The National Association of Federal Credit Unions (NAFCU) is the only national organization exclusively representing the interests of our nation's federally chartered credit unions. NAFCU is comprised of more than 1,070 federal credit unions--financial cooperatives from across the nation--that collectively hold approximately 70 percent of total federal credit union assets; NAFCU represents the interests of approximately 25 million individual credit union members. NAFCU and the entire credit union community appreciate this opportunity to participate in these vitally important hearings regarding the current and future field of membership policies of the National Credit Union Administration (NCUA) and other important issues affecting credit unions.
Officially established by an act of Congress in 1934, the federal credit union system was recognized as a way to make financial services available to people of small means and to promote thrift and extend credit. Congress established credit unions as a financial alternative to banks and to fill a precise public need--a niche that credit unions still fill for over 70 million Americans. Every credit union is, by statute and practice, a cooperative association organized "for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes." [12 USC 1752(1)] While more than 60 years have passed since the Federal Credit Union Act was signed into law, two fundamental principles regarding the operation of credit unions remain every bit as important today as they were when Congress first authorized the establishment of federal credit unions:
As owners of not-for-profit, cooperative financial institutions united by a common bond, all credit union members have an equal say in the operation of their credit union--regardless of the amount they have on account at the credit union. These singular rights extend all the way from making basic operating decisions to electing the board of directors. Unlike banks and thrifts, federal credit union directors, motivated by an altruistic desire to be of service to others, serve without remuneration--a fact that epitomizes the true "volunteer spirit" permeating the credit union community.
Credit unions play an important role in the financial lives of more than 70 million Americans from all walks of life who have chosen the convenient and low-cost financial services provided by credit unions. As the package of services offered by various types of financial institutions becomes more homogenized, the emphasis shifts from the type of service offered to the quality and cost of service provided. Historically, credit unions have been second to none in providing their members with quality personalized service at the lowest possible cost. According to an annual survey conducted by the American Banker newspaper, 1997 was the thirteenth consecutive year in which credit unions have rated higher than all other financial institutions in overall service quality and this trend shows no sign of change.
Credit unions are not banks. The nation's 12,000 credit unions serve a different purpose and accordingly have a fundamentally different structure. Credit unions are not-for-profit cooperative institutions that serve the public good. They are owned by their members and managed by a democratically elected, unpaid board of directors. Regardless of the amount of money a member has in his or her account, he or she has an equal say in the management of the credit union. Membership in a credit union is not open to the general public; a credit union may serve only those individuals within its field of membership (as approved by the NCUA). Federal credit unions' have an independent federal regulator (NCUA) and an insurance fund (the National Credit Union Share Insurance Fund (NCUSIF)) separate from the bank and thrift funds managed by the Federal Deposit Insurance Corporation. Credit unions are prohibited from using their members' funds to make foreign loans or to engage in speculative ventures: just two of the many benefits enjoyed by the banking industry.
Ironically, banks are calling for greater regulation of credit unions, while demanding fewer regulations for themselves, so that they may enjoy more benefits of being a bank. Credit unions are not banks and never have been.
Credit unions exist solely for the purpose of providing financial services to their members. Banks exist primarily to provide a return on investment for stockholders; providing financial services is the method banks use to generate the profit necessary to provide that return on investments to stockholders, but it is not the raison d'être of the institution--as is the case with credit unions.
Since 1982, the federal government, in the form of NCUA, has allowed federal credit unions to affiliate more than one group into an individual credit union's field of membership as long as the members of each group share a distinct "common bond." One common trait among these groups is that their members wished to enjoy the benefits of credit union services. In most cases, these groups were simply too small or lacked the necessary capital and resources necessary for starting their own credit union. Consequently, the policy of the NCUA has been to allow the members of multiple groups to join an existing credit union.
On July 30, 1996, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Federal Credit Union Act permits only one common bond of occupation per federal credit union. This decision was issued as a result of a lawsuit filed in 1990 by the American Bankers Association (ABA) and several banks in North Carolina challenging the NCUA's authority to allow AT&T Family Federal Credit Union in Winston-Salem, North Carolina to add multiple groups to its field of membership. Acting on this decision, the U.S. District Court issued an order on October 25, 1996 barring the NCUA from approving new multiple groups. This decision immediately affected approximately 3,600 federal credit unions. In addition, credit unions were prevented by this order from adding members from any group other than the credit union's "core" group of members.
On December 24, 1996, the U.S. Court of Appeals granted a partial stay of the October 25 order. Under the partial stay, credit unions may accept members from existing multiple groups and from the core group; however, credit unions may not add new groups. This stay, still in effect, was to remain in place pending the review of a request for certiorari by the U.S. Supreme Court.
The Supreme Court granted certiorari on February 24, 1997 and heard oral arguments in the case on October 6, 1997. On February 25, 1998, the Court rendered its decision in the case of National Credit Union Administration v. First National Bank and Trust Company, et al., ruling in favor of the banking industry by stating that the banking industry has the legal standing to sue NCUA over regulatory matters, and that the NCUA erred in its interpretation of the Federal Credit Union Act when it allowed multi-occupational group charters.
The Court's decision effectively ended all legal redress of the under-lying issues; the credit union community is now appealing to Congress to consider the issue and enact legislation to resolve the field of membership issue in favor of the American consumer.
The Summit Federal Credit Union is located in Rochester, New York and serves 63,000 members from 382 groups who collectively have assets of $185 million.
To understand how one credit union has evolved into a somewhat larger and more diverse financial cooperative than originally chartered, a review of The Summit FCU's history and relevant data is appropriate. The Summit FCU background closely parallels the story of many of today's credit unions: transition from a single-employer based credit union to the multi-occupational-chartered federal credit union.
The Summit FCU was chartered in 1941 as the Rochester Telephone Employees Federal Credit Union, and remained a credit union solely for the employees of Rochester Telephone until 1980. At that time, new technology was causing great changes in the telephone industry and Rochester Telephone Corporation's workforce was considerably reduced. Furthermore, with deregulation of the telephone industry, independent telephone companies became candidates for buyouts. The credit union's future was at the mercy of the performance of one company that had and still has competitive threats. The NCUA allowed The Summit FCU to expand its field of membership before 1982 to include other small telephone companies across New York that were considered by the NCUA to have a "common bond" with Rochester Telephone. Still, The Summit FCU's future was dependent upon the performance of a volatile industry.
Across the nation meanwhile, credit unions as a movement were facing similar uncertainty. Inflation was at all time record levels, and a recession was forcing many companies to "downsize" and dramatically change their strategies. Banks and thrifts were failing in record numbers. In 1981, 222 credit unions alone failed due to these pressures. The National Credit Union Share Insurance Fund was at risk.
The NCUA, in an effort to protect credit unions, their members, and the American taxpayer from a potential credit union crisis, promulgated regulations in 1982 allowing credit unions to expand their fields of membership to include diverse industries and groups. The policy was intended, in part, to diversify risk and therefore better protect the safety and soundness of the institution and stabilize the NCUSIF. Congress was formally notified of the introduction of the multiple group policy by NCUA Board Chairman Edgar F. Callahan in an October 28, 1983 letter to House Banking Committee Chair Fernand St. Germain (D-RI). President Ronald Reagan responded to the progress made at the NCUA during that turbulent time in a November 17, 1982 letter to Chairman Callahan noting that: "...there has been remarkable progress toward self-help solutions to the problems facing the credit union industry."
Since that time, approximately 3,600 federal credit unions have structured their fields of membership to include such groups. Many of these credit unions were encouraged to diversify by the NCUA when circumstances indicated that a failure to change would mean a failed credit union. According to NCUA statistics, if the multiple group field of membership policy had not been available for the period of 1988-1997, $4.6 billion in credit union assets could have been placed at great risk, as the agency would have had no alternative other than to consider liquidations.
Much of the debate concerning the field of membership issue centers on the subject of the size of credit unions. Credit unions range from those that are "small" with total assets of perhaps $100,000 to those that are "large" with assets over $1 billion. (It is noteworthy that the average assets of credit unions is $30 million, while for FDIC-insured institutions the average is $513 million. In fact, if the assets of all credit unions were combined, they would not equal the assets of the nation's two largest commercial banks: Citibank and Chase Manhattan Corporation have combined assets of $535 billion.) Regardless of size, however, the original purpose for which credit unions were created and the spirit of the credit union movement permeates all credit unions. This is also the case with many "large" non-profit corporations. Consider the examples of the American Red Cross or the Girl Scouts of America. Who could argue that because these non-profit organizations seek to add members and increase contributions each year, they no longer fulfill their original purpose.
Similarly, all credit unions--regardless of size or number of groups served--train staff members in the philosophy and ideals of the credit union community. The larger the credit union, the greater the demand for a variety of financial services, and the greater the need by the credit union to meet these needs. The larger the credit union, the greater the number of consumers who are being served and have a choice in financial institutions. While placing limitations on credit unions or on the groups they serve based on size may seem to have appeal, any such limitation simply denies consumers' choices and services. Larger credit unions provide many of the resources that help to fuel the credit union movement. Many credit unions, such as The Summit FCU, often pay for the implementation of new services, and provide on-site assistance and critical uniform training programs to smaller credit unions. Clearly, any action taken to the detriment of larger credit unions will hurt credit unions of all sizes and membership types.
In accordance with the policies and procedures promulgated by the federal government, The Summit FCU added numerous employee groups during the 1980's and 1990's, growing substantially in asset size. The Summit FCU added virtually all the services that members asked that the credit union add and thus gave members a credit union better able to provide for their financial needs. Despite vast changes in size and services, there are many consistencies between The Summit FCU of today, and The Summit FCU of 1982, as follows:
When choosing to grow, the board of The Summit considered numerous issues. Their desire was to enhance financial stability through a diverse membership, to increase the credit union's ability to afford and offer more services for existing members, and to offer the credit union alternative to more people. The staff and members of The Summit FCU think of the credit union as a larger credit union that is an "accumulation of smallness" because of the following facts:
When a new company affiliates with The Summit FCU, the underserved members of that company are the first to join, eager to take advantage of this new employee benefit. These new members who join the credit union first are likely to be those who are currently underserved by other types of financial institutions. Thousands of The Summit FCU's members have benefited greatly from the NCUA's field of membership policy, in the very way that Congress intended when it approved the Federal Credit Union Act in 1934. Nationally, millions and millions of Americans benefit from multiple group credit unions.
The members of the Committee may be concerned that providing credit union services to more Americans may have a competitive impact on other providers of financial services. This impact is a positive one, and is a function of credit unions' structure and motives. The banking industry contends that credit unions enjoy unfair advantages. However, they ignore the fact that credit unions take more risk on members and charge few if any fees to members to offset the costly accounts of members of small means. Members are provided service in the most equitable way possible because of credit unions' structure as not-for-profit cooperatives owned and operated by the members. Each time a credit union improves its operation, it is with the sole purpose of doing a better job of serving members. The fact that credit union members pay lower fees and have greater access to credit is good for all Americans. Even those who do not belong to credit unions benefit from this competitive "check" on the high minimum balances and fees that they would be subject to absent financial cooperatives.
Despite the consumer oriented competitive impact of credit unions, the nearly $5 trillion U.S. banking industry has shown record profits for seven consecutive years. Credit unions, on the other hand, have total assets of $355 billion with 47 percent of all credit unions under $5 million in assets (only 1 percent of banks are under $5 million in assets). According to 1997 statistics, 98.8 percent of loans made by federally-insured credit unions were consumer loans (19.1 percent in the case of FDIC-insured banks).
The facts clearly document that banks are not being "injured" as a result of the government's multiple group membership policy. In 1980, two years prior to introduction of the multiple group field of membership policy, credit unions accounted for merely 2 percent of household financial assets. In 1995, credit unions, after operating for thirteen years under the multiple group policy, held only 2.1 percent.
Even more telling, however, are the statistics concerning market share of consumer installment credit. In 1980, credit unions accounted for 13 percent of consumer installment credit and banks 50 percent; by 1985, the bank share had grown to 56 percent, while the credit union share had declined to 12 percent--despite the multiple group policy. Facts such as these clearly demonstrate that banks have not suffered a loss of market share as a result of the multiple group policy; on the contrary, banks have prospered in that environment. The Los Angeles Times agreed in a December 6, 1996 editorial:
Credit unions hardly pose a major competitive threat to banks. They do provide a needed and increasingly popular alternative....Nonprofit credit unions are the little guys. In fairness, Big Banking should give them some breathing room.
If perhaps, some elements of the banking industry do sense competitive pressure from other financial institutions and the ever-looming presence of possible consolidation, that sense may be well justified. Consider for example a January 22, 1998 article that appeared in the American Banker newspaper under the headline: "U.S. Bancorp CEO: Big banks To Steal Small Ones' Lunch." The article begins:
The top official at U.S. Bancorp is warning California community banks that their days may be numbered. John F. Grundhofer, president and chief executive officer of the Minneapolis banking company told a group of bank presidents here [Santa Barbara, California] last week that big banks--like his--are expanding in California and aiming to steal business from small banks.
The article goes on to note that: "In fact, many California community banks enjoyed their most profitable year ever in 1997." At least one former bank CEO, now the CEO of an Illinois credit union, observed in a recent letter to members of his Congressional delegation:
When [I was] a bank CEO, I too complained of credit unions, but not because of damage they were doing to our profits as we continued to experience higher levels of profits each year. I complained because they were this little thorn out there that was offering better service and rates to their select group of members.
The matter of credit union membership would not be before Congress if banks and bank trade associations had not insisted on challenging in Court the federal government's exercise of its discretion in granting credit union charters and charter amendments. It strikes many as disingenuous for the banks to be petitioning their own regulator to stretch the banking laws to the limits to gain new powers and authorities in the absence of Congressional action, while challenging an interpretation of the Federal Credit Union Act that the federal government has consistently applied for 16 years.
Who can avail themselves of a particular credit union's services is defined by that credit union's charter or "license" to do business, which is issued by the federal government. For the past 16 years the government has been more expansive in the number of groups it allows a single credit union to serve. This government policy that has enjoyed bi-partisan support under Republican and Democratic Presidents, and has been ratified by Republican and Democratic Board Chairs at the NCUA.
Credit unions are justifiably proud of the fact that only credit unions fully funded their federal insurance fund with no seed money--not a single cent--coming from the federal government. Credit unions are equally proud of the fact that when times were tough in the 1980's, credit unions did not turn to the government or the American taxpayer for a bailout. It is important to remember that it was a policy decision by the federal government--a policy decision of which Congress and the public was fully informed at the time it was made--to promote multiple group fields for federal credit unions.
If the Supreme Court's decision is not overturned by Congress, but instead is interpreted by the U.S. District Court to limit federal credit unions to adding members only from the original "core" membership group and existing members are forced out of their credit union, the impact on the credit union community would be devastating: either immediate erosion and possible failure of individual credit unions and the long term erosion of certain credit unions. Approximately 85 percent of The Summit FCU's members are affiliated through some means other than through membership in the core group. In a December 4, 1996 editorial in the St. Petersburg Times, the message was clear: "If the banks don't like the growth of credit unions, they can fight back the old-fashioned way--by offering customers a better deal."
If even a few credit unions are required to liquidate or fail because of this abrupt change in federal policy mandated by the Court, the trust and confidence of the American people in the credit union system could be compromised. It is ironic that the banking industry is recommending to the Courts that credit unions should be broken apart while mega-bank mergers have become commonplace. Breaking apart The Summit FCU could forever end the relationship of at least 348 small businesses and over 30,000 consumers with any credit union.
According to a November 27, 1997 memorandum from the ABA to all members of the U.S. House of Representatives, if the Supreme Court were to rule against credit unions, the memorandum stated, "[credit unions] have other options. They can convert to state credit unions, to federal community credit unions, or to mutual savings banks." This statement is disingenuous at best. The banking industry has launched campaigns across the country to obtain legislative and regulatory action to prohibit multiple groups in the state-chartered and community-based credit unions. Another impact of the Court's ruling concerns the fact that many state credit union laws are similar to the Federal Credit Union Act, so the Court's adverse ruling on the meaning of the federal statue could undermine the availability of the state charter option for multiple group field of membership credit unions. The banking industry is telling Congress that state and community-based charters are an alternative for credit unions, while simultaneously seeking to eliminate these alternatives.
The fact is that credit unions may be forced to close as a result of the bankers' actions. For some credit unions, because the core group of members (the group the credit union was created to serve) is either gone (such as a closed military installation) or such a small percentage of the overall membership, permanently closing the doors may be the only option. Blocking further participation from credit unions' existing groups may in time result in widespread failures, but at a slower rate than the rate of damage brought on by divestiture. The CEOs and human resource managers of credit unions' multiple groups view the availability of a credit union as an employee benefit, and they do not want to offer a "mixed bag" of benefits to their employees. If a credit union cannot serve all employees of existing affiliated groups, companies will refuse to allow the credit union back on site to work with their employees who had previously joined the credit union. Although there may be the potential for credit unions to gain new members through the core group, it is simply not enough to offset the loss of accounts that close annually due to members leaving, changing relationships or dying.
While based upon the above it may seem fairly obvious, should the Court's ruling not be addressed by Congress in a timely manner, the impact on credit unions and the nearly 70 million consumers they serve will be far-reaching. Lay-offs, closing of facilities, and dramatic scale-backs in the products and services offered to credit union members would result in short order. The marketing director at a Massachusetts credit union summed up the feelings of the credit union community when she said in a March 2, 1998 article in The Boston Globe commenting on the Supreme Court's decision: "It's people who work in those companies [served by multiple group credit unions] and working families across the state who lost."
Credit unions are at the top of the 1998 legislative priority list of every major banking industry trade group. There are a number of legislative initiatives that the banking trades are pursuing to help their own groups: boards, shareholders and bank customers. Instead of serving the best interests of these groups their primary focus is on destroying the credit union system and eliminating a choice for millions of consumers. Despite their attacks, all credit unions ask is to be left alone to provide services to the millions of Americans who have chosen or will choose credit unions as their financial services alternative.
The banking industry is working to turn the clock back on credit unions, just as banks prepare to leap forward into the 21st century. In fact, some bankers hope to limit the way the Federal Credit Union Act is interpreted to the way it was interpreted in 1934. If banks were only able to offer their services to those who could avail themselves of their services in 1934--a burden they would like to impose on credit unions--in many cases banks would not be allowed to branch beyond their municipality of incorporation, to say nothing of interstate or nationwide branching.
The field of membership question is a tough issue for Congress to resolve, with banks on one side and credit unions, small businesses and the American consumer on the other. What should Congress do to resolve the issue? Take immediate action to enact the language of H.R. 1151, the Credit Union Membership Access Act. This legislation would resolve the issue by codifying the government's field of membership policy. Any legislative solution--however well intentioned--that falls short of completely ratifying the government's policy is punitive and could unjustly harm millions of credit union members. Any legislative resolution that does not reaffirm NCUA's policy of permitting multiple group field of membership will be detrimental to the safety and soundness of credit unions and most importantly, the financial well-being of credit unions and millions of credit union members and potential members. The credit union community supports the language of H.R. 1151 and urges the U.S. Senate to pass companion legislation with all speed.
The Community Reinvestment Act of 1977 (CRA) requires banks and thrifts to take certain steps to prove that they are serving the credit needs of all the communities that they serve. Federal credit unions are not subject to CRA because the Federal Credit Union Act requires them to serve their entire membership. CRA is a geographically based statute requiring the designation of a "community" that is served by the financial institution. Because most credit union fields of membership are not exclusively geographic, credit unions could not meet the requirements of CRA without serving individuals outside their field of membership.
Credit unions are required to comply with virtually all other financial institutions' regulations. For example, credit unions must comply with:
Credit unions must comply with many federal rules and regulations that banks are not subject to, such as: field of membership requirements, strict limits on business lending, tight rules for loans to board members, may not compensate board of directors and restricted investment options.
At The Summit FCU, nearly 90 percent of all deposited funds are reinvested in the members in the form of consumer loans. The communities served by the credit union are not defined geographically, but rather by the membership. Funds are not taken out of a part of the community and invested in another area. To hire trained professionals to complete reports that will bear out the obvious--that The Summit FCU is proud to comply with community support requirements--would be wasteful, expensive and a drain on resources. It is for this reason that the banking industry is asking Congress to reverse their earlier decision excluding federal credit unions from CRA.
Compliance with CRA does not relate to the number of groups served, or to the asset size of a cooperative institution. By adding more groups, credit unions are better able to loan funds to those in need. Furthermore, credit unions are heavily involved in community activities individually and through credit union trade associations. Credit unions are involved in their communities not because they are required to do so, but because credit unions believe in the principles of social responsibility and involvement.
Regarding any questions of taxation, credit unions are not-for-profit institutions that serve the public good and any net income is kept in the credit union for the benefit of its members. Banks are for-profit institutions, run for the benefit of their compensated board of directors and their shareholders. Consider the following:
Credit unions have to continuously answer to the question of their tax exempt status. No other tax exempt group is repeatedly challenged on this issue. These challenges do not come from the American public, but rather from the banking industry. Remember to consider the source, and the reason for such challenges. In fact, many banks can gain tax relief if they alter their structure:
The credit union community wishes to see the field of membership issue resolved in an expeditious and equitable manner that preserves the right of consumers to choose financial institutions, does not divide credit unions by the size of their assets or the groups they serve, and does not wind the clock backwards for credit unions while winding it forward for banks to move into the 21st century.
Every day that Congress delays in resolving this issue resources that should be spent or invested for the betterment of American consumers are instead squandered by the government, the banks and credit unions in needless and wasteful attorneys' fees; even more importantly, people are hurt because access to the reasonably priced financial services of credit unions is denied them. As long as this controversy remains unsettled, a great deal of time and energy that should be spent assisting people in need instead is spent calming the concerns of credit union members. The cornerstone of America's financial services system is trust and confidence. In the absence of prompt and decisive action by the Congress ratifying the long-standing federal policy permitting multiple group fields of membership there is a clear and present danger of seriously undermining consumers' confidence in that system.
Since their inception at the turn of the century, credit unions have served hundreds of millions of American consumers, providing low cost loans, friendly financial planning, the best opportunities to save and a level of service and commitment second to no other financial institution. Credit unions, regardless of size or the groups served, have retained their original character, and have remained true to their purpose.
In the 64 years since the passage of the Federal Credit Union Act, credit unions have asked little of Congress and have been no burden to the taxpayer; credit unions have stayed focused on the credo of "people helping people." Now, credit unions have something important to ask Congress on behalf of their 70 million current members and millions more potential members: change the phrase in the Federal Credit Union Act "groups having a common bond," to "groups having common bonds" and thereby ratify the policy of the federal government that credit unions have followed for nearly two decades. This minor change will allow credit unions to continue serve people of small means who look to credit unions as a safe, reliable and comfortable place to put their paychecks.
Communities, small businesses, the financial industry, the national economy and all Americans
will be well served if Congress preserves the right of the consumer to choose credit union
Home | Menu | Links | Info | Chairman's Page