Mr. Chairman, distinguished Subcommittee Members, as Chairman of the National Credit Union Administration Board, I appreciate the opportunity to testify before the Subcommittee and share with you the actions NCUA has initiated to address the Year 2000 issue, both within our Agency as well as within the credit union system.

The NCUA is the independent agency which regulates and provides federal share insurance for 7,100 federal credit unions and provides share insurance for 4,300 federally insured state chartered credit unions.

Mr. Chairman, the National Credit Union Administration recognizes the critical importance of the Year 2000 issue. NCUA has been working diligently at the micro and macro levels on this issue. We have undertaken the following three part approach:

• Examination and Supervision: Developing individualized plans through our examination and supervision programs for non-compliant federally insured credit unions in an one-on-one environment;
• Information Dissemination: Providing relevant Year 2000 information to federally insured credit unions, NCUA staff, State Supervisory Authorities, and various trade organizations; and
• Vendor Compliance: Working directly with credit union electronic data processing vendors to ensure compliance of their systems.

The actions and procedures I will be discussing will enable NCUA to effectively evaluate federally insured credit union and credit union vendor Year 2000 compliance and lead the system into the new millennium. We have already implemented an examination and supervision program to identify non-compliant credit unions and their vendors. This program requires reaching formal agreements with non-compliant federal credit unions and federally insured state credit unions in which we conduct an insurance review. These formal agreements (Documents of Resolution, Letters of Understanding and Agreements) are tailored to the individual credit union and specifically identify the problem, establish a course of corrective action, set time frames and benchmarks for implementing the corrective action, and assign a responsible person for ensuring the agreements are completed. One of the key components of our program is to require federally insured credit unions to complete initial system compliance tests during 1998 in order to ensure adequate time is available to debug the systems and implement a fully compliant system by the end of 1999.

Our supervision program requires periodic contacts with identified non-compliant federally insured credit unions to monitor their progress toward completing agreed upon procedures within the specified time frames. Should a federally insured credit union fail to meet its obligation, NCUA is prepared to institute the appropriate administrative remedies which are at our disposal.

Another component of our examination and supervision programs includes working directly with the state regulators. As part of this process, we be meeting with all the state regulators during the week of September 22, 1997 to ensure federally insured state credit unions are also Year 2000 compliant.

Furthermore, we have been working with the National Association of State Credit Union Supervisors to disseminate relevant Year 2000 issues and information to state regulators and credit unions.

Beginning in August of 1996, NCUA has taken various steps to heighten the awareness of and address the Year 2000 issue. We have sought to keep our staff, federally insured credit unions, and various credit union electronic data processing vendors informed of the Year 2000 concerns and requirements. The actions and procedures we have either completed or initiated include:

• developing and implementing an agency Year 2000 Plan (attached);
• assigning a Year 2000 Compliance Officer in our Central Office as well as in each of our six Regional Offices;
• working with the State Supervisory Authorities to evaluate their plans for addressing the Year 2000 issue;
• meeting with various trade organizations to discuss Year 2000 issues and appropriate plans for corrective action;
• coordinating our efforts with the Federal Financial Institutions Examination Council (FFIEC);
• participating in Year 2000 speaking engagements;
• issuing three NCUA Letters, two of which were addressed to both federal credit unions and federally insured state credit unions and the third which was addressed to federal credit unions (attached);
• identifying federally insured credit unions which have a high risk of not becoming Year 2000 compliant within reasonable time frames and increasing our supervision to enhance compliance;
• issuing advisory instructions to our regions (attached);
• developing an automated procedure to collect and compile Year 2000 compliance information on all federal credit unions as well as select federally insured state chartered credit unions;
• identifying and contacting major credit union electronic data processing vendors and issuing a vendor Year 2000 questionnaire to assess their compliance efforts (attached);
• continuing to update our electronic data processing vendor database to track vendor progress towards Year 2000 compliance;
• conducting and hosting a preliminary credit union electronic data processing vendor meeting to discuss hardware concerns and methods of identifying Year 2000 problems;
• developing a Year 2000 page on our Web site in order to share information with staff, credit unions, vendors, and others;
• monitoring various Year 2000 Web pages for emerging Year 2000 issues; and
• disseminating Year 2000 articles and information in NCUA publications.

We also have several other actions on our Year 2000 Plan which we will implement in the near future. These actions include:

• issuing a second letter to credit union electronic data processing vendors requesting additional information and updating their response to our initial questionnaire;
• hosting a conference for credit union electronic data processing vendors to discuss and discover general processing concerns and solutions;
• drafting a Year 2000 NCUA Instruction for NCUA staff to supplement guidance previously disseminated;
• hiring an outside consulting firm to assist us in performing Year 2000 compliance reviews of select credit union electronic data processing vendors as well as assisting NCUA in providing staff with Year 2000 training;
• reviewing a proposed program to train a number of examiners in specific testing procedures to assist our small automated credit unions in their conversion process;
• soliciting assistance from trade organizations, such as the Credit Union National Association, National Association of Federal Credit Unions, and National Association of State Credit Union Supervisors to work with credit unions to resolve Year 2000 issues;
• continuing our outreach with credit unions and vendors through conferences, publications, and speaking engagements; and
• disseminating the Year 2000 compliance status of electronic data processing vendors to our examiners, credit unions, and sister agencies.

As previously mentioned, we have been working with the credit union vendors to assist credit unions in their conversion. At this time, there are approximately 40 major credit union electronic data processing vendors who are serving 76% of all federally insured credit unions representing 79% of the total assets of federally insured credit unions.

As previously stated, we plan to have future vendor meetings. We will use these meetings to identify non-compliant systems and determine vendor compliance status, as well as to develop contingency plans should a vendor and/or credit union not be able to become compliant in a reasonable period of time.

Part of our contingency planning includes evaluating the ability of vendors to handle new customers (credit unions) on short notice. This plan should allow us to help non-compliant credit unions locate a vendor who is compliant and who can assist in their conversion while maintaining sufficient customer service support, both to new and existing customers.

Our contingency planning also addresses those situations where a credit union may not become Year 2000 compliant. NCUA will use its various administrative actions and remedies for credit unions which do not take sufficient action to become compliant.

With respect to our internal operations, NCUA has been working diligently to ensure that all agency internal automated systems are fully compliant with Year 2000 standards. By the end of this year, we will have completed our program to upgrade all core computer hardware, software, and communications systems within the agency. All of these systems were designed, purchased, and implemented to be Year 2000 compliant. We are working with our outside vendors and suppliers of data to make sure information coming into the agency in electronic form is Year 2000 compliant by September 30, 1998. We are also working with our security and administrative contractors in order to make NCUA's office building Year 2000 compliant by yearend 1998.

Finally, we have completed a Year 2000 preliminary plan for testing all our internal systems (attached). We are now in the process of finalizing a comprehensive agency-wide test plan designed to ensure that all NCUA internal automated systems will be Year 2000 compliant by September 1998. We expect this comprehensive plan to be completed by September 30, 1997 and we will forward a copy to this Subcommittee and Congress when it is done.

Obviously, our efforts have not come without a cost. We estimate our Year 2000 compliance cost related directly to our credit union examination and supervision program to be over $184,000 to date. We anticipate expending an additional $1.1 million during the next 2.5 years for examination and supervision. We have also expended $13 million to date to bring our agency's systems into compliance as part of our three year program to update all core systems. We estimate the total cost of our Year 2000 program to be over $14 million.

We believe our efforts demonstrate NCUA's determination to identify and resolve the Year 2000 issues in the credit union system. With proper oversight and guidance, NCUA can avoid any negative impact the millennium may have on the system.

Mr. Chairman and Subcommittee Members, this concludes my testimony, and I would be pleased to address any questions you may have.

Year 2000 Agency Plan

Year 2000 Compliance Verification Pre-Plan (internal compliance)

Year 2000 Questionnaire (Credit Union and Vendor)

Regional Advisory Instructions

Examination/Supervision Program

NCUA Letter to Federal Credit Unions (July '97)

NCUA Letter to Federally Insured Credit Unions (July '97, 97-CU-6)

EDP Vendor Letter and Preliminary Questionnaire

NCUA Letter to Federally Insured Credit Unions (August '96, 96-CU-5)