Category: NCUA

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The Learning Process for an NCUA Newcomer

Yesterday Tanya Otsuka became the 25th  NCUA board member since its establishment in 1978.

Her professional resume includes serving on Senator Sherrod Brown’s banking committee  and as a staff attorney at the FDIC.

Her direct experience with the credit union community is limited.

Onboarding is a critical process for anyone new to cooperative system leadership.  She has significant responsibility in overseeing and managing NCUA’s relationships with credit unions.

What Makes for Effective Onboarding?

Newcomers to important credit union leadership roles are becoming more frequent.

One example is BECU’s  CEO Beverly Anderson. Her professional background was in banking.  She provided an extended CU Times interview describing her transition as a first time coop CEO:

“What’s exciting about this role is, one I’m a first-time CEO, two I’m in the credit union movement for the first time, and three it’s my first time at BECU and here in the Pacific Northwest.  . .

“The first six, seven months or so have really been about listening and learning. I did 30-plus deep dives with the organization, used that time to get to know the team and have them get to know me, and learned a lot about the business.

“The second thing I did was begin to understand the movement. It was very clear when I started using language like ‘profitability’ and ‘ROA,’ and people very quickly suggested I use some different language.

“It’s helped me to understand that the movement is in fact very, very different. Our return is around return to member, not necessarily return on assets, and that was a very big shift and pivot, but one that I quite relished.

“The third thing was getting to know my board – I have a new kind of boss and leader, a board. . .they are encouraging, engaging, experienced in their own right, and they have a lot of support and commitment for this organization.”

 Onboarding An NCUA Board Member

Immediate board items and credit union events in 2024 will provide examples of Otsuka’s approach in her new role.

The following are questions on areas vital to credit unions as she undertakes her responsibilities.  

What is her understanding of the role of the non-profit, tax exempt, member-owned cooperative system in the American economy? 

Who does she turn to for advice? 

How does she learn from the credit union constituencies she is serving?  

Does her response to credit union issues enhance the member-owners’ role?   

What is her availability and openness with the public? (e.g. Anderson’s interview above)

The First 100 Days

Credit union press accounts presume Otsuka will become Chairman Harper’s policy doppelgänger.  That is, her democratic credentials mean her role is simply a reliable second vote for him to assert his regulatory and spending views on the industry.

Or, as an outsider might she bring a new generation’s fresh hope and enthusiasm for credit unions unique opportunities?  Are credit union priorities for NCUA a question of party labels?

My hope is that her unfamiliarity with cooperatives and NCUA result in an enlightened voice supporting innovation with a passion for credit unions.

When one reads BECU Beverly Anderson’s learning process, there is a sense of confidence, commitment, and positive leadership energy.

That learning spirit is especially needed in this moment of credit union challenges and NCUA’s increasing peripherality.

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January 1985: An Historic Turning Point for Credit Unions

For forty years, the NCUSIF has maintained  not only its own financial integrity but more importantly, the trust and confidence of the credit union system’s members. This record of stability began in 1985 and continues unabated through 2023.

Over the same four decades the FSLIC, the separate S&L fund, failed and merged into the FDIC.  The FDIC has had negative net equity on several occasions requiring an explicit government guarantee.  It has constantly modified  its premium model to accommodate numerous industry crisis.  These  include multiple premium levels, risk based pricing, an expanded assessment base for premiums, differential pricing according to institution size and other financial or accounting maneuvers. It’s equity to insured deposits has fluctuated from negative to 1.1% at June 30, 2023.

During this same period of national economic and interest rate cycles, the NCUSIF’s unique cooperative design allowed it to remain strong. The fund’s yearend equity level  of 1.2-1.3% of insured shares has always been met.  Premiums have been necessary only four times in this four decades.

“D” For Deposit Day

This fundamental  redesign was a two-year industry wide effort.

This priority came to fruition in January 1985 when the first 1% credit union deposit underwritings for the new insurance model were delivered to NCUA.  The event was pictured in NCUA’s 1985 Annual Report (pg 21):

(caption:  NCUA Staff Member Wayne Robb accepts a hand-delivered capitalization deposit in the unheated Washington lobby of the NCUA.)

The Chicago Tribune described this historic change in an article later that year:

“The solitary messenger clutched a plain brown envelope as he picked his way carefully across a deserted, icy sidewalk near the White House.  In- side was a check for $13 million.

“It was inauguration Day, 1985, a morning most memorable for the raw cold that forced cancellation of a parade and drove President Reagan inside to take his second oath of office.

“But for the messenger, and for the trio huddled around an electric space heater waiting for the check, it was also the deadline for credit unions to deliver payments to the new-look federal insurance fund that backs the deposits of 51 million credit union members.

“The $13 million check, the largest single payment, was from the huge Navy Federal Credit Union in Washington.

“The little-noticed transaction–one of more than 7,000 totaling $480 million that frosty January weekend–illustrates how the nation’s 15,000 federally insured credit unions have quietly put their house in order.

“Edgar  F. Callahan Chairman of the National Credit Union Administration said credit union’s willingness to embrace a new approach to shoring up their insurance fund was just one example of how the industry has recovered from the hard times of 1981.  

The challenge for his successor, Callahan said, is to keep Congress and other policy-makers aware that credit unions are unique.

“You’re in an industry this often grouped with banks and S&L’s and there’s a tendency to get painted with the same brush,” he said.  

“There is a danger to getting sucked into that atmosphere.  My successor will need to maintain that credit unions have been ahead of the problem curve and need not be grouped with other financial institutions.”

The Workup for Change

The NCUSIF was created in 1970, with no government-provided startup capital.  The Fund’s design mimicked the premium base of both the FDIC and FSLIC each which had a 35-year head start accumulating retained earnings.  But from 1979 onward the premium approach, even with doubling assessments,  did not prevent the Fund’s equity ratio from decline.

In April 1983 the NCUA presented a Report to Congress on the Credit Union Insurance Fund.  The Report was over 130 pages in seven chapters responding to specific Congressional questions and making four recommendations:

  1. All credit unions, federal or state, should have a choice of insurer;
  2. Capitalize the NCUSIF with a 1% deposit of insured shares;
  3. Authorized at least one uninsured share per member as capital;
  4. Keep the  insurance fund independent from FDIC/FSLIC due to the unique nature and role of credit unions.

The Report included direct quotes from leagues, private cooperative insurers, credit unions along with a history of credit union stabilization options prior to NCUA insurance.

Following the publication of this Report, NCUA and credit unions working in partnership developed an alternative to the traditional premium model describing it as, A Better Way.  It drew upon the two decade experiences of private insurer alternatives.  It rested on the fundamental cooperative concept that members should own their own fund.

The financial logic and analysis was summarized in a video sent to all credit unions and interested parties on the NCUA’s Video Network.  The following is an excerpt from this longer analysis,  A Better Way:

(https://www.youtube.com/watch?v=IlqxLeFkuLY&t=30s)

This redesign was achieved by challenging long time conventional governmental practice.  The alternative was drawn from cooperative experience and principles.

Trust in the Fund was not due to more regulation or open ended premium assessments.  It was constructed on mutual commitments including frequent and audited financial transparency, accountability for expenses and legislative guardrails.

This capacity to “imagine differently” resulted from collaboration and open communication at every step.  The historical financial analysis (above) and future forecasts were public, for all to review and refine.

The effort was not a sudden epiphany. Rather it resulted from hard work, shared viewpoints, a desire to create something better and courage to change.

The First Year’s Bottom Line

At the end of fiscal 1985, the fund held $883 million in 1% deposits.  Earlier in the year each credit union received a pro-rata equity distribution (in excess of the Fund’s .3% equity) of $80 million to meet the January 1% funding obligation followed by a $30 million cash dividend at yearend.

This 12.5% return on the 1% capital deposits was on top of fact that this was the first year since the Fund opened in 1970 that no premium was charged. (page 5, 1985 NCUSIF Annual Report)

In future blogs I will present how the fund  navigated specific economic and industry challenges.

Continued success does not rest on design alone.  Credit unions must also exercise continuous oversight of NCUA’s vital  responsibilities for fund management and supervisory oversight.

 

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Observations From NCUA’s 2024 Budget Approval

After a public hearing, multiple written comments and some give and take between board members, these are some of my initial observations from last Thursday’s board meeting on the 2024 Agency Budget.

  1. Only .02% of 1% was reduced  in the final budget of $385.7 million by the board from the initial staff amount.
  2. No discussion of why the Office of Information Serves (i.e. computer support) depends on contractors for 71% of its operations totalling $44.5 million.
  3. A 16.4% in the federal credit union operating fee when the Operating Fund’s cash on hand now would almost cover a full year’s expenses.  Or why the $24 million “carry forward” from 2023 (unspent  amounts collected) is not returned to credit unions, but “reallocated” to 2024.
  4. Why only four new charters justifies a 18% increase and 41 staff in the office of Credit Union Resources and Expansion(CURE); also when the industry’s total numbers declined by almost 170 credit unions.
  5. Most curious was the increases in staff to a total of 23 and 20% budget raise to $6.4 million in the Asset Management and Assistance center when the total reported losses to date in the NCUSIF are just $1.0 million. The remaining corporate AME’s are to be disbursed soon.  The office is spends more on staff than on the assets it oversees.
  6.  The CLF’s $2.2 million budget is nothing more than an effort to transfer NCUA’s overhead expenses to another set of books which credit unions fund separately. The CLF’s 4.62% third quarter dividend was at least .75% below what credit unions could earn in the overnight market, meaning NCUA requires members to subsidize this inert operation.

There are multiple other expenditures that appear with no specific goals or outcomes.   The board discussions were general observations.  Credit unions deserve more coherent and specific details to have confidence in how their funds are used.

In the spirit of the season, this cartoon caught my eye.  It summarizes NCUA’s budget review from a credit union perspective.

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Today’s Vital NCUA Board Meeting-Will it Be Productive for Credit Unions?

December’s NCUA board meeting will set the spending budget for 2024.  What will be the guiding star in the voting, to borrow words from yesterday’s post We Three Kings?

Is the guiding star one that illuminates the unique design and resilience of cooperatives? Or will it enhance bureaucrat resources as the number of credit unions falls to its lowest level since before the passage of the 1934 FCU Act?

Rodney Hood’s Credit Union Service

Hood has served as an NCUA board member during three tumultuous financial decades.  The first (November 2005-August 2009) saw the Great Financial crisis unfold.  The second  from April 2019 included the Covid national economic shutdown and the highest inflation since the 1980’s.

This meeting may be his final one as his current term ended in August. His two tenures over 18 years provide a unique perspective on the board. He brings a shared history of an important era for the cooperative system. 

We can only understand and celebrate the present when we appreciate how it came to be.  In the words of historian David McCullough, “history is who we are and why we are the way we are.”

Hood’s Focus as a Board Member

Relevant for today’s meeting is his support for the long time, traditional NOL cap on the NCUSIF of 1.3%, full transparency for all financial calculations including reserves, and most urgently, a more meaningful presentation of the fund’s equity ratio using current data in both the numerator (the 1% deposit) and denominator (insured risk.)

As chairman he oversaw the only year in NCUA history since 1984 that recorded an actual fall in NCUA’s expenditures. He has supported returning to credit unions the increasing surplus cash built up in the Operating Fund.

Another example of his expense focus is that his office is  the only one of over 25 NCUA budgets to request a lower amount in 2024, by 1.8%, versus the current spending level.  NCUA’s  2024 overall operating budget projects an 11% growth.

An Honorable Gentleman

The first time I met Rodney was at a credit union meeting in New York during the emerging financial crisis.   He was and still is a true gentle man, unfailingly polite and easy to talk to.

His manner at NCUA board meetings is always respectful.  Even when staff’s answers to his questions might be non-responsive, he never publicly challenged the presenter.

In his voting, he rarely dissents even when he disagrees with the motion or policy.  He would explain his vote as either deference to the Chairman’s role or to promote bipartisanship.  These acts of corporate courtesy were not the practice when he was chair.

As a board member in 2008 he approved an NCUSIF dividend when the NOL exceeded 1.3%.  That was the last time a dividend was paid.  This is a legal commitment intended to reward credit union’s perpetual 1% deposit underwriting. Last year he succeeded in urging the board to reduce the cash stockpile in the operating fund by giving credit on the FCU operating fee for 2023.

His approach to budgeting and board decisions to set meaningful agency  guardrails reflects the experience and wisdom of his years of credit union service.

Should this be his last official board meeting, his perspective  will be missed.  As Pearl Buck’s observed “if you want to understand today you have to know yesterday.”

In recent Board meetings, Rodney has tried to raise important issues and seek meaningful data. What might he propose today to recognize credit union’s exceptional performance this year?  Tune in at NCUA.gov at 10:00.

The Question in The Three Ships Carol

To recognize the pivotal nature of today’s many board votes, I believe the lyrics of the carol I Saw Three Ships are most relevant.

Here are some pertinent stanzas:

I saw three ships come sailing in
On Christmas Day, on Christmas Day
I saw three ships come sailing in
On Christmas Day in the morning

And what was in those ships all three
On Christmas Day, on Christmas Day?
And what was in those ships all three
On Christmas Day in the morning?

(https://www.youtube.com/watch?v=A9fselTsYSE)

 

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The Three Kings

Tomorrow is the last NCUA open board meeting this year.  And possibly Rodney Hood’s final one.

This is the most important Board event as it sets the spending limits for the agency all of whose funding is from credit unions.

The key question is whether the public will learn anything about the board’s ability to limit the staff’s desire for ever more spending?  Has all the deal making been completed and the questions and answers fully scripted out, or will real board dialogue actually occur?

The meeting is critical because decisions are made about the NCUSIF’s normal operating level (NOL), the overhead transfer rate(OTR), and how the agency will be funding itself from FCU’s operating fee.  Each of these directly affects credit union’s funding.

Budget Questions for 2024

Some of the issues that might be asked include the following;

  • Why does the “missions support” functions in the 19 DC offices need a 17.4% and 19 person staff increase, whereas the examination and field staff, the front line workers, gain only a 5% and 9 person increase?  Where does the real work of supervision take place?
  • How is it that the highest paid staff in the nineteen DC offices are those in the 8-person Chief Economist with annual compensation of $329,000 each ?
  • Are two completely separate legal offices needed, one the 46-person general counsel’s office and the second the 8-person staff for business ethics?
  • Numerous other personnel additions would benefit from more information such as  in the ombudsman, CURE or OCEO offices.
  • An explanation of why every office seems to require “contracted services” such as $44.5 million being spent by the Information Office, an increase of $3.5 million (8.6%). Is the agency in that much need of PR?   What firms are benefitting from this largess?
  • There are three different offices serving the Chairman: his office, the office of the Board and a newly established office of the Executive Secretary with a staff of two but then increasing in the out years.  Why is the new office needed given all the other support in place?
  • Why are key  units left out of the pubic budget package, that is the details of the CLF’s ever expanding spending and the separate NCUSIF direct charges?

The Role of Democratic Debate

The composition of the board where only two may be of the same party, is intended to encourage discussion and the airing of different approaches to policy and oversight.  This has not occurred with the current board.  Bipartisanship, or deferring to the chair, is used to explain the lack of meaningful dialogue or alternative positions being put forward.

But debate is what makes democracy work well.  Without a loyal opposition, the understanding of important options is lacking.

Gold, Frankincense and Myrrh

From wikipedia: “We Three Kings“is a Christmas carol that was written by John Henry Hopkins Jr. in 1857. At the time of composing the carol, Hopkins served as the rector of Christ Episcopal Church in Williamsport, Pennsylvania, and he wrote the carol for a Christmas pageant in New York City. It was the first widely popular Christmas carol written in America.”

(https://www.youtube.com/watch?v=ANXV46f3jo0)

 

 

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A Special Time of Year

Ed Callahan as both Director of the DFI in Illinois and as Chair of NCUA, had a post-Thanksgiving practice to recognize the December holiday spirit.  He would find a local radio station that  played holiday music as its full time programming through Christmas.  In  Washington the classical FM stations used to follow this practice.

He kept the volume low, but still  enough to acknowledge the special spirit and joy this time of year can bring.

But work does not go away.   December is the month that the NCUA board will make very consequential decisions on the amount of credit union funds it proposes to spend.

The budget agenda includes how much is spent, the normal operating level (NOL) for the insurance fund, the Overhead Transfer Rate (OTR) taken from the NCUSIF,  and how the full year financials for  three credit union funded operations were managed.

December’s posts will imitate Ed’s practice by presenting music of the season.   At the same time, I will preview some of the data and issues for NCUA’s upcoming budget approvals, along with other observations.

This is a season of joy and beauty, sometimes beyond our understanding.  But amid these moments of glory the real world events  of power used and misused continue.

Angels We Have Heard on High

This French Christmas hymn was translated by James Chadwick and is performed by a traditional choir.

(https://www.youtube.com/watch?v=7RlMuRYvndU)

NCUA’s Budget Creep: Growing from a Specialist to an 8-Person Office

On February 10, 2020 NCUA ‘s IG published an investigation  titled Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud.

In a March 9, 2020 post, I wrote of the personal indiscretions by Michael McKenna, NCUA General Counsel (July 2011 to November 2019) and his Deputy General Counsel Lara Daly-Sims.

The IG report detailed strip club visits and drinking while on the job from February 2017 through the beginning of the investigation in November 2019.  The General Counsel is the Agency’s senior legal officer providing interpretations and support directly to the NCUA Board and Chair.

Besides replacing the Agency’s two top lawyers, what else did the Board do about this high level leadership failure?   On April 22, 2020 NCUA announced that in a March closed meeting the Board decided to hire a “chief ethics counsel.”

Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This responsibility had been under the General Counsel’s office.

This personnel performance failure was resolved by expanding staff, a classic bureaucratic response to a problem. This new position was necessary to inform three board members, their personal policy advisors, senior staff including the executive director and deputy, the general counsel and deputy, and the human resources office the difference between right and wrong behavior!

The real problem was actually a failure of administrative oversight, not understanding morality.  The hiring was a political act to divert responsibility from all the senior staff who worked closely with these people during the episodes described in the IG’s investigation.

But is there any downside for another pair of eyes reviewing the agency’s personnel actions.  There is. It quickly became much more than one pair of eyes.

The 2024 NCUA budget increases the Office of Ethics Counsel to 8 full time staff with an average salary of $293,000 each.  This 15.2%  increase pushes the total 2024  expenditures to $2.449 million.

Some believe that problems are solved by government  spending more.  In this episode of personal indiscretions, the solution has grown from a “chief ethics counsel” to a separate, new legal department of  8 full time employees.

This is the pattern across NCUA’s ever expanding budgets for 20 separate “Offices” and three regions.

Harper and Hood both approved this solution (McWaters was replaced by Hauptman).   Is now the time to assess this ever-growing cost to determine whether there are more efficient ways to address the Agency’s ethical climate?

If safety and soundness is the Agency’s primary purpose how does an 8-person Ethics Office contribute?  These positions are in addition to the 44- person legal department and 47 employed in human resources.  Are ethics of the NCUA staff really that big a problem?

 

 

 

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Abundance and Gratitude

The initial Thanksgiving story celebrates abundance.  The timing still coincides with the regular rhythms of bountiful harvests which have filled farmer’s storage elevators to capacity.

Times are good. The American economy grew the fastest of any major country in the third quarter.  Unemployment remains at historical lows and inflation is sinking.  Job openings still exceed available workers.

This harvest holiday combines services of Thanksgiving with opportunities to share  with those in need in our communities.  Locally, families who may participate in an early morning turkey trot race can then go to a food kitchen to serve others  in the afternoon.

It is important for our future together as Americans to see our society from a perspective of abundance, rather than an economy of scarcity.  Even when our consumer driven culture constantly tells  us we need more.

Perspective Matters

Abundance does not mean prosperity is equally or equitably shared.  But without a sense of our own well being, serving others easily becomes secondary.

Recently Callahans Trend Watch presented a 60+ set of data slides with commentary on the state of credit unions as of the third quarter.

The message repeated throughout was that the industry is sound and that trends are normalizing from the exaggerated levels due to COVID.

However not all listeners had the same interpretation.  The headline in one credit union report about the call was Callahan Shows Sharp Drop in Q3 Earnings for Credit Unions.   This news story of the one hour briefing included multiple use of the words down, fell or fell sharply, far below and lower.  The overall tone was one of angst:

Credit union’s loan balances grew. . . but the growth rate was down. . . One way credit unions have coped with tighter liquidity is through borrowing, which has tripled in the past two years. It still accounts for a small portion of assets, but that portion is growing.

This was  the opposite interpretation the presenters gave.  Here are some of the headlines from the data slides:

The loan to share ratio is returning to prepandemic highs

Credit union market share is growing in key areas

Share draft account penetration climbs steadily

Quarterly loan originations are on a par with previous levels

Repricing drives record increasing total revenue

Capital ratios improve from slower asset growth

Operational efficiency improves. . . etc.

“Never Enough”

There is a belief created by America’s market driven, consumer led economy that one can never have enough.  Consumerism in its extreme forms becomes an addiction where spending becomes a way to cope with all of life’s shortcomings.

It unfortunately  appears to be the logic of NCUA as it prepares its budgets for its role with credit unions.  In the NCUSIF board  update dialogue last week, the fact that the actual losses are less than $1.0 million, fund reserves at a level of four to five times the last five years actual total losses, made no difference.   Board members observed the CAMELS trends are negative and Black Swan events could be just around the corner.

The NCUA’s budget for the next two years shows increases of double digit spending.  It is driven by the belief that there are never enough resources even with a declining number of charters.  Spending, like consumerism, becomes an addiction not a response to reality.

A Story of Gratitude

How does one respond in a society whose marketplace messages are constant efforts to make one dissatisfied with their current situation, whether personal or with an organization’s future outcomes?

In February 1982 my family and I moved to Bethesda, MD from Illinois to serve at NCUA alongside Bucky Sebastian and Ed Callahan.

At that time one of Bethesda’s local residents was called the “bag lady.”  She walked pushing her shopping cart filled with plastic grocery bags, cardboard and  personal possessions throughout the downtown area.

When the weather was cold, raining or she just need to stay indoors for a night, she would somehow find a way into a church, right next to her downtown journeys.

Our family could walk to this local Bethesda Presbyterian church, where I sang in the choir on Sundays.  The bag lady’s frequent overnight visits were a topic of conversation about the church’s security.  The questions was, how did she always find another way to get in?  Weren’t we locking all the doors?

One Sunday morning as I came early for choir rehearsal, the minister was in the sanctuary placing the offering plates on the alter for the service.  I noticed as he put the top plate to one side of the cross he took something out and put it in his suit coat pocket.  I asked. “Oh did somebody forget to take the offering?”

I will never forget his response:  “No, that’s just the bag lady.  Every time she stays here she puts something in the offering plate. She has left hairpins, political campaign pins and even clothing buttons.”

This lady had little to none of the world’s possessions. However she still had one of the greatest gifts anyone can ever receive: gratitude.

When we celebrate the varied and numerous  blessings which we all enjoy, may we experience the gratefulness this person knew and shared.

 

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Timeless Wisdom: Reverting Back and a State Contrast

After listening to yesterday’s NCUA board meeting, I recall this observation from a credit union leader who was a keen observer and co-op philosopher:

“The relationship between credit unions and the regulatory agency is one founded on mutual self-respect and the realization that both sides share equally in the responsibility for the survival and future development  of credit unions.

“It seemed as though we would never escape the attitude that the regulator knows best.  But a dramatic change has taken place in the last few years.  We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does.

“The nature of the federal bureaucracy, being what it is, there will be a great amount of inertia to cause it to revert to a less creative and less cooperative approach to regulating credit unions.  I would not like to see this happen.”

Source: Frank Wielga, CEO Pennsylvania State Employees Credit Union, NCUA 1984 Annual Report, page 14.

An Alternative to NCUA

A state charter option is  an alternative to the ever increasing federal burden.

This is the description and public leadership of the Texas Credit Union Commission (CUD).  It supervises 160 state charters and $57 billion of assets:

The Credit Union Department (CUD) is the state agency that regulates and supervises credit unions chartered by the State of Texas. The Department is professionally accredited by the National Association of State Credit Union Supervisors (NASCUS) certifying that CUD maintains the highest standards and practices in state credit union supervision.

Our Mission is to safeguard the public interest, protect the interests of credit union members and promote public confidence in credit unions.

Credit Union Commission

The Commission is the policy making body for CUD. The Commission is a board of private citizens appointed by and responsible to the Governor of Texas. Members: Jim Minge, Chair Elizabeth L. “Liz” Bayless David Bleazard Karyn C. Brownlee Beckie Stockstill Cobb David F. Shurtz Kay Rankin-Swan.

Following is the Commission’s November 2023 guidance on consumer compliance.  It is a very different tone and approach from the debate of this topic at NCUA’s budget hearing yesterday.

Cultivating a Culture of Compliance and Service

As consumer-focused financial institutions, compliance with consumer protection laws sets minimum standards for member service. Developing a culture of compliance means paying attention to compliance and member service at all levels, from the front-line teller to the C-suites of your credit union.

At the Credit Union Department, one of our functions is to process member complaints related to their credit unions. Many of these complaints could have been avoided with a culture of compliance and member service.

Last year we processed 515 complaints, and of those, 156 (over 25%), involved disputes related to fraud or billing errors, by far our largest segment. A robust, member focused, dispute resolution process as required by Regulation E (debit cards, ACH) and Z (credit cards) would have prevented many of these complaints.

Another area of common member complaints surrounds vehicle loans. Many disputes involve the member being pressured by the car dealer to purchase a more expensive vehicle or add-ons such as warranties and insurance without adequate time to consider the costs and need for the products.

Credit Unions should be aware of implications of consumer protection holder rules, where loans originated by a dealer, subsequently assigned to credit unions, are subject to being offset by claims of the borrower against the dealer. See Holder in Due Course Rule | Federal Trade Commission (ftc.gov).

Understanding the requirements of consumer protection rules related to serving credit union members goes a long way, not only in preventing complaints, but limiting losses.

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NCUA’s 2024/5 Budget and the Impulse to Spend

Recently I visited Bentonville, AR the home of Walmart.  There is a Walmart Museum that provides a history of the company.  Included is a hologram figure of founder Sam Walton who will answer questions, using an AI program, that  visitors may ask.

One  posed this query to Sam’s artificial reincarnation, “Are you cheap?” referring to the Walmart’s tagline,  “Always low Prices.”

Sam response started with his operating habits as the founding CEO. When he started the company they did everything possible to control costs, including sleeping two to a hotel room when traveling and always eating at low cost restaurants.

His reasoning was “Every dollar we save, stays in the customer’s pocket.”

Corporate America and Expense Control After the COVID Bounty

Both consumers and business benefitted from the government’s largess funding COVID programs to ensure the economy did not stop as people stayed home and commerce shut down.  That era is over. Inflation resulting from stimulus spending became the economic priority in the fall of 2022.  The political fight in Congress is now how to control or even reduce, government spending.

Company’s are seeing that consumers are once again aware of higher prices, and cutting back.

Layoffs of staff, even at some credit unions, are part of quarterly earnings updates and future projections.

One example is the turnaround by Spotify which returned to profitability for the first time since 2021 in this year’s third quarter.   Their monthly active users increased 26% (2 million more ) and income hit $34 million in the latest quarter.  The reason?

The company kept costs tight.  The CEO Daniel Ek said they had laid off 6% of their employees and raised prices.  His rationale: “We are still focusing on efficiencies, but efficiencies for us doesn’t mean just cost cutting, it means getting more out of each dollar.”

The Federal Government ‘s Institutional Spending Predisposition

 

The forces that drive CEO’s such as Walton and Ek to “get more out of each dollar” come from  competitive market forces.  These forces do not exist for government agencies.  In some state and municipal governments, legal constraints require a balanced budget.  But there is no such limit on deficit spending by the federal government or its separately funded agencies.

One result is that success in federal performance is measured by a department or agency’s spending authority and staff size.  The larger the spend, the more that good works that can be done.  Effectiveness is equated with resources deployed.  Government’s response to challenges and/ or service issues is based on the belief that more money is necessary to resolve all goals.

This institutional belief in ever more spending is part of NCUA’s culture as well.  There is no Congressional appropriation. The board can approve whatever increases two of the three political appointees agree upon.  The board is all powerful in setting the operating fees and internal transfers needed to fund the increases they approve.  No check and balance exists.

However this administrative habit of open-ended spending was not always the case.

In December 1984, the headline in the NCUA News read, FCU Operating Fee slashed 24% with the sub title announcing:  “Brings Cuts to 64% Over Three Years.”   This outcome was because the agency reduced its operating budget for three consecutive years.

Two examples of savings for credit unions were given in the article.  For a small Ft. Shafter  FCU the fee was reduced from $8,765 in 1982 to $4,587 three years later.  For the largest credit union, Navy FCU, the fee fell from $403, 503 to $295,481.

The result was to keep credit union money for members’ benefit.

How the Cost Savings Were Achieved

Under President Carter the administration had tried to implement zero based budgeting in an attempt to control ever increasing government spending.  It didn’t work.

At NCUA the expense reduction  was a result of how the agency was administered.  This is Chairman Callahan’s explanation in the NCUA’s 1982 Annual Report.

I want to report to you on decentralization because I think that ties in with regulation.  We had a very strong Central office, a very talented Central office and one that developed over time for very good reasons, I’m sure.  But as I viewed it, it had become so talented and so strong that the very mundane operational things that our field people tried to do got caught up in this pipeline—this pipeline of talent and centralization in Washington.  Seldom did things come out the other end in a very efficient manner.

Everyone was overdoing their job; so we found that decentralization was the answer. We found it necessary to cut the size of the Washington office by a third an to rechannel these resources to the field and to delegate to the Regional Directors the responsibility for using these resources in a timely way to get the exam cycle down to an annual one. . . to give back up information to the field examiners . . . and to make those decisions right on-site that involve safety and soundness, chartering and supervision.  (page 45)

The Washington office was reduced from eight Departments to two offices. The head count went from 207 in fiscal 1981 to 135 in 1982, a reduction of 72 positions.   Overall headcount was reduced by 97 but field examiners were at the highest level of staffing in five years representing 57% of the workforce, a total examiner force of 400 positions.

1982 was the first year operating expenses declined in the agency’s history.  At yearend the agency had examined all 11,120 FCU’s plus 18 Federal corporates.   From 1982 through 1985, the credit union system reported double digit growth in shares and loans.    As summed up in the 1984 Annual Report, NCUAs administrative approach was “More Service for Fewer Dollars.”

The agency’s culture was based on management performance and outcomes, not bureaucratic resource accumulation.  The dominance and slow response described by Chairman Callahan of the NCUA’s Washington office in 1982, feels similar to anyone trying to get an answer today.

NCUA’s 2024/5 Budget Hearing on Thursday

At a public meeting on Thursday afternoon, the credit union system can present comments on NCUA’s staff drafted 2024-25budget.    The 64 page staff draft shows an 11% operating increase from the current year to $382 million in 2024.

The third quarter results presented in Callahan’s Trend Watch update showed the credit union system returning to a normal level of performance outcomes following the extreme growth and historically low market interest rates (near zero) due to government’s COVID response.   This is a return to the long term traditional cyclical range of credit union balance sheet growth, moderate earnings and asset quality.

The NCUSIF as an example is well resourced. At September 2023 it reports a net recovery in reserve for losses of $6.5 million.  The loss reserve of $214 million is the highest level in ten years (since 2013).   The ratio to insured shares represents a level of loss that is almost five times the actual net cash losses reported in the last five years.

And yet the agency wants more.  The current proposal for double digit budget increases is a function of agency ego, not industry circumstance.

 

 

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The Onboarding Process of a Credit Union Leader

Credit Union Times has been publishing  multipart interviews with Tru Stage’s new CEO, Terrance Williams.  He has a long resume, but is from outside the credit union industry.

He is not the only recent external CEO arrival.  Another newcomer in a major credit union role is Beverly Anderson who became BECU’s new CEO in December 2022. Her professional resume is almost all in banking.

For “outsiders” onboarding is a critical  leadership process for someone new to the cooperative system.  Currently a major transition is underway at NCUA as  new board member Tanya Otsuka will shortly succeed Rodney Hood’s whose term expired in August.

Similar to these new CEO’s, she has no direct experience with credit unions.  Rather her background is mostly as an FDIC employee.  While not CEO, she will have a significant responsibility in overseeing and managing NCUA’s priorities.

What Makes an Effective Executive Onboarding?

Both new credit union leaders above have been quite open with the press discussing their backgrounds and how they are making the transition to their new responsibilities.

Here is an excerpt from Tru Stage’sTerrence Williams on his leadership approach:

“I often talk about the fact that leaders who push change for change’s sake are likely to meet with doom or demise. Because I guess change for change’s sake is not something that’s worthwhile. But change to ensure that you are evolving to maintain relevance, to ensure that you are continuing to adapt to the ever-changing needs of members is really what’s paramount for us …

We have a lot of work ahead of us collectively to figure out how we ensure we create a level of relevance with the next generation of future members, and ensuring that we are designing processes and solutions and tools that align with their needs and how they wish to interact.”

Similarly BECU’s Beverly Anderson gave an extended CU Times interview describing her transition to becoming a first time coop CEO:

“What’s exciting about this role is, one I’m a first-time CEO, two I’m in the credit union movement for the first time, and three it’s my first time at BECU and here in the Pacific Northwest.  . .

“The first six, seven months or so have really been about listening and learning. I did 30-plus deep dives with the organization, used that time to get to know the team and have them get to know me, and learned a lot about the business.

“The second thing I did was begin to understand the movement. It was very clear when I started using language like ‘profitability’ and ‘ROA,’ and people very quickly suggested I use some different language. It’s helped me to understand that the movement is in fact very, very different. Our return is around return to member, not necessarily return on assets, and that was a very big shift and pivot, but one that I quite relished.

“The third thing was getting to know my board – I have a new kind of boss and leader, a board. . .they are encouraging, engaging, experienced in their own right, and they have a lot of support and commitment for this organization.”

Important Steps in an NCUA Board Member’s Onboarding

Following are a number events that could mark NCUA board member Otsuka’s approach to her responsibilities. These cues will come from the statements and actions she takes in the initial days of her tenure. They include:

What is her understanding of the role of the credit union cooperative system?  How does its purpose as a non-profit, tax-exempt, member-owned system fit  with other financial options?

Who is on her team as advisors?  What is their knowledge and experience with credit unions?

How does she learn about the credit union constituencies she is serving?  Who does she see or visit on her first forays into the system?

What points of view does she bring to credit union issues?   Does she ask for data, seek options, and/or reference experiences from prior responsibilities?

What is her view of an NCUA board member’s role?   Is it a part-time or full-time job?  An in-the-office or show-up-for-Board meetings responsibility?  Is her focus on high level policy generalities or demonstrated interest in concrete operating outcomes and results?

Also, how transparent is she about the learning process that goes with any newly installed senior executive?  Does she give unscripted interviews?   Is she candid about her approach and areas for learning?  Is she available or kept in situ by the agency? 

The bottom line is whether Otsuka will become the Chairman’s doppelgänger in her board role? Or, as an outsider with a new generation’s vision, bring fresh hope and enthusiasm  to the credit union system?

When one reads the interviews of Terrance Williams of Tru Stage and Beverly Anderson at BECU there is a sense of confidence, commitment, and positive leadership energy.

That is what one would hope for in any NCUA board member, but especially at this juncture of credit union opportunity and challenges and NCUA’s peripherality.