TESTIMONY OF

NORMAN E. D'AMOURS
CHAIRMAN
NATIONAL CREDIT UNION ADMINISTRATION

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT

OF THE

COMMITTEE ON BANKING AND FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

FEBRUARY 26, 1997

Good morning Chairwoman Roukema and members of the subcommittee. I appreciate the opportunity to appear before the subcommittee today to outline the National Credit Union Administration's policy on credit union field of membership, and to discuss the implications we believe the ongoing litigation could have on the industry's long-term viability.

Madam Chairwoman, I want to briefly update you on the condition of our nation's credit unions and their federal insurance fund. Overall, the credit union industry continues to be in excellent health. This long-term picture of health could be threatened, however, should our existing field of membership and expansion policy be permanently rolled back or severely curtailed.

The National Credit Union Share Insurance Fund (NCUSIF) had its best operating year in its 26-year history during 1996. For the second consecutive year (and the third time in its history), the Fund paid credit unions a dividend on their 1 percent deposit into the Fund. The equity level at October 1996 exceeded the statutory ceiling of 1.3 percent or $1.30 per $100 in insured shares (deposits), so NCUA returned a dividend of 4 percent totaling $102.8 million to federally insured credit unions. We also returned a 4 percent ($103.9 million) dividend during 1995.

There were 11,429 federally-insured credit unions at year-end 1996;

7,174 with federal charters and 4,255 with state charters. The number of problem federally-insured credit unions (CAMEL supervisory rating 4 or 5) has continued to decline each year from 1,022 in 1988 to a record low 286 at year-end 1996. Deposits in these problem credit unions represented just 0.67 percent of total insured deposits in 1996, compared to 6 percent of the total in 1988.

The number of federally-insured credit unions that failed during 1996 fell to a record low for the third consecutive year, dropping to 19, requiring the insurance fund to payout only $2.3 million, also a record low. The previous low was 22 failures in 1995, with $11 million paid out to members.

Since federally-insured credit unions voluntarily recapitalized their insurance fund in 1985, its equity level has ranged between 1.25 to 1.30 percent. The current level is 1.28 percent, and we are projecting that it will again climb to 1.30 percent by year-end 1997.

Natural-Person Credit Unions

During 1996, federally insured credit unions performed admirably by all objective standards. The year-end 1996 call report data have just arrived at the agency and the preliminary data show that total industry assets at the 11,429 federally insured credit unions rose 6.9 percent to $327 billion. Capital accumulated at the rate of 11.1 percent during 1996, the tenth consecutive year of strong capital growth. The ratio of capital to assets of federally-insured credit unions, now averaging 11.4 percent of assets, is at a record-high level; net capital (total capital less the allowance for loan losses) is 10.8 percent. Loan delinquency and net charge-offs remain at or near historic lows. The delinquency rate is 1 percent of total loans, while net charge-offs are 0.5 percent. Profitability, as evaluated by the return on average assets ratio, was a healthy 1.1 percent for last year. This gauge of profitability has remained unchanged over the last year; and the loan-to-share ratio now stands at 74.6 percent compared to 71.1 percent at year-end 1995.

Corporate Credit Unions

Corporate credit unions (which act as bankers' banks to the approximately 12,000 natural-person credit unions) are also in good health. The risk in their investment portfolios (consisting of large amounts of Collateralized Mortgage Obligations -- CMOs) that concerned us two years ago when I last appeared before this panel, has been reduced significantly. Between September 30, 1994, and December 31, 1996, corporate credit unions' total holdings of CMOs declined from $10.2 billion to $4.5 billion. That amounts to only 10 percent of their assets.

There are currently 41 corporate credit unions, of which 36 are federally insured. While capital in corporate credit unions remains low compared to that in natural person credit unions, there has recently been an accelerating trend toward capital accumulation, perhaps in anticipation of new proposed capital standards the NCUA Board expects to consider at our March 6, 1997, meeting. The corporates' ratio of core capital (reserves and undivided earnings) to assets grew from 2.1 percent as of December 31, 1994, to 2.65 percent as of December 31, 1996. During that same period, total capital to assets rose from 4.9 percent to 7.38 percent.

Meanwhile, our management interlock regulation took effect in January 1996. This rule effectively deals with both actual and perceived conflicts arising from the interlocking relationship between the boards and management at corporate credit unions and their state and national trade associations. It also strengthens managerial requirements at corporates. We believe that significant progress has been made in the financial condition and supervision of corporate credit unions since we began our focus on them in early 1994, and our soon to be considered revisions to the corporate credit union regulation (12 CFR Part 704) will provide additional improvements.

In summary, federally insured credit unions have performed extraordinarily well throughout the 1980s and 1990s. It is no accident that NCUA has not had to come to Congress for legislation to deal with either systemic failure or the need for short-term financial buttressing of the insurance fund.

This long-term picture of health could be threatened, however, if federally chartered credit unions are forced to abandon the strategy of diversification adopted in 1982 that has helped to strengthen their operations during the past 15 years.

FCU ACT INTERPRETATION

To address viability problems resulting from the economic downturn in the early 1980s, the NCUA Board in 1982 interpreted the Federal Credit Union Act (FCU) to allow federally chartered credit unions to expand their fields of membership to include multiple groups, so long as members in each group shared a common bond. We believe this interpretation is consistent with the wording of the statute and the history of credit unions.

The recession of the early eighties fueled massive downsizings, closures and relocations at thousands of companies. Employees were laid off or fired. Since the federal credit unions affiliated with these companies did not have a diverse membership base, they quickly experienced viability problems. Many struggled with high loan delinquencies as out of work members could not repay loans on time. This loss of income hampered the ability of these federal credit unions to adequately serve those members when their need was greatest.

As a result, numerous federal credit unions closed and caused a significant drain on the insurance fund. In 1982, under revised policies of implementing the common bond section of the Federal Credit Union Act, NCUA began to merge and transfer assets of failed or failing federal credit unions into healthier federally-insured credit unions. In 1981, 222 federal credit unions failed. In 1982, with the revised policy in effect, the failures dropped to 112, and to 40 in 1983.

When a credit union, because of the loss or downsizing of its sponsor, added other groups it helped assure continuing services to existing and new members who might otherwise have been denied them. The revised policy also accomplished another very important purpose of the FCU Act by allowing employees of small businesses too small to sponsor viable federal credit unions on their own to join with other small groups and achieve the critical mass needed to establish a viable credit union.

We believe the multiple field of membership policy has helped to keep credit union failure rates down and payouts from the taxpayer-backed insurance fund at relatively low levels.

IMPACT OF FIELD OF MEMBERSHIP LAWSUITS

As you know, several banks and bank trade groups, after an unexplained hiatus of 8 years, attacked NCUA's 1982 interpretation of the Federal Credit Union Act's field of membership provision. After the banks suffered a number of losses at various U.S. District Courts, the U.S. Court of Appeals for the District of Columbia in July 1996 reversed the District Court and determined that all members of an occupational credit union must share a single common bond. The Appeals Court remanded the case for implementation to the District Court. That court decided to enjoin NCUA and all federally chartered credit unions in the U.S. from enrolling new groups, and new members from existing groups that did not share a common bond with the credit union's core (original) membership.

In December, the Appeals Court stayed an important part of the District Court's injunction. Federal credit unions, for now, can continue enrolling new members from existing membership groups with differing common bonds so long as those groups were affiliated prior to the District Court's October 25, 1996, injunction. However, federal credit unions remain barred from adding to their charters any new groups which do not share a common bond with their core group.

This (in our opinion) erroneous interpretation of the common bond provisions of the FCU Act could severely limit the viability of a federal credit union whose membership includes the employees of one sponsor organization, if that organization downsizes, relocates or goes out of business. The limitation places these credit unions at an unnecessary risk occasioned by a downturn in a single industry or sector of the economy. The NCUA Board believes that Congress should act now to clarify the Federal Credit Union Act on the question of common bond and to obviate the negative safety and soundness implications of court actions crippling the ability of credit unions to serve different groups that each have a common bond.

Should the courts ultimately decide to force a complete roll-back of our 1982 policy by ordering credit unions to divest existing members from unrelated groups, the potential for substantial losses would be significant and immediate for some 3,586 federally insured credit unions serving 157,000 groups.

Many of these groups have fewer than the 500 potential members needed, as a minimum, to organize and maintain a viable credit union. Thus, millions of Americans would lose or be deprived of the financial services they have chosen or desire. Financial services Congress has for 63 years directed NCUA and its predecessors to make available to them.

There are limited regulatory steps NCUA may be able to take in order to alleviate the problem for some credit unions. However, ultimately if the court's decision stands, only Congress can completely fix the problem.

Importance of Small Businesses to Credit Unions

Since small businesses, which are usually defined as having fewer than 500 employees (the critical mass needed for credit union viability), represent the largest and fastest growing segment of the United States economy, the ability of credit unions to serve such people would be effectively stymied by the Court of Appeals decision if it is not reversed. To exclude such small business employees as potential additions to a well-diversified credit union, would preclude credit unions from meeting their statutory mandate to provide credit and savings accounts to a significant portion of low- to moderate-income blue-collar workers.

According to Commerce Department data, the 6.18 million existing businesses in 1990 employed 93.48 million people. Of these 6.18 million businesses, 99 percent employed fewer than 500 employees (a total of 75 million people).

As we enter the 21st century, the changing nature of our national and world economies make it reasonable to expect continuous downsizing, mergers, and the complete elimination of companies and whole industries. Occupational credit unions remain extremely susceptible to these economic changes.

Federal credit unions have remained healthy and have grown because they invested substantial capital in achieving economic strength and diversity through the addition of select groups. Deprived of this option, even without the draconian order to divest existing groups, many credit unions over time will suffer unbearable losses and their members will lose needed services. Their liquidation or merger would significantly affect the federal insurance fund and the health of the entire industry.

The assets, shares, and loans of the 3,586 multiple-group federal credit unions at year-end 1995 comprised a substantial portion of the industry's total:

Madam Chairwoman, it seems clear from the above that if federal credit unions are not permitted to continue to add new groups or new members from existing select groups, the result will have a devastating impact on their financial viability over a period of time. As the remaining employees of existing select groups become older, trends show they borrow less and save more. Therefore, the inability of a credit union to add sufficient numbers of new members will dry up the pool of younger members who tend to borrow. The higher rates of income generated from loans will be reduced, making it difficult to maintain existing rates paid on savings. The result is an ultimately fatal asset liability mismatch.

Moreover, in reliance upon NCUA's 15-year multi-group field of membership policy, many federal credit unions have invested substantial sums to create an infrastructure to support select group expansion. Millions of dollars have been spent on branch offices, data processing, personnel, and other enhancements allowing credit unions to service the additional members of these groups. As people change jobs, move away, retire and die, and the credit union is prevented from adding additional members or groups, it will lose its ability to sustain the cost of these enhancements adding yet more costs to an already deteriorating income stream.

ACHIEVING MISSION OF FCU ACT

In addition to preserving the freedom of financial choice for America, addressing safety and soundness concerns and helping the employees of small businesses, NCUA's evolving field of membership policy has enabled credit unions to better fulfill the mission of the FCU Act that requires credit unions to make credit "more available to people of small means" as well as "promoting thrift among its members" (emphasis added).

The NCUA Board is firmly committed to following this legislative mandate by helping to ensure that our nation's low- and moderate-income communities are afforded access to the fairly priced financial services provided by credit unions. People of small means are denied this access by the existing court decision.

Some opponents of the credit union cause seek to avoid the stigma of this reality by professing support for such efforts and making them the sole litmus test by which each individual credit union is judged. This, unfortunately, is a specious approach.

Of the total 7,244 federal chartered credit unions at mid-year 1996, 65 percent had assets at or under $10 million -- minuscule by banking standards. Moreover, 30 percent of the total had assets at or below $2 million. Some credit unions have assets of only a few hundred thousand dollars and even less. It's critically important that policy makers understand that because of their cooperative nature both small and large credit unions often provide access to low-income people in different, but equally important ways.

Because of the cooperative structure of what is called the credit union movement, the savings of more affluent members in one credit union provide other credit unions with the funding needed to extend credit to those of lesser means. Larger credit unions have the ability to fulfill their mission of providing services to people with a range of incomes, including low-income,

because through a range of activities they are part of a single system that cooperatively serves all people in the credit union movement. Many larger credit unions of their own free choice donate office furniture and equipment, technical training and other forms of mentoring to smaller credit unions. They also make non-member deposits into credit unions that have NCUA's special low-income designation, do loan participations, and some open branches in low income areas.

Moreover, while there are more than 1,000, or some 15 percent, of federal credit unions located in low-income areas providing services to a membership that is predominately low-income, not all low-income and working-class people live in such areas. They also live and work in middle and upper class communities.

Low-Income Expansion Policy Enjoined by Court

An Interpretive Ruling and Policy Statement adopted by the NCUA Board in July 1994 (IRPS 94-1) was one of the more important initiatives this agency has taken to encourage larger, healthy credit unions to directly reach out into low-income inner-city and rural communities to give residents an opportunity to obtain fairly priced financial services and their only alternative to loan sharks, pawn brokers, check cashing outlets, and rent-to-own operations.

Until October 1996, when the district court injunction halted this policy, NCUA had granted authority to 76 federal credit unions to open branches in distressed neighborhoods and make their services available to a potential 1.4 million low-income residents. Several of these credit unions refurbished empty buildings and moved into abandoned bank buildings. The court injunction has forced the NCUA Board to place on hold, applications from 14 additional federal credit unions in states such as New York, Ohio, Florida, Pennsylvania, and Indiana which had made plans to continue this outreach into rural and urban low-income areas.

The NCUA IRPS 94-1 procedures require a federal credit union applying to add a low-income community to its existing membership to document that the annual income of the majority of households in such area is at or below 80 percent of the national average (according to US Census Bureau standards), and that the community actively desires credit union services. The expanding credit union must also submit business plans detailing how the existing credit union or a new branch will provide the needed services.

This approach has been particularly successful in the southeastern and southwestern states. NCUA is very concerned that such worthwhile and badly needed financial services, which are the quintessential underpinning of America's free enterprise system, are currently being deprived to those in need of them by the court injunction.

COMMON BOND HISTORY

In order to put in perspective the current legal wrangling and to better understand the vital necessity of continuing NCUA's select employee group policies, a short look at the history of the development and usage of common bond is appropriate.

The origin of cooperative credit was based in part on the principle that, when considering creditworthiness, an individual's reputation and character are as valuable as his or her possessions. Reputation and character were the original safety test. At that time, people of modest or small means were unable to obtain favorable credit from banks because of their lack of material means. Banks were simply not interested in dealing with them. (In many cases, this is still true today, which is why Congress enacted the CRA.) Credit unions were created in the mid 19th century to alleviate this situation.

The earliest credit unions in Canada and the United States were mostly based on geographic boundaries, not on occupational or associational common bonds. The New Hampshire state charter granted to the St. Mary's Bank Credit Union in 1908 permitted statewide membership. Neither did the Massachusetts Credit Union Act of 1909 place limits on membership. Massachusetts' was the first credit union act in the United States and laid out these basic organizing principles: 1) at least seven individuals were needed to apply for a charter; 2) it mandated democratic operation of the credit union (one member, one vote) and 3) it prohibited compensation of directors. There was no mention of common bond in that legislation, in the St. Mary's Bank Credit Union charter nor in the early history of credit union development in mid-19th century Europe. It is remarkable how the basic tenets of credit union organization have remained exactly the same over the past 150 years.

The earliest credit unions owe their success to a very limited set of determined individuals. As plans developed to organize credit unions nationwide, these credit union pioneers discovered that as a practical matter organizing credit unions along community lines was slow and tedious. It was simply easier to organize credit unions within factories or associations because those units were already defined and, to some extent, organized. Many of these groups already had a commonality of needs. As we have just seen, a narrow common bond also helped promote safety and soundness. People working, or associating, or living together in compact communities knew each other and were usually aware of a colleague's ability or disposition to repay a loan. There was also the matter of peer pressure. No one would want to be branded irresponsible by one's peers.

In drafting the FCU Act in 1934, Congress accepted the current technological state of credit unions and agreed with industry arguments that a Federal Act would lead to a rapid national expansion of credit unionism.

Thus, in 1934, Congress passed and President Roosevelt signed the FCU Act. The original statutory language (§ 109 FCU Act; 12 U.S.C. 1759) limiting federal credit unions to serving fields of membership remains today and recognizes three types of fields of membership: 1) occupational, 2) associational and 3) community based.

For an occupational common bond that might be the employees of a single factory or the personnel of fleet units of the U.S. Navy stationed at a given port. An associational field of membership might be persons who belong to a local trade union or the members of the First Baptist Church of a certain community.

Common bond then was an organizing mechanism for credit unions and an early standard of safety and soundness. While important as a tool, it was never the defining characteristic of a credit union. These characteristics are: cooperative structure within credit unions and cooperative operations among credit unions, one member one vote democratic control by all members, non-profit status, and a volunteer board of directors. As correctly noted in 1994 by the late U.S. District Court Judge John H. Pratt, in ruling against the bankers, "The salient feature of credit unions is their democratic control and management." He correctly understood that the real purpose of common bond is "to support the underlying policy of promoting stable credit unions."

In 1982, NCUA revised its policies to allow "select employee groups" --each with their own common bond -- to join a single credit union. This change had the same basis as the earlier interpretation -- that is, the promotion of safety and soundness. Under that revised policy, a federal credit union may add select groups to its field of membership even if the select groups do not share a common bond with the existing membership, provided that each group has it own common bond and is within a well-defined area accessible to the credit union's offices.

The revised interpretation allowing broad based multiple group credit unions was essentially based upon societal changes and advances in technology, which both required and permitted new ways to assure safety and soundness. In the highly mobile and technocratic society of our times, where businesses are constantly changing, downsizing or moving to new areas, it would be fundamentally unsafe and unsound to limit credit unions to shrinking or static memberships. Given the rapid diversification of other segments of the American financial industry, it would also be counter-cultural.

Some banks have perceived this change as a great competitive threat. They have brought numerous lawsuits against NCUA that are summarized in Appendix 1. Notably, the first challenge to NCUA's policy change did not occur until about eight years after it was implemented. After several setbacks at the district court level, the banks recently succeeded in convincing a panel of the U.S. Court of Appeals for D.C. that NCUA's multiple group policy violates the Federal Credit Union Act. This legal issue will not be finally resolved until sometime after the Supreme Court decides whether to review the matter.

However, NCUA believes that Congress as author of the Federal Credit Union Act, need not wait for the Supreme Court to rule. Should Congress decide to remove what we and some federal judges believe is at worst an ambiguity in the common bond provisions of the Federal Credit Union Act, it would be protecting the original purposes of the Act by: 1) promoting safety and soundness protection (through diversification of credit union membership in order to safeguard against difficult economic conditions that affect specific groups or industries); and 2) facilitating the growing availability of fairly priced financial services by making credit union service available to individuals who otherwise may not have access to them (such as members of groups too small to run and support a viable credit union on their own). In so doing, Congress would also be defending the quintessential American principle of freedom to chose whatever form of financial institution one may desire.

THE 1982 REVISION IN FIELD OF MEMBERSHIP POLICIES

Consistent with its regulatory mission, NCUA has modified the common-bond concept to enable credit unions to survive in changing economic conditions over the past three decades.

In the early 1980s, the United States experienced the most severe economic downturn since the Great Depression. At that time, more than 80 percent of credit unions were occupational based. Business failures in the United States skyrocketed from 11,742 in 1980 to 16,794 failures in 1981 and 24,908 in 1982.

Before NCUA's adoption of the multiple group policy in 1982, a federal credit union's options were strictly limited. If its sponsor business decided to shut down, relocate, file for bankruptcy, or simply shed workers through layoffs, then the credit union could 1) convert to a community charter, 2) switch to a state charter if the state had broader field of membership policies, 3) merge with a credit union with the same sponsor or 4) it could liquidate. Liquidation was obviously the most costly alternative both in human terms and in dollar-terms to the insurance fund. In the recession year of 1981, liquidation was the most frequent option. There were 251 such cases among federally insured credit unions. Following the 1982 policy change, liquidations fell dramatically to 160 and in 1983 to only 50.

Clearly, allowing federally chartered credit unions greater flexibility to diversify has bolstered the safety and soundness of the credit union system. As previously noted, in 1981, 222 federal credit unions failed and in 1982 when the common bond was expanded, there were only 112 federal credit union failures. In 1983 the number of federal credit union failures dropped to 40. Last year only 14 federal credit unions failed and the record of credit unions has been excellent since (see Table 1).

Table 1

Failures of federal credit unions by date

Year                      Year                      
Failures                  Failures                  
1981  222                 1989  40                  
1982  112                 1990  63                  
1983    40                1991  51                  
1984    31                1992  56                  
1985    24                1993  38                  
1986    21                1994  15                  
1987    21                1995    8                 
1988    29                1996            14        

It is important to understand the political backdrop to NCUA's 1982 multi-group charter policy. President Reagan brought to Washington a Jeffersonian form of federalism: devolution of federal power to the states and more control by local communities. NCUA's policy dovetailed with this concept by allowing credit unions the freedom to adapt to local economic conditions. The NCUA's 1983 Annual Report (sent to Congress) characterized the change in the field of membership policy as representing significant deregulation by allowing credit unions to "take their eggs out of one basket so the credit union won't rise or fall with its sponsoring organization."

NCUA's multiple group policy is an excellent example of an agency carrying out its responsibility to interpret its statute in the context of changing economic realities. In 1934, lawmakers could not have anticipated the technological steps we have taken to measure the safety and soundness of credit union operations. Nor could they have anticipated the explosion of job growth in this country through small businesses. The majority of employees in business are in enterprises with 100 or fewer employees. For instance, in 1990, according to the Statistical Abstract of the United States, 51.7 million of the 93.48 million employees in American businesses were employed in enterprises with fewer than 100 employees. As noted previously, at a minimum, NCUA guidelines require a potential membership of 500 people in order to charter a credit union that can be expected to operate safely and soundly.

Historically, our experience has shown that a group with less than 500 potential members cannot successfully support a credit union. Without the flexibility available in our common bond policy since 1982, millions of hard working American consumers would have had no access to credit unions' low-cost financial services and free financial counseling. Without a correction of the Circuit Court's interpretation of the common bond provision of the Federal Credit Union Act, current and future opportunities for these millions of Americans in small businesses and in low-income communities to exercise the choice of obtaining the benefits of credit union services will vanish.

CREDIT UNION UNIQUENESS AND TAXATION

Madam Chairwoman, there are clear differences between the operations and regulatory activities of credit unions and banks.

Credit unions are unique because they are not-for-profit, member-owned democratic cooperatives. They are the only financial institutions chartered with the social mission of making loans available to people of small means and teaching the benefits of thrift. Their boards of directors are members who volunteer their time, and set the policies of the credit union. They are not paid, and are elected by the membership. Each member gets one vote regardless of the amount of money he or she holds on account. Their guiding principle is "people helping people." And credit unions are the only form of depository institutions that have never turned to the Federal Treasury for any type of assistance.

In contrast, banks are for-profit institutions. Banks' boards of directors are paid. Decisions are made by the stockholders to further the interests and profits of the stockholders. Stockholders may not live in the service area of the bank or depend on its services, and therefore may not be affected by the decisions they make.

NCUA's multiple group policy has not affected the uniqueness of credit unions. It has simply allowed them to achieve the safety of diversity and enabled them to offer low-cost financial services to a greater number of working and low-income Americans from all segments of our society. As long as policy makers desire that credit unions should retain their unique nature, they should not be taxed.

Taxation would reduce federally insured credit unions' incentive to build retained earnings (their only form of capital) by requiring them to pay tax on all additions to retained earnings. This would likely create pressures to look to outside sources of capital. As the record shows, when Savings and Loans were taxed, many looked to outside sources of capital by converting from mutual to stock ownership. This made it possible for outsiders to buy S&Ls, and the majority lost their mutual, cooperative nature.

We also believe that credit unions, if taxed, will over time, begin to place greater emphasis on the bottom line instead of service. They will become profit-oriented, rather than service-oriented. In other words, taxation would eventually lead credit unions to become more like banks.

CRA Application

NCUA also believes credit unions, because of their unique nature, should not be subjected to Community Reinvestment Act (CRA) requirements. The vast majority of credit unions have an occupational or associational common bond not defined by geographic boundaries. At year-end 1996, only 742 or 6.5 percent of federally insured credit unions were community based.

Moreover, many community based credit unions are low-income designated credit unions -- whose sole purpose is to serve predominately low-income memberships. At year-end 1996, there were 346 low-income designated, federally insured credit unions.

It was not the lack of access to credit being provided by credit unions that first attracted Congress' interest in passing CRA. Credit unions, by definition, are controlled by their depositors and borrowers who live in a community or work or associate in defined groups, have remained close to their roots as non-profit financial cooperatives. As such, they have no incentive to deprive their member-owners of service and by definition have disincentives to move money or services away from their members.

CONCLUSION

In 1934, Congress passed the Federal Credit Union Act to promote a safe and sound credit union system that would flourish and provide low-cost financial services to people of small means or anyone else desiring such services. The intent is to help such people acquire wealth and dignity. Credit unions should not be criticized or punished for succeeding in this task. We believe that the evolution of credit unions including modifications in the common bond is perfectly in sync with this congressional intent. In fact, Congress, through prudent and infrequent legislative changes, has over time significantly contributed to the extraordinary success of credit unions while NCUA has, I believe, carried out its fiduciary responsibility to provide flexible regulation, faithful to the Federal Credit Union Act, through changing economic and technological times. This has assured safe and sound credit union operations.

By allowing federal credit unions to diversify their fields of membership, the safety and soundness of the credit union system has been significantly bolstered, credit unions themselves have adapted to profound changes in the American economic landscape, and many more Americans have chosen to be served by these financial member-owned cooperatives.

Congress did not intend to restrict competition through the common bond. In the US Appeals Court's July 30, 1996, decision the court said "we squarely reject" the argument put forth by the banks that Congress intended the common bond to regulate the competition between nontaxed credit unions and banks.

The court further found that: "Congress did not in 1934 intend to shield banks from competition from credit unions," but encourage the "proliferation" of these financial cooperatives. The Appeals Court also observed that only as credit unions have succeeded and competition for the consumer market intensified, did bankers begin to "see the common bond requirement as a desirable limitation on credit union expansion."

Thank you for the opportunity to testify. I would be happy to answer any questions.

Appendix 1

Field of Membership Litigation

There have been seven lawsuits filed by banks or bank trade groups and three by credit unions related to field of membership issues. One has been resolved in NCUA's favor, and the others are pending at various stages in the courts.

1. & 2. First National Bank & Trust Co. v. NCUA - Four North Carolina Banks and the American Bankers Association have challenged NCUA's approval of charter amendments granted to AT&T Family. The banks challenged amendments which allowed select employee groups, unrelated to the original sponsor, to join the FCU. Their claim is that the amendments violate the common bond requirements of the FCU Act.

In 1991 the District Court dismissed the lawsuit on the grounds that the plaintiffs did not have standing to sue NCUA over its chartering decisions. In 1993, the U.S. Court of Appeals for the D.C. Circuit reversed concluding that the banks had standing. After the Solicitor General declined to seek Supreme Court review on behalf of NCUA, that Court denied a petition for a writ of certiorari filed by AT&T Family FCU. The case went back to the District Court for a hearing on the merits.

The District Court concluded that NCUA's select employee group policy, which permitted more than one distinct employee group each with its own common bond to exist in a single credit union, was a reasonable interpretation of the FCU Act. It granted summary judgment in favor of NCUA. The banks appealed.

On July 30, 1996, the U.S. Court of Appeals for the D.C. Circuit issued an opinion reversing the District Court. That Court concluded, in the context of a challenge to the addition of select groups at AT&T Family FCU, that all groups in a credit union must share a single common bond. It held that NCUA's interpretation of the FCU Act was not entitled to any deference because the Act was not ambiguous. The case was remanded to the District Court for the entry of appropriate relief regarding AT&T Family's addition of select groups, consistent with the Court of Appeals' decision.

On remand to the District Court, plaintiffs sought a nationwide injunction barring all federal credit unions from adding select employee groups that did not share a single common bond or adding new members to select employee groups already within their field of membership. NCUA objected arguing that this relief went far beyond what was sought in the AT&T case. The District Court then permitted the filing of a new lawsuit, ABA et al. v. NCUA et al., which for the first time directly challenged NCUA's multiple group policy nationwide. The District Court consolidated this lawsuit with the AT&T case. The Court then issued a nationwide injunction barring NCUA's multiple group policy nationwide and prohibiting all federal credit unions from adding new select employee groups or new members to existing select employee groups. NCUA has appealed that Injunction. On December 4, 1996, the District Court refused NCUA's request for a stay pending the appeal.

On December 24, 1996, the Court of Appeals issued a partial stay which allows credit unions to admit new members to existing select employee groups. They are still prevented from adding new groups. The Solicitor General has petitioned for a writ of certiorari and the Supreme Court has not yet announced whether it will hear the case.

3. Community First Bank v. NCUA - Four Michigan banks filed suit against NCUA claiming that the agency had violated the FCUA by granting a county-wide community charter to Portland Federal Credit Union. The court concluded that the banks had standing to sue but ruled that NCUA acted within the law. The four banks appealed to the U.S. Court of Appeals for the Sixth Circuit, which upheld NCUA, thus producing a victory for NCUA and credit unions.

4. Financial Institutions for Tax Equality v. NCUA - Suit by four Montana banks alleging that NCUA violated its policies by allowing Missoula FCU to combine an occupational and community field of membership, and later to expand its community boundaries. The U.S. District Court in Montana concluded that the banks had standing to sue, although it disallowed the combined occupational/community challenge as time-barred. On October 1, 1996, a Magistrate issued a recommended decision upholding NCUA's approval of the credit union's community expansion. We expect the District Court to adopt that recommendation in the near future.

5. First City Bank vs. NCUA and AEDC FCU - A Tennessee bank challenged a multiple employee group charter for AEDC FCU. The District Court concluded that banks had standing to sue, but upheld NCUA's multiple group policy based in part on the District Court's decision in First National Bank & Trust Co. v. NCUA. The Banks appealed and the case was argued before the U.S. Court of Appeals for the Sixth Circuit in October, 1996. We are awaiting that Court's decision.

6. Texas Bankers Association vs. NCUA and Communicators FCU - Texas banks sued challenging seven select employee groups, and a senior citizen's association which were part of the field of membership of this Houston area FCU. The U.S. District Court for the District of Columbia ruled in NCUA's favor on the addition of select groups, but ruled against NCUA on the validity of the senior citizen's association. NCUA did not appeal the adverse decision on the association. The banks appealed the ruling on the select employee groups to the U.S. Court of Appeals for the D.C. Circuit. That Court's decision in the First National Bank and Trust case is controlling and resolves this issue against NCUA. This case has also been remanded to the District Court for the entry of appropriate relief.

7. Guaranty Bank et al. v. NCUA - This case was filed in the Federal District Court for the District of Columbia on January 16, 1997. Plaintiffs are a Texas bank and several bank trade associations. The action seeks declaratory and injunctive relief against NCUA in connection with its supervision of Red River Employees FCU, a Texas credit union. It seeks to prevent the admission of ineligible members pursuant to NCUA's select employee group policy and asks the court to require NCUA to conduct an audit of the credit union to assure that it is complying with the District Court's injunction in the First National Bank & Trust case.

8. First Entertainment v. NCUA - First Entertainment FCU and the California Credit Union League have sued NCUA in the U.S. District Court in Los Angeles. The plaintiffs are asking for declaratory and injunctive relief that NCUA's select employee group policy is lawful and that the credit union can retain all current members added under the policy and continue to add new members who are eligible under the policy. The Court had earlier ordered the parties to show cause why the case should not be transferred to U.S. District Court for the District of Columbia for consolidation with First National Bank & Trust case. All parties opposed such a transfer. However, the Court has now withdrawn its show cause order and stayed all proceedings in the First Entertainment case until such time as NCUA issues a directive stopping federal credit unions from enrolling new members from their existing groups other than "core" groups.

9. Fort Knox Federal Credit Union v. NCUA - This suit was filed in December 1996 by 10 federal credit unions located in Kentucky. The relief sought is the same as that sought in the First Entertainment v. NCUA case. This case has been stayed pending a decision by the Supreme Court on review in the First National Bank & Trust case.

10. Metropolitan Federal Credit Union v. NCUA - This lawsuit was filed in November, 1996 in the Eastern District of Pennsylvania. It is a challenge to an unassisted merger, approved by NCUA, involving two Pennsylvania credit unions. The merger occurred in 1995. The plaintiff is a federal credit union which was rejected by the merging FCU as a potential partner and is seeking to have the court invalidate the merger as unlawful because it combined credit unions with select employee groups, a policy declared illegal in the First National Bank & Trust case.