Is NCUA Up To The Task Of Regulating Industry?
SAN BERNARDINO, Calif. — Is NCUA up to the task of regulating natural-person and corporate credit unions?
The majority of credit union CEOs across the country interviewed by Credit Union Journal say the agency is not, although to be sure NCUA also has its defenders. But critics believe credit unions have evolved and expanded operations to the point where NCUA is challenged to perform effective, insightful examinations and to act proactively to prevent problems from escalating, citing examiner skill and the exam process itself as key problems.
CEOs, too, are concerned that at many levels within NCUA that the agency is "out of touch" with credit unions today.
Gregg Stockdale, CEO of the $35-million 1st Valley CU here, told Credit Union Journal that NCUA had been up to the task of regulating the CU industry, but over time the role "got away from them. I don't known when they fell off the planet. They used to go into credit unions and they understood us. I think somehow credit unions got beyond what NCUA is able to comprehend, be it the examiners or the powers above the field team. If you are examining a credit union that does member business lending, you can't go into that credit union with the same mental attitude you had when looking at a credit union that just does consumer lending."
Similarly, Stuart Perlitsh, CEO of Glendale Area Schools FCU in Glendale, Calif., contended that all of the new business "tentacles" coming out of credit unions today, such as MBL, have become too much for NCUA. Inexperienced examiners are part of the problem, said Perlitsh, who also felt NCUA's allocation of resources is "misguided. They are spending too much time on healthy institutions and not enough on the poor performers to catch trouble early."
Perlitsh said that often leaves NCUA with the option only to liquidate a credit union, and not save it. And in a number of failures, Perlitsh contended that many CEOs outside a failing organization have been aware of trouble brewing long before the problem CU goes under, yet nothing is done by NCUA in time to save the ship. "Case in point, Arrowhead and (Ohio's) St. Paul Croatian. You looked at St. Paul Call Report data and you do not have to be a CPA to have known something was wrong there. During the worst recession in my lifetime and the credit union did not experience a dollar in loan losses? Either the Croatians are very benevolent and pay back every dime they borrow or those Call Reports were fraudulent."
In the case of Arrowhead, Perlitsh offered that "everyone" knew the CU was in trouble, yet NCUA "went in at the 11th hour and pulled the plug. If they had gone in earlier they may have saved the credit union. NCUA gets the quarterly Call Report data and they fail to comprehend the negative trends."
The agency's lack of ability to spot problems was certainly an issue behind the corporate collapse, Perlitsh reminded. "NCUA admitted that they missed issues at WesCorp … NCUA is too reactive. They are not proactive enough — WesCorp, U.S. Central, Members United, Southwest — they should have been in there much sooner and more aggressively to save them from hemorrhaging."
Exam Process Is Lacking
According to Henry Wirz, CEO of the $1.7-billion SAFE CU in North Highlands, Calif., , and a member of the advisory board to Western Bridge Corporate (the former WesCorp), the agency's staff are up to the task, it's the exam process that is not. "I would ask NCUA to rethink their exam process, given the comments of the Inspector General in the sudden collapse of St. Paul Croatian, and given the number of instances where credit unions had huge losses due to some unsound lending practices and business policies that led to outcomes that seem to surprise NCUA."
Wirz said it is troubling that many issues that eventually sink credit unions surface too late and that the resolution process is often neither prompt nor effective. Wirz feels the problems with NCUA's current exam process is that it is not tight enough, it needs to be more clear-cut, and adhere to uniform standards. "This would help NCUA spot problems sooner and give them a common platform to resolve problems once they are identified. Currently it does not seem there is any logic to what examiners are doing and saying. I think this results from a process that is not well thought out."
What concerns Wirz about the future course for exams is that he believes NCUA is addressing its "faulty" exam process by "dumbing down the risk so the process can handle what is out there. That is the wrong approach."
View From Former Bank Examiner
Brandon Michaels, CFO for the $420-million Mazuma CU in Kansas City, Mo, suggested that part of the problem is NCUA is a "soft" examiner. "As a former (FDIC) examiner myself, I have to take some sympathy. When you go into a bank or a credit union, you are there only TWO weeks and you are supposed to examine the things the financial institution has done throughout the entire year, and its plans moving strategically forward. Having said that, most of the corporates had examiners on site. I think NCUA was a little soft on the corporates. I was in the WesCorp market before I came to Mazuma and NCUA specifically approved some of those investments they made. I am not sure NCUA knew anything more than Wes-Corp at that time. If you have an examiner in WesCorp and the institution ultimately fails, open mouth and insert foot."
Michaels suggested that NCUA's problem with being soft on the corporates extends to natural-person CUs. When Michaels was an examiner at the FDIC, he said NCUA was perceived by FDIC to be soft from a regulatory standpoint. "The agency was looked on more as a trade association, going after MBL and trying to expand CU market share."
Two sources who requested anonymity believe many of NCUA's problems with credit union regulation stem from the fact the majority of leadership and staff do not have a deep understanding of what it is like to run a credit union and are "out of touch."
"None of them have ever run a credit union or had to meet a payroll," one person observed. "When they need money they simply assess credit unions. There is no reality check, no common sense, no business sense, or street smarts. Just bureaucrats gone crazy."
Accountants, Not Business People
The issue with examiners, the two sources agreed independently of each other, is that many are accountants and have never run a business. As a result, one source said, examiners don't really know what to look for to spot problems. "We get Call Reports from credit unions every quarter. They are supposed to be examining them and understanding the credit union's business to work with credit unions to avoid problems or stop them before they get out of hand. You can't go in after everything has happened and scold the credit union like parents of little kids. As a parent, if you don't like what your kids are doing, you stop them before something happens."
Noting that the real accountability for the failure of any individual credit union lies with its board and management, from a regulatory standpoint NCUA has failed, asserted Hubert Hoosman, CEO of the $640-million Vantage CU in St. Louis.
"They have done a fairly lousy job," assessed Hoosman. "For instance, looking at the recent letter regarding board governance for federally chartered credit unions, giving the board the authority to get directly involved to manage staff-to hire and fire and set salaries-to me that is an indication that the NCUA board is not holding senior staff or management of NCUA accountable for the quality of their recommendations, specifically in the area of legal counsel. You wonder what system they have in place to evaluate and assess the quality of information that results in actions as far as recommendations from staff.
Problems At The Executive Level
"I think the members of the NCUA board are good people and want to do the right things," continued Hoosman. "But I think the office of general counsel, as well as other areas that have entrenched, long-term management at the executive level of NCUA, have been irresponsible with the recommendations that the NCUA board has been faced with."
Glendale Area Schools' CEO Perlitsh argued that the main problem with NCUA's regulation of credit unions is that they have "no skin in the game." In the wake of all of the problems that have surfaced during an admittedly trying economic period, Perlitsh said the federal agency is still not taking steps in-house to address matters.
"You have the WesCorps, the St. Paul Croations, and on and on. Those credit unions tank and employment remains strong at NCUA," observed Perlitsch. "No one got terminated, suspended, or furloughed, and NCUA failed. If the continued employment of NCUA examiners at WesCorp was in part contingent upon the success of WesCorp, those examiners would have been paying close attention and would have had more vested in their audits. These are federal government civil service protected employees that have nothing invested in the survival of credit unions."