Order Code RS22661
May 16, 2007
Credit Union Regulatory Improvements
Act of 2007 (CURIA)
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
On March 15, 2007, regulatory modernization legislation for credit unions was
introduced as H.R. 1537 in the 110th Congress. The Credit Union Regulatory
Improvements Act of 2007 (CURIA) would modernize capital requirements, raise the
cap on member business lending, enhance the ability of credit unions to serve financially
underserved areas, and provide regulatory relief. This legislation is an amended version
of CURIA 2005.1 For the past three Congresses, credit union representatives have
advocated for legislation that would address what they maintain are outdated restrictions
and the growing costs of regulatory compliance and thereby increase the ability of credit
unions to grow and serve their membership. The banking industry has been opposed,
in general, to any legislation that would increase the powers of credit unions. In prior
Congresses, some provisions of credit union specific legislation were incorporated into
omnibus legislation that would reduce regulatory requirements on all depository
financial institutions. Credit union representatives have remained committed to the
passage of a complete package of provisions most recently introduced as H.R. 1537.
This report will be updated as events and legislative events warrant.
Background
The original concept of a credit union was of a cooperative organization formed for
the purpose of promoting thrift among its members and providing them with a source of
low-cost credit. During the last couple of decades, technology, competition, and
economic conditions have brought many changes to the financial services marketplace
that have affected all types of depository financial institutions. The credit union industry
has evolved with marketplace changes in order to grow and serve its membership.
Currently, many of the financial services credit unions provide are similar to those offered
1 For information on the 2005 legislation please see CRS Report RS22212, Credit Union
Regulatory Improvements Act of 2005 (CURIA), by Pauline Smale.
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by banks and savings associations, but they remain distinguishable because of their
cooperative framework and unique charter requirements. Credit unions are nonprofit,
member-owned financial institutions and are subject to specific restrictions not placed on
other depository financial institutions.
Credit union charters are granted by federal or state governments on the basis of a
“common bond.” This requirement determines the field of membership, and is unique
among depository financial institutions. There are three types of charters: (1) a single
common bond (occupation or association based); (2) multiple common bond (more than
one group each having a common bond of occupation or association); and (3) a
community-based (geographically defined) common bond.
Individual credit unions are owned by their membership. The members of a credit
union elect a board of directors from their institution’s membership (one member, one
vote). Members’ savings are referred to as “shares,” and earn dividends instead of
interest. Credit union loan and investment powers are more restricted than those of
commercial banks. Credit unions can only make loans to their members, to other credit
unions, and to credit union organizations. The investment authority of federal credit
unions is limited by statute to loans, government securities, deposits in other financial
institutions, and certain other limited investments. Given that credit unions are
considered financial cooperatives, the institutions are exempt from federal income tax.
Individual members are taxed on their dividends.
Since 2001, both the banking and the credit union industries have worked with
Congress to develop legislative proposals that would reduce existing regulatory
requirements and the burdens compliance enforcement places on depository financial
institutions. During the 109th Congress, legislation was enacted (P.L. 109-351; 120 Stat.
1966) that provided some of the changes sought. The statute reduces regulatory
requirements for all types of depository financial institutions. Both the banking and credit
union industries remain interested in the regulatory relief provisions excluded from the
law.2
In the 110th Congress, the current measure providing regulatory relief and reform for
credit unions is H.R. 1537, the Credit Union Regulatory Improvements Act of 2007. The
intent of this legislation is to modernize the prompt corrective action system for credit
unions, make adjustments to their loan authority, enhance the ability of credit unions to
serve financially underserved areas, and ease credit union regulatory burdens. Credit
union advocates state the legislation would ensure the financial strength of credit unions,
enhance the services provided to credit union members, and address the growing costs of
regulatory compliance. Banking industry advocates have raised concerns that the
legislation would grant credit unions authorities that could enhance their competitive
strength, while continuing their federal income tax exemption.3
2 For additional information on regulatory relief in the 110th Congress, please see CRS Report
RS22651, Financial Services Regulatory Relief: Implementation and Reintroduced Provisions
in the 110th Congress, by Walter W. Eubanks.
3 For a discussion of this issue, please see CRS Report 97-548, Should Credit Unions Be Taxed?,
by James M. Bickley.
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An Overview of CURIA 2007
The Credit Union Regulatory Improvements Act of 2007 (H.R. 1537) was introduced
on March 15, 2007; no further action has been taken on this bill. The legislation had 80
co-sponsors by May 10, 2007. The following is an overview of the bill’s three titles.
Title I: Capital Reform
This section would reform credit union capital requirements by including a risk-
based approach to the prompt corrective action (PCA) system for federally insured credit
unions. The reforms address recommendations of the National Credit Union
Administration (the federal regulator for credit unions). The objective of PCA is to
minimize the probability of credit union insolvency through early intervention by the
federal regulator. The new PCA framework establishes a net worth ratio that requires
progressively more stringent mandatory and discretionary regulatory actions for credit
unions with low or declining net worth levels. A significant part of a credit union’s net
worth is its retained earnings balance. Credit unions use retained earnings as their only
source for meeting capital requirements, as opposed to banks which can raise capital in
many different ways, including subordinating debt.
The proposed legislation would require all credit unions to meet a risk-based net
worth requirement. Risk-based requirements would be designed to be comparable to
capital standards required of institutions insured by the Federal Deposit Insurance
Corporation. In addition, CURIA 2007 would make adjustments to required actions for
an undercapitalized credit union, including the implementation of a net worth restoration
plan.
Title II: Economic Growth
This title would amend the authority of federal credit unions to make member
business loans, and it would enhance the ability of credit unions to serve financially
underserved areas. Under current law, credit unions can make loans only to their
members, to other credit unions, and to credit union organizations. Currently the
aggregate limit on a credit union’s net member business loan balances is the lesser of 1.75
times the credit union’s net worth, or 12.25% of the credit union’s total assets. CURIA
2007 would replace this limitation with a flat rate of 20% of the total assets of a credit
union. In addition, the legislation would exclude loans or loan participations to nonprofit
religious organizations from the member business loan limit. The definition of a member
business loan now excludes loan(s) that are equal to or less than $50,000. CURIA 2007
would amend the definition to exclude loans of $100,000 or less.
CURIA 2007 would permit federal credit unions of all charter types to expand credit
union services to eligible communities that meet the income, unemployment, and other
distress criteria identified by the U.S. Treasury Department or that qualify as low income
areas under the New Markets Tax Credit targeting formula. Currently, only credit unions
with multiple-group common bond charters can add underserved areas to their field of
membership. Provisions of this title would also arguably enhance the ability of credit
unions to assist the economic revitalization efforts of distressed communities. It would
give a credit union operating in an underserved community more flexibility in regards to
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the leasing of space in a building or property in which the credit union maintains a
physical presence. A credit union would also be permitted to acquire, construct, or
refurbish a building in an underserved community and then lease out excess space in that
building.
Title III: Regulatory Modernization
Section 301. Investments in Securities by Federal Credit Unions.
The investment authority of federal credit unions is limited by statute to loans,
government securities, deposits in other financial institutions, and certain other limited
investments. Some believe this restriction places them at a competitive disadvantage with
state-chartered credit unions and other depository financial institutions. This provision
would expand investment options by permitting a federal credit union to purchase for its
own account certain investment securities of a defined investment grade. The total
amount of the investment securities of any one obligor or maker could not exceed 10%
of an institution’s net worth. The aggregate amount of investment securities could not
exceed 10% of the assets of the credit union.
Section 302. Authority of the National Credit Union Administration
(NCUA) to Establish Longer Loan Maturities for Certain Credit Union Loans.
Federal credit unions are authorized to make loans to members, other credit unions,
and to credit union organizations. Prior to P.L. 109-351, loans were restricted to a
statutory 12-year maturity limit with a few exceptions. That law gave the NCUA the
authority to increase the 12-year maturity limit on non-real estate secured loans to 15
years. This section of H.R. 1537 would provide the NCUA with the additional flexibility
to issue regulations to increase that 15-year maturity limit to longer terms.
Section 303. Increase in 1% Investment Limit in Credit Union
Service Organizations. Organizations that provide services to credit unions and credit
union members are commonly known as credit union service organizations (CUSOs). An
individual federal credit union is currently authorized to invest in aggregate up to 1% of
its unimpaired capital and surplus in CUSOs. In addition, the same limitation applies to
loans credit unions may make to CUSOs. This section of H.R. 1537 would raise both
limits to 2%.
Section 304. Voluntary Mergers Involving Multiple Common Bond
Credit Unions. The groups forming a multiple common bond charter are restricted to
3,000 members under most circumstances under existing law. This numerical limitation
has been a concern in voluntary mergers of multiple common bond credit unions. The
National Credit Union Administration (NCUA) has required member groups resulting
from the merger that are larger than 3,000 to spin off and form separate credit unions.
This section of the bill would provide that this numerical limitation does not apply in
voluntary mergers.
Section 305. Conversions Involving Certain Credit Unions to a
Community Charter. This section addresses a single or multiple common bond credit
union converting to a community credit union. Community charters are required to be
based on a single, geographically well-defined local community neighborhood, or rural
district. This section would require the NCUA to establish the criteria used to determine
that a member group or other portion of a credit union’s existing membership, located
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outside the community base, can be satisfactorily served and remain within the newly
constituted credit union’s field of membership.
Section 306. Credit Union Governance. This section deals with two
separate issues. It provides for the expulsion of a federal credit union member for a good
cause by a majority vote of a quorum of the institution’s board of directors. Currently,
a two-thirds vote of the membership is required. In addition, this section would give
institutions the authority to limit the number of consecutive terms an individual could
serve on the board of directors in an effort to encourage broader representation on the
board.
Section 307. Providing the National Credit Union Administration
With Greater Flexibility in Responding to Market Conditions. The rate of
interest on loans made by a federal credit union may not exceed 15% under most
circumstances. This section would permit the NCUA to consider whether sustained
increases in money market interest rates or prevailing market interest rate levels threaten
the safety and soundness of individual institutions when the agency debates lifting the
usury ceiling.
Section 308. Credit Union Conversion Voting Requirements. This
section deals with the process a credit union follows when it undertakes a charter
conversion to become a mutual thrift institution. Currently, the membership must
approve the proposal to convert by the affirmative vote of a majority of those members
who vote on the proposal. This section would increase the minimum member
participation requirement in any vote to approve a conversion to 30% of the credit union’s
membership. In addition, it would require the board of directors to hold a general
membership meeting one month prior to sending out any notices about a conversion vote
that contain a voting ballot.
Section 309. Exemption from Pre-Merger Notification Requirement
of the Clayton Act. This section would give all federally insured credit unions the
same exemption as banks and thrift institutions from pre-merger notification requirements
and fees for the purposes of antitrust review by the Federal Trade Commission under
Section 7A(c)(7) of the Clayton Act (15 U.S.C. 18a(c)(7)).