Best Practices Can Be Learned In The Strangest Of Places
As you may have noticed, I'm not wearing a hat in the photo that accompanies this column. That's because I've taken my hat off to the folks involved in the conversion bid by DFCU Financial Credit Union in Dearborn, Mich., to become a bank. Not a mutual. Not a "savings institution." A bank.
You have to admire chutzpah and the folks behind these conversions have it by the 10-gallon hat full. Two weeks ago I thought the "converters" had issued a never-to-be-topped claim when they insisted the reason they haven't disclosed more information about the conversion to members is because they are prohibited from doing so by NCUA. Yes, the same NCUA that has been passing regulations and insisting that these credit unions and the law firms and consultants behind them disclose MORE! Indeed, NCUA has been criticized by some of the uninformed in Congress for this very thing-upholding member rights.
But now, as is reported in this issue, that preposterous claim has officially been topped by a new complaint from the conversion crowd, which has been upset that the folks fighting the conversion at DFCU Financial, a group calling itself DFCU Owners United, haven't allowed them to address their members. What? A group not permitted to tell its side of the story!
The small groups behind these charter conversions have all followed the same playbook: take a year or two and begin laying the groundwork for the conversion by running member business loans up to the 12.25% or letting capital slide until it approaches PCA triggers (in both cases, giving the CU a "reason" to cite for the conversion). The boards secretly meet and discuss the conversion plan and then foist it upon the membership quietly (if possible) and quickly (vote NOW! and win a prize). And at no point in the process, according to their playbook, are any dissenting voices permitted, any critical views tolerated, and certainly no meeting or forum is to be held until the word "deal" is preceded by the word "done."
The Coalition of Credit Union Charter Options, a small group of former CUs that have converted to banks, has sent letters to the media complaining that it is not being permitted to tell its side of the story. A representative of the Coalition, Marvin Umholtz, a former credit unionist who has gone to the other side, stood outside a meeting room in Michigan last week and complained he was being "ignored."
Hmm, wonder where the folks fighting the conversion and loss of their ownership stake and equity learned that tactic?
On a far brighter note, WesCorp and Callahan & Associates hosted a meeting last week in Orlando that examined financial trends and included several panel discussions on credit union strategies. (By the way, I don't know if Orlando is getting closer to Tampa or Tampa to Orlando, but it's turning into Talando or Orampa, take your pick).
If there is one trend that has defined credit union operations over the past five years it's been the growth of mortgage lending and its slice of the overall portfolio pie. Rock-bottom home loan rates have kept everyone's pipeline full (as one CU at the meeting shared, TOO full), making it easy for just about everyone to be successful.
Rising rates will now identify those that have truly been successful in building a mortgage operation during the good times from those credit unions that have simply been having good times grabbing the low-rate fruit, separating the APRs and the oranges, so to speak.
Among the former are Pentagon FCU and Eastern Financial Florida Credit Union. Both are billion-dollar-plus operations, not surprisingly, that could invest in internal processes. Both, too, are in markets that have seen rapid appreciation (Washington, D.C./Northern Virginia and South Florida). Debbie Ames Naylor, VP-mortgage services at Pentagon, told the Callahan/WesCorp meeting the credit union's military membership has led it to focus on ARMs, since so many members are reassigned long before ever paying down a mortgage. It has also placed emphasis on "member values" that have included a 90-day lock with contract or refinance fee, no lender fees, jumbos priced similarly to conventional loans, and the purchase of a local real estate firm it operates as a CUSO called PenFed Realty.
Kendrick Smith, CIO with Eastern Financial Florida, had a story that will sound familiar to many. During the mid-1990s refi boom, it was busy-too busy. Phone calls were going unanswered, applications were sitting in the pipeline for 180 days, and worst of all, errors were being made. Employees were stressed out and leaving, moving to other mortgage lenders that were hiring anyone with a pulse (filling slots, no doubt, created by their own stressed out former employees).
For EFFCU, Smith said, the key to turning things around came in understanding the "Theory of Constraints," a modern day management theory built around the age old tenet: "you're only as strong as your weakest link." In its own review, EFFCU learned it was losing money on nearly every loan it did. By overhauling everything, it ensured its internal process could handle the workload and its pricing became more competitive as it improved member service. "You have to regulate the flow of applications into the pipeline at the speed at which the underwriter can process them," said Smith.
The best news? "I haven't had a member complaint in two years," he said.
We'll have more details on this session in an upcoming issue.
Frank J. Diekmann is Publisher of The Credit Union Journal.