"NCUA AND CREDIT UNIONS:

HEALTHY TENSION/COMMON BOND"

Dennis Dollar

NCUA Board Member

Remarks to the CUNA Governmental Affairs Conference

Washington Hilton and Towers

February 25, 1998

Thank you very much.

After six years of attending the CUNA Governmental Affairs Conference as a participant, it is an honor to now have the opportunity to stand before you as the newest member of the NCUA Board to address some of the pressing issues facing credit unions today and also facing the National Credit Union Administration.

Hopefully, in doing so, I can share with you some of my philosophy...a philosophy I believe you will find honed in the trenches of the credit union movement and founded on the credit union philosophy of "people helping people" and "not for profit, not for charity, but for service."

Before I begin, I would like to take just a moment to recognize the men and women who helped me catch the heartbeat and the spirit of the credit union movement. I would like to ask the Board of the Gulfport VA Federal Credit Union to stand. These dedicated volunteers, as so many of you in the audience, have given much of their hearts and lives to the credit union movement. When I make a decision on the Board that you agree with, you can thank them for teaching me well. When I make one that you do not like (and that is inevitable over a six-year term), tell them they should have kept me back in Mississippi.

Please join me in giving a round of applause to my former Board of Directors at the Gulfport VA Federal Credit Union - true patriots of the credit union movement.

Although I now leave the ranks of credit union management to assume the role of regulator, I can never forget the experience of having been a credit union manager sitting across from the member who, with tears in her eyes, says "without this loan, Mr. Dollar, I can't send my kids to school this year."

I will carry with me into all Board deliberations the clear remembrance of that member who invites me to come into the credit union parking lot to see the new vehicle that he never could have purchased without the credit union, but now enables the member to take a new job in a nearby town and support his family a little better.

I will bring with me to Board briefings a knowledge of the ins and outs of the examination process that can only come with the insight of one who has actually sat on the other side of an NCUA examination.

(An interesting aside which might be described as poetic, I received my official notice from the White House of my appointment to the NCUA Board on the day of my exit interview with my examiners for my credit union's annual examination. Talk about timing. And, to answer the question in all of your minds, I did not tell the examiners about the appointment before the exit interview, tempting though it may have been.)

Yes, I have seen first-hand the impact of the regulatory process, both the positive impact of its assurance to credit unions and their members that their institution is a safe and sound place to invest both their faith and their hard-earned dollars. But I have also seen the negative impact of excessive regulation that can shatter the hope of a member who turned to the credit union as their last resort for a loan, for a checking account, for a financial way out...only to be turned away because of inflexible risk management guidelines that may have replaced some aspects of character-based lending with a numerical score that might satisfy the examiners, but fails many times to meet the needs of the member.

Excessive over-regulation hurts healthy credit unions as they seek to achieve their mission.

But, most importantly, it hurts the members credit unions serve.

I come to the NCUA Board with one standard that I will apply to all decisions I am called upon to make.

It is the same standard that I applied to every decision I made as a credit union president - How will it affect the member?

At our credit unions, managers, staff and volunteers make decisions every day that inconvenience ourselves so that we can make service more convenient to our members.

It may be as small as where we park our cars to as large as the hours we choose to open. It may be as seemingly insignificant as how we answer our phones to as monumental to a member as how we answer a loan application. But credit unions make their mark by how we serve our members.

The number one member service that a credit union can provide to its members is a safe, sound institution in which to invest.

Let me say that again, lest there be any misunderstanding.

NCUA should have its focus on helping credit unions meet that number one member service - a safe, sound credit union. Safety and soundness...that is NCUA's charge by statute and by practice. That is likewise my charge as a member of the NCUA Board, and I accept it without hesitation or apology.

After ensuring that our credit unions are safe and sound, in my opinion, it is not the job of NCUA to then try to regulate the ins and outs of member service...that is the role of the marketplace.

I like to use what I call the FAA analogy in explaining my view of how the NCUA should regulate credit unions.

It is the role of the Federal Aviation Administration (the FAA) to make sure the planes are safe and sound, to insure that the pilots, navigators and controllers are qualified, and then to get out of the way and let the pilots fly, the navigators navigate and the controllers determine the routes. It is not the job of the FAA to fly the planes and set the routes, nor would we, the flying public, want that.

Well, in my opinion, neither does the credit union member want to see NCUA flying the plane of their credit union. Yes, make sure the plane is safe and sound, ensure that the pilots can fly, the navigators can direct, the controllers can select the best and safest route...then, get out of the way and let you, the volunteers, managers and members of your credit union, fly your own plane.

I know that it has been suggested in the past by some in the credit union movement that NCUA should possibly change its CAMEL rating system to a CAMEL'S' rating system that would incorporate an evaluation of service into the rating component.

I could not disagree more.

You are already being rated in the member service arena by the toughest regulator in America today...the member.

It is not the job of NCUA to regulate member service...that is the role of the member and the marketplace.

Yes, credit unions are in the member service business in a very competitive marketplace, whether we want to admit it or not.

There is no "fast track" to get around the competition we face, nor is there regulatory protection that can make it go away.

Credit unions are in the marketplace of consumer choice and are fighting an aggressive campaign at this very moment to ensure the right to remain there.

I believe in the American free enterprise system, and I believe without hesitation that America's credit unions have a right to participate in it.

There are those who cry for a level playing field who, although I'm pretty sure what they actually seek is a clear playing field, must realize that it is the American public who determines the winner on the marketplace playing field. Who crosses the goal-line of providing quality service will receive the points. Points are not awarded for the most lawyers, lobbyists or political action committees.

In the marketplace, it all comes down to taking care of the public, the customer, the member.

And, on that playing field, credit unions win.

Credit unions have now and must retain the home field advantage earned over the years in the member service arena. Credit unions may choose different niches of service, different products, even different approaches...but, whatever the niche, product or approach...serve it better than anyone else.

How do credit unions do that?

The answer is by applying the same standard I mentioned earlier: ask "What is best for the member" on each and every issue.

If you will continue to ask that question at the credit union, I give you my word that I will continue to ask it on the NCUA Board.

I would like to address an important and, yes, controversial recent issue before the NCUA Board that, I believe, is an example of applying the "how does it affect the member" standard in action.

One of the things you will learn about me is that I am not afraid to deal with a difficult issue, simply because there may be controversy or even disagreement surrounding it.

I would like to address the issue of exclusionary clauses in the case of a community-chartered credit union. I would like to address it from the "how does it affect the member" standard from both a practical and philosophical point of view.

Now, understand that we are talking here about community chartered credit unions and exclusionary clauses.

The situation might be different if we were talking about the longstanding and, I feel, proper NCUA policy of trying to avoid SEGs from affiliating with more than one occupational credit union and preventing that type of overlap.

We are talking here about community chartered credit unions.

From a practical point of view, excluding a protected group from a community-chartered credit union seems to be both ineffective from an enforcement standpoint and confusing from a member's standpoint. A potential member applying to a community credit union will be royally confused if he is told that he cannot join because he is in a protected group. He must therefore join another credit union which specifically serves only that protected group, but his spouse or family member may however join the community credit union because they are a non-protected member of that community. This, he is told, will allow the potential member to then join the community credit union anyway as a family member, despite his being a part of a protected group. This is both confusing to the member and ineffective in accomplishing its purpose. Plus, who could ever be expected to effectively police such an arrangement.

So, from an effectiveness point of view, an exclusionary clause is both ineffective and unenforceable.

Now, let's look at it from a philosophical point of view.

Consumer choice is the foundation of our American free enterprise system.

Now, I know that there are those who are concerned about competition and its effects on the cooperative spirit of the credit union movement.

I believe that credit unions cooperate today, not because there is no competition in the marketplace (for there certainly is), but because we are cooperatives. Credit unions have a history of cooperation and will continue to cooperate as long as we remain not-for-profit financial cooperatives. It is the profit motive, not competition, that would kill the cooperative spirit of credit unions.

But credit unions are a part of the free marketplace, whether we like it or not, and we are in daily competition with other financial institutions, investment houses, brokerage firms, insurance companies, finance companies, and others. There is even some competition already in existence among credit unions as competition ensued for Select Employer Groups (SEGs) prior to the ATT decision. Memberships of family members who may be eligible for more than one credit union create some competitiveness, as does the search for qualified employees and convenient branch locations.

How about "once a member, always a member?" Certainly this could create a credit union member eligible to join more than one credit union. Competition? Possibly. Bad for credit unions? I think not.

We would not want to see the ability to attract additional SEGs eliminated simply because there might be some resulting competition. Likewise, no one would recommend family-member eligibility or the discontinuation of "once a member, always a member" charter provisions because it could result in competition among credit unions. Credit unions believe in these cases that we should offer the best service possible and then we trust the member to make the decision. It's the marketplace...credit unions compete for our members business with quality member service.

Credit union members are bombarded daily with offers in the mail, the media and phone solicitations by other financial institutions trying to take their business away. Yet, they stay with their credit union. Why? Because of the service the credit union provides to meet the needs of those members.

If a credit union is not meeting the needs of its members in today's competitive marketplace, that credit union will have a difficult time keeping the members' business and all of the exclusionary clauses NCUA could offer will not force the member to continue to do business with that credit union.

If the credit union is however meeting the members' needs, all of the competition in the world will not drive that member away. Ownership interest will keep members doing business at their credit union, if the credit union is serving that member well. It is simple: NCUA cannot regulate member service nearly as effectively as the marketplace can.

So, if a regulation (like exclusionary clauses) is ineffective, unenforceable, and in conflict with basic uncontrollable marketplace principles, my question is why clutter up the already-overexpansive regulation books with it.

Again, it is NCUA's job to ensure the safety and soundness of the planes...not to fly them.

At NCUA, we do have some of our own planes to fly that can truly be described as aerodynamic challenges for the year 1998 and beyond.

The Year 2000 computer issue, also known as Y2K, is one of those challenges.

During my confirmation process on Capitol Hill, I was asked more questions about NCUA's efforts to ensure that our nation's credit unions are ready for the year 2000 in all data processing and technology arenas than I was asked about field of membership, taxation, the ATT case or any other issue. They were asking the same Y2K questions of nominees for other regulatory agencies as well.

I can tell you first hand that Y2K is an important issue in Congress, is becoming a focal issue in the media, and, most importantly of all, will become an issue of concern to credit union members if they come to believe their access to their accounts or the due dates on their loans may become confused by the Year 2000 bug. Just imagine. What would be the liquidity impact on your credit union if just half of your members decide they need a $1000 withdrawal on December 31, 1999 - just in case they feared they could not get it from their account on the morning of January 2, 2000. What if that happened systemwide? A legitimate fear...who knows? If it happens, a safety and soundness concern...possibly.

The Y2K issue is not much ado about nothing. It has very serious potential ramifications for both credit unions and credit union members.

It will be a top priority at NCUA to help credit unions prepare for this date-certain issue and to work closely with credit unions to test, prepare and verify that all systems will be "go" before the first of January 2000.

If we are sitting here at the GAC in February 2000 and talking about how well credit unions handled Y2K and how the doomsday scenarios were all overblown and overstated because everything went so well, then NCUA and credit unions will both have been successful.

And credit union members will be the beneficiaries.

I want to briefly discuss the OPM issue. When I got to NCUA and saw the much discussed Office of Personnel Management (OPM) audit findings, I felt like the guy who was accused of getting drunk and setting his bed on fire. He said, "Your honor, I plead guilty to being drunk but that bed was on fire when I got in." Well, when I got to NCUA the OPM findings were already a "field ablaze." I was not there when the fire started, but it is now a part of my responsibility as a Board member to help put it out - decisively and with great dispatch.

When we find problems at a credit union, NCUA demands immediate and decisive action to correct the problems. We should accept nothing less of ourselves when NCUA is the regulated, rather than the regulator.

The NCUA Board is closely monitoring all hiring practices and issues at the agency. It is my commitment to our nation's credit unions who pay the bills at NCUA, and I am convinced that it is the commitment of my two colleagues on the Board as well, that we will continue to make the tough decisions necessary to return NCUA to a proper working relationship with the Office of Personnel Management as quickly as is it is possible for a federal agency to act. (In fact, I hope "more quickly" than a federal agency usually acts. Maybe we could aspire to act as quickly as a credit union is called upon to act when its regulator issues a call to action.

Some have said it is a tough time to join the NCUA Board. I say it is a pivotal time.

Yes, there are controversial issues pending and there will undoubtedly be criticism. But my dad taught me that "those time in life when you face the most criticism is probably the time you are having the most long-term impact."

I am a man of faith and believe strongly that a higher plan and timetable have enabled me to serve on the Board at a crucial time in the history of the movement and to hopefully have that "long-term impact" - a positive impact for credit unions and credit union members.

During my six-year term, we will certainly disagree...there will always be a healthy tension between the regulator and the regulated.

But the emphasis should be on the word "healthy."

Always know my standard: "How will it affect the member?"

I may now wear the hat of a regulator, and it is a hat that I am not afraid to wear. But, in here shall always beat the heart of a credit union manager and, yes, a credit union member.

Credit unions have a mission - to meet the financial needs of our member-owners, regardless of their status or position in life. Credit unions serve millions that other financial institutions, our critics included, will not serve. Yet, they do not wish us to serve them. Apparently, they feel these millions do not deserve financial service.

Credit unions disagree. Although credit unions were not created to only serve those of small means, (for if we do our jobs well, we will attract the business of those with means as well as growing millions of people of small means into people of greater means), credit unions are the one element of financial services that does not ignore the needs of those of small means.

Credit unions are there when they need:

---A car loan to be able to get to work

---A home loan for their first home

---A school loan to help children get an

education mom and dad couldn't afford

---A personal loan based on character more

than their account balance or beacon score

If there has been any benefit to the ATT case, it is that it has helped many realize that NCUA and the credit union movement have, shall I dare say, a "common bond" despite our "healthy tension."

We are on the ship of providing safe, sound, viable credit unions to our members together. Maybe different decks at time, but we are on the ship together. Sometimes we may, and perhaps we must, view issues from the port side while the other is viewing it from the starboard. But, if we communicate, we can keep from falling into the sea. Or at least from pushing each other in.

I encourage you to participate in the decision-making process by responding to NCUA requests for comments. I can assure you that they are read, taken seriously and have changed potential regulatory actions significantly and for the better.

Participate in credit union organizations, as you are doing here today.

Be informed about credit unions issues and support them with the same passion you show for your individual credit unions.

Although a pivotal time in the history of the credit union movement, I can think of no more exciting time to be a part of it.

Diaz/DaGama story.

We must work through the Sea of Storms and find our Cape of Good Hope.

I look forward to working with you. Together we go through the storms so that together we will share the good hope.

Thank you very much. May God bless you all in your work for America's credit unions and credit union members.