Last week’s NCUA Board Meeting agenda included the latest audited report on the Share Insurance Fund. The 12/31/21 report like the prior reports since Chairman Harper has been on the board was further proof that the fund and the credit unions who own it are exceeding what many, including our Chairman, had imagined would be our performance during the pandemic crisis.

Despite his insistence for the last two years that the agency needs easier access to even more of our members’ capital, the current report indicates that credit unions continue to be safe and sound, in both a financial sense and as a cooperative business model.

Even as credit unions met the needs of their members and liquidity grew at unprecedented rates, credit union balance sheets have withstood the challenge. The crisis that lead Chairman Harper to ask for statutory permission for even higher Net Operating Levels and increased power over the SIF equity ratio has yet to materialize and the numbers continue to prove him wrong.

With the fund balance now over $20B, the number of credit unions rated as CAMEL 4 or 5 account for less than .5% of total insured shares and industry average net worth is over 10%. Further proof of this wide spread health was revealed in a later agenda item concerning the temporary rule on PCA. While the extension of the rule was approved for one more year, it was revealed that during this past year only 14 credit union–that’s right, only 14 out of almost 5000–found it necessary to apply for permission to submit a streamlined net worth plan when their capital ratio dropped below 6%. I’m not arguing against the rule, it was worth having in place given the flood of liquidity, but its very light usage certainly ran counter to the scenario of dread preached by the Chairman.

If we ever needed more proof that we can never trust any of the “sky is falling” projections of agency bureaucrats it is yesterday’s reported 2021 net income of the NCUSIF of over $150M. The gift that keeps on giving, the Corporate Stabilization Fund, contributed over $135M to that income number upon reversal of previous booked losses to the Corporate AMEs. More proof of the agency gross and incompetent over estimation of losses almost ten years ago and the resulting rape of credit union capital accounts to fund the TCCUSF.

So please excuse me if I roll my eyes the next time the Chairman talks about how we still have yet to see a certain apocalypse and the agency needs to dip their hands in our members’ pockets. If he has paid any attention to last week’s report he is now on notice that we don’t trust his projections or his proposed changes to how the SIF was designed to work by a guy we could trust, Ed Callahan. That was innovation that has stood the test of time.

The Great Pyramids of Egypt were built in less time than it has taken for the NCUA to recognize that they are not only beating a dead horse when it comes Risk Based Capital, they continue to waste credit union capital on studies of a bank-tested tactic that has the same smell of the aforementioned expired equine.

If you haven’t yet, check out Chip Filson’s blog on the matter: NCUA Board has a Unique Opportunity to Eliminate the Flawed Risk Based Capital Proposal. In it Chip details the proposal’s flawed foundation and the NCUA Board’s can kicking approach to it.

The NCUA persists in pursuing a disowned strategy that is now as outdated as the Sony Walkman while failing to take the time and make the effort to understand the fundamental differences between the cooperative institutions they are responsible for and the rest of the financial institutions marketplace. Can we ever hope to get them to recognize that CREDIT UNION is not spelled the same as BANK?

The recently released Interagency Statement Clarifying the Role of Supervisory Guidance is more pablum from agency leaders on Duke St., which will likely conflict with actual examination practices out here on Main St. The history of NCUA communication between national headquarters and the field staff more closely resembles the old party game of “telephone” as any directive flows downhill from D.C.

I hope that more CU CEOs and Boards will fearlessly and forcefully argue for those strategies and solutions that they have created for the benefit of the members they serve that are within the powers granted them but in conflict with “supervisory guidance.” A supervisory agency would prefer that every institution they evaluate look identical, have the same product mix, practice the same pricing strategies, and exercise the same propensity for risk. It makes their supervisory job easier and simplifies the management of an insurance fund that acts more like a “rainy day fund” than real insurance that recognizes and prices the variety and level of risks that credit unions need to assume to meet the needs of diverse, unique and complex fields of membership.

The most common problem experienced by any federally chartered or insured credit union is the inconsistency between what we hear from NCUA headquarters and what we are often told on the local level. I have no doubt that this Interagency Statement will create more than a few conflicting situations in CEO offices and CU board rooms.

What credit unions should demand from their supervisory agency is a level of managerial and communication skills that would make this Interagency Statement unnecessary. Every credit union should be required to be able to fully explain the strategic and tactical reasoning for any product, program and delivery system during the examination process. Every NCUA employee should be equally expected to clearly define the difference between exceptions due to statute or regulation and opinion based on perception. In fact, while I appreciate this explanatory statement to credit unions I think the primary audience for this information should be NCUA staff, national, regional and local examiners.

They are more content with reinventing the wheel and spending than learning from the industry

In a recent letter to federally insured credit unions, McWatters and the NCUA outlined some examination modernization initiatives. My first reaction was one of bewilderment at several of their statements given my interactions with both NCUA personnel and state regulators in the last few months.

We have been in multiple conversations and presentations with various NCUA staff and administrators for several years about exam innovation and implementation strategies. There has not been a single case in which we were not politely heard out and then, just as politely, blown off. They seem to feel that collaboration with those they regulate would be a waste of their valuable time and unlikely to add any value to their own intellectual and institutional superiority. From my many meetings and contacts with NASCUS leadership, it is certainly clear that the NCUA holds its state regulatory peers in the same regard.

At a recent update on the ESM initiative they revealed that a major component of their initiative, the Credit and Deposit Analytics Solution, would be delayed due to a lack of off the shelf vendors with a ready to use analytical tool that meets their specs. Their research of their fellow FI federal regulators has revealed that those organizations have built their own custom software for this purpose and that the NCUA will, of course, follow their banking cousins and pursue this custom build path as a new strategy.

Not having been allowed to see the 2017 RFP for this entire project, we don’t know in any detail what the specs for this tool are, but we had shared and shown both McWatters and the Exam Flexibility Committee chaired by Keith Morton, back in 2016, the earliest versions of Analytics Booth (then My CU Today), which we were told did represent the kind of analytics capability they would be needing in the future. Since then, when I bring it up I’m rebuffed. Now I don’t know if we even would want to be federal contractor, but you’d think they would at least reach out to learn more about our efforts. Personally, I think they like spending our members’ money more.

At the same time, we showed them what we had done with Wisconsin regulators to facilitate a test of remote examination tactics by using Virtual StrongBox. Few know that the agency has been on the hook for a September 2015 recommendation of the Inspector General to start using a secure FTP in their examination protocol. Even though their response to the IG in 2015 was that they would have such a tool by year-end 2015 and then later by year end 2016, it has yet to be implemented. The letter described above promises a release of a secure FTP later this year after further testing. Imagine that your credit union had an outstanding audit exception for close to three years! Especially one concerning data security! I’ll believe that they have a working model to move member data securely when I see it.

I congratulate Keith Morton on his test of virtual examination strategies in Region 4, but really, a reduction of onsite exam time by 35% should be unacceptable. There should be no excuse for not being able to remotely review everything from high-level institutional data to individual digitized records like member loan files.

Lastly, unless something has changed in the last three weeks, my contacts with NASCUS have indicated that to this point they have had no formal or continuous input into the ESM initiative (including the AIRES re-write) and any development of FLEX, the Office of National Examinations and Supervision (ONES) Data-Driven Supervision or Virtual Exam Protocols. There was a joint meeting of NCUA and NASCUS regulator board members at the NASCUS State Summit just 3 weeks ago. I’ll be checking if, as the letter might suggest, there has been a long and deep working relationship between the parties, when it has seemed to be 180 degrees opposite of that type of brotherhood.

We’ll be continuing to watch this activity closely and as NCUA makes changes to their exam protocols, we will be making sure that credit unions can leverage those changes to lower their cost compliance. I’m calling on credit unions to let their representatives know about your concerns regarding this waste of money in the name of progress. Tell Me Why I’m Wrong.

What does it take to get our attention?

Did any of you notice the damning NCUA Inspector General report released on March 14 addressing the audit of NCUA’s Comprehensive Records Management Process? I dare say that any federally chartered or insured credit union that chose to ignore NCUA regulations to the degree that the NCUA staff did with the Federal Records Act of 1950 and the regulations of both the National Archives and Record Administration and the Office of Management and Budget would be facing serious censure. Any credit union executive would probably lose their job if they further knew about these shortcomings for over a five year period and not only failed to take corrective action but also seemed to be less than forthcoming about these failures to the agency board over a similar period of time.

The IG audit covered a period of 2012 to 2016.  It was mid-year 2017 before the NCUA Board approved development of a full-time division within the Office of General Counsel (OGC) to manage day-to-day activities of records management and January 2018 before management issued a records management policy that addressed current federal laws and regulations. The prior six years, under the authority of the Office of the Chief Information Officer (OCIO), the audit is a story of misplaced priorities, ignorance of federal laws and regulations, obfuscation of the failure to act, and ineptitude in system development. Can you imagine an agency email system which is required to retain emails but lacks the capability to easily search, identify or retain those emails? Here is an especially descriptive quote from the IG audit:

“As shown throughout our report, decisions made by NCUA management to address records management requirements negatively affected the agency’s implementation of sound records management program.”  (“Audit of NCUA’s Comprehensive Records Management Process”, pg. 8)

Here’s another addressing intra-departmental communication:

“Specifically, we found that executive management did not timely or accurately update the NCUA Board on records management, offices did not effectively communicate with each other, and management gave limited guidance to staff on how to handle records in the conduct of their day-to-day duties.”  (Audit of NCUA’s Comprehensive Records Management Process”, pg. 10)

So that you can place this limited sampling in the proper context of the total report, I suggest you go to the NCUA website for the full report. One warning, you will not find this report prominently highlighted on the front page of the web site.

There’s an APB out for CUNA and NAFCU

Every bit as concerning as this audit should be to all of us, I am just as shocked by the lack of attention to the audit paid by our well-staffed and well-funded functionaries at our advocates CUNA and NAFCU. Try a search of “2018 NCUA IG Reports” on the websites of both and you’ll come up empty.  Not a word of concern from the guys who are supposed to be paying attention to the goings on at NCUA on our behalf. Must not have been a big deal to them that the same agency that just stuck their federal finger in our eye and grabbed billions of credit union capital in the distribution of the TCCUSIF, all in order to grow the pot of funds available to pay for the ineffective management highlighted by the IG. Do we really expect that the same OCIO that couldn’t keep track of emails should be trusted with the $25 + million budgeted for the ESM (Enterprise Solutions Management) initiative? Who’s keeping an eye on our federal agency and holding them accountable? Tell me why I’m wrong.

Why increasing the normal operating level from 1.3% to 1.39% is questionable at best

I took statistics a long time ago; slide rules were still the common tool for large number calculations and Texas Instruments was just coming out with its initial hand calculators. My extremely wise professor would allow the use of calculators in an exam, if you could afford one, but he always prefaced the test with the admonishment, “Remember, if you press wrong number, you get wrong answer.” The current plan to close the TCCUSF is long overdue and a bold move by the board, but I think the action steps are based on an overreliance on “sophisticated models” which have been shown over the last 6 years to consistently and considerably underestimate the value of the assets taken and overestimate the losses. Obviously, more than a few wrong numbers have been pressed, to get these kinds of modeling errors.

The great news is that NCUA has told us that closing the Stabilization Fund this year could result in a distribution of between $600 and $800 million of credit union capital in 2018. The bad news is that the distribution is keyed to a questionable increase of the normal operating level (NOL) from 1.30 to 1.39. By closing the TCCUSF and transferring those funds to NCUSIF the equity ratio of the NCUSIF would be between 1.45% and 1.47%. That’s an additional $1B to protect us from ourselves! Based on what horrible example from our past or unforeseen attack in the future?

Obviously, by maintaining the normal operating level at 1.30% the agency would be required by statute to make a distribution of 15bps to 17bps, right? Not so fast there buddy! What about all of that extra risk from the legacy assets of TCCUSF that now rest within the NCUSIF? According to the agency, they need to elevate the NOL and retain 9 basis points of the distribution to fulfill the economic projections based on the FRB scenarios and Black Rock modeling. That’s why if the closing transfer to the NCUSIF is $1.9B (as projected by NCUA) the agency keeps over half of it to cover the risk that their Black Rock Model projects in a recessionary economy.

They sure lean on their high tech and expensive modeling consultants. Is that the same kind of modeling that back in 2011 projected Legacy Asset defaults to be between $13.2 and $16.4 billion and which today are projected to be between $10 and $10.4 billion, or between 30% to 60% overstated? Is that the kind of statistical accuracy one can expect from a world-wide firm like PWC, who incidentally was paid over $9M between 2010 and 2014 by the NCUA? Can we expect that the current projections by Black Rock, which was paid $5.5M between 2013 and this year, to be any more accurate? After all, we’re talking about over an additional $1 billion dollars being placed under the control of the NCUSIF as long as the board accepts the staff recommendation to increase the NOL. That means the agency would now have the earning power of over the $15B in the NCUSIF to hit up for an OTR that, even if reduced to 50%, supports an NCUA operating budget which continues to be projected to grow at 4.5% per year and which continues to look to the NCUSIF as the cash cow that means as much to the sustainability of an overweight and wasteful budget at NCUA as it means to the credit unions who have funded their own insurance fund with their members capital.

So, what we have is the typical quid pro quo that the agency so often foists on us, on one hand giving us some of our money back while on the other placing an additional burden on us by increasing the normal operating level to 1.39%. Gee guys, if the NOL was last increased to 1.3% in 2007, before the great recession, and we seemed to survive that okay, why do you need 1.39% today? Even if we agree that 1.39% is a good number today why don’t you at least guarantee us that the NOL will sunset after one year, so you can transparently prove to us to remain at that level, increase it, or heaven forbid, actually decrease it.

Good intentions indeed, but forgive me if I also want to look beyond and beneath the “good news.” Remember, you only have two weeks to get your comments into NCUA. Tell me why I’m wrong!

Lessons we can learn from an old song

Remember the old spiritual song “Dem Bones”? The first verse went like this:

Toe bone connected to the foot bone
Foot bone connected to the heel bone
Heel bone connected to the ankle bone
Ankle bone connected to the shin bone

Etc. etc. etc………… until

Neck bone connected to the head bone
Now hear the word of the Lord!

During the last NCUA board meeting on Friday, June 23, I couldn’t get that song out of my mind. In what looked like a rather thinly attended meeting (no telling how many tuned in via the web with me), the board entertained a report from staff on their response to the 2016 request for comment on the Overhead Transfer Rate, which has resulted in an underwhelming proposed rate methodology for board approval after a 60-day comment period.

This is what happens when an organization has a poorly constructed strategic plan; the staff thinks too small. (See my 2014 and 2016 comments on the NCUA’s strategic plan.) They think that they were charged with finding a solution to a single limited problem. To design a more easily understood and transparent formula for the OTR and that’s exactly what we got. But the comment letters didn’t just address the OTR formula, they also addressed the unrestrained growth and burden of NCUA operating expenses, and that, my friends, is what made me think of “Dem Bones”!

My version……..

The NCUA operating budget is connected to the OTR,
The OTR is connected to a lower NCUSIF equity ratio,
The lower equity ratio is connected to another premium hit for all insured CUs,
The premium hit is connected to the ever growing earning capacity of the fund,
The significant earning capacity of the fund leads us back to the black hole of NCUA operating budgets.

Any exercise in problem solving starts with an analysis of the root cause.  The problem that faces us collectively is not the OTR formula, it’s the extraordinary operating costs of an agency that has grown to see the fund and its role as insurer as the credit union funded El Dorado. Regardless of Board Member Metsgers’ comments, this isn’t a problem that pits federal-chartered against state-chartered, it’s a problem we must all face together, both regulator and regulated.

I belong to two state-chartered credit unions, and while a reduction of the OTR to 60% is better than a stick in the eye, I have a much bigger problem with the $300 million operating budget. Sure, I understand the impact of lower rates in the bond market and how CU losses contribute to pressure on the equity ratio, but when was the last time anyone at the agency said they should reduce expenses as part of a plan to manage the equity ratio? I’m talking about a real world reduction not just a D.C. Beltway reduction of the rate of growth. How can we significantly (10%, 15% or 20%) reduce the costs of oversight while simultaneously increasing the quality of that same oversight? That should drive every thought and every action at an agency responsible to the nation and the owners of this country’s credit unions.

I’ll be addressing the details, good and bad, of the new OTR methodology in at least a couple of new blog entries in the next few weeks. While the official 60-day comment countdown has not yet started please take the time to look at the staff presentation slides found in the Board Action Bulletin at this location: www.ncua.gov/newsroom/Pages/news-2017-june-board-seeks-comments-proposed-changes-otr-methodology.aspx

If you get the chance, watch the video of the meeting on the NCUA web site. It should be available in the next few days. Let’s make a real effort to get as many comment letters as possible sent to the board. The last comment period produced 40 letters… It’s imperative that we at least make a case for being interested in the most important issues of our collaborative network.

Tell me why I’m wrong!

Pay attention to the FCU Act; today’s Board could make bold choices

We should soon be seeing the response from the NCUA to the Request for Comment on the Overhead Transfer Rate calculation methodology posted over one year ago, January 26, 2016. The comment period for that request ended on April 26, 2016, and even though the NCUA has apparently slow walked their response, it was a significant event on which credit unions, their associations, and state regulatory agencies were asked to comment and make recommendations.

As we know, the OTR is the methodology that supports the agency’s reimbursement for expenses directly related to its management responsibilities of the NCUSIF. This authority to transfer funds from the NCUSIF to the operational budget of the NCUA is found in Title II of the FCU Act.

Let’s take a look at the pertinent section of Title II if the FCU Act. Sec 1781, b(1)

• The act allows for the payment to the NCUA any reasonable costs is incurred to determine eligibility for insurance coverage. The legislation states that such payment shall be based upon “reasonable costs”.
• The act states that information gathered in a regulatory examination process shall be derived so that it may be utilized for purposes of the insurance review. This is obviously intended to streamline the examination process in federally chartered CUs, all of whom are also federally insured. This also explains why you can’t find any instruction in NCUA Examiner Guidelines that differentiates the process, protocol or evaluation of data between a “regulatory exam” and an “insurance exam.” For federally chartered CUs the clear legislative intent is that the NCUA examination be one in the same, covering both the requirements of Title I and Title II.
• The act clearly recognizes the existence of a dual chartering model that permits SCCU participation in a Federal Share Insurance Program. It recognizes the regulatory authority of the states and requires that NCUA, in its role as insurer, use state regulatory exams, “to the maximum extent feasible;” to carry out its responsibilities as insurer.

How do we create a new insurance business model and examination process that reinforces the principles of the Act? What will be the benefits of scrapping the current OTR calculation and the measured activities of the agency that have driven it to its current unacceptable state? How will it impact the security and stability of the Share Insurance Fund?

A bold opportunity for a regulatory renaissance

The months since the departure of Chairman Matz have shown evidence of board leadership which is willing and capable of driving the kind of innovative change that our co-operative model needs and the changing times demands. The agency has promised that we will see a new and more transparent OTR protocol. Unfortunately, I will be very surprised if the changes amount to much more than a few tweaks. There are way too many oxen that need to be gored to expect revolutionary and evolutionary change to a process currently being leveraged to the disadvantage of the credit unions who foot the NCUA bill. We can only hope that this new board grabs the opportunity to be bold, to re-engineer a process that currently ignores history and the clear written intent of the Federal Credit Union Act.

The usual MO of a government agency, seldom or never evaluates the opportunity to go back to the basics of the legislative intent, burn down and gut the current process and start over. Instead the usual, less painful, process is to make less drastic modifications that pacifies the internal pressure to fight change, protects jobs and adds costs to a process that does nothing to realign a regulatory environment that produces improved oversight at lower costs.

Can we change that mindset? Can we muscle up the courage and effort to support such an effort? How do we get from here to there?

Get serious about taking a meat cleaver to the NCUA budget

Like most organizations, the greatest expense of the NCUA budget is personnel and associated expenses. The majority of personnel costs are related to the regulatory and insurance related examination process. In 2016 the budgeted workhours (Request for Comment regarding OTR, January, 26, 2016, Table 5) related to these core programs (Federal Examination, Federal Supervision, State Exam & Supervision, State Exam Review, Federal 5300 Program and State 5300 Program) was 728,556 or 350 FTEs. The portion of that 2016 budget allocated to FISCU related activities was 190,251 workhours or 91 FTEs.

The agency does deserve credit for making a reduction in the allocated workhours related to these core programs in 2017 (2017 Overhead Transfer Rate Summary, Fazio, November 17, 2016). Total core programs workhours in 2017 are 655,641 or 320 FTEs. This represents a 10% decrease from 2016. The FISCU related activities have been reduced by 12%, to 167,414 work hours or 80 FTEs.

Good start, but hardly bold. Why isn’t there a small team of maybe 20 FTEs responsible for the insurance oversight of FISCUs? Why isn’t there a strategic objective to drive this kind of reduction? Why isn’t the clear intent of Title II being faithfully exercised by using the examination work product of state regulators to the maximum extent possible? Why isn’t the agency using modern technology strategies to remotely receive and review state regulator work product? Why isn’t the agency receiving real-time alerts from Camel 3, 4 and 5 CUs (most likely CUs to impact NCUSIF) when performance standards exceed acceptable ranges? Why are there reports that Camel 1 and 2 rated small state-chartered CUs are being visited by small teams of federal examiners for the first time in years? Are they suddenly a threat to the NCUSIF? What are the characteristics or criteria of an “insurance examination” that make it any different from the “regulatory exams” being performed by state examiners? Where is the legislative direction that authorizes a duplication of effort at SCCUs?

Agency realignment overdue

I know credit unions are not happy about the increasing regulatory financial burdens imposed on them, their self-funded share insurance fund and their member/owners. The current NCUA board has an opportunity to be strategic, bold and innovative by addressing these concerns of their constituents. They alone can impose an institutional objective that reduces oversight costs while simultaneously increasing the quality of that same oversight. As member owned co-operatives we are live daily with this same expectation and we should demand the same from NCUA as the benefactors of their activities

I hope they start this renaissance immediately. I hope they use a new OTR strategy as their example of their effort to be the best stewards possible of credit union capital and credit union principles.

Tell me why I’m wrong!