Is NCUA Hastening the Disappearance of Small Credit Unions?

Regarding the March 29 Credit Union Times' article, "NCUA Hits St. Clements Parish FCU with Letter of Understanding; Credit Union Says NCUA is Targeting Small Credit Unions", I offer the following thoughts. While St. Clements Parish FCU in Lakewood, Ohio is not a low-income credit union, nor a member of the National Federation of Community Development Credit Unions, the dilemma highlighted in the article is all too familiar to us. Letters of Understanding and Agreement are common – and sometimes, deadly – medicine that NCUA administers to small credit unions facing adversity. Rarely, do credit unions publicize them – and for bringing that to the credit union industry's awareness, we commend St. Clements. It would be easy to simply accept NCUA's negative diagnosis: ROA of negative 0.65%? Surely unacceptable. Rapid rise in loan delinquency, to 31.33%? Troubling, indeed (although we've found that in small credit unions, these numbers sometimes rapidly turn around, when a few large slow-paying loans are collected). Defective loan policies and collections? Agreed, these must be strengthened. But will NCUA's prescriptions for this credit union cure it – or hasten its demise? Reportedly, the credit union must refrain from making loans to applicants with less than a 670 credit score, unless they have a co-signer who meets that threshold. We agree with the credit union's manager, Joseph Murray, that this is too high. He may be overstating the case to say that this would mean "loaning money to people who don't need it," but it certainly seems to us that this restriction won't foster credit union service to "people of modest means," or the "underserved." In our experience, NCUA's LUAs – which, by the way, are automatically imposed on any newly chartered credit union – often constrict lending in ways that maximize chances of failure. Imagine if your credit union, for example, were limited to loans of $5,000 or less. Obviously, you would make no new car loans – or for that matter, no recent used car loans. How would that affect your profitability? The change in the bankruptcy law has hit many credit unions very hard. Among the Federation's members, that includes some CDCUs that have not previously suffered much loss from bankruptcy. There are signs that the current wave will continue to subside. We hope that NCUA will continue to recognize the unusual pattern that has prevailed over the last year. More broadly, what about the claim that NCUA is "targeting small credit unions?" NCUA officials would, and do, deny it. But the trends are bleakly obvious. Credit unions are disappearing through liquidation and merger at the rate of more than 300 a year; small credit unions are disappearing twice as fast; and small, low-income credit unions have been disappearing at a higher rate still. There are many reasons. Prompt Corrective Action is surely one: Ten years ago, a credit union like St. Clements Parish FCU with 7.90% capital (12/31/05) would not have been considered in mortal danger. Ten years ago, a small credit union also would not have faced such a crushing compliance burden as it (along with other credit unions) does today. I can't claim to know the full details of NCUA's LUA for St. Clements. I don't doubt that many of the problems the agency pointed out were real. To its credit, the agency has not yet forced the credit union close. But I do know from two decades of unfortunate observation that credit union boards often panic and cave in the face of pressure – indeed, sometimes bullying – by NCUA examiners. Boards hastily sign LUAs that they have little chance of successfully living up to. (I recall, especially, one struggling credit union that was supposed to turn around its situation by achieving a ROA of 2%, all the while reducing its lending.) In so doing, they sometimes ensure their eventual noncompliance, thus giving NCUA the grounds to liquidate or merge them. The struggle of St. Clements Parish FCU has important implications for the entire credit union movement. The movement is changing irrevocably. As the ranks of credit unions shrink, it is not sufficient to simply define upward the definition of "small" credit unions and maintain that this is the same movement it historically has been. We hope that St. Clements Parish FCU – like many other small credit unions – will find the strength to struggle on, and that other credit unions will rally to its assistance. Cliff Rosenthal Executive Director National Federation of Community Development Credit Unions New York