(November 20, 2009 – Washington, DC) Regulatory relief and enhanced access to capital dominated the national policy agenda that National Federation of Community Development Credit Union (Federation) leaders brought to the nation’s capital throughout a series of meetings on November 12 with the National Credit Union Administration (NCUA) and the U.S. Treasury Department, Community Development Financial Institutions (CDFI) Fund.
The Federation’s delegation included Board Chairman Randy Chambers, CFO of Self-Help CU (Durham, NC); former Board Chairman Eunice J. Rogers, CEO of NRS Community Development FCU (Birmingham, AL); Governmental Affairs Committee Chairman Deyanira Del Río, Board Chair of the Lower East Side People’s FCU (New York, NY) and Governmental Affairs Committee members Helen Godfrey-Smith, CEO of Shreveport FCU (Shreveport, LA) and Shirley Spruill, CEO of Renaissance Community Development FCU (Somerset, NJ); as well as Federation President/CEO Cliff Rosenthal.
“The credit union movement, and CDCUs in particular, are under intense stress,” said Mr. Chambers. “It is imperative that CDCUs have increased access to resources and a supportive regulatory environment to survive and grow.”
Discussions held with NCUA ranged broadly, from examination practices, to “whistleblower” protections, to regulations restricting CDCU access to capital. With the CDFI Fund, Federation representatives focused on ways to remedy the disproportionately small share of funding that went to credit unions in the recent funding round.
NCUA: Aligning Policy and Practice
NCUA’s “White Paper” about examination of low-income credit unions was a key topic in the delegation’s discussion with NCUA Board Member Gigi Hyland, and later with the agency’s Executive Director David Marquis, Deputy Director Larry Fazio, Director of Examination and Insurance Melinda Love, and Deputy General Counsel John K. Ianno.
The paper, which was first issued in February 2005 following a series of intensive discussions between CDCU leaders and NCUA, provided guidance to examiners about the unique operating characteristics of credit unions serving low-income memberships. However, “We have found that many examiners and supervisors are not even aware of the White Paper, much less follow its guidance,” said Godfrey-Smith. “This is a clear example of the disconnect that exists between NCUA board-level policies and actual practice on the ground.”
More recently, the Federation has been working with NCUA on an updated examinations white paper that is expected to be completed in the coming months. “We are optimistic that the new version, which will come out as a Letter to Credit Unions, will provide concrete, affirmative direction to examiners working with credit unions serving low-income populations,” said Del Río.
Ms. Smith stressed the “need for accountability” of NCUA in implementing this guidance among examiners. “One idea we discussed was adding a question to post-examination ‘checklists’ for supervisory examiners to ascertain whether the examiner of a CDCU discussed the white paper with the board of the credit union.”
A central issue, according to Ms. Rogers, is that CDCUs are routinely compared to credit unions that are not truly their peers. “CDCU characteristics differ significantly from the average credit union, and even from other low-income designated credit unions, which are much more likely to have employee payroll deduction groups. Many CDCU members handle all their transactions in person, making a typical CDCU’s operations much more labor intensive,” she said.
Ms. Smith suggested that it would be beneficial for examiners to familiarize themselves with the specific business plans of the credit unions they examine, in order to get a better understanding of the demographics of the communities being served, as well as their financial profiles.
The White Paper is now in the final stages of revision, although no definite release date has been set. “Systematic implementation is what matters most,” said Mr. Chambers. “We are optimistic that NCUA will publish it in a way that carries supervisory force.”
Access to Capital is Vital
The delegation also presented the Federation’s long-held argument for the elimination of non-member deposit restrictions on low-income credit unions, which are currently limited to the greater of 20% of their assets or $1.5 million in these deposits without seeking a waiver. The restriction has undermined the business strategies and created unnecessary paperwork for CDCUs.
Shirley Spruill, CEO of a $1-million credit union in New Jersey, cited the pressure from her examiner to return deposits at 0% or 1% to supporters such as Navy Federal FCU and another local bank, in order to raise her net-worth ratio and avoid prompt corrective action (PCA). “I refused to do it,” Ms. Spruill said. “The bank wouldn’t understand why we would want to do it, since the deposit helped them comply with the Community Reinvestment Act." Rosenthal explained that such an action would engender “reputation risk” for a CDCU, which would be perceived to be an unreliable partner or, worse, an institution at risk of failure.
Ms. Del Río provided a case study of the paperwork burden the regulation induced at her CDCU. “As a result of the NCUSIF stabilization charge earlier this year, the Lower East Side People’s FCU lost Reg Flex. Even though the charge was later reversed, our CEO had to prepare a waiver request to NCUA so that we could accept additional non-member deposits to fund our loans -- this for a $22 million credit union. It doesn’t make sense.”
Secondary Capital Moves to the Forefront
By statute and regulation, low-income credit unions are the only natural-person credit unions permitted to accept secondary capital – deeply subordinated, long-term debt that counts as regulatory net worth. “In general, CDCUs are less highly capitalized than other credit unions,” said Mr. Chambers. “This means that they have been hit disproportionately hard by the share insurance charges, as well as write-offs of their member capital shares in corporate credit unions. We see more of them falling into the PCA danger zone, and secondary capital can be vital in buying them time to rebuild their financial strength.”
“Unfortunately,” he continued, “examiners do not always understand the value of secondary capital, and the process of seeking NCUA approval for investment of secondary capital can be burdensome. We understand the need to protect the investors of secondary capital, but they receive extensive disclosure information. Only sophisticated institutional investors, like banks, foundations, and government are permitted to make secondary capital investments. It is not available to individual credit union members. Secondary capital actually protects the Share Insurance Fund, because it goes to cover insolvency before the Share Insurance Fund makes its payout to depositors of a failed institution. We are committed to working with NCUA to ensure that CDCUs have adequate access to secondary capital without substantial regulatory barriers.”
Community Development Revolving Loan Fund (CDRLF), a Source of Secondary Capital?
NCUA presently controls a $16-million pool, amassed through Congressional appropriations and repayment of interest, which it uses to make deposits or loans to low-income credit unions. “While deposits can be helpful, they are less needed in this environment than equity capital, or net worth,” said Rosenthal. “We believe NCUA can provide much-needed infusions of net worth to low-income credit unions by repurposing some or all of the CDRLF to make secondary capital loans, rather than simply liquidity deposits.”
Responding to the Federation’s urging, NCUA determined earlier this year that it could take such an action without legislation. However, the agency is still reluctant to do so without indications from Congress that it would not object to such a change. The change would not affect NCUA’s program for providing small technical-assistance grants, which receives a separate annual appropriation.
Freedom from Retaliation: “Whistleblower Protection?”
CDCUs, like other credit unions, often feel they have been treated inappropriately by examiners. Many regularly report to the Federation that they fear reprisals if they complain up the supervisory chain to the regional offices of the NCUA. During the recent meetings, the Federation explored with Board Member Hyland and the agency’s senior staff, appropriate channels for CDCUs and other LICUs to register complaints without fear of retribution.
“We will await further clarification from the agency,” Chambers said. “The ombudsmen and the Inspector General of NCUA seem to be possible avenues, but they are not widely known or understood among credit unions, and we’ve gotten some contradictory readings from NCUA itself. We look forward to the agency clarifying and publicizing these channels more broadly.”
Little Relief on CU Investments in Corporates
CDCUs, like many other credit unions, have suffered from write-downs of their permanent and member capital shares in some of the corporate credit unions. While acknowledging the financial harm that credit unions are suffering, NCUA staff could not offer any hints of substantive relief. Federation committee members suggested that 5300 reports separately break out these write-downs. Howeverm even if NCUA adopts the suggestion, it could not be implemented in the next reporting cycle.
Chartering Remains a Concern
The Federation delegation also pointed to the excessive delays in chartering of new federal credit unions. Reportedly, there are as many as 38 charter applications in various stages of review, and virtually no new charters have been granted over the last year. NCUA staff acknowledged that they are aware of the problem.
“This item will continue to be on our agenda,” Rosenthal said. “We have groups that have been seeking a charter for three years or more, and there really must be a commitment on the part of the agency to speed up the process.”
CDFI Fund: Restoring Funding Balance
In its meeting with CDFI Fund Director Donna Gambrell, the Federation focused on the extremely low share of CDFI Fund awards that went to credit unions in the most recent round. “We were stunned by the results of the latest CDFI Fund award round,” said Chambers, “when credit unions only received two-percent of the total $50 million in funding.”
The Fund’s mandate is to seek both geographic and institutional diversity among its awardees. “The minute share that went to CDCUs – by far the lowest in the Fund’s history – suggests that something needs fixing,” Chambers said. A heavy majority of all funding has always gone to unregulated community development loan funds.
According to Director Gambrell, CDCU scores on the application were 19 points lower than for other applicants, for reasons not readily apparent to the Fund. While the Fund uses, Gambrell said, “only credit union people” to read credit union applications, the Federation identified several “quality control” issues. For example, one unsuccessful CDCU applicant was penalized because it didn’t explain to the reader “why it didn’t have FDIC insurance.” That suggests a serious flaw in the process, Rosenthal argued.
Rectifying the situation would not require a legislative fix, according to Director Gambrell. The Federation has proposed several possible remedies for the imbalance. “We think that financial services are systematically undervalued by the Fund,” said Chambers. “There really is no way for a credit union to receive points for the many individuals it serves, the thousands of transactions it executes, the members it saves from paying exorbitant interest to payday lenders or credit cards or debt-trapping overdraft fees, or the financial counseling it provides. Incorporating these indicators could change the funding outcome dramatically.”
Another alternative suggested by the Federation would rank credit unions against credit unions and establish broad guidelines for allocating funding proportionately across the various institutional types – community development credit unions, banks, loan funds, venture funds, and microenterprise funds. “We’re not suggesting a hard quota, but a range of funding for the various sectors, so that credit unions might receive between 15% and 25% of the awards in any given year, depending on the quality of applications,” suggested Del Río.
The Federation also expressed dismay at the lack of smaller awards for small institutions. “In the past,” Rosenthal said, “it was not unusual for 15 or 20 CDCUs to get awards of $50,000 to $100,000 under the ‘SECA’ and technical assistance programs. This fall, no award of less than $350,000 was made. We think there is a strong argument for going back to the earlier approach, which benefits a greater number of institutions.”
Follow-Up Will Tell
The Federation’s committee emerged “cautiously optimistic” from its meetings with NCUA and the CDFI Fund, according to Rosenthal. “I believe we made progress in getting recognition of some of the policies and procedures at both agencies that have been detrimental to CDCUs. We’ll be following up and monitoring both NCUA’s and the CDFI Fund’s actions closely to ensure that the changes we seek are implemented.”
© 2009 National Federation of Community Development Credit Unions.