[House Hearing, 110 Congress] [From the U.S. Government Publishing Office] THE NEED FOR CREDIT UNION REGULATORY RELIEF AND IMPROVEMENT ======================================================================= HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS SECOND SESSION __________ MARCH 6, 2008 __________ Printed for the use of the Committee on Financial Services Serial No. 110-95 U.S. GOVERNMENT PRINTING OFFICE 41-726 PDF WASHINGTON DC: 2008 --------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800 DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California DEBORAH PRYCE, Ohio CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York RON PAUL, Texas BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts Carolina RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut CAROLYN McCARTHY, New York GARY G. MILLER, California JOE BACA, California SHELLEY MOORE CAPITO, West STEPHEN F. LYNCH, Massachusetts Virginia BRAD MILLER, North Carolina TOM FEENEY, Florida DAVID SCOTT, Georgia JEB HENSARLING, Texas AL GREEN, Texas SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas KEITH ELLISON, Minnesota TOM PRICE, Georgia RON KLEIN, Florida GEOFF DAVIS, Kentucky TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina CHARLES WILSON, Ohio JOHN CAMPBELL, California ED PERLMUTTER, Colorado ADAM PUTNAM, Florida CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois ROBERT WEXLER, Florida KENNY MARCHANT, Texas JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan DAN BOREN, Oklahoma KEVIN McCARTHY, California DEAN HELLER, Nevada Jeanne M. Roslanowick, Staff Director and Chief Counsel C O N T E N T S ---------- Page Hearing held on: March 6, 2008................................................ 1 Appendix: March 6, 2008................................................ 57 WITNESSES Thursday, March 6, 2008 Dorety, Tom, President and Chief Executive Officer, Suncoast Schools Federal Credit Union, on behalf of the Credit Union National Association (CUNA).................................... 16 Johnson, Hon. JoAnn M., Chairman, National Credit Union Administration................................................. 12 Lussier, Michael N., President and Chief Executive Officer, Webster First Federal Credit Union, on behalf of the National Association of Federal Credit Unions (NAFCU)................... 18 Menzies, R. Michael Stewart, Sr., President and Chief Executive Officer, Easton Bank and Trust Company, on behalf of the Independent Community Bankers of America (ICBA)................ 44 Reynolds, George, Senior Deputy Commissioner, Georgia Department of Banking and Finance, on behalf of the National Association of State Credit Union Supervisors (NASCUS)..................... 14 Rock, Bradley E., Chairman, President, and Chief Executive Officer, Bank of Smithtown, on behalf of the American Bankers Association (ABA).............................................. 46 APPENDIX Prepared statements: Kanjorksi, Hon. Paul E....................................... 58 Neugebauer, Hon. Randy....................................... 60 Paul, Hon. Ron............................................... 61 Dorety, Tom.................................................. 62 Johnson, Hon. JoAnn M........................................ 78 Lussier, Michael N........................................... 94 Menzies, R. Michael Stewart, Sr.............................. 115 Reynolds, George............................................. 124 Rock, Bradley E.............................................. 130 Additional Material Submitted for the Record Kanjorski, Hon. Paul E.: Follow-up information provided by Hon. JoAnn Johnson......... 153 CUNA Response to ABA's ``Top 10 Questions''.................. 156 THE NEED FOR CREDIT UNION REGULATORY RELIEF AND IMPROVEMENT ---------- Thursday, March 6, 2008 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Kanjorski, Waters, Maloney, Watt, Sherman, Moore of Kansas, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Davis of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter, Donnelly; Bachus, Castle, Royce, Lucas, Biggert, Shays, Miller of California, Capito, Feeney, Hensarling, Garrett, Pearce, Neugebauer, Price, McHenry, Marchant, and Heller. The Chairman. Good morning. This is a hearing of the Financial Services Committee on the question of the legislation that should govern the activities of credit unions. This has been a subject of considerable interest for some time. I'm very proud that, largely due to the efforts of the chairman of the Subcommittee on Financial Institutions, my colleague from Pennsylvania, Mr. Kanjorski, we are engaged in a serious legislative consideration of this for the first time in the memory of a number of people. This is an issue that has been before us, and I want to acknowledge that it was Mr. Kanjorski's accession to the chairman of the subcommittee and our working together that is the major reason that we are here today. And I am hoping that we are not just going to be talking about this but legislating. I believe that this committee has shown a willingness with regard to all of our financial institutions to do sensible deregulation. Now deregulation can be carried too far, as it was in the origination of mortgages. I think it should be noted that the percentage of subprime mortgages that have run into difficulty that were originated by credit unions is tiny. The credit unions and the regulators who are here are to be congratulated for showing that it is possible to lend to people of moderate economic means to help them accede to homeownership without irresponsibility and fiscal crisis. That is a model to which we want to adhere. That is, yes, we want to deregulate because we do not want bureaucratic interference with our ability to help people. But we do not want to take that to the point where abuses run rampant. And so our goal is to continue a pattern that we think has been manifest in the credit union sector of sensible regulation that allows consumers to be served and helps the economy, but does not lead to abuses. I want to make another point. This is one of the issues that I intend to deal with as we go forward legislatively, and I hope that many of my colleagues will agree. One of the best things we can do for lower income people in this country is to get them into the depository system--credit unions and community banks. People who are outside of that system pay a far higher percentage in the transactions they do of the cost of those transactions than any of us here, and I daresay than any of you there. Payday lending, check cashing, excessive fees for remittances; those are all problems that lower income people face if they do these transactions outside of the system of credit unions and community banks. One of the things that I hope we will do is to enhance the ability of both sets of institutions to offer to people in that economic category an opportunity to save money. And so today we are talking about the credit unions that will be particularly our goal; to enhance the ability of credit unions to offer services to people of lower income. Because, again, we have the experience that doing it within the appropriate regulatory structure that we have allows this to go forward in a reasonable way. I also believe that--and it is on the agenda of this committee--that there are similar deregulatory things we should do with regard to the banking system. I understand that there are conflicts, and there will continue to be. But I believe there is also a commonality of interest in both sets of institutions in reducing regulation which gets in the way of serving people, particularly people in the lower income category. So it is my hope that this committee will be able to come up with legislation. And let me say, as I am reminded of the stimulus, if we do this well, we will come out with a bill, in my view, that will make no one deliriously happy but that I hope will make no one delirious. Those are the outer limits of our choices. But I think there is room for us to enhance the ability of regulated institutions in general to serve the entire economy, and particularly people in the lower income area, and that is where we will be proceeding. I have other duties that I need to attend to, so I am going to turn over the hearing to the second ranking member, the chairman of the Financial Institutions Subcommittee, the gentleman from Pennsylvania, who is the main sponsor of the CURIA bill and a man of significant experience and interest in this. I believe we have indicated--the indication I have received is that under our rules, as a matter of right, each side is entitled to 10 minutes, for a total of 20 minutes. Is that correct? No. Each side gets 20 minutes. Wishful thinking. And I have used only a little over 5 minutes, so I leave my side for the time, and we will proceed with opening statements for the full amount of 20 minutes on each side, and then we will hear the witnesses, and I thank the witnesses for their attendance. We will begin with the ranking member of the full committee, the gentleman from Alabama, for 5 minutes. Mr. Bachus. Thank you, Mr. Chairman. First of all, I would like to associate myself with your remarks. I think the millions of Americans who are members of credit unions are a testament to the important services that credit unions provide to the Nation. I think that is particularly true and valuable in some of our underserved communities, where the credit union is really the only financial institution. And sometimes those areas, for whatever reason, are overlooked by other financial service providers. Because they are nonprofit cooperatives managed by their members, credit unions excel at providing high-quality, low-cost services that are responsive to customer needs. In some underserved and rural areas, a credit union, as I said, is the only conventional financial institution to be found. Many constituents have told me that they have been able to afford their house or repairs to their house, start new businesses or even attend colleges because of the help of a credit union loan. In addition, I--and I know Mrs. Biggert feels the same way--am impressed by credit unions' commitment to financial literacy. It is a well-known fact that credit unions help their members become better educated customers or consumers of financial services. As we learned during a series of hearings before the Financial Institutions Subcommittee, some of the regulations on credit unions are overly burdensome, they are unnecessarily costly, and they are largely duplicative of other legal requirements. Whenever we can identify these examples of regulatory overkill, Congress should strive to eliminate them. And I acknowledge the gentleman from California, Mr. Royce, for his leadership on these issues. With our regulatory reform bill, we built a bipartisan consensus last year, and I hope that we can do the same thing this year with these regulatory bills. If we're serious about regulatory relief for credit unions, however, our efforts must be directed not only at eliminating excessive burdens that currently apply but resisting attempts to impose broad new regulatory mandates. For example, there are some on this committee and in Congress who argue that CRA should be extended to credit unions that currently fall outside the law's coverage. On this point, I strongly disagree. Rather than expanding the regulatory dragnet, our focus must be on providing appropriate regulatory relief so that the credit unions are free to serve the needs of their communities, and by very definition of who they are, they do serve communities. Further, we must ask whether regulatory impositions like CRA would be counterproductive and take away from their resources to lend to their members. In conclusion, we must keep in mind that our goal should be to improve the quality and lower the price of financial services for consumers. Experience shows that when financial institutions compete for customers, customers benefit. Thank you, Mr. Kanjorski. I yield back the balance of my time. Mr. Kanjorski. [presiding] Thank you, Mr. Bachus. I am pleased that we meet today to examine the need for making statutory improvements and providing regulatory relief for our Nation's credit unions. Nearly 4 years have passed since the Financial Services Committee last met to exclusively examine the many issues of concern to the credit union movement. I therefore commend Chairman Frank for convening this long overdue hearing. I am also optimistic that today's proceedings will lay the groundwork for swift action on legislation to modify the Federal Credit Union Act. The last time we acted on a comprehensive credit union legislation occurred a decade ago when the Congress adopted H.R. 1151, the Credit Union Membership Access Act. For the last 5 years, we have also worked to craft and build bipartisan support for the Credit Union Regulatory Improvements Act, or CURIA. I have been a leader in both of these reform efforts. CURIA would help to fix several problems created by the rushed drafting of H.R. 1151. These fixes including putting in place a modern, risk-based capital system for credit unions, allowing credit unions of all types to expand into underserved communities, and amending conversion voting standards. CURIA also contains a number of provisions to facilitate the ability of credit unions to make business loans. For example, CURIA would raise the current asset limit on members' business loans from 12.25 percent to 20 percent, a limit comparable to the current one of thrifts for their non-real estate commercial lending. Some have suggested that this modest change represents a major expansion of business lending authority. I have a different view. Prior to the enactment of H.R. 1151, we had no limits on business lending activities of credit unions. CURIA would therefore provide minor but needed adjustments to the limitations on business lending currently imposed by the law. Support for CURIA has steadily grown over time. During the 108th Congress, we had 69 supporters. In the 109th Congress, we garnered 126 supporters. To date, in the 110th Congress, we have now gained the endorsement of 147 supporters in the House. Our legislation, moreover, no longer has just bipartisan support in the House. It now enjoys bicameral support. I am very pleased that Senator Mary Landrieu announced that she would introduce CURIA in the Senate, along with Senator Joseph Lieberman. Their support clearly demonstrates that the momentum of enacting credit union statutory reforms is growing. Although support for CURIA is building, I recognize that enacting legislation into law is often a multi-stage process. Therefore, in order to achieve some progress on these matters, I recently introduced a pared-back credit union bill known as the Credit Union Regulatory Relief Act. Like CURIA, Congressman Ed Royce joined me in these efforts. H.R. 5519 contains eight noncontroversial provisions found in CURIA and previously passed by the House. It also includes language to permit all credit unions to assist those living and working in underserved census tracts, help individuals with short-term financial difficulties to obtain loans, and expand member business lending activities very modestly, through some narrow carveouts and clarifications. The swift adoption of H.R. 5519 will allow us to continue to work on enacting the many other important legislative reforms contained in CURIA but not contained in this new bill. Before I close, I would like to strike a cautionary note. At today's hearing, we will hear not only from regulators but also credit unions and banks. In the past, banks and credit unions have sometimes found themselves engaged in what might be termed a family feud. In reality, credit unions and banks have much in common. I hope that they realize this fact. In my view, we can work to expand the pie for both of them by advancing well-crafted reforms to their underlying statutes consistent with safety and soundness objectives. In closing, I look forward to hearing from our witnesses and engaging in a thoughtful debate. I also look forward to moving a credit union bill through our committee in the very near future. I yield back the balance of my time. And the Chair will now recognize Mrs. Biggert for 5 minutes. Mrs. Biggert. Thank you, Mr. Chairman, for holding today's hearing to examine credit union regulations. Like banks, credit unions plan an important role in our communities. Credit unions serve the financial needs of upwards of 90 million Americans, some would say as many as one-third of U.S. citizens. Again, like banks, credit unions have provided millions of Americans the credit and financial services that they need to buy cars, build homes, and pay for education. However, unlike banks, credit unions are tax-exempt organizations that are run by their members. Banks serve both customers and investors, are required to comply with the Community Reinvestment Act requirements and pay taxes. Back in 1934, in the midst of the Great Depression, when banks were failing and credit was scarce, Congress passed the Federal Credit Union Act which established requirements for chartering credit unions as well as a national regulator. Congress revisited this Act a decade ago, and here we are again today. Based on the written testimony of today's witnesses, it is clear that competition is alive and well in the financial services industry. This is a good thing. It points to the success of this sector of our Nation's economy, but more importantly, to the fact that Americans benefit from such competition. We are here today to examine the playing field for this competition. Is it level? Should it be level? I hope that today we can better understand the original intent of Congress for credit unions and how that intent holds up in the face of today's realities. Was it to encourage competition with banks? Did Congress intend for credit unions to fill the void left by banks in niche markets and underserved communities? What are underserved communities, or who is underserved in communities? Are credit unions fulfilling or not fulfilling their congressional directive? Is it also important that we flesh out further what, if any, true need there is to change the capital system and expand member business lending for credit unions, which H.R. 1537 envisions? Well, this committee is always up for a good challenge, and with that, I thank my colleagues, Congressmen Kanjorski and Royce, for presenting us with another challenge, and I look forward to today's discussions. Thank you, Mr. Chairman. I yield back. Mr. Kanjorski. Thank you very much, Mrs. Biggert. And now the Chair recognizes Mr. Baca for 2 minutes. Mr. Baca. Thank you very much, Mr. Chairman. Okay. Remember I have the additional seconds because my clock didn't start yet. [Laughter] Mr. Baca. Thank you very much, Mr. Chairman, for calling this important meeting. I'm proud to be a cosponsor of H.R. 1537, the Credit Union Regulatory Improvement Act. I appreciate my colleagues, Representative Kanjorski and Representative Royce, for having offered this legislation again, and I look forward to doing everything possible to help provide credit unions with the Regulatory Relief and Improvement Act that they need to better serve their members. I state, to better serve their members, and I think this is what it is all about--the quality of service, and how do we serve the members as well? There are 13 credit unions headquartered in my district that serve one hundred and--I mean, one thousand and twelve plus one hundred and twelve credit union members who live in my district. I agree that several of them contained by Mr. Dorety's testimony, especially when he talks about the services to the underserved. And I state to the underserved. This is about the underserved, and that's what this hearing about individuals as well, who are underserved. It's hard for me to understand how anyone can complain that credit unions are not doing enough to serve the underserved, given the barriers that credit unions face today. The fact is that those who complain the loudest are the ones who fight the hardest to keep credit unions out of the underserved areas. And I state out of the underserved areas where a lot of us, minorities and others, live. Mr. Chairman, there are reasons that we call these areas underserved. The banks aren't there, and most credit unions cannot serve these areas. One way that we can provide more services to those needs is to allow credit unions to enter the underserved areas and provide literally unbanked in our country with mainstream and affordable financial services. And this is what we have to do. I look forward to hearing from today's witnesses on how we can help credit unions continue to reach the underserved--and I state the underserved--in our communities. I yield back the balance of my time. Mr. Kanjorski. Thank you very much, Mr. Baca. Now my good friend, Mr. Royce of California. Mr. Royce. Thank you, Chairman Kanjorski. I want to begin just by thanking you for your efforts over the years on behalf of credit unions. I know their 90 million members across the country very much appreciate your efforts. I also want to thank you as a friend and colleague for holding this hearing and focusing our attention on this important issue. I believe, as you do, that priority should be passage of CURIA. I think it has been a decade since we had any major credit union legislation passed through the Congress, and it is important, I think, to modernize the regulations overseeing credit unions. And I think putting credit unions, as you say, on a par with other FDIC-insured institutions is a good way to do that. Let me say that Representative Kanjorski and I introduced H.R. 5519 in the meantime, the Credit Union Regulatory Relief Act, this week. And while this legislation does not go as far as many would like, it's important that we not let the perfect be the enemy of the good. And as we build momentum and support for CURIA, we are now looking at passage of this piece of legislation. It does several things. It provides the NCUA with increased flexibility to determine the interest rates on loans from Federal credit unions. It authorizes credit unions to invest in non-stock investment grade securities totaling up to 10 percent of the credit union's net worth. It permits all credit unions to expand their services into underserved areas, and it exempts business loans made to members within those underserved areas from the lending caps. And lastly, the Credit Union Regulatory Relief Act would support the community development work of nonprofit religious institutions by excluding such loans from credit union business lending caps. This is based on legislation I had introduced prior in 2003, and we have been trying to advance this particular concept, because this provision would close a long- standing liquidity gap between creditors and nonprofit organizations. A major priority, by the way, which was left out of this legislation, is the modernization of the current capital requirements for credit unions. And as Chairman Paul Kanjorski shared with you, CURIA incorporates the net worth and prompt corrective action reform proposals of the National Credit Union Administration, the Federal regulator responsible for the safety and soundness of the credit union system. CURIA would replace the current one-size-fits-all leverage capital requirement for credit unions with a more rigorous two- part net worth structure that would more closely monitor actual asset risk. The revised credit union capital/PCA structure would incorporate the relevant international risk-based standards for Basel I and Basel IA financial institutions, and it would very closely resemble the current risk-based capital standards for FDIC-insured banks and thrift institutions in this country. So I believe this, along with many of the other provisions found in CURIA, but not in H.R. 5519, are important. They should not be forgotten as we continue to work toward that goal. We have 145 Members of Congress who have signed onto the legislation. It is going to remain the primary vehicle to modernize regulation of credit unions, and of course, it has also been introduced this week in the United States Senate. So, again, I'd like to thank Chairman Kanjorski for his work on this issue. I think we have a good starting point, and as we move toward a markup on this legislation, I am hopeful we can gain a better perspective and develop a workable solution. I look forward to hearing from our extensive panel of witnesses who are with us today, and I thank them for making the trip out here. I yield back the balance of my time, Mr. Chairman. Thank you. Mr. Kanjorski. Thank you very much, Mr. Royce. The gentleman from Georgia, Mr. Scott. Mr. Scott. Mr. Chairman, if I may, could I just yield to my good friend, Mr. Green? He has an appointment. Then I could come after him? Mr. Kanjorski. Surely. Mr. Green. Thank you, sir. Thank you, Mr. Chairman. I thank the ranking member as well. I thank the members of the panel who will appear today. I am honored to be with you and regret that I will have to leave. I just want to note that we have 8,100 credit unions across the length and breadth of the country, serving 90 million members. In Texas, we have 603 credit unions, about 6.9 million members. Credit unions are making a difference, and sometimes they can be the difference in asset acquisition and wealth building. I thank you again, and I yield back the balance of my time. Mr. Kanjorski. Thank you very much, Mr. Green. The gentleman from Texas, Mr. Hensarling. Mr. Hensarling. Thank you, Mr. Chairman. I have 89,000 members, credit union members, in my district, and I know how important the credit union movement is to them. I also have noticed in my district the important role that credit unions are playing in the subprime challenge that we have, given their relatively low exposure to that market, that they are being very helpful in a lot of workouts and a lot of financial situations. I would also let folks in the credit union movement know, and I see several of my friends here today. They may not know it, but recently, I became a credit union member myself. But before you get too excited, no, I have yet to cosponsor CURIA. I did, however, as my friends know, along with the gentleman from Kansas--I do not see him here at the moment--Mr. Moore, helped champion regulatory relief in the last several Congresses. Many titles that were in our regulatory relief bill are also simultaneously in CURIA. I continue to be very concerned about the regulatory burden on our financial institutions, and I continue to support regulatory relief that is generally applicable to all financial institutions. I am particularly concerned about the burden that the Bank Secrecy Act continues to play in our financial system. However, I am also very mindful that one person's regulatory relief is another person's regulatory advantage. We do know that credit unions enjoy certain unique privileges within our system. Those privileges I am happy to defend, but there was a dramatic change a decade ago when the common bond requirements were modified. I believe tradeoffs were had at that time with respect to lending caps and capital requirements. Although I have many persuasive friends in the credit union movement, I have yet to be persuaded that balance should be upset. Having said that, I continue to have an open mind. It is not an empty mind. So I look forward to hearing the testimony, and I am very glad to hear my good friend from California, Mr. Royce, talk about the ability to perhaps advance H.R. 5519, where we do have common ground, in hopes that these other issues may be worked out at a later time. With that, I yield back. Thank you. Mr. Kanjorski. The gentleman from Georgia now, Mr. Scott, for 2 minutes. Mr. Scott. Thank you very much, Mr. Chairman. This is indeed a very, very important and timely hearing. And we have what really amounts to a delicate balancing act here to accomplish. First of all, we do have a need. The credit unions are there. They deserve the attention and relief under this bill, because they do serve an underserved community, particularly lower and moderate income communities and minority communities. And so we need to make sure we keep that in mind. Now there are four actors here that have to be taken care of. We have the regulators. We have the banks. We have the credit unions. But the most important part of this is the consumer themselves. We have the banks, the regulators, and the credit unions here before us, but we don't have the consumer. And that is where we, who represent the consumers, must take that into consideration. But there are areas where we can work together, particularly when you take the meltdown in the mortgage markets. There is a need that we could have for credit unions to be able to help take some of the downward pressure off of banks now that are tightening up on their requirements, to give the consumers another way and another resource with which to refinance their homes. That is one area that we have to take into consideration. Now this is sort of like a ball game. We have to get to several bases. We have to compromise. We have to work. Any reform, it takes time, it takes patience. But if we understand our mutual goal, which is to provide that kind of relief to assist an underserved community that needs that service, an unbanked community, then I believe we have room for agreement here. Today, with this hearing, we will certainly get to first base. Then we have to get to second base, third base, and then home. And I believe we will be able to score some runs that way. I look forward to this hearing. It is a very important hearing. Thank you, Mr. Chairman. Mr. Kanjorski. Thank you very much, Mr. Scott. We now have Mr. Pearce of New Mexico. Mr. Pearce. Thank you, Mr. Chairman. I appreciate you convening the hearing. New Mexico is very much rural. Some counties have more land mass than States back East, and fewer than 1,000 or 2,000 residents underserved is a very key problem that we face, not just available access to lending. I understand and appreciate the concerns of the banks. I see the large, large growing institutions that look almost like banks and have tax advantages, so we are very familiar with those. But at some point in our State, we have to address the access to liquidity. So we are interested in the hearing on the bill to hear both sides and look to see the ways that we can make the system more fair. I would encourage the chairman to hold a hearing on the Communities First Act, H.R. 1869. I think that more than regulatory relief right now we have to be concerned with the entire aspect of our financial institutions. We had a couple of hearings last week that raised significant concerns. And so we need to be looking through this problem to making all financial institutions more sound and more competitive worldwide. So I hope that the chairman would consider that also. I look forward to the hearing and appreciate the chairman for convening it. Thank you. Mr. Kanjorski. Thank you very much, Mr. Pearce. And now we'll have Mr. Cleaver of Missouri. Mr. Cleaver. Thank you, Mr. Chairman. I appreciate this hearing. It seems as if each hearing this committee participates in is one that deals with those who hate regulations and those who want more. I have twin sons, and when they were smaller--we have a huge backyard and they would be riding their bicycle, and one of them would say, ``Daddy, would you make him get off so I can ride?'' I think that is kind of what we hear when we deal with credit unions and banks and other financial institutions. And I think that it is our responsibility to protect the consumers while at the same time making sure that there are opportunities available to the financial institutions, such as banks, and that we ought to create those opportunities with as few barriers as possible. But I'm looking forward to getting into the question and answer period, because I think that the great conflict is always, you know, laissez-faire. And I think if we have laissez-faire, we probably don't need Congress, and I don't need any response to that. It seems to me that we have a responsibility to play this role, and I look forward to playing it. Thank you, Mr. Chairman. I yield back the balance of my time. Mr. Kanjorski. Thank you very much, Mr. Cleaver. And now we will hear from the gentleman from Georgia, Mr. Price, for 1 minute. Mr. Price. Thank you, Mr. Chairman. I want to thank the chairman and Ranking Member Bachus as well and add my commendation to them for holding this hearing. And I want to commend Congressman Kanjorski and Congressman Royce for their ongoing efforts to spotlight this issue. I want to welcome all the members of the panel. I want to particularly welcome Mr. George Reynolds, who is the senior deputy commissioner of the Georgia Department of Banking and Finance. Welcome. We look forward to your testimony. I am interested in a number of issues. One of the provisions of H.R. 1537, the CURIA Act, would update the current capital requirements for credit unions addressing some concerns that NCUA has that the current capital requirements for credit unions may be too inflexible and should become more risk-based. We are all aware of the challenges that the housing market is creating for our whole economy, and I would be interested in hearing all panel members' thoughts on whether those challenges that we're facing require or would benefit from any legislative or congressional action as it relates to credit unions. Additionally, Chairman Kanjorski and Congressman Royce have introduced a couple of pieces of legislation on regulatory relief, and I am interested in hearing from the panel specifically on those regulatory challenges that you or your clients and those that you represent face during their daily routine. Specifically, are there compliance tasks that you feel are overly burdensome and end up costing more in compliance costs than they're worth for either the system or for consumers? And again, I appreciate each of you coming and look forward to your testimony and the Q&A. Thank you, Mr. Chairman. Mr. Kanjorski. Thank you, Mr. Price. And now, we will hear from Representative Neugebauer of Texas for 2 minutes. Mr. Neugebauer. Thank you. And I thank Chairman Frank for calling today's hearing. It's good to have all of our friends from the credit unions in Washington this week. I had several from my district, from Big Spring and Abilene yesterday. And I think it's important that you come to your Nation's capital and talk to the people who represent you here and make sure that your views, which are the views of your shareholders, your stakeholders, are expressed on this important issue. I appreciate the contribution that the many credit unions in my district make to the folks in West Texas. They are working very hard to make sure that they serve their customers. And one of the things that we're very blessed in our Nation, and particularly in our--in Texas is we have a lot of good, healthy financial institutions, banks, thrifts, and credit unions that provide for the financial needs of the folks that we serve. I think one of the important things is that whether it is a credit union or a bank or a thrift, what I hear over and over again is we have to do something about decreasing the amount of regulation because they said--what they tell me is they spend more time now working for the regulators than they spend time working for the people that they serve. And certainly I support additional efforts on behalf of this committee to look at ways to reduce the regulatory environment and also make sure that we have a streamlined, efficient, 21st Century financial services industry. Like many of my other colleagues, I am particularly interested in looking at the way that we assess the capital needs of credit unions in our country. I think the current system is an antiquated system today that we ought to measure the amount of capital that a financial institution has not based on what some arbitrary number that we're going to try to make one size fit all, but with a number that is based on the kinds of loans and lending practices that that particular credit union is using, as we do with other financial institutions to measure what is the risk that they are taking and then make their capital requirements to coincide with that. And so I think that's a system that makes sense. I again thank of the panelists for being here today. We look forward to hearing from you as we try to make America's financial institutions a better place and better serve the folks for whom we all work. Thank you, Mr. Chairman. Mr. Kanjorski. Thank you very much. And now we will hear from Mr. Davis of Tennessee for 1 minute. Mr. Davis of Tennessee. Thank you, Mr. Chairman. Living in a rural area as I do, and representing 10,000 of Tennessee's 40,000 square miles in the 4th, one of the most rural residential Congressional districts in America, we need every available resource to us that we can that will supply credit for those consumers in the 4th District to be able to at least access reasonable rates and reasonable terms. Since 1934, 8,100 credit unions have been established across the State, representing over 90 million people. But in the district I represent, we have small, independent bankers as well. And from my perspective, there's a reason that subprime lending is not damaging our small local banks nor our credit unions. We haven't gotten involved in that, consumer lender. So I applaud the folks in 1934 and Congress who saw fit to establish--and saw the need for the credit unions. But I also realize that as I live in a small rural area, I live in an area where there were two banks that didn't close in 1929 during the Great Depression. So I want to be sure that as we navigate through the future, we continue to allow credit unions to be able to provide the great service they are providing today, but also to be sure that our small banks in the district I represent are still going to be standing 10 years, 20 years, and 30 years down the road. Thank you for coming today, and I look forward to the question and answer session. I yield back my time. Mr. Kanjorski. Thank you, Mr. Davis. I will now introduce the panel. Thank you for appearing before the committee today, and without objection, your written statements will be made a part of the record. You will each be recognized for 5 minutes for a summary of your testimony. First, we have the Honorable JoAnn M. Johnson, Chairman of the National Credit Union Administration. Ms. Johnson. STATEMENT OF THE HONORABLE JOANN M. JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION Ms. Johnson. Thank you, Mr. Chairman, Ranking Member Bachus, and members of the committee. I thank you for this opportunity to testify. The variety of proposals before Congress would strengthen NCUA's ability to maximize the safe and sound operations of over 8,000 federally insured credit unions, modernize important aspects of the Federal Credit Union Act, and grant greater flexibility to credit unions serving consumers. The written statement I have submitted contains analysis of four bills: H.R. 1537; H.R. 1849; H.R. 3113; and H.R. 5519. I would like to devote most of my statement to two paramount issues--prompt corrective action reform, and extension of credit union service to consumers in underserved areas. I want to thank Chairman Frank for his leadership and Representatives Kanjorski and Royce for their stewardship of the issues contained in CURIA, and in a new iteration, H.R. 5519, just introduced this week. You have consulted with and advised this agency on a number of occasions as you assess possible updates to the Federal Credit Union Act, and have led an informed discussion of issues that have real world benefits for consumers. I also commend Representative Velazquez for her tireless efforts to assist credit union efforts to reach out to small business communities, and Representative Serrano for his legislation to improve credit union service in disadvantaged communities. NCUA currently administers a system of prompt corrective action with the purpose of resolving problems at credit unions at the least possible cost to the National Credit Union Share Insurance Fund. Our experience in regulating and supervising credit unions has shown that a more fully risk-based system, such as the one contemplated in H.R. 1537, would improve the regulatory regime while at the same time enable credit unions to put more money in the hands of their members. The legislation mirrors a proposal adopted by NCUA last summer and incorporates substantive and very helpful input from the Department of the Treasury. It also recognizes developments that have occurred with the adoption of the new Basil II capital standards for FDIC-insured institutions. A new risk- based system promotes active management of risk in relation to capital levels. By emphasizing risk assessment, credit unions would be able to better relate their capital to the risk they are assuming. Cash in the vault carries a different degree of risk than a 30- year fixed mortgage, and we believe our regulation should be able to recognize this. Also, NCUA oversight will be strengthened using additional tools to identify each credit union's risk profile based on their activities. It is important to note that the proposed leverage ratio thresholds will in fact result in some credit unions being required to hold more capital than under the current system. The proposed system would be robust and would promote a regulatory regime that more accurately portrays risk. It would reduce regulatory burden on credit unions while enhancing their ability to manage their balance sheets in a more efficient, effective, and most importantly, safe manner. What I have just described is an accountant's-eye view of PCA reform. What it means to consumers is more dollars available from their credit union for them to save, invest, and put to productive use, all in a safe and closely monitored environment. Another important feature of my regulatory relief legislation--of any regulatory relief legislation--involves modernizing the statute to allow all types of federally chartered credit unions to adopt underserved areas. Currently, NCUA can only permit multiple group credit unions to add underserved areas in their field of membership. Single group and community chartered credit unions are not authorized to adopt these areas. All types of federally chartered credit unions should be able to improve access, particularly at a time when so many Americans have turned to predatory lenders and are suffering the unfortunate consequences. Three different bills have language that would address the situation, and NCUA would be supportive of these approaches. I do note that H.R. 5519 establishes new standards regarding how credit unions are serving consumers when adopting underserved areas. We want to work with Congress to make sure that all consumers have choices in financial services. NCUA takes outreach seriously. Turning briefly to other issues addressed in regulatory relief proposals, several bills propose to improve the ability of credit unions to make member business loans. We support those efforts and note that credit union member business lending can be beneficial and productive service offered to consumers. We also underscore the importance of strong and active NCUA supervision of these activities. NCUA continues to devote significant attention to guidance for all credit unions in all types of lending. Irrespective of any statutory limits on individual or aggregate credit union member business loans, NCUA will continue to be vigilant and aggressive in its supervision. H.R. 5519 contains a provision that builds upon the progress Congress made 2 years ago in helping consumers find lower-cost alternatives to predatory lenders. Allowing credit unions to provide payday loan services within their field of membership makes sense, and we commend the approach. NCUA believes these modernizations represent significant improvements to our ability to regulate and supervise credit unions. We stand ready to work with Congress as you seek ways to improve the delivery of financial services to credit union members, and we feel confident that your deliberations will succeed. Thank you very much. [The prepared statement of Ms. Johnson can be found on page 78 of the appendix.] Mr. Kanjorski. Thank you very much, Ms. Johnson. As everyone knows, we have two votes on the House Floor, and rather than taking any more statements, we have about 6 minutes remaining on those votes, so we're going to recess the committee for about 20 minutes, and then we will reconvene and take further testimony. The committee stands in recess. [Recess] Mr. Kanjorski. We will now reconvene. Next, we will hear from Mr. George Reynolds, senior deputy commissioner of the Georgia Department of Banking and Finance, testifying on behalf of the National Association of State Credit Union Supervisors. Welcome to the committee. Mr. Reynolds, if you will present your testimony? STATEMENT OF GEORGE REYNOLDS, SENIOR DEPUTY COMMISSIONER, GEORGIA DEPARTMENT OF BANKING AND FINANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS (NASCUS) Mr. Reynolds. Good morning, Chairman Kanjorski, and distinguished members of the House Committee on Financial Services. I appear today on behalf of NASCUS, a professional association of State credit union regulators. NASCUS believes that H.R. 1537, the Credit Union Regulatory Improvement Act of 2007 called CURIA, is important legislation. As State regulators, we determined our position on the provisions in CURIA after reviewing the effect on credit union safety and soundness and State law. NASCUS supports comprehensive capital reform. First, credit unions need to be assessed using risk-based capital standards; and second, credit unions should have access to alternative capital. From a State regulatory perspective, capital reform that addresses these areas makes sense. CURIA expands risk-based capital options to all federally insured credit unions. NASCUS has long supported that risk- based capital standards are appropriate. We believe it is a sound and logical approach to capital reform for credit unions. The implementation of prompt corrective action for credit unions doesn't just happen. It requires strong cooperation and consultation between State and Federal credit union regulators as provided by the Credit Union Membership Access Act. We believe coordination between State and Federal regulators is imperative to ensure effective capital reform. Also, comprehensive capital reform requires more than just risk-based capital. NASCUS believes that CURIA's capital reform provisions would be enhanced by allowing a provision for the inclusion for alternative capital. Simply put, credit unions would benefit from alternatives that allow them to raise capital other than through retained earnings. In fact, low-income and corporate credit unions currently have access to alternative capital. We understand that additional dialogue with policymakers, the credit union industry, and NCUA is necessary to reach a consensus on alternative capital. Now is the time for dialogue before capital requirements are refute and time sensitive. Let me point out a few considerations. First, NASCUS is not the only voice advocating access to alternative capital. The Filene Research Institute released a study in November of 2007 entitled, ``Alternative Capital for U.S. Credit Unions: A Review and Extension of Evidence Regarding Public Policy Reform.'' The report concludes that it is in the public interest to permit credit unions greater access to alternative capital. It is attached to our testimony. Next, while the majority of credit unions were not involved in the subprime real estate market problems, all financial institutions are experiencing impacts from the residential mortgage market. How would alternative capital help? It would allow credit unions, as it does other financial institutions, to meet these challenges and potentially thrive in an uncertain market environment. As regulators, we realize that alternative capital requires solid regulation and rigorous regulatory review to ensure that these products are properly structured, meet proper disclosure requirements, and do not create any systemic risk. Before a credit union would be given access to alternative capital, it must demonstrate that it has the resources to properly manage alternative capital. NASCUS supports revisions to member business lending. Changes will provide an opportunity for credit unions to better serve members. With proper underwriting and controls, these changes are not believed to be a risk to safety and soundness. While NASCUS supports revisions, we recognize that they require proper regulatory oversight through examination and supervision. Credit unions must have a thorough understanding of member business lending and be diligent in their written policies, underwriting, and controls for provisions to be implemented in a safe and sound manner. CURIA also outlines procedures on conversion voting requirements. NASCUS supports full transparency and disclosure. We believe that any legislation concerning conversion requirements of a State-chartered credit union should recognize State law. NASCUS appreciates the opportunity to testify. Our discussion was limited to those provisions in CURIA that impact State-chartered credit unions. We urge this committee to be watchful of Federal preemption and to protect and enhance the viability of the dual chartering system. We welcome questions from committee members. Thank you. [The prepared statement of Mr. Reynolds can be found on page 124 of the appendix.] Mr. Kanjorski. Thank you, Mr. Reynolds. We will now hear from Tom Dorety, president and chief executive office of the Suncoast Schools Federal Credit Union, testifying on behalf of the Credit Union National Association. Mr. Dorety? STATEMENT OF TOM DORETY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SUNCOAST SCHOOLS FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION (CUNA) Mr. Dorety. Thank you. Chairman Kanjorski and members of the committee, on behalf of the Credit Union National Association, I appreciate the opportunity to appear before you to express our support for H.R. 1537, the Credit Union Regulatory Improvement Act. CUNA is the largest credit union advocacy organization, representing over 90 percent of our Nation's 8,400 State and Federal credit unions and their 90 million members. I am Tom Doherty, CEO of Suncoast Schools Federal Credit Union in Tampa. As you are well aware, we are experiencing a credit crunch in many sectors of the economy. It is ironic that credit unions are ready, willing, and able to help alleviate the problem and promote economic growth, and yet we are inhibited from doing so by outmoded laws that protect the narrow self-interests of bankers. Mr. Chairman, the last major changes to the Federal Credit Union Act were made in 1998. These changes did not provide significant regulatory relief to credit unions. In fact, the opposite is the case. The Credit Union Membership Access Act imposed statutory burdens related to business lending and prompt corrective action. It is now time for Congress to reconsider the applications of these statutory requirements. Credit unions support the provisions of H.R. 1537 which would increase the current limit on credit union member business loans from 12.25 percent to 20 percent of total assets and permit the NCUA to increase the threshold for defining an MBL from $50- to $100,000. We hope that Congress will also consider eliminating the statutory business lending cap entirely. There is no economic rationale for this cap. Credit unions have been providing these loans safely for nearly 100 years. If that broader approach is not approved as an alternative, CUNA asks Congress to consider exempting MBLs made in underserved areas from that cap. Credit unions also seek modernization of the statutory capital requirements Congress enacted in 1998. By law, not regulation as for other depository institutions, credit unions must maintain a 7 percent net worth ratio in order to be considered well capitalized. In comparison, the current ratio for banks to be well capitalized is only 5 percent. This capital requirement for credit unions is inefficient. It unnecessarily retards member service and growth and it does not appropriately account for risk of a credit union's assets. Under the proposal in H.R. 1537 which has been endorsed by NCUA, the new capital requirements would still be more strenuous than bank capital requirements and would accurately account for the risk for the credit union's portfolio. A more precise, risk-based capital requirement would enable credit unions to do even more to help members in these economically stressful times. CUNA also supports a statutory clarification that all Federal credit unions may apply to NCUA to add underserved areas. This provision will enhance the ability of credit unions to assist underserved communities with their economic revitalization efforts. It provides all Federal credit unions with an opportunity to expand services to individual and groups working or residing in areas that meet unemployment and other distress criteria identified by the Treasury Department. Mr. Chairman, it's unfortunate that credit unions must come to Congress to ask for this clarification. You, yourself, along with several members of this committee thought that had been addressed 10 years ago. We were forced to ask Congress for this provision because the American Bankers Association sued NCUA in 2005 for authorizing single sponsor and community chartered credit unions to add underserved areas to their field of membership. In a November 2005 hearing before the House Ways and Means Committee, the ABA complained that credit unions do not do enough to serve people of modest means. Within days, the same group took credit unions to court to prevent them from doing so. Mr. Chairman, as you know, these areas are called underserved with good reason. Banks make a business decision not to operate in underserved areas. Credit unions seek to serve the underserved. It is not just part of our congressionally mandated mission; it is part of our core mission. Six years ago my credit union added and opened a branch in an underserved area in Immokalee, Florida. The median income in this county is $24,000. We currently have over 6,600 members, $24,000 million in deposits, and $62 million in loans from this area. We are providing quality financial services to an area that otherwise would not have it. Those living in underserved areas lack access to mainstream financial services. For millions of lower income families, this means their only alternative is to use the high cost products provided by check cashers, payday lenders, finance companies, and pawn shops. CURIA would permit all Federal credit unions to apply to NCUA to add underserved areas. This is what many Americans need in order to have mainstream financial services. Mr. Chairman, my written testimony provides greater detail on these and other provisions. I appreciate the opportunity to appear before the committee and look forward to any questions the members may have. Thank you. [The prepared statement of Mr. Dorety can be found on page 62 of the appendix.] Mr. Kanjorski. Thank you very much, Mr. Dorety. Next we will hear from Mr. Michael N. Lussier, president and chief executive officer of the Webster First Federal Credit Union, testifying on behalf of the National Association of Federal Credit Unions. Mr. Lussier? STATEMENT OF MICHAEL N. LUSSIER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, WEBSTER FIRST FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU) Mr. Lussier. Good morning, Mr. Chairman, and members of the committee. My name is Michael Lussier, and I am the president and CEO of Webster First Federal Credit Union located in Webster, Massachusetts. I'm here today on behalf of the National Association of Federal Credit Unions, where I proudly serve on the board of directors. We appreciate the opportunity to express our views and the need for credit union regulatory relief and improvements. As with all credit unions, Webster First is a not-for-profit financial cooperative governed by a volunteer board of directors who are elected by our members. I am pleased to report to you that unlike other types of financial institutions that put many people into predatory subprime loans, credit unions work with their members to give them responsible loans at rates that they can afford. America's credit unions are vibrant and healthy. Membership in credit unions continues to grow, now serving over 90 million Americans. According to data obtained from the Federal Reserve Board, in terms of financial assets, credit unions have just a 1.1 percent market share and, as a consequence, provide little competitive threat to other financial institutions. NAFCU would like to thank Representatives Paul Kanjorski and Ed Royce for their leadership in introducing H.R. 1537, the Credit Union Regulatory Improvements Act; and H.R. 5519, the Credit Union Regulatory Relief Act; and the many members of this committee who have cosponsored these important pieces of legislation. The facts confirm that credit unions are more heavily regulated than other financial institutions. We believe H.R. 5519 is a solid and non-controversial bill and urge the committee to take up and pass these needed first steps at regulatory relief in a timely manner. I want to focus my statement today on two aspects of CURIA which are much needed by the credit union community. First, Prompt Corrective Action, or PCA reform, would modernize credit union capital requirements by redefining the net worth ratio to include risk assets as proposed by the NCUA. This would result in a new, more appropriate measure to determine the relative risk of a credit union's balance sheet and also improve the safety and soundness of credit unions and our share insurance fund. For example, the current capital system treats a new 1- year, unsecured, $10,000 loan the same as a secured, 30-year mortgage that is on its last year of repayment; something that just simply makes no sense. It is important to note that this proposal would not expand the authority for NCUA to authorize secondary capital accounts. Rather, we are moving from a model where one-size-fits-all to a model that considers the specific risk posed by each individual credit union. This proposal creates a level comparable to but still greater than what is required by FDIC insured institutions. Secondly, NAFCU also asks the committee to refine the member business loan cap established as part of the Credit Union Membership Access Act in 1998, replacing the current formula with a flat rate of 20 percent of the total assets of a credit union. At Webster First, we are currently at the cap of 12.25 percent and, as a result, each week we must turn away members requesting business loans that cannot be obtained elsewhere. The simple modification of the Member Business Lending cap would allow Webster First to provide an additional $32 million in small business loans to our members in central Massachusetts. There are many credit unions like mine in congressional districts across the country that can provide the immediate economic stimulus to their local areas by this simple change that does not cost the government a dime. We also support revising the definition of a member business loan by giving NCUA the authority to exclude loans of $100,000 or less from counting against the cap. The current de minimis level of $50,000 was established in 1998 and has been eroded by inflation over the last 10 years. There is a lot of rhetoric out there on this issue, but I must note that a 2001 Treasury Department study entitled, ``Credit Union Member Business Lending,'' concluded that ``credit unions' business lending currently has no effect on the viability and profitability of other insured depository institutions.'' In conclusion, the state of the credit union community is strong and the safety and soundness of credit unions is unquestionable. Nevertheless, there is a clear need to ease the regulatory burden on credit unions. It has been 10 years since Congress last enacted major credit union legislation. NAFCU supports H.R. 5519 as important first step in providing regulatory relief and urges its passage. Furthermore, we call on the committee to follow the lead of the 145 Members of the House who are supporting CURIA and pass this important legislation. Lastly, we ask that any efforts to provide regulatory relief to financial institutions are balanced and equitable. We look forward to working with you on this important matter and I welcome your comments and questions. Thank you very much. [The prepared statement of Mr. Lussier can be found on page 94 of the appendix.] Mr. Kanjorski. Thank you very much, Mr. Lussier. And I thank the entire panel for their testimony. It was very informative. I certainly have a few questions, as I am sure my colleagues do. First and foremost, I am certainly going to reserve some of the questions for the banking witnesses, because I am at a loss, honestly, to understand the two elements of H.R. 1537 that I hear the most objection to from the banks: the risk- based capital question; and the conversion question. It would seem to me that it is just good practice to put the credit union financial position on the same level with risk as other banking institutions have. It would be good for the system. It is good for the credit union movement and it would actually be good for the banking system as a whole. So I do not understand their objection to that. Secondly, the conversion problem is almost insulting in terms of so few people today can dissolve credit unions and dispose of the assets in a favorable way to themselves as opposed to having a recognition of the built-up equity over generations that credit unions represent. I find that offensive, if for no other reason than that. Rather than having the type of conversion system we have now, I would rather a court dispose of the assets and direct the assets to a like or similar type of entity to carry on the mission that was originally indicated for the to-be dissolved credit union. But we will save those questions. What do the witnesses have to say in terms of, maybe I will start with Ms. Johnson. Why do you think there is such objection to the risk-based capital structure that we have put in place, since our committee and the Congress have really worked very closely with the regulators to take exactly what they have recommended in its best regards and try to put it into place and adopt it into law? Have you heard any response or comment as to what the objection is to everyone else on this point? Ms. Johnson. Congressman, I think the proposal before you is one, on this risk-based capital, is one that is coming from the regulator. It is not coming from the trades. It is not coming from the credit unions that have been working on this for over 3\1/2\ years. I think the opposition that is out there is misleading in that it is being sold as an across-the-board reduction in capital for credit unions. This is not true. What this is, it is a positive--this will have a positive impact on our insurance fund from the standpoint that it allows us as the regulator to identify problems more quickly. Credit unions will be assessed higher risk levels for riskier activities, or higher capital levels for riskier activities; and it's actually a tool for us as a regulator. This is not a give-away. In fact, for 30 percent of the credit unions it is actually going to raise their capital levels, or those standards. So I think it has been sold as a give-away, and by all means, it is just the opposite. It is a tool for us. It is my number one priority of all of the regulatory items that we are addressing today. This is probably the one that is most important to me as a regulator and so I would really ask for your serious consideration of this proposal that it either be included in the legislation, or put back in whatever piece might actually pass. Mr. Kanjorski. Well, as you may or may not know, what we broke out is H.R. 1537 to stand on its own as it was originally introduced, and maybe modified by H.R. 5519, which we recently introduced this week, which would take the less contentious elements so that we can move them through the Congress quickly and get them passed. But of course, we are not going to accomplish the two most important things there: the conversion correction; and the risk capital correction. How can we make this strong issue? Maybe I am asking the wrong person on this since you participated as a regulator in adopting this, but I have been sort of frustrated myself over the last several years because I thought we invited everybody's comment. It was not anything that anyone individually promoted, not the association or the credit union movement themselves, but in fact the regulator. And we waited, if you recall, until you completed all of your studies before we wrote the bill and then incorporated what the regulator asked us to incorporate in the bill. Ms. Johnson. Congressman, it is frustrating for me, too, that this item is being seen as contentious, because it shouldn't be. We have put over 3 years of work into this. Actually I saw written quotes in the media early on from the bank and trade associations that they understood that this was probably necessary. And then I think as time went along and the fires were stoked in a competitive nature, I think it became contentious, but in my belief for the wrong reasons. This is substantive and we see it as a necessary tool. Mr. Kanjorski. Now you know we have made some corrections in CURIA in terms of conversion. I am just going to take another minute. Do you feel that we have made sufficient corrections to prevent abuse in conversions that have been occurring over the last several years? And as a regulator, are you satisfied with what we have done? Ms. Johnson. Well, from our standpoint, we just recently put out a new ANPR that we are continuing to study some of these elements that we still find in conversions, and I think this is probably the most important ANPR that we have put out during my tenure at the agency and we're asking for additional ideas. We have been doing additional study in areas of conversions, mergers, insurance, and so we will continue to work with you. This has been an area of concern for us as well. Mr. Kanjorski. I remember particularly conversions so well. It had to have been about 11:00 or 12:00 at night when we were in the final consideration of H.R. 1151, and I was so frustrated with the blowing away of getting reasonable quorums to vote for conversion that I almost decided to oppose H.R. 1151, but I knew how important it was for the membership portions of it that we would have destroyed the credit union movement. So I accepted thinking--this is 10 years ago--that we would never let this happen and continue to go on in Congress. We would come back and correct it. I anticipated that we would have a correction in a matter of years. Here we are 10 years later, still fighting the same issue. Mr. Reynolds. Mr. Chairman, I just wanted to make one comment about the conversion issue from the State perspective. I just wanted to make sure that it is understood that there is sensitivity to the fact that there are State law issues. We do have State laws in place in many of our States that deal with conversions. They have very robust disclosure and governance provisions in them and whatever solution in this area is considered, we just want to make sure that for State credit unions in particular, there is acknowledgement of the fact that there are State law issues that should be considered. Mr. Kanjorski. Have you-- Mr. Reynolds. Yes, I commented on that in our written testimony, and I alluded to it in my oral testimony as well. Ms. Johnson. Congressman, I would just add that, as you know, credit unions are member-owned cooperatives, and our focus has been on the members and the transparency in this process. I have been up here to testify a couple of times on conversions, and that has always been our focus and will continue to be the focus. But these are member-owned cooperatives, and so the members' interest is our priority. Mr. Kanjorski. Thank you all, very much. And now, Ms. Biggert, if you will? Mrs. Biggert. Thank you, Mr. Chairman. I would like to thank the panel for all of their testimony. And I would also like to recognize the Illinois credit unions that are here to hear your testimony and our questions. Mr. Dorety, one thing that always bothers me just a little bit is that credit unions do enjoy certain advantages, such as the tax-exempt status. But it was because they are established as member-owned financial cooperatives to meet the financial needs of the members. But given that advantage, shouldn't Congress make sure that whatever regulatory changes we make do not change the fundamental character of credit unions? And when we are taking today about raising the business lending cap or expanding into the broadly defined underserved areas, will this invite credit unions to disregard the congressional mandate that credit unions serve people of modest means, which is one of your criteria? Mr. Dorety. Congresswoman, we totally agree with you that we should never get away from the core of who we are, which is a not-for-profit cooperative institution. The things that you refer to can only enhance our ability to serve those members that we were chartered to serve. Underserved communities, an example is we have done five at Suncoast. The community I referred to, Immokalee, has a total of 25,000 individuals in that community. In 6 years time, we now are serving 6,600 of those individuals in that community. If credit unions are given the ability to expand further into underserved communities, then more people of modest means will in fact be served, which is exactly what I think most folks here want us to do. In the member business lending cap, credit unions serve a number of members and do it very well on the consumer side. Many of those members would love to have small business loans from their credit unions. But because of the cap and the expense involved in putting together a business service program, it costs a lot of money to do that. And many small credit unions are not able to fund or to spend the money to even start a member business loaning program. So I think both of these features of the new bill would certainly help credit unions do even more in providing services to folks, and ensure that we are doing exactly what you want us to do. Mrs. Biggert. How do you define what are underserved communities or who is underserved in those communities? Mr. Dorety. Our regulator defines who are underserved communities, and it is a certain portion of folks. It has to do with income levels, and Chairman Johnson can certainly answer this better than I can. It has to do with certain income levels and the availability of services in those communities. Mrs. Biggert. Maybe, Chairman Johnson, could you respond to that? Ms. Johnson. That is correct. It is based on geographic areas that meet income standards. It is difficult to say. I think a better approach to what is underserved versus what the ability or what the number of institutions, etc., might be what is the access to affordable financial services. What is the appropriate number of institutions? There is no criteria out there. Is it so many check cashers? Is it so many other financial institutions? But having access to affordable financial services is what is key. We know that when a credit union has access to an underserved area, it is offering all of the consumers another option. And that is what the goal is. It has to be made available before they can take advantage of it. Mrs. Biggert. Well, we are hearing from banks that credit unions are purchasing or participating in business loans to non-members. And how many credit unions are making these types of loans, or is that true? Ms. Johnson. Credit unions only make member business loans to members. I think the figures that you are referring to, credit unions have the option or the opportunity to purchase participations from other credit unions. But these are member business loans that have been made by a credit union to a member. So credit unions don't make business loans to non- members. Mrs. Biggert. Did you exclude these loans from the aggregate business loan cap? Ms. Johnson. Loans that are $50,000 or less in the amount are excluded from the business lending cap. Participations are also excluded from the business lending cap. Mrs. Biggert. I think that most people would agree that anything that provides lower income Americans with an alternative to high-cost short-term loans would be a good thing. Can you tell me what impediments currently prevent financial institutions from offering these alternatives, and are the impediments economic or regulatory? Ms. Johnson. Well, I would say the biggest impediment is having access to the area in order to provide them. Mrs. Biggert. So is there an economic impediment? That is all right. Ms. Johnson. I guess I am not understanding the question. Mrs. Biggert. My time is expired, and I will yield back. Mr. Kanjorski. Ms. Biggert, just a little point of information. On both bills that are pending, the definition that we are using in both bills for ``underserved area'' have been taken out of the new markets tax credit initiatives, are very restrictive to census track definition, and consistent with the existing definition, and from the CDFI definition of underserved areas. And we use in the alternative. But they are much more restrictive than other definitions in underserved areas. But it would get us into about 40 percent or less of the country of underserved areas. Ms. Waters? Ms. Waters. Thank you very much, Mr. Chairman. I am sorry I was not here for an opening statement. We were tied up in another committee. But I would like to ask a question based on an anecdote that I would have mentioned in my opening statement, namely, a local credit union in my district helping to reach out to folks who had previously relied on a check cashing and payday lending franchise. Mr. Lussier and Mr. Dorety, can you tell me, from a national perspective, what you know or understand that credit unions are doing to move people from being unbanked, so to speak, meaning without a relationship with a reputable financial institution, and thus reliant on extortionate sources of credit, interrelationships with credit unions in particular? Can you share with us something about what credit unions may be doing, collectively moving to meeting the short-term borrowing needs that many working and poor folks need? Mr. Lussier. Yes. I just want to say that as far as the financial literacy programs that are out there--I will address that first--I know that our credit union itself has had educational facilities in the local high schools as well as branches in the high schools to help assist and train the young to become educated financially on their responsibilities of what is going to take place in the next few years of their lives. We have just enhanced our program by having an educational facility within our own new operations center to address just that issue, to help financial literacy in both from people from underserved areas in the community as well as minorities and/or people who are in high school or even some of the senior citizens. So we have gone to great strides to having additional staff put onto our staffing to assist just for the financial literacy programs. That is what we do regarding that. As regarding the payday lending, we actually again go out to give many small loans of the $500 to $600 area, and charge no abnormal fees or underwriting costs or anything else, and just do that for many, many people within our community to help and assist them to get away from some of the payday lenders. Ms. Waters. Thank you very much. And let me just address this question to any of you who would like to answer: What will H.R. 5519, the Credit Union Regulatory Relief Act, which we have been discussing--what can happen with the passage of this legislation? Will you be able to expand to be of more assistance to our constituents and their ability to borrow? And would this include businesses also? Mr. Dorety. Congresswoman, really quickly, the national efforts on serving the underserved--we have a national program called Real Solutions. It is administered by the National Credit Union Foundation, and it is in over half of the States. It provides products, services, and guidance to credit unions. It is a very popular program. It is being moved out nationally at this time. And our State leagues are also getting involved in a program called the Real Deal. So there are national efforts on credit unions attempting to go out and provide services to the underserved. This particular bill that we are talking about would enable more credit unions, obviously, to include underserved communities in their field of membership. It would also enable more credit unions to offer business loans to their small business members. Clearly, it would help to provide economic stimulus to the constituency that you are referring to. Ms. Waters. Simply put, you just would have more resources to expand out into these communities that are not available to these communities today. Is that correct? Mr. Dorety. I couldn't put it any better myself. Ms. Waters. I like that. Thank you very much. I yield back the balance of my time. Mr. Kanjorski. Thank you very much, Ms. Waters. And now my friend from California, Mr. Royce. Mr. Royce. Thank you very much, Mr. Chairman. I am going to Mr. Dorety with a question first, and that is: Credit unions, by their very nature, are quite risk-averse. By law, they lack any access to capital markets. The current prompt corrective action rules induce credit unions to maintain capital levels higher than those necessary to protect the share insurance fund. So I would ask if you would explain why credit unions must maintain their current net worth requirements, and how credit union members would benefit from modifying these requirements proposed by CURIA? Mr. Dorety. Congressman, I think the reason that we are required are basically what you suggested. First of all, we have to account for the 1 percent share insurance fund. But also, we do not have the availability, or most credit unions don't have the availability, to go into the area of alternative capital. So I think that is probably the basis for why we are where we are. The new provisions under prompt corrective action would allow credit unions obviously to address some of that. Now, credit unions are risk averse, and many credit unions have capital levels that are above that level of 7 percent that we consider to be well capitalized. If we were to enable to move that well-capitalized level still to a safe and sound level that our regulators would adhere to, then more credit unions would certainly be encouraged to provide more capital and spend more money, provide better products and services, and enhance their products and services to members. The risk-based side of this provision would certainly help credit unions make more loans and allocate risks appropriately towards making those loans. The one-size-fits-all, as we heard here earlier today, just doesn't make sense any more. So we really believe that would assist credit unions in providing more economic stimulus to our membership. Mr. Royce. So in theory, we have a more rigorous two-part net worth structure that is actually going to closely monitor actual risk. So I will ask Chairwoman Johnson: What type of impact would you expect that to have, then, on the national credit union share insurance fund when we go to a risk-based capital system? Ms. Johnson. Congressman, actually it will have a positive impact on our insurance fund because it will allow us to--it accelerates our ability to deal with those thinly capitalized institutions. I would also like to point out that the other regulators have the ability to adjust their capital levels by regulation. We are held to statute. And that is why we need action in a bill such as you are proposing. Mr. Royce. Going to another issue, Chairwoman Johnson, with the economy continuing to work through some pretty challenging and difficult times here, is this the time to be thinking about the prompt corrective action reform that is in the CURIA bill? Ms. Johnson. It is actually the very best time, because the way we have seen the economic conditions, although credit unions have done a terrific job in the mortgage lending area, and have not gotten themselves into some of these precarious positions, their record is very good, but it is because of the focus now on the economy and where institutions are and the interest rates, etc. This is the time that we should be addressing the issue through this statute. Mr. Royce. Thank you very much, Chairwoman Johnson. I am going to go back to Mr. Dorety. There has been a lot of discussion here today about how the Credit Union Membership Access Act of 1998 was the last major piece of credit union legislation that we have enacted here in the United States Congress. But as I think you pointed out, while this Act certainly saved a number of credit unions from disappearing, it was not regulatory relief. In fact, the legislation put additional statutory burdens on credit unions. So the question I would ask you is: When was the last time Congress provided credit unions with change to the Federal Credit Union Act that provided some type of regulatory relief, in your memory? Mr. Dorety. Congressman, it has been over 20 years. It was after the Garn-St Germain Depository Institutions Act of 1982, but it has been over 20 years since Congress has enabled--has given credit unions any meaningful regulatory abilities, in my memory. Mr. Royce. Well, I thank you all. I thank the witnesses again for traveling out here to testify today. And Chairman Kanjorski, I yield back the balance of my time. Mr. Kanjorski. Thank you very much, Mr. Royce. And now we will hear from our friend from North Carolina, Mr. Watt. Mr. Watt. Thank you, Mr. Chairman. I want to relate an experience going back, and I am going to assume some risk today, the same risk that I did the first time I mentioned this. I will put it in context. I represented a credit union before I came to Congress, and was a member of two credit unions at that time. And about a year or two into my service on this committee, after I came to Congress, I was at a breakfast and made the political judgment that I had enough credibility with credit unions to raise a basic question, and have incurred the wrath of some credit unions, especially the larger ones, since that. The basic question was: What is the dividing line between what credit unions do and banks do? What should the appropriate dividing line be, given the fact that credit unions are not taxed and other financial institutions are? I have found over the years that has been the real undercurrent of just about everything that this committee has dealt with, and continues to be the underlying question. And so I want to put that question out here as a general context again. I think it raises itself in the context of this proposed legislation, especially modifications that may be made to the service of underserved areas. And I want to start with Ms. Johnson because one of the concerns I have--I mean, I will do anything to get more financial services access to poor people. And one of the concerns I have is that the interpretation of underserved areas may need a lot more attention than your office is giving it. I am reading here from a report that was done in 2004, which says to me, ``Treasury Department Federal Credit Union,'' and defines its field of membership as ``persons who live, work, or regularly conduct business, worship, or attend school in, and businesses and other legal entities located in, Washington, District of Columbia. Underserved addition 12/8/ 04.'' I am reading a provision that allows JSC, Houston, Texas, if I read this correctly, to serve a field of membership ``persons who live, work, worship, or attend school in, and businesses or other entities located in Houston, Texas and underserved area.'' Could it possibly be that the whole City of Houston, Texas, is an underserved area? Could it possibly be that the whole City of Washington, D.C., is an underserved area? Could it possibly be, if I look at some of these other descriptions, that the whole City of Monterey, California, is an underserved area? Is this just a misstatement of this, or do we have a problem? Because I think part of the problem that people are having here is that if you define this area as being so broad, people don't understand what the distinction is any more between a nonprofit credit union and a for-profit financial services entity of another kind. That is one serious problem that I think needs to be addressed here. And it entails more than just a question of serving underserved people. I think everybody is willing to serve underserved people, but if the definition is that broad, there are a lot of people in these areas who fall in that definition. The second question, and giving my speech here, I have run out of time. But the same thing applies when you convert out of a credit union because if the owners are the people who are being served in a credit union, it is like a mutual insurance company. I had some litigation about that before I came here, too. I stopped a conversion from a mutual insurance company to a stock-based insurance company because the people who were benefitting from the conversion disproportionately were the people at the top of that institution. The people at the bottom of that mutual insurance company were getting virtually nothing out of the conversion process. That is the issue that Mr. Kanjorski raised. I think we have to do more work on these two issues to satisfy people that the status of credit unions is not being abused. And maybe you can shed some light on the first of those, Ms. Johnson. I will shut up and give you an opportunity to respond. Ms. Johnson. Thank you, Congressman. I would be pleased to respond. The underserved areas that have been granted do meet the statistical criteria for the definitions of the underserved. And these are statistics-- Mr. Watt. You are telling me that the entire City of Washington, D.C., and the entire City of Houston, Texas, meet that definition? Ms. Johnson. Well, I would like to address the example you used of the Treasury Department Federal Credit Union. Mr. Watt. No. I am asking you that question. Does the entire City of Houston, Texas, meet that definition? Ms. Johnson. Statutorily, yes, it does, by the criteria that is already in--the criteria that we go by, yes. Mr. Watt. So a credit union could do--could have a member-- Ms. Johnson. It is based on the investment areas. Mr. Watt. --of any business that is located--any person who works in the District of Columbia? Ms. Johnson. It is a consumer choice, yes. If they reside, if they are within that underserved area. And I would like to point out-- Mr. Watt. That underserved area being the entire City of Houston, Texas? Ms. Johnson. If that meets the statistical criteria for those investment areas, it is anyone residing within that statistical area. That isn't-- Mr. Watt. What happened to this clear definition of neighborhood that we started out with? Does that not have any bearing any more? How is that a clearly defined neighborhood? Isn't that in the statute? Isn't that in your regulations? Ms. Johnson. The term ``neighborhood'' is not used. Mr. Watt. I have run out of time, but-- Ms. Johnson. Might I respond, though? Mr. Watt. --you see the problem. And I am sure I am going to get abuse for even--I got abuse the last time in a private setting for putting this discussion in a breakfast setting on the table with what I thought were my friends. So I very well anticipate getting substantial abuse for putting it in this public setting. But I don't think we need to sweep this concern under the rug. And if we don't address it, I think we are going to have some major problems on an ongoing basis really meeting the needs of underserved people. Maybe our definition is too broad now, the way you all are defining it. Ms. Johnson. I would like to point out that I recently personally attended the--I wouldn't call it a grand opening, but the Treasury Department Federal Credit Union does serve-- they have adopted an underserved area. And in cooperation with Operation Hope, they are working specifically with these underserved residents, these low-income residents in particular, of offering the counseling-- Mr. Watt. I have no doubt that that is what they are doing. But the language that we-- Ms. Johnson. That spreads out. Mr. Watt. --that we have here is broad enough to drive mega-trucks and planes and tanks and everything else though. The good things that they are doing with it are wonderful. But I am telling you that this is subject to abuse, and we have to figure out a way to find what the appropriate balance is here. Otherwise we are going to lose--we will win the battle and lose the war. Mr. Kanjorski. May I just add to this conversation that is going on? I think you are talking to cross points. The existing definition of an underserved area is different and much broader than the definition contained in the two bills presently pending. The two bills presently pending adopt the definition used in the new markets tax credit, which is highly restrictive. And under the new markets tax credit, you could not get a tax credit in any portion of Washington, D.C., only in those census tracks that meet the very restricted definition contained in that Act. And the same thing goes to Houston, Texas. I know of no city in the United States that would fully encompass a credible area of an entire community-- Mr. Watt. I am surprised to read this myself, Mr. Chairman. I am reading from the report of the regional director of the National Credit Union Administration. That is the way it is defined in the report. Mr. Kanjorski. Well, it is defined in that report because you are operating under some other definition presently at the credit union regulatory level, where this Act-- Ms. Johnson. We are operating under the current congressional-- Mr. Kanjorski. Definition. Ms. Johnson. --definition. Yes. Mr. Kanjorski. And the new definition under the two pending acts would be very much more restrictive, and purposefully so. But you cannot restrict it to the point that they become nonexistent. I know you have worked very closely on the new markets initiative, and we are going to be reauthorizing that this year after 5 years. That is a very restrictive act. I come from a congressional district that is quite on the low side of income and level, and yet less than a third of my congressional district qualifies for new market tax credits. And I think we are probably in the 30 percent range. Mr. Watt. I would just tell the chairman that is not the only concern I have with the new markets tax credit. We have had a hearing about some other concerns with it, too. So I will be looking forward to working with the chairman on that. But that is in the jurisdiction of the Ways and Means Committee, as I understand it. Mr. Kanjorski. Right. Mr. Watt. So we may not get as direct a shot at it as I would like to have. Mr. Kanjorski. Well, I think we ought to assume any jurisdiction we possibly have to get a tax credit. [Laughter] Mr. Kanjorski. I see Mr. Miller of California has returned, and so I recognize Mr. Miller. Mr. Miller of California. Mel, you were much easier to get along with when you had facial hair. I thought I would point that out. He is not even--Mel, you are not paying attention this morning. He is through talking. I can tell. I said, you were much easier to get along with when you had facial hair. I want you to know that. Mr. Watt. Well, I am glad to see you are talking my place in being easier to get along with and the facial hair. Mr. Miller of California. I have always been easy. You know, when I was growing up, my parents were retail clerks, and I don't think--if it wasn't for credit unions, we wouldn't have had sofas and chairs and carpets. So you have done a great job. Are there any other institutions you are aware of that have a 7 percent requirement, as you are placed upon in capital requirements? Ms. Johnson. The risk--or the prompt corrective action that we operate under is the highest level of capital that is required. Currently, credit unions have to have 7 percent in order to be considered well capitalized. The proposal that we have before you would make it approximately 6 percent, but it would actually raise it at the lowest category, and it actually would raise it for about 30 percent of the credit unions. The banks currently are required to have 5 percent to be well capitalized. Mr. Miller of California. And Congress provided the banking regulators the flexibility to risk-base capital as they deemed proper. How do you look at that? Ms. Johnson. Excuse me? I didn't hear the first part of your question. Mr. Miller of California. Congress provided the banking regulators the flexibility to risk-base the capital requirements for banks. How do you think that would apply to credit unions? Ms. Johnson. Well, we would like that ability to risk-base the capital. They are able to change theirs through regulation, and ours is firmly held by statute. And we are very limited. If we had this capability, we would be able to identify problems more quickly, and credit unions would be able to manage to their risk more successfully. Mr. Miller of California. In conversations I have had, I understand that a number of credit unions actually want to help their members restructure or refinance troubled mortgage loans that are currently existing today, and including loans that their members may have gotten elsewhere. How does the NCUA address that issue? Ms. Johnson. Credit unions have addressed the mortgage lending area very well. We have not changed our standards through this whole process. We came out with early guidance, going back as far as 1995 and addressing some of these types of loans, and have continued with strong guidance in the last few years. We have maintained our lending guidelines based on the three Cs: collateral; character; and the capacity to repay. And we have not changed that. Now, we have encouraged credit unions to work with their members. We encourage modifications, where possible. And credit unions have been very successful in that regard. Mr. Reynolds. Congressman, can I have a point on that? Mr. Miller of California. Yes. Mr. Reynolds. From the perspective of the State system, the State regulators have been encouraging their financial institutions, including credit unions, to work diligently with consumers to try and remediate these types of situations. And credit unions, our State-chartered credit unions, have been very effective in being able to step forward and help consumers in some situations where they have gotten themselves into subprime lending situations. And they are not always able to extricate consumers, but they are always able to assist them with being an honest broker of information on their options. Mr. Miller of California. So you think you can actually help your members restructure or refinance some of these troubled mortgage loans in a safe and sound fashion where they have no place else to go today? Ms. Johnson. That's right. Mr. Reynolds. Absolutely. Mr. Miller of California. And you don't think that would be unfairly involving yourself in the marketplace? That is a stupid question, but I think I know how you are going to answer that one. Should Congress extend the CRA to credit unions? Mr. Dorety. I will take that one. The answer is ``no.'' Congress should not extend the CRA to credit unions. CRA was brought to banks, I think in 1978, because they were doing bad things. They were redlining, and they were doing some of those characteristics that credit unions do not do. We serve our members. We have a defined membership. There is no reason for CRA in credit unions at this time. And if you look at what credit unions are doing, and if you allow credit unions the ability to add underserved, and if you allow us to do the risk-based capital lending, and if you allow us to do the member business lending extension, we will still not need CRA. We will still not be doing the things that banks were doing which brought CRA upon them. Mr. Miller of California. Mr. Chairman, I think this is a good approach you are taking on this. You know, growing up, in my youth I watched my parents, retail clerks, use a credit union. I think they are filling a void out there in the marketplace that banks really don't want to get into in many cases. I think they are doing a good job. And I think some people out there who benefit from the credit unions would have no place else to go in many cases. I think this is a reasonable approach, and I am glad we are taking it. I wholeheartedly support it, and I yield back my time. Mr. Kanjorski. Thank you very much, Mr. Miller. Now the gentleman from California, Mr. Sherman. Mr. Sherman. Mr. Chairman, I hope that when we ultimately pass legislation--I do hope we pass legislation this year--that it will include a look at the credit union capital structure, the prompt corrective action structure, and that we more closely resemble the risk-based capital standards that the FDIC uses. I look forward to working with you on that. Our colleague, Mr. Watt, brought up the interesting issue of whether credit unions are doing enough to deal with underserved areas. I think he is right that we have to be careful in crafting legislation, and we may end up crafting something more limited than the current regulatory definition of what is an underserved area. And maybe the Ways and Means Committee did a good job with their definition of new markets, but maybe we will do a different job here, if they didn't do a good job. But I think it is important that credit unions serve underserved areas, and that we define underserved areas narrowly enough so that, for example, here in Washington, we focus their desire to serve the underserved communities to the underserved communities in Washington. We wouldn't say, well, open up a facility in Chevy Chase and you are doing something to help the underserved people of the District. But I am often asked to define the Yiddish word ``chutzpah.'' And I noticed that a group brought litigation which effectively prohibited well over half of the credit unions, that is to say, those with a single group or community charter, from extending credit union services to low-income areas and groups not adequately served by traditional financial institutions. And then this same group, having used the legal system to prevent the majority of credit unions from serving underserved areas, has this beautiful ad. I don't know if you--are you folks familiar with this? Have you seen this, maybe, once? And it attacks credit unions for not serving underserved areas, having been prohibited from doing so by the litigation brought by the same people who brought you the ad. So Mr. Dorety, I wonder if you happen to have seen this ad--which I will put into the record without objection--if perhaps you could spend a few minutes responding to it. Mr. Dorety. Well, it has come to my attention, sir, yes. Our folks have shared it with us. And I couldn't agree with you more that the information and the questions--it is a series of 10 questions. And we have responded to those questions, and would love to put this in the record, our responses to the questions that the bankers put forth in this ad in the last couple of days. Mr. Kanjorski. Without objection, the ad in its totality will be entered into the record, and the 10-question response by the credit union will also be entered into the record. Without objection, it is so ordered. Mr. Sherman. Perhaps you could spend a minute or two highlighting some of those answers. Mr. Dorety. Well, I don't want to go into all 10 questions because it is kind of like a David Letterman Top Ten. The last question is the most interesting one. And they go from 10 to 1, so it is a David Letterman thing: ``Why should Members of Congress cosponsor H.R. 1537 if the credit union industry cannot answer these questions?'' We have answered the questions right here, and so the answer to that question is Congress should cosponsor H.R. 1537. We can get into specifics of the others. But there are a lot of issues in these, Congressman, and I don't know that we can get into all of them at this time. Mr. Sherman. Ms. Johnson, perhaps you could highlight what would be the effect of going to risk-based capital? As I understand it, some credit unions would then have to have more reserves, some less. But would we do a better job of protecting the insurance fund if, instead of a rigid simple system, we had a more complex and more sophisticated formula? Ms. Johnson. The overall effect is that you would be giving the regulator the best tool that we could have in our tool box. The risk-based proposal that we have presented will actually have a positive impact on the insurance fund because it accelerates our ability to deal with those thinly capitalized institutions more quickly. The current system does force credit unions to all--it is a one-size-fits-all. And especially in this economy, and with these changing times, and with the different amount of risk that credit unions take on, we should be able to measure it according to the risk. And so I believe it is imperative. I think if you want to have these other regulatory relief items, this is the real tool that allows us to have this other regulatory relief. Mr. Sherman. And it is my understanding--and this, I think, differs from banks and thrifts; we all remember the Federal Government having to write a check back in the 1980's--that if for any reason the insurance fund was inadequate, every credit union in the country would then have to contribute up to its full net worth to the insurance fund. Is that correct? Or if the insurance fund is inadequate, is it the Federal Treasury that is on the hook? Ms. Johnson. Credit unions contribute 1 percent. We have a robust insurance fund. Mr. Sherman. Well, but if for some reason--and this would be a catastrophe none of us would want to see--the fund was inadequate, would it be the taxpayers or the credit unions of the country that would be on the hook? Ms. Johnson. It is not the taxpayers, Congressman. It is the credit unions. You are correct. Mr. Sherman. So basically, when we change to a different formula, the real parties in interest, the entities that would be on the hook if you didn't have adequate capital, would be first the insurance fund and then all the other credit unions in the country? Ms. Johnson. You are correct. Mr. Sherman. And it is my understanding that none of these credit unions, who would be ultimately on the hook if one of their brother/sister organizations or several of them went under, that none of them is opposing this change in the prompt corrective action statute. Is that correct? Ms. Johnson. No. It is being strongly supported, actually. Mr. Sherman. So they are putting their capital on the line? Ms. Johnson. That is right. Mr. Reynolds. Congressman Sherman, I just wanted to add as well that the State regulatory system strongly supports risk- based capital. Risk-based capital is being used for other financial institutions, primarily because it is a risk management tool for regulators. And so I wanted to add our strong support to that issue. Mr. Sherman. I thank you for that, and I believe my time has expired. Mr. Kanjorski. The gentleman from Florida, Mr. Feeney. Mr. Feeney. Thank you, Mr. Chairman. And thanks to the panel. I think that one of the great things about credit unions is that there has not been taxpayer money lost in their long years of service, and we are very grateful that is one of the things that make you unique. You know, I got involved in elected politics for the first time in 1990 in the State legislature in Florida, and as expected, we had healthy, interesting debates over welfare reform and tax policy and education reform. But there were very few things as spirited as, say, the fights between the commercial bingo parlors and the local VFWs over who got what nights for bingo. The only thing more energized in debate was the fights over racing dates for dog tracks in places like South Florida, if you could get the prime tourism season. And inevitably, those debates resulted in several members having to stand in between and literally stop the outbreak of fisticuffs. And turf battles are always interesting. By the way, I never had a dog in the dog track day fights, so I just sort of sat back and enjoyed the show. And I will tell you, we have my colleagues on the committee that are huge advocates for the banks, and we have colleagues that are huge advocates for the credit unions. I find myself as somewhat of an umpire here. But I will tell you that we saw the most recent proposal-- because this is a line drawing problem. I mean, for example, the issue of whether credit unions--to what extent they can loan money to members for business enterprises. You know, I think most of us feel strongly that if it is a $20- or $30- or $50,000 startup enterprise that your member wants to be engaged in, that is terrific. On the other hand, if we are going to get into international financing at a high level, that is another end of the scale. So it becomes a line drawing problem for a lot of us that want to do what is right ultimately for your customers. I have to tell you, my friends in the banking industry say that there ought to be tax parity between credit unions and banks. And I may vote for tax parity one day, I tell them, but it would never be to levy a tax on the credit unions. It would be to eliminate the tax on banks. Because ultimately what I am interested in is access to credit, on a rationale basis. Your customers and customers of banks and my constituents, we have a credit crisis in America right now. I think in some ways Congress is dramatically overreacting. I am leading the charge to stop the primary foreclosure bankruptcy proposal, which I think would marginally increase the cost of credit for everybody and reduce the value of every American's real estate. So it is sort of the forgotten people as we try to do things that look sympathetic that I am concerned about, and I appreciate your stand on that. But while I am on the subprime and credit--the crisis created initially from the subprime effort, Chairman Johnson, what percentage of the mortgages that credit unions nationally make roughly are held in portfolio, and what percent are packaged and sold to investors? Ms. Johnson. Credit unions hold the majority of their mortgages in-house. They do sell some into the secondary market, but they sell to the GSEs. Mr. Feeney. Well, it is one of the great things credit unions are doing as we have this huge credit crisis because they really do fill many niches. And this is just one of them. Ben Bernanke testified here just the other day. Securitized lenders have gone from putting, annually, $1 trillion into the marketplace for borrowers of mortgages, $1 trillion, to $50 million a year; 95 percent of that market has dried up. So credit unions once again are filling a niche and stopping what would otherwise be a worse catastrophe in the mortgage loan crisis. And as I understand it, credit unions make almost no, if any, subprime loans. Is that right, Ms. Johnson? Ms. Johnson. Credit unions make approximately 2 percent of all mortgages throughout the entire country. The percentage of subprime is even less than that. I would note there is a difference between a subprime loan, which is just to a borrower with lesser credit, than some of these exotics and, you know, the mortgages that really got people into trouble. And credit unions did a fine job, I think, by following our guidance in not putting their members into loans that they couldn't afford. Mr. Feeney. Right. Ms. Johnson. And so it was that one-on-one with the member up front. Mr. Feeney. Well, and I think community banks do that. Ms. Johnson. Correct. Mr. Feeney. Often very well. But I should say that one of the problems we have had in the subprime mess is that we have a total disconnect between the people that purchase the scrutinized loans by the thousands on one end, and the people that are making loans. You all are able to evaluate on an individual basis, and therefore are making very rational loans throughout a period where there have been, unfortunately, huge numbers of irrational loans. And now that crisis has bled over and created a credit crisis, not just in other markets in the United States but around the world. So congratulations for what you are doing. We appreciate the fact because to the extent we are hoping for an immediate bottom of the real estate market, I think credit unions have been a reliable partner in keeping a bad situation from getting worse. With that, I will yield back. Mr. Kanjorski. Thank you very much, Mr. Feeney. Now the gentleman from Massachusetts, Mr. Lynch. Mr. Lynch. Thank you, Mr. Chairman. I want to thank you and Mr. Royce for focusing on this issue. And I want to thank the witnesses for helping us out. I think there has been definitely a reconfiguration of finance in a lot of communities. I think with the mergers of a lot of large banks, especially in my area, in the City of Boston--we have seen six banks become three banks, and then at least the larger ones have really consolidated. There have also been, however, I think, a growing number of community banks that have tried to fill in that void, as well as--and I am blessed with a lot of great credit unions in my district. Let me go back to that last question. I had a foreclosure prevention workshop in my district a couple of weeks ago, where I rented out the cafeteria of a local high school. And to my surprise, I had about 400 people show up. And we are getting hit pretty hard with foreclosures. What can you do--I know you haven't been guilty of investing, and you haven't been pulled into the whole subprime mess. But for instance, at our event we did have a lot of the banks step up and try to do the right thing and to correct the situation as best they could. What is the credit union community doing with respect to reaching out? What are the limitations that you have that prevent you from doing more of that? And what could we do to help you at least address this problem? It looks like it is going to be with us for a while. Ms. Johnson. Well, first of all, I would applaud you for being proactive and holding your workshop. There is a need out there. And that is what we have done. We are doing the same thing with the credit unions in encouraging them, especially with the up-front counseling. I think the most important thing we can do is to ensure that the credit unions are educating their members to the terms of the loan, understanding what they are getting into, and then not putting them into a loan that they can't afford in the first place. Where we are seeing a little bit of residual damage is they may not have gotten their loan, their mortgage, a high risk mortgage from the credit union. They may have gotten it somewhere else. I think where credit unions have to be particularly careful is in this residual damage of their other consumer loans. And this is where the counseling again and extending that hand to their members and working with them to modify. They have their car loans, their credit card loans, etc. And so we are encouraging that, and credit unions are doing so on a member-to-member basis. As far as limitations, I don't know--off the top of my head, I can't think of a specific instance that is limiting us other than just continuing to put--being able to adopt more underserved areas so that these individuals that need this help then have access to the credit union itself. Mr. Dorety. Congressman, I would like to touch on that if I might. Mr. Lynch. Sure. Mr. Dorety. You know, the subprime market has touched all of us. I happen to live in Tampa, Florida, on the west coast of Florida, and we certainly have been impacted by this. We have made no subprime loans. We have made loans to people who you might consider to be qualifying for subprime loans, but the loans we make are honest, straightforward loans that don't have any of the escalation, don't have high interest rates. And going forward, we work with all those folks. And we are looking at foreclosures. We have been working with them on a one-on-one basis. We are telling our other members that if they have one of these toxic loans, that they need to come to us and talk to us and see if there is something we can do. We are still making mortgage loans. Actually, we have a huge increase in mortgage loan applications recently because of what has been going on through the other financial institutions. There are credit unions all over the country who are engaged in this type of effort, and they are not making those loans that caused the problems to start with. So I think as a community, credit unions are certainly willing, and are, in fact, stepping up to the plate to help try and get us out of this mess that so many folks are in. Mr. Lynch. Thanks. Yes, sir? Mr. Lussier. Congressman, I have a comment as well. In Massachusetts, as you know, we have been hit with the economy as well. One of the things that I think we just recently got into, and I take my hat off to the State of Massachusetts for doing this, they came up with some type of special grant funds and so on and so forth--I think it was the Mass Housing recently, of which we were one of the first ones in there to see what we could do to try to take some of those funds to put it back to the community to assist the people to get them out of some of these subprime mortgage instruments. It is extremely expensive for them to--expensive for people to even get out of them, if at all possible to get out. I think the State of Massachusetts has come to the forefront to try to help and assist--to help them do that as well. So we worked with Mass Housing. That was one of the items we have done. Mr. Lynch. Mass Housing Finance Agency? Mr. Lussier. I believe that is right. Mr. Lynch. MHFA? Yes. Mr. Lussier. I believe that is where it is. Yes. Actually, my vice president of real estate lending was just going through that with me before I left the other day, so I had the bare minimum. But it was a great program that he was trying to get through our board meeting this month to get involved with the Mass Housing Finance Agency to help and assist in that area, as well as the financial literacy and counseling that we actually try to do and put out in the forefront by having some of my senior executives get together if someone does have an issue with one of those loans, which I know that we had three people in our office this week that were wondering what they could do to get out of it. We brought them in personally to discuss the issues, to show them where they were, and try to assist them to see what we could do to try to help them get out of that problem. Mr. Lynch. Great. Thank you, Mr. Chairman. I see my time is expired. I yield back. Mr. Kanjorski. Thank you very much, Mr. Lynch. And now the newest member of the committee from the great State of Nevada, Mr. Heller. Mr. Heller. Thank you very much, Mr. Chairman. I certainly do appreciate your hard work on this particular piece of legislation. I appreciate the opportunity for the first time to be able to approach the rest of the committee. I apologize I was not here for your opening comments, and for that reason I may be asking questions or making comments that have been repeated before. But I will try anyway. I have a limited knowledge of the background and perhaps the scope of what your industry does as it is concerned with credit unions. I guess my question is: I am confused as to what now is the scope of a credit union. I live in northern Nevada. I would love to have you tour my 110,000 square miles we call a district, but I will tell you, you guys play an important role in some of the smaller communities that we have in that State. The inability to get financial institutions to come in, but when we talk to the larger communities, the scope seems to change pretty dramatically. And it is my understanding that history has told us that the purpose of a credit union was to fill a unique niche. And I am wondering if that is getting too broad now. That is the complaint that I am hearing from the other side, that perhaps you are trying to become more and more like other financial institutions, with certain advantages. For example, you want to maintain your tax-exempt status, but you don't want to comply with CRA. You want to change your capital requirements in this particular piece of legislation, but you want fewer regulatory burdens. And the argument is--and again, I haven't taken sides on this particular issue--but what it appears to me is you want the benefits but you don't want to take the risks. How do I respond to that when those questions are asked and I have to answer them? Mr. Dorety. Congressman, we happen to be one of those credit unions you are talking about. We are a $6 billion credit union located in Tampa, Florida. We started in 1937 as a small teachers' credit union in Hillsborough County. Our board of directors are volunteers. We are a not-for-profit cooperative. That is the reason we were granted a credit union charter, and that is the reason we have been given a tax exemption. If you come into our board meeting today, we are exactly the same as we were then. Our structure has not changed. And the structure is what has enabled us to have that status. It never started as saying a limited field of membership. It never started as trying to--there is no size restrictions on this. The fact of the matter is, if you are doing a good job with your members and you are providing good services and products to them, you are going to be successful, and guess what, you are going to grow. Growth is important to financial institutions. Look at the rash of mergers. We are a $6 billion--we are the largest financial institution headquartered on the west coast of Florida. Every bank is out of Charlotte, out of Birmingham, or out of Atlanta. And the fact that we have been successful and grown has not changed the basic structure of who we are or what we do. Our entire focus is on our member owners, as opposed to investors. And that is the difference, and that is why we deserve the tax exemptions. Mr. Heller. I come from a State--Nevada is in particular probably the largest foreclosure State right now, especially in the southern end of the State. Just to give you an example, I believe our foreclosure rate is 3 times higher than the national average; 1 in every 154 homes right now are being impacted, whereas I think the national average is about 1 in 555. So you can understand my concern over this. I just want to make sure that this piece of legislation doesn't put credit union members at risk, more at risk than they were before. And can you explain to me why I shouldn't be concerned that these capital requirement changes won't put your members more at risk? Mr. Dorety. I will be happy to. I don't want to try to one- up you, but I am in the west coast of Florida. So we have just as many issues as you do. Actually, Fort Myers is ranked the worst in foreclosures, and we have a significant presence there. Mr. Heller. You win. Mr. Dorety. So I think the new regulations will only help. I think two things. One is we have strong regulatory backing, and they are going to be able to look at credit unions. As Chairman Johnson has explained, they are going to have more tools to help develop and estimate risk in credit unions. And that is the key. Credit unions are going to be able to have the ability to measure risk when we make loans, more so than we do today. Today it is a one-size-fits-all. An unsecured credit card loan, we have to risk. The assessment is exactly the same as an investment in a government-backed security. That just doesn't make any sense. And so when you enable us to do these types of things that we will be able to do under the new prompt corrective action guidelines that are in this law, we will be better served. Our members will be better served, and we will have no greater risk than we have today. Our regulators--we will be on the exact same footing, well, not the exact same. We will actually have higher regulatory restrictions than other financial institutions do, even after this is imposed. But credit unions have high capital levels today. We have never contributed. We have never had a bailout, as other financial institutions have done. We have always been a safe institution, and this particular bill will do nothing to change that. Mr. Heller. Mr. Chairman, I yield back. I went a little bit over my time. Please don't hold it against me in the future. Mr. Kanjorski. No. We welcome contributions from Nevada. Mr. Heller. Thank you. Mr. Kanjorski. The gentleman from Georgia, Mr. Scott. Mr. Scott. Yes. Thank you, Mr. Chairman. It has been a very informative hearing. And I want to talk--first of all, what you are after is--we are dealing with two bills here, number one. And I want to get your response to find out if you are--which direction you think we ought to go on these two bills, and do either or both of them meet your primary obligations, your primary objectives? Ms. Johnson? Ms. Johnson. Congressman, the CURIA bill does contain the element of the risk-based capital. And that has has been dropped from the CURIA bill. And for me, that is the priority. I would like to see the risk-based capital put into the CURIA bill, or vice versa. That is vitally important. The underserved, extending the opportunity for all credit unions to adopt underserved areas, is vitally important. If I were to list two items, however it is combined, those would be my priorities. Mr. Scott. All right. Now, let me just get it kind of focused here. Let's talk about one of the areas that I think is certainly helpful, and that is, you want to raise the limits on how much business lending you can do. And I think you stated in your testimony that credit union members' business lending cap is currently the lesser of 12.25 percent of total assets or 1.75 times the net worth. How does this cap compare with other financial institutions, and how do credit union members' business loans compare or differ from the business loans made by these other institutions? Ms. Johnson. I believe the current cap that is in place for the thrifts is 20 percent, and there has been legislation proposed that would take the cap off completely. When credit unions were first formed, there was no cap on business lending. It is only as recent as 1998 that there has been any cap in effect at all. About 25 percent of the credit unions currently make business loans, and the average is only $190,000. So it about-- I mean, it is important for those small business in these communities to be able to offer these--have access to credit. It will help these communities. And it is a valuable system for the members. Mr. Reynolds. Congressman Scott, also-- Mr. Scott. Yes, Mr. Reynolds? And welcome up here from Georgia. Mr. Reynolds. Well, thank you, sir. Mr. Scott. Glad to have you. Mr. Reynolds. Thank you, and we appreciate your hospitality. From the State perspective, the other point I would like to make is that in credit unions, member business lending is looked at very carefully in the examination process. We don't have member business lending being made in every credit union that we go into. So we are very diligent. When we go in and do an examination in a credit union, we look very carefully at any credit union that is making member business loans. We are very careful to review the underwriting, the written policies and procedures, and the ability of management to properly manage that function. So it is looked at probably more in depth in a credit union than it would be in another financial institution. Mr. Scott. All right. Let me ask you about prompt corrective action, Ms. Johnson. Credit unions are by nature risk-averse, and by law, they lack access to capital markets. It is my understanding that the current prompt corrective action rules induce credit unions to maintain capital levels higher than those necessary to protect the share insurance fund. Can you explain why credit unions are forced to maintain excessive net worth requirements, and how credit union members would benefit from modifying these requirements as they are proposed in CURIA? Ms. Johnson. Well, the current requirements in place are by statute. We don't have the ability, as the other regulators-- Mr. Scott. I see. Ms. Johnson. --through regulation. So that is by statute, and that is what we are asking to be changed. And the second--oh, credit unions are incredibly well capitalized, and they are averse to--you know, they are not risky institutions. And they have raised, through retained earnings, their capital levels. They are in excess of this required 7 percent. The current average capital is about 11.4 percent. So it demonstrates that credit unions are managing effectively. Mr. Scott. All right. My time is about up. But let me get to this question. The three points, of course, you want a more flexible risk-based standard that would be determined and regulated by the regulators. You want to raise the limits on how much business lending credit unions can do to business. And you want to get into the underserved areas. Those are the three things I think you are basically asking. So the question presents itself to me: How do you respond to the banking community's interest that if we do these three things for you, that some kind of way this is going to give you an unfair competitive advantage? That seems to me as what we have to answer. Are there legitimate concerns--do they have a point to make here? Are you getting an unfair advantage over the banks by getting into this? Ms. Johnson. I imagine my colleagues would like to jump in on this. But I will tell you from a regulator standpoint that this is not an unfair advantage in that credit unions are still held to higher regulatory requirements than other institutions. They are limited in investments. They are limited by field of membership. You don't--I mean, there is--this isn't a tradeoff. This is just giving the credit unions the tools they need to serve their members. Mr. Dorety. Credit unions--excuse me. Mr. Scott. Yes, sir. Please. Mr. Dorety. Credit unions, to say we have an unfair advantage is--it is an illusion. We are subject to different regulatory restrictions at times. We have a totally different structure. You know, banks have the opportunity, if they care to, to change to a credit union charter. We are a not-for-profit. We send everything back to our members, and if there is an unfair advantage, it is in that structure because we have one audience, our membership. We do not have to pay outside investors. That is our choice of charter. Banks' choice of charter is a different choice, so they are established differently and they have different economic factors that they are dealing with. It is simply the choice of charter, and it allows us in some situations--actually, in many situations--to offer far better products and services to our members for that one very fact: We are a not-for-profit cooperative. Mr. Scott. Yes, Mr. Lussier? Mr. Lussier. Yes. I just want to say that I want to make sure that we remind each other that we only represent 1.1 percent of the market share out there. And I would just like to say that if banks think that it is that unfair, that they can convert to credit unions if they so wish as well. Mr. Scott. All right. Thank you, Mr. Chairman. Mr. Kanjorski. Thank you, Mr. Scott. The gentleman from Missouri, Mr. Cleaver. Mr. Cleaver. Thank you, Mr. Chairman. Let me continue on that same line. Is it true that there are 123 credit unions with more than a billion dollars in assets, which would mean that they are larger than 82 percent of the banks? Mr. Dorety. It is true, I believe. I am pretty certain that is the case that there are 123 credit unions that have a billion dollars in assets. All of the assets of the credit unions combined do not equal either of the three largest banks in the country. So we ought to put that in perspective as well. But yes. Mr. Cleaver. Generally, those who talk with us are the smaller banks, who come in to talk with us, quite frequently, I might add. And the issues, of course--I mean, I understand the two different charters and the way the Federal Government is allowing the two to exist. But it would seem to me that if credit unions are disinterested in doing CRA, it seems to me that you have to be careful about how you say you are not wanting to do it just because I think the way you say you are not wanting--the way you make that statement can send the wrong signals. And Mr. Watt was dealing with that a little before he left. And so that does trouble me. But in the urban core all over this country, and I am not that sure about rural areas, but in the urban care--and I represent a district that is very urban--we have a potpourri of payday loan operations and ``Jenny's Come Cash Your Check Quick'' companies. And it would seem to me that one of the things that maybe credit unions could do is develop a new product that would allow--that would cause the people in those underserved areas to have a service that is desperately needed. One of the reasons--I used to have an NPR radio show that I did live, and I did a show on these check cashing places. And it was a live show. I had a whole group of people who showed up in the poor parts of Kansas City, Missouri, angry with me because they said they needed those check cashing places. They said, there are no banks around. You know, we need a place to cash our checks. We need a place where we can get small loans. And so, you know, with everyone--with the mantra from banks and credit unions, we want no regulations, you know, just leave--the market will take care of everything. Well, the market is not taking care of everything, and the truth is that you could develop products that would help, that would really help the community. I mean, those people are getting ripped off whether they like it or want to or not. They are getting ripped off because there are no institutions around to handle their needs. So it seems to me that that ought to be one of the things that credit unions would consider. I mean, that is CRA without anybody having to ask you to do it. Chairman Johnson? Ms. Johnson. Congressman, I would like to respond. Congressman Kanjorski's bill does have a provision in it that would allow credit unions to offer check cashing services to non-members within their field of membership, which is a good way of getting individuals into these traditional institutions. One other thing is that federally chartered credit unions have a usury ceiling of 18 percent. And so that is a helpful limitation in this sense to these consumers of not being charged with these exorbitant fees. Mr. Cleaver. Yes. Mr. Watt talked about-- Ms. Johnson. Oh, I meant payday lending rather than check cashing. Excuse me. Mr. Cleaver. That is fine. They are the same, as far as I am concerned. The neighborhood language that Mr. Watt actually--the word neighborhood is in the CRA legislation. And he mentioned neighborhood for yours. It is not, but it is in the CRA for banks, that they serve neighborhoods. We don't have neighborhood banks any more. And even if credit unions--I mean, I belong to two credit unions. I am not anti-credit union; I belong to two. The problem is, the credit unions are not located where people need the service. That is the problem. Mr. Dorety. Congressman, we have--actually, Congressman Scott earlier said something about the most important group in this discussion is not in this room; it is the consumers. We are owned by these consumers. Our credit union has a branch in an underserved area in East Tampa. There are four payday loan shops; you can walk out the front of our door and look at the four payday loan shops. There are no banks in that community. We opened that branch 2 years ago to serve the people that you are talking about. Credit unions nationally have a program called Real Solutions which addresses payday loans, check cashing, and a number of products and services, exactly the type of thing that you are talking about. Mr. Cleaver. There are two things. Mr. Dorety. We do CRA. We just aren't required--we aren't forced to do CRA. Credit unions are already handling those issues. Mr. Cleaver. Two things. One, your services would be made available, I guess, based on the charter only to members. Is that right? Mr. Dorety. My understanding under this bill is that payday loans would be available to folks living--eligible for membership in the community who are not members. But yes, today we are. Mr. Cleaver. No. Say that again, if you would, Mr. Dorety? Mr. Dorety. Under the new bill, payday loans--the provision in the new bill allows credit unions to make payday loans to residents who are in an area that they would be eligible for membership but they are not members. I believe that is correct. Mr. Cleaver. Eligible? They would be eligible? Mr. Dorety. Would be eligible. Right. Therefore, the more underserved communities we were able to have, the more folks would be eligible for those payday loans. Mr. Cleaver. Final question: If we have one in Tampa and we have 50 States, 300 million people, I mean-- Mr. Dorety. We have one in St. Petersburg, too, sir. Mr. Cleaver. Okay. We have two. [Laughter] Mr. Dorety. But the fact of the matter is, I said the national program that credit unions are undergoing right now, we are very active in very underserved communities and we want to do more. So it is-- Mr. Cleaver. I want you to do more. The question is, you know, will you do more? I mean, the legislation, I think, is good. But will you do more? I mean-- Mr. Dorety. Yes. Mr. Cleaver. --people are not standing in line trying to go in to serve these people. Now, the payday loan folks are making money or they wouldn't be there. Mr. Dorety. Absolutely. Mr. Cleaver. And so, I mean, which would suggest that you can make money as well. Mr. Lussier. Congressman, that is why passage of H.R. 5519 is a great start and beginning to what we need to get that job done. Credit unions would be out there trying to do it if they were permitted to do so. Mr. Cleaver. So you wouldn't mind a provision in this legislation that would give you a certain time in which you would have a certain number of these facilities located in underserved areas? I mean, some kind of provision that would give us some comfort in going to our districts and saying, you know, we just passed one or two of these bills and that help is on the way. Mr. Dorety. Our regulator already requires us to put a branch in that community within 2 years of getting our charter. So they have the ability--they already are doing that, and they would have the ability going forward to require us to put a branch, a full service branch, in that community. Mr. Cleaver. So you want me to support Mr.--I always mess it up but-- Mr. Lussier. Yes, sir. We do. Mr. Cleaver. Yes. And then I will be happy at home, telling people that you are coming? Mr. Lussier. Yes, sir. Mr. Cleaver. And the payday loan people will be angry and start fleeing? Thank you. Thank you, Mr. Kanjorski. Mr. Kanjorski. Thank you very much, Mr. Cleaver. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for Members to submit written questions to these witnesses, and to place their responses in the record. This panel is now dismissed, and I would like to welcome our second panel. I am pleased to welcome our second distinguished panel. First we have Mr. R. Michael Stewart Menzies, Sr., president and chief executive officer of Eastern Bank and Trust Company, testifying on behalf of the Independent Community Bankers Association. Mr. Menzies? STATEMENT OF R. MICHAEL STEWART MENZIES, SR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) Mr. Menzies. Mr. Chairman, thank you so much. It's an honor to be here in front of you again. My name is Mike Menzies and I am the president and CEO of Easton Bank and Trust in the little town of Easton, Maryland, on the Eastern shore of Maryland. We're a $140 million community bank, 14 years old. And it's also my honor to represent the Independent Community Bankers of America as the chairman-elect of that trade association of 5,000 community banks. We do appreciate the invitation to come before this group. And as you would expect, we do strongly oppose this bill, H.R. 1537. Congress should not expand credit union powers without addressing first the tax advantage of credit unions and their inability or lack of willingness to comply with the Community Reinvestment Act. I want to make clear that community bankers strongly support local, not-for-profit organizations. I'm the chairman of our local hospice. I have been the chairman of our United Way in Talbot County. Over my 38 years of experience in banking, I have always been involved with local charities. And community bankers throughout the Nation are also fully invested in the charities in their communities. But I believe CURIA is a misnamed, aggressive measure disguised as regulatory relief that would give credit unions expanded business lending powers and actually weaken their capital standards. It would increase the already unfair competition that credit unions currently pose to community banks. A Congressional Research Service report notes, if I may quote, ``Over the past 30 years, most of the distinctions between credit unions and other depository institutions have been eliminated or reduced because of deregulation. Consequently, the justification for the tax exemption for credit unions has been increasingly questioned.'' Credit unions are seeking to expand farther into the core business of community banking, small business lending, and I can assure you, community banks are not afraid of competition. We have no shortage of competition when it comes to small business lending. We compete with large banks and finance companies and automobile dealerships, but all of those competitors pay taxes. Credit union representatives often claim that they represent such a small percentage of the industry, and we heard that again this morning. While the banking assets total about $12.7 trillion in assets, and our 5,000 members represent roughly $982 billion, the credit union industry has grown to a $753 billion industry. And as you heard this morning, over 19 million members, and over 8,000 credit unions in this country today. We recognize that you, sir, have introduced H.R. 5519. And while we haven't totally analyzed that bill, we recognize it is a narrower bill. That's good. Clearly, credit unions want to expand their charter because they feel inadequate in serving the needs of their community and their customers. For credit unions that truly believe they need to expand their powers, there's a wonderful solution that's out there--convert to a mutual thrift. It's a wonderful solution, because it allows credit unions to go into a business structure where they can expand their services dramatically. Unfortunately, NCOA is constantly putting up roadblocks to keep credit unions from moving into that mutual thrift structure. So why should credit unions have to go to a new charter rather than just expand their current powers? The answer is really simple. Congress provided credit unions with a substantial tax advantage over community banks and does not require compliance with the Community Reinvestment Act. Congress put this basic tradeoff in decades ago. Limiting activities, providing credit to individuals of modest means, but valuable tax and regulatory benefits. In 2005, the Tax Foundation calculated the credit union tax subsidy is worth about $2 billion a year and growing. On the average, credit unions found little or no effect on deposit rates or other costs, so the average member benefit is very little. But these are averages. Credit unions can use their subsidies selectively to secure business if they want. One of my customers, a retired airline pilot, very attractive 7-figure net worth, and a very attractive high-6-figure income, applied to me a year ago for an aircraft loan. I gave that individual, who has most of his deposits with us, not with his credit union, what I considered to be an extremely competitive rate, and the credit union quoted that loan on much more aggressive rates to buy a $700,000 airplane at probably a 20 percent discount to our pricing. Several studies have shown repeatedly that credit unions have strayed far beyond their mission to serve individuals of modest means. Credit unions involved in last year's Florida real estate investment scheme, dubbed ``Millionaire University,'' illustrates just how far credit unions have strayed. This scheme, a number of credit unions invested in a speculative land development deal far outside of their marketplace, far outside of the needs of their members, and lost hundreds of millions of dollars, causing the insurance fund one of the greatest losses in the history of the insurance fund. For these reasons, sir, we urge Congress to reject calls to expand their powers. And instead, we hope that you consider true regulatory relief for all financial institutions. Thank you, sir. [The prepared statement of Mr. Menzies can be found on page 115 of the appendix.] Mr. Kanjorski. Thank you Mr. Menzies. Next we will hear from Mr. Bradley E. Rock, chairman, president, and chief executive officer of the Bank of Smithtown, testifying on behalf of the American Bankers Association. STATEMENT OF BRADLEY E. ROCK, CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, BANK OF SMITHTOWN, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) Mr. Rock. Thank you, Mr. Chairman. We appreciate the opportunity to comment on expanding the powers of credit unions. These issues are sometimes filled with emotion on both sides. The banking industry is sometimes portrayed as attacking the entire credit union industry. Let me assure you, Mr. Chairman, this is not our goal. Most of the credit union industry today continues to focus on their mandated mission to serve people of small means. I would suppose that most of the credit unions that have been present in this room today are these mission-focused credit unions. These institutions are an important part of our financial system. Our issue is not with credit unions that are meeting the needs of people of modest means, but rather with the new breed of credit unions that want to grow aggressively, serve high-income individuals and large businesses, and take over small credit unions to expand their charter. These new breed credit unions are the biggest threat to traditional credit unions, as they are fundamentally changing the nature of the business, shunning their core mission to serve those people with limited options for financial services. It is important to look beyond the rhetoric to the reality of today's credit union landscape. For example, the reality is that over 2,000 credit unions have been absorbed by these new breed credit unions since 2001. Today there are more than 123 credit unions with over $1 billion in assets, which makes them larger than 92 percent of the tax paying banks in this country. Near where I live, Bethpage Federal Credit Union, with more than $3 billion in assets, is nearly 3 times the size of my bank, and 5 times larger than the typical community bank on Long Island. And from their advertising, I can tell you that Bethpage is very much focused on serving wealthy individuals. During this hearing, we have heard about the need for broader authority to serve underserved areas. The reality is that there is no requirement today that credit unions demonstrate that they are meeting the needs of low-income individuals. NCUA's approval of so-called underserved areas does nothing to assure such a requirement. NCUA has declared entire cities to be underserved and allowed credit unions to open branches in high-income areas with no requirement, none at all, that they actually serve low-income neighborhoods. For example, all of Washington, D.C., has been declared underserved. Under proposals from NCUA and credit union groups, every credit union would be eligible to come into Washington, put a branch in wealthy Georgetown, and not make a single loan to a low-income person. During this hearing, we have also heard about the need to serve small businesses. But the reality is that the new breed credit unions are hitting the congressionally mandated limits on business lending because they are making very large loans to real estate developers and others, including those businesses out of their market area. For example, consider a $30 million luxury condo loan, which is currently in default, made by Eastern Financial Credit Union, or the loan for a luxury golf and condominium resort by Twin City Co-op's Federal Credit Union. Or the construction loans by Texans Credit Union that average $10 million each. Or the millions of dollars in loans involving a land deal in Florida that caused the recent failures of credit unions in Colorado and Michigan. Are these loans that the credit union tax exemption was intended for? How many loans to low-income people could have been made instead? Expanding business lending powers and easing credit union capital rules will only move the new breed of credit unions further away from their mandated mission, and encourage them to bulk up by acquiring small ones at an even faster pace. Fortunately, for those expansion-minded credit unions, there is a very viable option for them today--switching to a mutual savings bank charter. This charter, which some credit unions have already adopted, provides greater flexibility while still preserving the mutual member focus that credit unions find desirable. Mr. Chairman, there remains an important role for traditional credit unions that serve people of modest means. But we see no reason for Congress to give authority to expand business lending that will only encourage a further departure from this mission. Thank you very much. [The prepared statement of Mr. Rock can be found on page 130 of the appendix.] Mr. Kanjorski. Thank you very much, Mr. Rock. And I thank the entire panel for waiting this long. Let me make first and foremost a congratulatory note to the community banks and to the average banks in America, and let it be noted for the record that our present situation of subprime loan failures is less attributable to the regulated national and State banks in this country, and more attributable to unregulated institutions in this country. And if we had had more of the formal regulated community banks or regular banks, although you are both regular banks, we probably would be in less difficulty than we are today in the credit markets. So you are fulfilling a good function and I want to make sure this committee recognizes that fact. Now, with that being said, I think there is probably a fundamental disagreement philosophically between the chair of this committee and yourselves. And we could sit here for hours, and I would probably enjoy it, but I doubt whether we would convince each other of our mutual positions as being correct. Although, I want you to know that prior to my arrival here in Congress and my service on this committee, I actually served as a board member of a small bank in Pennsylvania, and I think I served for about 10 years as a director in that bank. So I understand some of the problems that small banks have, certainly their competitive positions that they have. And I empathize, let it be said, with the banking community. On the other hand, I was not preconceived to sympathize with the credit unions prior to my arrival in Congress. I had never been a member of a credit union and I knew little about what they did. I actually got here in an interesting way. I represented as an attorney the cooperatives, food cooperatives. And I will not say I fell in love with, but I became enamored with, the process of cooperatives and saw how they could be utilized to work to the benefit of people. And when I came to Congress and then studied the credit union movement, I became very appreciative of the fact that a cooperative effort in banking, removing some of the activities of competition and profiteering or profiting from commercial endeavors, actually worked to the benefit of people. I do not know how we would ever agree that all organizations in the country should be for- profit and for nothing else. I think we have a huge number of institutions that border on that cooperative area that perform great functions. Some abuse their positions. I will concede that. That is not a question. But I can tell you quite frankly, some banks abuse their positions. If we wanted to sit here and go back and forth, I do not know who would win that challenge, but some of my best friends, as they say, are now residents of Allenwood who used to be in banking institutions. May I just leave it at that--be a little humorous, but that happens. That is the-- Mr. Rock. None of our members, I hope, Mr. Chairman. Mr. Kanjorski. No what? Mr. Rock. None of our members, I hope. Mr. Kanjorski. Well, I would imagine they at one time or another were your members. They are not anymore. But those are the foibles of human beings. To look at those excesses or extremes that caused those results, and then attribute it to the whole I think is somewhat of a mistake. What I do not understand, honestly, is we worked very hard on putting a new financial structure here in place, a risk management tool. And being good businessmen, both you and your institutions; your associations being made up of good businessmen, why wouldn't you for the protection of the credit union members and for that aspect of the financial service industry and the country, why would you not be more in favor or in favor of a risk management capital system as opposed to what it is today, which does not really meet the needs and protect it against some of the abuses that you are actually asking? You heard the regulators say here, you would afford the opportunity for better Federal regulation, for better protection for the members, for better protection for society, if we put in place a risk management capital system that was not thought up by the credit unions, was not thought up by their association, was not thought up by the Congress, but actually was developed by the regulator. How can you argue against that sort of meritorious position? Go to it. Tear me apart, gentlemen. Mr. Menzies. Go ahead. Mr. Rock. Mr. Chairman, credit unions by the nature of their structure do not have all of the same means available to them for raising capital that banks have available. Credit unions' only means of raising capital is through retained earnings. And history has shown that in times of stress when banks or credit unions are losing money, they do not have the ability to build capital through retained earnings. Therefore, it has always been thought, because that's their only method of raising capital, it has always been thought that credit unions therefore need to have higher capital requirements than banks do, because banks have other alternatives during those hard times. The second reason-- Mr. Kanjorski. Okay. But now let me call you on that. This risk system that is proposed by the regulators is 1 percent higher than what is required of banks. Mr. Rock. No. I believe it's a quarter-- Mr. Kanjorski. It is 6 percent-- Mr. Rock. --a quarter of a percent. Five versus five-and-a quarter is what they're proposing. A quarter of the percent. Mr. Kanjorski. No, I think it's 6 percent. Mr. Rock. No. It's 7 now. It's 7 now, Mr. Chairman. Mr. Kanjorski. And would go down to 6? Mr. Rock. Would go down to--no. Would go down to five-and- a-quarter is what they're proposing. Mr. Kanjorski. I thought I heard 6 in testimony, but I will trust you. Still, it is higher than what is required of banks. Mr. Rock. Well, by a quarter of a point. And I think the question would be, is that sufficient to protect the depositors? And historically, the answer has been no. Mr. Kanjorski. Well-- Mr. Rock. Because when you're losing money, you can't build retained earnings. There are no retained earnings. Mr. Kanjorski. Look, when banks fail, they go to the insurance fund. When the insurance fund does not have enough money, they go to the taxpayers. We all know that, and I do not think there is anything wrong with that. Mr. Rock. Well, that has never happened, though, Mr. Chairman. It's theoretical. Mr. Kanjorski. I know. But we have supported that. Never happened, but that is the trail. But if the insurance fund for the credit unions fails, they go to the rest of the credit unions throughout the country. It does not come to the taxpayers. So they have to have an awful lot of faith in the performance of these various credit unions to risk all of their capital. I mean, it is really quite a brotherhood; 90,000 people linking together to provide security for their needs within their financial services. Mr. Rock. I would say two things to that, Mr. Chairman. First of all, it presumes that bank capital doesn't stand behind those obligations, and I think that's an incorrect assumption. Mr. Kanjorski. What bank-- Mr. Rock. It has never happened. The collective bank capital. Yes, you look first to the insurance fund. Then you would look to the bank capital, just as you're hypothesizing for credit unions, and only then would you look to the Federal Government, which by the way, there is no requirement that the Federal Government stand behind. That's the whole too-big-to- fail argument. Mr. Kanjorski. And maybe you could help me out. Your position is that under present banking laws, if there were a failure of banks in the country, and the Federal insurance fund fails, they then draw on all of the other remaining banks? Mr. Rock. I'm saying that both of your hypotheticals are purely hypothetical. It has never happened for credit unions, and it has never happened for banks. It's not a matter of law. Mr. Kanjorski. Well, you know, I agree they may be hypothetical, but I would have to be honest with you and say we may get to test that system shortly. According to Mr. Bernanke the other day, he thought that there would be about 100 bank failures. Now we hope that they are not very large banks, but, you know-- Mr. Rock. And there is a $50 billion fund standing there financed through--not through-- Mr. Kanjorski. But there is some fear that it may be a too- large-to-fail bank that is involved, which would be incredibly disruptive. Mr. Rock. And that would be unfortunate. Mr. Kanjorski. Very unfortunate. Mr. Menzies. Mr. Chairman, if I could pipe in a little bit. Mr. Kanjorski. Yes. Mr. Menzies. I think the great challenge that you, sir, and this committee face is understanding what types of risk you'd really want to take with this structure called credit unions. We had the great honor of having breakfast with Mr. Bernanke this week in Florida and with Chairman Sheila Bair, and with OTS Director Reich, and it's pretty obvious that we're going through one of the most difficult economies in our history. We're talking about the housing stock falling in value from $600 billion to $1 trillion. We're talking about subprime losses that are hard to measure, that are estimated by some to equal a couple of trillion dollars. These numbers are unbelievable. And then the question is, do you take an industry whose mission is to serve the underserved--to serve the underserved--and do you give them powers that let them convert Washington, D.C., and Houston, Texas, into their marketplaces? You can go into small business lending. Mr. Kanjorski. Okay. Let us stop right there. Mr. Menzies. Okay. Mr. Kanjorski. I am the author of these two bills-- Mr. Menzies. Yes, sir. Mr. Kanjorski. --with Mr. Royce. They do not use the definition of underserved that presently is interpreted by the regulator. The definition of underserved is greatly restricted from what its present definition is to shadow and be consistent with the New Markets Initiative definition. And to my knowledge--I will not say that there isn't a community in America that is not in total included in the New Markets Initiative, a census tract method of being underserved, but I highly doubt it. I certainly have a congressional district that is in the lower third economically in the country, and there is no community in my district that in totality qualifies as an underserved community. So when Mr. Watts proposed that possibility of Houston and Washington, I think that is not the facts. And we are going to check into the facts, okay? Mr. Menzies. If in fact it's driven by economics, then, frankly, I would say that makes sense. If the underserved member is eligible because of their economic condition, not where they live, then that may well make sense if they have a net worth under some number, $100,000. If they have an income under some number, that makes a great deal of sense. But if it's geographic and Wal-Mart wants to put a store in one of these areas that's defined geographically as eligible, then should Wal-Mart be able to go borrow from a credit union or Home Depot or Lowes or somebody else? Mr. Rock. Mr. Chairman, I would make two points. One, and I think this was part of the point Mr. Watt was trying to make before, that would--I agree with what you have said, but that would presume that the Cities of Houston, Tucson, Philadelphia, etc., that have already been approved by NCUA, the entire city as an underserved area, that those don't get grandfathered in. Mr. Kanjorski. This Act is only allowing underserved areas to be served by credit unions in accordance with the definition here. It would be actually restricting what credit unions could do. Mr. Rock. Okay. Including the 641 previous approvals. Is that what you're saying? Mr. Kanjorski. I would think that is how-- Mr. Rock. I would think so, too, but I think that's something that's not clear. Mr. Kanjorski. I am glad you raised the question, and we certainly will look into it. Mr. Rock. And the second point I would make, Mr. Kanjorski, and do agree that, as you said to Mr. Watt before, that the proposal is more restrictive, and I concur with that. But I would point out that in the City of Washington, for example, under the current proposal, almost all of Georgetown and almost the entire area along Massachusetts Avenue would qualify as an underserved area. And I think for any of us who know those areas, those areas are hardly comprised of low-income individuals. Mr. Kanjorski. Now wait. Under-- Mr. Rock. Under the new proposal. Mr. Kanjorski. All of Georgetown would apply? Mr. Rock. Almost all of Georgetown and almost all of the area along Massachusetts Avenue. Mr. Kanjorski. Meaning that Treasury has interpreted the New Markets Initiative statute to say that these homes in Georgetown and the residents there are underserved? Mr. Rock. That's the way we read the proposal. We have mapped it out, and we look at it, and that's the way we read the proposal. Mr. Kanjorski. I think we are going to find the old definition. We will check it out. Mr. Rock. No. Under the old definition, the entire City of Washington, D.C., has been approved as an underserved area. Mr. Kanjorski. Well, this is very good, because the evidence you are giving us we should also transmit to Ways and Means, because we are working on the reauthorization of the New Markets Initiative, and I certainly, having been one of the original drafters of that piece of legislation some 5 or 6 years ago, never intended, nor did the President at the time, ever intend that we finance those tax credits for areas like the rich sections of Georgetown. So we will certainly check into that. Mr. Rock. Yes. Mr. Kanjorski. I have taken far in excess of my time, and I am fearful that the chairman may run down here and dispossess me of the chair. So, with that, let me recognize my charming friend from Illinois. Mrs. Biggert. Thank you. I hate to break into that discussion. It was, I think, lively and productive. But just a couple of questions. Mr. Menzies, in your statement you referred to a GAO study of 2003, and it says that credit union serve a more--the study found that credit unions serve a more affluent clientele than banks, and the study concluded that credit unions overall served a lower percentage of households of modest means than banks. Could you expand on that a little bit? Mr. Menzies. Well, you have quoted the GAO study correctly. The GAO study says that the community banks have more customers of low and modest income as a percentage of their customers than do credit unions. And that's because they're based in the community and they need to serve the entire community. Mrs. Biggert. Now that is a 2003 study. Do you think that would still hold true today? Mr. Menzies. Well, that's a good question, and the question is, has the credit union history studied their low- to moderate-income statistics and broadcast them so that we can clearly understand that a majority of their customers are people of modest means and people who need access to credit. Mrs. Biggert. Well, then, my next question is that--for both of you--is that the credit unions said that banks don't want to make small business loans, especially under $100,000. Does your bank? Mr. Menzies. Absolutely. We just participated, 50 ICBA banks, just participated in Chairman Bair's Small Business Loan Initiative to establish strategies to make small loans, $1,000 and under, to individuals. We make $500 and $1,000 loans all the time. We lose money on them. We lose a lot of money on them. And we lose money because we pay taxes and we have a lot of overheard associated with regulatory burden. But we do it because we have to because they're members of our community. Mr. Rock. Congressman, we have an entire staff of people in my bank, which is a community bank, devoted to finding and making small business loans of under $100,000. And we currently, as of the date of filing of our last call report, have $95 million of such loans outstanding. So we absolutely do. Mrs. Biggert. Are the business loans under $100,000 less risky than business loans over $100,000? Mr. Menzies. I would say no. I would say that business loans under $100,000 inherently carry more risk, require more underwriting, require more analysis, and require a closer relationship. We have commercial lenders who have significant experience lending into small business. They need to triage whether this is an appropriate FDIC deposit-insured risk or whether we should use the SBA or SBA 504 or some other strategy to mitigate risk. But my personal perspective would be that loans under $100,000 can be riskier than the larger loans. Mrs. Biggert. You said it cost you more. Mr. Menzies. Absolutely it does. Mrs. Biggert. Would that be true--how different would that be for a credit union to make the same loan? Mr. Menzies. How different would-- Mrs. Biggert. Well, would they have the same costs. How would the costs be different since they don't pay taxes on that? Mr. Menzies. I don't know the exact basis point difference in terms of regulatory burden. I do know that the credit union tax advantage gives them 50 basis points or a half a point up to sixty-some basis points of pricing advantage. That's why a 7 percent 20-year aircraft loan that I quoted was written at 5.75 for 20 years by a competing credit union. So there's a significant competitive advantage if they're not paying 35 percent to the Federal Government and 7 percent, in our case to the State, of their income. Mrs. Biggert. Okay. Then Mr. Rock, you testified that in spite of the change in the credit unions that kind of metamorphose into highly competitive financial institutions that they're almost indistinguishable from banks, and yet they continue to enjoy the tax exempt status conferred when it was composed of small self-help organizations. And if our goal is to foster a healthy competition in the financial services industry in order to benefit all the consumers, should we try and level the playing field between bank and credit unions? Mr. Rock. I would say yes, absolutely, among the new breed credit unions. If a credit union wants to grow to a very large size, wants to serve everyone in the community without limitation, if they want to offer all the products and services that a bank can to all the same customers, then I say I welcome the competition, but they should play by the same rules. They should be subject to the same regulations. They should pay the same income taxes and so on. I do not think that that would be a wise policy choice for the traditional credit unions. I think the traditional credit unions that abide by the original quid pro quo, I think they serve an important function in the financial system, and I think they should be continued to allowed to do so. Mrs. Biggert. Thank you. I yield back. Mr. Kanjorski. Thank you very much, Mrs. Biggert. We are pushing up against the votes that have been called, but I think we have enough time. Mr. Lucas of Oklahoma. Mr. Lucas. Thank you, Mr. Chairman. One quick question. Gentlemen, obviously you both have a great deal of experience, and when I joined this committee 13 years ago, we were still in the process of sorting out what remained of the S&L meltdown, a concept basically where short-term money was used to make long- term commitments, and when circumstances changed, an entire industry went away. Tell me from your experience in the financial services industry in relation to how things have evolved in the last 20 years, is there still a challenge when you use short-term money to make long-term obligations? Mr. Menzies. We don't use short-term money to make long- term obligations. We are required by the FDIC to manage our balance sheet within an interest rate risk sensitivity that doesn't put too much earnings at risk. And the same is the case with Mr. Rock. We can't just go mismatch our balance sheet. We have a comprehensive management process to make sure we don't go make 30-year loans and put them on our books and fund them with savings accounts. It's as simple as that. Mr. Lucas. And do you have concerns about that being done by other people? Mr. Menzies. I think it is not a responsible form of financial management. I think the reason the savings and loans got into trouble is because they had been given exclusive privileges and exclusive powers, and they were funding 30-year assets with savings accounts, and the market went upside down, and the government deregulated them, and they tumble. That is not the case with the thrifts today. The thrifts that are in business today are well capitalized and well managed, for the most part. They do a good job. But they're subject to the same types of interest rate risk management policies that I'm subject to, and I've just been through an examination, and they are serious about it. Mr. Rock. I would say, Mr. Lucas, yes, I think those continue to pose substantial risks. I think that 20 to 25 years ago when those events happened that we characterize as the S&L crisis, banks were not required to engage in the same level of interest rate risk simulation modeling that we are today. And I know that our regulator, the FDIC, requires us to engage in extensive monitoring. We have special computer programs. We do it quarterly. In times of stress, we do it monthly. So, I think that has reduced it. With regard to how the credit union regulators look at that, and whether the same requirements are demanded of them, I really don't know. Mr. Lucas. Fair enough. Thank you, Mr. Chairman. Mr. Kanjorski. Thank you very much, Mr. Lucas. I really have to apologize. We have these votes on. I would really love to sit here and trade off a lot of questions and answers, because I think we would get a lot of the needed information. I want to assure you that this committee, and certainly this majority, are not prone to favor one institution over another. What we are trying to do is get to risk management, get to firmness in making sure that whatever occurs in our financial service industry is well examined and ideal. We are also working on regulatory reform for banks. I am going to ask my friends in the credit union movement not to get involved in being opposed to those deregulations for banks, because we do not intend to deregulate anything that would cause greater risk to the system, but in fact deregulate those things that are determined to be unnecessary or further restrictive or limiting your ability to earn. In that regard, I hope we come to parity here. We may not. If we do not, I don't want the two of you to get ulcers over it. If we do, I want you to realize that then we have all succeeded at our chore to get the system to work as best it can. With that in mind, we are not going to take any further questions, because we have to make the votes. And I am going to note that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for Members to submit written questions to these witnesses, and to place their responses in the record. I want to thank both of you for appearing here today. And we did not mean to overwhelm you with time or questions. Certainly your statements and your answers will be fully examined and taken as seriously as any of the other testimony before this hearing. And with that said, the panel is dismissed, and this hearing is adjourned. 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