Good morning, Chairman Leach and members of the Committee

NCUA CHAIRMAN NORMAN D'AMOURS

TESTIMONY ON H.R. 3116

FEBRUARY 5, 1997

Good morning, Chairman Leach and members of the Committee. I am pleased to be here today to express NCUA's support for H.R. 3116, the "Examination Parity and Year 2000 Readiness for Financial Institutions Act."

The Board Members and staff of NCUA have long recognized the threat posed by the Year 2000 conversion, and we are working diligently to ensure that every credit union will have systems in place to solve this problem. Section 4 of H.R. 3116 will increase our ability to oversee these preparations by granting NCUA examination authority over services provided by entities under contract to federally-insured credit unions. This mirrors the authority other federal financial institution regulators already have under the Bank Service Corporation Act. This provision, as well as section 3 of the bill granting the same authority to the Office of Thrift Supervision, is supported by the Federal Reserve, the FDIC and the OCC.

We believe this authority is crucial to ensuring that credit unions are prepared for the Year 2000. Increasing numbers of credit unions receive services, such as share and loan processing, from external service providers. These services must be made Year 2000 compliant and integrated with other credit union systems. Credit union contractors fall into two broad categories - credit union service organizations (CUSOs), which are owned by credit unions, and service providers that are not credit union-owned. Currently, NCUA has no direct statutory authority over either type of service provider.

NCUA has long recognized that credit union ownership of CUSOs has the potential to effect the safety and soundness of credit unions. To address this risk, NCUA has required through regulation that federal credit union contracts with CUSOs provide for access to the books and records of the CUSO. Despite this regulatory authority, we believe that a clear, unambiguous statutory directive would be more efficient. Reliance on pre-existing contracts between credit unions and CUSOs in order to gain access can slow the regulatory process considerably and subject NCUA to limitations on the extent of its access based on the language of a particular contract. Any such delay in our oversight efforts at this point could render it impossible for the service provider to respond to our concerns and develop a realistic plan for Year 2000 conversion. Thus, it is essential that NCUA be able to assess the ability of CUSOs to make the necessary conversions as soon as possible.

In contrast to our position with regard to CUSOs, NCUA has not attempted to assert authority over non-credit union-affiliated service providers through regulation. Absent an ownership interest by credit unions, the nature and extent of the contractual relationship in each case determines whether there are safety and soundness implications for the credit union. While we believe Year 2000 compliance by contract vendors is critical to the safety and soundness of credit unions, we currently must assert this in each case and request the voluntary consent of the service provider before we can assess their Year 2000 efforts. Sometimes we succeed in gaining cooperation; for example, ten of the largest service providers to credit unions permitted our contractor, Cooper's and Lybrand, to review their Year 2000 conversion efforts. Other efforts, however, are not always successful. A case in point is our effort to survey a broader range of service providers about their Year 2000 conversion efforts, which met with a lackluster response - only 30 of 87 service providers replied. If NCUA is to ensure that all critical services credit unions receive from outside service providers are Year 2000 compliant, we must have clear statutory authority to collect information from these service providers.

While the difficulties of collecting information from service providers are significant, a bigger concern emerges if we find the service provider is not progressing with Year 2000 conversion efforts. Under current law, even if we learn of a Year 2000 problem that could threaten the safety and soundness of an insured credit union, we cannot direct the service provider to make any necessary changes. While we can exert authority indirectly through the credit union customer, particularly if the service provider is a CUSO, the oversight process would be enhanced and improved if NCUA had direct authority over service providers, allowing us to take swift and decisive action to assure that the service provided to the credit union is compliant.

Section 2 of H.R. 3116 would require the federal financial institution regulatory agencies to hold seminars and provide model approaches for institutions on Year 2000 issues. We at NCUA agree that it is right and appropriate for regulators to take the lead in such activities. I want to make sure the Committee knows that NCUA and the other agencies, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), have been working to educate financial institutions about the Year 2000 issue since 1996. NCUA's actions include the following:

Letters to Credit Unions: NCUA has issued five letters to federally-insured credit unions on this topic. The first two letters, issued in August 1996 and June 1997, identified the Year 2000 problem, provided a framework for the credit union's phased resolution of the issues, and discussed the potential risks of noncompliance. An August 1997 letter informed credit unions of the areas NCUA would be reviewing for Year 2000 compliance in examinations. A December 1997 letter provided a self-analysis guide for credit unions to use as a model approach for assessing their Year 2000 conversion process. Our most recent letter, issued January 14, 1998, alerts credit unions to the need to ensure that individual programs and services converted to be Year 2000 compliant continue to work together, or interface, when processing Year 2000 transactions.

Letters to Credit Union Auditors: In December, we sent a letter to supervisory committees of credit unions urging them to take an active role in oversight of the Year 2000 conversion at their credit unions. This letter was preceded by a November 26 letter to the American Institute of Certified Public Accountants (AICPA) Credit Unions Committee, re-emphasizing the importance of Year 2000 oversight for credit union auditors. Both letters stress that credit unions supervisory committees should complete their Year 2000 evaluations as early as possible in the 1998 audit cycle.

Contingency Plan: In addition to specific instructions to examiners about how to oversee Year 2000 compliance, the NCUA Board recently approved a contingency plan outlining the timing and level of enforcement actions to be taken against credit unions who are not proceeding with Year 2000 conversion on schedule.

Meetings and Seminars: NCUA officials have spoken at a wide variety of industry meetings and seminars about Year 2000 issues. NCUA Central Office staff participated in seven seminars on this topic sponsored by credit union trade groups. In addition, the Year 2000 specialists in NCUA's regional offices have participated in at least 65 seminars and meetings on this topic to date.

Web site: NCUA's web site has a special Year 2000 section. While much of the information is available at other points on the web site, the Year 2000 section consolidates all the agency's Year 2000 documents, making it easier for credit unions to quickly locate Year 2000 information. The Year 2000 section also offers "hot links" to other Year 2000-related sites.

Publications: NCUA News, the monthly newsletter NCUA distributes to all federally insured credit unions, ran three articles on the Year 2000 conversion in 1997. From this point forward, every issue of NCUA News will include an article on Year 2000 issues in order to ensure that credit unions are receiving a constant stream of information about the Year 2000 conversion.

Staffing: NCUA is currently in the process of augmenting our staff to deal with the increased workload caused by Year 2000. The Office of Personnel Management has now posted the openings for two of three EDP auditor positions the NCUA Board has authorized, and we will move to fill those positions as quickly as possible. In addition, as all examiners are now assessing Year 2000 conversion procedures as part of credit union exams, we have added an additional 42,000 hours of examiner time to Year 2000 efforts in 1998 and will be hiring additional examiners to deal with the increased workload. Finally, we have budgeted $450,000 in 1998 to hire contractors to assist us in our Year 2000 oversight efforts.

I would like to assure the Committee that NCUA is not seeking the additional authority in H.R. 3116 simply for the sake of expanding our regulatory "turf." Rather, we seek this authority primarily for the purpose of overseeing critical system vendors' Year 2000 preparations. NCUA has no desire to examine the minutia of every contract between a credit union and a vendor, nor do we have the resources to engage in such activity.

In conclusion, Mr. Chairman, I thank you and your staff for your diligent work on the Year 2000 issue and urge the quick enactment of H.R. 3116. I would be happy to answer any questions from the Committee.