The nomination of Debbie Matz to chair the NCUA is a sound one, and I congratulate Debbie and wish her well in what I expect to be a smooth confirmation and introduction to her position. Such a time gives us all the opportunity to reflect on what the needs of our industry are and how we can reach our goals.
I would like to take the opportunity to again point to a serious flaw in the Membership Access Act of 1998 (also known as H.R. 1151), one that I feel must be undone or overcome with corrective legislation. This has to do with reserving requirements. If we do not make this change, I think our industry will be slowly strangled to death.
What the New Act Did
The original Federal Credit Union Act, signed in 1934, presumed an infant industry, one with more sweat equity than financial equity, and indeed this was the case. No one started a credit union by getting 15 millionaires to put in $1 million apiece. Rather, the typical birth of a credit union was a handful of concerned persons drawing up bylaws and chipping in $5 to $20. From these humble beginnings we now have credit unions controlling assets worth hundreds of millions, even billions, of dollars.
The original act called for net worth goals of 4% and 6%. It required putting away 10% of gross income until the credit union achieved 4% net worth, then putting away 5% of gross income until achieving a net worth of 6% (this was actually for the larger and older credit unions; newer and smaller ones were supposed to build up to higher net worth levels). No time limits were placed on reaching the net worth goals.
Although not attracting much attention at the time, the Membership Access Act of 1998 dramatically changed this approach. The new act was an expedient in restoring to credit unions powers crippled by a Supreme Court ruling that limited FOMs. You could look back on it now as a quid pro quo, but whatever the intentions, the new language has built in dangers. The Membership Access Act replaced the stepped approach to building up net worths to one that merely stated 7% net worth was the standard and that falling below this level would trigger corrective actions by the regulator.
The new Act presumes a mature industry, not the kind of one expected to grow and help people as the one that was poised in 1934. It presumes steady positive income. Indeed, if a credit union were to make steady positive income year after year, it could keep up with setting aside money for reserves.
But the persons who drew up the Membership Access Act never envisioned times of the kind we are having. If you can't make money from investments but must make your money from loans, and if your portfolio is under pressure owing to a shrinking FOM or a crashed real estate market or if too many of your people are not credit-worthy, and you have to grow your reserves, then you are in a very tough pickle. It's almost impossible to grow reserves when you are losing money. Yet this is precisely what so many credit unions are facing today.
I dare say, credit unions could not have started and flourished as they have over the past 75 years if they had to operate under the rules as written in the 1998 Act. We now understand that the unimaginable can happen, that systemic risk has been lurking beneath the surface for years and has now reared its head to face us. Under the old rules, if you had a bad stretch, you could probably work your way out of it without much trouble. Under the new rules, it is vastly more difficult to do so; you are trapped in a depression out of which it is very difficult to climb.
Reversal or New Forms of Capital
I believe we either have to revert to the old mechanism, which was a mechanism for success and growth, or allow for alternative forms of at-risk capital that counts as reserves for regulatory safety and soundness purposes. The rules under which we live now are not a formula for robust growth – witness the lack of new charters since the institution of the 1998 Act. We need to remember that regulatory agencies do not make capital; only credit unions can do that. Credit unions must be allowed to succeed, or to fail. But if a regulatory agency does not allow credit unions to succeed, it is guaranteeing their eventual failure. This is what was done in the Membership Access Act and that is what needs to be reversed.