Mutual Respect for Mutual Survival
A natural tension exists between industry and regulators that can be healthy and helps keep both on their toes. But when a loss of respect occurs on either side, and currently on both sides, it becomes counterproductive. Both sides must earn back that respect for the good of the entire industry.
Several credit union failures have been spotlighted over the last couple of years that have many in the industry wondering what is going on and placing blame. Accusations, usually made in private, have been hurled at the NCUA regarding its lack of expertise, while the agency said credit unions are to blame, too. Some in the industry have referred to the NCUA as "vindictive" and "bullies"-again in private-while the agency issues regs repealing RegFlex and establishing board member qualifications.
Clearly there's a lack of trust and respect, and it goes both ways.
A lot of fodder has been made of the corporate problems because that's the immediate crisis, but a growing one is looming for natural person credit unions that have been piled upon by the poor economy, unrestrained growth strategies, ever increasing regulatory burdens and the corporate assessments. among other things.
In recent material loss reviews by the NCUA's Office of Inspector General, credit unions, boards, and state and federal regulators have been knocked for deficiencies that have led to major losses to the NCUSIF. The OIG report on High Desert FCU blamed the credit union's failure on a high concentration (60% of its portfolio) of real estate construction loans. And the underwriting and monitoring of the loans did not meet NCUA standards. The credit union was responsible for ensuring compliance. At the same time, the NCUA was in charge of making the credit union comply, but the OIG found that the "NCUA examiners did not adequately evaluate the risk in the HDFCU's real estate construction portfolio."
The estimated loss to the NCUSIF: $24.3 million.
On April 14, the OIG released two reports. One knocked Cal State 9 and federal and state examiners for not indentifying and monitoring liquidity risk at the credit unions due to excessive growth and concentration in the HELOC portfolio. Estimated loss to the NCUSIF: $206 million. The second report involved fraud at Center Valley FCU, which dinged the insurance fund for $16.4 million. Blame was placed on lack of internal controls and insufficient monitoring.
On May 5, the OIG issued a report stating that Eastern Financial Federal Credit Union would cost the NCUSIF $40 million due to both the credit union's and the NCUA's lack of understanding of the collateralized debt obligations the credit union was buying.
These losses are just the tip of the iceberg.
Additionally, what tipped off this column was the release of the NCUA's 2008 and 2009 unqualified audited statements, which found that NCUA did not have the necessary accounting expertise. Items pointed out by KPMG in the 2009 financial audit were as banal as workers' compensation liability, which were more than $2 million below what KPMG found it to be.
One point that can't be ignored at the NCUA is the cloak of federal government employment. I'll start out by saying that most federal government employees are competent workers who do their jobs at least adequately; my father was one of them. However, instead of incompetence resulting in real consequences, such as loss of said employment, federal employees are just shifted around to other positions. The system is broken and breeds incompetence. Add to that the fact that many NCUA employees are organized under the National Treasury Employees Union, and they're untouchable-a real management nightmare when faced with troublesome or unmotivated employees.
Credit unions have the responsibility to fund the agency, yet neither the NCUA nor credit unions can control the fate of less-than-enthusiastic workers. According to the U.S. Census, federal government employees earned an average of $67,052 per year as of year-end 2009. Under FIRREA, the NCUA and other federal financial regulators work from a higher scale than the rest of the federal government. By contrast, the Bureau of Labor Statistics reported that the weekly income for all U.S. workers in the first quarter of 2010 was $754, or roughly $39,208 per year. Again, most NCUA employees are certainly not lazy or incompetent, but what premium are credit unions paying for those that are and cannot be eliminated?
Credit unions and the NCUA have a lot on their plates in addition to the corporate fiasco, again due to a lack of understanding by credit unions and the NCUA about what they were getting into, and legislative efforts to overhaul financial services regulation. It seems a miracle to me that the NCUA has survived the overhaul virtually unscathed while the OTS is being eliminated. Certainly the OTS deserves it for its poor track record with WaMu and Countrywide, but hats are off to the NCUA and the credit union lobby for staying out of it. Some large credit unions even discussed lobbying for abolishing the agency but eventually decided they were better off with the devil they know.
The NCUA is heading in the right direction. The agency has issued three public letters of understanding and agreement this year, compared to one in 2009 and zero in 2006 through 2008. These problems in credit unions didn't occur overnight as noted in the OIG reports. The agency has publicly stated it will improve oversight of member business lending programs and clean up its accounting practices. Public statements increase accountability.
Now credit unions must lick their wounds and work toward being a partner with the agency to improve oversight and create a more productive environment for the good of the entire industry.
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