FROM THE OFFICE OF PUBLIC AFFAIRS

The Honorable Alfonse M. D'Amato

Chairman

Committee on Banking, Housing, and Urban Affairs

United States Senate

Washington, D.C. 20510

Dear Mr. Chairman:

We understand that on April 30 the Committee will mark up H.R. 1151 as passed by the House, with the Treasury's prompt corrective action proposal to be included as a managers' amendment. I am writing to express the Treasury's support for the bill as so amended.

In revising the statute governing federal credit unions' field of membership, the bill would strike a reasonable balance among competing policy objectives (e.g., giving credit unions reasonable flexibility to expand beyond a single membership group, and yet preserving a meaningful common bond as a characteristic of credit unions). The bill would protect existing credit union members and membership groups, and would remove uncertainty created by the Supreme Court's AT&T decision.

The amended bill's safety and soundness provisions would represent the most significant legislative reform of credit union safety and soundness safeguards since the creation of the National Credit Union Share Insurance Fund in 1970. The bill would institute capital standards for all federally insured credit unions, including a risk-based capital requirement for complex credit unions. It would create a system of prompt corrective action -- specifically tailored to credit unions as not-for-profit, member-owned cooperatives. It would require periodic review of credit unions' access to liquidity.

The bill would also strengthen the Share Insurance Fund: by requiring more timely and accurate calculation of the Fund's ratio of reserves to insured deposits; by not permitting distributions to dissipate the Fund's reserves when the Fund's ratio of high-quality, liquid net reserves to total insured deposits falls below 1 percent; by requiring federally insured credit unions with more than $50 million in total assets to adjust their 1 percent deposit in the Fund semi-annually (instead of just annually); by replacing a fixed back-up premium rate with some discretion for the NCUA to adjust the premium rate according to the Fund's financial needs; by requiring the NCUA to charge a premium if the Fund's reserves fall below 1.2 percent of insured deposits; and by giving the NCUA discretion to let interest on the Fund's reserves increase the Fund's equity ratio to 1.5 percent.

These reforms involve little cost or burden to credit unions today, yet they could pay enormous dividends in more difficult times.

The bill rightly reaffirms and reinforces credit unions' mission of serving persons of modest means. The bill would require periodic review of each federally insured credit union's record of meeting the needs of such persons within its field of membership. This requirement is flexible, tailored to credit unions, and will impose no unreasonable burden. Section 204 rests on the Congressionally mandated mission of credit unions and on the benefits of federal deposit insurance. Such deposit insurance gives credit union members ironclad assurance about the safety of their savings, and thus helps credit unions compete for deposits with larger, more widely known financial institutions (just as it helps community banks and thrifts). Section 204 is particularly appropriate in view of how the bill liberalizes the common bond requirement and thus facilitates credit unions' expansion beyond their core membership groups.

Finally, we wish to comment on the safety and soundness of credit unions' business lending. The NCUA's existing regulations require that specified types of good-quality collateral fully secure such loans, require that credit union members be personally liable on such loans, and generally prohibit business loans to any one borrower from exceeding 15 percent of the credit union's capital. The regulations also require credit unions to have appropriate written loan policies that meet specified criteria, including policies relating to the qualifications and experience of the persons making and administering business loans. 12 C.F.R.  701.21(h). We believe that these existing safeguards -- together with such new statutory safeguards as the 6 percent capital requirement, the risk-based capital requirement for complex safeguards, and the system of prompt corrective action -- represent an adequate response to safety and soundness concerns about credit unions' business lending.

In closing, we very much appreciate your willingness, and that of Senator Sarbanes and other Members of the Committee, to support the Treasury's safety and soundness reforms. We look forward to continuing to work with the Committee to secure expeditious enactment of the bill.

Sincerely,

Richard S. Carnell

Similar letter sent to the Honorable Paul S. Sarbanes