The NCUA's recent proposal that credit unions pay thefederal 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 badprecedent because the $250 million threshold would divide theindustry, and the fee itself would create a barrier to creditunions' use of derivatives. To the contrary, I find the ideainnovative.

The proposed fee would set precedent but not necessarily a badone if taken in a broader context. I'm not arguing that the NCUA'sproposed dollar amount for the program is correct, but hear me outon the concept.

The vast majority of credit unions apply risk-based pricing totheir lending programs. The members they trust more to pay themback are charged less. The non-borrowers don't pay interest onloans they didn't take out. Credit unions charge members fees forthe products they use because there are expenses and valuesattached to them. I don't know about your credit union, but minedoesn't charge me because another member used a foreign ATM.

If the industry really would like the NCUA to run more like acredit union, more democratically and cooperatively, then settingup a structure where credit unions support the individual services(oversight) they use from the regulator makes a lot of sense. TheNCUA should not add this necessarily to its budget but reconfigureresources to appropriately reflect the environment by using a morerisk-based approach to all of its operations. While the economyisn't zipping along, it has more than stabilized, yet there arestill reports of large, stable credit unions experiencing two-weeklong examination visits by a handful or more of examiners whennothing about their business has changed in two years. The agencymight be able to dial it back from the level of examination it wasat during the height of the crisis.

Credit unions have also called for an agency better positionedfor the future. Placing appropriate resources into the appropriateprograms based on usage makes sense. Also, the agency should beable to start up a new program more quickly if it's fundedseparately and by the credit unions that want to perform thatfunction or offer that new product.

The issue would be then that the entire funding structure of theNCUA and the examination structure would have to take a massiveshift. This user-based funding method will make more sense if itapplies to everything rather than just derivatives. Likely theagency would need small general fund for the basics and then applyuser fees to business lending, credit cards, student lending andevery other major product category.

Then hire specialized examiners reporting in to senior oversightexaminers that piece together and analyze the overall risk profileof the credit union. In theory the examiners would have a strongerunderstanding of the various lines of business, which has been acomplaint among credit unions particularly as it pertains tobusiness lending and student lending. Whispers at networking eventsoften come to asking why the credit union is training its examinerson these areas of business.

Affinity FCU has come out against the fee arguing thatderivatives actually reduce the risk to the NCUSIF. That's true,but there is an associated cost to overseeing such a program. NavyFederal has said the fee won't stop it but expected the fees wouldbe a barrier to entry for some small credit unions that could usederivatives. However, again, if the user fee were applied acrossthe board in all areas of regulation, it would make more sense.Those small credit unions would no longer be paying theirpercentage (small to many but potentially huge for them) forbusiness lending oversight by the NCUA if they're not involved init. Those small credit unions could reallocate that discount toderivatives oversight cafeteria style.

NCUA Chairman Debbie Matz has told me this user fee-basedconcept was not a trial balloon for future regs but simply a wayfor paying for the derivatives expenses. She added, “NCUA shouldn'tbe holding the industry back. We need to look for ways to let theindustry have flexibility and be competitive.” I maintain that theuser-fee concept with highly specialized examiners should beapplied to all categories of credit union regulation with onesenior examiner responsible for putting the pieces to the puzzletogether 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 andonly 700 or so even can qualify. All credit unions should not footthe bill for it. Less than 2,000 credit unions are involved inbusiness lending, so it makes no sense to ask the 4,000 or so othercredit unions to foot the oversight bill.

Sarah Snell Cooke Publisher/ Editor in [email protected]