Category: NCUA

The title is from a Commentary by William Reinsch written four days after Russia’s invasion of Ukraine.

He is the Scholl Chair in International Business at the Center for Strategic and International Studies. His professional specialty within government and outside is international commerce and trade policy.

His article projected the end of the rules-based system of international trade that had been developed post WW II.

He foresees the war causing economic chaos, a return of power politics, and resurgence of authoritarianism.  The world will not be the same; unintended consequences will proliferate.

Turning Points in History

In individual, organizational and country’s histories there are moments that are eventually understood as turning points.  Sometimes these are sudden and instantly consequential.  Like Ukraine.

Other changes occur slowly, but inexorably, in a new direction with the outcome unseen for years.   For example the evolving demographic composition of the American population; or even the  inevitable forces leading to the deregulation of financial services in the 1970’s and 80’s.

I believe the century long credit union movement is in one of these transformational periods. This  involves significant changes in the regulator’s role,  credit union business priorities, accepted performance norms and the ambitions of leaders.

These cooperative developments are occurring as economic trends are moving away from the two decade  experience  post 9/11.   Inflation is nearing 8%, unemployment is at historic lows, worker shortages are occurring in many sectors, and interest rates  are projected to rise to potentially the highest level this century.

The juncture of these economic and industry changes could significantly alter the institutional makeup of the cooperative system. They could result in the loss of credit union’s independent identify and purpose.

The Breakdown in the Regulatory-Industry Relationship

The seeds were sown in the disruption of the Great Recession in 2008-2010.  The scope of the potential corporate problem created a rupture between NCUA and the industry.

NCUA leaders whether through fear, inexperience or bureaucratic instinct distanced itself from credit unions.   The agency took  the sole role of developing one all encompassing solution for five distinct corporate balance sheets.  The results were disastrous for credit unions, the corporate system and the credit unions that relied on them.  Additionally, 30-year industry partnership for the CLF was ended.

The most critical long term loss however was not financial, but the agency’s ability or willingness to work collaboratively with the industry—on all issues and in all circumstances.

Instead of viewing their role as empowering a system of cooperatives, NCUA positioned itself as rulers over the credit union system.

At the March 2022 Board meeting this view was expressed by Chairman Harper in comments on the agency’s Annual Performance Plan:  With the geopolitical crisis unfolding in Ukraine, the NCUA will also continue to prioritize cybersecurity and guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.

This paternalistic or in loco parentis approach to regulation and supervision emerged from the agency’s ability to impose solutions and rules unilaterally following  the corporate crisis.

The agency publicly proclaimed its independence under Chairman Matz from both credit union involvement and external oversight.  No one at the board or staff has been able to replace the critical experience and knowledge credit unions brought to all issues.

Credit union experience is absent in the regulatory bureaucracy. Credit unions manage over $2.0 trillion for over 100 million members but they have little to no voice in policy priorities.   Stakeholders, both members and the professional leaders, are viewed simply as recipients of perceived regulatory wisdom.

Increasingly credit unions are developing new financial schemes with the regulator seemingly oblivious to their impact on these credit unions or the member owners.   The wheeling and dealing in mergers, bank purchases and raising external capital is accelerating.

The makeover of a number of credit unions from member-centered to financial strategists, gamesman, hustlers and horse-traders is well underway.

This failure to interact removes NCUA’s most important resource – the industry’s professional leadership experience.   Mistakes will continue to be made and paid for by credit unions due to the missing counsel of those who make the system work on a daily basis.

Overcoming the Schism

Credit unions created NCUA and designed and passed in Congress all of its constituent capabilities specifically the NCUSIF and CLF.

Board members seem divided between two binary positions:  let the free market determine outcomes or, NCUA must pass rules to micromanage every credit decision and balance sheet IRR risk.

Effective NCUA regulatory policy is not democratic or republican, or even bipartisan; it is pragmatic supported by facts, logic and cooperative purpose.

Rules and manuals in the thousands of pages cannot replace business judgments and may in fact result in reducing sound operational choices.

Mutual respect is missing.  Credit unions are intimidated or consider fruitless any effort to critique ineffective agency actions.   NCUA’s most frequent justification for more rules is comparison with other financial regulators.

Mutual dialogue creates respect and enhances understanding of shared responsibility.  Future posts will describe changes in priorities, norms and professional ambitions shaping industry character.   All are examples of events occurring without the benefit of public dialogue.

Credit union’s democratic member voting is a critical feature of cooperative design.

However the practice of democracy can become a charade if those in control fail to follow long standing practices to make it a reality.

A Board Controlling Their Re-election

At December 2021 yearend Virginia Credit Union (VACU) reported $5.0 billion in assets with 310,000 members, 22 branches and 731 employees. The net worth ratio was 9.8%.

In yesterday’s post I shared the member Notice from my credit union’s annual meeting and the fact there would be no voting for four open board seats.  The number of nominations equals the number of vacancies.

Then I received this email from a credit union member about the board of VACU trying to control their own reappointment.  And members’ response.

“Are you aware of this? [link] It appears that VACU needs a mechanism for members’ self-nomination for board elections. Find that hard to believe but VACU is a state-chartered CU and the VA credit union act gives them much discretion.

“Although the nominating committee can send forward more than one candidate for each board vacancy, if they don’t, then nominations from the floor are not allowed and the vote at the meeting shall be by voice vote – which precludes any write-in votes!

“Under any circumstances, if only the uncontested nominees selected by the board appointed nominating committee are eligible to run…it ain’t right…talk about the destruction of cooperative principles?!?!?.

“The fix is definitely in!”

We Own VACU

The link in the email is to a petition in which four members of VACU state their interest in serving on the board.  They describe their efforts as follows:

The Virginia Credit Union Board is trying to rig their election so that YOU lose your right to vote for four amazing community leaders who are running for the board. 

Credit unions are financial cooperatives. They are owned equally by the members with a democratically elected board of directors – one member, one vote. The Virginia Credit Union (VACU) is a Community Development Finance Institution (CDFI) with a responsibility to invest federal dollars alongside private sector capital in the nation’s most distressed communities.

Four outstanding Richmond community leaders and VACU member-owners filed paperwork by last year’s deadline to run for the board in the March 23rd elections — Frank Moseley, Kati Hornung, Richard Walker, and Tori Jones — to bring a different direction, a different relationship with the Richmond community, and accountability for VACU’s atrocious pandemic response to an out-of-touch board of directors that needs all three.

VACU’s board has not only refused to allow their names on the ballot, it didn’t bother to interview or respond to the candidates. Instead the board is planning to hold a Soviet-style election at our annual member meeting on March 23rd, with three board-chosen candidates running unopposed for three seats. You can read the full story here, and learn more about the candidates here.

Tell VACU this is not democratic ownership and we will fight for our voting rights at the credit union the same as anywhere else they are under attack. 

A longer  post called We Own VACU provides the back story of their efforts.  They show the board chair appointed the nominating committee, which in  turn nominated the chair as one of the candidates for the four open seats.

Complaint Filed with NCUA

Where can members go if their efforts are denied?  Who is to call a foul on those in charge if they do not follow their own rules?

The members appealed to NCUA.  Yesterday they filed a formal complaint which can be read in full. The complaint gives the history of their attempts to be nominated starting in September 2021 and the repeated no responses or rebuffs by the board.

They attach their documentation and ask NCUA to vacate the “sham election scheduled for March 23 and require a new election with all four names included on the ballot.”

However their most important request is that NCUA make a policy statement declaring  that:

No credit unions in the country will be permitted to remove member owner oversight, participation in governance, or democratic control, thereby removing the temptation of misguided boards to try.

NCUA has published many such interpretations of acceptable bylaw implementation such as this:

1. Nomination procedures: Under all options under this Article, the nominating committee must widely publicize the call for nominations to all members by any medium. This requirement can be satisfied by publicizing the information to a large audience, whether by newsletter, email, or any other satisfactory medium that reaches as many members as possible. The NCUA emphasizes that member participation is important during an election, and FCUs must make sure that members are aware of the nomination process. (emphasis added)

But in practice the Agency has shown no interest in member rights even when confronted with documented evidence of board manipulation of voting and annual meeting misconduct. A prime example is the denial of member rights in the Cornerstone Credit Union merger with Belco Community Credit Union.

As a result member participation in annual elections is increasingly a shadow exercise with no substance.  With more virtual annual meetings, the process becomes even more controlled.

As members are removed from the governance process, board and management are free to follow whatever course they alone believe is in the members’ interest. Even when this means giving up sound charters via merger or using member’s collective reserves to buy troubled banks.

Regulatory Leadership or Continued Neglect?

Chairman Harper in last week’s GAC address gave this view of his regulatory approach:

One of my favorite quotes by Molly Ivin’s reads: “I think government is a tool, like a hammer. You can use a hammer to build with or you can use a hammer to destroy with. Whether government is good or bad depends on what you use it for and how well you use it.

He then says how he intends to use his regulatory hammer as Chairman:

Protecting Consumers

Since joining the Board, I have focused on strengthening the NCUA’s consumer financial protection and fair lending resources. Given the consumer compliance examination program for comparably sized community banks, our program’s scope is insufficient, especially for those credit unions between $1 billion and $10 billion in assets. We should be doing more, and we can do more.

I understand this is not a popular opinion in this room. Many within the industry maintain that the NCUA should primarily focus on its safety-and-soundness mission or that the agency has not demonstrated a significant rationale for a stronger consumer compliance program.

Some also contend that the cooperative nature of credit unions prevents their lending practices from being discriminatory because their primary purpose is to serve their members’ needs. However, the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end.

Confusing Consumers with Member-Owners

Chairman Harper wants to protect consumers but not coop member-owners who are his primary responsibility.  The GAC comment suggests he has yet to grasp what it means to regulate cooperatives with their system of member governance.

The VACU members’ complaint and the ever-spreading practice of board’s ignoring the critical role of member’s franchise role will demonstrate whether the NCUA Board believes in member rights—or just wants credit unions to see their owners as only consumers.

The VACU members requested a straight forward policy statement that all credit unions could embrace.   It’s much shorter than a GAC speech. It doesn’t require a hammer. Just a reminder of who credit unions are.

I bet such a statement, recognizing members’ governance role,  would also enhance whatever shortcomings there might be in consumer compliance!

In describing Jeanne D’Arc’s 110 year history yesterday, I said their leadership was fulfilling a “civic trust.” What does that mean when describing a credit union’s role?

The word “trust” refers to the fiduciary responsibility  of  credit union leaders to be conscientious  stewards of the member’s resources and affairs.   “Civic” enlarges the scope of that oversight to the entire community of citizens from which members join.   This public duty is confirmed by credit union’s tax exemption and their democratic one-person, one-vote governance.

As I researched Jeanne D’Arc’s legacy, an article about a credit union’s conversion to a bank was published.   The occasion was the retirement of Jim Blake the CEO of Brockton Credit Union, founded in 1917, which he rechristened HarborOne Credit Union in 2004.

As the credit union’s President, one of his industry honors was to be chosen by his peers as Chairman of the Massachusetts CUNA League.

In 2013 he initiated a controversial two-step conversion to make HarborOne a stock owned bank.  At the time the 96-year-old, $1.8 billion credit union was the largest state charter in New England.  The move was controversial.  The member vote was just over 60% in favor.

The result of the conversion was to transfer the “common wealth,” that is the approximately $200 million in reserves, to private owners. The new bank’s shareholders received the benefit of this equity but no payouts for credit union owners.

In his February 27, 2022 retirement interview with the Banker and Tradesman Blake shares his thinking about this decision.

The excerpts below  illustrate a different understanding of cooperative’s obligations than that followed by Jeanne D’Arc’s leadership.  I have added emphasis to certain of his statements.

Q: How did you end up at Brockton Credit Union?

A: A search firm that had called me over the years called because Brockton Credit Union was looking for a CEO. I didn’t know what a credit union was. The company told me about them, and I went to the commissioner of banks’ office and talked with them about Brockton Credit Union and then looked at their financials. When I looked at it, I said, “This looks like a mutual savings bank, and they don’t pay taxes.”

Brockton Credit Union at the time was the largest community credit union in the country. I was hired as the chief operating officer, and the expectation was that if things worked out, the CEO was going to retire and I’d take over.

Most of the people that were CEOs of credit unions grew in the credit union industry, and so their view of the industry was guided specifically toward credit union structure and financial capability. I’m not saying anything bad there – I’m saying it’s good.

That wasn’t my focus. I looked at the organization as a financial institution, and we had a credit union charter. The more I got into it, the more I liked it because we were doing really good things, and it was consistent with the history of what credit unions were about at the time.

Q: What led you to convert to a bank?

A: My position had always been that as a credit union, the charter worked for us. As long as the credit union charter worked, we would continue to be a credit union. But if the charter got in the way of the success of the company, then the organization should consider what other options were available.

That was unusual in the sense that credit unions didn’t want to hear comments like that. But the industry changed, and the economy changed. Then we started moving toward the Great Recession, and from my standpoint, that was the real issue for us. We didn’t have much in the way of foreclosures during that period.

What was obvious, as I pointed out to the board, is that we are the only financial institution in the country that has no ability to raise capital.

“We’ve just gone through a Great Recession where it hasn’t impaired us in capital,” I said, “and if this is what we’re dealing with, what do you think the next recession is going to look like? As a board, are we in a position to risk the future of the institution because of the charter, as opposed to having the capability to raise capital if needed?”

And we then talked about all the other issues that, from a product standpoint, we couldn’t get into. We couldn’t do business in Boston; we couldn’t do mortgages over $225,000; and we wanted to get into the indirect auto lending business.

Q: What was the process like?

A: It was a difficult decision to make because we knew that the entire industry was going to attack us. And they did. There were only 35 credit unions that had ever converted to banks. We were the largest credit union to convert to a bank.

Additionally, we were the largest community credit union in the country, and we had received numerous national accolades and trophies about what we do in the community.

We had the [National Credit Union Administration] that was absolutely opposed to us becoming a bank. The NCUA changed their policies as to how a credit union can become a bank, and we were required to send three proxy documents to all of our depositors that said that there’s really no reason for the credit union to convert to a bank.

We had our membership vote in Randolph at Lantana, and we had staff and police prepared in case there were protests. We had one of the largest in-person votes that had taken place in a conversion, and 96 percent of the customers said “yes” to convert to a bank. So, needless to say, it worked well for us. 

Q: When you converted to a bank, did you plan on going public as well?

A: No. When we became a bank in July 2013, we had a couple of things we wanted to do. We wanted to have the ability to go into Boston, and we wanted to buy a mortgage company. It worked for us until we began to get to a point where we needed capital for the growth that we were looking at in the future.

Q: Is HarborOne different from what you envisioned in 2013?

A: We’re totally different because I never had a vision of us being where we are, in terms of the business we’re in and the size that we’re at. This is a tough business, and I say that because the regulatory requirements and competitive environments and credit cycles that you go through – you do the best you can, and you still get bit.

We’ve never had a regulatory issue of any kind. We’ve never had a quarter in our history of losing money. Most of the years when we’ve had CRA ratings, they’ve been outstanding. I just wanted to grow the bank and certainly had no vision of anything like this at all.

End of Interview.

To see HarborOne’s regulatory environment as a bank, one can review the 110 page 2020 SEC 10K filing for the bank and its holding company here.

Other readers might find this link more appropriate.