Over-Regulated and Overdue: The Reasons For Reg-Flex
Often I have referred to RegFlex as a "third way" approach between excessive regulation and de- regulation. I believe we at NCUA must transform our examination and regulatory functions from a "one- size-fits-all" strategy to one based on the safe-and-sound practice of earned regulatory flexibility for well- managed, well-capitalized credit unions.
"One-size-fits-all" regulation has proven to place too many hurdles in the path of innovation and expansion of member service, as well as the building of capital. "One-size-fits-all" de-regulation is equally as undesirable as it removes necessary standards as well as the unnecessary.
That is why the earned regulatory flexibility offered in RegFlex is the right approach. It is based on safety and soundness. And it is, frankly, too long overdue.
Unlike those who always seek to impose new mandates to prove how beefy the regulatory process can be, I have faith in the ingenuity and dedication of credit union managers and volunteers to decide when and by what process they should make, for example, a charitable contribution to a local cancer drive or Little League baseball team. I certainly think they know better than we whether they need an updated computer system, a new branch, or to improve their liquidity by selling some of their loans to another credit union.
It is inconceivable to me that we have regulations that would keep a CAMEL 2 federal credit union with, let's say, 12% capital from taking any of those steps without first going through a costly and time- consuming waiver process from NCUA.
The regulatory process can become a stumbling block for innovative credit unions if we do not re- examine it from time to time to keep it both safe and sound, but also reasonable and in step with the times.
For example, NCUA has for years encouraged credit unions to reach out and serve low-income or underserved areas-a noble cause. However, unless NCUA provides certain regulatory reform that would in essence empower and enable a credit union to be able to do what is necessary to truly serve the underserved (for example, through locating a branch or at least an ATM in the underserved area or by freeing liquidity for a new lending program), I do not see how we can hope to be effective in facilitating such an extension of service.
Although I oppose the Community Action Plan (CAP) plan as unnecessary regulatory burden, we are bidding against ourselves if we mandate community action plans and then restrict the ability of credit unions to serve that same community through "one-size-fits-all" fixed-asset caps, charitable contribution restrictions and prohibitions against improving liquidity positions by selling or buying in-house loans.
Our NCUA regulations have, at times, become a stumbling block to credit unions serving the underserved. RegFlex would help remove some of those stumbling blocks.
With each credit union having different opportunities and challenges, one regulation hard-lined toward a particular credit union may not be in the best interest of another. RegFlex could provide earned flexibility for small, medium, and large credit unions alike.
Among the biggest beneficiaries of RegFlex will be those small credit unions who are most adversely impacted by excessive regulation. They do not have the resources to hire a compliance officer or an internal auditor. They need NCUA to make their lives easier, not more difficult.
If you believe RegFlex does not provide a benefit for your credit union today, it is still valuable in that it may benefit you greatly tomorrow. Your credit union's situation may change as your membership changes-or as the marketplace in your local area changes. You should also know that RegFlex is only the first step for additional analysis of other rules or regulations in place now that may need to be addressed or to help avoid a "one-size-fits-all" approach to regulations that may be promulgated in the future.
Lessons From The Road
Over the past few years, I have had the great opportunity of traveling the country and meeting with thousands of managers and volunteers-learning of the many concerns and issues you face in your credit unions on a day-to-day basis. As a former credit union manager myself, I recognize firsthand the challenges for committed credit union leaders who are consistently focused on providing safe and sound member service which keeps them with a competitive edge in the market, while still complying with NCUA's regulatory mandates, which at times run counter to their ability to effectively meet the very challenges they daily face.
If they have proven their ability to mitigate risk through their strong capital positions and CAMEL ratings, those credit unions have earned a better approach from their regulator. RegFlex is indeed a better approach, and it is built on the foundation of safety and soundness.
NCUA, like most of you, must engage in visionary planning based on sound business practices and solid member performance. Unequivocally, I believe that providing prudent and reasonable flexibility in existing NCUA regulations will not compromise safety and soundness. In fact, I believe just the opposite. RegFlex is designed as an incentive to both attain and to maintain the levels of performance which earn the regulatory flexibility.
Just as RegFlex can be earned through performance, it can be lost the same way.
Six Areas of Opportunity
There are six major areas of opportunity in RegFlex for those credit unions that have earned the exemptions due to their having achieved a net capital of 9% or greater and a CAMEL 1 or 2 for at least two consecutive NCUA examinations. The proposed opportunities for flexibility include exemptions from NCUA's 5% fixed-asset limitation, certain investment and charitable contribution restrictions, non- competitive appraisal limits, public unit funds restrictions and strict rules on a credit union's ability to purchase and hold obligations from other credit unions.
RegFlex was developed based on almost a year of focus groups and open forum discussions with leaders from all types and sizes of credit unions. These areas of regulatory flexibility which emerged from these extensive meetings were found not to be mandated by congressional statute, nor are they necessary for safety and soundness purposes when applied to credit unions with this level of performance and risk mitigation.
Reforming these six areas in RegFlex today will allow greater flexibility for serving underserved communities and enables innovation for enhancing member service.
One Credit Union's Story
While attending a league meeting in New Jersey last year, I recall a credit union official who asked questions about our eligible obligations rule. In this particular situation, the credit union was 96% loaned- out and desired to reach out to serve an underserved community where title loan companies and pawn shops were the only local source for many in this community to get a small loan for a personal need. However, because of our prohibition against another credit union buying and holding some of his loan portfolio applied to him as a CAMEL 2 credit union with over 15% capital the same as it would for a CAMEL 4 credit union with only 3% capital, the credit union was prevented from selling some of his loans to another credit union in his state that was only 45% loaned-out and needed to buy the loans as much as he needed the liquidity from the sale to meet the loan needs of this underserved community. Therefore, the result was the community did not get the service.
This is not fair-either to the community or to the credit union. NCUA must find a way to enable credit unions to meet these opportunities rather than placing hurdles for credit unions to stumble over as they attempt to reach out and serve.
Today, RegFlex is more than just a concept for discussion; it is a proposed rule and opportunity for you to let your voice be heard. I urge you to send your comments, concerns and suggestions so that we may have your input as we evaluate this important proposal. You may send your comment letter to Becky Baker, Secretary of the NCUA Board, 1775 Duke Street, Alexandria, VA 22314 or e-mail it to firstname.lastname@example.org. The public comment period ends May 14th and we hope to hear from you.
Dennis Dollar is Acting Chairman of NCUA. A former state representative in Mississippi from 1976- 1984, Mr. Dollar was most recently the President of Gulfport VA FCU in Gulfport, Miss., and can be reached at the address above.