(June 16, 2009 – Phoenix, AZ)  On Friday, June 12, during its recent 35th Annual Conference on Serving the Underserved in Phoenix, Arizona, the National Federation of Community Development Credit Unions (Federation) presented a recorded interview with NCUA Board Member Gigi Hyland to an assembled gathering of more than 250 community development credit union (CDCU) representatives and organizers from across the nation, credit union regulators, and government officials. 

Ms. Hyland, who was originally scheduled to speak in person at the event, was unable to travel to the event.    However, rather than cancelling her speaking engagement entirely, she agreed to a live interview on June 8 with   Federation President/CEO Cliff Rosenthal in her Alexandria, VA offices.  Below are some highlights from that interview. 

Impact of Corporate Stabilization & Prompt Corrective Action on CDCUs

Background:  The Federation’s research shows that CDCUs will be especially hard-hit by the Corporate Stabilization proposal.  According to that research, the corporate stabilization charge will effectively wipe out all CDCU profits from 2008.  This loss of income is particularly difficult for CDCUs, who tend to face significantly higher operating costs and smaller margins since they specialize in serving the poorest and most marginalized communities across the United States.  Worse yet, these charges may push many CDCUs below 6 percent net worth, bringing issues of Prompt Corrective Action.

Cliff Rosenthal (CR):  We are getting reports on our side from CDCUs that the charges from the corporate meltdown are pushing our credit unions below 6% in many cases, and that examiners are demanding that the credit unions immediately prepare a net worth restoration plan, even if there’s a possibility that some of these [corporate] charges are going to be reversed.  Is this in line with the NCUA Board’s intent?

Gigi Hyland (GH):  As you know, we don’t have a lot of flexibility on Prompt Corrective Action…  It’s a very fine line and when an examiner looks at a credit union, that examiner has to make an assesment based on the numbers as to where a credit union might be going; and requiring a net worth restoration plan at a particular time, may be the appropriate mechanism.

The caveat to that is that we now have the corporate stabilization fund that’s been approved and signed into law, and we know that a lot of the numbers are going to be reversed because the assement will now happen over a much longer period of time.  And if the assessment is reversed on a credit union’s books and that changes the net worth of that credit union right now, then does it really make sense for an examiner to be requiring a net worth restoration plan?

If you have credit unions that are hovering just below 7%, I would argue the credit union has to have a robust dialogue with their examiner and maybe the supervisory examiner to really see if a net worth restoration plan is mandated right now.

CR:  Is there not some flexibility in how the net worth restoration plans are constructed and how long a time can be allowed to get them back to that level?”

GH:  The answer is yes, there is some flexibility at that level.  The one small area where we have flexibility is in the area of allowing and permitting credit unions to have more time to be able to come up to appropriate net worth levels...  Given that the cause of pushing some credit unions below the percentages is the corporate credit union stabilization plan, that in itself should spur examiners to allow for more time for credit unions to get back up to the appropriate levels and not mandate an immediate or a six month requirement for credit unions to get back to the appropriate level.

CDCU Examinations

Background:  Many CDCUs believe that examiners do not adequately understand the challenges of serving low- and moderate-income members.  They report that they have been reprimanded by their examiners for activites that are consistent with their mission of serving low-income people, but which cause some of the CDCUs’ key ratios, such as net worth and return on assets, to be lower than their non low-income peers.   

CR:  Here is an example of what we hope is a worst case…  We’ve been receiving reports of an examiner going into a CDCU, which has a little bit more than 6% net worth, and telling them “there is no future for a small credit union like yours”… How do you respond to that?”

GH: That attitude is untenable from this Board Member’s perspective.  That is absolutely inappropriate for an examiner to say that, and I would hope that the credit union that experienced that picked up the phone and talked to the supervisory examiner and to the regional director about that.

Our examiners are trained to go out and examine credit unions from a saftey and soundness perspective and to rank them to let us know how risky they are, or are not, to the share insurance fund.  That is their job, not to add editorial comments of where they believe the credit union system is going or not going.  That in my mind would be an incident that merits the credit union reporting that to the regional office, because I believe that is inappropriate.

CR:  A substantial portion of CDCUs have been placed at risk as a result of this crisis.  From our perspective, losing lots of low-income credit unions and CDCUs would be a real black eye and disaster for the overall credit union movement.  Are there any steps the NCUA has taken to blunt or mitigate this outcome?”

GH:  I am concerned about this also, and one of the efforts that we are undertaking… is a supervisory letter, the “White Paper” on CDCUs [Ed.: issued first by NCUA in 2005], and making sure that examiners have a better understanding of the uniqueness of low-income designated credit unions and how they need to examine them a  little differently, understanding that their business model is not your “plain vanilla” credit union. 

On that front, I want to give an update that our staff is working to update that supervisory letter.  They are working on a draft and we hope that by the end of the summer we will have an updated supervisory letter on examining LICUs.  I anticipate that letter will accommodate some of those concerns that I’ve heard from your folks... about examination issues related to low-income designated credit unions and CDCUs.

Secondary Capital and the Community Development Revolving Loan Fund (CDRLF)

Background: CDCUs must maintain net worth above the 7% mark in order to stave off prompt corrective action (PCA) by NCUA.  Secondary capital, which is deeply subordinated debt, counts toward regulatory net worth.  Since 2008 the Federation has been advocating for NCUA to use funds from the $16-million Community Development Revolving Loan Fund (CDRLF), which NCUA controls, for secondary capital infusions in CDCUs. 

CR:  For our CDCUs that are at PCA risk or may become so, the Federation has been supplying secondary capital to increase their net worth, which as you know would have the effect of moving them out of PCA territory and hopefully buying them some time to recover.

As you know, as well, we have been pressing NCUA for several months now to change the CDRLF so that it can make secondary capital loans instead of only loans or deposits that increase the liquidity of credit unions, which is not the most critical need now.  We have been told that the General Counsel of NCUA believes that this can be accomplished as a matter of  NCUA Board policy without requiring any legislative action, yet there seems to be no movement at the board level to do so, despite the danger that many CDCUs find themselves in.  Can you respond to that?

GH:  While PCA is very important… when credit unions fall below 7% [net worth] as a result of this crisis, it certainly is an issue, but it’s not the preeminent issue in terms of credit union sustainability.  That’s why I urge credit unions to have very specific dialogue with their examiners about their sustainability, about their strategic plan, and about the need for a net worth restoration plan, because we expect that this particular crisis is going to push certain credit unions below the net worth figures that are required by regulation.

Examiners and the agency’s policy and practice need to walk hand in hand in being as flexible as we can be to allow credit unions to weather the crisis if it is the corporate issue that has pushed them below the necessary percentages. I think it’s imperative that the dialogue happen between credit unions and the examiners and the regional offices to make sure that PCA doesn’t become a hammer in a situation where we’re really trying to get through a crisis that has affected every aspect of the financial services industry.

In terms of using the CDRLF to sustain and to get credit unions through this issue and through PCA, I asked Bob Fenner, our general counsel, to write a legal opinion on that.  And you’re correct that he opined that the board could take action to change that, and you’re absolutely right that there’s been no movement by the board on this. What is the reason for that? Part of this is disinclination, and part of that is an attention to other things that are going on, particularly the corporate situation.  I guess one of the options is to readdress this issue with the incoming Chairman of NCUA and see if there’s any more appetite at that point to address this issue from a regulatory standpoint. 

I think the struggle the NCUA Board will have, knowing that there’s very little legislative history on the CDRLF, is trying to reconcile whether or not Congress really intended the CDRLF to be used in the manner that you’re proposing, versus just to be used as loans.  That’s the dialogue and the debate that the NCUA Board would have to have in trying to review proposed changes... to accommodate your request.  I don’t think that will be an easy climb, and I think there will be some very robust debate... once the new Chair comes to NCUA.

Closing Comments

In her closing comments, Hyland expressed her desire for continued dialogue between credit unions and NCUA, and with the Federation and other trades. 

“It’s very hard to be forward-looking [in times of crisis],” Hyland explained. “We need more thought provoking dialogue that deals with some the issues that have bubbled up from this crisis, such as:  Is the share insurance fund structured in the correct fashion?  Should it be a deposit based fund or a premium based fund like the FDIC?  Should there be a share insurance fund just for corporate credit unions or should they be insured at all?  There’s also been a lot of dialogue in terms of who uses corporates and what do they use them for?  Our next challenge... will be to determine what we are going to do in terms of a proposed rule to try and accommodate that wide spectrum of comments.”

The Federation will make the full interview available on this website in the coming days, and will send an announcement with that link in the next CDCU Insight newsletter at the end of the month.

© 2009 National Federation of Community Development Credit Unions.