Credit unions in the States are under the supervision of the State departments of banking. Under the terms of the bill under consideration, local credit unions would be supervised by the Comptroller of the Currency, in generally a similar manner as banking institutions of the District are controlled. Your committee is advised that this bill has been indorsed by the Federation of Citizens' associations, the American Federation of Labor, the director of service relations of the Post Office Department, the Washington Central Labor Union, the District Federation of Federal Employees, the National Federation of Post Office Clerks, the League of the American Civil Service, the Peoples' Legislative Service, the Credit Union National Extension Bureau, the Russell Sage Foundation, the National Federation of Federal Employees, and the parish credit union committee of the National Catholic Welfare Conference. The committee has been informed that the Commissioners of the District forwarded a favorable report to Senator Capper of the Committee on the District of Columbia in the Senate, on an identical Senate bill, though no report has been received from the commissioners on the House bill. The committee knows of no opposition to the measure and urges its passage at this session. GOVERNMENT OF THE DISTRICT OF COLUMBIA, To the COMMISSIONERS: Respectfully returning herewith C. C. O. file No. 16682, containing Senate bill No. 4775 entitled "A bill to provide for the incorporation of credit unions within the District of Columbia." The main object and purpose of the credit-union system of finance is to encourage thrift in a more effective manner than do the ordinary savings agencies, to increase the opportunities of borrowing for legitimate purposes by persons who can offer as security little more than their good character, and finally as a constructive measure of stamping out the loan-shark evil. The principal feature of organizations of this system is that the members of the union control its operations in their entirety. Historically the credit-union system of finance is about 75 years old. It first became a part of the world's financial system in 1849 when Germany adopted it. Thereafter, in 1866 Italy undertook to legalize its operation, and gradually Austria, Ireland, France, Russia, and Japan realized its worth and authorized the organization of such systems in their respective countries. In 1900 the credit union became a part of the financial industry of the new world when a credit union was established in the Province of Quebec, Dominion of Canada. It was not until 1909 that the credit union was recognized in the United States, and in that year the Legislature of Massachusetts passed the first bit of legislation respecting it, and within 4 years 34 such agencies began to function in that State with a membership of approximately 4,500 persons and a share capital of $120,000. Since that time several States of the Union have cnacted legislation permitting the incorporation of credit unions-the States are New York, Rhode Island, Utah, South Carolina, Maine, Wisconsin, Texas, Nebraska, Oregon, New Hampshire, North Carolina, Virginia, Arkansas, and Kentucky. Inquiries in the several States indicate that they are highly favored and seem to be an effective method of eliminating the loan shark. All of the State banking officials in the States where credit unions are permitted indicate that they are well established and enjoy a reasonable confidence. The proposed legislation is a reproduction in a large measure of the New York and Massachusetts laws. Section 2 of the bill defines a credit union to be "A cooperative society organized for the purpose of promoting thrift among its members and creating a source of credit for them for provident purposes.' The foregoing definition is entirely in accord with the idea of the credit-union system of finance as originally conceived and has remained in effect over a period of some 75 years. The general organization requirements as to the number of incorporators, their qualification as to residence and place of employment, the names and addresses of the subscribers and the number of shares subscribed to by them, the fixing of the par value of the shares of the credit union, and the proposed field of membership are to be found in section 3 of the bill. The bill undertakes to permit the incorporation of the associations formed under the provisions thereof and grants to them, when duly approved and incorporated, perpetual existence. Little comment need be made on this feature of the legislation other than to draw attention that the provisions thereof appear to be similar to provisions of existing laws in force in the several States which recognize the credit union system. Power is granted, by the provisions of section 4 of the legislation, to the Commissioners of the District of Columbia to approve the certificate of organization when presented to them when they are of opinion that it conforms to the provisions of the act, and that the proposed field of membership is favorable to the success of the corporation, and when they are satisfied that the character and general fitness of the subscribers is such as to give assurance that the affairs of the corporation will be administered in accordance with law and for the exclusive benefits of the members. The commissioners may discretionally control the inception of the organization; but, thereafter if they approve the certificate of organization, their power ceases, other than the approval of the by-laws and amendments thereof as appears hereafter. It does not appear that such should be the case. The authority of the recorder of deeds of the District of Columbia with respect to corporations generally in the District of Columbia remains unimpaired by this legislation so far as credit unions are concerned. The legislation, however, exempts such organizations upon their becoming legal entities, through the operations of the office of the recorder of deeds, from the provisions of section 552 of the Code of Law for the District of Columbia. The provisions of that paragraph provide (1) for the recording fee, (2) satisfactory proof to the recorder of deeds that the full amount of the capital stock of the company has been subscribed for in good faith, and (3) that not less than 10 per cent thereof has been actually paid in cash and the money derived therefrom is in the possession of the person named as the first board of trustees. I am in full accord with the exemption so far as (2) and (3) thereof are concerned, but fail to perceive any reasonable theory upon which the exemption from the payment of the usual and ordinary recording fees could be based. I based my reason for approving exemptions (2) and (3) hereof on the peculiar type and business of the corporation herein provided for, it being remembered that it is an association intended for the mutual benefit of the members thereof, they controlling its management and operations. The laws of the various States of the Union authorizing the incorporation of credit unions place the supervisory powers over such unions after their organization and incorporation with the State banking commission. The intended legislation places this supervisory power in the Comptroller of the Currency, who is directed to exercise the same supervision over them that he now exercises over banking institutions in the District of Columbia with the exception that he may relieve the credit unions from compliance with any such requirements to such extent and in such manner as he deems will not prejudice their proper conduct of the affairs of the association. Were there in the governmental organization in the District of Columbia any function of a kindred nature to the State banking commissions of the various States, I would recommend that the supervision of credit unions after their incorporation and organization be placed therein. At this point attention should be directed to the fact that no licensing provision is contained in the proposed legislation, and since many of the residents of this District will doubtlessly avail themselves of the benfits of the credit-union system of finance it is only natural to assume that they will look to their immediate governmental body to exercise at least a licensing authority over them. If the Commissioners of the District of Columbia are to be intrusted with the authority of regulating the admissibility of the association they should undertake to license them and to retain the authority to revoke a license granted for cause. I therefore recommend that the legislation be amended in the following respects: On page 4, line 3, change period to colon and insert the following: "Provided, however, That it shall be unlawful for any such credit union to transact business in the District of Columbia without procuring a license from the District of Columbia; and all such credit unions shall pay a license tax of $50 per annum to the District of Columbia. No license shall be granted for a period longer than one year: Provided, however, That the Commissioners of the District of Columbia may suspend or revoke a license upon proof of the bankruptcy or insolvency of any such credit union or upon conviction of a violation of any provision of this act or of any law or regulation of the District of Columbia or of the United States." Section 7 of the bill specifies the powers that may be exercised by credit unions after their incorporation. The powers therein granted are substantially identical with the provisions of existing laws in the several States hereinbefore mentioned. There are, however, three features to which special attention should be directed: Subsection 5 of section 7 fixes the rate of interest on loans made by credit unions at a figure not to exceed 1 per cent per month, which amount shall include all charges incidental to the making of a loan. Comment will be forthcoming that the amount therein set forth is identical with the present "small loan law" now in force (see 39 Stats. 1006) and is inadequate. That this is inadequate is shown by the fact that not a single license has been issued for many years under the present statute and but one such license in the life of the law. It is true, however, that many of the statutes of the States wherein credit unions are authorized do not exceed the interest permitted under this act, and in fact one such State, Texas, permits only 10 per cent. An answer to such comment may lie in the fact that the operating expenses of the association are maintained at a minimum because the members themselves conduct its operations and give their services without compensation. Further, since the members alone may avail themselves of the advantages of the lending feature of the organization necessity for detailed investigations as to credit standing, etc., are to a very large extent obviated. This is one of the prime features of the credit union “self-insurance." Subsection 5 of section 7 further provides: "A borrower may, prior to maturity, repay his loan in whole or in part." A detailed examination of the various laws hereinbefore mentioned does not disclose that such a privilege is extended to members, and it appears to me that such a provision is not good business. I believe, however, that this feature might be left to the board of directors of the credit unions or to the credit committees thereof and be included in the by-laws. It is my opinion, however, that Congress should not include such a provision in the body of the statute. Subsection 9 authorizes the association to borrow in an aggregate outstanding amount not exceeding 50 per cent of its paid-in and unimpaired capital. The New York law limits the amount to 40 per cent. By the provisions of section 8 the commissioners have the power of approval of the by-laws of the credit unions and likewise any amendments thereto. Section 9 provides the qualifications for membership in the credit unions authorized incorporated and permitted to operate under the provisions of this intended legislation. The qualifications are in keeping with the intent of this system of finance and are identical with the laws of the several States permitting credit unions to operate. Attention is now invited to section 11 of the bill, wherein the management provisions of credit unions are outlined. A careful reading thereof discloses that the members of the association control its operations. Doubtlessly, it was the intent of the drafters of the legislation to follow this idea through and to permit only the members thereof to serve as officers, directors, and on the various committees, but I do not believe that the intent is clearly expressed. In keeping therewith, I recommend that the following proviso be inserted on page 8, line 11, before the period appearing after the word "compensated": "Provided, That no person shall be elected to the board or to either committee unless he be duly elected to membership as provided in section 9 of this act." For the purposes of clarity and certainty, I recommend that on page 8, line 25, after the word "deposits," the semicolon be changed to a colon and insert the following: "Provided, however, That the interest rate on loans shall not be in excess of the maximum amount fixed by the provisions of this act." There is but one remaining feature of the legislation that requires attention and that is found in section 16 under the title "Taxation." This legislation undertakes to exempt the credit unions, but not the members thereof, from the obligation of paying Federal or District of Columbia taxes except taxes upon real estate. Bearing in mind that these associations are in the last analysis "mutual" organizations, intended for the mutual benefit of its members and are not intended for profit and gain, every inducement should be given to encourage and approve them. This encouragement and approval could not come in a more substantial manner than through relief from taxation. The several States permitting credit unions have undertaken by positive legislation to relieve the credit union from taxation. The statutes of the several States hereinbefore mentioned are silent on the question of taxation. In fact the constitution of one of the States, Utah, specifically prohibits exemption from taxation. This, however, is a feature for the consideration of Congress, and having herein expressed my opinion I recommend that relief from taxation be granted, notwithstanding the fact that building associations which, in a large measure, function in a manner similar to credit unions are taxed by the laws of the District of Columbia. There is this, however, to be said with respect to building associations, that they are money-making propositions and the credit union is strictly one for mutual advantage and not intended as a source of revenue to the stockholders. As the result of the careful study given the subject of credit unions and comparing the various reports received from the several States wherein they are in operation, I am convinced that their adoption in the District of Columbia through congressional action will provide a much needed accommodation to the resident of meager means who must resort to an occasional financial loan to supplement his income and who is able to comply with the requirements of credit-union membership. I do not believe that its passage will completely solve the small loan problem. There will be those who have been and will be unable to make this necessary financial sacrifice for membership. There remain those whose necessities must be met and they can only be met by liberalizing the present so-called loan shark law for the rates permitted by that law are too low to permit profitable operation. The best evidence of this fact is that in the past 10 years of its operation not a single license has been taken out by persons interested in making small loans, and the fact that it has driven those operators beyond our small area into other jurisdictions where they operate without our supervision or control. We should realize the necessities of the small borrower who needs money when he needs it and has little security to offer. We should recognize the necessity for the small loan broker, realize the risks that he takes, and permit him to charge rates that are commensurate with these conditions. We simply blind our eye when we refuse to do so, and the result is that we have the practice whether we like it or not, beyond our borders but so close to us as to merely make more difficulty for the borrower and at the same time remove the operators from our supervision control. A study has been made of the whole question by able economists and, while approving the establishment of credit unions, we should deal practically with the question by enacting a small loans law which would deal fairly not only with the borrower but with the lender as well. We can not settle the question by the enforcement of an unworkable law. We need credit unions badly, but we need also a small loans law, which would recognize the needs of the borrower, the risks of the lender, and the necessity for local jurisdiction and control. |