All of us in the credit union industry–regulators, credit unionprofessionals and directors–have a role to play. Our actions haveconsequences both short term and long term. I fear that the actionsof some of us are leading credit unions on a path tomediocrity.

Let’s start with the NCUA. Ask the NCUA, and they will tell youthat its principal function is to protect the share insurance fund.There are two ways of protecting the fund, by surgically cuttingout the risks or by full scale amputation of any risk. The NCUA haschosen the latter approach. The strategy is to identify the weakestlinks to the system (credit unions that have caused losses),determine the cause and implement rules to prevent that cause fromoccurring in all other credit unions. The strategy serves thepurpose of protecting the share insurance fund in the short termbut, I would argue, puts the fund and the industry at much greaterrisk in the long term.

The problem is that in order to take away the opportunities forfailure, the NCUA also takes away many of the opportunities forsuccess. For example, there have been a couple of high profilecredit union failures due in large part to poor business lendingpractices (Texans and Telesis). Concerned the situation could berepeated in other credit unions, the NCUA repealed RegFlex andremoved the power of well-capitalized credit unions to decide forthemselves when to make business loans without a personalguarantee.

Just because a credit union has the ability to make a loanwithout a personal guarantee does not mean it should or will. Goodunderwriting requires that most small business loans have personalguarantees. However, if there is a borrower with an investmentgrade credit rating that has ample collateral and awell-established and reliable cash flow, that borrower is notrequired in the marketplace to give a personal guarantee. If apersonal guarantee is required by credit unions, the best borrowerswill go elsewhere along with the other lucrative business servicesopportunities and related consumer services. The member growthopportunities are impeded, and the credit unions’ businessportfolios as a whole become riskier as less creditworthy borrowersare sought.

By not permitting any credit union to independently deter­­mineif a personal guarantee is necessary, the NCUA effectively statesthat there is no credit union in the country with the competency tomake that decision, regardless of their experience and lendingrecord. How in the world does an industry grow if its regulatorseems to deem the entire industry ­incapable of the essentialskills to operate?

NCUA has turned over the power to approve personal guaranteewaivers to the regional directors. This amounts to the regulatorbecoming a part of a credit union’s underwriting team. There areindeed many fine and outstanding NCUA regional directors, but I amnot sure how many of them have the business lending experiencerequired by their own agency’s regulations to make business lendingdecisions. Nonetheless, to the credit of the regional directors,they granted many waivers based upon their working knowledge of howthe credit union handles business lending effectively, even thoughit would have been much safer for them to turn down therequests.

Now, the NCUA has taken the further step of curtailing thediscretion of its own regional directors with the recent NCUAsupervisory letter 13-01. A personal guarantee waiver cannot beconsidered unless the borrower and guarantors have been members forat least five years. How do you develop a relationship with thebest business borrowers if you cannot provide a competitive loan tothem? How serious is the NCUA when it says it wants to expand theMBL cap and help credit unions serve small businesses?

The alternative regulatory approach would be for the NCUA tocontinue to permit well-capitalized credit unions to decide forthemselves when to issue business loans without personalguarantees. The NCUA could further limit this power to only thosewell-capitalized credit unions that use credit analysts andunderwriters with business lending experience of at least 10 yearsand have a business lending program of at least three years withdelinquency levels that do not exceed industry norms. This approachwould give well-managed and experienced credit unions the abilityto compete in the marketplace while providing protection to theshare insurance fund. The current NCUA regulatory approach is sorestrictive that it may force credit unions to seriously consider acharter change. Unnecessary restrictions on the ability of creditunions to serve members will move the industry to a place ofmediocrity, a place where excellence is not encouraged orrewarded.

These regulatory decisions are not the only ones pushing creditunions to mediocrity. Many credit union boards and staffs arecontributing as well. The net interest business model that creditunions thrived on for years is no longer a sustainable businessmodel. Credit unions have always led with price and service astheir competitive edge. Now that competitive edge is gone. TheInternet and other low-cost providers can often provide financialservices at lesser cost and more conveniently and that is not goingto change.

The only way credit unions sustain themselves and survive longterm is to find creative ways to generate more net income. Thiswill take innovation and collaboration, and it will entailsubstantial changes to the traditional credit union business model.If credit union boards and staffs do not wake up every day thinkingabout how they can use innovation and collaboration to generatemore net income, the question is why not?

It can be done. There are many examples of credit unionsgenerating significant net income through innovative ways ofgenerating more loans and noninterest income. There are also creditunions using CUSOs to obtain scale to significantly reduceoperating costs while at the same time increasing the level ofexpertise they can afford. The proof exists, yet unfortunately toofew act upon the evidence.

I have seen situations where a CUSO has a demonstrated valueproposition, but the credit union board and staff elect not toimplement the solution. Why? Some do not recognize the need orurgency. Some put their personal relationships with existingvendors or their own self-interest ahead of the interest of theirmembers. Some do not want to expend the energy to change. Some arejust uncomfortable with change.

Yet there are forward thinking determined credit unionprofessionals, volunteers and regulators who understand that changeis necessary and are taking steps to make those changes a reality.Their vision of credit unions is a vibrant industry full ofpotential where the people who run credit unions are treated asresponsible professionals with the freedom to serve their members.If they abuse that freedom, the regulators have the right and theduty to restrict them. But, if they prove they can effectivelymanage the risk inherent in that empowerment, they should beallowed to continue to do so.

Healthy credit unions and a healthy share insurance fund areboth possible. All it takes is the vision and courage of all of usin the industry to make the changes that will take us off the pathto mediocrity and put us on the path that will empower creditunions to grow and serve their members.  

Guy A. Messick is an attorney with Messick & Weber PC inMedia, Pa. Contact 610-891-9000 or [email protected].