Tell Me Why I'm Wrong

Feat. Randy Karnes

Chip Filson deserves an answer from all of us as credit union professionals

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Is it possible that Chip Filson is the last NCUA critical thinker of his generation or just a one-trick pony?

Read this most recent posting from Chip Filson on CreditUnions.com. Within just a few seconds you will pause and think “Oh, Chip, are you ever going to give up on kicking this dog? Does anyone really think it matters if we critique the NCUA’s action anymore? Does it make a difference?” But then you will read on—I always do. Chip Filson is a friend of mine and I believe his opinions on the system and the NCUA are valuable on many levels.

First, they remind me that the NCUA is not just an insurance firm or a regulator – they were designed to be more. They were designed to foster and separate the concept of a consumer-owned financial system that saw the world through a community lens and with bigger goals than just banking.  Chip might be the last true commentator who had a pulpit focused on wanting the NCUA to be more than just a government agency.

Second, they remind me that you have to look further than today’s headlines to ADD it all up. And while the numbers are getting so large that we round to the nearest billion these days, Chip reminds us that the NCUA only rounds numbers up or down based on their own internal goals to look good. The NCUA is no longer balanced by anything other than its own sense of importance. And board members are no longer the voice of reason, they are simply the promoters of a bureaucrat’s reputation. Chip might be the last true historian with enough perseverance to audit, research, and painstakingly try to sum up the NCUA’s actions in totals to paint stories as lessons for the future, not just sound bites without conscience.  

Third, they remind me that counting on the central planners of Washington and all those that see our business, credit unions, as some fine-tuned social model for justice is becoming more and more fool’s folly. For those who make up the industry have lost much of their fire over injustice, lost much of their indignation of those who would tread on consumers that act to be owners of community businesses, and have lost faith in political structures that cannot see a reason to separate a cooperative system from the evaluations and constructs of for-profit designs for banking and community action. Chip might be the last CU leader that truly reminds me to maintain hope that the NCUA could be more, and that counting on our system to heal itself is still worth the effort.

Today, the article strikes out against the way 8,000 member-borrowers were discounted and forgotten. Yesterday, there were dozens of moments Chip reminded us that the NCUA was off track. But what I am the most dismayed about in thinking about all of these articles is that they never rallied my generation of CU leaders and CU organizations to any recognizable effort to change anything at the NCUA. We have yet to mount any effort that showed us that any administration’s intent for the credit union industry was greater than a quid quo pro nod to a third level constituent owed a favor. We never got anyone’s attention for the effort to build a better NCUA, a better insurance fund, or a better machine to improve our own solutions.

We are capable community, small business builders, but we might be little else if Chip will be the last commentator to try to rally our ire and hopes for bigger things. Tell Me Why I’m Wrong.

You do not see this every day, but now is the time to see it more

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A CU industry ICON reaches out to the Washington Post for more light on credit union regulatory agency’s disrespect for 100M American citizen-owners of credit unions

Many of us have long become accustomed to Chip Filson’s warnings related to NCUA excesses and lack of respect for process expectations or rules.  He constantly lets us know that the current administration at the NCUA and ineffective board cares little about due process, transparency, or even the hint of propriety in the use of their power to just wipe out credit union owners’ capital and the future it represents. So when he published his most recent article on the NCUA’s spending $1.5B of member funds, many of us might have just sighed “there he goes again”, and way too many of us might have given up trying to connect the dots with all of the numbers, acronyms, and references to the NCUA’s shenanigans. It is news, but it is just expected news these days.

What was surprising to me was when I read this email from Chip to the Washington Post, because his indictment of the NCUA in his email was much easier to consume, to engage with, and to “feel” as an industry supporter. I have always been able to feel Chip’s passion for the system, and even his hopes that the NCUA would play up. But when I put this article, our industry apathy to the details, and this reach out to the real world together I knew things were changing. Keep going Chip, and keep pushing for people to pay attention.

For now is the time to push harder. With the recent announcement of Rodney Hood for another round at the NCUA as a board member, the recent push to fill the other empty seat, and the pending need to replace McWatters, there could be no bigger reason to try to get the attention of all of the people who might care about those 100 million citizens. Now is the time to push for a different type of leader on the board. Rodney Hood shows no signal, from his past or current activities, that he will change a thing for the better as a future board member. I predict that he will be recycling the agency’s disrespect for all of us with his passive, quiet demeanor of a bureaucrat without the skills to lead.

Now is the time to push the President to actually have a “project” for the NCUA Board. Something that calls for leaders. Now is the time for the administration to do more than dole out appointments as an afterthought. Now is the time for the administration to give the NCUA Board a job! Change the path of the CU industry by actually caring about the owners of credit unions as much as they care about the owners of for profit financial service models. Now is time to push for a new day.

I hate to see icons of the credit union industry (e.g. Chip) pushed to calling on the Washington Post, but now is the time to reach out and demand somebody shines a light on the need for a better NCUA Board with a real agenda. Tell Me Why I’m Wrong.

The tides of change don’t affect the legacies we leave behind

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Thoughts on the merger of Progressive Credit Union

I recently read an article from Chip Filson about the merger of Progressive Credit Union, a 16-year CU*Answers client, and PenFed, and it got me thinking. To some the merger may have come as a surprise, but for those aware of what made Progressive so successful for many years, the taxi medallion industry, it did not come as a shock. Rather, Progressive was caught up in the tides of an industry being swept away by Uber and other rideshare services. But instead of serving as a cautionary tale, I think Progressive’s legacy will be one to inspire others looking for that next big thing.

There’s no doubt that Progressive was a long-term leader in leveraging a marketplace for its members and the members of many other credit unions—they positively worked by proxy for us all. Robert Familant and his team creatively encouraged community lending (participation lending) and its evolution to aggregate capabilities to reach more people than they could otherwise have done alone.

And Progressive did leverage the medallion economy to great success, seeing their assets rise with the bubbling medallion prices, which climbed from an average of roughly $200K in 2002 to $1M in 2014, and have since crashed back down to 2002 levels. As new entries into the market disrupted the medallion industry, Progressive, among many others, was part of the wave requiring everyone to adjust to new norms.

No insurance company puts any credence to the idea of working things out, whether it be living through a portfolio of loans, or working through lawsuits, or trying to defend taking on hard roads ahead. They put so much weight on removing the topic from the to do list, that they weight their models for only their goals. While I think that the credit union might have been able to work it out over the long term, the NCUA would never have allowed them to continue riding the roller coaster of adjustment. They doomed the credit union for convenience and a sense of calm—get Progressive and medallions out of the news.

The taxi medallion business was a great business and the lifetime earnings of those who were good at it cannot be denied as anything but positive. It had its phases of wins and losses, but on the balance did very well for Progressive and its members. Its time has run out and so has Progressive’s. Not being flippant here, far from it, I respect Robert, Progressive, and all of the CUs that helped their members through the years based on the economies created by medallions and credit union hard work.

Every generation must learn this evolution of economies and the wins and losses that come with it. To 1) see the constant need to search for opportunities; 2) constantly consider how those situations might be disrupted; 3) avoid the impatience of disconnected regulatory oversight; and 4) see the long-lasting triumph of those who lead into the future without regret instead of clinging to the injustice of what was. There are lessons to be learned, adjustments to be made in the next cycle, and joy over the fact that it worked for Progressive for as long as it did.

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Scale is not everything

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Be careful not to dismiss ownership as some inconsequential detail on the path to success

I received a comment from Gregg Stockdale on my last piece, “The risks of vendor consolidation on the credit union industry“. In it he wrote:

“What disrupter of the credit union industry followed this model?  -“Only ownership can prioritize disruption of the status quo, competitors and the core of innovation. Cooperative ownership of our solutions is the key”  Also, “Protecting the decisions and mechanisms for maintaining our differential is the mandate for the future”  –  What differential?  Other than ownership, how is a cu different from a bank?  Cu’s are very bank-like and banks have become cu-like in their service offerings.  The big disrupters have come from outside the entire industry and many are privately owned.”

I agree whether a CUSO, CU, or any other company is a disrupter can be difficult to identify without close examination. But I contend there are many in the CUSO space as vendors, and in the credit union space, when they are judged locally by their consumer-owners (members) who meet or surpass the bar for disruption. Where I think Gregg was off track is his MACRO EXPECTATIONS from these ideas. He dismisses CU ownership as the DIFFERENTIAL that counts. It does count, and it should. Credit unions represent consumer owners, citizen ownership, and ultimately the best of community ownership model in society. Our economy and government should be more aware of that and be more demanding of that differential. If they were, it would be more than just an internal goal of cooperatives to focus on disrupting, it would be a national goal and mandate that they do. For that reason I judge the NCUA not to be a cooperative regulator, but just a bank regulator hiding under a cooperative banner.

Owners, no matter what their type, can internally mandate that their approach to the marketplace be disruptive to their competitors, for their consumers, and for the status quo. We both can be disappointed when their efforts are not STUNNING and APPARENT to the outside world, but their efforts can be real. They can be real one consumer at a time. So when he mentions the “big disrupters” he is scaling disruption with a MACRO EXPECTATION again. Why?

That is the point of my blog – vendor mergers like Fiserv and First Data are based on the MACRO EXPECTATIONS that scale is all that matters. And that when scale wipes out the nuance of niche approaches by simple rolling over the needs of those niche players we lose something, and in our case (CU supporters and believers) we might lose everything when we buy from these vendors.

I do believe that CU*Answers is a disruptive force, but not one that will move the world or even vendor analysts. I believe the force mandated by our ownership will move our industry to respect itself via our intent. I believe the force mandated by our ownership will move our industry to see that the cooperative inherent win-win model with consumers is powerful because consumers are the owner. And I believe that that is a disruptive idea for the ages when highlighted, amplified, and sincere in its efforts. So I focus on the micro-disruption of the owner’s intent, the owner’s heart to move things given a chance. Every community’s heart given a chance. I believe that our industry should be concerned when the vendor marketplace consolidations take that chance away.

Thanks to Gregg for commenting and pushing the conversation further.

The risks of vendor consolidation on the credit union industry

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By now you’ve probably read about the announced Fiserv-First Data merger. In an opinion piece, one person suggested that “small banks and credit unions fear big fintech.”

“Fear” is the wrong word here though. It should have been “CU Thinkers See the Long-Term Challenges in Vendor Consolidation.”

It is not just competitors merging here that should concern credit union planners and leaders. It is the consolidation of focus, project resources, and price to ROI expectations that should worry a niche-based industry like the credit union industry. When the vendor marketplace or the industries that support a marketplace design, like financial services, become so out of proportion with segments of customer niches, then those niches are mandated to more and more.

Those niches, in this case credit unions, struggle with each renewing contract and acceptance of norms other than the ones that they count on to propel their unique success. What appears to be simply buying tactics at one level of the credit union becomes accepting new conditions that change the very culture and business approaches that once were the defining differentiators for credit union success.

  1. Focus – As these super-firms–these glaciers–set their marketplace priorities and execute their plans, they will continue to marginalize credit unions and their drive to be unique in a commoditized, externally defined marketplace. How will CUs set their own unique priorities?
  2. Project Resources – With vendor consolidation combined with resource scarcity we see in the labor markets, these recombining firms have less project management focused on niche marketplaces and the concerns of those marketplaces to project manage CU adjustments and change priorities.
  3. Price – Does a vendor design its prices for its success or to the needs of its clients after absorbing the prices cast upon them? CUs are increasingly becoming price takers and massagers through CU distributors like PSCU, COOP, etc., but less so price innovators through ownership or via their own manufacturing of solutions.

While some segments of the CU industry believe they can grow and keep pace with the scale that can keep them in the game with these firms, other segments will feel these pressures growing. Credit unions are not just struggling with the need to compete with other financial service segments for consumer connections, they are or will struggle to find a vendor focus that does not simply press them into being weaker versions of their competitors via commoditizing of their business models – not just their tools that support their products. And like cancer, one day you wake up and find you’ve been eaten from the inside out, and the body does not respond to the mind’s desire to execute its own plan.

CUs must continue to prioritize their own uniqueness, and that is the ownership model. Cooperative ownership is the key to being the manufacturer of price and culture even in spaces that seem dominated by commodity tones. Pushing to design prices that allow a client to earn out on the investment, pushing to focus resource and project management based on the timing of the client, and pushing to ensure that models for shared and cooperative execution come to the forefront.

We are an industry of cooperatives, and that required sense of connection is important to our futures. Only ownership can prioritize disruption of the status quo, competitors, and the core of innovation. Cooperative ownership of our solutions is the key to:

  • Price Disruption – to ensure our cooperative models can earn the ROI on the prices they pay.
  • Access Disruption – to ensure that the things CUs need are not walled off from them or relegate them to the back of the line.
  • Execution Disruption – to ensure that when service engagement options need cooperative alternatives, they are there.

Protecting the decisions and mechanisms for maintaining our differential is the mandate for the future. Whether it be in our dismay about a regulator who seems as resolved as ever to a one-way model for financial service firms or about the fact that we increasingly rely on vendors where we are only an afterthought in their strategies, we all, the customer-owners and members of credit union cooperatives, should not fear the future. We should simply mandate the future to the greatest extent we can by mobilizing active ownership in every level of our value stack or vertical capabilities.

Tell Me Why I’m Wrong.

The new norm for credit unions should be a return to a norm seemingly forgotten

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Last month, Randy sent out an email regarding a generational approach not to how credit unions view their consumer-owners, but how they see themselves and their own staff. He posed the question of whether CUs and CU leaders are self-aware enough to expect norms to change or do they just find themselves out of sync with where they are today and behind the gun. How will new generations of leaders decide what it means to be a credit union moving forward? I took up the intellectual challenge and suggest the following…

Future executive and managerial skills will need to be fine-tuned to meet the evolution of the credit union into what I would call a “pure financial intermediary.” In the purest sense, tomorrow’s credit union would act more as a broker of the member’s financial needs, all while controlling the brand identity of the credit union as seen by the member/owner and the general public. To be successful, small, medium and yes, even the largest credit unions, will identify the expanding requirements to build collaborative operational and aggregated funding and depository solutions to lower operating costs and maximize the fee return on networked lending and depository solutions. The concentration of expertise in shared operational and transactional solutions owned by a network of credit unions will eliminate duplicative overhead expense and minimize, reduce or even eliminate the growing costs of managing balance sheet risk.

By aggressively building collaborative scale, fully leveraging technological tools and refining the special skills necessary for a successful, networked business strategy, tomorrow’s credit union leaders will be able to not only sustain the credit union model but should aim to be the pre-eminent solution for all consumer-based retail and small business financial solutions. We’ll beat the banks and the fintechs by being  “greater than the sum of the parts.” We have often “talked” this strategy, but our execution has sucked.

Adopting this strategy allows the individual credit union to focus and concentrate on what we have traditionally been the best at: providing the expertise necessary to identify and meet the life time needs of the individual credit union owner and member. This strategy also requires that CU management teams possess and execute the skills necessary to be a good network partner. We’ve all seen in our many collaborative efforts among credit unions, some credit union CEOs and their teams are great partners in any networked effort, some not so much.

This is a learned skill! Some will never be comfortable in anything but the traditional vertical hierarchy, but credit union survival and our desire to provide the very best in product design, pricing and delivery/distribution channels demands that future leaders learn and execute the skills required of a networked model. Think about it… at some point in the past, a group of individuals decided to create a network in order meet financial needs that they found lacking in other institutions or completely barred from. We need to take that same strategy up more than a few notches than we find in our current institutional solutions.

In the future , if you think you can manage in isolation or think you and your team can manage in the networked world without a new set of skills, good luck.

Why be right when you can have the last word?

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NCUA Board approves amendments to 2015 risk-based capital final rule, delay until 2020

The NCUA recently adjourned from their October board meeting and with respect to the impending RBC rule has approved action to raise the minimum impacted asset size from $100M to $500M. More importantly, however, they have delayed implementation from January 2019 to January 2020. Vic Pantea provided his thoughts on this decision:

“This action, in my humble opinion, will kill the entire RBC rule for the immediate future. I see a purely political compromise here that allows both McWatters and Metsger to gain satisfaction. McWatters who argued strongly, back in 2015, that the board did not have the authority to implement RBC, cannot reverse implementation as long as Metsger, who voted along with Matz, is the other vote on a 2-person board. But by getting the delay to 2020, we can assume that Rodney Hood will supply a 2nd vote sometime during 2019 to eliminate the final rule, regardless of Metsger’s disposition as an expired board member or if his eventual replacement has been appointed. Metsger, as a consolation, can continue to say that for as long as he held office, he was a supporter of RBC and excessive agency overreach in the name of “protecting the NCUSIF.”

Got to love politics… The pendulum between rules and tools swings back and forth based more on who has the last word than what is right. Always being last to the party on these kinds of things is a good bet. Picture all the effort and money that has been wasted in debating RBC, CECL, and other regulatory divides in the last 5 years.

How many real issues might have moved forward if we had not stalled so many people in debating the “what if’s” of fluff, risk management overreach, and style points for politicians? Imagine all the CU leaders that were discouraged by the doomsday preached when the predictions of these changes doomed all small CUs. And most of the debate was over late to the party, overreactions to disasters already survived, and the idea that data and measurements can predict the unpredictable, low probability events called life.

My advice: live by the creed of “do valuable things and good things will happen” as CU leaders. Let’s find a way to never be herded into a corner again by those who garner our attention over shuffling paper, debate the inconsequential, and doom us with protection from “it could have been worse” insurance policies.

Would you enjoy warm pork rinds with your car loan?

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Have you read the last two postings of Tell Me Why I’m Wrong? Vic Pantea and Patrick Sickels commented on an NCUA Interagency Statement Clarifying the Role of Supervisory Guidance and while they may not be riveting, they are informative. Do not get me wrong, their postings are good work. Logging the document and ideas for a rainy day after a bad exit interview with your examiner is probably prudent. You know those meetings… the ones where the board wants to know what the heck happened in that last exam and why the examiner is throwing their weight around when you promised you are in compliance with the rules.

It is a good document to pull out during a board member orientation where you discuss the concept of being a regulated firm heavily leveraged not only by the rules, but by the feelings of your insurance agent (the NCUA) as well. Remind the new board member to consider Vic’s optimism and support. “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.”

The problem with the two postings is WHO CARES? Who thinks an interagency statement that was designed as a “get out of jail card” for the NCUA board and home office bureaucrats to explain that they do try to “temper” their field agents is going to change anything? 

I struggled when Patrick brought the statement to my attention. Patrick’s lawyer side was showing a “precedent for arguments not yet made” kind of thing. Too many times I have seen field examiners blow off the home office’s cautions at the NCUA, and the oversight of the NCUA by other government officials has seldom seemed to weigh in on the side of a CU under pressure. And Vic, reminded me that this might help CUs play up, but is there momentum to be gained when you only hear about when CUs gave in and almost never about the wins made through pushing back? For a second, I wondered if it would be better to post an opinion piece of the value of serving warm pork rinds at loan closings, but I gave in. I took the bait that NCUA was sincere.

But now I worry that even if the NCUA were sincere, the game is set and we all will respond year after year in the same groove: capitulation to our fate. We need supervisory guidance no matter the consequences. Tell Me Why I’m Wrong.

P.s. Are we pushing for a new norm?

NCUA’s Interagency Statement should encourage credit unions to argue fearlessly

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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.

NCUA clarifies the role of supervisory guidance

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Credit unions handed another tool in the fight against examiner overreach

The NCUA, in conjunction with the other primary financial regulatory governmental agencies, published an Interagency Statement Clarifying the Role of Supervisory Guidance paper on September 11, 2018. This interagency paper provides ammunition to credit unions looking to challenge federal examiner findings, if these findings are based on “guidance” and not “law” or “regulation.”  This paper is likely in response to significant criticism from Congress that federal agencies are regulating through “guidance” rather than through actual regulations or laws vetted or passed by Congress.  The most concrete example of Congressional criticism happened this year when Congress used the Congressional Review Act to abolish CFPB guidance on indirect lending and the Equal Credit Opportunity Act.  This is an opportunity for credit unions to push back on examiner overreach and “regulation by guidance” by citing the Interagency Statement.

The core piece of the Interagency Statement is:

“Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.”  [emphasis added]

This statement by the NCUA provides credit unions with some significant arguments if  individual federal examiners attempt an enforcement action on a credit union based on supervisory guidance rather than on the actual regulation or law.  There are five areas of clarity provided by the Interagency Statement.  Of these, there are three primary points that can be used to push back against federal examiners:

  • Limit the use of numerical thresholds or other “bright-lines” not supported by regulation.  The use of these thresholds should be examples and not suggestive of requirements.

Example:  A well-capitalized federally-chartered credit union with $30 million paid-in and unimpaired capital surplus as of its last year-end report is in the process of loaning $250,000 to a CUSO.  An examiner says the credit union should lower the amount of the loan to $150,000 due to “risk.”  That threshold is not supported by Section 712.2 of the Code of Federal Regulations, which limits the total loan amount to 1% of unimpaired capital or surplus (or $300,000 in this example).

12 CFR 712.2 – How much can an FCU invest in or loan to CUSOs, and what parties may participate?

…

(b) Loans. An FCU’s total loans to CUSOs must not exceed, in the aggregate, 1% of its paid-in and unimpaired capital and surplus as of its last calendar year-end financial report. Loan authority is independent and separate from the 1% investment authority of subsection (a) of this section.

  • While federal examiners remain free to identify “unsafe or unsound” practices, examiners are not to criticize a financial institution for failing to follow supervisory guidance.

Example:  A credit union is criticized for not using the FFIEC Cybersecurity Assessment Tool.  The FFIEC’s own FAQ states that the Cybersecurity Assessment Tool is not mandatory.  This could form the basis of a challenge to the examiner’s finding.

2. Does my institution have to use the Assessment? No. Use of the Assessment by institutions is voluntary. Institution management may choose to use the Assessment, or another framework, or another risk assessment process to identify inherent risk and cybersecurity preparedness. The FFIEC released the Assessment as a voluntary tool that institution management may use to determine the institution’s inherent risk and cybersecurity preparedness.

  • Public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law.

Example:  The most obvious example was overturning the CFPB’s Bulletin “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.”

  • Aim to reduce multiple supervisory documents on the same topic.
  • Encourage credit unions to discuss supervisory questions with their appropriate NCUA contact.

As with any resistance to examiner findings, executive management and the Board’s willingness to engage, history of the credit union’s safety and soundness, and demonstrated meeting of the membership’s needs will all influence the success the credit union may have.  This letter from the NCUA and other agencies simply represents another tool available to credit unions and CUSOs concerned about examiner overreach.