No Limiting Principle

A reader inquired why I wrote about the  minor update to corporate rule 704 to illustrate aberrant NCUA policy.  The reason is that seemingly small errors compound; they become embedded when no one grasps their implications.   Ultimately these deviant practices recycle and become the basis for consequential erroneous actions.

This 704 rule update is an example of NCUA’s policy process subject to no limiting principles.  The critical flaws are numerous.

First, the agency asserted open-ended, unchecked authority from the Federal credit union act. There are no restrictions to what the board might “deem appropriate.”

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.

In law, a limiting principle without limits, does not limit.

Secondly, the rule provided no statement  of general authority or purpose, as the basis for  corporate’s buying subordinated debt.  Why is this activity appropriate? There is brief reference to lending power for what appears to be activity more akin to investing.

Thirdly there was no factual, objective information given for any aspect of the rule including the demand for or any known risk related to credit union’s issuance of subordinated debt.

Fourth, the rule has contradictory logic. It authorizes an activity-investing in subordinated debt-but then negates the very action by requiring credit unions to subtract from their capital any such “loans” when complying with required net worth ratios.

Fifth, the required subtraction contradicts generally accepted accounting principles-GAAP.

Sixth, the write-off requirement is not grounded in objective analysis  and ignores the fact that every such  debt issuance has to be approved by NCUA with a fully documented plan for its use.   The Agency effectively admits that it cannot rely on its own supervisory decisions if a corporate chose to invest in an offering they authorized.

Seventh, the rationale that this is equity and therefore at risk, contradicts the way corporates record investments, following GAAP, in other financial institution’s shares including the CLF and Federal Home Loan Bank stocks.

Eighth, the ultimate justification is that this is the way the agency treated similar “investment-loans.”  In plain English, this is the way we have always done it.

This is the most troubling of all the logical errors.   For it illustrates how bad decisions and rules become embedded in agency practices forever-and a board lacking in historical familiarity just accepts the continuation and cumulation of previous errors.

There are additional flaws in both logic and substance.  One agency official defended the action by saying nobody objected to the rule in the comment period.  Might the reason be that the corporate input has been ignored or denigrated for so long corporates saw no  benefit in pointing out how irrelevant the rule was in the first place?

A 3-0 Board Vote

In the midst of a full January agenda and the aura that the action somehow represented deregulation, the board unanimously approved this “nothing rule.”

No harm no foul, one might argue.  Wrong.  The board’s approval sanctioned a very flawed and incoherent policy by staff resulting in regulation with no practical meaning or purpose.

That precedent is now in place.  The deficiencies in logic and substance were rubber-stamped.  These factual, illogical and legal flaws will reappear in other policies down the road.

With the NCUA board relying on the open-ended authority referenced above there is a real danger to the credit union system when any two members can take unfounded actions that can severely harm credit unions.

The NCUA Board’s Challenge

Ultimately a government of laws depends on the judgment and intelligence of those chosen to oversee the authority the people have given.  For credit unions, the NCUA board are the three individuals with that responsibility.

At this time there appears to be “no limiting principle” that governs their deliberations and decisions. When one reviews the prior decade’s use of this unconstrained regulatory power, the challenge is real.

The critical question from this rule is what is the limiting principle for the Agency?  Is there any? Would board members agree on one?

Shouldn’t a primary discipline be thorough public deliberation that earns the confidence of the 100 million plus credit union members knowing their rights and interests are paramount in all agency decisions?

The Paradoxical Commandments

These ten insights were included in a book, The Silent Revolution, published in 1968 by a Harvard sophomore.

The latter years of the 1960’s were marked by demonstrations and unrest across the country.  Civil rights activity combined with anti-war protests culminated  in occupations and extensive campus disruptions. Kent’s book presented  the alternative of working within the system for change.

To succeed, he presented ten  obstacles to be expected and the necessary counter response to sustain an effort.

I think his sixth commandment is especially relevant for the majority of credit unions, many of whose futures are devalued in public commentary.

The biggest men and women with the biggest ideas can be shot down by the smallest men and women with the smallest minds.

Think big anyway.

A Critical Role for America’s Credit Union Museum

America’s Credit Union Museum in Manchester, New Hampshire, is on the site of the first credit union founded in the United States— St. Mary’s Cooperative Credit Association, renamed in 1925 to La Caisse Populaire Ste.-Marie, or “Bank of the People.”

Over the past several years the museum’s role has expanded beyond collecting credit union memorabilia.  When the Richard Ensweiler research library was christened in2018,  the goal of supporting studies of the movement became central to its purpose.

I believe this expanded function couldn’t be more timely.  If credit unions lose their connection to past events and personalities, it will lead to a declining IQ for the industry.

This does not mean that the IQ of current leaders is less their predecessors.  It may even be higher.

But the collective appreciation  of the unique power of cooperative design, the advantage of collective action, and  the embrace of disruptive innovation have atrophied in favor of imitating banks and an addiction to mergers versus organic growth efforts.

The importance of knowing about the movement’s past was captured in this CEO’s observation:

I wish I had kept the phone numbers and emails of CEO’s that are now gone from view.  Ex-CEO’s that could tell what they wished they had done when they faced downward curves to the end.  I worry that lessons lost and archived outside our industry are what is needed now.

 Some might say that we missed nothing; we witnessed progress and the natural march towards an industry’s maturation.  But that sounds like short-term winners talking to me.

Randy Karnes, CEO CU*Answers, February 2018

Timeless Wisdom: Effective Public Policy From the Bottom Up

Our movement does not exist because it was created from the top down.  Rather it was created from the bottom up.  We did not tell Congress we wanted to be “safe and sound” institutions.   We always knew that if we were lending to our members there was risk involved.  Serving came first; safety and soundness was a means to the end of serving.

Ed Callahan, Callahan Report, May 1999

It’s NOT a Wonderful Life or Can Miracles Still Happen?

On December 28th,  the Monday after Christmas, the 85-year, $35 million  Post Office Credit Union (POCU) in Madison may come to an end.   The savings and loans of its 3,196 members and their abundant reserves (22% net worth) will be transferred in due course to the $26 billion PenFed Credit Union in Virginia.  Their new financial “partner” is 850 miles distant and 742 times larger. They would join an already existing membership of over 2 million.

Why should credit unions care?  After all UPS, Federal Express, DHL and even Amazon can fill the needs if the local Post Office itself were to close.  Same with financial options–aren’t there plenty?

Member-owned cooperatives fill a special niche in every community.  The members pool their savings to provide loans to members and businesses with local control and leadership.  Founded during the Depression, POCU serves member needs with services guided by familiarity and circumstance.  Especially in a pandemic.

It’s Madison, Not Bedford Falls

But alas, Madison is not the Bedford Falls of the Christmas film It’s A Wonderful Life. No Clarence, or guardian angel, has appeared to “ring a bell” asking  for a public hearing.  Or to demonstrate what the future for  members and the community will be without POCU.

And there is no George Bailey to stand against Potter’s acquisitiveness.  For the CEO of POCU will choose between receiving a five-year $650,000 sinecure or  immediate cash severance of $437,000 while turning over his leadership responsibility to another firm via merger.

Will there Be a Rerun?

Three generations of members have supported POCU to be always present for them.  But no rerun of It’s A Wonderful Life may happen next year.

Unless there is an unexpected intervention. Do I hear a bell ringing signaling another angel’s presence?  A real life Clarence to help members see  life without POCU?

Such an event would  fulfill the spirit of this timeless movie. Except it would be a real-world “Madison miracle”  this Christmas time.

New Credit Union Charter Germinates After Eight Years

From the new credit union’s announcement:

On Wednesday, August 14, the National Credit Union Administration (NCUA) approved charter number 24915 for Maine Harvest Federal Credit Union. This approval was announced publicly in an NCUA press release:

Maine Harvest FCU become the first regulated, deposit-taking financial institution with a mission to promote a local food system by lending to small farms and food producers. At Maine Harvest FCU, we hope to see the impact of our mission in stronger rural economy, a cleaner environment, increased soil fertility and improved public health.

Maine Harvest FCU becomes the first new credit union in Maine in 30 years and only the second credit union chartered nationally in 2019.

The process took eight years and required $2.5 million in donated, startup capital.

Since starting  the chartering process with NCUA’s required survey (seen below), there have been eight crop harvests. How many small farms and start up efforts were frustrated in the interim?

Which is harder: being a small farmer or a credit union organizer?

Potential Member Survey (2012)

The potential member survey was fielded at MOFGA’s Common Ground Fair in 2012. This two-page survey was based on a template from the National Credit Union Administration and is an important part of the credit union chartering process. The goal of the survey was to gauge the level of interest in the proposed credit union and to get an idea of potential deposits from prospective members. 258 responses were received and consistently indicated a high level of interest in joining the CU and with substantial potential deposits. (Source Maine Harvest web site)