Financial Literacy Rule Questioned

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MADISON, Wis.-While in favor of NCUA's new financial literacy standards for federal CU board members, two trade groups are expressing concerns over requirements to comply with the new provisions, and raising the even bigger question of whether the rules will have any real impact on board knowledge.

Directors of federal credit unions elected or appointed on or before Jan. 27, 2011, including those directors serving prior to NCUA finalization of the rule, must be in compliance with NCUA's new financial literacy requirements by July 27, 2011. Directors elected or appointed after Jan. 27 must satisfy the financial literacy requirements within six months following seating.

CUES President Fred Johnson, while lauding NCUA for taking action and moving quickly to improve the level of director financial literacy, wondered if the efforts by the regulator could be a "quick fix. To date, guidance from NCUA on this matter has been quite broad. Are we trying to stick our finger in the dike and hope?"

Johnson emphasized that while the new rule has provisions, it does not include clear educational standards. Johnson is in favor of CUNA, NAFCU, CUES, NASCUS and NCUA partnering to develop a standard director accreditation process.

Anthony Demangone, NAFCU's director of regulatory compliance, believes NCUA guidance needs to be flexible. "We are pressing NCUA to make sure the guidance has to be extremely general. Because what each director needs in terms of financial literacy training could vary a great deal."

Both Johnson and Demangone agreed that directors who possess sound financial knowledge should not be required to undergo additional training and that a simple certification process be established for these situations.

Whatever additional direction is handed down by NCUA-and the regulator was close last week to releasing a letter to credit unions that further clarified rules regarding the financial literacy standards-Johnson recognized that training is needed.

Assessing Financial Literacy A Challenge

Saying it is difficult to assess the overall level of director financial literacy today, the CUES president feels that the financial industry has changed significantly in the last 10 years and continuing education is needed by boards. "It's time to go back to school if you have not been to school in while. Just because you served on the board for 20-plus years does not qualify you completely to guide the credit union through the challenges ahead-new regulations and requirements. I'd compare the situation to the professor of geology who has been at the college for 30 years and suddenly there is a new structure of rock formation that changes the way geologists viewed everything before."

Johnson added directors can be elected due to popularity, not skill. "When I was on the board of West Point Federal Credit Union, we had two to three people on our board who could not read financial statements. But they were elected consistently because they had a group of constituents who voted for them."

Demangone concluded that director financial literacy is "extremely strong in some cases and lacking in others. It's hard to generalize."

While state-chartered CUs are not subject to the new rule, NASCUS reported that state-charters have been paying attention to director education. "During the last three years we have had over 600 directors attend our director's college," said CEO Mary Martha Fortney.

Johnson acknowledged there is "consternation" among CEOs who are uncertain what will be required by NCUA. Demangone said grumbling he's encountered has come from CEOs who want enough flexibility from the regulator so they will not be "second guessed. Such as being told a director should have spent another hour on a certain aspect of financial literacy training. They also don't want the rules to be so onerous or intimidating that they will hinder a credit union's ability to recruit board members."

Potential Benefit Of New Rule

However NCUA proceeds, Demangone believes there will be a benefit. "It remains to be seen (how effective the new rule will be on improving board financial literacy). I do think one of the effects will be that you see more robust training programs at credit unions. I think you will see a greater emphasis on education, which is always a good thing."

Luke Martone, CUNA assistant general counsel, told CU Journal it was too soon to provide comment on the matter since NCUA was working to provide further direction.

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