As Prepared for Delivery on July 29, 2020
Good morning everyone, and thank you, Dennis, for that gracious introduction.
Thank you also to Private Equity International for hosting this impressive conference. I’m honored to be among such a distinguished lineup of speakers, and it’s my pleasure to participate, albeit virtually.
Six months ago today, health officials in Washington state announced the very first death in the United States from the coronavirus, a global health, economic and social crisis unlike anything the world has seen.
And just two months ago today, the United States was in the early days of grappling with the tragic Memorial Day death of George Floyd. This was yet another instance of abuse of authority against a black man.
Indeed, it’s truly remarkable to reflect on how dramatically these two disparate events, in such a short period of time, have forever changed our country, and how many of us — likely most of us—have been gripped with uncertainty as a result.
For credit unions, in particular, these events have taken on added significance because they highlight inequities that have long existed within the communities they serve throughout the United States.
That’s why today, I’d like to give a brief overview of where the credit union industry currently stands in light of these crises and what my colleagues and I at the NCUA are doing to support our nation’s system of cooperative credit during this unprecedented and uncertain time in our nation’s history.
Let me address each of these topics in turn.
State of the Credit Union Industry
First, it’s no doubt unsurprising that the economic news in the wake of COVID-19 is disconcerting, to say the least. As we know, the pandemic is not simply a regional crisis. Indeed, the measures necessary to combat the virus’ spread has resulted in our nation’s highest unemployment rates in 80 years.
Thankfully, we’re starting to see evidence of an economic recovery. But this is a fluid crisis, and what lies ahead is uncertain.
Because credit unions are an important source of credit for their members and consumers, their financial performance is linked to the financial well-being of consumers and their members.
For example, credit unions hold $380 billion, or 24 percent, of the industry’s assets in auto loans, so we’ll be closely monitoring the demand in new and used autos. Loans secured by 1 to 4 family homes are now over $488 billion, and as always, the agency will continue to monitor housing prices and the market throughout the country.
We’ll also be watching troubled debt restructurings. If they are related to COVID-19, short-term loan modifications of six-months of less are not currently classified as trouble debt restructurings. Many credit unions have shared with me that six-months may be insufficient to help members withstand the current pandemic. So, as we are approach the six-month mark, we’ll be looking for a reasonable and prudent approach to work with members while monitoring loan performance.
This issue is magnified by the implementation of the current expected credit losses (or CECL) methodology. Even before the current pandemic, credit unions had approached the NCUA with concerns about the unintended consequences of implementing the new accounting standard.
In our current environment, I am especially concerned that adopting CECL will have a chilling effect on lending, including loans to low-income borrowers.
To that end, I have written to Financial Accounting Standards Board (FASB) Chairman Russell Golden respectfully urging that FASB permanently exempt credit unions from complying with CECL.
In the meantime, the NCUA Board will consider, at its meeting tomorrow, proposed regulatory amendments that will mitigate the adverse consequences of the capital adjustments resulting from CECL. The Board will also exercise its statutory authority to exempt small credit unions with less than $10 million in assets from generally accepted accounting principles (GAAP).
In the coming months, we anticipate that credit unions will experience higher delinquency rates as consumers and credit union members are affected by the pandemic.
We do know, however, that credit union underwriting standards have been quite strong. For example, credit scores for our industry’s auto loans have been significantly higher than for other lenders. For mortgage loans, which comprise a particularly large share of credit union loan portfolios, historical loan performance is also somewhat reassuring. During the last economic downturn, our industry’s mortgage delinquency rates were well below rates for other types of loan originators.
All this said, better underwriting standards don’t fully immunize our industry — or any other industry — from dramatic economic downturns like the one we’re in. Fortunately, we know that credit unions were generally well-capitalized entering into the crisis.
In early June, Blue Chip forecasters predicted a strong economic rebound in the third quarter of this year, but a full recovery from the current recession, they said, is unlikely for at least two years. As a result, the near-term economic outlook is somewhat challenging. I encourage credit unions to continue monitoring economic and financial developments.
In the meantime, the NCUA Board has provided measures of regulatory relief and flexibility to support credit unions as they respond to the COVID-19 pandemic.
At the same time, the current uncertainty presents an enormous opportunity for credit unions to rise to the occasion.
Because credit unions are cooperative, member-owned financial institutions that reinvest profits, they have the needed flexibility to do what they do best: care for their members directly and individually.
And working with consumers directly and optimizing the credit union/member relationship on a personal level is particularly meaningful during times of economic uncertainty.
Over the last several months, I’ve been heartened by the many stories I’ve heard of credit unions going above and beyond to continue providing quality and affordable financial services to members experiencing economic hardship due to the pandemic.
From making policy adjustments to meet the needs of borrowers who are facing stress from the crisis, to easing loan terms to help members through a difficult time, credit unions are doing everything they can to help their members.
Though the months ahead will undoubtedly challenge the credit union system in unprecedented ways, it’s important to remember that credit unions have historically played a vital role in helping their members — and by extension, their communities — succeed financially.
As evidence of the industry’s commitment, just prior to the crisis, the NCUA’s Office of the Chief Economist completed a study showing that mortgage rates for 30-year fixed-rate loans originated by credit unions in 2018 were substantially below rates for other institutions. The savings shown in that report were significant — large enough to have a meaningful effect on financial security.
Clearly, the efforts of credit unions throughout the country are consistent with, and indeed in the best tradition of, the “people helping people” ethos that has guided the credit union industry for nearly a century.
Long after the COVID-19 crisis subsides, that will continue.
Commitment to Diversity, Equity and Inclusion
And that brings me to my second topic for today.
Certain communities — including and especially poor communities and communities of color — are at increased risk of getting COVID-19 or experiencing COVID-19-driven economic disruptions due to long-standing systemic health and social inequities.
For instance, rural and underserved communities have been especially hard hit by COVID-19, and these are the areas that minority depository institutions and low-income designated credit unions predominately serve.
These communities are especially vulnerable to the economic and financial disruptions resulting from the virus. Likewise, minority-owned businesses have been particularly affected by the suddenness and depth of the economic shock.
Simultaneously, the death of George Floyd has revealed the anguish, pain, frustration, and anger that have long existed in the black community.
So what can we do to remedy those inequalities?
One of the things I passionately believe is that financial inclusion is the civil rights issue of our time.
And this effort is truly personal for me, as I’ve spent my entire career focused on building and reinforcing hard-pressed urban neighborhoods and rural communities that have fallen behind.
Since being sworn-in last year as NCUA Chairman, I have talked to literally thousands of credit union leaders, employees, regulators, and members about the importance of diversity, equity, and inclusion, or “DEI” for short, and it’s been encouraging to see that this message is so well-received.
One of the reasons for that, I think, is because everyone knows by now why DEI is so important.
We have endless numbers of studies and surveys, stretching back at least three decades, making the strategic business case for DEI.
In 2018, for instance, McKinsey and Company published its “Insights on Diversity and Inclusion” report, which found that, across the board, companies committed to the guiding principles of diversity, equity, and inclusion outperformed the competition. According to the report:
- Diverse companies were better at attracting and retaining top talent;
- They enjoyed superior financial performance, including profitability; and
- They had higher levels of employee satisfaction and engagement.
Unfortunately, organizations and executive leaders far too often treat diversity as simply a “human resources” issue.
To be truly effective, though, diversity requires a commitment to cultural change at every level and must extend throughout the organization.
It cannot merely be a matter of “checking the boxes” to show that you’ve got the right proportional representation of women, people of color, and LGBTQ+ people in the C-suite or on a corporate board.
A commitment to a strong DEI program must inform all of the organization’s strategic planning and operations. For the financial services industry, in particular, diversity is vital when it comes to reaching and serving a wider range of people.
That’s why we must consider diversity in a much more expansive way, beyond the standard categories.
For example, we must ask ourselves:
- Are we doing everything we can to reach people with low and moderate incomes?
- Are we including disabled and differently abled individuals in our financial inclusion plans?
- What about people in hard-pressed urban communities, or conversely, distressed rural communities, where financial service options are increasingly limited?
Each of us should be thinking critically about these and other questions because they are at the core of true financial inclusion.
We also need continued innovation in financial products that promote greater inclusion.
The financial services industry has shown great creativity in developing new types of products, but we haven’t always directed those creative energies toward the people and communities who need help the most.
And that’s important because what truly matters is the impact we’re having on real people.
Last year, for example, I spoke with a woman in Maryland who’d been excluded from the financial system for most of her adult life. After joining a credit union and participating in a financial coaching program, she built over time a credit score that enabled her to obtain access to mainstream financial products.
Today, she’s on the road to financial freedom and homeownership.
That’s just one example, but I could point to scores of others.
Here’s the bottom line: When we talk about addressing inequities, what we must focus on is action—that is, what can we do to address inequality?
On a concrete level, we can identify and implement solutions within our realm of influence, to make the changes we need to see.
And once those changes are made, it will inevitably have larger reverberations throughout the U.S. and the world.
I believe it’s time we make genuine change. And it begins with an authentic and sustained commitment to financial inclusion.
But we can’t simply sit back and wait for someone else to fix it.
It begins with leadership and a dedication to problem solving and making a positive difference in our world. On that note, and in closing, let me share with you a quote from Robert F. Kennedy, who in the aftermath of Dr. Martin Luther King’s assassination in 1968, said:
What we need in the United States is not division; what we need in the United States is not hatred; what we need in the United States is not violence or lawlessness; but love and wisdom, and compassion toward one another, and a feeling of justice toward those who still suffer within our country.
This is where the vital work of credit unions comes in. The industry’s mantra of “people helping people” can also serve as a useful moral guidepost for how we can transform today’s challenges into an opportunity for understanding, inclusion, and healing.
I look forward to working with all of you in support of that great endeavor.
Thank you again for inviting me to speak. I look forward to participating in the Q&A with Dennis in a moment.