COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida NANCY L. JOHNSON, Connecticut WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas PHIL ENGLISH, Pennsylvania J.D. HAYWORTH, Arizona JERRY WELLER., Illinois KENNY C. HULSHOF, Missouri RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas THOMAS M. REYNOLDS, New York PAUL RYAN, Wisconsin ERIC CANTOR, Virginia JOHN LINDER, Georgia BOB BEAUPREZ, Colorado MELISSA A. HART, Pennsylvania CHRIS CHOCOLA, Indiana DEVIN NUNES, California	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California LLOYD DOGGETT, Texas EARL POMEROY, North Dakota STEPHANIE TUBBS JONES, Ohio MIKE THOMPSON, California JOHN B. LARSON, Connecticut RAHM EMANUEL, Illinois
Allison H. Giles, Chief of Staff Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisories announcing the hearing

WITNESSES

National Credit Union Administration, the Honorable JoAnn Johnson, Chairman; accompanied by Robert Fenner, General Counsel

Internal Revenue Service, Tax-Exempt and Government Entities Division, Steven T. Miller, Commissioner

U.S. Government Accountability Office, Financial Markets and Community Investment, Richard J. Hillman, Managing Director

American Bankers Association, and First National Bank of Waverly, Jeff L. Plagge

America’s Community Bankers, and  Litchfield Bancorp, Mark E. Macomber

Credit Union National Association, and Greater El Paso’s Credit Union, Harriet May

Independent Community Bankers of America, and Security Bank, Dyersburg, Tennessee, David E. Hayes

National Association of Federal Credit Unions, and Navy Federal Credit Union, Vice Admiral Cutler Dawson, retired

National Community Reinvestment Coalition, John Taylor

National Credit Union Administration, the Honorable Norman E. D’Amours

Tulane-Loyola Federal Credit Union, Constance Kennelly

University of Nebraska-Lincoln, College of Business Administration, Gordon V. Karels, Ph.D.

SUBMISSIONS FOR THE RECORD

Ayers, Walter, Virginia Bankers Association, Glen Allen, VA, statement

Bartlett, Steve, Financial Services Roundtable, statement

Becker, Fred, National Association of Federal Credit Unions, Arlington, VA, letter

Chatfield, David, California Credit Union League, Rancho Cucamonga, CA, letter

Dawson, Cutler, Navy Federal Credit Union, Vienna, VA, statement

English, Phil, U.s. House of Representatives, statement

Gillespie, Donald J., A.M. Community Credit Union, Kenosha, WI, letter

Gittens, Lane, West Haven, UT, letter

Headlee, Howard, Utah Bankers Association, Salt Lake City, UT, letter

Heller, Thomas, Orlando, FL, statement

Kerslake, Dale, Cascade Federal Credit Union, Kent, WA, letter

Mica, Dan, Credit Union National Association, Washington, DC, letter

Minnesota Bankers Association, Edina, MN, statement

Oemichen, William, Wisconsin Federation of Cooperatives/Minnesota Association of Cooperatives, Madison, WI, letter

Slach, Harold, Port Orchard, WA, statement

Woodard, Thad, North Carolina Bankers Association, Raleigh, NC, letter

REVIEW OF CREDIT UNION TAX EXEMPTION

U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.

The Committee met, pursuant to notice, at 10:44 a.m., in room 1100, Longworth House Office Building, Hon. Bill Thomas, (Chairman of the Committee), presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairman THOMAS.  If we could ask our guests to find seats, please.  Today, the Committee continues its series of oversight hearings on the tax‑exempt sector.  At this hearing we will focus on the tax-exemption provided to Federal and State credit unions.  Credit unions have been statutorily tax-exempt for almost 70 years.  Today, they have approximately 87 million members and combined assets of more than $674 billion.  Yet, their tax status has received little scrutiny from Congress.  In fact, this is the Committee's first hearing in 20 years devoted exclusively to credit union tax-exemption.  Based upon e‑mails sent around, newspaper articles generated and statements made, it appears as though some people think it is an affront to have the Committee ask the people who receive a benefit from the taxpayers of this country to come in and answer a few questions.  They have even gone to the extent of apparently setting up a countdown calendar on how long I am going to remain chairman and how long they need to hunker down.

Mr. RANGEL.  How did that turn out?

Chairman THOMAS.  Several credit unions‑‑far longer than you ever wanted it to, Charlie.

[Laughter.]

Mr. RANGEL.  I just asked.

Chairman THOMAS.  I just answered.  We are going to hear over and over that Federal credit unions were created in 1934, and then received their tax‑exempt status in 1937.  But what I really want to do, since many people do not remember the banking structure from 1934 and 1937 and what it looked like at that time, that was the era in which the industry was examined and credit unions were established, because, no question, based upon the statute, Americans of modest means had difficulty obtaining credit at that time.  Over the last 70 years, however, the financial service industry as a whole, and credit unions specifically, have changed a great deal.  That is why it is important to periodically revisit the field and see if what did apply continues to apply.  Or in evolving, in meeting those changing needs, the evolution, in fact, makes sense to the taxpayers who provide a very generous subsidy.

If you examine what a credit union was when it first started and look at what credit unions are today, especially those that are the newest in emerging credit unions, you find out that you can have a credit union which is called the Congressional Federal Credit Union but supplies credit to a retail restaurant, to Legal Seafood, and to a law firm called Akin Gump, notwithstanding the fact it is called a "congressional credit union."  When you deal with community charters, whatever local means, I find it somewhat amazing that a credit union can be chartered to have as its local community the county of Los Angeles, which has a population greater than 42 States in the country.  While the original credit unions offered limited services, many modern credit unions offer a wide variety of services.  Increasingly credit unions are offering business loans to members, and through some affiliates, credit unions offer services that seem to be quite unrelated to their original mission.  For example, health and dental insurance, automobile sales, or even pet insurance.

So, as we begin to look at this, one of the concerns I have is not so much, although we will inquire, about the question of what is it that they do to continue to get the tax‑exempt status.  For example, when we examined nonprofit hospitals, we found that at one time they were required to provide services to the poor.  That was eliminated sometime ago--hospitals are not even required to do that.  However, I do think it should be noted that the original statement from the 1930s offering people of modest means financial services was restated as recently as 1998 in legislation.  So, that seems to be an ongoing theme.  The concern that I have in today's world, as many of us were shocked in terms of things that were occurring in the corporate world, are focused primarily on the question of transparency, accountability, verifiability, the sorts of things that taxpayers if they were sitting here today would want to know to determine whether or not they are getting their money's worth in terms of not just the activities or the services that credit unions provide, but the way in which they are run, who gets the benefits, to what extent they have a comfort level that the accounting procedures are aboveboard, and match up to some of the new accounting procedures that Congress has passed on to entities that pay taxes.  So, that is really the direction that Congress ought to engage in once every two decades.  With that, I recognize the gentleman from New York for any statement he would like to make.

Mr. RANGEL.  Thank you, Mr. Chairman.  Seventy‑five years ago, a great concept came into being, and as a result of that, the lives of people have improved throughout the United States and, indeed, throughout the world, because 75 years ago, Charlie Rangel was born, and he certainly has made a difference.

[Laughter.]

Mr. RANGEL.  Of course, at the same time credit unions were created, and so those were two great things that happened 75 years ago.  It seems as though that they provided a great service to many people, and right here at Wright Patman I see the long line of members who are anxious to receive services here.  I, like the chairman, welcome these positive, motivated hearings to see what we can do to improve the quality of service that we render.  So, it is very interesting that hospitals would be on the same line of interest to the Chair that is the not‑for‑profits.  But we do hope that at the end of this administration, if the public does not provide the service and we have not‑for‑profits providing the service, that something would be left for those people that are not among the powerful as relates to their lobbying interests.  So, Mr. Chairman, let me thank you for openly having these hearings so that at least those of us who appreciate the great work that hospitals are doing and the credit unions are doing, we are able to let our constituents know the direction in which you are going.  I reserve any other comments I might have.

Chairman THOMAS.  I thank the gentleman.  Our first panel today consists of the Honorable Mrs. Johnson, who is the Chairman of the National Credit Union Administration (NCUA); Steven T. Miller, Commissioner in the Internal Revenue Service, who has visited with us before; and Richard J. Hillman, who is the Managing Director, Financial Markets and Community Investment, U.S. Government Accountability Office, who has visited with us as well.  Each of you has submitted written testimony, and it will be made a part of the record, without objection.  The Chair and the Members look forward to hearing from each of you present the information you have, in any manner you see fit in the time that you have available to you.  Let's start with Chairman Johnson and move across the panel.

STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION, ALEXANDRIA, VIRGINIA, ACCOMPANIED BY ROBERT FENNER, GENERAL COUNSEL, NATIONAL CREDIT UNION ADMINISTRATION

Ms. JOHNSON.  Chairman Thomas, Ranking Member Rangel, and Members of the Committee, on behalf of the National Credit Union Administration, thank you for the opportunity to be here today to present NCUA's views on the credit union tax-exemption.  The NCUA acknowledges the support of this and previous administrations, and also of Congress, favoring the continued tax-exemption for credit unions as important public policy.  The NCUA's primary mission is to ensure the safety and soundness of federally insured credit unions.  We fulfill this mission by examining, regulating, and insuring all Federal credit unions.  In coordination with the State regulators, we participate in the supervision of federally insured State‑chartered credit unions.  As credit union cooperatives, federally insured credit unions vary in size.  However, their cooperative structure and purpose is identical.  They are strongly capitalized and present minimal risk to the National Credit Union Share Insurance Fund, the Treasury, and ultimately the American taxpayers.  The Share Insurance Fund has never required taxpayer support.  It is from this perspective that we have reviewed the implications of the debate over continuing the credit union tax-exemption.

Credit unions are today, as they were at their inception in the United States, member‑owned, democratically controlled‑‑that is, one member, one vote, and a volunteer board‑‑tax‑exempt cooperatives, fulfilling their mission of serving the credit and savings needs of consumers, especially those of modest means.  This structure, begun as a financial service provider for the working Americans, remains intact today as credit unions fulfill their purpose of serving a broader base of American consumers, especially those of low and moderate income, even as both credit unions and other financial institutions have adapted to consumer demand for improved delivery of financial services.  It is through this cooperative structure that the credit union system provides billions of dollars in annual benefits to consumers.  The structure supports the incentive of credit unions to provide affordable services to their consumer owners rather than to maximize profits to outside investors or stockholders.

Though credit unions comprise only 6 percent of federally insured institutions' assets, essentially the same level since 1992, the effect of this minimal competition also assures better rates and services for users of all financial institutions.  Critical to this discussion, it is the agency's view that credit unions are fulfilling their mission of serving persons of modest means.  Over 1,000 credit unions exist specifically for the purpose of serving designated low‑income fields of membership.  Additionally, 640 Federal credit unions as well as many State‑chartered credit unions have added underserved areas to their fields of membership.  Industry‑wide, savings and loan balances in credit unions are lower than in other institutions.  Credit unions make a higher percentage of their HMDA‑reported loans to low‑ and moderate‑income borrowers than do other institutions.  These and other facts reported in my written statement demonstrate that credit unions are actively fulfilling this aspect of their mission.  Credit unions have modernized their methods of delivering services.  This has been appropriate.  It has been necessary for their survival, and it is consistent with the principle that those of modest means should not be restricted to modest services.

Also important to this analysis is the fact that credit unions build capital only by setting aside a portion of their earnings.  Taxation threatens to diminish that sole source of capital, resulting in changes that could undermine the continuation of the cooperative credit union system.  When subjected to the additional expense of taxation on net worth in conjunction with the limitations on membership and powers, it may be difficult to justify retaining a cooperative credit union charter.  A likely response, especially for larger credit unions, will be to convert to bank charters.  The present structure is successfully serving 84.5 million credit union members and empowers many Americans, especially those outside the financial mainstream, to be introduced to the financial services marketplace.  It is the same success that argues most strongly for the retention of this important statutory mandate if a viable financial alternative is the desired result.  Due to their unique cooperative structure and in the interest of maintaining it, credit unions have had tax‑exempt status since 1917.  This status was affirmed and formally codifies for Federal credit unions in 1937 and reaffirmed by Congress in both 1951 and 1998.  In 2001, the Treasury department reviewed, along with several other issues, the credit union tax-exemption.  The resulting report offered now administrative or legislative changes regarding the exemption.

The original justification for tax‑exempt status remains valid.  Federally insured credit unions provide billions of dollars of benefits annually to all consumers, not just credit union members, by assuring that competitive rates are offered in the financial marketplace.  Congress should carefully consider these facts in determining whether to repeal the credit union tax-exemption.  Thank you for the opportunity to participate on the panel, and I will be happy to address questions.  Thank you.

[The prepared statement of Ms. Johnson follows:]

Chairman THOMAS.  Thank you, Chairman Johnson.  Mr. Miller?

STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX‑EXEMPT AND GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE

Mr. MILLER.  Chairman Thomas, Ranking Member Rangel, Members of the Committee, thank you for the opportunity to address the treatment of credit unions under Federal tax law.  Our regulatory role in this area depends upon whether the credit union is chartered by the Federal Government or by a State.  The Service has virtually no enforcement responsibility with respect to federally chartered credit unions.  We have more but still rather limited engagement responsibility with respect to State‑chartered credit unions.  Credit unions were formed to encourage thrift among members and to create a source of credit at a reasonable rate of interest.  Congress has stated that credit unions are exempt from tax because they are member‑owned, democratically operated, not‑for‑profit organizations, generally managed by volunteer boards of directors, and because they have a specified mission of meeting the credit and saving needs of consumers, especially persons of modest means.  Let me start my discussion of the tax rules with federally chartered credit unions.

Federal credit unions were first chartered by an act of Congress in 1934 and were exempted from tax in 1937.  They are chartered and regulated in their operation by the National Credit Union Administration.  Once chartered, they are exempt from Federal income tax under the Federal Credit Union Act and are treated as instrumentalities of the United States under Section 501(c)(1) of the Internal Revenue Code.  Federal credit unions are liable for Federal unemployment and Social Security taxes, but are not subject to the tax on unrelated business income, which is the tax imposed on income derived from a trade or business that is not substantially related to the exempt purpose of an entity.  Federal credit unions do not file information returns with the IRS, nor do they apply to the IRS for recognition of exemption.  Other than employment taxes, we have no oversight over these entities.  For State‑chartered credit unions, the tax treatment is significantly different.  Favored Federal tax treatment for these entities dates from a 1916 statute.  The exemption of State‑chartered credit unions from Federal income tax is now governed by Sections 501(c)(14)(A).  State‑chartered credit unions are exempt if they are without capital stock, are organized and operated for mutual purposes, without profit and under a State law governing the formation of credit unions.

State‑chartered credit unions do not need to file with the IRS for exemption, but some do.  In that event, they must show the State and date of their incorporation and that they comply with the State law applicable to loans, investments, and dividends.  In addition, 34 States have group rulings in which the State regulatory authority controls additions or deletions to the group and notifies the IRS of the names and addresses of new and departing members.  State‑chartered credit unions are also required to file an annual information return with the IRS.  Like Federal credit unions, State‑chartered credit unions are liable for employment taxes; however, unlike the Federal credit unions, they are subject to unrelated business income tax.  As part of our overall examination program for tax‑exempt organizations, we do examine State‑chartered credit unions.  We currently have about 50 such examinations underway.  We are finding that not only are State‑chartered credit unions engaging in traditional core credit union activities, but many are also engaging in a wide range of other activities, including marketing a variety of insurance products.  We are working to determine which of the traditional activities are subject to the unrelated business income tax.

Let me conclude.  The IRS has begun to rebalance its efforts by placing greater emphasis on enforcement.  This applies across the board, including the tax‑exempt community.  As we proceed in the tax‑exempt sector, we have found that some areas have become difficult to administer because industry practice or the industry itself has changed over decades, while the tax rules have remained constant.  The transformation of credit unions and other financial institutions is an excellent example of this kind of change, with credit unions offering new services and entering new markets.  We take no position on whether credit unions should be taxable or whether the treatment of Federal and State‑chartered credit unions should be conformed.  What we can say is that, with respect to exemption, the IRS has a very limited role.  However, industry changes do raise concerns for the IRS.  As State‑chartered credit unions offer new services, we have the responsibility of determining which of them generate taxable income.  This is a factually intensive and difficult analysis.  Thank you, and we look forward to working with you and your staff on these and similar issues.

[The prepared statement of Mr. Miller follows:]

Chairman THOMAS.  Thank you, Mr. Miller.  Mr. Hillman?

STATEMENT OF RICHARD J. HILLMAN, MANAGING DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENTS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Mr. HILLMAN.  Chairman Thomas, Members of the Committee, I am pleased to be here today to discuss issues regarding the tax‑exempt status of credit unions.  My prepared statement today includes discussion on:  one, the historical basis of the tax‑exempt status and arguments for and against taxing these institutions; two, information on the extent to which credit unions offer services that are distinct from those offered by banks of comparable size; and, three, information from prior work assessing available information on the extent to which credit unions are serving low‑ and moderate‑income individuals.  The basis for continuing tax-exemption of credit unions, although not often articulated in legislation over the years, appears to be related to the perceived distinctness of credit unions and their service to people of modest means.  More specifically, unlike banks, credit unions are member‑owned, democratically operated, not‑for‑profit organizations generally managed by volunteer boards of directors, and these institutions have a specific mission of meeting credit and savings needs of people of small or modest means.

Arguments for taxing credit unions centered on creating a level playing field among financial institutions.  Recent growth of the credit union industry is often cited as support for the argument that many credit unions now compete more directly with banks.  Proponents of taxing credit unions also point to the potential revenue associated with repealing the tax-exemption with the Federal agencies estimating over $1 billion in potential annual revenues.  Those in favor of taxation also question the extent to which the tax subsidy provided to credit unions is being used to serve people of modest means, especially in comparison with peer group banks.  Opponents of taxation argue that credit unions remain distinct, both organizationally and operationally, from other financial institutions.  Opponents also point out that taxation could jeopardize the safety and soundness of credit unions since their net worth or capital levels are restricted to retained earnings only.  Opponents also note that other depository institutions do have opportunities for tax relief such as S corporation status.

As part of further addressing this issue, I would like to provide two slides and some contextual information on the size of the credit union industry and its distribution of assets, as well as to provide trend information on the changes in credit union membership.  As of December 2004, the Federal Government chartered about 62 percent of the slightly more than 9,000 credit unions.  Figure 1, shown on the screens, illustrates institution size and asset distribution in the credit union industry.  The top bar reflects that as of December 31, 2004, the 4,255 smallest credit unions, those with $10 million or less in total assets, constituted nearly half of all credit unions, but only 2.5 percent of the industry's total assets.  Conversely, the 98 credit unions with assets over $1 billion, which is the shortest bar at the bottom of the figure, held 33 percent of the total industry assets, but represented just 1 percent of all credit unions.  In an earlier 2003 report, we noted that as of December 31, 2002, there were just 71 credit unions with assets over $1 billion, and figures through June 2005 indicate that there are now 103 credit unions with over $1 billion in assets.  So, the size of credit unions continues to grow.  Despite this growth, the credit union industry remains much smaller than the banking industry, with credit unions representing around 6 percent of the total assets of both industries.

As the credit union industry has evolved, the historical distinction between credit unions and other depository institutions has continued to blur.  Since 1992, the number of credit unions has declined, but total assets of the industry have grown.  The consolidation in numbers and concentration in assets have resulted in two distinct groups of credit unions:  a few relatively large credit unions providing a wide range of services that resemble those offered by banks of similar size, and a number of smaller institutions that provide basic financial services.  Among the more significant changes that have occurred in the credit union industry over the past two decades have been the weakening or blurring of the common bond that traditionally existed between credit union members.  Credit union membership may be based on one of three types of common bond:  a single bond, which is typically employer or occupation based; multiple common bonds, which allow for more than one single bond within an institution; and community bonds, which are comprised of persons or organizations within a well‑defined local community, neighborhood, or rural district.

The next figure, shown on the screens, provides additional information on the percent of assets of federally chartered credit unions by bond type.  While multiple‑bond credit unions have constituted on average slightly under 50 percent of all credit unions since 2000, they represented 57 percent of credit union assets.  This chart also shows that the percent of community bond credit unions has more than doubled since 2000, growing from 9 percent of federally chartered credit unions in 2000 to 19 percent by the end of 2004.  The steepest growth of the assets in federally chartered credit unions also comes from community bonds, which comprise about $92 billion in assets at the end of 2004.  In conclusion, the movement towards geographically based fields of membership and other expansion of the common bond restrictions, in conjunction with expanded lines of financial services, have made credit unions more competitive with banks.  These changes have raised questions about the extent to which credit unions are fulfilling their perceived historical mission of serving individuals of modest means, yet limited comprehensive data are available on the incomes of credit union members.

In prior work on the credit union industry, our assessment of available data suggested that credit unions served a slightly lower proportion of households with low and moderate incomes than do banks.  To the NCUA's credit, it has established a low‑income credit union program and an underserved program that are intended to provide increased services to low‑ and moderate‑income individuals and underserved areas.  However, NCUA currently does not collect comprehensive data such as the overall income on individuals benefiting from these programs to allow for definitive conclusions about the information on incomes that the membership serves.  As a result, we recommended in 2003 to NCUA that it develop more tangible indicators to determine whether credit unions have provided greater access to credit union services in underserved areas.  The NCUA has yet to adopt any indicators but says it has established a working group to study credit union success in reaching people of modest means.  Mr. Chairman, this concludes my prepared statement.  I would be pleased to respond to any questions you or the other Members may have at the appropriate time.

[The prepared statement of Mr. Hillman follows:]

Chairman THOMAS.  Thank you very much, and to determine whether or not there are any Members who wish to inquire, the Chair's inquiry will be withheld until the end of the Members' responses.  The Chair would recognize the gentleman from Florida, Mr. Shaw.

Mr. SHAW.  Thank you, Mr. Chairman.  Ms. Johnson, in your testimony you gave us a good overview as to the structure of member‑owned‑‑as to credit unions.  Do the members receive complete financial statements from the credit unions such as they would in a corporation?

Ms. JOHNSON.  Members receive monthly statements, just like‑‑

Mr. SHAW.  Now, I am not talking about their own account.  I am talking about‑‑

Ms. JOHNSON.  There is an annual report and the regular statements on a monthly basis.  The monthly financials are posted monthly.

Mr. SHAW.  All right.  That is of the overall structure itself?

Ms. JOHNSON.  Correct.

Mr. SHAW.  This would be reported to them.  Do they get‑‑do accountants come in and do‑‑CPAs come in and do opinion reports on them?

Ms. JOHNSON.  They have their regularly scheduled audit, opinion audits.  The examining from the regulator is done on a regularly scheduled basis, typically either annually or up to 18 months.  But, yes, they are required to have audits on a regular basis.

Mr. SHAW.  Does that information include salaries paid by the credit union to the officers of the corporation, of the credit union?

Ms. JOHNSON.  We do not collect salary information specifically.  It has not been required.  Federal credit unions are not required to fill out the 990Ts, and so that information is not gathered individually.

Mr. SHAW.  Can the individual members get that information?  What I am trying to do is establish ownership rights here.  Can the individual get that information if they request it?

Ms. JOHNSON.  The credit unions are managed by a volunteer board, and the salaries, et cetera, are set by that volunteer board, and the audit and supervisor Committee and the board of directors take care of that part of the management.  It is set by the volunteers who are elected by the members of the credit union.

Mr. SHAW.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  Does the gentleman from New York wish to inquire?

Mr. RANGEL.  Thank you.  Mr. Hillman, with your Government Accountability investigation, could you share with us whether the for‑profit banks‑‑what salaries they pay to the executives and employees?

Mr. HILLMAN.  We have not gathered information on the banking industry as part of this review, but all publicly owned companies are required through SEC filings to provide information on salaries of key officers and directors.

Mr. RANGEL.  Ms. Johnson, do you know whether or not your salaries are competitive or in line with the salaries that are paid in similar institutions that operated for profit?

Ms. JOHNSON.  As I said, we don't collect individual salary information.  The only bit of information I could give you, on a recent website of one of the firms that is working on behalf of those that are looking perhaps to convert from a credit union to a bank charter, they do have on their website, according to their information, that credit union CEOs are paid approximately 57 percent less than their counterparts.

Mr. RANGEL.  Well, throughout your testimony, it seems as though you were advocating a position that credit unions should not be taxed.  Are there any reasons politically that you believe that there is any consideration about doing that?  If so, what is it?

Ms. JOHNSON.  Congressman, the rhetoric is around all the time, I guess.  I know when I served as Chairman of the Senate Ways and Means Committee back in Iowa, the rhetoric was happening back then as well.  I believe the questions that are asked today about the validity of the tax-exemption are very‑‑they are necessary.  I did the same thing in my role back home.  But I would tell you that when you are looking to see whether you are getting your money's worth for this tax-exemption, I would assure you that you are getting a lot of bang for the buck.  If you set the stage a little bit with the bank versus credit union stature as it is, it is important to note that credit unions only comprise about 6 percent of the industry, of the assets.

Mr. RANGEL.  Yes, but what I am getting to is that Mr. Miller would agree that even though the IRS does not have a policy, that the Secretary of the Treasury has publicly stated that he is opposed to taxing credit unions.  The President of the United States and the leader of the free world has indicated that he opposes taxing of tax‑exempt.  So, who would you think represents the concept that would threaten you politically?

Ms. JOHNSON.  Only the competition that would like to see competition go away.

Mr. RANGEL.  So, you do not feel that threat coming from the Congress or this Committee.

Ms. JOHNSON.  I have never had it expressed by a Member of Congress, no.

Mr. RANGEL.  You have not?

Ms. JOHNSON.  Not directly.

[Laughter.]

Chairman THOMAS.  Does the gentleman yield back the time?

Mr. RANGEL.  Yes, I do, Mr. Chairman.

Chairman THOMAS.  Does the gentlewoman from Connecticut wish to inquire?

Mrs. JOHNSON.  Thank you.  Mr. Miller, in your testimony you say that credit unions are not required to file the IRS forms that most other tax‑exempt entities are required to file, and I would like you to enlarge on that.  Then I would like you to enlarge on your claim that credit unions are not subject to internal control reporting requirements that are applicable to banks and thrifts.

Mr. MILLER.  Well, Congresswoman Johnson, as to the first item on the filing requirements, again, we need to divide our world between the federally chartered and the State‑chartered entities.  The federally chartered entities, by reason of being an instrumentality of the U.S. Government, do not have to file Forms 990 with the Service, like any other instrumentality.  The States do have to file with us.  Now, we received in, I think, 2003 something in excess of 1,360 Forms 990 from some States.  We also receive because we have a process that allows for the filing of a group consolidated return, from 21 States we receive consolidated returns, and that contained aggregate information on another 2,000 entities.  So, we do have, you know, something in the range of 3,500 or something in the range‑‑of entities that file with us, 2,000 of those are filing on a consolidated basis.  I do not, unfortunately, have an answer for you on the internal controls, but perhaps my colleague from the Accountability Office could help out.

Mrs. JOHNSON.  Mr. Hillman?

Mr. HILLMAN.  Yes, the Federal Deposit Insurance Corporation Improvement Act requires banks and thrifts with assets over $500 million to prepared an annual management report that contains a statement of managers' responsibilities for preparing the institution's annual financial statements, and for establishing and maintaining an adequate internal control structure and procedures for financial reporting.  Management assessments are also required on the effectiveness of the institution's internal control structures and procedures for financial reporting.  Indeed, internal auditors and external reviewers are required to attest to management's assertion of their internal control standards.  As it relates to credit unions, they currently are not required to provide for those management assertions or for their external auditors to provide for independent attestations of the effectiveness and quality of the internal control structures.  In a report that we provided to the NCUA and to the Congress, we recommended that the NCUA consider requiring their entities to have external reviews of their internal control structures.  Indeed, we recommended to the Congress that they amend the Federal Deposit Insurance Corporation Improvement Act to cause such things to occur.  That action is currently under consideration within the Congress.

Mrs. JOHNSON.  Without that, what kinds of abuses are possible?

Mr. HILLMAN.  Having a properly structured internal control function was very important in considering recent legislation in the Sarbanes‑Oxley Act for public companies, for example, financial statements were being prepared that were not accurately reflecting the financial position of the entities, and management was basically indicating that they had no knowledge of the extent to which those numbers were accurate or correct or could be held to any scrutiny.  The Sarbanes‑Oxley Act was intended to provide managers with an affirmative responsibility to know what their internal control structures were and to know that the financial information that they are providing to the public was accurate.  Indeed, doing something of that nature for credit unions is something that would make good public policy as well.

Ms. JOHNSON.  I understand that Sarbanes‑Oxley provisions, however, have been bearable for larger banks, but they are very expensive and would be very heavy for small independent institutions.  Does your recommendation accommodate to that?

Mr. HILLMAN.  You are absolutely right.  There is continuous debate going on today about the extent to which entities and at what size ought to be providing for these internal control assessments.  The current limit is organizations with $500 million in assets and above.  They are looking at raising that level to address some burden issues with smaller organizations, and that is a debate also taking place in Congress today.

Mrs. JOHNSON.  Thank you.

Chairman THOMAS.  The gentleman from California, Mr. Stark.

Mr. STARK.  Thank you, Mr. Chairman.  Mr. Miller, please recognize the limitation of my understanding of the technical differences between (c)(1)s up through (c)(50)s or (20)s or whatever come under your purview.  But based on the underlying initial reason for granting the tax-exemption, could you give us a little insight?  I am just going to go down some that come to my mind, and you will probably know a lot more, but irrigation districts, municipally owned electric companies, USAA, a reciprocal insurer, agricultural co‑ops, rural electric co‑ops, on down the line.  In their genesis, was there any great difference in these types of organizations and the (c)(1)s that I guess are credit unions?

Mr. MILLER.  Well, again, Mr. Stark, the (c)(1)s are only the federally chartered credit unions.

Mr. STARK.  I understand that, but I am just‑‑

Mr. MILLER.  In terms of the cooperative nature of the endeavor, they are all a little different.

Mr. STARK.  But would you say they are all similar in the reason they hold a tax-exemption or are tax free, from a lay person's‑‑

Mr. MILLER.  I would say they are similar, that the rural electric cooperatives obviously are another group of entities that started up because there was no electricity in certain areas of the country.  Agricultural co‑ops started up because of a need for that business as well, so‑‑

Mr. STARK.  But would it be also safe to say, however long ago many of these things started, that the initial reason for their beginnings no longer holds true?  I think that former members of the armed services can buy their auto insurance from GEICO or Allstate or anybody they want, and it is a question of whether they pay more or less for it.  But it may have been difficult‑‑when my ranking member got out of the service, it may have been a different time than it is for those of us who are younger veterans.

[Laughter.]

Mr. STARK.  I am just trying to see if in our thinking, as we review this‑‑I do not think it has been stated, but the banks are out to get credit unions taxed because it will make it more difficult for them to compete.  I would presume then that my Pacific Gas and Electric would like to see the rural electric co‑ops taxed because then they would have a better competitive edge.  But is there any reason for us, outside of the very technical differences, to think about credit unions as distinct from all these other groups, health, education services.  There are, I guess, providers of medical care that come under the cooperative rubric.  Any reason we should sort those out, or can we think of them as one group?

Mr. MILLER.  Well, I would hesitate to put them all in one group, Congressman, because I do think they are different industries and they should be looked at separately.

Mr. STARK.  For tax policy, how should we look at them differently?

Mr. MILLER.  Tax policy you may be correct, they may be very similar.  But, again, if the underlying discussion here is let's take a look to see where the industry is today, then in terms of the Internal Revenue Service's view, that is a useful thing because, as I have mentioned in my testimony, industries change, the laws remain the same, and sometimes that creates difficulties for us in administration.

Mr. STARK.  I will come back at you with tax policy.  I think what I heard you say is that within all of these, the underlying tx policy is probably the same or very similar.

Mr. MILLER.  I think it is going to depend on the particular provision and the particular code provision.  And, again, I cannot say in a general fashion that they are all the same, Congressman.

Mr. STARK.  One more try.  Between (c)(1) and (c)(13), are the tax‑exempt rules pretty similar, no unrelated business, I mean‑‑

Mr. MILLER.  Not really.

Mr. STARK.  Not really, okay.

Mr. MILLER.  It really depends.  Along the edges they are different.  You know, the (c)(12)s, the rural co‑ops, the rural electric and rural telephone cooperatives have some very different rules than do Federal credit unions.  They go in and out of status on an annual basis, depending on their income sources.  They are similar to credit unions in one fashion; that is, they have expanded from their original list of public sector.  So, the rules do vary depending on the provision.

Mr. STARK.  Thank you.

Chairman THOMAS.  Would the gentleman yield briefly?

Mr. STARK.  Sure, I would be glad to yield.

Chairman THOMAS.  On that point, one of the things, I think‑‑sometimes Members go more deeply into these areas than others.  One of the things that I will ask you on my time, but since it was brought up, I want you to think about, is the argument that the (c)(1)s are instrumentalities of the United States in which you then dismiss looking at them because of that categorization as opposed to a 501(c)(3), which is a charitable organization, which allows you based upon what particular category they are in, your ability to do certain things or not do certain things.  So, when you say that you do not do this or you do not do that, it is because of the structure as an instrumentality, not that it should or should not be done based upon trying to understand what is going on in an organization.  That is something that I think needs to be discussed, and we will look at that a little bit later.  But the gentleman is right.  When you looked at (c)(1)s, (c)(3)s, on through the various (c)s, it is based upon what they are, which then indicates the relationship between those organizations, notwithstanding the fact they are within the 501 section, and the IRS and the responsibilities associated with the IRS in overseeing those particular structures.  Sometimes it just happens to be the category that they are in that they, therefore, do not receive scrutiny and, therefore, cannot get answers to questions that Members would ask.  They do not file 990s, so you do not know certain things about them.  Why?  Because they are instrumentalities of the United States.  It begins to get circular in terms of trying to get an answer should we, not do you, and the "should we" is what we should at some point pursue.  The gentleman from California, Mr. Herger.

Mr. HERGER.  Thank you, Mr. Chairman.  Mr. Miller, if you could tell us just as historical background, generally the history of the tax‑exempt sector, Congress usually provided exemption to certain entities because they were providing a service that the government could not provide.  In the case of credit unions, could you tell us what social good or public benefit do they provide in exchange for the exemption?

Mr. MILLER.  Congressman, I think it is certainly true with respect to many provisions in the exempt sector that there is an underlying rationale of public good in providing general benefit to the community at large.  A little more murky with respect to credit unions.  They were based on a cooperative structure, and the early legislative history talks about a cooperative enterprise which is offering opportunities for savings, opportunities for credit to those who otherwise might not have it who have joined as members.  That is sort of the underlying rationale in the credit union area.

Mr. HERGER.  Would either of the other two of our witnesses care to comment?  Ms. Johnson?

Ms. JOHNSON.  Yes, Congressman, I would like to speak to the public good because I think that is the big question here.  Are you receiving the public good in exchange for the exemption?  I can very strongly say that the 84.5 million members of the federally insured credit unions benefit from higher rates on their deposits.  They benefit from lower fees.  They benefit from lower interest on the loans that they take out as members.  There was a study done in April of this year by the University of North Carolina in Chapel Hill that estimated that the members of credit unions in North Carolina save an average of $130 a year, and if you were to multiple that nationwide, that could be an eventual savings in the $11 billion category just for the members of the credit unions.

But I would not stop there.  There are actually benefits to those that use the services of other financial institutions as well.  This limited competition that is in the marketplace helps offer competitive rates for everyone.  In fact, there was a statement by a CEO of a large bank earlier this year after their record profits were reported.  He said that they would have been higher had it not been for the credit unions because they had to pay higher interest on their deposits.  So, it is estimated that saving the customers of other institutions may be as high as $4 billion.  I know the estimate has been given that there may be a billion, $1.2, $1.3 billion that could be realized in tax revenue if credit unions were taxed, but I would offer that is far offset by the amount that is saved by the consumer simply by having a minimal competition in the marketplace.  Credit union members do pay taxes at the ordinary income level on the dividends they receive, just like bank customers pay taxes on the interest they receive.  The exemption really results in a return to the local economy in far excess of what would be realized by any tax revenue, I believe.

Mr. HERGER.  Thank you.

Chairman THOMAS.  Does the gentleman from Michigan wish to inquire?

Mr. LEVIN.  Thank you, Mr. Chairman.  I think truth may be somewhat relative in this area, so let me just ask Mr. Hillman, because you have presented a number of charts, and it might be useful for us to try to put these figures in a broader perspective.  I think there has been‑‑at least we have seen this where I come from‑‑very substantial consolidation in financial services.  Indeed, most of the banks that we once knew are now part of larger entities.  So, if you look at Figure 1, for example, in terms of industry size and total assets distribution, do you have data, useful data, that tell what has happened to financial services more broadly?  For example, if you had a chart like this for financial institutions other than credit unions, what do you think that chart would show?

Mr. HILLMAN.  Congressman, it would show probably different numbers but pretty much the same pictures in terms of bars.  What you are seeing in the banking sector today is a much more‑‑larger groups of organizations that are much more competitive and much more complex.

Mr. LEVIN.  Also I take it‑‑you say the bars would be the same, but in terms of assets, I would think you might see  a different picture in terms of the size of the assets, would you not?  I mean, you would have to have a somewhat different chart than is here.

Mr. HILLMAN.  In order of magnitude, absolutely.

Mr. LEVIN.  For example, there may be one, there may be more financial institutions that have more assets than all of the credit unions combined.

Mr. HILLMAN.  Yes, that would be true.  The largest banking institution has vastly far more assets than the industry as a whole.

Mr. LEVIN.  Do you think you could supply us that?

Mr. HILLMAN.  Absolutely.

Mr. LEVIN.  If you would, go through the charts and just see‑‑there is some information here as to the types of loans, but where you can‑‑and I do not want you to do endless basic research, but if you can, go through your charts one by one and supply us with the picture in these regards as to the entire financial services area.  Because I do think‑‑the chairman, for example, did point out a few instances, and I do not mean to minimize them or mimic them, but I do think rather than trying to pick out one or two or three or a few examples, we really need to look at the total picture as it relates to financial services as to who is served, as to the kind of competition, as to who does what.  You cannot simply take one area without relationship to what is going on generally in the world.

For example, it would be interesting to know what has happened to smaller financial service entities other than credit unions.  I mean, you have a fairly large number in Chart 1 of credit unions with assets $10 million to $100 million, and that is, roughly speaking, as I gather‑‑I did some math‑‑what, about 40 percent‑‑I do not know exactly.  Maybe a third of them are in that size category.  It would be interesting to know what it is like with other financial institutions to really get some kind of a feel as to who is doing what where.

Mr. HILLMAN.  As part of our analysis of the credit union industry, we did run comparisons of credit unions at these various sizes and assets to banks of‑‑peer group banks of comparable size.  In our prepared statement that we submitted for this hearing, on Figure 3 we provide a variety of information about the types of products and services that credit unions of that size provided, that peer group banks of similar size provided.  In addition, in our report in November 2003, we provide a variety of other graphics, which does provide information comparing credit unions to banks as it relates to products and service and as it relates to other forms of activities.

Mr. LEVIN.  Okay.  So, if you would put this together in as succinct a form as possible, will you?

Mr. HILLMAN.  It would be my pleasure.

[The information follows:]

Figure 9: Assets (in billions) of Financial Institutions as of June 30, 2005

Mr. LEVIN.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  The Chair would say that would be very useful, but in beginning to examine the area, I think you will find that it just runs away from you very quickly.  With banks, one of the key attractions was the fact that you could write a check.  We created share drafts with credit unions, which are, in essence, a check.  But as we saw through the 1980s and the 1990s, more and more structures like stock brokers, you can write what amounts to a check.  So, when you say financial institutions, it is not just banks.  A lot of the studies I have seen solely use a credit union or solely use a bank.  There are very few people, I think, that are in that category of solely doing this or solely doing that.  So, I agree with the gentleman.  I think we should begin to see that kind of data.  But when you say financial institutions, you may have to define it in a way that encompasses all of the various current structures, just as what money has changed, what the financial institution and services provided from them have changed.

Mr. HILLMAN.  As well as my initial response to Congressman Levin in dealing with the consolidation in the financial services industry as a whole, there is also a significant convergence within the financial services industry where individual organizations are providing like products and like services, and the competition is becoming fierce.

Chairman THOMAS.  Which was not the case in 1937 or 1934 during the Depression.

Mr. HILLMAN.  That is correct.  Exactly right.

Chairman THOMAS.  Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY.  Mr. Hillman, can you explain why Congress revoked the tax‑exempt status of mutual insurance companies, mutual savings banks, and mutual savings and loan associations?

Mr. HILLMAN.  Mutual savings banks, cooperative banks, and savings and loan associations were originally tax-exempt.  In the Revenue Act of 1951, before this Committee, Congress removed their tax‑exempt status.  Committee reports that we reviewed accompanying the legislation indicate that the mutual savings banks were in competition with taxable financial institutions, and the taxation, it was determined, would level the playing field with their competitors.  Similarly, Congress found that savings and loans were no longer self‑contained cooperative institutions, and there was little difference between the savings and loans and other financial institutions, and for that reason they chose to provide them with taxation.

Mr. MCCRERY.  Is there a similarity today between some credit unions and their competitive position vis‑a‑vis other financial institutions and what Congress found with mutual savings associations and so forth in 1951?

Mr. HILLMAN.  Well, certainly with an increasing‑‑the expansive membership, you are beginning to see blurring lines of distinction between credit unions and entities such as these, which have a tax‑exempt status.

Mr. MCCRERY.  What about in terms of services offered?

Mr. HILLMAN.  Services offered typically by at least the largest credit unions tend to mirror those services offered by peer group banks.  There are, as shown, though, in our first slide, almost half of the industry being made up of smaller credit unions, and those credit unions continue to provide more basic services.

Mr. MCCRERY.  In your research as to the rationale for revoking the tax‑exempt status of those other entities, was there any discussion of the relative sizes of those institutions, any consideration given to revoking or modifying the tax‑exempt status based on size?

Mr. HILLMAN.  I am not familiar with any indication that that was a consideration, but I would be happy to take a second look and provide that information for the record.

Mr. MCCRERY.  Thank you.

[The information follows:]

Our review of the legislative history of the Revenue Act of 1951, in particular Senate Report 82-781, did not identify any documented discussion of institution size as a factor or consideration in the revocation of the tax-exempt status of mutual savings banks and savings and loan associations.

Mrs. JOHNSON.  Would the gentleman yield?

Mr. MCCRERY.  Sure.

Mrs. JOHNSON.  Mr. Hillman, the 50‑mile limit that mutual banks have to live with, is that more or less restrictive than the geographic limits on credit union‑‑than the membership limits on credit unions, would you say?

Mr. HILLMAN.  The 1998 act added a term "local" to define the boundaries within which a geographically based community credit union could offer services.  That act, though, did not provide any further delineation of what was meant by that term "local."  So, determination of geographic boundaries or community‑based credit unions have been left up to the interpretation of the NCUA.  Those credit union decisions in some instances have exceeded a 50‑mile radius.

Mrs. JOHNSON.  But isn't there a 50‑mile radius that governs mutual banks?

Mr. HILLMAN.  I am not familiar with that.  I would like to do some research and provide that.

[The information follows:]

Federal savings associations (including mutual savings banks) historically evolved as local home-financing institutions, and limitations reflecting this evolution were initially incorporated in the governing statutes.  At one point in time, the Home Owners' Loan Act referred to “local” home-financing institutions and the act generally limited real estate lending by federal savings associations to property that was within fifty miles of their home offices.  In 1964, the lending area was expanded to property within one-hundred miles of the home office.  In 1970, the restriction was expanded to include property within the state in which the home office was located or within one-hundred miles of the home office.  In the 1980's, Congress began to remove the geographic restrictions on the lending authority of federal thrifts.   Title IV of the Depository Institutions Deregulation and Monetary Control Act of 1980 deleted the geographic restrictions on lending authority by federal savings and loan associations.

Mr. MCCRERY.  Just in the time that I have left, would either of the other two panelists like to comment on my initial question and the question of competitiveness and whether that should play a role in our examination of tax‑exempt status?

Ms. JOHNSON.  I would, Congressman.  The initial tax-exemption was granted on the structure of the institution itself.  The structure of credit unions has not changed.  It is still that cooperative, that not‑for‑profit institution.  There is nothing in the statute concerning the size of the institution, the products or services offered.  If one would want to paint the credit unions back into the corner where they were in 1934 when they were first started for the working population, you would be limiting to those of modest means to very modest services.  It has been necessary over the years‑‑consumers, credit union members demand the same types of services that other financial institutions provide, and to not provide those services to those who need them most I believe is the wrong direction.  I would also say that banks and credit unions have both changed over the years, there is no question, because both are serving their customers, are serving their members in the best way they can.  But I would also mention that it was the credit unions that were doing the consumer lending in the 1930s, and that is now an area where banks are doing more consumer lending as well.  So, there has been a blending going both directions.  There is nothing wrong with that, in my opinion.  I think providing the best services for your members or for your customers is what every institution strives to do.

Mr. MCCRERY.  Thank you.

Chairman THOMAS.  I thank the gentleman.  The gentleman from Maryland will be the final questioner prior to the Committee recessing for a few minutes to run over and vote.

Mr. CARDIN.  Let me thank you and let me thank all of you for your testimony.  I strongly believe in a competitive market for financial services, and I was just going to ask a question of Ms. Johnson, and you can respond or respond for the record.  You have already touched upon this.  The Consumer Federation of America found that the benefits that the credit unions deliver to the public far exceed the costs in the report that they did, and they cited interest rates, higher interest rates, lower service costs for the niche in which they perform their services within the financial community.  You have touched upon that in some of your replies.  I am wondering whether you can quantitate that more definitively as to the benefits that credit unions are providing versus the value of the tax‑exempt status that they enjoy.

Ms. JOHNSON.  The statistics that I pointed to are from some individual studies such as the North Carolina study, and there are other studies out there.  I have no doubt that the benefits far outweigh what the tax-exemption would bring in.

Mr. CARDIN.  If you could make those studies available for our Committee, I am sure we could get them.

Ms. JOHNSON.  I would be glad to do that.

Mr. CARDIN.  Any other information you have that quantitates that would be useful for us.

Ms. JOHNSON.  Thank you.  I would be glad to do that.

[The information is being retained in the Committee files.]

Mr. CARDIN.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  The Committee stands in recess, probably until noon.

[Recess.]

Chairman THOMAS.  If I could ask our guests to find seats quickly?  Does the gentleman from Georgia, Mr. Lewis, wish to inquire?

Mr. LEWIS OF GEORGIA.  Thank you very much, Mr. Chairman.  Mr. Chairman, I would like to try to solicit a little more information from members of the panel.  I think when my colleagues raised the question earlier about what is the redeeming social value of credit unions, I think maybe Mr. Miller or maybe someone said when it comes to tax-exemption for credit unions, maybe it is a little murky.  Ms. Johnson, maybe you could tell the Committee, what is the real redeeming social value of credit unions?  Is there a greater need today than 40 or 50 or 60 years ago?

Ms. JOHNSON.  I would be pleased to address this topic because I think it is probably the heart of the whole issue.  The redeeming social value of credit unions is that they provide an option for affordable financial services in the marketplace.  There are many folks today that continue to be un‑banked, and credit unions have a special mission of reaching those of modest means, and that is an opportunity for them to reach out.  You know, as credit unions were initially formed, they were made up of employee groups.  That means people that have jobs and that are working.  So, most credit unions were actually formed by working people.  In the last few years, in particular, credit unions have begun to take on underserved areas, and we have low‑income designated credit unions now.  We have some that have gone to community charters, which is now allowing them to reach out into the community and reach some of those folks that aren't necessarily the member of an employee group but that are now eligible for membership.  There are many in the community that have to rely on predatory lenders, either check‑cashing, payday lenders, others that charge much higher fees than credit unions.  Credit unions are the only financial institutions that are actually held to a statutory interest rate level, a usury rate.  Credit unions cannot charge more than 18 percent.  Find me a payday lender that charges less than 18 percent.  It just doesn't exist.

Credit unions, I think the mission is even greater today than what it has been in the past, and though they have made great strides over the last few years by being able to reach out in the community, I would admit there is more to be done.  I believe, especially in this day and age, when in this economy‑‑in particular, I look at two of our largest credit unions, our military credit unions.  Two of the three largest credit unions serve the military population.  You show me a group of people that are of more modest means than what our military personnel are, and with these credit unions being able to offer financial services at an affordable rate, I think it is one of the best things that we can do for our military in particular at this time.  So, I think the social mission is still very much intact.  It is something that the credit unions take very seriously and continue to look for ways that they can fulfill that mission.

Mr. LEWIS OF GEORGIA.  Thank you, Ms. Johnson.  Mr. Miller?  Mr. Hillman?

Mr. MILLER.  Mr. Lewis, the only thing‑‑

Mr. LEWIS OF GEORGIA.  To be clear for me, was it you who said that the tax-exemption for credit unions may be a little‑‑or did Mr. Hillman‑‑may be a little murky?  What do you mean?

Mr. MILLER.  It was in response to the question as to what the public benefit is of these organizations.

Mr. LEWIS OF GEORGIA.  But what do you see as a public benefit?  What do you see as a redeeming social value of credit unions?

Mr. MILLER.  I can only speak to what the legislative history talks about in the 1930s, and that is that it is a cooperative‑based opportunity for people to save and to get credit.  That is, I think, the underlying premise.

Mr. LEWIS OF GEORGIA.  You would not care to elaborate and say how you really feel?

[Laughter.]

Mr. LEWIS OF GEORGIA.  You are going to stick to the letter of the law.  You are not going to‑‑

Mr. MILLER.  I think, Mr. Lewis, that that is my job here, is to stick to the letter of the law.

Mr. LEWIS OF GEORGIA.  I appreciate that.  Mr. Hillman?

Mr. HILLMAN.  Well, the Federal Credit Union Act of 1934 refers to making credit available to people of small means as one of the primary impetuses behind the establishment of credit unions.  More recently, the Credit Union Membership Access Act of 1998 refers to serving the productive and provident credit needs for individuals of modest means.  While these terms are used to describe the types of people who credit unions might serve, these terms are not well defined in the statutes.  The NCUA has defined "modest means" or "small means," to us, anyhow, as meaning individuals who are wage earners or who must work in order to make a living, individuals such as these who can provide a benefit from a credit union's services.

Mr. LEWIS OF GEORGIA.  Thank you.  Mr. Chairman, I yield back my time.

Chairman THOMAS.  I thank the gentleman.  Does the gentleman from Michigan, Mr. Camp, wish to inquire?

Mr. CAMP.  Mr. Chairman, thank you very much.  Ms. Johnson, the GAO report talked about credit unions not having the same reporting requirements as other financial institutions, and my question to you is if you could comment on that statement, and then if you could also elaborate how the GAO report said the so‑called lack of transparency makes it difficult to evaluate the effect credit unions might have on average Americans.  Could you just elaborate on what the tax‑exempt status of a credit union does for average Americans?

Ms. JOHNSON.  Okay.  You had kind of two parts, in responding to the GAO and also the second‑‑

Mr. CAMP.  It is a two‑part question, how the lack of transparency‑‑if you could comment on that statement in the GAO report, I would like to get your opinion of that.

Ms. JOHNSON.  Okay.

Mr. CAMP.  The so‑called lack of transparency.  Then just in general, what benefits for average Americans does the tax‑exempt status of credit unions have.

Ms. JOHNSON.  Okay.  Two good questions.  Thank you.  In response to the question about the GAO report and the lack of transparency, back in 1998 Congress debated very thoroughly the suggestion or the idea of whether CRA requirements should be required of credit unions.  At that time it was reaffirmed that there did not appear‑‑that there was no need to put CRA requirements on.  In our work with GAO, the question has arisen about transparency and the opportunity or the ability to really put in hard numbers what credit unions are doing.  I would suggest that credit unions are basically CRA in action.  They are taking deposits and using those deposits to make loans to other members that need loans.  They can only serve their members, and that is the only way the credit union will grow and survive, is to serve those members.  It is very difficult‑‑and we have struggled with this‑‑whether some type of a hard reporting is necessary.  I look to the nursing home in my home town who, because of the burdensome regulatory requirements had to take a full‑time nurse off the nursing floor in order to just do the paperwork.  That is the danger that we run with the credit unions, especially when almost half of our credit unions are less than $10 million in assets.

The reporting requirements, if we are not careful, could heavily outweigh any benefits from the actual reporting itself.  You are taking away from the time and the resources, in particular, serving the people that you are supposed to be serving.  We do have a Committee working to see if we could arrive at something that would not put the burden on the credit union.  Is there some additional data that we could collect on the 5300 report?  But, again, it has never been put forth by Congress that a CRA‑type report is needed, and at this time I would have to agree with that.  Credit unions, we believe, are serving the very members who they are supposed to serve.  Let's see.  What was the last?  On the lack of transparency, it is kind of‑‑is it in regard to this type of reporting?

Mr. CAMP.  Well, I was interested in what are some of the filings that you do do as an institution.  Certainly there are audits, and you mentioned earlier in your testimony about posting online.  What are some of the filing requirements that you do fulfill?

Ms. JOHNSON.  The credit unions file their 5300 reports quarterly.  The credit unions themselves do CPA audits every year.  They have an annual audit and supervisory Committee report that is also done, as I said, annually.  I am not exactly sure what type of information you or other Members of Congress would see as the most beneficial of what type of information you are trying to glean that you think would be the most beneficial.

Mr. CAMP.  Well, I just wanted to point out for the Committee that there are public filings that credit unions do engage in, and so I appreciate your going through some of those, and that they are filed with regulators of both banking and credit union‑‑both parts of the financial industry.  So, thank you very much.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank you.  Does the gentleman from Pennsylvania wish to inquire?

Mr. ENGLISH.  Thank you, Mr. Chairman.  I do indeed.  Chairman Johnson, does the NCUA measure in what capacity credit unions are serving people specifically of modest means, and if not, can you offer an explanation of whether this would be an administratively feasible task to take on, and in your opinion, would such measures be helpful to Congress in making policy decisions, as well as to consumers?

Ms. JOHNSON.  Well, we know credit unions are serving members of modest means by the very fact that they are serving their members.  We do have some‑‑and I am trying to find my figures here.  I have too many pieces of paper.  They were some of the stats that Chairman Thomas had actually alluded to earlier.  We know those that use only credit unions have lower incomes and lower median wealth than those who use only banks, and I would agree that many of us use both types of institutions.  Back home there is not a credit union that I am eligible to join, and so back home I also‑‑I will put in a pitch for my local banker.  But we know that credit unions are serving those members, and we know that those balances, the wealth is lower, so to speak, the wealth of those members is lower.  We also know that the member business lending done by credit unions, the average member business loan is much lower than that of someone attaining a business loan or a commercial loan from a bank.  The average member business loan for a credit union member is $155,000.  That is much lower, that is the average.

Mr. ENGLISH.  How exactly do we know that?  What is the source and reliability of those figures?

Ms. JOHNSON.  That information comes in on our 5300 reports, which are issued on a quarterly basis.

Mr. ENGLISH.  Very good.  Commissioner Miller, credit unions have, since their inception, had a mission of targeting low‑ and moderate‑income families, and this continues today through programs like the Low‑Income Credit Union program and the Underserved Areas program.  I, for myself, know from experience in my district that credit unions serve people of moderate means, and I think do a good job.  It seems to me though that we still do not have access to many statistics that show the impact of credit unions on low‑ and moderate‑income families on a nationwide basis, and I just had that exchange with Commissioner Johnson.  I wonder, in your opinion, what policies could Congress implement to either better track credit union service to families of moderate means and to help us shape policies that would encourage those sorts of opportunities?

Mr. MILLER.  Well, Congressman, again, we have talked about it, and we do have to divide our world into the Federal charter versus State charter.  As to tax issues, you know, we are the tax agency, and in general, while our Forms 990 have as one of their purposes transparency, that the public can see what these organizations are doing, ultimately they are tax forms.  With respect to Federal credit unions we have no tax issues.  It would be purely for other purposes that we were making people file this.  With respect to State chartered, they do file Forms 990 with us.  The Form 990s, I do not believe, at this point probably has a meaningful impact on your inquiry here, to be frank.

Mr. ENGLISH.  In that case, may I shift, while I have time?  Mr. Hillman, same question.  What policies could Congress implement to better track precisely who is being serviced by credit unions, whether that service is disproportionately, as the mission indicates, to families of moderate or modest means, and help us shape policies?

Mr. HILLMAN.  We have raised this question with the National Credit Union Administration, and they have developed a working group to study this issue, and we encourage them to develop more tangible indicators that would provide information on who credit union members are actually serving.  When you look at how credit unions serve individuals, you look at the products and services that individuals might be procuring from credit unions.  Those might be individuals who might be procuring loans of some sorts or another.  In order to make credit decisions on those loans, there is likely to be information available within their files in order to determine the income levels of those individuals, and I would suggest that that would be one source that could be explored as possibly obtaining some information on the extent to which credit unions do serve individuals of modest means.  Secondly, you could perhaps also come up with a mechanism to provide for a sampling, a stratified sample that cuts across the population of individuals that credit unions are serving, and indeed obtain credible, accurate information on the membership base that credit unions serve.  It is not something that is an impossible thing to do.

Mr. ENGLISH.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  The gentleman from Washington wish to inquire?

Mr. MCDERMOTT.  Thank you, Mr. Chairman.  Since I know the President and the Secretary of Treasury have said that they are not interested in taxing the credit unions, the question has to arise, why are we having this hearing?  I know all the bankers are in town, and so I believe it is a revenue question.  It is a revenue question.  It could be raising revenue for a variety of sources, but it seems to me that there is all kinds of evidence that this issue is not something that is pressing anybody.  I really believe that the reason we are here having this hearing is because the government is financially and morally broke.  Now, the DeLay Congress is one that has enacted a tax cut every year in the face of budget deficits in times of war.  Now they are starting to look under rocks for revenue, and you folks are a rock.

Last week this Committee took some revenue out of the hides of foster children living in low‑income families.  Last week we found revenue by reducing child support enforcement funding by $20 billion.  Other Committees have found money by reducing food stamps.  The Education and Workforce Committee has reduced the availability of student loans to low‑income students.  That is the way the Republicans view sacrifice in a time of war, and budget problems go after the vulnerable.  They sacrifice morality for tax cuts.  The DeLay Congress pursued reckless tax cuts and an unjust war at the same time.  Instead of watching the news from Iraq or reading the CBO budget reports and realizing a change in course is necessary, this Congress continues in its same folly.  They are continuing to fight a war and balance a budget on the backs of the economically disadvantaged.  It seems contradictory given the Republicans proclaiming themselves as the party of morality and prudence.

But if you remember, last spring they launched an assault on Social Security, the program that single-handedly lifted millions of people out of poverty.  Last week the Republicans launched an assault against low‑income people.  Now today, we have the credit unions up here.  I don't know which of the co‑ops they will go after next, whether it will be the electrical co‑ops or whoever, but it is really a frontal assault on the middle class's ability to financially make it.  The co‑ops came into existence because the banks wouldn't do it, and now we have this assault going on here.  So, I have to ask the question, and somebody has to give me some reason.  How many billion dollars are they going to get if they begin taxing credit unions?  Anybody there who has an idea or has any data, I would like to hear it.

Mr. MILLER.  Well, I guess I can start, Congressman.  I think that there are two, at least two or more revenue estimates out there.  One stems from a 2001 Treasury study, and I think over a 10‑year period that was between $13 and $16 billion, and I think more recently a CBO 2005 document, which actually attributes the number to the joint Committee, had it at about $15 billion, so roughly‑‑

Mr. MCDERMOTT.  Over a 10‑year period?

Mr. MILLER.  Ten‑year period.

Mr. MCDERMOTT.  I saw in the GAO report something from the Tax Foundation.  Who is that?

Mr. HILLMAN.  That was a study that the Tax Foundation did funded by the Independent Community Bankers Association of America that estimated revenue of about $3.1 billion per year from 2004 to 2013.

Mr. MCDERMOTT.  So, that would be around 13 billion, so they are sort of falling in the same category.  Ms. Johnson, are you aware what the revenue figure is that they are after?

Ms. JOHNSON.  I will accept my colleague's‑‑the taxation, that is their area of expertise.  However, I would say it pales in comparison with what the consumer is going to save over those same 10 years.  We estimate that the credit union members are going to save up to $11 billion a year just in lower rates, lower fees, better interest on deposits.  We estimate that the banking customers are going to save 4 billion, or do save 4 billion a year.  Because of the minimal competition that is available, the banking customer also benefits.  It is my opinion that if you have a bank and a credit union in the same community or serving the same people basically, both institutions are better for it than if you had a single institution there.  That bit of competition is enough to make institutions better and it is the consumer that benefits.  The money that is earned on dividends is taxed at the ordinary income level, so those individuals do pay taxes on dividends that they receive from their credit union accounts.  The money that is saved by the consumer and stays in the consumer's pocket, is turned over in the economy, and hopefully a few of them will save a bit of it.

Mr. MCDERMOTT.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  Does the gentleman want unanimous consent to place his written statement in the record?

Mr. MCDERMOTT.  Thank you very much, yes.

[The information was not received at the time of printing.]

Chairman THOMAS.  The gentleman from Illinois wish to be recognized?

Mr. WELLER.  Thank you, Mr. Chairman, and appreciate the opportunity to participate in today's particular hearing.  Credit unions are a recognizable institution in the communities that I represent south of Chicago, and to be up front, I am a member of a credit union, like a lot of my colleagues, and like a lot of the staffers that are in this room as well.  When I visit the local credit union back in Morris, Illinois, the Morris Community Credit Union, I see regular folks who are participating and standing in line, immigrants, working people, small business people, people in the community, that are participate in credit unions.  I know my good friend from Washington State was trying to suggest that someone out there is trying to take away the tax‑exempt status, and I am certainly not aware of much support for that idea.  In fact, I recall we had a vote I believe in the Congress sometime in the last 10 years on that, and I believe less than 10 members of this House voted yes to take away the tax‑exempt status.  So, I think that is an idea that does not have much support.  What I would really like to truly understand is exactly what does the tax‑exempt status for a credit union, what does it really mean to the bottom line of a typical credit union, such as the Morris Community Credit Union?  And, Ms. Johnson, if you could discuss that from the bottom line of the operations of a local credit union, what does the tax‑exempt status mean, and if it were not there, what would the difference be?

Ms. JOHNSON.  Well, credit unions are the only financial institution that must earn their capital.  They are not allowed accesses other than some low‑income designated credit unions, don't have access to secondary capital.  They are not stock‑held institutions.  So, the effect of taxation on a credit union would have behavioral changes for the management.  It is because there are other restrictions on credit unions in the products and services and of how they can operate that though the tax-exemption isn't a quid pro quo for the restrictions and the exemptions, it isn't a quid pro quo.  However, it is tenuous because of the incentive that it gives the management to do the best they can for their members.  It is the members' capital.  It is the members' money.  Their sole purpose is to meet the needs of their members.  It is not to meet the profit, so to speak, of the stockholders.  So, everything is poured back into the credit union.  The taxation I think would change behavior.  Credit unions are held to a higher capital standard than other institutions.  They are conservative by nature, but certainly by taxing credit unions you are going to reduce that capital, and credit unions would have to be thinking about raising rates, taking in more income in order to balance that that they have had to reduce through taxation.  So, I think it is a direct detriment to the members as far as what would happen with the rates and benefits.

Mr. WELLER.  Could you just elaborate further on the differences between a traditional bank, which may be on one corner, and down the street you have a credit union, and the structure and how the tax affects either the bank versus the structure of the credit union, of those institutions?

Ms. JOHNSON.  I guess I would have to turn the taxation issues of the banks over to my colleagues.  The dividends are taxed for credit union members, just like interest is taxed for bank customers.  Let me see‑‑

Mr. WELLER.  I was going to say, Mr. Miller, perhaps you can help with that?

Mr. MILLER.  Commercial banks, mutual thrifts and credit unions are all taxed differently.  With respect to commercial banks and mutual thrifts, those two are taxed differently because mutual thrifts, under some circumstances, are able to deduct amounts that are distributed to their members, whereas banks are not.  Both of the for‑profit side of this are treated as C corporations generally, but they do have very detailed rules on taxation depending on which way they go on that.  The credit union doesn't have that issue.  Its income is tax-exempt.  Now, as I have mentioned, depending on what the activity is and whether it is a State or Federal chartered credit union, there may be a different tax implication there, but on their business, general core business, they are simply not taxed.

Ms. JOHNSON.  They still do pay payroll taxes, property taxes, other taxes of that nature.

Mr. WELLER.  Thank you.  I see I have run out of time.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  Gentleman from Kentucky, wish to inquire?

Mr. LEWIS OF KENTUCKY.  Yes.  Thank you, Mr. Chairman.  I would just like to start out by making a comment about the gentleman from Washington, Mr. McDermott.  He seems to like to make politically erroneous commercials from time to time here when we are trying to do serious business for the DCCC and the left wing, extreme left wing fringe, and I think if Mr. McDermott would have had his way, I believe Saddam Hussein would still be the President of Iraq, so thank goodness he didn't have his way.

Mr. MCDERMOTT.  Mr. Chairman, the gentleman is out of order.  You want to debate the Iraq war, let us start right here.

Mr. LEWIS OF KENTUCKY.  I think you started.

Mr. MCDERMOTT.  No, I didn't raise that.  I raised your fiscal policies‑‑

Chairman THOMAS.  The Chair has indicated that he is trying to allow Members to make statements they wish to make.  The gentleman from Washington made a statement he wished to make.  The gentleman from Kentucky is making a statement he wished to make.

Mr. LEWIS OF KENTUCKY.  Getting back to business‑‑and by the way, the tax relief that we have given the American people has allowed the deficit to drop by almost $100 billion in the last year.  So, I think that is a very credible and a very worthy thing that we have accomplished here in Congress for the American people.  By the way, when I was a young married man in 1966, I worked for Armco Steel Company in Ashland, Kentucky, working my way through college.  I took advantage of the credit union there.  I was a member.  It allowed me to purchase an automobile, to get a low‑interest loan that allowed me to have the transportation to do what I needed to do.  I believe that what credit unions do today is still just as valid as what they did in 1966 and before.  The only change that seems to have happened is that there is more access for people that are in similar circumstances to what my circumstances were.  I assume that the interest rates, the loan rates, and the services and the fees are still pretty much on par with what I experienced in 1966.  Would that be true?

Ms. JOHNSON.  I believe you would find that true.

Mr. LEWIS OF KENTUCKY.  I think what was provided for me was a tremendous help in allowing me to accomplish some of the goals that I had early in life, and I am hopeful that that is providing the same opportunities for people today that I enjoyed.  Thank you.

Chairman THOMAS.  Thank the gentleman.  Gentleman from Connecticut, Mr. Larson, wish to inquire?

Mr. LARSON.  Thank you, Mr. Chairman.  I have written remarks that I would like to seek unanimous consent to revise and extend.

Chairman THOMAS.  Without objection.

[The opening statement of Mr. Larson follows:]

Mr. LARSON.  Thank you, sir.  Just an observation.  The history of credit unions in my State has been exemplary in terms of the service that they provide.  I know, Ms. Johnson, you have been through this several times already in the questioning, so I will forego all of the benefits that I believe that are directly received on behalf of the constituents that I serve and represent in the State of Connecticut, and I submit my written remarks for the record, and thank all the panelists for their attendance here this morning and this enlightening conversation.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  The gentleman from Texas, Mr. Brady, wish to inquire?

Mr. BRADY.  Thanks, Mr. Chairman.  For 18 years before coming to Congress I ran Chambers of Commerce in three different communities, and in various economies, in different recessions and boom times, I have seen how critical capital is to small business growth in a community.  There tends to be an ebb and flow to it, times where as major banks merged, there seemed to be a major tightening up of credit for small businesses.  I have seen somewhat a resurgence of community banks and credit unions now offering capital to small business.  I am most interested in the role of credit unions.  I want more capital to valid, solid entrepreneurial efforts at the local level.  What and how we get there is a good debate.  Can I ask each of the panelists, what is the role of credit unions in providing capital to small business start‑ups at the community level, and how does that role compare to that of a community bank and the larger type banks?

Ms. JOHNSON.  Many people don't realize that credit unions were originally formed for business purposes, whether it was agriculture, a lot of small business, but there were commercial‑‑small business lending was a major part of credit unions from the very beginning.  It continues to be a very important role for credit unions to play, for small businesses to have access to capital.  We see a number of folks‑‑take the military, for example.  When you have someone retiring from the military after 20 years, they are just ready to begin their own small business, and having access to that capital to begin that small business with the credit union that they have been doing their transactions with for perhaps their entire military career, it makes sense for the credit union to be able to continue to serve them.  The small businesses are the heartbeat of the economy, and credit unions have an important role to play in that.

Mr. BRADY.  Can you address‑‑thankfully, we have far more home‑based businesses than ever before.  We have far more women and minority‑owned entrepreneurs entering the market than ever before, thank goodness.  To each of the panelists, do credit unions play a special role in meeting the needs of that new market?

Ms. JOHNSON.  Absolutely.  That is where we see a lot of the growth, especially in these underserved areas, who are in many areas comprised of the minorities and the very people that you are talking about.  Those are the people, the women that are perhaps coming to get the equipment for their hair salon, or someone coming in for a vehicle for their small business.  Credit unions see a lot of that and that is a segment of their membership that they are reaching out now to serve.  I think the whole community is better for it.  There has been a sore need for access to capital for these entrepreneurs.

Mr. BRADY.  Thank you.  Mr. Miller or Mr. Hillman?

Mr. MILLER.  Actually, I will let Mr. Hillman handle this one because the Service doesn't really have very much information on that unfortunately.

Mr. HILLMAN.  We have gathered information over the years from 1992 to 2004, which shows that there is a very much a different perspective when you look at smaller credit unions and you look at larger credit unions.  What we are seeing is that for larger credit unions, you are seeing them much more actively involved in first mortgage loans than that of smaller credit unions than they have been in the past.  Smaller credit unions continued to tend to provide for a loan such as new vehicle loans or used vehicle loans and the like, as Congressman Lewis indicated as part of his past.  As it relates to member business loans, there is current restrictions that credit unions have about the extent to which they can provide those types of loans, and over the years, since 1992 through 2004, they have been a relatively small portion of the portfolio of credit unions.

Mr. BRADY.  Did you do any comparison on community banks?  To a person in the community it is hard to know who is filling that need objectively.  It is more anecdotal.  Do you have any views or studies on who is filling the need for start‑ups, home‑based businesses, women‑, minority‑owned entrepreneurs?

Mr. HILLMAN.  Not as part of this study, the credit union history, no.

Mr. BRADY.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  Gentleman from Colorado, Mr. Beauprez, wish to inquire?

Mr. BEAUPREZ.  Thank you, Mr. Chairman.  In the spirit of full disclosure, I am a former community banker.

Ms. JOHNSON.  At least you said former.

Mr. BEAUPREZ.  My wife is still chairman of the board of a bank that I still own stock in.

Ms. JOHNSON.  That is fine.

Mr. BEAUPREZ.  Well, thank you.  I appreciate that.

[Laughter.]

Mr. BEAUPREZ.  I appreciate your very, I guess, ecumenical attitude toward that.  I also came to Congress with a pretty clear pledge.  I didn't come here to raise taxes, and I have consistently told my credit union friends‑‑and they are friends from Colorado; they have been very supportive of me and I appreciate that.  I have told them that I did not come here to raise taxes on them or anybody else for that matter.  I am pretty proud of the record we have had on this side of the aisle on actually reducing the tax burden on the vast majority of people, in fact, I think all people that actually pay taxes out there.  I think the record is pretty clear on what effect that has had for our economy.  I say all that just so people don't get scared as soon as a community banker, who happens to also be a Republican, opens his mouth, saying, he must be planning to tax me.  The place I would like to go though, and this is the same message I have given my credit union friends, is you have to help us.  So, I want to pursue in the time I have, a clear distinction that allows Congress to straight‑face say this tax‑exempt status makes sense.

Chairman Johnson, you have said that they exist to help people of modest means.  I understand that.  I think we all understand that, that that was part of the original charter.  But you are not really suggesting that those are the only customers of credit unions now, are people of modest means, nor once people get out of whatever modest means status means and move on, that they no longer can be a member of a credit union, are you?

Ms. JOHNSON.  Absolutely not.

Mr. BEAUPREZ.  So, then credit unions don't exist only for people of modest means, nor, I am assuming‑‑I don't want to lead the witness‑‑but I am assuming you are not suggesting that people of less than modest means can't belong to a credit union?

Ms. JOHNSON.  Congressman, the term "modest means" is certainly open for interpretation, but I would probably assume that most of us in this room and our families consider themselves people of modest means.  There are others that think credit unions should serve only, quote, "the poor."  I would contend that you can't have a common bond of the poor and have a successful credit union.  So, you need folks that can put in deposits in order to serve those that need the loans.

Mr. BEAUPREZ.  I accept that.  Some banks serve people of modest means as well, right?

Ms. JOHNSON.  Right.

Mr. BEAUPREZ.  Same basic financial services?

Ms. JOHNSON.  That is right.

Mr. BEAUPREZ.  Make loans, deposits, checking accounts, that sort of thing.

Ms. JOHNSON.  Right.

Mr. BEAUPREZ.  Where we struggle‑‑and Mr. Hillman, I would like to go to you next because of a statement you made‑‑where I think we do struggle and part of the reason I think we are having this hearing, is making that clear distinction again beyond the obvious one, different ownership structure between banks and credit unions.  Where we struggle is where is the service, the clear service differentiation that allows us to say, well, there is an obvious reason for tax‑exempt status here.  I think the statement you made‑‑and again, I want to make sure all you credit union folks out there hear me, I am not here to raise taxes on anybody.  What I am here, trying to make sure we always understand, is that there is a clear distinction as to why one is taxed and one is not.  I think your closing comments went something to this effect:  services are provided by State chartered‑‑and I accept that‑‑State chartered credit unions expand, we have the responsibility to be determining which of them generate income that is subject to unrelated business income tax and thus, which ones are not.  I think you kind of set the stage.  So, how do we continue doing that?  I would suggest to you, Chairman Johnson, that is a test.  It is a test as much for your membership as it is for us, is that that distinction that those lines don't get blurred to the point where somebody can't tell the difference.  I think that is part of what we struggle with up here is the difference.  Mr. Hillman, you want to respond as to what I wrote down as kind of a blurring of those lines?

Mr. HILLMAN.  I think you hit the nail right on the head, and in fact, that is one of the two main reasons why credit unions enjoy their tax‑exempt status, and it is also something that is very undefined in legislation.  It is very vague.  There is no clear standard out there as to what the requirements are, or defining an individual of smaller, modest means in order to ensure that credit unions are providing the public good that Congress is expecting, clarity in that standard would be important.

Mr. BEAUPREZ.  I will just close, Mr. Chairman, if I might, that I think it is a very natural evolution from 1934 or 1916 to where we are today, that those lines have gotten blurred, but it is also a responsibility of those in Congress to make sure that‑‑and I think that is why we are having this hearing, just asking the questions‑‑is can we still justify what the original intent was?  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  The gentleman from Georgia wish to inquire?

[No response.]

Chairman THOMAS.  Gentlewoman from Pennsylvania wish to inquire?

Ms. HART.  I do briefly, Mr. Chairman.  I have a question mostly centering around some of the law as it is today that doesn't necessarily lead us to the point where we would want to remove a tax-exemption.  I represent an area where there are many active credit unions, most of which are small and represent a very small segment‑‑I am sorry‑‑their members are a very small segment of the community.  In communities that are what I think most people would think of as traditional credit union communities, that had lots of employees of one company.  They belonged to the credit union for generations.  They don't have a lot of money.  They are what I think most people would consider people of modest means who belong to a credit union.  I met with some of the credit union folks at home, and asked them directly, do they believe that they are still fulfilling the original mission of credit unions, and they, without hesitation, said, yes, the original mission being to provide access to people who might not really have it, and I believe that for the most part these organizations do that.

The one thing that is in the law that they enjoy, and I think one of the things that actually may cause a little bit of discomfort among my colleagues, is the issue of transparency, because the credit unions do enjoy this opportunity to not disclose a number of things.  What I am curious about mostly, why are they excused from filing the forms such as 990?  What purpose does that really serve? Would, perhaps, changing that part of the law, alleviate some of the concerns that people seem to have about credit unions?  I think Mr. Miller may be able to help me with that.

Mr. MILLER.  Congresswoman, the Form 990, again, we need to divide our world, as I have said almost every time I have spoken, into the State versus the federally chartered.  The federally chartered, by regulation of many decades at this point, exempts, excuses from filing a Form 990 any instrumentality of the United States Government, and one of the types of instrumentalities is the Federal credit union.  If we were to require that‑‑and I do believe we could require it; we would have to modify a regulation, but we could require it‑‑the question is why?  If Congress said because we want transparency into that sector, notwithstanding the fact that that transparency doesn't lead to any tax impact, then we could do that.  But again, with respect to Federal chartered credit unions, that 990 is not going to provide us with virtually any information of a tax nature.  It may provide the public with transparency into the workings of an organization, but not tax information.

Ms. HART.  That is okay.  My goal is not tax information as much as it is to have them be responsible for providing information as other financial institutions would be.  Mr. Hillman, you look like you want to say something.

Mr. HILLMAN.  Yes.  The GAO has noted in prior testimony to this Committee earlier this year, the need to improve governance, transparency and oversight of the tax‑exempt sector.  The public availability of key information about the entities, i.e., transparency, can enhance incentives for ethical and effective operation and support public oversight of tax‑exempt entities, while helping to achieve and maintain public trust.  The good thing about the Form 990 that you referred to are that they are public documents, and individuals, therefore, have an ability to review those documents, and that helps to maintain the public trust.

Ms. HART.  Thanks, I appreciate that.  The discussion with my constituent credit unions, one of the things they said that is so very important and one of the reasons why I really don't want us to be jumping to any conclusions here, is that if someone does need a $250 loan, they are certainly not going to go to a commercial bank and be able to get one.  But there are credit unions in the communities I represent that do that, and I think that is a very important service.  Since I have probably a minute left, Ms. Johnson, can you tell me of any reason why the organization would object to this form?

Ms. JOHNSON.  What I would respect to is that currently it is not required and so we don't require it.  The volunteers that serve as directors are the ones that set the salaries.  The only time that we have seen a need to take a closer look is for safety and soundness reasons, if there is a credit union that we are examining for safety and soundness reasons, that there are problems, then we would look into that, but otherwise it is the purview of management.  We don't set salaries, and so‑‑

Ms. HART.  So, the disclosure would present no extra burden?

Ms. JOHNSON.  I don't know that it is not a burden, other than the time for reporting, but it isn't anything that we require, and therefore don't.

Ms. HART.  Okay.  Thank you for your indulgence, Mr. Chairman.

Chairman THOMAS.  The gentlewoman from Ohio wish to inquire?

Mrs. TUBBS JONES.  Mr. Chairman, Thank you very much, and thank you for hosting this hearing.  For the record, I am pleased to be a part of a discussion with regard to credit unions.  My prior Committee service was on financial services, and was glad to be a supporter and a founder, in fact, of a credit union in my congressional district.  My first question goes to Mr. Hillman.  Mr. Hillman, there are roughly 9,000 credit unions of all sizes.  Of the 9,000 credit unions, have there been any issues‑‑and maybe this should be Mr. Miller as well‑‑with regard to credit unions compliance with any IRS or GAO regulations, or any issues with regard to that, in complying with what is the rules that are laid upon them?

Mr. HILLMAN.  As part of this study we haven't looked into the enforcement actions that NCUA has taken against credit unions for certain activities and transgressions, but I suspect that the enforcement unit has had some activity in that area, but I am not aware of‑‑

Mrs. TUBBS JONES.  Surely any enforcement unit is going to have some activity in some area, or else they wouldn't be an enforcement unit.  They probably would say, well, we don't need any money there.  But what I am asking, trying to get an understanding, is that most credit unions meet the compliance requirements that are laid upon them.  Any of you can answer the question.

Mr. MILLER.  Let me say, Congresswoman, that that I think is generally the case.  We have one area I think we have under investigation right now, and that is with respect to State‑chartered credit unions.  The array of activities that we see, particularly in the insurance area and the sale of insurance products, whether income derived from those sources is taxable under unrelated trade or business.

Mrs. TUBBS JONES.  Excepting that part of that, if they are State chartered, some of the regulation actually will come under the State, not under your jurisdiction; is that fair?

Mr. MILLER.  I believe that with respect to State chartered, they are regulated by the State regulator, but for Federal tax purposes on UBITs, on the unrelated business income tax, that would fall within our purview.

Mrs. TUBBS JONES.  Well, lest we leave this hearing with a cloud over the heads of the credit unions of America, you are saying you believe something is being looked at, but apparently it must not be too big of a deal because credit unions continue to operate with great success and support for their members across the country.

Mr. MILLER.  Let me clarify my comment, that we were talking at the edges with respect to some income.  It does not go to the exemption, the tax-exemption of these entities.  It goes to whether they owe some income tax.

Mrs. TUBBS JONES.  Let me move on, and just say, roughly, in Ohio, that the number of credit unions in Ohio translates into about 2.7 million Ohioans that are members of credit unions.  Collectively Ohioans have $6.5 billion worth of assets invested in credit unions.  So, needless to say, I am getting lots of calls from my constituents about what is happening with credit unions.  One is great, it is the Wright‑Patt, it is our largest credit union.  Then there is one in my congressional district called Safe Community United Credit Union, that stepped in to fill a void created by the desertion of traditional commercial banks from inner city areas.  Again, I think there is enough room at this financial table for community banks, large banks and credit unions, and in my 7 years of being here at this table‑‑well, not this table, but a table of the Congress, that we continue to kind of push and shove, and I just want to be on record saying there is room enough for all of you all.  Let us go on to something more about.  Thank you very much.  I yield back my time, Mr. Chairman.

[Applause.]

Chairman THOMAS.  Thank you.  Obviously, that influences us.  Gentleman from Texas?

Mr. DOGGETT.  Thank you, Mr. Chairman.  I certainly would not question the appropriateness of looking at the tax‑exempt status and the tax‑paying status of any business entity, but it does strike me that the priorities here and the rationale here are somewhat peculiar.  We have ample evidence of commercial corporate tax dodging as the amount of corporate taxes continue to decline as a percent of our overall revenue package.  We have ample evidence of abusive tax shelters, some of which involve what are called tax in different parties, or non‑tax‑paying parties.  None of that has been considered in this Committee.  We have an increasing number of commercial entities that bear a great similarity with credit unions in that they are no‑tax corporations, who year after year, though they have ample multinational operations, don't pay a penny of taxes.  We have some corporations that have chosen to reincorporate abroad in order to avoid any of their responsibilities.  We have substantial involvement of the investment banking community in abusive corporate tax shelters along with firms that of course are facing criminal charges like KPMG.

None of those matters have been made the subject of today's hearing or other hearings.  Indeed, I think it has been since 1999 that this Committee ever had a hearing that really focused on extensive abusive corporate tax shelters.  Fortunately, the Senate, under the leadership of Senator Grassley, has explored some of these issues and come up with some good ways of addressing it in a bipartisan fashion, and has even dared to look at the abuses that were so costly to investors and taxpayers that Enron and similar companies have engaged in.  This all, of course, does involve a substantial amount of money.  I think that it would be appropriate if the goal is to really reevaluate all of these areas and their contribution to the community, to the Federal Treasury, that we look first at those who have been the subject of the greatest abuses, even though we might eventually want to get to charity hospitals and credit unions.  The second thing I would note about today's hearing is that rarely does this Committee deviate from the Bush Administration party line, and I am thinking that perhaps today may be an exception.  You made reference, Ms. Johnson, to a Treasury Department study that was done in 2001 concerning credit unions.  Have there been any Treasury studies about credit unions since that time?

Ms. JOHNSON.  That is the latest study that I am aware of.  I would say, however, that your assumption is incorrect about the support of the exemption.  Both President Bush and Secretary of the Treasury Snow, have both reiterated strong support for the tax-exemption for credit unions, as have pervious administrations.

Mr. DOGGETT.  Usually at a hearing of this nature, we would have an administration witness that would testify, but as far as the Treasury Department is concerned, the 2001 study has never been questioned.  The Treasury Department has never come forward and asked for legislation in this area, and the Secretary of the Treasury has spoken out in favor of maintaining the existing exemption?

Ms. JOHNSON.  That is correct.

Mr. DOGGETT.  As has the President of the United States?

Ms. JOHNSON.  Yes.

Mr. DOGGETT.  Let me ask you, Mr. Miller, has there been any requests from the Internal Revenue Service for legislative action concerning credit unions?

Mr. MILLER.  Well, Congressman, legislative action and one of the reasons why my testimony takes no position is because we are not the tax policy arm of the administration.  That is a different piece, and that is where legislative suggestions would come from.  But I am unaware at this point of legislative requests in this area.

Mr. DOGGETT.  So, it would be Secretary Snow's Department to make the recommendations for policy changes?

Mr. MILLER.  We are all in Secretary Snow's Department, Congressman, but it would be the Office of Tax Policy within his office that would push forward on tax policy matters.

Mr. DOGGETT.  He is, of course, the individual who has voiced a position favoring no change in the taxation of credit unions; isn't that correct?

Mr. MILLER.  I have read the speeches.  That is all that I know on that topic.

Mr. DOGGETT.  Thank you very much.  Thank you, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  It is indeed an interesting hearing that the gentleman from Texas finds comfort and protection in the Bush Administration and the Secretary of the Treasury in the Bush Administration, knowing that we know so much about the activity here, and that therefore, they could reach that conclusion.  I would also remind the gentleman that the President and Secretary of Treasury are not charged with writing the tax code.  We are.  They aren't charged with overseeing it.  We are.  They are not charged with changing it.  We are.  That is why this Committee, the Committee responsible in the House of Representatives for the tax code, is holding the hearing.

Mr. DOGGETT.  Mr. Chairman, may I ask unanimous consent at this time to insert the letter and the speech of the Secretary of the Treasury, Mr. Snow, and the President on this issue into our record?

Chairman THOMAS.  Certainly, without objection.

Mr. DOGGETT.  Thank you.

[The information follows:]

PRESIDENT
GEORGE W. BUSH

April 30, 2004

The Honorable Daniel A. Mies
President and CEO
Credit Union National Association
601 Pennsylvania Ave, N.W.
Suite 600
Washington, D.C. 20004

Dear Dan:

My Administration’s pro-growth policies have spurred strength and vitality in our economy, and America’s credit unions have played an important role in that success. By increasing lending opportunities to small businesses, families, and workers, credit unions are contributing to our economic recovery and increasing opportunities in our communities.

I support strongly the tax –exempt status of credit unions, and will continue to highlight the important contributions that credit unions make to our financial system. As service-oriented, member-owned financial cooperatives, credit unions should continue to invest in a safe and sound manner in America’s future.

I look forward to continuing to work together to ensure a bright future for all Americans.

Sincerely,

George W. Bush

FROM THE OFFICE OF PUBLIC AFFAIRS

September 10, 2004

The Honorable John W. Snow
Prepared Remarks: National Credit Union Administration
Health Savings Accounts Event
Lima, OH

Thank you so much for having me here today. It's always great to come home to Ohio, and I always appreciate the chance to meet with credit union managers… you are such an important partner, such a valued member of the financial community.

It's wonderful to be here with my good friend Mike Oxley. Chairman Oxley is someone I regularly turn to for insight and counsel on a broad range of matters impacting the Treasury Department. I consider him to be a leader of great substance; the Financial Services Committee clearly benefits from his leadership, and the people of Ohio are lucky to have his representation in Congress.

I appreciate that credit unions are in business to do good, as well as to do business.  That's clear from your motto: Not for charity, not for profit – but for service. So before I go any further today, let me say to you:  I value the fact you are for service.  Which is the fundamental reason why talk of taxation of your industry, and what you do, is something the Bush Administration opposes. We know that you always get less of anything you tax.  And we don't want to get less of what you do.

We have a lot of things to talk about today, but I wanted to make that point clear up front.

Americans know and trust their credit unions, and this makes your role in our country's economic growth especially important. You're there for your customers whether they are opening a checking account or a small business. Whether they're saving for extra holiday spending or their child's education, you've been there.

And while our nation's economy is doing quite well – and enormously better than it was just a few years ago – there is still much to be done, and much that credit unions will be doing to help.

Your dedication to small-business lending is one of the major reasons why I say that.

Small business is at the foundation of this great economy, and credit unions have been there for entrepreneurs when they needed you the most.

As of 2003, under the leadership of SBA Administrator Hector Barreto, credit unions were welcomed into the SBA lending programs for the first time. I hope that has helped out both you and America's entrepreneurs as much as this Administration hoped it would.

You know as well as I do: small business is where the jobs come from. We estimate that between two-thirds and three-quarters of recent net new jobs are coming from that sector.

That's why we want to make small business tax cuts permanent, and that's why I want to commend the credit union community for financing America's hard-working small-business owners!

In addition to providing your small-business customers with the capital they need to start and grow, there is a new product that I would encourage you to market to them, and that's what we're focusing on here today: Health Savings Accounts (HSAs).

The recently enacted Medicare prescription drug bill created HSAs, an innovative new program to empower consumers to make better health care choices. HSAs are really super-charged IRAs that put patients back in charge of their health care. You own it, you control it, you can leave it to your heirs.

It's a new option for health coverage that is good news for individuals and employers who are struggling with their health-care costs.

I have good news for Credit Unions when it comes to offering this new product. First, insured credit unions are automatically qualified to handle HSAs.

Second, the reporting on these accounts is minimal. You only need to report on them once a year – to the customer and the IRS – one form to report contributions to the account and another form to report the amount that has been taken out of the account.

Best of all: you won't need any new forms. Treasury has model forms that you can use, or you can adapt the forms you use for IRAs for HSAs.

In terms of the market for this product, I believe the future is bright. As small-business customers research the services you offer, adding HSAs to your portfolio are bound to make you more attractive as the small-business financial service provider of choice.

Federal employees will also be a rich market for HSAs. Soon, they will have the option of opening HSAs and they are likely to come to their credit unions for that service.

I believe the business opportunity for you is great. Just ask the Mid-American Credit Union in Wichita, Kansas or HealthAmerica Credit Union in Jacksonville, Florida – both of whom have gotten into the HSAs business early!

And I know that you also appreciate that HSAs are good policy, a mechanism that will bring more Americans into the ranks of the insured. This speaks to your motto… not for charity, not for profit, for service. And affordable health insurance is a service the American people need.

HSAs are a critical step toward increasing the availability and affordability of health insurance for all Americans. They are also helping to put individuals in charge of their own health care… and that's something that is good news both for the American family and for the American economy as a whole.

Rising health-care costs are one of many factors that can act as a drag on our economic health. And while our economy is the strongest and most resilient in the world, it is important that we keep the burdens on free enterprise as light as possible.

We want fairness and freedom for America's small-business owners. It's not fair to add additional burdens to their already-heavy load. Lightening those burdens gives them the freedom they need to open a business, expand it... or, if an entrepreneur wants to... to close the doors and go fishing.

Lower costs for health insurance reduces one of the top burdens on America's smallest employers – the employers who are also creating most of the new jobs.

Lowering their tax burden is critical for their health as well, and that's why the President's tax cuts paid particular attention to small business.

The President's tax cuts allowed well over three-quarters of a million small-business owners to keep more of their business income, and encouraged them to invest in the growth of their companies. For example, nearly 860,000 business taxpayers here in Ohio will save money on their 2004 taxes.

Similarly, the tax cuts have allowed individuals to keep more of their income. More than 4.4 million Ohio taxpayers will have lower income tax bills in 2004 thanks to the tax relief. Those tax cuts helped to offset the serious blows to the U.S. including in rapid succession the bursting of the stock market bubble back in March of 2000, the economy in steep decline which President Bush inherited, the terrible behavior by high ranking corporate executives who forgot their duties to shareholders, workers and pensioners, and of course September 11^th which took such a toll. President Bush saw the urgent need to act, to put oxygen into the economy and because of his leadership the American economy is now getting back onto a good course.

I am often asked: what is the most important thing I can do, as Treasury Secretary, to strengthen the American economy? And I think that people appreciate the economic significance of tax cuts... that is the obvious answer. But it strikes me that this question is even better answered by Education Secretary Rodney Paige. For nothing will have a bigger, more lasting impact on the American economy than educating and preparing America's workforce for the jobs of today and tomorrow. Primary, secondary and continuing education - for generations to come - are by far the most important efforts toward achieving continued economic prosperity.

While recent economic recovery and growth has been impressive – with 1.7 million new jobs created in the last year, strong GDP growth, and homeownership at an all-time high – we are not satisfied, and we must always seek ways to increase growth and job creation.

You have lost jobs here in Ohio. No one knows the value of new jobs better than the people of this state.

Ohio's is an economy grounded in manufacturing, and recent years have been hard. I know what you are going through, what you have been through, and I know that it hasn't been easy. I grew up less than 100 miles from here - in Toledo, another heavily industrial town.

The people of this state have lost jobs; getting them back to work is a top priority for President Bush, and for me. We understand that the manufacturing recession that began in 2000 hit Ohio hard. And the effort to get the economy of the state on solid footing, to a place where Ohio businesses can expand, grow and create more jobs, is awfully important.

Some things we know for certain – like the fact that new jobs cannot come soon enough for the people of Ohio. The question is: where will those jobs come from?

While no one can really predict what the next high-growth industry will be, in a country where innovation is so wonderfully strong we know there will be plenty of jobs for our families. The state of Ohio overall has had some good news recently on jobs, with 3,400 new jobs created in July.

But much remains to be done. We need to return Ohio to its rightful prosperity. I remember when Ohio was a Mecca for jobs and it drew people from all across the country. I want those days to return.

I am optimistic that times will get better in Ohio. You will not be left behind; the U.S. economy is too strong for that and Ohio's workers and businesses have a long tradition of excellence and success. We're going to keep growing as a country, and Ohioans will be part of that growth.

And I know that Ohio's credit unions will be helping, every step of the way.

You understand the value of working together to achieve important goals. This quality makes you valuable to your customers, and makes you valuable to your country. More valuable because we are working together to fight the war on terror. Because while hatred fuels the terrorist agenda, money makes it possible.

As we mark the third anniversary of September 11^th, I am once again reminded of the tremendous resolve in the financial community that came out of that day… resolve to cut off the terrorists' lifeblood: their money.

Institutions large and small have committed themselves to the task.

America's credit unions have done everything that the Treasury Department has asked of you during this fight, and I want to personally thank you for your efforts.

Your compliance with Section 314 of the Patriot Act – which requires everyone to share information – has been exemplary.

We've asked that you cross-check a list of terrorists and their partners, sent to you by Treasury's Financial Crimes Enforcement Network (FinCEN), every two weeks, against your customer databases.

It's a big job to keep up with these lists, and it's one that is never finished. You're doing it, and our country is safer because of it.

The list that comes to you from FinCEN is an important tool… but it would be useless without your partnership. We're in this together.

We've also asked you to comply with Section 326 of the Patriot Act, which has to do with record keeping. And I want you to know that you do have flexibility under those regulations… we've worked hard to make sure that your customers are able to use as many forms of identification as possible under those rules. We hope the flexibility makes it easier for you to be vigilant.

And we're always looking for ways to provide you with more and better information about our regulations. So let's keep up the dialog… let us know when we're confusing you, or when we can do better – because the better our regulations are understood by you, the more successful our critical enforcement efforts will be.

I know that complying with the regulations is burdensome, but it's for an important cause. We want to work with you to ease the regulatory burden while tightening our grasp around terrorist financiers.

Working together, we have accomplished a lot on this front of the war on terror in the last three years. The United States has designated 383 entities as terrorists or supporters of designated terrorists and frozen nearly $142 million in terrorist-related assets.  More than $37 million has been frozen in the United States.

The U.S. has also identified and frozen over $4.5 million in al Qaida-related funds.  In addition, almost $72 millionhas been frozen by other governments worldwide. 

Almost 1500 terrorist-related accounts and transactions have been blocked around the world, including 151 in the United States. 

Our efforts are making a difference. So please know that we appreciate our working relationship on the war on terror, and that we view you as a partner in other critical ways, as well.

You're also a partner in the effort to increase financial literacy and protect our citizens from identity theft. Both programs are critically important to the citizens of America.

For many Americans, credit unions are successful gateways for people to enter the financial mainstream through their relationships with employers, schools, community groups and other affiliations. 

I want to commend you for your terrific support for financial literacy.

The Department of the Treasury has awarded the John Sherman Award for Excellence in Financial Education to several credit unions for their innovative financial education efforts.  For example, in June 2003, we presented a certificate to the Ohio Credit Union League's Latino Financial Literacy Program, which provides financial education for Latino immigrants in the Columbus area. We understand the importance of your efforts.

The National Credit Union Administration also plays an important role on the Financial Literacy and Education Commission along with the Department of Treasury and 18 other agencies.  This Commission is working to coordinate the federal effort on financial education and will soon be launching a web site and toll free hotline to provide Americans with a central source for federal financial education information.

You do so much for your customers, and for your country… I'm thrilled to be here with you today, and thrilled to have you as a partner in so many efforts.

I look forward to continued work with the credit union community on all fronts, and am pleased to share with you an optimism and enthusiasm for the future of the American economy. We have a shared belief that our best days are ahead of us. I am pleased to be working toward that future together.

Thank you for having me here today.

Chairman THOMAS.  Of everything that I have heard here today, Mrs. Johnson, the one statement you made I just find dumbfounding, that you cannot find a credit union back home in Iowa that you can join.  If you were in California, there are ads that are run that say, "Can you join?"  The response, "Are you breathing?"  I think you meet that qualification.  On the panel number 3 we will have a spokesperson from Louisiana, who will talk about how terrific it was that their particular credit union had exchange relationships with other credit unions, and so I could indicate that you could perhaps join a credit union here in Washington, and I can't believe there isn't a credit union in Iowa that would offer reciprocal opportunities based upon your membership in the credit union here.  If that is not the case, you and I need to explore how we can create for you the opportunity to join a credit union back home.  I think it is outrageous that you don't have the ability to avail yourself of the services of the very structures you are charged with overseeing.

The difficulty that I have, either in the President's statement or the Secretary of the Treasury's statement, or most of the other statements about whether or not we have a comfort level with what is going on in credit unions, is the fact that most often you have to accept statements, for example, Madam Chairman, as you gave us:  "I have no doubt," "we believe," "acts of faith," are probably not comfortable enough, especially as the gentleman from Texas indicated, that there was a lot of activity out there in the corporate community.  You indicated that you have CPAs who report.  They had CPAs that reported.  They were concerned there were reporting requirements that were burdensome and didn't want additional reporting requirements.  We now have an individual serving 25 years in jail based upon what he actually did.  What I have difficulty in is not understanding, as you continue to evolve and change the form of the credit union, that there isn't any more sensitivity on what could happen in terms of the downside of that evolution.  Let me give you an example, and I would like to hear your response.

In 1998, the definition for community was modified using a local concept, geography.  You have approved a local geographic‑based credit union which has as its boundaries, Los Angeles County.  That is more than 10 million people.  If in fact there is an opportunity to try to serve people of modest means, there are ample opportunities in Los Angeles County.  There are also ample opportunities to locate your credit union offices in ways in which you could absolutely skim those folk who make more than half a million dollars a year, if they are so inclined to use a credit union.  Repeatedly, when Members asked you what do you do in terms of a measuring unit to see if people are actually providing services to people of modest means, you don't have the structure or the data capability of determining that.  Does that concern you at all?

Ms. JOHNSON.  Congressman, there have been some large community charters granted, and I think that has been very beneficial to those communities.  They are still restricted in their geographical boundaries.  They have to establish a‑‑there has to be interaction, common interests documented.  Typically, when you have a single political jurisdiction, you find those types of interaction services, a commonality among that segment.

Chairman THOMAS.  Would you give me an example of the commonality other than the fact that they live in Los Angeles County?  In fact, I understand that they don't even have to live in Los Angeles County to belong.  They can worship or work.

Ms. JOHNSON.  There is certainly commonality of public services.  There is commonality‑‑

Chairman THOMAS.  Not necessarily.  Somebody could be in Orange County, which is often the case, and work in LA.  It is a completely different county structure.

Ms. JOHNSON.  Then the interaction of the working within the county, using the facilities of the county, using the‑‑

Chairman THOMAS.  Just let me say that at this point, comparing that structure to what we started with, "I am a member of a company," "I am a member of a school district," in terms of what was the historical rationale for creating these, and you are down to now telling me that those are still substantially sufficient commonalities to allow the concept to continue, I am just saying at some point you need to maybe take a step back.  In arguing in terms of the Community Reinvestment Act‑‑and we are going to have a panelist on the third panel and I know he has a 3:00 o'clock flight, and I am going to do everything I can to get him up here‑‑here is the question.  You have tax-exemption.  What is the primary reason you have tax-exemption?  Is it because of the cooperative community volunteer structure of the organization, or is it because during the '30s, when it was clear that people of modest means were not being served adequately, given the existing financial structures of the day, that this made sense in creating opportunities for people of modest means?  Which one is the primary reason you think that Congress gave credit unions tax-exemption?

Ms. JOHNSON.  I think by reading the statute. that Congress was establishing an alternative provider for affordable financial services, and the structure is certainly what it is based on by having a not‑for‑profit with the members putting in their capital and then loaning it back out, everyone, every single member of the credit union was benefiting.  That is entirely different than a structure of a stock‑held institution.

Chairman THOMAS.  No, no, I understand that.

Ms. JOHNSON.  Having both is great.

Chairman THOMAS.  I understand that, but is that the primary reason you think you get the tax-exemption, because of the structure?

Ms. JOHNSON.  Reading the statute, I believe that that has been reaffirmed, yes.  The structure, and there is also then to serve the savings needs and those of modest means, but I would say yes.  I would say the structure, in reading the statute, the structure is the main basis for the tax-exemption.

Chairman THOMAS.  Okay.  But I think it is very important, and I think you should underscore this, that was included in the '30s is included in 1998, serving people of modest means.  Earlier, I used not‑for‑profit hospitals as an example.  The IRS has allowed not‑for‑profits based upon a changing definition of what their mission is, to no longer have to serve the poor.  All they have to do is have a structure, and it is the structure alone that allows them that competitive advantage.  But I think it is important that your structure, the people that you are supposed to administer and oversee and police, have this commitment in terms of serving people of modest means, difficult to define, as we indicated.  But I have a hard time understanding why you would resist a question or not put up a structure which would allow you to show clear evidence that you do serve people of modest means, and that you serve them better than other institutions that don't have that as part of their charter.  That is why I have some difficulty understanding your testimony on page 12.  I assume you were presenting evidence which would convince us that you serve people of modest means, and you made a comparison with banks, and I would assume that the comparison with banks would show you favorably in serving people of modest means if you were going to include it in your information.

What you have in the last full paragraph on page 12 is that in the year 2003 "credit unions made a higher percentage of single family mortgage loans to low and moderate income borrowers...than banks."  You were at 24.2, banks were at 23.2.  You got them there by a percentage point.  "In addition, credit unions significantly increased home purchase loans to low and moderate income borrowers to 28.3% of their loan portfolios at 2003."  That is up from 23.6 in 2001.  But you make the point, "while bank lending in this area stayed relatively constant."  Well, ironically, the relatively constant rate of the banks was 28.6 percent in 2001, which was 5 percentage points better than credit unions.  The point of constancy showed that in 2003 banks loaning to low and moderate income borrowers was 28.9, which is half a percentage point greater than what the credit unions did in 2003.  So, in both instances the banks did a better job, according to your own testimony, of loaning money to folks of low and moderate means to purchase houses.  How does that buttress your argument?

Ms. JOHNSON.  Congressman, that is in part why the chart is presented above.  The interpretation of the HMDA data is being done in a very different manner, and I would propose when the HMDA data is analyzed in an objective form, you will see that credit unions fare very well.  If you look at the denial rates for the minority groups on the mortgage, you will see that credit unions are doing a very good job.  In fact, the denial rates are lower than for other financial institutions.  I would also say that those rates have improved on an annual basis.  I believe as GAO had reported earlier, that the rates are getting better.

Chairman THOMAS.  Of course they are getting better, but your statement, your mission, one of the reasons you get tax-exemption is because you are committed to serving people of low and modest means, and banks aren't.  They pay taxes and they are beating you in a very significant, growing and important area for people of low and modest means, and that is providing personal loans on homes.

Ms. JOHNSON.  The reason that this information is included is because this is information from a particular group that you will probably see elsewhere, and to be truthful in putting it in, I think that that is what we need to do, because that is information provided by one particular group that is calculated and manipulated in one fashion.

Chairman THOMAS.  All I am saying is that you included that data, and I assumed you meant it to have some positive impact on us, and I am trying to figure out how it does.  That is all.  In addition, one of the things that shocked a lot of people was the corporate behavior, how much the chief executives were being paid, other remunerations that were available to them, the discrepancy between a typical corporation and certain corporations.  What I heard in terms of your response to Ms. Hart and others was about the idea of maybe if we could get some understanding of executive compensation.  We could show that there is a consistent relationship between the size of the credit union and what the CEOs get paid and there aren't any anomalies, and if there are some anomalies, you might want to focus on those anomalies.  That is transparency.

But to get the transparency you have to be able to collect the data, and the argument that the law doesn't require you to collect that data, I would think, would be something you would want to talk about with the credit unions so that you don't wind up with a scandal.  If your answer is, "Don't worry, there won't be one," I would be very concerned about that, especially as the way you have changed your credit union structure in which the similar relationship to join it is that you are breathing, and that it can include a geographic unit that is larger than 42 States in the United States.  Those structures create opportunities for people who aren't as committed to the core concepts that created credit unions in the first place, to give you some comfort that people who work in the same place, people who are employed in the same place, who deal with similar issues.

I will tell you that I belong to the current Schools Federal Credit Union, and I understand the nexus, and I understand people are there.  It continues to change a little bit, but I understand the basic nexus.  I don't understand county of LA.  Your explanation as to why the county of LA makes sense, I would tell you, probably isn't enough cement for the people who might join this credit union to have a very high comfort that they are going to be looking out after their own interest, the common interest that we have, the common interest that we are all in LA.

I have a little concern, because I would think you would want to be looking for tools to provide accountability, tools for transparency, tools for verifiability, because if as recently as 1998 you restated your mission as helping people of modest means, you should feel proud about proving that, and I think you could if you had the instruments that could establish that, but you don't.  I would think, given the enormous discrepancy that Mr. Hillman presented between credit unions, and especially the comment about the shift from the structure of credit unions, you would want to give people some comfort that there isn't a certain structure, or you yourself would like to know that maybe some of these newer structures are simply not as responsive to the old core common ideas of a credit union that protected you in the past.  So, I am kind of wondering why every time you gave an answer, it was an answer that was very, in my opinion, defensive.

I came across a court opinion in 2004 which I think illustrates the concern that a number of us have and one of the reasons we would prefer having a hearing to listen to what you are doing as the structure has evolved.  The court said the "NCUA must have some gatekeeping responsibility to ensure"‑‑in this instance‑‑"that the local requirement be satisfied."  It "cannot act as a rubber stamp or cheerleader for any application brought before it."  This case is troubling because there is no indication in the record that the NCUA questioned any of the data Tooele First Credit Union (TFCU) provided, or that the NCUA queried into areas that would diminish the likelihood of finding a local community.  If the NCUA had conducted any critical analysis of the information provided, it should have recognized areas of concern that required further discussion.

That to me is a cautionary signal that you should be concerned about the integrity that you could show easily and simply by the data you collect, both through transparency and through accountability, in terms of rules that are applied to other institutions that have a slight different tax structure, but which you should talk about emulating so that it doesn't bite you.  But to say "I believe" or "I have no doubt" in today's world with the evolving structure of credit unions, I personally believe puts you at great risk.  I would just caution you that Mr. Hillman and the GAO have provided you with some structures.  I know you are taking a look at it.  Cheerleading probably doesn't serve the clients of the NCUA as much as a very careful analysis of where you might get tripped up, in which public disclosure might be made, and that the credit union movement is damaged far beyond the individuals who conducted themselves in ways that certainly weren't typical of the way credit unions were supposed to conduct themselves.  The old original structure virtually guaranteed that it wouldn't happen.  The new structure, I think, is going to cause a number of people some real concern if there is no ability to prove, not on faith, but on structure and information, that the compensation, the accountability and the mission are all being served.

So, I would think simply from a defensive point of view that you would be anxious to find those tools, some of them indicated by the GAO and others, so that you could readily provide the data that would dismiss any argument, and perhaps in collecting the data, you might find that there are some outliers that you would be very concerned about, but you don't know about them now because you don't collect the data.  That would be an early warning system that some of the new and novel directions that you are going are perhaps fraught with a little more peril than the old typical structure, which I think made a lot of sense, still makes a lot of sense today, and serves clearly defined groups.  Frankly, peer group review is usually one of the best ways to keep people in line, and that is based upon the structure.  I just have to tell you, I have a very difficult time understanding peer group review when what you have in common is that you either worship, work, go to school, or live in a county that has a population greater than 42 of the 50 States.  That is really the point I wanted to make after having listened to all of the Members in terms of the questions that they had, just as a prudent thing you might want to think about doing sooner rather than later.  Any reaction?

Mr. MCDERMOTT.  Mr. Chairman?

Chairman THOMAS.  I wanted to know if the chairman had any reaction to the statement.

Ms. JOHNSON.  Thank you for your comments, Congressman.  We realize that this is an issue, and we have met with GAO, and we do intend to respond.

Chairman THOMAS.  But I think you should look at, for example, the 990s, which would provide you with some of the compensation that is going on.  I know you are not required to do them, but perhaps some kind of a cooperative effort to examine exactly what tripped up some of those other corporations on accountability, on thinking that a CPA structure worked, on relying on folk that you can't tell me by a thorough examination actually did what they said they did.  I mean I know those things are unseemly, but in today's world I think just to protect credit unions, the Agency created to protect them would want to have an oversight function more than a cheerleader.

Ms. JOHNSON.  I would add that many of the credit unions have voluntarily adopted many of the requirements in Sarbanes‑Oxley, not required by statute to do so, but many credit unions have moved that direction.  We encourage it.  We have put out guidance on Sarbanes‑Oxley, and that transparency is also beneficial.

Chairman THOMAS.  Do you think we are probably worried about those who voluntarily adopted Sarbanes‑Oxley?

Ms. JOHNSON.  I would say it is‑‑I may have used that word a little loosely.  We have put out guidance and we have strongly encouraged many of the Sarbanes‑Oxley procedures.

Chairman THOMAS.  I understand the cost and the difficulty of complying.  I think it makes all kinds of sense to figure out at what level, given the risk of something going wrong, especially since the small ones have that tighter old‑fashioned structure, would you draw a line, that you would say below this level and this structure, there is not that great of a concern, you don't necessarily have to comply; above that, moving in the new direction with all of these different opportunities, especially outreach with for‑profit structures in alignment with a not‑for‑profit structure, that this is probably a prudent thing to really think through, given the size of multibillion dollar operations and the opportunity in a whole new environment to put you people at risk in a way that you never thought you would be at risk.  I am reacting to the way you thought you were at risk with this hearing, when all I wanted to do was to ask you to look inward and do the kinds of things that you need to do to protect yourself so that what happened to corporations doesn't happen to you.  I agree completely the old structure pretty well protected you.  You are off into areas now that are vastly different with amounts of money that are vastly different, with people who become leaders in the movement, who want to create new structures vastly different than what you had 25 years ago even, and certainly different than 50 years ago.

I would very much like to see, and in fact will make sure on a follow up that we do it, that you have got some structures, you are asking questions.  There is never a problem when you ask a question and the answer is a verifiable‑certified‑backed‑up‑with‑information, no.  The fact that you didn't do it would be of great concern, especially given the Federal role you play in your oversight.  Okay?  Thank the panel very much.  Anticipate the second panel.

Mr. BECERRA.  Mr. Chairman?

Chairman THOMAS.  Anticipate the second panel.

Mr. BECERRA.  Mr. Chairman.

Chairman THOMAS.  I tell the gentleman we have been here, and I accommodated everyone who was here when the Chairman began the final statement, and the Chairman said at the beginning of the hearing that the Chair would conclude with the questioning.  The gentleman will have ample opportunity to question a number of other people on different panels.

Mr. BECERRA.  Mr. Chairman, I was here before the Chairman started his final remarks.  He never said that this was his final statement.  I was here prior to that.  I was here prepared to ask my 5 minutes of questioning.  I believe under the rules of this Committee and this Congress, this House, I am entitled to 5 minutes to address the panel.  So, unless I don't understand the rules, I am not sure why I would not be entitled‑‑

Chairman THOMAS.  I tell the gentleman that the gentleman that spoke just prior to the Chairman was the gentleman from Texas who sat next to him, and I have to tell you that I saw the gentleman from Texas in his entire profile.

Mr. BECERRA.  Mr. Chairman‑‑

Chairman THOMAS.  However, the Chair wants to make sure that no Member, regardless of how brief their appearance in the Committee, is shorted in terms of their opportunity to ask questions.  Does the gentleman from California, Mr. Becerra, wish to inquire?

Mr. BECERRA.  Under regular order, Mr. Chairman, yes, I would.

Chairman THOMAS.  The gentleman is recognized for 5 minutes.

Mr. BECERRA.  I thank the Chairman.  I thank the panel for being here such a long time.  Let me ask a couple of questions of Ms. Johnson, because I think the Chairman brought up some good points that I believe a number of the credit unions in the industry are trying to address, and I think others could be encouraged to do more.  It seems to me that there has been a good purpose served by giving credit unions an opportunity to have options on how to service modest income, low‑income communities in this country so that they can avail themselves of financial services.  It seems, though, that most of the studies do show that the credit union industry is still lagging far behind, substantially behind even banks and thrifts, in making loans to modest income communities, especially communities of color, and, in some cases, when it's compared to women.  I know that a few years back in 2001 or 2000, there was a proposal before the Administration to try to provide for something similar to what CRA does within the financial services industry for banks and savings and loans.  That proposal, the community action plan, which was initially approved by NCUA, was subsequently reconsidered.  I know that the reasons having been given were that NCUA was preferring to use a carrot versus a stick approach.  I guess my first question would be:  How long do we feed carrots before we think we need to use a stick to make sure that the credit unions do move forward and do a much better job of fulfilling the charter passed in the 1930s that we try to service modest‑income communities through credit unions?

Ms. JOHNSON.  Well, it has been the belief of NCUA that the credit unions are serving members of modest means and those in the community because they can only serve their members.  In 1998, Congress had debated at length CRA requirements and whether they should be imposed on credit unions, and at that time, there was no evidence to show that it was necessary for credit unions.

Mr. BECERRA.  Would you say that is still the case?

Ms. JOHNSON.  We have‑‑

Mr. BECERRA.  With the evidence that is before you now, some of the analyses that have been done, would you say it is still the case that there is no need to try to have further encouragement for credit unions to do a better job of serving low‑income or modest‑income communities?

Ms. JOHNSON.  Well, actually, Congressman, most credit unions that have adopted underserved areas are actually growing three times faster than other credit unions.  We see the results that they are reaching out into the community when they have that opportunity for a community charter or through adoption of an underserved area.  Otherwise, if you are dealing with employer groups, et cetera, many of those people are restricted through that employee group.  There are others in the community that could probably benefit from a credit union that aren't being‑‑cannot walk through the door and join the credit union.

Mr. BECERRA.  I think you sort of point out that, on the whole, credit unions are still fairly small compared to banks and savings and loans.  I think Citibank by itself is bigger than all the credit unions in the country combined‑‑

Ms. JOHNSON.  Actually, the‑‑

Mr. BECERRA.  In terms of total assets.

Ms. JOHNSON.  Actually, the top three banks‑‑the three biggest banks, any one of them is larger than the entire credit union industry combined.

Mr. BECERRA.  To some degree, in response to the exchange you had with the Chairman, you can only do what the law permits you to do.  How you go about enforcing these laws with regard to outreach into low‑income communities is dependent on what the law permits you to do.  The laws which are passed by this Congress, to some degree, dictate, they prescribe to you how to go about doing this.  So, to some degree, I think we have to recognize that we have to tailor the law so that credit unions can go out there and encourage the membership in these modest‑income communities.  But the 1998 law I think did you give you an opportunity to expand membership to try to get into some of these modest‑income communities.  We have this year legislation that is working its way through the Committees that may come to the floor in the House at least that would likely expand the reach of membership for credit unions.  While I have always supported the charter of credit unions, it seems to me that credit unions would probably serve themselves well if they did a better job of demonstrating that they were going to go into these modest income communities if the industry is going to try to go out there and have a more expanded definition of membership.  So, I am wondering if you could just comment on that last question.

Ms. JOHNSON.  The aspects as far as membership that are included in the proposed legislation is very limited.  I believe it allows credit unions to retain single segs.  If they were to become a community charter, they could retain those segs.  There are actually very minimal changes to the actual membership proposals or to enlarge membership.

Chairman THOMAS.  The gentleman's time has expired.  I once again want to thank the panel, and at this time ask the second panel‑‑Vice Admiral Cutler Dawson, Harriet May, Jeff L. Plagge, David E. Hayes.  I would recognize the gentlewoman from Connecticut for purposes of introducing the last member of this second panel.

Mrs. JOHNSON.  Thank you, Mr. Chairman.  It is my pleasure to welcome Mark Macomber to the dais here to testify before the Ways and Means Committee.  I have known Mark for many, many years.  He is first Vice Chairman of America's Community Bankers, but he is the President and CEO of Litchfield Bancorp in Litchfield, Connecticut, a mutual organization, and has been a leader not only in banking circles in Connecticut and now nationally, but also in the communities of the Northwest Corridor of Connecticut, not only dedicated to building a strong economy, but to building strong communities, and I thank him for all he's done throughout that region and welcome him here today.

Chairman THOMAS.  The Chair apologizes to the panel, and would indicate that all of you have written statements and will make them a part of the record, and you can then, as you have noticed, address the Committee in whatever manner you see fit.  We might as well just go from the Chair's left to the right, and start with Vice Admiral Mr. Dawson.

STATEMENT OF VICE ADMIRAL CUTLER DAWSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF NAVY FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

Vice Admiral DAWSON.  Thank you, Mr. Chairman.  Chairman Thomas, Members of the Committee, I am Vice Admiral Cutler Dawson, United States Navy retired; President and CEO of Navy Federal Credit Union.  I am here today on behalf of the National Association of Federal Credit Unions to address the tax-exempt status of our Nation's credit unions.  We have provided the Committee a written statement, as you said, Mr. Chairman; and, however, my oral comments will draw primarily on my experience with Navy Federal Credit Union.  In 2004, I completed a 34‑year career in the Navy and was chosen to take the helm at Navy Federal.  During that time, I have seen what the‑‑during my time in the Service, I have seen what the credit union has done for sailors and marines.  It is truly their credit union.  Navy Federal began operations over 70 years ago with a group of Navy Department employees and their surplus dollars to make emergency loans to employees.  At the end of the first year of operation, the credit union included 46 borrowers and total assets of $450.

We now serve sailors and marines and Navy Department employees and their families around the world through 106 members' service centers, including 21 that are overseas.  Our motto is we serve where you serve.  We have not strayed from our mission of serving those members who share a common bond of military or civilian service with the Department of the Navy.  Last year, as I was leaving active duty, the last‑‑one of the last things I did while on active service was I went to Iraq to review the finances of the folks that were there that were conducting the operations.

I spent the day with the Marines in Fallujah, and they spent the day briefing me on what they were about to do and what operations they were about, and what they had contemplated in the future.  That night while we were having dinner, I happened to mention to them that I was retiring from the Navy, and that I had just been selected the day before to be the new President of Navy Federal.  All the conversation stopped at that time about what they were doing.  They wanted to know what I was going to do at Navy Federal, 'cause virtually all of them were members of Navy Federal.  Some had been members for 25 years.  Some had been members for 10; some for less.  But to a man and to a Marine and to a woman, they wanted to know what I was going to do.

This same commitment and dedication to their members is duplicated by thousands of credit unions all over America.  Navy Federal and all credit unions are not‑for‑profit, as you know, and that served defined memberships.  We are owned by our members and we are governed by unpaid directors who are elected on the basis of one vote and one member regardless of deposits.  We build the necessary operating capital by retaining earnings, earnings that if taxed would curtail our ability to do the very best of things that we currently do.  But how does the Nation benefit from our tax-exempt status?  I can only explain it to you in terms of the members that we serve, many of whom are sailors and marines.  It allows Navy Federal to operate in overseas locations where our members are serving our nation.  As I mentioned to you earlier, we serve in 21 different locations across the world.

We also conduct financial management training through Navy and Marine Corps programs.  In the first six months of this year, we conducted over 750 such sessions.  We assist our members through budgetary counseling and debt management services at no‑cost to the member.  We guarantee utility deposits and security deposits for members in the Navy and Marine Corps.  As you know, they move quite a lot.  We provide members remote access to their accounts via the Internet worldwide, and even to ships at sea.  But most importantly, we offer financial alternatives to provide lower loan rates and higher savings dividends, and I think, in some way, we keep the payday lenders at bay.  In summary, Mr. Chairman, the credit union mission of meeting the credit and savings needs of customers, including the sailors and marines that serve our country is as important today as it ever has.  It is with this in mind that I believe that continuing the Federal income tax-exemption for all credit unions is merited.  I thank you for this hearing today, and I look forward to your questions.

[The prepared statement of Mr. Dawson follows:]

Chairman THOMAS.  Well, thank you, Admiral.  Ms. May?

STATEMENT OF HARRIET MAY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, GREATER EL PASO'S CREDIT UNION, EL PASO, TEXAS, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION

Ms. MAY.  Thank you.  Good afternoon.

Chairman THOMAS.  Push the button.

Ms. MAY.  Got it.  I know I always have to adjust this.  Thank you for this opportunity, Chairman Thomas, to speak before the Committee.  Thank you, Committee members, for being here.  I am Harriet May, President and CEO of GECU of El Paso, Texas, and I am testifying on behalf of the Credit Union National Association.  The GECU, formerly known as Government Employees Credit Union, has served the families of El Paso County since 1932, when, at that time, 11 men pulled $5 a piece to serve their fellow civil service employees.  Today, we serve the needs of over 247,000 members, with assets of over $1 billion.  El Paso's population is 82 percent Hispanic, with a median household income of just under $30,000.  Nearly 25 percent of families live below the poverty level.  Just over 43 percent of our members have household incomes of less than $29,000.  The majority of our members are low‑income, so our day‑to‑day products and services, not just special products, must be tailored to meet their unique needs.

So, Mr. Chairman, I confess GECU is one of those big, bad billion dollar credit unions that the bankers claim have morphed into something they were not intended to be; except, quite honestly, they are wrong.  They are wrong because GECU is a relatively large credit union, by credit union standards, but it is important to understand it operates under the same philosophy, the same function, and is organized in the same structural make up as occurred when it was set up in 1932 as do other credit unions.  It is this fact that justifies maintaining the tax-exempt status of credit unions.  My written testimony addresses the issues laid out by the Committee for review, making a strong case that credit unions earn their tax-exemption each and every day.  Let's be clear from the start.  The original reason for the credit union tax-exemption was based on the positive nature of credit unions.

Since 1917, the tax-exemption has been reaffirmed a number of times, most recently with strong statements in support from both President Bush and Treasury Secretary Snow.  Contrary to rhetoric, the asset size of credit unions has never been the basis for considering the imposition of Federal income taxation.  Additionally, whether or not credit unions make business loans has no connection to tax-exemption.  Since their earliest days, credit unions have provided business loans to their members.  In fact, the first Federal statute limiting member business loans was enacted in 1998.  Recently, both the U.S. Treasury and congressional studies have found that credit unions are indeed fulfilling their purpose.  Studies portray credit unions as robust institutions with a specialized structure serving identifiable groups of members.  Meanwhile, in 1998, Congress recognized that there are five characteristics that distinguish credit unions:  member ownership, net worth created by retained earnings, dependence on volunteers, and not‑for‑profit basis of operations; and foremost, service only to its members.

The findings concluded that credit unions are exempt from taxation because of these characteristics and because they had the specified mission of meeting the credit and saving needs of consumers, especially, but not only, persons of modest means.  Even though taxing credit unions might result in $1.5 billion in annual tax revenues, as described in my written statement, consumers at credit unions and banks benefit approximately $10.6 billion a year in the form of better rates on loans, fees, and savings nearly because credit unions exist.  As member‑owned institutions, credit unions endeavor to offer products and services that their members need and want.  As technology results in more and better offerings, credit unions must respond to their members' needs.

However, none of the core characteristics of credit unions or rationales for the tax-exemption has anything to do with credit union size, field of membership restrictions, the range of services offered, or the extent to which credit unions might not compete with financial institutions.  Instead, they have everything to do with the cooperative structure of credit unions and their mission of providing affordable services to American households.  It is clear that credit unions play an important role in our economy.  Credit unions serve people of all walks of life, at all economic levels.  Credit unions provide the public with a not‑for‑profit cooperative alternative to the for‑profit sector.  Consumers benefit by having access to lower cost services that might not otherwise be available to them.  The tax-exempt status of credit unions is the glue that holds credit unions and their not‑for‑profit approach cooperative financing together.  If the tax-exemption were removed, if 87 million Americans were forced to pay additional taxes solely because of their ownership in the credit union, it would lead to the end of a movement as we know.  Credit unions would become banks, and consumers would pay a high price.  Thank you, Mr. Chairman.  I would be glad to answer any questions.

[The prepared statement of Ms. May follows:]

Chairman THOMAS.  Thank you, Ms. May.  Mr. Plagge, is that correct?

STATEMENT OF JEFF L. PLAGGE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FIRST NATIONAL BANK OF WAVERLY, WAVERLY, IOWA, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

Mr. PLAGGE.  That's correct.  Plagge.

Chairman THOMAS.  Okay.

Mr. PLAGGE.  Mr. Chairman, my name is Jeff Plagge, and I am President and CEO of First National Bank, a community‑ and employee‑owned bank in Waverly, Iowa.  We just celebrated our 141st anniversary.  I am grateful for the opportunity to testify about the credit union tax-exemption, and, on behalf of the American Bankers Association, and thank you for holding this hearing.  As we've heard many times, Federal Credit Unions pay no income tax.  In 1937, Congress exempted Federal Credit Unions from all forms of taxation‑‑Federal taxation, and chartered them with the specific mission of helping people of small means.  Traditional credit unions still fulfill this mission by providing basic financial services to a well‑defined group.  Unfortunately, an increasing number of credit unions have abandoned this core mission.  Instead of helping people of small means, sophisticated credit unions are expanding into commercial lending, buying naming rights to sports stadiums, financing luxury hotels, and building elaborate headquarters.  My written testimony is filled with examples of these and other activities.

How does a $5.2 million contribution for naming rights to a sports arena serve credit union members?  If a credit union can add the entire State of Washington to its field of membership, what has happened to the common bond?  If a credit union is making business loans to non‑members, what does that have to do with tax-exempt purpose, and who is indirectly being subsidized?  In my home town, the $1.1 billion John Deere Community Credit Union is more than five times larger than our $200 million community bank.  Fueled by its Federal tax-exemption, the John Deere Community Credit Union competes virtually for every one of my customers regardless of their income, employment, or need.  On the local level‑‑and this is what this is about, where all competition plays out‑‑the effects can be dramatic to our community bank and others like it around the country.

Credit unions' tax-exemption gives them a significant price advantage over tax paying banks that offer essentially the same products and services, and it enables credit unions to grow much more rapidly.  The fact is in more and more communities, credit unions are many times larger than the local banks that are competing in that market.  For example, my bank's average agricultural and business loan size is $52,000.  John Deere Community Credit Union's business loan size is more than twice that, and that is still a reasonable amount, and there are others in the testimony on page seven that talk about some of the more aggressive business lending things going on.  The Federal Government is subsidizing super competitors against nearly 8,000 taxpaying community banks in this country that have $500 million or less in assets.  There are now 263 credit unions with assets of more than $500 million each, and more than a hundred credit unions with assets more than a billion dollars each.  Studies by the Federal Reserve and the GAO show banks served more low and moderate income people than credit unions.  The National Community Reinvestment Coalition has also concluded that the average bank is more often the source to credit of people of modest means than credit unions.

The NCRC says most people would be surprised to learn that banks are doing a better job of serving low‑ and moderate‑income people than credit unions.  Credit unions argue that their tax status exists because they are not‑for‑profit and cooperatively owned.  But being a not‑for‑profit cooperative does not justify a tax-exemption.  In fact, most cooperative member‑owned and not‑for‑profit financial institutions are now subject to Federal taxation of some kind.  Credit unions enjoy the sweetest tax deal of all of them.  In contrast, mutual insurance companies, mutual savings banks, and mutual savings and loan associations lost their tax-exemption years ago.  Removing their tax-exemption did not diminish their vitality.  These institutions are healthy, well capitalized, and profitable.  During the last 5 years, mutual savings banks and mutual savings and loans paid $2.9 billion in corporate income tax.  Just like my bank, they are paying their fair share.  This cannot be said today for some of the new breed of large and aggressive credit unions.  These financially sophisticated complex credit unions should be required to stay within their mission or be taxed and regulated like the rest of us.  The ability of community banks like First National to compete depends on it.  Thank you, Mr. Chairman.

[The prepared statement of Mr. Plagge follows:]

Chairman THOMAS.  Thank you.  Mr. Hayes?

STATEMENT OF DAVID E. HAYES, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECURITY BANK, DYERSBURG, TENNESSEE, AND CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF AMERICA

Mr. HAYES.  Mr. Chairman and Members of the Committee, my name is David Hayes.  I am President of Security Bank in Dyersburg, Tennessee, and the Chairman of the Independent Community Bankers of America.  I am pleased to appear today on behalf of the ICBA and its nearly 5,000‑member community banks throughout this great country.  My bank has $135 million in assets.  I have 70 employees, and I live in a community of 19,000 people, located in rural west Tennessee.  The ICBA believes this hearing will help foster a better understanding of the genuine concerns and frustrations community banks often have as they work in their local communities, pay their fair share of taxes, and compete head on with credit unions.  The credit union sector often states that they represent only a small portion of the entire financial service industry.  However, an important distinction is that most often tax-exempt credit unions compete head on with taxpaying community banks of similar size.  Research finds that the largest overlap in terms of competition in size is in the $10 million to $100 million asset size class, which includes about half of all banks and about 40 percent of all credit unions.  In this class, banks and credit unions primarily compete with each other and not with the largest banks or credit unions.

Unfortunately, the dramatic tax burden difference between these taxpaying banks and tax-exempt credit unions places community banks at a severe competitive disadvantage.  Congress originally allowed credit unions tax and regulatory advantages in the 1930s for the purpose of helping serve people of modest means and with a common bond.  But today, the notion of modest means and common bond is lost.  For example, the local credit union in my community promotes that anyone who lives, worships, attends schools, or business or other legal entities and their families are eligible customers.  Today, credit unions have more than 87 million customers, reaching the wealthy and the middle‑income classes.  In fact, there are more than one hundred billion dollar credit unions providing sophisticated banking services.  Consequently, today, the $680 billion credit union industry is quite similar to any other financial service provider except for their special regulatory treatment and tax subsidy.  Because of their rapid expansion, the credit union tax subsidy will cost an estimated $31 billion in lost Federal revenue over the next decade, according to the Tax Foundation.

Credit unions often cite that they deserve tax-exempt status because of their mutual ownership structure.  However, mutual structures can be taxed and are, in fact, taxed.  In 1951, Congress eliminated the tax-exemption for savings and loan and mutual savings banks on the grounds that they were no longer unique from other taxpaying financial institutions.  Perhaps most troublesome is the failure of the credit union industry to provide any unique service to individuals of modest means despite their large tax subsidy.  A growing body of research shows how banks consistently exceed credit union performance in lending to women, minorities, and low‑ and moderate‑income borrowers in communities.  Ironically, little of credit unions' tax subsidy is passed to their members.  The Tax Foundation research shows that a huge portion of the credit union earnings are retained and used for expansion.  Only six of 50 basis points may go to credit union borrowers through lower interest costs.  While more and more research shows credit unions are not providing any special services to the people of modest means, the credit union industry has embarked on expanding its business lending.  It is doubtful that Congress in passing the Federal Credit Union Act of 1934 envisioned credit unions making commercial loans.  Yet, credit unions continue to advance measures to skirt their legal business lending cap.

As long as credit unions are tax-exempt, the ICBA will oppose expanding credit union powers, such as H.R. 2317.  In conclusion, the credit union industry is similar to other taxpaying banks serving the same customer base.  Notably, the Tax Foundation credit union research concluded that today the principal justification for tax-exemption would seem to be that it already exists.  Over the past decade, Security Bank has paid more than $4.2 million in Federal income taxes alone, and we proudly support our local community.  During that same period of time, Security Bank has committed over a million dollars to fund scholarships at local community colleges, while tax-exempt credit unions have done very little.  When asked to contribute for civic needs, the response typically is we can't because we're not‑for‑profit.  Community banks pay their taxes and serve their communities.  We urge the Committee to consider policies that would help create greater parity between tax-exempt credit unions and taxpaying community banks.  Thank you very much.

[The prepared statement of Mr. Hayes follows:]

Chairman THOMAS.  I thank the gentleman.  Mr. Macomber?

STATEMENT OF MARK E. MACOMBER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, LITCHFIELD BANCORP, LITCHFIELD, CONNECTICUT, ON BEHALF OF AMERICA'S COMMUNITY BANKERS

Mr. MACOMBER.  Thank you, Chairman Thomas.  First, I'd like to express my gratitude to Congress Nancy Johnson for her kind introduction today.  Nancy represents our district, our State, and our Nation extraordinarily well.  Chairman Thomas, Ranking Member Rangel, and Members of the Committee.  I am Mark Macomber.  I am President and CEO of the Litchfield Bancorp in Litchfield, Connecticut.  I am here this afternoon representing America's Community Bankers, where I serve as first Vice Chairman of the Board of Directors.  I want to thank Chairman Thomas for his leadership in reviewing the appropriate application of tax-exemptions for cooperative and not‑for‑profit organizations and in particular for today's hearing, which is addressing the credit union industry.  My institution is a $180 million state chartered community bank that is part of a two‑bank mutual holding company.  We are one of 765 mutual savings institutions that operate throughout the country alongside community banks organized as stock companies.

Today, my remarks will focus on the unfair competitive advantages that credit unions have compared to community banks like mine.  We are facing a looming crisis unless tax policy favoring multi‑billion dollar credit unions is changed.  We urge the Committee to create a fair tax system that encourages a diversity of community credit providers, offering competitive products and paying taxes to support the public needs of our nation.  The Nation's mutual savings institutions hold over $250 billion in assets and paid $800 million in taxes in 2004.  Mutual institutions have a long and vibrant history and have demonstrated an enduring commitment to our communities.  Over 35 percent of mutual institutions have been in existence for 100 years or more.  My own institution was chartered in 1850.  Mutual institutions are cooperative.  They were founded to serve the average American.  We are a critical part of our local community‑‑its life, its culture, and its economic future.  We have survived depressions and recessions, world wars, and natural disasters.

In 1951, we survived taxation.  Despite the revocation of our tax-exemption, mutual savings institutions continue to experience growth and thrive as pillars in the communities we serve.  The parallel to the development of mutual savings institutions and credit unions is a very close one.  In 1951, this Committee determined that mutual institutions were mature and provided a broad range of banking products and services, and, as a result, should become subject to taxation despite their cooperative status.  I never had the opportunity to meet my predecessors from that time, but I am quite sure that they didn't like losing their tax-exemption.  However, the Committee's decision was the right one based on principles, principles of equity, fairness, allowing the market to allocate resources and generating revenue to support essential functions of government.  In our written submission, Chairman Johnson states that, and I quote this, "in 1951, Congress found the mutual thrifts had essentially lost the essence of their mutuality; and, therefore, lost their tax-exemption."

Her submission reflects a total lack of understanding of mutuality then and now.  My own bank lives up to the intent and standards of the community service envisioned by its incorporators in 1850.  She is simply wrong on this count.  Today, the credit union industry is a $646 billion segment in the financial services industry, and is growing rapidly.  This growth, driven primarily by multi‑billion dollar credit unions, is increasingly displacing community banking.  This trend will accelerate unless the Committee takes action.  Inaction will result in more concentration and less competition driven only by tax incentives and not by economic efficiency.  The parallels between mutual savings banks 50 years ago, including my own bank, and today's conglomerate bank‑like credit unions cannot be ignored.  Conglomerate full‑service credit unions are competing for the same customers and offering the same products as community banks.  In fact, credit union service organizations, CUSOs, as used by Federal Credit Unions, are in abuse of their tax-exempt status.  Allowing credit unions to create new companies that are outright purchase companies is not only unfair, but completely unjustifiable and further expands their tax-exemption.

These credit unions offer every conceivable financial service, and serving more than most community banks.  The range of services even includes airplane leasing, and, as the Chairman noted, pet insurance.  Individual credit unions have been granted geographic markets as large as 11,000 square miles and so‑called fields of membership of over 10 million people.  This last number, again alluded to‑‑referred to by the Chairman, is particularly phenomenal because it means that there is one credit union today serving a population greater than that of 42 of the 50 States.  I say it again because it bears repeating.  Mr. Chairman and Members of the Committee, like mutual savings institutions in 1951, these credit unions should be recognized as a mature industry that has a responsibility to contribute to essential federally funded initiatives.  In 1951, Congress concluded that the continuance of tax‑free treatment for mutual institutions would be discriminatory.  Clearly, continuing a tax‑free treatment for bank‑like credit unions would be equally discriminatory today.  Thank you for the opportunity to testify before your Committee today.  I would be happy to answer any questions you may have.

[The prepared statement of Mr. Macomber follows:]

Chairman THOMAS.  Thank you, Mr. Macomber.  The gentlewoman from Connecticut.  Does Mrs. Johnson wish to inquire?

Mrs. JOHNSON.  Thank you, Mr. Chairman.  There clearly is a difference between the very big credit unions and the smaller credit unions.  Are there greater constraints on you membership area, Mr. Macomber, than on a credit union's membership area?  Or membership isn't the right word‑‑but your service area?

Mr. MACOMBER.  Well, legally, we get to go across State boundaries.  We certainly have to do some work.  But we are not really restricted geographically as far as the State of Connecticut.  There was at one time a law in place that had a 50‑mile radius restriction on banks like mine.  However, as a practical matter, again, we are $180 million bank, and exactly like credit unions, we generate all of our capital, all of it from retained earnings.  As a bank our size, we really don't have access to capital markets for any consequential growth in capital, so we are also limited to where our capital comes from from retention earnings.

Mrs. JOHNSON.  What is the regulatory burden of a small bank versus a small credit union?

Mr. MACOMBER.  Well, we are not subject to CRA.  And, as I think was mentioned earlier, there are a couple of recent‑‑actually one as recent as 2003 that indicated that credit unions were not serving the lower‑income and moderate‑income individuals as well as smaller banks are doing, community banks are doing.  I would like to quote actually something that was in the Credit Union Times.  Their editor, Mike Wells stated that‑‑and this is in response to a letter over my signature that was printed in his publication, "ACB apparently thinks credit unions' first obligation is to serve communities in which they operate.  Wrong.  CUs’ number one obligation is to serve the changing financial needs of the members who own it.  Of course, the community will also be served as a by‑product."  That is not exactly, you know, a ringing endorsement of what the Community Reinvestment Act is all about, and I think the performance of credit unions outside of what they are chartered to have done in 1934 supports that this statement is exactly how a lot of credit unions feel.

Mrs. JOHNSON.  Is it more costly for a small bank to make a loan than it is for credit union to make a loan?

Mr. MACOMBER.  That is hard to gauge.  You know, I will say that the overhead in credit unions, looking at their statistics, tends to run higher.  I don't think that is a function of what it costs to make a loan.

Mrs. JOHNSON.  In this issue of size, is there any precedent in any other section, area of banking, to regulate differently according to size?

Mr. MACOMBER.  Again, in the CRA area, banks now under the FTIC, the OTS, actually started this, and the FTIC has adopted similar rules.  Banks of a billion dollars or less have a less detailed examination from a CRA perspective than banks of over a billion dollars.

Mrs. JOHNSON.  Thank you.  Thank you, Mr. Chairman.

Chairman THOMAS.  Does the gentleman from New York wish to inquire?

Mr. MCDERMOTT.  No.

Chairman THOMAS.  Does the gentleman from Kentucky wish to inquire?

Mr. LEWIS OF KENTUCKY.  No.  Not at this time.

Chairman THOMAS.  Does the gentleman from Michigan wish to inquire?

Mr. LEVIN.  Thank you.  Let me ask those from the community banks, are there any restrictions on credit unions that don't exist for you?  Any of you want to answer that?

Mr. PLAGGE.  I think probably the one right now, and it would be part of this CREAL legislation, there is some restrictions that they have as it pertains to the percent of business loans they can have as part of their assets.  Right now that I believe is 12 and a half percent.  They're seeking to get that to 20 percent.  But one of the things that is discouraging to community banks in that percentage is they don't count loans currently below $50,000, and I think the legislation calls for not counting business loans below $100,000.  As my testimony identified, almost all of our business loans as a percentage last year, 2004, 62 percent of our business loans‑‑business and agricultural loans‑‑were under $100,000.  Now, what that legislation says is apparently they aren't even important enough to count.  That's indeed a big part of our portfolio.

Mr. MACOMBER.  Also Federal savings banks do have restrictions on commercial lending.  They're restricted to 10 percent‑‑excuse me 20 percent total; 10 percent, which has to be small business loans.  So, there are restrictions on that part of the banking industry.

Mr. LEVIN.  How about other restrictions that apply?  How about interest rates?  Any difference?

Mr. PLAGGE.  We see it up and down the ladder.  I can find credit unions where we have lower fees, lower rates.  I can probably‑‑they can probably find credit unions that have the reverse of that.

Mr. LEVIN.  How about restrictions, though.  Any legal restrictions?

Mr. PLAGGE.  Restrictions on interest rates?

Mr. LEVIN.  Yeah.

Mr. PLAGGE.  You mean just state usury laws and so forth?  The same.  I would assume that would apply to credit unions in our State.

Mr. HAYES.  That would be my guess is I mean‑‑you know, the state law controls the interest rates on the‑‑

Mr. LEVIN.  How about for Federal Credit Unions?  Isn't there a difference?

Mr. MACOMBER.  Well, I think the Chairman mentioned that there's an 18 percent usury rate for Federal Credit Unions, which would probably match most States or perhaps be higher than some.

Mr. LEVIN.  What is the largest credit union within 10, 15 miles of‑‑or say 10 miles of each of your banks?

Mr. PLAGGE.  I am in Waverly, Iowa.  We have a branch of John Deere Community Credit Union, which is a billion one.  They are in 33 I think now of the 99 counties in Iowa.  So, they are by far‑‑I think they are the seventh largest financial institution in the state.  So, they are, by far, the largest in the State at this point.

Mr. HAYES.  There is a small credit union in the community in which I live, and then 40 miles away, we have branches of one of the larger credit unions in the‑‑

Mr. LEVIN.  Forty miles away?

Mr. HAYES.  Forty miles.  Yes, we have facilities there.

Mr. MACOMBER.  We are basically in the same situation.  We have a small local credit union.  But certainly within 35 or 40 miles, we have a billion dollar credit union as well.

Mr. LEVIN.  Thirty‑five or 40 miles?  Okay.  Thank you.

Chairman THOMAS.  The gentleman from Texas, Mr. Brady, wish to inquire?

Mr. BRADY.  Briefly, Mr. Chairman.  I would ask the panel, back on the issue of small business access to capital, how does the tax-exemptions for credit unions impact for good or for worse access to capital of small business start ups and expansions?  Who‑‑what institution now, what type of institution now best serves those needs in our communities?  I would‑‑why don't reverse it from the earlier panel.  Start with Mr. Macomber and head in that direction.

Mr. MACOMBER.  Well, certainly, banks have the SBACU‑‑in Connecticut, we have the CDAs.  So, we have a number of government programs that are very helpful as far as start‑up capital.  We also provide start‑up capital for folks that we've known, very much like credit unions.  The different between a small bank like ours that has been in the same community for 155 years and that of a credit union that has been there for 50 years is pretty slim as far as knowing our customers and being able to help where it is appropriate.  Start‑up capital for new businesses is a very difficult thing to come by, as you know.  Again, knowing our customers makes it easier for us than it might be for someone from outside the State.

Mr. BRADY.  Thank you.

Mr. HAYES.  The same for our institution and our community.  I mean, you know, we are with our customers working in civic projects.  We are working with them on school boards.  We understand their needs.  You know they understand that we are there to help them achieve their dreams.  So, you know, I think we are a good source of that capital, being a community bank, because if our community doesn't grow, then our institution doesn't grow and we can't continue to add new staff.  So, that is an important part we play.  And, you know, I am looking at my loans for my board report next week.  I would tell you that the majority of the loans that we've made in the last 30 days would be under $10,000.

Mr. BRADY.  Thank you.

Mr. PLAGGE.  As my figures show, I mean we make a lot of small business loans.  We have the same basically structure that credit unions in our market would have.  We have access to SBA loans and so forth.  It is really not the issue of small business lending I guess that we say should be restricted with credit unions.  It is the types of business lending that you are starting to see nationwide through the credit union industry‑‑some of the examples I gave in my written testimony‑‑and the amount of that that is actually occurring to non‑members.  So, geographically, even though they may not have a credit union branch in their market, there is business lending going on, leaping across markets and the credit union industry.  So, it doesn't have to be‑‑that competition doesn't have to come from the local branch in your market.  So, I think what we look at is what is happening with the business loan exemption, and indirectly when you start seeing luxury hotels and those kinds of things being financed, who's being subsidized in the process?  So, it is not so much the‑‑being against credit unions and business lending.  It is what you are starting to see and the lack of regulation or the lack of monitoring behind it from the standpoint of NCUA, saying is this what we intended that tax subsidy for.

Mr. BRADY.  Thank you.

Ms. MAY.  I guess.  Short arms.  I guess in my community, it is a little different.  We are a low‑income community, largely Hispanic.  We were not doing member business loans.  We had for many years prior to let's say 195 or so.  But then we set back and said this wasn't something we wanted to concentrate on.  In the late '90s, I started receiving a great amount of pressure from my State Senator and my State Representatives that there is lack of capital available in my city.  We have an abundance of out of the local market banks that have moved into El Paso, and we see capital leaving in the form of deposits going elsewhere.  We had‑‑a brother of our Congressman had to go to a different State to get his small business loan made.  So, we did reach out and start making small business loans.  Now, our small business loans are averaging right around $120,000, $145,000.  But they are largely to minorities, and, as I said, in a low‑income community.

Mr. BRADY.  All right.  Thank you.

Vice Admiral DAWSON.  Sir, we have also only recently begun business lending.  Our average loan for a business loan is about $25,000.  We see members such as spouses that start daycare centers; members who have transitioned to a second career and need to buy a fleet of two or three trucks.  That is where we are concentrating right now.

Mr. BRADY.  Great.  Mr. Chairman, thank you very much.

Chairman THOMAS.  I thank the gentleman.  Does the gentleman from Washington wish to inquire?

Mr. MCDERMOTT.  Admiral and Ms. Ma, you represent the credit unions; is that correct?  Can you give me your opinion about what evil brought about this oversight hearing?  What is it that we are searching out?  Why do you think you are being summoned before the United States Congress?

Ms. MAY.  I believe we have heard some of that in our recent testimony here.  We, as an industry, have grown to 6 percent of the financial assets of the Nation.

Mr. MCDERMOTT.  Six percent?

Ms. MAY.  Yes, sir.  That it is if you exclude the Merrill Lynch's and so forth.  I mean the insurance companies have gone into offering checking accounts.  So, we have grown to 6 percent, and as contrasted with the mutual savings industry, which grew to 50 percent in the early '50‑‑of the deposits.  This is‑‑our 6 percent seems to be perceived as a threat.  I believe that the issue here is that we do not have to serve stockholders.  We serve our members, and our members only.  All our net income is returned to the members in the form of lower rates on loans, higher rates on deposits, and contributions to retained earnings, which provides safety and soundness.  It seems to be a concern that our structure works in that manner.  But I think as a result, we have, as quoted by Ms. Johnson from I believe it was Zion National Bank made the issue that if it weren't for credit unions, just think what their record profits could be.

Mr. MCDERMOTT.  Admiral?

Vice Admiral DAWSON.  Sir, at Navy Federal, we consider our tax-exemption to be a privilege.  I am very happy to come here today and to explain how we use that privilege to the best use of the Nation and to our members.

Mr. MCDERMOTT.  Is there anything about your credit union that would me it‑‑now, I am talking about your own personal credit union, not your national status‑‑that would‑‑that you are worried about?  Is there some kind of creeping problem there?

Vice Admiral DAWSON.  No, sir.  The Chairman's remarks at the beginning about transparency, accountability, and verifiability that is something that we work on very hard every day at our credit union, as I think all credit unions do, and I think we should.  We owe that to our members and we owe that to you.

Mr. MCDERMOTT.  But my understanding of the value here is we are talking about $600 billion in credit unions as opposed to about $4 trillion in the‑‑and all the credit unions put together don't even come up to Citicorp.  So, what is this threat?  I mean how could you be a threat?  Is it the idea would catch on, that people would form their own banks?  Is that‑‑it is kind of like a socialist germ that is infecting the body politic or what are we‑‑

Ms. MAY.  I do have an application to convert to a credit union if any of my peers would like it here at the table.

[Laughter.]

Mr. MCDERMOTT.  Well, let me ask a technical question.  If you have money‑‑you have made some money, and you retain it; you don't give it out in dividends to your members.  You use it as a capital to be used for your operation of your credit unions; is that correct?

Vice Admiral DAWSON.  Yes, sir.  That is correct.

Mr. MCDERMOTT.  So, if you had to pay that, you could no longer keep it.  You would have to pay taxes to the Federal Government.  Where would you get that capital that you would use?  You would have to go‑‑

Vice Admiral DAWSON.  There is no other source under current‑‑

Mr. MCDERMOTT.  But can't you get it from the Federal Reserve or some place?  Maybe you should open it up so that you can go to the Federal Reserve?  How would you function if you lose your capital?

Ms. MAY.  We couldn't‑‑we can only build capital from retained earnings.  If‑‑we pay out dividends on our member shares, which is the same as interest on deposit accounts.  But we have to retain earnings into capital, which is held at a higher standard for credit unions than it is for our banking brethren.  We have mandated capital standards under the 1151, which was passed in 1998.  Without that capital, at the level we maintain it, and net income we have to contribute to it every year, we would not be considered as safe and sound as‑‑

Mr. MCDERMOTT.  You mean the law that was passed by the Republicans in 1998; is that correct?

Ms. MAY.  Yes.  This must be a fight between the Banking Committee and the Ways and Means Committee.  I guess that is why you are here today.  Thank you, Mr. Chairman.

Chairman THOMAS.  The gentleman is welcome.  Does the gentleman from Colorado, Mr. Beauprez, wish to inquire?

Mr. BEAUPREZ.  Thank you, Mr. Chairman.  I think I will start with you, Mr. Macomber.  Am I pronouncing it correctly?

Mr. MACOMBER.  That is about as close as anyone ever gets.  That is great.  Thank you.

Mr. BEAUPREZ.  Nobody tries my name ever at all.  You have made a case that I think actually is going to invite a response from the Admiral and from Ms. May.  But you made a case that credit unions aren't unlike the mutuals of the '50s.  All credit unions?

Mr. MACOMBER.  Credit unions aren't like mutuals of 2005, either.  I think the answer to that might be to go back‑‑Mr. Brady had asked a question of Chairman Johnson about could she really quantify or make a real distinction between credit unions and small community banks.  She seemed unable to come up with an answer to that, and frankly I am unable to come up with an answer to that as well.

Mr. BEAUPREZ.  Well, I wanted to clarify that that is what you said, because I want to come back to the Admiral and Ms. May because my guess is that you have a different perception, and invite you to maybe rebut that at least.

Mr. MACOMBER.  If I could add just one quick question.

Mr. BEAUPREZ.  Very quickly because my time is‑‑

Mr. MACOMBER.  But I am with a mutual savings bank, and our only real source of capital is also retained earnings.  We are fully taxed.

Mr. BEAUPREZ.  Oh, I heard that.  I understand that.

Ms. MAY.  Any real differences between credit unions and mutual savings banks?

Mr. BEAUPREZ.  Yes, and let me tell where I am going.  In my earlier questions, I said I am here to reduce tax burdens on people.  I am not looking to raise taxes, and I am very serious about that.  But I am also very serious that the credit union industry needs to help us somehow‑‑I think it is a line that the Chairman was following‑‑in defending what the Admiral just used I think exactly the right word, the privilege, of tax-exempt status.  I think that is‑‑I think with all due respect to my colleague from Washington, I think that is what this is about is making sure that we can do that.

Ms. MAY.  Well, and I certainly acknowledge that it is a privilege to have a tax-exempt status, and I value that highly.  You know, when I walk out of my office at any time of the day, and I look at the members that we serve, or when I answer my phone‑‑

Mr. BEAUPREZ.  Well, I want to be very specific because I have got limited time.

Ms. MAY.  Okay.

Mr. BEAUPREZ.  I want to go right to the heart of his question.  If we just say because in El Paso, there are poor folks, I understand and accept that.

Ms. MAY.  Yeah.  In El Paso, I am able to reach out and do things with my members that if I was paying and concerned about paying interest or dividends to stockholders I would not be able to do.

Mr. BEAUPREZ.  Okay.  I accept that.  Admiral?

Vice Admiral DAWSON.  Sir, I have no rebuttal.  I just‑‑I know what we are as a credit union.  We are owned by our members.  Our borrowers are our‑‑and lenders are the same people.  We are governed by a volunteer board.

Mr. BEAUPREZ.  Okay.  All right.  I accept that.  I am going to leave you with but a singular, very personal experience, and tell you that, like we politicians suffer with one bad apple spoiling the barrel and we all get painted, I would submit to you that there is‑‑that is a little bit of the challenge your industry faces.  I would submit to you that it is probably incumbent upon your industry again to help us make sure that your privilege is protected.  I would like to be able to do that.  Here is my very personal experience.  I had a daughter who was obsessed a particular little car.  She found it in the used car‑‑the want ads.  It was about an hour and half away.  My wife and she went down to the used car lot, looked at it, negotiated, got a price, and the salesman when they were closing the deal said you need a loan.  Well, frankly, she didn't, but her curiosity was up, and she said what do you got.  He says, well, the credit union right across the street will take care of you.

Oh, but I am not a member.  That is not a problem.  There is your problem, Ms. May and Admiral Dawson.  That is your problem in that, you know, we had nothing to do with that area, that region, that field of membership, and when you see those kind of circumstances I understand why people like this have concern, and when I wrote down the words equity and fairness, that is our job.  On this side of the desk now, I have a different job.  It is very much one of trying to provide equity and fairness to all of the taxpayers and those that don't.  I submit to you again the challenge for your industry, of which I am a fan and I want to remain a fan, and I want to be as supportive as I can possibly be, is to help us help you demonstrate that we are still continuing to be fair and equitable to everybody that is operating on the playing field.  Thank you, Mr. Chairman.  I yield back.

Chairman THOMAS.  I thank the gentleman.  The gentleman from Louisiana?  The gentlewoman from Pennsylvania?

Ms. HART.  Thank you, Mr. Chairman.  I asked a question earlier of the Association President Chairman I guess, Chairwoman, regarding the transparency issue for credit unions, and just request an answer from you since I really didn't get one from her, Admiral and Ms. May.  Is there some objection to providing more transparency in the credit union business?  Is there something that I am missing that would present a problem for that industry if they filed the same form, the form 990, with the IRS?

Vice Admiral DAWSON.  I can speak for Navy Federal, and I will say that none whatsoever.  We want to be transparent.  We think that we are.  We submit a 5300 report once a quarter to NCUA.  That report is available to anyone that wants to see it, not only our members, but anyone in the Nation that wants to see it.  We have a‑‑I have an internal audit Committee or audit division that looks very closely at my credit union.  We have Price Waterhouse as an outside auditor.  In fact, as I speak today, they are on board doing their quarterly audit.  I have a supervisory Committee made up of volunteers that can look at anything within my credit union.  Transparency is a good thing.

Ms. HART.  Okay.  Ms. May?

Ms. MAY.  As the gentleman from IRS mentioned several times, state‑chartered credit unions do file a 990.  I am a state‑chartered credit union.  So, we do file in the State of Texas, and it is filed as a group 990, and then I subsequently file a 990‑T.

Ms. HART.  Is there information that is disclosed in there that you believe is sensitive that in some way might harm the credit union members?

Ms. MAY.  You know, complying with the law and the rules set forth is certainly something that is very important to us.  I, like the Admiral, go out of our way to make sure our members‑‑everything possible can be disclosed to our members.  I also have the same audit Committee structure, do the same certified CPA audits.  They are fully unqualified with‑‑we sign off on the various statements that we have to make to get a CPA audit.  There are, in fact‑‑my institution, my staff, and my self go out of our way to over comply with any rule or any reporting requirements.  So.

Ms. HART.  I didn't get‑‑what is the size of your credit union?

Ms. MAY.  One point one billion.

Ms. HART.  Okay.  Thank you.  I would like to ask the bankers a similar question.  Do you think it is necessary that they would comply with the same transparency?

Mr. HAYES.  Yes, ma'am.

Ms. HART.  Tell me why, Mr. Hayes?

Mr. HAYES.  Well, you know, I have examiners coming in my bank on Monday.  I have had the 30‑page questionnaire, and we have completed all that, and I am sure that the credit unions go through that as well.  But it is imperative‑‑it is sort of like the report card that your children sometimes don't want to bring home.  You know, when you ask them how are they doing?  Fine.  But until you  get the piece of paper that says well, you made a "C."  I think transparency is that report card, and I think it is absolutely not a problem for me, and I don't think it should be a problem for anybody, especially if there is a tax advantage that is there.

Ms. HART.  I think that is the major point is that people have a suspicion because there isn't a level of transparency, and it may be completely unfounded.

Mr. HAYES.  Right.  I think they are all very‑‑

Ms. HART.  But we can't be sure.

Mr. HAYES.  We are all honorable people.  But, you know, I think it is just transparency needs to be there, and I think that is important.  I applaud these folks that are doing it.  But the regulator needs to say, the regulator tells us what we are going to do nine times out of 10.

Ms. HART.  Right.  Mr. Macomber?

Mr. MACOMBER.  I don't really have a different‑‑anything to add to what‑‑

Ms. HART.  Okay.

Mr. MACOMBER.  ‑‑Dave said, except that the FDIC, which examines our bank and is our primary federal regulator, does have some curiosity about salaries and things in the bank, which doesn't appear to be true for the NCUA.

Ms. HART.  Okay.

Mr. PLAGGE.  The only comment I would make:  It really struck me in the first panel of just how an entity that is there for the public good has literally no reporting to do, period‑‑I mean as it relates to CRA, as it relates to those kind of things that would prove the marketplace that they serve there seems to be no push from the regulator, who is supposed to be doing that, as OCC does with our bank, to actually accomplish that.  That is probably the biggest frustration.  If everybody followed the best practices that we just hear to the right, that is probably not‑‑you know, it is probably a lot less conversation.

Ms. HART.  That may be the case.  Ms. May, do you want to respond?

Ms. MAY.  I just want to say a CPA audit is a requirement.

Ms. HART.  Yes.

Ms. MAY.  There is no way around that.  The audit by the examiners, by the regulator occurs every year, and, yes, they do ask my salary and the salary of my management staff.  There is no hiding of any facts in that sense.  We do also report HMDA information.  The only report that we don't make is the CRA report.  We do everything else that has been alluded to.  Quite honestly, I assume the mutual savings were reporting 990 during the S&L crisis.

Ms. HART.  Thank you.  I am out of time.  Thank you, Mr. Chairman.

Chairman THOMAS.  I thank the gentlewoman.  Does the gentleman from Tennessee, Mr. Tanner, wish to inquire?

Mr. TANNER.  Thank you very much, Mr. Chairman.  And, Mr. Hayes, thank you for being here.  He is from the great eighth district of Tennessee, and we appreciate your coming to Washington today.

Mr. HAYES.  Thank you, sir.

Mr. TANNER.  Most of the questions that I had have been asked.  Are there any meaningful restrictions on credit union membership?  In other words, is there‑‑if Mr. Beauprez's daughter can join a credit union across the street with no connection to that area or anything, what are the meaningful restrictions on credit union membership and who sets them?

Vice Admiral DAWSON.  Unfortunately, his‑‑I don't think his daughter could join my credit union.  I would like her to, but she would have to join the Navy or the Marine Corps first.  We are always looking for a few good folks.  So, yes, I have restrictions on my field of membership, which is the Department of the Navy active duty military sailors and marines and civilians that work for the Department of the Navy.  I have restrictions.

Mr. TANNER.  Could I just add something here?  But the membership, and let me preface my remark by saying I spent 22 years in the Navy.  I was once a member of the Navy Federal Credit Union, and have a great deal of respect for everything the credit union does.  But the credit union membership rules are not just members of the military, but their spouses, their mothers, their fathers, their grandparents, and then it can go out from there.  By the six‑‑if you remember the movie, "Six Degrees of Separation," you could take on just about anybody in the country.  There are 2.5 million members in the Navy Federal Credit Union.  That is not a criticism of the credit union.  But I think it shows you how the membership can be just expanded.  This is the first time I have ever taken issue with an admiral in a public forum.

Vice Admiral DAWSON.  No issue there.  Did you keep your membership?

Mr. MACOMBER.  I did not get my membership.

Vice Admiral DAWSON.  But unfortunately, if you had applied again, you couldn't become a member; is that is the restriction that I have so.

Mr. TANNER.  Do you set that or does the‑‑are you a federal credit union‑‑who sets the membership guidelines?  Is it left up to individual credit unions or is it‑‑

Vice Admiral DAWSON.  No.  No, sir.  You apply for your field of membership with our regulator, NCUA, and they determine what your field of membership can be.

Mr. TANNER.  Well, I was just wondering what the field of membership is for your daughter.

Mr. BEAUPREZ.  I don't know what the field of membership was Mr. Tanner, but the question that we asked was, how do we become a member.  Oh, all you got to do is walk in and sign the form.  If you wanted to be a member, in other words, my wife was told, you are a member.  That is all you needed.

Mr. TANNER.  Is that because we all have a body temperature of approximately 98.6?  I assume we do at least unless somebody up here is dead.

Chairman THOMAS.  Will the gentleman yield?  Apparently, that is variable as well.

[Laughter.]

Mr. TANNER.  Thank you, Mr. Chairman.

Chairman THOMAS.  Does the gentleman from California wish to inquire?

Mr. BECERRA.  Yes, Mr. Chairman.  Thank you.  Let me see if I can ask a question that Ms. May posed or she made a comment that I am hoping folks from the banking industry might respond to.  She indicated that she had an application for credit union status with her.  Can you give us your explanation of why more banks or mutuals have not converted to credit unions if the credit unions have it so good?

Mr. PLAGGE.  First National Bank in Waverly is a 141‑year‑old small business.  It is a small banking institution.  It's part of the American fabric of small business.  There are non‑profits.  There are for‑profits.  There are publics.  There are privates.  I guess the question in itself, if the world was made up if not‑for‑profits, non‑taxpaying, tax-exempt entities, it doesn't work.  Again, our argument isn't against the industry itself, the credit union industry itself.  It is those that‑‑that it made a comment here several times before‑‑that seem to have no limits on what they can do.  It seems to frame around NCUA that has no borders on what they will approve for a community charter for a common bond for business and products and services.  You are seeing exceptions here with the large credit unions that are staying to task, that are staying to a membership field common bond, which is terrific.  But that is not what we are seeing on a nationwide basis as it relates to business lending and so forth.  So, I am not apologizing for our status as a community bank in Waverly, Iowa, 141‑years‑old, owned by our community and employees.  So, that is not an option we would chose to take.

Mr. BECERRA.  I think that is a great response, and before I move to anyone else, let me do that‑‑is it Plagge or Plague?

Mr. PLAGGE.  Plagge.

Mr. BECERRA.  Plagge.  Mr. Plagge I think makes a good argument here that you can have any number.  His concern is not with any credit union.  It is those that seem to be going beyond the scope of what the charter was meant to provide to any credit union.  To those of you who operate credit unions, two questions:  Is there ever a point where you get too big?  Secondly, should you be allowed to get bigger when you still‑‑or at least some or the credit unions in the industry still don't seem to be providing service to a lot of the modest‑income families that you would think that credit unions would be best at serving?

Ms. MAY.  Congressman, when 1151 was passed in 1998, that made available to credit unions the opportunity to expand beyond their traditional fields to add low‑income areas.  In adding low‑income areas, we have seen I believe Ms. Johnson reported three times the growth among those credit unions than we have in the credit unions that did not add low‑income areas.  As a credit union grows and reaches out and serves more people of modest means, I think that is a success factor, and that is an opportunity to bring more services to people who otherwise are unbanked.

Mr. BECERRA.  So, Ms. May, if I could ask you there:  At what point will you be able to come back to us and say you at least match the banks when it comes to providing loans, mortgages, or otherwise to folks in modest income communities to the level that banks do?

Ms. MAY.  Are you speaking of GECU or are you speaking of credit unions as a movement?

Mr. BECERRA.  As a whole.

Ms. MAY.  As a whole.

Mr. BECERRA.  Because obviously, as I think Mr. Plagge pointed out, there are some exceptions or perhaps they are the rule, but they are concerned more with the outliers.

Ms. MAY.  Well, we are already seeing in the HMDA data an improvement year by year.

Mr. BECERRA.  But I am asking at what point do you think the industry, the credit union industry, will at least as an industry come to the point of matching the banking‑‑the for‑profit industry‑‑when it comes to making loans to modest‑income families in this country?

Ms. MAY.  Well, I would suspect we are already there or above it.

Mr. BECERRA.  Okay.  I am not sure if the data are out there, but I am not sure if that is the case.  I would hope that that would be the case because that would certainly move forward in lending you a lot more support.  I think I stopped is it Mr. Hayes?

Mr. HAYES.  Yes, sir.  You know, like Mr. Plagge, I mean we‑‑you know, we have been around for 75 years, and we have been there because we have served our customers, all levels of customers, from low to moderate to those who have resources.  As I have traveled throughout the country representing the ICBA and the 5,000 member banks‑‑we represent 6 percent of the total banking assets, and we are‑‑you know, we pay taxes.  I think it gets to be an issue to us is just, you know, it looks like it is not fair.  And, you know, you shouldn't even be asking the question if the charter was to serve the low and moderate, and, yet, you are having to ask the question when are they going to be there, I mean if that was the charter, that was what was put forth.  I think it is ironic that we are even asking the question.

Mr. BECERRA.  Thank you very much.

Chairman THOMAS.  The gentleman's time‑‑

Mr. BECERRA.  My time has expired.

Chairman THOMAS.  The gentleman's time has expired.  Does the gentleman from North Dakota wish to inquire?

Mr. POMEROY.  I did, Mr. Chairman.  I thank you for this hearing.  I think it has been a very interesting discussion.  I am not quite sure where all of this is going, but if we are just in a kind of expansive, fact‑gathering position of the Ways and Means Committee, I have found this to be a quite an interesting discussion.  I might suggest, Mr. Chairman, that a hearing similar on pensions would be extremely timely.  It is just an enormous amount of concern in this area, and a lot of misinformation in this area, too.  Even having the discussion about it, absent any particular legislation might be something that would be a good pursuit for this Committee.  But as to the issue before us‑‑

Chairman THOMAS.  Would the gentleman yield?

Mr. POMEROY.  Yes, I will.

Chairman THOMAS.  I think I have a thick enough skin for that.

[Laughter.]

Mr. POMEROY.  I reckon you do.

[Laughter.]

Mr. POMEROY.  I would just have a couple of questions.  It is a bit off the topic, but I have been concerned about, and as long as we have the Navy here, Admiral, I have been concerned about the location of these payday lending outfits and these subprime outfits and even the‑‑I used to be an insurance commissioner‑‑the marketing of scurrilous insurance products to the men and women in our military. I think that for the favored tax status of credit unions, we do have a right to expect a measure extra, and investment back in the members.  So, I am interested in what you can tell us about Navy Credit Union's effort to really help your membership steer its way through and around that subprime industry.

Vice Admiral DAWSON.  We do a variety of things.  We make our‑‑we make services available to the bases where we serve, to provide education on finances for young sailors and marines.  I have a very large budgetary counseling division at Navy Federal that people can call in to get counseling, and they work with a lot of people that‑‑or a number of people that have gotten in trouble with payday lenders.  I think of payday lending for‑‑as a spiral of doom for sailors and marines.  It is something they just can't recover from.  We all must bring forth alternatives to that.  We have worked with the Navy‑Marine Corps Relief Society.  We have talked to them about how we can bridge the gap between when people arrive at their doors who are destitute, many of them because they have just gone on the shoals from payday lending.

Mr. POMEROY.  I appreciate that response, and I‑‑in the event there are federal legislative issues that you think we actually ought to pursue, relative to market abuse in this area, the Committee would I am sure appreciate having it called to your attention.  Generally, it is a regulatory issue dealt with at a state level, but it does concern me a lot.  I mean those who would prey upon men and women in our Services, and it is despicable conduct.  More generally, on this‑‑look I have got friends on both sides of this issue, and I have spent a lot of years with my friends in the North Dakota banker community talking about the words you used, Mr. Macomber, an impending crisis.  There is no doubt they feel like they can't compete against these non‑taxed entities, and they are deeply anguished about it, sincerely so.  For me trying to evaluate how all this sorts out, I tend to think market share is the ultimate demonstration of whether or not we have got something here that indeed has given somebody a clear and non‑competitive advantage in the marketplace.  Now, I would like the bankers on the panel to tell me how you‑‑to me it looks like the market share is staying relatively stable and that profits are healthy in the banking sector, and that diminishes my concern that we are heading toward an impending crisis in banking.  I don't say that to be argumentative.  I would just like your response, sir.

Mr. PLAGGE.  Well, I think it is a great question, because I just refer back to something David just said.  You know, the community banking sector represents 6 percent of the financial sector.  Interestingly enough, that is the same percent as the credit union.  The credit union industry tries to do I think a great job, and it has been very successful at it‑‑doing‑‑making this the discussion about Citi Group or Citicorp against small credit unions, when, in fact, the real battle lines are on the local level against large credit unions and community banks.  One tax study in Virginia said that there is a 67 basis point difference‑‑benefit to the credit union either on the loan side or the borrowing‑‑or the deposit side.  If that indeed is the case, and whether it is that amount or a little less, whatever.  Just take the tax rates and look at it as a whole.  If we are all community‑based, and we all know our customers, we are all offering essentially the same products and services, 67 basis points is a huge difference.  Because it is an exemption that goes into that marketplace, I mean competition isn't competition.  It is not level playing field competition.  The tax-exemption gives enough benefit in rates and terms that it can move the market in that direction, which is what we are seeing happen in community bank marketplaces.

Mr. POMEROY.  Well, I mean that is just a question.  I mean I know the argument.  It has been well advanced and often today.

Mr. PLAGGE.  Right.

Mr. POMEROY.  But what is happening in market share relative to community banks?

Chairman THOMAS.  The gentleman's time has expired.  Any of these questions that are asked in which time runs out, if any panel member of any panel wishes to supply in writing additional information to explore this area, because I do think share of overall pie versus concentration within a share of the pie is something that I think needs to be talked about completely.  Does the gentleman from Indiana, Mr. Chocola, wish to inquire?

Mr. CHOCOLA.  Thank you, Mr. Chairman.  Thank you all for being here today.  At the risk of stating the obvious, I think we all, obviously, understand that credit unions' tax‑exempt status is based on their unique organizational structure and their goal of operating for mutual purposes, serving under‑served areas and populations.  So, I guess the purpose of being here today is to answer:  Do you do that?  Maybe to help us answer that, we can look at the state I come from, which is Indiana.  The Federal Reserve has estimated that a minimum profitable loan is about $2,400.  There was a survey done this year in Indiana that indicated that 41 credit unions were randomly surveyed, and it found out that the average minimum loan for these credit unions was $281.

It also found out that no‑cost checking in these credit unions was offered on an average of a $17 balance in the checking account.  Also, 26 percent of their members had checking balances under $100; and 55 percent of the savings account balances in these credit unions were under $250.  So, I guess for the credit union representatives, I would ask, is this unique to Indiana?  Or is this a similar experience that you see in your state and industry‑wide?  In the interest of full disclosure to the community bankers, I was part of a group that started a series of community banks in Indiana.  Is this the kind of business that you solicit and want?  Do you see this as potentially profitable?  So, I would ask the community bank representatives, first, is this unique to Indiana, or is this what you see industry‑wide?

Vice Admiral DAWSON.  I think we see it across the credit union industry.  At Navy Federal, in 2005, we have a quarter of our loans average $1,600.  Also, as you mentioned, checking, we not only have free checking, we pay interest in checking.  And 20 percent of our checking accounts have $100 balance or less at the end of the month.  So, they not only get free checking for that, they get interest on that, as well.  I don't think we are unique in the credit union industry.

Mr. CHOCOLA.  Ms. May?

Ms. MAY.  While I don't have the exact numbers with me, he is absolutely right.  Indiana is not unique.  Our 247,000 members, the average balance overall is $4,000 in their deposit accounts in total.  In a financial cooperative, you have those who have, and those who don't have.  So, it takes a few very large depositing members to make available the monies that we can lend out to those who don't have.  We make $200 loans on a regular daily basis.  We make loans for eyeglasses, for dentures‑‑whatever it takes to improve our members' lives.

Mr. CHOCOLA.  Are those profitable loans?

Ms. MAY.  No.  Our tax-exemption allows us to make those loans.  There are a number of loans that we make that are not profitable.  We participate actively in a bond program in our city, and there is no profit in those loans, either; but we are able to put a good number of people, first‑time homebuyers, into homes.  Twenty‑six percent of the mortgage loans we made last year were for first‑time homebuyers.  We put out over $3 million just in bond money, which is low‑interest down payment assistance money.  The tax-exemption does allow us to do business the way we are able to do business, to help our members‑‑our members, your constituents.

Mr. PLAGGE.  Our bank offers the same things:  free checking, free ATM, free money markets, free Internet banking, all those kinds of things.  We do small loans.  We do a variety of direct loans, credit cards, home equity lines, all those kinds of things the same way.  We are not unusual in the community banking industry.  As an industry, though, there are lots of statistics out there that the credit union industry actually has a higher‑wealth membership than our customer base is in the community banking world.  There are plenty of studies to show that as well again, and I think it is actually part of my testimony.

Mr. MACOMBER.  There is no one here that is running a private bank.  We are taking customers regardless of their background.  Again, the statistics that came out, there was a survey I mentioned earlier that goes back to 2003 that indicates that small community banks do a better job of serving low‑ and moderate‑income individuals than credit unions do.  So, I think you can focus in on certain statistics, but I think that is pretty much where we are.  I think everything we have heard today from the industry, from the credit union industry itself, supports that position.

Mr. HAYES.  We are community bankers.  That is our community.  I mean, that is who our customers are.  When you have $8‑, $10‑an‑hour jobs that you worked hard to bring into your community, I mean, you are going to take care of those people.  Having been in a community bank, I believe you understand that those customers that we all probably have are similar.  There is just one difference.

Mr. CHOCOLA.  Well, thank you.  I yield back, Mr. Chairman.

Chairman THOMAS.  Thank the gentleman.  Does the gentlewoman from Ohio wish to inquire?

Ms. TUBBS JONES.  Thank you, Mr. Chairman.  I always am in amazement, having sat as a judge for about ten years, when I bring people into my chambers for pre‑trial discussion.  I say, "Plaintiff, tell me what is going on," and I say, "Defendant, tell me what is going on."  I realize I have to wade through all of it to understand, myself.  I am always amazed at why one or the other of the financial institutions in this community seem to think they are better than the other, or they are at a disadvantage, or whatever.  But I understand the next thing on the loom is when Wal‑Mart gets to become an industrial bank.

Mr. HAYES.  Yes, ma'am.

Ms. TUBBS JONES.  All of you are going to be at my desk, telling me, "Don't let it happen," right?

Mr. HAYES.  You don't want to get me started on that.

Ms. TUBBS JONES.  Don't get you started, huh?

Mr. HAYES.  How long do you have?

Ms. TUBBS JONES.  All right, I'll just ring a bell in the room here.

[Laughter.]

Ms. TUBBS JONES.  I really think, Mr. Chairman‑‑and I would suggest this‑‑that there might be a forum in which we might be better able to have a discussion like this‑‑because members are restricted to 5 minutes‑‑if there are truly issues that anybody needs to address to make themselves stronger in the job that they do.  Clearly, our goal is that our constituents are served, no matter what institution it is that is in our community.  We all really want to try and be supportive.  Maybe there is a forum in which we could literally sit down, maybe with all the credit unions talking about what it is we see, or they need to do, or with all the community banks, with all the other ones.  Then maybe try and bring them all in the same room‑‑without boxing gloves‑‑and have a discussion about finances in America.  I thought I would ask another question, Mr. Chairman, but I know, like all of my colleagues, we are probably at the end of questions.  I just put that on the table as a possibility that we might engage in down in the future.  Also, it makes it not seem as if there is an environment operating here to support or not support any institution.  I yield back the balance of my time, Mr. Chairman.

Chairman THOMAS.  Thank the gentlewoman.  The problem in part is that it depends on how you ask the question, as to what you get in answer.  If are a common bond union and you belong to a corporation and everybody is employed, then you don't have extremely low-income, as people would define low-income.  But you also oftentimes don't have very high income.  So, on average, you may be higher than someone else, or in fact you may not be.  When you talk about including under‑served areas, that doesn't mean that you are necessarily serving people who are low-income in the under‑served area; unless, of course, you can produce the data that shows that.  Part of the discussion has been that, unfortunately, in the Chair's opinion, the agency that is created to oversee the structure seems to not understand that the ability to produce data is a very positive thing which can make a point and which provides an early warning system if in fact certain things are going in particular directions.  It seems to be that the people are more comfortable simply saying "I believe, and therefore it is."  Now, in some instances, you can get an answer that shows you how comfortable people are when they say "I believe."  Vice Admiral Dawson, you folks, what is your structure?  Common bond, multiple bond?

Vice Admiral DAWSON.  Common bond.

Chairman THOMAS.  You are a common bond.  Now, we have gone a little out of the color marks of Navy.  It is navy family, even if they are civilians; but it is on bases, so you are looking at Navy.  You are enormous in size.

Vice Admiral DAWSON.  Navy and Marine Corps, yes, sir.

Chairman THOMAS.  Navy and Marine Corps together.  You have got to include those.  But you are enormous in size.  But you have a common thread which I think is fairly clear, but you extend it to families.

Vice Admiral DAWSON.  Yes, sir.

Chairman THOMAS.  How far out does the family tree go?  Obviously, husband or wife.

Vice Admiral DAWSON.  Husband or wife.

Chairman THOMAS.  Obviously, children.

Vice Admiral DAWSON.  Children, mothers.

Chairman THOMAS.  Mothers.

Vice Admiral DAWSON.  Yes.  My mother is a member.

Chairman THOMAS.  Well, therefore, fathers, I assume.

Vice Admiral DAWSON.  Fathers, yes.

Chairman THOMAS.  Okay.  Is that it?

Vice Admiral DAWSON.  Yes, sir.

Chairman THOMAS.  Ms. May, you folks have decided to take it one more jump; is that correct?

Ms. MAY.  That is correct.  We were originally Federal Civil Service workers and their family members.

Chairman THOMAS.  But that was a common bond.

Ms. MAY.  That was a common bond.

Chairman THOMAS.  But you are not a common bond any more?

Ms. MAY.  We are now a community, the El Paso County.

Chairman THOMAS.  Right.  But you are also under the state structure, right?

Ms. MAY.  I am also under state structure.

Chairman THOMAS.  Yes.  You are state, and he is federal.

Ms. MAY.  That is correct.

Chairman THOMAS.  Yes.  But you don't just stop at mother, father, sons, and daughters.  You include‑‑

Ms. MAY.  Pretty much everybody in El Paso County is related, so that pretty well handles my community.

[Laughter.]

Chairman THOMAS.  Is that why you decided to go to first cousins?

[Laughter.]

Ms. MAY.  Well, you know, first cousin really was‑‑that is pretty far out there.

Chairman THOMAS.  But you cover first cousins.

Ms. MAY.  We cover first cousins.

Chairman THOMAS.  If someone comes in and says, "I am a first cousin‑‑"

Ms. MAY.  But typically, they qualify because they live in El Paso County.  We only have offices in El Paso County.

Chairman THOMAS.  You clearly serve under‑served areas.

Ms. MAY.  Absolutely.

Chairman THOMAS.  Do you believe that if you are now going to respond to an under‑served area, and you put an ATM in there, that that really meets the financial services of an under‑served area?

Ms. MAY.  I can only respond for GECU.

Chairman THOMAS.  That is why I am asking you.

Ms. MAY.  We have placed offices‑‑12,000‑square‑foot building‑‑in, I'd say, the southeast side of El Paso, which is primarily Hispanic.  In fact, every sign we have in that office, every brochure we have in that office, is in the Spanish language.  This is what I would consider an under‑served area, and it is a very successful branch.  We are very proud of what we do in that branch.

Chairman THOMAS.  Don't you find, though, that if you are really going to try to service an under‑served area, one, you probably have to have a facility, because they are not as knowledgeable about the way things work; you have to have people who speak their language; and the counseling has to be far more supportive than it would be in an non‑under‑served area?

Ms. MAY.  In my city, that is true.

Chairman THOMAS.  Yes.

Ms. MAY.  As I say, we are Hispanic.  It is face‑to‑face, mano‑a‑mano.  We speak the language, we share the common culture, quite honestly.

Chairman THOMAS.  But you are saying that probably an ATM would not‑‑

Ms. MAY.  Not in my city.

Chairman THOMAS.  ‑‑satisfy?

Ms. MAY.  No, sir.

Chairman THOMAS.  That is why I find it interesting that there has been an attempt to move ATMs as satisfactory in under‑served areas.  That seems to me to be looking at outreach far more similar to these fellows over here, who are driven by the profit motive, by which we temper that with taxes, because all they want to do is just make money.  The credit unions don't want to just make money; they want to serve an area.  But it seems to me, as I said, ATMs, period.  Admiral, have you ever discussed going beyond the common bond in terms of structure; multiple bond or community?

Vice Admiral DAWSON.  No, sir, not at our credit union.

Chairman THOMAS.  I mean, if you push this community thing anywhere a ship sails, you guys have got a pretty interesting territory.

[Laughter.]

Vice Admiral DAWSON.  Girlfriends are not permitted to join.

Chairman THOMAS.  Okay.  Ports of call, I mean, you know.

Vice Admiral DAWSON.  Girlfriends are not permitted to join.

[Laughter.]

Chairman THOMAS.  Now, I am going to ask you, and I am going to ask Ms. May, and I know it is difficult because you are here representing organizations, and not yourselves, and you may not want to answer this question.  If you choose not to, I understand.  Ms. May, you saw a need in the community, and so the community concept and outreach with the state structure made sense to you.

Ms. MAY.  Yes, sir.

Chairman THOMAS.  Do you have any minor discomfort about the concept that a geographic or community structure would include Los Angeles County, with all of the rich and the poor and the millions of people?

Ms. MAY.  I guess my simple response to that would be, a credit union is a financial cooperative.  In order to have a cooperative, you have to have those who have, and those who have not.  Those who have make deposits, so that those who don't have can borrow monies.

Chairman THOMAS.  That wasn't my question, but I understand the difficulty you would have in answering a question like that.  Based upon the way you answered it, I really thank you very much.

[Laughter.]

Chairman THOMAS.  Vice Admiral, do you get any qualm at all about an area which is supposed to be local that has a population greater than 42 states?

Vice Admiral DAWSON.  Sir, I have just been aboard 11 months.  I would have to look at what that is all about.  I am not familiar with that.

Chairman THOMAS.  You see, I think you are comfortable and people are comfortable with you because, in essence, it is Navy family, or people who are close to Navy family.

Vice Admiral DAWSON.  Right.

Chairman THOMAS.  So, you feel comfortable with that; notwithstanding the fact that you are millions, and have got billions.  But there is a comfort level based upon that nexus.  I am just trying to get my arms around the nexus of LA County.  That is part of my problem.  But I appreciate your narrow answer‑‑which could have been different, and wasn't.  So, I appreciate it very much.  Does the gentleman from New York wish to inquire?

Mr. RANGEL.  I just wanted to thank Ms. May.  I have heard that just her presence here and her presentation has made you a very pleasant Chair here and changed the whole atmosphere‑‑

[Laughter.]

Chairman THOMAS.  Oh, not at all.

Mr. RANGEL.  Well, I just heard that, so let me say‑‑

Chairman THOMAS.  It was actually the fact that you were gone.

[Laughter.]

Mr. RANGEL.  Okay.  Ms. May, I just want you to know that I may be calling you from time to time‑‑

[Laughter.]

Mr. RANGEL.  You know, just to just be here and sit here and be your pleasant self.

[Laughter.]

Mr. RANGEL.  Let me thank all of you for making it possible that we understand the problem better.  Thank you.

Chairman THOMAS.  Thank you.  Let me say, if you understood the discussion on the first panel, that the fear that we are simply out as a cash cow to find money where people aren't paying taxes should not be thought of as the particular thrust.  Our concern is with how a changing structure, not justified or documented is fulfilling its responsibilities.  Obviously, Ms. May, in the basis of how you grew up and what you did and where it is, that is the kind of thing that is documented.  Then the question is, "Okay, so why?"  That is a second decision.  But given the structure movement with definition and obviously displayed by small bankers who I think partly have some envy of the loans made to these massive buildings and major companies, which is something they would be desirous of--does that really focus on a mission statement?  But to the extent that the mission statement is seen totally as the organization or the structure of the organization doesn't focus on the social assistance aspect to it, I do believe we have a problem because the lines are getting blurred.  That is where we have to spend more time focusing on that line to get it clear; rather than what I think is a blurring which generates a degree of criticism, which in part has led to this hearing, but which also is simply something systematically this Committee needs to do under the oversight structure.

We let people do what they do without paying taxes.  Periodically, we have to stop by and say, "How are things going?  Because I have got people who are paying taxes, and they want to know why you don't pay taxes."  That is what this hearing is all about.  Thank you very much.  If we will have the third panel, I want to thank the third panel for their patience.  But apparently, I don't have to, because the first name on the third panel is someone who is very familiar with the way this place works.  It is a pleasure to have before this Committee a former member, a former colleague, a former Representative from New Hampshire, Norm D'Amours.  We have Gordon V.‑‑is it Karels?

Dr. KARELS.  Karels.

Chairman THOMAS.  Karels, thank you, Karels, who is the Associate Dean, College of Business Administration, at the University of Nebraska; John Taylor, who is the President and Chief Executive Officer of the National Community Reinvestment Coalition; and Constance Kennelly‑‑"Kennelly"?  It is pronounced "Kennelly"?  I thought it was "Kennelly," but they put it "Kennelly," because we had a former member of the Committee who we had as "Kennelly."  Of Tulane‑Loyola Credit Union in New Orleans, Louisiana.  All of you have submitted written testimony.  It will be made a part of the record.  During the time that you have, you can address the Committee as you see fit.  If you will allow me, I will start with our former colleague, Mr. D'Amours.

STATEMENT OF HON. NORMAN E. D'AMOURS, A FORMER REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW HAMPSHIRE; FORMER CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION

Mr. D'AMOURS.  Thank you, Mr. Chairman and Ranking Member Rangel, members of this Committee.  I am here today, at the request of this Committee, to offer my perspective on the performance of credit unions in serving low‑income Americans, as they were dedicated to do by their founders, their history, their traditions and, very importantly, by the U.S. Congress in the 1934 Credit Union Act and the 1998 Credit Union Membership Access Act.  In my opinion, the majority of credit unions are holding true to their mission of focusing on low‑income members and potential members.  However, this majority controls a relatively small minority of the total assets of the credit union system, and this majority has little or no voice in setting the direction and priorities of the overall direction of the credit union system.  The founders of the credit union movement insisted that unpaid volunteers would control a not‑for‑profit system, run on sound business principles by people who were not out for personal enrichment, and who would focus on low‑income Americans.

The reality today is that a small minority of large credit unions have created a tightly‑controlled and intimidating structure, controlled not by volunteers, but by professionals who pursue growth for its own sake, and who profit quite handsomely from that growth.  Those in control are uncomfortable with, and even at times in denial of, the traditional credit union obligation to focus on low‑income people.  They fear there is just not enough profit in that.  When I was Chairman of the NCUA, I attempted to refocus the system on low‑income credit unions and low‑income people who belong to those credit unions and to other credit unions.  That effort was resisted by the major credit union trade groups and by some larger credit unions.  Also, as Chairman of NCUA, I tried to effectively measure the performance of credit unions in serving low‑income people.  Those efforts were defeated by the NCUA board because of strong opposition by trade groups and some credit unions.

There have been several objective studies over the past six years providing substantial evidence that credit unions as a whole are not serving low‑income people adequately.  These studies, by Dr. John Caskey of Swarthmore College in Pennsylvania, by the Woodstock Institute of Chicago, by the GAO, by the National Community Reinvestment Coalition, conclude that in many cases banks serve more low‑income Americans than do credit unions, and credit unions aren't sufficiently focused on low‑income people.  You can ignore these studies if you choose to, but they are there.  There is also strong evidence that, while touting their performance in serving low‑income people, some credit unions and their trade groups fiercely resist any meaningful effort to effectively measure that performance, just as they did when I was Chairman of NCUA.

Mr. Chairman and members of the Committee, I am not here to suggest that credit unions should lose their tax-exemption.  However, as both a taxpayer and a strong supporter of credit union ideals, I do think credit unions should be held accountable for their tax advantages that they are provided.  This tax advantage is based on the traditional focus of credit unions on people of small means.  Congress needs to mandate and oversee measurable standards requiring credit unions to focus on serving low‑income Americans.  This effort is going to have to come from this Committee and from this Congress.  It will surely not come from the current credit union structure, and it will not come from the NCUA.  A good first step might be an effective survey of credit union performance in serving people of small means.  That action might begin the process of injecting needed transparency into a closed system.  The Woodstock Institute study, by the way, in 2003, did suggest other steps that perhaps this Committee could look at.

Lacking strong congressional direction, I believe it is a virtual certainty that the credit union system will continue to veer further and further off course, and this to the great detriment of low‑income Americans and to America itself.  Mr. Chairman, there are hundreds and hundreds of small credit unions out there greatly in need of assistance.  They aren't getting that assistance; meaning their low‑income members aren't getting the help and assistance that they need.  I hope this Committee will, after this hearing, follow up and see to it that the steps we have discussed, and that I have mentioned in my written testimony, and that the Woodstock Institute outlined, will be considered.  I thank you for your attention.  I will be glad to answer questions, when the moment arises.

[The prepared statement of Mr. D'Amours follows:]

Chairman THOMAS.  Thank you very much.  Dr. Karels?

STATEMENT OF GORDON V. KARELS, PH.D., ASSOCIATE DEAN, COLLEGE OF BUSINESS ADMINISTRATION, UNIVERSITY OF NEBRASKA‑LINCOLN

Dr. KARELS.  Thank you, Chairman Thomas, Ranking Minority Member Rangel, and distinguished Committee members.  I want to express my appreciation for the invitation to testify before your Committee today.  I just want to reiterate the main points of my submitted testimony:  First, the rationale for credit unions' federal income tax-exemption is not entirely transparent to me, and may no longer hold;  Second, the credit union common bond requirement has evolved markedly since the granting of the tax-exemption, and no longer constrains credit union opportunities and incentives as it had in the past;  Finally, the ultimate beneficiaries of the credit union tax-exemption are very difficult to determine.  To me, the rationale for exempting credit unions from federal income tax is probably best understood by examining the reasons Congress eliminated the same exemption for mutual savings and loans and mutual savings banks in the Revenue Act of 1951.  According to the U.S. Treasury 2001 study, the reason for the loss of the tax-exemption was the evolution of these associations as commercial bank competitors.  Mutual thrifts operated in a manner similar to banks, and the exemption gave them a competitive advantage over taxable commercial banks and life insurance companies.

That same study also indicated that the original exemption in 1937 was based upon their mutual nature; being operated by and for their members.  That was also consistent with the original 1917 administrative exemption for state credit unions that were said to closely resemble the cooperative banks and similar institutions Congress had earlier exempted.  Credit unions evidently had preserved their mutuality in a fashion such that members were not just customers in other depository institutions.  Clearly, credit unions competed with commercial banks, thrifts, and savings banks in the personal lending market.  They also offered share accounts that served as deposits.  But their uniqueness among depository institutions is quite apparent; and to me, that is the affinity among their members with a common bond.  The common bond requirements subject credit unions managers to restrictions not found in other depository institutions.  Loan opportunities are limited in the field of memberships, so that managers are constrained in their ability to grow the institution, and they may not rapidly change the riskiness of their loan portfolio.

In the case of credit unions with occupational common bonds, long the most dominant type, it also produces company sponsors who have an interest in monitoring the operations of the credit union and help promote safety and soundness.  It is widely accepted that the mutual organizational form produces organizations that are not as risky as stock‑based companies.  This has been demonstrated at both banks and insurance companies.  Some research that we did in looking at the adoption of federal deposit insurance by credit unions in the 1970s found no evidence that the adoption of deposit insurance led to increased risk‑taking in the credit industry.  I think this was somewhat of a surprise in the academic community.  We find that the common bond requirement helped to limit the risk‑taking behavior of managers.  In addition, loan size limitations help to constrain loan losses.  While these limitations were relaxed and new types of loan and share accounts were allowed after 1977, they influenced the overall composition of the balance sheets for some time.

It is widely accepted that the NCUA's support for multiple employee groups grew out of concern about concentration risk.  The recession of the '80s caused many industrial firms to close or relocate, and associated credit unions to fail.  We did some research there, and found that the addition of select employee credit union groups allowed credit unions to dissipate some of this concentration risk; but at the same time, it reduced the informational advantage they had with the close common bond.  In many ways, it seems that credit unions have evolved in a fashion similar to that of savings and loans 50 years earlier.  Credit unions now have many powers that allow them to compete directly with other depository institutions in many lines of business.  Furthermore, the common bond has become diluted.  The tax-exemption gives credit unions a competitive advantage over depository institutions, and this advantage can manifest itself in various ways.

One might expect that credit unions would, because of their not‑for‑profit status, have a lower overall profitability than banks.  As mutual organizations, the managerial priorities would seemingly favor competitive loans and deposit rates over profit levels.  The emphasis on member services would also tend to drive up operating expenses and reduce profitability.  Ultimately, the tax-exemption provides an avenue for credit unions to have a competitive advantage in loan and deposit rates that are still providing expanded levels of service and reasonable capital accumulation financed out of profits.  Historically, we don't find that they necessarily have lower overall profitability.  There is also mixed evidence as to whether they actually have lower net interest margins than other mutual organizations. In addition, there is mixed evidence as to whether credit unions are less efficient than other mutual types of organizations.  In summary, all of these changes, I believe, parallel the developments that led to the taxing of mutual thrifts and savings banks.  Deposit insurance has removed the issue of excessive burden of share accounts.  It is not clear that credit union members have been the direct beneficiaries of the tax-exemption.  At the same time, there is only limited evidence of expense preference behavior.  Overall, it does not appear that a repeal of the exemption would be particularly detrimental to members, but would more likely affect the ability of credit unions to grow at the rates they have had in the past.  Thank you.

[The prepared statement of Dr. Karels follows:]

Chairman THOMAS.  Thank you very much, Dr. Karels. Mr. Taylor.

STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION

Mr. TAYLOR.  Good afternoon, Chairman Thomas and Ranking Member Rangel.  The National Community Reinvestment Coalition is honored to be here today and to speak for our 600 community organizations across the country that comprise our membership.  We are essentially a trade association of economic justice organizations working to increase access to credit and capital for minority and working‑class families.  The fundamental purpose and basis of establishing credit unions is the same as for the Community Reinvestment Act.  The establishment of credit unions and the passage of CRA were motivated by concerns that lending institutions were not serving low‑ and moderate‑income borrowers.  When banks do not meet their CRA obligations, they face ramifications, including failing their CRA exams and possible denials of mergers and branching applications.  When credit unions do not serve low‑ and moderate‑income borrowers and communities, the penalties are non‑existent.  Unfortunately, NCRC's research indicates that large credit unions are not adhering to the mandate of the Federal Credit Union Act of 1934 to "make credit available to people of small means."

Recently, NCRC conducted a comprehensive study, entitled "Credit Unions:  True to Their Mission," which I believe we have supplied to the Committee.  This study compared the performance of banks and credit unions serving minority communities and women and low‑income borrowers in home loans.  Despite credit unions' origins as institutions devoted to people of modest means, NCRC's study finds that banks make a higher portion of their home loans, with fewer loan denials, than credit unions, to traditionally under‑served populations.  The NCRC's study adds powerful evidence to the numerous studies over the years that have detailed credit unions' lackluster service to people of modest means.  I am not including all credit unions because, obviously, some of them do an extremely good job.  But I am talking about the majority of these credit unions, the large credit unions that constitute‑‑I think we have a chart somewhere; it is not up‑‑but that constitute the‑‑could someone run over and put that chart up on the percentage of ownership?

[The information follows:]

If you look in terms of the percentage of assets that are controlled by a small number of credit unions, that is the group we are really focusing on and their lack of commitment toward under‑served populations.  A Federal Reserve survey revealed recently‑‑and there was an earlier question from the panel about what income was being served‑‑that 36 percent of the households that use credit unions had low and moderate incomes; in contrast to 42 percent of the households that primarily use banks.  The GAO released a report finding that banks provided 34 percent of their mortgage loans to low‑ and moderate‑income borrowers; while credit unions issued just 27 percent of the loans to borrowers in 2001.  The NCRC's study finds over a three‑year period, from 2001 to 2003, when all types of home lending are considered, banks out‑perform credit unions in 36 states; or 72 percent of the states.  When just home purchase lending is analyzed by itself, credit union performance drops off even more.  Banks out‑perform credit unions in 40 of the 50 states; or 80 percent of the time.

In home purchase lending, the difference in bank and credit union performance was usually substantial.  For example, in 2003, banks made 14.1 percent of their loans to minority neighborhoods; whereas credit unions issued just 7.9 percent.  In 2003, banks made 21 percent of their home purchase loans to women; credit unions issued 18.7 percent of their loans to women across the country.  In 2003, banks made 9 percent of their home purchase loans to Hispanics; credit unions, 4.8 percent to Hispanics across the country.  In your home State of California, Mr. Chairman, banks made 18.3 percent of their home purchase loans to Hispanics; while credit unions issued 12.4 percent to borrowers in 2003.  In your home State of New York, Ranking Member Rangel, banks made 16.6 percent of their home purchase loans in minority neighborhoods; while credit unions issued just 5.1 percent in these tracts during 2003.

Finally, banks made 5.6 percent of their home purchase loans to African‑Americans; whereas credit unions issued just 2.8 percent of their purchase loans to African‑Americans in 2003.  In preparing for this testimony, NCRC conducted analysis of the most recent data, the 2004 HMDA data, Home Mortgage Disclosure Act data.  This analysis shows once again that credit unions trail banks in making loans to minorities, to women, and to low‑ and moderate‑income borrowers and communities.  The chart in our testimony shows that banks exceeded credit union performance on all nine CRA and fair lending indicators.  In addition, the largest credit unions‑‑Navy Federal Credit Union, who you just heard from, and Golden 1 in California‑‑also performed poorly.  Navy Federal lags all credit unions on five of the nine indicators of performance, and Navy Federal lags all banks and thrifts on eight of the nine indicators of performance.

I think the question posed by the gentleman from North Dakota is a very accurate one, about the presence of so much predatory lending business butting up to and surrounding military bases.  It begs the question:  if the Navy Federal Credit Union is doing such a great job and serving people in the Service, why are they surrounded by predatory lending, payday lenders, and other kinds of sharks that are literally across the street from the bases where the men and women of Service, as the President of the Navy Credit Union pointed out, are being taken advantage of?  Let me close by saying large credit unions and their trade associations should not be comfortable in arguing to members of Congress that, while credit unions lag banks, credit unions are getting better.  Their tax benefits and other privileges dictate that they should be better.  More importantly, you are right, Mr. Chairman.  Why would Congress be satisfied with credit unions lagging banks, considering the valuable benefits bestowed on these institutions by the American taxpayer?

In my home State of Massachusetts, we actually have CRA for credit unions.  If you look at our study and you look at the performance of state‑run, state‑mandated credit unions compared to banks, guess what?  With the presence of CRA, they perform just the same as banks in terms of serving low‑income, minorities, and women.  The NCRC recognizes that a significant segment of the credit union industry remains devoted to serving people of modest means.  But don't be misled that Ms. May constitutes anything near what the majority of the credit unions are made up of‑‑the majority of number of credit unions, certainly; but in terms of who controls the assets, it is a very, very different picture.  By the way, I have got to say, just as an aside, I really love all this conversation from the majority, talking about the need to increase access to credit and capital for under‑served people, for poor people and people of modest means.  I hope that carries over in a lot of other ways.  Because I think you are absolutely right on in that perspective, because it continues to be a problem.  Predatory lending is growing in this country.

Taking the time to really look at institutions that get public benefit, whether it is from depositors' insurance; applied guarantees like the GSC's, the "too big to fail"; or whether it is credit unions having tax-exemption‑‑which by the way, for the record, we continue to support the tax-exemption for these credit unions; but we think the most wise avenue for the credit unions, for CUMAA and the large credit unions to take, and the wisdom that they could show the rest of the industry, would be to endorse the CRA‑like applications so there is a level playing field between those community banks and other banks, and that they have to serve under‑served populations, which is what they have not been doing.  Thank you, Mr. Chairman, for your indulgence.

[The prepared statement of Mr. Taylor follows:]

Chairman THOMAS.  Thank you.  Ms. Kennelly, before we ask for your testimony, I just want to indicate that every member indeed, those who aren't here and the members of Congress, offer our sincere condolences.  You folks were right in the heart of what was an extremely difficult, tragic, natural disaster‑‑perhaps exacerbated by some man‑made assistance, but the devastation was there nevertheless.  Our colleague, the gentleman from Louisiana, Mr. Jefferson, and my colleague, the gentleman from Louisiana, Mr. McCrery, have been focused on trying to make sure that, at a minimum, life is restored back to some semblance of normal as soon as possible.  I am anxious to hear where you were, where you are, and what has been going on, from someone who obviously is at the forefront in listening to, hearing, and probably trying to meet people's needs who had no understanding of what their needs were going to be just a couple of months ago.

STATEMENT OF CONSTANCE KENNELLY, CHIEF EXECUTIVE OFFICER, TULANE‑LOYOLA FEDERAL CREDIT UNION, NEW ORLEANS, LOUISIANA

Ms. KENNELLY.  Exactly.  Thank you very much.  I must admit, I did evacuate.  I did not stay.  Chairman Thomas, Ranking Member Rangel, distinguished Members of the Committee on Ways and Means, I do want to express my profound gratitude for the opportunity to testify before you today, and to share with you my personal story and those of others regarding the ways in which credit unions assisted them and their families and untold thousands of other people in the aftermath of Hurricanes Katrina and Rita, in ways that I believe are unique.  I also want to express my appreciation to my fellow Louisianians, Congressman Jefferson, who represents a significant number of my members, and Congressman McCrery, for their continuing efforts in the Committee to help our devastated state recover.  I am, and have been since 1998, the Chief Executive Officer of the Tulane‑Loyola Federal Credit Union, and I am also a member.  Our membership includes the faculty, staff, and students from Tulane University, Tulane Hospital, and Loyola University, which I think spreads the gamut of income across the board.

We are small, with slightly less than $15 million in assets and 5,000 members.  In addition, our credit union is unique, in that it has been designated as a low‑income credit union, which will allow the credit union to receive grants to serve low‑income members of the community, including those devastated by the hurricane.  As you might imagine, Hurricane Katrina's impact on our membership and on the membership of credit unions throughout the greater New Orleans area has been catastrophic.  More than 4,800 of our members were evacuated, and many were‑‑and some still remain‑‑temporarily located throughout the United States; some in remote areas, but with fairly heavy concentrations in Baton Rouge, Houston, Dallas, and Atlanta.  To date, only about 30 percent have actually returned to the New Orleans area.  It has been reported that the universities plan to reopen for the spring semester in January of 2006; however, it still remains unclear how many of our members will be able to return home by that time.

Of our 14 staff members, five lived in the areas of total devastation now well known to most of the Nation:  the Lower Ninth Ward of New Orleans, New Orleans East, and Saint Bernard Parish.  They may not be able to return.  During the storm's aftermath, I had my personal cell phone number listed on the National Credit Union Administration's website, as well as on our own website, for member contact.  The calls were answered from 7:00 a.m. until 11:30 p.m., and most of the information requested was related to being able to access their funds.  I was able to direct them to the service center link on our website, or to provide them with the information directly if they did not have access to a PC.  During the first few days, I responded personally to over 700 e‑mails from members.  For weeks, there were overlapping, non‑stop phone calls.  With rare exception, members were able to access their funds conveniently from credit union service centers or outlets within the cooperative credit union network of people helping people.  In only two instances were members located outside of a convenient radius‑‑that is, greater than 25 miles from the nearest branch‑‑and for those, funds were wired to them at no cost.

In so many instances, Louisianians were not just separated from their homes; they were also separated from family and from the means by which to live.  Many were left not only homeless, but penniless as well.  With phone lines and other means of communication compromised, ATM service was sporadic throughout the affected area.  Even credit and debit card use was limited in many areas.  Moreover, most people who evacuated‑‑including myself‑‑never envisioned the level of destruction wrought by Katrina, and were thinking that they would only be away from home for a couple of days; not weeks or even, as we have seen, months.  Thankfully, credit union members have access to something unique in the financial services industry, and it is a cooperative, shared branching network.  Because of this  network, our members were able to walk into credit unions all over the country‑‑in Texas, in California, in Georgia, and elsewhere in Louisiana‑‑and access their funds, obtain emergency loans, initiate lines of credit, increase their credit card limits, and receive other critical financial services, with no questions asked, as though they were at their own home credit union.  To my knowledge, there is no similar shared access system in the banking sector.  Moreover, while we had certainly planned for emergencies, an event of this magnitude is unprecedented; and yet the shared branching network far exceeded the expectations, and ensured our members the financial access they needed.

We heard from members who had been separated from their family.  There was one, a sister, who had been separated.  Funds were transferred from their joint account.  We were able to intervene and allow the apartment owners to actually waive the $175 fees.  We had another instance with an incoming Tulane student who had joined the credit union literally one hour before they were told to evacuate with their family.  They called.  We had not processed the check, but we immediately made that $1,000 available to them.  To sum it up again, I do want to thank you for your indulgence.  I see that I have gone over by 27 seconds right now.  I want to add that not only do we as credit unions not pay taxes; we don't pay our volunteers.  We are run by credit unions.  Although we are considered not‑for‑profit, we have to make a profit, because we have to maintain a level of capital above that of other financial institutions.  So, we are not‑for‑profit; we meet capital expectations; and we do not pay our directors.  Thank you very much, Chairman.

[The prepared statement of Ms. Kennelly follows:]

Chairman THOMAS.  Thank you, Ms. Kennelly.  Does the gentleman from Louisiana, Mr. McCrery, wish to inquire?

Mr. MCCRERY.  Mr. Chairman, I don't have any questions.  I appreciate the testimony of the panel.  We have had some thought‑provoking testimony, I think, today from all three of our panels.  I commend the Chairman for undertaking this responsibility of the Committee to review the tax‑exempt status of institutions that have that grant from the Federal Government.  Certainly, we ought to continue this with other institutions, as well.  But I do think today's testimony has been enlightening in many respects, and gives us a good bit to look at and examine as we move forward with these hearings.  So, I thank the Chairman for holding the hearing, and thank the panel for their testimony.

Chairman THOMAS.  Thank the gentleman.  Does the gentleman from Michigan wish to inquire?

Mr. LEVIN.  I just want to join with you and Mr. McCrery and others.  It has been an interesting hearing, and this last panel added some provocative thoughts.  Thank you.

Chairman THOMAS.  The gentleman from Texas, Mr. Brady?

Mr. BRADY.  Mr. Chairman, one, I think this has been an excellent hearing.  My only point would be I think regulation has a cost, and sometimes an unintended consequence.  If we were a banking Committee, I would be taking a good, hard look at the whole regulatory structure on all our lenders in the community, to see and make sure, as I think that we have, I think, overburdened them in areas that they ought not be.  I think we ought to provide a lot more flexibility than we do today.  But with that, again, thank you for holding this hearing.

Chairman THOMAS.  Thank the gentleman.  The gentleman from Louisiana.

Mr. JEFFERSON.  I thank you, Mr. Chairman.  I don't have any questions, either.  I do want to thank Ms. Kennelly for having come and for the testimony she offered, as well as the other witnesses, but particularly her; and for the work that she did to help relieve the suffering and to provide some point of contact for people who were displaced all over the country as a result of the horrific events of Hurricane Katrina, and Rita after that.  I think what is really important here is that there may be some differences of opinion about the tax‑exempt status, or about the lending practices, or whatever; but I think the importance of a hearing like this is that these things get aired, and that from each side there can be, we hope, some basis on which the private sector can find a way to come together itself and resolve some of these issues without the need for there to be any intervention by this Committee or by any Committee of Congress.  Sometimes, just by having these matters explored as they are and having others hear the concerns, one here in front of the other, helps to bring resolution to the problem and helps to prod some of us to make changes where we hadn't really thought about the need to do that.  So, I am hopeful that out of this will come some voluntary action on the part of those who may feel themselves on the edge of some concerns of others, and find a way to work things out before the Congress has to make any decision about stepping in on that.  So, I want to thank the Chairman for bringing the parties together and for holding this hearing.  I think it has been very beneficial.

Chairman THOMAS.  Thank the gentleman.  The gentlewoman from Pennsylvania.

Ms. HART.  No questions.

Chairman THOMAS.  The gentleman from California.

Mr. BECERRA.  Thank you, Mr. Chairman.  I, too, would like to thank the panel for its testimony.  I have one question for Ms. Kennelly; but I would like, before I do ask the question, to say that I hope that what we get from this is an opportunity to have a further discussion, as I think Mr. Taylor was trying to say, about what the responsibilities of the credit unions should be.  To me, most of the evidence I see points to the fact that credit unions have done something very good for many Americans.  If it reduces the cost of obtaining credit and opportunities to expand a business or to purchase your first home, I think that is great.  I think we have to continue there.  But I think, Mr. Taylor, you point out in your testimony very well that, as the credit unions grow, it seems they are growing in areas that don't fulfill the mission that was first set forth for them back in the 1930s; and that was to serve modest‑income families principally.  While I think many of them do a very good job, sometimes as you grow, sometimes you forget, or you lose sight of your mission.  I hope that they can focus as much as possible, because I think most of us in Congress would like to continue to support not just the credit unions and the industry, but their tax‑exempt status.  Ms. Kennelly, a quick question for you.  Mr. Taylor did propose that we consider adding CRA‑type requirements or regulation over the credit industry's larger players, its larger credit unions.  I am wondering if you can comment on that suggestion by Mr. Taylor?

Ms. KENNELLY.  Well, I don't know what the threshold would be.  I really don't have much of a comment.  I think most credit unions generally fulfill those requirements without being required to do so.  I don't recall what the threshold was.  Do you?

Mr. TAYLOR.  Yes.  Well, it is different for different institutions but‑‑May I?

Mr. BECERRA.  Please.

Mr. TAYLOR.  In fact‑‑and this gets to Mr. Brady's point‑‑the regulators really did streamline the process.  This Congress dealt a lot with the regulatory burden associated with financial institutions; very recently reduced the reporting requirements as it relates to CRA.  For small institutions less than‑‑what is it, Josh, 100 million, 250 million?  For 250 million, it is really‑‑

UNIDENTIFIED SPEAKER.  It started off, I think, at 50.

Mr. TAYLOR.  Yes, it has grown very easily.  It is a very streamlined exam, so I don't think the idea of having CRA‑like requirements is going to add a terrible burden.  For all these institutions that say, "We're doing it, we're doing it," they shouldn't have to worry about complying with it.  But I didn't want to answer for you.

Ms. KENNELLY.  Well, I answered.  Originally, when all of that came up, I thought it was $50 million.  We are very small.

Mr. TAYLOR.  Yes.

Ms. KENNELLY.  So, it is not a burning issue for me.  But I do feel‑‑believe‑‑that most of the credit unions are complying, without the regulation being there.  If it is $100 million, you will probably see some that will want to stay at 99.9.

Mr. BECERRA.  I think Congressman D'Amours pointed out that in the past there was an attempt by the industry to try to have something similar to CRA applied, but that proposal‑‑which had at first been adopted, I believe, under your chairmanship‑‑was subsequently reconsidered.  It seems like perhaps now we are finding that the fruits of that reconsideration may be coming back to haunt some of the credit union industry a bit.  But I don't know if you have any comment on that.

Mr. D'AMOURS.  Yes, Congressman, if you would permit me.  That was my proposal.  I advanced that‑‑well, way back in '97, I believe, for the first time.  You heard Chairman Johnson and other people refer to, when Congresswoman Hart and other people were asking about transparency and reporting, the 5300 report that they filed quarterly.  All I was asking for in that attempt was that they add into their business plans something that would state what efforts they might make to reach out to low‑income people.  They called that "CRA."  They fiercely resisted it.  After three years or so of persisting, I finally got it passed.  It was not an industry effort; it was an agency effort, because I was the chairman of the agency.  It was repealed a month or two before it went into effect, after I left the agency.  The truth is, they don't want to be looked at, and I wonder why.

Mr. BECERRA.  I thank everyone for their comments.  As we move forward, those of us who are very supportive of credit unions hope that this is something that can be examined further, now that we are collecting more and more data.  Perhaps one of the things we should do is try to collect even more data, to give us a better sense of really where the industry is heading; and therefore we have something to compare apples and apples with.  So, I thank you for your testimony.  Mr. Chairman, I thank you for the time.

Chairman THOMAS.  Thank you.  As we conclude, I want to make some statements and ask some questions, because I think we have been dodging around some of the core structures that we have to face sometime.  If other Committees, or if agencies that are seen more as enablers than regulators, aren't willing to face up to it, then I am willing to make some statements and I am willing to allow people to respond to the statements that I make.  I believe‑‑in large part, based on historical analysis‑‑that the term "modest means" was used for a couple of reasons.  "Low‑income" is easily measured.  It is a term that is often used inside government.  "Modest means" is in the eye of the beholder.  But clearly, in the 1930s, when you talked about "modest means," it was a typical, middle‑class structure in those days.  I honestly believe Congress did not intend to include "modest means" in the credit union structure to require that not‑for‑profit structure reach out to low‑income and racial minorities as a primary focal point in establishing a mutual credit structure.When you talk about common bond, they were all kind of the same.  When you use a company with its employees, they aren't exactly low-income.  It was because the banking structure at that time did not make loans, normally, to those kinds of people.

When you look at the history that we have now gone through‑‑and we are looking at it today‑‑for someone to respond, who is supposed to be a regulatory agency over credit unions, "We don't know what 'modest means' really means," then it is time to get serious about a definition.  I believe today "modest means" would be substituted with "low-income and racial and ethnic minority."  I know there is resistance if that is the definition that is used, but I cannot believe we sat through an entire hearing in which people just shrugged their shoulders and couldn't figure out what "modest means" means.  It means a whole lot different today than it did in the 1930s.  Now, I asked the question several times:  What is the primary reason for granting tax preference?  The structure, which is certainly admirable, in terms of a cooperative, self‑help, bootstrap kind of a concept, is not the sole reason for the exemption.  It made sense at the time, because of the environment the country was in, for individuals trying to get a loan.

Today, as we have seen, there are banks who pay taxes, who have no common bond, who offer lower rates to low‑income and minority individuals.  Why?  Because, ironically, the structure that was to provide assistance back in the '30s is a limitation today.  Because of the structure, you are limited; and so the people who belong may not necessarily be low‑income or minorities.  So, the credit unions believe they have shifted to a degree by creating the opportunity for a number of common bond folk to come together, in a multiple bond; or in fact, to go out and deal with a community.  I just found it almost amazing that when you talk about under‑served areas, it was always geographic; it wasn't people.  There was no evidence that was required to show that if you achieved moving out into this other area which was defined as under‑served, that you had to show you were in fact serving the under-served.

So, one of the real concerns I have is not understanding why the credit union industry does not want transparency and accountability.  In terms of seeing whether or not we are getting our money's worth, I, personally, as the Chairman of this Committee, as long as I am the Chairman of the Committee, when we are dealing with somebody who gets a tax‑preferred status‑‑as admirable as a volunteer, cooperative structure is‑‑I am going to interpret the tax‑preferred structure as meaning servicing those who are unable, either through the structure that is present or geography, to get their basic financial needs met.  Today, that means low‑income, minorities, racial, women, and so on; and not some "modest means" that can't be defined.

I also am quite concerned that an agency that is supposed to be a regulator appears to be, to a very great extent, an enabler which is making excuses for not being able to measure up to deliver a product which gets a tax preference.  People keep talking about how tax preference isn't worth much.  In fact, banks are better off than the rest.  Well, then I can't figure out why you are fighting so much, worried so much, and causing so much concern about examining the question of tax preference.  If it is no big deal, why are you here?  So, what I really think this industry and Congress and everybody else needs to do is look at how the full panoply of financial services are providing the kinds of needs that Americans of all economic levels, ethnicities, or gender, need, and determine whether or not the taxpayers' dollars‑‑which I think are supposed to be available to help service‑‑are really being met.

The only way you can know that those needs are being met is to gather data to determine if the decisions you make are effective or not.  I do not fully understand the defensiveness on the part of a number of people, who have been provided with new structures presumably to reach out and provide those services to certain groups of people, who seem to say that, "That isn't our job.  That isn't why we are here."  That probably concerns me as much as anything, in terms of the comments that have been made during this hearing.  No, I don't think you should remove the tax‑exempt status; but I won't put a period there.  I would say where it makes sense, in terms of the historical and current use of a cooperative structure‑‑which, interestingly enough, enabled at one time in the 1930s, inhibits today to carry out your various activities.  That is why I think measurements such as the community‑‑

[Discussion in hearing room.]

Chairman THOMAS.  Don't worry about them.  They are perfectly willing to be rude because they have other needs they want serviced.  You can do it outside the room, if you so desire.

[Pause.]

Chairman THOMAS.  It seems to me that a measurement that is applied to taxable entities of financial services should be a reasonable yardstick to be applied to the tax‑free area.  It has to be explained to me why you shouldn't adopt it.  Providing information on remuneration totally of officers and other people who are paid, to allow for transparency, shouldn't be fought.  You should do it to show how reasonable and equitable the payment structure is, which reflects the membership structure, and how it appears favorably to other institutions who deal with money‑‑unless, of course, that is not the case.  Arguing that you have CPAs who collect data, which is exactly the same argument the corporations made, does not pass the oversight test.  Prior to our peeling off the ugly cover we found that the relationship between the then‑existing CPA structures, who not only audited but advised the financial structure where to put their money, and who then went back and looked at the structure and said it was okay.

To resist voluntarily submitting yourself to something that is an FDIC Sarbanes‑Oxley similar accounting system, instead of explaining what you do have, is again something I think you need to be concerned about.  Because as we have seen the concentration of money is in a select group of credit unions--I think you are beginning to see a potential of a mitosis, in terms of a broad‑based, historical structure which renders a valuable service at a particular level and style of service, that may not be compatible with today's modern structure, with what they want to do and how they want to do it.  To artificially gloss over those differences because you want to retain some kind of structure for its historical integrity, rather than trying to deal with the issue that is currently growing inside your structure, is something I think everybody should be concerned about.  One of the purposes of this hearing, as far as I was concerned, was to get all of the different kinds of credit unions not only to talk to us, but to talk to each other; so that you can begin to understand that a single, common bond, small community credit union isn't the same as a credit union that has as its endeavor the entire County of Los Angeles, with no other bond than that you live, work, go to school, or worship there‑‑and that that collection can pull together amounts of money that rival relatively major financial institutions, to finance office buildings, hotels, and other activities.

Then, finally, of all of the not‑for‑profit structures, this is the one, ironically, that has hung onto that commitment to people, tied to people of modest means.  Maybe some of you fail to realize that that definition, which was never firmed up, has changed, and "modest means" means low-income, racial minorities, and women.  The easiest way to show that is to use the CRA as a standard.  I would just tell you, if you look at Massachusetts, which is an absolute case study of a requirement that some use and some don't, all the fog disappears.  There is a bright line of who is servicing those, and who is not.  Mandated; imposed‑‑I don't care.  It is taxpayers' money going to you for the purpose of carrying out a particular function.  Frankly, I think a good and worthy one is to define the people of modest means along the lines of the CRA.  Now, that is a very strong opinion on my part, as I said, based upon the changes that I have seen occurring and the reading that I have made.  I will give anybody a little bit of time here to have a response back, if what I have said outrages you, or misses the point, or does not assist us in moving forward at the end of this hearing to try to get a handle on where we are and where we need to go.

Mr. D'AMOURS.  Mr. Chairman, may I say something?

Chairman THOMAS.  Certainly.

Mr. D'AMOURS.  I think you are quite right in noting that it is amazing that we can't get a definition of what "modest means" amounts to.  But the truth is that that is not happenstance; they want it that way.  To hear somebody in this room say that everybody in this room is a person of modest means is to fundamentally misunderstand what credit unions are all about.  When the credit union system was created‑‑it goes back to Canada‑‑people of modest means were people who didn't have access to banks.  I will bet everybody in this room has access to a bank or some kind of financial institution.  In that day, they didn't.  All they had was loan sharks and other predatory lenders.  People, if they had jobs, it was small factory jobs that weren't paying very much.  The truth is, when I was Chairman, and I stressed that they should focus on low‑income people, in several cases‑‑as that Woodstock Institute, by the way, study found‑‑in several cases, they shot back that credit unions were never really intended to serve anything but the middle class.  So, it is to their advantage to deny that "modest means" means "low-income."  It did mean "low-income" at the beginning, Mr. Chairman.  I take slight issue with you on that, if I may.  It did mean low‑income people from the very beginning.  The people of modest means, it was built into the credit union statute, were in fact low‑income people.  But I just want to say, Mr. Chairman, thank you‑‑

Chairman THOMAS.  If the gentleman would yield briefly, the reason I said it didn't was because those people were invisible back in those days.

Mr. D'AMOURS.  Precisely.  Precisely.

Chairman THOMAS.  They really weren't low‑income.  They were modest means, and they thought they were low-income, but nobody looked at all the other folk out there who really were.

Mr. D'AMOURS.  But I do want to say, Mr. Chairman, having hit my head up against a brick wall for seven years as Chairman of NCUA, thank you very much for what you are doing.  I hope that this isn't just going to be another rallying point for credit union trades to go out and raise a lot of money to fight the tax bogeyman, and it will result in something positive coming from the U.S. Congress.  As I said earlier, if it doesn't come from Congress, it is not going to happen.

Chairman THOMAS.  Thank you very much.

Mr. TAYLOR.  Mr. Chairman, if I may?

Chairman THOMAS.  Mr. Taylor?

Mr. TAYLOR.  I, too, want to thank you, Mr. Chairman and the other Members of the Committee.  I think this is a very important discussion, at least from where I sit, in trying to influence financial institutions to not overlook the needs of traditionally under‑served people, or low‑ and moderate‑income people.  I do think it is a problem when the NCUA Chairperson sits in front of you and says, "I consider myself someone of modest means," because I think there is a disconnect as to‑‑I mean, I don't know what they pay these days to the Chairman of NCUA, and maybe it is modest means; but the medium income for a household in this country is about $42,000, and I would put "modest" somewhere below that.

Chairman THOMAS.  Right.

Mr. TAYLOR.  Now, I know you have been cutting government budgets and cutting salaries and cutting things, so maybe you have done a lot more than I perceived.  But I have got to tell you, I think the problem is bigger than simply: why doesn't the industry sort of get it, and subject itself to some transparency, some sunshine?  Because while we are having this conversation, the credit union association, CUMAA, through its Renaissance Commission, in June of 2001, issued a report that was sent to its members with a recommendation that it remove the words "people of modest means" from the credit union mission statement.  In that, they went on to say, "That is a clear victory.  We won it.  We have done it.  You know, we don't need that statement any more."  Even in the testimony today, Mr. Chairman, if you look at the CUMAA testimony on page 9, there are two paragraphs that refer to those important words, "people of modest means," as cryptic words; a fleeting reference.  In other words, trying to downplay what we all think‑‑and I think we do‑‑is an important part of the mission of what credit unions are about:  to serve people of modest means.  They are working to try to eliminate that from the mission statement.  So, it is actually a bigger problem than simply‑‑you know, they are trying to move away from that; make no mistake about it.  I think this Tulane Credit Union, the El Paso, I think they do great work.  I think they are, obviously, very nice people.  But it is not representative of the majority of assets, of where this industry is going.  I think this is an incredibly important hearing, and I really thank you again for having it.

Chairman THOMAS.  Well, let me conclude with this statement.  Because if in fact I advocated that we would remove the tax-exemption status, you would get something similar to what occurred here when this was just an oversight hearing, and you would see a whole lot more.  I have no intention of doing that.  I will tell you, though, Mr. Taylor, that transparency, accountability, verifiability, are extremely valuable tools.  Because it then means somebody else determines whether or not somebody should continue to receive a tax‑free status.  I think what you will find is some people meet the test easily; others with difficulty, and need to change; and others, as you indicated, who wanted to drop that phrase altogether, have no interest in meeting it, and do not want transparency, accountability, or verifiability, because then they would be exposed.  Right now, they are all behind the structure of the small, common bond, wonderful‑‑I belong to one‑‑credit union.  All I tried to do with this particular hearing was to get people to realize that who comes up to the mike to talk about what is going on isn't necessarily representative of an industry that is rapidly changing and needs transparency, accountability, and verifiability.  Thank you all very much.  The hearing is adjourned.

[Whereupon, at 4:10 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Thomas to Ms. JoAnn Johnson, and her responses follow:]

Question:  Please describe what data the NCUA collects regarding Credit Union Service Organizations (CUSOs), including their ownership and activities.  How many CUSOs are there?  How many are wholly owned by a single credit union?  How much revenue do CUSOs generate annually?

Answer:  It should be noted, as an initial matter, that NCUA does not directly regulate CUSOs.  Instead, in conformance with the Federal Credit Union Act and our regulatory framework, the focus of the agency is on the credit union and its relationship with CUSOs.  While we require that a CUSO’s books and records be fully accessible to us, issues such as unauthorized CUSO activity or other threat to a credit union’s safety and soundness are addressed at the credit union level.  In such cases, we would require either divestiture or other remedial action to be taken by the credit union, as opposed to a direct regulatory intervention at the CUSO level.      

On a quarterly basis, NCUA requires federally insured credit unions to submit the following data via Schedule D – Credit Union Service Organization (CUSO) Information – of the 5300 Call Report:

• Full/legal name of CUSO
• Value of investment in CUSO
• Amount loaned to CUSO
• Wholly owned (yes or no)
• Predominant service
• Accounting method used by the credit union to reflect the value of the CUSO on the credit union’s financial statements
• Aggregate Cash Outlay in CUSO

For the third quarter of 2005, there was an aggregate of $735,219,785 reported in investments in CUSOs and $396,499,868 in loans in CUSOs.  These figures reflect a mere .17% of all credit union assets, comprised of  .11% from investments and .06% from loans.  As reported on the third quarter 2005 call reports, there were 551 wholly owned CUSOs.   Overall, 2,017 credit unions reported a loan or an investment in a CUSO.  This figure includes the 551 wholly owned CUSOs. 

The total number of CUSOs is approximately 750.  This figure is an approximation because NCUA collects CUSO data by legal name which in order to be aggregated by number requires data analysis to remove any inconsistencies in the reporting of multi-owner CUSOs.  The primary CUSO trade group, NACUSO, and credit union consulting firm Callahan and Associates jointly publish a CUSO directory that reflects the aggregated list of names.  Their figure from the June 2005 Directory of Credit Union Service Organizations is 758 CUSOs.

NCUA believes the risk to credit unions is not in the dollar amount of investments or loans but in potential service disruptions or other reputation issues.  For example, a CUSO providing Electronic Data Processing (EDP) services may represent an insignificant investment on an individual credit union’s balance sheet, but the risk of disruption of service needs to be mitigated and contingencies developed.  For EDP CUSOs, NCUA includes them in the annual review of data processing vendors and a sample is selected for on-site review by an NCUA Information Systems Officer.

NCUA’s data collection does not capture CUSO revenue data.

Question:  What information is needed in order for a credit union to obtain approval by the NCUA to engage in a business relationship with a CUSO?  By law, credit unions are restricted in some of the services they can provide, however, CUSOs allow credit unions to offer such services.  Is the NCUA concerned about the increased use of CUSOs, and how does the NCUA oversee these relationships?  

Answer:  NCUA’s CUSO rule, 12 C.F.R. Part 712, sets out the requirements governing FCU investment or lending to CUSOs.  NCUA expects every Federal credit union (FCU) to comply with these requirements, but does not require advance notice of, and does not issue specific approval for, a particular FCU’s determination to engage in a business relationship with a CUSO.  NCUA oversees the relationship and enforces compliance with its rule through the examination process.  Additionally, CUSO activity is monitored from information gathered in the quarterly call report program. 

Section 712.5 identifies broad categories of permissible types of activities for CUSOs.  All such categories reflect the statutory requirement for CUSOs that they may engage only in providing services that are associated with the routine operation of credit unions.  The Board has authority to prescribe rules for the administration of the FCU Act. 12 U.S.C. 1766(a). The loan authority for CUSOs in the FCU Act specifically reads: ``[a] credit union organization means any organization as determined by the Board, which is established primarily to serve the needs of its member credit unions, and whose business relates to the daily operations of the credit unions they serve.'' 12 U.S.C. 1757(5)(D) (emphasis added). Similarly, the investment authority for CUSOs in the FCU Act defines CUSOs as: ``any other organization, providing services which are associated with the routine operations of credit unions . . . with the approval of the Board.'' 12 U.S.C. 1757(7)(I). 

By contrast, an FCU has several specifically enumerated express powers, as well as the authority to exercise “such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated.”  12 U.S.C. 1757(17).    There is some direct overlap between a FCUs authorized services and that which may be provided by a CUSO.  For example, while an FCU can always do its own data processing, one or more credit unions may be able to achieve economies of scale or other efficiencies from securing necessary services through a CUSO.  Similarly, one or more FCUs may secure advantages in terms of available expertise by conducting their mortgage or member business loan origination through a CUSO.  Other services, for example, consumer loan origination, are not an authorized activity for CUSOs.  Similarly, section 712.5 includes some activities that are not authorized for FCUs.  The attached Appendix outlines each of the areas listed in section 712.5 and outlines whether the activity is one that is permissible for an FCU.

In general, NCUA is pleased with the range and extent of CUSO activity.  The flexibility reflected in the CUSO rule allows credit unions to take advantage of pooled resources to obtain expertise for complex programs, such as a sophisticated consumer mortgage loan origination or business lending program.  For more traditional services, use of a CUSO allows an FCU to take advantage of economies of scale in obtaining services, resulting in improved services at a lower cost for members.

Question:  According to NCUA regulations, the NCUA may limit any CUSO activities at any time, based on safety and soundness reasons.  How many times has the NCUA done so?

Answer:  NCUA has found CUSOs engaging in inappropriate activities.  These cases are dealt with by requiring corrective action to be implemented via the credit union that has investments or loans to the CUSO.  Unless the corrective action is implemented, NCUA typically requires that the credit union divest itself of its investment or loan to the CUSO.  Prior to September 2005, when NCUA implemented a new problem resolution tracking system, the agency did not capture data in a format that can be queried for this type of information.  The resolution of CUSO related problems is documented in individual examination reports and it would be labor intensive to generate the number of instances corrective action or divestiture was required. 

Two additional factors have a bearing on risk mitigation, from a safety and soundness standpoint, as between an FCU and its relationship with a CUSO.  First, the extent of permissible investment by an FCU in a CUSO is limited to one percent, in the aggregate, of the FCU’s shares plus undivided earnings.  An FCU may lend an additional one percent to CUSOs.  In the unlikely event that an FCU’s financial stake in a CUSO were to become a total loss, the impact on the FCU’s overall capital position would not be significant.  Second, as more clearly spelled out in the CUSO rule, an FCU is required to assure that the corporate veil between itself and its CUSO is intact.  In accordance with general principles of corporate law, the corporate veil insulates a shareholder from liability for the debts of the corporation.

Question:  NCUA regulations also state that a CUSO may offer services beyond the list of preapproved activities and services only with the approval of the NCUA.  How many such applications have been received by the NCUA, and how many of these applications have been approved, and how many have been denied?

Answer:  The provisions in the CUSO rule relating to the ability to petition NCUA to request approval for a service not specifically listed in the rule have been included in subsection 7 since March, 1998.  12 C.F.R. 712.7  As the NCUA Board clarified in 2001, the examples under the broad categories listed in the rule are for illustrative purposes only and are not intended to be exhaustive. Since the adoption of the rule, we have reviewed numerous requests for interpretation as to whether a specific service, such as the referral to other lenders of loan applicants that have been turned down by the credit union and the subsequent servicing of those loans, is considered permissible under the rule. In accordance with the FCU Act, NCUA is guided in its evaluation of any such request by the consideration of whether the proposed service relates to or is associated with the routine, daily operation of credit unions. 

As prescribed in the rule itself, a request for an addition to the broad categories listed in section five should be accompanied by a complete analysis and explanation of how the proposal conforms to the overall purpose and requirements of the rule, i.e., that the service relates to or is associated with the routine, daily operation of credit unions.   If NCUA determines to act on the request, we would first publish notice in the Federal Register, treating the request as a petition to amend the rule, and invite public comment, which would be reviewed and evaluated before any amendment is made.  Since 1998, we have received a small number of requests to amend the rule by expanding the approved listing of categories, none of which have been approved.  The Board did amend the rule in 2003 to add the category of business loan origination as an approved category, but this determination, which became effective after notice and the solicitation of public comment in the Federal Register, was made by the Board on its own initiative.     

Question:  The NCUA chartering manual recognizes four types of affinity on which a community charter can be based:  residence, education, worship, or employment in the relevant community.  For how long has the NCUA recognized these forms of affinity as satisfying the requirements of the Federal Credit Union Act that an individual be “within a well-defined local community, neighborhood or rural district”?

Answer:  The NCUA Chartering Manual currently recognizes four types of affinity on which a community charter can be based: residence, education, worship, or employment. 63 Fed. Reg. 72011, 72037 (Dec. 30, 1998).  NCUA has recognized these forms of affinity as satisfying the requirements of the Federal Credit Union Act since various dates as reflected in Federal Register issuances.  The history is as follows:

In 1989, NCUA issued a proposed rule and a final rule, Interpretive Ruling and Policy Statement (IRPS) 89-1, on its Chartering and Field of Membership Policy.  In both rules, NCUA wrote:  “Congress has required that a credit union charter that will be based on a tie to a specific geographic location be limited to a ‘well-defined neighborhood, community, or rural district.’  NCUA recognizes two types of affinity on which a community common bond can be based: residence and employment.”  IRPS 89-1, 54 Fed. Reg. 31165, 31170 (Jul. 27, 1989); 56 Fed. Reg. 12221, 12225 (Mar. 24, 1989).

In 1993, NCUA proposed changes to IRPS 89-1, but proposed continuing that there be:  “two types of affinity on which a community common bond can be based:  residence and employment.”   IRPS 93-1,  Jul. 28, 1993.  After receiving and reviewing public comments on this proposal, NCUA issued a final rule in 1994 adding the affinity based on worship.  In IRPS 94-1, NCUA “recognize[d] three types of affinity on which a community common bond can be based- persons who live in, persons who worship in, and persons who work in the community.”  IRPS 94-1, 59 Fed. Reg. 29066, 29077 (June 3, 1994).

In 1995, NCUA proposed changes to IRPS 94-1.  60 Fed. Reg. 51396 (Oct. 4. 1995).  In 1996, NCUA, after receiving and reviewing public comments, issued a final rule adding an affinity based on education, stating: 

One commenter requests that students should be part of the community common bond so that persons who attend any educational institution located in a community would be eligible to join a credit union whose field of membership includes that community.  The Board agrees.  The Board believes that a student is working for the purpose of the community common bond and therefore a person going to school within the community boundaries is deemed to be working in the community for field of membership purposes. 

IRPS 96-1, 61 Fed. Reg. 11721, 11725 (Mar. 22, 1996). 

In 1998, after the passage of the Credit Union Membership Access Act (CUMAA), NCUA issued proposed and final rules to implement CUMAA, retaining the four previously approved affinities.  The preamble to the proposed rule stated that:  “NCUA continues to recognize four types of affinity on which a community common bond can be based--persons who live, work, worship, or attend school in the community.” 62 Fed. Reg. 49164, 49167, 49187 (Sept. 14, 1998).  After receiving and reviewing public comments, NCUA issued a final rule in 1998.  IRPS 99-1 stated that “NCUA recognizes four types of affinity on which a community charter can be based--persons who live in, worship in, attend school in, or work in the community.”  IRPS 99-1, 63 Fed. Reg. 72011, 72037 (Dec. 30, 1998).  

Question:  Is there any requirement that a credit union verify that a potential member prove that he works, attends school, worships, or resides in the relevant community?

Answer:  Section 5 of a federal credit union’s charter defines those persons eligible for membership in a community credit union.  Article II, Sections I and II of a federal credit union’s bylaws provide that membership applications will be signed and accepted, and approved or denied from those eligible persons.  Credit unions must comply with their bylaws, and NCUA has an expectation that credit unions will only serve individuals who qualify for membership. 

It is standard practice for credit unions to maintain completed signature or membership cards for their members.  A sample signature card form is provided to credit unions in Section 707, appendix B of NCUA’s Rules and Regulations.  The sample form includes a statement by the member certifying he or she is within the credit union’s field of membership.  In the Supervisory Committee Guide for federal credit unions, Supervisory Committees are tasked with ensuring adequate internal controls exist over share accounts.  The testing of new member signature cards for proper member qualification and approval is one element of signature card control itemized in the Internal Control Checklist for share accounts.  NCUA examiners consider such testing during their normal review of Supervisory Committee activity, and also during their own review of share accounts.  Chapter 14 of NCUA’s examiner guide sets forth the examination objective to determine share account programs meet all legal requirements.

[Question submitted from Mr. Johnson to Ms. JoAnn Johnson, and her response follows:]

Question: A majority of the House delegation from Texas, including myself, sent letters to the NCUA detailing our concern with what appeared to be unnecessary regulatory obstacles thrown in front of two Texas-based credit unions in their attempts to convert to for-profit, taxable banks.  After having to go back and forth through the courts, the credit unions were finally allowed to convert to banks. What I’d like to know is what steps, if any, the NCUA is taking to ensure credit unions which choose to convert to tax-paying, for-profit banks are able to do so?

Answer: NCUA fully supports the legal ability of credit union members to change the charter of their financial institution under the Federal Credit Union Act and NCUA regulations and acknowledges that NCUA's regulatory role is limited to oversight of the methods and procedures of the vote.  In carrying out its responsibility, NCUA believes complete and accurate disclosures for members are crucial to a fair and legal vote and members are entitled to know the effects a conversion to a mutual savings bank will have on their ownership and control of their financial institution.

[Submissions for the record follow:]

Ayers, Walter, Virginia Bankers Association, Glen Allen, VA, statement

Bartlett, Steve, Financial Services Roundtable, statement

Becker, Fred, National Association of Federal Credit Unions, Arlington, VA, letter

Chatfield, David, California Credit Union League, Rancho Cucamonga, CA, letter

Dawson, Cutler, Navy Federal Credit Union, Vienna, VA, statement

English, Phil, U.s. House of Representatives, statement

Gillespie, Donald J., A.M. Community Credit Union, Kenosha, WI, letter

Gittens, Lane, West Haven, UT, letter

Headlee, Howard, Utah Bankers Association, Salt Lake City, UT, letter

Heller, Thomas, Orlando, FL, statement

Kerslake, Dale, Cascade Federal Credit Union, Kent, WA, letter

Mica, Dan, Credit Union National Association, Washington, DC, letter

Minnesota Bankers Association, Edina, MN, statement

Oemichen, William, Wisconsin Federation of Cooperatives/Minnesota Association of Cooperatives, Madison, WI, letter

Slach, Harold, Port Orchard, WA, statement

Woodard, Thad, North Carolina Bankers Association, Raleigh, NC, letter