All of us in the credit union industry–regulators, credit union professionals and directors–have a role to play. Our actions have consequences both short term and long term. I fear that the actions of some of us are leading credit unions on a path to mediocrity.
Let’s start with the NCUA. Ask the NCUA, and they will tell you that its principal function is to protect the share insurance fund. There are two ways of protecting the fund, by surgically cutting out the risks or by full scale amputation of any risk. The NCUA has chosen the latter approach. The strategy is to identify the weakest links to the system (credit unions that have caused losses), determine the cause and implement rules to prevent that cause from occurring in all other credit unions. The strategy serves the purpose of protecting the share insurance fund in the short term but, I would argue, puts the fund and the industry at much greater risk in the long term.
The problem is that in order to take away the opportunities for failure, the NCUA also takes away many of the opportunities for success. For example, there have been a couple of high profile credit union failures due in large part to poor business lending practices (Texans and Telesis). Concerned the situation could be repeated in other credit unions, the NCUA repealed RegFlex and removed the power of well-capitalized credit unions to decide for themselves when to make business loans without a personal guarantee.
Just because a credit union has the ability to make a loan without a personal guarantee does not mean it should or will. Good underwriting requires that most small business loans have personal guarantees. However, if there is a borrower with an investment grade credit rating that has ample collateral and a well-established and reliable cash flow, that borrower is not required in the marketplace to give a personal guarantee. If a personal guarantee is required by credit unions, the best borrowers will go elsewhere along with the other lucrative business services opportunities and related consumer services. The member growth opportunities are impeded, and the credit unions’ business portfolios as a whole become riskier as less creditworthy borrowers are sought.
By not permitting any credit union to independently determine if a personal guarantee is necessary, the NCUA effectively states that there is no credit union in the country with the competency to make that decision, regardless of their experience and lending record. How in the world does an industry grow if its regulator seems to deem the entire industry incapable of the essential skills to operate?
NCUA has turned over the power to approve personal guarantee waivers to the regional directors. This amounts to the regulator becoming a part of a credit union’s underwriting team. There are indeed many fine and outstanding NCUA regional directors, but I am not sure how many of them have the business lending experience required by their own agency’s regulations to make business lending decisions. Nonetheless, to the credit of the regional directors, they granted many waivers based upon their working knowledge of how the credit union handles business lending effectively, even though it would have been much safer for them to turn down the requests.
Now, the NCUA has taken the further step of curtailing the discretion of its own regional directors with the recent NCUA supervisory letter 13-01. A personal guarantee waiver cannot be considered unless the borrower and guarantors have been members for at least five years. How do you develop a relationship with the best business borrowers if you cannot provide a competitive loan to them? How serious is the NCUA when it says it wants to expand the MBL cap and help credit unions serve small businesses?
The alternative regulatory approach would be for the NCUA to continue to permit well-capitalized credit unions to decide for themselves when to issue business loans without personal guarantees. The NCUA could further limit this power to only those well-capitalized credit unions that use credit analysts and underwriters with business lending experience of at least 10 years and have a business lending program of at least three years with delinquency levels that do not exceed industry norms. This approach would give well-managed and experienced credit unions the ability to compete in the marketplace while providing protection to the share insurance fund. The current NCUA regulatory approach is so restrictive that it may force credit unions to seriously consider a charter change. Unnecessary restrictions on the ability of credit unions to serve members will move the industry to a place of mediocrity, a place where excellence is not encouraged or rewarded.
These regulatory decisions are not the only ones pushing credit unions to mediocrity. Many credit union boards and staffs are contributing as well. The net interest business model that credit unions thrived on for years is no longer a sustainable business model. Credit unions have always led with price and service as their competitive edge. Now that competitive edge is gone. The Internet and other low-cost providers can often provide financial services at lesser cost and more conveniently and that is not going to change.
The only way credit unions sustain themselves and survive long term is to find creative ways to generate more net income. This will take innovation and collaboration, and it will entail substantial changes to the traditional credit union business model. If credit union boards and staffs do not wake up every day thinking about how they can use innovation and collaboration to generate more net income, the question is why not?
It can be done. There are many examples of credit unions generating significant net income through innovative ways of generating more loans and noninterest income. There are also credit unions using CUSOs to obtain scale to significantly reduce operating costs while at the same time increasing the level of expertise they can afford. The proof exists, yet unfortunately too few act upon the evidence.
I have seen situations where a CUSO has a demonstrated value proposition, but the credit union board and staff elect not to implement the solution. Why? Some do not recognize the need or urgency. Some put their personal relationships with existing vendors or their own self-interest ahead of the interest of their members. Some do not want to expend the energy to change. Some are just uncomfortable with change.
Yet there are forward thinking determined credit union professionals, volunteers and regulators who understand that change is necessary and are taking steps to make those changes a reality. Their vision of credit unions is a vibrant industry full of potential where the people who run credit unions are treated as responsible professionals with the freedom to serve their members. If they abuse that freedom, the regulators have the right and the duty to restrict them. But, if they prove they can effectively manage the risk inherent in that empowerment, they should be allowed to continue to do so.
Healthy credit unions and a healthy share insurance fund are both possible. All it takes is the vision and courage of all of us in the industry to make the changes that will take us off the path to mediocrity and put us on the path that will empower credit unions to grow and serve their members.
Guy A. Messick is an attorney with Messick & Weber PC in Media, Pa. Contact 610-891-9000 or firstname.lastname@example.org.