Experts Tell Directors They Should Be Visionary but Also Cautious
These were among the suggestions that experts on credit union operations gave at NASCUS' Directors College last week. The one-day session, which preceded the association's annual meeting, attracted directors and CEOs, mostly from Washington State.
Former NCUA Chairman Dennis Dollar said board members need to keep a close eye on the credit unions' overall direction but not so much that they interfere with the top executives' ability to do their jobs.
"Trust but verify," Dollar said, quoting former President Reagan's approach to the Soviet Union.
He also said that before making a fundamental change in policy, board members should be certain that the problem a credit union is solving is a trend, not just a one-time occurrence.
The former regulator said while it is important to pay attention to economic trends, directors shouldn't overreact to either strong or weak conditions.
"Things are never as bad in a bad economy as a single snapshot will show, and things are never as good as in a good economy as a single snapshot will show," he noted.
Linda Jekel, the director of the Washington Department of Financial Institutions' Division of Credit Unions, predicted the economy would continue to pose a challenge to credit unions for the foreseeable future.
"Credit unions aren't out of the woods yet. Some economists have said we haven't hit the bottom of the housing crisis," she said. "I often wake up in the middle of the night and worry what will happen when rates change."
The problems in the housing industry have caused regulators to be more dogged in their enforcement.
Dollar, who now runs a consulting firm that helps credit union with strategic planning and operational issues, said board members' jobs are harder than ever because federal and state governments are imposing more regulatory oversight. That trend is likely to continue, he predicted.
NASCUS' Senior Vice President of Regulatory Affairs Brian Knight said that being thorough when complying with laws such as the Bank Secrecy Act may be burdensome in short run but will pay off down the road.
The BSA is "ultimately a safety and soundness concern" because if a credit union is involved in illegal activities, it could be subject to criminal or civil penalties, he told the attendees. If the violations are too severe, it could result in the credit union being closed or having to be taken over by another credit union.
Knight said credit unions located in high-intensity drug trafficking areas should be especially careful when monitoring members' deposits. Employee groups have lower risk profiles than credit unions that have broader fields of membership, he added.
Board members should be advised if the credit union has filed suspicious activity reports but should not receive copies of those filings, he added.
Knight also said credit unions need to do a more effective job of monitoring contracts with third parties. He said all too often credit unions don't perform adequate due diligence on those contracts and ignore potential risks either to their financial health or their reputation.
He also reminded directors that by Nov. 1, all credit unions must develop a comprehensive identity theft protection program and file it with the Federal Trade Commission.
While directors face a range of regulatory challenges, some of their difficulties also stem from more basic operational issues, such as dealing with examiners.
Mike Delimont, a program manager for the Washington Department of Financial Institutions' Division of Credit Unions, said the ideal examination should be thorough but not adversarial.
"We keep people informed during the process, and include a meeting with the board chairman, and there are no surprises at the end," he said.
He noted that while regulators focus on a range of subjects, a common theme is a concern about a credit union's exposure to risk. These factors include risks to their reputation and risks to their liquidity.
While individual examiners' have a great deal of leeway during the process, their reports are always reviewed by their superiors and CAMEL ratings are the result of a thorough review and analytical process, he said.
When discussing the current and future financial health of their credit union, directors should avoid having a mindset that only causes them to act when bad things happen and doesn't lead them to ask the right questions.
That's the advice of Pete Cruisus, an Arizona-based consultant whose firm provides financial and strategic advice to credit unions.
Cruisus said board members should always be asking whether the current growth level is sustainable and what factors could turn things upside down, especially if liquidity is in short supply.
"You shouldn't manage to probabilities but focus on the risk, the bad things that might happen," he noted. "Too many people make the mistake of not testing their contingency plans to determine if they are adequate."
Cruisus added that board members should make decisions about what's good for their members, and not focus too much on what other credit unions are offering in terms of rates and services.