Shouldn’t It Start at NCUA?

Credit union volunteers must meet certain financial knowledge requirements. Shouldn’t the movement’s governing agency be held to a similar standard?


In the January Callahan Report, Maurice Smith, a lawyer and CEO of Local Government Federal Credit Union ($1.08B, Raleigh, NC), responds to NCUA’s new rule that imposes a financial literacy test on credit union volunteers. He presents the case that NCUA’s requirement is contrary to the Federal Credit Union Act and violates the U.S. Constitution’s First Amendment on freedom of expression.

Being financially literate is one of many important attributes for a director. A more important question is whether the industry should also expect this capability from NCUA’s leadership?

Should Financial Literacy Begin at Home?
The Chairman’s Corner of NCUA’s January Report contains the following: “We completed 2010 with 28 consumer credit union failures … The costs of those credit union failures amounted to less than $300 million [presumably this includes the $170 million loss at St. Paul Croatian Credit Union, which means the combined losses of the remaining credit union failures would amount to $130 million]. However, the National Credit Union Share Insurance Fund had budgeted for losses of $750 million....”

Three paragraphs later, this statement appears:  “It is important to note that NCUA does not charge credit unions for the dollars budgeted in the Insurance Fund … Credit unions are only charged for the dollars spent.”

In fact, credit unions expensed an insurance premium totaling $929.5 million and sent those funds to NCUA. These funds came out of members’ pockets and are recorded as an insurance expense on the 5300 Call Report. NCUA charged the NCUSIF a loss provision expense of $ 750 million in 2010, not the $300 million actual losses cited above. 

The NCUSIF’s loss reserves at December 31, 2010 are more than $1.26 billion — four times the $300 million cash losses incurred in 2010. The NCUSIF’s loss provision is over reserved.  Today, NCUA could raise every credit union with a net worth less than 7% to a well-capitalized standard from the loss provision alone, and there would still be several hundred million dollars left in the reserve.   

Refusing to Disclose the Reserve Calculation
Because the funds are in the reserve versus retained earnings, they do not count in computing the 1.3% operating expense ratio cap. As a result, NCUA retains funds in excess of the operating cap by overstating the loss provision and total reserve. 

Moreover, the NCUA Board made a conscious decision not to disclose the basis for its NCUSIF reserve calculation. General Counsel Robert Fenner stated as much in a Board Action Memorandum from October 2009.

“Two commentators requested the final rule include a requirement for NCUA to provide detailed information about the causes, type and amount of any NCUSIF’s expenses in connection with any assessments,” Fenner wrote.  “The Board has not adopted such a requirement.” 

The Biggest Misstatement of All
For a moment, let’s accept Chairman Matz’s point that credit unions should be focusing on actual losses as the critical indicator of regulatory expenses even while credit unions are expensing much larger amounts.

When NCUA shut down the existing corporate system on September 24, 2010, by taking over three more corporates and imposing a new business model via a rule on all others, the actual OTTI losses incurred by all the corporates since the financial crisis began in 2008 were $1.154 billion. The unused reserve for future losses, already expensed against corporate retained earnings, capital, and special insurance premiums for the TCGGF, was an additional $10.6 billion. Just 10% of the OTTI losses had been incurred after more than three years of these so-called toxic investments’ performance. 

Even in the case of the highest estimate of losses, which resulted in WesCorp’s presentation of a 24% negative equity, the actual cash defaults had not exceeded the credit union’s prior reported retained earnings when liquidation began. WesCorp’s economic value was much greater than its accounting estimates.

If it’s actual losses that are critical, and not models projecting years into the future, then why haven’t actual losses guided NCUA decisions? Why have credit unions been expensing insurance premiums and sending cash to Washington DC when actual losses are less than 25% of existing reserves? Why was the corporate network shutdown, which forced all 7,500 credit unions to evaluate new settlements and lines of options when only 10% of actual losses had been incurred and $10.6 billion was still sitting unused in reserves?

When will NCUA return the excess NCUSIF contributions to credit unions?
These are fundamental questions about the NCUA Board’s financial literacy that affect every credit union’s 2011 budget and planning. Shouldn’t the Board be held to the same standard that NCUA’s rule imposed on unpaid volunteers, to:  “have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the FCU’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors ….

What Should Credit Unions Do?
The financial literacy rule is the latest in a series of actions that show the lack of accountability in NCUA’s role as regulator. The corporate shutdown and the requirement that credit unions recapitalize a system on its way to recovery are discussed in a special Callahan Report. The Report concludes that these actions are the result of a governance failure caused by a structure that overrides all traditional checks and balances on regulatory action.

In a webinar on Wednesday, February 2, 2011, Callahan & Associates will present steps to help credit unions address these issues and explore reforms. “Expanding Credit Unions’ Role in the American Economy: Reforms to Enhance Credit Unions’ Ability to Create Shared Value,” will take place at 2 p.m. Eastern. The presentation is free to Callahan Report subscribers; for all others, the $165 fee includes the special 52-page Callahan Report on the corporate shutdown, the January edition containing Maurice Smith’s analysis of the new financial literacy rule, and a year-long subscription to the Callahan Report.




Jan. 31, 2011


  • Call it what you will... ethics, integrity, honor, accountability...NCUA and state agencies lack it. The most urgent conversation we should be having in America today is ethics now! If NCUA and state regulators had a core values statement to do no harm, like a doctor, their actions could be measured agianst those core values. Having a sticker on the front door that says your savings are insured to $250,000 is of diminished value when the underlying guarantee forces us to be governed by an unethical, and mis-guided federal agency who has no accountability.
    Tom Randle
  • Maybe NCUA's Board should adhere to the same standards they dictate for natural person credit union Board's, ie. unpaid volunteers! Another case of lawmakers knowing what's best for their constituents but not good enough for lawmakers.
  • This article goes to the heart of the very reason why all credit unions that are not trying to be like banks should wake up and take notice. Especially the small credit unions under 100 million who are being forced out of business. If this is a spark that starts a movement, sign me up.
    Gary Bell
  • Chip,

    Take some time to read and respond to this post by Gary Bell,

    "This article goes to the heart of the very reason why all credit unions that are not trying to be like banks should wake up and take notice. Especially the small credit unions under 100 million who are being forced out of business. If this is a spark that starts a movement, sign me up."

    I think there are many who would agree with Gary that credit unions under $100 million are being forced out of business.

    Why are they being forced out of business? My view is that the change from a sponsor based credit union system to one in which most credit unions are now community based has changed the rules that govern success. We can't blame NCUA or anyone else. And the other significant change is that members don't act like owners they act like customers. The real owners are the Board and management. Board and management are acting in their own self interest and that in the long run is forcing credit unions out of business.

    My credit union served McClellan Air Force Base until the base closed and we were forced to switch to a community field of membership. A sponsor supported credit union has lower operating costs, a closed field of membership that limits competition from other credit unions and in many cases from banks too; a sponsor based credit union has easier access to new members; a sponsor based credit union has the halo brand of its sponsor (often sharing the same name); a sponsor based credit union has lower defaults because no one wants to offend the employer.

    Sponsor based credit unions have lower expenses and do well with less than $100 million in assets.

    The change to a community field of membership means that scale matters. It means you have to have branches or other delivery channels that add a lot of operating expenses. It means you compete with everyone and you don't have a halo brand and you don't have exclusive access to an employers employees to sign up new members. You have to promote and market and tell your story to get business.

    The loss of sponsor support puts small credit unions at risk. SAFE has 21 branches. We feel that a branch with less than $30 million in deposits is probably not viable. Yet there are thousands of credit unions with less than $30 million in assets.

    The financial statistics support this view. In the aggregate, credit unions with assets of $100 million or less have lost members over the last three years. Their operating expense ratios point out the fact that they are far from the efficiency of larger credit unions that can spread overhead over more assets.

    The mantra of "save the small credit union" doesn't make sense. The mantra has to be "serve the memb er". The fact that some credit

  • I'll cast a vote in favor of requiring financial literacy for the NCUA Board. That isn't to say I oppose financial literacy requirements for credit union board members. We need both and I disagree that NCUA should not have imposed that requirement. But what is good for the goose is good for the gander. Make NCUA's Board and senior management pass the same test. Maybe the NCUA Board won't have to make excuses the next time the Inspector General finds major deficiencies in the NCUA's financial accounting.

    The Chairman's report you cited in your article contains another mistatement. I refer to the statement that 28 credit unions failed. There were a lot of failures that NCUA did not count because the credit union was merged into another credit union. There are many other failed credit unions that are only operating due to forebearance by NCUA.

    The fundamental issue with regard to NCUSIF is the "estimate" of future losses. How does NCUA estimate future losses? That calcuation should be made public and put to the test of independent review. Show us the analysis for the various corporate securities. Show us the Clayton or Pimco (0r whoever did it) analysis--we paid for it.

    We need to stick to GAAP accounting for NCUA, the insurance fund and credit unions. That means we don't expense actual losses but rather we expense losses based on management's estimate of the current expense based on the impaired assets in the portfolio.

    We need transparency so that we can evaluate our insurance fund, our insurance fund premium assessments and the estimates of future losses. That means we need to see the detail behind actual losses; we need to see the detail calculations for loss estimates and we need to stop the arbitrary over head transfer from the insurance fund to the NCUA. All of NCUA's budget should be paid by credit unions directly in the form of an annual fee. That assures accountability. We don't have accountability now because of the overhead transfer that obscures how much we are paying to support NCUA. And if we want to fully reform our insurance fund, the we should expense the 1% over the next ten years and go to a premium based insurance fund.
    Henry Wirz