I recently attended the National Association of CUSO (NACUSO) conference in San Diego. One of the presentations was given by Dennis Dollar, a former NCUA Chairman and Principal of Dollar Associates. He provided some wonderful information on the status of the industry which I am passing on in this blog.
Now that Congress is divided, what will be the new impact on Credit Unions? The Democrat majority in the House and Republican majority in the Senate will result in stalemates. The House may try to push new regulatory legislation unlikely to make it through the Senate. The Senate may try new reg relief that will not make it through the House. The House may take up hearings on the CFPB or NCUA to force them into more action. The House has also shown interest in Senator Elizabeth Warren’s proposal to expand CRA into the CU world (this would be very problematic for CUs which are SEG based). More likely, the House will be consumed with their angst against the President. The Senate will streamline the filibuster rule to speed confirmations for agencies and the courts through.
What is the state of the CFPB? The CFPB’s head of Mick Mulvaney is succeeded by Kathy Kraniger. She is a kinder version of Mulvaney but holds to the philosophy of limiting the expansion of the agency and its regulatory actions.
Status of the NCUA? The NCUA has a full Board in place with the addition of Chairman Rodney Hood (R) joining Todd Harper (D) and McWatters (R), whose term expires in August 2019. It is likely that McWatters will go on to other things which will leave a vacancy. Hood is a strong believer in effective and not excessive regulations. Harper has been big on promoting an expansion of CU membership and making CUs and CUSOs more accessible.
Any taxation threat on the horizon? We had our first major tax overhaul in 2017. Last one was in the Reagan administration. CU taxation was not proposed in this overhaul. This is a good sign there is not congressional appetite to deal with taxing CUs, especially in an election year. A full tax of CU net income would only produce a little less than $2 billion in tax revenue for a country with over $23 trillion in debt. The threat may be lessened but we need to stay vigilant.
Will Risk Based Capital rules be implemented in 2020? This was extended from 2019 to 2020 and will be likely unless McWatters joins Hood to a further regulatory delay. One major victory here is that CUSO investments are treated as an equal dollar for dollar risk compared to one of the original proposals where CUSO investments were 2.5x riskier than other investments.
What role will CUSOs play? CUSOs are still part of the answer. CUs still need to build capital. Some of the nation’s top ROA performing CUs are driving income from CUSOs. Also, 80% of merged CUs had no CUSO investment. The NCUA will begin to have a focus on the efficiency ratio. CUs who are moving some operational expenses into a collaborative CUSO for some of the lines of business can improve the CU’s efficiency. The NCUA is now also five years into implementing the CUSO rule and the implementation has been reasonable so far. However, there appears no statue that gives the regulator authority over vendor regulation.
What is the trend in CU mergers? In 2018, 192 CUs merged or 3.7% of the total of institutions. The total number of CUs is around 5,375 at the end of 2018 which is down by 65% from the 15,000 CUs present in the mid-1980s. The new Merger Disclosure Rule is not slowing a move toward mergers as marketplace, member service, and supervisory pressures are driving more merger discussions. The new rule is making the process longer, requiring more disclosures and longer times to complete. The biggest single deterrent to mergers is not the disclosure rule. It is the lack of field of membership flexibility at the federal level. This drives more mergers to the state charter rules which are more open. The merger activity is slowing but not stopping.
What about the regulators? Regulators may call you on the carpet for a decision, but you should be able to make a sound business case as to why you did what you did. The changing of the prescriptive MBL policy to a principles-based policy is a good example of this. Play within the rules and respect the refs but do not allow fear of the refs to dictate your play calling. Play your own game confidently and stay away from areas where you are not familiar or bring in experts to help you.
Watch the examiner and attorney opinions that come from the NCUA. In 2019 so far, these have been very few. There was one on loan participations dealing with the difference between securitized loan pools and groups of loans. Also, the use of the verb “banking”, when talking about CU services is not out of bounds like some on the bank side want it to be.
What changes may CUSOs see from the NCUA? There has been talk of expanding CUSO powers and adding different types of loans they can manage. CUSOs are viewed favorably by some in the regulatory agency who have oversight for MBLs. They like the expertise and support given by these groups to CUs as they continue to service their membership and communities.
There is a push at the NCUA to have authority over vendors, any vendor, used by a CU. If used, this could extend to CUSOs, technology providers, leagues, independent accounting firms, and any other supplier for CUs. Most of these vendors are covering areas that the agency has no expertise in providing informed oversight or can render an educated judgement.
It appears that the members of the NCUA Board want vendor authority. Part of this may be that their counterparts at the FDIC and OCC have this authority. The initial reasoning in asking for this is for cyber security concerns regarding various core banking products used by CUs. But this information is currently available to the agency through the FFIEC. Core providers are currently regulated by other regulators and have been for years. This information can be obtained by the NCUA without expanding vendor authority. This proposed expansion can be easily abused and prone to over-reach. As the saying goes, “Power corrupts, and absolute power corrupts, absolutely.”