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WASHINGTON -Though the Senate Banking Committee’s hearing on regulatory relief legislation last week had the potential for an anti-credit union free-for-all, nothing was said against the provisions credit unions are seeking. According to sources, the banker groups had been admonished in advance by committee members that they should not raise their objections to regulatory relief provisions for credit unions, but focus on what the potential legislation could do for them. NCUA Chairman JoAnn Johnson raised a number of issues with the panel, but one of the most recent to grab credit unions’ attention is the proposed changes to Financial Accounting Standards Board guidelines from the pooling to the purchase method of accounting for mergers. Under the pooling method, the two credit unions’ net worth was combined and the true net worth of the new institution was reflected. However, under the purchase method, the discontinuing credit union’s net worth is included in the equity. “Specifically, the change will provide that when two credit unions merge, the retained earnings of the discontinuing credit union would not be included in the post-merger net worth. FASB expects to implement this change as early as Jan. 1, 2006,” Johnson explained in her testimony. When the Federal Credit Union Act was updated in 1998 by the Credit Union Membership Access Act, a system of Prompt Corrective Action was imposed, which defined net worth as “retained earnings.” This has worked well until FASB’s proposal to switch to the purchase accounting method, which would include the discontinuing credit union’s net worth as equity. In a letter following up on a query from the Committee’s Ranking Member Paul Sarbanes (D-Md.), Johnson wrote, “Our proposed legislative solution, which involves substituting the term “equity” for “retained earnings” addresses the problem without interfering with FASB’s jurisdiction over accounting principles and without otherwise affecting the PCA capital requirements of the FCU Act.” She reassured the senator that NCUA is not proposing “legislation that would in any way dictate accounting standards.” The chairman wrote, “Under [FASB's] change, the retained earnings of the discontinuing credit union in a merger becomes part of the equity, but not the retained earnings, of the post-merger credit union. Thus, the use of the term “retained earnings” in the FCU Act to define net worth results in a significant understatement of the net worth of the post-merger credit union. This will seriously impair the ability of credit unions to conduct mergers that are otherwise in the best interests of their members.” Additionally, Johnson pointed out during her testimony that NCUA is the only banking regulator that does not have oversight over third party vendors. “We believe that in these times, privacy, money laundering, and financing of terrorism are issues of paramount national interest as well as general safety and soundness concerns. NCUA should have direct examination authority over those vendors providing services for federally insured credit unions,” she stated. NASCUS Chairman Roger Little, deputy commissioner of credit unions for the Michigan Office of Financial and Insurance Services, also testified during the regulators’ panel of the hearing. He stated that NASCUS supported the changes proposed in H.R. 1375, the House’s Financial Services Regulatory Relief Act, and outlined NASCUS’ priorities. At the top of the list was not requiring credit unions to count loans to non-profit religious organizations against the member business lending cap. He also provided exemptions from pre-merger notification requirements and fees and from Securities and Exchange Commission registration requirements as having high importance to NASCUS. NASCUS also backed the lifting of the member business lending cap and risk-based PCA included in the Credit Union Regulatory Improvements Act (H.R. 3579). Going beyond that, where other credit union representatives did not tread, NASCUS pushed for permitting credit unions alternative forms of capital. Additionally, one item that was excluded from CURIA but does appear in H.R. 1375 is a provision allowing privately insured credit unions to join the Federal Home Loan Bank System. Little said NASCUS supported this provision as well. “Permitting non-federally insured institutions to join the FHLB system would not establish a new membership principle for the system. More than 50 insurance companies, chartered and regulated by state governments with no federal oversight or insurance, are now members of these banks,” he said. The third panel of the hearing included interest trade associations from credit unions to banks to consumer advocates. Marilyn James, president and CEO of NEPCO Federal Credit Union, testified on behalf of CUNA. The first point she hit was expanding the member business lending cap. “There is no safety and soundness reason to impose this limit.” she stated, adding that it “severely restricts small business access to credit.” The 12.25% cap was keeping her $22 million credit union from making member business loans because it would not allow the program to pay for itself. However, at 20%, there would be room. She also advocated that the best way to perform PCA is to use a risk-based measurement. NAFCU Board Member Bill Cheney, president and CEO of Xerox Federal Credit Union, picked up on this point during his testimony. He asked that credit unions be given parity with the banks regarding a risk-weighted system of PCA. He too said that increasing the member business lending cap and increasing the threshold for loans that count against the cap would help credit unions better serve their members. Cheney added that CURIA and the House version of the regulatory relief legislation would be good jumping off points for the Senate on this issue. “We hope the Senate considers provisions from both of those bills as it crafts its own bill,” he said. “Senator (Mike) Crapo (R-Idaho) has said that he would plan to try and craft a legislative proposal for regulatory relief after this hearing,” NAFCU Director of Legislative and Political Affairs Brad Thaler explained. CUNA Vice President and Senior Legislative Counsel Gary Kohn said, “Beyond that, it’s unclear what will happen. As it is, (there’s) not a lot of time left and we know that there’s some very controversial aspects of regulatory relief that may determine whether or not they can move ahead.” [email protected]

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