Usage Fees Are Not a Strange Idea: Editor/Publisher's Column
The NCUA’s recent proposal that credit unions pay the federal regulator a fee to oversee the derivatives program has raised complaints among credit unions. NAFCU immediately fired off a statement supporting credit unions’ entry into derivatives, but blasting the fee as setting bad precedent because the $250 million threshold would divide the industry, and the fee itself would create a barrier to credit unions’ use of derivatives. On the contrary, I find the idea innovative.
The proposed fee would set precedent but not necessarily a bad one if taken in a broader context. I’m not arguing that the NCUA’s proposed dollar amount for the program is correct, but hear me out on the concept.
The vast majority of credit unions apply risk-based pricing to their lending programs. The members they trust more to pay them back are charged less. The non-borrowers don’t pay interest on loans they didn’t take out. Credit unions charge members fees for the products they use because there are expenses and values attached to them. I don’t know about your credit union, but mine doesn’t charge me because another member used a foreign ATM.
If the industry really would like the NCUA to run more like a credit union, more democratically and cooperatively, then setting up a structure where credit unions support the individual services (oversight) they use from the regulator makes a lot of sense. The NCUA should not add this necessarily to its budget but reconfigure resources to appropriately reflect the environment by using a more risk-based approach to all of its operations.
While the economy isn’t zipping along, it has more than stabilized, yet there are still reports of large, stable credit unions experiencing two-week long examination visits by a handful or more of examiners when nothing about their business has changed in two years. The agency might be able to dial it back from the level of examination it was at during the height of the crisis.
Credit unions have also called for an agency better positioned for the future. Placing appropriate resources into the appropriate programs based on usage makes sense. Also, the agency should be able to start up a new program more quickly if it’s funded separately and by the credit unions that want to perform that function or offer that new product.
The issue would be then that the entire funding structure of the NCUA and the examination structure would have to take a massive shift. This user-based funding method will make more sense if it applies to everything rather than just derivatives. Likely the agency would need a small general fund for the basics and then apply user fees to business lending, credit cards, student lending and every other major product category.
Then it could hire specialized examiners reporting to senior oversight examiners that piece together and analyze the overall risk profile of the credit union. In theory the examiners would have a stronger understanding of the various lines of business, which has been a complaint among credit unions particularly as it pertains to business lending and student lending. Whispers at networking events often come to asking why the credit union is training its examiners on these areas of business.
Affinity FCU has come out against the fee arguing that derivatives actually reduce the risk to the NCUSIF. That’s true, but there is an associated cost to overseeing such a program. Navy Federal has said the fee won’t stop it but expected the fees would be a barrier to entry for some small credit unions that could use derivatives.
However, again, if the user fee were applied across the board in all areas of regulation, it would make more sense. Those small credit unions would no longer be paying their percentage (small to many but potentially huge for them) for business lending oversight by the NCUA if they’re not involved in it. Those small credit unions could reallocate that discount to derivatives oversight cafeteria-style.
NCUA Chairman Debbie Matz has told me this user fee-based concept was not a trial balloon for future regs but simply a way for paying for the derivatives expenses. She added, “NCUA shouldn’t be holding the industry back. We need to look for ways to let the industry have flexibility and be competitive.”
I maintain that the user-fee concept with highly specialized examiners should be applied to all categories of credit union regulation with one senior examiner responsible for putting the pieces to the puzzle together to arrive at a credit union’s overall risk profile.
The funding piece makes sense. Look at derivatives for example. The NCUA expects maybe 50 to 75 credit unions to participate and only 700 or so even can qualify. All credit unions should not foot the bill for it. Less than 2,000 credit unions are involved in business lending, so it makes no sense to ask the 4,000 or so other credit unions to foot the oversight bill.