We Should All Be Rooting for NCUA

As the credit union movement learns that the latest Corporate Credit Union Assessment is 25 basis points, now is the time to collectively call on NCUA to do everything it can do to ensure credit unions don’t just survive, but thrive well into the future.

The chips are down and a lot is riding on NCUA. Yes, NCUA holds the keys to our future. Credit unions should look no further than to our prudential regulator for our prospects.

This may seem scary to some. NCUA holds our future? Yes they do, and we need them to succeed.

Let’s look at the current environment. Loan demand is at historical lows at credit unions. Interest rates are likely to be low for two years, meaning credit unions are going to struggle to earn good returns on their investments. The importance of non-interest (fee) income has never been greater. Credit unions earned $12 billion in non-interest income in 2010, or approximately 23% of all earnings. That’s a daunting figure when you consider that core sources of non-interest income are in the crosshairs of regulators and lawmakers.

Approximately 19% of non-interest income comes from debit card interchange. We all know about the battle credit unions just fought to ensure credit unions are exempt from the new price cap on debit card interchange, but it’s unclear how well the $10 billion exemption cap will work. It’s also unclear, with no current two-tier interchange system, how credit unions will be able to maintain their current prices. What is to stop retailers from steering consumers to lower cost cards from large banks?

Looking down the list of non-interest income sources and credit card interchange is a strong component accounting for approximately 12%. Will retailers push for this next? Possibly. The good news there is that the intense lobbying effort by credit unions has put lawmakers on notice that any future caps will be vehemently fought and that they need to consider all the costs that issuers occur to maintain card programs. Sadly, lawmakers missed the importance of fraud costs in the debit card law.

Another key source of non-interest income is overdraft/nonsufficient funds. This is an area that regulators are impacting. The Fed issued a reg last year requiring consumers to opt in for point-of-sale overcharge services. That was done in lieu of legislation that could have limited the number of overdrafts per consumer and further impacted non-interest income. If that legislation comes, credit unions will face more pressure on non-interest income.

So what does all of this have to do with NCUA? If you add up the weak lending environment, the low yield on investments and the potential impact to non-interest income you are left with a credit union movement that needs to find new sources of business and revenue. They need to diversify. They need to fill niche areas. They need to find ways to deepen relationships with existing members.

NCUA must allow credit unions the ability to break new ground and not hamstring innovative credit unions. Credit unions are moving into new areas such as private student loans and green loans to generate loan volume. These can be great sources of loans for credit unions but they are not typical consumer loans. NCUA owes it to credit unions to raise its IQ on emerging areas like this and not restrict credit unions that are looking for new opportunities. The same goes for business loans. NCUA must do its regulatory diligence, but can’t kill deals on the surface that may need a waiver because they go beyond a CU’s regulatory limit or be in an innovative area such alternative energy loan projuects. When CUs ask for exemptions, NCUA should consider the full impact of doing that business loan. Not only is it loan revenue, but how does it play into that CU’s relationship with the small business? There might be more business than meets the eye.

On the capital and earnings fronts NCUA has said many times that it is considering the impact of the Corporate Credit Union Assessments when examining a credit union, yet that’s not always happening on the ground level. NCUA leadership must ensure its on-the-ground staff is in sync with its directives.

I hate to hear credit unions say they are not going to invest in their credit union because of capital concerns. If the regulatory requirement is 7% to be well-capitalized, NCUA should not be hampering CUs hovering just about 7% or negatively rating CUs that are well above that but trending down because of assessments and the economy. Unfortunately that is happening and that’s not good safety and soundness regulation. NCUA should want credit unions to put capital to work for future growth.

We all know that credit union capital is much higher than meets they eye. There is no risk-based capital in the credit union system. With everything being counted the same, 7% capital would be higher under a risk-based system. NCUA needs to lead the charge on a new capital structure for credit unions. They should also be leading the charge on MBL reform. With all the talk about lack of capital for small businesses, NCUA could play hero with Congress and small business by boldly telling the story of the $10 billion in capital and the more than 100,000 jobs credit unions can create with an expanded MBL cap.

NCUA needs to realize that growth is the best answer to safety and soundness concerns, not overregulation or eliminating all risk from credit unions. Credit unions must take reasonable risk and the regulator must expend the time and effort to understand how new, innovative steps credit unions are taking can lead to future growth. NCUA can’t shun innovation because it doesn’t fit the model of yesteryear. The old days aren’t coming back any time soon and we need a regulator who wants to work with credit unions on new areas of growth.

We’re all rooting for you NCUA.

Paul Gentile is the president/CEO of the New Jersey Credit Union League, the statewide trade association representing New Jersey’s 200 credit unions. Prior to NJCUL, Gentile served as editor/publisher of Credit Union Times. Credit unions can keep up with Gentile by reading his weekly column published in NJCUL’s Weekly Exchange. Please visit the following link to sign up for the newsletter, http://www.njcul.org/news.aspx, which will be emailed to you every Friday. Gentile also presents “External Factors”, a cutting edge presentation on the many challenges credit unions are facing today, but did not face in the past. This presentation has become popular with CU boards looking for broad perspective on the industry. Those interested in inviting Gentile to present External Factors can contact him at pgentile@njcul.org.