Risk-Based Rule Lets NCUA Manage CU System
While we often focus on the challenges facing credit unions today, it’s easy to gloss over just how well positioned the system is in the financial services marketplace. Credit unions not only have tremendous financial strength, but also a powerful innovative and cooperative spirit that will make credit unions a catalyst for improving consumers’ financial lives for years to come.
Credit unions shined throughout the recession and have emerged on the other end stronger than ever. Credit unions had a record 11.5% capital in 2006, the year before the economic crisis started, and we now stand at more than 10.5% and are expected to surpass 11% by year-end.
We could very well end 2014 at a record level in capital.
We’ve seen the system manage a corporate credit union crisis through grit and commitment to the cooperative system. Credit unions fought through a front-end loaded corporate assessment system. Although the NCUA had 13 years to spread out the assessments, the agency strategically decided to put more of the burden in the early years, years where credit unions were struggling with a crippling economy.
Still and all, credit unions weathered the storm.
Credit unions outpaced banks in lending during the recession. Credit unions found new ways to innovate and are now leaders in serving consumers remotely with affordable, high-quality financial products. Credit unions’ commitment to emerging Hispanic markets and credit unions’ focus on meeting the challenges of the underserved is leading edge.
We are stronger than ever, yet we face maybe our toughest foe to date — excessive regulation. Credit unions have proven they can manage through tough economies. Credit unions can deal with changing demographics. Credit unions have mastered utilizing new technologies to deliver a better member experience. The challenge of excessive regulation may be more daunting than all of these challenges combined. If credit unions are being regulated to the past economic crisis, one that we may never see again, our prospects for helping consumers improve their financial lives today will continue to be challenged.
Already the CFPB’s qualified mortgage rule has changed the way many credit unions approach mortgage lending. There are now boxes into which applicants must neatly fit to get the types of mortgages the CFPB wants to see.
Credit unions have never been about cookie-cutter financial services. Working with our members’ unique challenges has been a thing of pride for credit unions. Now it’s being called into question because of a regulatory framework that is increasingly looking to box-in the product set of financial institutions.
While the CFPB has publicly lauded credit unions for not causing the mortgage crisis, it has failed to use its authority to exempt credit unions from many of its new rules that don’t fit our system and hurt members. Did credit unions really need to be harnessed with burdensome international remittance rules if they do more than 100 international remittances?
Of course not.
It has led to many CUs leaving that business and consumers suffer by having one less option. The QM rule will see many credit unions get out of or change the way they offer mortgages.
That brings us to one of the most potentially impactful proposed regulations the credit union system has ever seen — the NCUA’s Risk Based Net Worth proposal. Make no mistake, this is not an overreaction, the RBNW proposal will have lasting impact if it is not significantly altered. I have tremendous respect for the role NCUA has to play in regulating the innovative, dynamic credit union system that puts serving members above anything else, but NCUA must in turn respect the system it is regulating.
The NCUA has been hard at work in recent years, promulgating regulation after regulation, many, in fairness, in response to Dodd-Frank. This latest RBNW proposal is far and away the most vital because it will essentially allow the NCUA to “manage” credit union growth. The NCUA will determine how deep a credit union gets into certain loan categories. It will be able to manage investment modeling. It will manage investment in new products a credit union may make in CUSO-driven offerings. It’s a proposal heavily weighted on interest rate risk versus credit risk.
While it is true that the proposed weightings on mortgages, business lending and others are not much different than Basel, the NCUA’s added focus on interest rate risk and concentration risk, which Basel does not address, puts the brakes on key areas of credit union growth.
Many say that as a system we should not fight the concept of risk-based net worth. I agree. It is helpful to know where the most risk is and to put measures in place to address it, but a system that only goes in one direction is hard to support.
If the NCUA is so confident in the ability of RBNW to manage risk, it should advocate for lowering the leverage ratio so those credit unions that fit nicely in their RBNW box can do more to help members.
The NCUA must not be allowed to “manage” credit unions with this proposal. As a trade association CEO, I also worry about the NCUA “managing” the message. Time after time in every one of the NCUA’s major regulatory proposals there are some major outlier provisions that get credit unions, and consequently credit union trade associations, stumping for change. Inevitably, after major industry feedback, those outlier provisions are lessened or removed. We saw that in the derivatives, loan participation, and many other recent proposals
That same outlier approach is present in the RBNW proposal. Some of the weightings are clearly outliers. The provisions on the process in how it can require credit unions to hold more capital is an outlier. You can also throw in the governor the NCUA is trying to put on awarding member dividends as an outlier.
Even the NCUA’s messaging is an outlier. For an agency that fought tooth and nail to prevent a very large state chartered credit union from sharing its CAMEL rating, the NCUA had no problem allowing anyone to look up a credit union’s risk-based net worth weighting on a regulation that is not even approved — and was not even posted in the Federal Register.
The NCUA’s outlier provisions will likely be altered in the final rule, but we’ll be left with everything in the middle, and it’s the middle that will hinder credit unions’ opportunity for growth. It’s the middle that we can’t forget. If the very high CUSO weighting is reduced, but we’re stuck with a limiting investment framework or a system focused solely on interest rate risk, credit unions will be boxed in.
The NCUA must hear in droves from credit unions on how this proposal will affect their ability to manage their business and serve members in the future. The NCUA must not be able to “manage” us as a system by simply lessening the outlier provisions in the proposal. Credit unions must comment on the entire proposal. Credit union associations must call for lawmakers to work with us and take a hard look at the impact of this proposal. This is no time for us to be “managed” by the regulator.
Paul Gentile is president/CEO of the Massachusetts Credit Union League, New Hampshire Credit Union League and the Credit Union Association of Rhode Island. He can be reached at firstname.lastname@example.org.