Credit Unions:

Reforms for Ensuring Future Soundness

GGD-91-85: Published: Jul 10, 1991. Publicly Released: Jul 10, 1991.

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Pursuant to a legislative requirement, GAO examined: (1) the financial condition of credit unions; (2) the regulation and supervision of credit unions; (3) the structure of the credit union industry; (4) the evolving role of credit unions in the financial marketplace; and (5) a certified public accountant's audits of the National Credit Union Administration's (NCUA) Operating and Share Insurance Funds and its Central Liquidity Facility's financial statements for 1989 and 1990.

GAO found that: (1) federally insured credit unions are in better condition than banks and thrifts; (2) most credit unions are small and about half have assets of less than $2 million, but the 375 credit unions with assets of $100 million or more hold about 46 percent of the industry's assets; (3) as of December 30, 1990, the National Credit Union Share Insurance Fund's (NCUSIF) equity was $1.25 for every $100 in insured accounts; (4) audits of NCUSIF and other financial statements for the years ended September 30, 1988, 1989, and 1990 were fair and conformed with generally accepted accounting principles; (5) although NCUA took steps to strengthen its supervision of credit unions, further improvements were needed in off-site monitoring; (6) NCUA established policy goals for the resolution of credit unions in weak and poor condition and made progress in meeting these goals; (7) NCUA criteria for granting assistance to failing credit unions were not always met, and decisions on resolution methods for failed credit unions were not adequately documented; (8) there was no assurance of consistency in forbearance decisions among the regions; (9) federally insured credit unions invested $20.4 billion in 44 corporate credit unions; (10) NCUA lacked complete supervisory control over a central credit union and 13 of its member credit unions; (11) although there were no inherent problems in NCUA insurance functions, changes were needed to ensure that the insurance function would be given priority if conditions should deteriorate; and (12) expansions of common bonds helped in merging troubled credit unions, but made it more difficult for members to ascertain other members' creditworthiness.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: As of September 1994, the Senate has not held hearings, but the House Banking Committee now is. Whether this will be done annually is unknown but GAO is recommending it again.

    Matter: Congress should hold annual oversight hearings at which the NCUA Board testifies on the condition of credit unions and NCUSIF and assesses risk areas and reports on NCUA responses.

  2. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to authorize NCUA to provide assistance in resolving a failing credit union only when it is less costly than liquidation or essential to provide adequate depository service in the community.

  3. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should require NCUA to maintain documentation supporting its resolution decisions, including the statistical and economic assumptions made.

  4. Status: Closed - Not Implemented

    Comments: Congress does not intend to enact this recommendation. NCUA requires that nonfederally insured corporates can receive investment funds from federally insured credit unions only if the corporates agree to be examined by NCUA and accept NCUA supervision. Corporates now operating without federal insurance have agreed to be subject to examination and regulation by NCUA under section 704.

    Matter: Congress should amend the Federal Credit Union Act to confine insured credit union investments in corporates and U.S. Central to those that have obtained deposit insurance from NCUSIF.

  5. Status: Closed - Not Implemented

    Comments: Congress does not intend to enact this recommendation. NCUA issued a new regulation which is intended to improve the capital levels in corporates.

    Matter: Congress should require NCUA to establish a program to promptly increase the capital of corporates and establish minimum capital standards.

  6. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. NCUA is evolving risk-based capital requirements for all credit unions. NCUA is also considering a second minimum requirement of GAAP capital to assets (not risk-weighted).

    Matter: Congress should amend the Federal Credit Union Act to require NCUA to establish minimum capital levels for credit unions no less stringent than those applicable to other insured depository institutions, providing for an appropriate phase-in period.

  7. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action could result from House hearings in September 1994.

    Matter: Congress should amend the Federal Credit Union Act to require the amount that credit unions can loan or invest in a single obligor, other than investments in direct or guaranteed obligations of the U.S. government in the credit union's corporate, be limited to not more than 1 percent of the credit union's total assets. Presently permitted limits with respect to credit union service organizations should continue, and exposure of not more than 2 percent of assets should be provided for in repurchase agreements transactions. Congress should authorize NCUA to set a higher limit for secured consumer loans made by small credit unions and for overnight funds deposited with correspondent institutions.

  8. Status: Closed - Not Implemented

    Comments: NCUA issued regulations further restricting commercial lending. New legislation is not expected.

    Matter: Congress should amend the Federal Credit Union Act to require NCUA to tighten the commercial lending regulation and include an overall limit.

  9. Status: Closed - Not Implemented

    Comments: Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to require the borrowing authority to specify that credit unions may not borrow for the purpose of growth, unless prior approval of NCUA is obtained.

  10. Status: Closed - Implemented

    Comments: Congress did enact this recommendation as part of comprehensive banking reforms in 1991. NCUA has issued a regulation under Truth in Savings Act (FDICIA).

    Matter: Congress should amend the Federal Credit Union Act to require credit unions to adequately disclose that dividends on share and other accounts cannot be guaranteed in advance but are dependent on earnings.

  11. Status: Closed - Not Implemented

    Comments: Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to require all credit unions to obtain NCUA permission before opening a new branch.

  12. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended

    Matter: Congress should amend the Federal Credit Union Act to require credit unions above a minimum size to obtain annual independent certified public accountant audits and to make annual management reports on internal controls and compliance with laws and regulations.

  13. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to require NCUA to compel a state credit union to follow the federal regulation in any area in which the powers go beyond those permitted federal credit unions and are considered to constitute a safety and soundness risk.

  14. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. There is little prospect for congressional action. "Single regulator" legislation proposed by the administration in 1993-1994 specifically excluded NCUA from consolidation with the other regulators.

    Matter: If there is a broad reform of the depository institution regulatory structure and Congress legislates an approach that places all examination and supervision functions under a single federal regulator, Congress should consider credit unions for inclusion once such an entity is operating effectively. The insurance function could then be placed under the Federal Deposit Insurance Corporation or under a separate entity.

  15. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: If the Central Liquidity Facility (CLF) is to continue to operate, Congress should sharply reduce CLF borrowing authority from the current level of 12 times subscribed capital and surplus.

  16. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: If CLF is to continue to operate, Congress should require the terms and conditions of CLF loans to be no more liberal than those made by the Federal Reserve.

  17. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: If CLF is to continue to operate, Congress should prohibit CLF loans or guarantees of any kind to NCUSIF, and, in the event NCUA Board certifies that CLF does not have sufficient funds to meet liquidity needs of credit unions, authorize the Department of the Treasury to lend to NCUSIF, rather than to CLF, in order to meet such needs. The power of federal credit unions to borrow from the Farm Credit Banks, as provided for in the Federal Credit Union Act, should be removed.

  18. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Community Development Credit Union Revolving Fund Transfer Act to designate an entity other than NCUA as administrator of the fund.

  19. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: If credit unions are to remain distinct from other depository institutions because, in part, of their common bond membership requirement, and if this requirement is intended to further the safe and sound operation of credit unions, Congress should consider stating this general intent in legislation and setting forth guidelines on the limits of occupational, associational, and community common bonds, as well as the purpose and limits of multiple group charters.

  20. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should require that credit unions expense the 1-percent deposit over a reasonable period of time, to be determined by NCUA. Congress should at the same time emphasize that the assets represented by a failed credit union's insurance deposit should be available first to NCUSIF. This should be coordinated with and consistent with any legislation to recapitalize the Bank Insurance Fund, so as to avoid placing credit unions at a competitive advantage.

  21. Status: Closed - Implemented

    Comments: This is an alternative to the GAO main recommendation. NCUA indicated its agreement with the recommendation in commenting on the draft report, but did not mention this in its response to Congress. NCUA states that it does not intend any formal action to do this, but that the 1% deposit is allowed for in their analysis of the condition and prospects of all undercapitalized credit unions.

    Matter: If Congress does not require that the 1-percent deposit be expensed, NCUA should require credit unions to exclude the amount from both sides of their balance sheet when assessing capital adequacy. This would have the effect of not counting that amount as credit union capital.

  22. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to: (1) provide for a five-member NCUA Board, with two members ex officio, the Chairman of the Federal Reserve Board and the Secretary of the Treasury; and (2) authorize the two ex officio members to delegate their authority to another member of the Federal Reserve Board or to another official of the Department of the Treasury who is appointed by the President with the advice and consent of the Senate.

  23. Status: Closed - Not Implemented

    Comments: Congress did not act on this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to require NCUA to take appropriate enforcement action when unsafe and unsound conditions or practices, as specified in law or NCUA regulations, are identified.

  24. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to establish an available assets to ratios for NCUSIF.

  25. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to authorize NCUA to raise the basic NCUSIF equity ratio, available assets ratio, and premiums and delete its ability to set a normal operating level below the statutory minimum.

  26. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to provide for additional NCUA borrowing from Treasury on behalf of NCUSIF.

  27. Status: Closed - Not Implemented

    Comments: Congress did not enact this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to place NCUSIF in a second position to general creditors but provide that this position rank ahead of uninsured shares.

  28. Status: Closed - Not Implemented

    Comments: Congress did not act on this recommendation as part of comprehensive banking reforms in 1991. Congressional action is not intended.

    Matter: Congress should amend the Federal Credit Union Act to require that NCUA, in consultation with Congress and the credit union industry, identify specific unsafe and unsound practices and conditions that merit enforcement actions as well as the appropriate action, and promulgate these requirements by regulation.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: NCUA claims that it uses its authority when necessary and has hired more staff to do this.

    Recommendation: NCUA should invoke its statutory authority to refuse to accept state supervisors' examinations when a state regulatory authority lacks adequate independence from the credit union industry.

    Agency Affected: National Credit Union Administration

  2. Status: Closed - Implemented

    Comments: As of 1992, NCUA has arranged to review any state credit union which does not have a state examination within 18 months.

    Recommendation: NCUA should establish a policy goal for examination frequency of state credit unions.

    Agency Affected: National Credit Union Administration

  3. Status: Closed - Not Implemented

    Comments: NCUA believes this is unnecessary, prefers to use its discretion in setting such requirements, and has taken alternative methods to achieve goals.

    Recommendation: NCUA should require all credit unions to submit copies of their supervisory committee audit reports to NCUA upon completion.

    Agency Affected: National Credit Union Administration

  4. Status: Closed - Implemented

    Comments: The Inspector General has conducted quality assurance reviews of three regions this year and will issue reports. The other three regions will be reviewed in fiscal year 1994, and the reviews will be followed by a final capping report.

    Recommendation: The NCUA Inspector General should conduct a review focusing on NCUA handling of problem credit unions since mid-1990, specifically its use of enforcement powers, and submit a report to the NCUA Board.

    Agency Affected: National Credit Union Administration

  5. Status: Closed - Not Implemented

    Comments: NCUA claims it has an improved system to track any waivers given by regional directors and that amounts involved are small.

    Recommendation: NCUA should require that waivers and special charges be authorized by the Director, Office of Examination and Insurance, the General Counsel, and the regional director.

    Agency Affected: National Credit Union Administration

  6. Status: Closed - Implemented

    Comments: NCUA issued a revised regulation (704), effective in late 1992, which incorporates all of the recommended features.

    Recommendation: NCUA should establish minimum capital requirements for corporates and U.S. Central, taking all risks into account. In the interim, NCUA should establish a minimum level based on assets, and set a time frame for achieving this level. This could be achieved by increasing reserving requirements and using subordinated debt arrangements, such as the membership capital share deposits.

    Agency Affected: National Credit Union Administration

  7. Status: Closed - Implemented

    Comments: New corporate regulations have accomplished this recommendation.

    Recommendation: NCUA should restrict the investment powers of state-chartered corporates to the limits imposed on federal corporates.

    Agency Affected: National Credit Union Administration

  8. Status: Closed - Not Implemented

    Comments: NCUA believes its current procedure, in place at the time of the review, is adequate.

    Recommendation: NCUA should require documentation at the regional office level of examiners' reviews of all credit union call reports.

    Agency Affected: National Credit Union Administration

  9. Status: Closed - Implemented

    Comments: The requirements for the use of off-site monitoring tools were added to the project list of the Office of Examination and Insurance and completed in fiscal year 1995.

    Recommendation: NCUA should clarify the purpose, unique values, and requirements for use of each of its off-site monitoring tools. It should determine the appropriate recipients of the tools and distribute them accordingly within each region.

    Agency Affected: National Credit Union Administration

  10. Status: Closed - Implemented

    Comments: This recommendation was implemented in the March 31, 1993 quarterly call reports.

    Recommendation: NCUA should require that credit unions with assets greater than $50 million file financial and statistical reports quarterly.

    Agency Affected: National Credit Union Administration

  11. Status: Closed - Implemented

    Comments: In June 1991, NCUA issued comprehensive guidelines regarding real estate lending and believes this, rather than formal regulations, is an adequate action for the present.

    Recommendation: NCUA should assess its real estate regulation and strengthen it to help ensure the sound underwriting of loans and their suitability for sale in the secondary market.

    Agency Affected: National Credit Union Administration

  12. Status: Closed - Implemented

    Comments: A final rule addressing all of GAO concerns and recommendations went into effect January 1992.

    Recommendation: NCUA should restrict the exclusions from its commercial lending limit set forth in 1987 to help ensure that credit unions are not used as vehicles underwriting large commercial ventures.

    Agency Affected: National Credit Union Administration

  13. Status: Closed - Not Implemented

    Comments: NCUA disagrees with the recommendation and has now limited such investments to 5 percent of assets.

    Recommendation: NCUA should limit corporate credit union and U.S. Central investments in a single obligor to 1 percent of the investor's total assets. Exceptions should include obligations of the U.S. government, repurchase agreements that equal up to 2 percent of assets, and all investments by corporates in U.S. Central.

    Agency Affected: National Credit Union Administration

  14. Status: Closed - Implemented

    Comments: Per section 704, the loan limit is now 10 percent of capital. This constitutes a major improvement, but the amount still could exceed 1 percent of assets. No further limits are being considered. There is an additional requirement that loans to one borrower only be approved after review of several required credit considerations and a due diligence analysis.

    Recommendation: NCUA should limit corporate credit union and U.S. Central loans to one borrower to 1 percent of the lender's assets. NCUA should be authorized to make exceptions on a loan-by-loan basis.

    Agency Affected: National Credit Union Administration

  15. Status: Closed - Implemented

    Comments: Action taken addressed all GAO concerns except that information on interest rate sensitivity is still inadequate.

    Recommendation: NCUA should expand the information required on the financial and statistical reports in the areas of asset quality, interest rate sensitivity, management, and common bond.

    Agency Affected: National Credit Union Administration

  16. Status: Closed - Implemented

    Comments: NCUA claims that all state credit unions may be examined if supervision of that state is not credible. In 2 states, it is now examining all credit unions.

    Recommendation: NCUA should examine all NCUSIF-insured credit unions in such states.

    Agency Affected: National Credit Union Administration

  17. Status: Closed - Implemented

    Comments: NCUA claims it will continue to adhere to its criteria for assisting credit unions.

    Recommendation: NCUA should develop policy guidance concerning the use of these provisions and monitor their use.

    Agency Affected: National Credit Union Administration

  18. Status: Closed - Implemented

    Comments: NCUA now requires corporates to report in greater detail and more timely.

    Recommendation: NCUA should obtain more complete and timely information about corporate financial operations.

    Agency Affected: National Credit Union Administration

  19. Status: Closed - Implemented

    Comments: NCUA originally disagreed with this recommendation but changed its mind and is implementing a program of centralized oversight of corporates. In 1994, responsibility for supervision of corporates was given to a new director whose office will report directly to the NCUA Board.

    Recommendation: NCUA should establish a unit at NCUA headquarters that would be responsible for corporate oversight, examination, and enforcement actions.

    Agency Affected: National Credit Union Administration

  20. Status: Closed - Implemented

    Comments: NCUA has developed and implemented a system for evaluating the risk associated with corporate credit unions that is different from the CAMEL ratings used for ordinary credit unions and for other depository institutions. This risk rating system reflects the unique nature of corporate credit unions. The system, known as the Corporate Risk Information System (CRIS), appears to resolve the concerns presented in the report.

    Recommendation: NCUA should review the capital, assets, management, earnings, and liquidity (CAMEL) rating system for corporate credit unions to reduce the inconsistencies and focus more clearly on the component being rated.

    Agency Affected: National Credit Union Administration

  21. Status: Closed - Implemented

    Comments: NCUA changed the NCUSIF fiscal year to calendar year, effective for fiscal year 1994. This will reduce time lags from 7 months to 3 months.

    Recommendation: NCUA should reduce the time lag in adjusting the Bank Insurance Fund's financing.

    Agency Affected: National Credit Union Administration

  22. Status: Closed - Implemented

    Comments: In November 1993, NCUA changed to calendar year, effective for fiscal year 1994.

    Recommendation: NCUA should place NCUSIF on a calendar fiscal year.

    Agency Affected: National Credit Union Administration

  23. Status: Closed - Not Implemented

    Comments: NCUA disagrees with this recommendation.

    Recommendation: NCUA should immediately establish separate supervision and insurance offices that report directly to the Board.

    Agency Affected: National Credit Union Administration

  24. Status: Closed - Implemented

    Comments: NCUA claims it will continue to adhere to its criteria for assisting credit unions.

    Recommendation: NCUA should adhere to the criteria for assisting credit unions.

    Agency Affected: National Credit Union Administration

 

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