which would include consideration of the general character and fitness of the applicant's management.

In addition, he should consider the economic advisability of insuring the applicant without undue risk to the fund.

However, the factors contained in section 201 (c) (1) (D) and (E) concerning the convenience and needs of the members to be served by the applicant and whether the applicant is, in effect, a credit union, and section 201 (c) (2) concerning its powers and purposes as being inconsistent with the promotion of thrift among its members and the creation of a source of credit for provident or productive purposes, are in our opinion more properly within the provience of the State regulatory or chartering agency rather than the Administrator.

On a related question as to the authority of the Administrator, sections 201(b) (5) and (6) provide that each insured credit union must agree to maintain such regular reserves as required by State law and such special reserves as the Administrator may require for protection of the interest of the members.

Reserve requirements should, in our opinion, be controlled by State regulatory agencies rather than the Administrator of the fund. State regulatory authorities are charged with the responsibility of supervising and regulating State-chartered credit unions, and changes in the reserve requirements should only be accomplished by legislative action at the State level. In fact, many State statutes already contain requirements for special reserves for State-chartered credit unions. Thus, we would recommend that State-chartered credit unions be required to maintain such regular and special reserves as may be required by State law.

Also concerning the powers given to the Administrator, section 205 (c) would require approval of the Administrator before any insured credit union could establish any new branch office or move its main office or any branch office from one location to another.

It is our opinion that this is more properly a matter which falls within the prerogative and decisionmaking of the credit union concerned, rather than the Administrator of the National Credit Union Administration.

In a similar vein, section 201 (b) (7) provides that an insured credit union must agree not to issue or have outstanding any account or security the form of which has not been approved by the Administrator. It is our opinion that this provision is unduly restrictive and

unnecessary.

Presently, the Federal Credit Union Act limits the type of accounts Federal credit unions may have. Similarly, in most cases, State laws specify the type of accounts permitted by the State-chartered credit union.

In addition, authorizing the Administrator to approve accounts and securities of State-chartered credit unions would abrogate the responsibility and authority of State legislatures and regulatory agencies in this respect to the detriment of the dual chartering system.

Finally, relative to the insuring of State-chartered credit unions, we would recommend that the Administrator may in his discretion grant provisional insurance to any applicant in the event he finds cer

tain discrepancies which he believes can be corrected. The following language is suggested:

For State-Chartered Credit Unions, the Administrator may also grant provisional insurance for a period not less than one year and not to exceed two years. If such conditions are not corrected within the time specified by the Administrator in a notice to the credit union the Administrator shall notify the credit union of termination of its insurance and he shall advise the State regulatory agency of the action taken. If he finds that such conditions have been corrected, he shall issue the credit union a certificate stating that it is, as of the date of the certificate, insured under this Act.

This provision would enable the Administrator to insure a credit union on a provisional basis in the event he determines the credit union has a chance of getting back on its feet within a reasonable period and would have the effect of perpetuating smaller credit unions which may be undergoing temporary difficulties, thus preserving the only real source of low-cost consumer credit for large numbers of credit union members.

Mr. Chairman, there is another question which has arisen as to the type of accounts to be insured under S. 3822. As you know, under section 201 (a) the Administrator is authorized to insure member accounts of insured credit unions. These accounts are defined as including a share, certificate or deposit account of a member-see page 56, line 10. We recommend consideration be given to expanding the type of accounts which may be insured by the Fund to include deposits made by Government agencies, corporations, and deposits of other insured credit unions.

If we are to help credit unions in need, particularly the low-income or poverty credit union, and the people they serve, it is essential to attract capital from without its membership. Presently, and in the forsesable future, the share deposits in these credit unions will remain insufficient to meet loan demands.

Consistent with this need, we further recommend the Administrator be authorized to insure the investments of nonmembers who make deposits in poverty area credit unions under regulations to be established by the Administrator.

The authority to insure deposits in these credit unions would significantly enhance their ability to attract funds from outside sources and thus increase their chances for continued service to persons who otherwise would not be able to obtain credit at reasonable cost or who otherwise could not obtain credit at all.

In this respect, section 8 (8) (D) of the Federal Credit Union Act which now permits investment of credit union funds in share or savings accounts of savings and loan associations or mutual savings banks should be amended to permit a Federal credit union to invest its funds in the shares or accounts of another insured credit union.

As previously mentioned, every effort should be made to minimize the cost of a share insurance program for credit unions. However, under S. 3822 any insured credit union should have to agree to pay the costs of such examinations as the Administrator considers necessary to determine eligibility for insurance and subsequent examinations for the protection of the Fund and other insured credit unions-see section 201 (b) (1) (2), page 2.

Presently, all Federal credit unions are examined annually by the National Credit Union Administration pursuant to section 7 of the Federal Credit Union Act, for which a fee is charged.

Also, each Federal credit union is subject to an annual supervisory fee in accordance with section 6 of the Federal Credit Union Act. In order to avoid a duplication of fees and unnecessary expense for Federal credit unions, it is suggested that the Administrator be required to utilize examinations presently made under section 7 of the Federal Credit Union Act for purposes of insurance protection.

For State-chartered credit unions, similar considerations should apply, that is, to require the Administrator to maximize utilization of examinations performed by State regulatory agencies in order to avoid duplication of examination fees.

The next section we would like to consider is section 201 (a) (1) which concerns reports of condition to be filed by an insured credit union. The requirement for insured credit unions to submit reports of condition appears to be a duplication of reporting requirements, as all Federal credit unions must now file an annual financial report to the National Credit Union Administration.

Similarly, all State-chartered credit unions are required to file reports to the particular State regulatory agency which supervises them.

We would recommend that the annual reporting requirement which now exists for Federal credit unions be amended to reflect the information necessary for purposes of the insurance fund and that these reports be attested by three officers of the credit union. Further, that no additional reports be required.

Concerning State-chartered credit unions, the Administrator for purposes of the insurance fund, should be required to utilize reports of condition submitted by these credit unions to their State regulatory agency, provided they contain sufficient information to determine eligibility for insurance and for continuation of insurance by the fund.

As to the penalty of $100 per day for failure to make or publish a report of condition, (sec. 202(a) (3)) this is, in our opinion, an extremely severe penalty, particularly for the very small credit union which, in most cases, is run exclusively by volunteers. We feel that the inadvertent or negligent failure to file such reports should not result in the imposition of a penalty, but rather that such penalty should only be incurred when there is an intentional failure to make or file a report of condition. Accordingly, on line 12, page 61, between the words "which" and "fail" we recommend the insertion of the word "willfully."

Mr. Chairman, as I am sure you realize, we are vitally concerned with the cost of a Federal program of insurance for credit union members and we would hope that the premium charge would be consistent with the past record of the credit unions, self-help efforts of leagues, and the amount of risk to be assumed by the fund.

Historically, losses of credit unions over the years have been relatively small. For example, during the period 1934 to 1969, actual losses for Federal credit unions were $1,716,211. Net losses from scaledowns have amounted to $1,643,330 during this same period.

Donations to liquidated Federal credit unions and Federal operating credit unions have totaled $1,016,467 and $606,337, respectively.

Thus, total losses for all Federal credit unions for the last 36 years have amounted to less than $5 million, while actual losses to members have amounted to only $3,359,541.

For Federal credit unions, in 1969 actual losses resulting from liquidation were $95,547. Net scaledown losses were $3,562; donations to liquidated credit unions and operating credit unions were $164,576 and $85,755, respectively.

Thus, total losses for Federal credit unions in 1969 were $349,440. Actual losses to members of these credit unions amount to $99,109. S. 3822 provides for an annual premium of one-twelfth of 1 percent of member accounts. As member accounts in Federal credit unions are estimated to be $7,343 million by the end of 1970, this would result in an annual assessment of $6,116,719 the first full insurance year.

In 1970 the anticipated losses for Federal credit unions have been estimated to be $389,179 by the National Credit Union Administration. This figure, however, assumes that no donations will be made from league stabilization programs to either operating or liquidated credit unions.

It is our considered opinion that the annual premium charge should be reduced. Historically, credit union losses have been small compared with other financial institutions. In fact, most liquidated credit unions have paid at least 100 cents on the dollar. A study conducted by the National Credit Union Administration for the period 1964 to 1968 reveals that 1,220 Federal credit unions completed liquidation, representing $50 million in share capital and a total membership of 213,000. As a group, the liquidations were completed at a net gain of 5.8 percent.

Only 164 credit unions of the total group returned less than 100 cents on the dollar. Over 50 percent-91-of the 164 credit unions had less than $50,000 in share capital; 133 of these credit unions paying less that 100 cents on the dollar had share capital of less than $25,000.

In addition, 23 percent-37-of these 164 liquidated credit unions were operative for less than 2 years. Also, 128 of the 164 had less than 200 members. (See p. 19, table 20 of the BFCU's report on liquidations.)

Historically, the experience of the Federal Deposit Insurance Corporation for banks has proven that premium assessments need not be one-twelfth of 1 percent as the banks are now assessed one thirty-first of 1 percent even though the normal operating level of 2 percent has not yet been achieved.

For these reasons, we strongly recommend a reduction in the annual premium for Federal credit unions to one-half of 1 percent.

The size of the fund as projected for 10 years on a one-twentieth of 1 percent basis indicates that at the end of the first full year of the fund's operation the net worth of the fund would be $3,135,461. In the fifth year income from the investment of surplus funds will be adequate to cover anticipated losses as well as operating expenses of the fund, and the same holds true for successive years thereafter.

For details of this 10-year projection I would refer the committee to annex 1 of our prepared testimony.

Concerning the annual premium charges to be assessed insured credit unions, we would like to raise another point concerning the accounting treatment of this charge. As you know, the amount of money paid into the fund by an insured credit union will be utilized to cover not only losses and expenses of the fund but also to meet the solvency needs of credit unions threatened with liquidation.

We have indicated in the 10-year projection that the amount of prospective losses to be paid out of the fund are minimal in relation to the total amount of money to be paid into the fund by insured credit unions. Inasmuch as the fund may be used to avoid threatened liquidation of insured credit unions and this is a function of maintaining reserves, it would appear to be more consistent to treat the annual premium charge as a payment from the reserve account on the books of the credit union.

In other words, a portion of the reserve requirement for credit unions could be met to the extent of its annual premium charge paid to the National Credit Union Share Insurance Fund by Federal credit unions and by State-chartered credit unions where State law permits, rather than treated as an expense to the credit union.

Concerning section 202 (c) (5) which relates to an additional premium assessment, in the event expenses of the fund exceed income in any one year, we recommend the Administration be authorized to assess an additional charge equal to one-half the amount of the regular premium charge or one-fortieth of 1 percent of member accounts.

This recommended change is consistent with the rationale expressed above as to the amount of the premium charge and the size of the insurance fund necessary to cover projected credit union losses and expenses of the fund.

Another provision of this bill which causes us some concern is section 202(d) (2). This section provides that any director or officer of an insured credit union who participates in the declaration of or payment of a dividend while the credit union is in default of its insurance premium would be subject to severe criminal penalties for such action (sec. 202 (d) (3)).

We would recommend that the word "knowingly" be inserted between the words "who" and "participates" on line 7, page 11. As you know, the majority of persons serving on the board of directors of credit unions are not professionally trained and may not have the qualifications of members of the board of banks and savings and loan associations.

Accordingly, it would be more consistent with the operation of a credit union to require the directors or officers to know that the premium charge is in default before the penalty should be incurred. It is considered crucial to the credit union movement that credit union members continue to demonstrate a willingness to serve as officers and directors of their credit unions, and the existence of such severe sanctions may quickly dissipate the number of persons willing to place themselves in these positions.

Mr. Chairman, and member of this committee, I would be less than candid if I failed to tell you that many sections of this bill providing for criminal penalties for directors, officers and committee members; $100 per day penalties for failure to advertise deposits are insured