In the September 2018 NCUSIF financial statement, the regulator reported $744 million in “charges for liquidation.” The NCUA did not otherwise explain this expense against the allowance account other than in vague references to the closure of two taxi medallion credit unions it liquidated in the same quarter.
This is a failure of leadership. The absence of timely and transparent justification for expenditures totaling $1.5 billion undermines the confidence in the cooperative system of credit unions, their members, and the public.
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Transparency, Accountability Are Fundamental For Regulatory Oversight
The issue at hand is more consequential than the NCUA’s fiduciary responsibility to be a proper steward of members’ funds. In fact, the entire system is at stake. Jelena McWilliams, the new chair of the FDIC, best describes the organizational responsibility required in these two events in an Oct. 3, 2018, speech describing her leadership priorities:
“We, as Americans, entrust in our government the power to lead. In return, we expect the government to be fair and open, and to work to advance the public good.
“When we trust the system, we feel a part of it. It is our government. On the other hand, distrust breaks down relationships, whether it is between a business entity and its customers, manager, and employee, or government and citizen. When taken to the extreme, it can lead to the breakdown of institutions.
“Like any asset, trust must be earned and then preserved. In my view, the best way to maintain a trusting relationship is to be accessible, understandable, and responsive — to provide your stakeholders with the information and means to hold you accountable.”
Trust And Transparency Lay At The Heart Of The FDIC’s Mission
“During times of economic or financial stress, transparency becomes even more important as the FDIC undertakes stronger and more visible actions to deal with problem banks and resolve failed banks,” McWilliams continued in her address. “The stronger the actions, the greater the need to be transparent, not only with respect to what action is being undertaken, but who will benefit, who will pay for it, how will it affect banks and consumers, and why it is the best possible course. Communications that are absent, misunderstood, or nonresponsive, will only serve to heighten misperceptions that undermine trust and the recovery process. …
“To promote real trust, we cannot simply make data available, publish performance measures, and consider the job complete. That is not transparency or accountability. … ‘Trust through Transparency’ is my first public initiative as chairman of the FDIC. My ultimate hope is that the ‘Trust through Transparency’ initiative will strengthen the bond of trust between consumers, banks, and the FDIC, while best positioning the FDIC to fulfill its mission of maintaining stability and confidence in the nation’s financial system.”
The Taxi Medallion “Resolution” Works In Whose Interest?
With the emergency merger of Progressive Credit Union into Pentagon Federal Credit Union on Jan. 1, the NCUA completed the shutdown of credit unions whose business models focused on financing the sale of taxi medallions for owners and drivers.
The NCUA defended its decision by citing concentration risk in an industry in which the “bubble burst.” In most cities with regulated taxi or livery businesses, there’s no question the disruptive effect of ride-sharing alternatives has had serious economic consequences for traditional valuation models. Whether this disruption is cyclical or the end of the medallion business model remains to be seen.
The regulator’s war on concentration risk belies the reality that all credit unions have niches and concentrations, and it's an excuse not to creatively seek workouts in the cooperative spirit. Learn more in “The NCUA’s Taxi Medallion Vendetta Threatens All Credit Unions.”
The critical question is not whether the value of the asset has dropped, but how does a credit union manage through a business transformation to sustain operations. The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumption, and forced merger. And in the end, to charge credit unions $744 million for its oversight. For doing its job. A job for which it already has a generous budget and a well-reserved share insurance fund.
This “resolution” raises two questions: Did the NCUA act in members’ best interest? And is $744 million the best use of credit union money?
The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumption, and forced merger. And in the end, to charge credit unions $744 million for doing its job.
Who Is The NCUA Really Helping?
The traditional approach of share insurance is to ensure the safety of member savings for all amounts less than $250,000. But in a credit union, the interests of the borrowers should also be considered and treated with the same or even greater respect as those of savers.
Credit unions were not designed primarily as savers clubs. Consumers have multiple options for safely saving money, insured and uninsured. Wholesale funding for credit unions is available through borrowings and non-member deposits. The cooperative system with the liquidity role of the Central Liquidity Fund and the capitalization capability of the NCUSIF, were specifically designed to help in a crisis. Especially crises imposed by external events.
Credit unions were formed to address borrowers’ needs. Taxi medallion financing was not only a community need but also an ideal example of cooperative finance. A lot of people — many of them immigrants making their way in a new country — financed their American dream through taxi driving and then medallion ownership.
When the security that underwrites a loan is devalued, both the borrower and the institution suffer. When the security is an income-producing asset, such as a taxi medallion, the impact on both is even greater. Both income and accumulated value are hurt.
Whatever the security for a loan, a lender’s successful transition through a crisis depends on its willingness to rewrite terms, lower payments, and recognize the borrowers’ efforts to find income and/or to persevere in current circumstances. This is what credit unions did repeatedly for home and auto borrowers during the recent Great Recession.
Credit unions that used creative extensions to lower payments preserved value in secured assets and, more importantly, helped the member work through the economic hardships faced by many.
If problem-solving becomes merely an exercise in disposing of problem loans, then the bond between the borrowing member and the credit union is broken.
Conservatorship is an important regulatory option for sustaining the institutional framework as a credit union works through problem assets (loans or investments) whose ultimate value is uncertain. But if problem-solving becomes merely an exercise in disposing of problem loans, then the bond between the borrowing member and the credit union is broken. The future for both becomes problematic and the options for a positive solution much reduced.
The NCUA conserved Melrose and LOMTO credit unions in February 2017 and later liquidated them. Unfortunately, these conservatorships did not preserve value. Rather, they undermined the relationship between the credit unions and borrowers so much that the president of the Committee for Taxi Safety wrote NCUA chair McWatters on May 12, 2017, about Melrose’s tactics:
“For the most part medallion owners are not seeking to walk away from their loans. They are not seeking to walk away from personal liability. Recognizing this, lenders have stepped up to meet this challenge and work with medallion owners. … The only lender that is refusing to work with medallion lenders is Melrose, under the control of NCUA. Regardless of each owner’s outstanding debt, the NCUA has taken a hard-line, one-size-fits-all approach that demands massive up-front principal pay downs of several hundred thousands of dollars and/or mortgages on residences to renew loans.
“Even if the borrower complies, the NCUA then seeks to substantially increase the interest rate on the loans. Melrose has taken borrowers who want to pay and placed them in a position in which they know they will be put in default, thereby forcing them to face financial ruin. …
“The NCUA’s position is so extreme that it has told borrowers who are current on their loans and still making all payments, that if a medallion is in storage for any reason, temporarily or long term, that it will immediately commence foreclosure proceedings. …
“All we are asking is for the NCUA to act reasonably and allow struggling medallion owners some flexibility in paying off loans. … The NCUA’s behavior has been that of a bully. … It is time for the NCUA to end this assault on our industry and show leadership and human decency.”
When LOMTO and Melrose reported their June 30, 2018, financial condition under NCUA management, their combined deficit capital position was $155 million. When liquidated within months of that filing, NCUA recorded a $744 million expense. This almost $500 million difference shows the cost of ineffective conservatorship and resolution competency. From another perspective, if the NCUA had used $744 million to capitalize a credit union at a 7% well-capitalized level, it could support more than $10 billion of cooperative assets.
This almost $500 million difference shows the cost of ineffective conservatorship and resolution competency.
The Problem With Secrecy And Silence
A lack of regulatory transparency creates a culture of impunity where no one is accountable and no explanations are necessary. The NCUA described its writing down $767 million in AME values as making required “accounting entries.” The NCUA’s focus is no longer about the members — it’s about institutional self-interest. And this bureaucratic self-interest versus members’ welfare does not go unnoted by credit union leaders.
The best estimates implied by call report data are that credit unions now hold more than 8,000 member loans secured by taxi medallions. The average outstanding loan is between $250,000 and $350,000. Many of these borrowers will be financially challenged either as self-employed drivers and/or debtors. Like others working in the so-called gig economy, their future is not certain. Will credit unions work with these borrowers as members, or will credit unions try to rid themselves of problem credit?
The NCUA transferred Melrose’s medallion loans to an outside servicer after liquidation. The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy. Without an interested lending partner holding the loan, rewrites or other refinancing accommodations are lost. There is no prospect of a future relationship. The credit union promise to member-owners is non-existent. Selling problem loans is how banks, not coops, routinely solve their problem credits.
The NCUA transferred Melrose’s medallion loans to an outside servicer after liquidation. The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy.
These two, $1.5 billion expense transactions continue an NCUA pattern of converting the recoveries from fiduciary assets acquired in liquidations to its own use. These recoveries are outside the budget and expense oversight processes. They are, in the auditor’s words, “non-governmental assets,” beyond the scope of their opinion audit. By constantly overestimating future losses, the NCUA has set up a system to shield its balance sheet from current events through allowance write-offs and/or expense reversals. Hence no accountability.
The NCUA assessed credit unions for the corporate workout at its initial estimated cost of $13 billion to $16 billion. Recoveries currently exceed $5.6 billion. In merging the Temporary Corporate Credit Union Stability Fund, the NCUA positioned the NCUSIF to take this ongoing income from TCCUSF assets and all past and future recoveries before returning these surpluses to the credit unions that pre-funded these exaggerated resolution estimates.
The regulator kept the corporate crisis bailout money for itself, further undermining the pillars of the cooperative system. Does anybody care? Read “How The NCUA Cheated 100 Million Credit Union Members Out Of $3.1 Billion.”
Asking The Right Questions
Should borrowers expect the same protection as savers in troubled co-ops?
Should the NCUA rehabilitate versus liquidate problem institutions?
Are credit union fiduciary funds being properly monitored and used?
Is the NCUA conflicted between minimizing problem resolution costs versus explaining its supervisory effectiveness?
Without transparency and contemporary financial reporting, it is difficult to ask the right questions about the NCUA’s effectiveness. The agency reverts to the rationale of “safety and soundness” as a mantra that disguises its decade-long habit of paying its way out of problems that it’s supposed to minimize.
Transparency and accountability are not simply institutional virtues — they are critical operational processes. They are at the heart of any organization’s effectiveness. This is especially the case with a government regulator that has significant, unilateral authority over credit unions and their resources.
An advantage of cooperative design is that it is meant to focus on members’ needs, not insiders’ ease or comfort. When an institution focuses on its internal agenda rather than on the principals it is supposed to serve, that is a warning sign of potential failure.
Paying off crisis events is not the same as sustaining a system. It is not the money that will run out, it is the willingness of principals to stay in an unaccountable system.
The new FDIC chair said it best in a speech given to the International Association of Deposit Insurers on Oct. 18, 2018:
“The essence of an effective deposit insurance system is the trust of the banking public in the operations of the deposit insurer. The only way to build trust is to make those operations transparent so that your stakeholders have the information and the means to hold you accountable. It is all about being accessible, understandable, and responsive to both regulated entities and those we seek to protect vis-à-vis deposit insurance.
“If you do not trust the system in which you live, you do not feel a part of it. It is not your government.”
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