GENERAL COUNSEL,
NATIONAL CREDIT UNION ADMINISTRATION

ON

THE "DEPOSITORY INSTITUTION REGULATORY STREAMLINING ACT OF 1999"

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT COMMITTEE ON BANKING AND FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

May 12, 1999

Good afternoon, Madame Chair and members of the Subcommittee. My name is Robert Fenner, and I am the General Counsel of the National Credit Union Administration. Thank you for inviting me here to provide NCUA's views on H.R. 1585. I will focus my remarks on the provisions of H.R. 1585 that would affect NCUA or federally insured credit unions.

I would like to begin by noting that NCUA is continuously striving to ease the regulatory burden on credit unions. Although we have had a number of new regulations this year because of the passage of the Credit Union Membership Access Act, we have made every effort to make them as clear and understandable as possible. Also, we review all of our regulations at least once every three years in order to eliminate outdated or unnecessary requirements. Our goal is to impose the minimum burden necessary to ensure that credit unions remain safe and sound while achieving the goals of the Federal Credit Union Act.

Your invitation letter asked for our position on section 101 of H.R. 1585, which would require the Federal Reserve to pay interest on reserves. NCUA strongly supports this provision of the bill.

Your also requested our views on section 102 of H.R. 1585, the removal of the prohibition on paying interest on business checking accounts. The underlying statutory prohibition on paying interest on business checking accounts does not apply to credit unions, and they are generally permitted to pay dividends on their business share draft accounts. Thus, NCUA and federally insured credit unions are not affected by this provision.

Next I would like to make an observation about Section 103 of H.R. 1585, which calls for a study of the "deposit insurance funds" to be conducted by the Federal Reserve, the FDIC and the Treasury. It is not entirely clear whether the National Credit Union Share Insurance Fund (NCUSIF) is included as a subject of this study, as section 302 of the Credit Union Membership Access Act amended section 202 of the Federal Credit Union Act to address many of the issues listed in your study. For example, CUMAA established a range for NCUSIF's reserve ratio and clarified under what conditions premiums may be assessed and when rebates may be granted. Also, the Treasury Department's recent study of credit unions included a section on the NCUSIF. Accordingly, it is my opinion that NCUA need not be included in such a study. If the intention is to include the NCUSIF, however, then NCUA, like the FDIC, should participate in conducting the study.

Section 221 of H.R. 1585 would prohibit credit union insiders from profiting from a credit union conversion; NCUA strongly supports this provision of the bill. The "Credit Union Membership Access Act" (CUMAA), enacted last year, changed NCUA's former requirements on conversions by credit unions to other types of financial institutions by allowing a conversion to proceed upon the majority vote of members voting. Thus, even a very small minority of credit union members can force a credit union to convert to a thrift. The CUMAA also eliminated much of NCUA's ability to oversee the integrity of the conversion process and ensure that the interests of all members of the credit union are taken into account.

While NCUA is grateful for Congress's efforts in preserving access to credit union membership for millions of Americans by enacting the CUMAA, NCUA did not support the section of the CUMAA which allowed for much easier conversion to other types of financial institutions. Section 221 of H.R. 1585 would restore some of the balance taken away by the CUMAA by eliminating the profit motive for credit union conversions. We believe this is an important measure to protect the interests of millions of credit union owner-depositors.

A brief review of NCUA's former requirements and the reasoning behind them may be helpful in understanding the need for Section 221 of H.R. 1585. Prior to the enactment of the CUMAA, NCUA required a majority vote of all members of the credit union before a credit union could convert to a mutual thrift. This standard made conversions a decision reserved to a democratic majority of the entire membership. Unlike other financial institutions, all of a credit union's capital belongs to its members, and the members govern the institution on the basis of one-member, one-vote. Once the conversion to a mutual thrift is accomplished, the institution can convert to a stock institution, with the result that a few officers and insiders of the former credit union may realize ownership of all the former credit union's capital in the form of stock.

In order to prevent insiders from walking away with capital that belongs to the entire credit union membership, NCUA instituted the majority vote requirement. This requirement was subject to notice and comment rulemaking in 1995; the agency received no comments opposed to the majority vote requirement. In fact, half the commenters on this section urged the agency to institute a supermajority requirement. The NCUA Board then imposed the least burdensome voting requirement suggested by the commenters - a majority vote of all members of the credit union.

While passage of the CUMAA has quelled anxieties over the field of membership issue for most credit unions, other restrictions imposed by this legislation, such as the limits on member business loans, will cause some credit unions to consider converting to other types of institutions. NCUA strongly endorses section 221 as a way to protect a credit union's capital for the benefit of all its members.

Another provision of H.R. 1585 affecting credit unions is section 401, which makes changes to required Truth-in-Lending disclosures. NCUA supports this effort to ease the compliance burdens of credit unions and other financial institutions.

Finally, NCUA supports the provisions contained in section 502 of your bill, which would protect credit union examination reports from unauthorized disclosures. However, we suggest several minor changes to ensure that data from credit union-affiliated entities will receive the same protection as information from credit unions and that information collected by state credit union supervisory authorities receives the same protection as information collected by NCUA. Our proposed legislative language for these changes, which parallels the language for other types of financial institutions included in section 501, is attached.

Thank you for this opportunity to present the NCUA's position on these issues. I will be happy to answer any questions.

Proposed Changes to Section 502 of H.R. 1585

National Credit Union Administration

1) At page 44, line 16, insert the following and renumber subsequent paragraphs accordingly:

"(1) CREDIT UNION.-The term "credit union" includes

(A) any "insured credit union" as defined in section 101(7) of this Act; and

(B) any "credit union organization" as defined in sections 107(5)(D) and 107(7)(I) of this Act."

Explanation: NCUA also examines credit union service organizations, which are affiliated with credit unions. Information from examinations of these entities deserves the same protection as credit union examination data. The amendments to the Federal Deposit Insurance Act made by section 501 of H.R. 1585 include entities affiliated with banks in their protections.

2) At page 47, line 8, insert the following and renumber subsequent subsections accordingly:

"(c) TREATMENT OF STATE SUPERVISORY INFORMATION.---In any proceeding before a court of the United States, in which a person seeks to compel production or disclosure by a State credit union supervisor or supervisory authority, the Administration, or other person, of information or a document prepared or collected by a State credit union supervisor or supervisory authority that would, had they been prepared or collected by the Administration, be confidential supervisory information for purposed of this section, the information or document shall be privileged to the same extent that the information and documents of the Administration are privileged under this Act."

Explanation: This amendment would protect state credit union supervisory authority information to the same extent as information collected by the NCUA. This change parallels language in section 501 protecting state bank supervisory information.

3) At page 49, line 10, strike "discover" and substitute "discovery." At page 48, line 7, strike "in" and substitute "to."

Explanation: Correction of typographical errors

4) At page 44, line 11, delete the words "at the end."

Explanation: After enactment of the Credit Union Membership Access Act of 1998 (P.L. 105-219), the FCU Act ends with section 216, but does not have a section 215. Therefore, section 215 is no longer at the end of the FCU Act.