CUNA Comment Letter
CUNA Supports Repeal of CAP
February 19, 2002
Ms. Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
Re: CUNAs Support of the Repeal of Government-Imposed Requirements on Community Credit Unions
Dear Ms. Baker:
On behalf of the Credit Union National Association, thank you for the opportunity to file comments on the National Credit Union Administration Boards interim final regulation to repeal unnecessary community service plan and documentation requirements (CAP) for existing federal community credit unions. The rule also includes an update of the Boards definition of investment area-- in its Chartering and Field of Membership Manual for Federal Credit Unions. The update is the result of the new census data and revised Community Development Financial Institution Fund standards.
Summary of CUNAs Position
CUNA strongly supports the elimination of the agencys policy that imposed needless requirements on existing community federal credit unions to document for agency review their plan to serve the entire community. Such requirements are not based on provisions in the Federal Credit Union Act, and their necessity has not been supported by agency data demonstrating community credit unions are failing to reach out to their fields of membership. Rather, as discussed below, data show that credit unions do not need a regulation to force them to serve their members.
While CUNA opposes so-called CAP requirements imposed by the federal government, we steadfastly embrace the importance of serving all members, including low-income individuals. CUNAs Renaissance Commission report, as adopted by the CUNA Board in October 2001, states: The purpose of credit unions is to promote the economic well being of all people, including those of modest means.-- CUNA has called upon state and federal credit unions to document their service to their entire fields of membership, including those with the greatest financial needs, through Project Differentiation. This program allows credit unions to assess how well they are meeting their members needs and focus on areas of achievement as well as identify marketing opportunities and other service initiatives. Credit unions will be delivering their Project Differentiation reports to Congress early next week in conjunction with CUNAs Governmental Affairs Conference.
Whether NCUA complied with the Administrative Procedure Act in repealing the CAP requirements as an interim final rule with a subsequent comment period, rather than seeking comments in advance of the interim rule change is now being challenged in court. Because this issue is in litigation, CUNA will refrain from making detailed comments on this subject, except to note that the procedure used by NCUA appears to be a standard practice at federal agencies and that no member of the public was denied the opportunity to express a view on the CAP repeal prior to the Boards final action in this matter.
Details of CUNAs Comments
In October 2000, the NCUA Board adopted an amendment to its FOM policy and manual that required federal community credit unions to spell out in their marketing plan, business plan or other separate document, how they planned to serve the entire community. The plan included how a community credit union would market its services to the community and what programs and services would be offered to underserved individuals in the community. The Board acknowledged at the time the amendment was approved that there is no tangible evidence that credit unions are not serving their entire communities.
Studies on Credit Union Service
Two recent studies critical of credit union performance, we believe, support this point. CUNAs Chief Economist Bill Hampel analyzed two separate studies from the Woodstock Institute and the National Community Reinvestment Coalition, respectively.
Data recorded through application of the Home Mortgage Disclosure Act (HMDA) demonstrates that a low-income or non-white borrower is much more likely to win approval of a loan application at a credit union than she or he would at a bank. The Woodstock study acknowledges that credit unions may do somewhat better at serving middle- and lower-middle-income households -- It is just a matter of time before credit unions will show similar results among low-income areas served, given the recent changes in the Federal Credit Union Act and NCUAs field of membership policies to facilitate community service.
The Woodstock study relies on language from the Federal Credit Union Act, which states that the credit union statute was enacted in 1934 to make more available to people of small means credit for provident purposes -- among other things. At the height of the Great Depression, people of small means-- referred to the working population of the country who wereby and largepeople of small means.-- Since 1934, credit unions have been very successful in performing this task, focusing on serving the working population. In fact, year 2000 figures from the Filene Research Institute show that, on average, the average income, net worth and net financial wealth of persons using only credit unions (or predominantly credit unions) are below those of persons using only banks or predominantly banks.
Regarding the NCRC analysis, which suggests that the rate of increase in loans to low-income and minority borrowers was less at credit unions than at other lenders from 1999 to 2000, one years data is not necessarily representative of underlying trends.
The NCRC analysis notes that credit unions make a smaller proportion of covered loans to low income and minority borrowers. Because the vast majority of credit union fields of membership have historically been employment based, people at the lower end of the income distribution may be less likely to be eligible to belong to a credit union than moderate and middle income households. This is likely to change in the next several years, as there have been considerable recent expansions in credit union fields of membership into low and moderate-income groups and neighborhoods. It will likely take some time for credit unions to penetrate these newly added potential members.
Also, credit unions that specialize in serving low-income communities tend to be smaller, and therefore less likely to offer mortgages. Those that do offer mortgages are also less likely to report HMDA data because their assets are below the reporting threshold of approximately $32 million.
The NCRC analysis states that credit unions have higher denial discrepancy ratios-- than CRA-covered lenders. This numerical anomaly is due to the fact that credit union denial ratios are, across the board, much lower than at CRA covered lenders.
The fact remains that, despite these studies, a low-income or minority borrower is much more likely to have his or her loan application approved at a credit union than at other lenders.
Misunderstanding about the Interim Final Rule
We believe there is considerable misunderstanding about the interim final rule, including the misconception that the plan had to be available to the public for inspection. While the rule eliminates the CAP requirements for existing federal community credit unions, it retains requirements that a proposed community federal credit union (new and converting) develop a detailed and practical business plan. Such federal credit unions must also develop a marketing plan to serve their entire community. The rule reiterates that community credit unions will be expected to regularly review and follow, to the fullest extent economically possible, the marketing and business plan submitted with their application.
The interim final rule notes that the CAP requirement only applied to one type of federal credit union charter community federal credit unions. The Supplementary Information accompanying the rule states that because there is no evidence credit unions are not attempting to serve their entire communities, it is not a reasonable regulatory practice-- to apply the CAP requirement only to certain existing credit unions.
Reasons for CUNAs Opposition
CUNA opposed the CAP when it was adopted last year and has since then strongly advocated the agency remove it. Our opposition is based on the following concerns:
- Until relatively recently, most credit unions since the inception of the system more than 70 years ago were occupational based and their fields of membership were limited to employee groups.
- It has only been since the changes in the Federal Credit Union Act in 1998 and subsequent amendments to NCUAs field of membership policy to facilitate community charters and conversions, that credit unions have widening opportunities to serve groups that are not employee based.
- As NCUA recently announced, credit unions are expanding service into underserved and low-income communities across the United States at a record-setting pace with an additional 12.5 million potential new credit union members in 231 communities added in 2001.
- Credit unions have been able to expand their services to low-income individuals in large part due to improvements the agency made in the field of membership expansion process, not as a result of CAP requirements.
- The NCUA Boards recent initiatives to expand incidental powers for federal credit unions and allow latitude under the Reg-Flex program for well-run credit unions are also examples of regulatory approaches that provide incentives to expand member services, including to low-income individuals.
- Such incentives to support, facilitate and enhance service to underserved individuals and communities are far more effective and appropriate than a regulatory mandate.
- Such future incentives could include:
- continued improvements in NCUAs membership application process,
- reconsideration of the terms low-income-- and underserved-- in the context of the agencys field of membership policy to allow more credit unions and groups to qualify for such designations and benefit from favorable NCUA field of membership policies;
- expanding the use of secondary capital to allow credit unions serving low-income groups and/or underserved areas to utilize secondary capital to meet net worth requirements; and
- allowing credit unions that are well-capitalized and well-positioned to manage risk to assume some additional risk without negative regulatory consequences in order to provide a greater array of loan products to underserved areas.
- Congress declined to add such Community Reinvestment Act-type requirements for credit unions when it adopted the Credit Union Membership Access Act in 1998. Further, it reaffirmed in the findings accompanying that Act that credit unions do serve individuals of limited means. These directives from Congress make it inappropriate for NCUA to impose CAP requirements unilaterally.
Another change contained in the in the interim final rule is the updating of the definition of investment area-- in Chapter 3 of the FOM manual. Under the interim rule, an area located outside of a Metropolitan Area with a county net migration loss (out-migration minus in- migration) over the five year period preceding the most recent decennial census of at least 5 %; and an area meeting the criteria for economic distress that may be established by the Community Development Financial Institutions Fund (CDFI) of the United States Department of Treasury-- would be added to the Manual as investment areas for purposes of permitting federal credit unions to add underserved communities. This amendment updates the definition of this term and we support its adoption.
In closing, CUNA wants to make clear that while it opposes the CAP requirements, which are unnecessary and paint credit unions with the same brush applied to other financial institutions that need a rule before they would serve those in need CUNA wholeheartedly endorses service to all individuals, including those of limited means. As we have in the past, we want to work with the NCUA Board to pursue regulatory incentives that will allow federal credit unions to continue their proud history of service to all, regardless of background, ethnicity, gender or other factors unrelated to credit union membership.
Thank you for the opportunity to share our views. Please do not hesitate to contact me at email@example.com if you have any questions about our comments.
Mary Mitchell Dunn
Associate General Counsel
And Senior Vice President