Month: March 2021

The Wall Street Journal headline and subtitle suggested something very bad was going on in the credit union system:

Credit Unions Ramp Up Risk

Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets  By Ryan Tracy June 5, 2014

The following lead paragraphs cites NCUA as the primary source:

“Credit unions in search of higher returns are loosening lending standards and piling into longer-term assets, exposing the firms to potentially significant losses if interest rates rise and worrying regulators in the process.

Such moves are raising concerns at the National Credit Union Administration, the sector’s regulator, which said a rise in interest rates could make loans and investments unprofitable. Some analysts also said credit unions likely are unaware of the risk they are taking on because they largely avoided the housing downturn. That has raised worries that lax underwriting standards could fuel another bubble.

“I am concerned that the message [about rates] is either not getting through, or it’s getting through and they are just choosing not to do anything about it,” said Debbie Matz, chairman of the NCUA, who has long sounded the alarm about the industry’s exposure to interest-rate risk.

“Credit unions’ net holdings of long-term assets, a measure of exposure to rising interest rates, rose to an all-time high at the end of 2013 to 35.85% of total assets, according to the NCUA. The increase comes as some credit unions are adopting lax standards for mortgage and home-equity loans and lines of credit reminiscent of those leading up to the financial crisis, according to interviews. Credit unions also are extending the duration on investments like mortgage bonds, regulatory data show.”

The Backstory

In response to the regulator’s alarming and authoritative outlook, Jim Blaine printed an internal NCUA document in which senior staff celebrated, in an email high-five, this external PR coup.  The full blog can be found here under the ironic title, NCUA Ramps Up Risk.  A brief excerpt follows.  Reader comments to the post provide even more context for this PR exercise:

“Story’s up!…”

Seems that “a bunch of the boys” over at the Agency were breathless with excitement, waiting for the WSJ article to appear!

An interesting little group spending their Thursday evening [6/5/2014 – the day before publication!] playing with matches, waiting to read this little firestorm-creating, napalm piece.

NCUA Misleads the Public

Further down the Journal article is a calming quote from a Callahan executive:

“Jay Johnson, executive vice president at Callahan & Associates, a firm that advises the sector, said credit unions are prepared for a rise in interest rates because they have to hold capital against potential losses, and they also are holding short-term assets that could provide cash in a pinch, including more than 40% of investments in short-term holdings that mature in less than one year. “For the most part, I would say that [credit unions] are extremely ultraconservative,” he said.”

Contrast this NCUA created assessment in the Journal with the official portrayal  of the real state of credit unions by Chairman Matz in her opening paragraph in the agency’s 2014 Annual Report:

“In 2014, the U.S. credit union system also had one of its strongest years in recent memory. Membership continued to rise, reaching 99.3 million members. Delinquencies and charge-offs continued to fall, and the overall credit union system had its best year-over-year loan growth in nearly a decade at 10.4 percent. Federally insured credit unions also had aggregate net income of $8.8 billion, the best performance ever. As a result, our country’s federally insured credit unions ended 2014 with a healthy net worth ratio of 10.97 percent and more than $1.1 trillion in assets.”

Banging the Drums of Fear

This PR misinformation effort occurred at the same time NCUA had to withdraw and rethink its first risk-based capital RBC rule proposal.  Over 2,050 comment letters (the most ever on a rule) were submitted, all with substantive criticism.

As a result, the agency backed off and said it would make significant changes in what became the RBC-2 proposal.

Forecasting a future of doom and gloom or hyping a present crisis is unfortunately an all-too-frequent regulatory temptation. Predicting negativity creates an aura of expertise.   It elevates the power of the regulator.  Crises enable overreach of authority.

There is no downside to predictions of future problems especially by regulators.  If nothing happens, then the warning worked,  everyone feels OK and no-harm-no foul for an erroneous judgment.  If there is a downtrend, then one can claim prescience and proven expertise about the future.

An example of this crisis-hyperbole was trotted out  in the March 2020 NCUA board meeting.  The staff provided “background context” to the 2008-2009  corporate crisis.  They opened by stating there was a $50 billion difference between the book and market value of corporate investments at some point in the Great Recession. They proclaimed that if the agency had let those corporates fail, then this “loss” would have caused thousands of credit unions to also liquidate.

That possibility was never an option, but a wonderful story to justify any and all subsequent actions. In fact the agency’s auditor presented the collective corporate TCCUSF potential deficit at yearend 2009 as $6.9 Bn in the firm’s opinion released in early 2010.  By dramatically exaggerating risks in an event, NCUA avoids addressing its mutual responsibility for the state of affairs.

Banging the rhetorical drums is a political tactic unfortunately tempting in a democracy.   When those in authority say things are bad and can get worse, it legitimizes the exercise of unbounded and unexamined power. Due process is not an option.  For the ‘house is on fire” echoing Blaine’s metaphorical critique.

The person with the responsibility for Congressional and Public Affairs when this article placement occurred was Todd Harper, current NCUA Chair.

I will next look at a continuing policy priority he has championed, the immediate implementation of the final RBC rule on credit unions.  NCUA cited FDIC as the precedent for this rule in 2014.  Yet the FDIC completely eliminated this standard of capital adequacy for banks under $10 billion three years ago stating it was so ineffective to that even collecting the data was no longer necessary.

In his February DCUC 2021 speech, Todd Harper stated: “As the COVID-19 pandemic rages on, we must smartly, pragmatically, and expeditiously address the economic fallout within the credit union system. To that end, when I first became Chairman, I issued my Commander’s Call to the agency.”

What will this Call entail? What do events from his previous NCUA tenure as senior policy advisor and PACA director for Chairman Matz suggest about his views on America’s credit union system?

Closing Home-Based Credit Unions by Rule

The Debbie Matz era was marked by a lack of transparency, catastrophic corporate liquidations and an avalanche of new regulations. One of the policies was a regulatory vendetta against small credit unions. The first effort in December 2013, was described on creditunions.com:

“At its December 2013 meeting, the NCUA board voted 2-to-1 for a proposed new rule (12 CFR part 701.40) that would do away with credit unions’ ability to operate from homes. The 30-day comment period is over. If finalized as presented, the rule would immediately require home-based credit unions to provide a public exam location. Within two years, the proposal dictates that all federal credit unions must “obtain and maintain a business office not located on the premises of a private residence.”

When a FOIA request was filed for the names of the 81 federal credit unions which NCUA cited as the basis for the rule, the response was: “Your request is denied in full.”

NCUA’s Office for Small Credit Union Initiatives (OSCUI) supported the rule which explicitly contradicted its own mission: this office “supports the success of small credit unions … (and) recognizes the unique role small, low-income designated and new credit unions play in the lives of their members and communities. We are committed to helping these credit unions not only survive but thrive.”

The NCUA’s New Philosophy and Misinformation

The regulation’s goal as stated: “the proposed rule intends to ensure all FCUs operate in a manner consistent with modern-day expectations for insured financial institutions.” The term “modern-day” was not otherwise defined.

Then Chairman Matz told the Credit Union Times in an April 7, 2014, article: “Times have changed, and financial institutions have changed as well and if you are stuck in the past, that means you are not growing, and you are not serving your members well and they would probably receive better services from a different credit union.”

The rule’s premise was based on inaccurate and misleading facts: “NCUA asserts home-based credit unions are “stuck in the past,” but the fact these credit unions have an average charter length of 55 years and have survived the Great Depression, World War II, the Vietnam War, and the Great Recession tells a more meaningful story.”

Bestowing the Regulator’s Imprimatur

One CEO strongly opposed this vague, regulator-imposed “modern-day” criteria noted that one effect would be to kill all new charter activity:

“It is not about the fact that I believe 500 [credit unions] will pop up tomorrow — it is about the fact that I support their right to start, exist, and maintain a credit union charter. It is about the fact that I do not believe the NCUA gets to make the call on what is relevant — it is here to serve American consumers in their right to form and maintain a financial cooperative. When a regulatory body decides it makes the call on whether a charter is relevant, then the spirit of renewal is dead and the spirit of our pioneers is dead. Also dead is the hope that, should we need more credit unions in the future, there will a fair process or will to foster them.” 

In the seven years after this rule was proposed, NCUA has approved been only 15 new charters. In the seven years prior to this, there were 57. In 2020 only one new charter was granted.

Where is Chairman Harper on This Issue Today?

In his DCUC speech last month, Harper stated: “My whole heart is in the mission of the NCUA and its vital work.”

It is hard to know a person’s heart. Chair Matz, whom Harper advised, defended the rule for months after passage. The credit union system objected strongly, not just the several hundred smaller credit unions that would be shut down. The effort eventually died without explanation from the agency.

What was senior policy advisor Harper’s role in this rulemaking? What is his position today? Does he support the agency policy to eliminate small credit unions? Is this “modern-day” criteria a standard he believes the regulator should determine? What is his view on new charters?

It is vital that credit unions know what Harper understands as “the mission of NCUA and its vital work.”

NCUA’s efforts to eliminate smaller credit unions did not end with this rule. Shortly thereafter, OSCUI undertook another initiative described tomorrow in NCUA, Oxymorons, Truth.

A five-minute excerpt from this 2015 House Congressional oversight hearing captures NCUA’s leadership team’s approach to credit unions. Answers to Congressman Mulvaney’s questions illustrate the agency’s duplicity in providing information, misuse of FOIA and failure to post the agency budget for public review.

Chairman Matz deflects all these documented “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replies, “it would not be effective.”

Todd Harper sits to Matz’s left alongside her other senior staff. His role: Director of the Office of Public and Congressional Affairs and Chief Policy Advisor to the Chairman (2011-2017).

https://www.youtube.com/watch?v=CiPgW1mgDw8

CUNA’s Long Standing Concerns Submitted Prior to the Hearing

CUNA’s public announcement of the hearing included the following concerns: the agency’s budget, the RBC rule, OTR, the corporate stabilization fund, examination issues, and the imposition of “systemically significant” bank regulations on credit unions.

NCUA Chairman Matz to Testify Before House Committee

Posted July 19, 2015 by CUNA Advocacy

It’s been six years since the last time NCUA held a hearing on its budget; it’s been almost four years since an NCUA Chairman has testified before the House Financial Services Committee. On Friday, that will change when NCUA Chairman Matz testifies before the House Financial Services Committee. And, while the hearing is not the venue we had been seeking for stakeholders to weigh in on the agency’s budget, it would be reasonable to expect that the budget will be among the several topics Members hone in on. Without a doubt, the spotlight will be on NCUA and credit unions Friday morning.

In advance of the hearing, we met with Committee staff and Members over the last several weeks to raise concerns and opportunities we see at NCUA. Much of our conversations have focused on recent rulemakings and proposals, including the RBC2 proposal and our concerns with respect to NCUA’s legal authority to issue the rule and the capital adequacy provision that was added to the revised proposal. We have discussed our recent comment letter on the proposed rule on Interest on Lawyer Trust Accounts (IOLTAs) and our belief that even without the enactment of the IOLTA legislation last year, NCUA has the authority to extend share insurance coverage to prepaid debit accounts. 

We have also raised concerns that the RBC2 proposal and the agency’s view of “systemically significant” seems to suggest the agency is simply copying bank regulation without much regard for the characteristics that make credit unions different. No credit union represents a system risk to the financial system, but the agency is applying standards to the largest credit unions that rival requirements on the huge, systemically significant banks.

During these meetings, a host of other issues have been raised by Members including NCUA’s handling of the corporate stabilization fund, examination issues, and the overhead transfer rate. . .

We intend to submit a letter to the Committee in advance of the hearing highlighting these and other issues. 

Tomorrow I will describe NCUA’s efforts in December 2013 to close 81 home-based credit union by passing a new rule.

President Biden’s appointment of Todd Harper as NCUA chair on January 25 is not the final step in the process.

Harper’s term ends on April 10, 2021.  Three options can occur. 1) Nothing, and Harper just continues in place. 2) A new democratic nominee is selected by the Biden administration. This would require Senate approval and likely take months. 3) Harper could be reappointed–an option contested by those who read the Federal Credit Union Act as preventing successive appointments.

Harper’s Audition

The NCUA Chairman’s role is vital. His leadership, oversight of the agency, spokesperson roles and competence will affect the industry’s direction, reputation and public standing.

Whatever the future course, his three months as chair will provide credit union’s first-hand experience with his leadership style. But there is also other data to draw upon.

Harper frequently touts his prior NCUA credentials. He introduced himself in his February 2021 DCUC speech by saying: “I’ve spent nearly a decade at the NCUA and worked on credit union policy issues for more than 20 years.”

So, what does Harper’s NCUA resume include?

The Team Harper Ran With

Ed Callahan described his management and industry relationships as: “Run with good people and good things will happen.” Implicit, of course, is the reverse possibility.

The photo below is Chairman Matz and her senior NCUA staff at a House Financial Services hearing in July 2015.

From left to right:

Rendell Jones: then CFO, now deputy executive director and COO at the agency. Joined NCUA in 2014 after positions at Homeland Security and the Justice Department.

Mark Treichel: Executive director, retired in 2020 after 33 years at NCUA. Now a credit union consultant presenting himself as Helping Credit Union CEOs Achieve the Best Possible Examination Results So They Save Time and Money His capabilities as outlined in an email solicitation to credit unions:

I know how NCUA thinks and why they think it.
I know the examination process inside and out.
I know how to communicate and negotiate with NCUA.
I know how to get NCUA to YES instead of NO.
If I can help you in anyway just hit REPLY and let me know?

Steve Bosack: Matz’s Chief of Staff. Left NCUA in 2016 to join PenFed as Special Advisor to the President & Chief Communications Officer.

Todd Harper: Joined NCUA in February 2011 as Matz’s Director of the Office of Public and Congressional Affairs (PACA)and Chief Policy Advisor   (2011 until 2017).

Michael McKenna: General Counsel; retired in 2019 from an NCUA career prior to the release of a February 2020 IG report on his improper behavior with staff and unprofessional conduct.

Matz’s Post-NCUA Positions as a Bank-Finance Director

Upon leaving NCUA in April 2016, she was appointed (in November) to the Board of the Mutual of Omaha Bank where she is Vice Chairman of the Risk and Compliance Committee and a member of the Audit Committee. In addition, she has served on the Advisory Board of OpenDoor Trading (a start-up providing a platform for the resale of U.S. Treasury bonds), since January 2017. In October 2020 she joined RenoFi, a home-renovation fintech firm based in Philadelphia, as a strategic advisor.

Her appointment at RenoFi came as the company works to extend its reach in the credit union industry. RenoFi’s platform is intended to let lenders offer home-renovation loans to borrowers based on the house’s after-renovation value. The company’s press release said Matz will work to deepen its relationships with existing credit union clients and make inroads with new customers.

This Team’s Policy Initiatives

In follow up posts I will review  agency initiatives during Harper’s tenure on Matz’s staff. Tomorrow an excerpt from the House Committee hearing pictured above will illustrate this leadership team’s approach to the industry. In addition I will also provide one trade association’s concerns they hoped would be covered in this public testimony.

Last week, Xceed’s CEO announced the final vote approving their merger with Kinecta FCU. Reviewing this combination in light of 2020’s full year results suggests that Xceed’s members are just being offloaded from a sinking ship to a severely listing one.

An obituary on Xceed’s passing can be written from three vantage points:

1. The tale of the data
2. The members’ reaction
3. The NCUA’s Regional Director cosigning bonus checks

The Data: Exceed’s Last Performance Report

Xceed’s 2020 headline result is a $2.7 million operating loss (-.29 ROA), representing a $4.6 million fall from the prior year. Loans outstanding declined by 20% ($142 million), reducing the loan to asset ratio to 59%. Total income was down 11%; the loss provision expense increased by 89%.

This full year outcome continues this management team’s track record of declining performance. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year.

During the CEO’s 15-year tenure there have been five mergers that added $200 million in external assets and over 30% more members. Even after these combinations, Xceed’s annual asset growth of 1.39% was far behind the credit union average of 5.8%.

In this final act, the senior team doubled down on their failed merger growth strategy. They became the “mergee” turning over their leadership responsibilities to Kinecta, just down the road. They bailed out, but not before rewarding themselves for this timely exit. (see below)

Kinecta’s 2020 performance appears better with an ROA .48%, share growth of 13%. But the credit union also reported a decline in loans outstanding of over $300 million or 8%. Its net worth ratio of 7.9%, is almost 2% lower than Xceed’s 9.8%.

More important, Kinecta’s long term performance is similar to Xceed’s. That is, it has not been able to keep pace with its peers in the market.

In 1995 Hughes FCU (Kinecta’s earlier persona) ranked 9^th out of all 12,107 credit unions. Twenty-five years later at 2020 yearend, Kinecta’s asset ranking is 50^th out of 5,207 credit unions.

But didn’t the members approve this transaction?

The Members Vote by Ballot and with their Feet

Voluntary mergers require members vote to end their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

Of Xceed’s 47,950 members at yearend, Credit Union Times reports that 1,536, or 3.2%, voted in favor of the merger. Some 323 members, or .7%, voted no. Just 3.9% (1,859) of members participated in the decision to give up this longstanding charter.

But a more meaningful member number is 3,768. That is the 7.9% of members who closed their credit union membership in 2020. They expressed their “no vote of confidence” with their feet. They took their relationships elsewhere.

To make a good choice, members must understand what the options are. This “voting” requirement was presented as an administrative event, devoid of any information with which members might make an informed choice. In a rebuke to the entire process, double the number of members who voted decided to get out now.

But Kinecta, five times larger, will fix this member run, right? Wrong. In the last full year Kinecta itself lost 13,079 members or 5.6%!

All credit union membership grew by 3.4% in 2020. This pending combination, by contrast, lost 16,847 members. Both institutions leadership teams are unable to attract followers.

One might surmise that since NCUA approved this transition– moving members from the frying pan to the fire– it must be OK!

NCUA’s Regional Director Cosigns Xceed’s Bonus Checks

NCUA’s Regional Director approved Xceed’s December 30 Member Notice including the details justifying the merger and calling for the member vote.

This regulator-approved Notice included the additional compensation that the five senior managers will be able to receive from this action. Following are the “possible maximum amounts” in the Notice:

Teresa Freeborn	President/CEO	$1,500,000
Michael Sacher	Executive VP/CFO	$622,127
Fabiana Burkett	Chief Risk Officer	$561,480
Bertha Gascon	Chief Lending Officer	$544,439
Kelly Ritchey-Davoran	People Officer	$269,268

In contrast, the members whose loyalty built the credit union receive nothing. Xceed’s 9.8% net worth is $27 million above the 7% well-capitalized level. These excess reserves are given, for free, to shore up Kinecta’s faltering net worth, which declined from 8.3% to 7.9% in 2020.These payments total $3,497,314 of enhanced financial benefits. What could possibly justify “additional compensation” for a management team leading to a credit union’s demise? They rewarded themselves the fruits of victory after losing the competitive race, year in and year out.

It is likely that Xceed’s members will continue to lose value from this leadership failure. The credit union’s eight branches, apart from the head office, are far removed from Kinecta’s southern California branch network. Two are hundreds of miles to the north in San Jose and Menlo park. Outside California, the six locations serve members in Rochester, NY, Parsippany, NJ, and Leesburg, VA.

To reverse the combined institution’s long term performance declines, Xceed’s members, employees and communities outside California will pay the cost. The legacy relationships and community goodwill created over the past 60 years will be forfeited. Members will quickly discover that phrases in the Member Notice such as “putting members’ needs first” and “lasting benefits” were nothing but shallow rhetoric.

Cherie Freed, NCUA’s regional director, approved the transaction including the $3.5 million in bonuses and vacuous descriptions of member benefit. Whatever conclusions can be drawn from the facts of this event, it would seem that the NCUA is either oblivious to its supervisory oversight, or complicit in approving payouts to a management team to move an underperforming Xceed off its watch list.

Timely supervisory action during a decade long economic expansion could have prevented this charter’s demise. But does NCUA recognize any cooperative values to stand up for?

The unique strength of cooperative design is the credit union’s relationships with its member-owners. These self-interested merger arrangements squander goodwill that credit unions have nurtured over decades, especially in crisis. Members of these two credit unions see this declining value clearly: 16,847 left in 2020.

What message will this and similar episodes convey when credit union CEO’s or NCUA board members are asked to explain merger events like this in congressional hearings or other public forums?

The trades may try to “open eyes” and extoll credit unions’ focus on member well-being. However, the tallest candle ain’t much good without a wick.

Examples multiply of the conflicts of interest embedded in these “voluntary” actions, the stripping of assets, the erosion of member value, and the regulator’s negligence. Can the cooperative model survive these self-inflicted wounds?

Preoccupied with the mantra “safety and soundness” of a single firm, industry leaders fail to understand cooperative history in a systemic way. The results have been disastrous. The isolated credit union is left fragile and defensive, adrift and alone, in a huge sea of others who are preoccupied for themselves—neither assisting nor relying on one another. The members who created the credit union are cast overboard.

Turning a blind eye will not make these issues go away. It will just encourage a feeding frenzy by others seeking to cash out on their tenure as well.

ALEXANDRIA, Va. (Jan. 4, 2021) – The National Credit Union Administration Board unanimously approved, by notation vote, a request for information(opens new window) seeking comments and information on the NCUA’s communication methods to promote efficiency and increase transparency.

“This request for information seeks public input on how the agency can streamline and improve its communications with our stakeholders. Outdated or duplicative regulatory and supervisory information adds to the overall regulatory burden of credit unions as they must devote time and resources to sorting through this information,” NCUA Chairman Rodney E. Hood said. “We recognize that the amount of information the NCUA provides to credit unions can create challenges and may impose unintended burdens.

Four pages, half of this  request, describes NCUA’s current communication efforts.  Reading through, I was not even sure where to send this response:  oeacmail@ncua.gov?

My Comment

Effective communication is not about publication design, content, frequency or media.  Nor is it determined by statutes and interpreting the law. It is about human intent.   My suggestions are:

1.  Require every NCUA employee who provides their email in their presentations to actually reply if contacted. Public servants responding to constituent’s inquiry is a professional courtesy as well as a responsibility, especially when they advertise their availability.

When I tested Rodney Hood’s offer of his personal email for contact  in last week’s GAC speech (BMHood@NCUA.gov) I was surprised to get a direct reply within 24 hours.

2. Fix the so-called “search” engines on NCUA’s web site. To have uploaded decades of information that cannot be accessed is offering nothing at all.  Neither the general search engine on NCUA’s home page nor  the one dedicated to finding documents from the general counsel’s office are effective.

One can type in a very precise request such as a credit union’s name or for a specifically identified NCUA supervisory letter or document and receive hundreds of unrelated responses, none correct.

Hint to readers:  Use the search engines at Credit Union Times, Credit Unions Today or CU Journal to find relevant information more easily.

3. Reorganize FOIA. Repurpose its mission to answer requests with full transparency and awareness of the agency’s responsibility to the public.  Quickly.  NCUA routinely denies requests for which information is public, has been routinely provided in the past, or to hide shortcomings in its own activities.

For example, credit unions know more about former Chairman McWatters’ hundred-dollar travel reimbursements than how the agency managed and sold over $750 million dollars of 4,000 members’ taxi medallion loans to a hedge fund.  Many of those details were in a Wall Street Journal article. For the first 15 years of the CLF’s operations, NCUA routinely published its member subscribers, but now refuses to release the same information.

The list could go on.  One CEO described this FOIA  coverup of NCUA shortcomings and falsehoods in a series of posts  several years ago.  The oversight of this function was then by a General Counsel whose professional and personal decisions were revealed to be unprincipled, even corrupt, upon “retiring.” The FOIA’s office’s practices have not changed with a new General Counsel.

Communication versus PR

Today corporate and credit union “communications” are seen as a skill best managed by public relations professionals.  Never admit error or mistakes.  Do not show vulnerability.  Reframe questions to give your talking points.

No straight talk.  Select chosen facts or use phrases such as “our research shows” or resort to unprovable assertions about future events.

An organization’s communication challenge is not an issue of volume, mastering  the right digital media or even words. It is about leadership’s trustworthiness; a responsibility that cannot be outsourced, delegated or covered over with  a FOIA blanket.

This ends my comment.