CUNA Letter to Treasury Secretary Paulson on "Blueprint" for Regulatory Reform
April 9, 2008
The Honorable Henry Paulson
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Dear Secretary Paulson:
As I am certain you are aware by now, the Credit Union National Association and its member credit unions, which represent 90 million consumers, were stunned and concerned by the credit union provisions in the Treasury Department's recently released Blueprint for a Modernized Financial Regulatory Structure. The credit union provisions not only disregarded the Administration's stated support for credit unions, but also portrayed a complete misunderstanding and misrepresentation of our mission, purpose and function.
When I asked you during last week's press conference if there was something credit unions had done to be treated in this manner - essentially put on track to be put out of business - your response was, "that is not our intent and that would not be the effect". However, our review of the actual recommendations clearly reveals that the report does not support that comment.
You indicated that a Presidential Working Group, which coordinates the implementation of policies regarding financial markets, would be expanded. Of the five federal financial institution regulators, the only regulatory body that would be excluded from the group is the National Credit Union Administration.
Moreover, the proposal requires the elimination of NCUA in addition to the eradication of the credit union charter. A regulatory agency would be formed to unilaterally determine which credit unions are considered small and which are large. Small credit unions would be lumped in with similarly sized, for-profit banks that will not be required to convert to not-for-profit status yet would be tax exempt. That same agency would also define large credit unions based on size and eliminate their tax status. Coincidentally, language used to justify these approaches is very similar to the language used by the bankers in their description of credit unions.
Given these recommendations, you can understand the immediate and forceful reaction credit unions have had to this proposal. As you may be aware, several Congressmen and Senators have stately publicly or communicated to us that the credit union provisions will not be acted upon by Congress.
Nonetheless, because the Treasury Department deals with a number of issues affecting credit unions, I am compelled to write to you in an effort to address the Department's marked change in posture toward credit unions as reflected in the report and its failure to acknowledge the importance of credit unions to consumers. This is a posture that regrettably reverses seven years of support and understanding from the Treasury Department under President Bush.
Why the Report is So Negative for Credit Unions
Does Treasury Appreciate That a Single Regulator Would Favor Banks Over Credit Unions?
The Blueprint calls for all federally insured institutions to be regulated by a single "prudential financial regulator" and all financial institutions with federal deposit insurance would require a federal charter. We believe this will mean the demise of credit unions as they function today, whether this result was intended or not. The only beneficiary of this outcome would be banks, not the economy and certainly not consumers.
We understand that in theory, one could argue that the proposal would allow the continued existence of credit unions as cooperative FIDIs. However, in practice, this would almost certainly not be the case. Financial institutions that choose to have community status would be tax exempt but would face serious restrictions. For example, there could be great difficulty in qualifying as a community FIDI, particularly if the size level for automatic qualification is low. More significantly, as described in the report, the combination of other requirements to qualify as a community FIDI appear to be much more restrictive than current credit union requirements. One could theoretically conceive of a set of qualification requirements under which almost any existing credit union would continue to enjoy the tax exemption. However, one could also conceive of a set of requirements under which almost no credit union above the default size would qualify. The actual result would no doubt be somewhere in between these two extremes, but a significant percentage of the nation's larger credit unions would no longer be tax exempt and have little incentive to operate as cooperatives owned by their members.
If the Blueprint proposal were to take effect, a mere 6% of the assets under supervision of the new Prudential Financial Regulator would be in not-for-profit, cooperative FIDIs, i.e., former credit unions. Another small percentage would be from former mutual thrifts. The remainder, which would be almost the entire total, would be for-profit, stock owned FIDIs, banks. The types of regulation and supervision that a for-profit institution requires are very different from those that best apply to not-for-profit cooperatives.
Since the Office of Thrift Supervision and the National Credit Union Administration would be eliminated under the Blueprint, all federal financial institutions would apparently be regulated by an evolved Comptroller of the Currency. We see nothing in the report that calls for the single regulator to have employees who specialize in regulating institutions other than banks.
Does Treasury Understand the Differences Between Credit Unions and Banks - and the Benefits Credit Unions Provide Consumers?
Because of their cooperative structure, credit unions behave differently from stock-owned banks. This is evidenced by the fact that the credit union share insurance fund has remained very stable over the past twenty five years, while FSLIC went bankrupt at a huge cost to taxpayers, and FDIC came close to insolvency almost two decades ago. Given the distribution of assets under supervision (almost all banks), it is hard to believe that the Prudential Financial Regulator would not expect all institutions to act like for-profit banks, and design its regulations and supervision to deal with for-profit institutions. Even if virtually all credit unions were to qualify for "community status," it is highly unlikely that credit unions would be able to remain credit unions under the supervision of an agency that expects them to act like entities they are not.
This last point highlights one of the major flaws in the Treasury Department's understanding of credit unions. What fundamentally distinguishes unions from banks is neither their size nor the range of services they offer. Rather, it is the differences between the cooperative and the for-profit, investor owned structure. Both types of institution seek to please their owners. The difference for credit unions it that the owners are also the customers, which is not the case for banks.
Also, because the board members and managers of credit unions do not receive stock options or restricted stock warrants, they face a very different set of incentives in making decision for their credit unions. This results in some very different metrics for credit unions as opposed to banks in the context of prudential regulation. For example, the net worth of a bank and a credit union could reasonably be on the same scale, yet what might be a very healthy return on assets for a not-for-profit credit union might be an indicator of very weak management at a bank.
Why Does the Report Use Banker Rhetoric in Describing Credit Unions, Rather Than Congress' Five-Point Definition?
Another aspect of the report that we found highly disturbing is that a number of descriptions in the report regarding credit unions are very similar to the mischaracterizations that the banking industry routinely uses. Some of the most biased statements in the report are found on page 160, reflecting banker rhetoric that credit unions must only serve those of modest means and must remain small institutions. "While credit union size is not a perfect proxy for this trend," the report states, "the increasing share of credit unions assets held by larger credit unions indicate movement toward a broader focus."
This statement wholly distorts the fact that credit unions have but 6% of the combined assets of all depository institutions, which they have held for the last ten years. Also, the rising importance of economies of scale is leading to consolidation among all types of financial institutions. The increase in concentration in the banking industry in the past two decades dwarfs that of credit unions. Treasury's depiction also contradicts the statement from you, Mr. Secretary, when you announced the Blueprint that institutions must be able to evolve or they become obsolete.
Treasury has chosen to ignore the characteristics of credit unions described in the findings of the Credit Union Membership Accuracy Act. There is also a failure to acknowledge the fact that there is a large body of evidence that credit unions significantly outperform others in lending to low- and moderate- income (LMI) and minority borrowers. For example, Home Mortgage Disclosure Act (HMDA) reporting reveals that credit unions make a greater proportion of HMDA covered loans to LMI borrowers than do other mortgage lenders. Also, credit unions approve first mortgage loans to LMI and minority borrowers at much higher rates than do other lenders. Similarly, credit unions deny first mortgage loans to LMI and African American borrowers at much lower rates than do other lenders.
In addition to the longer-term recommendations regarding credit unions and NCUA, we are extremely concerned about the recommendations for the President's Working Group on Financial Markets, which will have an enhanced role regarding financial institution policies. These recommendations do not require congressional action and are in the process of being implemented now, as we understand it.
Why Should PWG Exclude NCUA?
As stated in the report, Treasury is seeking to have the PWG expanded to include the federal banking regulators but not the National Credit Union Administration. Not only would this disadvantage NCUA and credit unions, it would undermine the goals of the expansion of the PWG, which include facilitating policy coordination and communications to promote consumer protection and enhance financial market interiority. Again, this recommendation clearly reflects a bias against and disregard for the credit union system. We urge Treasury to pursue a fair and more balanced approached and to work with the White House to include NCUA on the PWG.
In closing, given the Treasury's lack of understanding about credit unions, it is no surprise that the Blueprint would set in motion a plan that will result in their demise. In the process, consumers would not be protected and an important alternative to for-profit banks would be eliminated from the financial marketplace in the name of efficiency. In the meantime, CUNA will continue to do all that is necessary to prevent that outcome.
Daniel A. Mica
President & CEO