The tough NCUA financial literacy requirements for credit union volunteer directors came as a loud wake-up call on Jan. 27, 2011. And the provision came with a requirement that all new directors had to gain financial literacy within six months of their election.
Before, many directors thought it wasn’t their job to keep tabs on the institution’s books. The January bombshell challenged any such complacency.
The NCUA rule defined what it expected from directors. “Each FCU director has the duty to... at the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the FCU’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors.”
A first-blush reaction, particularly among smaller credit unions, was horror. Speculation was rife that many would struggle to assemble an acceptably financial literate board. Some even feared a forced merger.
A year later, how did this shake out? Did the NCUA regulations have bite or were they all bark?
“NCUA got the attention of volunteers with this requirement, I will say that. There even were concerns that examiners would administer pop quizzes to directors. None of that happened,” said NAFCU CEO Fred Becker, who added that he is unaware of any credit union forced out of business because it could not muster enough financially literate directors.
After an initial wave of panic on the part of some credit unions, acceptance of the NCUA rule has settled in. Helping the cause was that many organizations, from the NCUA itself to NAFCU to independent consulting firms, rushed to offer classes designed to bring directors up to required levels.
That alone, some experts say, is a plus. Dennis Dollar, a credit union consultant in Alabama whose firm offers director training, said, “The new NCUA requirement created more discussion in 2011 at the board level than ever before about training needs. So, from that perspective, it would have to be considered beneficial.”
Superior-run credit unions may in fact be an upshot of this NCUA push, said Michael Lozoff, chair of the credit union practice group at Miami law firm Shutts & Bowen. “When all is said and done, [this] will result in improvements in governance but only in the sense that the new requirements have formalized and will help to fuel an already existing trend toward better governance.”
Not everybody concurs with this positive view. Olympia, Wash.-based credit union consultant Marvin Umholtz wrote in an email that the NCUA’s financial literacy requirement for board members was an insult toward the performance and competence of seated board directors. He added that those directors “were all ill-served by the NCUA board’s misguided and unnecessary criticism. As a reaction to the NCUA board’s financial literacy rule the credit union industry went through a lot of unnecessary compliance monkey-motion that yielded a questionable return on investment.”
Umholtz is not alone in that skepticism, although he is more vocal than many. The weighted reality is that most industry leaders now seem to believe that a better-trained director is a better director, and the NCUA requirements are a nudge in that direction.
Looking to 2012, the question is will the NCUA requirements prove to have sharp teeth? That is, will the regulator effectively penalize board members for failing to get up to the required speed? Right now, nobody knows. Said Ben Johnson, research director at Think Tank Filene in Madison, Wis., “Until we see an enforcement action and begin to understand when NCUA will seek to enforce the rules, it's hard to say whether they're biteless.”