Credit unions are strong proponents of democratic values. Until they have to practice them.
I was reminded of this reluctance in a press story of a recent merger approval. When asked about the vote tally, the credit union did not answer how many of its 9,870 members supported their charter cancellation:
Members of the $137 million Embark Federal Credit Union in Great Falls, Mont., voted to approve a merger with the $1.7 billion Horizon Credit Union, the Spokane Valley, Wash.-based financial cooperative said in a prepared statement Tuesday.
Horizon did not disclose the final vote tally. The credit union did not respond by deadline on Tuesday afternoon to CU Times‘ request for the member vote count.
Reporting the vote outcome, but not the actual numbers, suggests the credit union does not want the totals known. The credit union provides the veneer of democracy but not the facts of how many member-owners actually participated in this required step to give up their charter.
To paraphrase a term from writer Jared Brock, credit unions have become “cooperative oligarchies.” The word comes from the Greek oligarkhía, meaning “rule by the few.”
Merriam-Webster ‘s definition: “a government in which a small group exercises control especially for corrupt and selfish purposes.”
Democracy has rarely been tried by capitalists. Can credit unions really go against the incessant drive for corporate dominance and consolidation of power sought by firms in “free” market economies?
Many CEO’s and credit union boards don’t want democratic governance. They want silent customers who will passively accept the leaders who achieved their roles years, or sometimes decades, earlier.
What they ignore is that members are the political constituency to whom fidelity is owed. Boards and CEO’s are nothing without members. Members deposit the funds, borrow for loans, pay the fees and generate transactions that keep the credit union revenue flowing.
Member-owners are the reason credit unions exist.
Members keep the lights on.
Members create 100% of the wealth for their cooperative.
One would think it required practice to tell members the vote tally in this management initiated effort to give up their independent credit union charter. Especially as the CEO was awarded a $100,000 bonus and continued employment at an increased salary with the continuing credit union.
Horizon Credit Union assumes Embarks FCU’s member capital of $14 million, (approximately $1,500 per member). The members get rhetorical promises about the future.
Is this the democratic model that will sustain members’ belief in credit unions?
Since the NCUA updated its rule for mergers in 2017, almost 1,000 voluntary mergers have been completed. In the first quarter of 2022, 41 mergers involving 366,000 members and $5.5 billion in assets were announced.
These were overwhelming strong, long-serving successful credit unions whose boards and CEO’s decided to turn their loyal members’ futures over to another firm.
The 2017 rule was intended to correct self-dealing transactions that were prompted by payouts to senior managers and staff to incent sound credit unions to give up their charters.
The rule required disclosure of all compensation related benefits that would not have occurred if the merger had not taken place. The result has been some, but not all disclosures of promised payments.
The rule has not prevented enrichment, but ironically validated them. The amounts and creativity of merged CEO payouts are growing. Financial Center CU’s CEO and Chair transferred $10 million of the credit union’s capital to their private firm incorporated just prior to merger.-all with NCUA pre-approval. In the merger of Xceed CU the CEO negotiated a $1.0 million dollar merger bonus while promising members to look after their interest as President of Kinecta FCU for three years-only to leave within six months.
The CEO of Global negotiated a “change of control” clause in his contract that will pay him $875,000 upon merger with Alaska USA. Change of control is used in stock corporations for managers who might lose their positions in a sale of the firm. In this case the CEO negotiates the employment clause, seeks out a merger, retains employment post merger as President, Pacific and International Markets, and pockets the money for the deal whose terms he set up.
The Banking Industry Is Looking at Merger Practices
In a May 9, 2022 speech at Brookings, the Comptroller of the Currency announced a review of bank merger approvals:
From my perspective, the frameworks for analyzing bank mergers need updating. Without enhancements, there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks.
Bank mergers should serve communities, support financial stability and industry resilience, enhance competition, and enable diversity and dynamism of the banking industry. Revisions to the bank merger framework would help to realize this goal.
NCUA’s rule 2017 merger rule was off target. It did disclose self-enrichment, incentives which were common place. But it did not prohibit them.. The rule entirely missed the Agency’s primary job which to protect members’ interests.
The evidence before and since the rule indicates that managers and boards act without consulting members, negotiate terms privately, and then present the events as final only needing the members’ perfunctory ratification.
Formal member approval is a foregone conclusion. All of the resources, information and control was in the hands of those who set up the deal. Members are unable to challenge let alone question the actions.
As members are shut out of the process, the concept of member owned financial institutions becomes a fiction. Boards and management control the fate of a charter, its resources and relationships. Members’ interests, loyalty and accumulated wealth are just pawns in management’s efforts to enhance their well-being.
As demonstrated yesterday, the majority of mergers are sound, long-serving and certainly capable of operating on their own.
How does one bring balance, objectivity and most importantly, member interests, to the fore in this increasingly wild west of uninhibited sellouts of cooperatives.
One writer, Denise Wymore, has urged a greater commitment to purpose by credit union leaders.
Decisions, not conditions, determine your credit union’s future.
Do we look for the why behind a tough situation or do we just complain about it? Increased regulation, cost of technology, economies of scale, expanded products and services, lack of succession planning. Struggling to achieve a goal is normal and natural. Is it possible to work together to address the challenges facing “at risk” credit unions?
You have to find meaning, a purpose, something bigger than yourself. Reflect and think about your credit union’s purpose, passion, meaning…
The Comptroller outlined enhanced regulatory reviews such as:
“Community feedback on the impact of a proposed merger also is important. . . .For example, for mergers involving larger banks, , the OCC is considering adopting a presumption in favor of holding public meetings.” and,
“The OCC takes into account an acquiring bank’s CRA rating and performance. Banks with unsatisfactory CRA ratings are highly unlikely to receive merger approval.” and,
Financial Stability in “too-big-to-manage is a risk with mergers, especially for banks engaged in serial acquisitions.”
Whether NCUA can reassess its role in mergers is questionable. Unless political pressure from the Congress is exerted, NCUA seems oblivious to the reputational and safety and soundness implications of the wheeling and dealing now occurring, and the harm done to the communities who are losing their local institutions.
Putting Market Forces Back In transactions
I believe two changes in merger policy are required. The first is make members’ interest the paramount criteria in any proposed charter cancellation via merger. Secondly members should have the benefit of market forces to inform their decision.
Market choice would entail that all credit unions who decide to explore mergers would announce that intent publicly, invite all parties to express interest (both credit unions and non-credit unions) and then select the option the board believes meets the test of members’ best interest. The full process would then be presented to the members for their approval or turn down.
The options for future employment, products and services, return of member capital would all be part of the public record and members would have the information needed to make an informed choice. If a firm that is not selected wants to make a better offer, it would be able to do so and ask the members to turn down the board’s recommendation.
Putting Members Back in Charge
This change would place members in charge of the future of their credit union; not management and its personal preferences for future employment.
Mergers when sought should be a means to the end of enhancing member options and value. Today mergers alone have become the goal. They are about self-dealing, power and control by a few. It is time that members are given the choice about who they want in charge of their shares and loans.
This score is not the opening of an NBA playoff game. It is the number of credit union charters given up versus new charters issued in the first three months of 2022.
What does the score mean? Why is it so lopsided? More importantly, are any members winning in these charter closures?
365,700 Members Lose their Credit Union
The 41 credit unions’ CEO’s and boards are transferring their 365,700 members to another credit union’s control. These members did not choose this fate. In fact they showed continued loyalty: total members increased by 2% and share grew by almost 11% for the year ended 2021.
These members have $3.3 billion in loans and have placed over $4.7 billion in savings to benefit their fellow members. Collectively they have created over $540 million in common wealth, none of which will be distributed to them. Their average ownership is $1,500 each.
There is no information that any of the members were consulted before the boards and CEO’s made these decisions.
Check the Box Explanations
The Credit Union Times article categorized the 41 by the explanation NCUA provided when approving the mergers as follows:
“34 credit unions that received the NCUA’s nod to consolidate for expanded services, two credit unions got the OK to merge because of poor financial condition, two for inability to obtain officials, two for lack of sponsor support, and one for loss or decline of field of membership.”
The continued growth in shares, membership and most importantly, the 47% increase in loan originations in 2021 suggest this group was more than competitive based on the latest performance data. They ended the year with 9.9% net worth, delinquency of .55% and a collective ROA of 1.25%.
These 41 credit unions are sound performers which the members are loyally supporting.
The Largest Three
The three largest charter cancellations are the $2.5 billion Capital Communications FCU, the $612 million Global CU and $524 million People’s Trust FCU. What they have in common is they are turning over the keys to their operations to credit unions already operating in their communities.
This means these six-decades old institutions are combining with other local credit union competitors. The effect will be to reduce member choice, end opportunities for local leadership, close career options for employees, and extinguish the generations of earned loyalty and goodwill with members and local constituencies.
These credit union’s hundreds of millions of collective capital will be under the control of directors the members did not elect and who will have broader corporate goals then just serving the newly acquired members and their transferred wealth.
These combinations eliminate local options and the diversity of models and service approaches that make credit unions successful. Consolidation and concentration which reduces local competition may make life easier for managers. It does not enhance member choice.
The most important math in credit union mergers is the 1 + 1 = 1. There is no expansion of credit union coverage; the system did not grow market share; the members gained no immediate benefits. But they will pay all the costs of merger including the cancelations of vendor contracts, employee benefits, and of course the help of professions who facilitate the deal making.
A Game without Rules or Umpires
Mergers of sound, well run credit unions are not benefitting members. Rather they have become a sop for managers to game the system for self-benefit and boards who have lost any sense of fiduciary responsibility.
Competition depends on rules, and rules depend on umpires. We should fight to protect competition — not winners. Because winners subvert the process. In the name of competition, they demand that their anticompetitive acts go unpunished. In the name of freedom, they insist on their right to shout down the dissenter’s voice.
His thesis is simple in capitalist economies: No field sees winners try to retract the ladder behind them more aggressively than businessor I might add, the CEO’s of sound merging credit unions.
The primary advantage of the credit union model is the member relationship grounded in democratic ownership. Their unique advantage is their local knowledge and relationships that provide members a sense of agency over their lives and communities.
That goodwill, built up year by year over generations of members. is sacrificed in mergers.
NCUA requires new charters to survey potential members to demonstrate support, years of financial projections, vetting of proposed board members and employees with a process that takes hundreds of pages of documents and generally years to approve.
To give up a successful coop charter which took generations to succeed, is literally approved in weeks. The form is perfunctory, there is no effort to validate the reasons given nor the rhetorical promises made.
The credit union system is failing the members who created it by routinely approving consolidations that mimic the activities of institutions for which credit unions were supposed to be an alternative.
At a time when individuals and communities are confronted by forces, events, private and governmental institutions over which they have no say, the credit union is supposed to be an option they can count on. Mergers destroy this sense of influence over events in one’s life.
The score this quarter is 41 to 0. At the moment, the members are losing this game.
Tomorrow I will provide some thoughts of others on what might be done.
Just spent four days in California at my granddaughter’s graduation from Claremont McKenna College (CMC). Some observations from the trip.
The governor announced that California will have the largest budget surplus of any state ever. Over $100 billion.
Air and water now cost $2 minimum
Debit versus credit. You decide. You pay the exchange fee now for card points!
The Search for Employees by recruiting customers. In addition to the signs outside firms such as Wendy’s Now Hiring, there are numerous efforts to reach out to a firm’s customers.
On the TV screen on my flight was the headline, Captain Your Career. It was an invitation to train to become a pilot for United Airlines. The website https://unitedaviate.com/ explains that: We intend to hire more than 10,000 pilots in the next decade and have the largest fleet of wide body aircraft in North America, offering you exciting opportunities to advance.
And on my fast food receipt:
The next generation’s college thesis topics. Each graduate of CMC writes a senior thesis. Here are some of the titles:
Which consumers are driving electronic vehicles; An analysis between EV adoption and individual characteristics.
Does H1-B Visa restrictions hinder American innovation?
Moral Hazard in Monetary Policy: Assessing the Impact of Federal Reserve actions on asset returns during the COVID-19 Pandemic.
The impact of merger and acquisition on the United States Video Game industry.
Potential for electoral success and the future of the Republican party.
The effects of CFO gender on earnings quality and financial risk.
And so forth for over 300 submissions. Makes one feel behind the learning curve. One topic I thought might have relevance for credit unions and their regulator: A Paradoxical relationship: US Government authority and the American people.
A green Uber option. A Tesla, EV option to reduce pollution is offered. The driver said he leased the Tesla for a week at a time for around $330 under a special Hertz-Tesla agreement. Applicants go online. When he showed up there were at least 30 other drivers waiting to pick up cars under the plan. One way to recruit more drivers (provide the auto) and create a positive public image.
60 years ago seven employees of the Philip Morris Company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the founder’s commitment, the human motivation required by any coop startup, still drives Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment is stated as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating their 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are situations where the credit union has made a difference in members’ lives spanning generations.
The CEO John West recalls his predecessor, Roger Ball–CEO for 36 years–saying that service is not just the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not limited to financial services. “We want employees to span different schools of thought to continuously enhance our member relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment aligns with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
One example of this holistic approach to member financial well-being is a free resume review. Other services include coaching, financial workshops, even for kids, and articles to help members with both financial events and career planning.
Sustaining the Movement
Speaking with West about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story,” that is, serving each other while living in community.
The credit union’s 2021 “State of the Union” video below describes the credit union’s response during COVID. It includes two members recounting their personal circumstances, an employee’s special efforts to help staff and a community agency discussing the credit union’s steadfastness. Each person speaks with passion about their credit union connection.
That passion is the difference that never grows old, no matter a credit union’s charter date.
(https://youtu.be/K4REjbxV68A)
60 years ago seven employees of the Philip Morris company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the drive and commitment, the human capital required by any coop startup, still motivates Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment reads as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating this 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are examples where the credit union has made a difference in relationships that span multiple generations.
The CEO John West recalls his predecessor, Roger Ball who was CEO for 36 years, saying that service is not the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not just financial services. “We want employees to span different schools of thought to continuously create value in our relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment coincides with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles in their efforts to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
An example of this holistic approach to member financial well-being is a free resume review. Coaching, financial workshops, even for kids, and articles help members with both financial events and career planning.
Sustaining the Movement
Speaking with John about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story” of providing service to each other living in community.
The credit union’s 2021 “state of the union” video shows how the credit union responded during COVID in this five minute video. It includes two members recounting their personal circumstances, an employee’s special help for staff and a community agency discussing the credit union’s steadfastness. Each speaker communicates passion about their credit union connection.
That is the difference that never grows old no matter a credit union’s charter date.
Reverse Robin Hood: Bank Purchases by credit unions
A response to my comments in a recent conference call: Your points that really resonated were lack of transparency and accountability inherent in the cooperative governance structure. Also the fact that the bank acquisitions are taking money from CU members to line the pockets of bank shareholders, truly a reverse Robin Hood situation.
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“If My Words Can Convince One Credit Union”
I think CEOs just get tired. I think boards can get tired, too. And they think if our current CEO can’t make this place grow, who can? They see the simple solution is to merge out.
I am telling small credit unions that is a mistake; at least look for someone. I have had conversations with a number of CEOs who are retiring from small credit unions and they’re not even considering looking for somebody. They aren’t doing anything. They are not telling their boards to look for somebody. In fact, they’re telling the board the opposite—nobody can do this job at my pay.”
That type of thinking, and an unwillingness to “fight,” is hurting the movement.
“If my words can convince one credit union…if one credit union decides not to give up and says at least I will look for a replacement for the retiring CEO, I will feel good. I hope more small credit unions will follow what we are doing here.” (source: David Sawin, CEO, MN Catholic Credit Union, interview in CU Today)
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What’s Missing?
“I am starting to think that credit unions are a waste of my time.
. . . as best I am able to ascertain, CUs are essentially just nonprofit banks – institutions that exist first and foremost to keep their employees employed and to keep the regulators happy. The trappings of cooperation – invocations of principles, mechanisms for elections of board members, etc. – are either ignored or treated as empty formalities.
The new CEO of the CU on whose supervisory committee I serve told me that members simply don’t give a damn about that stuff; they just want convenience.
From my perspective, if CUs are just going to do exactly what the local banks are do, then I might as well just move my accounts over to banks. What am I missing? (name withheld by request)
An uncomfortable change in the conversation (with regulators) will require incredible bravery. I’ve been kicking around CU’s all my life. My parents were members of a Teachers and a Manufacturing credit union. I have been on Boards and now a CEO.
I have studied the history of the movement and the credo’s doled out as battle cries. We were “choice”, we were “people helping people” – those goals were always color and socioeconomically blind as we emerged fighting against banking practices that were not–think redlining.
But we forgot one credo recently – “not for profit, not for charity, but for service.” Since this credo does not make a singular virtue of EQUITY, can we no longer espouse it?
The conversation change needs to be about DOI – Diversity, OPPORTUNITY, and Inclusion. We were born out of opportunity and we are still built on it. Will we be brave enough to say it? We don’t need to be admonished with a new recitation.
We just need to remember our founding principles – which are both relevant and powerful. (David. A. Jezewski, President/CEO, CommStar Credit Union)
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Dear readers do not despair. Tomorrow, Friday the 13th, is good news. I will tell the story of a credit union that believes in the power of cooperative design.
This is the rest of CEO Joy Peterson’s concerns with the regulatory environment and six suggested changes.
Part I can be read here.
Pivoting from COVID to DEI
The pandemic saw record sums of COVID inspired money pouring into banks and credit unions. Global fear and confusion were rampant. Businesses were shuttered-some temporarily and some forever. The global economy began a free fall.
There were reports of billions lost to PPP and unemployment fraud. Where was NCUA? One would expect nearly daily guidance regarding concentration risk and fraud prevention and best practices regarding NACHA rules.
Instead, the talking heads at NCUA started scolding credit unions about Diversity, Equity and Inclusion. Rather than real concern for our members-the salt-of-the-earth member/owners of our financial institutions who feel a common bond to a financial institution with their co-workers or their community-NCUA decided we are evidently racist and somehow elitist.
Our color chart no longer satisfies their hunger for diversity. They alone are responsible for how our charters read but, in hindsight, they have decided we are perhaps too white or not serving enough underserved?!
In reality it doesn’t matter what color or gender our members are. It doesn’t matter whether they are rich or poor or anywhere in between. If we spend all of our time and most of our income trying to satisfy NCUA’s constantly changing view of what makes credit unions valuable to our members, we are no longer serving our members at all.
If we aren’t provided with the leverage to protect their money and their identity and their financial privacy, we are no longer good stewards of the faith 129.6 million people have placed in us.
The Most Needed Change: Respect for Credit Unions
Small credit unions are wounded and struggling to maintain our relevance and profitability in today’s economy. From one CEO to the CEOs of the thousands of smaller Federally insured credit unions, the next time you are notified that your examiner is due to arrive, make sure you look carefully behind their back as you usher them in. There could be a bayonet that will be driven firmly into your back as they write up yet another list of tail-chasing requirements to be deemed “safe and sound”.
I think it’s time all of us ask our regulators to be more constructive in their approach to the industry.
Here’s how NCUA can demonstrate respect for our efforts to serve members, the reason why we exist:
Recognize that small credit unions are, in fact, different from large ones. Their capabilities are not the same, but our service to members can still be extraordinary, needed and valued.
NCUA should support credit unions instead of fighting them. Statements by NCUA spokespersons often include comments critical of credit unions. Our members decide whether we are “good enough”.
Stop labeling our members. NCUA likes to call them marginalized, disadvantaged, underserved and low-income. They refer to “minority communities” and recently “Other Targeted Populations or OTPs”. While we happily serve ALL members of our community, these terms give the impression that only people who are “less than” or “other than” belong to credit unions. They are just people.
There needs to be more transparency from NCUA regarding its own management. Losses to the Share Insurance fund caused by thefts went on for years without raising any red flags to NCUA examiners. Were there any adjustments to NCUA examinations to address these limitations? NCUA should also be expected to manage their own investments at least as well as they expect us to manage ours. Our credit union members pay for NCUA’s management failures.
NCUA shouldn’t expect more of small credit unions than they expect of themselves. NCUA “recommended” that credit unions allow no-cost loan payment deferments and the waiving of overdraft fees during the pandemic. My credit union gave up more than $15,000 in income to help our members. What did NCUA do?
So many mixed messages. Don’t tell credit unions we need to do more lending to people with lower credit scores and then criticize us because our delinquency goes up. Don’t take away our ability to earn non-interest income from overdraft fees and interchange income and then wonder why we aren’t more profitable. Part of the reason for all the mergers is the demanding, overbearing NCUA requirements as well as the utter lack of support from our regulators.
Respect for members is what makes us different. That is also what makes us sound. It doesn’t work the same, the other way around.
Ten days ago I received a positive comment on a post. I asked what aspect spoke to the writer.
In return the CEO Joy Peterson of Bessemer System FCU, Grenville, PA sent an article written earlier that she hoped to publish in the credit union press.
I read it. Her voice is authentic; her coop commitment lifelong; and her frustration with the regulatory environment, clear.
In her lament, I hear echoes that concern many about leaders in Washington, especially those in positions of authority.
I suggested she add recommendations to her critique. She did. They are in the second part of this blog to be presented tomorrow. Here is part I.
From Joy Peterson:
As a lifelong accountant, my Dad had a sign hanging in his office that said “Auditors are the ones who come in after the war to bayonet the wounded”. His clients would all chuckle at the sign and nod in agreement. As a child, I didn’t quite understand the meaning. As the CEO of a small credit union, I understand completely. Our regulator, NCUA can be thought of as the auditor in the equation. It’s quite possible that FDIC and CFPB are members of the same group although I don’t have enough direct contact with them to speak to them specifically.
Membership Growing, Credit Unions Declining
At the end of 2013, there were 6,554 Federally insured credit unions in the U.S according to ncua.gov statistics. By the end of 2021, the number had declined by an astounding 1,612 to 4,942. During that same time period, the number of credit union members actually increased from 96.3 million members to in 2013 to 129.6 million members in 2021. Since the membership numbers grew, it seems evident that the decline in the number of credit unions is not due to consumer dissatisfaction.
What then, does explain the loss of so many credit unions at a time when Americans are searching for value and safety in the financial industries? Even with fewer credit unions to choose from, 129.6 million Americans still seem to find solace in member-owned financial services. Evidently, they still believe in the prospect of pooling their money for the good of all of the members that make up their charter. Based on results, our regulator doesn’t hold that same high opinion of Federally insured credit unions and their mission of service.
Serving NCUA, Not Members
I’ve been a lifelong member of my credit union and an employee since 2001. In that time, I’ve seen substantial regulatory changes in my credit union as well as the industry as a whole but none as significant and harmful as the ones I’ve noted from 2013-2022. Our members are not being served by their credit unions. Instead, our credit unions are serving NCUA.
Based on the numbers, many have been unable to continue to do so successfully. Some have been dissolved involuntarily and many others have been “encouraged” to merge in order to fulfill NCUA’s crushing requirements for what is deemed to be “safety and soundness.”
It seems NCUA would much rather provide oversight to a few giant credit unions than have to provide guidance and oversight to thousands of us little guys. Is that really what the millions of members of both small and large credit unions want? Do our members really understand that there will come a time when belonging to a credit union is no different than being an account holder with Bank of America or Wells Fargo as their individual control over their financial institution is being diluted at a record pace?
The Compliance Burden: Boards as Scapegoats
Today, trying to comply with NCUA’s ever growing list of compliance requirements is like trying to herd cats. Are those requirements making credit unions safer and more productive and efficient? Based on the numbers, the answer is a very clear and unequivocal NO.
Each NCUA audit results in additional requirements for volunteer board members and supervisory committee members. These completely uncompensated volunteers are now expected to review employees’ accounts, verify the vault, balance the checking account, review corporate accounts, attend meetings and training on Bank Secrecy and on and on and on.
When volunteers resign in frustration, NCUA demands they be replaced. Replacing volunteers encumbered with such overwhelming responsibility is becoming nearly impossible. Not only are they not compensated, they frequently aren’t even able to receive some of the benefits the rest of the membership are granted like the waiving of fees for an incidental overdraft or a request for a stop payment.
They are reminded with every NCUA contact of their culpability for any insider fraud or failure to mitigate risk appropriately. Rather than volunteers, they are becoming potential scape goats for NCUA. In order to rope in replacements, we have to overstate the “service to your community” aspect and seriously understate the actual responsibility of it all.
The Big Three DP Monopoly
Beginning around 2014, NCUA started a nearly constant drumbeat regarding “Vendor Due Diligence”. We are cautioned on the growing threat of losses caused by the numerous outside vendors we use for everything from data processing to corporate account services to network security.
We chase our tails trying to verify these vendors are properly insured and sustainable and are abiding by regulatory requirements in terms of security. We make lists and check boxes and retrieve SOC I and II reports. We even hire other vendors to help us keep track of us monitoring our vendors. We spend thousands upon thousands of dollars and hundreds and hundreds of hours trying to make sure our vendors are safe.
In reality, small credit unions have very little choice of vendors and almost no control of their behavior, particularly in regard to information security. The Big Three data processors have become so big and so powerful. They have not only access but also control of every bit of our members’ financial information.
They refuse to provide security audit information on the pretense that doing so would compromise their own security. They refuse to return our data without hundreds of thousands of our members’ hard-earned dollars in “de-conversion fees” if we attempt to cut ties with them. They hold our data hostage and simply refuse to allow our exit until we meet their demands. Rather than a contract termination, our dissatisfaction is relegated to a hostage negotiation scenario.
Does NCUA intervene on our behalf as we attempt to comply with their demands surrounding vendors? Absolutely not. In whispers they admit that they have no oversight of these giants either.
Yet small and large credit unions alike are expected to demonstrate that we are overseeing these bullies. The really large credit unions at least have the benefit of the substantial sums they pay to these vendors to use their leverage to obtain Service Level Agreements when signing contracts.
Small credit unions like mine have no such advantage. The Big Three don’t care what I demand in terms of service on behalf of my members. When their shoddy security practices put my members’ information at risk, they shrug their shoulders and basically dare me to find an alternative.
Rather than contrition and embarrassment regarding their failure to maintain adequate security against current threats, these Fortune 500 companies threaten legal action for disclosing their rookie mistakes. They aren’t sorry they failed to use their superior security resources to provide superior security. They are only sorry we found out about it and demanded that we deserve better.
End part I.
Part II tomorrow, includes a recent additional concern and six recommendations for improving the regulatory relationship.
In America the press is often called the “Fourth Estate.” The term places the press’s role as critical as the three branches of government: legislative, executive and judicial. It signals the watchdog role of the press, so vital to a functioning democracy.
What is the state of press coverage of credit unions? Especially now that coops are the second largest depository system in the economy, serving over 100 million members and managing $2.2 trillion assets.
A Brief Credit Union Press History
Today’s independent coverage of the credit union system evolved from newsletters that emerged in the 1970’s and 1980’s as the credit union system become more coherent with national ambitions and organizations.
These startups included CUIS, Report on Credit Unions, NCUA Watch. These newsletters relied on subscriptions versus the free in-house updates from league and trade associations.
In 1986 ASI established the first printed newspaper format called Credit Union Week. Shortly thereafter Mike Welsh, former CUES President, launched Credit Union Times offering original reporting and commentary. In following years Credit Union News and Credit Union Journal were launched as competitors. All used a combination of advertising and subscriptions to support their free-spirited reporting.
Today the independent credit union news media is largely virtual, publishing daily online summaries relying extensively on press releases from the industry.
More than Aggregators
With small staffs, limited budgets and daily posts, opportunities for original reporting or even investigative efforts are limited.
But there are periodic examples of the traditional press role of speaking “truth to power.” Power refers both to the actions of NCUA and other government agencies, as well as events within credit unions and trade organizations.
Peter Strozniak of the Credit Union Times has a talent for tracking legal proceedings involving credit unions. His articles have provided valuable insight into NCUA’s regulatory shortcomings, as revealed in court records. A recent example is his story of a credit union’s suing NCUA for failure to prudently manage its interest in taxi loan participations. The opening paragraph:
The $390 million Nassau Financial Federal Credit Union is suing the NCUA for nearly $1 million for allegedly breaching an agreement to settle defaulted taxi medallion loans for a mere fraction of what they were worth.
Many observers questioned NCUA’s disposition of the taxi medallion loans sold to a hedge fund in February 2020. The agency refused multiple FOIA requests for details. This example further adds to the impression of an NCUA coverup in its actions in the $750 million sale of loan participations to a Wall Street hedge fund.
The Members’ Interests: Sunlight as a Disinfectant
CU Today has published a series of original articles about member’s efforts to participate more openly in their credit union’s governance.
One series discussed the efforts of four members of Virginia State Employees Credit Union to seek nomination for open board seats. Their efforts were totally ignored. The credit union elected the board’s self-selected candidates including the current chair with no outside nominees permitted.
More recently CU Today has followed the efforts of former directors and CEO to challenge the announcement of Vermont State Employees to merge their very successful credit union into the larger New England FCU.
CU today publisher Frank Diekmann editorialized about his goal of “pulling back the curtains.” He explained why reporting the merger information provided members when charters are ended and the payouts to management that sometimes accompany such efforts matters. It read in part:
We also got to see how many CUs opted to return net worth to the people who own it (in some cases, obviously, there was little to reserve from the reserves). We further got a peek into which were not offering any payout, with a few citing odd reasons such as the acquiring CU has more branches or, bafflingly, offers Apple Pay and Google Pay. Eh?
One CU did announce it would be paying out some of the excess capital, but in this case only to savers, with more than $2 million being distributed in all. I’m not suggesting the members of the board all had savings/CDs at the credit union and that few if any were borrowers. I’m just saying.
Sunlight may indeed be the best disinfectant, but not if no one never opens the curtains. CUToday.info has made a commitment to reporting on all the merger disclosure forms sent to NCUA, meaning we will continue to give the curtains a pull.
Needed: A Pulitzer for Credit Union Reporting
At last week the White House Correspondent’s dinner the comedian Trevor Noah’s public roast of many public figures ended with this close about the never-ending importance of a free press.
While the international press coverage of the war in Ukraine was top of mind that night, a domestic event happened the following day proving Noah’s thesis.
The national press released a draft of a Supreme Court decision that would reverse the Roe vs Wade fifty-year precedent giving women the right to an abortion. The coverage took the debate from behind the hermetically sealed Supreme Court process, to the public sphere.
If credit unions are to fulfill their purpose of bringing more economic democracy to their members and greater choice for all consumers, one of the most important ways to monitor this role is an independent press. One that reports its successes and exposes its failures.
In addition to Herb Wegner awards honoring credit unions leaders who exemplify the best in cooperative commitment, I believe an equally important moment would be to award “Coop Pulitzers” to press coverage of credit unions.
These would recognize the writers and stories from within and without the industry who take the risks and invest the time to hold those in positions of leadership to public scrutiny. Especially for those with public authority. For unlike the White House Press, in credit union land there is only one estate, the NCUA.
The post describing NCUA examiner’s arbitrary imposition of IRR tests causing a credit union loss of $10 million resulted in other readers sharing their experiences.
Their long-standing frustrations suggest the need for a more balanced, common sense, exam process.
Story 1: LOC’s and Liquidity
“I remember conversations about our investments during the time of your most recent article. Fortunately, the vast majority of our investments was in CDs so there was very little to even talk about in terms of unrealized losses. We did have one or two securities, but they were near maturity so even unrealized losses were minimal.
“This was around the same time that the examiners demanded we establish some kind of borrowing capacity in case liquidity suffered. I set up a LOC with our corporate and “borrowed” just to be sure everything was set up correctly. When the examiner saw the tiny bit of interest I paid for this test, the furrowed brows and disapproving scowl came out. Why would I do such a thing? It appeared as though our liquidity was fine so why did I use our LOC?
“I said it was a new product and I wanted to make sure it would function correctly in the event we ever needed it. The only way to prove that was to actually test it. All this ruckus over a charge of less than $100 interest for the less than 30 days we had the money. In the process, I wrote up specifically how to borrow from it, how to book the GL entries, how to pay the money back, etc. so that if the line ever had to be accessed, we would know how to do it. We have never used it. Not once.
“During my last exam NCUA recommended we increase the limit on it. GRRRR. Keep in mind, our last exam was at the height of the pandemic when we literally had liquidity dripping from every corner of the credit union and they were recommending we increase our LOC. I can’t imagine being the credit union that lost millions because of misguided “guidance”.
“I’m afraid I would have spontaneously combusted. Credit to them for staying in the industry because those are the kinds of things that cause us to lose some of our best advocates.”
Story 2: Ending a Profitable Business
“A related horror story about examiners making short-sighted decisions… A credit union right after the great recession was told by their regional examiner that their expense to asset ratio was too high and they must shut down their insurance division to get things in line.
“The insurance division was profitable. It was throwing off $360k of profit a year – profit with no strain on net worth – and profit from any perspective (GAAP, Free Cash Flow, Cash Basis). There was no funny business in the numbers. It was showing steady growth in earnings as it was finally hitting its stride.
“What the examiner failed to understand was the fastest way to restore capital is with an income source that requires no regulatory capital to begin with.
“I told the CEO he needs to die on that hill and fight hard. He complied however, and shut down the insurance operation.
The Moral of Stories
Sharing stories, good or not so good, is how credit unions learn from each other’s experiences. This is one way change for the better can occur in NCUA’s interactions with the industry.
