GAO Report Finds Disappearing Middle Class Among Cus

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A report issued by the federal government last week portrays a credit union movement that is increasingly divided between large, diversified institutions and small, traditional mom-and-pop credit unions.

The report by the General Accounting Office, though, was generally positive, documenting a vast improvement in the financial condition of the credit union movement since 1991, just after the Rhode Island deposit insurance crisis and the last time the government auditors studied credit unions, and today when credit union assets are at all-time highs and the number of troubled credit unions has declined significantly.

But the GAO report did raise some potentially difficult issues for credit unions, specifically the level of service to the underserved, which has long been considered one of the major missions of credit unions.

Credit unions' adherence to this mission was one of the main purposes of the study, requested by then-Senate Banking Committee Chairman Paul Sarbanes (D-MD), a major advocate of the Community Reinvestment Act. Sarbanes, who raised the issue of credit union service to the underserved during several Senate hearings, requested the study soon after NCUA repealed its own CRA-like Community Action Plan, which would have required community-chartered credit unions to document their own service to low- and moderate-income communities

The GAO found that there is some evidence to suggest that credit unions devote a smaller portion of their services than banks to serving low- and moderate-income people. In fact, data gathered from the Federal Reserve's Home Mortgage Disclosure Act and the Fed's triennial Survey of Consumer Finances, indicates that credit union loans go to a lower percentage of low- and moderate-income borrowers than do bank loans.

These findings are something that congressional critics, and especially the banks, will continue to focus on as increasing numbers of credit union serve the general population through community charters. Adherence to this mission, insist the bankers, is part of the price for the continuation of credit unions' federal tax exemption.

The American Bankers Association, in fact, saw the GAO report pointing directly to the tax exemption, even though the report steered clear of the issue. The report, stated Edward Yingling, executive vice president of the ABA, successfully documents the trend that large credit unions are becoming more like community banks. "Policy makers should ask themselves: when is a credit union not a credit union? GAO's report, in our view, provides some answers," said Yingling.

But the data on serving the underserved is limited, conceded the GAO, which recommended that either NCUA or Congress undertake to collect more information to determine whether credit unions are adhering to their stated mission of serving people of modest means.

NCUA Chairman Dennis Dollar, who helped repeal the NCUA CAP, acknowledged the Fed's findings but said the limits on HMDA collection to only those credit unions over $31 million and offering mortgage loans provides little insight into the question of serving the underserved. Dollar insisted NCUA under his 'Access Across America' program has vastly expanded the low- and moderate-income markets for credit unions to serve over the past few years and it will take some time yet to determine whether those credit unions are adequately penetrating those markets. In addition, the majority of credit unions continue to be organized around occupation or association groups, limiting their ability to reach out to underserved communities, he said.

Still, Dollar moved last week to address this issue by organizing an NCUA task force aimed at addressing some of the findings in the GAO report, including creating a system to collect information on service to the underserved.

CUNA General Counsel Eric Richard also referred to a lack of data collection on the issue of service to the underserved. Richard suggested that the concept of service to the underserved, as stated in the Federal CU Act, passed in 1934 when the difference between blue collar and white collar America were more clear, has evolved over the past seven decades, so that different standards apply now.

The sum of the GAO report was much less bracing than the 1991 report, issued amidst the worst times in credit union history, when credit unions, like banks, were failing in record numbers, and the failure of the Rhode Island Share and Deposit Indemnity Corp. caused a state banking holiday and the failure of dozens of privately insured credit unions. The 1991 report included in more than 60 recommended reforms for credit unions, most of which were eventually adopted by either NCUA or Congress.

Since then, the GAO notes, the number of troubled credit unions has declined by almost two thirds to just 211 at the end of 2002, while credit union assets have more than doubled and profitability is near all-time highs. "I think the numbers speak for themselves," said NAFCU President Fred Becker. "Things are a lot better today than they were then."

As a result, the GAO this time had only a handful of recommendations, including creating some kind of data collection system to determine service to the underserved; that NCUA consult with other financial regulators on its recently adopted risk-focus examination programs; that NCUA improve the process for setting the overhead transfer rate for funding the annual operating budget; and that NCUA study a risk-based policy for pricing share insurance. Also, GAO suggested NCUA seek permanent authority from Congress, provided for a brief time during the Y2K concerns, over third-party vendors of credit unions, something all the other financial regulators have.

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