State Governmental Affairs

National Conference of State Legislators

Thank you Representative Stone, Madam Chair, and members of committee, and good morning to all of you.

I appreciate the opportunity to address NCSL's Financial Services Committee this morning on such an important topic as the modernization of the nation's credit union system.

My nearly 40 years of service in credit unions includes service on the National Credit Union Admin Board under Presidents Reagan and Bush, where I was responsible for the Federal Credit Union System – both supervision and insurance, and have long been a champion of the dual chartering system, as the CEO of both the California Credit Union League and Nevada Credit Union League.

Financial modernization is crucial to all U.S. financial institutions, which are today among the most innovative and effective providers of financial services in the world.

We operate in a marketplace that is undergoing major and fundamental change driven by a revolution in technology, by dramatic innovations in services and an increasing demand by consumers to provide these services in faster, more convenient and more affordable ways.

After banking industry efforts for over 20 years, the Federal Banking Law was finally modernized in the form of the 380 page Gramm-Leach-Bliley Act.

According to the American Bankers' Association, the banking industry fought hard to modernize its outdated laws in order to (quote) "provide more choice to consumers, more innovative products and more competitive prices in the financial marketplace."

Credit unions agree that these are important reasons to support financial modernization for all financial institutions. These are some of the same reasons credit unions in many states are working to update state credit union acts. And it's very important for consumers (non-credit union members as well as members) that there be a robust credit union system in the marketplace.

While Credit Union Modernization has not encompassed such expansive changes as the Gramm- Leach-Bliley Act did for the banking industry, it is just as critical to our 85 million members that credit unions be progressive in the ever-changing financial industry to offer services our members demand.

As a former federal credit union regulator, I understand full well that the financial services industry needs to maintain safety and soundness, and part of that is ensuring that all sectors of the industry have the freedom to change with the times so they remain viable.

Aside from banks' entry into the insurance and securities industries, the most visible trend in banking modernization -- and the one that has generated the greatest need for credit union modernization - has been bank consolidation.

In 1992, banks with less than $1 billion in assets controlled about 30 percent of all financial institution assets. Banks with more than $1 billion in assets then controlled about 65 percent.

Today, after more than a decade of mergers and acquisitions, small banks now control only about 12 percent of assets, while big banks control fully 80 percent.

It's worth noting that any demise of community banks isn't due to credit union growth - it's due to big banks taking over small banks. Credit unions' share of assets over the same period has remained steady, at about 7 percent.

The loss of community banks has left many communities without a locally owned financial institution – other than credit unions. About 12.5 percent of Americans don't use financial institutions at all. The Small Business Administration has said that bank consolidation is drying up the pool of loans available to small businesses, which is why the SBA is encouraging credit unions to become more involved in making SBA loans.

More than ever, American consumers need an alternative, and credit union modernization is needed at the state and federal levels.

A variety of academic research underscores the importance to consumers of a healthy credit union system. In short, these studies find that credit unions benefit both members and nonmembers.

For instance, in two recent Filene Research Institute studies (The Effect of Credit Unions on Market Rates for Unsecured Consumer Loans and the Effects of Credit Unions on Bank Rates in Local Consumer Lending Markets) professor Rrobert Feinberg of American University uses data from the Federal Reserve system and from the National Credit union Administration, to examine loan pricing behavior of financial institutions across a variety of U.S. markets.

The studies identify a strong positive role for credit unions on bank loan pricing.

Specifically. They reveal that the greater the local market share of credit unions and the greater the state-level membership penetration, the lower the bank loan rates for unsecured and new vehicle loans.

If credit unions weren't allowed to modernize their services and delivery systems, or if burdens or restrictions made them less competitive in the marketplace, then the clear losers would be American consumers, who would pay the price in increased loan rates, decreased savings rates, and increased fees and charges.

Two specific areas that need additional modernization are Credit Union Member Business Loan Authority and Field of Membership.

From our beginnings in the U.S. in 1909 until the early 1990's, credit unions were able to offer loans to credit union members for income producing things such as, purchasing a truck, a taxi cab or a tractor.

In the early 1990's federal laws and regulations began to differentiate these types of loans as "member business loans" and placed severe restrictions on these loans, causing hardship for many small business owners. In a number of states the credit union regulators have stepped up and made efforts to improve these laws, but unfortunately state regulators are hindered by federal laws.

As long as our members continue to request additional services, the credit union system will strive to improve and update our state credit union acts.

Now let me turn to the area of Credit Union Field of Membership - when credit unions originated in the mid-1800's in Germany, and when they came to the United States and Canada early in the last century, they were almost always community-based organizations, and that's how most credit unions operate today in nearly 90 countries around the world.

Occupational credit unions emerged when it was found to be easier to organize them in that way, and that organizing practice eventually found its way into federal and many state laws.

As Credit Union Field of Membership trends have returned to community form in recent years due to corporate consolidations, military base and factory closings, and other economic factors, it doesn't reflect a departure from the roots of credit unions, but a return to our roots, as community organizations.

Choices are important for consumers and the public is well-served by further modernization of Credit Union Field of Membership.

Whether a state chooses to undertake a significant overhaul of its credit union act or update specific provisions periodically, the modernization of all of the nation's financial services laws and regulations, including banks and credit unions, is critical to maintaining a progressive, competitive global market place.

Before I turn the microphone back to you Madam Chair, I would like to address one issue that I feel is appropriate in this discussion, because the American Bankers' Association is represented on this panel.

Despite banking organizations' claims to the contrary, the credit union income tax exemption is in no way related to the modernization issues I have just discussed or any other evolving credit union changes. The credit union income tax exemption was not granted based on the types of services we offer, the consumers we serve, or the amount of our deposits. The credit union tax exemption was granted because credit unions were organized and operated for mutual purposes and without profit, and that hasn't changed.

Credit unions' cooperative ownership and the service philosophy that flows from that will always make credit unions different from for-profit financial organizations, regardless of similarities in size, service areas, or service portfolios.

The state credit union system existed for over 25 years before the federal credit union system was developed. It was state policy makers that determined the tax status of credit unions that is largely still followed today at both the state and federal levels.

A 1917 U.S. Attorney General's opinion serves as the basis for exempting state-chartered credit unions from taxation.

That Attorney General's opinion made it clear that institutions "organized and operated for mutual purposes and without profit" should not be subject to the tax imposed by the 1913 Federal Income Tax Law.

In the aftermath of the collapse of the banking system during the Depression, Congress increased regulation over banks and sought ways to ensure that banks faced sufficient competition to keep their monopolistic tendencies in check.

Congress found the growing credit union movement to be the perfect alternative to banks, especially in the area of consumer credit.

Congress formally took steps to implement this plan in 1934 by passing the Federal Credit Union Act.

A bill to explicitly exempt federal credit unions from federal income taxes was introduced two years later in 1936 and passed in 1937.

Supporting testimony in the House of Representatives emphasized that credit unions were "mutual or cooperative organizations operated entirely by and for their members." There was never any link between the granting of the tax exemption in 1937 and the size of credit unions, the services offered by credit unions, or the members credit unions serve.

In 1951, the Tax Equalization Act reviewed the tax-exempt status of a number of corporations and cooperatives. It affirmed credit unions' federal tax exemption, because credit unions maintained their one-vote-per-member democratic form of representation.

And as recently as 1998, Congress again reviewed and confirmed the federal credit union tax exemption.

Credit unions have grown as a result of serving their members/owners well, and should be commended, not criticized, for success in meeting consumer financial needs, and should continue to evolve to continue to meet those needs.

Thank you Madam Chair, and members of the committee for the opportunity to share with you my thoughts on Credit Union Modernization. I look forward to responding to your questions and participating in the discussion that will follow Mr. Leggett's remarks.

Copyright © 2009 - Credit Union National Association, Inc.