Net Worth Amendment For Credit Unions Act

Mr. Speaker, I move to suspend the rules and agree to the bill (H.R. 1042) to amend the Federal Credit Union Act to clarify the definition of net worth under certain circumstances for purposes of the prompt corrective action authority of the National Credit Union Administration Board, and for other purposes.

Madam Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks and include extraneous material on H.R. 1042.

Madam Speaker, I yield myself such time as I may consume.

Madam Speaker, I rise in strong support of this legislation, H.R. 1042, the Net Worth Amendment for Credit Unions Act, which I and the gentleman from Vermont (Mr. Sanders), the ranking member, introduced along with 16 other cosponsors, evenly divided between Republicans and Democrats, including ranking members of both committees.

It is a so-called technical amendment, but it is also a very important piece of legislation designed to address the potentially harmful and unintended consequences of the recently proposed FASB accounting rules of mergers of financial institutions and, in particular, credit unions.

Because this new accounting rule is expected to become effective early next year, it will impact, going forward, credit union mergers, and it is essential that we have in place H.R. 1042 prior to that time. This legislation has been endorsed by FASB. It has the endorsement of the Federal credit union regulators.

I had testimony which I would like to introduce from NCUA chairman Joanne Johnson who testified before the Committee on Financial Services this past Thursday in strong support of this legislation. In fact, she said without this legislation, it would be hard to, in cases of mergers, provide the safest, most efficient and most beneficial mergers to the benefit of credit union consumers, and she says this legislation is essential for credit union consumers and for their protection.

It has no opposition that I know of. As far as explaining the rule, I am going to submit in its entirety two different pieces on actually what the issue is, what the solution is. The solution is 1042, and then I would like to introduce this two-page summary.

Let me briefly try to very briefly state what this does.

Under the current FASB rule, credit unions are able to use the pooling of interests method of accounting for mergers; however, the new rule will require use of the purchase method.

In doing that, they did not anticipate the current definitions in the National Credit Union Act. Under the new approach that FASB will be instituting, an institution is not permitted to bring over the retained earnings of the acquired institution onto its own balance sheet as retained earnings, but rather as acquired equity. Thus, the surviving institution, the institution which is taking the other institution into its corporate being, would not be able to count the retained earnings of the merged institution in its net worth for purposes of prompt corrective action purposes under the Federal Credit Union Act.

And the Prompt Corrective Action, as those of us on Committee on Financial Services know, is the mechanism to bring credit unions into compliance as far as safety and soundness. This change, therefore, would have the unintended effect of lowering the merged credit union's net worth category classification.

We have taken testimony of Board members of FASB who say this was not their intent; and as I said, they are in favor of the current legislation. So the practical effect of FASB's directive changing the accounting treatment of credit union mergers from the pooling method to the purchase method are perhaps illustrated by a simple hypothetical.

Under the pooling method previously used to account for a combination of two credit unions, if a credit union with $2 million in retained earnings merged with a credit union with $2 million in retained earnings, the surviving credit union would have $4 million in retained earnings, simply, two plus two equals four, which counted as its net worth for purposes of applying the Prompt Corrective Action capital requirements outlined above.

However, under the new purchase method of accounting mandated by the new FASB rule, if a credit union with $2 million in retained earnings merges with another credit union with $2 million in retained earnings, the surviving credit union would only have $2 million in retained earnings, not a result that makes any sense, and our legislation simply preserves the two plus two equals four.

As I say, Madam Speaker, the legislation simply amends the Federal Credit Union Act's definition of net worth to include retained earnings of both credit unions that merge in the net worth of the credit union that continues after the transaction. Failure to make this statutory change will create major disincentives to otherwise merged credit unions.

We took testimony last week from George Reynolds, Senior Deputy Commissioner of the Georgia Department of Banking and Finance, and I would

like to include his statement, but what he and others have pointed out to the committee is that oftentimes, whether it be a bank or a thrift or a credit union, if you have one credit union that is sound and one that may be in need of corrective action, one of the alternatives is to merge the weaker institution into a stronger institution for the protection of the members of that credit union.

The NCUA, and also the different State commissioners of banking and bank supervisors, and credit union supervisors had not been able to do this because of the anticipation of the FASB rules. It has resulted in a lot of hesitancy in merging these institutions and, in many cases, is slowing corrective action because of this. So failure to make the statutory change will, as I say, create major disincentives.

A credit union seeking to merge with another union institution would be faced, in many situations, with a marked decline in its capital for PCA purposes once the merger went through, giving rise to a supervisory intervention by the NCUA designed to limit its growth and restore its now depleted capital to acceptable levels when actually there would have been no depletion of capital at all.

Madam Speaker, I reserve the balance of my time.

Madam Speaker, I yield myself such time as I may consume, and let me simply conclude by saying that when the NCUA seeks a healthy credit union, or when there is a troubled credit union and the NCUA seeks a healthy credit union to rescue it through merger, the pooling of potential White Knights is presently limited because of the present interpretation. And as they have said, ``They are limited by the prospect of a significant postmerger reduction in capital for the acquiring credit union under the present interpretation, if the FASB rule goes forward without this legislation.'' It goes on to say, NCUA, that ``this will inevitably make NCUA-assisted mergers more difficult to execute, resulting in more credit union failures and a higher cost to the National Credit Union's Share Insurance Fund, which insures the deposits to credit union members.''

So I conclude by saying that for this reason, among others, not only the NCUA but also the National Association of Federal Credit Unions, NAFCU, and the Credit Union National Association, CUNA, strongly support this legislation to ensure an accurate depiction of net worth in credit union mergers and to avoid creating unintended obstacles to mergers that would otherwise benefit credit union members.

In addition, FASB has stated that, while it does not take positions on public policy initiatives unless they could impair the mission and independence of FASB, it believes H.R. 1042, and I quote, ``does not propose to establish or change general purpose standards of financial accounting and reporting and, therefore, has no impact on the standard- setting activities of FASB.''

I would like to again thank, and I will name as I close, the cosponsors of this legislation: Introduced by the gentleman from Vermont (Mr. Sanders), myself, the gentlewoman from Florida (Ms. Ginny Brown-Waite), the gentleman from Florida (Mr. Feeney), the gentlewoman from Oregon (Ms. Hooley), the gentlewoman from New York (Mrs. Kelly), the gentlewoman from New York (Mrs. Maloney), the gentleman from Kansas (Mr. Moore), the gentleman from Texas (Mr. Paul), the gentleman from California (Mr. Royce), the gentleman from California (Mr. Sherman), the gentleman from Michigan (Mr. Camp), the gentleman from Illinois (Mr. Gutierrez), the gentleman from Pennsylvania (Mr. Kanjorski), the gentleman from Ohio (Mr. LaTourette), the gentlewoman from

New York (Mrs. McCarthy), the gentleman from Ohio (Mr. Ney), the gentleman from Arizona (Mr. Renzi), and as I said, the main cosponsor, ranking member of the committee, the gentleman from Vermont (Mr. Sanders).

So that, I think, illustrates not only what the gentleman from California (Mr. Sherman) said, that there is no opposition to this legislation, but also the strong bipartisan support that this has across this Congress.

Madam Speaker, I submit for the Record herewith the various documents referred to throughout my remarks:

Madam Speaker, I yield myself such time as I may consume, and I rise today to urge the House to suspend the rules and adopt H.R. 1042, the Net Worth Amendment For Credit Unions Act. I would like to commend my colleague, the gentleman from Alabama (Mr. Bachus), the chairman of the Subcommittee on Financial Institutions and Consumer Credit, for bringing this issue before the Committee on Financial Services in a timely manner. I would also like to thank the ranking member, the gentleman from Vermont (Mr. Sanders), and members of the committee who joined with Chairman Bachus and me in sponsoring this somewhat technical but important legislation.

H.R. 1042 addresses a potential problem for a growing number of credit unions that arises under the Basel II negotiations on international capital accounting standards. In 1996, the Financial Accounting Standards Board, known as FASB, and the International Accounting Standards Board, initiated a joint project to develop a single uniform standard for assessing the value of the assets and liabilities acquired in business mergers and acquisitions.

The effort resulted in the issuing of FASB statement 141 back in June of 2001. This statement required the use of the ``purchase method'' of accounting as the most appropriate standard for assuring that the assets of an acquired business will be uniformly measured at their fair market value at the time of acquisition.

Thus, FASB abolished the then very popular ``pooling method'' of accounting, which had been widely used to measure the assets of surviving credit unions in credit union mergers. The pooling method had permitted the combining of the retained earnings of both the surviving and the merged credit unions to determine the net worth of the surviving credit union. Under the purchase method, which is now required under FASB 141, the retained earnings of the merged credit union must be listed as ``acquired equity,'' a concept that did not exist at the time the Federal Credit Union Act was last amended on this issue.

Currently the Credit Union Act recognizes only retained earnings in calculating a credit union's net worth and its net worth ratio. Accounting procedures that fail to recognize that the retained earnings of the merged credit union would seriously reduce the postmerger net worth ratio of the surviving credit union. This could have the effect of discouraging a number of needed mergers between smaller or weaker credit unions with a healthy credit union, and it could result in determinations that the surviving credit union in the merger is technically undercapitalized, even when that surviving credit union has a large amount of capital. It is simply that some of that capital is listed as ``acquired capital,'' or ``acquired equity'' a term that did not previously exist in our law, and some of it is listed as ``retained earnings.''

H.R. 1042 provides a narrow technical fix for the problem of postmerger accounting of credit union net worth. It amends the current definition of net worth for purposes of the Federal Credit Union Act to allow both retained earnings of a credit union and ``any amounts that were previously retained earnings of any other credit union with which the credit union has combined'' to be included in calculating a credit union's net worth and its net worth ratio.

Where the FASB 141 standard became effective for most business combinations initiated after June 30, 2001, FASB had agreed to defer the implementation for mergers and acquisitions among so-called mutual business enterprises, including credit unions, until the end of 2005. The National Credit Union Administration approved 330 mergers involving federally insured credit unions in 2004, many of which could have resulted in technically undercapitalized credit unions if FASB 141, imposing the purchase method, had been applicable. The Agency projects a similar number of mergers in 2006 that would be adversely affected unless we pass this legislation.

Madam Speaker, H.R. 1042 is bipartisan legislation which addresses a potential problem for credit unions that needs to be resolved this year, because next year FASB 141 will be applicable to mutual businesses, including credit unions. It is supported by the National Credit Union Administration, the National Association of State Credit Union Supervisors, and also by both national credit union trade associations, the Credit Union National Association, CUNA, and the National Association of Federal Credit Unions, NAFCU.

I am aware of no opposition to this bill, and I urge the House to suspend the rules and adopt the Net Worth Amendment for Credit Unions Act.

Madam Speaker, I have no further requests for time, and I yield back the balance of my time.

Mr. Speaker, earlier today, I, along with 15 of my colleagues introduced H.R. 1042, the Net Worth Amendment For Credit Unions Act. This amendment to Section 216 of the Federal Credit Union Act (12 USC 1790d(0)(2)(A)) redefines the term ``net worth'' for Prompt Corrective Action (PCA) purposes for credit unions. This legislation is needed in order to avoid an unintended consequence caused by an accounting change that the Financial Accounting Standards Board (``FASB'') is about to promulgate, requiring credit unions to utilize the ``purchase method'' of accounting rather than the ``pooling of interests'' method of accounting to account for credit union mergers.

This amendment does not affect accounting practices; credit unions will be required to use the ``purchase method'' of accounting for mergers in order to receive a clean audit. It should be noted that FASB itself has stated that it sees no problem with the amendment from an accounting perspective. The legislation does not grant credit unions that currently lack the authority to offer alternative capital accounts the authority to do so, nor does it confer upon the National Credit Union Administration (NCUA) the regulatory authority or discretion to authorize such accounts now or in the future. This amendment is intended to address a narrow and technical accounting issue and in the process simply maintain the status quo so that, in the case of merging credit unions, 2 + 2 can continue to equal 4.

Currently, under the ``pooling of interests'' method of accounting, if a credit union with $2 million in retained earnings merges with another credit union with $2 million in retained earnings, the