“We the People”
More than 200 years ago, our founders came together at a convention and wrote a constitution. That document begins with the words: “We the People.”
When getting into the field during my first 10 months on the National Credit Union Administration Board, I have kept in mind these three words as they relate to credit unions. In meeting with hundreds of credit union leaders, staff, volunteers, and members, I have seen the rich diversity of credit unions. And, I have heard the stories of credit unions advancing the system’s mission: to meet the credit and savings needs of consumers, including those of modest means.
In Oregon, I heard the inspiring story of a new American. While at her credit union to get a loan for car tires, she fortuitously brought along some of her homemade tamales. Because those tamales smelled so delicious, the loan officer had the presence of mind to ask whether she might also be interested in starting a small business. A $500 loan changed that member’s life. Her successful business has moved her family toward financial independence.
In Ohio, I heard about a firefighter who paid his sister’s bills instead of his while she fought cancer, believing he could later dig himself out of debt. He did not foresee the coming damage to his own credit score. His credit union, however, saw him as more than a statistic and worked with him to improve his credit, so he could afford a lower-cost car loan.
And, in North Carolina, I learned about a woman whose husband abandoned the family. She earned just $18,000 a year, but had a monthly mortgage of $1,000. Her credit union refinanced that loan, so the woman and her three small children could afford to stay in their home.
My visits with credit unions around the country have also informed my NCUA Board votes. For example, after meeting with a credit union in Washington State, I better understood the role that non-member deposits play in providing the capital needed to meet loan demand. As a result, I supported the recent final rule on non-member deposits.
FIRE Philosophy and Priorities
At my confirmation hearing, I first laid out my regulatory philosophy. Financial institutions regulators need to be fair and forward looking; innovative, inclusive, and independent; risk focused and ready to act expeditiously when necessary; and engaged appropriately with all stakeholders to develop effective and efficient regulation. Put them all together and you get an acronym. I call it my FIRE philosophy.
That philosophy guides my four priorities as an NCUA Board Member. Those priorities are capital and liquidity; cybersecurity; diversity, equity, and economic inclusion; and consumer financial protection.
One of my most important jobs at the NCUA is to safeguard the safety and soundness of federally insured credit unions. With that goal in mind, I focus on the issues of capital and liquidity. I supported the final rule on non-member deposits to enhance liquidity and a proposed rule on subordinated debt. Allowing more credit unions to obtain outside borrowings to increase their regulatory capital levels and protect against future losses safeguards all credit unions.
The increasing exposure of our financial system to malware, ransomware, distributed denial of service attacks, and other forms of cyber intrusion, which affect financial institutions of all sizes, also concerns me. The NCUA needs to work with credit unions, their vendors, and service providers to anticipate and protect against these threats. In that regard, the addition of cybersecurity policy staff as part of the agency’s 2020 budget is an important step toward preparedness.
Additionally, I support giving the NCUA regulatory authority to resume oversight of third-party vendors. Closing this regulatory blind spot would better protect the credit union system from cyber-threats and place the agency on a more level playing field with the other financial institutions’ regulators. It would also provide a measure of regulatory relief.
Many of you have heard me say this before: diversity, equity, and inclusion are highly important to the continued health of the credit union system. The NCUA must foster an environment that promotes inclusion, which will lead to economic dignity for all. The agency should also support the work of small credit unions, minority depository institutions, and low-income credit unions, who are often the ones reaching the underserved and who face the challenges of increased competition and difficulties in achieving economies of scale.
We can also advance economic dignity and inclusion by making sure that we count everyone when determining whether a credit union meets the low-income designation. Accordingly, we need to modify the NCUA’s rules to better account for service members who live on military bases in the United States and abroad. The NCUA staff is working on this issue, and I am hopeful that we can soon announce a solution.
Diversity and inclusion leads to better service, greater innovation, improved solutions, and increased membership. Because diversity and inclusion is a good investment, I have championed the voluntary diversity self-assessment available at cudiversity.ncua.gov (opens new window). The survey is voluntary and private. Individual responses will not be made public. I encourage you to complete the survey.
Finally, but not least, the NCUA has consumer financial protection responsibilities for credit unions with less than $10 billion in assets. Today’s credit unions are larger and more complex. At the end of the third quarter, 319 credit unions each had more than $1 billion in assets. Because of this growth, the NCUA needs to refine its approach to consumer financial protection.
The NCUA Board should create a dedicated program for supervising for compliance with consumer financial protection matters. In doing so, we will better safeguard member interests and ensure that the credit union system lives up to its commitment to serving members.
Think about it this way: Consumer compliance exams are like performing regular maintenance on your car. Would you go 10 years without getting a tune-up and checking your oil? None of us would. My proposal is about ensuring that a credit union runs smoothly, and if it does not, providing the maintenance needed to optimize credit union performance.
What’s on the Horizon
In a changing world, credit unions have many issues on the horizon, and I am focused on three things.
First, I am watching liquidity and how federally insured credit unions might respond to the next economic contraction. Strong economic conditions have fueled rapid loan growth. The loans-to-shares ratio for federally insured credit unions bottomed out in 2012 and 2013 at approximately 66 percent, but it has since rebounded. The ratio now sits at about 84 percent nationally. And, in some states like Vermont and Wisconsin, it exceeds 90 percent.
When a financial institution holds illiquid assets like long-term mortgages, it may have difficulty selling those assets at normal prices to obtain needed cash during times of economic stress. The NCUA’s rule requiring appropriate risk-management practices to maintain access to liquidity should help credit unions of all sizes to maintain ample access to cash to withstand unexpected emergencies. And, the NCUA’s supervision must ensure the rule is applied effectively going forward.
Second, consumer debt has grown sizably in recent years and, after adjusting for inflation, is now higher than at its peak during the Great Recession. Total household debt topped $14 trillion in the fourth quarter.1 Not counting mortgages, consumer debt exceeds $4 trillion, including a record $930 billion in credit-card debt.2
While increases in consumer loans are generally a good thing for credit unions, there are some warning signs. The overall percentage of consumers delinquent on their credit card payments is rising with more than 5 percent of debt more than 90 days late, suggesting that despite the good economic times, some households are running into trouble.
If a recession occurs and unemployment rises, you could see an increase in consumer loan delinquencies and charge-offs, which could result in losses. As a result, you need to prepare for such a possibility by carefully evaluating new credit risks and quickly mitigating delinquencies.
Finally, I have looked at the reasons why credit unions merge. After learning that one of the top two reasons cited for credit union mergers is succession planning, I dug deeper.
Overall, about one in five credit unions lack CEO succession plans. Some data I have seen indicate that a large proportion of credit union CEOs and executives are Baby Boomers who will be part of a retirement wave. With these retirements, flat budgets, and tight labor markets, there is a real need for credit unions of all sizes to focus on succession planning, especially if we want to curtail credit union mergers.
This Hoosier learned young that to “be prepared” is to be a good scout. Succession planning really is about being prepared. When you return home, I encourage you to raise the issue of succession planning in board discussions and to review or adopt policies. Your efforts to address this issue today may ensure the survival and health of your credit union for decades to come.
“A More Perfect Union”
Speaking of decades, next month the National Credit Union Administration turns 50 years old. This anniversary is a good time to reflect on the credit union system’s purpose of meeting the credit and savings needs of consumers, including those of modest means.
If you think about it, this mission really tracks the vision of our founders. Immediately after “We the People,” the U.S. Constitution speaks about striving to form “a more perfect union.” With the NCUA’s oversight, today’s $1.5 trillion credit union system aims to achieve that laudable goal.
When credit unions expand access to responsible financial services products, our economy will grow. And, through the ongoing efforts of the NCUA to refine its consumer financial protection program while also supporting small credit unions, minority depository institutions, and low-income credit unions, we can work together to create that more perfect union our founders envisioned.
1 Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit 2019:Q4 (February 2020).