Credit Unions:

Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements

GAO-07-29: Published: Nov 30, 2006. Publicly Released: Dec 1, 2006.

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Alicia P. Cackley
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Legislative and regulatory changes have blurred distinctions between credit unions and other depository institutions and raised questions about the tax-exempt status of credit unions. This report (1) assesses the effect of the Credit Union Membership Access Act on credit union membership and charters, (2) reviews the National Credit Union Administration's (NCUA) efforts to expand services to low- and moderate-income individuals, (3) compares rates offered by credit unions with comparably sized banks, (4) discusses unrelated business income tax issues, and (5) assesses transparency of credit union senior executive compensation. To address our objectives, we obtained NCUA data on credit union membership, charter changes, efforts to target those of modest means, and executive disclosure requirements. We also analyzed Federal Reserve Board's Survey of Consumer Finances and Internal Revenue Service data.

Since the passage of the Credit Union Membership Access Act (CUMAA) in 1998, larger community-based credit unions have constituted a much greater proportion of the industry. NCUA has approved federal community charters with increasingly larger geographic areas and potential for economically diverse membership. Much of the shift toward the larger community-based credit unions was due to conversions from other charters. NCUA's approval of these charters appears to have been triggered by changes in the economic environment and financial services industry and to diversify membership to accomplish goals such as increasing service to those of modest means. NCUA has established the low-income credit union program and allowed adoption of "underserved areas" to increase credit union services to individuals of modest means. Despite increased credit union participation in these programs and the expansion of community charters, the 2004 and 2001 Survey of Consumer Finances indicated that credit unions lagged behind banks in serving low- and moderate-income households. NCUA officials told GAO that, given the nascent nature of its two initiatives and the relatively recent shift to community charters, they did not yet expect observable changes in the data. Also, NCUA recently has undertaken a pilot effort to collect data on the income characteristics of credit union members. Because limited data exist on the extent to which credit unions serve those of modest means, any assessment would be enhanced if NCUA were to move beyond its pilot and systematically collect income data. Based on GAO analysis, credit unions typically had more favorable rates than banks, particularly for consumer loans. For example, credit unions auto loans were 1 to 2 percentage points lower than similarly sized banks, on average. However, it was not clear the extent that the more favorable rates fully reflected the tax subsidy that credit unions receive by tax-exemption. The Internal Revenue Service (IRS) has been reviewing state-chartered credit union activities (federal credit unions are exempt) to determine compliance with unrelated business income tax (UBIT) requirements, but such determinations are difficult due to complicated criteria and because many credit unions file group rather than individual returns. IRS stated that it plans to issue technical guidance in the first quarter of 2007 that the agency believes will help ensure credit union compliance with UBIT. Finally, credit union executive compensation is not transparent. Federal credit unions, unlike other tax-exempt organizations, do not file information returns, which contain data on executive compensation, with IRS. NCUA is collecting compensation data as part of its pilot, but it is unclear whether NCUA will conduct future reviews. NCUA officials noted a number of alternatives that could be used to increase transparency, such as requiring federal credit unions to provide compensation information in call reports or require that credit unions disclose compensation data at annual meetings.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In early 2006, NCUA designed the Member Service Assessment Pilot (MSAP) program to collect data on the membership profile of federal credit unions (FCUs), and the types and services FCUs provide their membership. In early 2007, NCUA established the Outreach Task Force (OTF) to review the MSAP recommendations and provide guidance to the NCUA Board. OTF made the following recommendations to the NCUA Board: (1) collect membership profile data through the examination process; (2) publish aggregate data on membership profile in the NCUA Annual Report or other publication(s); and (3) develop a means for each FCU to obtain its proprietary membership profile data from NCUA. On January 1, 2009, NCUA began collecting membership data for all examinations. NCUA is currently in the process of developing reports to publish the aggregate data collected from the membership income profiles and providing a means for FCUs to obtain their individual membership income profile data.

    Recommendation: To help ensure that credit unions are fulfilling their tax-exempt mission of providing financial services to their members, especially those of low or moderate incomes, the Chairman of NCUA should systematically obtain information on the income levels of federal credit union members to allow NCUA to track and monitor the progress of credit unions in serving low- and moderate-income populations. NCUA's recent pilot survey to measure the income of credit union members could serve as a starting point to obtain more detailed information on credit union member income. Ideally, NCUA should expand its survey to allow the agency to monitor member income characteristics by credit union charter type, obtain information on the financial services that low- and moderate-income members actually use, and monitor progress over time.

    Agency Affected: National Credit Union Administration

  2. Status: Closed - Not Implemented

    Comments: Current NCUA regulations do not require federal credit unions (FCUs) to disclose individual or aggregate information regarding executive compensation to their members. NCUA regulations, however, permit members to petition FCU boards of directors for nonconfidential portions of accounting books and records and minutes. Members may, if they have a proper petition, inspect employee information except for information the disclosure of which would constitute a clearly unwarranted invasion of personal privacy. According to NCUA, the petition requirement strikes a balance between the members' right to know and understand how the directors are executing their responsibilities on behalf of the members and an FCU?s right to be free from requests with illegitimate aims, such as harassment or the desire by the FCU's competitors to obtain information from the FCU. NCUA is currently considering whether to amend its regulation governing corporate credit unions to clarify or revise current provisions, including those related to corporate governance. In an Advance Notice of Proposed Rulemaking (ANPR) and request for comment issued January 28, 2009, the NCUA is seeking comments on, among other issues under consideration, whether the NCUA should require greater transparency of executive compensation by allowing members (natural person credit unions) of corporate credit unions greater access to salary and benefit information for senior management. NCUA is currently drafting guidance for credit unions to address the risks associated with executive compensation practices.

    Recommendation: To increase the transparency of executive compensation and enhance accountability of credit unions, the Chairman of the NCUA should take action to ensure that information on federal credit union executive compensation is available to credit union members and the public for review and inspection. To achieve this, NCUA may want to consider options such as requiring federal credit unions to include specific information on executive compensation in call reports or issuing regulations that would require all federal credit unions to make executive compensation information available to members of credit unions at annual meetings.

    Agency Affected: National Credit Union Administration


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