Words of Praise for Our Regulators
One of the stated reasons for Texas Dow Employees Credit Union leaving CUNA was our disappointment with the unending vitriolic attacks on credit union regulators that seem to dominate every meeting.
My view of regulators seems to be radically different from most credit union professionals; possibly because I function in three highly regulated environments. For over 25 years, I have interacted with the NCUA and the Texas Credit Union Department. As an instrument-rated pilot, I operate under the rules of the Federal Aviation Administration. I serve my community as the chairman of a large hospital district, which has numerous powerful regulators overseeing medical care, and many that often conflict.
Compared with those other regulators, our credit union regulators are highly responsive, understanding, flexible and almost positively benign.
My experience with the NCUA and the Texas Credit Union Department, especially when new regulations are issued or when existing regulations are strengthened, is very much akin to the FAA, where the catch phrase is “Nothing happens until something happens.” Restrictive regulations arise when a specific situation must be addressed. I have yet to see the NCUA or the Texas regulator design and implement a restrictive regulation that did not address something that had been done to either harm consumers or threaten the insurance fund.
As hard as it is for some credit union managers to believe, our regulators don’t have time to sit around dreaming up new, unnecessary restrictions on our operations. They’re far too busy trying to address the damage we, as an industry, seem to be able to inflict upon ourselves, at a sometimes alarming rate with seemingly increasing magnitude.
Our regulators are not naïve. A vibrant, growing credit union movement means job security, career advancement, agency growth and continuing agency independence for regulators. Claims that our regulators intentionally restrict growth are ridiculous. If we prosper, they prosper.
The most recent wailings from credit unions are about CUSO regulation and raising the MBL cap. On these issues I stand solidly with the regulators. These two areas have far more potential to harm our insurance fund, not to mention reputational risk to our movement, than anything resulting from the corporate collapse.
Increased member business lending is again being flogged as a galvanizing issue by trade organizations needing to appear relevant to their constituencies so that phones keep ringing and money keeps flowing.
Let’s get serious. MBL is perceived as the salvation for credit unions that either can’t, won’t or don’t know how to make consumer loans. MBL looks very attractive compared to grinding out pedestrian commodity loans for cars, houses and vacations. Instead of having to make 120 auto loans for $25,000, just make that $3 million motel loan.
Here’s the reality: 85% of all credit unions have assets less than $120 million and 50% of all credit unions have assets of less than $19 million. Even a 25% cap does not allow for the critical mass required to justify originating, servicing and collecting on MBL. Making the loan is the fun part. Few credit unions can afford to monitor and service MBL, and even fewer can do it right. Servicing, annual review, analysis and collections are killers.
CUSO failures have the potential to have all of us paying NCUSIF impairment premiums indefinitely. CUSO financial and operational risks must be subject to regulatory scrutiny and be fully encompassed by enterprise risk management oversight.
At minimum, regulators must examine CUSOs as they would a member business loan of similar size. This applies not just to the initial CUSO investment, but also to the entire CUSO net worth. An allowance for CUSO losses is as appropriate as the allowance for loan losses. Anyone who does not understand this needs an immediate immersion education into the fundamentals of consolidation accounting, especially when a credit union owns more than 50% of a CUSO.
There is no corporate veil to protect consolidated income statements and balance sheets. Anyone who does not understand the damage a CUSO failure can do to a credit union’s net worth, far beyond the initial CUSO investment, had better learn quickly. As to the corporate veil that CUSOs provide, I strongly suggest we ought not to engage in any activity that needs such protection.
There is a looming direct line from future CUSO failures to NCUSIF impairment premiums. If solid credit unions are going to have to make up insurance fund losses due to CUSO failures, then we should demand that any areas that can generate those losses be subject to the oversight of the regulatory insurer.
Edward Speed is CEO of Texas Dow Employees Credit Union, Lake Jackson, Texas.
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