2000 AND BEYOND

Remarks of Dennis Dollar

NCUA Board Member

CUNA Governmental Affairs Conference

Washington Hilton and Towers

February 22, 1999

Thank you so very much. As always, it is a pleasure to attend the CUNA Governmental Affairs Conference. From my years as a credit union CEO to my present tenure as a member of the NCUA Board, the GAC is always a highlight of the year. It is an honor to address you again this year.

I would like for us to take the next few minutes to look at the future of credit unions together...both from the perspective of the regulator and the regulated.

First, we must realize that there will always be a "natural tension" between regulator and regulated. This is not only natural but it is indeed proper... but I have long maintained that this "natural tension" should be a "healthy tension."

I have had the unique experience to have seen this regulator/regulated tension from both sides. As I shared with you in my first address last year:

Have sat across from member...kids to school

Have met that member in parking lot...new vehicle

But I have also now had the daunting task of:

Voting on appeals of members

Have voted on liquidations and conservatorships

It is that experience on both sides of the table which has taught me my regulatory philosophy - and it is the regulatory philosophy that I believe should be NCUA's regulatory philosophy as we, both as the regulator and regulated, face the new millennium and beyond.

Regardless of the size of your credit union, to you it is more important that NCUA be an effective regulator than it is to be an excessive regulator.

In fact, the two terms are mutually exclusive - an excessive regulator who does not allow those he regulates to have the flexibility to make necessary business decisions and compete in today's highly competitive marketplace without unnecessary interference will not be an effective regulator...neither will those he regulates be as effective in meeting the needs of their members.

And, if a credit union does not meet the needs of its members, it will ultimately become a safety and soundness concern for NCUA.

One of the basic concepts behind the new field of membership rules put in place by the NCUA Board in adherence with HR 1151 is that, in today's competitive marketplace, the ability to compete has a direct correlation with the ability to maintain safety and soundness.

As a safety and soundness regulator, we would be remiss if we did not consider the ability to make the business decisions necessary to compete in today's marketplace without unnecessary regulatory interference as a major component of safety and soundness, regardless of the size of your credit union.

And, while I am on the subject of the new field of membership rules, I would like to briefly address the bankers' most recent lawsuit against NCUA challenging that rule.

Now, ya'll know my Southern upbringing taught me to always try to be a gentleman, even to those who disagree with you - but when NCUA has been sued 13 times in the past five years by banks or bank trade organizations for simply trying to do our job - even the most well-bred Southerner begins to lose those most genteel responses. So I'm gonna try to make Mama proud and remember my manners. But I'm gonna try to address the issue, as we say down South, "straight up."

We drafted our new rule closely and carefully, under the watchful guidance of our office of general counsel, with our eye ever toward following the letter and the spirit of the act - an act named the Credit Union Membership Access Act.

Of the 37 pages of HR 1151 as it passed the House, the bill which ultimately became the Credit Union Membership Access Act, everyone should realize that 23 pages of the bill were new safety and soundness requirements - commonly referred to as the Prompt Corrective Action sections - that clearly indicate that Congress intended us to formulate all of our new rules, whether they be on membership access, member business lending, or supervisory committee audits with an overriding emphasis on safety and soundness.

You may not like everything in our new rules, and I know from my mail that many of you do not. We have been criticized by many credit unions for not having been liberal enough in our interpretations, while at the same time our banking critics and many of their spokesmen have said we went way too far.

As a general rule, I have found that when we as regulators are being shot at from both sides, we are usually pretty close to being on target.

No, we were not surprised by the ABA decision to file a suit against our new rule. Nor have we allowed the threat of such a lawsuit to deter us from our responsibility as regulators throughout the process.

We knew we would be attacked. You always are when you address the tough issues.

But we have a job to do. And know this. Simply because the ABA has gained the "right" to challenge our actions in court does not mean that their position is any more "right" than it was before.

If credit unions cannot compete, they cannot remain safe and sound in today's marketplace. Maybe that is what banks want, but it is not good public policy.

The banking industry has helped shape this marketplace with its "bigger is better" merger-mania.

Yet, an ABA spokesman recently criticized NCUA with this incredible statement: "I'm amazed that any federal regulator of financial institutions in America today could develop a rule that promotes bigness."

For the ABA to criticize credit unions merely for wanting to grow is much like Mark McGwire criticizing the rest of the Cardinal lineup for trying to get a few hits of their own. Folks, even Big Mac realizes he can't drive in all the runs, all the time.

We never expected the ABA to like our rule. They didn't like the new legislation Congress passed either.

Let's understand one thing clearly. The ABA has no stake in safe, sound and viable credit unions. On the other hand, NCUA is charged by law to be just that - a safety and soundness regulator. It is really not news that we do not see eye to eye with the ABA on this issue. For that matter, we do not always see eye to eye with CUNA either. There are many parts of this rule that your own organization would have preferred to be left out or changed.

But, we have adopted a solid rule that both restricts and empowers credit unions in accordance with the Credit Union Membership Access Act. The Congress built the

statutory frame, we poured the regulatory foundation.

It is up to you, the nation's credit unions, to build the structure within that frame, on that foundation. This new rule will allow you to build your choice of structure that fits that frame and foundation. We do not choose, nor should we choose, to make the decisions for you as to whether your structure is small or large, multi-tiered in its service structure or simply a single-level. We leave to you to build the structure, as long as it is a safe and sound one...not just for you who live in it now, but for those yet to move in.

I am confident we will prevail in court with these new rules because they are, in our opinion, both within the congressional framework and melded with the cement of safety and soundness considerations.

Consumer choice between financially sound credit unions and financially sound banks in a competitive marketplace is where this battle should be fought, not in the courts.

The new field of membership regulation, along with the proposed rules on member business lending, accounting and auditing standards, and the advance notice of proposed rulemaking on prompt corrective action are all designed to fully comply with the letter and spirit of HR 1151, while at the same time retaining for credit unions the empowerment to make their own business decisions within the boundaries of safety and soundness.

Empowerment to make the necessary business decisions to compete and therefore remain strong is vital for the year 2000 and beyond with a new millennium's

emphasis on free markets, international competition, technological advancements, less government regulation and efficiency of service.

FAA analogy

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

You must always know that, in this analogy, if the plane is not flightworthy...it must be repaired or grounded.

My mailbox daily carries letters from those who object to needed repairs or forced groundings...a safety and soundness regulator must be decisive when risk to that safety and soundness is discovered.

But, when there are no safety and soundness issues, an effective regulator provides the flexibility to meet the needs of members - within the framework of safety and soundness.

For example, we hear much emphasis on serving the underserved, and it is a proper emphasis. In fact, it is a part of the heartbeat of credit unions. It is your history and your heritage. But, from personal experience as a former credit union manager, I can attest that many innovative proposals to extend credit union services to those who are underserved are being voted down by credit union boards and management teams each year, not because of an unwillingness on the part of credit unions to provide those services - but, because of fear that NCUA will write them up for too many high-risk loans, an excessively high delinquency rate or expense ratios that are above peer...all of which might come from such an innovative program.

Special departments, emphases and conferences are commendable to encourage service to the underserved, and I support those...but I maintain that a regulatory approach that encourages innovation, not one that penalizes it...that rewards reasonable risk management, not one that writes it up...that welcomes solutions to benefit members whose personal situations may fall "outside the box," not one that determines to draw the box even tighter next time.......will do more to extend credit union services to the underserved than any other approach NCUA can take.

Before I leave this podium today, I also want to encourage this audience to provide the leadership necessary in the credit union community to foil the plans of the disciples of divisiveness.

You will hear some who say NCUA is spending a disproportionate share of its resources trying to save small credit unions. With this narrow perspective, they seek to build a wedge in this successful movement.

Others say that NCUA's rules favor large credit unions over the small. Again, seeking to build a wedge.

Longfellow wrote, although not about credit unions but certainly applicable here, "all your strength is in your union, all your danger is in discord."

A regulatory environment that empowers credit unions to make their own business decisions, and to map their own growth strategies, without unnecessary regulatory interference benefits all credit unions - large and small alike.

Know this, and I say it without equivocation. The only beneficiary of a wedge being driven between small and large credit unions is the banking lobby.

Do not allow your competitors to pick your enemies from within your own ranks.

You must not allow the safe, sound ship of America's credit unions to be sunk by an iceberg of divisiveness.

Those who sow the seeds of division, whether they come from your own ranks or even from the highest eschelons of your regulatory body, are not acting in the best interests of safe, sound credit unions.

The standard that should be applied by NCUA as we evaluate every issue is the same one I applied as a credit union CEO when we considered an issue:

"How will it affect the member?'

Not how will it affect small credit unions. Not how it will affect large credit unions. Not how will it affect the agency. Not how will it affect the insurance fund. But how will it affect the member. This should be the overriding standard.

For, in today's marketplace, if you take care of the member - you will take care of credit unions, small and large - the agency and the insurance fund.

Member service is paramount to remain a safe, sound institution. But NCUA cannot and should not regulate that aspect of what you do. You, at your credit union, must remain committed to service to your members - your entire field of membership - and reaching out to serve those you are not today serving or that you may not be serving as fully as you can.

What we at NCUA can and must do is to provide a regulatory environment that empowers you to do so within the bounds of safety and soundness.

Now, you who have heard me speak before know that I believe the first and most important member service you can offer is - a safe, sound credit union.

This is your and our first responsibility and all regulatory empowerment must be built upon that foundation.

Credit unions have a mission - to meet the financial needs of each credit union's member-owners, regardless of their status or position in life. Credit unions serve millions that other financial institutions, including some of the fiercest critics of credit unions, will not serve.

Credit unions do not believe these millions do not deserve financial service.

Although credit unions were not created to serve only those of small means, (for if the purpose of cooperative credit is done well, it attracts the business of many with means who share its goals but it also grows millions of people of small means into people of greater means), credit unions are one element of the financial services industry that does not and should not ignore the needs of those of small means.

It is indeed part of the heartbeat of the credit union movement. CUNA continues to demonstrate leadership in this important emphasis with its Project Differentiation and I commend you for this initiative. You have a breakout session this afternoon on this community service project, and it is a proper emphasis for you as a trade organization. I am honored that my Executive Assistant Kirk Cuevas has been asked to participate on this panel to talk about the role NCUA can play in creating the right kind of regulatory environment.

"One size does not fit all" among America's credit unions. They are as different as the employer groups and communities upon which they are based. But one thing is the same for all - if they do not serve their members financial needs well, they will ultimately have safety and soundness concerns. Member service and safety and soundness go hand-in-hand.

Effective, not excessive regulation ... empowerment ... allowing safe and sound credit unions to "fly their own planes"

This is the NCUA I see in the year 2000 and beyond. Your credit union's responsibility is to continue to earn your empowerment through your own emphasis on member service and safety and soundness.

I want to encourage your communication with NCUA.

Story - "I almost said something when mama fell out!"

Don't be the one who missed the chance to have your voice heard during this historic time in the history of America's credit unions.

You have won a major victory with the passage of HR1151...and I commend you. Don't lose it by allowing your empowerment to be diminished by excessive regulation. We should not allow credit union critics to win restrictions in the regulatory process that they did not win in Congress to take away the ability of safe, sound credit unions to make the business decisions necessary to maintain that safety and soundness, including your own growth strategies. Congress empowered small and large credit unions alike with HR 1151, even as they imposed certain restrictions and limitations. We must do the same at NCUA.

Yet, even as we empower credit unions under HR 1151 and its resulting regulations, I must likewise ask your support for the tough decisions we must make to be an effective regulator. Those decisions are tough at times and inherently unpopular.

There will always be a healthy tension between credit unions and NCUA. But always remember that safety and soundness must be the hallmark of America's credit unions.

There are over 75 million credit unions members who are depending on us both to do what is right for them.

Thank you very much. It has been an honor being with you today.