Credit Union, Bank, and Thrift Regulatory Relief Act of 2008
Credit Union, Bank, and Thrift Regulatory
Relief Act of 2008
Walter W. Eubanks and Pauline Smale
Specialist in Financial Economics and Analyst in Financial Economics
Government and Finance Division
Summary
Credit unions, banks and thrifts (savings associations) are subject to numerous
safety, soundness, and consumer protection laws and regulations. Since 2001, both the
banking/thrift and the credit union industries have worked with Congress to develop
legislative proposals that would reduce existing regulatory requirements and what are
seen as the burdens compliance enforcement places on depository financial institutions.th
During the 109 Congress, legislation was enacted (P.L. 109-351; 120 Stat. 1966) that
provided some of the changes sought by the industries. The statute reduced regulatory
requirements for all types of depository financial institutions. Both the banking/thrift
and credit union industries remain interested in the regulatory relief provisions excluded
from the law. Current legislation, the Credit Union, Bank, and Thrift Regulatory Relief
Act of 2008 (H.R. 6312), would provide additional steps towards obtaining the package
of regulatory relief originally sought. The legislation moved quickly through the House.
H.R. 6312 was introduced on June 19, 2008, and on June 24, 2008, the bill was
considered under suspension of the rules and passed by the House. On June 25, 2008,
the legislation was referred to the Senate Committee on Banking, Housing, and Urban
Affairs.
This report will be updated as developments warrant.
Background
While federal financial regulatory agencies engaged in the process of implementing
the provisions of the Financial Services Regulatory Relief Act of 2006 (P.L. 109-351),
new financial services regulatory relief measures were introduced in the 110th Congress.1
Reducing the regulatory burden on financial service providers has been an ongoing
1 For information on regulatory relief measures (in addition to H.R. 6312) in the 110th Congress,
please see CRS Report RS22651, Financial Services Regulatory Relief: Implementation andth
Reintroduced Provisions in the 110 Congress, by Walter W. Eubanks and CRS Report RS22661,
Credit Union Regulatory Improvements Act (CURIA): H.R. 1537 and S. 2957, by Pauline Smale.
concern since the passage of the Economic Growth and Regulatory Paperwork Reduction
Act (EGRPRA, 110 Stat. 3009-394) mandating that financial regulators review their
regulations at least once every 10 years in an effort to eliminate any regulatory
requirements that are outdated, unnecessary, or unduly burdensome. In addition, the
intended purpose of regulatory relief is to enhance the services provided by depository
institutions, and to contain the growing costs of regulatory compliance. The experience
of prior Congresses has shown that bills incorporating provisions that would reduce
regulatory requirements on banks, thrifts, and credit unions tend to receive stronger
support or less opposition than legislative proposals that address the industries separately.
H.R. 6312 is viewed as a compromise bill drafted to attract support from advocates for
both the banking/thrift and the credit union industries. The legislation, like P.L. 109-351,
provides some, but not all, of the changes sought separately by advocates for the
banking/thrift and the credit union industries. Therefore, even if H.R. 6312 is enacted the
industries’ interests in regulatory relief are likely to continue.
An Overview of H.R. 6312
The Credit Union, Bank and Thrift Regulatory Relief Act of 2008 (H.R. 6312) was
introduced on June 19, 2008, by Representative Kanjorski, and was cosponsored by 3
members. The legislation passed the House on June 24, 2008 and on June 25, 2008 was
referred to the Senate Committee on Banking, Housing, and Urban Affairs. H.R. 6312
has four Titles: Credit Unions, Saving Association Provisions, Notice Provisions and
Business Checking. The following is an overview of the legislation.
Title I — Credit Unions
Sec. 101. Investments in Securities by Federal Credit Unions. This provision would
expand federal credit unions’ securities investment activities. Federal credit unions are
presently limited in their investment activities for safety and soundness reasons by the
Federal Credit Union Act. Currently, investment authority is limited to loans, government
securities, deposits in other financial institutions and certain other investments. This
provision would allow credit unions to have similar powers to banks in the securities
business. It would allow credit unions to purchase certain investment-grade securities for
the credit union’s own account. The total investment in these instruments of any one
obligor or maker could not exceed 10% of the credit union’s net worth and the total
investments could not exceed 10% of total assets.
Sec. 102. Increase in 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. The provision would raise the amount a credit union may
invest in CUSOs from 1% to 3%. Banks and thrifts have the authority to make similar
kinds of investments in their services related businesses.
Sec. 103. Member Business Loan Exclusion for Loans to Non-profit Religious
Organizations. Under current law, federal credit unions can make loans only to their
members, to other credit unions, and to credit union organizations. 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. This legislation would
exclude from the member business loan limit, loans or loan participations to nonprofit
religious organizations, effectively increasing the amount of business lending credit unions
could make.
Sec. 104. Authority of the NCUA to Establish Longer Maturity for Certain Credit
Union Loans. The Regulatory Relief Act of 2006 gave the NCUA the authority to increase
the 12-year maturity limit on non-real estate secured loans to 15 years. This section would
provide the NCUA with the additional flexibility to issue regulations to increase that 15-
year maturity limit to a longer term for specific types of loans.
Sec. 105. 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% (the usury limit) 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 is determining whether or not to lift the usury ceiling.
Sec. 106. Conversions Involving Certain Credit Unions to 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 outside the community base, can be satisfactorily served and
remain within the newly constituted credit union’s field of membership.
Sec. 107. Credit Union Participation in the SBA Section 504 Program. This provision
would clarify existing law and regulations that permit credit unions to participate in loan
programs secured by the insurance, guarantees, or commitments of state or the federal
governments. It requires that the loan maturities, terms, and other conditions of these loans
be specified in applicable regulations.
Sec. 108. Amendments Related to Credit Union Service to Underserved Areas. The
1998 Credit Union Membership Access Act (P.L. 105-219) permits only credit unions with
multiple common bond charters to expand services to individuals and groups living in areas
of high unemployment and below median incomes that are underserved by other depository
institutions. This proposal would permit all federal credit unions, regardless of charter type,
to expand services to eligible underserved communities. These underserved areas include
“investment areas” under the Treasury Department’s Community Development Financial
Institution (CDFI) program and qualified “low income area” under the New Markets Tax
Credit Targeting formula adopted by Congress in 2000. Census tracts which would
otherwise qualify but in which more than 50% of resident families make more than $75, 000
per year would not qualify. The provisions call for credit unions serving an underserved
area to establish and maintain an office or facility within 24 months of receiving approval
from the NCUA Board and would require such credit unions to report to the NCUA on their
work in the underserved area.
Sec. 109. Short-term Payday Loan Alternatives within the Field of Membership. This
section addresses expanding access to a defined and limited set of services to non-member
individuals. This section would permit credit unions to offer short-term loans as an
alternative to payday loans to non-member individuals within their field of membership.
Sec. 110. Credit Union Governance. This provision allows federal credit unions to limit
the length of service of their boards of directors to ensure broader representation from
membership. 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.
Sec. 111. Encouraging Small Business Development in Underserved Urban and Rural
Communities. This provision enables credit unions to make more business loans by
excluding from a credit union’s member business loan cap the member business loans made
to underseved communities. It adds the clarification that business loans made to national
operated businesses are not exempt from the cap, but business loans made to locally-owned
franchises of businesses operating nationally would be exempt if they are in a underserved
area.
Tittle II — Savings Association Provisions
Sec 201. Restatement of Authority for Federal Savings Associations to Invest in Small
Business Investment Companies. Under this proposal the amount that federal savings
associations could invest in Small Business Investment Companies (SBICs) and/or in
entities established to invest solely in SBIC would increase from 1% to 5% of its capital and
surplus.
Sec. 202. Removal of Limitation on Investments in Auto Loans. Current law places an
aggregate limit (35% of total assets) on thrift loans or leases for motor vehicles. This
provision allows a savings association to invest in, sell, or deal in auto and other vehicle
loans and leases for personal, family, or household purposes without a percentage of assets
limitation. This provision is an attempt to level the playing field with credit unions’
investments in auto loans and leasing.
Sec.203. Repeal of Qualified Thrift Lending Requirements with Respect to Out-of -
State Branches. Current law requires that federal savings associations must meet the
qualified thrift lender (QTL) test both as a entity operating regionally or nationally and in
each state where the association has a branch. This provision would eliminate the second
requirement that a multi-state federal savings association meet the QTL test on a state-by-
state basis. The beneficiaries of this proposal are thrifts operating in more than one state.
Sec. 204. Small Business and Other Commercial Loans. This section would eliminate
the current small business lending limit for federal savings associations, and would increase
lending limit for other types of business loans from 10 to 20% of total assets.
Sec. 205. Increase in Limits on Commercial Real Estate Loans. This section would
expand the capacity of savings associations to make more commercial real estate loans. The
aggregate limit for this category of loans would be increased from 400% to 500% of a
thrift’s capital.
Sec. 206. Savings Association Credit Card Banks. This provision would change current
law that requires a savings and loan holding company to charter a credit card savings
association as a national or state bank in order to maintain its exemption from the activity
restrictions imposed on companies that control multiple thrifts. Under this provision, a
unitary thrift holding company would be permitted to charter a credit card savings
association and maintain its exempt status.
Title III — Notice Provisions
Sec. 301. Exception to Annual Privacy Notice Requirements Under the Gramm-
Leach-Bliley Act. Provisions of the Gramm-Leach-Bliley Act (P.L. 106-102) require most
financial institutions to issue annual privacy notices to their customers. These notices spell
out privacy policies and how the institution may share information. This proposal would
exempt institutions that (1) provide nonpublic personal information only in accordance with
specified requirements; (2) do not share information with affiliates under the Fair Credit
Reporting Act; and (3) have not changed their policies and practices with regard to
disclosing nonpublic personal information from those disclosed in the most recent
disclosure sent to their customers. In addition, state licensed institutions that are either
prohibited or become prohibited (by regulation) from disclosing nonpublic personal
information without the knowing and express consent of the consumer are also exempt.
Title IV — Business Checking
Sec. 401. Short Title. This act may be referred to as the “Business Checking Fairness Act of
Sec. 402. Interest-Bearing Transaction Accounts Authorized for All Businesses. This
proposal would legalize a common practice employed by banking institutions for many
business accounts involving transferring deposits between interest earning accounts and
checking accounts. This provision would authorize depository institutions to offer
customers the ability to make up to 24 transfers per month from an interest-bearing or
dividend earning account into any other account maintained by that customer in that
institution.
Sec. 403. Interest-bearing Transaction Accounts Authorized. This section would repeal
the prohibition against the payment of interest on demand deposits (checking accounts),
which would include personal deposit accounts. It would do this by amending the laws
behind the prohibition: the Home Owners Loan Act and the Deposit Insurance Act. The
repeal would be effective at the end of the 2-year period beginning on the date of the
enactment of this Act.
Sec. 404. Rules of Construction. This provision pertains to escrow accounts maintained
at a depository financial institution in connection with a real estate transaction. The
proposal describes certain expenses, fees, and benefits that could be incurred in connection
with escrow accounts and states that these transactions shall not be treated as the payment
or receipt of interest for the purposes of this legislation. In addition, this section would
neither require nor prohibit an institution to pay interest on such an escrow account. Finally,
this section would not preempt state law dealing with the payment of interest on escrow
accounts.
Sec. 405. Consumer Banking Costs Assessment. This section would amend the Federal
Reserve Act to require the Board of Governors of the Federal Reserve System to conduct
a biennial survey of retail banking fees, services, and products provided by insured banks,
thrifts, and credit unions. The proposal details certain information that must be included
in the survey. The proposal includes the requirement for a biennial report to Congress. It
would also amend the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, to
repeal certain reporting requirements.
Reactions to H.R. 6312
The proposed Credit Union, Bank and Thrift Regulatory Relief Act of 2008 is viewed
by many as a compromise between the positions taken by credit union and the banking
industries. This compromise was reached after the banking industry launched an intense
lobbying effort against the Credit Union Regulatory Relief Act (H.R. 5519) and the Credit
Union Regulatory Improvement Act (H.R. 1537), which would have expanded the definition
of the field of membership, allowing more credit unions to provide financial services in
unserved areas; increased the cap on member business lending, allowing credit unions to
make more business loans; and instituted a risk-based system of Prompt Corrective Action,
which would allow credit unions use their capital more efficiently and increase their
capacity to make more loans. The banking industry saw these provisions as making credit
unions more competitive with banks in addition to the tax exemption they already possess.
The compromise was reached after the credit union industry modified its definition of
underserved areas by reducing them. In addition, H.R. 6312 would lift the cap on member
business loans less than it was lifted in the earlier legislation, and would drop the risk-based
system. Perhaps what was most important was that the compromise added the provisions
of the Bank Regulatory Relief Act of 2008 (H.R. 5841), the banking industry’s own
regulatory relief bill that had already passed the House. The resulting H.R. 6312 has the
support of the Credit Union National Association, the Independent Community Bankers of2
America, and the American Bankers Association.
One provision in H.R. 6312 that was opposed in the past by some small banking
institutions is the provision to pay interest on business checking accounts. As mentioned
above current law prohibits the payment of interest on checking account, because banks are
required to keep higher reserve balance on transaction accounts as these deposits can be
withdrawn at anytime. Smaller depository institutions that are failing at a higher rate than
larger ones, are likely to be even less profitable if they are required to pay interest on3
business checking accounts.
2 See “CU Reg Relief Bill Sails Through Full House,” CUNA New Now, June 24, 2008, p. 1, Joe
Adler, “Banks and CUs Alike Lukewarm on Kanjorski Bill,” American Banker, June 25, 2008, p.
2, and Letters to the Honorable Barney Frank from the American Bankers Association and the
Independent community bankers of America supporting this legislation at
[ h t t p : / / www.aba.com/ NR/ r donl yr es/ 76DCD307 -2D7E-48A6-A10F-623175F0AEAD/ 53999/ Reg
Relief_ABAMemo_062308.pdf] and [http://www.icba.org/files/ICBASites/PDFs/ltr062408.pdf].
3 See CRS Report RL30816, The Anticipated Effects of Depository Institutions Paying Interest
on Checking Accounts, By Walter W. Eubanks, pp. 1, 7.