Mr. Chairman and Members of the Committee: The Independent Bankers Association of
America (IBAA) welcomes this hearing and appreciates the opportunity to state its views on
what Congress should do now that the Supreme Court has ruled on the credit union common
bond issue. My name is K. Reid Pollard, and I am President and CEO of Randolph Bank and
Trust Company, a community bank in Asheboro, North Carolina. Our bank was one of the
original plaintiffs against the AT & T Family Federal Credit Union in 1990 in the case the Court
decided on February 25th.
In our view, the primary theater of credit union competition has been, and will continue to be,
between the 3,600 larger, multi-occupational federal credit unions that are the subject of the
Court's decision, and the small and mid-sized banks, typical of those represented by the IBAA.
Both of these sets of institutions have the same core businesses of making local consumer loans,
and are increasingly competing for the same deposit and loan customers, especially as credit
unions expand into business lending (which we feel is inappropriate).
In these daily contests, credit unions have manifold advantages over community banks including,
but not limited to, exemption from federal (and generally state) taxes that over the course of the
next five years is worth $5.8 billion according to the Office of Management and Budget, less
restrictive regulations and capital requirements, including an exemption from the Community
Reinvestment Act (CRA) which continues to be a tremendous cost burden on community banks,
and a promotional posture by their regulatory authority, the National Credit Unions
Administration, that sometimes acts more like a cheerleader than a regulator.
IBAA feels this is the time for all concerned to closely and objectively analyze the positions of all of the parties to this debate, and attempt to reach a true compromise that preserves the openness that is the best feature of the American financial system, without giving undue regulatory advantages or taxpayer subsidies to particular participants in that system. This compromise should be fair to the taxpayer, consumers, banks and credit unions.
The recent decision by the Supreme Court held that multi-occupational credit unions were in
violation of the law. Importantly, the Supreme Court was unanimous on the merits of the case.
In essence, the large credit union conglomerates were caught with their hands in the cookie jar.
However, the banking industry is united in not wishing to expel current credit union members
from their present credit unions, even though their recruitment was in violation of the law. In
this sentiment, we concur with the request that you and number of your colleagues have made to
the District Court, Mr. Chairman, that current employee groups be allowed to remain in their
present credit union and that no current credit union member be required to give up their
Following the Supreme Court decision, the banking industry sent a letter to Members of
Congress designed to eliminate the anxiety among those credit union customers who were
concerned about losing their accounts, and offering to meet with Members of Congress and the
credit union industry to discuss possible long term solutions to this issue. The banking industry
announced that it did not intend to seek any solution that would cause any credit union customer
to lose his or her account, and that it would not seek in forthcoming lower court proceedings a
remedy that would force these consumers out of credit union membership, or require them to
give up accounts or pay off loans, or cause injury to them in any way.
Last month, the three associations that are named parties in the lawsuit known as NCUA II -- the
American Bankers Association, America's Community Bankers and the IBAA -- formally
amended their complaint before the District Court to demonstrate clearly that it is not our intent
to make widows or orphans out of any current credit union customer. We recommended a broad
grandfathering of all members of all groups added through the effective date of the enforcement
order. This would mean that every credit union member who joined any credit union up to a date
certain at some point in the future, would be held harmless according to the terms of the District
Let me repeat this statement for emphasis, and put to rest statements by some in the credit union industry who have fomented panic by falsely claiming that the status of 10 million or 20 million credit union members is in peril: A united banking industry has agreed that it will not pursue any remedy that will injure any member of a credit union that is impacted by the Supreme Court decision. However, credit unions would not be permitted to grow grandfathered groups.
A broad industry coalition of the six leading banking and thrift trade associations (IBAA, ABA, ACB, the National Bankers Association, the National Association of Military Bankers, and the American League of Financial Institutions) advanced compromise proposals on both judicial remedy (described above) and legislation that protects current credit union members and preserves choice for both credit unions and their customers within the framework of the Federal Credit Union Act of 1934.
The banking industry believes in healthy competition, and in that spirit, has recommended a
legislative compromise that would allow small, traditional credit unions to continue to operate as
they always have, provided that they comply in the future with the requirements of a single
common bond, maintain no commercial accounts, and do not advertise to the general public.
Such credit unions would be able to maintain their tax subsidy and favored regulatory and capital
Larger credit unions, however, that want to have multiple employer groups, maintain commercial
accounts (both loan and deposit) and advertise to the general public -- in other words become the
functional equivalent of banks -- would have to make a choice. They could either retain their
credit union status but come under banking laws and regulations, including taxation and CRA; or
they could convert to a mutual savings bank charter, thus maintaining their cooperative structure
while engaging in banking activities. An outline of the banking industry's legislative proposal is
The concerns of community banks with respect to pending legislative proposals and our recommendations for the Committee's consideration are spelled out below.
IBAA believes that to restore the legal right for the 3,600 most aggressive credit unions to admit
members without any limitation -- the goal of the credit union lobby -- is not desirable public
policy, particularly since there are reasonable alternatives.
Accordingly, IBAA has joined with the rest of the banking industry in taking a strong position
against H.R. 1151, the House Banking Committee-passed "Credit Union Membership Access
Act" that would reverse the landmark Supreme Court decision. While purporting to limit the
expansion of multiple common bond credit unions, in fact H.R. 1151 contains so many loopholes
and weak provisions that it would allow credit unions virtually unrestricted growth, perpetuating
their tax subsidies and regulatory advantages, deepening the competitive disadvantages for
community banks, and exacerbating the spiraling cost to taxpayers.
From community bankers' point of view the bill contains a massive loophole permitting expansion of multi-occupational common bond credit unions, contains no restrictions on community credit unions or on commercial lending by credit unions, applies a weak imitation of CRA to credit unions, places no restrictions on state chartered credit unions, and fails to include most of the safety and soundness provisions recommended by the Treasury Department earlier this year (after an extensive study ordered by Congress). At the same time, the bill does not address the fact that credit unions remain tax exempt.
The enactment of H.R. 1151 would give the 3,600 largest, most aggressive federal credit unions,
the legal right to add members from any group with few limitations. The majority opinion of
the Supreme Court declared that under NCUA's 1982 interpretation of the statute, every
employee in the nation could be a member of a single occupational credit union. H.R. 1151
would perpetuate this type of abuse by failing to put reasonable limitations on the growth of
multiple common bond credit unions.
Under the bill any group of less than 3,000 people would have the unlimited ability to affiliate
with an existing credit union. This is a very high number. In many states, the number of
employers with more than 3,000 employees is very small. For example, in Iowa, there are only
26 employers with over 3,000 employees. All the other employee groups in the state could
conceivably join together to form a single credit union. In smaller communities, there is unlikely
to be any employer with over 3,000 employees, allowing every employer in the community to
form a single credit union. In rural areas, even a number as "low" as 500 employees would allow
every employer in the area to join together to form a single credit union. (There are now over
2,000 credit unions with less than 500 members operating successfully. In fact, according to
NCUA and FDIC figures, return on assets for these small credit unions has been higher over the
last five years than for mutually-owned thrift institutions.) Under the bill, existing large multiple
common bond credit unions would be permitted to expand by adding unlimited numbers of new
groups of less than 3,000.
Moreover, the bill contains a loophole that would allows NCUA to make exceptions and
authorize a group over 3,000 to affiliate with an existing credit union if it "could not feasibly or
reasonably establish a new single common bond credit union." With NCUA's history of illegally
expanding common bonds, we do not view the criteria for granting exceptions as placing much
restraint on the agency. In addition, the bill fails to restrain state-chartered credit unions from
unreasonably expanding through multiple common bonds.
As an alternative to this proposal, we recommend the Committee consider allowing multiple common bonds only for credit unions under $25 million in assets. (Credit unions of any size, formed solely to serve and continuing to serve low-income neighborhoods, would not be affected.) A size cutoff would ensure that small credit unions need not be concerned that an inability to add groups would threaten their viability. This alternative also allows for the formation of new employer credit union groups. At the same time, it would prevent large credit unions from growing indiscriminately by adding unlimited numbers of small groups.
Many people expect a run to community charters (as well as state charters in those states that do
not have "wild card" statutes which track Federal law) by credit unions seeking to circumvent the
common bond restrictions imposed by the Courts. There are about 225 applications now pending
at the NCUA for conversions from occupation-based credit unions to community-based credit
Yet, H.R. 1151 does little to redefine community-based credit unions. It permits community
credit unions comprised of persons or organizations within "a well-defined local community,
neighborhood or rural district." NCUA is directed to promulgate regulations defining "well-defined local community, neighborhood, or rural district."
But, under the current statute, NCUA has already abused its discretion in approving some very
large geographic areas to serve as "communities." For example, NCUA has approved the
conversion of the Point Mugu Federal Credit Union from an occupation-based credit union to a
community-based credit union covering all of Ventura County, California (an area of over 1,800
square miles with a population of nearly 700,000 in 1990, and including four separately
incorporated cities with populations ranging from 60,000 to 155,000). The IBAA, ABA and
ACB have joined with the California Bankers Association in a lawsuit filed against the NCUA
challenging this approval and arguing that it violates the requirement of the Federal Credit Union
Act that limits community-based credit unions to "groups within a well-defined neighborhood,
community or rural district." Ventura County is not a single, well-defined community as
required by the Act.
IBAA and the banking coalition have developed proposed language to deal with the emerging issue of community based credit unions. Under a compromise proposal advanced by banking industry, community-based credit unions would be limited to a community which is compact and contiguous and consists of persons or families of limited means or is under-served by banks or thrifts. Community-based credit unions under $25 million in assets would be treated the same as the low-income credit unions.
Business lending by credit unions is directly competitive with one of the most important
specialties of community banks. Business lending is not in accordance with the mission of credit
unions to provide credit to persons of small means. In fact, it diverts financial and managerial
resources from this mission. Business lending in our judgement takes credit unions beyond their
original purposes, justifying a change in their tax and regulatory subsidies. Absent a change in
the tax status of credit union, their commercial lending activities should be restricted. Such
business lending diverts and, yes, even undermines the very purpose of credit unions. It diverts
available funds from lending for consumers--hopefully, low and moderate income consumers.
This NCUA abetted move into commercial lending underscores the need to bring credit unions
engaged in such lending under bank-like taxation and regulation.
Although the Federal Credit Union Act of 1934 grants no authority to credit unions to make
commercial or business loans, the friendly regulations of the National Credit Union
Administration created authority for this type of lending in 1987 by regulation (12 CFR
701.212(h)), without a statutory basis. Current NCUA regulations permit credit unions to make
business loans to any one member up to 15% of the credit union's reserves or $75,000,
whichever is higher, unless an NCUA regional director approves a greater amount. Loans to
one member that aggregate less than $50,000 are not considered to be business loans, even if
made for a business purpose, and therefore are not subject to the safety and soundness
requirements in NCUA regulations regarding written policies, qualifications and experience of
loan personnel, and underwriting standards like analysis of the ability of the borrower to repay,
documentation, collateral, loan-to-value ratios, personal guarantees, etc. There is no limit on the
overall percentage of a credit union's loan portfolio that can be devoted to business loans, and
some large credit unions engage in commercial lending as their principal line of business.
By the end of 1995, NCUA reported 17,795 business loans for "federally insured" credit unions
in the amount of $881.9 million. Moreover, there appears to be a category of loans to individual
members "for business purposes" that blurs these totals. The CEO of the State Bank of Colwich,
Kansas reported that two of his customers paid off business loans at his bank "in the high five
figures" with credit union financing ("Credit Unions Expand into Commercial Loans, American
Banker, Aug. 5, 1996, page 27).
The American Banker story noted that almost half of the larger credit unions with assets of more
than $200 million (45.5 percent) were making business loans. Some of these are trying to
become primarily business lenders, like the Citizens Equity Federal Credit Union of Peoria,
Illinois (Interview with John Siefkin, Interbusiness Issues, December, 1996). The Banker
estimated that credit unions, by late 1996, had made $2 billion in business loans.
Over the past two years, the major banking associations, including IBAA, have alerted NCUA
(letter to the Chairman of NCUA by the ABA, ACB, and IBAA, November 12, 1996) and the
Treasury Department (letter from IBAA, April 30, 1997) about this issue. The response of
NCUA has been to propose to expand credit union business lending authority that is not subject
to safety and soundness rules. IBAA maintains that concentration on business lending introduces
risks unforseen by the 1934 Act or the credit union insurance fund, and that neither credit union
executives nor examiners are trained in assessing and monitoring such risks. Thus, IBAA
believes that business lending by credit unions is not only unauthorized, but is a source of
potential systemic problems, especially over the business cycle ("Credit Union Study," Letter
from IBAA to the Department of the Treasury, April 30, 1997, pages 6-7).
H.R. 1151 would allow credit unions to continue making commercial loans consistent with
current NCUA regulations. Current NCUA regulations would be frozen for a period of one year,
during which time NCUA is directed to complete a study of credit union commercial lending
practices. Many members of Congress have told us that they believe credit unions, because of
their tax exempt status, should focus on lending to low and moderate income consumers. They
have questioned credit union business lending authority. Yet, the House Banking Committee
could not even pass an amendment that would limit credit unions from making loans over $1
million to businesses.
IBAA recommends that the Committee consider limiting the amount that credit unions can lend to any one member for business purposes to $10,000. This would appropriately limit commercial lending by credit unions, while continuing to allow credit unions to engage in small, start-up business lending to their members. (Outstanding commercial loans could be grandfathered.)
The foregoing are our major concerns with H.R. 1151. Briefly, our additional concerns include:
In accordance with these positions, the legislative proposal of the banking industry gives credit unions a choice: If they are larger credit unions and wish to add additional multiple common bonds, or continue operating commercial accounts or business loans, they should adopt a charter that legally permits them to engage in these operations. The combined banking industry legislative proposal is attached, and we would be glad to respond to questions about it.
If larger credit unions are acting in every way like commercial banks or thrifts, IBAA
believes they should be required to pay taxes like commercial banks or thrifts. We would
emphasize that such a decision is up to them. If the Congress is not willing to require bank-like
credit unions to pay bank-like taxes, then Congress should consider granting community banks
tax relief comparable to that enjoyed by credit unions.
The current credit union tax subsidy is worth more than $1 billion a year in lost tax revenue. The Office of Management and Budget, in its fiscal year 1999 tax estimates, forecast that the cost of the credit union tax subsidy will total $5.8 billion over the next five years. In addition, there is an undetermined tax loss to the states. This twin revenue drain is likely to increase rapidly if the 3,600 aggressive credit unions are restored virtually unlimited growth of membership and allowed to continue unrestricted and expanding business lending. The longer such a permissive posture is maintained, the more significant will be the tranche of commerce that is removed from federal and state taxation.
IBAA recommends that this Committee, and the Congress, take a close look at the actual
financial competition that is taking place throughout the country, and to assess the impact on this
competition if the larger, conglomerate, aggressive credit unions maintain their federal and state
tax and multiple regulatory advantages, and then regain the legal authority to add members with
few limits. Our point is that we are not talking about "Mom & Pop" credit unions, rather large
multi-occupational federal credit unions that are professionally managed and staffed, extremely
well organized and capitalized. These credit unions have proven themselves very capable of
competing in their chosen markets already, as evidenced by the fact that between 1977 and 1997,
federal credit union membership grew to 43.5 million from 20.4 million, their assets grew to
$215 billion from $30 billion, and their outstanding loans grew to $140 billion from $23 billion.
(Overall, at year-end 1996, credit union membership totaled 69 million, and credit unions had
assets of $327 billion.)
These credit unions have outgrown their original purposes and it is time they lost their special
subsidies. As the popular saying goes, "If you want to run with the big dogs, you have to get
yourself off the porch" defined as the public trough.
The Washington Times recently printed a list of the largest 10 federal credit unions, based upon their total assets as of September 1997. Each of these credit unions is more than 20 times larger than the average IBAA member bank that pays taxes and is subject to CRA. The multiple common bond credit unions on this list include:
|Credit Union||Headquarters||Total Assets|
|Orange County Teachers FCU||Santa Ana, California||$1.8 billion|
|Alaska USA FCU||Anchorage, Alaska||$1.7 billion|
|Hughes Aircraft Employees FCU||Manhattan Beach, CA||$1.7 billion|
|Citizens Equity FCU||Peoria, Illinois||$1.6 billion|
|Sunset Schools FCU||Tampa, Florida||$1.6 billion|
|Star One FCU||Sunnyvale, California||$1.4 billion|
|Security Service FCU||San Antonio, Texas||$1.3 billion|
The AT & T Family Federal Credit Union, subject of the Supreme Court case, is reported to have
164,000 members from 328 employee groups, in many states of the union, and assets of more
than one-half billion dollars ("Court Curbs Credit Unions," USA Today, Feb. 26, 1998).
COMPETITION COMES IN SMALL PACKAGES,
NOT TAX-EXEMPT ONES
Credit unions have made claims that they offer consumers the best rates. What they failed to
mention was that this is really an issue about size. Several independent studies have concluded
that smaller banks tend to offer better rates and lower fees than large multi-state institutions. The
Federal Reserve reported to Congress last summer that "...average fees reported for banks that
were part of multi-state organizations in 1996 were in most cases significantly higher than
average fees charged by banks that were not part of such organizations." US PIRG also indicated
that their study findings showed that the cost spread between higher-cost multi-state banks and
locally-owned banks is widening. US PIRG recommended that the best deal for consumers were
small locally-owned community banks or credit unions -- for those that qualify for membership.
There are over 9,000 independently operated, locally owned community banks across this
country with about 16,000 locations. The credit union lobby claim about consumer choice and
better fees is unfounded.
CREDIT UNION DEMOGRAPHICS
Credit unions also have the advantage of having a select customer base -- higher percentages of
employment and home ownership, and higher levels of education and income than the general
public and than bank customers ("The Credit Union Industry: Trends, Structure and
Competitiveness," The Secura Group, Washington, D.C., Nov. 10, 1989, Chapter II, page 29, et.
seq.). This explodes the careful myth they have created that they serve under-banked markets.
Another study, by the credit union industry, concluded that credit unions had fewer lower income
customers (defined as income of less than less than $15,000) and more higher income customers
(defined as income of $50,000 or more) than did banks ("Study of Consumer Reaction to
Changes in Federal Deposit Insurance," 1989). From the available evidence, it appears that
banks tend to serve a greater spectrum of the general public, including, specifically, lower
income citizens, than do credit unions.
FREE CHOICE, NOT A FREE RIDE
In conclusion, Mr. Chairman, the IBAA welcomes healthy competition. Indeed, the strength of
our financial services system is an open, competitive and diverse marketplace. Community
bankers thrive on it, and we believe consumers benefit from it. But the question Congress must
consider is whether or not American taxpayers should continue to subsidize those credit unions
that have evolved into highly profitable, multi-million dollar financial conglomerates. The
question also is why such institutions aren't under the consumer compliance regulations that are
applicable to banks.
The thousands of credit unions that have remained faithful to their original mission should be
allowed to continue to operate as they always have. They add to the diversity of our financial
services marketplace. But conglomerates like the AT&T Family Federal Credit Union, and the
3,600 others that the Supreme Court has found to be in violation of Federal law, can no longer
justify a free tax ride.
Congress created credit unions in 1934 to provide credit to "persons of small means" who had a
"common bond" of occupation, association or community. Congress granted credit unions tax-exempt status in consideration of their restricted mission and limited scope of membership. Now
Congress has an obligation to craft a reasonable compromise that is fair to credit unions and their
members, their bank and thrift competitors, and the taxpayers. H.R. 1151 does not fit the bill.
Thank you again for this opportunity to express our views on these issues of vital importance to
community banks, to all financial institutions, consumers and to the U.S. financial services industry.
Home | Menu | Links | Info | Chairman's Page