Category: NCUA

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NCUA’s 9.6% Increase in the Proposed 2023  Budget Shows the Need for A Better Way for Spending Oversight

NCUA’s 2023 Staff Proposed Draft budget is 84 pages. It adds 25 new positions and an 80% increase in spending on the Merit technology system.

CUNA and NAFCU provided 8 and 9-page detailed suggestions for changes.  Credit unions pay all NCUA’s expenses. The two trade associations critiques are an excellent starting point for readers who want to see the critical issues.

A Longer Term Spending Perspective

Two weeks ago I posted a blog called NCUA’s budget hearing and inflation that included a chart from the Bureau of Labor Statistics showing the 22 year cumulative price increases for many sectors of the economy.  The largest was the 240% gain in hospital services followed by college tuition and fees at 180%.

Average hourly wages had increased  100% and overall inflation was 74.4% in this time frame.

In this 22 years the US population has grown by 50 million. Each of these economic sectors are serving many more customers with more products and more facilities than was the situation in 2020.

NCUA’s proposed 2023 budget would result in a 283% increase for this same period, higher than any other economic sector.   Meanwhile number of NCUA insured credit unions has fallen from 10,316 to 4,853.

NCUA’s budget process is one sided.  It details all spending request but provides  no cost control or expenses reductions.  An example is this excerpt from CUNA’s analysis of administrative costs:  Specifically, the budgets for contracted services, administrative expenses, and rent, communications, and utilities are proposed to increase by 30.3%, 10.8% and 21.8%, respectively.

Without external oversight, the budget process becomes a PR exercise with scripted answers and no independent review.   Board members readily give in to the inflation rationale.

NCUA’s budget grows inexorably faster than every other sector because there is no check and balance.   The agency is answerable only to itself.   Or as one board member frequently observes, “NCUA is a monopoly.”

Chairman Ed Callahan’s Last Congressional Hearing

For there to be accountability over NCUA’s spending, the process should be changed.  The example of former NCUA Chairman Ed Callahan’s final Congressional testimony suggests a possible solution.

On April 24, 1985 Ed appeared before Chairman Boland’s  subcommittee of the House’s powerful Committee on Appropriations.  He presented the CLF’s 1986 appropriation request.

The following are excerpts from Chairman Callahan’s opening statement:

For fiscal year 1986 we are requesting a $600 million in new loans, the same number as the previous five years. The expense limitation $850,000 is the number as the current fiscal year and has been unchanged for the past four years. . .

We believe the lending limit is adequate to meet the needs of over 18,000 credit unions. . . Our agents, the 42 corporates,  have reported minimal increases in loans even though loans outstanding at their member credit unions have increased 44% the past two years. . .

The CLF’s loan balances of $288.5 million represent a very slight increase since our fiscal year end. . .

Mr. Chairman, today the (CLF) system provides services to more credit unions at a lower cost and with fewer employees than at any other time in its history.   Credit unions and we are proud of its success.

At the time of this hearing, NCUA insured 18,000 credit unions with six regional offices and a DC headquarters.  Total employment was 600. The CLF’s bottom line of no increases in operating expenses for four consecutive years was the same outcome for both the NCUSIF and  agency’s operating budgets.

In contrast, NCUA’s total spending has grown over 200% more than the economy’s total inflation for the past 22 years.  The solution to NCUA’s open-ended spending is to make the entire NCUA budget subject to Congressional oversight and approval.

A Better Way:  Put  NCUA Spending “On Budget” for Congressional Review

All CLF spending was subject to Congressional oversight until the 2008/2009 crisis changed this annual approval process.  Congress no longer reviews CLF lending or expenses.  The CLF’s coverage has never been as comprehensive or meaningful since.

Currently the NCUA is seeking to extend the CARE Act provisions enlarging the CLF’s capabilities. This legislative request  is an ideal opportunity to put the CLF back on budget along with the remainder of the Agency’s spending.

In the real economy, constraining costs is the first responsibility of leaders when facing unprecedented inflation and the prospect of an economic downturn.   Personnel and other resources must be redirected to immediate priorities, rather than just adding staff for new initiatives.

Both efficiency and effectiveness concerns were raised in NAFCU and CUNA’s detailed budget responses.   However, these comments come with no formal authority. NCUA routinely restates its positions, such as the need for consumer examiners or more specialists.   Board members, with rare exceptions, just support each other’s spending priorities.

Putting the NCUA on-budget would open up the process to independent monitoring and public commentary.   Congress would review and approve the spending as well as the underlying “themes” or policy justifications.  As the NCUA’s taxpayers,  credit unions would then have a meaningful way to comment on NCUA’s budgets and operating performance.

It worked for the CLF.  It would be a better way for insuring accountability for NCUA’s performance today.

 

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NCUA’s 2023 Budget Hearing and Inflation

Today is NCUA’s public hearing on its proposed $367 million budget for 2023.

Inflation is the number one topic on many people’s minds.  An NCUA board member has presented numerous examples on  LinkedIn  of the impact of inflation on consumers. The posts include reporting on  the price of beer in sports stadiums, the cost of a Five Guy hamburger and presenting the two decade chart below tracking  price increases in various sectors of the economy.

His latest comment reads as follows:

Ouch. Average monthly payment for new cars hits $738. Throw in gas, insurance, registration and that’s $1000 a month just to drive around.

#cars #inflation

Now he is in a position to do something about his observations.

NCUA’s Spending and Price Increases in the Economy

The Bureau  of Labor Statistics chart below is a 21-year history of the price changes of various services and products from 2000 through June of 2022.  The changes are compared with  the  average hourly wage increase.

Some services or products are “more affordable” as their price changes are less than the increase in wages.   The “less affordable” group have seen prices rise faster than wages.

The  overall inflation in the period is 74.4%.  The highest increase in this 22 years  is in hospital costs with a  240% price surge, just ahead of college tuition.

At the same time TV’s, computer software, and cell phones have become more affordable with price rises less than the increase in wages.

Where would NCUA’s ever swelling growth in total regulatory costs paid by credit unions be on this chart ?

NCUA is Number 1: What to Look for in  Today’s Hearing

In 2000 total NCUA  expenses for the operating fund, NCUSIF and the CLF were $129.9 million.   For the 2023 budget NCUA proposes spending $367 million.

At yearend 2000, NCUA oversaw 10,316 federally insured credit unions.  At June 30, 2022 the number was 4,853.

NCUA’s proposed new budget would result in a  283% increase for this 22 year period.  This places the agency number 1, at the very top of the chart of price escalations across all sectors of the economy.

Inflation is the most urgent  economic challenge facing the country.   The only sure way dealing with this challenge is to reduce costs.  Companies across the economy have announced hiring freezes and layoffs to control their ability to compete.

Even some credit unions are announcing layoffs especially in their mortgage lending personnel.

The issue for the NCUA board members is whether they just want to talk about inflation; or, will they have the courage and capability to do something about it in this area of their direct responsibility?

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A Tale of Two Credit Union Liquidity Options

The dramatic drying up of market liquidity since the Fed launched its fight on inflation earlier this year has been multidimensional.

The 16.2% surge in credit union loan demand in the first two quarters  was the highest this century.  Cash on the balance sheet fell by $66 billion in the second quarter alone.  Investments are 30.5% of the system’s assets, totaling $655.5 billion.   Only 42.6% of this total was under one year maturity at June 30.

Most of the remaining portfolio over one year, would be underwater, that is with book value less than current market.  These funds could be converted to cash only at a loss.

Consumer savings previously buoyed by COVID relief plans, fell to 5% in June, and are at a lower level than historical norms.

Finally market competition for funds is increasing.  The SEC 7 day yield on government money market funds is 2.75%.   Online banks such as Marcus are offering one year CD’s at 3% and higher for longer terms.

Credit union’s are responding with multiple balance sheet straggles, such as CD specials, loan sales for cash, higher pricing to slow loan demand, and looking at borrowing and other funding strategies.

Two Credit Union Created Liquidity Options

Credit unions have created two system options to assist with managing liquidity.  One is industry managed, the corporate network owned SimpliCD, a CUSO.  The second is the CLF, created by Congress in 1977.

Both partner with remaining corporates as one option for access.  Credit unions can also go direct as regular members of the CLF or by calling the CUSO, Primary Financial, directly.

Even though both were created by credit unions and both rely on the corporate network for broad coverage, the results of both efforts could not be more different.

A CUSO’s Results

SimpliCD has posted its activity through the June quarter.  With almost 3,000 credit union investor agreements, the CUSO reported $2.9 billion CD’s placed at June 30.  The current largest outstanding was for $239 million and 228 credit unions report current funding.

President Chris Lewis says the market is the tightest he has seen in his 30 years with the industry.  Some credit unions are making early withdrawals from purchased CD’s or sell at a discount for cash.  Finding credit unions to invest in CD’s is getting harder.  Credit unions generally seek  funds in the 1-3 year maturities.

SimpliCD’s advantages include a centralized way to access CD funding, quickly, in whatever amount needed.   Most of the top ten credit unions have used the service in past with the largest placement at $400 million.  Twenty million can be raised in just a couple of hours.

The funds are unsecured and structured so that the $250,000 NCUSIF insurance covers all issuance.  If the transaction is done via the credit union’s corporate account, all monthly interest payments or receipts are automatically settled with confirmations provided to the credit union.

Two current examples:  A billion dollar credit union placed two CD’s as  of September 30th  via their corporate,  $5.0 million for 182 days at 4.1%, and a second $5.0 million for 272 days at 4.15%.

A $150 million dollar credit union placed a $1.5 million 182 day CD for 4.05% at September month end.

The October 3rd rates for secured FHLB Boston advances for equivalent six and nine month maturities are 4.29% and 4.37%.

The CUSO was originally founded by Corporate One in 1996 and converted to corporate wide ownership in 2004.  In addition to the speed and ease of one stop funding, the CUSO has earned the trust of its credit union users who range in size from the very smallest to the largest.

Lewis comments that the other advantage of SimpliCD is that credit unions can “keep their borrowing powder dry” for use as secondary liquidity.

The CLF Today

Opened in 1978, the CLF was intended to be the third leg of the regulatory structure which added share insurance in 1971 to NCUA’s initial chartering and supervision responsibilities.

Last week I received this query from a colleague:

Today, as interim CEO,  something came up, and I immediately thought of you.  It’s the CLF.   While we are managing liquidity well, but don’t have the FHLB currently – I put it in process –  I thought I read that the CLF was broadened in scope through CARES ACT and was more user friendly.

I contacted the Corporate CU, as we are just under $250M, and asked about it, and they said no one is using it.  I thought that response was very odd considering the drain on the system of over $80 billion from March. 

Seems from what I was told that the CLF doesn’t have much value.  Do you believe this is true?   Am I missing something here?

Any advice would be greatly appreciated.

As of July 30, 2022, the CLF has $1.3 billion in total equity, all invested in treasury securities.  Its total borrowing authority from the Treasury is $29.7 billion.   The 10 corporate agent members, and the 349 direct credit union members cover approximately 26% of all credit union assets.

The CLF has not made a loan since the 2009 financial crisis.  Its major activity then was to lend $10 million to two conserved corporates guaranteed by the NCUSIF.   There has not been a loan extended since.

The CLF currently earns 1.39% on  its portfolio and spends about $1.2 million to keep the CLF open.  It currently pays 80% of its net earnings to its credit union owners.   The CLF continues to add to its retained earnings of $40.5 million even though it has had no “risk” assets for over 12 years.

A Story of Two Systems

Both SimpliCD and the CLF were formed to serve credit unions.  The CUSO managed by credit unions is active at every level providing financial intermediation, funding, and market options to almost two thirds of all credit unions.  It partners with its corporate owners to market, inform about funding options and facilitate transactions.  It is active in both good times and periods of stress.  It continues to innovate, be present and evolve.

The CLF does not interact with credit unions.   It has created no programs or options.  Until the leadership of the CLF engages with its member-owners and the system to develop solutions relevant for them, it will remain unused, untried and without purpose.  A vestigial regulatory organ frozen in bureaucratic time.

 

 

 

 

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Credit Unions and Liquidity Management

Managing liquidity will be an ongoing priority during the interest rate transformation now being led by the Federal Reserve.

Today  I want to show how credit unions have prepared.

Relying on a Cooperative System

Credit unions managing  74% of assets ($1.57 trillion) use the FHLB system.   To borrow from the banks, credit unions must invest in a bank’s capital with borrowings a multiple of their contribution.

As cooperatives, the banks are owned by their members, pay a dividend on the capital and offer multiple borrowing, hedging and funding options.

These 1,271 credit unions report a total of advised lines of  credit of  $288.1  billion at June 30, 2022.

The credit union funded CLF at June 30 reports total membership 349 regular members plus 10 corporate agents which have funded the CLF capital requirements for their members with less than $250 million in assets.

The total CLF capital contributions represent approximately 26.2% of all credit union shares as of June 30.

In addition the CLF has total borrowing authority of $29.7 billion but has no advised lines of credit with credit unions.  This lending capacity, if fully utilized would equal just 10.3% of the total advised lines credit unions report from the FHLB system.

Two Observations

Credit  unions rely on the cooperatively designed, privately managed FHLB with boards elected by the owners, as their primary source of external liquidity.

The CLF, specifically designed for credit unions, has not evolved to respond to credit union needs.   The CLF managed by NCUA has no credit union representation or programs to encourage credit union involvement.

There have been no loans from the CLF to credit unions since 2010.   At that time the two most significant loans were initiated by NCUA as part of their corporate conservatorships of US Central and WesCorp.  These two borrowings were for $ 5 billion dollars each, guaranteed by the NCUSIF.

In the upcoming period of enhanced liquidity management, credit unions are turning to the organizations they own and can rely on.

 

 

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SIF’s Slippery Slope Slide Speeds Up

By Sancho Panza

As you might suspect, got a call from Don Quixote after that last opinion piece (“Tilting Windmills”). The Man from La Mancha, Illinois was, shall we say, wild-worded and a bit tilted.  Quixote claimed I had definitely blown any chance of ever serving on the NCUA Board. I attempted to express my regret.

But aghast and inconsolable, Mr. Filson mounted up and charged off into a philippic on another of his favorite windmills, the NCUSIF (a topic about which he blogs incessantly and quite opaquely!).

The National Credit Union Share Insurance Fund is your 1% deposit plus accumulated earnings, which undergirds the federal insurance of member accounts. The NCUSIF (agency staff’s nickname is SIF) is cooperatively owned by credit unions and mismanaged by the NCUA.

The continued mismanagement of the Fund is surprising for two reasons – Rodney Hood and Kyle Hauptman. Both gentleman imply in their resumes to have substantial acumen and experience in finance – Mr. Hood with Bank of America and Mr. Hauptman with Jeffries, a sophisticated, international investment house.

And of course as Republicans, one would hope that both men champion the prudent, conservative investment of your funds while under their supervision. Neither Mr. Hood nor Mr. Hauptman, however, seems to be paying attention. For the Republican-majority NCUA Board members is this yet another RINO  (“Responsible In Name Only”) example?

Robots and Ladders

Case in point, the NCUA’s “investment strategy” for the NCUSIF – your deposit, your investment, your Fund – is to invest the @$20 billion balance in U.S. Treasury securities with maturities “laddered out” over 10 years or less. “Laddering” simply means NCUA robotically spreads out that $20 billion evenly (approximately in this case) over seven or eight years.

NCUA’s investment gurus self-laud their approach, comparing it to “dollar cost averaging”; and pooh-pooh any suggestion of intelligent, strategic flexibility as  “risky market timing”. ‘Course it’s true, you can’t be called indecisive, if you never make any decisions. In investment circles this type thinking is called “real A.I.” – or true artificial intelligence.

But, let’s not argue with the “strategy”, let’s talk about the consequences to you of its’ execution. Any strategy, which defies common sense and ignores major shifts in the national economy, will invariably cause significant losses to the investor – that means you, the cooperative owners of the NCUSIF. How so? Well, did you know that any excess earnings on NCUSIF investments (over and above the legally required “net operating level” (NOL) of the Fund) are required to be paid out to the owners of the NCUSIF – hey, that’s you, your credit union and all 135 million American credit union members. Want an estimate of how much NCUA’s “real A.I.” strategy is costing member credit unions?

The Critical Question

Okay, here goes. First, which way do you believe interest rates are moving – up or down? Right! How did you know? “Because I can read!” is an acceptable, sensible answer. But in addition, you might add 1) because Jerome Powell, Chairman of the Federal Reserve says so, 2) because 10,000 of the world’s finest economists at the Department of Labor say inflation in the U.S. exceeds 8%, 3) because the slope of the yield curve, and lastly 4) because Jerome Powell says so. Everyone in finance, except the folks at NCUA (including RINOs?), knows the axiom “Don’t Fight the Fed” – if you do, you’ll lose!

Second, so if Chairman Powell had been telling you all yearlong that the Fed was going to increase rates rapidly and significantly – a major national policy change – would you rush out to lock in some 7 and 8 year, long term – sure to be underwater losers – investment rates? No, me neither; nor anyone on the planet including Bank of America, Jeffries, and your 6 year old preschooler – that would truly be “real A.I.”

Yet, that is exactly what the pointy-headed, investment gnomes at NCUA are doing with your money in the NCUSIF – evidently with the full support of the NCUA Board, RINO’s [“Relevant In Name Only”) included! Reinvestment activity at the NCUSIF historically occurs around mid-month in February, May, August, and November. In February $650 million was invested for @ 7 years at a yield of 2.01%, in May $650 million for @ 7 years at a yield of @ 2.84%. The August investment results will be released today at the NCUA Board meeting. Surely the folks at the NCUSIF didn’t repeat their mistakes of February and May – right?  (Wanna bet?)

The Cost of A.I.-Artificial Intelligence

Seven-year treasury securities as of 9-19-2022 are yielding 3.62%. Every one of the NCUSIF investments made in 2022 is substantially underwater.  In fact the “unrealized loss” in the NCUSIF portfolio has increased by over $1 billion in 2022 alone, following a similar $1 billion+ decline in 2021 – with much more to follow according to the Fed!

The “real A.I.” investment gurus at NCUA self-importantly and incorrectly point out that “unrealized losses” don’t matter, because the NCUSIF “holds to maturity” all investments. In a sense that is true because “holding to maturity” does wash out all their investment missteps over a 7 or 8 year period – their mismanagement never shows up on “their” income statement, so no big deal – right? No, that’s wrong! NCUA’s “real A.I.” strategy, in the current economic environment, wastes any prospect of your credit union receiving a premium payout of greater NCUSIF earnings – you’re the loser, as are your credit union members..

So, here’s the “real Republican” estimate – well-reasoned, conservative – of what “real A. I.” is costing you and your members. To start, assume Jerome Powell is a man of his word – a real Republican. On August 15, 2022 (the last NCUSIF investment date) the 7-year treasury was yielding 2.86%, the 6-month treasury was yielding 3.13%!. What if that last $650 million had been invested for just 6 months, while we all waited to see where the yield curve settles out? An intelligent, no brainer? An irresponsible, missed opportunity? A RINO alert?

The Lost Opportunity

If one could improve the overall yield of the NCUSIF by just one-half of one percent, the “excess earnings” would exceed $750 million ($20 billion x .50% x 7 years = $750 million). Remember the 7-year yield is now at 3.62% (with Powell promising more to come!), but we’re stuck with the 2.01% February and 2.84% May investments for the next 7 years! Would credit unions have any use for $100 million or so in extra income this year? If not; don’t worry, be happy!

A couple of rhinos skiing downhill in winter is quite an amusing thought. A couple of RINO’s frolicking in “the Swamp”, while ignoring the yield curve in an election year, isn’t quite so funny and could become a slippery slope.

 

 

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Tilting at Windmills?

By Sancho Panza

Chip Filson and I were friends until recently, but things have changed.

Calling him a modern day Don Quixote, for his relentlessly obscure attacks on the NCUA sparked the breach. Seeking to upend the “giants” of NCUA with logic, facts, and reason once is certainly an act of fantasy, persisting is delusional. I speak from experience, if you get my tilt.

Entrenched, NCUA trifles and traffics in bureaucratic unaccountability. Those Duke Street windmills remain churned by the oft-feckless winds of politics – and their own internal, hot air.

Mr. Filson aside, it is unsettling to find a Republican-majority, NCUA Board perpetuating – and even encouraging – the legendary, “we-know-better-than-you” bureaucratic insolence of the Agency.

Republicans, one thought, were the Party of less government, not more; of more accountability to the people, not less.

Republicans, one thought, were “Bill of Rights”-type folks, who believed that the Federal government should be less intrusive in our lives, not more.

Republicans, one thought, would easily spot that NCUA, an “independent” (answerable-to-no-one) Federal agency, is – more or less – a small “d”, democratic mess!

RINO’s

But, apparently, the two NCUA Republican board members, Mr. Hood and Mr. Hauptman, are “RINOs” not “RRs”! Real Republicans shouldn’t vote 3-0 on risk-based capital, unnecessarily increasing regulatory burden and overriding federal law.

Regan Republicans shouldn’t condone a mushrooming Agency budget in an era marked by far fewer credit unions, the availability of micro-cost digital monitoring, and virtual regulatory exams.

Responsible Republicans should actually stand for something, not just “go along” with the “dINO-mite” (democratic-In-Name-Only)  “Agenda of the Chair” (Mr. AOC!).

Whether RINO-1 (Republican In Name Only] or RINO-2 (Regulator In Name Only), something isn’t “right” with Mr. Hood nor Mr. Hauptman. Surely when “the base” realizes the problem, Mr. Hood won’t be dining again at Mar-a-Lago and will soon have more free time to enjoy opera.

As for Mr. Hauptman, hard to believe that his political sponsor – an Arkansas Senator – would “Cotton” to learning that his protégé has gulped down the in-house, let-them-eat-cake Kool-Aid and swerved off the right road into a ditch on the left.

Oh, by the way, wonder if Chip Filson remains a life-long “RR”?

Is that why he continues to tilt so earnestly…

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The NCUSIF Look Back: Its Vulnerabilities after 40 Years

The radical, cooperative redesign of the NCUSIF was approved by the NCUA board in October 1984.

In this board meeting video excerpt, Chairman Callahan thanked all who had worked to put this new “safety net” in place.  He called it a “great victory that is truly unique and sets the credit union system apart from all other financial institutions.”

Board member PA Mack stated his support of the new plan:  “I think this is an outstanding product as a partnership among government and credit unions. “

Chairman Callahan closed with these words about what it would take for this redesign to succeed:  “The real challenge now goes to the people at NCUA. The system can work beautifully for credit unions in the future. . . the real secret now is the operations.” 

This look back suggests the wisdom of Ed’s insight.  For the unique structure is only as effective as the people responsible for its implementation.

Immediate Success Brings Temptations

In NCUA’s  1985 NCUSIF’s Annual Report, the board  led by Chairman Roger Jepsen reported that in the first year the restructuring had “returned over $275 million in tangible benefits” to credit unions.  (Page 5)

The major initial concern was whether the agency’s multiple supervision efforts to resolve problem situations could reduce the losses charged to the fund.    The 1985 Report reported five-year trends that documented losses for all liquidations at only 1.5 basis points of all credit union insured savings.  Net losses in closed credit unions were $3.1 million, the lowest in the previous five years. The fund’s $29 million dividend at yearend was a payout ratio of 46% of  net income.  The Fund still maintained its 1.3% equity ratio.

But the fund’s fourfold increase in size, revenue, earnings and financial success also resulted in changing the long-standing practice of how the agency’s operating costs were allocated to the NCUSIF. From 1981 through 1985,  this allocation had ranged from a low of 30.5% to 34%.  This ratio aligned with the percentage of state charted credit unions insured by the NCUSIF.

At yearend 1986, state charters were just 33.3% of all NCUSIF insured institutions.   However the NCUA board increased the indirect expense to 50%.   As stated in that year’s Annual Report “The cost of these services which totaled $16,821,936 and $8,069,244 for the years ended September 30, 1986 and 1985, respectively, are reflected as a reduction of the corresponding (operating) expenses in the accompanying financial statements.”

The NCUA’s operating expenses charged to FCU’s “declined” from $21.5 million in 1985 to $17 million in 1986. This 100% increase in the NCUSIF’s expenses reduced the operating fee paid by federal charters. There was no change in the proportion of state chartered credit unions covered by the NCUSIF. This was an easier political option than raising the fee charged FCU’s.

This 50% increase in the expense allocation highlighted the most frequent concern expressed by credit unions about the new plan.  Here are some questions asked at a Q & A open meeting about the plan as reported in NCUA’s 1984 Annual Report:

Questioner:

What if the fund doesn’t operate on the interest earned?  If you don’t pay a dividend?  What happens if the agency is poorly run?  (pages 18, 19)

The concern was specific.  If the agency was given more money, wouldn’t it just be tempted to spend more?   Could the agency change the guardrails at its sole discretion?

This 50% increase in the Overhead Transfer Rate (OTR) was just the beginning of efforts to use the increased resources, not for insurance costs, but to underwrite the ever expanding agency budget.

“Building Out” The Agency

Soon after the 1986 OTR adjustment, the NCUSIF became the funding source for the NCUA’s building aspirations.  In 1988 the Operating Fund “entered into a $2,161,000 thirty-year unsecured note with the NCUSIF for the purchase of a building. . .In 1992, the Fund entered into a commitment to borrow up to $41,975,000 in a thirty-year secured term with the NCUSIF.  The monies were drawn as needed to fund the costs of constructing a building in 1993.”  (NCUA 2003 Annual Report pg 52.)

The variable rate on both notes was equal to the NCUSIF’s prior month yield on investments.  The interest was paid by the Operating Fund, 50% of whose expenses were then charged back to the NCUSIF.  The NCUSIF loaned the money and then paid half the interest on the loan!

It should be noted that during this construction and move to a new building in Alexandria , VA financed by the $42 million loan, the NCUSIF still paid a dividend  every year from 1995 through 2000, as the fund’s yearend equity ratio was above the 1.3% cap.

A Double Whammy in 2001

The Fund’s financial management which had produced six consecutive annual dividends was altered in two significant steps in 2001  by the NCUA Board.

The first was to increase the percentage of the fund’s OTR from 50% to 66.6%.   This resulted in a 37.3% growth NCUSIF’s operating expense while the operating fund reported a 31% decline in expenses in just the first year of this change.

The operating assessment for FCU’s fell by 20.4%.  The NCUA board was able to lower this fee on all FCU’s by shifting the expenses internally to the NCUSIF funded by all credit unions.

Each year since 2001, NCUA has calculated a different OTR’s based on “a study of staff time spent on insurance-related duties versus supervision-related duties.”   This ever fluctuating OTR peaked at 73.1% in 2016 under Chairman Matz.

During the past two decades of variable OTR, the percentage of state chartered credit unions in the NCUIF has remained more or less constant.    At June 30,2022 the 1,811 stare charters were only 37.3% of all FISCU’s.

The second administrative action was more consequential, because it modified how the normal operating level (NOL) was calculated and thus when the dividend is required. In a footnote 5 to the NCUSIF’s 2001 audited financials the following change was announced:

The NCUA board has determined that the normal operation level is 1.30 %  at  December 31, 2001 and 2000.   The calculated equity ratio at December 31 was 1.25%. The equity ratio at December 2000 was 1.33% which considered an estimated $31.9 million in deposit adjustments billed to insured credit unions in 2001 based upon total insured shares as of December 31, 2000.  Subsequently, such deposit adjustments were excluded and the calculated equity ratio at December 31,2000 was revised to 1.3%.

The Fund reversed its year earlier NOL determination. But even with this retroactive adjustment to the December 2000 equity ratio, the footnote continued:  Dividends of $99,490,000 which were associated with insured shares as of December 31, 2000 were declared and paid in 2001. 

Since the 1% deposit redesign in 1985, this annual adjustment has always been collected  in the following year.   And until this 2001 modification, the retained earnings/equity ratio was based on yearend insured savings.  A dividend was paid if retained earnings exceeded the .3% cap.

By not counting the 1% true up until the amount was billed results in an understatement of the actual NOL. It eliminated a dividend in years when the ratio would have exceeded the .3% cap under the prior practice, starting in 2001.

The Ultimate Guardrail Change

Since 1985, the NCUSIF normal operating level (NOL) had always been set at 1.3%.  In many years the cap was not reached, but the resulting ratio was considered adequate even if under the cap.  During and after the Great recession, the Board did not change the 1.3% cap even though they had been authorized to do so in the 1998 CUMAA.

Then in 2017 the board voted to merge the surplus from the TCCUSF into the NCUSIF.  But this surplus would have raised he NOL to greater than 1.5%.  To retain this amount above the traditional 1.3% cap, the board took two actions.  It raised the cap to 1.39%, the first time this change had ever happened.

The agency also immediately expensed and added to loss reserves $750 million from the TCCUSF surplus to pay for potential losses in natural person credit unions.   This action directly contradicted the congressional language establishing the TCCUSF that the fund “was not to be used for natural person credit union losses.”  But it did reduce the NOL to 1.39% even after setting aside a dividend for credit unions from a portion of the surplus.

This was the first time that the cap had been raised above the longstanding 1.3 level.  No verifiable details were provided about how this new level was determined except for summary data unsupported with actual calculations.

NCUSIF Success Raises Temptations

Credit unions’ concerns about supporting a perpetual 1% underwriting were well founded.  Their worry was “If we send more money to the NCUA, won’t they just be tempted to spend it because that is what government does.“

Subsequent NCUA boards have converted the “partnership” understandings referred to by Board member PA Mack into a perverse interpretation:  that to “protect the fund” the agency has to spend more and more on its operations to accomplish that objective.

From 2008 through 2021, the NCUSIF spent $2.2 billion on operating expenses and only $1.88 billion on actual cash losses.

NCUA has converted the fund into the agency’s cash cow. It has transferred much of its annual budget increases to the NCUSIF.   For example in 2012 the operating fund expense was $90.6  million; six years later in 2017 the expenses were still only  $90.3 million   All of the annual increases in the agency’s operating budget and more, in this six years, were paid by the insurance fund.

Federal credit unions became “free riders” as the operating fee paid an increasingly smaller share of the agency’s expenses.

The NCUA Board’s Responsibility: A Legacy Being Squandered

While staff proposes, the board disposes of their recommendations.  NCUA and its budget are literally exempt from any outside approval.  The agency is independent.  This absence of oversight raises responsibility of political appointees.

The annual OTR transfer have lost any connection to insured risk.  Instead they remind one of a person declaring their waistline to be 32″; but then, when you gain weight, redefining 32″ as whatever your waistline happens to be.  Insurance activity is whatever we want it to be.

The shortcomings have been bipartisan.   Republicans and democratic appointees have repeatedly affirmed transparency and actions to protect the fund.  But in practice the agency has declined to release the accounting options provided by its own outside CPA firm Cotton, the details in setting its annual NOL limit above 1.3, or the investment options and risk analysis used in managing the fund’s portfolio.

Every NCUA board member inherits a unique cooperative legacy in the NCUSIF that requires both knowledge and diligence if the fund is to be sustained.  This responsibility takes work and continual vigilance.

When the critical guardrails of the fund are modified one by one, the initial signposts of success are forgotten, and critical facts routinely omitted, then the prospect of a sound NCUSIF future is undermined.

The most important success factor in the Fund’s special public-private partnership is the ability to ask hard questions.  When this is not possible for board members to do and to followup, then it is up to credit unions or Congress.

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A Lookback: The NCUSIF Four Decades after Redesign (1985-2022)

Knowing the past is essential to understanding the present and charting the future. This is true for individuals, institutions and society.

History provides us with a sense of identity. People, social movements  and institutions require a sense of their collective past that contributes to  what we are today.

This knowledge should include facts about our prior behavior, thinking and judgement.  Such information is critical in shaping our present and future.

The NCUSIF’s Transition Story

 

The NCUSIF legislation was passed by Congress in October 1970 authorizing  a premium based financial model imitating the FDIC’s and FSLIC’s  approach begun four decades earlier. This multi-decade head start was how those funds achieved their 1% required statutory minimum fund balance. This reserve growth occurred  during the post-war years of steady economic growth with only modest cycles of recession.

Then the economic disruption with double digit inflation and unemployment of the late 70’s and 80’s led to the complete deregulation of the financial system established during the depression.

Ten years after insuring its first credit unions, the NCUSIF’s financial position at fiscal yearend September 30, 1981, was:

Total Fund Assets:   $227 million

Total Fund Equity:    $175 million

Insured CU assets:    $57 Billion

Total Insured CU’s:    17,000

Fund equity/Insured shares:   .30%

CUNA president Jim William told NCUA Chairman Ed Callahan before his GAC speech in 1982, the dominant concern of credit unions was survival.

Because the fund equity ratio was so far short of its 1% legally mandated goal,  NCUA  implemented the only available option  to increase the ratio.   Double premiums were assessed in 1983 and 1984 totaling 16 basis points of insured savings for every insured credit union.

However, the ratio continued to decline primarily due to increased losses from the country’s macro-economic challenges. These trends and the prospect of double premiums caused  credit unions to ask if there were a better way.

The history of the analysis of the fund’s first dozen years leading up to these changes is in this seven minute video from the NCUA Video Network.

In April 1984, NCUA delivered a congressionally mandated report on the history  and current state of the NCUSIF.  It included the development of private, cooperative share insurance options and league stabilization funds.  It presented four recommendations to restructure the NCUSIF from a premium revenue model, to a cooperative, self-help, self-funding one.

Today’s NCUSIF after 40 Years

The four decades of NCUSIF performance since 1985 have proven the wisdom of the redesign and generated enormous financial savings for credit unions versus annual premiums.

Today the NCUSIF is $21.2 billion in total equity giving a fund insured share ratio of approximately 1.29%.   This size represents a 12.7% CAGR since 1981 when the fund’s equity was  just $175 million.

The critical success factor  of the 1% cooperative funding model is that it tracks the growth of total risk with earning assets, whatever the external economic environment.

This was and is not the fate of the premium based funds. The FSLIC failed and was merged into the FDIC in 1994.  The FDIC has assessed an annual premium(s) on total assets every year since the 1980’s.

The FDIC’s ratio of fund equity to insured shares at March 31, 2022 was 1.23%, down from its peak of 1.41% in December 2019.   On a number of occasions, the FDIC fund has reported negative equity during financial crisis.

NCUSIF Twice the Coverage Size of FDIC

It should also be noted that FDIC insured savings are only $10 trillion (41%) of the $24.1 trillion total assets in  FDIC insured institutions at the end of the March 2022.  The FDIC  is only .51% of all banking assets.

For credit unions insured shares are 78% of total assets.  Today, the NCUSIF’s total assets are  1% of all credit union assets, a ratio two times the size  of the FDIC’s.

Five Decades of Reliable, Sound Coverage

Throughout the redesigned NCUSIF’s history, a premium has been assessed to augment the fund four times: 1991 and 1992; and 2009 and 2010.   In both situations the premiums were levied based on reserve losses expensed but then subsequently reversed in later years.

In 1985, the fund’s first full year of the redesign, NCUA reported “for the first time ever, the NCUSIF paid a dividend.”   The NCUSIF Annual Report further stated that “credit unions were returned $275 million in tangible benefits.” (page 5).  This from a fund that just four years earlier reported $175 million in total equity.

The fund continued to pay dividends including six consecutive years from 1995 through 2000, and again in 2008 when the equity ratio was above 1.3%.

These results were achieved because of a collaborative partnership between NCUA and credit unions.  The changes were based on an analysis of prior events.  Options were evaluated and based on open dialogue at every stage.  Ultimately this consensus for change was critical in obtaining congressional support for this unique cooperative solution.

The redesign included commitments by credit unions to guarantee the fund’s solvency no matter the circumstances. But it also mandated guardrails on agency options and required transparency in reporting and managing the fund’s assets.

The NCUSIF four decades of performance has also provided a valuable record for reviewing credit union loss experience in multiple economic circumstances and events.   It provides an audited account of actual losses during the many years when there are none and credit unions received a dividend.

But it also documents the actual cash losses in the four or five short recessions or economic upheavals such as the aftermath from the 9/11 attacks, the Great Recession and the most recent COVID economic shutdown.

The NCUSIF’s record is sound.  It is proven. The facts are known.   So what could possibly go wrong?

Tomorrow I will review the temptations awakened by the NCUSIF’s successful track record.

 

 

 

 

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“The Public Purpose” of the Credit Union Cooperative System

In every new administration and most assuredly  following economic or other national crisis (Covid, natural disasters), the need to review governmental and agency responsiveness is raised.  Are changes needed?

Whether prompted by political priorities or  performance shortcomings, this is how existing policies are reassessed.

Another motivator is when market competition carries over to the political arena . Firms call out their rival’s more favorable regulatory  or tax status in their lobbying messaging.

In last week’s posts listed below, I noted the current absence of a policy framework at NCUA for the cooperative system.  I believe this leaves the system vulnerable to priorities set by others or to purely personal agendas.

The Reviews Begin

Last week the Director of the Federal Housing Finance Agency (FHFA) announced a review of the FHLB system.  FHFA, created in 2008, is the successor to the five person FHLB board.  This single administrator oversees the eleven FHLB’s and the conserved Fannie Mae and Freddie Mac.

The assessment of the 90-year old FHLB’s $ 1 trillion assets is to determine if  its modern day activities fully match its original mission of supporting mortgage lending.

FHFA Director Thompson’s purpose is to ensure the banks “remain positioned to meet the needs of today and tomorrow.”  One outside observer noted: “The home-loan banks lack a well-articulated contemporary purpose.”

Similar to credit unions, the FHLB cooperatives are exempt from corporate federal, state, and local taxation, except for local real estate tax.  For individuals, all FHLB bonds are also exempt from state and local taxes.

Credit Union’s Tax Exemption On the Agenda

A month earlier on July 27, columnist David Bauman wrote how the GAO was urging the OMB to study tax expenditures,  a budget category that includes the credit union tax exemption.  Are numerous tax exempt organizations still fulfilling their mission?

Bauman points out  the Treasury Department estimated the credit union tax immunity will cost the federal government $25.3 billion between 2022 and 2031.  This issue he wrote is “part of an ongoing battle between the banking and credit union industries.”

Scrutiny Not a New Process

From 1981 through 1985, the credit union system was part of four national studies directed by the Regan administration.  These were in  response to record high inflation, unprecedented interest rates,  disintermediation, financial innovation and growing concerns with institutional solvency.  For example, the Penn Square Bank’s 1982 failure was the largest FDIC liquidation post WW II.

In addition to the normal inter-agency or industry councils such as the FFIEC, NASCUS and multiple studies such as CUNA’s CapitalizationCommission, NCUA’s Chair was directly assigned to these four government-wide  assessments.

  1. The Depository Institutions Deregulation Committee (DIDC) was a six-member committee established in 1980 by Depository Institutions Deregulation and Monetary Control Act passed on March 31, 1980. DIDC’s primary purpose was phasing out interest rate ceilings on deposit accounts by 1986.

NCUA Chairman Callahan was one of five federal depository regulators. Chaired by Treasury Secretary Regan, all banks and S&L’s were given until June 1987 to end all federal controls on deposits.

NCUA chose not to follow the banking group’s timetable, eliminating all regulations in one new rule in May 1982. The decision effectively gave credit unions a five-year head start in the new market-facing era for financial intermediaries.

  1. The Garn-St Germain Depository Institutions Act of 1982, known as the “Deposit Insurance Flexibility Act” mandated that the three regulatory agencies study their insurance funds and make any recommendations for future changes.

On April 15, 1983, NCUA forwarded its 71-page, five-chapter study containing four policy recommendations.  This study became the foundation for the NCUSIF’s financial redesign approved by Congress in The Deficit Reduction Act  signed by the President  on July 18, 1984,

In Chairman Callahan’s forwarding letter to the study he noted:  “For credit unions there are very clear answers to the issues raised by Congress.  This is because credit unions . . .have actual experience with the options and alternatives suggested. . .Our responses are based on historical facts and current operational realities rather than academic theories or untried options. The credit union experience with insurance has been substantially different from the other agencies and our recommendations accordingly reflect this unique heritage.”

  1. The Private Sector Survey on Cost Control(PSSCC), commonly referred to as The Grace Commission, was an investigation requested by President Ronald Reagan, authorized in Executive Order 12369 on June 30, 1982.

The focus was waste and inefficiency in the US Federal government. Its head, businessman J. Peter Grace, asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”

The Grace Commission Report was presented to Congress in January 1984.  The Report included this observation:   “NCUA Chairman Callahan is a role model for government agency executives.  In one year NCUA reduced Agency staff 15% and its budget, 2.5%, while maintaining their commitment to preserving the safety and soundness of the credit union industry.” (NCUA 1983 Annual Report, page 3).

  1. The Vice President’s Task Group on the Regulation of Financial Services was formed in late 1982. Treasury Secretary Regan, the five financial regulators, the Attorney General, Directors of OMB, chairs of the SEC and FTC and state regulators raised the total principals to thirteen. The Group was given one-year to make recommendations to address the challenges of the emerging financial markets after deregulation and the potential repeal the Glass Steagall Act.

A final report was issued in November 1984. The Group’s recommendations were summarized by John Shad, Chairman of the SEC, in a later speech. He closed saying:

The lines of demarcation between the financial service industries have eroded. These activities should be regulated, and permitted to compete, according to their functions, rather than outmoded industry classifications.  

NCUA and the independent cooperative system were not mentioned in the Group’s regulatory recommendations.

NCUA and credit unions thrived in this transformative period of rapid financial change and increased scrutiny by completing the institutional, regulatory and policy foundations for a separate, unique and sound cooperative system.

Why a Cooperative Policy Framework is Essential

Without a clearly stated understanding of credit union’s role, every government study above could have drawn credit unions into their macro policy recommendations.

Instead NCUA demonstrated its ability to develop, document  and implement  how the deregulated cooperative system was successfully meeting its public purpose role serving members.

The cooperative system’s soundness was based of the values of self-help, self funding, and democratic volunteer leadership.  The “moral hazard” concern from FDIC/FSLIC insurance of private financial ownership  was absent in  cooperative’s creation of “common wealth.”

Today the ability to articulate this purpose is missing.  Regulations, especially the recently imposed RBC/CCULR were defended as being virtually identical to bank capital requirements.  New charters are rarely issued raising the question of credit union relevance today.  Whole bank purchases are routinely approved by NCUA even though  this use of member savings would seem contrary to why a cooperative system was created.

Absent an awareness of cooperative history and precedents, policy pronouncements or priorities of board members may just seem  like comfortable generalities.

In Harper’ July 2022 investiture address, he reflected on his year and half tenure as Chairman:

In achieving each of these things (regulatory activities), we have followed a philosophy that should guide all financial services regulators. Specifically, we were fair and forward looking; innovative, inclusive, and independent; risk focused and ready to act when needed; and engaged appropriately with stakeholders to develop effective regulation and efficient supervision. This philosophy will continue to drive our actions in the years ahead.

Is this the regulatory understanding that credit union cooperatives are seeking?

Sooner or later credit union’s special identity will be challenged by some governmental or political process.

The cooperative system navigated the multiple reviews from 1981-1985  because NCUA and credit unions earned a reputation for trust, expertise, mutual respect, shared purpose and performance.  This achievement was recognized by the industry and throughout the executive and legislative branches of both state and federal government.

NCUA Chairman Callahan in the Agency’s 1984 Annual Report observed:  The only threat to credit unions is the bureaucratic tendency to treat them, for convenience sake, the same as banks and savings and loans.  This is a mistake, for they are made of a different fabric.  It  is a fabric  woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together. (page 3) 

Should  the movement aspire for anything less in this time?

 

 

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A Rare New Species Sighted This Labor Day

Rare bird sightings are often front-page local news.  Such was the lead story on July 5, 2022  in Rockland, MI: Rare Eurasian bird spotted in Michigan, first sighting in US:

A Michigan birdwatcher made a once-in-a-lifetime discovery this weekend when he spotted a bird known as a common redshank in a marsh near Detroit, a few thousand miles from the bird’s usual home.

Equally rare among the financial species is discovering a new credit union charter.  The local news headline says it all:   Somebody Actually Started a New Credit Union. Here’s How They Did it.

This was the second sighting of a new credit union charter this year.  NCUA’s press announcement described the event as an example of credit union’s purpose: Supporting underserved communities and providing capital for community development is at the core of the credit union mission. 

Few in the credit union movement are actively trying to spot new charters.   CU*Answers and its CUSO challenge is one multi-year institutional effort.  Two individuals have been public in their pursuit of this rare activity:  Denise Wymore and NCUA Vice Chair Kyle Hauptman.

Because this event is so unusual, the joy, passion and hope embodied in a new credit union today are often overlooked.

Many persons’ deep desire to create something new to serve one’s community is a defining characteristic of American enterprise.

Entrepreneurs are central for a market economy, especially for new credit union charters that begin with limited financial capital.

On this Labor Day eve, I am reprinting this August 30 story as I believe it describes the dynamic human spirit new charters bring to the movement.  Enjoy this description of Community First Fund FCU’s creation by OSCAR PERRY ABELLO:

A Credit Union in the Neighborhood:  It Just Makes Sense

Leo Rodriguez knew all he needed was $10,000 in startup capital to open his own hair salon, something he’d dreamt about doing since he was four years old and saw a poster of legendary hair stylist Vidal Sassoon. Twenty-nine years and countless clients later, he is more excited than ever to invest back into the only institution that believed enough in him to make that loan.

The year was 1993. Rodriguez had already spent the previous several years studying cosmetology and hair styling in New York City and London. He returned to his home city of Lancaster, Pennsylvania, where he landed a job working at a new downtown hair salon founded by local legend Paula Severino Standish. After a wildly successful year, gaining his own influential clientele, he knew it was finally time for him to go out on his own.

He just needed that $10,000. But none of the banks he went to around town were interested in loaning him the money.

“I wasn’t looking to, like, renovate a building, I just needed a couple chairs, just to get started,” Rodriguez says. “There were a lot of banks that just didn’t want to give you any money. It was very hard to start a business. Also being a minority, that was difficult.”

A Personal Connection

But as fate would have it, one day Rodriguez was catching up with his childhood friend, Daniel Betancourt, who had recently left his job in commercial banking to join a new loan fund created by another local legend, a Black civic leader named James Hyson. Now called Community First Fund, it invests in Black, Hispanic, immigrant and other entrepreneurs whom traditional financial institutions weren’t interested in serving.

Not only did Community First Fund give Rodriguez his first $10,000 loan, it also taught him the ins and outs of running a business, creating a business plan, proper accounting, and profit and loss statements. He soon repaid that $10,000 and borrowed another $35,000, then $50,000. Every time he needed to expand or renovate or move his salon to a different location, he went back to Community First Fund. During his prime — he’s 63 now and expects to semi-retire in a few years — Rodriguez had 10 stylists working in his downtown Lancaster hair salon.

“I probably borrowed over three or four hundred thousand dollars from them in total over 30 years,” Rodriguez says. “They’ve never turned me down. They were always, always there for me.”

Loyalty and a Credit Union

Earlier this year, Community First Fund opened a traditional financial institution, a credit union. Why? Because after serving entrepreneurs like Rodriguez for 30 years, the fund found that the families and communities around those entrepreneurs either weren’t getting access to banking and affordable credit elsewhere or would prefer access to banking and affordable credit from a name and face they’ve come to trust.

Rodriguez was one of the first members of the new Community First Fund Credit Union. He’s moving all his personal and business accounts over.

“I’m into loyalty, man. I’m into taking care of people. it’s what I do,” Rodriguez says. “When Dan was telling me they were gonna open up this credit union, I’m like, ‘Oh, Jesus, thank God.’”

New Credit Unions Much Rarer

Starting up a new credit union is much rarer than it used to be. Prior to 1970, it was typical for federal regulators to charter 600-700 new credit unions every year. But since then, for multiple reasons, the number of new credit unions chartered every year began a long, slow decline. The new Community First Fund Credit Union was one of only four chartered in 2021. That’s as many new credit unions chartered over the previous five years combined. With so few new credit unions starting up, and scores closing or merging with others every year, the total number of active credit unions has declined from a high of 12,977 in 1970 to just 4,872 today.

The new Community First Fund Credit Union is also an even rarer example of something else. It’s modeled partly after Hope Credit Union, based in Jackson, Mississippi — which itself is really a replication of a model for banking that was birthed either on the South Side of Chicago or Manhattan’s Lower East Side, depending on who you ask. The model explicitly combines deposits from inside the community with deposits brought in from outside the community that might otherwise be deposited in bigger banks like those on Wall Street.

CDFI Plus a Credit Union

“The very fact that a new credit union is chartering is something noteworthy,” says Clifford Rosenthal, who helped establish Lower East side People’s Federal Credit Union in 1986. “And it’s especially significant in the CDFI world that this loan fund has used its resources to establish a credit union, which in the optimal scenario will operate side by side with the loan fund and hopefully achieve some real synergies.”

CDFI stands for “community development financial institution,” a U.S. Treasury designation for loan funds, credit unions, banks and venture capital funds that have a primary mission of serving low-to-moderate income, historically marginalized communities. Rosenthal helped craft the legislation passed in 1994 that created the CDFI designation as well as the CDFI Fund, an arm of the U.S. Treasury that provides grants, tax credits and other forms of support for CDFIs across the country. Community First Fund is a CDFI loan fund, and after it gets up and running, the new credit union can also seek its own separate CDFI certification.

Based on his own experience helping to start a credit union to serve a neighborhood other financial institutions were leaving behind at the time, Rosenthal expected that the new CDFI Fund would provide assistance to other groups starting either new credit unions or banks — regulated, depository institutions. But that isn’t how things turned out. Most of the CDFI Fund’s support has gone to loan funds like Community First Fund. And, with assistance from the CDFI Fund, some of those loan funds have grown very large, with assets in the billion dollar range.

“Some of the loan funds clearly have the capacity to launch a depository institution if they choose, but none of them have until now,” Rosenthal says.

Five Years Planning

Betancourt, now the CEO of Community First Fund and its credit union, says he started mulling over the idea maybe around five years ago. Clients of Community First Fund would occasionally ask if the loan fund could maybe help them or their families out with a home mortgage, or a used car loan, or alternatives to payday loans. Maybe they had tried getting those loans elsewhere and couldn’t, maybe they just wanted to deal with an institution they already knew and came to trust. At the time, Community First Fund had no way to help with those situations directly, it could only refer those requests to others.

Betancourt says he also started reading books like Lisa Servon’s “The Unbanking of America,” which gave him even more food for thought. Community First Fund also partnered with Lancaster’s Franklin & Marshall College to do a study of underbanked populations in Lancaster County.

More recent findings affirm what Betancourt was starting to grapple with. A study released last week from the Joint Economic Committee Democrats in Congress found Black and Hispanic Americans are more than twice as likely as white Americans to be unbanked or underbanked. Similarly, families at the bottom of the income distribution are more than six times as likely as families at the top of the distribution to be among the unbanked or underbanked. In 2021, 46% of Black Americans and 37% of Hispanic Americans reported that they had been denied credit or were approved for less credit than requested, compared to less than 25% of white Americans. Evidence shows that while new financial technologies show less bias than face-to-face lenders, they fail to eliminate discrimination.

Social Change with Transformational Deposits

The year 2020 ended up becoming the moment that provided the fuel for Betancourt’s credit union fire. Between the racial disparities laid bare by the COVID-19 pandemic, and the racial reckoning sparked by George Floyd, Breonna Taylor and other Black people killed at the hands of police, individuals and corporations were looking for something to do in response. One of the options that emerged was moving money into Black banks and credit unions.

Hope Credit Union received a $10 million deposit from Netflix and another $10 million deposit from PayPal, on the way to raising $100 million in deposits from corporations and philanthropy. CEO Bill Bynum started telling corporations his credit union actually didn’t need any more, but he could refer them to others like Betancourt who were looking to secure such big dollar corporate deposits — which Bynum started calling “transformational deposits.” They aren’t donations. These are part of the large pots of money that all corporations keep around on their balance sheets as part of managing their finances, but historically they’ve left those deposits in big banks or short-term Wall Street investments.

Finding Capital

But Betancourt needed more than just transformational deposits to charter a new credit union. Federal regulators require depository institutions to set aside a small portion of cash as a cushion against potential losses. For banks the minimum is $1 set aside for every $11 in assets, for credit unions it’s $1 set aside for every $16 in assets. New banks typically raise that initial small portion of cash from their shareholders. New credit unions can’t do that. So Community First Fund instead launched a capital campaign, in the traditional sense of a nonprofit or church group capital campaign in which donors are asked to make multi-year pledges.

For every corporation that called about making a transformational deposit, Betancourt also approached them about making a multi-year pledge as part of Community First Fund Credit Union’s capital campaign. And of course Community First Fund went around to its long list of previous donors to see who else might be interested in contributing to the capital campaign. A pledge of $500,000 could be spread out over five years, as $100,000 a year in retained earnings for the credit union to set aside as part of its regulatory requirements.

A Wealthy Donor

Community First Fund might have needed more time were it not for MacKenzie Scott’s surprise $10 million donation to the nonprofit, $2 million of which it plowed into the capital campaign for the new credit union. Thanks to the capital campaign pledges, stretched out over as many as five years, the new credit union projects it will have positive net income starting from year one. That’s unusual for any new depository institution, most of which anticipate negative net income during the first few years of getting up and running.

With its target customer base, letters of intent for transformational deposits and capital campaign pledge letters, not to mention its decades of experience making 5,592 small business loans and counting, Community First Fund submitted all of that as part of its charter application to the National Credit Union Administration in December 2020. The agency approved the application in just six months — lightning speed by normal chartering standards.

Since then, Community First Fund converted its headquarters into its first credit union branch, serving the Lancaster metropolitan area’s 550,000 residents. The credit union eventually plans to open six total branches and also leverage online and mobile banking to serve Community First Fund’s entire footprint, which now includes Philadelphia and crosses state lines into Delaware and parts of New Jersey.

The loan fund will continue to do what it has been doing, providing loans to underserved business owners, 71% of whom so far have been people of color. But now it has an affiliated credit union as a way to meet those requests for home mortgages, auto loans, emergency loans and other personal loan requests from its existing borrowers and their networks.

A Credit Union in the Neighborhood: “It Just Makes Sense”

“I’m so happy that they got the new credit union,” Rodriguez says. “It’s almost like the old way, you know, where you had a bank in the neighborhood and it knew everybody in the neighborhood and you knew the bank was there to help you. I believe every client that they ever had will open up an account there. It just makes sense.”