Needed: More Inter-coop Marketing Alliances

A response to my post last week on Marketing: A Critical Credit Union Advantage promoted a broader view of the situation.
Leo Sammallahti, Marketing Manager for the  Coop Exchange in Finland suggested a different framework.   Specifically he believes coops serve individuals who would have a natural interest in knowing about other cooperatively owned business.  Here is his idea.
I’m not familiar enough about credit union marketing in the US, but have some thoughts more generally about marketing within coops.
I recently talked with a friend who helps run a food co-op. He mentioned that they have 2000 people on their email list. A while later, another friend told me about a retrofitting (housing) coop that is raising money through an equity crowdfunding campaign.  The UK has a special financial instrument called “community shares” tailored for coops to raise capital through crowdfunding.
I believe there is an opportunity for a simple website with a directory of coops (in communities or a state) that want to promote other coops through their email lists. I sent a survey to 10 small and medium sized (SME) coops asking if they would like to promote other coops in their email list. Every single one of them said yes.
This interest caused me to realize this is an advantage coops have in marketing – coops (at least small and medium sized coops) want to promote each other.
Had I sent a survey to traditional publicly owned stock owned firms asking  if they would like to promote other businesses because those businesses have stockholders, they would have found the question absurd,  “Why would I do that?”
My suggestion is that the platform allow co-ops to make different type of arrangements to promote each other in their email lists. They can set up cross-promotions (I promote you if you promote me) and “cross promotional circles”–I promote another co-op every month in my email list and my co-op gets promoted in another co-ops email list every month. In addition, they can  require the coop to put out a coupon code or some similar special offer for them to promote.
What’s the relevance to credit unions in the US?  Not sure, yet. But if we create an ecosystem of many coops promoting each other, that can be powerful for credit unions as well. The US credit union movement has over 100 million members.  Credit  unions communicate via newsletter or social media regularly.
If they would systematically promote other coops in their messaging, and other coops would systematically promote credit unions, this could a create virtuous cycle.
From the point of view of a customer, when they become a customer of one coop and receive their communications, those  would include promotions of other coops. As a result, they learn about other coop possibilities and could become patrons.
This effort  could be more even more practical if regulations that limit investing in coops and promoting such investment opportunities were more encouraging.
Once the market for coop financial funding in an area reaches a critical mass, it could possibly lead to common funds that enable ordinary people to make recurring, low-cost, passive, diversified investments across small and medium sized coops.
This community investment evolution is being developed in the UK and could be a model for the US. Here is a recent report:  Understanding a maturing community shares market – new report | Co-operatives UK

Charitable Giving by Individuals and Credit Unions

A donor advised fund (DAF) charitable investment account is an option for individuals who wish to support charitable organizations in a more organized manner. The funds are administered by third parties such as a mutual fund or broker dealer.  A person can contribute cash, securities or other assets and take an immediate tax deduction.

The funds can be invested in various investment options for tax-free growth.  Donors  can recommend grants to virtually any IRS-qualified public charity (501C3) they may wish to support at a future date.

The major advantage is that DAF contributions provide an immediate tax benefit while allowing assets to potentially grow tax free in the future.  The flexibility in managing contributions and subsequent gifting versus answering numerous individual appeals  is an advantage along with the tax planning options.

The annual reports of these various funds also provide insights into where this segment of the population focuses its giving.

T Rowe Price’s DAF 2021 Annual Giving Report shows its 1,600 donors made over 29,300 individual grants to 11,100 charities.

The five most supported charities were:

    1. Doctors without Borders
    2. Salvation Army
    3. Maryland Food Bank
    4. American Red Cross
    5. Planned Parenthood

These individual donors are  a very small and possibly elite sample of the population.  However I found the top five instructive because they are well known charities and national in scope.

While I would presume many donations were made to educational, religious institutions and other local charities, it was heartening to see the communitarian spirit indicated by these leading gifts.

Credit Union Charitable Activity

In addition to individual credit union 501C3 foundations, the most popular long term charitable effort has been the Children’s Miracle Network.

However credit unions in 2013 received another  option via Charitable Donation Accounts.  These accounts were approved as an incidental power by NCUA. Multiple credit union organizations including CUNA Mutual, CUES, and Members Trust Company offer programs for managing these special investment accounts.

While limited to 5% of net worth, their advantage is they can invest in securities outside those permitted for credit unions by rule 703. Their only requirement is that 51% of the total return must be donated to 501C3 organizations over a five-year period.

As of June 30, 2021 there were 187 credit unions which had established CDA’s with a total value of $1.084 billion.

The CDA option is established, credit union by credit union, for both fund contributions and subsequent donations. Individual accounts range in size from Pentagon FCU’s $136.4 million to Temple-Inland’s $1,000 balance.

There is no current process for aggregating and reporting these individual charitable efforts as in the T Rowe Price report.  As the majority of these accounts appear to be managed by three providers, it would seem feasible to report collective donations by credit unions on an annual basis.

Credit unions certainly promote their individual donations, often with press releases and photos; however the overall impact is missing.   I wonder what the top five credit union charitable contributions might be?   Whether these are local, national or even international organizations, the message of cooperative community assistance is only being partially told.

 

 

 

 

 

 

Re-examining the Inequity of Risk Based Loan Pricing

Most credit unions today used risk-based pricing when granting loans.  That means the rate paid by each member is tiered from lower to higher based on their FICO or other scoring matrix.

This change from the initial co-op practice that all members be charged the same rate for the same loan was considered a major innovation by credit unions.  Consultants showed how to implement the program in the 1990’s. Compliant scoring models were empirically validated by experts.  One long serving CEO of a top 10 credit union said that implementing risk-based pricing for members was one of his most important contributions.

The practice is defended with two logics.   It expands credit union lending opportunities by qualifying more borrowers at the lower end of the risk scale.   Credit unions also claim they save these members money by charging a lower rate than other lenders would, if the credit union had not made the loan.

Today the vast majority of credit union leaders routinely accept these propositions.   Members deserve the rate their economic or past borrowing behavior merits.  Members with perfect credit should get better terms than members who have struggled with their finances.

The Reason Why Some Coops Do Not Follow Risk Based Pricing

The most public critic of this approach to consumer lending is Jim Blaine the retired CEO of State Employees (SECU) of North Carolina.

His reasoning follows:

The issue with risk-based loan pricing based on credit scores is that it imposes a real dollar penalty unjustly on folks in “the lower” credit tiers (tiers are usually A,B,C,D,E).

An easy example would be that say “D paper” with a statistically sound, model-projected 10% default rate might pay 12% for a car loan, while “A paper” folks with a projected 1% default rate pay only 6%. The real world penalty for the “D paper” folks is a 6% higher rate – not a minor cost!

The injustice arises because modeling cannot predict which 10% of the “D paper” folks will actually default. But, a substantial, unjustified interest rate cost (+ 6% in the example) is imposed on the entire D tier! Or in other words, 90% of the folks in the D tier (who the model has empirically proved will not default!) are paying an undeserved up charge – because, again, the model has validated that 90% of folks in the tier will actually pay!

 These folks have been unjustly charged because the model has profiled them into a class.

“Redlining” is an example of a financial “tiering” practice for real estate lending that has been discredited (and made illegal). “Redlining” imposed an unjust penalty on generally African Americans who lived in a particular neighborhood – many of these folks were unable to obtain loans at any cost – effectively a 100% profiling penalty!

Two Reasons To Review This Policy Now

Recent political dialogues have raised awareness of systemic inequalities that can accrue in society in critical areas of life: health care, employment options, education and housing.  These lead to structural inequity passed from generation to generation as accepted wisdom:  that’s just the way things are.

Financial services incorporate these histories when they underwrite members who may need financial assistance for one or more of these activities.

America is in an era of examining many past practices to understand the origins of present inequities.  Historical interpretations and beliefs are being re-evaluated.  New interpretations and additional data can lead to better, more equitable policy today.

Is risk-based pricing locking in systemic bias or is it fairly equating a member’s risk of default and pricing?   Each credit union will make its own decision.  It is far easier in moments of uncertainty to automate judgments via an impersonal model than to take time to understand an individual’s situation.

But shouldn’t every member-owner be evaluated on their character, capacity and circumstance? And if credit worthy, pay the same as other credit worthy members?

Should credit unions be more self-critical of lending practices that perpetuate disadvantages for those who have the least or know the least –and are frequent targets for predatory lenders?

The second reason to revisit this practice is that credit union have many years of portfolio performance from several economic cycles. Just as the impact of overdraft fees on members is now being reassessed, might it also be worthwhile for a credit union to review its risk-based loan pricing results?   Which members pay the highest rates? What is the loss rate of various credit tiers?  What might be the outcome if members in each class of loan had paid the same rate?  Should our policy be modified?

Finally, which members are most likely to need and use the credit union for their borrowing needs?    Is that group one for which the credit union is most able to make a real difference in their lives?

I don’t know the answers.   But if a credit union or analyst has done such an evaluation, I would be glad to share their analysis and any actions they may have taken.

 

Marketing: A Critical Credit Union Advantage-Lost, Forgotten or Misunderstood?

My initial class at the Navy’s Supply Corps School in 1969 was inventory management.   The instructor opened the first session by passing out membership cards to Navy Federal Credit Union. As new officers, he encouraged all of us to join.   He said that it was an important benefit of being in the Navy.   The credit union would be available no matter where we were stationed-even at sea in some cases.

At that time my wife and I were living in a trailer home.  Base housing was not yet ready.  We lived paycheck to bimonthly paycheck. I didn’t want to split our only cash flow into two separate accounts.  So, I didn’t act.

However I still remember his friendly advice and effort to sign us all up.  Later we became members of United Credit Union in Yokosuka, Japan when needing cash for an R&R trip during an extended deployment.

Traditional marketing practices have an ambiguous history in coops.   The 5300 call report line item under which marketing expenses are listed is labelled “educational.”

One of State Employees North Carolina’s (SECU) contrarian tactics is eschewing all traditional marketing media and advertising efforts. At mid-year SECU reports total “educational” expenses of $185,000 out of a total operating spend of $490 million.   The intent is that SECU’s foundation’s many good works and press releases, plus word of mouth, provided the public messaging necessary to communicate its availability and value to potential members.

Rethinking “Marketing” as a Competitive Advantage

In September 2021 Bank of American announced it would eliminate the Chief Marketing Officer’s position.  Henceforth all marketing will be under the head of digital channels.

In a recent analysis by Visual Capitalist, its comparisons showed that Tesla spent $0 on marketing per car sold, whereas all its major competitors expensed from $400 to $660 per car.   The strategic advantage Tesla developed was in R&D.  Tesla spends almost $3,000 per car sold; the closest competitor of the big four, Ford, spends $1,100.

Word of mouth is Tesla’s marketing “strategy.”  The article summarized its market leading reputation as:

And while Tesla technically spends nothing on advertising, the company is a marketing machine that is rated as the world’s fastest growing brand, and Tesla often dominates press mentions and social media chatter.

Two Recent Examples of Credit Union “Marketing”

One of my credit unions recently mailed an expensive marketing package offering free $1,000, no-questions-asked term life insurance, plus the option to buy more at a fixed price.   My only question was why did I receive this marketing message at the age of 77?  Life insurance is not only unneeded, but a waste of money.

A second experience. Terminal C is United’s primary location for gates at Dulles airport.   To get to this outer terminal requires travel by underground, up an escalator and a 200 yard tunnel walk to the next up-escalator and the gates.  Along the walls of this walk are panels maybe 15 feet high and wide completely covered with ads for two products only.

The first is Capital One’s Credit Card.  Panel after panel announces its advantages. The second effort, right alongside,  is for PenFed’s Platinum Rewards Visa Signature Card.  Both offer no fee, initial bonus miles, multiple extra points for certain purchases,  cash back, and other benefits that the moving sidewalk traveled too fast to compare.

Both institutions have head offices close to in each other in Virginia.  The difference ends there.  Capital One has $370 billion in assets, the 10th largest bank in America.  It is the fifth or sixth largest credit card issuer in the US with approximately 75% of total revenue from its card program.   PenFed is $27 billion in assets with a card portfolio of $1.7 billion, or 8% of its total loan portfolio.

It hardly seems like a fair ad fight on the walls of this Dulles corridor by  two firms seeking business from the traveling public.

How do Credit Unions Win? Or Why Market?

The 5300 line item calls marketing “educational” expense for a reason.  Most credit union start with a common bond.  Members were most often employees who knew each other, recognize the board and shared a familiar place of work, worship or gathering.

Marketing was not needed to inform employees  about the credit union.  It was often referenced in new employee orientation as a company benefit. The credit union’s role was to inform members about fair value for financial products (educate) and be convenient to their place of work.

Once credit unions expanded their ambitions to larger areas these personal connections no longer existed.  Credit unions tried to reach these new groups by emulating the public marketing efforts of competitors.  The commonality shared by early groups was often lacking.  It became imperative to find new ways to attract members; so, why not do what everyone else does?

As this evolution continued, credit unions even shied away from  their unique design urging consumers to see them as “better than banking.”  Instead of replacing the competition, credit unions mimicked the institutions with which they compete.   Trying to beat the competition by becoming its shadow.

The challenge is not size, expansion or even growth. Navy Federal has been able even at $150 billion to focus on “members as the mission.”  With an added inference, not everyone can join-which is why you should.

Every organization wants fans, not just consumers who can be wooed away with a better price and slicker commercial.  Members are the roots from which every credit union grows year after year.  When the focus becomes the tree and not the roots, that’s when credit unions lose a critical advantage.

Credit unions will rarely out-market competitors.  The two largest credit unions in the country retain the connection with members as the center of their strategy and messaging efforts.   Their belief is that great organizations create great brands; great branding does not build great firms.

 

Wise Reflections on Two Topics:  RBC and the Inflation Outlook

Two experienced bank regulators on risk-based capital:

Comment by  leo.sammallahti@coop.exchange:

What banks perceive as safe is more dangerous to the financial system than what banks perceive as risky. Financial crises are not caused by banks engaging too much in activities deemed risky, but by activities deemed to be safe turning out to be riskier than thought.

Per Kurowski is a former Executive Director of the World Bank for Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain and Venezuela who has been on a decade long crusade against risk weighted capital requirements. Recommend googling him – if you come across a YouTube channel with covers of Latin American pop songs don’t be mistaken to think that is not him. It is him, and the channel includes also videos about his thoughts on banking. He also has a blog.  A recent memo on RBC.

As Paul Volcker, the former head of the federal reserve said:

“Over time, the inherent problems with the risk weighted bank capital-based approach became apparent. The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011.”

The Inflation Tax-an Excerpt

“… So, yes, inflation is here. It’s real. And it’s slowing the economy. It’s like a giant new tax on households and businesses, and wage hikes aren’t a panacea. And now you have a Fed that has partly caused the problem, by overstimulating demand relative to the preparedness of the supply side, and ends up with an economic slowdown anyway. What’s worse, these resulting high food and energy prices hurt low-income households the most–the very contingent that the Fed’s super-easy-monetary policy was supposed to help by letting things “run hot” this time around.

And finally, on the fiscal side, the situation doesn’t look much better. Politico has a piece today about how the stimulus checks and child tax credits aren’t delivering for Democrats; “whatever political benefits were supposed to accrue…have seemingly faded,” they write. “Giving people money may not be the dispositive political winner that they imagined.”

It may simply be that voters are smart enough to connect the dots and realize what all this cash and Fed stimulus has done to the economy–and how little it can fix of the lingering Covid challenges.”

From: Kelly Evans, kelly@cnbc.com, The Inflation Tax, October 11, 2021

Columbus or Indigenous People’s Day?

In grade school I learned about the discovery of American with the phrase “In 1492, Columbus sailed the ocean blue.”  An event that was ultimately honored in the Columbus Holiday the second Monday of October.

It became a legal holiday in 1971.  However it was President Franklin Roosevelt in 1937 who proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic organization.

The current renaming of the holiday as Indigenous People’s Day celebrates the people who had lived here for thousands of years prior to Columbus’ “discovery.”  The histories of some of these existing populations are increasingly noted in the naming of some of  many natural and new  landmarks in their tribal territories

For example the Anacosta River in DC is named after the Anacostia Indian peoples who live in what is now DC.  There are several dozen geographic features and constructions such as high schools in the areas that incorporate the name.

Is the Issue Historical Truth?

The holiday has been a political issue since Columbus Day was first declared.   In 1892, the 400th anniversary of Columbus’ voyage, President Benjamin Harrison declared a one-time national celebration following the lynching in New Orleans where a mob had murdered 11 Italian immigrants.

Continuing today Italian American politicians walk in parades to celebrate the prior contributions and today’s success of the descendants of these immigrants.

As the injustices of the country towards the native populations has become more acknowledged and patterns  of systemic wrongs better documented, there has been an increased focused on correcting the tragedies and changing the traditional narrative.

One effort is to dishonor Columbus and remove statues or other names celebrating his role.  Last Friday a Philadelphia judge ordered a plywood box hiding Columbus statue for over a year be taking down before the parade today.

Thus another issue is added to the cultural clashes now infecting the political dialogue.

But is it possible that both views could be “truths” and that society benefits from knowing about each historical circumstance and their relevance to current priorities?  And what does this example suggest for credit unions?

President Biden has  proclaimed this holiday will celebrate both Italian Americans and indigenous communities.

Individual Achievement and Society’s Circumstances

America has had a long tense debate between what is good for society as a whole and the celebration of individual enterprise and success.

Individual effort, passion, ambition and fortitude matter.   We celebrate accomplishments in every area of activity from business, to entertainment, to sports to academia.   We honor these superstars with prizes, fame and enormous fortunes.

However much of that success depends on context—the training, the resources, the organizations and the examples that make individual achievement possible.  Everyone benefits from this social infrastructure and the connections that make success possible.

In credit unions this same tension exists.   Current leaders take actions which they believe are in the best interests of their organization sometimes oblivious to the legacy they inherited.  They see a different, more “modern” future than their forebears.   This limited grasp of both history and the kind of future being passed on, could undermine the future of the cooperative system.

Cooperatives were built on human connection.  Every society needs these organizations so individuals can prosper and help each other.  Today when three and four generations of members are separated from their credit union’s roots by merger, the ties of loyalty that bind are broken.

Credit unions need persons who want to build a better tomorrow for their own organization and the entire system.   It is OK to be self-interested.  However that motivation needs to be tempered with honor.

The charge against Columbus is he had no respect for the native people he encountered.  Only the search of gold mattered.  Many Europeans who followed had the same belief in their own superiority and right to ownership of the seemingly open lands.

We can see  issues more clearly with the benefit of history.   But it is an error if in our own lives and responsibility within coops today we believe we are immune from such hubris.    The future of credit unions needs innovation.  But it also requires character that respects the legacies we all inherited to achieve our positions of responsibility.

 

 

A College Student Interviews a Credit Union CEO

A student recently shared a paper for a senior  leadership course that required two interviews with active CEO’s.

One interview was with a small silicon valley based startup. The second  was the CEO of a multi-billion dollar credit union with a two-decade long record of incredible performance-excerpted below.  At the end are her conclusions about leadership, which suggests the influence of the credit union CEO’s wisdom.

CEO Interview Comments from the Paper

He said “I really don’t do anything.” While we both laughed, he really wasn’t joking. He clarified saying, “Sure, I set what the credit union stands for, I get to influence strategic direction, and I point the various leaders in the right direction, but I sit back and let them execute.”

However, his leadership practice was truly the opposite of “doing nothing.” He describes it as “servant leadership” which requires “complete transparency” with the understanding that the “way to get what you want, is to help people get what they want.” This transparency he believes, “pays huge dividends in terms of helping the company meet its goals.”

That ”servant’s heart” is what he looks for when  hiring someone: “You can train technical skills – and sure, some jobs require certain backgrounds – but you can’t teach someone the desire to serve others.”

He meets with every new-hire in the beginning of their careers.

He wants them to know that they are making a difference in people’s lives – not just cashing checks – and here’s how. Our prices and services are not our competitive advantage. What makes the credit union special is “Us,” each and every employee.”

He wants his employees to think of him as just another person, because quite simply, he is. He makes mistakes, he goes on vacation, he has a family, just like everyone. To emphasize the point he tells all his employees: “You don’t work for the credit union; you work for the dreams and ambitions you have. The role of this credit union is making those dreams possible.”

 The Student’s Leadership Conclusion

I had believed that to be a leader it was essential to hold a position of authority. One where people report to you, often indicated by some swanky leader-esk title. However, what I’ve learned is that leadership has many different styles and can mean a lot of different things – and it doesn’t have to be directed downward.

One can hold a position, not formally recognized as a leadership role, and still have the ability to lead.  Leading is related to your influence as an individual more than any job title. Not only have I learned this is possible, but also just how necessary it  is. To be good at your job, and to make the right impressions on those around you, it is essential that you are able to lead – even your bosses.

My Note:  The art of leadership is not the responsibility of a single position.  For any organization to be successful, everyone must feel responsible for their role in serving others.

 

How Are Credit Unions Different from Banks? Three Powerful Words

During a week this summer at Chautauqua Institute one of my fellow attendees asked what’s the difference between a bank and credit union?

The question was from a very successful executive who had been the senior staff director for four consecutive DC Mayors.  I felt an opening to give her the full 100-year story.

I described credit union’s progressive origins, the dramatic expansion after passage of the 1934 FCU Act, and their current role as the second largest depository system in the US.

Later, thinking back, I realized I hadn’t answered her question.

What I should Have Said

The difference between a bank and a credit union is three words:  You own it.

That distinction will mean different things to people.  For some it indicates better rates.  For others it means convenience, or trust, or serving the local community.

When one hears about a local grocery, hardware store, bar-brewpub, day care center or even a restaurant option that is a coop, we instinctively believe there is something different from  other choices. The inference is that organizers are doing more than just trying to succeed in a business.

The Other Side of the Coin

The fact that You Own It generates consumer expectations is important.  But the other responsibility of “ownership” is nurturing  opportunities to be more than a consumer.

In some situations this means taking turns serving in a daycare coop; in others it may mean patronage refunds (REI); in some grocery coops, members can sell their own baked goods.  Or it can mean voting for directors at the annual meeting.

This unique customer/owner design anticipates that coop leaders will be open to engage with members beyond transactions.  The coop advantage depends on members willingness to participate in events and other activities to realize this unique potential.

This week, Geoff Johnson became CEO for the CUSO cooperative CU*Answers.   He expressed this member-owner advantage as follows:

A cooperative will only ever be as good as its owners, and we have great ones.

To that effect, my message for credit unions is to never be afraid of wanting more from your members. The more involved they become, and the more they act like owners, not just consumers, the better off you’ll be.

At their most successful, credit unions create fans with lifetime loyalty.   Efficient, reliable transactions are important, but most institutions meet those minimum table stakes.

What makes credit unions special is their ability to transform the three words into  interactions that provide value for both the coop and the member.   You Own It is an opportunity to put this advantage front and center in every member interaction.

 

 

Harper’s NCUA Priorities: “Fiddling While Rome Burns”

Chairman Harper’s Senate hearing for a second term confirmed his intentions for NCUA.  In his opening statement and when answering questions, he reiterated his regulatory to-do list.  Along with prior speeches and proposals these include:

  • Establishing a separate consumer examination force (he stated NCUA is working on a white paper to validate this need).
  • Eliminate all current legislative constraints on NCUSIF funding and premium assessments.
  • Seek authority for examining and supervising third party vendors serving credit unions.
  • Climate change risk must be included when evaluating safety and soundness.
  • And the need for multiple agency investments to “continue prioritizing capital and liquidity, cybersecurity, consumer financial protection, and diversity, equity, and inclusion.”

His opening Senate statement reflects his experiences as entirely within the “legislative, regulatory and policy” arena.  He sees the scope and purpose of his role as running a government agency, not facilitating the relevance, role and reach, i.e. the sustainability of the cooperative system.

Since the late 1990s, I have worked as an advisor, manager, and executive on banking, insurance, and securities legislation and regulation. These jobs have given me broad knowledge of financial services policy and a deep understanding of the many issues facing our nation’s $2 trillion credit union system. 

One Vote Short to Enact Harper’s Agenda

Sooner or later all of Harper’s desires to expand NCUA’s authority and resources will receive a second board vote.  Either by convincing a current member that “bipartisan compromise” is the correct leadership response, or due to the expiration of one of the other board member’s term.

Harper’s positions are not driven by facts, data analysis, or even trends.  He has been advocating for risk-based capital (now linked with CCULR) since 2014 despite all the factual evidence that it is both unneeded and does not work.  He persists in immediately imposing this 400+ page rule even in the face of statements such as this by former board Member McWatters at a June 2019 board meeting:

Board Member McWatters: Okay, so there’s work to be done on the rule. And I should also note that when this rule was proposed and finalized, I dissented from it. And I dissented from the rule because in my view, as a lawyer for over 37 years, the rule violates the Federal Credit Union Act. I said that twice in written dissents in some detail in some legal analysis.

Now, I understand that reasonable minds may differ. Other people, other people in this room have a different view. I respect those views, but I also think that if this delay passes, we should look at that. We should go through that analysis again. I don’t want a rule on the books that in my view as a lawyer dealing with issues like this for a long, long time simply does not comply with what Congress told us to do. So I hope that, I hope that we can do that.

The Danger of a Misguided Regulator

We all see what we want to see.

Harper has spent most of his professional life working on legislative and regulatory policy. His goal is to enhance government’s role, not sustain the cooperative movement that created the agency in the first place.

His position on issues is to promote a regulation- heavy outcome.

His lack of credit union experience, knowledge and operations is a serious blind spot.

Today the credit union movement faces growing challenges. They have nothing to do with Harper’s understanding of safety and soundness, forecasting the next recession or even competitors overwhelming the movement through innovation or scale.

There are two wildfires burning uncontrolled throughout the cooperative environment. Both were started internally, and each is continuously fed by NCUA’s actions.

Not “Mergers” but “Collective Euthanasia”

The first wildfire is the increasing use of self-interested mergers, allegedly for economies of scale by managers of sound, stable and long-standing credit unions to become part of a larger one.  The increasingly brazen appropriation of credit union members’ common wealth is exemplified by a CEO’s arranging $35 million in funding for the non-profit organization he will run after his $650 million credit union is merged.

These acts of the CEO and senior leadership cashing out via merger are not new.  But they are increasingly promoted by third parties who draw up “change of control” clauses for CEO contracts.  Then the same CEO’s go out and negotiate their own change to collect the bonus.

NCUA routinely signs off on these self-serving charter cancellations.  The problem is more than self-enrichment.  Every merger of these long serving credit unions rips out roots feeding the cooperative model. Members’ accounts, loyalty and common resources are transferred to a third party which has little to no relationship to the community which loses their decades old local financial institution.

These mergers destroy the credit union system at its roots.  Members leave and the entire basis of the credit union’s soundness, the member relationship, withers and dies.

The continuing credit union may seem strong, but that is a temporary illusion.  Loyalty, trust and confidence cannot be bought.  They are earned via long standing service relationships.

The common bond which first brought the credit union to life is now transformed into an act of  cooperative euthanasia in these merger manipulations.

The rot then shows up in the continuing credit union even when it tries to regain former member’s allegiance. The roots have been severed.  As a result  the solution is sometimes to ask its own members to approve this collective merger death ritual by the continuing credit union— the story of Xceed CU.

Using Member Reserves to Buy Banks

The second challenge is credit unions using members’ accumulated reserves to buy banks.  Often these are outside the credit union’s existing network and market influence.  The reasons are to grow faster than might otherwise occur, especially in new markets.

However, paying $1.50 to $2.00 for each $1.00 of book assets sooner or later will lead to a financial dead end.  Unlike mergers, these purchases are for cash.  There will have to be a return over years to support the premiums being paid for these assets.  The results of each purchase will not be known for some time.  Meanwhile, credit unions will have to convert new employees, customers and  products and services in a process different from the credit union’s traditional member-chosen relationships.

The jury is out as to whether these financial investments will ever payout.  But one trend is apparent.  Bank purchases to pursue growth becomes a narcotic.  It is like an opioid that a CEO and board become addicted to when their own efforts at internal expansion no longer seem enticing. Some credit unions have completed more than one bank purchase.  It is not unusual to see a credit union undertake two transactions back-to-back or in a current case, two at once.

The Common Source for these Growing Cooperative Wildfires

Both of these activities are failings of fiduciary duties.  The common characteristic in both is  credit unions have lost touch with their own members.  Their leaders believe the credit union is their personal fiefdom to do as they like, even when the decision is to ask members to commit cooperative suicide by giving up their generations-old charter.

As institutional growth and performance is prioritized over member well-being, the credit union model becomes more and more like the competitors’ it was meant to replace.

In both activities members are kept in the dark- told nothing about bank purchases. Or in mergers, members are given  a series of assertions about better products and services that omit significant information or misrepresent the entire situation—and given less than 45 days to act before voting.  Few vote, rightly sensing the system is rigged against them, which is often the case.

The solution to these two failings is as straight forward as the cause—empower members to be truly informed and engaged about their credit union’s activities.  Transparency is critical whenever members’ collective wealth is used outside the normal business model.

In mergers members are given nothing more than PR cliches.  Should ending a successful, sound charter be so much easier than what is required for a new charter in the first place?

Harper sees “consumer protection” as crossing every “T” and dotting every “I”.  That approach is  fiddling while the cooperative industry burns down.  In the meantime, members’ collective legacies are stripped away by their boards and managers.

Sound, well run credit unions are losing their cooperative roots and purpose.  No one is willing to address the situation for what it is and stop these extermination.  Unfortunately, we know how this movie ends.  The original version was called the S & L industry.

 

A COVID Program to Assist Smaller Credit Unions That Few Know About

Note:  the numbers initially published of eligible credit unions were updated as of October 7, 2021.

Recently the former NCUA General Counsel Bob Fenner, now in private practice, asked if I was aware of the Employee Retention Credit grants provided under the Cares Act.

I had no knowledge.   He sent me a brief description:

There is a provision in the federal stimulus legislation not well publicized and not well understood that may entitle a credit union to significant federal funds.   

The criteria to qualify are:

  • the credit union averaged fewer than 500 full-time employees in 2019, and
  • the gross income in quarter 4 of 2020 declined by 20% or more when compared to quarter 4 of 2019, or
  • gross income in any quarter of 2021 declined by 20% or more when compared to the same quarter of 2019.

The reason for the decline in gross income does not matter.

The credit union is eligible for up to $7,000 per employee per qualifying quarter in federal funds, in the form of so-called Employee Retention Credits. 

Finally, if your CU has an 80% or more interest in one or more CUSO’s, you must consolidate the books for purposes of determining the number of employees and applying the gross income test.

This IRS official website gives a January 26, 2021 update on the program’s extension into this year.

Estimate of Number of Credit Unions Eligible

 

Scanning the data for credit unions with fewer than 500 employees in 2019 and declines in total revenue in one of the three applicable quarters (2020-4th, 2021-1st and 2nd) shows the following count:

For test 1 (empl <500 @ 2019, 4Q ’20 income -20%+): 782 CUs

Test 2 (excluding test 1): 350

Test 3  (excluding test 1 & 2): 135

The total of 1,267 includes mostly smaller credit unions.  However the results show that a few credit unions with over $1 billion would also qualify.

This list could be expanded if additional credit unions meet the negative 20% fall in revenue for the third and fourth quarters of 2021 versus the comparable quarter in 2019.

Next Steps

Bob is working with a colleague, Darrell Smith, CEO of Highmark Companies.  He describes their approach as follows:

There is no fee for a consultation and a determination whether a CU qualifies. There is a fee only if a CU qualifies and uses our services to obtain the credits. We don’t talk fees until we do the initial consultation.  

Our services include determining qualifying amounts, preparing the forms to be filed with Treasury, providing a pre-submission audit review from an independent accounting firm, and working with the CU and their payroll provider to submit to IRS.

He continues:  It is a complicated process unless you have studied it carefully and understand it. Sometimes credit unions who have not carefully studied the law and the IRS guidance often conclude either they are not qualified when in fact they are, or they don’t get everything they are entitled to.

Once you understand all the ins and outs of the process, it does not take long to complete the forms. It does however take anywhere from 2 to 10 months to receive the money from the Treasury Department. So while it is definitely good money that qualifying credit unions are legally entitled to, it’s not quick money.

As one example, we recently worked with a with 55 employee credit union that will obtain $1.1 million based on the first three quarters of 2021.  We will assist credit unions of any size.

Resources to Help

Bob’s contact information is  bobf1228@gmail.com and  Darrell Smith at Highmark Companies is dsmith@highmarkcompanies.com.   The only information about their program is what they have sent me.  So as with all contacts, credit unions should always perform their own due diligence, as I am sure Bob in his former General Counsel role would advise.

I am not aware of any other organizations providing credit unions assistance to access this program’s funds.   Bob’s heads up could be a valuable service especially if smaller credit unions who are likely most in need, can be easily qualified.

If readers have other information on this program that would benefit credit unions, I would be glad to offer it in future posts.