How Would Martin Luther King Jr. Speak To Us Today?

The exam process in North Carolina is compromising cooperative values and critical aspects of the credit union system.

 
 

Martin Luther King Jr. is the only non-president to have a monument dedicated to his honor on the National Mall in Washington, DC. Why? Because in addition to his message of racial justice he represented an emerging commitment to economic fairness and growing opposition to the Vietnam War. As is reflected in the quotes on his monument, his leadership and vision encompassed broad aspects of our society.

One of King’s memorable phrases was: “Our lives begin to end the day we become silent about the things that matter.”

The dominant issues of his era – racial equality, economic opportunity, and America’s wars – have not gone away. They still matter. But what are the immediate challenges to us, on this day, at this time?

A Credit Union Perspective

I believe the core of King’s message relates to how individuals use their respective positions to advance our common humanity and well-being. These efforts, big and small, occur within credit unions every day.

It takes the courage of individuals to advance humanity. It takes courage to stand up to authority. It takes courage to stand up to the misuse of power. It takes courage to stand up to an authority that is compromising cooperative values and critical aspects of the cooperative system.

The Takeover Of North Carolina’s State Chartered Credit Unions

Last week, NCUA announced it was canceling its mutual examination program with North Carolina’s state regulatory authorities. NCUA will now conduct its own examination of all state charters and will withdraw all exam support, computers, and coordination with the state regulator.

Why did this happen? Because NCUA does not like the state regulator’s decision to disclose the exam rating for State Employees’ Credit Union ($23.4B, Raleigh, NC), the second largest credit union in the country. This is not a safety and soundness issue. According to NCUA’s January 12 memo by Herb Yolles, “NCUA’s need … is not driven by anything you did or failed to do nor any overall concern with the safety and soundness of North Carolina credit unions.”

The issue is transparency. The state regulator and credit union boards believe credit union members have the right to know a credit union’s rating. Members own the credit union. It is their money, their common well-being.

Unlike publicly traded firms, credit unions do not have independent rating firms or stock analysts. There is no evaluation from Standard & Poor’s. There is only the regulatory exam. So why should a score be available to the members’ representatives on the volunteer board but not to the members themselves? Democratic governance and informed support for board members depends on information and insight about how the credit union is being managed. What better way than the examination judgment to disclose this? What better way for examiners to be answerable for their judgments?

Dual chartering is a vital part of credit union cooperative success. Credit unions were started at the state level in 1909 and operated at that level for 25 years until the passage of the Federal Credit Union Act in 1934. Since then, the state system has been the proving ground for innovation in mortgage lending, share drafts, share insurance, new business CUSOs, and, most importantly, field of membership evolution. All of these issues were being addressed at the state level long before they became part of the federal chartering system.

State-level innovation also includes regulatory authority and approach. The dual charter provides a check and balance. Sometimes credit unions lack new authority, so converting charters provides choice for members and boards. Sometimes regulators misuse their authority, and the option to change to another charter keeps a cooperative choice available for members. NCUA’s takeover of the examination in North Carolina usurps the authority of the state to make the most important decisions about its credit unions’ operations. Examinations are about judgment. NCUA, through its examination oversight, has imposed reserves on credit unions far in excess of GAAP requirements, has removed officials without due process, and has implemented business and marketplace strategies that go beyond safety and soundness decisions.

By keeping its ratings and examination assessments closed, NCUA is trying to keep its own actions from independent scrutiny, including from its fellow state regulators. NCUA’s examination errors, such as in St. Paul Croatian Federal Credit Union, have cost the credit union system more than any wayward board or management team has. Both internal (OIG) and external reviews (GAO) have extensively criticized NCUA’s oversight of the corporate system and, more importantly, its management of the conserved corporates and their transferred assets. Their primary critique concerns the mismanagement of examination information, the mismanagement of assets, and the mismanagement of systems related to both.

So NCUA’s actions are not about North Carolina’s regulatory effectiveness. They are about sharing work in an interdependent credit union system of both federal and state responsibilities. This is an example of NCUA’s efforts to monopolize the control of information so others cannot challenge its judgment and assertions in the light of day and with open discourse. NCUA wants to keep its power unchecked, unregulated, and unchallenged.

I repeat NCUA’s point above: This is not a safety and soundness issue. This is not how democracy works. Absolute power corrupts, not enhances, judgment.

Demand A Debate

So what steps should credit unions take next? Demand a real debate on examination innovation. Dr. King had thoughts about the requirements for leadership for contentious issues: “The ultimate power of a man is not where he stands in moments of comfort and convenience, but where he stands in times of challenge and controversy.”

Today’s exam process is flawed. In an ideal world, examinations prevent crisis. Today they are a batched effort based on observations conducted mostly once per year. In a networked world, it is possible to analyze information in real time and returned the assessment to users with red flags noted almost instantly.

The purpose of any exam is to help credit unions self-correct. Future constraints should not be the prerogative of a single party. Multiparty involvement is the best way to ensure all points of view are considered versus one imposed set of actions. North Carolina’s regulator is testing an innovation.

Multiparty involvement insures transparency. It encourages answerability for crucial judgments about future actions. To whom is NCUA answerable? Today, there is no weight to CPA reviews against NCUA comments. There is little weight to professional’s views in comparison to NCUA’s future assumptions. And there is little to no power that volunteers have to review their hopes against NCUA actions.

How will NASCUS and the other state regulators react to this NCUA takeover? Keep their computers, and paid training, and remain silent, hoping NCUA will not take away their regulatory earmarks as well?

How will state chartered credit unions act, knowing the federal agency has said it will be the final decision maker concerning the activities of state credit unions in North Carolina? What will CUNA, not to mention the leagues, do about this serious challenge to the dual charter system?

Greatness is possible when we take responsibility for our actions. NCUA doesn’t want the responsibility that goes with authority, just the power. Now is the time for responsible debate or we could all be the next target of this de facto federalization of North Carolina chartered credit unions. It is time for more than the citizenry of the Tar Heel State to rally for credit unions and tell Washington to step off.

Want to learn more about the exams in North Carolina? Read more at Jim Blaine on Credit Unions.

 

 

 

Jan. 10, 2012


Comments

 
 
 
  • I strongly endorse sharing examination findings with members.

    Members are “owners” in the sense that they elect the Board and in that role must hold the Board accountable for how well the credit union performs. Unlike stock holders, credit union members do not have the independent analysis of performance that stock prices provide. The examination findings are an important way for members to access the performance of the their credit union and the Board that they elect. It isn’t the only way but unfortunately is probably the best way. Audited financial statements don’t come with a management letter—that is confidential and shared with the Board and management. The KPMG audit report for NCUA is a great example of why audited financial statements are a bad way for readers to understand the problems that the auditors have uncovered. An unqualified opinion may mean nothing positive. Members can’t do their job with only audited financial statements and the annual meeting.

    The GAO report and those of the NCUA Inspector General indicate that NCUA lacks internal accounting controls and has significant deficiencies in their own accounting. The GAO report further indicates that the examination practices of NCUA are faulty. The NCUA does not have prompt corrective action with regard to credit union problems. NCUA use of capital adequacy as a leading indicator of credit union problems is faulty. NCUA fails to use other indicators which provide earlier indications of problems.

    The publication of examination results would make NCUA accountable to members for their examinations. Members bear significant inconvenience when their credit union fails. Although members do not bear any direct cost, members would ultimately bear the costs if credit unions are unable to repay the Treasury loans. Of course members are affected by the diversion of net income to repay Treasury loans in the form of less credit union service and higher costs for loans and deferred investment in their credit union.

    henry wirz