WASHINGTON-Though the credit union industry appears to be running smoothly and the financial condition strong, NCUA should make some changes to its oversight programs, according to a new 183-page report from the U.S. General Accounting Office. Time has been good to credit unions, GAO found. The government watchdog has not performed an overall study of credit unions since 1991. In that time, the number of troubled credit unions-those with a CAMEL 4 or 5 rating-declined from 578 (5% of credit unions) in 1992 to 211 or 2% in 2002. Additionally, NCUA implemented Prompt Corrective Action procedures in 2000, but very few credit unions have been subject to them due to the positive economic environment, GAO concluded. However, these good economic times caused a fissure based on assets in the credit union community; the number of credit unions fell over the 10-year period while assets continued to grow. "This has resulted in two distinct groups of credit unions-larger credit unions, which are fewer in number and provide a wider range of services that more closely resemble those offered by banks, and smaller credit unions, which are greater in number and provide more basic financial services," GAO found. Credit unions over $100 million in assets represented 4% of credit unions and 52% of assets in 1992, but by the end of 2002, this category represented 11% of all credit unions and 75% of total assets. As a result of the shrinking number of credit unions, NCUA has implemented a risk-focused examination process like the other federal financial regulators. While NCUA has met with the other regulators for guidance in implementing the program, "opportunities exist to further leverage the experiences of other depository institution regulators to more effectively deal with ongoing challenges such as ensuring that examiners have sufficient training and expertise to evaluate the more sophisticated activities of credit unions, such as Internet banking and member business lending," GAO wrote. Some examiners, according to the report, said they were unsure of whether they could appropriately assess credit unions' vital information systems. GAO highlighted the fact that NCUA does not have the same authority to oversee third-party vendors that the other regulators have, which is a congressional matter. Another statutory difference between banks and thrifts and credit unions is that credit unions are not subject to internal control reporting requirements in the Federal Deposit Insurance Corporation Improvement Act of 1991. According to GAO, all the expansion of the credit union system has led to debate of who is receiving credit union services. Though credit unions have historically been accepted as serving those of modest means, available data does not support that, according to GAO. The Federal Reserve's 2001 Survey of Consumer Finances and Home Mortgage Disclosure Act data were used to determine this. According to the Fed's survey, 36% of households of low- and moderate-incomes primarily or only use credit unions, while 42% of the same group exclusively or primarily use banks. According to a previous report from CUNA, the higher income of credit union members is linked to the fact that many credit unions are occupationally based. HMDA data shows that mortgage loans to low-and moderate-income households from credit unions came to 27%, while banks recorded 34%. However, GAO noted that small credit unions, which most are, are not required to report HMDA data and that credit unions generally make more consumer loans for which data is not available. "An analysis of consumer loans or other services by household income would provide a more complete picture of credit union service to low- and moderate-income households," GAO recommended. NCUA has used the number of potential members in underserved areas and communities as an "indirect measure" of service to those areas. "NCUA officials believe that potential membership is an appropriate measure because they view NCUA's role as expanding membership opportunities for credit unions as opposed to the credit unions' role of actually extending service to new members," the report stated. GAO also indicated that NCUA highlighted that membership at credit unions adding underserved areas was growing at a rate of 4.8% versus 2.49% at credit unions that did not, but could not determine if those members actually came from the underserved areas. GAO explained that one community reinvestment organization has recommended that credit unions be subject to the Community Reinvestment Act, while the National Federation of Community Development Credit Unions has said that credit unions serving large communities should be held accountable in some way. NCUA and credit union trade associations have resisted stating that no data suggests credit unions are not serving their members. Just two years ago, NCUA rejected CRA-lite requirements for credit unions for the third time. The agency and the credit union trades also consistently point to the fact that Congress specifically opposed credit unions becoming subject to CRA during the H.R. 1151 battle. Currently, only Connecticut and Massachusetts require credit unions to collect data on who is using their services. Insurance is Strong, But Not Perfect Not only are credit unions running strong, but so is their insurance fund. Performance indicators have shown that the National Credit Union Share Insurance Fund has remained stable over the past 10 years. Net income has been positive, though declines in portfolio yields occurred in 2001 and 2002. Other factors in the decreased net income, according to GAO, include increases in the overhead transfer rate and increasing insurance losses from failed credit unions. Despite favorable financial indicators, GAO pointed out that the NCUSIF is the only deposit insurance fund not using a risk-based insurance structure. "By not having risk-based insurance structure, NCUSIF puts a disproportionate share of the pricing burden on less-risky credit unions and does not provide an incentive through pricing for owners and managers to control their risk," GAO wrote. The report also stated, "Moreover, NCUA's process for estimating anticipated losses to the fund lacks precision.As a result, NCUA may be over or underestimating probable losses to the fund." Concerning private insurance, GAO found that, overall, the risk to the credit union system from private primary insurance providers has decreased with time, though concerns remain. Between 1990 and 2002, the number of privately insured credit unions fell from 1,462 to 212; the assets in those credit unions dropped from $18.6 billion to $10.8 billion; and just one of 10 private primary insurance providers, American Share Insurance, still exists. GAO stated in its report that ASI is too concentrated in some large credit unions and a few states. GAO also questioned the insurer's ability to absorb "catastrophic losses because it does not have the backing of any governmental entity and its lines of credit are limited." ASI has worked to mitigate risk by more closely monitoring its largest credit unions and state regulation of ASI and its credit unions "provides some additional assurance." GAO also noted its recent report that concluded that a significant number of privately insured credit unions do not provide members with adequate disclosures that the credit union is not federally insured. While NCUA Chairman Dennis Dollar made it clear that he did not agree with all of the conclusions of the GAO's report, he said he was pleased with the overall results. Dollar explained that NCUA valued third-party oversight and would carefully evaluate each of GAO's recommendations. "Although there are several of the GAO recommendations in which we see potential value and others in which we envision considerably more regulatory burden than benefit," the chairman said. Some of the recommendations NCUA is following up on include the overhead transfer rate methodology and insurance loss estimation. Interested private sector parties were not so even keeled in their comments. CUNA President and CEO Dan Mica fired out this statement shortly after the study's release: "CUNA strongly objects to a basic premise stated in the GAO report. Frankly, it is outrageous for the GAO to claim that `recent legislative and regulatory changes have blurred some distinctions between credit unions and other depository institutions such as banks.' No matter what product or services credit unions may offer, the point is that they are offered in a different way from banks: on a not-for-profit, cooperative basis." Mica was disappointed that the banking industry was even consulted on the study, which had nothing to do with the subject of the report. "Moreover, we know of no instance where the GAO has contacted CUNA or credit unions in connection with any study of the banking industry," Mica continued. "The first thing I scratched my head at, at least in the conclusion, is that there are two types of credit unions," said NAFCU President and CEO Fred Becker. The study makes a point that the gap between small and large credit unions is spreading and places a cut off point at $100 million in assets, which Becker said is an inaccurate definition of a large credit union. Regarding the data collection on service to the underserved, which the industry has been fighting for at least 10 years, Becker said that banks were given CRA requirements because they were redlining and no one is accusing credit unions of that. Additionally, he said it is impractical to expect a $1 million credit union run by volunteers without electronic operations to collect that kind of data and that the extra burden might put them out of business. Becker has encouraged credit unions to "talk about examples of what they are doing and how they have taken people who are underserved or low-income or whatever the case and helped them to get to where they are today." He said that he hopes Congress, the audience the report was completed for, would give the issue careful consideration if thinking of addressing it legislatively. Dollar agreed. "Given their democratic control and not-for-profit organizational structure, credit unions are uniquely positioned to reach out and serve these low-income consumers, and have neither motive to do otherwise nor a record of failing to do so." As for the portion regarding private insurance, ASI President and CEO Dennis Adams wrote in response to the GAO's report, "[I]t is our opinion that the GAO has failed to adequately assess the private insurance industry and has drawn conclusions based on assumptions regarding future outcomes that lack foundation in actuarial science and fail to give credit to the past performance of the sole remaining credit union private share insurer." The credit union trade associations and ASI were consulted in GAO's review of the industry. -

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