Menzies. Go ahead.
    Mr. Rock. Mr. Chairman, credit unions by the nature of 
their structure do not have all of the same means available to 
them for raising capital that banks have available. Credit 
unions' only means of raising capital is through retained 
earnings. And history has shown that in times of stress when 
banks or credit unions are losing money, they do not have the 
ability to build capital through retained earnings. Therefore, 
it has always been thought, because that's their only method of 
raising capital, it has always been thought that credit unions 
therefore need to have higher capital requirements than banks 
do, because banks have other alternatives during those hard 
    The second reason--
    Mr. Kanjorski. Okay. But now let me call you on that. This 
risk system that is proposed by the regulators is 1 percent 
higher than what is required of banks.
    Mr. Rock. No. I believe it's a quarter--
    Mr. Kanjorski. It is 6 percent--
    Mr. Rock. --a quarter of a percent. Five versus five-and-a 
quarter is what they're proposing. A quarter of the percent.
    Mr. Kanjorski. No, I think it's 6 percent.
    Mr. Rock. No. It's 7 now. It's 7 now, Mr. Chairman.
    Mr. Kanjorski. And would go down to 6?
    Mr. Rock. Would go down to--no. Would go down to five-and-
a-quarter is what they're proposing.
    Mr. Kanjorski. I thought I heard 6 in testimony, but I will 
trust you. Still, it is higher than what is required of banks.
    Mr. Rock. Well, by a quarter of a point. And I think the 
question would be, is that sufficient to protect the 
depositors? And historically, the answer has been no.
    Mr. Kanjorski. Well--
    Mr. Rock. Because when you're losing money, you can't build 
retained earnings. There are no retained earnings.
    Mr. Kanjorski. Look, when banks fail, they go to the 
insurance fund. When the insurance fund does not have enough 
money, they go to the taxpayers. We all know that, and I do not 
think there is anything wrong with that.
    Mr. Rock. Well, that has never happened, though, Mr. 
Chairman. It's theoretical.
    Mr. Kanjorski. I know. But we have supported that. Never 
happened, but that is the trail. But if the insurance fund for 
the credit unions fails, they go to the rest of the credit 
unions throughout the country. It does not come to the 
taxpayers. So they have to have an awful lot of faith in the 
performance of these various credit unions to risk all of their 
capital. I mean, it is really quite a brotherhood; 90,000 
people linking together to provide security for their needs 
within their financial services.
    Mr. Rock. I would say two things to that, Mr. Chairman. 
First of all, it presumes that bank capital doesn't stand 
behind those obligations, and I think that's an incorrect 
    Mr. Kanjorski. What bank--
    Mr. Rock. It has never happened. The collective bank 
capital. Yes, you look first to the insurance fund. Then you 
would look to the bank capital, just as you're hypothesizing 
for credit unions, and only then would you look to the Federal 
Government, which by the way, there is no requirement that the 
Federal Government stand behind. That's the whole too-big-to-
fail argument.
    Mr. Kanjorski. And maybe you could help me out. Your 
position is that under present banking laws, if there were a 
failure of banks in the country, and the Federal insurance fund 
fails, they then draw on all of the other remaining banks?
    Mr. Rock. I'm saying that both of your hypotheticals are 
purely hypothetical. It has never happened for credit unions, 
and it has never happened for banks. It's not a matter of law.
    Mr. Kanjorski. Well, you know, I agree they may be 
hypothetical, but I would have to be honest with you and say we 
may get to test that system shortly. According to Mr. Bernanke 
the other day, he thought that there would be about 100 bank 
failures. Now we hope that they are not very large banks, but, 
you know--
    Mr. Rock. And there is a $50 billion fund standing there 
financed through--not through--
    Mr. Kanjorski. But there is some fear that it may be a too-
large-to-fail bank that is involved, which would be incredibly 
    Mr. Rock. And that would be unfortunate.
    Mr. Kanjorski. Very unfortunate.
    Mr. Menzies. Mr. Chairman, if I could pipe in a little bit.
    Mr. Kanjorski. Yes.
    Mr. Menzies. I think the great challenge that you, sir, and 
this committee face is understanding what types of risk you'd 
really want to take with this structure called credit unions. 
We had the great honor of having breakfast with Mr. Bernanke 
this week in Florida and with Chairman Sheila Bair, and with 
OTS Director Reich, and it's pretty obvious that we're going 
through one of the most difficult economies in our history. 
We're talking about the housing stock falling in value from 
$600 billion to $1 trillion. We're talking about subprime 
losses that are hard to measure, that are estimated by some to 
equal a couple of trillion dollars. These numbers are 
unbelievable. And then the question is, do you take an industry 
whose mission is to serve the underserved--to serve the 
underserved--and do you give them powers that let them convert 
Washington, D.C., and Houston, Texas, into their marketplaces? 
You can go into small business lending.
    Mr. Kanjorski. Okay. Let us stop right there.
    Mr. Menzies. Okay.
    Mr. Kanjorski. I am the author of these two bills--
    Mr. Menzies. Yes, sir.
    Mr. Kanjorski. --with Mr. Royce. They do not use the 
definition of underserved that presently is interpreted by the 
regulator. The definition of underserved is greatly restricted 
from what its present definition is to shadow and be consistent 
with the New Markets Initiative definition.
    And to my knowledge--I will not say that there isn't a 
community in America that is not in total included in the New 
Markets Initiative, a census tract method of being underserved, 
but I highly doubt it. I certainly have a congressional 
district that is in the lower third economically in the 
country, and there is no community in my district that in 
totality qualifies as an underserved community. So when Mr. 
Watts proposed that possibility of Houston and Washington, I 
think that is not the facts. And we are going to check into the 
facts, okay?
    Mr. Menzies. If in fact it's driven by economics, then, 
frankly, I would say that makes sense. If the underserved 
member is eligible because of their economic condition, not 
where they live, then that may well make sense if they have a 
net worth under some number, $100,000. If they have an income 
under some number, that makes a great deal of sense. But if 
it's geographic and Wal-Mart wants to put a store in one of 
these areas that's defined geographically as eligible, then 
should Wal-Mart be able to go borrow from a credit union or 
Home Depot or Lowes or somebody else?
    Mr. Rock. Mr. Chairman, I would make two points. One, and I 
think this was part of the point Mr. Watt was trying to make 
before, that would--I agree with what you have said, but that 
would presume that the Cities of Houston, Tucson, Philadelphia, 
etc., that have already been approved by NCUA, the entire city 
as an underserved area, that those don't get grandfathered in.
    Mr. Kanjorski. This Act is only allowing underserved areas 
to be served by credit unions in accordance with the definition 
here. It would be actually restricting what credit unions could 
    Mr. Rock. Okay. Including the 641 previous approvals. Is 
that what you're saying?
    Mr. Kanjorski. I would think that is how--
    Mr. Rock. I would think so, too, but I think that's 
something that's not clear.
    Mr. Kanjorski. I am glad you raised the question, and we 
certainly will look into it.
    Mr. Rock. And the second point I would make, Mr. Kanjorski, 
and do agree that, as you said to Mr. Watt before, that the 
proposal is more restrictive, and I concur with that. But I 
would point out that in the City of Washington, for example, 
under the current proposal, almost all of Georgetown and almost 
the entire area along Massachusetts Avenue would qualify as an 
underserved area. And I think for any of us who know those 
areas, those areas are hardly comprised of low-income 
    Mr. Kanjorski. Now wait. Under--
    Mr. Rock. Under the new proposal.
    Mr. Kanjorski. All of Georgetown would apply?
    Mr. Rock. Almost all of Georgetown and almost all of the 
area along Massachusetts Avenue.
    Mr. Kanjorski. Meaning that Treasury has interpreted the 
New Markets Initiative statute to say that these homes in 
Georgetown and the residents there are underserved?
    Mr. Rock. That's the way we read the proposal. We have 
mapped it out, and we look at it, and that's the way we read 
the proposal.
    Mr. Kanjorski. I think we are going to find the old 
definition. We will check it out.
    Mr. Rock. No. Under the old definition, the entire City of 
Washington, D.C., has been approved as an underserved area.
    Mr. Kanjorski. Well, this is very good, because the 
evidence you are giving us we should also transmit to Ways and 
Means, because we are working on the reauthorization of the New 
Markets Initiative, and I certainly, having been one of the 
original drafters of that piece of legislation some 5 or 6 
years ago, never intended, nor did the President at the time, 
ever intend that we finance those tax credits for areas like 
the rich sections of Georgetown. So we will certainly check 
into that.
    Mr. Rock. Yes.
    Mr. Kanjorski. I have taken far in excess of my time, and I 
am fearful that the chairman may run down here and dispossess 
me of the chair. So, with that, let me recognize my charming 
friend from Illinois.
    Mrs. Biggert. Thank you. I hate to break into that 
discussion. It was, I think, lively and productive. But just a 
couple of questions. Mr. Menzies, in your statement you 
referred to a GAO study of 2003, and it says that credit union 
serve a more--the study found that credit unions serve a more 
affluent clientele than banks, and the study concluded that 
credit unions overall served a lower percentage of households 
of modest means than banks. Could you expand on that a little 
    Mr. Menzies. Well, you have quoted the GAO study correctly. 
The GAO study says that the community banks have more customers 
of low and modest income as a percentage of their customers 
than do credit unions. And that's because they're based in the 
community and they need to serve the entire community.
    Mrs. Biggert. Now that is a 2003 study. Do you think that 
would still hold true today?
    Mr. Menzies. Well, that's a good question, and the question 
is, has the credit union history studied their low- to 
moderate-income statistics and broadcast them so that we can 
clearly understand that a majority of their customers are 
people of modest means and people who need access to credit.
    Mrs. Biggert. Well, then, my next question is that--for 
both of you--is that the credit unions said that banks don't 
want to make small business loans, especially under $100,000. 
Does your bank?
    Mr. Menzies. Absolutely. We just participated, 50 ICBA 
banks, just participated in Chairman Bair's Small Business Loan 
Initiative to establish strategies to make small loans, $1,000 
and under, to individuals. We make $500 and $1,000 loans all 
the time. We lose money on them. We lose a lot of money on 
them. And we lose money because we pay taxes and we have a lot 
of overheard associated with regulatory burden. But we do it 
because we have to because they're members of our community.
    Mr. Rock. Congressman, we have an entire staff of people in 
my bank, which is a community bank, devoted to finding and 
making small business loans of under $100,000. And we 
currently, as of the date of filing of our last call report, 
have $95 million of such loans outstanding. So we absolutely 
    Mrs. Biggert. Are the business loans under $100,000 less 
risky than business loans over $100,000?
    Mr. Menzies. I would say no. I would say that business 
loans under $100,000 inherently carry more risk, require more 
underwriting, require more analysis, and require a closer 
relationship. We have commercial lenders who have significant 
experience lending into small business. They need to triage 
whether this is an appropriate FDIC deposit-insured risk or 
whether we should use the SBA or SBA 504 or some other strategy 
to mitigate risk.
    But my personal perspective would be that loans under 
$100,000 can be riskier than the larger loans.
    Mrs. Biggert. You said it cost you more.
    Mr. Menzies. Absolutely it does.
    Mrs. Biggert. Would that be true--how different would that 
be for a credit union to make the same loan?
    Mr. Menzies. How different would--
    Mrs. Biggert. Well, would they have the same costs. How 
would the costs be different since they don't pay taxes on 
    Mr. Menzies. I don't know the exact basis point difference 
in terms of regulatory burden. I do know that the credit union 
tax advantage gives them 50 basis points or a half a point up 
to sixty-some basis points of pricing advantage. That's why a 7 
percent 20-year aircraft loan that I quoted was written at 5.75 
for 20 years by a competing credit union. So there's a 
significant competitive advantage if they're not paying 35 
percent to the Federal Government and 7 percent, in our case to 
the State, of their income.
    Mrs. Biggert. Okay. Then Mr. Rock, you testified that in 
spite of the change in the credit unions that kind of 
metamorphose into highly competitive financial institutions 
that they're almost indistinguishable from banks, and yet they 
continue to enjoy the tax exempt status conferred when it was 
composed of small self-help organizations.
    And if our goal is to foster a healthy competition in the 
financial services industry in order to benefit all the 
consumers, should we try and level the playing field between 
bank and credit unions?
    Mr. Rock. I would say yes, absolutely, among the new breed 
credit unions. If a credit union wants to grow to a very large 
size, wants to serve everyone in the community without 
limitation, if they want to offer all the products and services 
that a bank can to all the same customers, then I say I welcome 
the competition, but they should play by the same rules. They 
should be subject to the same regulations. They should pay the 
same income taxes and so on.
    I do not think that that would be a wise policy choice for 
the traditional credit unions. I think the traditional credit 
unions that abide by the original quid pro quo, I think they 
serve an important function in the financial system, and I 
think they should be continued to allowed to do so.
    Mrs. Biggert. Thank you. I yield back.
    Mr. Kanjorski. Thank you very much, Mrs. Biggert. We are 
pushing up against the votes that have been called, but I think 
we have enough time. Mr. Lucas of Oklahoma.
    Mr. Lucas. Thank you, Mr. Chairman. One quick question. 
Gentlemen, obviously you both have a great deal of experience, 
and when I joined this committee 13 years ago, we were still in 
the process of sorting out what remained of the S&L meltdown, a 
concept basically where short-term money was used to make long-
term commitments, and when circumstances changed, an entire 
industry went away.
    Tell me from your experience in the financial services 
industry in relation to how things have evolved in the last 20 
years, is there still a challenge when you use short-term money 
to make long-term obligations?
    Mr. Menzies. We don't use short-term money to make long-
term obligations. We are required by the FDIC to manage our 
balance sheet within an interest rate risk sensitivity that 
doesn't put too much earnings at risk. And the same is the case 
with Mr. Rock. We can't just go mismatch our balance sheet. We 
have a comprehensive management process to make sure we don't 
go make 30-year loans and put them on our books and fund them 
with savings accounts. It's as simple as that.
    Mr. Lucas. And do you have concerns about that being done 
by other people?
    Mr. Menzies. I think it is not a responsible form of 
financial management. I think the reason the savings and loans 
got into trouble is because they had been given exclusive 
privileges and exclusive powers, and they were funding 30-year 
assets with savings accounts, and the market went upside down, 
and the government deregulated them, and they tumble.
    That is not the case with the thrifts today. The thrifts 
that are in business today are well capitalized and well 
managed, for the most part. They do a good job. But they're 
subject to the same types of interest rate risk management 
policies that I'm subject to, and I've just been through an 
examination, and they are serious about it.
    Mr. Rock. I would say, Mr. Lucas, yes, I think those 
continue to pose substantial risks. I think that 20 to 25 years 
ago when those events happened that we characterize as the S&L 
crisis, banks were not required to engage in the same level of 
interest rate risk simulation modeling that we are today.
    And I know that our regulator, the FDIC, requires us to 
engage in extensive monitoring. We have special computer 
programs. We do it quarterly. In times of stress, we do it 
monthly. So, I think that has reduced it.
    With regard to how the credit union regulators look at 
that, and whether the same requirements are demanded of them, I 
really don't know.
    Mr. Lucas. Fair enough. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you very much, Mr. Lucas. I really 
have to apologize. We have these votes on. I would really love 
to sit here and trade off a lot of questions and answers, 
because I think we would get a lot of the needed information.
    I want to assure you that this committee, and certainly 
this majority, are not prone to favor one institution over 
another. What we are trying to do is get to risk management, 
get to firmness in making sure that whatever occurs in our 
financial service industry is well examined and ideal.
    We are also working on regulatory reform for banks. I am 
going to ask my friends in the credit union movement not to get 
involved in being opposed to those deregulations for banks, 
because we do not intend to deregulate anything that would 
cause greater risk to the system, but in fact deregulate those 
things that are determined to be unnecessary or further 
restrictive or limiting your ability to earn.
    In that regard, I hope we come to parity here. We may not. 
If we do not, I don't want the two of you to get ulcers over 
it. If we do, I want you to realize that then we have all 
succeeded at our chore to get the system to work as best it 
    With that in mind, we are not going to take any further 
questions, because we have to make the votes. And I am going to 
note that some Members may have additional questions for this 
panel, which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
Members to submit written questions to these witnesses, and to 
place their responses in the record.
    I want to thank both of you for appearing here today. And 
we did not mean to overwhelm you with time or questions. 
Certainly your statements and your answers will be fully 
examined and taken as seriously as any of the other testimony 
before this hearing. And with that said, the panel is 
dismissed, and this hearing is adjourned.
    [Whereupon, at 1:35 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             March 6, 2008