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entitled 'Credit Unions: Financial Condition Has Improved, but
Opportunities Exist to Enhance Oversight and Share Insurance
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Report to the Ranking Minority Member, Committee on Banking, Housing,
and Urban Affairs, U.S. Senate:
October 2003:
CREDIT UNIONS:
Financial Condition Has Improved, but Opportunities Exist to Enhance
Oversight and Share Insurance Management:
GAO-04-91:
GAO Highlights:
Highlights of GAO-04-91, a report to the Ranking Minority Member,
Committee on Banking, Housing, and Urban Affairs, U.S. Senate.
Why GAO Did This Study:
Recent legislative and regulatory changes have blurred some
distinctions between credit unions and other depository institutions
such as banks. The 1998 Credit Union Membership Access Act (CUMAA)
allowed for an expansion of membership and mandated safety and
soundness controls similar to those of other depository institutions.
In light of these changes and the evolution of the credit union
industry, GAO evaluated (1) the financial condition of the industry
and the deposit (share) insurance fund, (2) the impact of CUMAA on the
industry, and (3) how the National Credit Union Administration (NCUA)
had changed its safety and soundness processes.
What GAO Found:
The financial condition of the credit union industry has improved
since GAO’s last report in 1991, and the federal share insurance fund
appears financially stable. However, a growing concentration of
industry assets in large credit unions creates the need for greater
risk management on the part of NCUA. The question of who benefits from
credit unions’ services has also been widely debated. While it has
been generally accepted that credit unions have a historical emphasis
on serving people of modest means, our analysis of limited available
data suggested that credit unions served a slightly lower proportion
of low- and moderate-income households than banks.
CUMAA and subsequent NCUA regulations enabled federally chartered
credit unions to expand their membership, serve larger geographic
areas, and add underserved areas. According to NCUA officials, these
changes were necessary to maintain the competitiveness of the federal
charter with respect to state-chartered credit unions. While NCUA has
stated its commitment to ensuring that credit unions provide financial
services to all segments of society, NCUA has not developed indicators
to determine if credit union services have reached the underserved.
In response to the growing concentration of industry assets and
increased services offered by credit unions, NCUA recently adopted a
risk-focused examination and supervision program but still faces a
number of challenges, including lack of access to third-party vendors
that are providing more services to credit unions. Further, credit
unions are not subject to internal control and attestation reporting
requirements applicable to banks and thrifts. GAO also found that the
insurance fund’s rate structure does not reflect risks that individual
credit unions pose to the fund, and NCUA’s estimation of fund losses
is based on broad historical analysis rather than a current risk
profile of insured institutions.
What GAO Recommends:
With respect to the share insurance fund, GAO recommends that the
Chairman of NCUA explore developing a risk-based funding system,
improve the process for allocating overhead expenses, and refine the
process for estimating future losses. To improve reporting, the
Chairman should also use tangible indicators to determine whether
credit unions are serving people in underserved areas. To help ensure
safety and soundness, Congress may wish to consider making credit
unions subject to internal control reporting and attestation
requirements applicable to banks and thrifts and providing NCUA
legislative authority to examine third-party vendors.
www.gao.gov/cgi-bin/getrpt?GAO-04-91.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Richard J. Hillman at
(202) 512-9073 or hillmanr@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Financial Condition of the Credit Union Industry Has Improved Since
1991:
Limited Comprehensive Data Are Available to Evaluate Income of Credit
Union Members:
CUMAA Authorized NCUA to Continue Preexisting Policies That Expanded
Field of Membership:
NCUA Adopted Risk-Focused Examination and Supervision Program, but
Faces Challenges in Implementation:
NCUSIF's Financial Condition Appears Satisfactory, but Methodologies
for Overhead Transfer Rate, Insurance Pricing, and Estimated Loss
Reserve Need Improvement:
System Risk That May Be Associated with Private Share Insurance Appears
to Have Decreased, but Some Concerns Remain:
Conclusions:
Recommendations for Executive Action:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Status of Recommendations from GAO's 1991 Report:
Appendix III: Financial Condition of Federally Insured Credit Unions:
Appendix IV: Comparison of Bank and Credit Union Distribution of
Assets:
Appendix V: Credit Union Services, 1992-2002:
Appendix VI: Characteristics of Credit Union and Bank Users:
Appendix VII: Key Changes in NCUA Rules and Regulations, 1992-2003:
Appendix VIII: NCUA's Budget Process and Industry Role:
Appendix IX: NCUA's Implementation of Prompt Corrective Action:
Appendix X: Accounting for Share Insurance:
Appendix XI: Comments from the National Credit Union Administration:
Appendix XII: Comments from American Share Insurance:
Appendix XIII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables Tables:
Table 1: Regulatory Definitions of Local Community, 2000 and 2003:
Table 2: Federally Insured Credit Unions Were Similar to Banks and
Thrifts with Respect to Capital Categories, as of December 31, 2002:
Table 3: Peer Group Definitions:
Table 4: Definition of Income Categories:
Table 5: Status of GAO Recommendations to NCUA and Congress, as of
August 31, 2003:
Table 6: Federally Insured Credit Union Growth in Assets and Shares,
1992-2002:
Table 7: Distribution of Credit Unions by Asset Size, 1992 and 2002:
Table 8: Asset Composition of Credit Unions as a Percentage of Total
Assets, 1992-2002:
Table 9: Comparison of the Loan Portfolios of Federally Insured Credit
Unions with Peer Group Banks and Thrifts, as of 2002:
Table 10: Timeline of Key Changes to NCUA Rules and Regulations, January
1992-September 2003:
Table 11: CUMAA Mandates and NCUA Actions on PCA Regulation
Implementation:
Table 12: Discretionary Supervisory Actions:
Table 13: Net Worth Category Classification for New Credit Unions:
Figures:
Figure 1: Comparison of Credit Union and Bank Capital Ratios, 1992-2002:
Figure 2: Credit Union Industry Size and Total Assets Distribution, as
of December 31, 2002:
Figure 3: Income Characteristics of Households Using Credit Unions
versus Banks, Low and Moderate Income versus Middle and High Income:
Figure 4: Income Characteristics of Households Using Credit Unions
versus Banks, by Four Income Categories:
Figure 5: Mortgages Made by Credit Unions and Banks, by Income Level of
Purchaser, 2001:
Figure 6: Loans Made by Credit Unions and Banks, by Average Income in
the Purchased Home's Census Tract, 2001:
Figure 7: Percentage of Federally Chartered Credit Unions, by Charter
Type, 2000-2003:
Figure 8: Actual and Potential Members in Federally Chartered Credit
Unions, by Charter Type, 2000-2003:
Figure 9: Actual and Potential Members in Federally and State-chartered
Credit Unions, 1990-2003:
Figure 10: Underserved Areas Added before and after CUMAA, by Federal
Charter Type, 1997-2002:
Figure 11: Credit Union Mortgage Loans Have Grown Significantly Since
1992:
Figure 12: NCUSIF's Equity Ratio, 1991-2002:
Figure 13: Equity to Insured Shares or Deposits of the Various Insurance
Funds:
Figure 14: Net Income of NCUSIF, 1990-2002:
Figure 15: Financing Sources of NCUSIF and NCUA's Operating Fund:
Figure 16: Share Payouts and Reserve Balance, 1990-2002:
Figure 17: States Permitting Private Share Insurance (March 2003) and
Number of Privately Insured Credit Unions (December 2002):
Figure 18: Capital Ratios in Federally Insured Credit Unions, 1992-2002:
Figure 19: Profitability of Federally Insured Credit Unions, 1992-2002:
Figure 20: Federally Insured Credit Unions, by CAMEL Rating, 1992-2002:
Figure 21: Total Assets of All Credit Unions and All Banks, as of 2002:
Figure 22: Total Assets of Credit Unions and Banks with Less Than $100
Million in Assets, as of 2002:
Figure 23: Total Assets of Credit Unions with Less Than $5 Million in
Assets, as of 2002:
Figure 24: Percentage of All Credit Unions and All Banks Holding Various
Loans, as of 2002:
Figure 25: Percentage of Credit Unions and Banks with Assets of $100
Million or Less Holding Various Loans, as of 2002:
Figure 26: Percentage of Credit Unions and Banks with Assets between $1
Billion and $18 Billion Holding Various Loans, as of 2002:
Figure 27: Percentages of Credit Unions and Banks Holding Various Loans,
by Institution Size, as of 2002:
Figure 28: Percentage of Credit Unions Holding Various Loans, 1992-2002:
Figure 29: Percentage of Assets Held in Various Loans by All Credit
Unions, 1992-2002:
Figure 30: Percentage of Credit Unions Offering Various Accounts, 1992-
2002:
Figure 31: Credit Union Employees and Number of Credit Unions, 1992-
2002:
Figure 32: Percentage of Credit Unions, Smallest versus Largest, Holding
Various Loans, 1992-2002:
Figure 33: Percentage of Assets Held in Various Loans, Smallest versus
Largest Credit Unions, 1992-2002:
Figure 34: Differences among Services Offered by Smaller and Larger
Credit Unions, as of 2002:
Figure 35: Credit Union Size and Offerings of More Sophisticated
Services, as of 2002:
Figure 36: Households Using Credit Unions and Banks, by Education Level,
2001:
Figure 37: Households Using Credit Unions and Banks, by Age Group, 2001:
Figure 38: Households Using Credit Unions and Banks, by Race and
Ethnicity, 2001:
Figure 39: Mortgages Made by Credit Unions and Banks, by Race and
ethnicity, 2001:
Figure 40: NCUA Budget Levels, 1992-2004:
Figure 41: NCUA-authorized Staffing Levels, 1992-2003:
Abbreviations:
ASI: American Share Insurance:
ATM: Automatic Teller Machines:
BIF: Bank Insurance Fund:
BSA: Bank Secrecy Act:
CLF: Central Liquidity Facility:
CPA: Certified Public Accountant:
CRA: Community Reinvestment Act:
CUIC: Credit Union Insurance Corporation:
CUMAA: Credit Union Membership Access Act of 1998:
CUNA: Credit Union National Association:
CUSO: Credit Union Service Organization:
FCUA: Federal Credit Union Act:
FDIA: Federal Deposit Insurance Act:
FDIC: Federal Deposit Insurance Corporation:
FDICIA: Federal Deposit Insurance Corporation Improvement Act of 1991:
FFIEC: Federal Financial Institutions Examination Council:
FRC: Financial Risk Committee:
FTC: Federal Trade Commission:
HMDA: Home Mortgage Disclosure Act:
HUD: Department of Housing and Urban Development:
IRPS: Interpretive Ruling and Policy Statement:
LAR: Loan Application Records:
MCIC: Metro Chicago Information Center:
MSA: Metropolitan Statistical Area:
NCUA: National Credit Union Administration:
NCUSIF: National Credit Union Share Insurance Fund:
NFCDCU: National Federation of Community Development Credit Unions:
OCC: Office of the Comptroller of the Currency:
OTS: Office of Thrift Supervision:
PCA: Prompt Corrective Action:
RISDIC: Rhode Island Share and Depositors Indemnity Corporation:
SAIF: Savings Association Insurance Fund:
SCF: Survey of Consumer Finances:
Letter October 27, 2003:
The Honorable Paul S. Sarbanes:
Ranking Minority Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
Dear Senator Sarbanes:
Credit unions have historically occupied a unique niche among
depository institutions. Credit unions are not-for-profit, member-
owned cooperatives that are exempt from paying federal income taxes on
their earnings. Unlike banks, credit unions are subject to limits on
their membership because members must have a "common bond"--for
example, working for the same employer or living in the same community.
However, over the years, these membership requirements have loosened
considerably and credit unions have received expanded powers, which
have raised questions about the extent that credit unions remain unique
and serve a different population than banks. We last conducted a
comprehensive review of the credit union industry, including the
National Credit Union Administration (NCUA), in 1991.[Footnote 1] Since
that time, the credit union industry has experienced substantial growth
and expansion of activities. In addition, recent legislative and
regulatory changes have blurred some distinctions between credit unions
and other depository institutions--banks and thrifts. For example, the
1998 Credit Union Membership Access Act (CUMAA) expanded the definition
of common bond and provided for reforms intended to strengthen the
safety and soundness of credit unions, including instituting procedures
for prompt corrective action (PCA) when credit unions' capital levels
fall below a certain threshold.[Footnote 2]
In 2002, there were about 10,000 credit unions with approximately 82
million members. Credit unions, like banks and thrifts, are chartered
by both the federal government and state governments, also referred to
as the dual-chartering system. NCUA has oversight authority for
federally chartered credit unions and requires its credit unions to
obtain federal share (deposit) insurance for their members' deposits
from the National Credit Union Share Insurance Fund (NCUSIF). This
fund, administered by NCUA, also provides share insurance to most
state-chartered credit unions. Some states permit their credit unions
to purchase private share insurance as an alternative to federal
insurance.
In light of the evolution of the credit union industry and the passage
of CUMAA, you asked us to review a variety of issues involving the
credit union industry and NCUA. In response, we provided your staff
information on how NCUA responded to recommendations made in our 1991
report and conducted preliminary research on the industry and
NCUA.[Footnote 3] After discussing this information with your staff, we
agreed that the objectives of this study were to evaluate (1) the
financial condition of the credit union industry; (2) the extent to
which credit unions "make more available to people of small means
credit for provident purposes";[Footnote 4] (3) the impact, if any, of
CUMAA on credit union field of membership requirements for federally
chartered credit unions; (4) how NCUA's examination and supervision
processes have changed in response to changes in the industry; (5) the
financial condition of NCUSIF; and (6) the risks associated with the
use of private share insurance. You also asked us to review issues
associated with corporate credit unions, which we plan to address in a
separate report.[Footnote 5]
:
To evaluate the financial condition of the credit union industry we
performed quantitative analyses on credit union call report data for
1992-2002.[Footnote 6] Since NCUA lacked readily available data to
assess the extent to which credit unions serve people of low and
moderate incomes, we analyzed data from the 2001 Federal Reserve Survey
of Consumer Finances (SCF) to identify the characteristics of credit
union members. This survey is the only comprehensive source of publicly
available data on financial institutions and consumer demographics that
we could identify that is national in scope. We also analyzed 2001
mortgage data from the Home Mortgage Disclosure Act (HMDA) database,
which allowed us to categorize the income levels of households
receiving mortgages from credit unions and banks, and reviewed other
industry studies. To determine how CUMAA affected field of membership
requirements for federally chartered credit unions, we analyzed NCUA
regulations and obtained data on field of membership trends from NCUA.
In addition, we surveyed state regulators to obtain information about
their chartering provisions, particularly for credit unions serving
geographic areas. To determine how NCUA's examination and supervision
process has changed, we reviewed NCUA documentation on its risk-focused
program and conducted structured interviews of NCUA regional directors
and examiners, as well as selected state credit union supervisors. We
also analyzed NCUA data on examiner resources provided to states and
progress in implementing PCA. To determine the financial condition of
NCUSIF, we obtained and analyzed key financial data about the fund from
NCUA's annual audited financial statements for 1991-2002. Finally, to
assess the risks associated with the use of private share insurance, we
identified and analyzed relevant federal and state statutes and
regulations and surveyed the 50 state credit union regulators to
determine which states permitted private share insurance. In addition,
we conducted interviews with state supervisors from states where credit
unions are permitted to choose private insurance--Alabama, California,
Idaho, Illinois, Indiana, Maryland, Nevada, and Ohio. We also
interviewed and obtained relevant documentation from representatives of
American Share Insurance (ASI)--the remaining provider of private share
insurance. Appendix I provides additional details on our scope and
methodology. We conducted our review from August 2002 through September
2003 in accordance with generally accepted government auditing
standards.
Results in Brief:
The overall financial condition of the credit union industry, as
measured by capital ratios, asset growth, and regulatory ratings, has
improved since our last report in 1991. An example of the improved
condition of the credit union industry is the decline in the number of
credit unions identified by NCUA as being in weak or unsatisfactory
condition--578 (about 5 percent of all credit unions) in 1992 compared
with 211 (about 2 percent of all credit unions) in 2002.[Footnote 7]
While credit union profitability, as measured by the return on assets
ratio, generally declined between 1992 and 1999, it has since
stabilized. The number of credit unions declined between 1992 and 2002
while total industry assets have grown. This has resulted in two
distinct groups of credit unions--larger credit unions, which are fewer
in number and provide a wider range of services that more closely
resemble those offered by banks, and smaller credit unions, which are
greater in number and provide more basic financial services. Credit
unions with over $100 million in assets represented about 4 percent of
all credit unions and 52 percent of total credit union assets in 1992
compared with about 11 percent of all credit unions and 75 percent of
total credit union assets in 2002. These larger credit unions were more
likely to provide sophisticated financial services, such as Internet
banking and electronic loan applications, and engage in mortgage
lending than smaller credit unions.
As credit unions have become larger and expanded the range of services
they offer, the question of who receives services from credit unions
has been widely debated. While it has been generally accepted that
credit unions have a historical emphasis on serving people of modest
means, limited data exist that can be used to assess the income
characteristics of credit union members. Our analysis of available data
suggested that the income of credit union members is similar to that of
bank customers; although credit unions may serve a slightly lower
proportion of low-and moderate-income households than banks. Our
analysis of the Federal Reserve's 2001 Survey of Consumer Finances
indicates that 36 percent of households that primarily or only used
credit unions had low and moderate incomes compared with 42 percent of
households that used banks. Our analysis of HMDA 2001 loan application
records indicated that credit unions provided a slightly lower
percentage of their mortgages to low-and moderate-income households
than banks--27 percent compared with 34 percent--of comparable asset
size. However, relying on HMDA data to evaluate credit union service to
low-and moderate-income households has limitations because most credit
unions are (1) small and, therefore, not required to report HMDA data
and (2) generally make more consumer loans (for example, for cars) than
residential mortgage loans. An analysis of consumer loans or other
services by household income would provide a more complete picture of
credit union service to low-and moderate-income households. Other
industry studies concluded that credit union members tended to have
higher incomes than nonmembers, but indicated that this was likely due
to credit union membership being primarily occupationally based.
CUMAA authorized preexisting NCUA policies that had enabled federally
chartered credit unions to expand their membership over the last two
decades. In response to a Supreme Court decision, Congress enacted
provisions of CUMAA permitting federally chartered credit unions to
form multiple-bond credit unions--consisting of groups, such as for
employment, each with their own distinguishing characteristics--and
permitted these credit unions to add communities underserved by
financial institutions to their membership. NCUA permitted single-and
community-bond, federally chartered credit unions to add underserved
communities to their field of membership as well. CUMAA also amended a
chartering provision authorizing community credit unions by specifying
that the area in which their members are located should be "local."
However, NCUA regulations have made it easier for credit unions to
qualify to serve larger geographic areas (for example, entire cities).
According to NCUA officials, these changes were necessary to maintain
the competitiveness of the federal charter with respect to what they
perceived as less restrictive field of membership requirements allowed
for state-chartered credit unions in some states. While CUMAA permitted
multiple-bond credit unions to add underserved areas, and NCUA has
stated its commitment to ensuring that credit unions provide financial
services to all segments of society, NCUA has not developed indicators
to determine if credit union services have reached the underserved.
Instead, NCUA uses "potential membership," the number of people who
could join credit unions, as an indirect measure of credit union
success in penetrating these areas.
In response to the growing concentration of assets in the credit union
industry and increased services and activities offered by credit
unions, NCUA adopted a risk-focused examination and supervision program
similar to that of other depository institution regulators. While NCUA
has taken a number of steps to ensure the successful implementation of
its risk-focused program, it faces a number of challenges. NCUA has met
with the other depository institution regulators, such as the Federal
Deposit Insurance Corporation (FDIC), to learn about how they
implemented their risk-focused programs. However, opportunities exist
to further leverage the experiences of other depository institution
regulators to more effectively deal with ongoing challenges such as
ensuring that examiners have sufficient training and expertise to
evaluate the more sophisticated activities of credit unions, such as
Internet banking and member business lending. Furthermore, unlike the
other depository institution regulators, NCUA lacks authority to review
the operations of third-party vendors, which credit unions increasingly
rely on to provide services such as Internet banking. However, these
third-party arrangements present risks such as threats to security of
information systems, availability and integrity of systems, and
confidentiality of information. In addition, credit unions are not
subject to the internal control reporting requirements that the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed
on banks and thrifts. NCUA implemented PCA, in 2000 as mandated by
CUMAA, as another control for safety and soundness of the industry. To
date, there have been very few credit unions subject to PCA partially
because of a generally favorable economic climate for credit unions.
Indicators of the financial condition and performance of NCUSIF have
generally been stable over the past decade. For example, the ratio of
fund equity to insured shares--a measure of the fund's equity available
to cover losses on insured deposits--was within statutory requirements
at December 31, 2002, as it has been over the past decade. While
NCUSIF's net income has remained positive through 2002, it experienced
significant declines in 2001 and 2002 due to decreased yields from the
investment portfolio, increases in the amount paid to NCUA's Operating
Fund for administrative expenses (overhead transfer rate), and
increasing insurance losses on failed credit unions. NCUA's external
auditors reviewed the basis on which the transfer rate was determined
and made several recommendations for improvement that, according to
NCUA officials, are being assessed and implemented. While financial
indicators have generally remained satisfactory, NCUSIF is the only
share or deposit insurance fund that has not adopted a risk-based
insurance structure. Currently, credit unions are assessed a flat rate
that does not reflect the risk that individual credit unions pose to
the fund. Moreover, NCUA's process for estimating anticipated losses to
the fund lacks precision, as it does not identify specific historical
failure rates and related loss rates for the group of credit unions
that have been identified as being in troubled condition. As a result,
NCUA may be over or underestimating probable losses to the fund.
The overall system risk to the credit union industry that may be
created by private primary share insurance appears to have decreased
since 1990, although some concerns remain. The number of privately
insured credit unions and providers of private primary share insurance
have declined significantly since 1990. Specifically, in 1990, there
were 1,462 privately insured credit unions--with $18.6 billion in
insured shares--compared with 212 privately insured credit unions--with
about $10.8 billion in insured shares, as of December 2002. This
represented a 42 percent decrease in privately insured shares.
Moreover, during the same period the number of private primary share
insurers decreased from 10 to 1--ASI. Although the use of private share
insurance has declined, some circumstances of the remaining private
insurer raise concerns. First, ASI's insured risks are overly
concentrated in a few large credit unions and in certain states.
Second, ASI may have a limited ability to absorb catastrophic losses
because it does not have the backing of any governmental entity and its
lines of credit are limited. However, ASI has implemented a number of
risk-management strategies, including increased monitoring of its
largest credit unions to help mitigate concentration risk. In addition,
state regulation of ASI and the privately insured credit unions it
insures provides some additional assurance that ASI and the credit
unions operate in a safe and sound manner. One additional concern, as
we recently reported, is that many privately insured credit unions
failed to make required disclosures about not being federally insured
and, therefore, the members of these credit unions may not have been
adequately informed that their deposits lacked federal deposit
insurance.
This report contains recommendations to NCUA and matters for
congressional consideration that, if implemented, would better ensure
NCUA's ability to achieve its goal of ensuring that credit unions can
safely provide financial services to all segments of society, promote
greater consistency in federal oversight of depository institutions,
and enhance share insurance management.
We requested comments on a draft of this report from the Chairman of
the National Credit Union Administration and the President and Chief
Executive Officer of American Share Insurance. We received written
comments from NCUA and ASI that are discussed in this report and
reprinted in appendixes XI and XII respectively. NCUA generally agreed
with most of the report's assessment regarding the challenges facing
NCUA and credit unions since 1991 and planned to implement the majority
of the report's recommendations. In commenting on a draft of the
private share insurance section, ASI stated that this report did not
adequately assess the private share insurance industry and objected to
our conclusions that ASI's risks are concentrated in a few large credit
unions and a few states; it has limited ability to absorb large losses
because it does not have the backing of any governmental agency; and
its lines of credit are limited in the aggregate as to amount and
available collateral. In response, we considered ASI's positions and
materials provided, including ASI's actuarial assumptions and ASI's
past performance, and believe our report addresses these issues
correctly as originally presented.
Background:
Credit unions differ from other depository institutions because of
their cooperative structure and tax exemption. Credit unions are
member-owned cooperatives run by boards elected by their members. They
do not issue capital stock; rather, they are not-for-profit entities
that build capital by retaining earnings. However, like banks and
thrifts, credit unions have either federal or state charters. Federal
charters have been available since 1934 when the Federal Credit Union
Act was passed. States have their own chartering requirements. As of
December 2002, the federal government chartered about 60 percent of the
nearly 10,000 credit unions, and about 40 percent were chartered by
their respective states. Both federally and state-chartered credit
unions are exempt from federal income taxes, with federally chartered
and most state-chartered credit unions also exempt from state income
and franchise taxes.
Another distinguishing feature of credit unions is that they may serve
only an identifiable group of people with a common bond. A common bond
is the characteristic that distinguishes a particular group from the
general public. For example, a group of people with a common profession
or living in the same community could share a common bond. Over the
years, common-bond requirements at the state and federal levels have
become less restrictive, permitting credit unions consisting of more
than one group
having a common bond to form "multiple-bond" credit unions.[Footnote 8]
The term "field of membership" is used to describe all the people,
including organizations, that a credit union is permitted to accept for
membership. As previously noted, the loosening of common-bond
restrictions, as well as expanded powers, have brought credit unions
into more direct competition with other depository institutions, such
as banks. In addition, credit unions can offer members additional
services made available by third-party vendors and by certain profit-
making entities with which they are associated, referred to as credit
union service organizations (CUSO).[Footnote 9]
CUMAA was the last statute that enacted major provisions affecting,
among other things, how federally chartered credit unions could define
their fields of membership and how federally insured credit unions
demonstrate the safety and soundness of their operations. In February
1998, the Supreme Court ruled that NCUA lacked authority to permit
federal credit unions to serve multiple membership groups.[Footnote 10]
In response, CUMAA authorized multiple-group chartering, subject to
limitations NCUA must consider when granting charters. Also, the act
limited new community charter applications to well-defined "local"
communities. Moreover, CUMAA placed several additional restrictions on
federally insured credit unions. It tightened audit requirements,
established PCA requirements when capital standards were not met, and
placed a cap on the percentage of funds that a credit union could
expend for member business loans.
NCUA has oversight responsibility for federally chartered credit unions
and has issued regulations that, among other things, guide their field
of membership and the scope of services they can offer. NCUA also has
responsibility for overseeing the safety and soundness of federally
insured credit unions through examinations and off-site monitoring. In
addition, NCUA administers NCUSIF, which provides primary share
(deposit) insurance for 98 percent of the nation's credit
unions.[Footnote 11] NCUA, in its role as administrator of NCUSIF, is
responsible for overseeing federally insured, state-chartered credit
unions to ensure that they pose no risk to NCUSIF.
State governments have responsibility for regulating state-chartered
credit unions. State regulators oversee the safety and soundness of
state-chartered credit unions; although, as mentioned above, NCUA also
has responsibility for ensuring that state-chartered credit unions that
are federally insured pose no risk to NCUSIF. States set their own
rules regarding field of membership and the services credit unions can
provide. In addition, some states allow the credit unions in their
states the option of obtaining private primary share insurance.
Currently, 212 credit unions in eight states have primary share
insurance from a private company, ASI, located in Ohio. Primary share
insurance for these privately insured credit unions covers up to
$250,000.
Financial Condition of the Credit Union Industry Has Improved Since
1991:
Between 1992 and 2002, the capital ratios of federally insured credit
unions improved and remained higher than those of other depository
institutions. The industry's assets also grew over this period,
coincident with an increased emphasis on mortgage loans. Credit union
industry profitability, after declining from 1992 to 1999, has since
stabilized. In addition, since 1991 there has been a significant drop
in the number of problem credit unions as measured by regulatory
ratings. Consolidation in the industry has continued while total
industry assets have grown, which has in part resulted in two distinct
groups of federally insured credit unions--larger credit unions, which
are fewer in number and provide a wider range of services that more
closely resemble those offered by banks, and smaller credit unions,
which are larger in number and provide more basic financial services.
Credit Union Capital Ratios Have Improved Since 1991 and Remain Higher
Than Those of Banks:
The capital of federally insured credit unions as a percent of total
industry assets--the capital ratio--increased steadily between 1992 and
1997 and has since remained mostly level. As shown in figure 1, the
capital ratio of the industry was 8.1 percent in 1992, increased to
11.1 percent in 1997, and was 10.9 percent in 2002. As a point of
comparison, the capital ratio of credit unions has remained higher than
that of banks and thrifts since 1992.[Footnote 12] As a result, credit
unions have a greater proportion of assets available to cover potential
losses than banks and thrifts. This may be appropriate since credit
unions, unlike banks, are unable to raise capital in the capital
markets but must instead rely on retained earnings to build and
maintain their capital levels.
Figure 1: Comparison of Credit Union and Bank Capital Ratios, 1992-
2002:
[See PDF for image]
Note: Bank and thrift data are from all FDIC-insured institutions
filing call reports, excluding insured branches of foreign
institutions.
[End of figure]
Industry Assets Have Grown and Asset Composition Has Changed:
Total loans as a percent of total assets of federally insured credit
unions grew between 1992 and 2002. In 1992, 54 percent of credit union
assets were made up of loans and 16 percent were in U.S. government and
agency securities, while in 2002 loans represented 62 percent of
industry assets, and U.S. government and agency securities represented
14 percent of total assets. The largest category of credit union loans
was consumer loans (a broad category consisting of unsecured credit
card loans, new and used vehicle loans, and certain other loans to
members, but excluding real estate loans such as mortgage or home
equity loans), followed by real estate loans. For example, in 2002, 31
percent of credit union total assets were classified as consumer loans
and 26 percent were classified as real estate loans.
However, over time, holdings of real estate loans have grown more than
holdings of consumer loans. For example, real estate loans grew from 19
percent of total assets in 1992 to 26 percent in 2002, while consumer
loans grew from 30 percent to 31 percent over the same period. Despite
a larger increase in real estate lending relative to consumer lending,
credit unions still had a significantly larger percentage of consumer
loans relative to total assets compared with their peer group banks and
thrifts: consumer loan balances of peer group banks and thrifts were
less than 8 percent of total assets in 2002. To provide context, in
terms of dollar amounts, credit unions had $175 billion in consumer
loans while peer group banks and thrifts had $190 billion in consumer
loans. However, these banks and thrifts held a greater percentage of
real estate loans than credit unions. See appendix III for additional
details.
Credit Union Profitability Has Been Relatively Stable in Recent Years:
The profitability of credit unions, as measured by the return on
average assets, has been relatively stable in recent years.[Footnote
13] The industry's return on average assets was higher in the early to
mid-1990s than in the late 1990s and early 2000s. While declining from
1.39 in 1993 to 0.94 in 1999, the return on average assets has since
stabilized. It has generally hovered around 1, which, by historical
banking standards, is a performance benchmark, and it was reported at
1.07 as of December 31, 2002. For comparative purposes, the return on
average assets for peer group banks and thrifts was 1.24 in 2002.
Earnings, or profits, are an important source of capital for financial
institutions in general and are especially important for credit unions,
as they are mutually owned institutions that cannot sell equity to
raise capital. As previously mentioned, credit unions create capital,
or net worth, by retaining earnings. Most credit unions begin with no
net worth and gradually build it over time.
Regulatory Ratings Have Improved:
Since we last reported on the financial condition of credit unions,
there has been a significant drop in the number of problem credit
unions as measured by the regulatory ratings of individual credit
unions. Regulatory ratings are a measure of the safety and soundness of
credit union operations, and credit unions with an overall CAMEL rating
of 4 (poor) or 5 (unsatisfactory) are considered problem credit unions.
The number of problem credit unions declined by 63 percent from 578 (5
percent of all credit unions) in 1992 to 211 (2 percent of total) in
2002.
Consolidation in Industry Has Widened the Gap between Larger and
Smaller Credit Unions:
Total assets in federally insured credit unions grew from $258 billion
in 1992 to $557 billion in 2002, an increase of 116 percent. During
this same period, total member shares in these credit unions grew from
$233 billion to $484 billion, an increase of 108 percent. At the same
time, the number of federally insured credit unions fell from 12,595 to
9,688. As a result of the increase in total assets and the decline in
the number of federally insured credit unions, the credit union
industry has seen an increase in the average size of its institutions
and a slight increase in the concentration of assets. At year-end 1992,
credit unions with more than $100 million in assets represented 4
percent of all credit unions and 52 percent of total assets; at year-
end 2002, credit unions with more than $100 million in assets
represented about 11 percent of all credit unions and 75 percent of
total assets. From 1992 to 2002, the 50 largest credit unions by asset
size went from holding around 18 percent of industry assets to around
23 percent of industry assets. Despite the slight increase in
concentration of assets in the credit union industry, it was neither as
concentrated as the banking industry, nor did it witness the same
degree of increased concentration. From 1992 to 2002, the 50 largest
banks by asset size went from holding around 34 percent of industry
assets to around 58 percent of industry assets. Appendix IV has
additional information on assets in federally insured credit unions and
banks.
This consolidation in the credit union industry has in part widened the
gap between two distinct groups of federally insured credit unions--
larger credit unions, which are relatively few in number and provide a
wider range of services, and smaller credit unions, which are greater
in number and provide more basic banking services. Figure 2 illustrates
institution size and asset distribution in the credit union industry as
of 2002, with institutions classified by asset ranges; smaller credit
unions are captured in the first category, while credit unions with
assets in excess of $100 million are separated into additional asset
ranges for illustrative purposes. For example, as of December 31, 2002,
the 8,642 smaller credit unions--those with $100 million or less in
total assets--constituted nearly 90 percent of all credit unions but
held only 25 percent of the industry's total assets (see right-hand
axis of fig. 2). Conversely, the 71 credit unions with assets of
between $1 billion and $18 billion, held 27 percent of total industry
assets (see right-hand axis of fig. 2) but represented less than 1
percent of all credit unions.[Footnote 14]
Figure 2: Credit Union Industry Size and Total Assets Distribution, as
of December 31, 2002:
[See PDF for image]
Note: This figure depicts credit union industry distribution both in
terms of the number of federally insured institutions in a particular
size category as well as the percentage of industry assets that are
held by institutions in that category. Group I credit unions had assets
of $100 million or less; Group II credit unions had assets greater than
$100 million and less than or equal to $250 million; Group III credit
unions had assets greater than $250 million and less than or equal to
$500 million; Group IV credit unions had assets greater than $500
million and less than or equal to $1 billion; and Group V credit unions
had assets greater than $1 billion and less than or equal to $18
billion, which is the asset size, rounded up to the nearest billion
dollars, of the largest credit union as of December 31, 2002. Thus,
Group I represents smaller credit unions and Groups II, III, IV, and V
represent larger credit unions.
[End of figure]
We observed that larger credit unions tended to hold a wider variety of
loans than did smaller credit unions, and larger credit unions
emphasized different loan types than smaller credit unions. For
example, new and used vehicle loans have represented a relatively
greater proportion of total assets for smaller credit unions, and
nearly all smaller credit unions held such loans. However, while nearly
all of the larger credit unions held new and used car loans, first
mortgage loans represented a relatively greater proportion of total
assets for larger credit unions. In fact, nearly all larger credit
unions held first mortgage loans, junior mortgage and home equity
loans, and credit card loans, while in general less than half of the
smaller credit unions held these loans. Larger credit unions also
tended to be more likely to provide more sophisticated services, such
as financial services through the Internet and electronic applications
for new loans. While nearly all larger credit unions offered automatic
teller machines, less than half of smaller credit unions did. In fact,
when compared with similarly sized peer group banks and thrifts, larger
credit unions tended to appear very similar to their bank peers in
terms of loan holdings. Appendixes IV and V provide further details.
Limited Comprehensive Data Are Available to Evaluate Income of Credit
Union Members:
As credit unions have become larger and offer a wider variety of
services, questions have been raised about whether credit unions are
more likely to serve households with low and moderate incomes than
banks. However, limited comprehensive data are available to evaluate
income of credit union members. Our assessment of available data--the
Federal Reserve's 2001 SCF, 2001 HMDA data, and other studies--provided
some indication that credit unions served a slightly lower proportion
of households with low and moderate incomes than banks. Industry
experts suggested that credit union membership characteristics--
occupationally based fields of membership and traditionally full-time
employment status--could have contributed to this outcome. However,
limitations in the available data preclude drawing definite conclusions
about the income characteristics of credit union members. Additional
information, especially with respect to the income levels of credit
unions' members receiving consumer loans, would be required to assess
more completely whom credit unions serve.
Data Lacking on Income Characteristics of Credit Union Members and
Users:
It has been generally accepted, particularly by NCUA and credit union
trade groups, that credit unions have a historical emphasis of serving
people with modest means. However, there are currently no comprehensive
data on the income characteristics of credit union members,
particularly those who actually receive loans and other services. As
credit unions have become larger and expanded their offerings of
financial services, industry groups, as well as consumer advocates,
have debated which economic groups benefit from credit unions'
services. Additionally, questions have been raised about credit unions'
exemption from federal income taxes. As stated in our 1991 report, and
still true, none of the common-bond criteria available to federally
chartered credit unions refers to the economic status of their members
or potential members.
Information on the extent to which credit unions are lending and
providing services to households with various incomes is scarce because
NCUA, industry trade groups, and most states (with the exception of
Massachusetts and Connecticut) have not collected specific information
describing the economic status of credit union members who obtain loans
or benefit from other credit union services.[Footnote 15] Credit
unions, even those serving geographic areas, are not subject to the
federal Community Reinvestment Act (CRA), which requires banking
regulators to examine and rate banks and thrifts on lending and service
to low-and moderate-income neighborhoods in their assessment
area.[Footnote 16] As a consequence, credit unions are not required by
NCUA or other regulators to maintain data on the extent to which loans
and other services are being provided to households with various
incomes.
However, two states--Massachusetts and Connecticut--collect
information on the distribution of credit union lending by household
income and the availability of services because their state-chartered
credit unions are subject to examinations similar to those of federally
regulated institutions. Modeled on the federal examination procedures
for large banks, the state regulators apply lending and service tests
to assess whether credit unions are meeting the needs of the
communities they have set out to serve, including low-and moderate-
income neighborhoods. Massachusetts established its examination
procedures in 1982, and
Connecticut in 2001.[Footnote 17] All credit unions in Massachusetts
are subject to these examinations, including those whose field of
membership is community-based.[Footnote 18] In contrast, in
Connecticut, only state-chartered credit unions serving communities
with more than $10 million in assets are subject to the examination.
According to a Connecticut state official, the Connecticut legislature
established its examination due to an increasing trend of multiple-bond
credit unions to convert to community-chartered bonds, and the $10-
million threshold was chosen because the legislature believed credit
unions of that size would normally have the personnel and technological
resources to appropriately identify and serve their market. In May
2003, Connecticut started to examine community-chartered credit unions
with assets of more than $10 million.
Consumer and industry groups have debated if information that
demonstrates whether credit unions serve low-and-moderate income
households is necessary. Some consumer groups believe that credit
unions should supply information that indicates they serve all segments
of their potential membership. The Woodstock Institute--an organization
whose purpose is to promote community reinvestment and economic
development in lower-income and minority communities--recommended,
among other things, that the CRA requirement should be extended to
include credit unions, based on a study they believe demonstrated that
credit unions are not adequately serving low-income
households.[Footnote 19] Woodstock Institute officials noted that they
would prefer to see CRA requirements applied to larger credit unions,
those with assets over $10 million. The National Federation of
Community Development Credit Unions (NFCDCU) has recommended that
credit unions whose fields of membership cover large communities should
be affirmatively held accountable for providing services to all
segments of those communities, and that NCUA publish annual reports on
the progress and status of these expanded credit unions.[Footnote 20]
In contrast, NCUA and industry trade groups have opposed these and
related requirements largely because they state that no evidence
suggests that credit unions do not serve their members.[Footnote 21]
Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly
Lower Proportion of Low-and Moderate-income Households:
Our analysis of the Federal Reserve Board's 2001 SCF suggested that
credit unions overall served a lower percentage of households of modest
means (low-and moderate-income households combined) than
banks.[Footnote 22] More specifically, while credit unions served a
slightly higher percentage of moderate-income households than banks,
they served a much lower percentage of low-income households. The SCF
is an interview survey of U.S. households conducted by the Federal
Reserve Board that includes questions about household income and
specifically asks whether households use credit unions or banks.Our
analysis of the SCF indicated the following percentages for those
households that used a financial institution:[Footnote 23]
* 8 percent of households only used credit unions,
* 13 percent of households primarily used credit unions,[Footnote 24]
* 17 percent of households primarily used banks, and:
* 62 percent of households only used banks.
To provide a more consistent understanding of our survey results, we
used the same income categories used by financial regulators--low,
moderate, middle, and upper--in their application of federal CRA
examinations.[Footnote 25]
To determine the extent to which credit unions served people of "modest
means," we first combined households with low or moderate incomes into
one group and combined households with middle or upper incomes into
another group. We then combined the SCF data into two main groups--
households that only and primarily used credit unions versus households
that only and primarily used banks. As shown in figure 3, this analysis
indicated that about 36 percent of households that only or primarily
used credit unions had low or moderate incomes, compared with 42
percent of households that used banks. Moreover, our analysis suggested
that a greater percentage of households that only and primarily used
credit unions were in the middle-and upper-income grouping than the
proportion of households that only and primarily used banks.
Figure 3: Income Characteristics of Households Using Credit Unions
versus Banks, Low and Moderate Income versus Middle and High Income:
[See PDF for image]
[End of figure]
To better understand the distribution of households by income category,
we also looked at each of the four income categories separately. As
shown in figure 4, this analysis suggested that the percentage of
households that only and primarily used credit unions in the low-income
category was lower than the percentage of households that used banks in
the same category (16 percent versus 26 percent). In contrast,
households that only and primarily used credit unions were more likely
to be moderate-and middle-income (19 percent and 22 percent) than those
that only and primarily used banks (16 and 17 percent). Given that
credit union membership has traditionally been tied to occupational-or
employer-based fields of membership, the higher percentage of moderate-
and middle-income households served by credit unions is not surprising.
Figure 4: Income Characteristics of Households Using Credit Unions
versus Banks, by Four Income Categories:
[See PDF for image]
Note: We found no statistical difference in the percentage of upper-
income households when the only and primarily using credit union group
and the only and primarily using bank group were compared.
[End of figure]
We also attempted to further explore the income distribution of credit
unions' members by separately analyzing households that only used
credit unions or banks from those that primarily used credit unions or
banks. However, the results were subject to multiple interpretations
due to characteristics of the households in the SCF database. For
example, when user groups are combined and compared, the results may
look different than when the groups are separated and compared. Because
such a high percentage of the U.S. population only uses banks (62
percent), the data obtained from the SCF is particularly useful for
describing characteristics of bank users but much less precise for
describing smaller population groups, such as those that only used
credit unions (8 percent).
In addition to assessing the income characteristics of households using
credit unions and banks, we also performed additional analysis by
education, race, and age. The results of these analyses can be found in
appendix VI.
Credit Unions Made a Slightly Lower Proportion of Mortgage Loans to
Households with Low and Moderate Incomes Than Banks:
As an indicator of the income levels of households that utilize credit
union services, we used 2001 HMDA loan application records to analyze
the income of households receiving mortgages for the purchase of one-
to-four family homes from credit unions and peer-group banks.[Footnote
26] Our analysis indicated that credit unions reporting HMDA data made
a lower proportion of mortgage loans to households with low and
moderate incomes than peer group banks reporting HMDA data--27 percent
compared with 34 percent.[Footnote 27] More specifically, credit unions
made 7 percent of their loans to low-income households compared with 12
percent for banks, and credit unions made 20 percent of their loans to
moderate-income households compared with 22 percent for banks (see fig.
5).[Footnote 28]
Figure 5: Mortgages Made by Credit Unions and Banks, by Income Level of
Purchaser, 2001:
[See PDF for image]
Note: About 16 percent of all credit union and peer group bank loans
reported to HMDA were excluded from this analysis because their loan
records did not identify the MSA of the purchased property. Because we
did not know the MSA, we could not calculate a MSA median income to
categorize the loan. HMDA reporting requirements allow for the omission
of the MSA when the property is not located in an MSA where the
institution has a home or branch office. Also, percentages of loans
made by credit unions do not add up to 100 percent due to rounding.
[End of figure]
We also analyzed and compared the proportion of mortgage loans reported
by peer group banks and credit unions for the purchase of homes by the
median family income of the census tracts in which the homes were
located. We found that credit unions made roughly the same proportion
of loans for the purchase of homes, by census tract income category, as
banks. For example, we found that both credit unions and banks made 1
percent of their loans for the purchase of homes in low-income census
tracts and that credit unions made 9 percent of their loans for the
purchase of properties in moderate-income census tracts compared with
10 percent by banks (see fig. 6). In addition, we found that both
credit unions and banks made 54 percent of their loans for the purchase
of homes in middle-income census tracts, and that credit unions made
about 37 percent of their loans in upper-income census tracts compared
with 35 percent by banks. This analysis is a measure of whether all
neighborhoods (census tracts within an assessment area) are receiving
financial services, including low-and moderate-income ones.
Figure 6: Loans Made by Credit Unions and Banks, by Average Income in
the Purchased Home's Census Tract, 2001:
[See PDF for image]
Note: About 16 percent of the credit union and peer group bank loans
reported to HMDA were excluded from this analysis because their loan
records did not identify the census tract of the purchased property.
Because we did not know the census tract, no census tract median income
was available to categorize the loan. HMDA reporting requirements allow
for the omission of the census tract locations under certain
conditions; for example, when the property did not have an identified
census tract for the 1990 census or was located in a county with a
population of 30,000 or less. Also, percentages of loans made by credit
unions do not add up to 100 percent due to rounding.
[End of figure]
Because each HMDA loan record identified the income of the mortgage
loan recipient and the location of the property, the HMDA database
allowed us to determine the proportion of mortgages made within the
four income categories--low, moderate, middle, and upper--used by
financial regulators for CRA examinations. However, not all financial
institutions are required to report HMDA data--for example, depository
institutions were exempt from reporting data in 2001 if they had assets
less than $31 million as of December 31, 2000, and if they did not have
a home or branch office in an MSA. Further, not all credit unions,
including those that had more than $31 million in assets, made home
purchase loans.[Footnote 29] As a result, most credit unions did not
meet HMDA's reporting criteria--only about 14 percent of all credit
unions submitted data included in our analysis.[Footnote 30] On the
other hand, the credit unions that did report their loans to HMDA held
about 70 percent of credit union assets and included about 62 percent
of all credit union members.
HMDA Analysis Has Certain Limitations:
Our analysis of HMDA data allowed us to determine the overall
proportion of mortgage loans credit unions and peer group banks made to
households and neighborhoods with low and moderate incomes. However, we
would need information on the proportion of low-and moderate-income
households within credit union fields of membership to actually make an
evaluation of whether credit unions, collectively or individually, have
met the credit needs of their entire field of membership. Similar to
analyses used in federal CRA lending tests, this information could then
be used as a baseline from which to evaluate an individual credit
union's actual lending record.[Footnote 31] In addition, information on
factors (for example, a community's economic condition, local housing
costs) that could affect the ability of a credit union to make loans
consistent with safe and sound lending would be necessary to evaluate
an institution's lending record. If regulators were to make these types
of evaluations for credit unions, they would be easier to implement for
those serving geographic areas because demographic information (for
example, on census tract median income levels) would be available to
describe credit union field of membership. For credit unions with an
occupational or associational membership, other ways of characterizing
their field of membership would need to be determined.
In addition, as previously mentioned, using HMDA data to analyze credit
union mortgage lending to members does not provide any information on
smaller credit unions, because in 2001 credit unions with less than $31
million in assets as of December 31, 2000, were not required to report
HMDA data. Because smaller credit unions did not report HMDA data, one
group of credit unions--the roughly 3,800 credit unions that qualified
for NCUA's Small Credit Union Program in December 2002--were largely
excluded from our HMDA analysis. Credit unions qualifying for
assistance from this program must have less than $10 million in assets
or have received a "low-income" designation from NCUA.[Footnote 32] In
addition, low-income credit unions must demonstrate that more than half
of their current members meet one of NCUA's low-income
criteria.[Footnote 33] Further, smaller credit unions are more likely
than larger credit unions to make consumer loans than mortgages, making
an evaluation of mortgage lending more relevant to larger credit unions
than smaller ones. Because most credit unions can be classified as
small, analyzing the distribution of consumer loans by household income
would provide a more complete picture of credit union lending.[Footnote
34]
Other Studies Indicate That Credit Unions Serve Households with Higher
Incomes Than Banks:
Other recently published studies--CUNA and the Woodstock Institute--
generally concluded that credit unions served a somewhat higher-income
population. The studies noted that the higher income levels could be
due to the full-time employment status of credit union members.
The CUNA 2002 National Member Survey reported that credit union members
had higher average income households than nonmembers--$55,000 compared
with $46,000.[Footnote 35] The report provided several reasons for the
income differential, including the full-time employment status of
credit union members, credit union affiliation with businesses or
companies, and weak credit union penetration among some of the lowest-
income age groups--18 to 24 and 65 and older. However, the report noted
that additional analyses, specifically those grouping consumers based
on the extent to which they rely on banks and credit unions as their
primary provider should also be considered.[Footnote 36] In addition, a
study sponsored by the Woodstock Institute, based on an analysis of
1999 and 2000 survey responses obtained from households in the Chicago,
Illinois, metropolitan area concluded that credit unions in the Chicago
region served a lower percentage of lower-income households than they
did middle-and upper-income ones.[Footnote 37] For example, while 40
percent of surveyed households with incomes between $60,000-$70,000
contained a credit union member, only 23 percent of households earning
between $30,000-$40,000 contained a credit union member. The study also
noted that household members working for larger firms, and those who
were members of a labor union, were significantly more likely to be
credit union members.
Officials from NCUA and the Federal Reserve Board also noted that
credit union members were likely to have higher incomes than nonmembers
because credit unions are occupationally based. An NFCDCU
representative noted that because credit union membership is largely
based on employment, relatively few credit unions are located in low-
income communities. However, without additional research, especially on
the extent to which credit unions with a community base serve all of
their potential members, it is difficult to know whether full-time
employment is the sole explanatory factor.
CUMAA Authorized NCUA to Continue Preexisting Policies That Expanded
Field of Membership:
The Credit Union Membership Access Act of 1998 authorized preexisting
NCUA policies that had allowed credit unions to expand field of
membership. In 1998, the Supreme Court ruled against NCUA's practice of
permitting federally chartered credit unions to consist of more than
one common bond.[Footnote 38] In CUMAA, Congress specifically permitted
credit unions to form multiple-bond credit unions and allowed these
credit unions to serve underserved areas.[Footnote 39] CUMAA also
specified that community-chartered credit unions serve a "local"
area.[Footnote 40] However, after the passage of CUMAA, NCUA revised
its regulations to make it easier for credit unions to serve
communities larger than before CUMAA. To some extent, these NCUA
policies appear to have been triggered by concerns about competing with
the states to charter credit unions. While CUMAA permitted multiple-
bond credit unions to add underserved areas to their membership, the
impact of this provision will be difficult to assess because NCUA does
not track credit union progress in extending service to these
communities.
CUMAA Permitted NCUA Policies Expanding Field of Membership:
CUMAA authorized several preexisting NCUA field of membership policies
that had enabled federally chartered credit unions to expand their
fields of membership. These policies had allowed credit unions to
consist of more than one membership group and expand their membership
to include underserved areas. In addition, CUMAA permitted credit
unions to retain their existing membership.
Specifically, CUMAA affirmed NCUA's 1982 policy of permitting credit
unions to form multiple-bond credit unions, allowing these credit
unions to retain their current membership and authorizing their future
formation.[Footnote 41] A credit union with a single common bond has
members sharing a single characteristic, for example, employment by the
same company. In contrast, multiple-bond credit unions consist of more
than one distinct group.[Footnote 42] Congressional affirmation of
NCUA's policy of permitting multiple-bond credit unions was important
because earlier in 1998 the Supreme Court had ruled that federally
chartered, occupationally based credit unions were required to consist
of a single common bond.[Footnote 43] Figure 7 provides additional
information since 2000 on the percent of federally chartered credit
unions by charter type.[Footnote 44]
Figure 7: Percentage of Federally Chartered Credit Unions, by Charter
Type, 2000-2003:
[See PDF for image]
Note: With the exception of the statistics provided for multiple-bond
credit unions for 1996, NCUA cannot provide us data on federal
chartering trends before 2000. However, NCUA was able to report that by
1996, about half of all federally chartered credit unions were
multiple-bond credit unions.
[End of figure]
In addition, CUMAA affirmed other preexisting NCUA policies. For
example, CUMAA authorized multiple-bond credit unions to add
individuals or organizations in "underserved areas" to their field of
membership. This provision was similar to an NCUA policy that permitted
multiple-bond credit unions, as well other federally chartered, single-
bond, and community-chartered credit unions, to add low-income
communities
to their field of membership.[Footnote 45] In addition, CUMAA affirmed
NCUA's "once a member, always a member policy," which had been in
effect since 1968. CUMAA authorized this policy such that credit union
members may retain their membership even after the basis for the
original bond ended.[Footnote 46] However, CUMAA still contained
provisions encouraging the creation of new credit unions whenever
possible.[Footnote 47]
NCUA Eased Requirements for Permitting Credit Unions to Serve Larger
Geographic Areas:
Despite the qualification in CUMAA that a community-chartered credit
union's members be within a well-defined "local" community,
neighborhood, or rural district, NCUA eased requirements for permitting
credit unions to serve larger geographic areas. CUMAA added the word
"local" to the preexisting requirement that community-chartered credit
unions serve a "well-defined community, neighborhood, or rural
district," but provided no guidance with respect to how the word
"local" or any other part of this requirement should be
defined.[Footnote 48]
Following passage of CUMAA, NCUA expanded the ability of credit unions
to serve larger geographic areas through its regulatory
rulings.[Footnote 49] Interpretive Ruling and Policy Statement (IRPS)
99-1, issued soon after CUMAA, was the first regulation to set
standards for what could be considered a "local" area. It required
credit unions to document that residents of a proposed community area
interact or have common interests. Credit unions seeking to serve a
single political jurisdiction (for example, a city or a county) with
more than 300,000 residents were required to submit more extensive
documentation than jurisdictions with fewer than 300,000
residents.[Footnote 50] However, IRPS 03-1, which replaced IRPS 99-1,
eliminated these documentation requirements, regardless of the number
of residents. Further, IRPS 03-1 allowed credit unions to propose MSAs
with less than 1 million residents for qualification as local areas.
See table 1 for changes in "local" requirements. NCUA adopted these
definitions of local community based on its experience in determining
what constituted a local community charter.
Table 1: Regulatory Definitions of Local Community, 2000 and 2003:
IRPS 99-1, effective in November 2000, (as amended by IRPS 00-1): 1.
Areas in single political jurisdictions (for example, counties or
cities) qualified as a local community if the number of residents did
not exceed 300,000; 2. States, noncontiguous jurisdictions, and MSAs
did not meet the definition of a local community; 3. Contiguous
political jurisdictions qualified as a local community if they
contained 200,000 or fewer residents; 4. A letter describing community
interaction or common interests was required for conditions (1) and (3)
above. Otherwise, the credit union had to provide additional
documentation; IRPS 03-1, effective in May 2003: 1. Any city, county,
or political equivalent in a single political jurisdiction, regardless
of population size, automatically meets the definition of a local
community; 2. MSAs may meet the definition of local community provided
the population does not exceed 1 million; 3. Contiguous political
jurisdictions qualify as a local community if they contain 500,000 or
fewer residents; 4. A letter describing community interaction or
common interests is required for conditions (2) and (3) above.
Otherwise, the credit union must provide additional documentation.
Source: IRPS 99-1 and IRPS 03-1.
Note: NCUA amended IRPS 99-1, the first field of membership regulation
issued by NCUA after CUMAA, several times (IRPS 00-1 on Oct. 27, 2000;
IRPS 01-1 on March 2001; and IRPS 02-2 on April 24, 2002.) This table
only highlights key changes pertaining to the geographic and population
criteria used by NCUA to approve community charters.
[End of table]
Specifically, NCUA officials said that they decided single political
jurisdictions should automatically qualify as "local" areas based on
their review of applications by credit unions for community charters.
They reported that they came to this conclusion because credit unions
converting to a community charter or expanding their service areas had
generally been able to successfully supply the documentation required
by NCUA. We asked NCUA officials what kind of relationships community-
chartered credit union members could have if, for example, a local
community were to be defined as all of New York City. NCUA officials
said that the defining factors for them were that people lived in the
same political jurisdiction--thus providing, for example, a common
government and educational system--and noted that credit unions
applying to serve these larger jurisdictions still had to meet other
requirements related to safety and soundness. The officials also said
that had CUMAA not introduced the word "local," NCUA could have
considered providing credit unions permission to expand their field of
memberships statewide.
The regulatory changes in IRPS-03-1 pertaining to the definition of
local community have made it easier for federally chartered credit
unions to serve larger communities. Under IRPS-03-1, NCUA approved the
largest community yet--the 2.3 million residents of Miami-Dade County,
Florida.[Footnote 51] NCUA had disapproved this same credit union's
request about 2 years earlier, under IRPS 99-1, as amended by IRPS 01-
1. Prior to IRPS-03-1, some of the largest community field of
memberships approved by NCUA included service to 836,231 residents on
Oahu, Hawaii, and service to 710,540 residents in Montgomery County and
Greene County, Ohio.[Footnote 52] In addition, over the last 3 years,
potential membership--an estimate of the maximum number of members that
could join a credit union--in community-chartered credit unions has
come to exceed that in multiple-bond credit unions.[Footnote 53]
According to NCUA estimates, in March 2003, community-chartered credit
unions had 98 million potential members compared with multiple-bond
credit unions with 92 million potential members (see fig. 8).
Figure 8: Actual and Potential Members in Federally Chartered Credit
Unions, by Charter Type, 2000-2003:
[See PDF for image]
[End of figure]
Dual Chartering System May Have Created Pressure for Less Restrictive
Field of Membership Regulations:
According to NCUA, a major reason for NCUA's recent regulatory changes
was to maintain the competitiveness of the federal charter in a dual
chartering system. They also characterized NCUA's field of membership
regulations as more restrictive than those in some states. Officials in
three of the states in which we conducted interviews--California,
Texas, and Washington--said that the ability to expand field of
membership more readily under state rules was a reason that federally
chartered credit unions had converted to state charters.
Consistent with this assertion, we found that state-chartered credit
unions have experienced greater membership growth, although federally
chartered credit unions still had more members. Between 1990 and March
2003, state-chartered credit union membership increased by 88 percent,
from 19.5 million to 36.6 million, while membership in federally
chartered credit unions increased by 24 percent, from 36.2 million to
44.9 million. In addition, if estimates of potential membership serve
even as an approximation of future membership, state-chartered credit
unions could be positioned to experience greater growth (see fig. 9).
In March 2003, state-chartered credit unions had about 405 million
potential members, almost twice the 208 million for federally chartered
credit unions.
Figure 9: Actual and Potential Members in Federally and State-chartered
Credit Unions, 1990-2003:
[See PDF for image]
Note: In 2001, the total population of the United States was about 285
million people. In contrast, between 2001 and 2003, the total number of
potential credit union members ranged from 446 million to about 613
million. The total number of potential members exceeds the total
population of the United States because credit unions can count the
same individuals as potential members when their field of membership
overlaps.
[End of figure]
We also found that states had chartered a higher percentage of their
credit unions to serve geographic areas (communities) than
NCUA.[Footnote 54] In 2002, we estimated that about 1,146 state-
chartered credit unions, 30 percent of all state-chartered credit
unions, served geographic areas compared with 848 federally chartered
credit unions, 14 percent of all federally chartered credit
unions.[Footnote 55] However, this number increases to 1,096, 18
percent of all federally chartered credit unions, once federally
chartered credit unions serving underserved areas are included. State-
chartered credit unions serving geographic areas held about 59 percent
of state-chartered credit unions assets compared with 17 percent held
by federally chartered credit union serving geographic areas, or 29
percent when the assets of credit unions with underserved areas were
included.[Footnote 56]
Credit Unions Have Added Underserved Areas, but No Information
Available to Evaluate Actual Service:
An NCUA objective is to ensure that credit unions provide financial
services to all segments of society, including the underserved, but
NCUA has not developed indicators to evaluate credit union progress in
reaching the underserved.[Footnote 57] This type of evaluation could
require information similar to that provided as part of CRA
examinations--for example, information on the distribution of loans
made by the income levels of households receiving mortgage and consumer
loans--and provide comprehensive information on how credit unions have
utilized opportunities to extend their services to underserved areas,
including low-and moderate-income households.[Footnote 58] CUMAA had
specifically provided that multiple-bond credit unions could serve
underserved areas, and NCUA permitted single-bond and community-bond
credit unions to add them as well. However, neither CUMAA nor NCUA
required that credit unions report on services to these areas once they
had been added. Figure 10 shows the number of underserved areas added
before and after CUMAA.
Figure 10: Underserved Areas Added before and after CUMAA, by Federal
Charter Type, 1997-2002:
[See PDF for image]
Note: Between 1997 and 1999, credit unions were adding communities
under NCUA's low income standards. While CUMAA did not specifically
permit single-bond and community-chartered credit unions to add
underserved areas, NCUA permitted them to do so.
[End of figure]
Instead of developing indicators to evaluate credit union progress in
reaching the underserved, NCUA officials have claimed success based on
the increase in the number of potential members added by credit unions
in underserved areas and, recently, on the membership growth rate of
federally chartered credit unions that have added underserved areas. As
of March 2003, credit unions had added 48 million potential members in
underserved areas. As noted previously, potential membership is an
estimate of the maximum number of people who could be eligible to join
a credit union. However, NCUA officials believe that potential
membership is an appropriate measure because they view NCUA's role as
expanding membership opportunities for credit unions as opposed to the
credit
unions' role of actually extending services to new members.[Footnote
59] In addition, in June 2003, NCUA claimed success based on estimates
indicating that annual membership growth in credit unions that expanded
into underserved areas has been higher than that of all federally
chartered credit unions--4.8 percent compared with 2.49 percent.
However, they could not identify whether the increase in membership
actually came from the underserved areas or provide any descriptive
information (for example, the income level) about the new members.
Because NCUA does not collect information on credit union service to
underserved areas, it would be difficult for NCUA or others to
demonstrate that these credit unions are actually extending their
services to those who have lower incomes or do not have access to
financial services.[Footnote 60] As the number of credit unions adding
underserved areas increases, this question becomes more important. For
example, in 1999, the year after CUMAA, 13 credit unions added 16
underserved areas to their membership. In 2002, 223 credit unions added
about 424 underserved areas. Further, the size of these communities can
be substantial. For example, in May 2003, NCUA permitted one multiple-
bond credit union to add an additional 300,000 residents within Los
Angeles County, California, for a total of almost 1 million added
residents in the last 2 years. In the same month, NCUA also approved a
multiple-bond credit union's (headquartered in Dallas, Texas) addition
of 600,000 residents in underserved communities in Louisiana.
NCUA Adopted Risk-focused Examination and Supervision Program, but
Faces Challenges in Implementation:
Industry consolidation and changes in products and services offered by
credit unions prompted NCUA to move from an examination and supervision
approach that was primarily focused on reviewing transactions to an
approach that focuses NCUA resources on high-risk areas within a credit
union. Prior to implementing its risk-focused program in August 2002,
NCUA sought guidance from other depository institution regulators that
had several years of experience with risk-focused programs. While this
consultative approach helped NCUA, it still faces a number of
challenges that create additional opportunities for NCUA to leverage
off the experience of the other depository institution regulators.
These challenges include ensuring that examiners have sufficient
expertise in areas such as information systems, monitoring the risks
posed by expansion into nontraditional credit union activities such as
business lending, and monitoring the risks posed to the federal deposit
(share) insurance fund by institutions for which states are the primary
regulator. Moreover, unlike other depository institution regulators,
NCUA currently lacks authority to inspect third-party vendors, which
credit unions increasingly rely on to provide services such as
electronic banking. Further, credit unions are not subject to the
internal control reporting requirements that banks and thrifts are
subject to under FDICIA.[Footnote 61] NCUA adopted prompt corrective
action, a system of supervisory actions tied to the capital levels of
an institution, in August 2000, as required by CUMAA; few actions have
been taken to date due to a generally favorable economic climate for
credit unions.
Changes in the Credit Union Industry Prompted NCUA to Revise Its
Approach to Examination and Supervision:
The credit union industry has undergone a variety of changes that
prompted NCUA to revise its approach to examining and supervising
credit unions. As described earlier, the credit union industry is
consolidating, and more industry assets are concentrated in larger
credit unions, those with assets in excess of $100 million. For
example, in December 1992, credit unions with over $100 million in
assets held 52 percent of total industry assets, but by December 2002,
they held 75 percent of total industry assets. Furthermore, credit
unions are providing more complex electronic services such as Internet
account access and on-line loan applications to meet the demands of
their members. Thirty-five percent of the industry offered financial
services through the Internet as of December 2002; however, the rate
increased to over 90 percent for larger credit unions. In addition, the
composition of credit union assets has changed over time, with credit
unions engaging in more real estate loans (see fig. 11). For example,
the number of first mortgage loans about doubled from 589,000 loans as
of December 1992 to 1.2 million loans as of December 2002. During this
same period, the amount of first mortgage loans more than tripled from
$29 billion to $101 billion. From 1992 to 2002, the percentage of real
estate loans to total assets grew from 19 percent to 26 percent, a
greater rate of growth than that of consumer loans over the same time
period. The longer-term real estate loans introduced a greater level of
interest rate risk than that introduced through the shorter-term
consumer loans credit unions traditionally made.[Footnote 62]
Figure 11: Credit Union Mortgage Loans Have Grown Significantly Since
1992:
[See PDF for image]
Note: Only first mortgage loans represented.
[End of figure]
As a result of these changes, NCUA found that its old approach of
reviewing the entire operation of credit unions and conducting
extensive transaction testing no longer sufficed, particularly for
larger credit unions, because of the number of transactions in which
they engaged and the variety of products and services they tended to
provide. In contrast, under the risk-focused approach, NCUA examiners
are expected to identify those activities that pose the highest risk to
a credit union and to concentrate their efforts on those activities.
For example, as credit unions engage in more complex electronic
services, examiners are to focus their efforts on reviewing information
systems and technology to ensure that credit unions have sufficient
controls in place to manage operations risk.[Footnote 63] In addition,
as credit unions engage in more real estate lending, examiners are to
focus on ensuring that these credit unions have sophisticated asset-
liability management models in place to properly manage interest rate
risk.[Footnote 64] When transaction testing is used under the risk-
focused approach, it is used to validate the effectiveness of internal
control and other risk-management systems. Further, the risk-focused
approach places more emphasis on preplanning and off-site monitoring of
credit union activities, which helps ensure that once examiners arrive
on site, they already will have identified those areas of the greatest
risk in a credit union and where to focus their resources.
To compliment the risk-focused approach and allow NCUA to better
allocate its resources, the agency adopted a risk-based examination
program in July 2001. This program eliminates the requirement to
perform annual examinations on low-risk credit unions, replacing annual
exams with two examinations in a 3-year period.[Footnote 65]
NCUA Took Various Steps to Ensure Successful Implementation of the
Risk-focused Program:
NCUA consulted with its Office of Corporate Credit Unions to inquire
about their experiences with their risk-focused program that was
implemented in 1998. As a result of this consultation, NCUA
incorporated a greater level of examiner judgment in its risk-focused
approach, specifically allowing examiners to determine the appropriate
level of on-site versus off-site supervision. For example, if an
examiner discovered a problem during off-site monitoring of a credit
union, the examiner might adjust the schedule of the on-site
examination to directly address the problem. In addition, in
recognition that examiners would be required to assess the future risks
that credit unions might be undertaking, NCUA, after consulting with
its Office of Corporate Credit Unions, required that examiners review
information beyond the financial statements. For example, under the
risk-focused program, examiners might analyze due diligence reviews by
management for new and existing products and services, internal
controls, and measurements of actual performance against forecasted
results, to determine what future risks a particular credit union might
be undertaking.
NCUA's consultations with FDIC and its review of two FDIC Inspector
General reports prompted NCUA to develop programs to address challenges
that FDIC experienced in implementing its risk-focused program. For
example, according to NCUA, FDIC did not conduct much training for its
examiners prior to implementing its risk-focused program. NCUA, on the
other hand, held training for all examiners, including state examiners,
and once the risk-focused program was implemented, NCUA also provided
additional training to help examiners assess risks more effectively.
NCUA's review of the FDIC Inspector General reports found that some
FDIC examiners resisted the move to the risk-focused program. NCUA's
response was to develop a quality control program to ensure that
examiners and supervisors were adopting the risk-focused approach and
that documentation was completed consistently across NCUA's regions.
Under the quality control program, NCUA officials reviewed a sample of
examinations from each region for scope, conciseness of reports,
appropriateness of completed work papers and application of risk-
focused concepts. NCUA's development of the quality control program was
timely and appropriate, because we found some NCUA examiners and state
supervisors were reluctant to move to the risk-focused program. The
examiners and supervisors were concerned that they would be blamed if a
credit union later had a problem in an area they had not initially
identified as high-risk.
NCUA's consultations with the Office of the Comptroller of the Currency
(OCC) enabled NCUA to consider a different approach to improve its
oversight of large credit unions under the risk-focused program. OCC
had implemented a large bank program in recognition of the need for an
alternative approach to oversight of large and sophisticated banks.
NCUA likewise found the need for an alternative approach to oversight
of large credit unions because its examiners traditionally examined a
large number of small credit unions and very few larger ones and, thus,
had been unable to gain sufficient comfort and expertise in examining
the larger, more complex institutions. As a result of consultations
with OCC, NCUA implemented its Large Credit Union Pilot Program in
January 2003 to, among other things, develop a core of examiners with
experience overseeing these larger credit unions. Under this program,
NCUA has also experimented with different examination approaches,
including targeted examinations, which focus on certain aspects of
credit union operations such as the loans, investments, or asset-
liability management. NCUA officials told us that they received some
preliminary feedback from credit unions that found the pilot to be
beneficial. However, because the pilot ended recently, NCUA officials
stressed that it was too early to tell how effective this program will
be in helping NCUA improve its examinations of large credit unions.
In recognition that the risk-focused program was a significant
departure from NCUA's old approach to examination and supervision, NCUA
also sought feedback from the industry on the risk-focused program by
developing a survey for credit unions to complete once they had gone
through their first risk-focused examination. NCUA reported that it had
received preliminary results from the survey that indicated that the
risk-focused program has been well received. Specifically, NCUA
received the highest marks for examiners' courteous and professional
conduct, effective overall examination process, and effective
communication with management and officials throughout the examination.
Officials from some of the large credit unions we interviewed were
pleased with the program because they felt that the examination was
focused on the high-risk areas that credit union officials needed to
monitor. Likewise, examiners with whom we spoke told us that adopting a
risk-focused approach had made a bigger difference in their oversight
activities at the larger credit unions because they could focus their
resources on the high-risk areas of these institutions. In contrast,
the examiners relied on the old approach of extensive transaction
testing at the smaller credit unions that lacked sufficient resources
to implement robust internal control structures and tended to limit
their activities to the basic or traditional services offered by credit
unions.
NCUA Has Further Opportunities to Leverage the Experiences of Other
Regulators to Address Existing Challenges:
NCUA faces a number of challenges in implementing its risk-focused
approach that create additional opportunities for it to leverage the
experiences of the other regulators that have been using risk-focused
programs for several years. These challenges include ensuring that
examiners have sufficient training to keep pace with changes in
industry technologies and methods, adequately preparing for monitoring
credit unions as they expand more heavily into nontraditional credit
union activities such as business lending, and overseeing state-
chartered institutions in states that lack sufficient examiner
resources and expertise.
NCUA Faces Challenges in Ensuring That Examiners Are Adequately Trained
to Assess Changing Technology:
According to NCUA examiners who had recently implemented the risk-
focused program, NCUA faces challenges in training its examiners in
specialized areas such as information systems and technology. Likewise,
as we found in prior reviews, other depository institution regulators
also faced these challenges in implementing risk-focused
programs.[Footnote 66] Some NCUA examiners with whom we spoke indicated
that NCUA's formal and on-the-job training of subject matter examiners,
particularly in the areas of information systems and technology,
payment systems, and specialized lending, was insufficient and did not
help them keep pace with the changing technology in the
industry.[Footnote 67] As a result, some examiners were not confident
that they could assess the adequacy of information systems that were
vital to the operations of some credit unions.
NCUA officials sought to address concerns about specialist training by
modifying their training manual to more clearly state what classes were
appropriate for the different specialized areas. Further, as a member
of the Federal Financial Institutions Examination Council (FFIEC), NCUA
was aware of specialized training offered by other depository
institution regulators under the auspices of FFIEC, and encouraged NCUA
examiners to take advantage of this training.[Footnote 68] However,
NCUA had not specifically consulted with other depository institution
regulators on how these regulators addressed the challenge of training
their specialists as banks and thrifts had become more complex over
time.
NCUA Faces Challenge of Ensuring That It Is Adequately Prepared to
Monitor Credit Unions as They Expand into Nontraditional Activities:
NCUA's revised regulation on member business loans also presents NCUA
with the challenge of ensuring that it is adequately prepared to
monitor this growing area of lending. A recent NCUA final rule on
member business loans relaxed certain requirements (allowing well-
capitalized, federally insured credit unions to offer unsecured
business loans) and introduced a new risk area for NCUA to
monitor.[Footnote 69] (Appendix VII provides a detailed description of
changes to this and other NCUA rules and regulations since 1992.):
While member business loans are still a relatively small percentage of
credit union loans (2 percent) and there are statutory limits placed on
these loans, NCUA's recently revised rules could result in credit
unions making more of these loans.[Footnote 70] The Department of the
Treasury has raised concerns that allowing credit unions to engage in
unsecured member business loans
would increase risks to safety and soundness.[Footnote 71] Since member
business loans constitute only a small percentage of credit union
lending, most NCUA examiners will not have significant experience
looking at this type of lending activity. In contrast, banks and
thrifts offer these loans to a much greater extent than credit unions
and their regulators do have experience in this area.
Variability in State Oversight May Constrain NCUA's Ability to Monitor
Risks to NCUSIF Posed by Federally Insured, State-chartered Credit
Unions:
Due to variability in levels of state oversight and resources, NCUA may
face challenges in implementing the risk-focused program at the state
level. Lack of examiner resources and expertise in some states, high
state examiner turnover, and weakness of enforcement by some state
regulators may affect oversight of federally insured, state-chartered
credit unions, according to NCUA officials.
While state officials with whom we met had adopted NCUA's risk-focused
program and indicated they were generally pleased with NCUA's support,
some of these officials indicated that they faced challenges related to
oversight of their credit unions. For example, they indicated that
budget problems had made it difficult to hire additional staff. In
addition, some state officials indicated that they could not compete on
pay with the industry, which led to high examiner turnover. A state
official from a large state indicated that the increase in credit
unions converting from federal to state charters had stretched her
examiner resources.
The challenges faced by states are of particular concern given that
state supervisors have primary responsibility for examining federally
insured, state-chartered credit unions, which as of December 31, 2002,
held 46 percent of industry assets. Inadequate oversight of these
state-chartered institutions could have a negative impact on the
financial condition of NCUSIF. The FDIC and Federal Reserve share
oversight responsibility with state supervisors for state-chartered
banks, and these regulators also face challenges similar to those faced
by NCUA with regard to variability in state oversight.
In commenting on how it addressed some of the issues facing states,
NCUA officials told us that in cases where states lacked examiner
resources or expertise, NCUA provided its own staff to ensure that
federally insured, state-chartered credit unions were adequately
examined. In addition, NCUA conducted joint examinations with state
supervisors on selected federally insured, state-chartered credit
unions to assess the risk they posed to NCUSIF. Some state officials
with whom we met raised concerns over joint examinations, claiming that
NCUA examiners tried to impose federal regulations on these state-
chartered credit unions. These state officials also expressed concern
over NCUA's process for developing its overhead transfer rate, which
they claimed was not transparent.[Footnote 72] We discuss the overhead
transfer rate more fully later in this report.
NCUA Lacks Authority to Examine Third-party Vendors:
As we reported in July 1999, NCUA does not have the third-party
oversight authority provided to other federal banking regulators, and
the lack of such authority could limit NCUA's effectiveness in ensuring
the safety and soundness of credit unions.[Footnote 73] Credit unions
are increasingly relying on third-party vendors to support technology-
related functions such as Internet banking, transaction processing, and
funds transfers. While these third-party arrangements can help credit
unions manage costs, provide expertise, and improve services to
members, they also present risks such as threats to security of
systems, availability and integrity of systems, and confidentiality of
information. With greater reliance on third-party vendors, credit
unions subject themselves to operational and reputation risks if they
do not manage these vendors appropriately. Although NCUA received
authority to examine third-party vendors as part of the year 2000
readiness effort, this authority was temporary and expired on December
31, 2001.
While NCUA has issued guidance regarding due diligence that credit
unions should be applying to third-party vendors, NCUA must ask for
permission to examine third-party vendors. Without vendor examination
authority, NCUA has no enforcement powers to ensure full and accurate
disclosure. For instance, in one case NCUA was denied access by a
third-party vendor that provides record-keeping services for 99
federally insured credit unions with $1.4 billion in assets. NCUA
notified the credit unions to heighten their due diligence to ensure
that appropriate controls were in place at the third-party vendor. In
another case, NCUA was given access to a third-party vendor, but the
vendor withheld financial statements from NCUA examiners. The third-
party vendor served 113 credit unions representing almost $750 million
in assets.
Credit Unions Not Subject to Internal Control Reporting Requirements of
FDICIA:
Credit unions with assets over $500 million are required to obtain an
annual independent audit of financial statements by an independent
certified public accountant, but unlike banks and thrifts, these credit
unions are not required to report on the effectiveness of their
internal controls for financial reporting. Under FDICIA and its
implementing regulations, banks and thrifts with assets over $500
million are required to prepare an annual management report that
contains:
* a statement of management's responsibility for preparing the
institution's annual financial statements, for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting, and for complying with designated laws and
regulations relating to safety and soundness; and:
* management's assessment of the effectiveness of the institution's
internal control structure and procedures for financial reporting as of
the end of the fiscal year and the institution's compliance with the
designated safety and soundness laws and regulations during the fiscal
year.[Footnote 74]
Additionally, the institution's independent accountants are required to
attest to management's assertions concerning the effectiveness of the
institution's internal control structure and procedures for financial
reporting. The institution's management report and the accountant's
attestation report must be filed with the institution's primary federal
regulator and any appropriate state depository institution supervisor
and must be available for public inspection. These reports allow
depository institution regulators to gain increased assurance about the
reliability of financial reporting.
Banks reporting requirements under FDICIA are similar to the reporting
requirement included in the Sarbanes-Oxley Act of 2002. Under Sarbanes-
Oxley, public companies are required to establish and maintain adequate
internal control structures and procedures for financial reporting and
the company's auditor is required to attest to, and report on, the
assessment made by company management on the effectiveness of internal
controls. As a result of FDICIA and Sarbanes-Oxley, reports on
management's assessment of the effectiveness of internal controls over
financial reporting and the independent auditor's attestation on
management's assessment have become normal business practice for
financial institutions and many companies. Extension of the internal
control reporting requirement to credit unions with assets over $500
million could provide NCUA with an additional tool to assess the
reliability of internal controls over financial reporting.
NCUA Implemented PCA as Mandated by CUMAA, but Few Actions Taken to
Date:
In August 2000, NCUA initially implemented PCA for credit unions. CUMAA
mandated that NCUA implement a PCA program in order to minimize losses
to NCUSIF. Under the program, credit unions and NCUA are to take
certain actions based on a credit union's net worth.[Footnote 75] Other
depository institution regulators were required to implement PCA in
December 1992. PCA was intended to be an additional tool in NCUA's
arsenal and did not preclude NCUA from taking administrative actions,
such as cease and desist orders, civil money penalties,
conservatorship, or liquidation of credit unions.
CUMAA requires credit unions to take up to four mandatory supervisory
actions--an earnings transfer, submission of an acceptable net worth
restoration plan, a restriction on asset growth, and a restriction on
member business lending--depending on their net worth ratios.[Footnote
76] Credit unions that are adequately capitalized (net worth ratio from
6.0 to 6.99 percent) are
required to take an earnings transfer.[Footnote 77] Credit unions that
are undercapitalized (net worth ratio from 4.0 to 5.99 percent),
significantly undercapitalized (net worth ratio from 2.0 to 3.99
percent), or critically undercapitalized (net worth ratio of less than
2 percent) are required to take all four mandatory supervisory
actions.[Footnote 78]
CUMAA also required NCUA to develop discretionary supervisory actions,
such as dismissing officers or directors of an undercapitalized credit
union, to complement the prescribed actions under the PCA program.
CUMAA also authorized NCUA to implement an alternative system for new
credit unions in recognition that these credit unions typically start
off with zero net worth and gradually build their net worth through
retained earnings.[Footnote 79] Appendix IX provides more detail on
NCUA's implementation of PCA.
To date, NCUA has taken few actions against credit unions under the PCA
program due to a generally favorable economic climate for credit
unions. As of December 31, 2002, NCUA took mandatory supervisory
actions against 2.8 percent (276 of 9,688) of federally insured credit
unions. Of these credit unions, the vast majority--92 percent or 253--
had under $50 million in assets. Further, 41 percent (113 of 276) of
these credit unions were required to develop net worth restoration
plans. However, it is too early to tell how effective these plans will
be in improving the condition of the credit unions or minimizing losses
to NCUSIF.
Credit unions were similar to banks and thrifts with respect to PCA
capital categorization with 97.6 percent of credit unions considered
well-capitalized compared to 98.5 percent of banks and thrifts (see
table 2). However, a slightly higher percentage of credit unions were
undercapitalized, significantly undercapitalized, and critically
undercapitalized than banks and thrifts.
Table 2: Federally Insured Credit Unions Were Similar to Banks and
Thrifts with Respect to Capital Categories, as of December 31, 2002:
Capital category[A]: Well-capitalized; Credit unions (number)[B]:
9,363; Percent: 97.6; Banks/thrifts (number): 9,210; Percent: 98.5.
Capital category[A]: Adequately capitalized; Credit unions
(number)[B]: 153; Percent: 1.6; Banks/thrifts (number): 134; Percent:
1.4.
Capital category[A]: Undercapitalized; Credit unions (number)[B]: 61;
Percent: 0.6; Banks/thrifts (number): 6; Percent: 0.1.
Capital category[A]: Significantly undercapitalized; Credit unions
(number)[B]: 10; Percent: 0.1; Banks/thrifts (number): 2; Percent:
0.0.
Capital category[A]: Critically undercapitalized; Credit unions
(number)[B]: 10; Percent: 0.1; Banks/thrifts (number): 2; Percent:
0.0.
Capital category[A]: Total; Credit unions (number)[B]: 9,597; Percent:
100.0; Banks/thrifts (number): 9,354; Percent: 100.0.
Sources: NCUA and FDIC.
Note: Does not include new credit unions.
[A] Although the categories triggering PCA actions are the same for
both the bank regulators and NCUA, the capital requirements underlying
these categories are different.
[B] Numbers reported by NCUA as of May 2003.
[End of table]
Some NCUA, state, and industry officials claimed that PCA was
beneficial because it provided standard criteria for taking supervisory
actions and was a good way to restrain rapid growth of assets relative
to capital. However, many state officials expressed concern over PCA
due to the limited ability of credit unions to increase their net worth
quickly, because they can only do so through retained earnings. They
indicated that if a credit union were subject to PCA, it would be
difficult for that credit union, particularly a smaller one, to
increase capital and graduate out of PCA. In contrast, other financial
institutions are able to raise capital more quickly through the sale of
stock.
Some of these state officials raised the issue of whether credit unions
should likewise have a means to raise capital quickly by allowing
credit unions to use secondary capital toward their capital requirement
under PCA.[Footnote 80] Texas allowed its state-chartered credit unions
to raise secondary capital even though the secondary capital could not
count towards PCA.[Footnote 81] According to the Texas credit union
regulator, no credit unions had taken advantage of the state's
secondary capital provision. Currently there is a debate in the
industry on whether secondary capital is appropriate for credit unions.
While some in the industry favor secondary capital as a way to help
credit union avoid actions under PCA, others have raised the concern
that allowing credit unions to raise secondary capital (for example, in
the form of nonmember deposits) could change the structure and
character of credit unions by changing the mutual ownership. As of
September 2003, NCUA had not taken a position on secondary capital.
Another concern raised by NCUA officials is in regard to the most
appropriate measure of the net worth ratio for PCA purposes. NCUA
officials have suggested using risk-based assets, rather than total
assets, to calculate the net worth ratio of credit unions because they
believe risk-based assets more clearly reflect the risks inherent in
credit unions' portfolios. NCUA officials recognize that, similar to
banks, a minimum net worth ratio based on total assets (tangible equity
for banks and thrifts) would still be needed for those institutions
that are critically undercapitalized. For most credit unions, risk-
based assets are less than total assets; therefore, a given amount of
capital would have a higher net worth ratio if risk-based assets were
used. While there may be some merit in using risk-based assets, credit
unions have been subject to PCA programs for a short time, and the
advantages and disadvantages of the current programs are not yet
evident.
Finally, some NCUA officials raised the concern that PCA has led to
more liquidations of problem credit unions. In the past, NCUA sought
merger partners for problem credit unions. However, NCUA officials told
us that it was more difficult to find merger partners because stronger
credit unions were concerned that their net worth ratio would be
lowered by merging with problem credit unions, thereby putting them
closer to the 7.0 percent net worth ratio that triggers PCA. As a
result, the cost of mergers has increased under PCA because NCUA would
have to provide greater incentives to a potential partner, and that has
forced the agency to liquidate credit unions to a greater extent than
prior to PCA. While the initial costs of liquidations appear to be
high, the purpose of PCA is to reduce the likelihood of regulatory
forbearance and protect the federal deposit (share)
insurance funds through early resolution of problem institutions; thus,
in the long run, the overall costs to NCUSIF should be less because of
PCA.[Footnote 82]
NCUSIF's Financial Condition Appears Satisfactory, but Methodologies
for Overhead Transfer Rate, Insurance Pricing, and Estimated Loss
Reserve Need Improvement:
NCUSIF appears to be in satisfactory financial condition. For most of
the past 10 years, NCUSIF's financial condition has been stable as
indicated by the fund's equity ratio, earnings, and net income.
However, while remaining positive as of December 31, 2002, NCUSIF's net
income declined in 2001 and 2002. Among the factors contributing to the
decline was a drop in investment revenues, a sharp increase in the
overhead transfer rate, which is the amount paid to NCUA's Operating
Fund for administrative expenses, and an increase in losses to the
insurance fund. Moreover, NCUA's methods for pricing NCUSIF insurance
and for estimating losses to the fund did not consider important
factors such as current credit union risk. NCUA's flat-rate insurance
pricing does not allow for the fact that some credit unions are at
greater risk of failure than others, and the historical analysis NCUA
uses for determining estimated losses does not reflect current economic
conditions or consider the loss exposure of credit unions with varying
risk. As a result of the current weaknesses in the methodologies used
by NCUA, information reported on the financial condition of the fund
may not accurately reflect the current risks to the fund.
NCUSIF Has Met Statutory Fund Equity Ratio Requirements, but Concerns
Exist over Transfers of Expenses to the Fund:
Indicators of the financial condition and performance of NCUSIF have
generally been stable over the past decade. NCUSIF's fund equity ratio-
-a measure of the fund's equity available to cover losses on insured
deposits--was within statutory requirements at December 31, 2002, as it
has been over the past decade.[Footnote 83]
CUMAA defines the "normal operating level" for the fund's equity ratio
as a range from 1.20 percent to 1.50 percent. CUMAA has designated the
NCUA board to evaluate and set the specific operating level for the
fund equity ratio. In setting the level, the board considers current
industry and fund conditions, as well as the future economic outlook.
For 2002, NCUA's board set the specific operating level at 1.30
percent. If the equity ratio exceeds the board's determined operating
level, CUMAA requires NCUA to distribute to contributing credit unions
an amount sufficient to reduce the equity ratio to the operating level.
Also, should the equity ratio fall below the minimum rate of 1.20
percent, under CUMAA, NCUA's board must assess a premium until the
equity ratio is restored to and can be maintained at 1.20 percent. (See
appendix X for a more detailed discussion of the funding process and
accounting for NCUSIF.):
Between 1991 and 2002, the equity ratio has fluctuated between 1.23
percent and 1.30 percent, a rate that has remained in line with legal
requirements (see fig. 12). As of December 31, 2002, the ratio of fund
equity to insured shares for NCUSIF as reported by NCUA was 1.27
percent.
Figure 12: NCUSIF's Equity Ratio, 1991-2002:
[See PDF for image]
[End of figure]
NCUSIF's ratio can be usefully compared with the only other share or
deposit insurance funds in the United States currently--FDIC's Bank
Insurance Fund (BIF), which insures banks, and its Savings Association
Insurance Fund (SAIF), which insures thrifts; and ASI, which insures
state-chartered credit unions that are not federally insured. The
NCUSIF ratio was comparable with the other share and deposit insurance
funds as of December 31, 2002 (see fig. 13).
Figure 13: Equity to Insured Shares or Deposits of the Various
Insurance Funds:
[See PDF for image]
[End of figure]
NCUSIF's earnings--principally derived from its investment portfolio,
which has increased significantly since 1991--have been sufficient to:
* cover operating expenses and losses from insured credit union
failures;
* make additions to its equity with the net income that is retained by
the fund;
* maintain its equity in accordance with legal requirements;
* maintain its allowance for anticipated losses on insured deposits;
* avoid assessing premiums, except for 1991 and 1992; and:
* make, in some years, distributions to insured credit unions.
NCUSIF's net income has remained positive through 2002 and had
generally been increasing since 1993, until significant declines
occurred in 2001 and 2002 (see fig. 14). The declines were due to a
combination of decreased yields from the investment portfolio, an
increase in the overhead transfer rate, and larger insurance losses on
failed credit unions. The investment portfolio of NCUSIF consists
entirely of U.S. Treasury securities. Yields on these securities have
declined--for example, from 6.07 percent in 2000 to 5.10 percent in
2001 and to 3.18 percent in 2002 on its 1-to 5-year maturities--
following similar general declines in market yields for Treasury
securities. Of the $40.2 million net income decline between 2000 and
2001, $22.2 million of the decline was attributable to increases in the
overhead transfer rate, and $15.3 million was attributable to declines
in investment income. Of the $47.5 million decline in net income
between 2001 and 2002, $39.6 million was attributable to declines in
investment income, while $12.5 million was attributable to provision
for insurance losses. At the same time, operating expenses decreased by
$5.1 million. For 2003, interest rates have continued to decline, which
will likely continue to negatively affect investment earnings.
Figure 14: Net Income of NCUSIF, 1990-2002:
[See PDF for image]
[End of figure]
The sharp increase in the overhead transfer rate and its negative
impact on NCUSIF's net income have raised questions about NCUA's
process for determining the transfer rate. The Federal Credit Union Act
of 1934 created the Operating Fund for the purpose of providing
administration and service to the credit union system--for example, the
supervision and regulation of the federally chartered credit unions.
NCUA's Operating Fund is financed through assessment of annual fees to
federally chartered credit unions as well as the overhead transfer from
NCUSIF (see fig. 15). Federally chartered credit unions are assessed an
annual fee by the Operating Fund based on the credit union's asset size
as of the prior December 31. The fee is designed to cover the costs of
providing administration and service, as well as regulatory
examinations to the Federal Credit Union System. NCUA's board reviews
the fee structure annually. The overhead transfer from NCUSIF for
administrative services provides a substantial portion of funding for
the Operating Fund. The annual rate for the overhead transfer is set by
NCUA's board based on periodic surveys of NCUA staff time spent on
insurance-related activities compared with noninsurance-related, or
regulatory, activities. An amount of overhead or administrative expense
is transferred to NCUSIF in proportion to staff time spent on
insurance-related activities. The overhead transfer is intended to
account for NCUA staff being responsible for both insurance and
supervisory-related activities.
Figure 15: Financing Sources of NCUSIF and NCUA's Operating Fund:
[See PDF for image]
[End of figure]
Between 1986 and 2000, the transfer rate was 50 percent, which,
according to NCUA management, was based on surveys that indicated staff
time was equally split between insurance and regulatory activities. For
example, 50 percent of the Operating Fund's $127.6 million, or $63.8
million, in expenses for 2000 were allocated to and paid by NCUSIF. For
2001, NCUA's Board of Directors increased the overhead transfer rate to
67 percent on the basis that Operating Fund staff had increased their
insurance-related activities. This resulted in a $24.7 million increase
(almost 40 percent) from 2000 in the amount being allocated to NCUSIF.
For 2002 and 2003, the NCUA board lowered the 67-percent overhead
transfer rate to 62 percent by adjusting downward its allocation of
what it considered "nonproductive" time factors such as employee
administrative and education time used in the 2001 survey because it
was reflective of regulatory rather than insurance-related activities.
In September 2001, NCUA management engaged its financial audit firm,
Deloitte & Touche, to review the basis on which the transfer rate was
determined. The auditor's report contained several recommendations that
indicated that NCUA's 2001 survey of staff time spent on insurance-
related functions--the primary basis on which NCUA allocates
administrative expenses--may not have resulted in an accurate
allocation. The lack of a clear separation of the insurance and
supervisory functions had also been the focus of a recommendation in
our 1991 report (still unimplemented) that NCUA should establish
separate supervision and insurance offices.[Footnote 84] The 2001
recommendations from NCUA's financial audit firm included improvements
in communication with staff on the survey process and results,
frequency and timing of the survey, methods of survey distribution, and
updated documentation of survey definitions and purpose. The auditors
also noted that individuals were allocating time after the fact, when
recollection may have been faulty, rather than tracking their time
concurrently as would be possible if provided the survey and guidelines
prior to an assignment. Additionally, the auditors reported that, to
provide reliable results, the survey should cover a greater period of
time. The limited period used could significantly skew the resulting
proportion of activities devoted to insurance versus regulatory
activities. The auditor's recommendations indicated that the survey's
lack of consistency and reliability may have resulted in a
misallocation of overhead expenses between the operating and insurance
funds. Any misallocation would affect NCUSIF's financial condition
because any increase in the overhead transfer rate results in a
decrease of NCUSIF's net income. Misallocations also can significantly
affect the financial results of the Operating Fund. In addition to the
auditor's findings, some federally insured, state-chartered credit
unions and trade groups have expressed concerns about NCUA's
calculation of its overhead transfer rate. Primarily, they say that
NCUA has not clearly defined insurance and regulatory functions, and
its methodology for determining the overhead transfer rate is not
transparent or understandable to participating credit unions.
According to NCUA's management, NCUA has begun implementing Deloitte &
Touche's recommendations. For example, selected field examiners are now
completing surveys in a timely manner for periods covering a full year.
However, headquarters staff are not required to complete the surveys as
management asserts the split of their time mirrors that of field
examiners. In addition, the transfer rate is calculated and approved by
management every few years. However conditions can change that may
result in the transfer rate not representing the current condition.
Changing workloads and conditions can also cause a significant change
in future rates.
Federal Credit Union Insurance Pricing Is Not Based on Risk to Insurer:
The Federal Credit Union Act requires all federally insured credit
unions to allocate 1 percent of their insured shares to NCUSIF. This
flat rate does not take into consideration variations in risk posed by
individual credit unions. Although FDIC had implemented a version of
risk-based pricing in 1993, FDIC has continued to study options for
improving deposit insurance funding. FDIC's suggestions for improvement
were issued in a 2001 report that noted the cost of insurance,
regardless of type (property, casualty, or life), in the private sector
is priced based upon the risk assumed by the insurer.[Footnote 85]
Premiums and loss experience are generally actuarially determined, such
that increased risk equates to increased cost. Since passage of FDICIA
in 1991, deposit insurance for banks and thrifts are adjusted for some
risk, and since December 31, 2000, private-sector insurance for credit
union shares has been adjusted for risk. (See appendix X for additional
information on accounting for insurance.) While BIF and SAIF are
adjusted for some risk, FDIC has made additional proposals for
enhancing the risk-based nature of its insurance pricing. For instance,
the current BIF and SAIF funding does not require a fast-growing
institution to pay premiums if it is well capitalized and CAMEL-rated 1
or 2. As a result, FDIC has proposed that the pricing structure for BIF
and SAIF be amended so that fast-growing institutions would be required
to pay premiums.
NCUSIF is the only share or deposit insurer that has not adopted a
risk-based insurance structure. Therefore, some credit unions could be
overpaying while others could be underpaying if their current rates
were compared to their risk profiles--with the cost of insurance not
being equitable based on the level of risk posed to NCUSIF by
individual credit unions. In contrast, FDIC's BIF and SAIF and ASI
currently operate on a risk-based capitalization structure. Depository
institutions insured by BIF and SAIF pay a premium twice a year based
upon their capital levels and supervisory ratings, with institutions
with the lowest capital levels and worst supervisory ratings paying
higher premiums. ASI's insurance fund requires its insured credit
unions to maintain deposits between 1.0 and 1.3 percent of their
insured shares. The amount for each credit union is determined based
upon its supervisory rating, with lower-rated credit unions maintaining
higher deposits.
The risk-based structure has certain advantages. First, by varying
pricing according to risk, more of the burden is distributed to those
members that put an insurance fund at greater risk of loss. Second,
risk-based pricing provides an incentive for member owners and managers
of credit unions to control their risk. Finally, risk-based pricing
helps regulators focus on higher-risk credit unions by enabling them to
allocate their insurance activities in proportion to the price charged.
During our review, members of NCUA's management told us that they
believe that risk-based pricing would adversely affect small credit
unions and suggested that an option would be to add risk-based pricing
only for credit unions over a certain size. By not having risk-based
insurance structure, NCUSIF puts a disproportionate share of the
pricing burden on less-risky credit unions and does not provide an
incentive through pricing for owners and managers to control their
risk.
Management's Estimation of Insured Share Losses Does Not Reflect
Specific Loss Rates:
NCUA's process for determining estimated losses from insured credit
unions--the largest potential liability of the fund--does not reflect
current economic conditions and loss exposures of credit unions with
varying risk. The estimated liability balance is established to cover
probable and estimable losses as a result of federally insured credit
union failures. The estimated liability balance is reduced when the
insurance claims are actually paid. NCUSIF's estimated liability for
losses was $48 million at December 31, 2002.
In 2002, NCUA's management analyzed historical loss trends over varying
periods of time in order to assess whether the estimated liability for
losses was adequate. It analyzed historical rates of insurance payouts
for the past 3-year, 5-year, 10-year, and 15-year averages. The 15-year
analysis encompassed an economic period of dramatic losses, which
management contends may be cyclical and indicative of future exposure,
although not necessarily indicative of current economic conditions. As
a result of this analysis, in July 2002, management began building the
estimated losses account balance by $1.5 million a month to $60 million
(from $48 million at December 31, 2002), the amount the analysis
determined would be needed to cover identified and anticipated losses.
NCUA's estimation method does not identify specific historical failure
rates and related loss rates for the group of credit unions that had
been identified as troubled, but instead specifically calculates
expected losses for each problem credit union, if it is determined that
a particular credit union is likely to fail. This methodology
essentially assigns a probability of failure of either zero or 100
percent to each individual credit union considered to be troubled. By
not considering specific historical failure rates and loss rates in its
methodology, NCUA is using an over-simplified estimation method. As a
result, NCUA may not be achieving the best estimate of probable losses.
Therefore, NCUA may be over or underestimating its probable losses
because it does not apply more targeted and specific loss rates to
currently identified problem institutions, but instead, makes a
determination that essentially selects from two probabilities: zero or
100-percent probability of failure.
From 2000 to 2002, the amount of insured shares in problem credit
unions doubled, going from $1.5 billion insured shares in 2000 to
nearly $3 billion insured shares in 2002. The increase in insured
shares of problem credit unions may be an indicator of larger future
losses to the fund, since problem credit unions are more likely to
fail. In addition, recent increases the share payouts show that the
insurance fund is suffering from increasing losses that totaled $40
million in 2002. At the same time, the estimated loss reserve, which is
intended to cover actual losses, has been declining since 1994. As a
result the cushion between payouts for insurance losses and the reserve
balance became increasingly smaller between 2001 and 2002 (see fig.
16). Given the recent trends, it is especially important to utilize
specific data on failure rates for troubled institutions.
Figure 16: Share Payouts and Reserve Balance,1990-2002:
[See PDF for image]
[End of figure]
In contrast to NCUA's method, FDIC's method records estimated bank and
thrift insurance losses based on a detailed analysis of institutions in
five risk-based groups. The first group consists of institutions
classified as having a 100-percent expected failure rate. This
determination is based on the scheduled closing date for the
institution, the classification of the institution as "critically
undercapitalized," or identification of the institution as an imminent
failure. The remaining four risk groups are based on federal and state
supervisory ratings and the institutions' projected capitalization
levels. Every quarter, FDIC meets with representatives from other
federal financial regulatory agencies to discuss these groupings and
ensure that each institution is appropriately grouped based on the most
recent supervisory information. Also on a quarterly basis, FDIC's
Financial Risk Committee (FRC), an interdivisional committee, meets to
discuss and determine the appropriate projected failure rates to be
applied to each of
the four remaining risk-based groups.[Footnote 86] The projected
failure rate for each risk-based group is multiplied by the assets of
each institution in that group, which results in expected failed
assets. Expected failed assets are then multiplied by an expected loss
experience rate, the product of which results in the loss estimate for
anticipated failures. The projected failure rates for the remaining
four risk-based groups are based on historical failure rates for those
categories. However, FRC has the responsibility for determining if the
historical failure rates for each group are appropriate given the
current and expected condition of the industry and may adjust failure
rates, if necessary. The expected loss experience rates have been based
on asset size and reflect FDIC's historical loss experience for banks
of different sizes. FRC may also use loss rates based on institution-
specific supervisory information rather than the historical rates. This
process, as implemented by FDIC, results in a more targeted estimation
process that specifically captures current changes in the risk profile
of insured institutions.
System Risk That May Be Associated with Private Share Insurance Appears
to Have Decreased, but Some Concerns Remain:
The amount of insured shares and the number of privately insured credit
unions and providers of private primary share insurance have declined
significantly since 1990. Specifically, 1,462 credit unions purchased
private share insurance in 1990 compared with 212 credit unions as of
December 2002. During the same period, the total amount of privately
insured shares decreased by 42 percent ($18.6 billion to about $10.8
billion). Although the use of private share insurance has declined,
some circumstances of the remaining private insurer, ASI, raise
concerns. First, ASI's risks are concentrated in a few large credit
unions and in certain states. Second, ASI has a limited ability to
absorb catastrophic losses because it does not have the backing of any
governmental entity and its lines of credit are limited in the
aggregate as to the amount and available collateral. To mitigate its
risks, ASI has implemented a number of risk-management strategies, such
as increased monitoring of its largest credit unions. State oversight
mechanisms of the remaining private share insurer and privately insured
credit unions also provide some additional assurance that ASI and the
credit unions it insures operate in a safe and sound manner. One
additional concern, as we recently reported, is that many privately
insured credit unions failed to make required disclosures about not
being federally insured and, therefore, the members of these credit
unions may not have been adequately informed that their deposits lacked
federal deposit insurance.
Few Credit Unions Are Privately Insured:
Compared with federally insured credit unions, relatively few credit
unions are privately insured. As of December 2002, 212 credit unions--
about 2 percent of all credit unions--chose to purchase private primary
share insurance.[Footnote 87] These privately insured credit unions
were located in eight states and had about 1.1 million members with
shares totaling about $10.8 billion, as of December 2002--a little over
1 percent of all credit union members and 2 percent of all credit union
shares. In contrast, as of December 2002, there were 9,688 federally
insured credit unions with about 81 million members and shares totaling
$483 billion.
Through a survey of 50 state regulators and related follow-on
discussions with the regulators, we identified nine additional states
that could permit credit unions to purchase private share
insurance.[Footnote 88] Figure 17 illustrates the states that permit or
could permit private share insurance as of March 2003 and the number of
privately insured credit unions as of December 2002.
Figure 17: States Permitting Private Share Insurance (March 2003) and
Number of Privately Insured Credit Unions (December 2002):
[See PDF for image]
[End of figure]
The number of privately insured credit unions and private share
insurers has declined significantly since 1990. In 1990, 1,462 credit
unions in 23 states purchased private share insurance from 10 different
nonfederal, private insurers, with shares at these credit unions
totaling $18.6 billion. Between 1990 and 2002, the amount of privately
insured shares decreased 42 percent to about $10.8 billion. Shortly
after the failure of Rhode Island Share and Depositors Indemnity
Corporation (RISDIC), a private share insurer in Rhode Island in 1991,
almost half of all privately insured credit unions converted to federal
share insurance voluntarily or by state
mandate.[Footnote 89]As a result of the conversions from private to
federal share insurance, most private share insurers have gone out of
business due to the loss of their membership since 1990; only one
company, ASI, currently offers private primary share
insurance.[Footnote 90]
In states that currently permit private share insurance, a comparable
number of credit unions have converted from federal to private share
insurance and from private to federal share insurance since 1990--31
and 26, respectively. Most of the conversions from federal to private
share insurance (26 of 31) occurred since 1997. According to management
at many privately insured credit unions, they converted to private
share insurance to obtain higher coverage and avoid federal rules and
regulation. Additionally, management at these credit unions noted that
they were satisfied with the service they received from the private
share insurer and all but one planned to remain privately insured.
According to NCUA--in states that currently permit private share
insurance--since 1990, 26 credit unions converted from private to
federal share insurance; the majoritydid so in the early 1990s,
following the RISDIC failure and widespread concern over the safety and
soundness of private share insurance.[Footnote 91] ost of the 26 credit
unions planned to continue to purchase federal share insurance either
because they were reasonably satisfied or because they viewed having
their share insurance backed by the federal government as a benefit.
Risks Exist at Remaining Private Share Insurer, but Certain Factors
Help to Mitigate Concerns:
Although the use of private share insurance has declined, we found two
aspects of the remaining private insurer that raise potential safety
and soundness concerns. First, ASI faces a concentration of risk in a
few large credit unions and certain states. Second, ASI has limited
borrowing capacity and could find it difficult to cover catastrophic
losses under extreme economic conditions because it does not have the
backing of any governmental agency, its lines of credit are limited in
the aggregate as to the amount and available collateral, and it has no
reinsurance for its primary share insurance. To help mitigate these
risks, ASI has taken steps to increase its monitoring of its largest
credit unions and is using other strategies to limit its risks. In
addition, as a regulated entity, state regulation of ASI and the credit
unions it insures provides some additional assurance that ASI and the
credit unions operate in a safe and sound manner.
Risks of Remaining Private Insurer Concentrated in a Few Credit Unions
and States:
ASI is chartered in Ohio statute as a credit union share guaranty
corporation.[Footnote 92] As specified in Ohio statute, the purpose of
such a corporation includes guaranteeing payment of all or a part of a
participating credit union share account.[Footnote 93] Although ASI is
commonly referred to as a provider of insurance, it is not subject to
all of Ohio's insurance laws.[Footnote 94] For example, ASI is not
subject to Ohio's insurance law that limits the risk exposure of an
insurance company. Specifically, while Ohio insurance companies are
subject to a "maximum single risk" requirement--"no insured
institution's coverage should comprise more than 20 percent of the
admitted assets, or three times the average risk or 1 percent of
insured shares, whichever is greater"--Ohio has not imposed this
requirement on ASI.[Footnote 95] Although ASI is not subject to this
requirement, we found that ASI exceeded this concentration limit. For
example, one credit union made up about 25 percent of ASI's total
insured shares, as of December 2002. In contrast, the largest federally
insured credit union accounted for only 3 percent of NCUSIF's total
insured shares. Other concentration risks exist; for example, we found
that 45 percent of ASI's total insured shares were located in one state
(California). Further, all of ASI's insured credit unions were located
in only eight states, with almost half being located in one state
(Ohio), which represents 14 percent of all ASI-insured shares. In
contrast, 14.3 percent of federally insured credit union shares were
located in one state (California). The credit unions that NCUSIF
insures are located in 50 states and the District of Columbia, with the
largest percentage (8 percent) of credit unions located in one state
(Pennsylvania), which represents about 4 percent of NCUSIF's insured
shares.
While we remain concerned about ASI's concentration of risks, ASI
employs a number of risk-management strategies--intended to mitigate
its risk exposure in individual institutions--including being selective
about which credit unions it insures, conducting regular on-and off-
site monitoring of all its insured institutions, implementing a
partially adjusted, risk-based insurance pricing policy, and
establishing a 30-day termination policy. More specifically, ASI
employs the following risk-management strategies:
* To qualify for primary share insurance with ASI, a credit union must
meet ASI's insurance eligibility criteria, which include an analysis of
the financial performance of the credit union over a 3-year period and
an evaluation of the institution's operating policies. For example, to
qualify for ASI coverage, a credit union's fixed assets must be limited
to 5 percent of the institution's total assets or the amount permitted
by its supervisory authority, whichever is greater, and credit unions
must maintain a minimum net capital-to-asset ratio of 4 percent of
total assets.[Footnote 96] In contrast, federal PCA requirements compel
federally insured credit unions to maintain a minimum capital to assets
ratio of 7 percent of total assets.[Footnote 97] The credit union also
must submit its investment, asset-liability management, and loan
policies for ASI's review. In addition, ASI obtains and reviews the
most recent reports from the credit union's regulator and certified
public accountant (CPA) or supervisory committee. Between 1994 and July
2003, ASI denied share insurance coverage to eight credit unions while
approving coverage for 31 credit unions.[Footnote 98]
* ASI also regularly monitors all credit unions it insures. ASI
routinely conducts off-site monitoring and conducts on-site
examinations of privately insured credit unions at least once every 3
years. It also reviews state examination reports for the credit unions
it insures and imposes strict audit requirements. For example, ASI
requires an annual CPA audit for credit unions with $20 million or more
in assets, while NCUA only requires the annual CPA audit for credit
unions with more than $500 million in assets. Further, after insuring a
large credit union, ASI implemented a special monitoring plan for its
largest credit unions in light of its increased risk exposure. For
larger credit unions (those with more than 10 percent of ASI's total
insured shares or the top 5 credit unions in asset size), ASI increased
its monitoring by conducting semiannual, on-site examinations, as well
as monthly and quarterly off-site monitoring, which included a review
of the credit unions' most recent audits (monthly) and financial
information (quarterly). ASI also annually reviews the audited
financial statements of these large credit unions.In January 2003, five
credit unions with about 40 percent of ASI's total insured assets
qualified for this special monitoring.[Footnote 99] ASI also began a
monitoring strategy intended to increase its oversight of smaller
credit unions, due in part to experiencing larger-than-expected losses
at a small credit union in 2002.[Footnote 100] ASI determined that 98
smaller credit unions qualified for increased monitoring, with shares
from the largest of these smaller credit unions totaling about $23
million.
* ASI also has implemented a partially adjusted, risk-based insurance
pricing policy, which produces an incentive for the institutions
insured by ASI to obtain a better CAMEL rating, which in turn lowers
the risk to ASI's insurance fund. Like NCUSIF, ASI's insurance fund is
deposit-based; that is, ASI requires credit unions it insures to
deposit a specified amount with ASI.[Footnote 101] As of December 2002,
these deposits with ASI totaled $112 million. Unlike NCUSIF, ASI's
insurance fund is partially adjusted for risk, which acts as a
positive, risk-management strategy to mitigate against losses.
Specifically, a credit union with a higher, or worse, CAMEL rating is
required to deposit more into ASI's insurance fund.[Footnote 102]
Conversely, NCUA requires federally insured credit unions to deposit
1.0 percent of insured shares into NCUSIF regardless of their CAMEL
ratings.[Footnote 103] According to ASI, it also has the contractual
ability to reassess all member credit unions up to 3 percent of their
total assets to raise additional funds to cover catastrophic loss.
* ASI's credit union termination policy provides another risk-
mitigating strategy that ASI can use to manage its risk exposure to an
individual credit union. ASI's insurance contract identifies several
circumstances that would enable ASI to terminate insurance coverage.
For example, ASI may terminate a credit union's insurance with 30 days
notice to the credit union and its state regulator, if the credit union
fails to comply with ASI requirements to remedy any unsafe or unsound
conditions or remedy an audit qualification in a timely manner.
According to ASI management, it has not terminated a credit union's
share insurance, although ASI has used its termination policy as
leverage to force changes at a credit union.[Footnote 104]
When its largest insured credit union applied for primary share
insurance, ASI undertook an assessment of its financial and
underwriting considerations for insuring this institution.[Footnote
105] ASI had previously provided excess share insurance to the credit
union and was familiar with its financial condition. ASI's independent
actuaries determined that the ASI fund could withstand losses sustained
during adverse economic conditions for up to 5 years, with or without
insuring this large credit union. Ultimately, ASI's assessment
concluded that the credit union's financial condition was strong and,
although it would increase ASI's concentration of risks, insuring the
credit union would have a favorable financial impact on ASI. According
to regulators from the Ohio Department of Commerce, Division of
Financial Institutions (Ohio Division of Financial Institutions), they
did not take exception to ASI insuring the large credit union and had
reviewed ASI's underwriting assessment and asked to be updated
periodically.
Remaining Private Insurer Has Limited Borrowing Capacity and May Find
It Difficult to Cover Losses from Its Largest Insured Credit Unions
under Extreme Economic Conditions:
Unlike federal share insurance, which is backed by the full faith and
credit of the United States, ASI's insurance fund is not backed by any
government entity. Therefore, losses on member deposits in excess of
available cash, investments, and other assets of ASI-insured
institutions would only be covered up to ASI's available resources and
its secured lines of credit, which serve as a back-up source of funds.
According to ASI documents, the terms of ASI's secured lines of credit
required collateralization between 80 and 115 percent of current market
value of the U.S. government or agency securities ASI holds. As a
result, ASI's borrowing capacity is essentially limited to the
securities it holds. ASI officials also explained that due to the high
cost of reinsurance, it has not purchased reinsurance on its primary
share insurance, although it has reinsurance for its excess share
insurance.
ASI has not had large losses since 1975. ASI has expended funds for 118
claims and its loss experience--from the credit unions that have made
claims--has averaged 3.95 percent of the total assets of these credit
unions. If ASI's historical loss average of 3.95 percent was tested and
proved true for a failure at the largest credit union ASI insured, as
of December 2002, the loss amount would be about $119 million.[Footnote
106] While this would be a major loss, ASI would most likely be able to
sustain this loss. ASI's historical loss rate is nearly 60 percent less
than the loss rate experienced by NCUSIF for the same period. However,
under more stressful conditions, ASI could have difficulty fulfilling
its obligations. For example, ASI's five largest credit unions
represent nearly 40 percent of insured shares, for which a collective
loss at 3.95 percent of the assets of these credit unions would exceed
ASI's equity by approximately $30 million. According to ASI, it could
raise additional funds to cover catastrophic loss by reassessing all
member credit unions up to 3 percent of their total assets, which
excluding the top five credit unions, would generate approximately $214
million of additional capital, while maintaining minimum capital levels
at 4 percent of total assets. Further, by Ohio statute, the
Superintendent of the Division of Financial Institutions can order ASI
to reassess its insured credit unions up to the full amount of their
capital, which, excluding the top five credit unions, would generate
approximately $794 million of funds for ASI with which to pay claims.
This recapitalization process is generally similar to that required of
NCUSIF before accessing its Treasury line of credit. However, if ASI
reassessed its member credit unions during a catastrophic failure, it
would further negatively affect these credit unions at a time that they
were already facing stressful economic conditions.
State Oversight of ASI and the Credit Unions It Insures Provides
Additional Assurance:
State regulation of ASI and the privately insured credit unions it
insures provides some additional assurance that ASI and privately
insured credit unions operate in a safe and sound manner. As a share
guaranty corporation, ASI is subject to state oversight and regulation
in those states where ASI insures credit unions. ASI was chartered in
Ohio statute, with the Ohio Division of Financial Institutions and the
Ohio Department of Insurance dually regulating it. ASI is licensed by
the Ohio Superintendent of Insurance and is subject to routine
oversight by that department and Ohio's Superintendent of Credit
Unions.[Footnote 107] The Ohio Division of Financial Institutions
conducts annual assessments of ASI, which evaluate ASI's underwriting
and monitoring procedures, financial soundness, and compliance with
Ohio laws. Under Ohio law, its Department of Insurance also is required
to examine ASI at least once every 5 years. The last Ohio Department of
Insurance exam of ASI was completed in March 1999, which covered
January 1995 through December 1997. When we met with Ohio officials in
June 2003, they told us that the Ohio Department of Insurance planned
to examine ASI in the third quarter of calendar year 2003. ASI is also
required to submit annual audited financial statements, including
management's attestation, and quarterly unaudited financial statements
to Ohio insurance and credit union regulators.[Footnote 108] Ohio law
also requires ASI to provide copies of written communication with
regulatory significance to Ohio regulators, obtain the opinion of an
actuary attesting to the adequacy of loss reserves established, and
apply annually for a license to do business in Ohio. In our discussions
with officials from the Ohio Division of Financial Institutions and the
Ohio Department of Insurance, we found that, to date, ASI has complied
with all requirements and regulations, and no regulators have taken
corrective actions against ASI or limited ASI's ability to do business
in Ohio.
Generally, state financial regulators have taken the primary lead for
monitoring ASI's actions, while state insurance regulators were not as
involved in overseeing ASI's operations. All states where ASI insures
credit unions have, at some point, formally certified ASI to conduct
business in that state.[Footnote 109] Ohio and Maryland have certified
ASI in the past year--as required by governing statutes in those
states. Regarding the other states in which ASI operates, while they
have not formally recertified ASI, Ohio's annual examination process of
ASI involves regulators from most states. State credit union regulators
from Idaho, Illinois, Indiana, and Nevada commonly participate in this
assessment; according to ASI officials, their acceptance of the final
examination report infers that they approve of ASI's continuing
operation in their respective states. State credit union regulators
from California and Alabama, however, have not participated in the
annual on-site assessment of ASI. Regarding monitoring efforts by state
insurance regulators, according to ASI, the Ohio Department of
Insurance is the only state insurance department that imposes
requirements and insurance regulators from Idaho, Illinois, and Nevada
only request information.
Most state credit union regulators with whom we met told us they had
regular communication with ASI about the credit unions ASI insured. ASI
officials reported that they commonly conducted joint, on-site exams of
credit unions with state regulators. State credit union regulators
imposed safety and soundness standards and carried out examinations of
state-chartered credit unions in a way similar to how the federal
government oversees federally insured credit unions. According to state
regulators, state regulations, standards, and examinations apply to all
state-chartered credit unions, regardless of their insurance status
(whether federal, private, or noninsured). State credit union
regulators reported that they had adopted NCUA's examination program,
and their examiners had received training from NCUA. However, as
previously discussed, some state officials with whom we met indicated
that they faced challenges related to oversight of their credit unions;
for example, some states lacked examiner resources and had high
examiner turnover.
Additionally, privately insured credit unions--as compared with
federally insured credit unions--are not subject to identical
requirements and regulations. For example, while federally insured,
state-chartered credit unions are subject to PCA--as discussed earlier,
privately insured, state-chartered credit unions are not subject to
these federally mandated supervisory actions. Although, as a matter of
practice, many state regulators reported that they have the authority
to impose capital requirements on privately insured credit unions and
could take action when a credit union's capital levels are not safe and
sound.However, state officials in California, Idaho, Illinois, Indiana,
Ohio, and Nevada said that their states required privately insured
credit unions to maintain specified reserve levels, which were codified
in statute or regulation. Additionally, Alabama requires credit unions
seeking private insurance to meet certain capital levels.
While some states had specific requirements for credit unions seeking
to purchase private share insurance, many states regulators reported
that they have the authority to "not approve" the conversion of credit
unions to private share insurance. Alabama, Illinois, and Ohio have
written guidelines for credit unions seeking to purchase private share
insurance and regulators reported that they have the authority to "not
approve" a credit union's purchase of private insurance. The other five
states that permitted private share insurance do not have written
guidelines for credit unions seeking to purchase private share
insurance, but Idaho, Indiana, and Nevada state regulators also noted
that they have the authority to "not approve" a credit union's purchase
of private share insurance.
Moreover, NCUA supervised the conversions of federally insured credit
unions to private share insurance. Specifically, NCUA has imposed
notification requirements on federally insured credit unions seeking to
convert to private share insurance and requires an affirmative vote of
a majority of the credit union members on the conversion from federal
to private share insurance. NCUA has required these credit unions to
notify their members, in a disclosure, that if the conversion were
approved, the federal government would not insure shares.[Footnote 110]
We reviewed six recent conversions to private share insurance, and
found that, prior to NCUA's termination of the credit union's federal
share insurance, these credit unions, including the large credit union
that recently converted to ASI, had generally complied with NCUA's
notification requirements for conversion.
Members of Many Privately Insured Credit Unions Are Not Receiving
Required Disclosures about the Lack of Federal Share Insurance:
Although actions taken by ASI and some state regulators provide some
assurances that ASI is operating in a safe and sound manner, ASI's
concentration risks and limited borrowing capacity raise concerns that
under stressful economic conditions it may not be able to fulfill its
responsibilities to its membership. Congress determined that it was
important for members of privately insured credit unions to be informed
that their deposits in such institutions were not federally insured.
Specifically, among other things, section 43 of the Federal Deposit
Insurance Act requires depository institutions lacking federal deposit
insurance, which includes privately insured credit unions, to
conspicuously disclose to their membership that deposits at these
institutions are (1) not federally insured and (2) if the institution
fails, the federal government does not guarantee that depositors will
get back their money.[Footnote 111] These institutions are required to
conspicuously disclose this information on periodic statements of
account, signature cards, and passbooks, and on certificates of
deposit, or instruments evidencing a deposit (deposit slips). These
institutions are also required to conspicuously disclose that the
institution is not federally insured at places where deposits are
normally received (lobbies) and in advertising (brochures and
newsletters).
The Federal Trade Commission (FTC) is responsible for enforcing
compliance with section 43.[Footnote 112] However, FTC has never taken
action to enforce these requirements, and has sought and obtained in
its appropriations authority a prohibition against spending
appropriated funds to carry out these provisions. We recently reported
that because of a lack of federal enforcement of this section, many
privately insured credit unions did not always make required
disclosures.[Footnote 113] We conducted unannounced site visits to 57
locations of privately insured credit unions (49 main and 8 branch
locations) in five states--Alabama, California, Illinois, Indiana, and
Ohio and found that 37 percent of the locations we visited did not
conspicuously post signage in the lobby of the credit union. During
these site visits, we also obtained other available credit union
materials (brochures, membership agreements, signature cards, deposit
slips, and newsletters) that did not include language to notify
consumers that the credit union was not federally insured--as required
by section 43. Overall, 134 of the 227 pieces of materials we obtained
from 57 credit union locations--or 59 percent--did not include
specified language. As part of our review, we also reviewed 78 Web
sites of privately insured credit unions and found that many Web sites
were not fully compliant with section 43 disclosure requirements. For
example, 39 of the 78 sites reviewed had not included language to
notify consumers that the credit union was not federally insured.
Our primary concern, resulting from the lack of enforcement of section
43 provisions, was the possibility that members of privately insured,
state-chartered credit unions might not be adequately informed that
their deposits are not federally insured and should their institution
fail, the federal government does not guarantee that they will get
their money back. The fact that many privately insured credit unions we
visited did not conspicuously disclose this information raised concerns
that the congressional interest in this regard was not being fully
satisfied. In our August 2003 report, we concluded that FTC was the
best among candidates to enforce and implement section 43 and provided
suggestions on how to provide additional flexibility to FTC to enforce
section 43 disclosure requirements. The House Committee on
Appropriations, Subcommittee on Commerce, Justice, State, the
Judiciary, and Related Agencies, is currently considering adding
language in FTC's 2004 appropriations bill that would require FTC to
enforce and implement section 43 disclosure provisions.
Conclusions:
The financial condition of the credit union industry has improved since
1991. Between 1992 and 2002, changes in the industry have resulted in
two distinct groups of credit unions--smaller credit unions providing
their members with basic banking services and larger credit unions that
seek to provide their members with a full range of financial services
similar to other depository institutions. These larger credit unions
control a larger percent of industry assets than they did in 1991. This
concentration of industry assets creates the need for greater risk
management on the part of credit union management and NCUA with respect
to monitoring and controlling risks to the federal share insurance
fund.
Among the more significant changes that have occurred in the credit
union industry over the past two decades have been the weakening or
blurring of the common bond that traditionally existed between credit
union members. The movement toward geographic-based fields of
membership, and other expansions of the common-bond restrictions in
conjunction with expanded lines of financial services, have made credit
unions more competitive with banks. These changes have raised questions
about the extent to which credit unions are fulfilling their perceived
historic mission of serving individuals of modest means. However, no
comprehensive data are available to determine the income
characteristics of those who receive credit unions services, especially
with respect to consumer loans and other financial services. Available
data, such as that provided by the SCF and HMDA, provide some
indication that credit unions serve low-and moderate-income households
but not to the same extent as banks. If credit unions, as indicated by
NCUA and the credit union industry, place a special emphasis on serving
low-and moderate-income households, more extensive data would be needed
to support this conclusion. These data would need to include
information on the distribution of consumer loans because smaller
credit unions are more likely to make consumer than mortgage loans.
Lack of data especially impairs NCUA's ability to determine if credit
unions that have adopted underserved areas are reaching the households
in the communities most in need of financial services.
As the industry has changed and larger credit unions have become more
like banks in the services they have provided, NCUA has adopted a
supervisory and examination approach that more closely parallels that
of the other depository institution regulators. While it is too soon to
determine whether the risk-focused approach being implemented by NCUA
will allow it to more effectively monitor and control the risks being
assumed by credit unions, our work suggests that further opportunities
exist for NCUA to further leverage off the approaches and experiences
of the other federal depository institution regulators. For example, as
NCUA is addressing challenges in implementation of its risk-focused
program, it has the opportunity to use forums such as the FFIEC to
learn how other depository institution regulators dealt with similar
challenges in implementing their risk-focused programs. Also, NCUA
might gain an evaluation of an institution's internal controls,
comparable to other depository institution regulators, if credit unions
were required, like banks and thrifts, to provide management
evaluations of internal controls and their auditor's assessments of
such evaluations. Finally, NCUA could gain better oversight of third-
party vendors if it had the same ability to examine the activities of
third-party vendors as do other depository institution regulators.
As of December 2002, NCUSIF's financial condition appeared satisfactory
based on its fund-equity ratio and positive net income. However, it is
not clear whether or to what extent NCUSIF's recent decline in net
income will continue. Improvements in NCUA's processes for determining
the overhead transfer rate, pricing, and estimated losses could help to
promote future financial stability by providing more accurate
information for financial management. As currently determined by NCUA,
the overhead transfer rate may not have accurately reflected the actual
time spent by NCUA staff on insurance-related activities. Recent
fluctuations are the result of adjustments being made because of
surveys that had not been conducted regularly or over sufficient
periods of time. In addition, NCUSIF's pricing for federal share
insurance coverage does not reflect the risk that an individual credit
union poses to the fund. Moreover, the process used by NCUA to
estimated losses to the insurance fund--the fund's most significant
liability and management estimate--has been based on overly broad
historical analysis. The risk-based pricing structure that is the norm
across the insurance industry and, for loss estimates, the more
detailed, risk-based historical analysis used by FDIC in insuring banks
and thrifts may provide useful lessons for NCUA in improving its
management of insurance for credit unions.
While systemic risks that might be created by private share insurance
appear to have decreased since 1990, the recent conversion of a large
credit union from federal to private share insurance has introduced new
concerns. Because the remaining private insurer's (ASI) insured shares
are overly concentrated in one large credit union and in certain
states, and because it does not have the backing of any governmental
entity and it has limited borrowing capacity, ASI may have a limited
ability to absorb catastrophic losses. This raises questions about the
ability of ASI, under severe economic conditions, to fulfill its
obligations if its largest credit unions were to fail. Given this risk,
we believe it is important that the members of privately insured credit
unions are made aware that their shares are not federally insured. As
we previously reported, since no federal entity currently enforces
compliance with federal disclosure requirements for privately insured
credit unions, and with the high level of noncompliance that we found
in on-site visits to privately insured credit unions, we believe that
members of privately insured credit unions might not be adequately
informed that their shares are not federally insured. As a result, we
have previously recommended that Congress consider providing additional
flexibility to FTC to ensure compliance with the federal disclosure
requirements.[Footnote 114]
Recommendations for Executive Action:
To promote NCUA's ability to meet its goal of assisting credit unions
in safely providing financial services to all segments of society, to
enable more consistent federal oversight of financial institutions, and
to enhance share insurance management (for example, improving
allocation costs, providing insurance according to risk, and improving
the loss estimation process), we recommend that the Chairman of the
National Credit Union Administration:
* use tangible indicators, other than "potential membership," to
determine whether credit unions have provided greater access to credit
union services in underserved areas;
* consult with other regulators through FFIEC more consistently about
risk-focused programs to learn how these regulators have dealt with
past challenges (for example, training of information technology
specialists);
* continuously improve the process for and documentation of the
overhead transfer rate by consistently calculating and applying those
rates, updating the rates annually, and completing the survey with full
representation;
* evaluate options for implementing risk-based insurance pricing. In
its evaluation, the NCUA Chairman should consider the potential impact
of risk-based insurance pricing to the ability of credit unions to
provide services to various constituencies; and:
* evaluate options for stratifying the industry by risk profile and
applying probable failure rates and loss rates, based in part on
historical data, for each risk profile category when estimating future
losses from institutions.
Matters for Congressional Consideration:
Should Congress be concerned that federally insured credit unions,
especially those serving geographical areas, are not adequately serving
low-and moderate-income households, Congress may wish to consider
requiring NCUA to obtain data on the proportion of mortgage and
consumer loans provided to low-and moderate-income households within
each federally insured credit union's field of membership and obtain
descriptions of services specifically targeted to low-and moderate-
income households.
To ensure the safety and soundness of the credit union industry,
Congress may wish to consider making credit unions with assets of $500
million or more subject to the FDICIA requirement that management and
external auditors report on the internal control structure and
procedures for financial reporting, as well as compliance with
designated safety and soundness laws.
To improve oversight of third-party vendors, Congress may wish to
consider granting NCUA legislative authority to examine third-party
vendors that provide services to credit unions and are not examined
through FFIEC.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Chairman of
the National Credit Union Administration and the President and Chief
Executive Officer of American Share Insurance. We received written
comments from NCUA and ASI that are summarized below and reprinted in
appendixes XI and XII respectively. In addition, we received technical
comments from NCUA and ASI that we incorporated into the report as
appropriate.
NCUA concurred with most of the report's assessment regarding the
challenges facing NCUA and credit unions since 1991. For example, NCUA
concurred with the report's assessment that overall the financial
health and stability of the credit union industry has improved since
1991. NCUA also agreed with our recommendation to consult with other
regulators through FFIEC more consistently to leverage the knowledge
and experience the other regulators have gained in administering risk-
focused programs. NCUA stated that it plans to continue its
coordination with its FFIEC counterparts as it makes ongoing
improvements to its approach to supervising federally insured credit
unions.
NCUA also concurred with our matter for congressional consideration
that credit unions with assets of $500 million or more should provide
annual management reports assessing the effectiveness of their internal
controls over financial reporting and their external auditor's
attestation to management's assertions. NCUA stated that it is
providing guidance for credit unions on the principles of the Sarbanes-
Oxley Act that will, among other things, strongly encourage large
credit unions to voluntarily provide this reporting on internal
controls. However, NCUA believed that legislation was not necessary
because NCUA has the authority to implement regulations requiring
credit unions to provide these reports should it become necessary.
While we acknowledge NCUA's authority to issue regulations on this
issue, we note that regulations can be changed unilaterally by the
agency, whereas legislation is binding unless changed by Congress. Our
intent in developing this matter for congressional consideration was to
ensure parity between credit unions, banks, and thrifts with regard to
internal control reporting requirements; therefore, we have left this
as a matter for congressional consideration in our report.
NCUA also indicated that it did not oppose our recommendation that it
be given statutory authority to examine third-party vendors that
provide services to credit unions and are not examined through FFIEC,
provided that appropriate discretion was extended to the agency in the
allocation of agency resources and evaluation of risk parameters in
using this authority. NCUA stated that given that many of these third-
party vendors service numerous credit unions, a failure of a vendor
poses systemic risk issues. However, NCUA suggested that it be changed
to a matter for congressional consideration because it was a statutory
issue rather than one involving the use of existing NCUA regulatory
authority. We agreed with NCUA's assessment and have modified the
report accordingly.
NCUA concurred with the report's recommendation to make improvements to
the process for determining the overhead transfer rate and indicated
that management is in the process of improving the methodology for
calculating this rate. NCUA also concurred in part with our report's
conclusion that the NCUSIF loss reserve methodology warrants study, in
order to further refine NCUSIF's estimates. Regarding our
recommendation that NCUA study options for improving its estimates of
future insurance losses, NCUA stated that it is awaiting the receipt of
recommendations that FDIC received on revising its insurance process,
and NCUA will review the details of the revised FDIC process and how to
integrate those practices within NCUA's system.
In its response, NCUA proposed an alternative to risk-based insurance
pricing by using the adoption of a PCA approach where required net
worth levels would be tied to an institution's risk profile. While
NCUA's proposal may be one option to consider, we continue to recommend
that NCUA evaluate and study various options for achieving a risk-based
pricing of insurance to fairly distribute risk, provide incentives for
member credit unions to control their risk, and focus regulators on
higher-risk credit unions. While it is possible that the option
suggested by NCUA would achieve the objectives, we believe that NCUA
should study the costs, benefits, and risks associated with various
options in order to determine the most effective and cost-beneficial
means of achieving a risk-based system of insurance.
NCUA disagreed with our recommendation that it should use indicators,
other than "potential membership," to determine whether credit unions
have provided greater access to credit union services in underserved
areas. NCUA officials stated that they believe that their data
indicated that credit unions have reached out to underserved
communities; implementation of this recommendation could result in
significant and unnecessary data collection; and Congress has not
imposed CRA-like requirements on credit unions in the past. We agree
that federally chartered credit unions have added underserved areas in
record numbers, increasing the numbers of potential members in these
areas, and that membership growth in credit unions with underserved
areas has been greater than for credit unions overall. However, this
information does not indicate whether underserved individuals or
households have received greater access to services (for example, by
using check-cashing services, opening no-fee checking accounts, or
receiving loans) as a result of these field of membership expansions.
Further, while we agree that documenting service to the underserved
would result in additional administrative requirements, the magnitude
and scale of this effort does not necessarily require imposition of CRA
as implemented for banks and thrifts, and could result in information
benefitting future credit union expansion efforts. At a minimum, it
would be useful to know whether membership growth in credit unions that
have added underserved areas has come from the underserved areas
themselves and the extent to which those census tracts within these
areas have been identified as low-or moderate-income. This type of
information, collected uniformly by a federal agency like NCUA, could
serve as first step towards documenting the extent to which credit
unions have reached for members outside of their traditional membership
base. Finally, without this information, it will be difficult for NCUA
or others that are interested to determine whether credit unions have
extended services of any kind to underserved individuals as authorized
in CUMAA.
Finally, NCUA also concurred with the report's identification of
possible systemic risk that could be associated with private share
insurance that lacks the full faith and credit backing of a state or
the federal government. NCUA believed that the asset concentration,
limited borrowing capacity, and the lack of any reinsurance of the
private insurer present unique challenges for the eight state
supervisory authorities where private insurance exists today.
In commenting on the private share insurance section of a draft of this
report, ASI stated that we failed to adequately assess the private
share insurance industry. In summary, as discussed below, ASI raised
objections to the report statements that ASI's risks are concentrated
in a few large credit unions and a few states; ASI has limited ability
to absorb large losses because it does not have the backing of any
governmental agency; and ASI's lines of credit are limited in the
aggregate as to amount and available collateral. In response, we
considered ASI's positions and materials provided, including ASI's
actuarial assumptions and ASI's past performance, and believe our
report addresses these issues correctly as originally presented.
First, in regard to ASI's concentration risks, ASI stated that the
inclusion of a single large, high-quality credit union provided
financial resources that improved, not diminished, the financial
integrity of ASI. Our report acknowledges this fact. However, our
report also notes that this credit union made up about 25 percent of
ASI's total insured shares, and that ASI's five largest credit unions
represent nearly 40 percent of ASI's insured shares, as of December
2002. While not disputing that the large credit union would improve
ASI's current financial position, we continue to believe that this
level of concentration in a few credit unions, under adverse economic
conditions, could expose ASI to a potentially high level of losses. ASI
also stated that ASI's coverage and the geographic distribution of
ASI's insured credit unions is a matter of state law. The report points
out this fact, and we acknowledge that it limits ASI's ability to
diversify its risks. However, the fact remains that ASI's risks are
currently concentrated in eight states.
Second, in response to our report's assessment of ASI's limited ability
to absorb catastrophic losses, ASI noted "its sound private deposit
insurance program builds on a solid foundation of careful underwriting,
continuous risk management and the financial backing of its mutual
member credit unions, capable of absorbing large (catastrophic)
losses." In addition, ASI noted that over its 29-year history, it has
paid over 110 claims on failed credit unions, and that no member of an
ASI-insured credit union has ever lost money. ASI also noted that it
could assess its member credit unions up to 3 percent of their total
assets in order to obtain more capital. We acknowledge these facts in
this report; however, our point remains that ASI has limited borrowing
capacity and, under stressful economic conditions, may have difficulty
securing funds from others to meet its obligations. ASI also objected
to the report's comparison of private share insurance to the federal
insurance program. As the last remaining private share insurer, ASI has
no peer on which to base a comparison and the only alternative to
private share insurance for credit unions is NCUSIF.
Third, ASI commented that the draft report incorrectly views the
company's lines of credit as a source of capital. ASI noted that their
lines of credit are solely in place to provide emergency liquidity. We
do not disagree with ASI's statement. When incorporating ASI's
previously received technical comments, we clarified in the report that
losses on member deposits, in excess of available cash, investments,
and other assets of ASI-insured institutions, would only be covered up
to ASI's available resources and its secured lines of credit, which
serve as a back-up source of funds. Further, the report notes that
ASI's lines of credit required collaterization between 80 and 115
percent of current market value of the U.S. government or agency
securities ASI holds. As a result, ASI's borrowing capacity is
essentially limited to the securities it holds and therefore, in a time
of stressful economic conditions, ASI may have difficulty maintaining
its own liquidity if its insured credit unions were failing and unable
to meet the withdrawal requests of depositors.
Lastly, ASI supported our previous conclusion that FTC is the
appropriate agency for monitoring and defining private share insurance
consumer disclosure requirements and believed that privately insured
credit unions would benefit from FTC's enforcement of such provisions.
In our concluding discussions with ASI officials, they emphasized that
they were undertaking efforts to educate their member credit unions on
the required consumer disclosures and taking steps, in conjunction with
state credit union leagues, to ensure compliance.
:
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Chairman of the Senate Committee on Banking, Housing, and Urban
Affairs, the Chairman and Ranking Minority Member of the House
Committee on Financial Services, and other congressional committees. We
also will send copies to the National Credit Union Administration and
American Share Insurance and make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov.] http://www.gao.gov.
This report was prepared under the direction of Debra R. Johnson and
Harry Medina, Assistant Directors. If you or your staff have any
questions regarding this report, please contact the Assistant Directors
or me at (202) 512-8678. Key contributors are acknowledged in appendix
XIII.
Sincerely yours,
Richard J. Hillman:
Director, Financial Markets and Community Investment:
Signed by Richard J. Hillman:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our report objectives were evaluate (1) the financial condition of the
credit union industry; (2) the extent to which credit unions "make more
available to people of small means credit for provident
purposes;"[Footnote 115] (3) the impact, if any, of the Credit Union
Membership Access Act of 1998 (CUMAA) on the credit union industry with
respect to membership provisions; (4) how the National Credit Union
Administration's (NCUA) examination and supervision processes have
changed in response to changes in the industry; (5) the financial
condition of the National Credit Union Share Insurance Fund (NCUSIF);
and (6) issues concerning the use of private share (deposit) insurance.
Financial Condition of Industry:
To assess the financial condition of the credit union industry, we
obtained and analyzed annual call report financial data (Form 5300) and
regulatory ratings (CAMEL scores) for all federally insured credit
unions from 1992 to 2002.[Footnote 116] NCUA requires federally insured
credit unions to submit a quarterly call report, which contains
information on the financial condition and operations of the
institution. Using the call reports, we calculated descriptive
statistics and key financial ratios and determined trends in financial
performance. NCUA provided us with a copy of the electronic Form 5300
database for our analysis. The database contained year-end information
for December 1992-December 2002. We reviewed NCUA established
procedures for verifying the accuracy of the Form 5300 database and
found that the data that forms this database are verified on an annual
basis, either during each credit union's examination, or through off-
site supervision. We determined that the data were sufficiently
reliable for the purposes of this report. In addition we received a
database of regulatory ratings (CAMEL) from NCUA for 1992-2002, on
which we (1) reviewed the data by performing electronic testing of
required data elements, (2) reviewed existing information about the
data and the system that produced them, and (3) interviewed agency
officials knowledgeable about the data. We determined that the data
were sufficiently reliable for the purposes of this report.
In addition to using call report data for credit unions, we also used
data collected by the Federal Financial Institutions Examination
Council (FFIEC) and Office of Thrift Supervision (OTS) to compare the
financial condition of and services offered by credit unions with those
of other depository institutions insured by the Federal Deposit
Insurance Corporation (FDIC).[Footnote 117] We used call report
(reporting forms FFIEC 031 and FFIEC 041 for banks and OTS Form 1313
for thrifts) data obtained from FDIC's Statistics on Depository
Institutions Web site, which contains consolidated bank and thrift data
stored on FDIC's Research Information System database.[Footnote 118] To
assess the reliability of these data, we randomly cross-checked
selected data obtained from this Web site with selected individual call
reports and compared our calculations with aggregate figures provided
by FDIC. Given the context of the analyses, we determined that these
data were sufficiently reliable for the purposes of our report. For
broad, industrywide comparisons with banks involving industry
concentration and capital ratios, we used total assets and equity
capital data for all FDIC-insured institutions, excluding insured
branches of foreign-chartered banks. In order to determine bank and
thrift institutions for our more detailed review, we constructed five
peer groups in terms of institution size as measured by total assets,
reported as of December 31, 2002. See table 3 for the definitions we
used to create peer groups.
Table 3: Peer Group Definitions:
Group: I; Asset size of institution: Total assets of $100 million or
less.
Group: II; Asset size of institution: Total assets greater than $100
million, but less than or equal to $250 million.
Group: III; Asset size of institution: Total assets greater than $250
million, but less than or equal to $500 million.
Group: IV; Asset size of institution: Total assets greater than $500
million, but less than or equal to $1 billion.
Group: V; Asset size of institution: Total assets greater than $1
billion, but less than or equal to the asset size, rounded up to the
nearest billion dollars, of the largest credit union (for example, $16
billion for 2001 and $18 billion for 2002).
Source: GAO.
[End of table]
We specified the maximum total assets of $18 billion by rounding up the
total assets of the largest credit union in our database as of December
31, 2002, to the nearest billion dollars. We also classified bank and
thrift institutions as to whether they emphasized credit card or
mortgage loans; this was done by determining if a given bank had (1) a
total loans to total assets ratio of at least 0.5 and (2) either a
credit card loans to total loans ratio of at least 0.5 or a mortgage
loans to total loans ratio of at least 0.5. The call report data that
we used for our financial condition and services analyses consisted of
information on total assets and total loans, as well as more specific
loan holdings data (for example, consumer loans and real estate loans).
We also obtained additional data to calculate bank capital ratios and
return on average assets, including equity capital, net income, and
average assets.
Service to People with Low and Moderate Incomes:
To evaluate the extent to which credit unions serve people with low and
moderate incomes, we analyzed existing data on the income levels of
credit union members, reviewed available literature, and interviewed
regulatory and industry officials. We analyzed 2001 Home Mortgage
Disclosure Act (HMDA) data, the Federal Reserve's 2001 Survey of
Consumer Finances (SCF), NCUA program literature, and statistical
reports of industry trade and consumer groups. To present our findings,
we relied on the combined message of all these studies and data sources
because we found no single source that contained data on the incomes of
credit union and other depository institution consumers. To compare the
income characteristics of households and neighborhoods that obtain
mortgages from credit unions and banks, we used four income categories-
--low, moderate, middle, and upper--used by financial regulators as
part of the Community Reinvestment Act (CRA) exams.[Footnote 119] See
table 4 for definitions.
Table 4: Definition of Income Categories:
Categories: Low income; Definitions: For an individual income, when
income is less than 50 percent of the metropolitan statistical area's
(MSA) median family income, and for a geographic area, when the median
family income is less than 50 percent.
Categories: Moderate income; Definitions: For an individual income,
when income is at least 50 percent and less than 80 percent of the
MSA's median family income, and for a geographic area, when the median
family income is at least 50 percent and less than 80 percent.
Categories: Middle income; Definitions: For an individual income, when
income is at least 80 percent and less than 120 percent of the MSA's
median family income, and for a geographic area, when the median family
income is at least 80 percent and less than 120 percent.
Categories: Upper income; Definitions: For an individual income, when
income is at least 120 percent or more of the MSA's median family
income, and for a geographic area, when the median family income is 120
percent or more.
Source: 12 C.F.R. 228.12 (n).
[End of table]
We analyzed loan application records (LAR) from the HMDA database to
compare the proportion of mortgage loans made by credit unions and peer
group banks with households and communities with various income levels.
We used 2001 HMDA data, the most recent data set available from the
Federal Reserve Bank at the time of our review. For the purposes of
comparing credit union lending with that of banks, we included only
those banks with assets of $16 billion or less on December 31, 2001,
which was the size of the largest credit union in 2001, rounded up to
the nearest billion. In addition, we excluded lending institutions that
only made mortgages. Our HMDA analysis included records from 4,195 peer
group banks. We obtained the asset size and total membership for credit
unions reporting to HMDA from NCUA's 2001 call report database and
obtained the asset size of other lenders (to identify the peer group
banks) from the HMDA Lender File, which contains data on the
characteristics of institutions reporting to HMDA, supplied to us by
the Federal Reserve.
Our HMDA analysis did not include all credit unions and banks because
only institutions that meet HMDA's reporting criteria, such as having a
certain amount of assets, must report their mortgage loans to HMDA. For
example, in 2001, depository institutions with more than $31 million in
assets as of December 31, 2000, were required to report loans to HMDA.
Largely because of this criterion, most credit unions--86 percent--were
not required to report mortgage loans to HMDA and, thus, were excluded
from our analysis. However, we believe our analysis is still of value
because, in 2001, reporting credit unions held about 70 percent of
credit union assets and included 62 percent of credit unions' members.
For our analysis, we only analyzed LARs for originated loans for the
purchase of one-to-four family homes that served as the purchaser's
primary dwelling. Our analysis included about 71,000 loans reported by
credit unions and about 807,000 loans reported by peer group banks. We
determined that the data were sufficiently reliable for the purposes of
this report by performing electronic testing of the required data
elements, reviewing existing information about the data and the system
that produced them, and interviewing agency officials knowledgeable
about the data. We did not independently verify the accuracy of the
contents of the LARs reported to the HMDA database or the accompanying
lender file.
After selecting the records, we determined what proportion of credit
union and bank loans were made to purchasers with low, moderate,
middle, and upper incomes. To do so, we categorized the purchaser's
gross annual income, as identified on the LAR, into one of four income
categories based on the median family income of the MSA in which the
purchased home was located. We did this by matching the Metropolitan
Statistical Area (MSA) on the HMDA LAR with the appropriate Department
of Housing and Urban Development (HUD)-estimated 2001 median family
income. We used SAS version 8.02 version, which is a computer-based
data analysis and reporting software application, to perform all of
these analyses. We did not analyze about 16 percent of the credit union
and bank LARs because they did not contain a MSA. While it is possible
that this information was simply not recorded, lenders must only report
MSAs for properties located in MSAs where their institution has a home
or branch office.
In addition, we determined what proportion of credit union and bank
loans were made for the purchase of properties in census tracts by the
median family income of the census tract. The Federal Reserve Board, in
categorizing each census tract level, used the four income categories
used by the financial regulators (low, moderate, middle, and upper) and
used definitions corresponding to the ones identified in table 4.
Because the median income of each census tract is labeled within HMDA,
we did not have to determine the income category ourselves. We did not
analyze about 16 percent of the credit union and bank LARs because they
did not contain a census tract. While it is possible that this
information was simply not recorded, lenders are not responsible for
identifying census tract information if the property is located in a
county with less than 30,000 people or if the property was located in
an area that did not have census tracts for the 1990 census.
Finally, we analyzed the race and ethnicity data in HMDA to compare the
lending records of credit unions and banks whose loans met our
criteria. As noted in appendix VI, about 15 percent of records for
credit unions lacked race and ethnicity data and 6 percent of records
for banks. While it is possible that this information was simply not
recorded, applicants filing loan applications by mail or by telephone
are not obligated to provide this information.
We also analyzed the Federal Reserve's 2001 SCF, a triennial survey of
U.S. households sponsored by the Board of Governors of the Federal
Reserve System with the cooperation of Treasury, and reviewed secondary
sources to identify the characteristics of credit union members. We
analyzed the SCF because it is a respected source of publicly available
data on financial institution and consumer demographics that is
nationally representative and because it was the only comprehensive
source of publicly available data with information on financial
institutions and consumer demographics that we could identify. We
analyzed the SCF to develop statistics on the income, race, age, and
education of credit union members and bank customers. Because some
customers use both credit unions and banks, we performed our income
analysis based on the assumption that households can be divided into
four user categories--those who use credit unions only, those who
primarily use credit unions, those who use banks only, and those who
primarily use banks. Dr. Jinkook Lee of Ohio State University developed
these categories. In addition, to identify existing research on credit
union research, we asked officials at NCUA and industry groups (for
example, the Credit Union National Association (CUNA) to identify
relevant studies and performed a literature search.
Impact of CUMAA:
To study the impact of CUMAA on credit union field of membership
regulations, we reviewed and analyzed CUMAA and compared its provisions
with NCUA interpretive rulings and policy statements (IRPS) in effect
before and after CUMAA. In addition, we interviewed NCUA officials and
industry representatives to obtain their viewpoints on how NCUA
interpreted CUMAA's membership provisions. To obtain information about
state field of membership regulations in general and how many state-
chartered credit unions serve geographical areas, we surveyed
regulators in the 50 states and received responses from the 46 that
actively charter credit unions. This allowed us to compare the number
of federally chartered and state-chartered credit unions serving
geographical areas. Finally, we obtained historical trend data from
NCUA on the charter types of federally chartered credit unions,
"potential" (that is, people within a credit union's field of
membership but not members of the credit union) and actual membership,
and service to underserved areas.
Regulatory Oversight:
To evaluate how NCUA's supervision and examination of credit unions has
evolved in response to changes in the industry since 1991, we
identified changes in the types of products, services, and activities
in which credit unions engage as well as key changes to NCUA
regulations. We also identified changes to NCUA's examination and
supervision approach, and evaluated oversight procedures of federally
insured, state-chartered credit unions. Finally, we studied NCUA's
implementation of prompt corrective action (PCA).
To identify changes in the types of products, services, and activities
in which credit unions engage, we analyzed 1992-2002 Form 5300 call
report data and conducted structured interviews with NCUA examiners,
state supervisory officials, and officials from seven large credit
unions. To identify key regulatory changes, we (1) reviewed the Federal
Credit Union Act and amendments made by Congress since 1991; (2)
interviewed NCUA officials, including NCUA's General Counsel and
officials from NCUA's Division of Examination and Insurance, NCUA and
state examiners, and officials from seven large credit unions; (3)
reviewed NCUA legal opinions and letters to credit unions; and (4)
reviewed final rules published in the Federal Register.
To identify changes to NCUA's examination and supervision approach, we
reviewed NCUA's examiner guide for key elements of the risk-focused
examination approach and compared current exam documentation
requirements with previous requirements. We conducted structured
interviews with six of NCUA's regional directors, 23 NCUA examiners
covering all NCUA regions, and 13 state supervisory officials from
Alabama, California, Idaho, Illinois, Indiana, Maryland,
Massachusetts, Michigan, Nevada, Ohio, Texas, Washington, and
Wisconsin. These states contained 51 percent of the total number of
federally insured, state-chartered credit unions and 58 percent of the
total assets of federally insured, state-chartered credit unions as of
December 31, 2002. In addition, we interviewed officials from seven
large credit unions; selecting at least one credit union from NCUA's
six regions. To obtain information on the experiences of other
depository institution regulators with the risk-focused examination and
supervision approach, we interviewed officials from the FDIC, OTS,
Office of the Comptroller of the Currency, and the Federal Reserve
Bank. Finally, to obtain information on other NCUA initiatives intended
to compliment the risk-focused program, we reviewed NCUA documents on
the large credit union pilot program, and the subject matter examiner
program.
To evaluate oversight procedures of federally insured, state-chartered
credit unions, we obtained information about the oversight procedures
during our structured interviews with the 13 states supervisory
officials and NCUA examiners. We also reviewed NCUA's examiner guide
and memorandum of understanding between NCUA and states describing
NCUA's procedures for conducting joint examinations of federally
insured, state-chartered credit unions with state regulators.
Finally, to study NCUA's implementation of PCA, we reviewed CUMAA, NCUA
rules and regulations pertaining to PCA, and NCUA's examiner guide. We
also analyzed data from NCUA on the number of credit unions subject to
PCA as of December 31, 2002. We interviewed agency officials
knowledgeable about this data and found that NCUA headquarters, as well
as the region, conducted reasonableness checks against the Form 5300
database, which contains the net-worth ratio used for PCA. When data
outliers were found, examiners were required to review the data for
accuracy and make any necessary corrections. We determined that the
data were sufficiently reliable for the purposes of this report. In
addition, we interviewed NCUA officials and examiners, state
supervisory officials, credit union officials, and officials of other
federal financial regulatory agencies to obtain their perspectives on
PCA.
Status of NCUSIF:
To evaluate the financial condition of NCUSIF, we obtained key
financial data about the fund from NCUA's annual audited financial
statements for 1991-2002. For 2002, we compared NCUSIF's key
performance measure, which is the ratio of fund equity to insured
shares (deposits), to key performance measures of the Bank Insurance
Fund, Savings Association Insurance Fund, and American Share Insurance,
the remaining private insurer. We also reviewed NCUSIF's estimated loss
and overhead administrative expenses transfer process and applicable
internal controls. We reviewed other relevant industry studies on
deposit-insurance pricing and loan-loss allowance. In addition, we
interviewed NCUA officials, industry trade groups, and officials of
other federal financial regulatory agencies to obtain their
perspectives on the funding of NCUSIF, the overhead transfer rate, and
the loan-loss allowance.
Private Share Insurance:
To better understand the issues around share (deposit) insurance, we
reviewed and analyzed relevant studies on federal and private insurers
for both credit unions and other depository institutions.[Footnote 120]
In addition, we interviewed officials at NCUA, the Department of the
Treasury, and FDIC to obtain perspectives specific to private share
insurance. We also obtained views from credit union industry groups
including the National Association of Federal Credit Unions, National
Association of State Credit Union Supervisors, and CUNA.
To determine the extent to which private share insurance is permitted
and utilized by state-chartered credit unions, we conducted a survey of
state credit union regulators in all 50 states. Our survey had a 100-
percent response rate. In addition to the survey, we obtained and
analyzed financial and membership data of privately insured credit
unions from a variety of sources (NCUA, Credit Union Insurance
Corporation, CUNA, and ASI--the only remaining provider of primary
share insurance). We found this universe difficult to confirm because
in our discussions with state regulators, NCUA and ASI officials, and
our review of state laws, we identified other states that could permit
credit unions to purchase private share insurance.
To determine the regulatory differences between privately insured
credit unions and federally insured, state-chartered credit unions, we
identified and analyzed statutes and regulations related to share
insurance at the state and federal levels.[Footnote 121] In addition,
we interviewed officials at NCUA and conducted interviews with
officials at the state credit union regulatory agencies from Alabama,
California, Idaho, Indiana, Illinois, Maryland, Nevada, New Hampshire,
and Ohio. Finally, we analyzed NCUA's application of its conversion
policies and looked at the cases of six credit unions that terminated
their federal share insurance and converted to private share insurance
in 2002 and 2003.
To identify factors influencing a credit union's decision to obtain
private or federal share insurance, we conducted structured interviews
with officials of both federally insured and privately insured credit
unions. Specifically, we interviewed management at 29 credit unions
that, since 1990, had converted from federal to private share insurance
and management at 26 credit unions that had converted from private to
federal share insurance. We did not interview credit union management
in states that did not permit private insurance.
To determine the extent to which privately insured credit unions met
federal disclosure requirements, we identified and analyzed federal
consumer disclosure provisions in section 43 of the Federal Deposit
Insurance Act, as amended, and conducted unannounced site visits to 57
privately insured credit unions (49 main and 8 branch locations) in
Alabama, California, Illinois, Indiana, and Ohio.[Footnote 122] The
credit union locations were selected based on a convenience sample
using state and city location coupled with random selection of main or
branch locations within each city. About 90 percent of the locations we
visited were the main institution rather than a branch institution.
This decision was based on the assumption that if the main locations
were not in compliance, then the branch locations would probably not be
in compliance either. Although neither these site visits, nor the
findings they produced, render a statistically valid sample of all
possible main and branch locations of privately insured credit unions
necessary in order to determine the "extent" of compliance, we believe
that what we found is robust enough, both in the aggregate and within
each state, to raise concern about lack of disclosure in privately
insured credit unions. During each site visit, using a systematic check
sheet, we noted whether or not the credit union had conspicuously
displayed the fact that the institution was not federally insured (on
signs or stickers, for example).
In addition, from these same 57 sites visited, we collected a total of
227 credit union documents that we analyzed for disclosure compliance.
While section 43 requires depository institutions lacking federal
deposit insurance to disclose they are not federally insured in
personal documents, such as periodic statements, we did not collect
them. We also conducted an analysis of the Web sites of 78 privately
insured credit unions, in all eight states where credit unions are
privately insured, to determine whether disclosures required by section
43 were included. To identify these Web sites, we conducted a Web
search. We attempted to locate Web sites for all 212 privately insured
credit unions; however, we were able to identify only 78 Web sites. We
analyzed all Web sites identified. Finally, we interviewed FTC staff to
understand their role in enforcement of requirements of section 43 for
depository institutions lacking federal deposit insurance.
To understand how private share insurers operate, we conducted
interviews with officials at three private share insurers for credit
unions--ASI (Ohio), Credit Union Insurance Corporation (Maryland), and
Massachusetts Credit Union Share Insurance Corporation
(Massachusetts). Because ASI was the only fully operating provider of
private primary share insurance, ASI was the focus of our
review.[Footnote 123] We obtained documents related to ASI operations
such as financial statements and annual audits and analyzed them for
the auditor's opinion noting adherence with accounting principles
generally accepted in the United States. Additionally, to understand
the state regulatory framework for this remaining private share
insurer, we interviewed officials at the Ohio Department of Insurance.
[End of section]
Appendix II: Status of Recommendations from GAO's 1991 Report:
We made 52 recommendations to Congress and the National Credit Union
Administration (NCUA) in our 1991 report on the credit union industry
and NCUA[Footnote 124] Of these, 28 were made to Congress, of which 8
were implemented or partially implemented as of September 2003. We made
24 recommendations to NCUA, and 19 were implemented as of September
2003. In addition, we issued one matter for congressional
consideration. Congress partially addressed this matter.
Our recommendations spanned the range of issues addressed in our 1991
report, including:
* the condition of the credit union industry and the National Credit
Union Share Insurance Fund (NCUSIF),
* credit union law and regulation,
* supervision of credit unions,
* NCUA's management of failed credit unions,
* corporate credit unions,
* share insurance issues,
* structural changes in NCUA, and:
* the evolution of credit unions' role in the financial marketplace.
NCUA implemented most of our recommendations to the agency. The key
changes implemented by NCUA affected (1) corporate credit unions, (2)
reporting requirements for credit unions, and (3) supervision of state-
chartered credit unions. With respect to corporate credit unions, NCUA
implemented various recommendations that established minimum capital
requirements, limited investment powers of state-chartered corporate
credit unions, increased detail and frequency of reporting
requirements, and established a new unit in NCUA that is responsible
for oversight, examination, and enforcement of corporate credit unions.
We expect to review corporate credit unions following this study and to
report in greater depth on issues affecting corporate credit unions. In
the area of reporting requirements, NCUA implemented a requirement in
1993 that all federally insured credit unions with assets greater than
$50 million file financial and statistical reports (call reports) on a
quarterly basis and as of July 1, 2002, required all federally insured
credit unions to file quarterly call reports. Finally, NCUA affirmed
its supervision of state-chartered and federally insured credit unions
by establishing examination goals, as well as conducting examinations,
at almost 16 percent of all state-chartered and federally insured
credit unions in 2002.
NCUA told us that it chose not to implement five of our recommendations
because it either disagreed with the recommendations (see
recommendation 24 in table 5), or believed it had already addressed the
recommendations (see recommendations 9, 11, 16, 17 in table 5). For
example, NCUA disagreed with our recommendation to separate its
supervision and insurance functions (see recommendation 24) and
believed it was unnecessary for credit unions to submit copies of their
supervisory committee audit reports to NCUA, as NCUA examiners
routinely review the reports as part of the examination process (see
recommendation 9).
Congress implemented or partially implemented 8 of the 28
recommendations we made, which (1) established minimum capital levels
for credit unions, (2) tightened commercial lending, and (3)
established annual audit requirements for credit unions with assets
greater than $500 million. As discussed in table 5, among those not
implemented are recommendations dealing with NCUA's Central Liquidity
Facility (CLF) (see recommendations 49-52) and the structure of NCUA
(see recommendations 43-48).[Footnote 125]
See table 5 for our recommendations to NCUA and Congress and their
status as of August 31, 2003.
Table 5: Status of GAO Recommendations to NCUA and Congress, as of
August 31, 2003:
Issue: 1; Condition of credit unions and NCUSIF; GAO Recommendation to
NCUA: Require credit unions with
assets greater than $50 million to file financial and statistical
reports quarterly; Status: Implemented; Comments: Implemented in the
March 31, 1993, quarterly call reports for federally insured credit
unions with assets greater than $50 million. Effective July 1, 2002,
NCUA expanded rule to cover all federally insured credit unions.
Issue: 2; GAO Recommendation to NCUA: Expand the information required
from credit unions with
assets greater than $50 million on the financial and statistical
reports in the areas of asset quality, interest rate sensitivity,
management, and common bond; Status: Implemented; Comments: According
to NCUA, it established a reporting system for common bond data in
January 2002. The system monitors the approvals of field of membership
and is called Generated Efficient National Information System for
Insurances Services. Also, NCUA investment rules require credit unions
that make certain investments to perform shock tests on interest rate
sensitivity. According to NCUA, it performs shock tests of credit
unions using call report data and expects examiners to make contact
with credit unions if potential problems are identified.
Issue: 3; Law and regulation; GAO Recommendation to NCUA: 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; Status: Implemented; Comments: In
June 1991, NCUA issued comprehensive guidelines and since then issued a
series of letters to credit unions to address this issue.
Issue: 4; GAO Recommendation to NCUA: Restrict the exclusions from its
commercial lending limit
established in 1987 to help ensure that credit unions are not used as
vehicles underwriting large commercial ventures; Status: Implemented;
Comments: A final rule addressing all of our concerns and
recommendations went into effect in January 1992. The rule established
a limit on the amount of loans that may be made to one borrower to the
greater of 15 percent of reserves or $75,000.
Issue: 5; Supervision; GAO Recommendation to NCUA: Clarify the
purposes, unique values, and requirements
for use of each of its off-site monitoring tools. Determine the
appropriate recipients of the tools and distribute them accordingly,
within each region; Status: Implemented; Comments: According to NCUA,
the Office of Examination and Insurance completed the requirements for
the use of off-site monitoring tools, such as the use of risk reports,
in fiscal year 1995. Since then, NCUA has adopted additional off-site
monitoring tools, such as the consolidated balance sheet and scope
workbook.
Issue: 6; GAO Recommendation to NCUA: Require documentation at the
regional office level of
examiners' reviews of all credit union call reports; Status:
Implemented; Comments: NCUA requires this review as part of the
examination process and requires documentation of the review in the
examination report.
Issue: 7; GAO Recommendation to NCUA: Invoke its statutory authority
to refuse to accept state
supervisors' examinations when a state regulatory authority lacks
adequate independence from the credit union industry. Examine all
NCUSIF-insured credit unions in such states; Status: Implemented;
Comments: According to NCUA, its examiner guide addresses oversight of
federally insured, state-chartered credit unions, including processes
to make an independent assessment of these credit unions. NCUA affirms
it is empowered by the Federal Credit Union Act to examine any
federally insured credit union, including those where questions are
raised regarding the independence of the state from the industry. NCUA
claims that use of this authority is evidenced by having conducted
exams at 15.6 percent of all federally insured, state-chartered credit
unions in 2002.
Issue: 8; GAO Recommendation to NCUA: Establish a policy goal for
examination frequency of state-
chartered credit unions; Status: Implemented; Comments: NCUA affirms
that its regions have established goals that include monitoring the
examination cycles and supervision efforts of each state. State
examinations not conducted within 18 months are tracked and agreements
are made and followed to bring the state into compliance.
Issue: 9; GAO Recommendation to NCUA: Require all credit unions to
submit copies of their
supervisory committee audit reports to NCUA upon completion; Status:
Not implemented; Comments: This recommendation pertains to federally
insured credit unions with less than $500 million in assets. NCUA
believes that the 1991 recommendation is unnecessary. NCUA claims it
reviews the supervisory committee audits as a required step during the
risk-focused examination process.
Issue: 10; GAO Recommendation to NCUA: Conduct an Inspector General
review focusing on NCUA's
handling of problem credit unions since mid-1990, specifically its use
of enforcement powers, and submit a report to the NCUA board; Status:
Implemented; Comments: The Inspector General completed quality
assurance reviews of each NCUA region as of July 1994.
Issue: 11; NCUA's management of failed credit unions; GAO
Recommendation to NCUA: Require that waivers and
special charges be authorized by the Director of the Office of
Examination and Insurance, the General Counsel, and the regional
director; Status: Not implemented; Comments: Under prompt corrective
action, NCUA is required to take various mandatory supervisory actions
against credit unions depending on their net worth ratio, including
requiring earnings transfers for credit unions that are less than well
capitalized--7 percent net worth ratio or less. NCUA has established
guidelines under which regional directors can grant earnings retention
waivers as well as charges to the reserve. NCUA claims that its
regional offices track approval of waivers and charges.
Issue: 12; GAO Recommendation to NCUA: Develop policy guidance
concerning the use of these
provisions and monitor their use; Status: Implemented; Comments: NCUA
maintains rules regarding waivers and special charges in Section 702 of
its rules and regulations.
Issue: 13; GAO Recommendation to NCUA: Adhere to the criteria for
assisting credit unions;
Status: Implemented; Comments: NCUA claims that the implementation of
prompt corrective action in February 2000 greatly changed its ability
to assist credit unions. To address the issue of assistance to credit
unions, NCUA affirms that the board approved a Special Assistance
Program in February 2001, and that it maintains a Special Assistance
Manual regarding the documentation and quality of requests for
assistance. Finally, NCUA claims it has implemented an approval process
for different levels of assistance to credit unions.
Issue: 14; Corporate credit unions; GAO Recommendation to NCUA:
Establish minimum capital requirements for
corporate credit unions and U.S. Central Credit Union, taking all risks
into account.[A] In the interim, 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 membership capital share deposits; Status:
Implemented; Comments: Section 704 of NCUA regulations requires a
minimum 4 percent capital ratio for retail, as well as wholesale,
corporate credit unions, such as U.S. Central Credit Union.
Issue: 15; GAO Recommendation to NCUA: Restrict the investment powers
of state-chartered
corporate credit unions to the limits imposed on federal corporate
credit unions; Status: Implemented; Comments: NCUA's corporate credit
union rules apply to all federally insured corporate credit unions.
NCUA requires all nonfederally insured corporate credit unions to
adhere to the same rules as a condition of receiving shares or deposits
from federally insured credit unions.
Issue: 16; GAO Recommendation to NCUA: Limit the investments of
corporate credit unions and U.S.
Central Credit Union 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 corporate credit unions in U.S. Central Credit
Union; Status: Not implemented; Comments: NCUA believes it is more
appropriate to establish concentration limits on capital rather than
assets and established a regulation limiting aggregate investments in
any single obligor to the greater of 50 percent of capital or $5
million.
Issue: 17; GAO Recommendation to NCUA: Limit loans to one borrower by
corporate credit unions and
U.S. Central Credit Union to 1 percent of the lender's assets. NCUA
should be authorized to make exceptions on a loan-by-loan basis;
Status: Not implemented; Comments: NCUA believes it is more appropriate
to set limits based on capital instead of assets. In October 1997, the
loan limit was 10 percent of capital--an amount we determined could
exceed 1 percent of assets. As of January 2003, NCUA rules capped the
maximum aggregate loan amount to any one member to 50 percent of
capital for unsecured loans, and 100 percent of capital for secured
loans, with exceptions. We view this as a departure from the 1991
recommendation.
Issue: 18; GAO Recommendation to NCUA: Obtain more complete and timely
information about
corporate financial operations; Status: Implemented; Comments:
According to NCUA, it requires corporate credit unions to submit
monthly call reports to NCUA as well as information to examiners. Also,
NCUA affirms that it revises the corporate call reports annually to
ensure proper supervision of corporate credit unions.
Issue: 19; GAO Recommendation to NCUA: Establish a unit at NCUA
headquarters that would be
responsible for corporate oversight, examination, and enforcement
actions; Status: Implemented; Comments: According to NCUA, the NCUA
board separated corporate credit union supervisory responsibility from
the Office of Examination and Insurance and created the Office of
Corporate Credit Unions in August 1994.
Issue: 20; GAO Recommendation to NCUA: Review the CAMEL rating system
for corporate credit unions
to reduce the inconsistencies and focus more clearly on the component
being rated; Status: Implemented; Comments: In January 1999, NCUA
implemented a system for evaluating the risk associated with corporate
credit unions that is different from the CAMEL ratings used for other
credit unions. The system, known as the Corporate Risk Information
System, has 12 component ratings regarding financial risk and risk
management.
Issue: 21; Share insurance; GAO Recommendation to NCUA: Place NCUSIF's
fiscal year on a calendar year;
Status: Implemented; Comments: In November 1993, the NCUA Board of
Directors approved the change to a fiscal year based on the calendar
year (January-December), which became effective January 1, 1995.
Issue: 22; GAO Recommendation to NCUA: Reduce the time lag in
adjusting NCUSIF's financing;
Status: Implemented; Comments: According to NCUA, establishing a fiscal
year based on the calendar year for NCUSIF reduced time lags in
collection of assessments from 7 to 3 months.
Issue: 23; GAO Recommendation to NCUA: Require credit unions to
exclude their 1 percent deposit
in NCUSIF from both sides of their balance sheet when assessing capital
adequacy. Then, that amount would not be counted as credit union
capital; Status: Implemented; Comments: Action taken by Congress
addressed our concern. Minimum net worth ratios established in the 1998
Credit Union Membership Access Act (CUMAA), which is 7 percent for
well-capitalized credit unions, compensated for the NCUSIF deposit (1
percent of assets) that credit unions account for on their balance
sheet. The minimum capital ratio for banks insured by FDIC is 6
percent.
Issue: 24; NCUA structural changes; GAO Recommendation to NCUA:
Immediately establish separate supervision
and insurance offices that report directly to the board; Status: Not
implemented; Comments: NCUA disagrees with this recommendation.
Issue: 25; Condition of credit unions and NCUSIF; GAO Recommendation
to Congress: 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's
responses; Status: Not implemented; Comments: As of September 1994,
the Senate did not hold hearings, but the House Banking Committee had.
NCUA has no objections to this recommendation.
Issue: 26; Law and regulation; GAO Recommendation to Congress: Amend
Federal Credit Union Act (FCUA) 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; Status:
Implemented; Comments: Implemented as part of prompt corrective action
in CUMAA (August 1998) and promulgated as NCUA regulation in February
2000.
Issue: 27; GAO Recommendation to Congress: Amend the FCUA to limit 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 or in the credit union's
corporate credit union, to not more than 1 percent of the credit
union's total assets. Limits permitted in 1991 with respect to credit
union service organizations should continue, and exposures of not more
than 2 percent of assets should be provided for in repurchase agreement
transactions. Authorize NCUA to set a higher limit for secured consumer
loans made by small credit unions and for overnight funds deposited
with correspondent institutions; Status: Not implemented; Comments:
NCUA's position has changed since 1994, when it believed a 5 percent of
assets limitation on exposure to single obligors would be satisfactory.
According to NCUA, the 5-percent limitation is too restrictive for some
credit unions, especially for smaller credit unions. According to NCUA,
its current regulations for credit unions do not provide specific
limits, but provides flexibility to well-run and managed credit unions.
NCUA believes that setting obligor limitations is better handled
through the agency's regulation process because it permits prompt
changes, is considerate of the fluid financial environment, and
maintains emphasis on overall risk.
Issue: 28; GAO Recommendation to Congress: Amend the FCUA to require
NCUA to tighten the commercial
lending regulation and include an overall limit; Status: Implemented;
Comments: Implemented as part of CUMAA in 1998 and promulgated as NCUA
regulation in May 1999. NCUA established the aggregate limit on a
credit union's outstanding member business loans to the lesser of 1.75
times the credit unions' net worth or 12.25 percent of total assets.
Issue: 29; GAO Recommendation to Congress: Amend the FCUA to modify
borrowing authority and specify
that credit unions may not borrow for the purpose of growth, unless
prior approval of NCUA is obtained; Status: Not implemented; Comments:
NCUA believes that this recommendation is not necessary because
Congress indirectly addressed this issue through PCA provisions in
CUMAA in 1998. According to NCUA, if a credit union is undercapitalized
under PCA, then growth can be restricted. Also according to NCUA, PCA
requirements indirectly influence borrowing because borrowing could
impact net worth classification; For clarification, we intended this
recommendation to apply to all credit unions, not just those under
PCA.
Issue: 30; GAO Recommendation to Congress: Amend the FCUA to require
credit unions to adequately
disclose that dividends on shares and other accounts cannot be
guaranteed in advance but are dependent on earnings; Status:
Implemented; Comments: Implemented as part of comprehensive banking
reforms in 1991. NCUA issued a regulation under the Truth in Savings
Act.
Issue: 31; GAO Recommendation to Congress: Amend the FCUA to require
all insured credit unions to
obtain NCUA permission before opening a new branch; Status: Not
implemented; Comments: NCUA is opposed to this recommendation and
believes that current regulations are appropriate. NCUA's regulations
require federally insured credit unions with over $1 million in assets
to obtain NCUA approval to invest in fixed assets, including branch
offices, if the aggregate of all such investments exceeds 5 percent of
shares and retained earnings. Credit unions eligible under NCUA's
Regulatory Flexibility Program are exempt from this requirement.
Issue: 32; GAO Recommendation to Congress: Amend the FCUA 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; Status: Partially implemented;
Comments: Implemented as part of CUMAA in 1998 and promulgated as NCUA
regulation in July 1999. Credit unions with assets greater than $500
million are required to obtain annual independent certified public
accountant audits. However, no requirement has been made requiring
annual management reports on internal controls and compliance with laws
and regulations.
Issue: 33; GAO Recommendation to Congress: Amend the FCUA to authorize
and require NCUA to compel a
federally insured, state-chartered union to follow the federal
regulations in any area in which the credit union's powers go beyond
those permitted federally chartered credit unions and are considered to
constitute a safety and soundness risk; Status: Not implemented;
Comments: NCUA agrees with this recommendation.
Issue: 34; NCUA's management of failures; GAO Recommendation to
Congress: Amend FCUA 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 services in the community; Status: Not implemented;
Comments: According to NCUA, it maintains a policy of assisting failing
credit unions at the least cost. Also, NCUA believes that changes to
the FCUA are unnecessary because NCUA has enough flexibility to assist
failing credit unions when the benefits of preserving the credit union
outweigh the cost.
Issue: 35; GAO Recommendation to Congress: Require NCUA to maintain
documentation supporting its
resolution decisions, including the statistical and economic
assumptions made; Status: Not implemented; Comments: According to
NCUA, its policies and practices emphasize the importance of
maintaining documentation of resolutions and that decisions are
supported. In addition, and according to NCUA, it actively updates
expectations and processes for retrieving and maintaining data through
the revision of the Examiner's Guide, Accounting Manual, Directives,
Special Actions Manual, and Guidance to Credit Unions.
Issue: 36; Corporate credit unions; GAO Recommendation to Congress:
Amend the FCUA to confine insured credit
union investments in corporate credit unions and U.S. Central Credit
Union to those that have obtained deposit insurance from NCUSIF;
Status: Not implemented; Comments: While not expressly implemented,
NCUA has taken some action in this area. NCUA regulations require
nonfederally insured corporate credit unions to agree to adhere to its
corporate credit union rule and to submit to NCUA examinations as a
condition of receiving shares or deposits from federally insured credit
unions. According to NCUA, there is only one corporate credit union
that is not federally insured.
Issue: 37; GAO Recommendation to Congress: Require NCUA to establish a
program to promptly increase
the capital of corporate credit unions and establish minimum capital
standards; Status: Implemented; Comments: NCUA's regulations require
corporate credit unions to maintain a minimum capital ratio of 4
percent. In addition, NCUA may issue a capital directive to corporate
credit unions to achieve adequate capitalization within a specified
time frame by taking any action deemed necessary, including increasing
the amount of capital to specific levels. NCUA's corporate credit union
rule also imposes an earnings retention requirement of either 10 or 15
basis points per annum if a corporate credit union's retained earnings
ratio falls below 2 percent.
Issue: 38; Share insurance; GAO Recommendation to Congress: Require
credit unions to expense the 1 percent
deposit in NCUSIF over a reasonable period of time--to be determined by
NCUA. At the same time, emphasize that the assets represented by a
failed credit union's insurance deposit should be available first to
NCUSIF. This action should be coordinated with and consistent with any
legislation to recapitalize the Bank Insurance Fund in order to avoid
placing credit unions at a competitive disadvantage; Status:
Implemented; Comments: We determined that Congress' passage of CUMAA,
which set net worth levels for credit unions 1 percent higher to
compensate for NCUSIF's accounting of the deposit as an asset,
addressed our concerns about the double counting of capital at NCUSIF
and credit unions. We determined that the recommendation regarding
NCUSIF's access to the assets of a failed credit union has not been
implemented, but we determined that this recommendation is implemented
because our greatest concern was addressed regarding the double
counting of capital between NCUSIF and credit unions.
Issue: 39; GAO Recommendation to Congress: Amend the FCUA to establish
an available assets ratio for
NCUSIF; Status: Implemented; Comments: In passing CUMAA in August
1998, Congress amended the FCUA to establish a minimum 1.0 percent
available assets ratio for NCUSIF. In addition, the NCUA board is to
make a distribution to insured credit unions after each calendar year
if, at the end of the calendar year: the NCUSIF's available assets
ratio exceeds 1.0 percent, any loans from the federal government as
well as interest on those loans have been repaid, and NCUSIF's equity
ratio exceeds the normal operating level.
Issue: 40; GAO Recommendation to Congress: Amend the FCUA to authorize
NCUA to raise the basic NCUSIF
equity ratio, available assets ratio, and premiums, and delete NCUSIF
ability to set a normal operating level below the statutory minimum;
Status: Implemented; Comments: Under CUMAA, Congress authorized NCUA to
assess a premium charge on insured credit unions if NCUSIF's equity
ratio was less than 1.3 percent and the premium charge would not exceed
the amount necessary to restore the equity ratio to 1.3 percent.
Congress also defined NCUSIF's normal operating level as an equity
ratio to be specified by the NCUA board between 1.2 and 1.5 percent.
However, Congress set the available assets ratio at 1.0 percent with no
authority given to NCUA to change it.
Issue: 41; GAO Recommendation to Congress: Amend the FCUA to provide
for additional NCUA borrowing
from Treasury on behalf of NCUSIF; Status: Not implemented; Comments:
NCUA believes that borrowing authority is appropriate so long as the
CLF and NCUSIF continue to have borrowing authority.
Issue: 42; GAO Recommendation to Congress: Amend the FCUA to place
NCUSIF in a position second to
general creditors but rank this position ahead of uninsured shares;
Status: Not implemented; Comments: NCUA sees no compelling reason to
make this change.
Issue: 43; NCUA structural changes; GAO Recommendation to Congress:
Amend the FCUA to require that NCUA, in
consultation with Congress and the credit union industry, to identify
specific unsafe and unsound practices and conditions that merit
enforcement action, identify the appropriate corrective action, and
promulgate these requirements by regulation; Status: Not implemented;
Comments: NCUA believes there is no need for legislative change, as PCA
provisions in CUMAA address declining net worth levels in credit
unions.
Issue: 44; GAO Recommendation to Congress: Amend the FCUA to require
NCUA to take appropriate
enforcement action when unsafe and unsound conditions or practices, as
specified in law or NCUA regulations, are identified; Status: Not
implemented; Comments: Same as above.
Issue: 45; GAO Recommendation to Congress: Amend the FCUA to 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). 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; Status: Not implemented; Comments: NCUA is opposed to this
recommendation.
Issue: 46; GAO Recommendation to Congress: Consider placing credit
union's examination and
supervision functions under a single federal regulator once such an
entity is operating effectively, if there is broad reform of the
depository institution regulatory structure. The insurance function
could then be placed under FDIC or under a separate entity; Status:
Not implemented; Comments: NCUA opposes this recommendation because it
believes the change would affect the identity of credit unions, limit
the financial choices for consumers, create competing and conflicting
priorities for the single regulator, and stifle the financial
marketplace.
Issue: 47; GAO Recommendation to Congress: Remove the power of
federally chartered credit unions to
borrow from Farm Credit Banks, as provided for in FCUA; Status: Not
implemented; Comments: NCUA has no objection to this recommendation.
Issue: 48; GAO Recommendation to Congress: Amend the Community
Development Credit Union Revolving
Fund Transfer Act to designate an entity other than NCUA as
administrator of the revolving fund; Status: Not implemented;
Comments: NCUA opposes this recommendation because such a change would
create additional bureaucratic requirements for small financial
institutions. According to NCUA, the agency does not receive
appropriations for administering the program and funds the program
through the operating and overhead transfer fees collected from both
federally chartered and federally insured credit unions.
Issue: 49; GAO Recommendation to Congress: Dissolve the CLF, as
established by Title III of the
FCUA; Status: Not implemented; Comments: NCUA opposes this
recommendation.
Issue: 50; GAO Recommendation to Congress: If CLF continues to operate,
sharply reduce CLF borrowing
authority from the current level of 12 times subscribed capital and
surplus; Status: Not implemented; Comments: NCUA opposes this
recommendation and believes that restricting CLF's capacity could
undermine its purpose.
Issue: 51; GAO Recommendation to Congress: If CLF continues to
operate, require the terms and
conditions of CLF loans to be no more liberal than those made by the
Federal Reserve; Status: Not implemented; Comments: NCUA believes that
the rates of CLF loans are prudent. According to NCUA, rates on CLF
loans to credit unions are based on the Federal Financing Bank (FFB)
fixed rate, as the CLF borrows from the FFB. Furthermore, according to
NCUA, FFB rates are related to U.S. Treasury rates.
Issue: 52; GAO Recommendation to Congress: If CLF continues to
operate, prohibit CLF loans or
guarantees of any kind to NCUSIF, and, in the event the 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;
Status: Not implemented; Comments: According to NCUA, CLF and NCUSIF
are distinct entities and CLF does not extend loans or guarantees to
NCUSIF.
Matter for congressional consideration:
Credit unions' role in the financial marketplace; GAO Recommendation
to Congress: 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, consider stating this general intent in legislation and
establish guidelines on the limits of occupational, associational, and
community common bonds as well as the purpose and limits of multiple
group charters. These guidelines should apply to all federally insured
credit unions; Status: Partially implemented; Comments: In passing
CUMAA in August 1998, Congress established membership limits for
federally chartered credit unions with respect to common-bond and
community-chartered credit unions. Furthermore, Congress established
numerical limitations for groups to be eligible for inclusion in
multiple common-bond credit unions and established geographical
guidelines for community credit unions; However, the legislation
only applied to federally chartered credit unions. It did not apply to
federally insured,state-chartered credit unions, which held 46 percent
of total industry assets as of December 31, 2002. Therefore, this
recommendation is partially implemented.
Sources: GAO; NCUA; Department of Treasury; Federal Register; CUMAA.
[A] U.S. Central Credit Union, founded in 1974, solely assists
corporate credit unions with financial services, including investment,
liquidity, and cash management products and services; risk management
and analytic capabilities; settlement, funds transfer and payment
services; and safekeeping and custody services. It is owned and
directed by its member corporate credit unions.
[End of table]
[End of section]
Appendix III: Financial Condition of Federally Insured Credit Unions:
As we reported earlier, the financial condition of federally insured
credit unions--the industry--has improved since 1991, based on various
measures such as capital ratios, assets, and regulatory ratings. This
appendix provides greater detail on these measures. We used annual call
reports from December 31, 1992, to December 31, 2002, as well as a
database of regulatory ratings from the National Credit Union
Administration (NCUA) for the same time period. In addition, we used
consolidated data based on annual call reports for banks and thrifts in
order to compare them with credit unions.
Industry Capital Ratios Have Increased over Time:
The capital of federally insured credit unions as a percentage of total
industry assets--the capital ratio--grew from 8.10 to 10.86 percent
from December 31, 1992, to December 31, 2002 (see fig. 18). Over this
period, larger credit unions had consistently higher capital ratios
than smaller credit unions.
Figure 18: Capital Ratios in Federally Insured Credit Unions, 1992-
2002:
[See PDF for image]
Note: In this figure, small credit unions are defined as those with
less than $10 million in assets; medium credit unions are those with
assets ranging from $10 million to less than $50 million in assets; and
large credit unions are those with $50 million or more in assets. The
capital ratio of a given size category is calculated as the total
equity of all credit unions in that size category divided by the total
assets of all credit unions in that size category.
[End of figure]
Growth of the Industry:
The credit union industry grew dramatically since December 31, 1992, as
measured by assets and the value of shares (see table 6). From December
31, 1992, to December 31, 2002, assets in federally insured credit
unions increased from $258 billion to $557 billion, or 116 percent,
while shares increased from $233 billion to $484 billion, or 108
percent. From December 31, 1992, to December 31, 2000, the annual
percentage growth rates of assets and shares generally fluctuated from
around 3 percent to around 7 percent, with a significant rise in 1998
to over 10 percent. In the last 2 years (2001-2002), however, the
annual percentage growth in assets and shares again rose sharply.
According to NCUA officials, the more recent growth in assets and
shares reflected a "flight to safety" on the part of consumers seeking
low-risk investments in reaction to the generally depressed condition
of the securities market.
Table 6: Federally Insured Credit Union Growth in Assets and Shares,
1992-2002:
.
1992; Assets: Dollar value: $258.37; Percentage Growth: [Empty];
Shares: Dollar value: $233.01; Percentage Growth: [Empty].
1993; Assets: Dollar value: 277.13; Percentage Growth: 7.26;
Shares: Dollar value: 246.96; Percentage Growth: 5.99.
1994; Assets: Dollar value: 289.45; Percentage Growth: 4.45;
Shares: Dollar value: 255.02; Percentage Growth: 3.26.
1995; Assets: Dollar value: 306.64; Percentage Growth: 5.94;
Shares: Dollar value: 270.14; Percentage Growth: 5.93.
1996; Assets: Dollar value: 326.89; Percentage Growth: 6.60;
Shares: Dollar value: 286.71; Percentage Growth: 6.13.
1997; Assets: Dollar value: 351.17; Percentage Growth: 7.43;
Shares: Dollar value: 307.18; Percentage Growth: 7.14.
1998; Assets: Dollar value: 388.70; Percentage Growth: 10.69;
Shares: Dollar value: 340.00; Percentage Growth: 10.68.
1999; Assets: Dollar value: 411.42; Percentage Growth: 5.84;
Shares: Dollar value: 356.92; Percentage Growth: 4.98.
2000; Assets: Dollar value: 438.22; Percentage Growth: 6.51;
Shares: Dollar value: 379.24; Percentage Growth: 6.25.
2001; Assets: Dollar value: 501.54; Percentage Growth: 14.45;
Shares: Dollar value: 437.13; Percentage Growth: 15.27.
2002; Assets: Dollar value: 557.07; Percentage Growth: 11.07;
Shares: Dollar value: 484.19; Percentage Growth: 10.77.
Source: Call report data.
[End of table]
As noted earlier, the industry has consolidated and become slightly
more concentrated. As of December 31, 1992, there were 12,595 credit
unions, but by December 31, 2002, that number had declined to 9,688
(see table 7). The number of credit unions with less than $10 million
in assets declined during this period, while the number of credit
unions with more than $30 million in assets grew. Those credit unions
with over $100 million in assets had around 52 percent of total
industry assets as of December 31, 1992, but by December 31, 2002,
credit unions of this size had around 75 percent of total industry
assets. The 50 largest credit unions held 18 percent of industry assets
in 1992, but by 2002 the 50 largest credit unions held 23 percent of
industry assets.
:
Table 7: Distribution of Credit Unions by Asset Size, 1992 and 2002:
Asset size (dollars in millions):
December 31, 1992:
Number of credit unions; Less than: .5: 1,696; .5 to less than 2:
2,818; 2 to less than 10: 4,304; 10 to less than 30: 2,121; 30 to less
than 50: 625; 50 to less than 100: 519; 100: or more: 512; Total:
12,595.
Percent of credit unions; Less than: .5: 13.47; .5 to less than 2:
22.37; 2 to less than 10: 34.17; 10 to less than 30: 16.84; 30 to less
than 50: 4.96; 50 to less than 100: 4.12; 100: or more: 4.07; Total:
100.
Total assets (dollars in millions); Less than: .5: $433,203; .5 to
less than 2: $3,243,850; 2 to less than 10: $21,230,518; 10 to less
than 30: $37,355,589; 30 to less than 50: $24,331,358; 50 to less than
100: $36,133,301; 100: or more: $135,637,393; Total: $258,365,211.
Percent of total assets; Less than: .5: 0.17; .5 to less than 2: 1.26;
2 to less than 10: 8.22; 10 to less than 30: 14.46; 30 to less than
50: 9.42; 50 to less than 100: 13.99; 100: or more: 52.50; Total: 100.
December 31, 2002:
Number of credit unions; Less than: .5: 620; .5 to less than 2: 1,327;
2 to less than 10: 3,022; 10 to less than 30: 2,121; 30 to less than
50: 801; 50 to less than 100: 751; 100: or more: 1,046; Total: 9,688.
Percent of credit unions; Less than: .5: 6.40; .5 to less than 2:
13.70; 2 to less than 10: 31.19; 10 to less than 30: 21.89; 30 to less
than 50: 8.27; 50 to less than 100: 7.75; 100: or more: 10.80; Total:
100.
Total assets (dollars in millions); Less than: .5: $165,054; .5 to
less than 2: $1,543,306; 2 to less than 10: $16,181,104; 10 to less
than 30: $37,913,707; 30 to less than 50: $31,135,123; 50 to less than
100: $52,762,245; 100: or more: $417,374,026; Total: $557,074,565.
Percent of total assets; Less than: .5: 0.03; .5 to less than 2: 0.28;
2 to less than 10: 2.9; 10 to less than 30: 6.81; 30 to less than 50:
5.59; 50 to less than 100: 9.47; 100: or more: 74.92; Total: 100.
Source: Call report data.
[End of table]
As industry assets have increased, the composition of these assets has
changed. Total loans as a percentage of total assets increased from 54
percent as of December 31, 1992, to 62 percent as of December 31, 2002
(see table 8). While consumer loans, which broadly consist of unsecured
credit card loans, new and used vehicle loans, and certain other loans
to members, remained the largest category of credit union loans, the
most significant growth in credit union loan portfolios was in real
estate loans. These loans grew from 19 percent of total assets as of
December 31, 1992, to 26 percent of total assets as of December 31,
2002.
Table 8: Asset Composition of Credit Unions as a Percentage of Total
Assets, 1992-2002:
[See PDF for image]
Source: Call report data.
[End of table]
Despite the growth in credit union real estate loans, credit unions had
a lower percentage of real estate loans to total assets (26 percent)
than their peer group banks and thrifts, which had 37 percent of real
estate loans to total assets (see table 9). Credit unions had a
significantly higher percentage of consumer loans to total assets (31
percent) compared with their peer group banks and thrifts (8 percent).
These banks and thrifts, however, had a significantly higher percentage
of agricultural and commercial loans to total assets (12 percent)
compared with credit unions (slightly more than 1 percent).
Table 9: Comparison of the Loan Portfolios of Federally Insured Credit
Unions with Peer Group Banks and Thrifts, as of 2002:
Loan types: Consumer loans; Credit unions: Dollar value:
$175,300,187,240; Credit unions: Percent: 31.47; Banks: Dollar
value: $189,841,654,000; Banks: Percent: 7.53.
Loan types: Real estate loans; Credit unions: Dollar value:
147,131,474,868; Credit unions: Percent: 26.41; Banks: Dollar
value: 944,031,005,000; Banks: Percent: 37.44.
Loan types: Agricultural and commercial loans; Credit unions: Dollar
value: 6,644,982,024; Credit unions: Percent: 1.19; Banks:
Dollar value: 303,205,739,000; Banks: Percent: 12.03.
Loan types: Other loans; Credit unions: Dollar value: 13,571,878,174;
Credit unions: Percent: 2.44; Banks: Dollar value:
65,472,408,000; Banks: Percent: 2.60.
Loan types: Total loans; Credit unions: Dollar value:
$342,648,522,306; Credit unions: Percent: 61.51; Banks: Dollar
value: $1,502,550,806,000; Banks: Percent: 59.60.
Loan types: Other assets; Credit unions: Dollar value:
214,426,042,531; Credit unions: Percent: 38.49; Banks: Dollar
value: 1,018,695,188,000; Banks: Percent: 40.40.
Loan types: Total assets; Credit unions: Dollar value:
$557,074,564,837; Credit unions: Percent: 100; Banks: Dollar
value: $2,521,245,994,000; Banks: Percent: 100.
Number of institutions: Credit unions: 9,688; Banks: 7,829.
Source: Call report data.
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered banks, banks with more than
$18 billion in assets, and banks we determined had emphases in credit
card or mortgage loans are excluded.
[End of table]
Credit Union Profits Have Been Relatively Stable in Recent Years:
The profitability of credit unions, as measured by the return on
average assets, has been relatively stable in recent years. According
to this measure, credit union profitability was higher in the early to
mid-1990s than in the late 1990s and early 2000s. While declining from
1993 through 1999, the return on average assets has since stabilized.
It has generally hovered around 1 percent, which, by historical banking
standards, is a performance benchmark, and it was reported at 1.07 as
of December 31, 2002 (see fig. 19). Profits are an especially important
source of capital for credit unions because they are mutually owned
institutions that cannot sell equity to raise capital.
Figure 19: Profitability of Federally Insured Credit Unions, 1992-2002:
[See PDF for image]
Notes: Profitability is measured by the return on average assets, in
which average assets are the simple average of total assets as of the
current period and prior yearend. The return on average assets was not
available for 1992 since we did not have 1991 total assets data.
[End of figure]
Credit Unions' Regulatory Ratings Have Improved Since December 1992:
The number of credit unions with a CAMEL rating of 1 (strong) increased
from 1,082 (9 percent) in 1992 to 2,186 (23 percent) in 2002 (see fig.
20). During the same time period, institutions classified as problem
credit unions--those with CAMEL ratings of 4 (poor) or 5
(unsatisfactory)--decreased from 578 (5 percent) in 1992 to 211 (2
percent) in 2002.
Figure 20: Federally Insured Credit Unions, by CAMEL Rating, 1992-2002:
[See PDF for image]
[End of figure]
[End of section]
Appendix IV: Comparison of Bank and Credit Union Distribution of
Assets:
Figures 21, 22, and 23 illustrate the marked size disparity between
credit unions and institutions insured by the Federal Deposit Insurance
Corporation (FDIC), with figure 21 highlighting how small most credit
unions are.[Footnote 126] At the end of 2002, the largest credit union
had less than $18 billion in assets, while the largest bank, with over
$600 billion in assets, was larger than the entire credit union
industry.
Figure 21: Total Assets of All Credit Unions and All Banks, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and include all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions are excluded.
This figure depicts the number of institutions in a particular asset
size category. Each category represents a range--for example, the first
category includes all institutions with assets of $100 million or less,
while the second category includes all institutions with assets greater
than $100 million and less than or equal to $250 million, up to the
last category, which includes all institutions with assets greater than
$500 million and less than or equal to $750 billion.
[End of figure]
Figure 22: Total Assets of Credit Unions and Banks withLess Than $100
Million in Assets, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and include all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions are excluded.
This figure depicts the number of institutions in a particular asset
size category. Each category represents a range--for example, the first
category includes all institutions with assets of $5 million or less,
while the second category includes all institutions with assets greater
than $5 million and less than or equal to $10 million, up to the last
category, which includes all institutions with assets greater than $95
million and less than or equal to $100 million.
[End of figure]
Figure 23: Total Assets of Credit Unions with Less Than $5 Million in
Assets, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and include all federally
insured credit unions filing call reports. This figure depicts the
number of institutions in a particular asset size category. Each
category represents a range--for example, the first category includes
all institutions with assets of $250,000 or less, while the second
category includes all institutions with assets greater than $250,000
and less than or equal to $500,000, up to the last category, which
includes all institutions with assets greater than $4.75 million and
less than or equal to $5 million.
[End of figure]
Given the disproportionate size of the banking industry relative to the
credit union industry, peer groups were defined to mitigate the effects
of this discrepancy. Therefore, for our more detailed reviews, we
constructed five peer groups in terms of institution size as measured
by total assets, reported as of December 31, 2002. We further refined
the sample of FDIC-insured institutions to exclude those banks and
thrifts we determined had emphases in credit card or mortgage loans.
The largest bank included in our analyses had total assets of nearly
$18 billion in 2002. See appendix I for details.
Figures 24, 25, 26, and 27 illustrate that differences in services (as
measured by the number of institutions holding various consumer,
mortgage, and business loans) between credit unions and peer group
banks are manifested in terms of institution size. Overall, the credit
union industry in aggregate did not appear to be that similar to the
banking industry (as captured by our sample of peer group banks) in
terms of services; however, when broken out by size, the larger credit
unions (those with more than $100 million in assets, or credit unions
in Groups II, III, IV, and V) appeared to be offering very similar
services to peer banks. Moreover, as nearly 90 percent of all credit
unions had less than $100 million in assets as of December 31, 2002,
the results depicted in Figure 24 are influenced more heavily by these
institutions.
Figure 24: Percentage of All Credit Unions and All Banks Holding
Various Loans, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions and banks we
determined had emphases in credit card or mortgage loans are excluded.
Bank data on mortgages exclude thrifts. Credit union data on other
consumer loans may include member business and agricultural loans.
[End of figure]
Figure 25: Percentage of Credit Unions and Banks with Assets of $100
Million or Less Holding Various Loans, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions and banks we
determined had emphases in credit card or mortgage loans are excluded.
Bank data on mortgages exclude thrifts. Credit union data on other
consumer loans may include member business and agricultural loans.
[End of figure]
Figure 26: Percentage of Credit Unions and Banks with Assets between $1
Billion and $18 Billion Holding Various Loans, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions and banks we
determined had emphases in credit card or mortgage loans are excluded.
Bank data on mortgages exclude thrifts. Credit union data on other
consumer loans may include member business and agricultural loans.
[End of figure]
Figure 27: Percentages of Credit Unions and Banks Holding Various
Loans, by Institution Size, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions and banks and thrifts filing call reports.
Insured U.S. branches of foreign-chartered institutions and banks we
determined had emphases in credit card or mortgage loans are excluded.
Bank data on mortgages exclude thrifts. Credit union data on other
consumer loans may include member business and agricultural loans.
Group I credit unions had assets of $100 million or less; Group II
credit unions had assets greater than $100 million and less than or
equal to $250 million; Group III credit unions had assets greater than
$250 million and less than or equal to $500 million; Group IV credit
unions had assets greater than $500 million and less than or equal to
$1 billion; and Group V credit unions had assets greater than $1
billion and less than or equal to $18 billion, which is the asset size,
rounded up to the nearest billion dollars, of the largest credit union
as of December 31, 2002.
[End of figure]
[End of section]
Appendix V: Credit Union Services, 1992-2002:
In the absence of detailed time series data on the provision of
services by credit unions, we used holdings of various loans, including
mortgage and consumer loans, as well as other variables, as rough
measures of credit union services over time. We also separated credit
unions by asset size to illustrate any differences in provision of
services by this criterion. For illustrative purposes, we compared the
smallest credit unions (those with assets of $100 million or less) with
the largest credit unions (those with more than $1 billion in assets).
The percentage of all credit unions holding first mortgage loans has
increased every year since 1992 (see fig. 28). However, nearly twice as
many credit unions hold new and used vehicle loans as first mortgage
loans.
Figure 28: Percentage of Credit Unions Holding Various Loans, 1992-
2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports.
[End of figure]
Calculating the percentage of loan amounts held to total assets can
reveal the relative importance of each type of loan to credit unions.
Figure 29 shows that first mortgage loans have increased in importance,
surpassing each of the other loan holdings.
Figure 29: Percentage of Assets Held in Various Loans by All Credit
Unions, 1992-2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports.
[End of figure]
Although nearly all credit unions have offered regular shares (savings
accounts), over the years, the percentage of those offering share
drafts (checking accounts) and money market shares has increased, as
illustrated in figure 30.
Figure 30: Percentage of Credit Unions Offering Various Accounts, 1992-
2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports. Regular shares are savings accounts
and share drafts are checking accounts.
[End of figure]
The number of employees could have an effect on the provision of
services as well. Figure 31 shows that industry consolidation has not
adversely affected employment. Even though the industry shrank in terms
of the number of institutions from 12,595 in 1992 to 9,688 in 2002, a
decline of 23 percent, the number of full-time employees went from
119,480 in 1992 to 180,401 in 2002, an increase of 51 percent.
Figure 31: Credit Union Employees and Number of Credit Unions, 1992-
2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports.
[End of figure]
The differences between the smallest credit unions (those with $100
million or less in assets) and the largest credit unions (those with
more than $1 billion in assets) are also apparent in the types of loans
held and their relative importance for each group over time (see figs.
32 and 33). Nearly all of the smallest credit unions have emphasized
new and used vehicle loans, but typically less than one-half of these
credit unions have held other loan types. As of December 31, 2002, used
vehicle loans were the relatively most important loan holding for the
smallest credit unions, surpassing new vehicle loans. Almost all of the
largest credit unions have held most types of loans over the past
decade, with the exception of member business loans--but the percentage
of the largest credit unions holding these has been steadily growing
and, as of December 31, 2002, roughly three out of four of these credit
unions held them. First mortgage loans have consistently been the most
important loan holding of the largest credit unions, and they now
represent nearly one-quarter of the asset mix of these credit unions.
Figure 32: Percentage of Credit Unions, Smallest versus Largest,
Holding Various Loans, 1992-2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports. The smallest credit unions (Group I)
are those with $100 million or less in assets while the largest credit
unions (Group V) are those with more than $1 billion in assets.
[End of figure]
Figure 33: Percentage of Assets Held in Various Loans, Smallest versus
Largest Credit Unions, 1992-2002:
[See PDF for image]
Note: Data are as of December 31 and are based on all federally insured
credit unions filing call reports. The smallest credit unions (Group I)
are those with $100 million or less in assets while the largest credit
unions (Group V) are those with more than $1 billion in assets.
[End of figure]
As of December 31, 2002, we observed a gap in services offered by
smaller credit unions and larger credit unions (see fig. 34). While
larger credit unions--those with assets of more than $100 million--
accounted for just over 10 percent of all credit unions, they offered
more services than smaller credit unions. For example, nearly all of
the larger credit unions held mortgage loans and credit card loans,
while only around one-half of the smaller credit unions held these
loans.
Figure 34: Differences among Services Offered by Smaller and Larger
Credit Unions, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions filing call reports. In this figure, larger
credit unions are those with more than $100 million in assets while
smaller credit unions are those with $100 million or less in assets.
[End of figure]
The discrepancy in the services offered by smaller and larger credit
unions is more accurately illustrated through an analysis of more
recently collected data on more sophisticated product and service
offerings, such as the availability of automatic teller machines (ATM)
and electronic banking (see fig. 35). While less than half of the
smallest credit unions offered ATMs and one-third offered financial
services through the Internet, nearly all larger credit unions offered
these services.
Figure 35: Credit Union Size and Offerings of More Sophisticated
Services, as of 2002:
[See PDF for image]
Note: Data are as of December 31, 2002, and are based on all federally
insured credit unions filing call reports. Group I credit unions had
assets of $100 million or less; Group II credit unions had assets
greater than $100 million and less than or equal to $250 million; Group
III credit unions had assets greater than $250 million and less than or
equal to $500 million; Group IV credit unions had assets greater than
$500 million and less than or equal to $1 billion; and Group V credit
unions had assets greater than $1 billion and less than or equal to $18
billion, which is the asset size, rounded up to the nearest billion
dollars, of the largest credit union as of December 31, 2002.
[End of figure]
[End of section]
Appendix VI: Characteristics of Credit Union and Bank Users:
This appendix provides additional information on the characteristics--
age, education, and race/ethnicity--of households that use banks and
credit unions. For figures 36, 37, and 38, we analyzed data from the
Federal Reserve's 2001 Survey of Consumer Finances (SCF). The
categories we used to describe these households--credit union users and
bank users--included those who only and primarily used each of these
institutions. To supplement our analyses of households by race, we also
analyzed 2001 loan application records from the Home Mortgage
Disclosure Act database (HMDA) (see fig. 39). As we did with our
analysis of HMDA income data, we only analyzed records for home
purchase loans actually made for the purchase of one-to-four family
homes.
Figure 36: Households Using Credit Unions and Banks, by Education
Level, 2001:
[See PDF for image]
[End of figure]
Figure 37: Households Using Credit Unions and Banks, by Age Group,
2001:
[See PDF for image]
Note: Percentages do not add to 100 percent due to rounding.
[End of figure]
Figure 38: Households Using Credit Unions and Banks, by Race and
Ethnicity, 2001:
[See PDF for image]
Note: Percentages do not add to 100 percent due to rounding.
[End of figure]
Figure 39: Mortgages Made by Credit Unions and Banks, by Race and
Ethnicity, 2001:
[See PDF for image]
Notes: The "other" category includes data reported for American
Indians, Alaskan natives, Asian or Pacific islanders, and those from
the HMDA "other" category. We collapsed these categories to create
groups similar to the ones used by the SCF. However, in our HMDA
analysis, we only included mortgages made by peer group banks (banks
with less than $16 billion in assets) whereas the SCF did not exclude
households using banks with more than $16 billion in assets.
[End of figure]
Fifteen percent of the HMDA data reported by credit unions and 6
percent of the HMDA data reported by banks lacked race and ethnicity
data. As such, the data in this figure may not represent the exact
proportion of mortgage loans by race. We also found that the proportion
of loans without data varied by the asset size of institutions. For
example, race data were missing for 23 percent of credit unions with
assets of more than $500 million compared with about 3 percent for
credit unions with less than $50 million in assets. Similarly, race
data were missing for about 8 percent of peer group banks with more
than $500 million in assets compared with about 4 percent of banks with
less than $50 million in assets. However, since these larger
institutions made most of the loans, missing data from these
institutions account for more than 80 percent of all the missing data.
[End of section]
Appendix VII: Key Changes in NCUA Rules and Regulations, 1992-2003:
Since 1992, changes to the National Credit Union Administration's
(NCUA) rules and regulations governing credit unions generally expanded
the powers of credit unions to offer products and services, and
broadened the activities in which they could engage. With the exception
of member business lending, which NCUA constrained during the 1990s,
federally chartered credit unions gained authority to, among other
things, (1) invest in a wider variety of financial instruments, (2)
offer services through the Internet, and (3) profit from referring
members to products, such as insurance and investments, sold by third
parties. Also, NCUA increased the number of activities in which credit
union service organizations (CUSO) could engage, including student loan
and business loan origination. In September 2003, NCUA expanded credit
union powers in member business lending to permit well-capitalized
credit unions to make unsecured member business loans within certain
limits, among other things. See table 10 for a timeline of key changes
to NCUA rules and regulations.
Table 10: Timeline of Key Changes to NCUA Rules and Regulations,
January 1992-September 2003:
Effective date: January 1992; Key change: NCUA limited member business
loans in response to losses to credit unions, their members, and the
National Credit Union Share Insurance Fund. NCUA established loan
security requirements, limits on loans to one borrower, and an
aggregate portfolio cap on construction and development loans at 15
percent of reserves for federally insured credit unions.
Effective date: September 1996; Key change: NCUA allowed credit unions
serving predominantly low-income members to raise secondary capital
from foundations and other philanthropic-minded institutional
investors, to help credit unions make more loans, and improve services
to low-income members.[A] NCUA required credit unions to establish
certain uninsured or other form of nonshare accounts for secondary
capital.
Effective date: January 1998; Key change: NCUA codified additional
powers of federally chartered credit unions to act as trustees and
custodians of Roth Individual Retirement Accounts (IRA) and Education
IRAs, which is in addition to those trustee and custodian services they
had been authorized to provide for other kinds of pension and
retirement plans for approximately the previous 23 years.
Key change: Effective dateApril 1998: NCUA changed its investment rule
to focus on risk management (previous focus was on specific financial
instruments for federal credit unions). NCUA established new
requirements for assessing and managing risk associated with federally
chartered credit union investment activities.
Effective date: April 1998; Key change: NCUA codified additional
preapproved CUSO activities to include student loan origination,
disaster recovery services, additional checking and currency services,
and electronic income tax filing services, among others.
Effective date: August 1998; Key change: Credit Union Membership Access
Act (CUMAA) became law. CUMAA provisions cap the aggregate portfolio
amount of member business loans for federally insured credit unions,
with exceptions.
Effective date: March 2000; Key change: NCUA allowed federally
chartered credit unions in specified locations outside the United
States to offer trustee or custodian services for IRAs.
Effective date: August 2001; Key change: NCUA issued legal opinion that
permitted a federally chartered credit union employee to be a shared
employee with a third party and, while acting in the capacity of an
employee of the third party, to sell nondeposit investment products and
provide investment advice. NCUA continued to restrict federally
chartered credit union employees, acting as an employee of the credit
union, from selling nondeposit investment products or providing
investment advice.
Effective date: September 2001; Key change: NCUA's Incidental Powers
Regulation became effective. This rule codified a broad range of
activities, products, and services that federally chartered credit
unions could offer directly to members, and which NCUA had previously
recognized in legal opinions or had recognized in other regulations.
One change, which permits federally chartered credit unions to earn
income directly from finder activities (the referral of members to
outside vendors, such as investment and insurance brokers), had the
effect of making it unnecessary to use a CUSO in third-party networking
arrangements in order to receive income. Key powers codified in the
regulation include: electronic financial services, finder activities,
loan-related products, such as debt suspension agreements,and trustee
services.b There is overlap of the activities in which federally
chartered credit unions and CUSOs may engage (for example, consumer
mortgage origination), but there are also activities only permissible
for CUSOs (for example, general trust services and travel agency
services).
Effective date: February 2002; Key change: NCUA issued a legal opinion
on how federally chartered credit unions can provide nonmembers, such
as agricultural workers with familial ties to foreign countries, with
wire transfer services. While expressly restricting unlimited services
to nonmembers, NCUA permitted federally chartered credit unions to (1)
establish nondividend-bearing accounts for people within its field of
membership, (2) provide wire transfer services as a promotional
activity on a limited basis, and (3) provide services as a charitable
activity, so long as the recipients of the charitable services were
within the credit union's field of membership.
Effective date: March 2002; Key change: NCUA's Regulatory Flexibility
Program became effective. NCUA relieved eligible federally and state-
chartered credit unions from certain NCUA regulations relating to
permissible investments and investment management requirements, limits
on share deposits from public entities and nonmembers, approval
processes for charitable contributions, and limits on ownership of
fixed assets.
Effective date: July 2003; Key change: NCUA expanded investment powers
of certain federally chartered credit unions to allow them to purchase
financial instruments that were previously prohibited, including
commercial mortgage-related securities and equity options.[C].
Key change: Effective dateSeptember 2003: NCUA permitted federally
insured credit unions to open branches in foreign countries, with
conditions.
Effective date: September 2003; Key change: NCUA amended its CUSO rule
to permit CUSOs to originate business loans.
Key change: Effective dateKey change: NCUA amended its member business
loan rule to allow eligible federally insured credit unions to make
unsecured member business loans, with limits, and to permit the
exclusion of purchased nonmember loans and nonmember participation
interests from the aggregate business loan limit, among other things.
Sources: GAO, NCUA, Federal Register.
Note:
[A] Secondary capital can take the form of investments into an
institution by nonmembers, such as foundations, corporations, and other
financial institutions. The investments are subordinated to all other
credit union debt, and are used to absorb losses.
[B] Debt suspension agreements are contracts between a lender and a
borrower where the lender agrees to suspend scheduled installment
payments for an agreed period in the event the borrower experiences
financial hardship.
[C] Equity options are limited to those that would be purchased for the
sole purpose of offering dividends based on the performance of an
equity index.
[End of table]
[End of section]
Appendix VIII: NCUA's Budget Process and Industry Role:
The National Credit Union Administration (NCUA) changed its budget
process in 2001 to allow outside parties, including credit unions and
trade organizations, to submit comments on the budget. While outside
parties can submit their budget suggestions and concerns at any time,
NCUA has a formal budget briefing where these parties can officially
submit their comments. This briefing takes place at the latter stage of
NCUA's budget process. The changes NCUA has made to its budget process
come during a period in which NCUA has been reducing the growth in its
budgets.
NCUA has two main sources of funding for its operating costs. According
to NCUA, 62 percent of the funds for operating costs in their 2002
budget came from the National Credit Union Share Insurance Fund
(NCUSIF), administered by NCUA. NCUSIF is principally financed from
earnings (income) on investments purchased using the deposits of
federally insured credit unions. Funds are transferred from the
insurance fund through a monthly accounting procedure known as the
overhead transfer to cover costs associated with ensuring that insured
deposits are safe and sound. The remaining 38 percent of NCUA's funds
for its operating costs came primarily from operating fees assessed on
federally chartered credit unions, for which NCUA has oversight
responsibility.
NCUA Budget Process Now Includes Step for Outside Parties to Submit
Comments:
NCUA budgets on a calendar-year basis, and its board sets the policies
and overall direction for the budget. In July and August prior to the
next budget year, the NCUA regional offices submit their workload and
program needs. NCUA's examination and insurance officials in
headquarters assess the information and formulate proposed program
hours, which along with historical actual expenditures are the basis
for the proposed budget. In September and October, the Chief Financial
Officer (CFO) reviews and analyzes the figures, conducts briefings with
office directors, and makes adjustments. In November, NCUA holds a
public briefing where interested parties, including credit unions and
trade associations, have the opportunity to comment. Later in November,
the CFO briefs the board prior to final budget adjustments.
Additionally, in July of the budget year, there is a midyear budget
review to determine if any adjustments need to be made to the budget.
According to NCUA officials, NCUA also conducts a variance analysis on
the budget on a monthly basis and a more comprehensive review at the
end of the year.
According to NCUA, credit unions and other stakeholders can submit
their budget suggestions and concerns at any time. Normally,
suggestions come between August and November while NCUA is working on
the budget. For the public budget hearing, credit unions can address
the board for 5 minutes or submit a written document.
Recent budget concerns by credit unions have centered on lessening the
costs to credit unions for NCUA oversight. Credit unions have raised
specific concerns about the number of NCUA staff or full-time
equivalents, the salaries of NCUA staff, and the overhead transfer rate
from the insurance fund. According to NCUA data, its average full-time
equivalent cost is less than that of the Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of the Currency
(OCC) and equal to that of the Office of Thrift Supervision (OTS).
Nevertheless, NCUA has responded to concerns over its salary levels by
deciding to undertake a pay study.
NCUA Has Reduced Its Budget Growth in Recent Years:
In recent years, NCUA has been successful in slowing its budget growth.
After 10-percent annual growth from 1998 to 2000, NCUA budget growth
has decreased to an average of about 3 percent in 2000-2003 (see fig.
40). The NCUA board's budget priorities have been to streamline
business processes, increase efficiencies, control budget growth, and
match resources to mission requirements, while maintaining effective
examination processes and products. NCUA is seeking budget savings by
adopting a risk-focused examination approach, extending the examination
cycle, adopting more flexible rules and regulations, increasing
efficiencies from technology (such as videoconferencing), and
consolidating two of their regions into one.
Figure 40: NCUA Budget Levels, 1992-2004:
[See PDF for image]
Note: The 2004 projected budget is expected to increase between 4.0 and
4.5 percent from the 2003 budget level.
[End of figure]
NCUA's authorized full-time equivalent staff level decreased over 7
percent from 1,049 in 2000 to 971 in 2003 (see fig. 41). This level of
staff reductions has been partly in response to changes in the
industry. Since 1998, the number of federally insured credit unions has
decreased steadily by about 3 percent per year.
Figure 41: NCUA-authorized Staffing Levels, 1992-2003:
[See PDF for image]
[End of figure]
[End of section]
Appendix IX: NCUA's Implementation of Prompt Corrective Action:
Section 301 of the Credit Union Membership Access Act (CUMAA)amended
the Federal Credit Union Act to require the National Credit Union
Administration (NCUA) to adopt a system of prompt corrective action
(PCA) for use on credit unions experiencing capitalization
problems.[Footnote 127] The goal of requiring PCA is to resolve the
problems of insured credit unions with the least possible long-term
loss to the National Credit Union Share Insurance Fund (NCUSIF). In
that regard, NCUA was required to prescribe a system of PCA consisting
of three principal components: (1) a comprehensive framework of
mandatory supervisory actions and discretionary supervisory actions,
(2) an alternative system of PCA for "new" credit unions, and (3) a
risk-based net worth (RBNW) requirement for "complex" credit
unions.[Footnote 128] Furthermore, section 301 also required NCUA to
report to Congress on how PCA was implemented and how PCA for credit
unions differs from PCA for other depository institutions. NCUA
submitted this report in May 2000. In addition, NCUA submitted a
further report to Congress that described how NCUA carried out the RBNW
requirements for credit unions and how these requirements differed from
RBNW requirements of other depository institutions (see table 11).
Table 11: CUMAA Mandates and NCUA Actions on PCA Regulation
Implementation:
CUMAA mandates to NCUA: PCA actions:
CUMAA mandates to NCUA: Issue PCA proposed rule; CUMAA deadlines: May
1999; NCUA action dates: Issued May 1999.
CUMAA mandates to NCUA: Issue the PCA final rule; CUMAA deadlines:
February 2000; NCUA action dates: Issued February 2000.
CUMAA mandates to NCUA: Issue PCA report to Congress; CUMAA deadlines:
February 2000; NCUA action dates: Issued May 2000.
CUMAA mandates to NCUA: Implement PCA; CUMAA deadlines: August 2000;
NCUA action dates: Implemented August 2000 [A].
CUMAA mandates to NCUA: RBNW requirements actions:
CUMAA mandates to NCUA: Issue RBNW requirements (Advance Notice of
Proposed Rulemaking); CUMAA deadlines: February 1999; NCUA action
dates: Issued October 1998.
CUMAA mandates to NCUA: Issue RBNW requirements proposed rule[B]; CUMAA
deadlines: [C]; NCUA action dates: Issued February 2000.
CUMAA mandates to NCUA: Issue RBNW requirements final rule; CUMAA
deadlines: August 2000; NCUA action dates: Issued July 2000.
CUMAA mandates to NCUA: Issue RBNW requirements report to Congress [B];
CUMAA deadlines: [C]; NCUA action dates: Issued November 2000.
CUMAA mandates to NCUA: Implement RBNW requirements final rule; CUMAA
deadlines: January 2001; NCUA action dates: Implemented January 2001.
Sources: Federal Register 64, no. 95 (18 May 1999): 27090; Federal
Register 65, no. 34 (18 February 2000): 8560; Federal Register 63, no.
209 (29 October 1998): 57938; Federal Register 65, no. 34 (18 February
2000): 8597; Federal Register 65, no. 140 (20 July 2000): 44950; and
NCUA reports to Congress.
Note:
[A] The PCA final rule applied to credit unions beginning in the fourth
quarter of 2000.
[B] CUMAA did not set any deadline for NCUA to issue the RBNW
requirement proposed rule and did not require NCUA to issue a RBNW
report to Congress.
[C] Not mandated by CUMAA.
[End of table]
After NCUA implemented the initial PCA and RBNW regulations, it formed
a PCA Oversight Task Force to review at least a full year of PCA
implementation and recommend necessary modifications.[Footnote 129]
The task force reviewed the first six quarters of PCA implementation.
It made several recommendations to improve PCA, including revising
definitions of terms and clarifying implementation issues. In June
2002, NCUA issued a proposed rule setting forth revisions and
adjustments to improve and simplify PCA. In November 2002, after
incorporating public comments on the proposed rule, NCUA issued the
final PCA rule adopting the proposed revisions and
adjustments.[Footnote 130] The final rule became effective on January
1, 2003.
PCA Incorporates a Comprehensive Framework of Mandatory and
Discretionary Supervisory Actions:
The PCA rule consists of a comprehensive framework of mandatory and
discretionary supervisory actions for all federally insured credit
unions except "new" credit unions.[Footnote 131] The PCA system
includes the following five statutory categories and their associated
net worth ratios:
* well-capitalized--7.0 percent or greater net worth,
* adequately capitalized--6.0 to 6.99 percent net worth,
* undercapitalized--4.0 to 5.99 percent net worth,
* significantly undercapitalized--2.0 to 3.99 percent net worth, and:
* critically undercapitalized--less than 2.0 percent net worth.
As noted earlier in the report, mandatory supervisory actions apply to
credit unions that are classified adequately capitalized or lower. The
PCA system also includes conditions triggering mandatory
conservatorship and liquidation.
CUMAA also authorized NCUA to develop a comprehensive series of
discretionary supervisory actions to complement the mandatory
supervisory actions. Some or all of these 14 discretionary supervisory
actions can be applied to credit unions that are classified
undercapitalized or lower (see table 12).
Table 12: Discretionary Supervisory Actions:
Discretionary supervisory actions: Require NCUA prior approval for
acquisitions, branching, new lines of business; Statutory net worth
category: "Undercapitalized" and lower.
Discretionary supervisory actions: Restrict transactions with and
ownership of CUSOs; Statutory net worth category: "Undercapitalized"
and lower.
Discretionary supervisory actions: Restrict dividends paid; Statutory
net worth category: "Undercapitalized" and lower.
Discretionary supervisory actions: Prohibit or reduce asset growth;
Statutory net worth category: "Undercapitalized" and lower.
Discretionary supervisory actions: Alter, reduce, or terminate any
activity by credit union or its CUSO; Statutory net worth category:
"Undercapitalized" and lower.
Discretionary supervisory actions: Prohibit nonmember deposits;
Statutory net worth category: "Undercapitalized" and lower.
Discretionary supervisory actions: Other actions to further the purpose
of part 702; Statutory net worth category: "Undercapitalized" and
lower.
Discretionary supervisory actions: Order new election of board of
directors; Statutory net worth category: "Undercapitalized" and lower.
Discretionary supervisory actions: Dismiss directors or senior
executive officers; Statutory net worth category: "Undercapitalized"
and lower.
Discretionary supervisory actions: Employ qualified senior executive
officers; Statutory net worth category: "Undercapitalized" and lower.
Discretionary supervisory actions: Restrict senior executive officers'
compensation and bonus; Statutory net worth category: "Significantly
Undercapitalized" and lower.
Discretionary supervisory actions: Require merger if grounds exist for
conservatorship or liquidation; Statutory net worth category:
"Significantly Undercapitalized" and lower.
Discretionary supervisory actions: Restrict payments on uninsured
secondary capital; Statutory net worth category: "Critically
Undercapitalized".
Discretionary supervisory actions: Require NCUA prior approval for
certain actions; Statutory net worth category: "Critically
Undercapitalized".
Source: Federal Register 64, no. 95 (18 May 1999): 27096-27098.
[End of table]
The discretionary supervisory actions are tailored to suit the
distinctive characteristics of credit unions.
An Alternative System for New Credit Unions:
CUMAA required NCUA to develop an alternative PCA system for "new"
credit unions. In doing so, NCUA recognized that new credit unions (1)
initially have no net worth, (2) need reasonable time to accumulate net
worth, and (3) need incentives to become adequately capitalized by the
time they are no longer new. Accordingly, the PCA system for new credit
unions has relaxed net worth ratios, allows regulatory forbearance, and
offers incentives to build net worth. The PCA system for new credit
unions includes six net worth categories and their associated net worth
ratios (see table 13).
Table 13: Net Worth Category Classification for New Credit Unions:
New credit union net worth category: "Well-Capitalized"; Net worth
ratio (Percent): 7.0 or above.
New credit union net worth category: "Adequately Capitalized"; Net
worth ratio (Percent): 6.0 to 6.99.
New credit union net worth category: "Moderately Capitalized"; Net
worth ratio (Percent): 3.5 to 5.99.
New credit union net worth category: "Marginally Capitalized"; Net
worth ratio (Percent): 2.0 to 3.49.
New credit union net worth category: "Minimally Capitalized"; Net worth
ratio (Percent): 0.0 to 1.99.
New credit union net worth category: "Uncapitalized"; Net worth ratio
(Percent): Less than 0.
Source: Federal Register 64, no. 95 (18 May 1999): 27099.
[End of table]
Risk-based Net Worth Requirement for "Complex" Credit Unions:
CUMAA also required NCUA to formulate the definition of a "complex"
credit union according to the risk level of its portfolios of assets
and liabilities. Well-capitalized and adequately capitalized credit
unions classified as complex are subject to an additional RBNW
requirement to compensate for material risks against which a 6.0
percent net worth ratio may not provide adequate protection. (We
describe the RBNW requirement in more detail elsewhere in this
appendix.):
NCUA Submitted Required PCA Report to Congress:
CUMAA mandated that NCUA submit a report to Congress addressing PCA.
The report, dated May 22, 2000, explains how the new PCA rules account
for the cooperative character of credit unions and how the PCA rules
differ from the Federal Deposit Insurance Act's (FDIA) "discretionary
safeguards" for other depository institutions as well as the reasons
for the differences.
The report discusses how the PCA rules account for credit unions'
cooperative character in three areas: their not-for-profit nature,
their inability to issue stock, and their board of directors consisting
primarily of volunteers.[Footnote 132] First, the final rule accounts
for credit unions' not-for-profit nature by permitting a less-than-
well-capitalized credit union to seek a reduction in the statutory
earnings retention requirement to allow the continued payment of
dividends sufficient to discourage an outflow of shares. In addition, a
well-capitalized credit union whose earnings are depleted may be
permitted to pay dividends from its regular reserve provided that such
payment would not cause the credit union to fall below the adequately
capitalized level. Secondly, to account for the inability of credit
unions to issue capital stock, the final rule relies on the Net Worth
Restoration Plan, which must be submitted by credit unions classified
as undercapitalized or lower. Finally, to recognize that credit unions'
boards of directors consist primarily of volunteers, the rule exempts
credit unions that are near to being adequately capitalized from the
discretionary supervisory action authorizing NCUA to order a new
election of the board of directors.
NCUA reported that the final rule established discretionary supervisory
actions that are essentially comparable to section 38 of FDIA, which
specifies "discretionary safeguards" for other depository
institutions. The report notes that NCUA adopted discretionary
supervisory actions that are similar to all but two of FDIA's 14
discretionary safeguards.
NCUA did not adopt FDIA's safeguards requiring selling new shares of
stock and prior approval of capital distributions by a bank holding
company. NCUA's rationale for these exclusions was that, unlike banks,
credit unions cannot sell stock to raise capital and are not controlled
by holding companies.
NCUA departed from FDIA discretionary safeguards in fashioning three of
the discretionary supervisory actions: (1) dismissals of senior
officers or directors, (2) exemption of officers from discretionary
supervisory actions, and (3) ordering a new election of the boards of
directors. NCUA reported that the discretionary supervisory action for
director dismissals departs significantly from its FDIA counterpart.
The FDIA safeguard protects from dismissal of officials with office
tenures of 180 days or less, when an institution becomes
undercapitalized. In contrast, NCUA contends that such a "safe harbor"
is unnecessary for credit unions. Moreover, NCUA field experience
supports the view that short-tenured officers can be as responsible as
others for rapidly declining net worth.
With regard to exempting officers from discretionary supervisory
actions, NCUA provides conditional relief to credit unions in contrast
to the FDIA. For example, the report notes that FDIA allows 11
discretionary safeguards to be imposed on undercapitalized
institutions. On the other hand, NCUA's comparable discretionary
supervisory actions can be imposed against undercapitalized credit
unions in the first tier of that category only when they fail to comply
with any of CUMAA's four mandatory supervisory actions or fail to
implement an approved Net Worth Restoration Plan.[Footnote 133] NCUA's
rationale for granting relief from the relevant discretionary
supervisory actions is to avoid treating credit unions that are just
short of adequately capitalized as harshly as those that are almost
significantly undercapitalized.
NCUA's report states that it modified the discretionary supervisory
action ordering a new election of the board of directors. Specifically,
NCUA excludes undercapitalized credit unions from this requirement but
applies it to significantly undercapitalized and critically
undercapitalized credit unions. NCUA's exception was based on the
belief that the safeguard would undermine a defining characteristic of
credit unions--membership election of directors--and possibly
discourage members from volunteering to serve as directors. Moreover,
NCUA noted that its discretionary supervisory action does not compel a
credit union to replace its board with a NCUA-designated slate; it
simply requires the membership to reconsider its original choice of
directors. Finally, the report states that ordering a wholesale
election of the board of directors may be an overreaction when a credit
union's net worth is within reach of becoming adequately capitalized.
NCUA Submitted RBNW Report to Congress:
NCUA submitted a report to Congress addressing its RBNW provisions on
November 3, 2000. In general, the report describes NCUA's comprehensive
approach to evaluating a credit union's individual risk exposure. It
explains the RBNW requirement that applies to complex credit unions.
The RBNW requirement takes into account whether credit unions
classified as adequately capitalized provide adequate protection
against risks posed by contingent liabilities, among other risks.
According to the RBNW report, NCUA's approach (1) targets credit unions
that carry an above-average level of exposure to material risk, (2)
allows an alternative method to calculate the amount of net worth
needed to remain adequately capitalized or well-capitalized, and (3)
makes available a risk mitigation credit to reflect quantitative
evidence of risk mitigation.
NCUA reported that its final rule targets credit unions that have
higher material risk levels, thus warranting an extra measure of
capital to protect them and NCUSIF from losses. As noted previously,
credit unions do not issue stocks that create shareholder equity.
Without shareholder equity to absorb losses, the RBNW requirement
serves to mitigate most forms of risk in a complex credit union's
portfolio. Specifically, the RBNW measures the risk level of on-and
off-balance sheet items in the credit union's "risk
portfolios."[Footnote 134] The requirement applies only if a credit
union's total assets at the end of a quarter exceed $10 million, and
its RBNW requirement under the standard calculation exceeds 6 percent.
The $10 million asset floor eliminates the burden on credit unions that
are unlikely to impose a material risk.[Footnote 135]
NCUA uses two methods to determine whether a complex credit union meets
its RBNW requirement. Under the "standard calculation," each of eight
risk portfolios is multiplied by one or more corresponding risk
weightings to produce eight "standard components."[Footnote 136] The
sum of the eight standard components yields the RBNW requirement that
the credit union's net worth ratio must meet for it to remain either
adequately capitalized or well-capitalized. If the RBNW requirement is
not met, the credit union falls into the undercapitalized net worth
category. NCUA allows a credit union that does not meet its RBNW
requirement under the standard calculation to substitute for any of the
three standard components, a corresponding "alternative component" that
may reduce the RBNW requirement. The alternative components recognize
finer increments of risk in real estate loans, member business loans,
and investments.
Finally, in reporting on the RBNW requirement, NCUA recognized that
credit unions, which failed under the standard calculation and with the
alternative components, nonetheless might individually be able to
mitigate material risk. In such instances, a risk mitigation credit is
available to credit unions that succeed in demonstrating mitigation of
interest rate or
credit risk.[Footnote 137] If approved, a risk mitigation credit will
reduce the RBNW requirement a credit union must satisfy to remain
classified as adequately capitalized or above.
[End of section]
Appendix X: Accounting for Share Insurance:
The National Credit Union Share Insurance Fund (NCUSIF) capitalizes its
insurance fund differently than the Federal Deposit Insurance
Corporation (FDIC) capitalizes the Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF). For NCUSIF, a cash deposit
in the fund equal to 1 percent of insured shares, adjusted at least
annually, must remain on deposit with the fund for the period a credit
union remains federally insured. This deposit is treated as an asset on
the credit union's financial statements, and as part of equity on
NCUSIF's financial statements in an account entitled "Insured credit
unions' accumulated contributions." If a credit union leaves federal
insurance, for example to become privately insured, the deposit with
NCUSIF is refunded. However, if the National Credit Union
Administration's (NCUA) board assesses additional premiums in order to
maintain the minimum required equity ratio, the premiums are treated as
an operating expense on the credit unions' financial statements and
would not be refunded. Since 2000, NCUA has not made any distributions
to contributing credit unions because the fund did not exceed the NCUA
board's specific operating level. And, between 1990 and 2002, federally
insured credit unions were assessed premiums only in 1991 and 1992,
when the fund's equity declined below the mandated minimum normal
operating level of 1.20 percent of insured shares.[Footnote 138]
However, unlike federally insured credit unions, federally insured
banks and thrifts operate exclusively under a premium-based insurance
system. This system requires banks and thrifts to remit a premium
payment of a specified percent of their balance of insured deposits
twice a year to FDIC to obtain federal deposit insurance. Each bank or
thrift treats the premium as an expense in its financial statements,
while FDIC recognizes the premium as income in its financial
statements. If a bank or thrift elects to not continue its federal
deposit insurance, its premiums are, unlike the NCUSIF insurance
deposit, nonrefundable.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA),
enacted in December 1991, contained some important provisions including
risk-based premiums for BIF and SAIF. FDIC developed and then
implemented the risk-based premium system on January 1, 1993. Under the
system, institutions were categorized according to a capital subgroup
(1, 2, or 3)and a supervisory subgroup (A, B, or C).[Footnote 139]
This resulted in the best-rated institutions being categorized as 1-A
and the worst institutions as 3-C. These categorizations result in a
range of premium costs, with the best-rated institutions paying the
lowest premium and the worst-rated institutions paying the highest
premium.
In August 2000, FDIC issued a report that discussed the current deposit
insurance system, including the existence of two separate funds, an
insurance pricing system that may provide inappropriate incentives for
risk and growth, and issues of fairness and equitable insurance
coverage, and offered possible solutions. The report warned that this
system might require banks to fund insurance losses when they can least
afford it. Solutions offered in the report included (1) merging BIF and
SAIF, (2) improving the pricing of insurance premiums through a number
of options, and (3) setting a "soft" target for the reserve ratio,
which would allow the deposit insurance fund balances to grow during
favorable economic periods, thereby smoothing premium costs over a
longer period of time. As a result of FDIC's report, legislation is
pending that may provide additional reforms of the deposit insurance
system, including pricing of insurance.
As did BIF and SAIF, American Share Insurance (ASI), the private
primary share insurer, adopted a form of risk-based insurance plan at
the end of 2000. As does NCUSIF, ASI's member credit unions pay a
deposit rather than an annual premium assessment to purchase their
insurance coverage. Prior to December 31, 2000, all of ASI's insured
credit unions were required to maintain a deposit of 1.3 percent of
each member's total insured share amounts, compared with 1.0 percent
that federally insured credit unions maintain with NCUSIF. With its
change to a risk-based system, ASI's insurance coverage now requires a
range--a minimum deposit of 1.0 percent up to a maximum of 1.3 percent
for each credit union depending on the credit union's CAMEL
rating.[Footnote 140]
The FDIC study of risk-based pricing indicated that one of the negative
aspects of not pricing to risk is that new institutions and fast-
growing institutions are benefiting at the expense of their older and
slower-growing competitors. Rapid deposit growth lowers a fund's equity
ratio and increases the probability that additional failures will push
a fund's equity ratio below the minimum requirements, resulting in a
rapid increase in premiums for all institutions.
[End of section]
Appendix XI: Comments from the National Credit Union Administration:
National Credit Union Administration:
October 10, 2003:
Office of the Chairman:
Richard J. Hilman, Director:
Financial Markets and Community Investment United States General
Accounting Office Washington, D.C.
Re: Draft GAO Report 04-91:
Dear Mr. Hilman:
Thank you for the opportunity to review and comment on GAO's draft
report entitled Credit Unions' Financial Condition Has Improved But
Opportunities Exist to Enhance Oversight and Share Insurance
Management. On behalf of the National Credit Union Administration
(NCUA), I would like to express our appreciation for the
professionalism exhibited by your staff, our gratitude for the dialogue
between NCUA and GAO throughout your study, and our concurrence with
most of your assessments regarding the challenges facing the National
Credit Union Administration (NCUA) and credit unions since 1991. The
discussion below responds specifically to your report's conclusions and
recommendations.
Financial Condition of Industry:
NCUA concurs with the report's assessment that overall the financial
health and stability in credit unions has significantly improved since
1991. NCUA has made notable progress in ensuring the safety and
soundness of the National Credit Union Share Insurance Fund (NCUSIF)
and providing proactive oversight of federally-insured credit unions.
Problem credit unions have declined and capital has substantially
increased. As noted in your report, the number of problem credit unions
declined since 1992 by 63 percent. During this same period assets grew
by 116 percent. Despite the strong asset growth, net worth in relation
to assets increased by a third. Net worth grew by 186 percent, adding
39 billion more dollars in protection to the credit union system.
Your report also correctly identifies the increasing concentration of
assets in larger, complex credit unions. Recognizing this trend, NCUA
responded by implementing the risk-focused examination (RFE) program.
As your report notes, the RFE program enables NCUA to focus our
resources on areas of risk. Further, the subject matter examiner (SME)
program, a key component of the RFE program, is enabling us to develop
staff with the necessary expertise and allocate them where needed. In
addition, NCUA is continuing to study [NOTE 1] means to further
enhance our supervision of larger, complex credit unions, while
maintaining our ongoing effective supervision of the 80 percent of
credit unions that have less than $50 million in assets.
NCUA also concurs with the report's recommendation to continue to work
closely with the Federal Financial Institutions Examination Council
(FFIEC) agencies to leverage the knowledge and experience the other
regulators have gained in administering a risk-focused examination
program. Your report notes that NCUA coordinated closely with our FFIEC
counterparts in developing and implementing the RFE program, and we
will continue this coordination as we make ongoing improvements in our
approach to supervising federally-insured credit unions.
Credit Union Mission of Serving Individuals of Modest Means:
NCUA respectfully does not concur with the report's recommendation that
the agency initiate a program or requirement to undertake the
collection of additional data beyond that presently being provided on
the extent to which credit unions are serving low and moderate income
members in underserved areas. Implementation of this recommendation
would impose significant and unnecessary data collection and reporting
burdens on credit unions [NOTE 2] and would be especially problematic
and burdensome for small credit unions that generally operate with
limited resources and rely heavily on volunteers. Also, given their
democratic control and not-for-profit organizational structure, credit
unions are uniquely positioned to reach out and serve these low-income
consumers, and have neither motive to do otherwise nor a record of
failing to do so. Indeed, Congress has amended both the Community
Reinvestment Act (CRA) and the Federal Credit Union Act on numerous
occasions since enactment of CRA in 1977. However, they have chosen
not to impose CRA-like requirements on credit unions, specifically
having rejected such proposals when offered.
Your report draws conclusions based on an analysis primarily drawn from
limited mortgage lending data, as well as demographic data
representative of what has primarily been an occupational based (thus
employed and tending to have better income levels) credit union
membership. However, as demonstrated in the marketing and business
plans in the applications of the growing number of credit unions
requesting community charters and underserved area expansions, there is
ample evidence to demonstrate that credit unions are both seeking to
serve, and are indeed serving, the un-banked as well as their low and
moderate income members. Credit unions accomplish this not only through
low-cost loans, but also through providing basic financial services
such as check cashing, direct deposit, no-minimum balance and no-fee
checking accounts, financial counseling and financial literacy
programs, bi-lingual operations, among other products and services. The
important entry point for this segment of the population is access to
savings and transaction services, eventually maturing into lending, as
some of these consumers are initially not capable of qualifying for
loans that meet appropriate safety and soundness criteria.
Available data, some of which is included in your report, already
indicates that credit unions in record numbers have added underserved
areas, reached out to entire communities through field-of-membership
conversions, and received low-income [NOTE 3] designations. In the
last few years, underserved area expansions have represented the
majority of all field-of-membership expansions approved. Further,
access to credit union service has been made available to 61.1 million
people in underserved areas through the 965 underserved area expansions
granted since January 2000. The number of federal credit unions serving
communities has more than doubled since 1998, from 6.2% to 16.5% of all
federal credit unions. Generally speaking, community charters provide
credit unions with more opportunities to serve underserved people than
traditional occupational-based charters. The number of low-income
designated credit unions has increased dramatically in the last ten
years, from 1.2% of all federally-insured credit unions in 1993 to
10.2% currently.
NCUA has been very active in encouraging credit unions to reach out and
provide service to those with limited access to financial services. Our
"Access Across America" initiative is one such example. This program
has focused on creating economic empowerment through expanded credit
union service into underserved neighborhoods and communities and
facilitating the sharing of resource information for credit unions
expanding into these areas. The results of this initiative, now with
three years of call report data available to make it possible for NCUA
to track membership growth trends in federal credit unions adopting
underserved areas in comparison to the membership growth trends in the
credit union community as a whole, clearly demonstrate that the
membership growth rate in credit unions with underserved areas
increased an average of 4.80% annually from 2000 to 2002, a 92.8%
higher rate than the 2.49% annual membership growth rate for credit
unions nationwide during the same three year period.
Requiring Report on Internal Controls:
NCUA concurs with your report's recommendation that large credit unions
(over $500 million in assets) should provide an annual management
report assessing the effectiveness of the institution's internal
control structure, and the independent auditor's attestation to
management's assertions. This is consistent with expectations and best
practices already established, such as the requirements in place for
banks via the Federal Deposit Insurance Corporation Improvement Act and
for public companies under the Sarbanes-Oxley Act of 2002. Further,
such a requirement would further leverage the ability of NCUA's RFE
program to focus attention on areas of risk. Your report includes this
recommendation for congressional consideration. NCUA is providing
guidance for credit unions on the principles of the Sarbanes-Oxley Act
that will, among other things, strongly encourage large credit unions
to voluntarily provide this reporting on internal controls. We expect
that all large credit unions will follow this guidance, but note that
NCUA has the authority to implement regulations requiring this should
it become necessary. Therefore, in our view, legislation regarding this
subject is not necessary.
Third-Party Vendor Review Authority:
Included among your recommendations is one encouraging NCUA to seek the
same legislative authority other depository institution regulators have
to examine third-party vendors. Credit unions often rely heavily on
third-party vendors for various mission critical or otherwise important
services and functions (e.g., data processing, technology-based service
delivery channels, etc.). Given that many of these third-party vendors
service numerous credit unions, a failure of a vendor poses systemic
risk. In addition to the financial risk, interruptions of these
services provided by third-party vendors subject credit unions and
their members to issues involving privacy, security, and reputation
risk. While NCUA to date has not experienced insurmountable problems
associated with the lack of direct authority over third-party vendors
and has had considerable and effective influence over third-party
vendors through our supervision of the credit unions who are their
customers, NCUA would not oppose legislation if brought before Congress
to provide this authority, provided appropriate discretion is extended
to the agency in the allocation of agency resources and evaluation of
risk parameters in utilizing this authority. Because this is a
statutory issue and not one of existing NCUA regulatory authority
without being provided a specific congressional authorization, NCUA
recommends that your report include this as a matter for congressional
consideration.
Overhead Transfer Rate:
NCUA concurs with your report's recommendation to make improvements to
the process for determining the overhead transfer rate (OTR). In fact,
we initiated such an endeavor in November 2002. The report suggests
recent fluctuations in the rate, and concerns regarding its accuracy,
are the result of surveys that have not been conducted regularly or
over sufficient periods of time, and that NCUA is still in the process
of implementing the recommendations made by the external auditor
review. NCUA fully implemented all of the external auditor
recommendations in 2002, and the agency now has an entire year's worth
of survey results based on the revised process.
Your report recommends we improve our process for determining the OTR
by consistently applying the rate (i.e., settling on and using the same
method overtime), updating the rate annually, and completing the survey
with full representation. NCUA is in the process of researching a more
consistent method of calculating the OTR that will incorporate the
recommendations of the external auditor review into a more thorough and
updated calculation method. Among various refinements, any new method
will incorporate the use of the most current information, including the
ongoing revised time survey, to enable the rate to be set annually.
Further, NCUA will continue to ensure the sample of examiners
completing time surveys is of sufficient size to be statistically
valid.
Risk-Based Pricing for Federal Share Insurance:
Your report accurately states that the NCUSIF, as the only deposit
insurer that has not adopted a risk-based pricing scheme, does not
allocate costs to institutions based on the relative risk they pose to
the fund. NCUA feels it must point out that despite the fact all other
deposit insurers have adopted risk-based pricing, it is not a foregone
conclusion that the advantages to this approach outweigh the
disadvantages. Some of the issues that would need to be carefully
considered with such an approach are the impact on smaller
institutions, designing an appropriate measure of relative risk,
[NOTE 4] and avoiding a system that is pro-cyclical. [NOTE 5] Also,
any risk-based pricing would require action by Congress to amend the
Federal Credit Union Act, which currently requires uniform pricing
with respect to the one percent deposit and any insurance premium.
NCUA suggests that a preferable way to provide incentives, impose
discipline on the industry in this area, and align risk with cost would
be through adoption of a Prompt Corrective Action (PCA) system based on
risk-based net worth. [NOTE 6] A PCA system where required net worth
levels are tied to an institution's risk profile would provide for
self-regulation and impose a higher cost (albeit indirect) on those
institutions with high growth and/or riskier operations. This would
also achieve the goal of linking the insurance fund's protection to
the risk each institution poses, as higher credit union net worth
provides for additional cushion against losses to the NCUSIF.
Insurance Fund Loss Estimation Methodology:
NCUA concurs in part with your report's conclusion that the NCUSIF's
loss reserve methodology warrants study to seek ways to further refine
our estimates. While we are always interested in applying best
practices in how we determine the amount of the liability for losses
from insured credit unions, the current process has proven reasonable.
Our external auditor has found our loss reserve funding to be
consistent with generally accepted accounting principles, and never to
be materially underfunded or overfunded. The precision of the process
is consistent with the relative materiality of the account and the
impact on the NCUSIF. Since reserving for losses is an accounting
exercise in matching current revenues with expenses, our primary focus
is in ensuring our overall equity level is sufficient to cover the
risks to the NCUSIF.
NCUA has been in regular contact with the FDIC regarding their
reserving process. FDIC recently received the recommendations of their
consultant and are revising their procedures based upon that review. We
are awaiting receipt of the results of the evaluation, and will review
the details of the revised FDIC process and our ability to integrate
their practices within our system.
Private Share Insurance:
NCUA concurs with the report's identification of possible systemic risk
that could be associated with inadequately capitalized or improperly
managed private share insurance that lacks the full faith and credit
backing of a state or the federal government. The asset concentration
risk with limited borrowing capacity of the private insurer along with
the lack of any reinsurance presents unique challenges for the eight
state supervisory authorities where private insurance exists today.
Additionally, while the 30-day notice termination policy that may be
employed is a risk mitigation strategy for the private insurer, it
could become a significant challenge to the state supervisors when such
an event occurs in a larger credit union. The likelihood of a credit
union qualifying for federal insurance upon receiving a 30-day private
insurance termination notice would be doubtful. Finally, the high rate
of failure to disclose the lack of federal share insurance noted in
your report presents a unique reputation risk for the state supervisors
and could also have an impact on federally-insured credit unions due to
confusion by consumers. It is also important to note that, for credit
unions insured by the NCUSIF, should insurance termination be required,
in addition to NCUA's requirement that all members be notified,
federally-insured credit unions are afforded a hearing and other due
process rights before termination of insurance, and coverage on member
deposits remains in place for one year after termination of a credit
union's federally-insured status.
NCUA concurs with GAO's previous conclusions as stated in the report
Federal Deposit Insurance Act - FTC Best Among Candidates to Enforce
Consumer Protection Provisions that members of privately-insured credit
unions may not be adequately informed that their savings are not
federally insured and Congress should remove the prohibition in the
Federal Trade Commission's appropriations preventing their enforcing
the legally required disclosures.
Thank you again for the opportunity to comment on the draft report. If
you have any questions or need further information, please feel free to
contact NCUA Executive Director J. Leonard Skiles at (703) 518-6321.
Sincerely,
Signed by:
Dennis Dollar:
Chairman:
NOTES:
[1] The primary example of this is the Large Credit Union Pilot
program.
[2] The information would need to include not just demographic (income)
information related to members with loans, but to be truly meaningful
this would need to be captured for all members. Further, the data would
need to include information on the specific demographics of each credit
union's field of membership.
[3] Indicating more than 50% of the membership is low income.
[4] FDIC's and ASI's model use CAMEL ratings as part of the risk-based
pricing determination. Our experience has been that CAMEL ratings are
not the best proxy of risk because they tend to be lagging indicators
and have only a modest correlation to actual losses to the fund. In
addition, linking CAMEL ratings to direct costs would create additional
conflict regarding the ratings. A more objective model involving the
risk on an institutions' balance sheet and inherent in the complexity
of their operations has more intuitive appeal.
[5] Federal Reserve Board Chairman Alan Greenspan's April 2002
testimony before the Senate Committee on Banking, Housing, and Urban
Affairs supports the need to avoid a pro-cyclical insurance pricing
system.
[6] Though PCA currently includes a Risk-Based Net Worth requirement
for credit unions, it is in addition to the standard requirement
applicable to all credit unions.
[End of section]
Appendix XII: Comments from American Share Insurance:
ASI: American Share Institute:
5656 Frantz Road, Dublin, Ohio 43017; 614.764.1900 Fax 614.764.1493;
800.521.6342; mail@americanshare.com; www.americanshare.com.
[End of table]
October 14, 2003:
Mr. Richard J. Hillman:
Director, Financial Markets and Community Investment Issues:
US General Accounting Office:
441 G Street NW:
Washington, DC 20548:
Dear Mr. Hillman:
Thank you for the opportunity to comment on the draft of the Private
Share Insurance component (the "Study Section") of your organization's
broader study of the Credit Union System, titled: Credit Unions:
Financial Condition Has Improved But Opportunities Exist to Enhance
Oversight and Share Insurance Management (the "Study").
After reviewing the draft of the Study Section, it is our opinion that
the GAO has failed to adequately assess the private share insurance
industry and has drawn conclusions based on assumptions regarding
future outcomes that lack foundation in actuarial science and fail to
give credit to the past performance of the sole remaining credit union
private share insurer, American Share Insurance (ASI). Further, the GAO
repeatedly, and erroneously, compares private share insurance to that
of the federal share insurance program, without any consideration being
given to other private sector insurers or the original principles of
private share insurance.
Private share insurance for credit unions is an alternative, enabled by
state, not federal statute that has brought various financial
innovations to the credit union system which has helped in the system's
growth and expansion of services to consumers, while providing
competitive balance in share insurance in those states that have
authorized its operation.
The Study Section states that the following concerns exist regarding
private share insurance in the credit union movement, to which we offer
our rebuttals. The four primary concerns noted are as follow:
A. ASI's risks are concentrated in a few large credit unions and in
certain states.
The Study Section's conclusions that a "large" credit union creates
inordinate risk in a private fund and that a limited market naturally
infers concentration risk are unfounded and presumptuous. A single
large, high-quality credit union actually provides financial resources
that improve, not diminish, the financial integrity of the private
share insurer. Also, the geographic distribution of ASI's insured
credit unions is a matter of state law. Of the almost 20 states that
statutorily permit the private share insurance option, nine have
approved ASI. In the aggregate, ASI insures 19% of the 1,095 state-
chartered credit unions in those states, which in any other private
sector business would be considered a significant market share,
especially given the competition. Also, a 19% market presence helps
diversify the risk assumed by the private program.
B. ASI has limited ability to absorb large (catastrophic) losses
because it does not have the backing of any government entity.
In its 29-year history, ASI has paid over 110 claims on failed credit
unions, and more importantly, no member of a privately insured credit
union has ever lost money in an ASI-insured account. Also, ASI's
statutory ability to reassess its member credit unions provides a
significant amount of committed equity for catastrophic losses.
Further, the company employs numerous programs to mitigate the risk of
large losses and field examines more than 60% of its insured risk
annually. Therefore, a sound private deposit insurance program, built
upon a solid foundation of careful underwriting, continuous risk
management and the financial backing of its mutual member credit
unions, can absorb large (catastrophic) losses.
With regard to the government backing, the GAO fails to consider that
ASI is a private business, licensed at the state level; owned by the
credit unions it insures; and, managed by a board of directors elected
by such member credit unions. Private share insurance was never
intended to have any state or federal guarantees.
C. ASI's lines of credit are limited in the aggregate as to amount and
available collateral.
The Study Section erroneously views the company's lines of credit as a
source of capital, when they are solely in place to provide emergency
liquidity. Proportionately, ASI's committed lines of credit with third
parties, as a percentage of fund assets, are greater than that of the
federal share insurer. Comparisons throughout the Study Section are
often provided on an absolute basis, not a proportionate basis, which
we believe skews many of the results included in the Study Section.
D. Many privately insured credit unions have failed to make required
consumer disclosures about the absence of federal insurance of member
accounts as required under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), and the Federal Trade Commission
(FTC) is the appropriate federal agency to enforce such compliance.
FDICIA was passed in December 1991, and not long thereafter, the FTC
sought and received an exemption from Congress from enforcing the
consumer disclosure provisions of FDICIA. We concur with the Study
Section's observations in this regard, and believe privately insured
credit unions would benefit from FTC's enforcement of such provisions.
Detailed comments supporting and supplementing our above comments are
attached as Exhibit A.
Very truly yours,
DENNIS R. ADAMS:
President/CEO:
Signed by DENNIS R. ADAMS:
DRA/krb:
Attachment:
Exhibit A:
Detailed Comments on the GAO's Draft Study of Private Share Insurance:
A Component of the GAO's Study Titled:
Credit Unions: Financial Condition Has Improved But Opportunities
Exist:
To Enhance Oversight and Share Insurance Management:
Submitted By:
American Share Insurance:
October 14, 2003:
A. ASI's risks are concentrated in a few large credit unions and in
certain states.
All businesses face some degree of concentration risk. For example, 55%
of all federally insured shares are on deposit at only 230 NCUSIF-
insured credit unions --this represents less than 3% of all federally
insured credit unions nationally. Despite this natural phenomena, the
GAO proceeds to raise concern over ASI's risk distribution.
Geographic Risk:
The Study Section states that compared to federally insured credit
unions, "…relatively few credit unions are privately insured." As of
December 31, 2002, about 2% of all credit unions are privately insured.
ASI is currently authorized in nine states and insuring credit unions
in eight nationally, and is limited to insuring only state-chartered
credit unions in those states in which the company is authorized to do
business. In its current states of operation, the company insures 212
credit unions, comprising $10.8 billion in insured shares. What the
Study Section fails to report is that these credit unions represent 19%
of all 1,095 state-chartered credit unions within that limited market,
and 13.67% of the $80 billion in shares in those same 1,095 credit
unions. Clearly, private share insurance is more significant to those
affected states than the Study Section's 2% statistic infers.
The Study Section also reports that 45% of all shares insured by ASI
are in credit unions chartered in California, as compared to 14.7% for
the NCUSIF. These facts can be misleading given that ASI has a limited
market, and the NCUSIF operates in all 50 states. An entirely
different, but more comparable, result is achieved when one isolates
the relative risk in these eight states only. Under an assumption that
both entities are limited to doing business in just the eight ASI
states, ASI's 45% concentration in California looks significantly less
daunting when compared to 55% for the NCUSIF. This should offer
evidence that when placed on equal footing, the relative risk
concentration variances are reduced materially.
While eight states represent a limited market, they do not necessarily
represent a geographic concentration risk, as inferred by the Study
Section. We argue that the company's states of operation represent a
diverse cross-section of our nation, for example: East Coast -
Maryland; Midwest - Ohio, Indiana and Illinois; West Coast - California
and Nevada; Northwest - Idaho; and, Southeast - Alabama.
Statutory Factors:
As a private company, ASI faces various admission obstacles when
seeking new markets. First, a state must have a state statute that
allows for an option in share insurance. According to the Study
Section, a total of approximately 20 state statutes currently allow for
the share insurance option for their state-chartered credit unions.
Based on this data, ASI is operating in about 40%-50% of the available
markets. Furthermore, the actual power to approve such coverage, when
permitted by statute, is generally resident with the specific state's
credit union supervisory authority. So, as a private company, to do
business in any state requires that three basic conditions exist: (1)
credit union demand; (2) a permissible statute; and, (3) regulatory
acceptance of the option.
Based on these legislative and regulatory barriers, we take exception
to the GAO constantly using the federal share insurer, the NCUSIF, as a
benchmark in evaluating a private company's geographic concentration
risk. Due to the agency's federal franchise, none of the above
conditions need be present for the NCUSIF to do business in a state.
Mitigating Concentration Risk:
The business of insuring credit union member deposits is a business of
risk assumption. Accordingly, the type of risk one assumes drives the
cost of the program and the risk of ultimate loss to the fund. ASI has
been very selective in assuming the risk it underwrites, and does a
thorough job of monitoring and field examining its insured institutions
on a recurring basis as reported in the Study Section. In addition, the
Study Section reports that the company has denied insurance coverage to
certain credit unions representing inordinate risk to the fund, and
conversely has approved many that satisfy the company's Risk
Eligibility Standards. Of the 29 credit unions that have converted to
private share insurance during the past decade, all were at the time,
and are now, safe and sound credit unions, and all strictly complied
with the federal requirements to convert insurance. These were not
problem credit unions fleeing federal supervision. Included in these
federal requirements is a mail ballot vote of the credit union's entire
membership.
Risk in a Few Large Credit Unions:
The Study Section reports that ASI has one insured institution that
represents approximately 25% of its total insured shares, and that its
"Top Five" credit unions represent 40% of total insured shares. The
first statistic compares unfavorably to the NCUSIF's reported
concentration risk in a single institution of 3%, to which we take no
exception. The risk of a single institution, however, has been
significantly misrepresented in the Study Section. A large, well
managed credit union contributes significantly to the financial
stability of a share insurance program.
When underwriting its current largest institution in 2002, ASI
considered several risk-mitigating factors, and, as with all applicant
credit unions, performed a careful analysis of the institution. First,
the subject institution received (and continues to receive) the highest
rating available for credit unions. Second, ASI's independent actuaries
evaluated the adequacy of ASI's capital prior to, and following, the
underwriting of this credit union, and determined that ASI would
continue to have a sufficiently high probability of sustaining runs
even with this credit union in its insurance fund. Lastly, the federal
insurer and state regulator both approved of the credit union's
insurance conversion, but only after the credit union took a full mail
ballot vote of its almost 200,000 members and agreed to satisfy all the
requirements of consumer disclosure under FDICIA.
With regard to the risk concentrated in a few large credit unions, the
Study Section fails to report the concentration risk in what would be
the equivalent of the NCUSIF's "Top Five" federally insured credit
unions. Proportionately, this would equate to the NCUSIF's top 230
federally insured credit unions. In terms of asset size, this group of
230 credit unions represents 45% of the NCUSIF's total insured shares.
Clearly, the two funds compare on this statistic, when measured on a
proportionate, not absolute basis.
B. ASI has limited ability to absorb large (catastrophic) losses because
it does not have the backing of any government entity.
The credit union movement introduced share insurance on the state level
long before Title II of the Federal Credit Union Act was enacted in
1971, providing the first federal deposit insurance for credit unions.
However, private share insurance didn't come of age until the mid
1970s, as states began to realize the loss of sovereignty in a state
charter under an all-federal insurance setting.
It was never envisioned that private share insurance would seek, or
need, any guarantee from a state or federal government to operate. In
the cooperative spirit of the credit union movement, private share
insurance was designed to be a credit union-owned and credit union-
operated private fund. Nor was it ever the intent of the framers of
private share insurance for it to operate without supervision, or
financial capacity. Accordingly, various state laws were proactively
sought and passed to permit the private share insurance option, subject
to admission standards and required approvals. Private share insurance
was designed to provide credit unions with a comparable - not identical
--alternative means for protecting member share accounts. Accordingly,
a government backing for private share insurance was never anticipated,
and to use the lack of such a guarantee as a criticism of private share
insurance does not take into account its legislative intent, past
performance or founding principles.
To our knowledge, no private insurance company, licensed by individual
states, has a guarantee from the federal government. Further, no
private insurance company in the U.S. would be able to meet the "deep
pockets" test of the federal or state governments inferred in the Study
Section. As evidence of this, the largest insurance company in the
country reports just under $32 billion in capital from all of its
various insurance product lines. This is barely 50% of the aggregate
capital available to the NCUSIF. (Note: This amount is the estimated
sum of the NCUSIF's balance sheet capital plus the off-balance sheet
recapitalization liability of its insured credit unions).
Credit union-only insurance funds have a stable history that does not
track with insurers of thrifts or a combination of thrifts and credit
unions. Funds that have insured only credit unions (like ASI and the
NCUSIF) have had very successful track records when it comes to loss
and risk management. In over 29 years, ASI's loss ratio has been
significantly below that of its federal counterpart, and ASI has never
had a year with an operating loss, nor has it ever had to seek any form
of recapitalization from its member credit unions to bolster the fund
due to losses.
The reality is that a sound deposit insurance program, built upon a
solid foundation of careful underwriting, continuous risk management
and the financial backing of its mutual member credit unions, can exist
as long as consideration is given to an actuarial analysis of the
capital adequacy of the program in terms of sufficiently high
probabilities (over 90%) of being able to withstand runs and multiple
runs on the system. This is a common analysis that is accepted in the
insurance industry for various kinds of low frequency, high-severity
risk programs and is the foundation that the ASI insurance program is
built upon. Our actuarial analyses and independent actuarial reports
were provided to the GAO during its investigation. Alternative share
insurance can be comparable to the NCUSIF, and still not have a
government backing.
C. ASI's lines of credit are limited in the aggregate as to amount and
available collateral.
With regard to ASI's committed bank lines of credit, the Study Section
infers that ASI's ability to absorb losses is reduced since its lines
of credit are limited in the aggregate as to amount and available
collateral. We disagree with this inference. The company's lines of
credit are designed to be solely a liquidity facility. The committed
lines ensure liquidity of ASI's invested funds; i.e., they provide a
mechanism for ASI to quickly generate cash to meet liquidity needs,
without having to liquidate the portfolio. Resources available for
funding losses are not the same as resources available for providing
liquidity. Lines of credit are not intended to be a source for funding
insurance losses. In fact, banks would not provide a loan for such a
purpose. ASI's assets and its off-balance sheet sources of funding
(i.e., the power to recapitalize the fund by insured credit unions
under the ASI's governing statute and insurance policy) are its capital
sources for funding losses, not the bank lines of credit.
Proportionately, ASI's lines of credits are greater than that of the
NCUSIF. ASI's $90 million in committed lines of credit equates to
approximately 47% of the company's total assets. NCUSIF's $1.6 billion
maximum borrowing capacity ($100 million from the U.S. Treasury and
$1.5 billion from the Central Liquidity Facility, as disclosed in the
NCUSIF's and CLF's audited financial statements for the year ended
December 31, 2002), equates to approximately 28% of its total assets.
ASI has other sources of liquidity when it liquidates a credit union -
-that is the credit union's own liquid assets. Approximately 42% of
ASI's primary insured credit unions' total assets are comprised of cash
and investments - we believe this is significant. In addition, the non-
liquid assets (namely loans and fixed assets) of a failed institution
can be pledged as collateral for additional borrowings to generate
short-term liquidity until such loans and other assets can be collected
and/or sold. In essence, a failed credit union's total assets over time
often generate sufficient liquidity to pay shareholders. Any shortage
(historically less than 4% of total assets of the failed institution)
is usually funded as a loss by ASI's assets. This is the same principle
under which NCUSIF operates.
Many privately insured credit unions have failed to make required
consumer disclosures about the absence of federal insurance of member
accounts as required under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), and the Federal Trade Commission
(FTC) is the appropriate federal agency to enforce such compliance.
The Study Section reference to the GAO's August 20, 2003 study titled:
Federal Deposit Insurance Act: FTC Best Among Candidates to Enforce
Consumer Protection Provisions (GAO-03-971) reiterates the GAO's
earlier concern that "…members of privately insured credit unions might
not be adequately informed that their deposits are not federally
insured…":
Although the statement may be accurate, any implication that ASI and
its member credit unions are purposefully misleading consumers fails to
directly implicate the Federal Trade Commission (FTC) who, with the
concurrence of Congress, has totally disregarded its statutory
responsibility to regulate the disclosure requirements as defined by
Section 151 (g) of FDICIA, codified at 12 U.S.C. § 1831 (t)(g).
We believe that the GAO's earlier study brought to light the problems
that arise when a federal law effectively lacks an enforcement agency,
and we support the GAO's previous conclusion that the FTC is the
appropriate agency for monitoring and defining private share insurance
consumer disclosure requirements.
This concludes ASI's detailed comments in response to the GAO's draft
report on its study of private share insurance in the credit union
movement --a component of the GAO's broader study titled, Credit
Unions: Financial Condition Has Improved But Opportunities Exist to
Enhance Oversight and Share Insurance Management.
[End of section]
Appendix XIII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard J. Hillman (202) 512-8678 Debra R. Johnson (202) 512-8678 Harry
Medina (415) 904-2220:
Staff Acknowledgments:
In additional to those named in the body of this report, the following
individuals made key contributions.
William Bates Sonja Bensen Anne Cangi Theresa L. Chen William Chatlos
Jeanette Franzel Charla Gilbert Paul Kinney Jennifer Lai May Lee
Kimberley McGatlin Grant Mallie José R. Peña Donald Porteous Mitch
Rachlis Emma Quach Barbara Roesmann Nicholas Satriano Kathryn Supinski
Paul Thompson Richard Vagnoni:
(250097):
FOOTNOTES
[1] U.S. General Accounting Office, Credit Unions: Reforms for Ensuring
Future Soundness, GAO/GGD-91-85 (Washington, D.C.: July 10, 1991). This
report contained a variety of recommendations to Congress and NCUA. See
appendix II for information on the implementation of these
recommendations.
[2] See Pub. L. No. 105-219 (Aug. 7, 1998).
[3] In addition, we recently completed a separate review of private
insurance issues. See U.S. General Accounting Office, Federal Deposit
Insurance Act: FTC Best Among Candidates to Enforce Consumer Protection
Provisions, GAO-03-971 (Washington, D.C.: Aug. 20, 2003).
[4] This quotation is taken from the title of the Federal Credit Union
Act of June 26, 1934. In addition, in CUMAA the congressional findings
stated among other things that credit unions "have the specified
mission of meeting the credit and savings needs of consumers,
especially persons of modest means (Pub. L. No. 105-219 § 2 (1998)).
While these statutes have used "small means" and "modest means" to
describe the type of people who credit unions might serve, in this
report we used "low-and moderate-income," as defined by banking
regulators.
[5] A corporate credit union is one whose members are credit unions,
not individuals. Corporate credit unions provide credit unions with
services, investment opportunities, loans, and other forms of credit
should credit unions face liquidity problems. See 12 C.F.R. Part 704
(2003).
[6] We only reviewed federally insured credit unions--about 98 percent
of all credit unions--because they were all required to submit call
report data to NCUA, while not all privately insured credit union call
report data were reported to NCUA. Call reports are submitted by credit
unions to NCUA and contain data on a credit union's financial condition
and other operating statistics. Throughout the report, when we use the
term "industry," we are referring to federally insured credit unions
and exclude the 212 privately insured credit unions.
[7] NCUA rates credit unions using the CAMEL system, which stands for
capital adequacy, asset quality, management, earnings, and liquidity.
The ratings are 1 (strong), 2 (satisfactory), 3 (flawed), 4 (poor), and
5 (unsatisfactory).
[8] See GAO/GGD-91-85 for additional background on the history of NCUA
and state field of membership regulatory policies.
[9] A CUSO is a corporation, limited liability corporation, or limited
partnership that provides services such as insurance, securities, or
real estate brokerage, primarily to credit unions or members of
affiliated credit unions. NCUA specifies which types of activities a
CUSO may undertake. Credit unions can invest up to 1 percent of paid-in
and unimpaired capital and surplus in CUSOs. Credit unions can loan up
to an aggregate of 1 percent of paid-in and unimpaired capital and
surplus to CUSOs. The CUSO must maintain a separate identity from the
credit union. See 12 C.F.R. Part 712 (2003).
[10] National Credit Union Administration v. First National Bank &
Trust Co., 522 U.S. 479 (1998).
[11] Generally, primary deposit insurance covers the first portion of
members' deposits up to a specified amount. For example, NCUSIF
provides primary deposit insurance up to $100,000 per member per
qualifying account. In contrast, excess deposit insurance is optional
coverage above the amount provided by primary deposit insurance that
credit unions may purchase from private insurers.
[12] Throughout the report we use the terms "banks," "banks and
thrifts," and "FDIC-insured institutions" interchangeably.
[13] The return on average assets is calculated as the current period's
net income divided by the average of current period assets and prior
year-end assets.
[14] There were 68 credit unions with assets between $1 billion and $5
billion, which held 21 percent of industry assets, and three credit
unions with assets in excess of $5 billion, which held 6 percent of
industry assets. As of December 31, 2002, the largest credit union held
$17.6 billion in assets.
[15] The Credit Union National Association (CUNA) collects information
about the characteristics (for example, income, race, and age) of
credit union members but not specifically the income levels of members
who actually receive mortgage and consumer loans or use other services.
[16] The CRA requires all federal bank and thrift regulators to
encourage depository institutions under their jurisdiction to help meet
the credit needs of the local communities in which they are chartered,
consistent with safe and sound operations. See 12 U.S.C. §§ 2901, 2903,
and 2906 (2000). CRA requires that the appropriate federal supervisory
authority assess the institution's record of meeting the credit needs
of its entire community, including low-and moderate-income areas.
Federal bank and thrift regulators perform what are commonly known as
CRA examinations to evaluate services to low-and-moderate income
neighborhoods. Assessment areas, also called delineated areas,
represent the communities for which the regulators are to evaluate an
institution's CRA performance.
[17] Overall, State officials reported that credit union examination
ratings have been similar to those of banks, except that credit unions
have received a somewhat lower percentage of "outstanding," the highest
rating. As of July 2003, no Massachusetts credit union had a rating
lower than "satisfactory" for Massachusetts's version of the CRA
examination. The officials also noted that analysis of HMDA data by
itself is inadequate because loan application records do not capture
all the information available in an application.
[18] The State of Massachusetts permits a credit union not serving
geographic areas to designate its membership as its assessment area.
For example, one credit union, serving a major communications company,
designated its membership as those who are employees or retired
employees of the credit union itself; retirees and employees of other
communication companies, including their affiliates and subsidiaries;
and family members of eligible employees and retirees.
[19] Woodstock Institute, "Rhetoric and Reality: An Analysis of
Mainstream Credit Unions' Record of Serving Low Income People"
(Chicago: February 2002).
[20] NFCDCU represents and provides, among other things, financial
assistance, technical assistance, and human resources to about 215
community development credit unions for the purpose of reaching low-
income consumers.
[21] In 2000, NCUA required that any type of application related to
expanding, converting, or chartering a community credit union include
information known as a "community action plan," which described the
credit union's plan for serving the entire community. In interim rules
issued in December 2001 and final rules adopted in May 2002, NCUA
repealed this requirement. In discussion of the final rule, NCUA
stated: "It is an unreasonable practice to require only certain credit
unions to adopt specific written policies addressing service to the
entire community, without any evidence that these credit unions are
failing to serve their entire communities." CUNA and the National
Federation of Credit Unions concurred with this decision. CUNA further
noted that the imposition of this requirement could encourage federally
chartered credit unions to convert to a state charter.
[22] The SCF is conducted every 3 years and is intended to provide
detailed information on the balance sheet, pension, income, and other
demographic characteristics of U.S. households and their use of
financial institutions. See appendix I for details.
[23] These percentages reflect the percent of households using
financial institutions as a percent of all financial institution users
and does not include those households that are sometime referred to as
unbanked.
[24] Those who "primarily" used credit unions placed more than 50
percent of their assets in credit unions and those who "primarily" used
banks placed more than 50 percent of their assets in banks. The term
"use" refers to a household's placement of assets in a checking,
savings, or money market account. Our methodology for determining these
classifications was based on work performed by Dr. Jinkook Lee, a
professor and researcher at Ohio State University. See Jinkook Lee and
William A. Kelly Jr., in "Who Uses Credit Unions?" (Prepared for the
Filene Research Institute and the Center for Credit Union Research,
1999, 2001).
[25] See appendix I for the income category definitions.
[26] HMDA, 12 U.S.C. §§ 2801-2811 (2000), was enacted to provide
regulators and the public with information on home mortgage lending so
that both could determine whether institutions were serving the credit
needs of their communities. As required by the Federal Reserve Board's
Regulation C (12 C.F.R. Part 203), lenders subject to HMDA are required
to collect data containing information about the loan and the loan
applicant. This information is submitted on files known as loan
application registers (loan records). HMDA-reportable mortgages
include those for home purchase, home improvement, and refinancing of
home purchase loans, but we analyzed only those made for home purchases
because these loans are a gateway to homeownership and other loans are
easier to obtain. See appendix I for more information.
[27] We created a bank peer group that consisted of financial
institutions with less than $16 billion in assets because the largest
credit union held assets between $15 billion and $16 billion as of
December 2001. We excluded financial institutions that only made
mortgages. Our analysis included 4,195 peer group banks.
[28] To categorize the home purchaser's income, we used the 2001 HUD-
estimated median income estimates for each Metropolitan Statistical
Area (MSA) based on the 1990 U.S. Census, as supplied by the Federal
Reserve Board. Results may have been more accurate if these estimates
were based on the 2000 U.S. Census. In 2003, HUD must begin basing
their median income estimates on the 2000 U.S. Census.
[29] Our analysis of NCUA call report data indicated that 93 percent of
credit unions with more than $31 million in assets, as of December 31,
2000, made first mortgage loans, loans that include home purchase
loans, compared with only 34 percent of credit unions with fewer
assets.
[30] In total, for 2001, 1,717 credit unions reported data to HMDA, but
our analyses only included the 1,446 that made mortgage loans that met
our criteria. For example, we only included mortgage loans for home
purchases rather than refinancing.
[31] For larger institutions, those with more than $250 million in
assets, CRA examinations generally consist of three parts--a lending
test, a service test, and an investment test. The lending test entails
a review of an institution's lending record, including originations and
purchases of home mortgages, small business, small farm, and, at the
institution's option, consumer loans throughout the institution's
assessment area, including low-and moderate-income areas. The lending
test is weighted more heavily than the investment and service tests in
the institution's overall CRA rating. The service test requires the
examiner to analyze an institution's system for delivering retail
banking services and the extent and innovativeness of its community
development services. The investment test evaluates an institution's
investment in community development activities.
[32] These credit unions receive special help from NCUA regional staff,
including assistance in completing business plans and maintaining
financial records. Low-income credit unions also qualify for low-
interest loans and technical assistance grants and are permitted to
accept nonmember deposits and secondary capital accounts. According to
NCUA estimates, as of December 31, 2002, the median asset level of
these credit unions was about $3.4 million. About 107 of these credit
unions had more than $32 million in assets, the threshold for reporting
lending data to HMDA in 2003.
[33] As of December 31, 2002, there were 907 low-income credit unions.
Credit unions can use a number of methods to document their low-income
eligibility, such as reviewing loans to identify members' wages or
household incomes, or written membership surveys that request the
members' total household income and annual wages.
[34] See appendix V for more detailed information on credit union
services by asset size.
[35] CUNA 2002 National Member Survey and research and information from
CUNA and affiliates. CUNA based its statistics on average household
income on a survey of 1,000 randomly selected households conducted in
February 2002. The data from this survey were weighted to accurately
represent U.S. consumers age 18 and older.
[36] CUNA supplemented its average income analysis of members and
nonmembers with one that divided consumers into four institution user
groups--as similarly done by Jinkook Lee, in "Who Uses Credit Unions"
in her analysis of the SCF and in our previous analysis--and calculated
the average household income of each institution user group. CUNA
determined that consumers who only used banks and only used credit
unions had a lower average income than consumers who used both
institutions. In addition, when comparing the average income of
consumers who used both institutions, the analysis concluded that those
who primarily used credit unions had a slightly lower average income
than those who primarily used banks.
[37] The study cited is "Rhetoric and Reality: An Analysis of
Mainstream Credit Unions' Record of Serving Low Income People"
(February 2002). To determine the characteristics of credit union
members, the Woodstock Institute analyzed 1999 and 2000 survey data
collected by the Metro Chicago Information Center (MCIC). MCIC surveyed
roughly 3,000 households in the Chicago area and asked respondents
whether they were members of a credit union. However, the survey did
not specifically ask whether the respondents held accounts at a bank or
credit union.
[38] National Credit Union Administration v. First National Bank &
Trust Co., 522 U.S. 479 (1998).
[39] Pub. L. No. 105-219 § 101(2).
[40] Id.
[41] CUMAA permitted the following common bonds: (1) the single common
bond, defined as one group with a common bond of occupation or
association; (2) the multiple common bond, defined as including more
than one group, each with a common bond of occupation or association;
and (3) the community bond, defined as persons or organizations within
a well-defined local community, neighborhood, or rural district.
Formation of multiple common-bond credit unions is limited to groups
having fewer than 3,000 members unless NCUA grants an exception based
on criteria contained in CUMAA. See 12 U.S.C. § 1759(b), (d), as
amended.
[42] According to NCUA officials, single-bond credit unions are more
susceptible to failure because they are reliant on one type of
occupational group. For example, if an occupational group were subject
to layoffs, the credit union could lose its membership base or
experience a decline in assets.
[43] National Credit Union Administration v. First National Bank &
Trust Co., 522 U.S. 479 (1998).
[44] Although single-bond credit unions included about 38 to 40 percent
of all federally chartered credit unions between 2000 and March 2003,
during this time period they only held about 18 percent of all assets
of federally chartered credit unions. In contrast, federally chartered
multiple-bond credit unions held about 70 percent of federal assets in
March 2000, and this percentage dropped to about 65 percent in 2003.
Federally chartered community credit unions held about 13 percent of
federal assets in 2000, and this percentage increased to about 17
percent of assets in March 2003.
[45] In 1994, NCUA's Interpretive Ruling and Policy Statement (IRPS)
94-1 authorized all federally chartered credit unions, regardless of
bond, to include in their membership, without regard to location,
communities and associational groups satisfying the definition of low
income. This program should not be confused with NCUA's "low-income
designated program," which permits credit unions who exclusively serve
low-income areas to maintain secondary capital and accept nonmember
deposits.
[46] Pub. L. No. 105-219 § 101 (2), 12 U.S.C. § 1759 (e)(2), as
amended. Under this provision, once a person becomes a member of a
credit union, that person or organization may remain a member of that
credit union until the person or organization chooses to withdraw from
membership in the credit union.
[47] The Federal Credit Union Act requires NCUA to encourage the
formation of separately chartered credit unions instead of approving
the inclusion of an additional common-bond group within the field of
membership of an existing credit union. 12 U.S.C. § 1759(f)(1). From
1991 to March 2003, only 143 new federally insured credit unions were
chartered, an average of about 11 to 12 new credit unions per year.
NCUA said that small groups are generally not economically sustainable
and prefer to join multiple-bond credit unions.
[48] Pub. L. No. 105-219 § 101; See 12 U.S.C. § 1759(c)(2), as amended.
[49] Prior to CUMAA, NCUA regulations did not limit the size of the
community a credit union could serve. However, NCUA required extensive
documentation to establish the existence of a community. For example,
up until March 1, 1998, credit unions were required to provide written
evidence of community support for their applications, such as letters
of support, petitions, or surveys. In March 1998, in IRPS 98-1, NCUA
deleted the information requirement but noted that credit unions still
had to demonstrate that residents of the proposed community interacted.
[50] For example, in IRPS 99-1, if the population of a single political
jurisdiction was less than 300,000, the credit union was only obligated
to submit a letter describing how the area met standards for community
interaction or common interests. However, if the population exceeded
300,000, the credit union would have to submit additional
documentation; demonstrating, for example, the existence of major trade
areas or shared facilities (such as educational).
[51] This multiple-bond credit union, located in Miami, Florida,
originally applied to serve Miami-Dade County, Florida, in April 2001.
However, NCUA officials denied both the original application and
subsequent appeal on the grounds that the residents of this area
(including two large cities and 28 other municipalities) did not have
common interests or interactions. As required by IRPS 99-1 (as amended
by IRPS 01-1), the credit union was required to supply documentation
that residents within this area interacted but the evidence, while
described as "voluminous" by NCUA officials, did not meet with their
approval. Under the new rule (IRPS 03-1), approved in May 2003, this
level of evidence was no longer required.
[52] While the examples in this paragraph represent some of the largest
community-charter field of memberships approved by NCUA, the population
sizes of these communities can vary tremendously. For example, in 2002,
NCUA field of membership approvals ranged from a population of 695 in
Delta County, Colorado, to a population of 1.1 million residents in the
area surrounding Maple Grove, Minnesota. Since 1999, the average
population of approved communities has increased--in 1999, this average
was 134,000 and as of June 25, 2003, 357,000.
[53] Federally insured credit unions are required to report their
potential membership on NCUA's call report. This number is expected to
include current membership as well as potential members. While the
instructions require that the estimates must be reasonable and
supportable, no further instructions are provided. Two or more credit
unions whose field of membership overlaps can count the same person as
a potential member.
[54] We use the term "serving geographic areas" because some states
(for example, California and Texas) permit their credit unions to serve
a mix of occupational and associational groups and communities. Because
NCUA could not provide us information on the number of state-chartered
credit unions serving communities, we surveyed state regulators to
obtain this information.
[55] The number of credit unions serving geographic areas varied by
state. For example, in California, state-chartered credit unions
serving geographic areas represented about 48 percent of state-
chartered credit unions and held about 82 percent of state-chartered
assets. In comparison, in New York, state-chartered credit unions
serving geographic areas represented about 5 percent of state-chartered
credit unions and held about 11 percent of state-chartered assets.
[56] Because chartering provisions among the states and the federal
government vary, we would like to emphasize that these numbers are
estimates only. For example, we had no way of knowing, short of
contacting individual credit unions, whether state-chartered credit
unions relied more extensively on a community or an occupational group
for their membership. In addition, some state-chartered credit unions
were excluded from our calculations, including those that were
privately insured, because we could not identify them in the NCUA call
report data.
[57] Part of NCUA's vision statement, included as part of its 2003-2008
Strategic Plan, is: "Ensure the cooperative credit union movement can
safely provide financial services to all segments of American society."
Further, in NCUA's 2003 Annual Performance Plan, NCUA states as a
specific goal that it plans to "Facilitate credit union efforts to
increase credit union membership and accessibility to continue to serve
the underserved, and enhance financial services."
[58] The Federal Credit Union Act, as amended by CUMAA, provides NCUA
criteria to use to determine if an area is "underserved." See 12 U.S.C.
§ 1759 (c)(2). Among other things, these areas must qualify as
"investment areas" as defined by section 103 (16) of the Community
Development Banking and Financial Institutions Act of 1994 (12 U.S.C. §
4703(16)). Areas could qualify, for example, by having at least 20
percent of their population living in poverty. Second, areas must
qualify as underserved based on data from the NCUA board and the
federal banking agencies. NCUA officials, however, apply only the first
criterion, presuming that areas qualifying as an investment area
automatically qualify as underserved.
[59] To promote adoption of these areas, NCUA developed a public
relations program called "Access to America" that promotes awareness of
NCUA programs that provide resources, or other support, to credit
unions to expand their financial services to the underserved.
[60] CUNA published a study, 2003 "Serving Members of Modest Means"
Survey Report, on how credit unions served consumers having annual
household incomes of $40,000 or less. While the survey findings cannot
be generalized to all credit unions, the survey results indicated that
most credit unions responding to the survey targeted at least one
service (for example, money orders, check-cashing services) to lower-
and moderate-income members, and that credit unions with underserved
areas were likely to offer more of these services. About 35 percent of
the credit unions responding to the survey indicated they would grant a
loan for $100 or less and about 30 percent indicated they would open a
certificate account for less than $100. The study noted that credit
unions had difficulty responding to questions that asked them to
estimate members' or potential members' income distributions.
[61] Pub. L. No. 102-242 § 112, 12 U.S.C. § 1831m (2000).
[62] Interest rate risk is the risk that changes in market rates will
have a negative impact on capital and earnings. In September 2003, NCUA
issued Letter to Credit Unions 03-CU-15, which discusses the interest
rate risk for credit unions with large concentrations of fixed-rate
mortgages.
[63] Operations risk is the risk that fraud or operational problems
could result in an inability to deliver products, remain competitive,
or manage information.
[64] Asset-liability management is the process of evaluating balance
sheet risk (interest rate and liquidity risk) and making prudent
decisions, which enable a credit union to remain financially viable as
economic conditions change.
[65] These credit unions are defined as those with a CAMEL rating of 1
or 2 for the prior two examinations, and those exhibiting additional
characteristics, such as having been in operation for at least 10
years, having a positive return on assets, having adequate internal
controls, and having added no recent high-risk programs.
[66] U.S. General Accounting Office, Risk-focused Bank Examinations:
Regulators of Large Banking Organizations Face Challenges, GAO/GGD-00-
48 (Washington, D.C.: Jan. 24, 2000).
[67] NCUA's subject matter examiner program was created in February
2002 to train experienced and knowledgeable examiners in specialized
areas, such as capital markets and information systems, to help
examiners assess risks more effectively. The program also was designed
to augment NCUA's existing core of specialist examiners.
[68] FFIEC is a formal interagency body empowered to prescribe uniform
principles, standards, and report forms for the federal examination of
financial institutions by the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the National Credit
Union Administration, the Office of the Comptroller of the Currency,
and the Office of Thrift Supervision. FFIEC also serves to make
recommendations to promote uniformity in the supervision of financial
institutions.
[69] See 68 Fed. Reg. 56537 (Oct. 1, 2003). Under NCUA's prior
regulations, all business loans to members had to be secured by
collateral. Under the revised rule, NCUA now allows well-capitalized
credit unions that have addressed unsecured loans in their member
business loan policies to make unsecured business loans to members.
These loans are subject to the limit that (1) the aggregate unsecured
business loans to one borrower not exceed the lesser of $100,000 or 2.5
percent of a credit union's net worth and (2) the aggregate of all
unsecured business loans not exceed 10 percent of a credit union's net
worth. The revised rule also permits the exclusion of participation
interests--credit union purchases of an interest in a loan originated
by another credit union--in member business loans from the aggregate
business loan limit, provided that the loan was for a nonmember of the
purchasing credit union. However, the total of nonmember and member
business loans may only exceed the aggregate business loan limit if
approved by NCUA regional directors. Finally, the revised rule expands
preapproved CUSO activities to include business loan originations.
[70] Under CUMAA, credit unions had an aggregate business loan limit of
the lesser of 1.75 times the credit union's net worth or 12.25 percent
of the credit union's total assets.
[71] Department of the Treasury comment letter concerning NCUA's
proposed rule on member business lending, dated June 2, 2003. Further,
Treasury stated that excluding business participation loans and
business loans originated by CUSOs from member business loan limits
would undermine the intent of congressional limitations on credit union
business loans established in CUMAA.
[72] The overhead transfer rate is the percentage of NCUA's share
insurance fund (NCUSIF) that is transferred to support the agency's
expenses (operating fund).
[73] U.S. General Accounting Office, Electronic Banking: Enhancing
Oversight of Internet Banking Activities, GAO/GGD-99-91 (Washington,
D.C.: July 6, 1999).
[74] See 12 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003).
[75] A credit union's net worth represents the sum of the various
reserve accounts--undivided earnings, regular reserves, and any other
appropriations designated by management or regulatory authorities--and
reflect the cumulative net retained earnings of the credit union since
its inception.
[76] The net worth ratio is defined as net worth divided by total
assets.
[77] Credit unions that are less than well-capitalized--that is, have
less than a 7.0 percent net worth ratio--are required to increase the
dollar amount of their net worth quarterly by transferring at least 0.1
percent of their total assets to the regular reserve account. These
credit unions must meet applicable risk-based net worth requirements if
they are complex, which under PCA is defined as a credit union having
more than $10 million in assets and a risk-based net worth ratio that
exceeds 6.0 percent. The ratio is a calculation that assigns risk
weightings to different types of assets and investments.
[78] The net worth restoration plan is a blueprint for credit union
officials and staff for restoring the credit union's net worth ratio to
6.0 percent or higher.
[79] Credit unions are defined as new if they have been in operation
for less than 10 years and have less than $10 million in assets.
[80] Secondary capital can take the form of investments in an
institution by nonmembers. The investments are subordinated to all
other credit union debt. Currently, only credit unions designated as
"low-income" by NCUA are eligible to raise secondary capital.
[81] This secondary capital must be in accordance with generally
accepted accounting principles.
[82] Regulatory forbearance occurs when regulators delay taking
corrective action, assuming that problems will not occur in the short-
term, or that economic conditions may change in a way favorable to the
troubled institution.
[83] The ratio is calculated as the fund balance (assets minus
liabilities) of NCUSIF divided by the sum of all credit union members'
shares insured by the fund.
[84] GAO/GGD-91-85, p. 197.
[85] Federal Deposit Insurance Corporation, Keeping the Promise:
Recommendations for Deposit Insurance Reform (Washington, D.C.: April
2001).
[86] The Financial Risk Committee consists of representatives from four
divisions within FDIC: Insurance and Research, Resolutions and
Receiverships, Supervision and Consumer Protection, and Finance. FDIC
maintains statistics on the percentage of institutions within different
risk categories that fail based on the ratio of failed institutions'
assets to total assets. For purposes of this report the term "failure
rate" is used to describe this statistic. A 100-percent projected
failure rate is always applied to the first risk-based group.
[87] Our review focuses on primary share insurance. Generally, primary
share (or deposit) insurance is mandatory for all depository
institutions and covers members' deposits up to a specified amount.
Excess share (deposit) insurance is optional coverage above the amount
provided by primary share insurance. NCUSIF provides primary share
insurance up to $100,000 per member; while ASI provides primary share
insurance up to $250,000 per account and excess share insurance. ASI is
chartered by Ohio statute. ASI's coverage is subject to a $250,000
statutory cap under Ohio law. Ohio Rev. Code Ann. § 1761.09(A),
(Anderson, 2003).
[88] States that "could permit" private share insurance include those
with state laws permitting credit unions to purchase private share
insurance, but that have no credit unions in the state that currently
carry private share insurance.
[89] Several factors precipitated the closure of RISDIC in 1991. For
example, weaknesses existed in the Rhode Island bank regulator's and
RISDIC's oversight of institutions. Furthermore, some of the
institutions insured by RISDIC engaged in high-risk activities. In
1991, RISDIC depleted its reserves because of the failure of one
institution. As a result, runs occurred at several other institutions
insured by RISDIC; it was not able to meet its insurance obligations
and was forced to call in a conservator. The Governor of Rhode Island
closed all institutions insured by RISDIC and required institutions to
purchase federal deposit insurance. According to NCUA, it did not
insure all Rhode Island credit unions following the Governor's closure
of institutions insured by RISDIC.
[90] As of December 2002, we identified two companies that provided
private primary share insurance in the 50 states and the District of
Columbia--ASI and Credit Union Insurance Corporation (CUIC) in
Maryland. However, CUIC was in the process of dissolution and,
therefore, we did not include it in our analysis. As of August 2003, of
the five credit unions that CUIC insured, four purchased private share
insurance from ASI, and one converted to federal share insurance.
[91] Generally, credit unions that converted from federal to private
share insurance since 1990 were larger than credit unions that switched
from private to federal share insurance during the same period.
Specifically, as of December 2002, about a third of the credit unions
that converted to private insurance had shares between $100 and $500
million; on the other hand, the majority of credit unions that
converted to federal insurance had shares totaling up to $50 million.
Only two of the 26 conversions occurred since 1995--one because the
private insurer went out of business and the other because of a merger
with a federally insured credit union.
[92] Ohio Rev. Code Ann. Oh. 1761.
[93] Ohio Rev. Code Ann. § 1761.03. Under Ohio law, other purposes of a
credit union share guaranty corporation are to (1) aid and assist any
participating credit union that is in liquidation or incurs financial
difficulty in order that the credit union share accounts are protected
or guaranteed against losses, and (2) cooperate with participating
credit unions, the superintendent of credit unions, the appropriate
credit union supervisory authorities, and the NCUA for the purpose of
advancing the general welfare of credit unions in Ohio and in other
states where participating credit unions operate.
[94] In Ohio, credit union guaranty corporations are subject to many
Ohio insurance laws; however, they apply only to the extent that such
laws are otherwise applicable and are not in conflict with Ohio laws
for credit union guaranty corporations. See Ohio Rev. Code Ann.
1761.04(A).
[95] Under Ohio law, insurers licensed by the state are subject to a
"maximum single risk" requirement. See Ohio Rev. Code Ann. §
3941.06(B).
[96] According to ASI, the average net capital-to-assets ratio of all
ASI's primary insured credit unions was 10.88 percent, as of December
31, 2002.
[97] For example, federal PCA regulations require supervisory action
when federally insured credit unions' capital to assets ratio is less
than 6 percent of total assets.
[98] Twenty-eight of these credit unions converted from federal
insurance, while two were newly chartered credit unions and one was an
uninsured credit union.
[99] As of June 2003, the total shares of these credit unions ranged
from $297.6 million to $2.5 billion. Though the plan targeted only
ASI's five largest credit unions, ASI may increase the number of
monitored credit unions at any time so that it continually reviews at
least 25 percent of total insured shares.
[100] ASI assigned a risk level to the credit unions it insured (low,
moderate, or high) and then used this assessment to determine the
extent of oversight at the credit union, which might include conducting
face-to-face interviews with the chair of the supervisory audit
committee, confirming checks over $1,000 have cleared, or verifying the
value of loans, investments, and share accounts with credit union
members in writing or over the phone.
[101] ASI deposit-based insurance fund is funded through capital
contributions to ASI from member credit unions. The member credit
unions record this capital contribution as a deposit (asset) on their
financial statements.
[102] ASI's insurance fund is funded through the credit unions it
insures depositing between 1.0 and 1.3 percent of a credit union's
insured shares with ASI. The credit unions' CAMEL ratings determine the
rate at which credit unions are assessed (the ratings are 1-strong, 2-
satisfactory, 3-flawed, 4-poor, and 5-unsatisfactory). For example,
credit unions with a CAMEL score of 1 must deposit 1.0 percent of total
insured shares into ASI's insurance fund; credit unions with a CAMEL
score of 4 or 5 must deposit 1.3 percent of their total insured shares.
[103] 12 U.S.C. § 1782a(c).
[104] ASI's involuntary termination procedure, unlike NCUA's, does not
require a credit union to notify its members that its share insurance
has been terminated. According to ASI, because states generally
prohibit credit unions from operating without share insurance, the
states would require notification to credit union members of the change
in the credit union's insured status. NCUA's involuntary termination
policy, on the other hand, requires 30 days notice and also requires a
credit union to issue "prompt and reasonable" notice to its members
that it will cease to be insured. 12 U.S.C. §§1786(b), (c).
[105] According to ASI documents, this credit union would have
represented 22 percent of ASI's insured shares; at the time of the
assessment, ASI's largest credit union represented only 6 percent of
the fund's insured shares.
[106] This estimate is based on using December 2002 financial data on
the largest credit union insured by ASI. According to a capital
adequacy analysis performed for ASI, ASI's independent actuaries
determined that the ASI fund could withstand losses sustained during
adverse economic conditions for up to 5 years, with or without insuring
this large credit union.
[107] See Ohio Rev. Code Ann. Ch. 1761.
[108] While Ohio law requires ASI to submit annual audited financial
statements, Ohio law permits the superintendent of insurance to require
the submission of quarterly reports. The superintendent of insurance
imposes this requirement on ASI. See Ohio Rev. Code Ann. §§ 1761.16 and
3901.42.
[109] The states are Alabama, California, Idaho, Illinois, Indiana,
Maryland, Nevada, and Ohio.
[110] Specifically, under the Federal Credit Union Act, if a federally
insured credit union terminates federal share insurance or converts to
nonfederal (private) insurance, the institution must give its members
"prompt and reasonable notice" that the institution has ceased to be
federally insured. 12 U.S.C. § 1786(c). NCUA rules implement these
provisions by prescribing language to be used in (1) the notices of the
credit union's proposal to terminate federal share insurance or convert
to nonfederal (private) insurance, (2) an acknowledgement on the voting
ballot of the member's understanding that federal share insurance will
terminate, and (3) the notice of the termination or conversion. See 12
C.F.R. Part 708b (2003).
[111] 12 U.S.C. § 1831t (b).
[112] 12 U.S.C. § 1831t (g).
[113] U.S. General Accounting Office, Federal Deposit Insurance Act:
FTC Best Among Candidates to Enforce Consumer Protection Provisions,
GAO-03-971 (Washington, D.C.: Aug. 20, 2003).
[114] GAO-03-971.
[115] While credit union legislation (see the Federal Credit Union Act
at 12 U.S.C. § 1751) uses "small means" and the credit union industry
has not defined the term, in this report, we used "low-and moderate-
income," as defined by banking regulators, to describe the type of
people who credit unions might serve.
[116] As do banking regulators, NCUA and state regulators use the
"CAMEL" rating system, a composite score, to help evaluate the safety
and soundness of institutions. CAMEL scores rate capital adequacy (C),
asset quality (A), management (M), earnings (E), liquidity (L), and
overall condition.
[117] FDIC is responsible for overseeing insured financial institution
adherence to FFIEC's reporting requirements, including the observance
of all bank regulatory agency rules and regulations, accounting
principles, and pronouncements adopted by the Financial Accounting
Standards Board and all other matters relating to call report
submission. Call reports are required by statute and collected by FDIC
under the provision of Section 1817(a)(1) of the Federal Deposit
Insurance Act. FDIC collects, corrects, updates, and stores call report
data submitted to it by all insured national and state nonmember
commercial banks and state-chartered savings banks on a quarterly
basis. Throughout the report, we use the terms, "banks," "banks and
thrifts," and "FDIC-insured institutions" interchangeably.
[118] As of August 31, 2003, the address for this Web site was
www3.fdic.gov/sdi/.
[119] In passing the CRA, Congress required federal financial
supervisory agencies, except NCUA, to assess an institution's record of
helping to meet the credit needs of the local communities in which the
institution is chartered.
[120] The scope of our work was limited to primary share insurance,
which is generally mandatory for all credit unions (whereas excess
share insurance is optional coverage above primary share insurance).
[121] We limited our analysis to those states with privately insured
credit unions--Alabama, California, Idaho, Indiana, Illinois,
Maryland, Nevada, and Ohio.
[122] 12 U.S.C. § 1831t.
[123] As of December 2002, we identified two entities that provide
private primary share insurance to credit unions in the 50 states and
the District of Columbia--ASI and Credit Union Insurance Corporation
(CUIC). However, CUIC in Maryland was in the process of dissolution
and, therefore, we did not include it in our analysis. During our
review, we learned that Massachusetts Credit Union Share Insurance
Corporation only provides excess deposit insurance, and therefore we
did not include it in our analysis.
[124] U.S. General Accounting Office, Credit Unions: Reforms for
Ensuring Future Soundness, GAO/GGD-91-85 (Washington, D.C.: July 10,
1991).
[125] CLF was created in 1978 to improve the general financial
stability of credit unions by serving as a liquidity lender to credit
unions experiencing unusual or unexpected liquidity shortfalls. The
NCUA board oversees the CLF.
[126] Throughout the report, we refer to institutions insured by the
FDIC interchangeably as "banks," "banks and thrifts," and "FDIC-insured
institutions."
[127] Pub. L. No. 105-219 (Aug. 7, 1998).
[128] CUMAA defines a "new" credit union as one that has been in
operation for less than 10 years and having less than $10 million in
assets. 12 C.F.R. §702.2(h). NCUA defines a credit union as "complex"
when its total assets at the end of a quarter exceed $10 million and
its RBNW calculation exceeds 6 percent net worth. 12 C.F.R. §702.103.
[129] NCUA established a PCA Oversight Task Force in February 2000.
This task force consisted of NCUA staff and state regulators. See
Federal Register 65, no. 140 (20 July 2000): 44964.
[130] The final PCA rule contains 17 revisions and adjustments. See
Federal Register 67, no. 230 (29 November 2002): 71078.
[131] NCUA issued staff instructions on discretionary supervisory
actions in April 2003, but has yet to impose a discretionary
supervisory action against any credit union.
[132] Credit unions cannot issue capital stock and, therefore, must
rely on retained earnings to build net worth.
[133] The net worth ratio of credit unions in the undercapitalized
category is 4.0-5.99 percent. The first tier of the undercapitalized
net worth category is 5.0-5.99 percent, and the second tier of that net
worth category is 4.0-4.99 percent.
[134] The RBNW report notes that the "risk portfolios" of balance sheet
assets consist of long-term real estate loans, member business loans
outstanding, investments, low-risk assets, and average-risk assets. The
"risk portfolios" of off-balance sheet assets are loans sold with
recourse and unused member business loan commitments.
[135] According to the report, the principal banking industry trade
association advocated $10 million as an appropriate minimum asset
"floor."
[136] Risk portfolios include real estate loans, member business loans
(MBL) outstanding, investments, low-risk assets, average-risk assets,
loans sold with recourse, unused MBL commitments, and allowances. See
Federal Register 65, no. 34 (18 February 2000): 8606.
[137] According to NCUA data, as of May 2003, no credit union failed to
meet an RBNW requirement under the standard calculation and with the
alternative component, and so none has applied for a risk mitigation
credit to date.
[138] Federal Credit Union Act.
[139] The capital subgroup is assigned on the basis of the
institution's total risk-based capital ratio, tier 1 risk-based capital
ratio, and tier 1 leverage capital ratio. The institutions report this
data quarterly to FDIC on their Report of Income and Condition (call
report). For instance, according to FDIC Risk-Based Assessment System -
Overview, Group 1 ("Well-Capitalized") has a "Total Risk-Based Capital
Ratio equal to or greater than 10 percent, and Tier 1 Risk-Based
Capital Ratio equal to or greater than 6 percent, and Tier 1 Leverage
Capital Ratio equal to or greater than 5 percent." Each semiannual
period, FDIC assigns the supervisory subgroup based on various factors
including results of the most recent examination report, the amount of
time since the last examination, and statistical analysis of call
report data. For example, according to the FDIC's Risk-Based Assessment
System-Overview, a subgroup A institution is "financially sound
institution with only a few minor weaknesses and generally corresponds
to the primary federal regulator's composite rating of '1'or '2'."
[140] Credit unions are rated on their condition by NCUA and state
regulators using a "CAMEL" system that evaluates their capital adequacy
(C), asset quality (A), management (M), earnings (E), liquidity (L),
and their overall condition.
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