Seeking A Cure For 'Intense Pain'

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PITTSBURGH-From the impact of NCUA assessments on already low ROAs to coping with examiners who fail to recognize the special needs of small credit unions, Clifford Rosenthal addressed the state of community development and low-income CUs. The CEO of the New York City-based National Federation of Community Development Credit Unions spoke with Credit Union Journal during the 36th Annual Conference on Serving the Underserved at the Omni William Penn Hotel here.

Credit Union Journal: What is a key issue facing your membership today?
Rosenthal: There is intense pain around the stabilization expenses and the write-off of corporate investments. This is not unique to our movement, but our numbers show that the effect on net worth is disproportionately large on low-income and small credit unions that do not have quite as high a capital base to start from.

Unfortunately, this can have an impact beyond the world of examiners and NCUA. If numbers are negative, it's hard for others to understand that the situation was not all of the credit union's doing. For example, if a community development financial institution seeks funding, and reviewers-which likely have a limited understanding of credit unions-see that the bottom line is a negative 20 basis points ROA, they are likely to downgrade the credit union and not award the funds."

The supervisory letter was the best document of its kind. There had been one in 2005 that addressed some of the issues, but this really went beyond that. We are pleased with NCUA's top-level understanding of the specific operating characteristics of low-income and community development credit unions. But the disconnect between policy and practice, which NCUA board member (Gigi) Hyland has been aware of for years, has not been obliterated (see related story)

CUJ: How would you describe the relationship between examiners and small credit unions?Rosenthal: There is a dilemma-the power relationship between examiner and credit union is very unequal. Our credit unions complain about this but, generally, they remain afraid to surface their complaints and identify particular examiner/examination problems because they are afraid of retaliation. That is a real barrier. We are trying to find a way around this problem and create a safe haven for credit unions to report issues.

CUJ: Is there too much power in the hands of examiners?
Rosenthal: "In the end, the agency will hear two sides of the story-from the examiner and the credit union. But we feel that there always will be sufficient instances that the examiner can point to, note that the small credit union is different, but say they should have done this and that. It's a tough battle to win.

CUJ: Is pressure increasing from examiners on small credit unions to turn a positive ROA?Rosenthal: While we feel continuing pressure, is it exacerbated? We don't know for sure. But the fact is that the recession persists and recovery has not hit the lowest income communities. Initially there was more patience and understanding of the small credit unions' problems. But I think examiners, after a year of seeing this, are thinking it's time to get better. 

CUJ: What will be the impact of the Community Development Capital Initiative (CDCI)?Rosenthal: This is a great victory. The amount of secondary capital that will come through this program may be 20 to 30 times more than the federation has ever been able to invest. We think it will help heal some credit unions and provide some breathing space.

CUJ: Has the CDCI attracted members to the federation?
Rosenthal: The Federation saw a 15% increase in membership from February through April, when we got more than 30 new members. The total membership of federation credit unions has increased from 1.1 million at the end of 2009, to 1.6 million today. And the collective assets of federation credit unions have increased from roughly $5 billion to $10 billion during that same time. Since the message about CDCI got out, large institutions have joined us. It reflects the distress of the industry. A lot of substantial credit unions-not just the small guys-are looking for supplementary capital.

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