Testimony of Dennis Dollar on IRPS 99-1, Chartering and Field of Membership Manual

TESTIMONY OF DENNIS DOLLAR

BOARD MEMBER

NATIONAL CREDIT UNION ADMINISTRATION

IMPLEMENTATION OF THE CREDIT UNION MEMBERSHIP ACCESS ACT

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER SERVICES

COMMITTEE ON BANKING AND FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

FEBRUARY 3, 1999

Thank you, Madam Chairwoman, members of the subcommittee. I appreciate the invitation to appear with my colleagues on the NCUA Board to discuss our recently promulgated rule, IRPS 99-1, commonly referred to as the Chartering and Field of Membership Manual, which came about as a result of the congressional passage of HR1151, the Credit Union Membership Access Act.

First, I would like to commend the Congress and particularly the leadership of you, Madam Chairwoman, and the members of this subcommittee as well as the full Banking Committee for your leadership in the passage of this important legislation. Your farsighted approach to ensuring credit union access for millions of Americans was approved with a foremost eye on the safety and soundness of those credit unions that you have chosen to allow eligible Americans to join. As the safety and soundness regulator for America's 6,900 federally-chartered credit unions and the insurer of over 11,000 federal and state chartered credit unions, we concur in that approach.

Although we as a Board may, as does the Congress, have differing policy approaches within our ranks from time to time, we are united in our focus and priority on safety and soundness. Differences on policy are not necessarily unhealthy if from those differences come more sound policy. I believe that is the case with IRPS 99-1, and I would like to briefly address some of the concerns that I know, Madam Chairman, you and some other members of this committee may have on some of the more controversial aspects of this regulation.

Let me begin by emphasizing that during every deliberation as we worked on this rule, we were diligent to follow the clear statutory mandates of HR1151. Our Office of General Counsel worked with us to draft clear language which tracked the statute on those mandated areas.

In those areas that were not statutorily mandated but were instead delegated to the Agency for policy interpretation, I can give you my approach as a board member to each issue. I applied the following three standards: (1) Is it consistent with the provisions of HR1151?; (2) Does it comply with recognized and historical safety and soundness standards?; and (3) Can we implement it with a minimum amount of paperwork and unnecessary regulatory burden? (The last of these three criteria is important in an agency that has become, in my opinion, so paperwork and process driven that compared to the 120 days it took seven federal regulatory agencies to approve the mega-merger of Bank of America and NationsBank, it takes approximately 12 to 18 months on average to charter a new credit union or for an existing credit union to complete a community charter conversion process in the very town or community they presently operate in. The single best thing, in my opinion, we can do to encourage and facilitate the chartering of more new credit unions is to create a more procedure-friendly regulatory environment.)

I would like at this time to refer you to the written statement that has been presented on behalf of the Agency in response to the nine specific questions raised in your letter inviting us to this hearing.

Although this attached statement covers each of your individual questions about the manual in much more depth than I have the time to address here, I would like to focus my remarks on what have become the two most controversial aspects: the 3,000 presumption for economic viability and the reasonable proximity definition.

NCUA has received some questions from members of the committee regarding the policy determination in the Chartering Manual that in general, a new charter of less than 3,000 may not be economically advisable. Some have interpreted this statement to mean that a group of less than 3,000 cannot form its own credit union or that NCUA is not encouraging small groups to form their own credit union. Such an interpretation is simply not true. NCUA specifically stated in the Chartering Manual that any size group can apply for a credit union charter and be approved if they demonstrate economic advisability. Common sense and experience dictates that the smaller the group, the more difficult it is to form a successful credit union. However, that does not mean NCUA will not charter a small group that is economically viable. Such a determination is fact specific.

This 3,000 number is not intended to undermine the statutory requirement to encourage the formation of new credit unions. Rather it has been established to provide groups necessary advice and guidance when seeking to charter a new credit union. Personally, I approached this number not as either a threshold or a ceiling, but merely as a documentation point. Those groups above that number would have some of the regular documentation requirements lessened because of a rebuttable presumption of economic viability. Those groups below would submit to the regular documentation requirements we have always required - nothing new, nothing additional. This is consistent with the paperwork reduction emphasis previously referenced.

Any group desiring to form its own credit union will be given every opportunity to demonstrate it has met the economic advisability requirement. Additionally, and most importantly, to encourage the formation of new credit unions, NCUA will review whether a group over 200 seeking to join a multiple group credit union has the capability and desire to do so. A key concept here is whether the group has the volunteers and resources to form its own credit union. NCUA cannot force a group of less than 3,000 to charter a new credit union if there is no desire and/or resources to form a new credit union. The analysis of whether a group can form a new credit union must take the members' desires, expectations, and resources into consideration. Failure to do so would put the National Credit Union Share Insurance Fund at risk.

In today's economic financial marketplace, it is unlikely that any group, but particularly a group of less than 3,000, will successfully operate a federal credit union without strong volunteer and sponsor support. This conclusion is supported by recent NCUA experience. From January 1994 to January 1999, a time period that included a nationwide injunction prohibiting new groups to join multiple-group credit unions, 45 new federal charters were granted. Only eight of these new charters had a primary potential membership that was less than 3,000. However, the average primary potential membership of these 45 credit unions was 37,470, a number which far exceeds 3,000.

Although NCUA recognizes that there are currently thousands of credit unions with a primary potential membership of less than 3,000, at the time of their charter economic conditions and the financial service expectations of the credit unions' members were different. These differences provided the credit unions an opportunity to become established and develop a loyalty base under marketplace conditions that significantly differ from those of today. Unfortunately, in today's economic marketplace, a small group that lacks member support, volunteers, and other resources will, in all probability, not operate a safe and sound credit union. NCUA would abdicate its regulatory responsibility if it required such a group to form its own credit union.

To separate the ability to compete in today's diverse and demanding marketplace with the ability to maintain safety and soundness is impossible. They are intertwined to the point where any responsible safety and soundness regulator must, as the Congress did in passing HR1151, be willing to create a regulatory environment that ensures access to the marketplace but clearly defines the risk management parameters within which the credit union must operate. Your "prompt corrective action" sections of HR1151 demonstrated that you recognized the correlation between the two, and we certainly consider that to be the major component of our statutory mandate.

Better that I be here today before this hearing answering questions about our economic viability standards than to be here three years from now answering questions about why we chartered so many fledgling credit unions without necessary support to succeed, that failed and cost the Share Insurance Fund millions of dollars.

I want to also briefly address another issue that has arisen as a result of our new Chartering Manual. This concerns the terms "reasonable proximity" and "service facility."

HR1151 states that groups must be within reasonable proximity to the credit union. The term is not defined in the law. The board concluded that the clear intent of the statute is to assure that the credit union is able to provide effective service to the members of the group. Our approach to this issue has been to focus on exactly that, service to the group.

As noted, HR1151 does not define reasonable proximity. Obviously the phrase has a geographic component, but Congress left to NCUA the responsibility to determine how close the credit union needs to be to the group in order to provide effective service. Also left to NCUA was the issue of what type of credit union presence could provide the appropriate level of service.

Does the statutory requirement of reasonable proximity mean the group must be near the main office, or can it be a branch office, shared office, mobile office, etc. It seems to me that the answer will vary from place to place and credit union to credit union.

We have approached this issue by requiring that the group be within the service area of one of the credit union's service facilities. Our approach is reasonable and practical. The focus is on the minimum amount of services that must be provided at any service facility, rather than on whether the facility has to be brick and mortar, one or two stories with or without granite. We concluded as a minimum that a service facility is a place where shares are accepted for members' accounts, loan applications are accepted, and loans are disbursed. We also decided, given the legislative history of HR1151 and our desire to assure that more than minimum service is provided, to prohibit ATM's from being considered as service facilities under the rule.

This generated a significant amount of complaints during our comment period, and I still hear today, complaints from credit unions that our rigidity in this service facility definition is outdated in this era of cyberbanking, the internet, automated response, and electronic transfer.

Still, I am confident that our approach is reasonable because it provides sufficient flexibility to assure that any credit union adding a group to its field of membership will have a sufficient presence near the group to provide its members adequate service.

There is another factor at work here that I am sure will enter into this equation as well and that is competition. All other things being equal, a group is not going to want to join a particular credit union unless it is convinced that the credit union has the ability, through its presence near the group, to provide adequate services to the group's members.

Still in place are NCUA's fixed asset ratio requirements, expense ratio to peer group comparisons, capital requirements (now made statutory through HR1151), and other examination and supervisory processes that will enable the agency to monitor and act decisively should abuse of this provision occur.

Just as our perennial critics in the banking associations have said that we could have drawn this regulation much more strictly (in effect attempting to win through the regulatory process a victory they did not win in Congress), we have been criticized by credit unions and their trade associations for restrictions that they consider tighter than necessary. Among these are a more restrictive regulatory definition of "immediate family member" rather than the individual credit union definition previously allowed and a limit on the size of new employer group additions that can be approved without first making a determination of economic viability of the group forming its own credit union, rather than the previous policy of no size limitation. Yet, the statute and the intent were clear. We drew the regulation accordingly and we are committed to making it work.

However, in these I have addressed today as well as in all other provisions of this new regulation, we will monitor IRPS 99-1 and its effectiveness very closely. Included in the regulation is a one-year monitoring and examination timetable through which we can and we will examine closely these and other areas to make sure the results are consistent with what we sought to accomplish as safety and soundness regulators. We will also examine how the rule is affecting the paperwork and regulatory compliance burden on both credit unions and the agency and, most importantly, what you specified statutorily in HR1151.

I appreciate the opportunity to appear before you today and look forward to answering your questions and to working with you to implement HR1151 effectively and within the all important confines of safety and soundness.

Thank you very much.