Net Worth Amendment For Credit Unions Act

NET WORTH AMENDMENT FOR CREDIT UNIONS ACT -- (House of Representatives - June 13, 2005)

Mr. SHERMAN. 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.

http://thomas.loc.gov