S. HRG.

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THE STATE OF THE CREDIT UNION INDUSTRY

HEARING
BEFORE THE

COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE HEALTH OF THE CREDIT UNION INDUSTRY AS WE
EMERGE FROM THE FINANCIAL CRISIS AND RECOVER AND GROW
OUR ECONOMY

DECEMBER 9, 2010

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota
RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island
ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky
EVAN BAYH, Indiana
MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey
BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii
JIM DEMINT, South Carolina
DAVID VITTER, Louisiana
SHERROD BROWN, Ohio
MIKE JOHANNS, Nebraska
JON TESTER, Montana
KAY BAILEY HUTCHISON, Texas
HERB KOHL, Wisconsin
JUDD GREGG, New Hampshire
MARK R. WARNER, Virginia
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
EDWARD SILVERMAN, Staff Director
WILLIAM D. DUHNKE, Republican Staff Director
LYNSEY GRAHAM REA, Chief Counsel
LAURA SWANSON, Professional Staff Member
ERIN BARRY, Legislative Assistant
BRIAN FILIPOWICH, Legislative Assistant
MARK OESTERLE, Republican Chief Counsel
ANDREW J. OLMEM, JR., Republican Senior Counsel
DAWN RATLIFF, Chief Clerk
LEVON BAGRAMIAN, Hearing Clerk
SHELVIN SIMMONS, IT Director
JIM CROWELL, Editor
(II)

C O N T E N T S
THURSDAY, DECEMBER 9, 2010
Page

Opening statement of Senator Johnson .................................................................

Prepared statement ..........................................................................................
Opening statements, comments, or prepared statements of:
Senator Shelby ..................................................................................................
Senator Hutchison ............................................................................................

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2
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WITNESS
Deborah Matz, Chairman, National Credit Union Administration .....................
Prepared statement ..........................................................................................
ADDITIONAL MATERIAL SUPPLIED

FOR THE

RECORD

Letter Submitted by Fred R. Becker, Jr., President and Chief Executive

Officer, National Association of Federal Credit Unions ....................................
Letter Submitted by Bill Cheney, President and Chief Executive Officer,
Credit Union National Association .....................................................................
Statement Submitted by the Credit Union National Association ........................
Statement Submitted by the American Bankers Association ..............................
Statement Submitted by Mary Martha Fortney, President and Chief Executive Officer, National Association of State Credit Union Supervisors .............
(III)

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THE STATE OF THE CREDIT UNION

INDUSTRY
THURSDAY, DECEMBER 9, 2010

U.S. SENATE,
URBAN AFFAIRS,
Washington, DC.
The Committee met at 10:06 a.m., in room SD538, Dirksen Senate Office Building, Senator Tim Johnson, presiding.
COMMITTEE

ON

BANKING, HOUSING,

AND

OPENING STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. I would like to call this hearing to order.

Todays first hearing will examine the current state of the credit
union industry, including the National Credit Union Administrations ongoing efforts to stabilize the corporate credit union system.
As the supervisor of Federal credit unions that insure the deposits
of over 90 million account holders in all Federal credit unions and
many State-chartered credit unions, this hearing is an important
and needed opportunity to explore the health of the credit union industry as we emerge from the financial crisis and recover and grow
our economy.
I want to welcome and thank NCUA Chairman Debbie Matz for
being here today. The NCUA has taken unprecedented steps over
the past several years to stabilize the credit union system as the
troubled corporates pulled liquidity and capital out of the natural
person credit unions. The system has also shared many of the same
challenges as the FDIC concerning the insurance of Americans
savings and retirement.
These steps have had a significant impact on thousands of credit
unions across the country, and I am pleased that we can have a
serious conversation about the current state of the credit union industry and the impact of increased assessments on credit unions
that serve millions of Americans across this country. I have certainly heard concerns from my constituents in South Dakota about
this matter.
This is not the first, and certainly not the last, hearing on the
financial condition of specific sectors of our financial services industry. The financial crisis took a toll, and the historic Dodd-Frank
legislation will bring many additional changes to all sectors of this
industry. It is very important to me that these types of hearings
become a common occurrence with all of the financial institutions
regulators. I look forward to your testimony, Chairman Matz, and
to the question-and-answer period.
Senator Shelby, your opening statement.
(1)

2
STATEMENT OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Thank you, Mr. Chairman. I will try to be brief

here today. This is a very important hearing, I believe.
Like other financial institutions, credit unions have faced unprecedented challenges from the financial crisis and our weak economy.
Five of the largest corporate credit unions suffered substantial
losses on mortgage-backed securities and had to be placed into conservatorship by the National Credit Union Administration. The
NCUA had to take extraordinary actions to prevent the failure of
these corporate credit unions from triggering problems with traditional credit unions. Given that these events occurred more than 1
year ago, an examination by the National Credit Union Administration of our Nations credit unions I believe is long overdue.
Accordingly, I hope that todays hearing will shed light on the
reasons for the failure of the corporate credit unions, the adequacy
of the National Credit Union Administrations rescue plan, and
whether these failures pose any risks to our taxpayers. I also hope
to hear the NCUAs assessment of what steps need to be taken to
prevent large-scale failures from happening again.
Mr. Chairman, there are a number of legislative measures before
the Committee that have been proposed by the National Credit
Union Administration. This hearing I hope will provide us with an
opportunity to discuss their merits and whether they should be enacted into law.
But because credit unions play a vital role in providing loans to
American consumers, a strong and vibrant credit union industry
will be an important participant in any economic recovery in the
future. Weak and failing credit unions will only further erode our
Nations already struggling economy and prolong unprecedented
levels of unemployment.
Thank you for calling this hearing.
Senator JOHNSON. Senator Reed.
Senator REED. Mr. Chairman, I just want to thank you for calling the hearing, and I look forward to the witnesses. Thank you.
Senator JOHNSON. Senator Hutchison.
STATEMENT OF SENATOR KAY BAILEY HUTCHISON

Senator HUTCHISON. Well, thank you, Mr. Chairman. I, too, appreciate that she is here to talk about the state of credit unions,
and I would just say that I think the NCUA has done a great job
in not burdening taxpayers with help for the credit unions. But I
also want to hear what she says about the assessments and the
cost to the credit unions of those assessments, because we do not
want to hurt their capability to be solvent and successful, too.
Thank you, Mr. Chairman.
Senator JOHNSON. Senator Johanns.
Senator JOHANNS. Mr. Chairman, my time here today is somewhat limited, so I think I will just offer that if I have anything in
terms of an opening, I will submit it in writing, and we will get
right to the witness.
Senator JOHNSON. Mrs. Matz has had a distinguished public and
private career. She served at the Department of Agriculture where
she was Deputy Assistant Secretary for Administration and also
chaired the Loan Resolution Task Force, which was charged with

3
the responsibility of resolving over $1 billion in delinquent farm
loans. Prior to her service at USDA, Mrs. Matz was an economist
with the Joint Economic Committee of Congress. She served as a
board member of NCUA from January 2002 to October 2005. In the
private sector, Mrs. Matz was the executive vice president and
chief operating officer of a large Federal credit union. She was confirmed as Chairman of the NCUA in August 2009.
Mrs. Matz, before you begin, please be assured that your written
statement will be part of the record. If you could confine your remarks to 5 to 8 minutes, that would be greatly appreciated. Any
other materials we have received will also be added to the record.
Mrs. Matz, you can begin your statement.
STATEMENT OF DEBORAH MATZ, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION

Ms. MATZ. Thank you, Mr. Chairman, for inviting me to appear

before this Committee to discuss the state of the credit union industry. Today I will update you on major developments since I last
appeared before the full Committee in August 2009 at my confirmation hearing.
As with other sectors of the financial service industry, the credit
union industry faced unprecedented threats to its stability in 2008
and 2009. When the housing bubble burst and the value of mortgage-backed securities plummeted, several of the largest corporate
credit unions were in danger of insolvency. This posed a grave
threat to the industry because corporate credit unions provide
needed liquidity for 7,400 consumer credit unions and process electronic payments for 90 million credit union members.
Five corporate credit unions held extremely high concentrations
of what were once highly rated mortgage-backed securities. When
the market for those securities dried up, it froze their liquidity and
threatened their operations. If these corporates had been forced to
sell their assets at that time, at least $30 billion in losses would
have flowed through the system, causing thousands of consumer
credit unions to fail.
From the onset of this crisis, NCUA took decisive actions. We
worked in consultation with Congress, the Treasury Department,
and the Fed to design a comprehensive plan to stabilize, resolve,
and reform the corporate system. On behalf of the NCUA Board,
I sincerely thank this Committee for the instrumental role you
played in creating the Temporary Corporate Credit Union Stabilization Fund in 2009. The Stabilization Fund permitted NCUA
to assess credit unions to cover the costs of corporate losses over
7 years rather than in one lump sum.
On September 24, 2010, with concurrence from Treasury Secretary Geithner, NCUA extended the Stabilization Fund through
June 2021. This means credit unions will reimburse the fund for
an additional $7 to $9 billion over the next 10 years. Let me emphasize this point. These losses are being paid for entirely by credit
unions.
Throughout the fall of 2010, NCUA has taken aggressive actions
to remove the long-term threats in the corporate system. We conserved three additional corporates that were no longer viable. We
seized control of over 98 percent of all impaired securities and

4
began an orderly disposition. We securitized cash-flows from those
impaired securities to raise billions of dollars in liquidity. We created four bridge corporates to effect the winding down of the five
conserved corporates with no interruption in service to consumers.
And we finalized a new rule to ensure that remaining corporates
operate with much stronger standards for safety and soundness.
NCUAs actions meet the four strategic objectives we set from
the beginning of the crisis. We prevented any disruption in service
to 7,400 consumer credit unions and 90 million consumers. We preserved public confidence in the credit union system. We resolved
the problem at the lowest long-term cost consistent with sound
public policy, and we facilitated an orderly transition to a new regulatory regime.
Even as NCUA managed the corporate resolution, we have been
working diligently to protect the safety and soundness of consumer
credit unions. Despite the challenging economy, Americas credit
unions remain strong overall. Total assets are over $900 billion.
Net worth is holding steady. Delinquencies are showing signs of
moderating, and charge-offs have inched lower. However, credit
unions have not escaped the effects of the economic downturn. Millions of credit union members are suffering from falling home values, business failures, unemployment, and bankruptcy. Some credit
union balance sheets reflect their members struggles.
This situation has caused us to reevaluate our resource needs as
well as our examination procedures. As a result, since 2009 NCUA
has hired more than 100 examiners. To be effective, however, the
field staff needed to be reinforced by more frequent exams. We are,
therefore, examining credit unions at least annually. By conducting
more frequent exams and increasing offsite supervision, we are
identifying issues earlier.
To this end, NCUA enhanced our red flag early warning system.
To resolve issues before they become material concerns, examiners
are reviewing credit union data off-site. When they find credit
unions holding high concentrations of fixed-rate mortgages, rising
delinquencies or other red flags, they follow up with immediate corrective actions. We are taking these actions in an effort to save as
many credit unions as possible.
NCUAs increased supervision has contributed significantly to
the credit unions ability to withstand the extraordinary economic
shocks over the past 2 years. Our experience demonstrates the
value of rigorous regulation, diligent oversight, and a healthy insurance fund. Equity in the National Credit Union Share Insurance
Fund is now up to 1.29 percent, near the high end of its normal
operating range.
To improve the tools for supervising and insuring credit unions,
NCUA has a package of three technical amendments that clarify
important provisions of the Insurance Fund and the Stabilization
Fund.
The first amendment would strengthen the ability of NCUA to
complete emergency mergers. A recent change in merger accounting would dilute the net worth of the recipient credit union, thus
discouraging the merger. Often, as a result, the troubled credit
union has to be liquidated. We are requesting that NCUA assistance to the failing credit union be counted as capital by the sur-

5
viving credit union, as in the past. This would reduce the costs to
the Insurance Fund and provide members of troubled credit unions
with continued services from healthy credit unions.
The second amendment would prevent credit unions from being
assessed artificially inflated insurance premiums. The language
clarifies that the equity ratio of the Insurance Fund is based solely
on its own unconsolidated financial statements. This would eliminate any confusion about whether the Insurance Fund is required
to consolidate statements with the Stabilization Fund or with credit unions under conservatorship. It would ensure that independent
accounting would be consistent with the original congressional intent.
The third amendment would allow NCUA the option of repaying
expenditures from the Stabilization Fund without having to first
borrow from Treasury. Current statute requires NCUA to borrow
from Treasury before making assessments. We are requesting a
modification to permit NCUA to assess credit unions when necessary and appropriate to satisfy the Stabilization Funds obligations, thus avoiding the cost of interest payments.
With this legislation, Americas credit unions would be even better positioned to help consumers take advantage of opportunities
that a recovering economy will offer.
Again, I appreciate this opportunity to come before you and look
forward to answering your questions.
Senator JOHNSON. Thank you, Chairman Matz.
I am going to put 7 minutes on the clock for Members questions.
Also, if Members have additional questions, you can submit them
for the record, and I ask you, Chairman Matz, to respond in a timely manner.
Chairman Matz, as you have noted in your testimony, extensive
losses by some corporate credit unions have led to conservatorships
and also to significant losses to the National Credit Union Share
Insurance Fund. What is the extent of the losses to the Share Insurance Fund in 2010? And how did this compare to previous
years? Also, to what extent do the losses result from corporate failures?
Ms. MATZ. Thank you, Mr. Chairman. The losses that have occurred in the corporate sector have been separated from the Share
Insurance Fund, and those are reflected in the Corporate Stabilization Fund. The loss to the Share Insurance Fund this year I believe
is about $250 million, and the number of failures is not far off from
what we had last year.
The Corporate Stabilization Fund is where we realize the losses
from the corporate credit unions, and overall we expect the losses
to total about $15 billion. But credit unions have already paid in
about $7 billion of that through the capital that was in the
corporates and through two assessments this past year that totaled
$1.3 billion. So we anticipate that over the next 10 years credit
unions will be assessed a total of between $7 and $9 billion.
Senator JOHNSON. What new steps has the NCUA taken to ensure that credit unions do not accumulate a concentration of highrisk assets?
Ms. MATZ. In terms of the corporates where that was a problemI should indicate that when we passed the previous corporate

6
rule in 2002, I voted against the rule. I was the only Member who
voted against it because it did not contain limits on concentration
risk. On September 24, 2010, the NCUA Board approved a new
rule which has very stringent limits on concentration risk by sector
and by obligor, and I believe that will satisfy that issue going forward.
As far as consumer credit unions, we are currently working on
a proposal that we will likely put out for comment in the first or
second quarter of next year to address concentration risks in natural person credit unions, and we have already put out guidance
to credit unions and to examiners dealing with that issue.
Senator JOHNSON. What will be the ultimate cost to federally insured credit unions from the resolution of problem corporate credit
unions?
Ms. MATZ. The ultimate cost we estimate will be between $7 and
$9 billion paid over the next 10 years.
Senator JOHNSON. You indicate in your written testimony that
NCUA has shortened its exam cycle to 12 months from the previous 18-month cycle in order to stay ahead of developing problems
at Federal credit unions. Has the agency taken any other steps to
detect problems in the natural person or corporate credit unions in
a more rapid or effective manner?
Ms. MATZ. Yes. We have hired 100 additional examiners in the
past 2 years and are intending to hire 61 more examiners this
year. In addition to doing the annual exams at federally chartered
credit unions, we are going to be examining all State-chartered
credit unions over $250 million every year. We have also enhanced
our red flag alert system, so we have examiners reviewing quarterly the call reports of credit unions. Those are the reports that
display all the financial data for credit unions. And if they see any
aberration, a sharp increase in delinquencies or some other red flag
that catches their eye, they will not wait for the next exam. Examiners will immediately go into the credit union and address the
problem.
In addition, when I came on as chairman, I learned that there
were some credit unions that were repeatedly being cited for the
same infractions, through the most benign administrative sanction
that we utilize, which is called a Document of Resolution. They
were getting the same Document of Resolution over and over again,
but that stopped last year at this time. Our examiners were given
guidance and told that a credit union gets one shot at addressing
a Document of Resolution. Examiners are to go back very quickly,
within 90 or 120 days, and if that DOR has not been addressed,
they will escalate the administrative action.
So we are working very diligently to address problems as early
as possible and to keep costs to the system as low as possible.
Senator JOHNSON. The October NCUA Inspector General report
said that credit unions managements actions greatly contributed
to the ten largest credit union failures. Specifically, there were significant actions that management was either unwilling or unable
to effectively manage or mitigate that exposed these credit unions
to significant amounts of risk. The Office of the IG also identified
several shortcomings related to NCUA supervision efforts, specifically examiner deficiencies and quality control efforts in examina-

7
tion procedures. The OIG reported that had the problems been
identified sooner, the eventual losses to the NCUSIF could have
been stopped or mitigated.
First, do you think this assessment is accurate?
Ms. MATZ. Yes, I do.
Senator JOHNSON. Second, what is the NCUA doing to address
management and risk management within the credit unions and
deficiencies in supervision and examination at the NCUA?
Ms. MATZ. First, I would just like to point out that the IG provided material loss reviews on any financial institution that incurs
losses of more than $10 million to the Share Insurance Fund. So
just to put it in perspective, over the period studied, which was
about 24 months, there were 10 such institutions out of over 7,400
credit unions. I just wanted to put into perspective, that it is really
a small number of credit unions that actually caused material
losses. Nonetheless, we are working closely to address those issues.
I also wanted to point out that the 10 credit unions are all federally insured, but only four of them are federally chartered. The others are State-chartered, and their primary supervisor is the State
supervisor. So I just wanted to make that distinction.
The IG had pointed out that the management in the 10 credit
unions overall lacked strategic decision making and oversight of
lending and investments, and in several instances there was fraud.
As far as the examiner supervision, the IG recommended that we
should be improving our examination and regs as related to concentration risks, third-party vendors, our quality control reviews,
our examination of new business strategies, and that we should
step up our administrative actions when Documents of Resolution
have been issued.
We have begun to address all of these issues. As I indicated before, we have put out guidance on concentration risks and are
working on a new reg to address that issue. We do not have authority to examine third-party vendors as all the other FIRREA
agencies have. So we work with the credit unions to get the data
that we need, but if we find a problem or suspect there is a problem, we can only request that credit union stop doing business with
that third-party vendor. We do not have control over the thirdparty vendor.
We are working to improve our quality control reviews. Those are
reviews of examinations to make sure that they are being done
properly and that there is sufficient supporting documentation.
And the staff for the past year, has been working on reviewing and
revising our national examination standards, and those should be
in effect relatively soon. In addition, the IG commented on our examination of new business strategies, when credit unions take on
a new line of business. We believe that our annual exams will help
catch any problems that develop with new lines of business.
So we are pleased that we have such a good relationship with the
IG. We work very closely with them. And we have already taken
steps to implement all of their findings.
Senator JOHNSON. Thank you, Chairman Matz.
Senator Shelby.
Senator SHELBY. Thank you.

8
I want to continue in the line of questioning that the Chairman
was into, the Inspector General report. I will try not to replicate
it all. But I want to just read into the record part of the report,
and it said, and I am quoting: Had examiners acted more aggressively in their supervision actions over these critical issues, the
looming safety and soundness concerns that were present early on
in nearly every failed institution could have been identified sooner
and the eventual losses to the National Credit Union Share Insurance Fund could have been stopped or mitigated.
I am going to ask you again. Do you agree with that assessment?
I think you indicated you did.
Ms. MATZ. Yes, I do.
Senator SHELBY. I think that is very important. Now, what steps
specifically have you takenit has been over a yearto ensure
that the problems identified by the Inspector General will be corrected? In other words, that we will not go down this road again;
perhaps we will never visit the taxpayer.
Ms. MATZ. Probably the biggest change that we have made is
going from an 18-month exam cycle to an annual exam cycle so
that we get into the credit unions every 12 months and can catch
problems earlier. That is probably the single biggest change that
we have made. Also, not allowing credit unions to receive repeat
administrative sanctions. Complying with administrative sanctions
is not optional. They get one shot to comply, and if they do not
comply within 90 or 120 days, we take more aggressive action. I
think those two actions in and of themselves will go a long way toward preventing any of these problems in the future, but in addition, we are in the process of overhauling our quality control review
process. That should be done very soon, and that will make sure
that all the regions have the same standards for conducting exams
and for verifying the accuracy of the exams. And we will be putting
out a new reg on concentration limits for natural person credit
unions.
Senator SHELBY. Arent the credit unions generally getting more
and more intoor want to get into commercial loans and small
business loans and so forth? Is that the trend?
Ms. MATZ. There are more credit unions making business loans
today than there were several years ago.
Senator SHELBY. Is that dangerous to you, I mean from your perspective, because so many of the banks have gotten in trouble with
lack of supervision, lack of control, quality control and so forth?
Ms. MATZ. As a regulator, I think all lending is risky.
Senator SHELBY. Well, we know that, but from your perspective
to protect that fund.
Ms. MATZ. I think it is more important how they manage the
risk. I think business lending is an extremely important service for
credit unions to offer their members. The average credit union
business loan is about $250,000, which is a very, very small loan,
and those are often loans to people who really do not have access
to capital from other institutions. For example, a credit union business loan might be to open up a car repair shop or a small boutique. So I think it is a very, very important service that they provide, and it just needs to be done carefully.

9
Senator SHELBY. Are a lot of these loans that you make to small
businesses and so forth what we would call in the financial world
covered loans? Do you do that with part of your capital? Do you
sell these loans or what do you do?
Ms. MATZ. Some of them are sold, and some are not.
Senator SHELBY. I know, but some is what percentage?
Ms. MATZ. I do not know the percentage.
Senator SHELBY. Can you furnish that for the record?
Ms. MATZ. I certainly can.
Senator SHELBY. OK.
You talked about the assessment as part of the plan to resolve
the corporate credit union debacle, that you intend to impose assessments on credit unions to pay for the losses you expect to suffer
on $50 billion in troubled mortgage-backed assets. In your testimony you stated that the National Credit Union Administration expects to levy approximately $8 billion in assessments, which is a
good bit of money. What impact will these assessments have on
credit unions? Can they sustain this and still be viable?
Ms. MATZ. Generally, yes. In the aggregate, the credit union industry is well capitalized. They have capital of about $90 billion,
and that is just under 10 percent. No doubt the assessments are
a burden to credit unions, and I hear that all the time, and that
is why we try to keep the assessments as low as possible. The Corporate Stabilization Fund was one way of doing that. We appreciate your support for that. It allowed us to spread out the costs
to the credit unions. The assessments will affect the ROA of some
credit unions, but overall we do feel that because of the significant
capital credit unions have, they will be able to meet those assessments.
Senator SHELBY. Your Insurance Fund, what is the value of it
today?
Ms. MATZ. It is about $800 billion.
Senator SHELBY. In other words, you have $800 billion in hand?
Now, that would be a lot more money than the FDIC ever had
surplus, so to speak.
Ms. MATZ. $8 billion. I am sorry.
Senator SHELBY. How much?
Ms. MATZ. $8 billion on hand.
Senator SHELBY. $8 billion. Now you are coming back
Ms. MATZ. Yes.
Senator SHELBY. Now, that $8 billion insures how manythe
value of your accounts right now today roughly, 1st of December?
Ms. MATZ. The insured shares of the credit unions are about
$800 billion.
Senator SHELBY. $8 billion insures the credit, in other words, the
integrity of $800 billion. Do you think that is adequate?
Ms. MATZ. Yes, I do.
Senator SHELBY. Especially in todays world?
Ms. MATZ. I do.
Senator SHELBY. OK. Is that $8 billion shrinking or growing? In
other words, are your assets shrinking or growing or remaining
constant?
Ms. MATZ. It has been pretty constant this year.

10
Senator SHELBY. My last area, and I appreciate the Chairmans
indulgence here, the National Credit Union Administrations regulations governing the investments of corporate credit unions, which
I think is an important area, relied heavily on the use of credit ratings. Specifically, the regulations allowed corporate credit unions to
invest in securities rated AAA or AA by credit rating agencies. We
now know that the credit ratings on mortgage-backed securities
were deeply flawed. In fact, the Dodd-Frank Act requires, as you
probably know, all Federal agencies, which you are one of them, to
review and to modify regulations to remove any reference to a requirement of reliance on credit ratings and to substitute a standard
of creditworthiness.
What steps are you and your administration taking to ensure
that credit unions do their own due diligence, so to speak, when
evaluating investments to make them creditworthy rather than an
investment based on the opinion or the rating of an agency which
we know is very flawed?
Ms. MATZ. When we voted on the rule on September 24, the rule
had been put out for comment and pretty much finalized before the
Dodd-Frank Act was passed. The language in the corporate rule
says that the credit unions need to get ratings from multiple agencies and then to use the least of those
Senator SHELBY. Wait a minute. Say that again. In other words,
you have ratingsyou are going to still get ratings from the agencies that are so flawed?
Ms. MATZ. No, we will be modifying that rule.
Senator SHELBY. Are you going to do your own due diligence?
Ms. MATZ. We do not have the proposed rule out yet, but we are
going to modify the current rule.
Senator SHELBY. Well, are you thinking about doing that? I guess
my question to you, if you look at some of the financial institutions,
insurance companies, and so forth, all financial, that have weathered the recent debacleI can name a few, but I will not here on
the podiumand that are really well done did their own due diligence and are very viable today, did not ask for money from the
taxpayers, no bailout and so forth. So you, as the administrator of
the credit unions, I think it is very important for you to do your
own due diligence. That is my message, and I think that was the
message of this legislation.
Do you disagree with that?
Ms. MATZ. I do not disagree with that, and as I said, we are in
the process of drafting a revision, so we will certainly
Senator SHELBY. Do you have now or will you have the personnel
in your administration to evaluate the creditworthiness of your investments? In other words, you have been relyinga lot of people
have been relying on the credit rating agenciesMoodys, S&P,
Fitch, and so forth. Well, we know the history of that.
Ms. MATZ. Yes.
Senator SHELBY. Are you going to have the proper people to do
that? I think this is important, that you have personnel that can
do this in lieu of outsourcing it to something that we know is a
dead end.
Ms. MATZ. We might have to enhance our Office of Capital Markets

11
Senator SHELBY. What does might mean?
Ms. MATZ. It means that I do not have an answer to your question right now.
Senator SHELBY. Will you let us know in the Committee?
Ms. MATZ. Yes.
Senator SHELBY. We think this is very important because we
want the credit unions to remain viable and strong and not ever
visit, to come up here for problems.
Ms. MATZ. I appreciate that, and we will get back to you on that.
Senator SHELBY. Thank you, Mr. Chairman.
Senator JOHNSON. Senator Reed.
Senator REED. Well, thank you very much, Mr. Chairman, and
thank you, Madam Chairman.
Does the NCUA have a list of problem credit unions similar to
what the FDIC does in terms of their watch list, and if so, how
many of these institutions are on your list?
Ms. MATZ. We do have a list of credit unions that we watch.
There are about 2 dozen institutions on the list.
Senator REED. Which would be roughly what percentage?
Ms. MATZ. Well, we have over 7,400 institutions that we insure.
Senator REED. Is there any geographic concentration or business
model concentration that is more prone on this list than
Ms. MATZ. Yes, credit unions that are located in the States that
were most distressed. Florida, California, Arizona, Utah, and Nevada have been hit the worst.
Senator REED. Let me ask a question that parallels some of the
comments made by both the Chairman and the Ranking Member.
In your testimony, you indicate that there are a growing level of
delinquent member business loans
Ms. MATZ. Yes.
Senator REED. and that they are a primary or secondary contributing factor for supervisory concern in many cases. And so the
first question, are you concerned with this increasing number of
member business loan delinquencies?
Ms. MATZ. I am concerned, but it is still a relatively small number of affected credit unions.
Senator REED. You are aware there are proposals to increase the
level of lending in member business loans. What would be your
view on that proposed, or these proposed legislative
Ms. MATZ. I support that.
Senator REED. And support that given the indication that there
are increasing, as you would, I think put in context, not as yet decisive but increasing delinquencies in this category?
Ms. MATZ. Yes, because as I said, I believe that it is still a very
small number of credit unions. There are 2,200 credit unions that
make member business loans and there are 270 that fall into the
category where they are either what we call CAMEL 3 or CAMEL
4. CAMEL 4 are the troubled ones where the business lending is
the primary or secondary reason for their being there. So it is a
manageable number. We do not like to have credit unions in that
category, period, but we feel that business lending done properly is
really an important tool for credit unions to have at their disposal
to serve their members.

12
Also, in terms of the legislation, if the cap gets lifted, we would
anticipate coming through with very rigorous regulations. We
would not just be opening the flood gates, so all credit unions
ccould not just go in and make high levels of loans. They would
have to demonstrate their ability to make a low level of loans, and
once they demonstrate that, we would increase it by a small
amount and then keep working with them, supervising them, and
let them gradually increase to a higher level.
Senator REED. Do you have a notion of the number of credit
unions that have already reached their limit? I mean, is this a situation where a huge majority of credit unions have no extra capacity, or is this a few members or concentrated in a few areas?
Ms. MATZ. It is a small number.
Senator REED. That have reached
Ms. MATZ. That are at their cap.
Senator REED. That have reached their cap.
Ms. MATZ. Yes.
Senator REED. And is there any particular area of the country
where the cap is reached, or is it just dispersed somewhat random?
Ms. MATZ. I am guessing that it is dispersed, but I do not know
that for sure. We can get back to you on that.
Senator REED. All right. There is another aspect that I want to
explore and that is that the NCUA is the only regulator subject to
FIRREA that does not have the authority to examine vendors that
provide services to insured institutions. And now with the increasing role of particularly information management systems, computer
systems, et cetera that are provided to vendors, and concerns about
money laundering, privacy, a hostI do not have to tell you the
concernsare you concerned this lack of authority affects your
ability to fully implement your statutory responsibilities?
Ms. MATZ. Absolutely.
Senator REED. Absolutely. So that you would like to have that
authority in place?
Ms. MATZ. Yes. I think we could do a better job of protecting the
safety and soundness of credit unions if we had that authority.
Senator REED. Let me ask the questionI think we will get the
same answer, but are there instances where you have seen significant problems at credit unions causing you to have to step in because of vendor contracts and other arrangements that you might
have been upset about but could take no effective steps until, in
fact, the institution became insolvent?
Ms. MATZ. Yes.
Senator REED. Yes. Would that apply to the corporate credit
unions, also?
Ms. MATZ. Correct.
Senator REED. Correct. Well, thank you very much, Madam
Chairman. Thank you.
Senator JOHNSON. Senator Johanns.
Senator JOHANNS. Thank you, Mr. Chairman.
Let me, if I might, just get a little perspective here. The institutions that went into conservatorship, basically, their problem was
real estate lending, would that be the case, or is it
Ms. MATZ. The corporate credit unions?
Senator JOHANNS. Yes.

13
Ms. MATZ. It was an over-concentration of mortgage-backed securities.
Senator JOHANNS. So it was real estate related?
Ms. MATZ. Yes.
Senator JOHANNS. Yes. When you look at the other issues that
you were talking about, the commercial lending, you said that was
a relatively small number of credit unions out there that were dealing with that. Let me just ask your opinion on something. Would
you describe that as something that just normally you would go
through in a recession, that that is what you are seeing, or are you
seeing something bigger and greater and more problematic there
than that description?
Ms. MATZ. With the business lending?
Senator JOHANNS. Yes.
Ms. MATZ. It is probably somewhat higher than it would ordinarily have been because some of the loans were collateralized by
real estate.
Senator JOHANNS. Yes. So again, we kind of get back to that
Ms. MATZ. Yes.
Senator JOHANNS. problem that everybody has dealt with.
Now, the Ranking Member read into the record an IG report that
basically said, I think, if I could summarize it, that if there had
been better oversight, a lot of these problems would not have occurred, and you agree with that assessment.
Ms. MATZ. Yes.
Senator JOHANNS. I am just going to offer an observation, that
if the whole system, whether it is banks or credit unions or whatever, if there had been better oversight, we would have avoided a
lot of these problems. Is that a fairdo you kind of agree with
that?
Ms. MATZ. Well, you know, the IG was addressing these 10 credit
unions
Senator JOHANNS. Yes.
Ms. MATZ. and I certainly agree with it in terms of those 10
credit unions. You know, I think in terms of the consumer credit
unions, I think we have done an adequate job. Of course, nobody
could have foreseen the significant drop in the value of real estate
and all the havoc that that has created. But, certainly in terms of
those 10 credit unions, we could have done a better job.
Senator JOHANNS. As I talk to small businesses that I interface
with, and we have had small business roundtables and a whole
host of efforts to try to be attuned to challenges that they are facing, one of the things I hear, and I am sure every Member on the
Committee is hearing it, whatever State they are in, and that is
that credit is still very tough for a small business. I was just in a
small business over Thanksgiving, and boy, that was the message.
I cannot get credit.
And I see your efforts, and I do not disagree with them. I think
you are trying to make sure that your fund is stable, thatand I
think you are trying to do those things to kind of rebuild from what
was a fairly disastrous situation. But it does occur to me that as
we pull that capital into whatever fund or try to minimize risk by
requiring margin, et cetera, that capital is not available to be lent.

14
What is your observation on that? Does that appear problematic to
you?
Ms. MATZ. We encourage credit unions that are interested in
making business loans to make sure that they have commercial
lending staff that can do very solid underwriting. We also are concerned that credit unions reserve for losses adequately, and that
does take capital out of the system. But it protects the Share Insurance Fund, and if it prevents losses, it also prevents additional assessments, ultimately. So we do make sure that credit unions are
adequately allowing for potential losses.
Senator JOHANNS. As you should. But that kind of describes
what small businesses are struggling with. They are struggling to
find somebody who will be their lender, because the system very,
very quickly became risk adverse. Would you agree with that?
Ms. MATZ. I think that credit unions have always been conservative and perhaps they are being more conservative now, but I do
believe that credit unions are still making business loans. In fact,
business lending has gone up in the last quarter. Of course, there
are only 2,200 credit unions making business loans, so it is not a
lot of capital. But in the communities that they serve, I think they
make an important difference to the small businesses.
Senator JOHANNS. Just to wrap up in this vein, just for my education, and, of course, maybe other Members of the Committee
would also be interested, I would like to see whatever charts or
analysis you have available of what happened over the last 2, 3
years relative to lending. Again, I think that would be good information just in terms of trying to work with small businesses who
are continuing to describe this very difficult problem of getting access to capital.
Ms. MATZ. Are you interested in lending in general or specifically
small business lending?
Senator JOHANNS. Whatever you provide will be helpful.
Ms. MATZ. Credit union lending has actually grown over the past
few years, despite the downturn, except for the most recent quarter, where it has leveled off. But that is not specific to business
lending.
Senator JOHANNS. Yes. I would be interested in business lending
if those numbers can be extracted from the whole, if you will.
Ms. MATZ. We will get that for you.
Senator JOHANNS. OK. Thank you. Thank you, Mr. Chairman.
Senator JOHNSON. I would like to thank Chairman Matz for testifying today, and with that, conclude our first hearing today.
[Whereupon, at 10:54 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for the
record follow:]

15
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Todays first hearing will examine the current state of the credit union industry,
including the National Credit Union Administrations ongoing efforts to stabilize the
corporate credit union system. As the supervisor of Federal credit unions that insure
the deposits of over 90 million account holders in all Federal credit unions and
many State-chartered credit unions, this hearing is an important and needed opportunity to explore the health of the credit union industry as we emerge from the financial crisis and recover and grow our economy.
I want to welcome and thank NCUA chairman Debbie Matz for being here today.
The NCUA has taken unprecedented steps over the past several years to stabilize
the credit union system as the troubled corporates pulled liquidity and capital out
of the natural person credit unions. The system has also shared many of the same
challenges as the FDIC concerning the insurance of Americans savings and retirement.
These steps have had a significant impact on thousands of credit unions across
the country, and I am pleased that we can have a serious conversation about the
current state of the credit union industry and the impact of increased assessments
on credit unions that serve millions of Americans across this country. I have certainly heard concerns from my constituents in South Dakota about this matter.
This is not the first, and certainly not the last, hearing on the financial condition
of specific sectors of our financial services industry. The financial crisis certainly
took a toll, and the historic Dodd-Frank legislation will bring many additional
changes to all sectors of this industry. It is very important to me that these types
of hearings become a common occurrence with all of the financial institutions regulators. I look forward to your testimony, Chairman Matz, and to the question and
answer period.
PREPARED STATEMENT OF DEBORAH MATZ
CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION
DECEMBER 9, 2010
I. Introduction
The National Credit Union Administration (NCUA) appreciates the opportunity to
provide views on The State of the Credit Union Industry. NCUAs primary mission
is to ensure the safety and soundness of federally insured credit unions. It performs
this important public function by examining all Federal credit unions, participating
in the supervision of federally insured State-chartered credit unions in coordination
with State regulators, and insuring federally insured credit union members accounts. In its statutory role as the administrator for the National Credit Union
Share Insurance Fund (NCUSIF), 1 NCUA provides oversight and supervision to
7,402 federally insured credit unions, representing 98 percent of all credit unions
and 90.8 million members. 2
The severe economic crisis that began in earnest in 2007 has impacted all facets
of the financial sector. Though credit unions by and large maintained traditional
standards and risk profiles, they have not been immune to the broad effects of historically high unemployment and severely declining home values. More specifically,
these national trends systemically affected credit unions in two particular ways.
First, several of the largest corporate credit unions 3 investment portfolios were
subjected to material losses.
Second, many consumer credit unions, 4 have experienced increased delinquency
and loan losses. This is most pronounced in States hardest hit by the economic
1 The NCUSIF was created by Public Law 91-468 (Title II of the Federal Credit Union Act),
which was amended in 1984 by Public Law 98-369. The Fund was established as a revolving
fund in the United States Treasury under the NCUA Board for the purpose of insuring member
share deposits in all Federal credit unions and in qualifying State credit unions that request
insurance.
2 Approximately 152 State-chartered credit unions are privately insured and are not subject
to NCUA oversight. The term credit union is used throughout this statement to refer to federally insured credit unions.
3 Corporate credit unions provide necessary liquidity, investment, and payment services to
consumer credit unions.
4 The term consumer credit union is used throughout this document to refer to retail natural person credit unions which interact with consumers on a daily basis. Corporate credit
Continued

16
downturn, such as Arizona, California, Florida, and Nevada. The combined impact
of these two occurrences has presented significant financial and operational challenges for both NCUA and credit unions and is discussed in detail in sections II and
III below.
Throughout the crisis, NCUA, with the assistance of Congress and the Administration, has taken extraordinary steps to successfully maintain the stability of the
credit union system for the 90 million Americans who depend on it.
II. Corporate Credit Union System
The primary purpose of a corporate credit union is to provide consumer credit
unions with correspondent banking, liquidity and investment services. Correspondent banking services help financial institutions, including credit unions, to
process and clear checks, process and settle electronic transactions, and move funds
through the financial system.
In the mid-2000s, several of the largest corporate credit unions invested heavily
in mortgage-backed securities (MBS), which resulted in concentrated exposure to
the real estate market. Virtually all of the investments were AAA or AA rated when
purchased. However, their value plummeted when the housing bubble burst.
In April 2007, several months before the distress in the mortgage market surfaced, NCUA issued Corporate Credit Union Guidance Letter No. 2007-02. This letter addressed credit, liquidity, market, and concentration risks associated with
MBS. By and large, corporates ceased the purchase of nonagency mortgage-related
securities by mid-2007. At that time, all investments held by corporate credit
unions, including MBS, were rated investment grade, and 98 percent were rated AA
or higher.
What began as a market disruption thought to stem from concerns with subprime
products, spread throughout the overall financial and real estate markets sector
with unprecedented severity. By the time it became apparent that this was not an
isolated market dislocation, there was no longer an active market for these types
of securities. Like other financial institutions, the corporates could not have found
buyers for the volume of these types of investments they held. The declining values
of these mortgage-backed securities created severe liquidity and capital problems for
these institutions.
Five corporate credit unions, which served more than half of the entire credit
union system, were financially imperiled by the losses in their investment portfolios,
with a far-reaching effect on the entire credit union industry. The industry has been
adversely impacted by consumer credit union losses from impaired capital investments held in corporate credit unions.
Consumer credit unions will continue to face necessary NCUA assessments to resolve the nonfinancially viable corporates. Had the agency not acted to inject liquidity and guarantee deposits in the corporate credit unions in the face of this crisis,
the costs to the industry would have been far greaterthreatening the entire credit
union system.
Without NCUA intervention, the losses, in their entirety, from immediate failure
of large corporates would have cascaded to consumer credit unions via their uninsured shares in the corporates. 5 This would have resulted in the failure of approximately 1,000 consumer credit unions. Consistent with the manner in which deposit
insurance functions, the costs of resolving these failures would have been borne by
all remaining federally insured credit unions, generating additional losses and failures. Ultimately, inaction would have resulted in massive disruption to consumer
services and total costs to any remaining insured credit unions would have been far
greater than the resolution strategy NCUA employed.
To address the systemic financial and operational impact of these five troubled
corporate credit unions, NCUA designed a three-phase strategy to stabilize, resolve,
and reform the corporate system based on the following guiding principles:
Prevent interruption of payments services to consumer credit unions and their
90 million members;
Preserve confidence in the credit union system;
Manage to the least long-term cost consistent with sound public policy; and
Facilitate an orderly transition to a new regulatory framework for the corporate
credit union system based on consumer credit union choice.
unions provide services to consumer credit unions and process consumer payments, but do not
interact with consumers directly.
5 Credit unions refer to deposit and savings accounts as share accounts, or shares for short.

17
Specific details of the actions implemented during these three phases are discussed below.
Stabilization Phase
Given the deterioration of the corporates financial conditions and quality of their
investment portfolios, their access to external sources of funds was compromised.
This resulted in consumer credit unions losing confidence in the corporate credit
unions and starting to withdraw their deposits. These withdrawals, and the prospect
of a wave of additional withdrawals, placed severe liquidity pressures on the
corporates, peaking in 2008. The losses and operational impact on the credit union
system from a nonorderly resolution of this crisis would have been untenable, severely impacting consumer credit unions and their 90 million members.
Accordingly, in the fall of 2008, it became critical for NCUA to initiate dramatic
action to bolster confidence in the corporates and ensure the flow of liquidity in the
credit union system. In the last half of 2008, NCUA began implementing actions to
stabilize and strengthen the credit union system. The first step in the stabilization
program was to increase liquidity throughout the entire credit union system, especially within the corporates.
NCUAs primary tool to address liquidity concerns in the credit union industry is
the Central Liquidity Facility (CLF). 6 At the time, the CLF was operating under
a Congressionally imposed borrowing cap of $1.5 billion. At the NCUA Boards request, in September 2008, Congress raised the CLFs borrowing cap to its full statutory limit of approximately $41 billion. Ultimately, lifting the cap proved to be one
of the primary reasons NCUA could successfully develop and implement a series of
critical liquidity interventions that served as the foundation for its corporate stabilization efforts.
With the full borrowing authority of the CLF now available, NCUA began working
with staff at both the Board of Governors of the Federal Reserve System (FRB) and
the U.S. Department of the Treasury (U.S. Treasury) to develop tools, such as the
Credit Union System Investment Program and the Credit Union Homeowners Affordability and Relief Program, to address the liquidity pressures in corporates.
These two programs enabled consumer credit unions to essentially invest funds borrowed from the CLF into corporate credit union offerings, which raised approximately $8.5 billion in liquidity.
The NCUA Board approved the Temporary Corporate Credit Union Liquidity
Guarantee Program (TCCULGP) on October 16, 2008. Under the TCCULGP, the
NCUSIF provided a 100 percent guarantee on new unsecured debt obligations
issued by eligible corporates on or before June 30, 2009, and maturing on or before
June 30, 2012. 7 The TCCULGP and the other CLF-based programs were successful
in restoring credit lines and funding in the corporate system.
To address the lack of confidence in the corporates and the resulting deposit outflow, the NCUA Board approved the Temporary Corporate Credit Union Share
Guarantee Program (TCCUSGP), which presently guarantees uninsured shares, excluding capital accounts, at participating corporates through December 31, 2012.
This program was vital in maintaining the confidence of consumer credit unions and
stabilizing the precarious liquidity situation at the corporates. The TCCUSGP has
proven very successful in stabilizing liquidity and continues to serve an important
role in the transition process under the resolution phase discussed later.
The NCUA Board also issued a $1 billion NCUSIF capital note to U.S. Central
Federal Credit Union (U.S. Central) to address realized losses on MBS and other
asset-backed securities. This action was necessary to maintain external sources of
funding and to preserve confidence in U.S. Central, given its pivotal liquidity and
payment systems roles as a wholesale service provider to the corporate credit union
system.
Creation of the Temporary Corporate Credit Union Stabilization Fund
The stabilization programs discussed so far came at a significant, but unavoidable, cost to the industry. Given the structure of the NCUSIF and existing law in
early 2009, NCUA would have been required to assess this cost to consumer credit
unions in one lump sum. To give the NCUA Board flexibility to manage the impact
of the costs to consumer credit unions, NCUA requested that Congress establish the
Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund). On May
6 The Central Liquidity Facility was created by Congress in 1978 to improve the general financial stability of the credit union industry by meeting the liquidity needs of individual credit
unions.
7 On May 21, 2009, the TCCULGP was revised to cover unsecured debt obligations issued on
or before June 30, 2010, and maturing on or before June 2017.

18
20, 2009, the Helping Families Save Their Homes Act of 2009 8 was signed into law
and created the Stabilization Fund, allowing costs to be assessed over a 7-year period instead of in a lump sum. 9 This is, perhaps, the most critical tool available to
NCUA to help ease the credit unions burden of resolving the corporate crisis. The
NCUA Board is appreciative that Congress acted so quickly to pass this legislation.
In addition to the Stabilization Fund provision, the Helping Families Save Their
Homes Act of 2009 also contains another important provision that assisted NCUAs
ability to mitigate the corporate problems. This law increases the NCUSIFs authority to borrow from the U.S. Treasury from $100 million to $6 billion, an aggregate
total available to both the Stabilization Fund and the NCUSIF. The Stabilization
Fund relies on the $6 billion borrowing authority in providing the NCUA Board
flexibility to manage the impact of the assessments on credit unions. The enhanced
authorities provided by Congress will permit NCUA to fairly and effectively distribute the insurance costs associated with the current economic downturn, including not just the costs of the corporate losses but also other costs that may arise.
The Stabilization Fund must repay the U.S. Treasury, with interest, all amounts
borrowed. As such, the total costs of the corporate stabilization, resolution, and reform will be fully borne by credit unions with the flexibility to absorb those costs
over a longer time period.
NCUAs stabilization efforts were successful in preserving the vital electronic payments and liquidity services that credit unions provide to over 90 million Americans.
Resolution Phase
The stabilization phase provided NCUA with the time and resources to design and
implement a strategy to resolve the troubled corporate credit unions and the distressed securities they held. Collaborating with the FRB and the U.S. Treasury,
NCUA carefully evaluated a wide range of options to arrive at the least cost, longterm solution consistent with sound public policy. On September 24, 2010, the
NCUA Board approved a comprehensive strategy to fully resolve the ongoing solvency, liquidity, and reputation risks associated with the nonfinancially viable corporate credit unions.
NCUA conducted a comprehensive evaluation of the entire corporate system. Of
the 27 corporates, this evaluation identified five corporates that were not financially
viable. These five corporates represented approximately 70 percent of the entire corporate systems assets and 98.6 percent of the investment losses within the system.
NCUA took direct control of these five institutions through Federal conservatorship. 10 In doing so, NCUA was able to achieve the goals of (1) protecting the vital
services to the thousands of consumer credit unions that rely on the corporate network and (2) implementing the process to resolve the distressed assets.
NCUA employed a traditional resolution model used in the financial sector often
referred to as the good bank/bad bank model. The good bank/bad bank model
was necessary given that the conserved corporates were correspondent service providers to thousands of credit unions and no viable acquisition partners were available. This strategy involved the creation of new charters, called bridge corporates,
and transfer of the good assets, deposits, and operations from the conserved
corporates to these new entities.
The four bridge corporates are led by chief executive officers selected by NCUA,
and who report directly to NCUA. Additionally, NCUA maintains control over their
operations. NCUA has established policies to ensure that the bridge corporates operate soundly, and minimize the long-term costs to the insurance fund. The bridge
corporates are temporary entities, created to maintain necessary services during the
transition period. NCUA intends to maintain the bridge corporate operations long
enough to allow consumer credit unions adequate time to determine their long-term
service options, perform appropriate due diligence, and implement the necessary
operational changes.
Remaining assets in the failed corporate charters were then placed into an inactive status and managed via asset management estates established to house the
8 Public Law 111-22, which was amended in July 2010 by Public Law 111-203.
9 The closing date of the Stabilization Fund can be extended with the concurrence of the U.S.
Treasury. Subsequently, as part of its plan to reduce the annual burden of assessments on credit
unions, in September 2010, NCUA requested the concurrence of the U.S. Treasury to extend the
life of the Stabilization Fund to June 2021; the U.S. Treasury concurred with this request.
10 On September 24, 2010, NCUA conserved Constitution Corporate Federal Credit Union,
Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit
Union. Western Corporate Federal Credit Union and U.S. Central were conserved on March 20,
2009.

19
assets 11

legacy
With the legacy assets isolated in the asset management estates,
NCUA is pursuing a least-cost solution for an orderly disposition of these assets.
After extensive analysis, NCUA determined that the least-cost disposition strategy
involved holding the distressed assets by obtaining long-term funding. This strategy
prevents much larger market losses and, in conjunction with the extension of the
Stabilization Fund, provides credit unions more time to absorb the lower credit
losses.
The long-term funding is being obtained through securitizing the legacy assets.
In summary, the legacy assets are being combined into new structured securities
that are being issued in the financial markets as NCUA Guaranteed Notes (ticker
symbol NGN). The new securities have a guarantee on the timely payment of principal and interest from NCUA, which is backed by the full faith and credit of the
United States. To date, NCUA has finalized four issuances of the structured notes;
all met with strong investor demand.
The underlying defaults on distressed legacy assets and other resolution costs are
expected to be between $13.9 billion to $16.1 billion. 12 This cost will be borne solely
by the credit union system. Credit unions that contributed capital to the corporates
holding these legacy assets bear the first loss, totaling $5.6 billion. The losses above
$5.6 billion will be borne by all federally insured credit unions through Stabilization
Fund assessments over time. Currently the expected range of total assessments is
between $8.3 billion and $10.5 billion. Credit unions have already paid $1.3 billion
in assessments. Thus, the projected range of remaining assessments is $7.0 billion
to $9.2 billion to be paid in annual installments through 2021.
Reform Phase
On September 24, 2010, NCUA issued a final rule reshaping the regulatory
framework of corporate credit unions, addressed in Part 704 of NCUAs rules.
NCUAs primary purpose in reforming Part 704 was to prevent catastrophic losses
from ever recurring. The new corporate regulation is designed to both address the
cause of the current crisis and to provide stronger protections against future potential risks.
The major elements of this new corporate rule can be divided into (1) investment
and asset liability management (ALM) restrictions, (2) capital standards, and (3)
corporate governance.
Investment and ALM Restrictions
Through a series of provisions related to investment suitability and asset liability
management, NCUAs new corporate rule will force corporate credit unions to properly diversify their investments and take other steps to minimize potential credit,
market, and liquidity risk. In short, key provisions:
Institute a variety of more stringent standards that each security must pass before a corporate can purchase the investment.
Prohibit certain highly complex and leveraged securities. Going forward, a corporate cannot buy a particular security if it is a collateralized debt obligation,
a net interest margin security, a private-label residential mortgage-backed security, or a security subordinated to any other securities in the issuance.
Reduce the single obligor limit. The new rule tightens the existing limit on securities from a single obligor from 50 percent of capital down to 25 percent of
capital.
Establish sector concentration limits. The new rule establishes sector concentration limits to diversify the composition of the investment portfolio.
Limit portfolio Weighted Average Life (WAL) to 2 years or less. The WAL limit
reduces not only market and liquidity risk, but also credit risk, since credit
fears negatively affect the price of longer-lived assets more severely than shorter-lived assets.
The new rule contains other ALM measures to reduce risk. For example, to discourage investment arbitrage, the rule tightens a corporates borrowing limits. To
11 The term legacy assets is used to describe the impaired private-label residential mortgage
backed securities and other asset-backed securities held by the failed corporates.
12 Given the complexity of projecting credit losses, the NCUA has relied on multiple expert
sources to validate NCUAs internal results. These external sources include the analysis done
by the corporates external vendors; a detailed, bond-by-bond analysis conducted by the Pacific
Investment Management Company (PIMCO) expressly for NCUA; and a detailed bond-by-bond
analysis performed by Barclays Capital, New York, New York, as part of the securitization.
These analyses incorporate assumptions about future economic events. Hence NCUA relies on
a range of estimates to project future costs to credit unions.

20
reduce the potential for overdependence by a corporate on one member credit union,
the rule also limits funding from a single member, whether it comes from deposits
or loans.
Capital Standards and Prompt Corrective Action
The new corporate rule strengthens capital requirements including new minimum
capital ratios, new risk-based capital calculations, and new definitions of capital
modeled after the Basel I capital requirements. 13 Corporate credit unions will now
need to satisfy three different minimum capital requirements: a 4 percent leverage
ratio, a 4 percent tier one risk-based capital ratio, and an 8 percent total risk-based
capital ratio. 14 The rule also mandates that a certain portion of a corporates capital
consist of retained earnings.
The rule also contains new Prompt Corrective Action (PCA) standards for enforcement of the capital requirements. The consequences of failing to retain adequate
capitalization can include restrictions on activities, restrictions on investments and
asset growth, restrictions on the payment of dividends, restrictions on executive
compensation, requirements to elect new directors or dismiss management, and the
possibility of conservatorship, liquidation, or a supervisory merger. These new capital and PCA requirements will ensure that corporates hold adequate capital commensurate with the risks of both their balance sheet assets and off-balance sheet
activities.
Corporate Governance Provisions
As a result of the recent corporate crisis, NCUA identified certain weaknesses in
corporate governance. The new corporate rule improves upon the existing governance provisions in several ways. All board members will be required to hold either
a CEO, CFO, or COO position at their member credit union or other member entity.
A majority of a corporates board of directors will have to be representatives of consumer credit unions. No person will be permitted to sit on the boards of two or more
corporates at the same time, nor will a single organizational member be permitted
to have more than one individual representative on the board of any given corporate.
Other governance changes relate to transparency. The new rule requires that each
corporate disclose to its members the compensation of its most highly compensated
employees. 15 In the case of merger involving a federally chartered corporate, the
corporate must disclose to both its members and NCUA any material merger-related
increase in compensation for any senior executive or director as a result of the merger.
The new rule also prohibits golden parachutes, defined as payments made to an
institution-affiliated party that are contingent on the termination of that persons
employment and received when the corporate making the payment is either troubled, undercapitalized, or insolvent.
Additional Proposed Amendments to NCUAs Corporate Rule
During the rulemaking process leading to NCUAs recent final amendments to its
corporate rule, NCUA received many suggestions for further amending the rule that
deserved consideration. Some of these suggestions were beyond the scope of the proposed rule, and so legally could not be included in the final rule. Other suggestions
were within the scope of the first proposal, but deserving of additional public comment before adoption.
Accordingly, on November 18, 2010, NCUA issued seven additional proposed
amendments to the corporate rule for public comment. Briefly, these proposed
amendments, if adopted by NCUA, would:
Increase the transparency of corporate credit union decision making by requiring corporates conduct all board of director votes as recorded votes and include
the votes of individual directors in the meeting minutes;
Require that corporate credit unions follow certain audit, reporting, and audit
committee practices required of commercial banks by the Federal Deposit Insur13 Basel 1 is a risk-based capital framework developed by the Basel Committee, a group of
11 industrialized nations, including the U.S., formed to harmonize banking standards and regulations among member nations.
14 Both the old and new corporate rules also require that a corporate maintain a minimum
net economic value ratio of 2 percent.
15 The disclosure includes the three, four, or five most highly compensated employees at each
corporate, with the exact number of employees depending on the size of the corporate. The compensation of the corporate credit unions CEO must also be disclosed, even if the CEO is not
among the most highly compensated at the corporate.

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ance Act, Part 363 of the Federal Deposit Insurance Corporation Regulations,
and the Sarbanes-Oxley Act of 2002;
Provide for the equitable sharing of Stabilization Fund expenses among all
members of corporate credit unions, including both credit union and non credit
union members, by establishing procedures for requesting members not insured
by the NCUSIF to make premium payments to the Stabilization Fund;
Protect against unnecessary competition between corporates by limiting consumer credit unions to membership in one corporate of the consumer credit
unions choice at any one time;
Improve risk management at corporates by requiring corporates to establish enterprise-wide risk management committees staffed with at least one independent risk management expert;
Provide corporates with more options to grow retained earnings by allowing
corporates to charge their members reasonable one-time or periodic membership
fees; and
Require the disclosure of compensation received from a corporate credit union
service organization (CUSO) by highly compensated corporate credit union executives who are also employees of the CUSO.

The public comment period on these proposals ends January 28, 2011.
Current State of Corporate Credit Unions
The corporate credit union system is in a state of transition, which is going according to plan. To date, that transition process has been extremely successful. The
four bridge corporates continue to deliver the critical payment and settlement services on which their members depend. The 22 corporates operating independent of
NCUA control are in the process of implementing critical operational changes to
conform with the new regulatory framework.
NCUAs number one priority in launching the corporate resolution efforts was to
ensure that the critical payment, settlement, and liquidity services corporates provide their member credit unions would continue uninterrupted. That goal has been
met. At no time over the past 2 years was there a lapse in services to the 90 million
consumers served by credit unions.
The future of the corporate credit union system will ultimately be decided by the
consumer credit unions they serve. If consumer credit unions are committed to a
corporate system for their financial service needs, the system must conform to the
new more rigorous regulatory framework NCUA has established. If credit unions
choose not to obtain services from corporates going forward, NCUA will ensure an
orderly transition for credit unions to new service providers. Under either circumstance, NCUAs primary goal is to ensure uninterrupted financial services to the
90 million credit union consumers.
NCUA is working closely with consumer credit unions to provide as much guidance as possible in making the critical decisions related to their future service
needs. NCUA has assured credit unions that they do not need to make an immediate decision. However, NCUA has also been clear in communicating that the decision process is complex and that credit unions need to begin evaluating their options
now.
III. Status of Consumer Credit Unions
Despite the stresses on credit union earnings, the industry remains very well capitalized. As of September 30, 2010, aggregate net worth totaled $90.6 billion, representing the highest dollar level in credit union history. This equates to a net
worth ratio of 9.97 percent of total assets. Ninety-eight percent of all credit unions
were at least adequately capitalized or better, with 94.8 percent of all credit
unions well capitalized. 16
During the past several years, credit unions have experienced strong membership
and deposit growth, indicating they continue to provide valuable services to members. They currently serve 90.8 million members, an increase of 5 million since
2006. Over the same period, shares have grown by $178 billion, or 30 percent, to
$780 billion.
Credit Unions Continue To Meet Member Lending Needs
Even during the height of the recent recession, credit unions continued to lend
to their members as demonstrated by 15 percent growth in loans originated since
16 See,

12 C.F.R. Part 702.

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2008. Loans account for 62 percent of all credit union assets, with more than half
secured by real estate.
Focusing more closely on credit union mortgage lending, 68 percent of credit
unions offer mortgage loans to their members, originating $55 billion in first mortgage loans through the third quarter of 2010. In the first nine months of 2010, total
mortgage loans held on credit union balance sheets increased $667 million, to a new
high of 54.6 percent of total loans.
All other consumer loans, such as auto loans and credit cards, make up 40 percent
of credit unions loan portfolios. Used vehicle loans are the fastest-growing segment
of consumer lending.
Regarding member business loans (MBLs), currently, 2,210 or approximately 30
percent of all credit unions offer these types of loans. MBLs comprise 6.5 percent
of all outstanding loans, or $36.7 billion. The majority of these MBLs are secured
by real estate. The average size of an MBL is $249,000, indicating credit unions are
largely serving the needs of small businesses.
Loan Portfolio Quality
Despite overall adherence to sound underwriting practices, the credit union industry was not immune to the macroeconomic impact of high unemployment and home
value declines. Since the end of 2006, the aggregate delinquent loan ratio and net
charge-off ratios more than doubled to highs of 1.84 percent and 1.21 percent respectively as of year-end 2009. However, aggregate delinquency and net charge-offs have
stabilized in 2010. While historically high for credit unions, these figures still compare favorably to other types of lenders.
Real Estate Loan Delinquency
At more than half of total loans, real estate is the predominant factor in overall
portfolio performance. Rising delinquency rates and losses present a challenge for
credit unions. Real estate loan delinquency has been steadily increasing as the economic crisis has unfolded, from 0.34 percent in 2006 to 2.06 percent as of September
2010. For this same time period, net charge-offs for real estate loans demonstrate
a similar trend, increasing to 0.63 percent as of the third quarter 2010.
Loan Modifications and Foreclosures
NCUA continues to support loan modifications to resolve credit union member
issues. For borrowers experiencing financial difficulties, in lieu of foreclosures, it
may be in the best interest of credit unions and their members to develop prudent
workout arrangements or loan modifications. Credit unions have shown a willingness to work with their members experiencing financial difficulty as noted by the
rapid growth in loan modifications. They have increased from $1.5 billion in 2008
to $8.4 billion, which is approximately 2 percent of total real estate loans.
Foreclosed assets represent only a small fraction (0.49 percent) of total real estate
loans outstanding in credit unions, but have been rising since 2007. In light of the
recent concerns over marketwide real estate foreclosure practices and documentation, NCUA is examining a sample of the largest credit unions selling mortgages
to ensure adequate controls are in place.
Member Business Loan Delinquency
While MBLs represent only 4 percent of total credit union industry assets and approximately 1 percent of total commercial loans in the financial markets, 17 the levels of delinquent member business loans have increased from 0.53 percent to 4.29
percent from 2006 to September 2010 (compared to total loan delinquency of 1.74
percent). A similar trend during this period was noted in net MBL charge-offs,
which increased to 0.71 percent. Presently, at 270 of the 633 credit unions which
have a 3, 4, or 5 CAMEL rating 18 and make member business loans, MBLs are the
primary or secondary contributing factor for the supervisory concern.
Investment Portfolio Quality
Credit union investments account for a third of total assets. These are generally
short-term in nature, with nearly half maturing in less than 1 year, and the majority are conservatively invested in Federal Government obligations.
17 Mortgage Bankers Association Commercial and Multifamily Mortgage Debt Outstanding
Report as of 6/30/2010. (http://www.mortgagebankers.org/NewsandMedia/PressCenter/
74019.htm)
18 Credit unions with a CAMEL rating of 3 have supervisory concerns; credit unions with a
CAMEL rating of 4 or 5 are considered troubled.

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Earnings Have Been Stressed
Earnings have been depressed over the last several years and will likely continue
to be stressed in the near future. As of September 2010, credit unions reported a
return on average assets of 0.45 percent compared to 0.82 percent in 2006. This has
reduced credit unions ability to build net worth. Credit union earnings are under
stress due to compressed net interest margins in the current interest rate environment, NCUSIF premiums and Stabilization Fund assessments, and higher provision
for loan loss expenses. Also, any future rise in interest rates will likely further reduce margins. NCUAs ability to better manage the timing of Stabilization Fund assessments improves the credit union systems capacity to absorb these costs, continue to provide needed member services, and remain well capitalized.
The Number of Troubled Credit Unions Is Increasing
The level of troubled credit unions 19 is highly correlated to the state of the economy. As of October 31, 2010, there were 363 troubled credit unions holding $44.4
billion in assets and $39.1 billion in shares. These credit unions represent 5.0 percent of all credit unions and total shares. The number of troubled credit unions has
increased in the current year, from 328 at year-end 2009.
Similarly, CAMEL code 3 credit unions, which exhibit some degree of supervisory
concern due to less than satisfactory risk management practices, increased from
1,648 to 1,779 over the same period. The following charts illustrate the changes in
the number of troubled and CAMEL code 3 credit unions and the dollars in total
shares held by these credit unions since year-end 2007.

19 NCUA

defines a troubled credit union as rated either a CAMEL Code 4 or 5.

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As Chart 2 illustrates, the majority of shares are held in CAMEL 1 and 2 credit
unions. While NCUA is working diligently with affected credit unions to resolve
problems in weaker institutions, the level of troubled credit unions will also depend
heavily on the pace of the economic recovery.
Impact on the NCUSIF
One of the primary factors impacting the NCUSIF equity level is losses due to
credit union failures. As a result of the above stresses on the credit union system
and the corresponding increase in troubled credit unions, the NCUSIF has experienced increased losses during the past 2 years.
For proper financial statement reporting, the shifting of credit union assets to
more adverse CAMEL codes results in an increase in the amount of NCUSIF reserves for credit union failures. The increase in reserves lowered the equity ratio 20
of the NCUSIF below 1.2 percent during the summer of 2010. Thus, in September
the NCUA Board approved a restoration plan consisting of a premium of 0.124 percent of insured shares to return the equity ratio to near 1.3 percent. The September
2010 premium was slightly more than the 2009 premium of 0.10 percent of insured
shares. As of October 31, 2010, the NCUSIFs equity ratio was restored to 1.29 percent and is projected to remain above 1.2 percent through at least June 2011.
NCUA regularly conducts stress tests to measure the resilience of the NCUSIF.
The most recent tests included analyzing the impact of further declines in real estate values and other economic conditions. The results of this years stress tests indicate the risk profile of the NCUSIF has not changed. The amount of losses at
modeled stress levels remain within the ability of the NCUSIF to absorb. NCUA will
continue to assess the risk profile of the NCUSIF and take appropriate actions
based on the results.
Potential Future Risks
While credit unions are financially strong and well positioned to weather the continuing impact of the economic recession, NCUA has identified the following potential future risks.
Interest Rate Risk
As of September 2010, fixed-rate mortgages represent 63 percent of total mortgage
loans, indicating a clear preference by credit union members for this product in the
current economic environment. While NCUA recognizes the benefit to consumers of
refinancing higher-rate real estate loans into lower fixed-rate loans, NCUA is concerned with the interest rate and liquidity risk associated with a high level of fixedrate, long-term assets should rates rise rapidly.
20 Equity ratio means the ratio of the amount of NCUSIFs capitalization, meaning insured
credit unions 1 percent capitalization deposits plus the retained earnings balance of the
NCUSIF (less contingent liabilities for which no provision for losses has been made) to the aggregate amount of the insured shares in all insured credit unions.

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Credit unions are taking some positive steps to mitigate interest rate risk. Credit
unions sold $27.6 billion in first mortgage real estate loans to date in 2010. These
sales represent nearly 50 percent of first mortgages granted. However, significant
exposure to rapidly rising rates remains.
Credit Union Service Organizations
A Credit Union Service Organization (CUSO) is a corporation, limited partnership, or limited liability company that provides services primarily to credit unions
or members of affiliated credit unions. These entities can be wholly owned by a single credit union or owned by a group of credit unions with or without other investors. A credit unions invested interest in a CUSO is subject to NCUA regulations. 21
Credit unions are increasingly using CUSOs to perform various functions and
achieve economies of scale by partnering with other financial institutions. This
partnering is especially critical to the 2,833 credit unions with less than $10 million
in assets. Credit unions currently have $1.3 billion invested in CUSOs and approximately 33 percent of all credit unions reported using CUSO services. While this arrangement can be beneficial from an efficiency standpoint, especially for smaller
credit unions, it places the systemic risk inherent in the delivery of these services
outside of NCUAs direct regulatory and supervisory domain. NCUA is the only Federal financial institution regulator that does not have oversight authority of thirdparty vendors.
Privately Insured Credit Unions
While NCUA has no regulatory authority over privately insured institutions, they
do pose a unique reputation risk to federally insured credit unions. All financial institutions have been negatively affected by high unemployment, declines in real estate values, and loan losses all arising from the recent, protracted recession. Consumers do not always differentiate between private share insurance and Federal
share insurance. As a result, any pervasive problems that may develop with privately insured credit unions could have an impact on federally insured credit
unions.
American Mutual Share Insurance Corporation (ASI) is a private share insurer
incorporated in Ohio. ASI, along with its wholly owned subsidiary Excess Share Insurance Corporation (ESI), provides primary share insurance to 152 credit unions
in nine States and excess share insurance to several hundred credit unions, including federally insured credit unions, in 32 States. 22 ASI has geographic concentration
in two States particularly hard hit by the recent recession: California and Nevada.
IV. NCUA Supervisory Improvements
The last several years have provided clear evidence of the importance of a strong
regulatory and supervisory approach. The depth and severity of the recent economic
crisis has provided new insight to all regulatory agencies. NCUA is committed to
proactively identifying areas of concern and implementing corrective action in a
timely manner.
To better accomplish this, NCUA modified its risk-based examination program to
require annual examinations of every Federal credit union and increased on-site reviews of State-chartered credit unions. Annual examinations provide more frequent
onsite contacts at credit unions, enabling NCUA to more effectively stay ahead of
developing problems than the previous 18-month examination schedule allowed. Full
implementation of the annual exam cycle is anticipated in 2011 as NCUA hires and
trains additional staff.
In addition to more frequent contacts at credit unions, NCUA is also taking
stronger resolution action earlier in the process when problems are identified. In
2010 NCUA issued a supervisory letter and increased training for field staff directing more rapid escalation of administrative remedies to resolve problems that had
been left uncorrected by credit union management.
NCUA has increased the resources provided for credit union supervision to ensure
problem areas are brought to a timely and appropriate resolution. A particular focus
going forward will be strong regulation and supervision relative to interest rate risk
management. NCUA has also been acquiring additional specialized expertise and incorporating an enhanced training program for examination staff.
21 See, 12 C.F.R. Part 712.
22 ASI provides primary insurance directly in nine States (Alabama, California, Idaho, Illinois,
Indiana, Maryland, Nevada, Ohio, and Texas), excess insurance directly in Arizona and California, and excess insurance indirectly through ESI in 30 other States. ASI and ESI both operate Web sites that list their respective States of operation.

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NCUA has made necessary adjustments over the past 2 years to address the increased challenges associated with the financial crisis and implement additional
proactive risk mitigation programs.
While NCUA remains a highly effective regulator and insurer, NCUA is also operating more efficiently. For every $1,000 in federally insured credit union assets,
NCUA is currently spending just 22 centscompared with 31 cents in the year
2000.
V. Legislative Remedies
Current Legislative Requests
Due to the financial environment and the evolving nature of financial reporting
rules, NCUA is requesting statutory changes to its enabling statute, the Federal
Credit Union Act (Act), to enhance its ability to serve as an effective safety and
soundness regulator of over 7,400 credit unions and deposit insurer for 90 million
members. While these amendments are technical and noncontroversial, they are
nonetheless critical to NCUAs role as regulator and insurer. 23
NCUA requests the following statutory changes to the Act.
Change the Net Worth definition to allow certain loans and accounts established by the NCUA Board to count as net worth. NCUAs ability to resolve
problem credit unions at the least cost to the NCUSIF has been limited by the
Financial Accounting Standard Boards changes in accounting standards, in
combination with the existing statutory definition of net worth. Since NCUA
does not have the ability to adjust the definition of net worth similar to the Federal Deposit Insurance Corporations authority, this results in the dilution of a
credit unions net worth when it acquires another credit union, regardless of
whether or not NCUSIF assistance is provided to facilitate the acquisition. This
increases costs to resolve failed institutions and necessitates more outright liquidations instead of mergers. Liquidations immediately cut members off from
credit union services.
Amend the Act to clarify that the equity ratio of the NCUSIF is based on
NCUSIF-only, unconsolidated financial statements. Evolving accounting standards could result in the consolidation of the financial statements of the NCUSIF
with regulated entities when NCUA exercises its role as the Government regulator and insurer by conserving failed institutions. The requested amendment
would be consistent with Congress original intent in defining the NCUSIF equity ratio, and prevent insured credit unions from being assessed artificially inflated insurance premiums resulting from the consolidation of financial statements with failed institutions.
Streamline the operation of the Stabilization Fund. As currently written, the
Stabilization Fund must borrow from the U.S. Treasury to obtain funds to make
expenditures related to losses in the corporate credit union system. The Stabilization Fund then assesses federally insured credit unions to repay the U.S.
Treasury borrowing over time. Relevant amendments to Section 217(d) of the
Act would give NCUA the option of making premium assessments on federally
insured credit unions in advance of anticipated expenditures, thereby avoiding
borrowing directly from the U.S. Treasury. In addition, while the existing statutory language includes the implicit authority for ongoing advances, a clarification of this in the statute is recommended.
Anticipated Requests for Next Congress
The following are important legislative initiatives for further improving the regulation of the credit union industry.
Statute of Limitations. NCUA proposes that Congress amend the Act to extend
the statute of limitations 24 provision applicable to actions filed by NCUA as
conservator/liquidating agent of a credit union. This would provide parity with
similar authority already provided to FDIC, clarify other ambiguities in the
statute, and allow the NCUSIF to better mitigate losses.
Third-Party Vendor Authority. NCUA is the only regulator subject to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that does not
have authority to perform examinations of vendors which provide services to insured institutions. Credit unions are increasingly relying on third-party vendors
to support technology-related functions such as Internet banking, transaction
processing, and funds transfers. Vendors are also providing important loan un23 See,
24 12

Appendix 1 for applicable proposed legislative text.

U.S.C. 1787(b)(14)

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derwriting and management services for credit unions. The third-party arrangements present risks such as threats to credit risk, security of systems, availability and integrity of systems, and confidentiality of information. Without vendor examination authority, NCUA has limited authority to minimize risks presented by vendors.
Supplemental Capital. Some financially healthy, well-capitalized credit unions
that offer desirable products and services are discouraged from marketing them
too vigorously out of concern that attracting share deposits from new and existing members will inflate the credit unions asset base, thus diluting its net
worth for purposes of PCA. In effect, the reward for their success in attracting
new shares is the risk of a demotion to a lower net worth category if accepting
those shares drives down the credit unions net worth ratio. NCUA believes two
legislative remedies would help reverse the disincentive to accept new share depositsone that addresses the total assets denominator of the net worth ratio,
and another that addresses the retained earnings numerator. For more information on the specific remedy proposed, refer to NCUAs letter to the Honorable
Barney Frank (appended to this testimony document as Appendix 2).
Member Business Lending Statutory Limit. The Act limits the amount of member business loans the vast majority of credit unions can grant to the lesser of
1.75 percent of net worth or 12.25 percent of assets. NCUA recognizes the importance of small businesses in our Nations economy. As such, NCUA supports
efforts to allow credit unions to provide businesses additional avenues of credit
when appropriate under a comprehensive regulatory framework, by increasing
or eliminating the current statutory MBL limitation. Given such a change,
NCUA would promptly revise MBL regulations to appropriately mitigate any
additional risk. For more information on the specific remedy proposed, refer to
NCUAs letter to the Honorable Timothy Geithner (appended to this testimony
document as Appendix 3).
VI. Conclusion
Over the last 24 months, the credit union industry has faced profound and unprecedented threats to its stability. A steep plunge in global financial markets triggered the most severe economic downturn in recent memory. The resulting cascade
of job losses, home foreclosures, and bankruptcies exerted significant pressure on
the entire American financial services sector, including credit unions.
NCUAs experience during these years of crisis demonstrated the value of rigorous
regulation, diligent oversight, and a robust insurance fund. NCUAs increased supervision contributed significantly to the credit union systems ability to withstand
the extraordinary economic shocks over the past 2 years.
Going forward, NCUA has also implemented proactive measures to address the
ongoing strains and emerging risks to consumer credit unions. Coming out of this
extraordinary economic downturn, the credit union industry remains financially stable and well positioned to emerge from the current economic downturn as a leader
in the delivery of financial products and services to more than 90 million consumers.

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ADDITIONAL MATERIAL SUPPLIED

FOR THE

RECORD

LETTER SUBMITTED BY FRED R. BECKER, JR., PRESIDENT AND CHIEF

EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

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LETTER SUBMITTED BY BILL CHENEY, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION

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STATEMENT SUBMITTED BY THE CREDIT UNION NATIONAL
ASSOCIATION

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STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION
Chairman Dodd, Ranking Member Shelby, and Members of the Committee, the
American Bankers Association appreciates the opportunity to submit this statement
for the recordfor the December 9, 2010, Senate Banking Committee hearing entitled The State of the Credit Union Industry. The American Bankers Association
(ABA) represents banks of all sizes and charters and is the voice for the Nations
$13 trillion banking industry and its two million employees.
There are several key points we would like to make in this statement:
Even though credit unions pay no Federal taxes, the industry received taxpayer
assistance to resolve insolvent corporate credit unions.
Raising the credit unions legal business lending cap is not necessary for credit
unions to meet members credit needs. Moreover, expanding the lending cap is
inconsistent with the credit union mission and raises serious safety and soundness concerns.
Alternative or secondary capital is not appropriate for credit unions. It would
dramatically change the focus of credit unions away from member-owned to a
market-driven capital structure, and would force credit unions to generate a
level of return necessary to attract such capitalall of which will negatively impact credit union members.
Credit unions, like many in the banking industry, have suffered losses as the recession took hold and unemployment dramatically increased. For the credit union
industry, several multi- billion-dollar corporate credit unions (which were designed
to provide investments and financial services to smaller, natural person credit
unions) dramatically increased their level of risk and ended up failing. This caused
severe losses to the National Credit Union Share Insurance Fund and created an
environment where many smaller credit unions could fail. Even though credit
unions pay no Federal taxesa privilege bestowed on credit unions in order to focus
their lending on people of small meansthe credit union industry sought taxpayer
help to facilitate the repayment of these losses. 1
This assistance, like many other special programs related to banking and financial institutions, was appropriate for that time. It appears that now, however, some
credit unions are using the financial crisis and the recession to argue for more business lending authority and access to alternative sources of capital. Credit unions
argue that these greater authorities would enable them to meet the needs of small
businesses seeking credit. Such arguments are simply not true. Under current law,
business loans under $50,000 do not count against the aggregate business loan cap
of 12.25 percent of assets. Moreover, the guaranteed portion of Small Business Administration loans does not count against the aggregate business loan limit. Thus,
there is considerable opportunity under current law for credit unions to meet the
needs of small business.
In addition, only a small percentage of credit unionsone-half of one-percentare
at or near the congressionally mandated cap. Thus, even for larger business loans
in excess of $50,000, there is little constraint on credit union lending except for
these small numbers of large, fast-growing, profit-seeking credit unions.
The real goal of expanded business lending is for some aggressive credit unions
to make even more large dollar loanssuch as loans for luxury golf and condominium developments. For some aggressive credit unions, it is not unusual for them
to make multimillion dollar loans. A dramatic example of just how far these credit
unions have gone is the financing of Thumper Pond, a resort development in Minnesota that went bankrupt. This luxury resort featured a golf course, spa, water
park, hotels, and a planned condominium community. The resort was financed by
a large commercial loan made by Spire Federal Credit Union. Not only is this far
beyond any sensible definition of modest means, but the resort is located over 200
miles from the credit unions headquarters. Is this the kind of loan that should be
tax-subsidized?
Such loans are clearly counter to the chartered mission of serving people of small
means. It is leveraging the tax-exemption to provide loans to large businesses that
have plenty of credit options available through taxpaying banks. This credit union
tax expenditure is neither focused nor contained; it takes revenue from banks that
compete for these same loansrevenue that would be taxed and would help to offset
some of the current Federal budget deficit.
1 See, Appendix B for details on the taxpayer assistance which benefited the credit union industry. The mission of credit unions to serve people of small means was articulated in the preamble to the 1934 Federal Credit Union Act.

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Lifting the business lending cap also raises serious safety and soundness concerns. As credit unions have aggressively pursued business lending options, business
loan delinquencies have risen and some credit unions have failed. In fact, just a few
weeks ago (November 23), the NCUAs Office of the Inspector General (OIG) released a report summarizing the 10 costliest natural person credit union failures.
In 7 of these 10 failures, business lending contributed to the failure. 2
Moreover, the General Accountability Office in 2003 warned about the danger of
business lending by credit unions and it was skeptical that NCUA was up to the
challenge to monitor the expansion of credit union business lending. 3 It should be
no surprise that the Inspector Generals Material Loss Review found adequate oversight often missing: business loans were made to nonmembers; credit unions exceeded the legal Member Business Loan cap of 12.25 percent; credit unions violated the
loan-to-one borrower limit; and credit unions made business loans without a Member Business Loan policy. Expanding credit union business lending only encourages
larger, riskier loans, without any assurance of adequate oversight.
Just as business lending is not the answer to the misfortunes of credit unions,
neither is access to alternative or secondary capital. In fact, it will blur the line between credit unions and other depository institutions. By granting credit unions the
ability to issue secondary capital, the capital structure of the credit union industry
would fundamentally change. This would potentially permit any credit union to
issue secondary capital to members and nonmembers alike. By moving away from
the concept of member-owned equity towards a reliance on capital contributions
from nonmembers and the broader marketplace, the very essence of a credit unions
ownership structure is called into question. It would force credit unions to generate
a level of returns necessary to attract such capital and therefore would be a costlier
source of funds. Not only does this dramatically change the focus of credit unions
away from serving their membership towards a market-driven capital structure, it
also raises a host of corporate governance concerns, such as voting rights of holders
of such ownership stakes, board composition, etc.
Moreover, granting all credit unions the ability to raise alternative capital may
negatively impact the ability of low-income credit unions to attract capital. Low-income credit unions would have to compete with other credit unions for this additional capital, thus, raising their cost of capital and making it more difficult to fulfill
their social mission.
NCUA will point to where credit unions in Australia and Canada have the ability
to issue alternative capital. It should also be noted that credit unions in Australia
and Canada are taxed. The lack of taxation of credit unions in the United States
is the key difference.
Finally, Congress, Treasury, and the GAO have questioned the need for alternative capital. In 1998, Congress specifically reinforced its view that credit unions,
in maintaining their distinct character, should rely upon retained earnings to build
net worth, while not issuing capital stock. For example, the report of the Senate
Banking Committee [Rept. No. 105-193, p. 12] states that the NCUA [National
Credit Union Administration] must design the system of prompt corrective action
to take into account that credit unions are not-for-profit cooperatives that (1) do not
issue capital stock, and (2) must rely on retained earnings to build net worth. This
was reinforced by Emil Henry, former Assistant Secretary of the Treasury for Financial Institutions, who noted in 2006 that the ability to raise equity capital by
increasing retained earnings . . . is an important feature that is grounded in the
cooperative nature of credit unions. And in 2004, GAO found that there was no
compelling evidence for alternative or secondary capital for credit unions.
In conclusion, while the common perception about credit unions is that they are
small mom-and-pop operations, the reality is that there are 167 credit unions that
have over $1 billion in assets. To put that in perspective, these credit unions are
larger than 91 percent of the taxpaying banks in this country. Moreover, the traditional credit unions are being squeezed out by the invasive tactics of these growthoriented credit unions. It is no surprise that over 2,600 credit unions have been absorbed into larger credit unions since the beginning of 2001.
While the rhetoric suggests that without greater business lending or capital authority there are no options for these institutions to grow and better serve their customers, the reality is that a very viable option is available today through switching
to a mutual savings bank chartera route that some credit unions have already
taken. This charter provides greater flexibility, still preserves the mutual-member
2 Appendix

A provides more details about what the Inspector General discovered.

3 Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance Oversight and Share Insurance Management. General Accounting Office, October 2003 (GAO-04-91),
p. 49.

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focus that credit unions find desirable, and is accompanied by the effective and experienced supervision of traditional banking regulators. This savings bank charter
would give these credit unions the ability to expand their business lending and retain their mutual structure. However, NCUA actively impedes the ability of credit
unions to engage in charter choice. Removal of NCUAs obstructionism is a far better
alternative to enabling more business lending and access to alternative capital than
a wholesale change in powers that will benefit only a small proportion of large credit unions. Facilitating conversion to a mutual savings bank charter will benefit
those credit unions that have outgrown their charter, and will also improve the fiscal position of the United States as these entities pay their fair share of taxes.
Congress is rightfully concerned about the state of the corporate credit unions in
receivership and the significant costs their rescue imposes on the rest of the credit
union industry. While the taxpayer assistance was appropriate for the circumstances, it is ironic that taxpayer dollars would be used to support an industry
that has not paid a single dollar in Federal taxes. The answer to the stresses currently suffered by credit unions is not to increase business lending powers or allow
alternative forms of capital. Nor are these necessary to meet the credit needs of
businesses. The fact is that there is ample authority under existing law to meet
credit unions small business member needs. Equally important is that expanding
the lending cap is inconsistent with the credit union mission and raises serious safety and soundness concerns. Similarly, alternative capital may sound appealing, but
it would dramatically change the member-owned focus of credit unions to a marketdriven one, which ultimately will negatively impact credit union members.
Against a backdrop where nontraditional credit unions forsake the common bond
in favor of fast growth, and where energies are diverted to favoring the well-off and
businesses rather than meeting their chartered obligation to serve people of modest
means, it is no surprise that ABA opposes expansion of credit union powers. To
allow such expansion will only move the new breed of credit unions further and further away from their mandated mission.

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STATEMENT SUBMITTED BY MARY MARTHA FORTNEY, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF
STATE CREDIT UNION SUPERVISORS
The National Association of State Credit Union Supervisors (NASCUS) appreciates the opportunity to provide a submission for the record of the December 9,
2010, Senate Banking Committee hearing The State of the Credit Union Industry.
NASCUS, the professional association of State credit union regulators, has been
committed to enhancing State credit union supervision and advocating for a safe
and sound State credit union system since its inception in 1965. NASCUS and State
regulators would like to take this opportunity to brief the Committee on a needed
critical reform: natural person credit union access to supplemental capital.
As this Committee knows, the credit union capital structure is unique among financial institutions. Credit unions can only rely on retained earnings for capital
growth, an archaic structure that does not allow credit unions to raise capital in
times of need. The current economic environment facing credit unions only reinforces NASCUS and State regulators steadfast support of supplemental capital access for natural person credit unions. NASCUS and State regulators have believed
for years that supplemental capital is appropriate for credit unions, a necessary tool
for safety and soundness and critical to the credit union systems long term health
and sustainability.
In addition to the general economic impact, credit unions are paying for the deterioration of the corporate credit union network through assessments to the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) at an estimated total
cost of $13.916.1 billion spread across 10 years. This is putting additional stress
on credit union balance sheets already challenged by a restrictive capital regime.
As evidenced by the development of the third iteration of Basel standards, international regulators are capital planning far into the future and addressing prospective capital considerations for banks and other financial institutions. What are U.S.
credit unions doing as far as capital planning for the future? Unfortunately, relying
on just retained earnings for net worth does not provide needed flexibility for capital
planning. Credit unions cannot thrive and compete under these archaic capital
standards.
Non low income, natural person credit unions remain virtually the only class of
depository institutions denied access to supplemental capital. This distinction carries enormous implications for natural person credit unions ability to manage both
the current economic climate, but also the eventual economic recovery. Further,
from a regulatory standpoint, a well managed supplemental capital program can
provide increased systemic stability, additional balance sheet management tools and
an extra buffer to mutualized losses.
NASCUS encourages this Committee to make the necessary changes to the definition of net worth in the Federal Credit Union Act to allow access to supplemental
capital. Following the legislative change, State and Federal regulators would establish prudent regulatory standards for supplemental capital. However, State and
Federal regulators would not be starting from scratchthere are supplemental capital models in use around the world, and NCUA and State regulators have studied
the regulatory considerations for its use in the United States.
For NASCUS and State regulators (many of whom are familiar with supplemental
capital through bank regulatory responsibilities) achieving capital reform has long
been a matter of safety and soundness. Increased capital and investor discipline can
provide critical buffers during economic downturns. We believe credit unions can
manage the complexities of supplemental capital. We know that State regulators
can manage its regulation.
NASCUS urges this Committee to make credit union access to supplemental capital a priority in the upcoming Congress. NASCUS and State regulators welcome
questions from the Committee on this issue.