The Credit Union System: Developments in Lending and Prudential Risk Management

Summary: Credit unions make loans to their members, other credit unions, and corporate credit unions that provide financial services to individual credit unions. Historically, credit unions have faced statutory restrictions on their lending activities, including restricting lending activities to their members. Other lending restrictions include a 15% statutory loan interest rate ceiling, with some authority to operate above the cap under certain circumstances; a 15-year maturity limit on most loans (with some exceptions, such as residential mortgages); and an aggregate limit on an individual credit union's member business loan (MBL) activity (in the form of outstanding loan balances) and on the amount that can be loaned to any one member.

Summary: Congress passed the Federal Credit Union Act of 1934 (FCU Act; 48 Stat. 1216) to create a class of federally chartered financial institutions to "promote thrift among its members and create a source of credit for provident or productive purposes." The original concept of a credit union stemmed from small lending cooperatives that not only provided a low-cost source of credit for but also promoted thriftiness among their members. Since their inception, credit unions have been granted additional lending authorities as the marketplace has evolved. Nevertheless, the credit union system still faces more restrictions than the commercial banking system.

Summary: Credit union industry advocates argue that lifting lending restrictions to make the system more comparable with the banking system would increase borrowers' available pools of credit. Community banks, which often compete with credit unions, argue that policies such as raising the business lending cap, for example, would allow credit unions to expand beyond their congressionally mandated mission and could pose a threat to financial stability. By amending the FCU Act several times to expand permissible lending activities, Congress arguably recognizes that the credit union system has evolved into a more sophisticated financial intermediation system. In addition to various FCU Act amendments over the past several decades, Congress has recently passed various legislation that would allow credit unions to expand their lending activities. For example, P.L. 115-174 revised the MBL definition, allowing credit unions to extend loans to one-to-four family dwellings regardless of whether the dwellings are primary residences. In the 116 th Congress, H.R. 1661 has been introduced and, if enacted, would amend the FCU Act to allow the National Credit Union Administration (NCUA)âthe primary regulator of federally insured credit unionsâthe flexibility to extend loan maturities for all loans, including MBLs and student loans.

Summary: Recognizing credit unions' primary mission as meeting consumers' credit and savings needs, Congress emphasized prudential safety and soundness concerns when it established the statutory cap on MBLs and a capital supervisory framework for the credit union system. Following the 2008 financial crisis, the federal bank prudential regulators (i.e., the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) enhanced their prudential capital requirements to increase the U.S. banking system's resilience to systemic risk events. Likewise, the NCUA initially proposed in 2014 to increase capital (net worth) requirements particularly for large credit unions (those with $500 million or more in assets); however, the proposal has been revised and delayed and is currently scheduled to become effective in January 2022. In the meantime, the NCUA has implemented and proposed rules to support expanding lending activities that would increase financial transactions volumes (economies of scale), thus increasing the array of loan product offerings for members and potential revenues for the credit union system. Likewise, Congress has been monitoring the extent to which the adoption of enhanced prudential capital requirements for the credit union system has kept pace with the bank prudential regulatory regime.

Credit unions are nonprofit depository financial institutions that are owned and operated entirely by their members. In other words, na tural person credit unions, also known as retail credit unions, are financial cooperatives that return profits to their memberships. For this reason, member deposits are referred to as shares , which may be used to provide loans to members, other credit unions, and credit union organizations; and the interest earned by members is referred to as share d ividends , which are comparable to shareholder profit distributions. Credit unions (and banks) engage in financial intermediation , or facilitating transfers of funds back and forth between savers (via accepting deposits) and borrowers (via loans).

The National Credit Union Administration (NCUA), an independent federal agency, is the primary federal regulator and share deposit insurer for credit unions. There are three federal bank prudential regulators: the Office of the Comptroller of the Currency (OCC) charters and supervises national depository (commercial) banks; the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance by collecting insurance premiums from member banks and places the proceeds in its Deposit Insurance Fund (DIF), which are subsequently used to reimburse depositors when acting as the receiver of a failed bank; and the Federal Reserve provides lender-of-last-resort liquidity to solvent banks via its discount window. The NCUA, by comparison, serves all three functions for federally regulated credit unions. The NCUA also manages the National Credit Union Share Insurance Fund (NCUSIF), which is the federal deposit insurance fund for credit unions.

Although scholars are unable to pinpoint the precise origin of the credit union movement, the organization of membership-owned cooperatives to raise funds for members lacking sufficient collateral or wealth necessary to qualify for bank loans dates back to colonial times. During their infancy stages, credit cooperatives basically emerged as a form of microlending in financially underserved localities to provide unsecured small-dollar loans. Small group cooperatives initially relied on pooled funds, donations, and subsidies to make loans (allocated via lotteries or auctions) until evolving into self-sufficient systems more reliant on deposits. The advantage of small memberships for group credit cooperatives allow members to know each other, which facilitates peer monitoring of the lending decisions and borrowers' repayment behavior. The original concept of a credit union stemmed from cooperatives formed to promote thrift among its members and to provide them with a low-cost source of credit.

Following numerous bank failures and runs during the Great Depression that resulted in an extensive contraction of credit, Congress sought to enhance cooperative organizations' ability to meet their members' credit needs. Congress passed the Federal Credit Union Act of 1934 (FCU Act; 48 Stat. 1216) to create a class of federally chartered financial institutions for "promoting thrift among its members and creating a source of credit for provident or productive purposes." Over time, Congress expanded credit unions' permissible activities because the original concept of a credit union arguably needed to evolve with the marketplace. According to the NCUA,

When Congress amended the FCU Act in 1977 to add an extensive array of savings, lending and investment powers, it intended to "allow credit unions to continue to attract and retain the savings of their members by providing essential and contemporary services," and acknowledged that credit unions are entitled to "updated and more flexible authority granting them the opportunity to better serve their members in a highly-competitive and ever-changing financial environment." H.R. Rep. 95â23 at 7 (1977), reprinted in 1977 U.S.C.C.A.N. 105, 110. Congress acknowledged the difficulty in "regulating contemporary financial institutions within the framework of an Act that has on a continuing basis required major updating by means of regulation."

Although small memberships may be more advantageous for informal microlending systems, advanced intermediation systemsâsuch as banking and the modern credit union industryâbenefit from economies of scale . In other words, more assets (loans), greater access to deposits, and increased transactions volumes provide greater risk diversification and lower average cost per transaction, thus reducing vulnerability to financial disruptions that would be confined to a particular small group.

On April 19, 1977, P.L. 95-22 (the Mini Bill of 1977) substantially amended the FCU Act. It authorized the credit union industry to provide many financial products (e.g., loans, checking and savings deposit services) similar to those offered by the commercial banking system. Today, modern credit unions primarily engage in consumer and residential lending, and some originate commercial business loans for members. The lending and investment powers of the credit union industry, however, are still more restrictive than those of commercial banks.

Credit unions can make loans only to their members, other credit unions, and credit union organizations, thus limiting who they can serve. A statutory interest rate cap for credit union loans exists (with exceptions that allow for sufficient earnings necessary to maintain credit availability). Loans made by federally insured credit unions are generally limited to 15 years (except for residential mortgages). Federal credit unions' investment authority is limited by statute to loans, government securities, deposits in other financial institutions, and certain other limited investments given their origins to promote thrift rather than be long-term investors. Business lending restrictions include an aggregate limit on an individual credit union's member business loan balances and on the amount that can be loaned to one member.

If some or all of these restrictions are relaxed to allow the credit union system's lending powers to expand and become more comparable to the banking system, the prudential regulatory regimes arguably may require greater harmonization to protect against comparable financial risk exposures.

This report focuses on policy developments pertaining to the credit union system. It begins with an overview of recent efforts to further expand system lending capacities. Next, it describes how the system's exposure to mortgage credit (default) risk grew after credit unions were given greater intermediation authorities in the mortgage lending space. It then discusses the system's financial distress and recovery resulting from the 2008 financial crisis, and updates the progress made to improve the system's resiliency to credit and insolvency risks. This discussion will use the balance sheet terminology defined in the box below.

Expanding Permissible Lending Activities

Congress has passed legislation, and the NCUA has implemented and proposed rules, supporting the expansion of lending activities that would increase financial transactions volumes (economies of scale). The expansion of lending activities, as discussed in this section, is likely to generate greater cash flows and revenues for the credit union system.

A credit union's "field of membership" is the legal definition of who is eligible to join. Federal or state governments grant credit union charters on the basis of a "common bond." There are three types of charters: a (1) single common bond (occupation or association based); (2) multiple common bond (more than one group each having a common bond of occupation or association); and (3) community-based (geographically defined) common bond. Individual credit unions are owned by their memberships. Credit union members elect a board of directors from their institution's membership (one member, one vote). Credit unions can make loans only to their members, other credit unions, and credit union organizations.

Field of membership restrictions may limit an intermediary's ability to collect deposits, which are used to fund loans. Common bond requirements on credit unions can be considered analogous to U.S. restrictions on interstate and branch banking, which are no longer in place. By limiting access to supplementary sources of funds, a credit union (or bank) becomes more vulnerable to cash flow disruptions (e.g., increases in loan defaults, substantial deposit withdrawals) following adverse eventsâparticularly those that would directly affect its field of membership. Despite field of membership restrictions, some of the larger credit unions may still be able to achieve a sufficiently large and diversified depositor base, allowing them to enjoy greater economies of scale. Nevertheless, all intermediaries of all sizes are still vulnerable to a sudden need for liquid funds following some unexpected or adverse interest rate movements or a national recession, discussed in the section entitled "Increased Exposure to Mortgage Credit Risk and Recent NCUSIF Management Initiatives." For this reason, access to more sources of depositors arguably enhances liquidity management for credit unions and banks, which typically have assets (portfolio loans) that are less liquid than their liabilities (deposits).

On December 7, 2016, the NCUA published a final rule comprehensively amending its chartering and field of membership rules to maximize access to federal credit union services to the extent permitted by law. Although NCUA cannot change the three initial statutory field of membership categories, it revised certain terms such as local community , rural district , underserved area , and multiple common-bond credit union , among other things to broaden access to federal credit unions. Competitors of credit unions, however, legally challenged the revisions, arguing that an associational charter may limit the ability of a credit union to add underserved areas (e.g., local urban or rural underserved areas as determined by the NCUA) to its field of membership unless it also has a multiple common-bond charter.

On August 20, 2019, the D.C. Circuit Court of Appeals upheld the rule but remanded two provisions of the NCUA's revised field of membership rule. One provision, to satisfy a community-based common bond charter, would have allowed a combined statistical area with fewer than 2.5 million people to qualify as a local community; arguably, this provision could have had a discriminatory impact on poor and minority urban residents. The second remanded provision would have raised the population limit for rural districts from the greater of 250,000 or 3% of the relevant state's population to 1 million people; some geographical areas arguably could have been defined to extend beyond the state borders of a credit union's headquarters. The NCUA proposed to clarify its authority to reject fields of membership applications that would want to exclude low- or moderate-income individuals. On November, 7, 2019, the NCUA proposed to re-adopt the provision pertaining to the combined statistical area to clarify existing requirements and add an explicit provision to the rule to address potential discriminatory concerns.

Lending caps on member business (commercial) loans offered by credit unions did not exist until 1998. Congress included provisions in the Credit Union Membership Access Act of 1998 (CUMAA; P.L. 105-219 ) that established a commercial lending cap that limits most credit unions to lending no more than 12.25% of their assets to small businesses, among other provisions. The following passages from the Senate's CUMAA report explain the rationale for establishing the member business loan (MBL) cap.

"The purpose of H.R. 1151, the CUMAA, as reported from the Committee, is to amend existing law with regard to the field of membership of federal credit unions, to preserve the integrity and purpose of federal credit unions and to enhance supervisory oversight of federally insured credit unions.... The bill significantly strengthens the prudential safeguards applicable to federally insured credit unions and makes the credit union system safer, sounder and more resilient." " Section 203. Limitation on member business loans . In new section 107A(a), the Committee has imposed substantial new restrictions on commercial business lending by insured credit unions. Those restrictions are intended to ensure that credit unions continue to fulfill their specified mission of meeting the credit and savings needs of consumers, especially persons of modest means, through an emphasis on consumer rather than business loans. The Committee action will prevent significant amounts of credit union resources from being allocated in the future to large commercial loans that may present additional safety and soundness concerns for credit unions, and that could potentially increase the risk of taxpayer losses through the National Credit Union Share Insurance Fund ('Fund')."

The CUMAA contained the following provisions:

The MBL definition was codified and defined as "any loan, line of credit, or letter of credit, the proceeds of which will be used for a commercial, corporate or other business investment property or venture, or agricultural purpose," but it does not include an extension of credit that is fully secured by a lien on a one-to-four-family dwelling that is a member's primary residence. The aggregate amount of MBLs that can be made by an individual credit union was limited to the lesser of 1.75 times the credit union's actual net worth or 1.75 times the minimum net worth amount required to be well-capitalized under the prompt corrective action supervisory framework, typically calculated to be 12.25%. Three exceptions to the aggregate MBL limit were authorized for credit unions (1) that have low-income designations or participate in the Community Development Financial Institutions program; (2) chartered for the purpose of making business loans (as determined by the NCUA); and (3) with a history of primarily making such loans (as determined by the NCUA).

In addition to the statute, a NCUA regulation limits the aggregate amount of a business loan that can be made to one member or group of associated members at 15% of the credit union's net worth or $100,000, whichever is greater.

On March 14, 2016, the NCUA implemented final MBL rules to replace the prescriptive requirements (and limitations) with a broad principles-based regulatory approach, which became effective on January 1, 2017. The prescriptive approach, for example, required credit unions to request MBL origination waivers for NCUA approval, among other requirements. According to the NCUA, the prescriptive approach took significant time and resources from both credit unions and NCUA, resulting in delays in processing MBL applications. The principles approach, by contrast, streamlines the MBL underwriting process by granting credit unions more flexibility and individual autonomy to best fit their members' needs. Credit unions are still expected to comply with prudential underwriting practices and commensurate net worth requirements.

To facilitate the streamlined underwriting approach, the NCUA updated various MBL exemptions, resulting in several new definitions. For example, a commercial loan is a business loan (1) that is fully guaranteed by a federal or state agency or provides an advance commitment to purchase in full or (2) made to a nonmember or part of a joint lending arrangement with an entity that is not a member of the credit union system. Commercial loans do not count toward the MBL cap.

On May 24, 2018, Section 105 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174 ) amended the statutory MBL definition (i.e., it removed the words ''that is the primary residence of a member'') to address a disparity in the treatment of certain residential real estate loans made by credit unions and banks. The NCUA has since revised the MBL definition to exclude all extensions of credit that are fully secured by a lien on a one-to-four-family dwelling regardless of the borrower's occupancy status. For this reason, non-owner occupied real estate (e.g., rental property) loans are no longer considered MBLs and do not count toward the aggregate MBL cap.

In addition to amending the MBL definition, EGRRCPA Section 103 amended the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA; P.L. 101-73 ) to exempt from appraisal requirements certain federally related, rural real estate transactions valued at or below $400,000 if no state-certified or state-licensed appraiser is available. The NCUA implemented this provision in a July 2019 final rule. Depository institution lending typically requires appraised collateral as backing for the loans. The rise in home prices (since the $250,000 appraisal threshold was set in 1994) along with the innovation of less expensive automated appraisal valuations arguably has reduced the need for manual appraisals on less expensive homes, thereby lowering borrowers' closing costs. The NCUA also increased the appraisal threshold to $1 million for commercial real estate and qualified MBLs. The $1 million commercial appraisal threshold is higher than the current $500,000 for banks. The NCUA board, however, did not unanimously agree on the $1 million commercial appraisal threshold because, despite the system's low exposure to commercial real estate risks, the banking system still has more expertise evaluating and managing commercial lending risks than does the credit union system.

Policy Options Related to an MBL Cap Increase

The credit union industry has generally supported efforts to increase or eliminate the MBL cap. At the end of 2018, the NCUA reported that the credit union system originated 4.7% in MBLs relative to its assets. If MBL capacity were increased, some larger credit unions could become more competitive with small community banks as well as with some midsize and regional banks. Credit unions that currently enjoy a presence in the commercial lending market, have a sufficiently large asset base, or already operating close to the existing statutory limit would be more likely to increase their presence in the commercial market if the cap were raised.

In addition, the credit union system as a whole can support increased member business lending by increasing its use of participation loans . Financial institutions use loan participations to provide credit jointly. The loan originator, that often structures the loan participation arrangement, typically retains the largest share of the loan and sells smaller portions to other institutions. This practice allows the originator to maintain control of the customer relationship (including the loan servicing) and overcome funding limitations. In addition, all of the institutions involved in the participation loan use their individual portions of the loan to diversify their asset (loan) portfolios, which can be a cost-effective financial risk management tool. The credit union system could, therefore, become a more prominent competitor in the commercial lending market with the banking system, which also uses participation lending arrangements to diversify risks. Nevertheless, because all lending entails exposure to financial risks, having multiple credit unions involved in participations would still pose risk to the NCUSIF.

From an economics perspective, a lending cap imposes an arbitrary limit that may be too high for some credit unions and too low for others, thus resulting in MBL shortages in the latter situations. For those credit unions that provide very few or no MBLs, a cap is irrelevant. Credit unions facing an active MBL market must abruptly cease this type of lending when activity volume reaches the cap, which some may argue is set "too low," given that they can no longer satisfy their memberships' financial needs. Hence, a lending cap is arguably a blunt instrument to the extent that it imposes the same requirement on all institutions without taking into account differences in asset size and market purview.

Alternatively, a policy tool with a greater focus on the costs to originate MBLsâspecifically subjecting the net income derived from MBL activities to a type of taxâwould impose financial costs on credit unions without directly capping their lending ability. For example, the unrelated business income tax (UBIT) for tax-exempt organizations could be applied to MBLs. At the entity level, credit unions are exempt from federal income tax because they are not-for-profit financial cooperatives. If, for example, a credit union were to provide financial services (e.g., check-cashing) to nonmembers, any revenue generated from those activities would be subject to UBIT. Likewise, implementing the UBIT for MBLs would allow costs to grow in proportion to the amount of MBL activity while minimizing an abrupt discontinuation of the activity for those credit unions nearing an established policy cap.

Another policy option, also with similarities to a tax, would be to adopt capitalization requirements comparable to those implemented for the banking system. The CUMAA established the MBL cap and a capital-based supervisory framework as tools to enhance prudential safety and soundness, ultimately providing more protection for the share deposit insurance fund. Enhanced capitalization (net worth) requirements arguably could substitute for an MBL cap. In short, policy tools operating via cost disincentives rather than quantity restrictions may still allow the credit union system to restrain MBL activity but with more flexibility for certain circumstances.

As previously discussed, the credit union system has evolved to a formal intermediation system that provides a range of financial services; however, it still has not acquired all of the lending powers comparable to those of banks. In addition, some of the system's current lending authorities are temporary and must be regularly renewed. This section reviews some of the temporary or limited lending authorities that the credit union industry and some policymakers argue could be enhanced.

Interest Rate Ceilings and Temporary Exemptions

The FCU Act sets an annual 12% interest rate ceiling (or cap) for loans made by federally chartered credit unions and federally insured state-chartered credit unions. The statutory loan interest rate ceiling was raised to 15% per annum after the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA; P.L. 96-221 ) was passed. The DIDMCA also authorized the NCUA to set a ceiling above the 15% cap for up to an 18-month period after consulting with Congress, the U.S. Department of the Treasury, and other federal financial agencies.

The credit union interest rate ceiling is currently set at 18%. According to NCUA notices, its interest rate ceiling is an annual percentage rate (APR) rather than a pure interest rate. The APR represents the total annual borrowing costs of a loan expressed as a percentage, meaning that it is calculated using both interest rates and origination fees. The text-box below explains more about how to calculate and interpret the APR.

In December 1980, the NCUA board raised the ceiling to 21%. In May 1987, the board reduced the rate ceiling and has since maintained it at 18%. When setting the interest rate above 15%, the NCUA must (1) review money market interest rate trends and (2) assess how prevailing interest rate movements (volatility) might threaten credit unions' safety and soundness in terms of the ability to sustain their lending activities, the effect on their net-interest income (earnings), and the effect on their liquidity. In July 2018, for example, the board expressed concern that a ceiling below 18% could result in lower net interest income, considered to be the key driver of credit union earnings, thus reducing credit union profitability and limiting borrowers' access to credit. On January 23, 2020, the board retained the current 18% rate ceiling for federally insured credit union loans, from March 11, 2020, through September 10, 2021, after (1) observing rising money market rates over the preceding six-month period; (2) observing adverse liquidity, capital, earnings, and growth trends; and (3) consulting with the relevant federal agencies.

The Military Lending Act of 2006 (MLA; P.L. 109-364 ) was passed to protect active duty military personnel and their eligible family members from predatory lending. The MLA limits the Military Annual Percentage Rate (MAPR) to 36% for small-dollar loans and credit products, such as credit cards, deposit advances, overdraft lines of credits, and certain types of installment loans. Â The MLA, however, does not apply to mortgages, automobile loans, and secured loans. A credit union borrower typically receives an APR below the MAPR ceiling for covered transactions. Hence, the credit union interest rate ceiling is currently below the federal MLA cap on consumer loans offered to military personnel.

The NCUA, however, permits the credit union system to make payday alternative loans (PALs) to its membership with certain restrictions. Under the existing permissible framework, PAL amounts may range from $200 to $1,000; they must have fully amortizing payments; the term length must range from 46 days to 180 days; and the application fee must be $20 or less. If the borrower cannot repay the initial PAL, a credit union may allow for a rollover into a new PAL of the same initial maturity as long as no additional fees are charged or no additional credit is extended. No more than three PALs can be made to a single borrower in a rolling six-month period. This specific loan product, referred to as a PALs I, requires a one-month membership before it can be offered.

The PALs program has a 28% ceiling, meaning that it is exempt from the 18% interest rate ceiling that covers other loan originations made by federally insured credit unions and from the 36% MAPR ceiling. The MAPR ceiling includes the origination fees, but the NCUA PALs ceiling excludes the $20 origination fee. The PAL loan APR when including the $20 origination fee, in many cases, exceeds the 36% MAPR ceiling. To avoid lending reductions by credit unions to military service customers, the NCUA requested and was granted a PAL exemption from the MAPR so that the PAL application fee is not included in the APR computation. The higher PAL ceiling also does not include an initial origination fee of up to $20 in the APR calculation.

On October 1, 2019, the NCUA broadened the PALs framework to allow credit unions to offer additional short-term, small-dollar products. A new PALs II product may have an amount up to $2000 and have fully amortizing payments over a 1-to-12-month term. Furthermore, there is no minimum membership length requirement to be eligible for a PALs II, which may allow borrowers to quickly consolidate multiple non-credit union payday loans into one PALs loan. Credit unions may not charge any overdraft or insufficient funds fees for any PALs II drawn against a member's account, which may reduce the likelihood of creating a negative balance in the account while still allowing credit unions to make sufficient (as opposed to maximum) profit in this line of business.

When the FCU Act was initially passed, credit unions were allowed to make loans not to exceed two years. Congress has since increased system-originated loan maturity lengths.

On September 22, 1959, Section 8 of P.L. 86-354 amended the FCU Act to increase credit union loan maturities for up to 5 years. On July 5, 1968, Section 1 of P.L. 90-375 amended the FCU Act to allow credit unions to make unsecured loans with maturities not to exceed 5 years and secured loans with maturities not to exceed 10 years. The Mini Bill of 1977 allowed loan maturities not to exceed 12 years. It also allowed credit unions to make residential real estate loans with maturities up to 30 years; home improvement loans and mobile home loans (for principal residence) were allowed for up to 15 years. The Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act; P.L. 97-320 , 96 Stat. 1469) permitted mortgage loan refinancing, and extended the maturity limit to 15 years for all second mortgages. The Competitive Equality Banking Act of 1987 (CEBA; P.L. 100-86 ) amended the FCU Act to authorize the NCUA to allow second-mortgage, home-improvement, and mobile home loans beyond 15 years. On October 1989, the NCUA finalized the rule to extend the maturity limit to 20 years. On October 13, 2006, Section 502 of P.L. 109-351 amended the FCU Act to set a 15-year maximum maturity on credit union loans, with some exceptions. For example, residential one-to-four family mortgages may exceed the 15-year maturity term as long as the property is the borrower's primary residence.

In the 116 th Congress, H.R. 1661 was introduced on March 8, 2019, and referred to the House Committee on Financial Services. H.R. 1661 , if enacted, would amend Section 107(5) of the FCU Act to allow NCUA the flexibility to extend maturities for all loans, including MBLs and student loans.

Developments in the Credit Union System's Prudential Risk Management

Congress created the NCUSIF in 1970 to be the insurance fund for all federally regulated credit unions. The NCUA manages the NCUSIF, which is completely funded by insured credit unions. The NCUSIF's primary income source is the premiums collected from credit unions, which pay the fund's operating expenses, cover losses, and build reserves. Premiums were originally set at one-twelfth of 1% of the total amount of member share accounts, but P.L. 98-369 required each federally insured credit union to maintain a fund deposit equal to 1% of its insured share accounts. Examination fees and any penalties NCUA collects from insured institutions are also deposited into the NCUSIF. Fund portions not applied to current operations can be invested in government securities, and the earnings also generate fund income. The NCUSIF's reserves consist of the 1% deposit, plus the fund's accumulated insurance premiums, fees, and interest earnings.

Prudential safety and soundness regulation, which includes holding sufficient capital reserves, may reduce the financial institutions' insolvency (failure) risk and promote public confidence in the financial system. Although higher capital requirements may not prevent adverse financial risk events from occurring, more capital enhances the financial firms' ability to absorb greater losses associated with potential loan defaults. The enhanced absorption capacity may strengthen public confidence in the soundness of these financial institutions and increase their ability to function during periods of financial stress. For this reason, the NCUA has proposed enhanced net worth (capitalization) requirements for credit unions, which is intended to increase the credit union system's resilience to insolvency risk and to minimize possible losses to the NCUSIF and ultimately to taxpayers. These prudential issues are discussed in this section.

Credit unions were granted the authority to increase their participation in the mortgage market during the late 1970s and 1980s. In light of the savings and loan (S&L) crisis, discussed in the text box below, the credit union system was also granted more powers to mitigate interest rate risk stemming from exposure to mortgage market risk. The following list highlights some of these authorities:

After the Mini Bill of 1977 was passed, the NCUA adopted regulations on August 7, 1978, permitting credit unions to sell mortgage loans in the secondary marketâspecifically to Fannie Mae, Freddie Mac, and Ginnie Mae (government-sponsored enterprises, or GSEs) as well as to federal, state, and local housing authorities. On August 16, 1978, federal credit unions were also granted the authority to sell their members' federally guaranteed student loans. The Garn-St. Germain Act, as mentioned, eliminated limits on the size and maturity of first lien mortgages, permitted refinancing of mortgage loans, and extended the maturity limit to 15 years for all second mortgages. The CEBA amended the FCU Act to authorize the NCUA to allow second-mortgage, home-improvement, and mobile home loans beyond 15 years. The Garn-St. Germain Act also amended the FCU Act to allow credit unions to issue and sell securities, which are guaranteed pursuant to Section 306(g) of the National Housing Act. In other words, federal credit unions were given the authority to participate in activities that would allow them to securitize assets. In 1988, the NCUA allowed credit unions to invest in mortgage-backed securities (MBS). Rather than hold, for example, 30-year mortgages, the ability to hold MBS of shorter (e.g., 10 year) maturities reduces asset duration risk (discussed in the text box below). In 1989, credit unions were allowed to use financial derivatives to purchase insurance against declines in GSE-issued MBS values that would occur after a rise in interest rates, thus protecting the overall value of their asset (loan) portfolios. (NCUA noted that the credit union system had experienced a 48% increase in real estate lending in 1987.)

Consequently, as credit unions and other financial intermediaries increased their participation in the mortgage market, they also grew more susceptible to the financial risks linked to this market. Rising interest rates was a major risk factor in the S&L crisis during the 1980s, whereas rising mortgage defaults or credit risk was a major factor in the financial crisis that occurred in 2008. Because of the greater exposure to mortgage credit risk, the credit union system along with numerous financial entities in 2008 experienced distress after a sharp rise in the percentage of seriously delinquent mortgage loans in the United States.

According to the NCUA chairman, corporate credit unions faced increasing liquidity pressures during 2008 after a significant portion of their MBSsâfollowing a deterioration of the underlying real estate collateralâlost value and were subsequently downgraded below investment grade. Corporate credit unions operate as wholesale credit unions, meaning that they provide financing, investment, and clearing services for the retail credit unions that interface directly with customers. The corporates accept deposits from, as well as provide liquidity and correspondent lending services to, retail credit unions. This reduces the costs that smaller institutions would bear individually to perform various financial transactions for members. Given that retail credit unions are cooperative owners of corporate credit unions, they are also federally insured by the NCUSIF. The NCUA placed two corporate credit unions into conservatorship in March 2009 and three additional corporates in September 2010. The five corporates under conservatorship at the time had represented approximately 70% of the entire corporate system's assets and 98.6% of the investment losses within the system.

The share equity ratioâthe ratio of total funds in the NCUSIF relative to the estimated amount of share deposits held by credit unionsâis an indicator that represents the adequacy of reserves available to protect share depositors and maintain public confidence. The NCUA annually determines the normal operating level for the share equity ratio, which statutorily must fall between 1.2% and 1.5%. The 2006 equity ratio was 1.30% and fell below the statutory minimum to 1.18% by August 2010. The NCUA board may assess a premium when the ratio falls between 1.2% and the declared operating level; however, it is required to assess a premium if the equity ratio falls below 1.2%. Similarly, the NCUA board may declare a dividend if, at the end of the calendar year, the equity level exceeds the normal operating level; it is required to do so if the equity ratio exceeds 1.5%.

Rather than deplete the NCUSIF, Congress in May 2009 established a Temporary Corporate Credit Union Stabilization Fund (TCCUSF) to accrue and recover losses from the corporates. The TCCUSF borrowed from Treasury to help cover conservatorship costs, and the NCUA also raised assessments on all federally insured credit unions, including those that did not avail themselves of corporate credit union services. The premium assessment reflected a plan to restore the NCUSIF equity ratio to 1.3%, which happened by December 2011.

After achieving a positive net position of $1.9 billion as of May 2017, the NCUA, in July 2017, proposed closing the TCCUSF and providing credit unions with a Share Insurance Fund distribution in 2018, estimated to be between $600 million and $800 million. The TCCUSF officially closed on October 1, 2017; its assets and obligations were transferred to the NCUSIF. The NCUA reduced the share equity ratio from 1.39, which had previously been set in September 2017, to 1.38, administering an equity distribution (rebate) of $160.1 million to member institutions.

On January 23, 2014, the NCUA announced increases in capital requirements for a subset of natural person credit unions designated as complex . NCUA initially defined a complex credit union to have at least $50 million in assets. On January 27, 2015, the NCUA revised the initial proposed rule, amending the definition as having at least $100 million in assets. On October 29, 2015, the NCUA finalized the risk-based capital rule. Some of the rule's specific requirements included the following:

A new asset risk-weighting system was introduced that would apply to complex credit unions, which would be more consistent with the methodology used for U.S. federally insured banking institutions. A new risk-based capital ratio (defined using the narrower risk-based capital measure in the numerator and total risk-weighted assets, which are computed using the new risk-weighting system, in the denominator) of 10% would be required for complex credit unions to be well-capitalized under the prompt corrective action supervisory framework. The risk-based capital ratio was designed to be more consistent with the capital adequacy requirements commonly applied to depository (banking) institutions worldwide. Compliance of complex credit unions with the risk-based capital ratio requirements as well as the existing statutory 7% net-worth asset ratio would have been effective by January 1, 2019, to avoid NCUA supervisory enforcement actions. Non-complex credit unions with assets below $100 million would not have been required to comply with the new risk-weighting system, and they would no longer be required to risk-weight their assets. Instead, non-complex credit unions must comply with the existing statutory 7% net-worth asset ratio. Credit unions with a concentration in commercial lending in excess of 50% of their total assets would be required to hold higher amounts of net worth to abate the higher levels of concentration risk.

On December 17, 2019, the NCUA issued a final rule to move the effective date to January 1, 2022. The NCUA also amended the complex credit union's definition by increasing the asset threshold level from $100 million to $500 million. The NCUA also wanted more time to consider the feasibility of adopting a capital framework for the credit union system that would be similar to the community bank leverage ratio framework. Under this framework, banks with less than $10 billion in average total consolidated assets may elect to maintain a leverage ratio of greater than 9% to satisfy both the risk-based and leverage capital requirements to be well-capitalized. Nevertheless, the delays have prompted some Members of Congress to monitor the implementation progress of the risk-based capital rule for credit unions.

Because credit unions do not issue common stock equity, they do not have access to capital sources beyond retained earnings. If alternative sources of capital, referred to as supplemental capital, were to be used in addition to net worth, then credit unions would be able to increase their lending while remaining in compliance with their safety and soundness net worth requirements. The proposal discussed below to adopt supplemental capital requirements would enhance the credit union system's lending capacity and introduce a new prudential risk management tool.

An NCUA working group has developed three general sources of supplemental capital, all of which would be repaid after reimbursement of the NCUSIF following liquidation of an insolvent credit union. Credit unions could raise

voluntary patronage capital (VPC) if (noninstitutional) members were to purchase "equity shares" in the organization. VPC equity shares would pay dividends; however, a VPC investor would not obtain any additional voting rights, and no investment would be allowed to exceed 5% of a credit union's net worth.

mandatory membership capital (MMC) if a member pays what may be conceptually analogous to a membership fee. MMC capital would still be considered equity for the credit union but, unlike VPC, it would not accrue any dividends.

subordinate debt (SD) from external and institutional investors. SD investors would have no voting rights or involvement in a credit union's managerial affairs. SD would function as a hybrid debt-equity instrument, meaning the investor would simply be a creditor with no equity share in the credit union while it is solvent and would not be repaid principal or interest should the credit union become insolvent. SD investors must make a minimum five-year investment with no option for early redemption.

A credit union 's net worth is defined in statute; therefore, congressional legislative action would be required to permit other forms of supplemental capital to count toward their net worth prudential requirements.

Credit union industry advocates argue that lifting lending restrictions to make the system more comparable with the banking system would increase borrowers' available pools of credit. Community banks, which often compete with credit unions, argue that policies such as raising the business lending cap, for example, would allow credit unions to expand beyond their congressionally mandated mission and could pose a threat to financial stability. By amending the FCU Act several times to expand permissible lending activities, Congress arguably had recognized that the credit union system has evolved into a more sophisticated financial intermediation system. Congress has also emphasized prudential safety and soundness concerns. Following the 2008 financial crisis, the federal bank prudential regulators implemented prudential requirements to enhance the U.S. banking system's resiliency to systemic risk events. The NCUA initially proposed in 2014 to increase capital requirements particularly for large credit unions (those with $500 million or more in assets); however, the proposal has been revised, delayed, and is currently scheduled to become effective in January 2022. In the meantime, the NCUA has implemented and proposed rules to support expanding lending activities that would increase financial transactions volumes (economies of scale), thus possibly generating greater cash flows and profitability for the credit union system. The adoption of enhanced prudential net worth requirements for the credit union system, however, arguably may facilitate mitigating the financial risks that typically accompany increases in lending.


Policy Topics and Background Related to Mining on Federal Lands

Summary: The 116 th Congress is considering multiple proposed changes to U.S. mineral policy. Currently certain types of mineral production on federal lands provide the federal government and some states and industries with sources of revenue, while other production does not generate similar revenue. Proposed changes to federal mineral policy could impact these revenue streams, industries, and states in a variety of ways.

Summary: The processes and requirements to mine on federal lands vary by mineral category, surface/subsurface management agencies, and estate ownership. Three main statutes create the three categories of minerals applicable to mining on federal lands. The General Mining Law of 1872 covers locatable (or hardrock) minerals, which are now defined as those minerals not defined by other statutes; typical examples include gold, silver, copper, and gemstones, when not found on acquired lands. Leasable minerals are defined by the Mineral Leasing Act of 1920, and include coal, phosphate, potassium, and sodium, among others (leasable minerals also include otherwise locatable minerals on acquired land, per the Mineral Leasing Act for Acquired Lands of 1947). Salable minerals are defined by the Materials Act of 1947, and include common minerals such as sand and gravel.

Summary: Additional processes and requirements apply when the surface rights above the federal mineral estate are privately owned (i.e., split estate), commonly resulting from the Stock Raising Homestead Act of 1916. Similarly, coordination is required between the surface management agency and the agency managing the mineral estate. Two statutes generally apply to mining on federal lands, including the Surface Mining Control and Reclamation Act of 1977 (only applicable to coal) and the Federal Mine Safety and Health Act of 1977, while others may apply, including the Federal Land Policy Management Act of 1976; the National Environmental Policy Act of 1969; the Clean Water Act of 1972; the Clean Air Act; the Endangered Species Act of 1973; and the National Historic Preservation Act of 1966, among others.

Summary: Data regarding mineral production for locatable minerals on federal lands are not collected by the federal government. This lack of data can hinder the development and analysis of policies intending to affect mineral production on federal lands. The 116 th Congress is considering H.R. 2579 , the Hardrock Leasing and Reclamation Act of 2019, which would, among other provisions, require mining operations on federal lands to report production volumes and values, with these data made public.

Summary: Locatable mineral production on federal lands is not subject to royalties. Some interested parties see not charging royalties as a means of encouraging mineral exploration and production, while others may argue the public is not recovering fair market value for the transfer of a public asset to a private entity. H.R. 2579 would also establish a federal royalty policy for all new hardrock mineral mining operations on federal lands, and use these and other fees for the reclamation of abandoned hardrock mines and other environmental conservation activities on lands and waters affected by past hardrock mining.

Summary: Federal land withdrawals may close a given area to mining. Advocates for a specific land withdrawal generally see the proposed use (e.g., military base, national park, national monument, wilderness area) as superseding the potential use of the public land by other interests (e.g., for mining). Proponents of mining generally advocate for limited withdrawals from the mineral estate, as access to public lands for mining represents opportunities for ongoing and future operations. H.R. 1373 would permanently withdraw about one million acres surrounding the Grand Canyon National Park from new mineral entry; it passed the House, and a companion bill, S. 3127 , has been introduced in the Senate. H.R. 5598 would withdraw 234,328 acres of federal lands in the Superior National Forest, including lands covered by previously disputed mineral leases.

Summary: Several bills in the 116 th Congress would address U.S. critical mineral supply (i.e., those minerals defined by the U.S. Geological Survey that meet certain net import dependence criteria and perceived necessity to the U.S. economy). For example, S. 1317 would instruct the U.S. Geological Survey (USGS) to publish information regarding domestic critical mineral resources and would authorize an ongoing research and development program for critical minerals in the Department of Energy. The text of S. 1317 was incorporated into a substitute amendment to S. 2657 . Another example is H.R. 4410 , which would establish a federal cooperative and a federal corporation to process and sell certain critical minerals commonly found with thorium, which is radioactive.

The North American Industry Classification System (NAICS) defines the term mining to "include ore extraction, quarrying, and beneficiating (e.g., crushing, screening, washing, sizing, concentrating, and flotation), customarily done at the mine site." Mineral mining in the United States had a value added of $60.6 billion in 2018, which was about 0.3% of total U.S. value added (i.e., GDP). The value-added contribution to total economic output of minerals mined on federal lands is not known, as not all of the underlying data are recorded by the Bureau of Land Management (BLM) or reported by mine operators. Using available data, the U.S. Department of the Interior (DOI) estimates that coal and solid minerals mined on federal lands supported $13.9 billion in value added, $24.2 billion in economic output, and 81,700 jobs in FY2018.

This report offers an introduction to the framework created by federal statutes applicable to mining on federal lands. It also highlights some topics in the mining sector that may be relevant to the issue of mining on federal lands for the 116 th Congress, such as the availability of mineral production data; royalties assessed on federal minerals; federal land withdrawals; and critical minerals on federal lands. While the focus of this report is on mining on federal lands, some related topics and concepts are included within this focus.

Statutory Framework for Mining on Federal Lands

The statutory framework applicable to mining on federal lands is a combination of mineral laws, land laws, and laws that impact mining directly or indirectly. These combinations can be complex when discussing specific minerals and mineral topics, as the statutes applying to one situation may be different for another situation.

This introduction to the statutory framework is presented in four subsections: " Laws Establishing Mineral Categories ," " Land Laws Applicable to Mining ," " Laws That Apply to Mining on Federal and Non-Federal Lands ," and " Selected Federal Laws That May Impact Mining on Federal Lands ." This section presents the statutory framework for mining on federal lands; the section " Processes Related to Mining on Federal Lands " presents more detail on the regulated processes to mine the different categories of minerals on federal lands.

The present regulatory framework applicable to mining on federal lands generally places minerals into three categories: locatable (or hardrock ), leasable , and salable . The latter two categories stem from two major changes to the General Mining Law of 1872, which encompassed all mineral deposits on federal lands that were considered valuable. The mining of leasable minerals requires lease and royalty payments; salable minerals generally only require a payment for the quantity purchased. The laws that define the leasable and salable categories are explained in the next two subsections.

Locatable minerals originally included all minerals, but now this category includes only those minerals not covered by other laws: a locatable mineral is a mineral that is not leasable or salable. Locatable minerals are typically high-value minerals; some examples include gold, copper, lead, gypsum, and gemstones. An otherwise locatable mineral is a leasable mineral if it is on acquired land (see " Mineral Leasing Act for Acquired Lands "). Locatable minerals mined on federal lands are not subject to federal royalties.

Leasable minerals are defined by the Mineral Leasing Act of 1920, and include minerals such as coal, phosphate, potassium, and sodium. Pursuant to this act, mining of these minerals on federal land is conducted under a statutory and regulatory framework similar to that of producing oil and natural gas, including lease payments and production royalties. The leasing process may be competitive, and the resulting leases are required to obtain fair market value for the public.

Salable minerals (or mineral materials) are defined by the Materials Act of 1947, and include low-value, common minerals and materials (i.e., not considered locatable minerals due to their low value), such as sand, gravel, and pumice. Salable minerals from federal lands are sold to the public at fair market value from community pits, common resource area, or under more formal arrangements for large quantities. Salable minerals can be obtained for free by some entities, including government entities and non-profit organizations. Unless found in unusually valuable deposits, salable minerals are no longer covered by the General Mining Law of 1872.

The present land area of the United States, excluding territories and possessions, is approximately 2.4 billion acres, and is the culmination of land purchases, cessions, and acquisitions. As the country's land area grew, public policies were enacted to encourage settlement and private land ownership of previously federal lands. These and other policies resulted in changes to the acreage of federal lands; these changes continue, although more slowly in recent years. Four federal land management agencies include the BLM, the Fish and Wildlife Service (FWS), and the National Park Service (NPS) in the DOI, and the Forest Service (FS) in the Department of Agriculture. The BLM managed 244.4 million acres of surface lands (about 10% of the total surface area) and 708.5 million acres of the federal mineral estate (about 29% of the total surface area) of the United States in 2018.

The laws and regulations applicable to mining on federal lands vary for different arrangements of surface and subsurface ownership, and if the lands are part of the public domain . The following examples illustrate some of the potential complexities related to mining on federal lands for different situations.

Mining may be allowed in a national forest, whose surface is managed by the U.S. Forest Service and whose subsurface is managed by the BLM. New mining claims are not allowed in national parks. Regulations for mining on acquired lands may be different from regulations for mining on other federal lands, depending on the mineral. The Department of Energy manages and leases about 25,000 acres of federal land that was withdrawn from the public domain for mining uranium, which would otherwise be a locatable mineral. Mineral production data for a given mineral may or may not be publicly available, depending on the type of federal land on which it is found.

The following three subsections highlight statutes related to federal lands that directly impact mining on federal lands.

Federal Land Policy Management Act of 1976

The Federal Land Policy Management Act (FLPMA) establishes statutory guidance for DOI and BLM management of federal lands, including the federal mineral estate. FLPMA directs the BLM to manage federal lands according to the principles of multiple use and sustained yield . FLPMA codifies the policy that public lands remain in federal ownership, unless the DOI determines disposal of public lands is in the national interest, and that fair market value is to be obtained for use of federal lands. Under FLPMA, the BLM prepares resource management plans (or land use plans ) through a defined process that incorporates public input, including environmental, historical, and societal values, from a variety of stakeholders. Where the BLM is not the surface management agency of a proposed mining operation, FLPMA directs the BLM to coordinate with the surface management agency. FLPMA provides authority to DOI to withdraw lands from mineral entry (i.e., no new mining is allowed).

Acquired lands are lands that federal agencies purchased, received by donation or exchange, or acquired through eminent domain; millions of acres have been acquired by the federal government. Generally, minerals that would otherwise be considered locatable are leasable if they are on acquired lands, per the Mineral Leasing Act for Acquired Lands, as amended, which became law in 1947. Specific legislation could allow for different treatment of such minerals on acquired lands.

The Stock Raising Homestead Act of 1916 allowed settlers to claim the surface rights of 640 acres of federal land, while the subsurface rights remained with the federal government. When the surface owner does not own the subsurface rights, the joint ownership is designated split estate . No new split estate lands have been created under the Stock Raising Homestead Act since 1976. The process to explore and claim mineral deposits on split estate lands requires additional steps, as the surface owner must be notified, and compensated in the case of damage to the surface resulting from the mining operation.

Laws That Apply to Mining on Federal and Non-Federal Lands

Two laws are discussed in this subsection. The first is applicable to all mining, including all mining on federal lands. The second is applicable to all coal mining, about 43% of which was produced on federal lands in 2018.

Federal Mine Safety and Health Act of 1977

The Federal Mine Safety and Health Act (FMSHA), as amended, created the Mine Safety and Health Administration (MSHA) within the Department of Labor. MSHA develops and enforces safety and health rules for all U.S. mines regardless of size, number of employees, commodity mined, method of extraction, or land ownership.

Surface Mining Control and Reclamation Act of 1977

The Surface Mining Control and Reclamation Act (SMCRA), as amended, established the Office of Surface Mining Reclamation and Enforcement (OSMRE) within the Department of the Interior. SMCRA applies to all coal mining operations, including those on federal and Native American lands. OSMRE's objectives "are to ensure that coal mines are operated in a manner that protects citizens and the environment during mining and assures that the land is restored to beneficial use following mining, and to mitigate the effects of past mining by aggressively pursuing reclamation of abandoned coal mines." Among other requirements, SMCRA establishes that, as a prerequisite for obtaining a coal mining permit, the applicant is required to post a reclamation bond.

Selected Federal Laws That May Impact Mining on Federal Lands

Other laws and statutes may apply to mining on federal lands in certain situations. Below is a selected list of such statutes with a reference for more information; a range of other federal and state laws may also apply on a case-by-case basis. Application of these laws and statutes vary widely for different mining operations; further discussion is beyond the scope of this report.

National Environmental Policy Act of 1969 (NEPA) Clean Water Act of 1972 (CWA) Clean Air Act (CAA) Endangered Species Act of 1973 (ESA) National Historic Preservation Act of 1966 (NHPA)

Processes Related to Mining on Federal Lands

The process to mine on federal lands generally begins with the interested person identifying the surface management agency (or owner, if the land is split estate) and the subsurface management agency, if different. The surface management agency can assist with the process to determine whether the area targeted for mining has been previously claimed, leased, or withdrawn from the federal mineral estate. This can occur when lands are designated as national parks, monuments, or military bases, among others. The agency can also ensure that the targeted area and mineral estate are still under federal control, as changes can occur that would give control to private entities, state governments, or Indian governments. The managing agency can also indicate whether the targeted area is acquired land, for which, in most cases, mineral leasing applies. Further, the managing agency can indicate the required information and processes to explore and potentially mine in a given area; such requirements can vary among agencies and within agency offices. Aside from special cases, the BLM is the subsurface management agency for mining on federal lands.

Additional considerations and regulations may apply to Indian territories, which number more than 300 territories and cover more than 56 million acres. Indian tribes and persons retain the right to develop or allow others to develop mineral resources on their lands. The BLM may be invited to provide assistance, in which case "the BLM's authorities and responsibilities include, but are not limited to, resource evaluation, approval of drilling permits, mining and reclamation, production plans, mineral appraisals, inspection and enforcement, and production verification."

The subsequent steps in the process to open a new mine on federal lands depend on the type of mineral to be mined (i.e., locatable, leasable, or salable), as the processes vary by mineral category.

If the mineral of interest is locatable and on federal lands open to mineral entry not previously claimed, exploration that does not result in surface disturbances (e.g., rock-hounding or use of hand-operated tools) can begin without a permit; a permit may be required if surface disturbance is expected. Establishing or staking a claim is the statutorily defined process of physically indicating and publicly recording the specific boundaries of the area containing the mineral(s). The local field office of the applicable surface management agency can assist with this process, but the person exploring is responsible for knowing if a specific area is subject to being claimed (i.e., there is not an existing prior claim on that area, and that the area is open to mineral entry). If a reasonable quantity of a locatable mineral is found on public land that is open to mineral entry and has not yet been claimed, the area can be claimed.

The two types of mineral claims defined by statute are lode claims and placer claims. Lode claims pertain to valuable minerals in an undisturbed state or location (i.e., rock in place); placer claims refer to valuable minerals that have been moved and deposited in a location different from the mineral's formation, typically due to erosion (e.g., sediment bars along streams). A lode claim cannot be longer than 1,500 feet along the main axis and wider than 300 feet on each side of the axis; an individual placer claim cannot exceed 20 acres.

If the BLM is both the surface and subsurface manager, it then works with the operator to approve a required notice or a plan of operation . The mine operator is required to submit an estimate of the reclamation costs to the BLM for approval, after which the mine operator provides a financial guarantee equal to that amount to the BLM. The financial guarantee is held until operations have ceased and the site has been acceptably reclaimed, as determined by the BLM. A claimant must pay a location fee when first recording the claim. An annual maintenance fee is also required. Claim holders may be required to file annual documentation required by FLPMA. More detailed processes need to be followed if exploring on split-estate lands.

Under the General Mining Law, mining claims meeting certain conditions are allowed to be patented , which typically transfers all rights to the claim holder. However, starting in 1994, Congress, through appropriations laws, has continually placed one-year moratoria on the patent process.

If the mineral of interest is leasable, which generally includes otherwise locatable minerals on acquired lands, exploration requires a permit or license

a pr ospecting permit is required to identify valuable deposits of leasable minerals in areas where valuable deposits have not yet been identified; an exploration license is required if additional information is desired by the prospective miner regarding a known deposit.

If a valuable deposit is identified by a prospecting permit holder (and other conditions are met), the BLM may issue the holder a preference right lease . The BLM may issue a notice for a competitive lease sale on unleased, leasable parcels known to contain valuable mineral deposits.

Some leasable minerals are subject to minimum royalties, including 5% of the value of gross output for sulfur and phosphate; 2% of the value of gross output for potassium and sodium; and 25 cents per ton of marketable production for asphalt. Unless otherwise indicated by the BLM, leases require the payment of rent, royalties, and the posting of a reclamation bond; reclamation includes removal of machinery and structures, in addition to required grading and re-vegetation. Many of the steps needed to obtain mining permits, leases, or licenses require the payment of cost-recovery fees to agencies and local governments.

Coal is a leasable mineral and follows the general process for leasable minerals. However, coal exploration and coal leasing on federal lands are subject to specific regulations and statutes. Coal exploration begins with a designation that the land in question is suitable for coal leasing. Coal exploration requires an exploration license, an exploration bond, and conformance with various federal statutory obligations, and also includes conformance of the regulations promulgated by SMCRA. After any party expresses interest in exploring for coal, the BLM is to publish a notice of in vitation calling for other interested parties to jointly explore the indicated tract of federal land.

Existing coal regions on federal lands may have tracts available for lease that do not require additional exploration. While some exceptions exist, coal leases are to be issued through the competitive process lease by application . This process begins when an interested party files an application of interest with the BLM for a tract of land previously identified as suitable for coal mining by the BLM. The BLM publishes notices of the lease sale and invites others to submit sealed bids for the lease. The lease is awarded to the highest bid that is at least equal to the fair market value of the lease (conditional on other requirements being met).

Only U.S. citizens, associations, corporations, and public bodies are able to obtain coal leases. No entity is permitted to own or control coal leases on federal lands exceeding 75,000 acres in any one state or 150,000 acres in the United States. Coal leases require an annual rental payment of a minimum of $3 per acre, to be specified in the lease. Coal mining on federal lands requires the payment of royalties. The royalty for surface mined coal is a minimum of 12.5% of the gross value of coal produced, and the royalty for coal mined by underground mining methods is 8%. A coal lease also requires that the successful bidder post a lease bond to the BLM.

An individual planning to mine or remove salable minerals must contact the local BLM office and secure a sales contract before conducting any operations. Generally, the BLM authorizes the removal (i.e., disposition) of salable minerals on federal lands by a sales contract ; a free use permit may be available to certain government entities or non-profit organizations. If a mine operator desires to open a new deposit of a salable mineral, exploration and mining follow the general processes for leasable minerals. However, c ommon use areas or community pits may be available for immediate mineral removal, eliminating the need for exploration and other processes. The BLM is to identify the fair market value of the mineral at the specific location, required payment, and limitation on surface disturbances, among other specifications.

Four policy areas related to mining on federal lands that have been raised in legislation in the 116 th Congress are presented and discussed below. After a brief presentation of the topic, each section presents policy concerns, options, and examples of related current legislation. Unless noted, bills discussed in this section have been introduced in the House or Senate and referred to committee, but have not seen further legislative activity.

Data Availability for Locatable Minerals

The BLM currently collects mineral production data for leasable and salable minerals on federal lands, but not for locatable minerals. Locatable mineral production information could be useful for some policy considerations; conversely, the lack of such information could limit policy discussion for those considerations.

Concern regarding the collection of these data is not new. In 2008 the U.S. Government Accountability Office (GAO) reported, "according to officials with BLM and the Forest Service, they do not have the authority to collect information from mine operators on the amount of hardrock minerals produced on federal land, or the amount remaining." The GAO also highlighted the limitations of the data collected and reported by the U.S. Geological Survey (USGS) by noting, "it is not possible to determine hardrock mineral production on federal lands from the USGS data." The DOI reports production of some hardrock minerals from federal lands, but notes those values are estimates based on state data.

This lack of locatable mineral production data for federal lands can impact multiple policy areas, including issues discussed in the following sections. Some related policy topics include

Royalties: Potential changes to existing mining laws to extend royalties to all locatable minerals face the challenge that current production and value of these minerals is not collected. Without this information, analysis of such policy changes may be limited. For example, it may be difficult to estimate increased royalty collection or increased costs to producers. Reclamation Bonds: Knowledge of production data could assist the BLM in determining if the posted reclamation bond continues to be adequate, is excessive, or is inadequate for an ongoing locatable mineral operation on federal lands. Critical Minerals: Executive Order (E.O.) 13817 tasked the DOI with coordinating with other executive branch agencies to publish a list of critical minerals. One criterion used to define a critical mineral is net import reliance , the calculation of which includes domestic production of the critical mineral commodity. It is unclear how locatable mineral production, which is not required to be reported, is incorporated into the calculation of net import reliance.

Congress could address this question of data availability by requiring the collection of mineral production data from federal lands. For example, Congress could authorize and require a government agency to collect mineral production and production value data, among other operations data. While the BLM could be the agency tasked with this data collection due to its role in managing the federal mineral estate, other agencies could also receive consideration. For example, MSHA currently collects and publicly provides data on all mining operations; the USGS tracks and distributes mineral production from sources around the country; and the Environmental Protection Agency (EPA) administers or oversees certain permits for most domestic mining operations.

H.R. 2579 , the Hardrock Leasing and Reclamation Act of 2019 (ordered reported by the House Committee on Natural Resources on October 23, 2019), among other provisions, would establish the requirement that mining operations on federal lands report production volumes and values, and it includes the requirement that these and other data are to be made public.

Locatable minerals remain regulated by the General Mining Law and are not subject to federal royalties, unlike leasable minerals. Although the federal government does not assess royalties on locatable minerals, some states assess royalties (i.e., severance taxes) on some minerals mined on federal lands.

Congress might consider establishing a royalty policy for locatable minerals. As viewed by some, locatable minerals represent public assets, and the public should be compensated if any of these assets are removed for private gain. Royalties on locatable minerals could capture this change in ownership, and the revenue streams could be used to fund national priorities. Others view royalty-free access to locatable minerals as a public benefit, given associated mining employment and mining-related economic activity. If set too high, mineral royalties could restrict mining activity and force marginal operations to cease.

Congress could also recognize additional complexities stemming from the different types of royalties and their associated characteristics. Three common royalties are unit-based royalties, ad valorem royalties, and profit-based royalties. Unit-based royalties are assessed on units of volume or weight and ensure that some revenue is collected in exchange for the removal of the mineral. Ad valorem royalties are assessed on the sale of the mineral and are subject to fluctuations in mineral prices. Profit-based royalties are assessed on operator profits, allowing deductions for certain costs. Further complexities can include whether to assign different royalty rates to different minerals and how to treat minerals that are byproducts of other minerals.

As noted above, Congress is currently considering H.R. 2579 , the Hardrock Leasing and Reclamation Act of 2019 (ordered reported by the House Committee on Natural Resources on October 23, 2019), which, among other provisions, would close federal lands to new mining claims under the General Mining Law of 1872 and create a hardrock mine reclamation fund. This bill would establish a federal royalty of 12.5% and a displaced materials reclamation fee of 7 cents per ton of displaced materials for all new hardrock mineral mining operations on federal lands. These fees and other revenue generated by provisions in the bill would be deposited into a newly created fund, the Hardrock Minerals Reclamation Fund. The reclamation fund would target reclamation of abandoned hardrock mines and other environmental conservation activities on lands and waters affected by past hardrock mining activity, independent of land owner. The bill would require the collection and public dissemination of data regarding mine production and royalties paid, and regular inspection of all hardrock mines on federal lands.

New mining operations on federal lands require that the federal lands are open for mineral entry. Some federal lands have undergone withdrawal , which generally means those lands are closed to or withdrawn from mining and other activities. FLPMA defines withdrawal as

withholding an area of Federal land from settlement, sale, location, or entry, under some or all of the general land laws, for the purpose of limiting activities under those laws in order to maintain other public values in the area or reserving the area for a particular public purpose or program; or transferring jurisdiction over an area of Federal land, other than "property" ... from one department, bureau or agency to another department, bureau or agency.

As indicated in this definition, a withdrawal does not necessarily close land to mining, and a withdrawal that closes land to mining may not restrict other land uses. A land withdrawal can occur through legislation, executive order, or agency action, and a withdrawal is usually for a specified period of time. In the event a withdrawal impacts existing mining claims or leases, the DOI and the involved agencies may allow the claims or leases to continue, or they may offer other federal land in exchange for the existing claims or leases. Many federal land withdrawals close the land to mining, including NPS lands, which are closed to new mining claims.

The mining industry generally advocates for limited withdrawals from the mineral estate, as access to public lands for mining represents opportunities for ongoing and future operations. Advocates for a specific land withdrawal (with closure to mineral entry) generally see the proposed use (e.g., military base, national park, national monument, wilderness area) as superseding the potential use of the public land by other interests (e.g., for mining).

One example of a withdrawal affecting mining on federal lands occurred in 2012 when the Secretary of the Interior withdrew about one million acres of federal land surrounding the Grand Canyon National Park from new mineral development for 20 years. The withdrawn area contained active uranium mining operations and about 3,200 mining claims. H.R. 1373 , among other provisions, would permanently withdraw this area from new mineral entry. H.R. 1373 passed the House; a companion bill has been introduced in the Senate as S. 3127 .

Another example of a withdrawal with closure to mineral entry is for the Nevada Test and Training Range (NTTR), which is currently comprised of over 2.9 million acres of federal land withdrawn until 2021. The Department of the Air Force is requesting that this land withdrawal be renewed and an additional 300,000 acres be withdrawn to expand the area. The State of Nevada Commission on Mineral Resources has produced a map of the existing and proposed expansion areas, including affected active mining claims. H.R. 5606 and S. 3145 , among other provisions, would expand and renew the withdrawn federal land.

A third example involves a planned mine by Twin Metals Minnesota (TMM) in the Superior Nation Forest, near the Boundary Waters Canoe Area Wilderness. The Superior National Forest was withdrawn from mineral entry in 1930, but it was reopened to mineral entry in 1950. TMM holds two leases issued in 1966 (renewed twice); no mineral production has occurred under these leases. TMM applied to renew these leases for a third time in 2012, ahead of their 2016 expiration. In 2016, DOI found that TMM does not have a non-discretionary right to renewal, and the FS did not consent to renewing the leases; DOI canceled the leases. In 2017, the DOI found that TMM has a non-discretionary right to renewal, and it renewed the leases. H.R. 5598 , among other provisions, would withdraw 234,328 acres of federal lands in the Superior National Forest, which include the lands covered by the TMM leases.

Affordable and reliable access to critical minerals, and materials or products containing critical minerals, has been an issue since before the Great Depression, with the first official list of critical minerals dating to 1921. One recent definition of a critical mineral is

(i) a non-fuel mineral or mineral material essential to the economic and national security of the United States, (ii) the supply chain of which is vulnerable to disruption, and (iii) that serves an essential function in the manufacturing of a product, the absence of which would have significant consequences for our economy or our national security.

Numerous lists of critical minerals and materials exist, and the creation of such lists is inherently subjective, as the definition of "critical" includes notions of access to markets and costs of possible supply interruptions. Potentially adding further confusion, some agencies and studies conflate or do not clarify distinctions between the related terms critical minerals, critical materials, strategic minerals, and strategic materials.

Discussions of critical minerals often note that the United States has few known locations of critical minerals that could be economically produced, and the United States does not presently have refining capabilities to process those critical minerals into commodities. The United States imports critical minerals (the USGS calculates net import reliance as part of the process to define a critical mineral) or products containing them, resulting in what is sometimes considered vulnerable dependencies. The limitations of using net import reliance to define a critical mineral or critical material are not fully defined, as manufactured products can contain critical minerals of domestic or foreign origin that have been previously imported or exported.

Some known critical mineral deposits lie on federal lands. One example is the Idaho Cobalt Operation, which is a cobalt reserve on federal lands. Another example is the Twin Metals Minnesota mining project, which would mine copper, nickel, platinum group metals, and cobalt in the Superior National Forest.

To provide more information on the likely locations of critical mineral resources, the USGS has begun the Earth Mapping Resources Initiative (Earth MRI). This program has produced a map and dataset covering numerous focus areas for one group of critical minerals: the rare-earth elements. Many of these focus areas occur in the western region and presumably lie on federal lands. As the Earth MRI program continues, it plans to focus on other critical minerals.

Policy options to address concerns related to critical minerals typically intend to create or increase access to secure quantities of critical minerals. Expanding mineral production on federal and non-federal lands is one option to create increased access to secure quantities of critical minerals. Other policy options can include non-mining options; two such options are mentioned below. One option that could increase access to critical minerals on federal lands includes creating mapping and mineral exploration programs, such as Earth MRI. Such programs can facilitate and lower the private costs of locating critical mineral reserves. While general knowledge of the likelihood of a deposit can assist new mineral developments, policies supporting such programs may have limited impacts on production from known critical mineral deposits.

A policy option not focused on increasing domestic mineral production would focus on reducing potential negative effects of supply shocks by stockpiling additional critical minerals at the National Defense Stockpile. Given the number of critical minerals and the higher number of manufacturing input materials made from critical minerals, the costs and complexity of maintaining substantial supplies could limit the effectiveness of this option. An additional complication is that "the National Defense Stockpile is not to be used for economic or budgetary purposes," and much demand for critical minerals stems from private consumption, such as motors and batteries for electric vehicles.

A third option, also not focused on increasing domestic mineral production, would be to secure more access to critical minerals by supporting a domestic supply chain based on critical minerals captured through recycling consumer products. Such support could include funding research to develop technology that would reduce the costs of recycling critical minerals to a competitive level. Other support could include tariffs or quotas on imported critical minerals, thus allowing recycled domestic sources to be more cost competitive.

Congress is presently considering bills related to critical minerals and materials, with some containing provisions related to the federal mineral estate. These include

An amendment in the nature of a substitute to S. 2657 was introduced on February 27, 2020 (including the new title "American Energy Innovation Act of 2020"), and incorporated language from several energy and mineral bills reported by the Senate Committee on Energy and Natural Resources. Cloture was invoked on March 2. This bill includes text from S. 1317 and S. 1052 (discussed below). S. 1317 , among other provisions, would instruct the USGS to publish information regarding known and unknown domestic critical mineral resources. The USGS may conduct geological surveys to increase this information. This bill would also establish a research and development program in the Department of Energy (DOE) to increase efficiencies in the critical mineral supply chain, to identify substitutes for critical minerals, and to promote the use of recycling as a source of critical minerals. This research also includes producing forecasts related to critical minerals for a 10-year period, including expected demand, market conditions, and possible substitutes for critical minerals. This bill would repeal the National Critical Materials Act of 1984 and authorize $50 million per year for 10 years to fund its activities. This bill also includes identical language to S. 1052 (discussed below). H.R. 4410 , among other provisions, would establish a federal cooperative and a federal corporation related to rare-earth minerals and thorium; both federal charters would be privately funded and operated. The cooperative would process domestic and international sources of rare-earth minerals and materials into products for sale. The corporation would accept all radioactive material (e.g., thorium) produced by the cooperative, sell any valuable materials, and could conduct research on new uses of such materials. S. 1052 , among other provisions, would direct the DOE to authorize an ongoing program to develop technologies for the extraction of rare-earth elements (REE) from coal and coal byproducts. The bill would authorize $23 million per year for eight years to fund this program. According the committee report accompanying this bill, "Congress appropriated funding in 2014 for [the National Energy Technology Lab] to develop extraction technologies for REEs from coal byproducts. S. 1052 formally authorizes the program." H.R. 2531 , among other provisions, would treat mineral exploration and mining projects related to critical minerals as high-priority infrastructure projects, as defined by E.O. 13807, and would attempt to reduce the time to issue permits to 30 months by allowing the lead agency to determine that NEPA requirements have been met or do not apply to the project. H.R. 3405 , among other provisions, would instruct the Secretary of the Interior to remove uranium from the list of critical minerals, as prepared by the USGS pursuant to E.O. 13817. A previous version of this bill, introduced on June 21, 2019, finds that the United States has reserves of uranium, and that 52% of uranium is imported from stable trading partners. H.R. 3567 , among other provisions, would direct the Under Secretary of Defense for Acquisition and Sustainment, in consultation with others, to establish guidance for the acquisition of items containing rare-earth materials and the supply chain of rare-earth materials from countries that are not U.S. adversaries. The bill would also direct the National Defense Stockpile Manager to dispose of an additional three million pounds of tungsten and to use available funds to acquire approximately $37 million of critical materials over five years; tantalum would be added to the list of critical materials. S. 3356 , among other provisions, would require the DOE to award grants to encourage battery recycling research, development, and demonstration projects. Separately, grants would be awarded to state and local governments and battery retailers to enhance battery recycling collection programs. The bill would authorize $10 million for one year for the existing Lithium-Ion Battery Recycling Prize competition at the DOE, and would authorize to be appropriated $30 million per year for five years.