Credit Unions:

Financial Condition Has Improved, but Opportunities Exist to Enhance Oversight and Share Insurance Management

GAO-04-91: Published: Oct 27, 2003. Publicly Released: Nov 4, 2003.

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Recent legislative and regulatory changes have blurred some distinctions between credit unions and other depository institutions such as banks. The 1998 Credit Union Membership Access Act (CUMAA) allowed for an expansion of membership and mandated safety and soundness controls similar to those of other depository institutions. In light of these changes and the evolution of the credit union industry, GAO evaluated (1) the financial condition of the industry and the deposit (share) insurance fund, (2) the impact of CUMAA on the industry, and (3) how the National Credit Union Administration (NCUA) had changed its safety and soundness processes.

The financial condition of the credit union industry has improved since GAO's last report in 1991, and the federal share insurance fund appears financially stable. However, a growing concentration of industry assets in large credit unions creates the need for greater risk management on the part of NCUA. The question of who benefits from credit unions' services has also been widely debated. While it has been generally accepted that credit unions have a historical emphasis on serving people of modest means, our analysis of limited available data suggested that credit unions served a slightly lower proportion of low- and moderate-income households than banks. CUMAA and subsequent NCUA regulations enabled federally chartered credit unions to expand their membership, serve larger geographic areas, and add underserved areas. According to NCUA officials, these changes were necessary to maintain the competitiveness of the federal charter with respect to state-chartered credit unions. While NCUA has stated its commitment to ensuring that credit unions provide financial services to all segments of society, NCUA has not developed indicators to determine if credit union services have reached the underserved. In response to the growing concentration of industry assets and increased services offered by credit unions, NCUA recently adopted a risk-focused examination and supervision program but still faces a number of challenges, including lack of access to third-party vendors that are providing more services to credit unions. Further, credit unions are not subject to internal control and attestation reporting requirements applicable to banks and thrifts. GAO also found that the insurance fund's rate structure does not reflect risks that individual credit unions pose to the fund, and NCUA's estimation of fund losses is based on broad historical analysis rather than a current risk profile of insured institutions.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: In February 2006, NCUA's Board issued an Advanced Notice of Proposed Rulemaking, posing 22 open-ended questions for public comment dealing largely with internal control attestation requirements for credit unions. Eighty-three comment letters were received. According to NCUA, comments were predominately opposed to an internal control attestation requirement, although some auditing practitioners and auditing industry trade groups favored the requirement. After considering the comments and assessing the attestation environment for both public and private companies, NCUA stated that its staff ultimately decided to not present a proposed rule on internal control attestation for Board consideration. NCUA noted that (1) the Securities and Exchange Commission (SEC) has been pressing Congress for a law change to segregate smaller public companies from the internal control attestation provisions of the Sarbanes-Oxley Act to reduce audit burden; (2) SEC and the Public Company Accounting Oversight Board (PCAOB) have been reconsidering Auditing Standard No. 2 (AS2), the public company internal control attestation standard, to reduce attestation scope and procedures; (3) the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board's announced a delay in finalizing its revised internal control attestation standard (AT501) for nonpublic companies (nonpublic banks, credit unions, etc.) until PCAOB AS2 revisions are complete; and (4) the Federal Deposit Insurance Company is expected to revise its bank attestation requirements in light of SEC, PCAOB, and AICPA actions. Additionally, NCUA noted that FDIC has raised the asset size threshold for requiring internal control attestation from banks and thrifts from $500 million in assets to $1 billion. NCUA stated that it will continue to monitor these developments relative to any consideration of internal control attestation requirements for credit unions.

    Matter: To ensure the safety and soundness of the credit union industry, Congress may wish to consider making credit unions with assets of $500 million or more subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 requirement that management and external auditors report on the internal control structure and procedures for financial reporting, as well as compliance with designated safety and soundness laws.

  2. Status: Closed - Implemented

    Comments: In response to inquiries from Congress and GAO, in early 2006 the NCUA designed the Member Service Assessment Pilot program (MSAP) to collect data on the membership profile of FCUs and the types and services FCUs provide their membership. MSAP was completed and a report presented to the NCUA Board on November 3, 2006. The report was also provided to various members of Congress and is referenced in GAO Report GAO-07-29. Overall, MSAP, which included the review of over 14 million credit union member records at a cost of over $1 million to NCUA, was responsive to Congress in that it provided the most conclusive data to date on the membership profiles of FCUS.

    Matter: Should Congress be concerned that federally insured credit unions, especially those serving geographical areas, are not adequately serving low- and moderate-income households, Congress may wish to consider requiring NCUA to obtain data on the proportion of mortgage and consumer loans provided to low- and moderate-income households within each federally insured credit union's field of membership and obtain descriptions of services specifically targeted to low- and moderate-income households.

  3. Status: Closed - Not Implemented

    Comments: Currently, Congress has not provided NCUA examination authority over third-party service providers (vendors) and NCUA is not requesting such authority. NCUA stated that it continues to successfully perform voluntary Information Systems & Technology reviews at vendors and that it has completed 25 such reviews since GAO's report. NCUA also indicated that it has participated on five Federal Financial Institutions Examination Council vendor examinations during that timeframe.

    Matter: To improve oversight of third-party vendors, Congress may wish to consider granting NCUA legislative authority to examine third-party vendors that provide services to credit unions and are not examined through FFIEC.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On February 11, 2005, the NCUA Board authorized the new procedure incorporating these recommendations for estimating losses from insured institutions. The new procedure was applied to the year-end 2004 financial statements.

    Recommendation: To promote NCUA's ability to meet its goal of assisting credit unions in safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), the Chairman of the National Credit Union Administration should evaluate options for stratifying the industry by risk profile and applying probable failure rates and loss rates, based in part on historical data, for each risk profile category when estimating future losses from institutions.

    Agency Affected: National Credit Union Administration

  2. Status: Closed - Not Implemented

    Comments: The Federal Credit Union Act requires uniform pricing with respect to the one percent deposit and any insurance premium. Further, risk-based insurance pricing would be a fundamental change with potentially significant consequences and there is no conclusive evidence that the advantages of such a system outweigh the disadvantages. Given these factors, NCUA has pursued changes to the Prompt Corrective Action (PCA) system for credit unions to make it more fully risk-based, which will more closely align risk with capital needs. NCUA issued its proposal for PCA reform in March 2005 and is working with members of Congress regarding the necessary legislative changes.

    Recommendation: To promote NCUA's ability to meet its goal of assisting credit unions in safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), the Chairman of the National Credit Union Administration should evaluate options for implementing risk-based insurance pricing. In its evaluation, the NCUA Chairman should consider the potential impact of risk-based insurance pricing to the ability of credit unions to provide services to various constituencies.

    Agency Affected: National Credit Union Administration

  3. Status: Closed - Implemented

    Comments: In November 2003, the NCUA Board approved a refined method for calculating the overhead transfer rate (OTR). According to NCUA, this new method is more comprehensive. The formula has been expanded to provide for greater equity and accuracy in the calculation and allocation of costs. The new formula provides for the recommended consistency in application of the rate and enables NCUA to set the OTR annually with the most current information. The formula and documentation of the calculation is available to the public, improving the transparency of the process. The survey's sample size was increased, ensuring statistical validity. NCUA is currently in the process of reviewing the definitions used in the survey to see if greater clarity can be provided.

    Recommendation: To promote NCUA's ability to meet its goal of assisting credit unions in safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), the Chairman of the National Credit Union Administration should continuously improve the process for and documentation of the overhead transfer rate by consistently calculating and applying those rates, updating the rates annually, and completing the survey with full representation.

    Agency Affected: National Credit Union Administration

  4. Status: Closed - Implemented

    Comments: NCUA continues to work with the other FFIEC agencies to improve and refine it's risk-focused programs. NCUA, as a member of the FFIEC, is involved in the joint development of examination procedures and guidance in a variety of areas. NCUA also participates on the various FFIEC task forces, including the Reports Task Force, Surveillance Task Force, Task Force on Examiner Education, and Task Force on Supervision. In addition to the information NCUA gleans from its involvement with the other FFIEC agencies in these venues, NCUA regularly reviews relevant studies and reports prepared by the other FFIEC agencies to help it continue to identify and incorporate best practices.

    Recommendation: To promote NCUA's ability to meet its goal of assisting credit unions in safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), the Chairman of the National Credit Union Administration should consult with other regulators through the Federal Financial Institutions Examination Council more consistently about risk-focused programs to learn how these regulators have dealt with past challenges (for example, training of information technology specialists).

    Agency Affected: National Credit Union Administration

  5. Status: Closed - Implemented

    Comments: During 2009, NCUA started collecting member address data as a component of all federal credit union examinations. With each examination, NCUA obtains member address information and then draw conclusions about the overall income characteristics of the credit union's membership. The agency's computer system generates a current statistical stratification to determine how well each federal credit union has succeeded in reaching out to members at all income levels. During the second and third quarters of 2012, the agency updated its low-income designation analytical tool. The tool now incorporates the most recently available Census Bureau data and analyzes member addresses at a lower geographic level than was possible previously. With the implementation of the Credit Union online system, the agency now routinely gathers information about services offered by credit unions. Data from the Credit Union online system allows NCUA staff to initiate queries to obtain statistics about various products and services for individual and aggregate groups of credit unions.

    Recommendation: To promote NCUA's ability to meet its goal of assisting credit unions in safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), the Chairman of the National Credit Union Administration should use tangible indicators, other than "potential membership," to determine whether credit unions have provided greater access to credit union services in underserved areas.

    Agency Affected: National Credit Union Administration

 

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