In response to my blog “What is the Value of a Member Account“, one reader sent:
“Thought you might be interested . . . this is a bank purchase a few years ago; $1200 per customer!”
A Picture Worth a Thousand Words
A Call to Action and a Test of Who Credit Unions Are
This photo is shared with permission from the January 23, 2020 NCUA board meeting courtesy of the New York Taxi Workers Alliance. http://www.nytwa.org/
What are these members telling us? Why has no one listened to them before? More crucially, why did these borrowers show up at an NCUA board meeting?
Member frustration and hope are on display. Throughout the taxi medallion disruption NCUA from top to bottom has turned a deaf ear to the needs of the member-borrowers.
This neglect has been pointed out time and again in letters to the NCUA Board, in articles in the New York Times, and in the stories from members to the press. Now there is a last opportunity to do the right thing. And to demonstrate the credit union difference.
A Thousand Words
A Feb 5, 2019, an article on creditunions.com described NCUA’s ineffectiveness in its oversight of the taxi medallion disruption. The article asked: The Taxi Medallion “Resolution” Works In Whose Interest? Following are excerpts from one year ago:
. . . .The critical question is not what the normalized the value of the medallion asset might be, but how does a credit union manage through a business disruption to sustain operations? The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumptions, and forced merger. And in the end, to charge credit unions $744 million for “washing its hands” for oversight.. . .
This raises two questions: Did the NCUA act in members’ best interest? And is the $744 million liquidation expense the wisest use of credit union money?
Who Is The NCUA Really Helping?
The traditional approach of share insurance is to ensure the safety of member savings for all amounts less than $250,000. But in a credit union, the interests of the borrowers should also be considered and treated with the same or even greater respect as those of savers.
Credit unions were not designed primarily as savers clubs. Consumers have multiple options for safely saving money, insured and uninsured.
Credit unions were formed to address borrowers’ needs. Taxi medallion financing was not only a community service but also an ideal example of cooperative finance. A lot of people — many of them immigrants making their way in a new country — financed their American dream through taxi driving and then medallion ownership.
When the security that underwrites a loan is devalued, both the borrower and the institution suffer. When the security is an income-producing asset, such as a taxi medallion, the impact on both is even greater. Both income prospects and accumulated value are hurt.
Whatever the security for a loan, a lender’s successful transition through a crisis depends on its willingness to rewrite terms, lower payments, and recognize the borrowers’ efforts to find other income and/or to persevere in current circumstances. This is what credit unions did repeatedly for home and auto borrowers during the recent Great Recession. Cooperative design makes this patient, member-focused adjustment process possible.
The Broken Bonds Costing $500 Million
Conservatorship is an important regulatory option for sustaining the institutional framework as a credit union works through problem assets (loans or investments) whose future value is uncertain. But if regulatory problem-solving becomes merely a “fire sale” to dispose of problem loans, then the bond between the borrowing member and the credit union is broken. The future for both becomes problematic and the options for positive, mutual solutions much reduced.
The NCUA conserved Melrose and LOMTO credit unions in February 2017 and liquidated them 18 months later. When these conservatorships were terminated, the opportunity to preserve value, and assist members, was destroyed..
LOMTO and Melrose reported their June 30, 2018, financial condition under NCUA management as a combined deficit capital position of $155 million. When liquidated within months of that filing, NCUA recorded a $744 million expense. This $500 million difference shows the cost of giving up all future value from working with members. Resolution becomes “cutting and running” away from members’ problems rather than using cooperative design advantages to resolve them.
A Request to the NCUA Chair
NCUA’s ineffective oversight undermined the relationship between the credit unions and borrowers so much that the president of the Committee for Taxi Safety wrote NCUA chair McWatters on May 12, 2017, about the agency’s shortcomings:
“For the most part medallion owners are not seeking to walk away from their loans. They are not seeking to walk away from personal liability. Recognizing this, lenders have stepped up to meet this challenge and work with medallion owners. … The only lender that is refusing to work with medallion lenders is Melrose, under the control of NCUA. Regardless of each owner’s outstanding debt, the NCUA has taken a hard-line, one-size-fits-all approach that demands massive up-front principal pay downs of several hundred thousands of dollars and/or mortgages on residences to renew loans.
“Even if the borrower complies, the NCUA then seeks to substantially increase the interest rate on the loans. Melrose has taken borrowers who want to pay and placed them in a position in which they know they will be put in default, thereby forcing them to face financial ruin. …
“The NCUA’s position is so extreme that it has told borrowers who are current on their loans and still making all payments, that if a medallion is in storage for any reason, temporarily or long term, that it will immediately commence foreclosure proceedings. …
“All we are asking is for the NCUA to act reasonably and allow struggling medallion owners some flexibility in paying off loans. … The NCUA’s behavior has been that of a bully. … It is time for the NCUA to end this assault on our industry and show leadership and human decency.”
Transferring Loans to an Outside Servicer
The best estimates implied by call report data are that all credit unions now hold more than 8,000 member loans secured by taxi medallions. The average outstanding loan is between $250,000 and $350,000. Many of these borrowers will be financially challenged as self-employed driver/ debtors. Like others working in the so-called gig economy, their future is not certain. Will credit unions work with these borrowers as members, or will the regulator and its agents try to rid themselves of any responsibility for these member-owners?
The NCUA transferred Melrose’s medallion loans to an outside servicer. . . The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy. Without an interested lending partner holding the loan, rewrites or other refinancing accommodations are lost. There is no prospect of a future relationship. The credit union promise to member-owners is non-existent. Selling problem loans is how banks, not coops, routinely solve their problem credits.
Although written one year ago, the article shows why the borrowers came to the NCUA, not the FDIC’s board meeting last week.
Where We Are Now: NCUA Largest Holder of Taxi Medallion Loans
Newspapers reported NCUA’s intent to sell in the open market its portfolio of loans acquired from its liquidations. Last week a New York city councilman announced a multi-pronged effort to stabilize the taxi industry including creating a mission driven, nonprofit entity to purchase the loans at a discount and then pass the lowered obligation through to borrowers CUNA and three leagues wrote NCUA on January 22 requesting that NCUA delay a liquidation sale due to harm it would cause borrowers, even those who are current in payments, and to credit unions still holding loans but whose collateral would be devalued in a fire sale.
NCUA working in collaboration with credit unions, leagues, CUSOs and New York taxi regulators, has the chance to create a cooperative solution that would help thousands of member-borrowers and set break from its past neglect. One NCUA board member called the drivers’ attendance “democracy in action.” But democracy only works if those in positions of authority respect their constituents by supporting collaborative solutions, versus selling out to financial bargain hunters seeking to maximize profits out of the misfortunes of others.
A Message: Who Does the Credit Union System Serve?
Read more:
CU Times: Amid Urgent Calls for Help, NYC Taxi Medallion Task Force to Meet With NCUA Officials
NY Times: New York Is Urged to Consider Surge Pricing for Taxis
From the Field: “Takes Away Choice” – One Member’s Comment on Proposed Chesterfield FCU Merger
The Board wrote in part to justify the merger:
Your Chesterfield FCU Board of Directors . . .has approved and is seeking a merger . . .It is the role of the board to look ahead and make decisions that we believe place our credit union in the best position to serve you. As we look to the future, we recognize the potential for economic challenges ahead. The last recession was very difficult for our credit union and we are not confident that we could remain well-capitalized through another economic downturn. We believe the time to take this step is now while our credit union remains financially strong.
The member responds:
I have been a member of Chesterfield F.C.U. for over 17 years. I do not support this merger and ask that all members vote against it. I have looked at the Financials for Chesterfield F.C.U. and in my opinion, the credit union is stable and is meeting its financial commitments.
It is well known that large majority of the members of Chesterfield F.C.U. can already qualify for membership at VACU due to being part of the Virginia Retirement System. This merger only takes away a choice from the current Chesterfield F.C.U. membership and future employees of Chesterfield County government and the Chesterfield County Public Schools. Less consumer choice is not a good thing. For this reason, I ask that the NCUA not approve this merger.
An Observation from the Field
The Stickiness of a Checking Relationship
In the January 2020 monthly AARP magazine, there is an article, Why You Should Search for a Different Bank.
There are four generic options listed: a national bank, a community bank, a credit union and a virtual/online firm.
The article provides brief pros and cons for each choice along with average rates from last October for two loan and two deposit options. But what struck me as important was the opening facts. Checking accounts are very stable relationships.
The Longevity of the Primary Checking Account
One 2019 survey cited that 40% of Americans have never switched banks.
A 2017 survey by Money magazine stated that the average primary checking account stays at the same financial institution for 16 years. People over the age of 65 have held their primary checking for 26 years.
No wonder banks are willing to pay as much as a $600 bonus to acquire new checking accounts.
The Business Analyst’s Challenge
The data suggests an interesting metric to track–the length of a member’s checking relationship, by age cohort. Obviously older members should have longer relationships.
Some questions that might be asked: How does the credit union’s checking loyalty compare with national averages? Are online competitors eroding the relationships of younger members versus persons in middle age?
More strategically, how might one predict that a member is likely to close their primary checking account in the next six months (or any forward time period) based on closed account statistics and related activity data?
PS: In 1985-1986 AARP received a FCU charter from NCUA to serve its nation wide members. The CEO hired of the de novo startup was P.A. Mack, the former NCUA board member. The charter was given up after approximately one year’s effort. Might such a charter make even more sense today?
Clayton Christensen (1952-2020): A Case Study for Life
The Harvard Business School professor and author of thinking disruptively was not unfamiliar to credit unions.
A number of years ago, I heard him at a reunion panel describe why he thought education, especially post high school, was ripe for disruptive innovation. After all, most knowledge is digital, improved real time virtual interactions were feasible, and the scalability of online reach is limitless.
At the close he said he would be putting his analysis into action by launching an online offering for the Harvard Business School called HBX (now rebranded as HBSO). The focus would be applying disruptive thinking to any organization coping with change.
I caught up afterwards and told him that Callahan would be very interested in seeing if his new course might be open to credit unions. He gave me his business card and turned it over to show me his assistant whom we should contact.
Several months later the Callahan team visited Cambridge and the founders of HBX in their temporary offices to seek ways we might tailor the course for credit unions. This was done. The first course was launched in 2014 called Disruptive Strategy with Clayton Christensen. A second offering is now available: Sustainable Business Strategy with Rebecca Hendersen.
Success in Life is More than Course Work
But what I remember most about Clayton’s thinking were his periodic comments on the personal qualities of leadership. A most readable example is How will you measure your life?
The paragraph that struck me is:
On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.
That is Not the Brand We Stand For
A personal story that captured this unique combination of moral and professional leadership is what he reminded his children when one of them had been accused of pushing another student.
He told them that is not who we are: “The brand that the Christensens are known for is kindness.”
And that is why I received his business card that summer afternoon.
The Cooperative Advantage in Mutual Funds
The fastest growing mutual fund family over the past decade has been the Vanguard funds. Their products feature no load, low cost index funds. The underlying philosophy is that investors cannot beat the market. Paying fees to investment managers that claim superior returns not only locks in higher costs, but also the claim to beat market averages is rarely achieved.
But there is one other critical advantage that allows Vanguard to offer this approach to investing contrary to the market positioning of virtually all other major mutual fund advisors. The funds are owned by their investors.
As described in a recent LA Times article: “the investment group is swelling at a dramatic pace, thanks to one crucial advantage over its rivals: It is owned by its own funds, allowing it to use profits after covering costs and business investments to lower its fees, rather than reward outside shareholders with dividends and buybacks.
In other words, the more it grows, the cheaper its funds can become, in turn generating more growth — a virtuous cycle that has helped Vanguard more than triple in size since 2011. It is particularly dominant in the U.S., where last year it took in more money than its two biggest rivals, BlackRock and Fidelity, combined, according to Morningstar.
Vanguard today accounts for over a quarter of the entire U.S. mutual-fund market — a market share almost as big as Fidelity, BlackRock and Capital Group put together — and it is one of the biggest shareholders in virtually every major listed U.S. company.”
A Harbinger for Credit Unions?
NCUA Chairman Ed Callahan (1981-1985) frequently described credit unions as America’s best kept secret or a “sleeping giant.”
Vanguard is a powerful example for cooperative design where the user-owners are the sole focus of management’s priorities. Could Vanguard’s success become an example for credit union’s future contribution to the American economy?
From the Field: Concerns About Leadership for CU America
The following email recently landed. The writer lists multiple concerns which reflect a lack of vision for the system. My experience is that his concerns are widely shared. Following used with permission:
I find myself squirming about another CU Times article pushing mergers.
- A month or so ago I was talking with an Ohio CU CEO who shocked me with the tale that the NCUA was pushing them toward dropping their State charter because the CU was informed they would never be a candidate to acquire a CU in a merger if they did not fall back into the Federal ranks.
- A few months before that I was contacted that my credit union was “ripe” and a good candidate for merger and wanted to know if I was interested further.
- A year before that we were pulled from consideration from a perfect merger candidate when the NCUA put a rep in their shop to “facilitate” and pushed it toward a fed charter CU.
- All of these things have been like an itch I can’t scratch. Here are my thoughts on lack of vision and these pressures:
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- I thought it was about member choice? – doesn’t the Boards know that they are the representatives and should stand up for their base’s wishes?
- If CU Times and NCUA are going to champion mergers, why do they need MORE operating budget?
- Why are well capitalized smaller, even the tiniest, cu’s “ripe” for anything?
- What happened to the unique circumstance that brought them in to existence? – why is that not relevant now?
- Why do CU leaders not recognize the risk to loss of tax status if we just keep consolidating, homogenizing, embracing banking attitudes and strategies, not evangelizing currently recognizable differences.
- Why does the national leadership groups keep beating this drum? – what is the agenda and long-term vision for CU America?
- Is CUNA Management school really focused on creating opportunities for CU rising stars in an environment that is saying less and less opportunities will be available?
- When did CU leaders agree not to be cooperative and eat our own?
- Can we get efficient with process and products and investments and keep our uniqueness out front?
- NCUA approved 50 mergers in the 3rd quarter 2019 (138 Q3 2018) – what was the value gained for the industry?
- Growth and value are not the same thing
- These may seem like rantings with no clear meaning/point/resolutions. I may not be able to articulate the concern but my hackles are up and the lack of national CU leadership recognition and the media that pander to it are making me feel like I put on that thick scratchy wool sweater that you have to wear to a relative’s house because they gave it to you.
A Question of Leadership
What makes a leader? In the cooperative system, as in many other organizations, the answer is presumed to be those selected for the highest level jobs.
In the case of credit unions this might be the CEO of a trade association, the Chair of NCUA or maybe several of the CEOs of top ten credit union by asset size. Or maybe a very consequential business partner providing essential services to hundreds of credit unions.
However leadership does not automatically accrue to positions of responsibility. For some will chose to be managers of their institution only, others seek personal agendas, and some will be content with the recognition and rewards that come with their position.
Leadership In Cooperatives
For many credit union CEOs, it is tempting to assign the challenge of leadership to others. It is a big enough job after all, just to manage a credit union and board. Leadership of the larger system is for those who have a broader base or mandate.
However, in a cooperative system, leadership comes from the grassroots up. Which means leaders take stands and look beyond the boundaries of their own firm to shape opportunities in the system which has spawned them.
Leadership is not conferred with a job title. It is earned through engagement, courage and foresight.
When was the last time your credit union took a stand to change the status quo? What was at stake? What did you learn?
If the answer is “I don’t know” then ask do you want to shape the future or let the future shape you?
What’s in a Name?
”What’s in a name? That which we call a rose by any other name would smell as sweet.”
The question that Romeo poses to Juliet suggests that it is not a name but the person, or substance of a thing, that matters.
Credit Union Names Evolve
Upon chartering most credit unions adopted names that identified their common bond. Starting a credit union generally required one of three fields of membership: affiliation by employer, by association or by community.
Credit union names reflected this core legal identity for example: IBM Southeast Employees, International Harvester, GTE, St Paul’s Parrish, or 717 Credit Union.
But as companies merged or laid off staff and the membership broadened, names became more generic: Community First, Workers, Family First, Together or MY Credit union.
And today many new names reflect the impact of branding consultants with aspirational titles such as: Aspire, Ascend, People’s Choice, NuVision or Credit Human
The Name: CommonBond
So I was intrigued that a fintech startup from the 2011 chose the name CommonBond to describe its firm.
Since 2012, it has made over $4 billion in new or refinanced student loans. But why call the firm Common Bond? Is a tangible connection being referred to? Is there an insight possibly drawn from credit unions, but now forgotten, as names evolve into branding events?
The firm’s business model is to target student loan refinancing and new borrowings. The market is millennials. So how are they trying to connect with this demographic beyond a virtual platform with competitive products and pricing?
The first declaration from their website is a statement of their business philosophy:
OUR SOCIAL PROMISE: A better way to do business
The way we see it, businesses have a responsibility to do more than just business. We’re passionate about giving people the opportunity to live their dreams, and we know improving student loans is just one way we can make a world of difference.
Our partnership with Pencils of Promise has provided schools, teachers, and technology to thousands of young students in the developing world and our yearly trip to Ghana gives customers and team members a chance to visit the amazing classrooms we’ve built together.
As described in a TIME magazine note: “The firm offers services to anyone with a degree from a not-for-profit American university regardless of citizenship, so long as he or she meets the other criteria. The company is also the first and only finance firm to offer what it calls a “one-for-one” social mission: for every degree fully funded on the company’s platform, it also pays for a year of education for a child in a developing nation.”
It also partners with employers as noted in a Fast Company article: “CommonBond has skirted the fates of other online lending companies in recent years by partnering with employers to turn student loan repayment into something like the 401(k)s of the millennial and gen-Z workforces. The goal was to tackle two financial problems in tandem: the costly turnover facing employers and the debt weighing down their youngest employees. CommonBond has racked up more than 250 business partners to deliver its debt-refinancing program as a work perk…”
Empowering
In CommonBond’s 2018 annual review, a video describes its core purpose as empowering the community, the workforce and the world.
The company relies on venture capital and wholesale funding sources including sales of bonds backed by student loans to the secondary market. This would lead one to believe that their funding costs must be higher than credit unions which rely on share deposits. Various student loan website comparisons say their rates are competitive, but there is no way to know the details unless one submits an application.
Therefore the initial positioning strategy of CommonBond is critical to attract prospective borrowers via the Internet. There is no prior relationship and no physical branches to serve borrowers.
The company is private and publishes no financials, so we do not know how financially sustainable its model is at this point in time. But what is clear is that the business design is focused on a set of values and actions that they believe will appeal to students who borrow for college. These concepts include social purpose, a global perspective, supporting educational projects, providing advice on college/work choices, partnering with employers, and empowering individuals through loans.
The company’s transactions are based on the belief that there is a need for a better student loan options, but that is not the starting point for their appeal. It is instead a description of values and commitments to attract prospects by making them feel comfortable when providing their personal information to evaluate a loan option.
With no legacy business reputation to rely upon, CommonBond instead must present a corporate profile that students, who are strangers to the company, will trust. Is that an example that credit unions can learn from as naming exercises continue? Or to paraphrase an expression : That which we would call a credit union by any other name should still be as trusted as before.