Category: NCUA

A five-minute excerpt from this 2015 House Congressional oversight hearing captures NCUA’s leadership team’s approach to credit unions. Answers to Congressman Mulvaney’s questions illustrate the agency’s duplicity in providing information, misuse of FOIA and failure to post the agency budget for public review.

Chairman Matz deflects all these documented “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replies, “it would not be effective.”

Todd Harper sits to Matz’s left alongside her other senior staff. His role: Director of the Office of Public and Congressional Affairs and Chief Policy Advisor to the Chairman (2011-2017).

https://www.youtube.com/watch?v=CiPgW1mgDw8

CUNA’s Long Standing Concerns Submitted Prior to the Hearing

CUNA’s public announcement of the hearing included the following concerns: the agency’s budget, the RBC rule, OTR, the corporate stabilization fund, examination issues, and the imposition of “systemically significant” bank regulations on credit unions.

NCUA Chairman Matz to Testify Before House Committee

Posted July 19, 2015 by CUNA Advocacy

It’s been six years since the last time NCUA held a hearing on its budget; it’s been almost four years since an NCUA Chairman has testified before the House Financial Services Committee. On Friday, that will change when NCUA Chairman Matz testifies before the House Financial Services Committee. And, while the hearing is not the venue we had been seeking for stakeholders to weigh in on the agency’s budget, it would be reasonable to expect that the budget will be among the several topics Members hone in on. Without a doubt, the spotlight will be on NCUA and credit unions Friday morning.

In advance of the hearing, we met with Committee staff and Members over the last several weeks to raise concerns and opportunities we see at NCUA. Much of our conversations have focused on recent rulemakings and proposals, including the RBC2 proposal and our concerns with respect to NCUA’s legal authority to issue the rule and the capital adequacy provision that was added to the revised proposal. We have discussed our recent comment letter on the proposed rule on Interest on Lawyer Trust Accounts (IOLTAs) and our belief that even without the enactment of the IOLTA legislation last year, NCUA has the authority to extend share insurance coverage to prepaid debit accounts. 

We have also raised concerns that the RBC2 proposal and the agency’s view of “systemically significant” seems to suggest the agency is simply copying bank regulation without much regard for the characteristics that make credit unions different. No credit union represents a system risk to the financial system, but the agency is applying standards to the largest credit unions that rival requirements on the huge, systemically significant banks.

During these meetings, a host of other issues have been raised by Members including NCUA’s handling of the corporate stabilization fund, examination issues, and the overhead transfer rate. . .

We intend to submit a letter to the Committee in advance of the hearing highlighting these and other issues. 

Tomorrow I will describe NCUA’s efforts in December 2013 to close 81 home-based credit union by passing a new rule.

President Biden’s appointment of Todd Harper as NCUA chair on January 25 is not the final step in the process.

Harper’s term ends on April 10, 2021.  Three options can occur. 1) Nothing, and Harper just continues in place. 2) A new democratic nominee is selected by the Biden administration. This would require Senate approval and likely take months. 3) Harper could be reappointed–an option contested by those who read the Federal Credit Union Act as preventing successive appointments.

Harper’s Audition

The NCUA Chairman’s role is vital. His leadership, oversight of the agency, spokesperson roles and competence will affect the industry’s direction, reputation and public standing.

Whatever the future course, his three months as chair will provide credit union’s first-hand experience with his leadership style. But there is also other data to draw upon.

Harper frequently touts his prior NCUA credentials. He introduced himself in his February 2021 DCUC speech by saying: “I’ve spent nearly a decade at the NCUA and worked on credit union policy issues for more than 20 years.”

So, what does Harper’s NCUA resume include?

The Team Harper Ran With

Ed Callahan described his management and industry relationships as: “Run with good people and good things will happen.” Implicit, of course, is the reverse possibility.

The photo below is Chairman Matz and her senior NCUA staff at a House Financial Services hearing in July 2015.

From left to right:

Rendell Jones: then CFO, now deputy executive director and COO at the agency. Joined NCUA in 2014 after positions at Homeland Security and the Justice Department.

Mark Treichel: Executive director, retired in 2020 after 33 years at NCUA. Now a credit union consultant presenting himself as Helping Credit Union CEOs Achieve the Best Possible Examination Results So They Save Time and Money His capabilities as outlined in an email solicitation to credit unions:

I know how NCUA thinks and why they think it.
I know the examination process inside and out.
I know how to communicate and negotiate with NCUA.
I know how to get NCUA to YES instead of NO.
If I can help you in anyway just hit REPLY and let me know?

Steve Bosack: Matz’s Chief of Staff. Left NCUA in 2016 to join PenFed as Special Advisor to the President & Chief Communications Officer.

Todd Harper: Joined NCUA in February 2011 as Matz’s Director of the Office of Public and Congressional Affairs (PACA)and Chief Policy Advisor   (2011 until 2017).

Michael McKenna: General Counsel; retired in 2019 from an NCUA career prior to the release of a February 2020 IG report on his improper behavior with staff and unprofessional conduct.

Matz’s Post-NCUA Positions as a Bank-Finance Director

Upon leaving NCUA in April 2016, she was appointed (in November) to the Board of the Mutual of Omaha Bank where she is Vice Chairman of the Risk and Compliance Committee and a member of the Audit Committee. In addition, she has served on the Advisory Board of OpenDoor Trading (a start-up providing a platform for the resale of U.S. Treasury bonds), since January 2017. In October 2020 she joined RenoFi, a home-renovation fintech firm based in Philadelphia, as a strategic advisor.

Her appointment at RenoFi came as the company works to extend its reach in the credit union industry. RenoFi’s platform is intended to let lenders offer home-renovation loans to borrowers based on the house’s after-renovation value. The company’s press release said Matz will work to deepen its relationships with existing credit union clients and make inroads with new customers.

This Team’s Policy Initiatives

In follow up posts I will review  agency initiatives during Harper’s tenure on Matz’s staff. Tomorrow an excerpt from the House Committee hearing pictured above will illustrate this leadership team’s approach to the industry. In addition I will also provide one trade association’s concerns they hoped would be covered in this public testimony.

Last week, Xceed’s CEO announced the final vote approving their merger with Kinecta FCU. Reviewing this combination in light of 2020’s full year results suggests that Xceed’s members are just being offloaded from a sinking ship to a severely listing one.

An obituary on Xceed’s passing can be written from three vantage points:

1. The tale of the data
2. The members’ reaction
3. The NCUA’s Regional Director cosigning bonus checks

The Data: Exceed’s Last Performance Report

Xceed’s 2020 headline result is a $2.7 million operating loss (-.29 ROA), representing a $4.6 million fall from the prior year. Loans outstanding declined by 20% ($142 million), reducing the loan to asset ratio to 59%. Total income was down 11%; the loss provision expense increased by 89%.

This full year outcome continues this management team’s track record of declining performance. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year.

During the CEO’s 15-year tenure there have been five mergers that added $200 million in external assets and over 30% more members. Even after these combinations, Xceed’s annual asset growth of 1.39% was far behind the credit union average of 5.8%.

In this final act, the senior team doubled down on their failed merger growth strategy. They became the “mergee” turning over their leadership responsibilities to Kinecta, just down the road. They bailed out, but not before rewarding themselves for this timely exit. (see below)

Kinecta’s 2020 performance appears better with an ROA .48%, share growth of 13%. But the credit union also reported a decline in loans outstanding of over $300 million or 8%. Its net worth ratio of 7.9%, is almost 2% lower than Xceed’s 9.8%.

More important, Kinecta’s long term performance is similar to Xceed’s. That is, it has not been able to keep pace with its peers in the market.

In 1995 Hughes FCU (Kinecta’s earlier persona) ranked 9^th out of all 12,107 credit unions. Twenty-five years later at 2020 yearend, Kinecta’s asset ranking is 50^th out of 5,207 credit unions.

But didn’t the members approve this transaction?

The Members Vote by Ballot and with their Feet

Voluntary mergers require members vote to end their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

Of Xceed’s 47,950 members at yearend, Credit Union Times reports that 1,536, or 3.2%, voted in favor of the merger. Some 323 members, or .7%, voted no. Just 3.9% (1,859) of members participated in the decision to give up this longstanding charter.

But a more meaningful member number is 3,768. That is the 7.9% of members who closed their credit union membership in 2020. They expressed their “no vote of confidence” with their feet. They took their relationships elsewhere.

To make a good choice, members must understand what the options are. This “voting” requirement was presented as an administrative event, devoid of any information with which members might make an informed choice. In a rebuke to the entire process, double the number of members who voted decided to get out now.

But Kinecta, five times larger, will fix this member run, right? Wrong. In the last full year Kinecta itself lost 13,079 members or 5.6%!

All credit union membership grew by 3.4% in 2020. This pending combination, by contrast, lost 16,847 members. Both institutions leadership teams are unable to attract followers.

One might surmise that since NCUA approved this transition– moving members from the frying pan to the fire– it must be OK!

NCUA’s Regional Director Cosigns Xceed’s Bonus Checks

NCUA’s Regional Director approved Xceed’s December 30 Member Notice including the details justifying the merger and calling for the member vote.

This regulator-approved Notice included the additional compensation that the five senior managers will be able to receive from this action. Following are the “possible maximum amounts” in the Notice:

In contrast, the members whose loyalty built the credit union receive nothing. Xceed’s 9.8% net worth is $27 million above the 7% well-capitalized level. These excess reserves are given, for free, to shore up Kinecta’s faltering net worth, which declined from 8.3% to 7.9% in 2020.These payments total $3,497,314 of enhanced financial benefits. What could possibly justify “additional compensation” for a management team leading to a credit union’s demise? They rewarded themselves the fruits of victory after losing the competitive race, year in and year out.

It is likely that Xceed’s members will continue to lose value from this leadership failure. The credit union’s eight branches, apart from the head office, are far removed from Kinecta’s southern California branch network. Two are hundreds of miles to the north in San Jose and Menlo park. Outside California, the six locations serve members in Rochester, NY, Parsippany, NJ, and Leesburg, VA.

To reverse the combined institution’s long term performance declines, Xceed’s members, employees and communities outside California will pay the cost. The legacy relationships and community goodwill created over the past 60 years will be forfeited. Members will quickly discover that phrases in the Member Notice such as “putting members’ needs first” and “lasting benefits” were nothing but shallow rhetoric.

Cherie Freed, NCUA’s regional director, approved the transaction including the $3.5 million in bonuses and vacuous descriptions of member benefit. Whatever conclusions can be drawn from the facts of this event, it would seem that the NCUA is either oblivious to its supervisory oversight, or complicit in approving payouts to a management team to move an underperforming Xceed off its watch list.

Timely supervisory action during a decade long economic expansion could have prevented this charter’s demise. But does NCUA recognize any cooperative values to stand up for?

The unique strength of cooperative design is the credit union’s relationships with its member-owners. These self-interested merger arrangements squander goodwill that credit unions have nurtured over decades, especially in crisis. Members of these two credit unions see this declining value clearly: 16,847 left in 2020.

What message will this and similar episodes convey when credit union CEO’s or NCUA board members are asked to explain merger events like this in congressional hearings or other public forums?

The trades may try to “open eyes” and extoll credit unions’ focus on member well-being. However, the tallest candle ain’t much good without a wick.

Examples multiply of the conflicts of interest embedded in these “voluntary” actions, the stripping of assets, the erosion of member value, and the regulator’s negligence. Can the cooperative model survive these self-inflicted wounds?

Preoccupied with the mantra “safety and soundness” of a single firm, industry leaders fail to understand cooperative history in a systemic way. The results have been disastrous. The isolated credit union is left fragile and defensive, adrift and alone, in a huge sea of others who are preoccupied for themselves—neither assisting nor relying on one another. The members who created the credit union are cast overboard.

Turning a blind eye will not make these issues go away. It will just encourage a feeding frenzy by others seeking to cash out on their tenure as well.

ALEXANDRIA, Va. (Jan. 4, 2021) – The National Credit Union Administration Board unanimously approved, by notation vote, a request for information(opens new window) seeking comments and information on the NCUA’s communication methods to promote efficiency and increase transparency.

“This request for information seeks public input on how the agency can streamline and improve its communications with our stakeholders. Outdated or duplicative regulatory and supervisory information adds to the overall regulatory burden of credit unions as they must devote time and resources to sorting through this information,” NCUA Chairman Rodney E. Hood said. “We recognize that the amount of information the NCUA provides to credit unions can create challenges and may impose unintended burdens.

Four pages, half of this  request, describes NCUA’s current communication efforts.  Reading through, I was not even sure where to send this response:  oeacmail@ncua.gov?

My Comment

Effective communication is not about publication design, content, frequency or media.  Nor is it determined by statutes and interpreting the law. It is about human intent.   My suggestions are:

1.  Require every NCUA employee who provides their email in their presentations to actually reply if contacted. Public servants responding to constituent’s inquiry is a professional courtesy as well as a responsibility, especially when they advertise their availability.

When I tested Rodney Hood’s offer of his personal email for contact  in last week’s GAC speech (BMHood@NCUA.gov) I was surprised to get a direct reply within 24 hours.

2. Fix the so-called “search” engines on NCUA’s web site. To have uploaded decades of information that cannot be accessed is offering nothing at all.  Neither the general search engine on NCUA’s home page nor  the one dedicated to finding documents from the general counsel’s office are effective.

One can type in a very precise request such as a credit union’s name or for a specifically identified NCUA supervisory letter or document and receive hundreds of unrelated responses, none correct.

Hint to readers:  Use the search engines at Credit Union Times, Credit Unions Today or CU Journal to find relevant information more easily.

3. Reorganize FOIA. Repurpose its mission to answer requests with full transparency and awareness of the agency’s responsibility to the public.  Quickly.  NCUA routinely denies requests for which information is public, has been routinely provided in the past, or to hide shortcomings in its own activities.

For example, credit unions know more about former Chairman McWatters’ hundred-dollar travel reimbursements than how the agency managed and sold over $750 million dollars of 4,000 members’ taxi medallion loans to a hedge fund.  Many of those details were in a Wall Street Journal article. For the first 15 years of the CLF’s operations, NCUA routinely published its member subscribers, but now refuses to release the same information.

The list could go on.  One CEO described this FOIA  coverup of NCUA shortcomings and falsehoods in a series of posts  several years ago.  The oversight of this function was then by a General Counsel whose professional and personal decisions were revealed to be unprincipled, even corrupt, upon “retiring.” The FOIA’s office’s practices have not changed with a new General Counsel.

Communication versus PR

Today corporate and credit union “communications” are seen as a skill best managed by public relations professionals.  Never admit error or mistakes.  Do not show vulnerability.  Reframe questions to give your talking points.

No straight talk.  Select chosen facts or use phrases such as “our research shows” or resort to unprovable assertions about future events.

An organization’s communication challenge is not an issue of volume, mastering  the right digital media or even words. It is about leadership’s trustworthiness; a responsibility that cannot be outsourced, delegated or covered over with  a FOIA blanket.

This ends my comment.

In the previous article, I outlined the unprecedented action this young credit union took to oppose NCUA’s efforts at forced liquidation. The credit union’s legal challenge stated in part:

“NCUA knowingly, intentionally attempted to summarily liquidate and revoke the charter of KAPFCU with total and reckless disregard for the truth.”

“The publication of the order of liquidation and revocation is defamatory, casts KAPFCU in a false light, and has caused an erosion of public confidence. For these reasons, if the rushed liquidation is allowed to continue, KAPFCU will suffer irreparable harm.”

The Roots of Black Belief

Recently a friend shared reflections on Martin Luther King’s last sermon. It was given on April 3, 1968, to support the Memphis garbage workers (“I am a Man”) strike.

It is remembered as the “I have been to the Mountaintop” speech as King was killed the next day. Those final words were prophetic, but there were many other truths he spoke that are relevant to this day. I believe these are why Kappa Alpha Psi FCU stood up to the NCUA.

King said in part:

“. . .we’ve got to strengthen black institutions. (That’s right, Yeah) I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank. (Yeah) [Applause] We want a “bank-in” movement in Memphis. (Yes) Go by the savings and loan association. I’m not asking you something that we don’t do ourselves in SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We are telling you to follow what we’re doing, put your money there. [Applause] You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an “insurance-in.” [Applause] Now these are some practical things that we can do. We begin the process of building a greater economic base, and at the same time, we are putting pressure where it really hurts. (There you go) And I ask you to follow through here. [Applause]

“Now the other thing we’ll have to do is this: always anchor our external direct action with the power of economic withdrawal. Now we are poor people, individually we are poor when you compare us with white society in America. We are poor. Never stop and forget that collectively, that means all of us together, collectively we are richer than all the nations in the world, with the exception of nine. Did you ever think about that? After you leave the United States, Soviet Russia, Great Britain, West Germany, France, and I could name the others, the American Negro collectively is richer than most nations of the world. We have an annual income of more than thirty billion dollars a year, which is more than all of the exports of the United States and more than the national budget of Canada. Did you know that? That’s power right there, if we know how to pool it.

“Let us rise up tonight with a greater readiness. Let us stand with a greater determination. And let us move on in these powerful days, these days of challenge, to make America what it ought to be. We have an opportunity to make America a better nation. (Amen)”

NCUA Pre-empts the Court:

On Friday, August 13, 2010, NCUA filed a brief in the DC Federal Court of Judge Emmet Sullivan responding to the complaint by Kappa Alpha Psi FCU challenging NCUA’s liquidation order of August 3. Several hours later, NCUA carried out the liquidation, mailing checks to the savers and assigning loans to the agency’s asset management unit.

The credit union had until noon, Monday, August 16, 2010 to file its reply to NCUA’s brief. NCUA’s liquidation nullified further court review. Why liquidate the credit union before the court’s expedited legal process had even run its course?

The credit union was serving the mission of the largest black professional fraternity using a virtual business model. No checking accounts, no ATMs, and no debit card withdrawals. Just regular savings to fund loans to students and black professionals to support “achievement”–a fraternity goal.

The risk of any NCUSIF loss was de minimus. The credit union’s lawyers were pro bono. Their goal was to merge the credit union, if NCUA wanted to cancel the charter. They sought an impartial hearing for this request.  Their motive was to preserve  the pride and dignity of their fraternal colleagues who began the effort and to continue a credit union offering for members.

NCUA held all the resources and power and used it to destroy this new charter.

A Legal Precedent

Their efforts to appeal NCUA’s unilateral actions may however have lasting value. For the credit union’s lawyers were not credit union attorneys. They had no prior experience to know how unprecedented their challenge would be. But their effort may have shown a legal path that could benefit members in the years to come.

Credit unions are member-owned, one-person, one-vote. The lawyers argued that NCUA’s actions violated two individual constitutional rights: due process and equal protection. Could this black-sponsored credit union have identified a legal standard that could benefit every credit union member which is subject to arbitrary NCUA dictates? Could NCUA have erred on both the facts of the case as well as the law?

Or was this just a little regulatory nuisance that NCUA wanted to dispose of quickly?

When creditunions.com reported these events in August 2010, more than 9,000 views were recorded. Almost 100 comments were filed. Many similar experiences of regulatory arrogance were recounted in these posts.

The Continued Use of Summary Authority to the Present Day

Kappa Alpha Psi FCU was not the only credit union to find its charter abruptly ended.

In September 2010, NCUA without warning liquidated five corporate credit unions with total assets of over $67 Bn. The agency stated any appeal efforts would risk personal liability—the credit unions were marched straight to NCUA’s chopping block.

Other credit unions were subjected to this authoritarian power mode even though the economic crisis was almost a year into recovery. The $846 million Arrowhead CU in June 2010, was conserved to remove a management team that challenged examiners’ exaggerated estimates of loan losses. Others were forced to merge, including the $600 million USA FCU into Navy FCU in September 2010.

But these were not just crisis incidents. NCUA continued to use this unchecked authority to end credit union charters without due process. On April 5, 2016, NCUA simultaneously liquidated six Philadelphia credit unions ending 308 total years of operations. These six were given no appeal rights.

These credit unions had been through economic thick and thin for decades, and their total size — $4.8 million — could not pose a serious threat to the share insurance fund. They reported an average net worth of 17.0%.

NCUA performed another instant liquidation on May 29, 2020 of IBEW Local Union 712 Federal Credit Union in Beaver, Pennsylvania. According to CUToday, “Chartered in 1964, IBEW Local Union 712 served 2,935 members and had assets of approximately $14.8 million according to the credit union’s most recent Call Report. NCUA did not provide a reason for the liquidation.”

This regulatory silence and lack of accountability continues to this day, for example in all conservatorships in which NCUA takes total control of the credit union from the board and members. When recently asked about the status of Municipal CU in New York, NCUA’s Office of External affairs stated: “we do not comment on our efforts or conditions related to conserved credit unions.”

The Journey to the Promised Land

Is Kappa Alpha Psi FCU’s fate just another instance of a decade’s long ongoing abuse of NCUA authority?

Does this credit union’s unmatched courage taking a stand have any meaning today?

Why did these credit union novices fight when others did not dare?

I believe their actions were living out the charge that King gave that final day in Memphis:

“We just need to go around to these massive industries in our country (Amen), and say, “God sent us by here (All right) to say to you that you’re not treating His children right. (That’s right) And we’ve come by here to ask you to make the first item on your agenda fair treatment where God’s children are concerned.”

Members’ Rights

NCUA does not respect members’ rights. Be they black, brown, or white; young, old or in between; male or female. When member-owned institutions, created through volunteer labor, are summarily closed or merged, the systemic failure that allows this will either be changed or there will be no more cooperative movement.

Injustice, whether by public or private organizations, always targets the vulnerable first. Be they the economically fragile, or the uninformed and unempowered. When violation of rights is left unchallenged, the inequities will extend across the entire population.

Will Kappa Alpha Psi’s stand make a difference today? I think hearing again this promise should inspire everyone to realize change is possible-even in those exercising unchallenged power.

Yes, I believe Kappa’s example will be remembered.

In 2010 NCUA’s regulatory activity reigned unchecked. Even though the economy was on the mend its penchant for shutting down credit unions was unabated.  It would ultimately lead to the liquidation of five corporate credit unions in September—the most catastrophic decision in credit union history.

On August 3^rd, 2010, six years after founding, Kappa Alpha Psi FCU ($750K, Dallas, Tx) fell under NCUA’s knee having been served a surprise order of liquidation and charter revocation.

In the regulatory environment, one might assume this was just another small credit union falling prey to economic circumstances.  But then something happened that no other credit union had dared in this situation. The credit union appealed NCUA’s action, filing a complaint contesting the order on both factual and constitutional grounds.

KAPFCU requested  a temporary restraining order against NCUA:  “Petitioner fears that before a show cause hearing can be held, the Respondent will complete what has already been threatened, and that is to hastily liquidate assets, expend money, enter or break contracts and disrupt the ongoing operations of the credit union.”

In response, a federal judge in DC granted a temporary injunction and scheduled a hearing on the issue in the time provided for an appeal.

Who  is Kappa Alpha Psi (source: KAP web page)

“The Kappa Alpha Psi®  college Fraternity, was born in an environment saturated in racism.  Indiana became the 19^th state of the Union in 1816 and it founded Indiana University in Bloomington four years later. The state of Indiana became a stronghold for the Ku Klux Klan.

In the school years of 1910-11, a small group of Black students attended the University. Most  working their way through school. Realizing that they had no part in the social life of the university they decided that a Greek-letter fraternity would do much to fill the missing link in their college existence. . .

It became the first incorporated Black Fraternity in the United States, granted a charter by the Indiana Secretary of State on May 15, 1911.

Kappa Alpha Psi® is the 1^st historically black Greek Letter intercollegiate Fraternity incorporated as a national body.  The Fraternity has over 125,000 members with 700 undergraduate and alumni chapters in nearly every state of the United States, and international chapters in Nigeria, South Africa, the West Indies, the United Kingdom, Germany, Korea and Japan.

One of the Objectives of the Fraternity is: “To promote the spiritual, social, intellectual and moral welfare of members.”  Reliance would be placed upon high Christian ideals and the purpose of ACHIEVEMENT.

The Fraternity seeks to raise the sights of Black youths and stimulate them to accomplishments higher than might otherwise be realized or even imagined.

Local chapters participate in community outreach activities to feed the homeless, provide scholarships to young people matriculating to college, serve as mentors to young men, participate in blood drives and serve as hosts of seminars for public health awareness to name a few.”

The Credit Union’s Brief History

Kappa Alpha Psi FCU, chartered in 2004, was in its sixth full year of operation when NCUA struck.  It was classified as a “new” credit union, that is, in operation for less than 10 years and its total assets did not exceed $10 million.

NCUA Regulations provide that ‘new credit unions’ must be ‘adequately capitalized’ or (6%) Net Worth Ratio within 10 years.

NCUA based its liquidation order on the credit union’s net worth ratio, asserting that because the financial institution was minimally capitalized at the end of first quarter 2010 with no reasonable prospect for becoming capitalized, prompt corrective action was warranted.

The credit union notes its first quarter net worth ratio was 1.95%; by the June 30, 2010 second quarter however, the credit union was moderately capitalized with a net worth ratio of 3.67%– a 600% increase since its December 31, 2009 rating.

These numbers, for reasons never explained, were not reflected on the credit union’s second quarter 2010 Call Report posted by NCUA. Who altered Kappa Alpha Psi FCU’s second quarter Call Report to make it appear insolvent? What was the basis for the change? Why was the credit union not contacted?

Read Part II for the outcome tomorrow:

Why Kappa Alpha Psi FCU’s Stance Matters Today

Part I showed how the changeover of NCUA board chairs has perpetuated a leadership vacuum at the agency frustrating effective policy development and positive relations with the industry. Following is a recent example of this challenge.

A classic case of ineffective pubic policy  is NCUA’s management of the corporate credit union crisis. It also demonstrates the embedded cultural mindset from the agency’s actions in this event.

This regulatory hangover continues whenever any corporate topic arises. Since 2009, NCUA’s attitude in supervising the corporate system could be described as, “If you don’t have a seat at the table, then you must be on the menu.”

The absence of market expertise at the NCUA board and staff level has created policy decisions by rote. Lacking different perspectives and professional insights, the existing culture plods on. When governmental backgrounds are the dominant experience senior officials bring to their roles, the disconnect with credit unions competing in the open market can become great.

Policy On Autopilot

One example of this bureaucratic legacy is from the NCUA board’s January 2021 meeting. It approved by a 3-0 vote a final rule 704 permitting corporate credit unions to invest in the subordinated debt of natural person credit unions. However, this “loan” must be deducted 100% when computing a corporate’s net worth ratio.

The following is the logic for this rule from the board memorandum:

NCUA claims open-ended authority: The FCU’s “broad mandate,” “plenary grant of regulatory authority,” and “an express grant of authority” can be exercised as “the Board deems appropriate.” The words are presented as unrestricted power to do whatever the board wishes. An unchecked authority.

“Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate.”

It’s a loan: “Treating the purchase of such subordinated debt instruments as lending ensures consistent treatment between natural person credit unions and corporate credit unions.”

It must be fully deductible from the capital ratio: “The Board believes that fully deducting such instruments from Tier 1 capital ensures any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”

The Result: A Nonsensical Rule

This “updated” rule restores an activity, previously allowed but then revoked, to make a loan. But only if it is 100% deducted in calculating the required net worth ratio.

Loans are a credit union’s primary purpose. Few “loans” would ever be made on the condition that the institution must “write it off“ when calculating capital compliance.

In effect, NCUA confesses a lack of confidence in its own supervisory decisions. For NCUA must first approve all the subordinated debt issuance by natural person credit unions. The rule’s logic is that this approval and oversight are so suspect that the only prudent behavior is to write it off if a corporate purchases this loan debt. This is not mere risk rating; it is 100% reduction from capital when calculating net worth.

The write off is not proper accounting under GAAP. It is an imposition of regulatory accounting practice or RAP. There is no limit to RAP interpretations; see authority claimed above.

No facts were offered to support this claimed risk. Has any issuance of subordinated debt ever been written down or subject to a loss? What is the evidence to document this risk? Moreover, how important is this debt option for credit unions? If it is an important, why discourage its use this way?

If NCUA is so concerned about investments or loans used as capital by the recipient, then why aren’t credit unions required to write down their home loan bank equity requirements?

Or closer to home, why aren’t the corporates required to write off their CLF capital investments. Are they not at risk?

The ultimate rationale is that this is the way we have done it before. The result is that past errors of policy, guidance, interpretations compound far into the future. The mind set continues.

“In addition, the February 2020 proposed rule included a requirement for a corporate credit union to fully deduct the amount of the subordinated debt instrument from its Tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions. Under the current regulation, corporate credit unions are currently required to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions.”

This rule is not based on any assessment of actual risks, Moreover it perpetuates “confirmation bias” errors that have been extraordinarily costly to the corporate and credit union system.

Which Leadership Model Will New Chair Harper Follow?

He inherits a decade-long policy of top-down mandates. Former board member McWatters described the situation this way in a 2015 speech to Pennsylvania League’s Annual Meeting:

“NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on NCUA’s budget and the budgetary process.

“With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community.

“I champion the right of the regulated to speak to the regulator on the record regarding the expenditure of their limited resources. . . It’s simply a matter of respect and professionalism evidenced through the lens of transparency and full accountability.”

‘Step Down from the Ivory Tower’

McWatters also cautioned against the view that board nomination validates knowledge:

“Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern-day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”

https://www.cutoday.info/Fresh-Today/McWatters-Says-NCUA-Treats-CUs-as-Victorian-Era-Children-Comments-Draw-Rebuke-From-Chairman

Duty vs Loyalty

The Chair’s approach to board leadership also affects how agency staff perceive their jobs. Is staff supposed to provide their professional judgment, or are they just expected to fall in line with the Chair’s approach?

This staff dilemma was described by former Chairman Rick Metsger: “As I told Mark Treichel, the then executive director of the agency when I became chairman when he offered his loyalty, I said I didn’t want his loyalty, but I did expect his loyalty to the mission of the agency and that he would offer unvarnished opinions and options to help me make the best decisions possible.”

https://www.cutoday.info/THE-tude/Political-Storm-Karma-Makes-Landfall-at-NCUA

Harper’s Challenge: Reset or More of the Same?

Todd Harper was chief policy advisor to Chairman Matz. Her top-down leadership approach to policy is what prompted the above comments by board members and staff who worked with her.

Will Harper follow her leadership and policy example? Or will he embrace the widespread belief that there needs to be a reset in Agency and credit union relations?

Since 2017 there have been four NCUA Chairmen designated by the President. Two republicans and two democrats.

The Board’s primary responsibility is the “management” of the agency as stated in the Federal Credit Union Act. The chair sets the agenda and is the primary spokesperson for the Agency.

Any organization that undergoes four changes of the titular leader in the same number of years would face unusual difficulties in both policy and operational effectiveness.

In the past decade, no one has accused NCUA of being well governed. Less than optimal outcomes can be endured in normal times. When crisis occurs, ineffective decisions can be destructive. A prime example is the ruinous handling of the corporate legacy asset resolution plans in 2008-2010.

These prior mistakes compound; the legacy perpetuates in subsequent decisions. The errors become hard-to-shed precedents especially when there is an organizational aversion to back-testing past events.

An Example of Effective Leadership

In October 1981 when Ed Callahan became NCUA chair, the economy had double digit unemployment and inflation. Credit unions had only one concern: survival. Only in 1977 had NCUA become an independent agency governed by a three-person board. The CLF was still in formation. The NCUSIF was out of cash and using 208 guarantees to assist troubled credit unions to work through problems.

Chairman Callahan’s approach was twofold: implement deregulation so that credit unions, not the government, could make the essential business decisions to serve members and effectively compete in the changing market; and secondly, build a regulatory infrastructure and supervision capable of overseeing the deregulated industry.

But his approach was not top-down but bottom-up policy implementation. To succeed, he initiated a multi-faceted open dialogue with credit unions. The first effort was a 24-minute video produced by the Illinois Credit Union League entitled: “Deregulation–What Does It Really Mean?” The video featured a panel discussion of three credit union CEOs, CUNA’s Vice President for Governmental Affairs, and Bucky and Ed from NCUA.

A comment in the video by Chairman Callahan illustrates his approach to policy leadership:

“Do you want government off your backs?

“Even though I think credit unions want deregulation, I am more committed to the fact that we have to respond to their needs. If they don’t want deregulation, we will see that it doesn’t happen.

“Write us a letter so that we can respond to your needs. I will read each one personally.”

Three months later, April 1982, the NCUA board approved the complete deregulation of all savings accounts with full credit union support. It took the other depository institutions until June 1987 to shed their regulatory deposit limits.

The key to success was having participants with experience in the room, even some who had made mistakes, but who were willing to learn from their involvement. Secondly, persons who would come at issues from a variety of viewpoints and backgrounds–not a single framework–but with multiple perspectives.

A Mutual Process

This engagement with the industry resulting in share deregulation was just the beginning. The insights of credit union leaders were crucial in all areas of policy development.

Before developing a new NCUSIF financial structure, the agency received input from all segments of the industry to prepare a Report to Congress, required by the Garn-St. Germain Depository Institutions Act of 1982. In April 1983 this seven-chapter, 100-page credit union share insurance analysis was submitted. It ended with a list of over 60 names of industry contributors, many of whom were quoted in the study.

The recommendations in that joint study became the basis for the 1% deposit NCUSIF restructure, A Better Way, passed by Congress in 1984. The dramatic change occurred because of the support of the entire system.

In a similar manner, the Central Liquidity Facility was completely opened to all credit unions in an innovative partnership with US Central, the corporate network and the CLF. This liquidity safety net is an example of a public-private partnership based on the unique principles of cooperative design. NCUA ended this valuable partnership when it liquidated US Central.

From 1982 forward, credit unions recorded annual, sound double-digit growth. This mutual approach built a regulatory infrastructure responsive to the moment. The credit union system prospered for the next 25 years.

Bureaucracy is built on the adherence to traditional practice when making decisions. This “mind set” or “culture,” may suffice in normal times. But when changes to meet credit union needs is necessary, then the approach “we’ve always done it this way” will not suffice.

When the 2008/09 financial crisis happened, the agency took a different approach. The legacy of which continues.

Part II will show how this hangover of poor regulatory decisions can infect subsequent rules for decades.