NCUA Rules Interpreting CUMAA Appear to Have Fueled Expansion of Community-Chartered Credit Unions

Since the passage of CUMAA in 1998 and subsequent NCUA rule changes,  NCUA has approved community charters with increasingly larger  geographic fields of membership—for example, covering entire cities or  multiple counties. NCUA has undertaken a  pilot effort to capture information on the income characteristics of credit  union members, but the data will not allow NCUA to reach statistically  valid conclusions by charter type. Congressional findings contained in CUMAA linked the tax-exempt  status of credit unions, in part, to their “specified mission of meeting the  credit and savings needs of consumers, especially persons of modest  means.” NCUA incorporated this emphasis into its current strategic plan,  which gives its mission as “facilitating the availability of credit union  services to all eligible consumers, especially those of modest means  through a regulatory environment that fosters a safe and sound credit  union system.” According to NCUA officials, the changes in chartering  requirements should allow credit unions to serve a more diverse  membership, including those of modest means. As a result, although NCUA data indicate increased adoption of  underserved areas and increased participation in the LICU program, data  do not exist to specifically show the extent to which these programs have  increased services provided to individuals of modest means. Federal Reserve Survey Data Suggest that Credit Unions Continued to Serve a Lower Proportion of Low- and Moderate-Income Households than Banks

Despite the shift toward community charters and the increase in the  number of credit unions participating in NCUA’s low-income and  underserved programs, our analysis of data from the Federal Reserve’s  2004 Survey of Consumer Finances (SCF) indicated that credit unions had  a lower proportion of customers who were of low- and moderate-income  than did banks. As of  September 2006, the officials indicated that the data collection effort had  started, and that they expected the results to be available in the first  quarter of 2007.

	Credit Unions Offered Better Interest Rates on Some Products, but the Extent to Which the Benefits of Tax- Exempt Status Have Been Passed to Members Is Unclear

Our analysis showed that credit unions tended to offer better interest rates  than similarly sized banks for a variety of products and loans, but rate data  alone cannot be used to determine the extent to which the benefits of tax  exemption have been passed to members. The difference between credit unions and banks was more pronounced for  consumer loans. Lack of Guidance and Criteria for Applying UBIT to State Credit Union Activities Makes Determining Compliance with the Requirement Difficult

As stated earlier, state-chartered credit unions are subject to tax on  unrelated business income while federal credit unions specifically are  exempt. However, the NCUA effort provides a snapshot of  federal credit union compensation for a single year, 2005, and it is unclear  whether NCUA will conduct future reviews of credit union executive  compensation. The value and utility of the  information collected would be greatly enhanced if NCUA were to move  beyond a pilot and continue the data collection effort and address some of  the limitations of the pilot. To achieve this, NCUA may want to consider  options such as requiring federal credit unions to include specific  information on executive compensation in call reports or issuing  regulations that would require all federal credit unions to make executive  compensation information available to members of credit unions at annual  meetings. Objectives, Scope, and Methodology

Our report objectives were to (1) assess the effect of the 1998 Credit Union  Membership Access Act (CUMAA) on federal credit union membership and  charter expansion, (2) review the National Credit Union Administration’s  (NCUA) efforts to expand credit union services to low- and moderate- income individuals, (3) compare rates offered by credit unions to  comparably sized banks as one indicator of how tax-exemption might  benefit credit union members, (4) discuss issues associated with the  application of the federal unrelated business income tax (UBIT) to credit  unions, and (5) assess the transparency of credit union executives and  board member compensation. That suggestion is not accurate.
Why GAO Did This Study

Legislative and regulatory changes have blurred distinctions between credit unions and other depository institutions and raised questions about the tax-exempt status of credit unions. This report (1) assesses the effect of the Credit Union Membership Access Act on credit union membership and charters, (2) reviews the National Credit Union Administration's (NCUA) efforts to expand services to low- and moderate-income individuals, (3) compares rates offered by credit unions with comparably sized banks, (4) discusses unrelated business income tax issues, and (5) assesses transparency of credit union senior executive compensation. To address our objectives, we obtained NCUA data on credit union membership, charter changes, efforts to target those of modest means, and executive disclosure requirements. We also analyzed Federal Reserve Board's Survey of Consumer Finances and Internal Revenue Service data.

What GAO Found

Since the passage of the Credit Union Membership Access Act (CUMAA) in 1998, larger community-based credit unions have constituted a much greater proportion of the industry. NCUA has approved federal community charters with increasingly larger geographic areas and potential for economically diverse membership. Much of the shift toward the larger community-based credit unions was due to conversions from other charters. NCUA's approval of these charters appears to have been triggered by changes in the economic environment and financial services industry and to diversify membership to accomplish goals such as increasing service to those of modest means. NCUA has established the low-income credit union program and allowed adoption of "underserved areas" to increase credit union services to individuals of modest means. Despite increased credit union participation in these programs and the expansion of community charters, the 2004 and 2001 Survey of Consumer Finances indicated that credit unions lagged behind banks in serving low- and moderate-income households. NCUA officials told GAO that, given the nascent nature of its two initiatives and the relatively recent shift to community charters, they did not yet expect observable changes in the data. Also, NCUA recently has undertaken a pilot effort to collect data on the income characteristics of credit union members. Because limited data exist on the extent to which credit unions serve those of modest means, any assessment would be enhanced if NCUA were to move beyond its pilot and systematically collect income data. Based on GAO analysis, credit unions typically had more favorable rates than banks, particularly for consumer loans. For example, credit unions auto loans were 1 to 2 percentage points lower than similarly sized banks, on average. However, it was not clear the extent that the more favorable rates fully reflected the tax subsidy that credit unions receive by tax-exemption. The Internal Revenue Service (IRS) has been reviewing state-chartered credit union activities (federal credit unions are exempt) to determine compliance with unrelated business income tax (UBIT) requirements, but such determinations are difficult due to complicated criteria and because many credit unions file group rather than individual returns. IRS stated that it plans to issue technical guidance in the first quarter of 2007 that the agency believes will help ensure credit union compliance with UBIT. Finally, credit union executive compensation is not transparent. Federal credit unions, unlike other tax-exempt organizations, do not file information returns, which contain data on executive compensation, with IRS. NCUA is collecting compensation data as part of its pilot, but it is unclear whether NCUA will conduct future reviews. NCUA officials noted a number of alternatives that could be used to increase transparency, such as requiring federal credit unions to provide compensation information in call reports or require that credit unions disclose compensation data at annual meetings.