Senate Banking, Housing and Urban Affairs Committee

Hearing on the Implications of the Recent Supreme Court Decision
Concerning Credit Union Membership (First of Two Hearings)

Good morning, Mr. Chairman and members of the Committee. I am pleased to discuss the field of membership chartering policies adopted in 1982 ("the 1982 policy") by the National Credit Union Administration ("NCUA") and the impact of the recent Supreme Court decision which overturns that 1982 policy.

By law, credit unions are not-for-profit, member-owned financial cooperatives. As the regulator of 6,982 federally chartered credit unions (FCUs) and the insurer of an additional 4,279 federally insured state-chartered credit unions (FISCUs), the NCUA works to ensure that credit unions have a regulatory environment in which to operate that helps them to continue to fulfill the mission embodied in the Federal Credit Union Act (FCU Act).⁽¹⁾

Since the FCU Act was enacted in 1934, chartering and field of membership policies have evolved in response to changes in technology and the structure of the economy. Credit unions nationwide faced an emergency situation, as did all financial institutions, precipitated by the recession which ran from about 1978 to 1983. During 1982 alone, the United States recorded at least 600 plants closings. The credit union system was negatively impacted as approximately 80 percent of then-existing credit unions were tied to the industries which underwent the majority of plant closings.

During the early 1980s, NCUA policy required immediate liquidation of a credit union tied to a plant that closed whether or not the credit union itself was healthy. Such liquidations placed a great strain on the National Credit Union Share Insurance Fund (the deposit insurance fund established for credit unions in 1971; "NCUSIF").

Equity in the NCUSIF fell dramatically during the height of the recession with heavy insurance losses to the NCUSIF in 1980-1982 tied to the significant numbers of plant closings and resultant liquidations of their credit unions.⁽²⁾ By 1982 the NCUSIF's equity ratio had dropped to 0.259 percent from 0.320 percent in 1979. The equity ratio was so low that the NCUA Board responded by charging credit unions a special premium in 1982 and 1983.

This era of financial crisis generated significant safety and soundness concerns about the NCUSIF and the credit union system. As a result, the NCUA Board constituted in 1982 pursued several policy initiatives in response to the recession of the early 1980s. Modeled after then current state practices, the 1982 Board reinterpreted the field of membership policy to permit the establishment of a single credit union consisting of multiple groups, so long as each group within the credit union's field of membership possessed a common bond. This 1982 policy permitted a credit union to add distinct groups to its field of membership through the chartering process or by way of a merger. The opening of field of membership to multiple groups and revised standards for mergers laid the foundation to reverse the downward spiral for credit unions caused by the recession.

Since the adoption of the 1982 policy, more than 3,400 federally chartered credit unions have chosen to diversify their memberships. Each of these credit unions has become less dependent on the financial success of one sponsoring company or group. Empirical data demonstrates that the ability to diversify strengthened each credit union and the credit union system as a whole. Small employee groups were the primary beneficiaries of the 1982 policy as they were provided access to financial services offered by credit unions in situations where there were insufficient potential members and resources to charter and sustain their own credit unions.⁽³⁾

The 1982 policy enabled credit unions to merge and to protect credit union services for members instead of liquidating credit unions which lost their sponsor or which had suffered from financial or operational downturns. The direct result of the policy was to preserve credit union services for significant numbers of credit union members. Under the pre-1982 policy, a merger was approved only if a merger partner was found with a substantially similar common bond. Thus, from 1970 until 1981, the ratio of liquidations to mergers was almost one to one. After the 1982 policy, from 1983 through 1996 the ratio of liquidations to mergers was almost one to ten--resulting in a significant retention of credit union benefits for credit union members and diminished risk to the NCUSIF.

Although a series of economic downturns precipitated the policy initiatives by that 1982 Board, other economic issues provided ample justification for the continued implementation of the 1982 policy developed by that Board. Since 1982, advances in technology, changes in workforce demographics, and financial modernization issues, to name but a few, have altered the economic environment in which financial cooperatives are expected to operate.

More affordable and accessible workplace technology has helped small businesses become the fastest growing segment of the United States economy. Demographics available from the Small Business Administration indicate people who work in small businesses represent more than 50 percent of the private sector workforce. In the current financial services environment, few small businesses can realistically be expected to sustain a credit union for its employees. Consequently, limiting the ability of more than 50 percent of the private sector workforce (approximately 60 million people currently) to have access to credit union membership through their place of employment raises a serious public policy concern.

The Supreme Court decision to invalidate the 1982 policy significantly frustrates the ability of American consumers to avail themselves of credit union services. Reverting to the pre-1982 merger policy will undoubtedly result in the loss of additional credit union services for members where a like common bond cannot be identified as loss of a sponsor or a viable common bond will certainly continue in this era of constant corporate downsizing and restructuring.

Structuring a credit union system which will not only survive, but thrive, in the next millennium requires a positive, healthy regulatory environment which promotes the congressional intent to "make more available to people of small means credit for provident purposes through a national system of cooperative credit . . ." In the past, Congress has recognized the need for credit unions to continue to evolve within the context of an ever-changing financial marketplace and a constantly evolving workplace.

For example, in the case of share drafts, Congress considered the impact on consumers and the marketplace of not receiving this basic financial service and the role of credit unions in the financial services sector.⁽⁴⁾ In 1979 the D.C. Circuit Court of Appeals held in American Bankers Association v. Connell, 686 F.2d 953, (D.C.Cir. 1979), that share drafts, offered by credit unions pursuant to an NCUA pilot program initiated in 1974 with final regulations issued in 1978, violated the language of existing statutes.⁽⁵⁾ The Court found that while the language of the statutes might be antiquated when dealing with technological advances, it was in the purview of the Congress to review the statute and make any such policy judgments. At that time, Congress reviewed the options to (i) retain the existing language and limit the ability of credit unions to provide basic financial services or (ii) alter the statutory language to formalize changes prompted by advances in technology. Congress chose the latter.

With respect to share drafts, the Court expressed an expectation that Congress would want to immediately consider the matter and express its will. Consequently, the Court ordered that the judgment invalidating share drafts would not be effective until January 1, 1980, giving Congress eight months to consider the matter and act. Similarly, in the case of field of membership, it would be helpful if the current stay pending before the Court of Appeals were to remain in place in order to give Congress sufficient time to review the repercussions of the Supreme Court decision on the credit union system as a whole.

From a historical perspective, we have over 15 years of statistical evidence which identifies the benefits of the 1982 policy in both good and bad economic times. The change in the field of membership policy which provided the option of diversification for credit unions weathered the test of the 1980s economic downturn. The implementation of the 1982 policy remains reasonable in good economic times because recent past history has demonstrated that it results in a safe, sound, viable system. In this instance, should Congress decide to retain the 1982 policy, there is ample justification when reviewing the safety and soundness issues.

In order for Congress to assess the impact of the Supreme Court decision on the future of the credit union movement, a brief synopsis of the case is helpful. The American Bankers Association and several North Carolina banks brought suit against the NCUA seeking to overturn the Agency's approval of certain applications filed by AT&T Family Federal Credit Union to expand its field of membership under the 1982 policy.

The District Court dismissed the complaint on the basis that the plaintiff bankers lacked standing to challenge the decision because their interests were not within the "zone of interest" to be protected under Section 109 of the FCU Act. The U. S. Court of Appeals for the District of Columbia Circuit disagreed and reversed the District Court's decision.

On remand, the District Court entered summary judgment against the plaintiff bankers and held that the NCUA had reasonably interpreted Section 109 when it issued the 1982 policy. The Court of Appeals again reversed the District Court's decision.

The Supreme Court granted certiorari to consider (i) whether the plaintiff bankers had standing to seek federal court review of the NCUA's regulatory interpretation of the 1982 policy and (ii) the merits of whether the 1982 policy was permissible. The Supreme Court on February 25, 1998, found that the plaintiff bankers had standing to bring suit in federal court and that the 1982 policy was impermissible.

There are a number of lawsuits now pending involving the issue of field of membership.⁽⁶⁾ Various remedies are being sought in these cases. Evaluating the implications and predicting the legal ramifications for FCUs which have multiple groups in their fields of membership is ongoing and will continue for some time unless Congress decides to intervene in this situation.

The immediate effect of the Supreme Court decision will be to limit the ability of previously eligible consumers to have the option of access to credit unions and the affordable financial services which are available through credit unions. The reduced opportunity to access credit union services will be borne disproportionately by certain groups. Specifically, the consumers who fall into this category would be (i) employees of small businesses with too few employees to sustain a credit union; (ii) individuals who live in low-income areas without adequate affordable financial services; and

(iii) members of a credit union whose sponsor has disappeared or whose core common bond is no longer viable and no statutorily permissible similar common bond credit union is available for a merger. The NCUA has limited regulatory alternatives to guarantee access in the future for all individuals who could have had access to credit union services under the 1982 policy.

In a related matter, the NCUA Board (like all financial regulators) is faced with concerns about Year 2000 issues and their impact on the credit union system. While there are no current concrete indications that credit unions and the credit union system won't successfully meet all the challenges which Year 2000 presents, the Agency must be prepared to address the unfortunate circumstance that some credit unions may not meet Year 2000 compliance standards. Should the need arise for the NCUA to pursue mergers as a result of Year 2000 concerns, the Supreme Court decision would preclude mergers with unlike common bond credit unions (other than in the extreme case of imminent failures) rather than using safety and soundness and continuation of services to members as the determining factors.

Concerns arise with any policy change which has the potential to stifle growth because such a policy can present grave economic consequences during an economic downturn. In the past, financial regulators have been criticized for being slow to react to an economic downturn. As a result of an economic downturn, the 1982 Board put policies in place with respect to credit unions to spread the risk by diversifying the membership base. However, since credit union diversification was the result of what has been determined to be an invalid policy, such diversification may be difficult to maintain.

Any action taken by Congress to codify the 1982 policy would circumvent the potential long term implications which are being predicted as a result of the Supreme Court decision. Moreover, such action is justified by the resultant health of the NCUSIF, the continued reduction in any insurance losses and the overall stability in the system promoted by diversification.

While such decisions are being made, the NCUA's focus will continue to be on the safety and soundness of the credit union system. Our highly qualified and motivated professional staff remain committed to an examination and supervision program which promotes the health and stability of all credit unions.

I would be pleased to respond to any questions you may have.

Notes:

1. FCU and FISCU statistics provided as of December 31, 1997.

2. Insurance losses to the NCUSIF were almost $30 million in 1980, $43.7 million in 1981 and $77.4 million in 1982.

3. The NCUA guidelines state that 500 potential members are needed, as an absolute minimum, to charter and maintain a viable credit union. That figure has changed over time, from seven in the 1930s, to 50 in the 1950s, to 200 in 1980, to the most recent number of 500 in 1989. However, that threshold number may need to be reevaluated due to current consumer expectations for minimum services and technology and infrastructure costs. For example, the stereotypical manual posting "plain vanilla" operation may not thrive in today's environment in which, at a minimum, direct deposit or electronic benefits transfers must be considered factors.

4. Pursuant to an NCUA pilot program initiated in 1974, credit union members were permitted to withdraw funds from interest-bearing time deposits by a devise functionally equivalent to a check, with final regulations issued in 1978.

5. The decision entered in this case affected three financial regulatory agencies in addition to the NCUA. In the same decision, the Court also overturned regulations issued by the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation on the issue of automatic fund transfers and regulations issued by the Federal Home Loan Bank Board on remote service units.

6. Cases on which action had been stayed or was pending a decision in the AT&T case include Financial Institutions for Tax Equality v. NCUA, First City Bank v. NCUA, California Bankers Association and American Bankers Association v. NCUA, Texas Bankers Association, et. al. v. NCUA, First Entertainment FCU v. NCUA, Fort Knox Federal Credit Union v. NCUA, Guaranty Bank v. NCUA, and Metropolitan Service FCU v. NCUA.

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