Mergers & Aggravations

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The credit union lobby's bid to fix an impending problem on merger accounting received a cool reception last week on Capitol Hill.

Sen. Paul Sarbanes (D-MD), co-author of the Sarbanes-Oxley Act that brings greater accountability to auditors of financial statements, delivered a minor rebuke to NCUA Chairman JoAnn Johnson when Johnson suggested the emerging accounting problem will require a congressional fix. "Should Congress start legislating accounting standards in issue after issue?" asked Sarbanes during a regulatory relief hearing before the Senate Banking Commission.

Johnson and three other credit union witnesses, including Michigan CU Supervisor Roger Little, the chairman of NASCUS, and credit union executives representing CUNA and NAFCU, testified that a pending rule by the Financial Accounting Standards Board will make it difficult for credit unions to merge because it will disallow the traditional practice of aggregating, or "pooling" the capital totals from both institutions after completion of the merger.

The new accounting rule could act as a disincentive to credit union mergers, because it will cause the merger to dilute net capital ratios, causing some to brush up against NCUA's minimum capital standards under prompt corrective action, according to industry representatives.

"FASB's change will, in effect, prevent credit unions from moving forward with mergers which are clearly in the best interests of their members," said Johnson.

But Sen. Sarbanes, who has become a leading congressional spokesman against the accounting excesses and scandals of the 1990s, was clearly opposed to a legislative fix and recommended that credit unions negotiate some kind of resolution with the FASB, the private-sector accounting standard-setters, instead.

Afterwards, Johnson said the agency has been working with FASB and is still hopeful of a resolution before the planned Jan. 1, 2006 effective date of the new rule.

But Roger Little, the Michigan regulator, was less optimistic and suggested that FASB, after rejecting credit unions' request for an exemption from the new accounting rule, will not be accommodating.

Under the proposal, Congress would amend the Federal CU Act to redefine net worth from its current definition of retained earnings, to one to be determined by the NCUA Board under generally accepted accounting principles (GAAP).

However, even if Congress were to endorse the change, it is highly unlikely the regulatory relief bill will be passed in time for the planned 2006 implementation of the new accounting rule, posing a different problem for credit unions.

During the Senate hearing, the credit union witnesses, Xerox FCU President Bill Cheney, who represented NAFCU, NEPCO FCU President Marilyn James, who represented CUNA, as well as Johnson and Little, repeated their endorsement of more than a dozen provisions, most of which have been included in a version of the bill already passed by the House.

Among the provisions are ones that would: allow federal credit unions converting to community charters to retain their select groups; allow federal credit unions to provide limited services, like check cashing and wire transfers, to non-members within their fields of membership; transfer rulemaking authority on loan maturities and permissible investments from Congress to NCUA; ease the limits on member business loans; and tighten voting requirements for credit unions converting to mutual savings banks.

The groups also endorsed a proposal by NCUA to amend the minimum capital standards under prompt corrective action to allow NCUA to develop a risk-based capital standard, similar to one required for banks and thrifts.

Witnesses representing banks and thrifts testified asking to both ease some of the consumer protection provisions, like the three- day right of rescission for mortgage loans, disclosure requirements for the Truth-In-Lending Act; and increase consumer liability for electronic funds transfer from $50 to $500; and expand the powers for thrifts to make auto and business loans

Neither the regulatory relief bill, nor a more narrow one pertaining to just credit unions, known as the CU Regulatory Improvements Act, are expected to be passed in this Congress, meaning they will have to be introduced again next year.

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