Long-Awaited GAO Report a Mixed Bag, Credit Union Advocates and Detractors Dizzy with Spin

WASHINGTON -- On the heels of NCUA's own report on credit union service and executive compensation, the Government Accountability Office has issued a similar report with a bonus study on the objectivity of NCUA, both of which each side has put in different lights.

Responses from credit union and bank groups, as well as Ways and Means Committee Chairman Bill Thomas (R-Calif.) who requested the studies, to the GAO's reports on NCUA and credit unions released publicly Dec. 1, have been predictably conflicting and pointed.

The credit union trade associations and NCUA have highlighted the report's look at credit union versus bank product and service pricing.

"Our analysis of interest rates for 15 loan and savings products indicated that credit unions seem to offer more favorable rates than those of comparably sized banks, particularly for consumer loans," GAO's report read. "For example, rates that credit unions charged for car loans averaged about 1 to 2 percentage points lower than rates offered by similarly sized banks, and credit union rates averaged 0.4 percentage points higher for regular savings accounts. This difference was slightly more pronounced as the size of the institutions increased."

The report also noted that mortgage rates were virtually the same at similarly sized banks and credit unions. "However, our analysis of deposit and loan rate data does not fully identify how the tax-exemption of credit unions might benefit credit union members. For example, tax-exemption may enable credit unions to reduce fees they charge for services provided to members," it stated.

CUNA Chief Economist Bill Hampel said that credit union closing costs are indeed lower than banks' on mortgages. The reason the rates are the same is because nearly all mortgages are sold on the secondary market and have to be priced accordingly.

Of the pricing comparisons, NAFCU President/CEO Fred Becker indicated, "In this regard, the GAO has largely ignored what should have been the focus of its analysis, how credit unions serve their members better than other financial institutions."

NCUA highlighted a number of places where GAO agreed that it might not have complete enough information to draw accurate conclusions, including member income, which GAO based on the Federal Reserve's Survey of Consumer Finances. "The data used by the Government Accountability Office does not provide as complete a picture of credit union member income as that gathered by NCUA in its Member Service Assessment Program," NCUA Chairman JoAnn Johnson said, which included more than 14 million member records.

NAFCU Director of Political Affairs Dillon Shea pointed out that the GAO report was based on the Fed's SCF, which was not designed for income comparisons and does not account for cost of living variances. He explained that NAFCU staff met with GAO during their study and laid out the group's analysis of the recently released Home Mortgage Disclosure Act data, "which shows a very different and more accurate picture," but GAO did not use it for their report.

"As NAFCU has said previously, we welcome a careful and balanced examination of the services credit unions provide," Becker added. "Unfortunately, today's reports do not shed much light on credit union services. We are especially puzzled that the GAO did not take into account the HMDA data and did not include a more in-depth analysis of how credit unions are serving their members."

The GAO report even stated that loan rates alone couldn't determine the use of the tax-exemption. "Loan rates may differ because of differences in borrower characteristics, such as creditworthiness, or because of geographic market differences. In addition, tax-exemption may benefit members in other ways than through loan and deposit rates," GAO said, lower fees being one of those benefits.

By contrast, the banking groups and Chairman Thomas touted the statistics at face value. Thomas stated, "One of the reasons cited for the need for credit union tax-exemption is that they would serve those of modest means, yet GAO found that banks continue to serve a higher percentage of low- and moderate-income households than credit unions."

American Bankers Association President/CEO Ed Yingling also pointed out, "The GAO found that, despite their tax-exemption, credit unions lag banks in serving low- and moderate-income individuals. Specifically, the GAO found that while 41 percent of households that primarily use banks are of modest means, only 31 percent of credit union households fall into the low- to moderate-income category. What's more disturbing is the fact that this shows a decline in credit unions' service from 2001, when 36 percent of members were of modest means. Meanwhile, the proportion of upper-income customers at credit unions has increased from 43 to 49 percent.

"If banks do a better job serving people of modest means, why do all credit unions continue to enjoy a tax-exemption?" he continued. "ABA believes it's time to distinguish traditional credit unions from those that have strayed from their mission."

ICBA President/CEO Camden R. Fine agreed. "ICBA commends the GAO for its comprehensive study examining the credit union industry. The report highlights that tax-paying banks are better serving low- and moderate-income people than tax-exempt credit unions...The credit unions do not even have any solid data to support their mandated role to serve people of modest means. Notably, the credit unions are not subject to the Community Reinvestment Act (CRA) as are banks. Taxpayers and policymakers should be extremely concerned that more than $31 billion in lost tax revenues will benefit credit unions in the next decade while they are not fulfilling their fundamental mission of serving low- and moderate-income families."

CUNA President/CEO Dan Mica fired back, "Although the GAO report notes that credit unions serve a lower proportion of low- and moderate-income members than do other financial institutions, it also notes that credit unions are subject to numerous field of membership restrictions. The effect of these restrictions results in credit unions serving a greater proportion of moderate and middle-income members than do banks. That is just who Congress intends credit unions to serve: Working Americans living paycheck to paycheck." He also noted the comparative pricing data, where credit unions were indicated as a better deal than banks in all categories but mortgages.

Johnson also emphasized GAO's acknowledgement of federal credit unions' membership restrictions, which she called "a critical aspect that merits additional discussion by Congress." GAO's report does mention the ABA lawsuit that required credit unions to scale back adopting underserved areas.

According to the GAO report, the proportion of credit union members in the upper-income category grew from 43% in 2001 to 49% in 2004. Additionally, there was a decline in the percentage of low-income households over the same time period. However, GAO noted, "Additionally, the relatively high percentage of households in the moderate- and middle-income categories that used credit unions (37%) in the 2004 SCF may be reflective of credit union membership traditionally being based on occupational- or employer-based fields of membership." Bringing Home the Bacon

The GAO indicated that the issue of executive compensation transparency has risen in prominence for tax-exempt and publicly held companies and recent Securities and Exchange Commission rulings have illustrated that. "In contrast," GAO wrote, "credit union executive compensation is not transparent because credit unions are not required to file publicly available reports such as the IRS Form 990 that disclose executive compensation data."

GAO also noted that credit union directors serve on a volunteer basis, but may get reimbursed for mileage, travel expenses, and other items. "In contrast, bank boards of directors may receive fees such as an annual retainer for serving on the board, profit sharing, professional fees, and other bonuses. Also, according to one bank survey, about half of the banks that responded indicated that their compensation fees were based strictly upon attendance."

Mica commented, "While noting the lack of comparable information, the details presented in the report on credit union and bank executive salaries strongly suggest that credit union executive salaries are consistent with their not-for-profit status."

However, ABA's Yingling stuck to his guns: "There's no reason, in the new age of transparent corporate governance, for credit union executives to shield information on their compensation from their members and the public." Modification Recommendations

The 110-page report boiled down to two recommendations from the GAO to NCUA. First, it suggested, "To help ensure that credit unions are fulfilling their tax-exempt mission of providing financial services to their members, especially those of low or moderate incomes, we recommend that the Chairman of NCUA systematically obtain information on the income levels of federal credit union members to allow NCUA to track and monitor the progress of credit unions in serving low- and moderate-income populations. NCUA's recent pilot survey to measure the income of credit union members could serve as a starting point to obtain more detailed information on credit union member income." The NCUA staff's report made a similar recommendation. "Ideally" the agency should expand the survey so that it is valid by charter-type as well, monitor actual usage by low- and moderate-income members, and monitor progress.

Specifically, GAO said NCUA's data should:

(1) Provide benchmark data, such as general population income statistics or other appropriate measures, to allow comparisons with the data collected on the income levels of credit union members;

(2) Obtain data on the extent of services offered by credit unions (e.g., free checking accounts, no charge ATMs, low-cost wire transfers, etc.) are being used by income category;

(3) Expand the data collection effort to allow the results to apply to various charter types; and

(4) Conduct the study on a systematic or periodic basis to assess the extent of progress over time.

The report noted NCUA's efforts to expand credit unions' service to low-income people through the low-income credit union designation and the adoption of underserved areas, but the results of such efforts have not been quantified.

While NAFCU was pleased the report did not recommend changes to the tax-exemption or Community Reinvestment Act-like requirements for credit unions, "It did recommend NCUA collect more data over time," Shea said. "Historically, NAFCU has opposed these added regulations for credit unions. For a lot of our smaller institutions, it will be a burden to have an ongoing NCUA data collection study."

NAFCU Senior Vice President of Government Affairs Dan Berger added, "We believe that this was supposed to be a pilot project, a one-time issue."

On the matter of executive compensation, GAO recommended, "To increase the transparency of executive compensation and enhance accountability of credit unions, we recommend that the Chairman of NCUA take action to ensure that information on federal credit union executive compensation is available to credit union members and the public for review and inspection." Impact

CUNA Vice President for Legislative Affairs Dean Sagar observed, "Its release in some ways is favorable even if it had been more negative just because Congress is really looking at its own leadership, reorganization. It's looking at restructuring; it's moving offices. It'll be largely overlooked, completely...I think it comes at a time when very few people are going to notice it."

CUNA is looking to use the results of the studies by GAO and NCUA, as well as it own data, to push field of membership legislation. "What it really comes down to is that credit unions effectively offer affordable services to the members who they are limited in serving," Mica concluded. "Credit unions could serve even more Americans of modest means if Congress drops or lowers key barriers that hinder credit union reach to these consumers."

Hampel added that CUNA's own data by charter-type shows "the fewer the field of membership restrictions the credit union has, the lower down the income distribution level its members tend to be. We think there's a message in that for legislators." --scooke@cutimes.com