Category: NCUA

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A Top Priority for New NCUA Chair Hood: Lead the Way in Setting a New Tone

While NCUA Chairs have different leadership approaches, all share one common challenge: setting the “tone” for the relationship between the regulator and the regulated.

Whether a chair is a hands-on manager or distant from operations, the chair’s attitude toward the industry will be seen and heard by all within and without the agency.

For the past decade the relationship between NCUA and credit unions has varied from openly adversarial to indifference to credit union knowledge and judgments. There has been a lack of respect for the experience, capabilities, and analysis of credit union professionals. This attitude is still present in some exam confrontations, and at the board level, in the total dismissal of required credit union commentary on issues such as the merger of the TCCUSF and NCUSIF.

The Relationship Needed

Chairman Hood enjoys opera. He is not tone deaf. His professional experiences focus on outreach efforts. The tone needed between NCUA and the regulated is one of mutual respect.

This is more than public speeches or a specific set of policy initiatives. NCUA should acknowledge the overwhelmingly positive track record of credit unions and their leaders’ deep, proven, expertise: wisdom and commitment to cooperative evolution.

A Place to Start with a New Tone

On May 7, NCUA released the names of nine credit unions who were fined a total of $4,069 in civil money penalties for late filing of the September 2018 call report, which was due at the end of October.

For nearly four decades NCUA had never fined a credit union for a late call report. During this time the report was extended semi-annually to quarterly, and the data requested increased exponentially.

NCUA’s rationale for public fining was in part because the late filers were holding up the timely release of all credit union data.

So, six months after the deed has occurred, NCUA releases the names for public shaming and sends the pennies collected to the US Treasury.

Timely submission of call reports is critical. But instead of fining shouldn’t the agency just send to all examiners the day after each filing deadline all reports not received? Examiners make a follow up phone call, and if not filed promptly, that would warrant a special visit.

Why the delay? Is it due to bookkeeping shortcomings (no timely cash reconciliations), personnel issues, or even operational problems?

How much staff time and effort has been wasted analyzing each late report with the three criteria below—and how many were not fined as a result of these investigations?

Mutual respect would direct that the agency use any report delay as a signal for examiner follow up. Get the data, forget the shaming and get on with the process of ensuring a safe and sound credit union operation.

Stop the penny ante, power trip of imposing a “parking ticket” fine. Treat credit unions with respect knowing that problems occur all the time that should be looked into.

Putting a CMP scarlet letter stamp and publishing the name of credit unions as an example of effective regulatory oversight is not professional. Some in authority may believe acting tough makes them effective. Most will see it as lacking grasp of the situation.

Regulators live in a glass house. Until McWatters became Chair, NCUA had failed to meet the statutorily deadline of April 1 for submitting its Annual Report to the President and Congress for decades–even missing the filing entirely in one year.

Chairman Hood, take away the CMP stamp and ask examiners to do their job. It would be a small, but important first step, in making the system more cooperative.

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Why Financial Disruption is an Attractive Fintech Opportunity

Many factors are powering the multiple fintech startups in the financial sector.

The advantages of internet-based platforms are clear: low startup costs, rapid and continuing market responsiveness, easy scalability, preferred channel for younger demographics just entering markets, etc.

An example of the fintech ecosystem’s many segments can be read here.

But another reason financial services are subject to such extensive external disruptive efforts is that the barriers to entry for traditional charters are enormous. New charters for both banks and credit unions are costly, time consuming and closely monitored.

As a result, de novo charters are few and far between. Five new CU charters have been approved by NCUA in the last decade. The average organizational effort is more than four years, and often longer.

For cooperatives, incumbent credit unions are protected from new entrants by a massive regulatory chartering obstacle that effectively prevents new competitors, no matter how much needed by organizers.

However, if one looks at the number of new and innovative CUSO startups by credit unions, the appetite for innovation and new solutions is clearly understood. But without an openness to new charters, these ventures will be outside the traditional charter structure. While that may be a necessary short-term path for innovation, is that approach hindering a credit union’s ability to change themselves?

Outsourcing technology innovation and solutions to new organizations is expedient. But will it stymie more dynamic and necessary approaches in traditional credit union operations and services?

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Understanding Disruption Within a Full Economic Cycle

At the FDIC’s April 23 Fintech conference, frequent reference was made to the growing role of “marketplace lenders”; firms using internet technology to reach customers directly versus traditional branch based, depository strategies.

Two frequent credit disruptors were cited: Quicken and peer lenders such as Lending Tree, Sofi, etc.

One estimate is that 40% of unsecured consumer credit was provided by fintech firms last year. Quicken was the number one mortgage originator in 2018.

While the advantages of internet based providers were easily listed–convenience, speed, ease of use, targeted market capabilities–the potential challenges were also noted. Most internet providers rely on external funding, which could disappear in a sectoral or broader economic downturn. Moreover the majority of marketplace lending innovation has been done in the very low and benign post-2008-crisis interest rate environment. Would their funding strategies be as viable in a higher or more volatile rate climate?

More importantly, the credit quality of most unsecured consumer lenders has not been subject to the stress of a economic downturn with rising unemployment. This part of the cycle is when capital adequacy is most tested.

There are real consumer benefits from financial innovation. However the lesson is to be careful about concluding that disruption in the short term will necessarily reshape markets over a full cycle. Market shakeouts may seem immediate, but the ultimate restructuring may not be known until incumbent firms and innovators experience a full cycle of financial competition.

Might such a perspective have informed credit unions’ and NCUA’s responses to the disruption of the taxi medallion industry? A subject for ongoing examination.

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Treasury Secretary Mnuchin Says Financial Regulatory Consolidation Not an Administration Goal

As the opening speaker at the FDIC’s Fintech conference on April 23, Treasury Secretary Mnuchin was asked by an attendee if consolidation of the financial regulatory agencies was an administration objective. He replied that it had been evaluated early on in the administration but was no longer an issue.

If the topic of regulatory consolidation arises, NCUA might be the most vulnerable of the independent agencies. A precedent has been set by the Savings and Loan industry in which FSLIC was merged into the FDIC and the OCC became the chartering, supervising authority for federal charters. The FHLB system was “spun off” the S&L system in the late 1980s when its charter was opened to serve all mortgage related financial providers.

When asked to comment on the recent OMB suggestion that all independent agency rules be submitted for review prior to issuance, Mnuchin suggested this was not an area for him to comment.

So the question remains: to whom is the NCUA answerable to, if anyone? Or does independence imply free of all accountability?

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The Entrepreneurs: Attracting the Next Cohort of Credit Union Leaders

Every business from Coca-Cola to Ford Motors faces the same marketplace reality. How does successfully serving one generation of customers transition to the next? Will consumers have the same tastes? Have the same transportation needs? Respond to similar messages?

At the George Washington University’s New Venture Competition, the guest speaker portrayed a different challenge in attracting today’s students.

Tim Hwang graduated from Princeton in 2013 and is today the CEO of Fiscal Notes a technology application for select areas of legal case research.

He described his age as the entrepreneurial generation. Students across the country are demonstrating widespread interest in building startups to change the status quo.

Today major universities see this student interest. From Ivy league schools to smaller liberal arts, university administrations are sponsoring new ventures and rewarding winning startups with cash prizes and offers of future help.

A sample of winners from GW’s recent contest are illuminating, even inspiring. From the winners list students are creating technology, engineering, social, and network business startups serving almost every area of society.

I was aware of this growing university commitment because one year earlier a group of freshmen who wanted to start a credit union for GW students, became one of the nine finalists out of hundreds of startup proposals in the new competition final.

These students have significant faculty and formal university endorsement. They have researched and met with numerous credit union vendors willing to help, often at little or no initial expense.

The most difficult part is the regulatory approval. They plan to spend the next three years of their college careers to this startup, and then leave it as a legacy for future students.

In addition to specific capital requirements, NCUA’s drawn out, detailed approval schedule would discourage even the most gung-ho organizers.

In the last decade there have been fewer than ten new charters. If this is the pace of new entries, will the cooperative model miss recruiting this generation of members?

As a member does your credit union actively serve startups? How does it encourage entrepreneurs of all ages seeking to create new solutions for their communities?

The questions are important. For the mindset to seek out and encourage member innovators, may be an important indicator of management’s ability to renew the credit union’s organizational design.

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A Black Hole

Astronomers capture first image of a black hole

In a worldwide scientific collaboration, scientists were able to create a picture of a black hole using a network of telescopes around the globe.

The discovery raises up questions about conventional physics and previous explanations of the evolution of the universe.

The photo below shows the dark center inside the ring where matter and light are wrapped.

Astronomers capture first image of a black hole
Credit: Event Horizon Telescope collaboration et al. via nsf.gov

However, for credit unions this first ever picture of a black hole was hardly unique. In fact, the cooperative system has been seeing black holes with ever increasing regularity.

On March 29, 2019, the most recent documentation of a black hole was released by the Inspector General’s office showing a black hole of at least $770 million dollars.

This observation was the latest in a series of IG observations going back as far as 2008. See:

  • Material Loss Review of Chester Upland School Employees, O P S EMP, Electrical Inspectors, Triangle Interests % Service Center, Cardozo Lodge, and Servco Federal Credit Unions (2/23/2017)
  • Material Loss Review of Telesis Community Credit Union (3/15/2013)
  • Material Loss Review of Southwest Corporate Federal Credit Union (9/22/2011)
  • Material Loss Review of St. Paul Croatian Federal Credit Union (10/7/2010)
  • Material Loss Review of Norlarco Credit Union (5/11/2009)

Unlike the astronomical black hole most recently observed that “open up questions for scientists to explore about deep fundamental physics and the explanations offered by theories of general relativity and quantum physics, NCUA’s black holes are more readily understood.

The black holes in the NCUSIF’s balance sheet stem from a continuing weakness in transparency and accountability in the Board’s oversight of NCUA. Although the causes are clearly understood there is no indication that these are being addressed. The only question is how many more black holes will be discovered in the future?