As Prepared for Delivery for March 2, 2021
Hello everyone. And, thank you, Antonio, for that kind introduction. It is good to see all of you, albeit virtually.
I hope that 2021 is going well for you, and that you, your families and your credit unions have safely emerged from a truly unprecedented year with good health – and a sense of humor – still intact. That, however, could be a tall order, because the COVID-19 pandemic has taken a tremendous human toll on many of us, and it continues to pose many challenges for our country and the credit union system.
Now, more than a year since the first confirmed COVID case in the United States, it is no exaggeration to say that the pandemic has affected everyone in some way and upended virtually every aspect of our daily lives. And yet, during this unprecedented time, credit unions have pressed forward as financial first responders, doing their part to support their members and the communities they serve. I thank you for that service.
Today, the credit union system sits at the intersection of several crossroads, and we each will likely face many difficult days and decisions ahead. For the next few minutes, I would like to briefly overview where the credit union industry currently stands in light of recent economic developments and the ongoing COVID-19 crisis, and what the NCUA is doing to support our nation’s credit unions and the members they serve. I will then focus on the importance of consumer financial protection, as well as economic equity and justice, and the path forward.
State of the Credit Union Industry
Let me start by acknowledging that 2020 was a very challenging year. We used to say that hindsight is 20/20. In hindsight, I will never use that phrase again.
Early in the year, the measures taken to combat the spread of COVID-19 all but ground economic activity to a halt, resulting in the loss of more than 22 million jobs and a soaring unemployment rate. But as quickly as the economy shut down, it rebounded as governments lifted restrictions on consumer and business activity and businesses began hiring again. By January, just over half of the jobs lost in March and April had been restored, and the unemployment rate declined from an 80-year high of 14.8 percent, to 6.3 percent — an improvement, but still a high number.
Nevertheless, this estimate likely undercounts the real number of unemployed workers. For instance, it does not factor in the nearly 5 million workers who exited the labor force and have been prevented from rejoining it due to the pandemic. It also excludes workers who have been misclassified as “employed but not at work” when they should have been considered unemployed. If these two groups were factored into the numbers, the unemployment rate would be close to 10 percent.
What is more, as COVID case counts have since ebbed and flowed, the economic recovery, which was just starting to gain considerable steam, has sputtered. Now, as we head into the spring and vaccination efforts ramp up, we expect an uptick in both consumer confidence and economic growth. Even so, it will take time for the economy to heal completely from the pandemic’s effects, and we cannot determine what role virus variants will play in the recovery’s path.
A consensus of forecasters expects the unemployment rate to decline to around 5.3 percent by year’s end, but it is unlikely to return to the level associated with full employment before 2023. Consequently, credit unions and their members could face numerous challenges. For example, employment in some industries, especially the retail and travel sectors, is unlikely to return to pre-pandemic levels anytime soon. Meanwhile, state and local governments faced with large budget shortfalls may have no choice but to cut jobs. Additionally, high unemployment levels will likely continue to impede loan demand, particularly for non-mortgage consumer loans, and could affect credit quality of loans already on the books.
Credit unions also face a prolonged period of very low interest rates, and short-term interest rates are expected to remain low for the foreseeable future. Longer-term interest rates are expected to edge higher, but they will generally remain lower than pre-pandemic levels, suppressing already compressed net interest margins. In the year ahead, your credit union’s ability to manage interest-rate risk will play a crucial role in financial performance.
In the final analysis, 2021 is likely to be one of the most consequential years for the credit union industry, and we must be prepared.
The NCUA’s Response to COVID-19
And, that brings me to my second topic for today. During the pandemic, the NCUA has focused on three priorities:
- Protecting the health and safety of NCUA staff and contractors, so the agency can continue to perform its mission-essential functions;
- Assessing the impact of COVID-19 on credit union members and operations; and
- Analyzing how the pandemic will affect the future financial condition of credit unions and the Share Insurance Fund.
Going forward, the top priorities for the NCUA Board will be ensuring that the credit union system and the Share Insurance Fund are prepared to weather any economic fallout related to the pandemic. To protect the Fund, we are actively monitoring certain segments of the system, including credit unions closely connected to the oil and gas, travel and leisure, and agricultural sectors, among others. We are also focusing on credit unions with elevated risks, such as those credit unions with large concentrations of commercial real estate loans relative to assets. One thing that seems likely is that, as during past recessions, credit union performance will lag the unemployment rate by one to two years.
Accordingly, your credit union should pay careful attention to capital, asset quality, earnings and liquidity. You should also heed the age-old advice of a “stitch in time saving nine” by acting quickly to mitigate problems when they develop. As the pandemic evolves, the NCUA will also continue to adjust its supervision and examination program to mitigate potential risks to the Share Insurance Fund and the broader system.
Central Liquidity Facility
We are also closely monitoring liquidity risk. Because liquidity can be scarce during a financial crisis, the NCUA sought legislation last year to enhance the capacity and powers of the Central Liquidity Facility. These temporary enhancements were part of the CARES Act. The NCUA Board also took its own actions to strengthen the CLF.
Because of these reforms, the facility’s borrowing authority has grown more than fourfold to $33 billion since the start of 2020 and nearly 80 percent of all credit unions now have access to the CLF. Although Congress extended these powers until the end of 2021, I have asked lawmakers to make these temporary changes permanent.
I strongly encourage all credit unions that do not already belong to, or have access through their corporate credit union, to join the CLF.
Consumer Financial Protection
Equally vital to the members of credit unions is consumer financial protection and fair and equal access to credit.
In 2020, NCUA examiners completed targeted reviews in all risk-focused and small credit union examinations to evaluate compliance with various consumer financial protection laws and regulations. The NCUA then performed quality control reviews on randomly selected examination reports. We observed several issues suggesting that some credit unions may not be paying attention to consumer financial protection as closely as warranted.
In some cases, the NCUA’s examiners found weaknesses in credit unions’ compliance management systems, which can lead to compliance issues, violations or harm to consumers if not adequately addressed. If left unchecked, issues such as deficient recordkeeping, or inadequate training, or weak internal review or audit processes could lead to heightened risks.
Based on those findings, we observed notable shortfalls in particular in complying with the:
- Fair Credit Reporting Act,
- Electronic Fund Transfer Act, and
- Truth in Lending Act.
Credit unions with Fair Credit Reporting Act problems typically did not establish and implement reasonable written policies and procedures about the accurate reporting of member information to a consumer reporting agency, potentially affecting the credit scores of consumers and their ability to obtain fairly priced credit. Credit unions with Electronic Fund Transfer Act issues typically did not promptly investigate errors or provide complete disclosures, preventing members and consumers from understanding their accounts and leading to expensive fees. And, credit unions with Truth in Lending Act problems typically did not provide complete and accurate disclosures to their members or correctly calculate the finance charge for certain consumer loans, potentially increasing the overall cost of credit for the consumer.
To address these and other issues, especially as the industry grows in complexity, the NCUA must create a dedicated program to supervise for compliance with consumer financial protection and fair lending laws. In doing so, we will better protect consumers’ interests, ensure that the credit union system lives up to its commitment to serve members, and provide a comparable level of consumer protection oversight as federal bank regulators.
Regarding discrete consumer protection issues, this year the NCUA will continue to focus on compliance with the forbearance provisions of the CARES Act and efforts to help consumers who are experiencing financial difficulties due to the pandemic. Whether it means reworking an existing loan due to financial stress, or delaying payments, the NCUA will not criticize a credit union’s efforts to provide prudent relief for members when such measures are conducted in a reasonable manner with proper controls and management oversight.
The NCUA’s efforts to enhance oversight of consumer financial protection rules will not only protect credit union members, but also all credit unions from the reputational risks resulting from the missteps of others.
Economic Equity and Justice
Lastly, I want to focus on economic equity and justice, which are vital to the continued health and success of the credit union system, especially regarding strategy, sustainable growth, innovation, talent acquisition and employee retention.
By enhancing support for minority depository institutions, enforcing fair lending laws, and advancing initiatives to close the wealth gap, we can address the disparities created by centuries of systemic discrimination and exacerbated by the pandemic. We can also ensure that the cooperative nature of the credit union system lives up to its mission of meeting the credit and savings needs of consumers, including those of modest means.
Research conducted after the last economic downturn found that credit unions that leaned in and increased lending within underserved communities recovered more quickly than those that did not. Research has also shown that there are three primary ways to close the wealth gap. One is to open and regularly fund a retirement account. Another way is to own a home. And the third way is to start a business.
Given the cooperative philosophy at the heart of the credit union movement, your credit union has a moral obligation to step up and help minority-owned businesses and communities recover and start anew in the months ahead.
So, I would like to challenge all of you to deliver more financial products and services – free of discrimination or unfair practices – to people of color and within communities of color. These efforts will be vital to ensuring a more equitable economic recovery.
A little more than two years ago, on a trip back to my home state of Indiana, I stopped at the Kurt Vonnegut Museum and Library. Best known for Slaughterhouse Five, Vonnegut was one of the most influential and innovative writers of the 20th Century. In his work, he offered us sound advice on the human experience, including when he once observed: “We have to continually be jumping off cliffs and developing our wings on the way down.”
Due to the ever-evolving nature of COVID-19 pandemic and its economic fallout, you may have to develop your wings along the way. I suspect that is what many of you will be doing throughout 2021. COVID-19 has changed almost everything, from how we live, work, and socialize, to how we think about, and plan for, the future. It has also changed the way in which many of you provide financial services and products to your members, and it has changed the way in which we conduct examinations and think about risk.
But, if we, as a community, work together to smartly and safely navigate through the pandemic-induced economic crisis, we will “develop our wings on the way down” and emerge stronger from it.
We obviously have lots of work ahead of us. But by staying focused on capital and liquidity, consumer financial protection, and diversity, equity and economic inclusion, we will together achieve a more vibrant economic outcome for everyone in society.
Becoming the 12th Chairman of the NCUA is the greatest honor of my career, and I look forward to working with all of you in support of the great promise embedded within the credit union movement.