I truly believe that the soul of the credit union movement,which is its philosophy, is still alive and well, but over the pastseveral years it has suffered from serious and identifiableerosion. I want to share some of the things I learned during mycareer that helped me define credit union philosophy and see wherewe are going.

When I gave up my job as a high school teacher of businesssubjects in 1956 to join the staff of Dallas Teachers Credit Unionand begin a credit union career that spanned a period of 40 years,it was my good fortune to learn about the credit union movementfrom H. B. Yates and Jack Mitchell, two credit union leaders whowere often referred to as pioneers of the movement. I also readeverything I could find about credit unions and their history, andhad a chance to become acquainted with and learn from a number ofother credit union leaders who made major contributions on bothstate and national levels.

All of these leaders credit the Great Depression of the 1930s asbeing a driving force in the rapid growth in the number and size ofcredit unions following World War II because of the desire ofcredit union volunteers to improve the lives of their members. Icould relate to that motivation since I was old enough beginningabout 1935, to remember the hardships that the people in the ruralarea where I grew up were suffering. However, it should be notedthat the motivation throughout the history of credit unions fromtheir beginning over 150 years ago was to assist members inimproving their economic welfare by providing badly needed low-costloans and a place to save.

As credit unions matured following the Great Depression, theexisting foundation of credit union philosophy was strengthened bythe leadership of that era. A good example was spelled out clearlyin the logo for the movement at that time, which pictured a littleman holding an umbrella over him with the words "Credit Union"printed on its side. Above the umbrella among falling rain were thewords "Hard Times," "Sickness," and "Financial Distress." An earlyslogan was, "Not for Charity, not for Profit, but for Service." Theslogan "People Helping People," which is in use today, alsodescribes what credit unions are about.

Roy F. Bergengren, famous for his efforts in the passage of lawsin individual states to authorize the formation of credit unionsand ultimately for leadership in the passage of the Federal CreditUnion Act in 1934 was quoted as saying, "The real job of a creditunion is to prove in modest measure, the practicality of thebrotherhood of man."

Credit unions have always sought to do everything possible toassist members to help themselves to live better lives and attain ahigher standard of living for their families. Their social valuehas always been recognized and justifies exemption from federalincome tax. This is the basis of credit unions making up the"credit union movement" rather than being referred to as the"credit union industry." Credit unions help make up the financialservices industry, but do not make up a standalone industry.

The principles, culture, and core values that determine howcredit unions as a group operate to serve their members on anational basis exemplifies the credit union philosophy. Clearlyunderstood and accepted standards provide valuable guidance for useby leaders of individual credit unions as operating practices andpolicies are formulated to fulfill goals set by vision and missionstatements. When these standards and practices are weakened orabandoned then the soul of the credit union movement is eroded. Theunbelievable development of technology and telecommunication, avery long list of new services and delivery systems, and moreappropriate laws and regulations should not and must not alter thepractice of philosophy as I have described it.

Serious erosion of the credit union philosophy can be related tothe following situations or practices.

(a) Clearly some of the worst damage has occurred because of theattempts of a surprising number of CEOs and directors to changetheir credit union's charters to bank charters. Members of somecredit unions who simply failed to understand what they were givingup have allowed the capital of their credit unions, which theyowned, to become the capital for the formation of a bank. Greed ona grand scale seems to have driven this scheme, which has made itpossible for credit union CEOs, senior staff, and directors to reaphuge financial gains in many cases. This practice clearly violateseverything credit unions have stood for and must be stopped.Fortunately, in a few cases credit union members have united tooppose such efforts with success. Also, a number of credit unionleaders are uniting to be sure that members fully understand whatthey stand to lose if they allow a charter change to occur and newregulations now mandate more detailed disclosure statements.

(b) Erosion of a different type has occurred because of thebuilding of excessive reserves by some credit unions. Excessivereserving hurts credit union members because they are deprived oflarger dividends on various share deposits, are charged higherrates for loans, and are usually charged higher fees while theexcessive reserves are being built. The principles of a financialcooperative mandate that after required reserves are set aside tomeet state and federal regulatory requirements and other safety andsoundness requirements, all income should be returned tomembers.

Over recent years many credit unions have built reserves thatsubstantially exceed reasonable requirements with some capitalratios ranging from 10-30% or more. Since the NCUA deems a capitalratio of 7% adequate for credit unions to be considered wellcapitalized, a strong case can be made that capital ratios thatrange from seven and one-half to nine percent are quite adequatefor almost all credit unions.

The practice of excessive reserving deprives members of some ofthe benefits of a financial cooperative and thus may jeopardize thefederal income tax exemption that has been of great help to creditunions as they have successfully helped millions of members achieveeconomic security. The practice of excessive reserving also makesthe credit union less competitive with other financial institutionswhile the excessive reserves are being built.

(c) Credit union principles have also been eroded by a fewcredit unions that have sold credit card portfolios to banks, whichthen are able to increase interest rates and a long list of fees tooutrageous levels. Such sales may result in a one-time windfallmonetary gain for a credit union, but can be damaging over time tothe members because of the added cost they face. If a credit unionwishes to be the primary financial institution for its members itmust offer them a broad array of financial services that they needand use on an ongoing basis (d) Another practice that has evolvedin some credit unions is the charging of exorbitant fees when sharedrafts written by members are returned because of insufficientfunds. Fees that range from $20 to up to $30 per item are excessiveand therefore detrimental to those members who might carelesslyfail to make a timely deposit or track the outstanding balance oftheir accounts. There has always been common agreement among creditunion leaders that it is appropriate to charge reasonable fees tocover the cost of handling the returned items, cover possiblelosses, and help deter the practice. These fees should not reachthe level where they become a major source of revenue. I hope thatcredit union leaders everywhere will carefully review all feesbeing assessed their members to be sure that none are excessive.The availability and promotion of overdraft protection programs andmember education can help members avoid returned share draft fees.There are other practices that could lead to similar erosion if notcarefully monitored: o The use of credit scores for loan approvalwithout enforced safeguards or review processes that look beyondthe scores could result in loan requests being declinedunnecessarily. o Risk-based lending if not carefully controlledcould result in loans being classified in a higher risk categorywithout justification, thus unfairly assigning higher interestrates.

o Indirect lending without careful oversight has the potentialof deteriorating the credit union's relationship with its members.Loans may be lost to auto dealer related financing if agreementsare not honored.

It is my hope that the leaders of both national and state creditunion trade associations will take a careful look at the damagethat has already occurred and seek ways to reverse the trend. Butmost of all, I hope the directors and senior staff members ofindividual credit unions will review policies and practices fortheir credit unions to determine whether changes are needed touphold the philosophy of the entire credit union movement.