State Regulators, SCUs Talk BSA, Conversions And More
The Credit Union Journal recently sat down for a far-ranging discussion with representatives of NASCUS. On hand were Linda Jekel, director of credit unions for the Department of Financial Institutions for the State of Washington, Mary Martha Forney, president of NASCUS, and Jo Anne Fillwock, CEO of Michigan's Financial Health Credit Union and chair of the NASCUS Credit Union Advisory Council.
CUJ: What is it like to attempt to oversee compliance with the Bank Secrecy Act?
Jekel: It's like a moving target. (The federal government) develops guidance, and we develop the examination questions. The difficulty is in trying to keep credit unions up to date on the guidelines.
Fillwock: A good example is bad checks. Do we file a SAR? What about a charged-off loan? One thing that makes me nervous (with BSA compliance) is all the shared branching in the Northwest. It's just really tough to stay on top of it. We do a good job, but the rules keep changing. It started out because of money laundering crimes and drug dealers. It's probably the best mechanism to build on.
Jekel: One reason the law is so broad is that law enforcement is trying to explore all the avenues of where the money is. We spend a lot of our examination time on BSA. We find there are some weaknesses, but we get them fixed within 90 days.
Fortney: Credit unions are not the only weak link (in BSA compliance), but they are getting up to speed.
CUJ: What about conflicts between BSA compliance and member privacy?
Fortney: This is where it gets very complicated.
Fillwock: I think credit unions are in a better position to know their members and they have the trust of their members. We've posted signs on desktops (in the credit union) saying that we do not mean to offend you but we have to ask. My concern is the small credit unions that do not have access to some of the supplemental (BSA information). I think the best solution for that would be an Internet-based solution on BSA.
CUJ: What about oversight of charter conversions?
Jekel: We think this is a big issue. We think it is an issue of state's rights and that it should be up to the state regulator (for state charters). This shouldn't be a (deposit) insurance issue.
Fortney: In some states a charter conversion is not even allowed.
Jekel: In Washington state we look at the consumer[s' interests] very carefully. The issues that NCUA has brought up very critical, and the state regulators feel they are very important, too.
CUJ: What about informing legislatures about conversions?
Jekel: We're very accessible. If I get a call I can meet with a legislator that day. If somebody says that 'Somebody needs to do something,' knock on the state regulator's door.
Fillwock: I think conversions have the potential to divide the industry. Some say 'Don't tell me I can't convert,' and others say, "This should not be permitted at all.'"
Jekel: The FDIC has looked at the same thing when mutual (savings and loans) went to banks. This is not a new issue. When you sell something with value, the key issue is disclosure.
Fortney: NASCUS is on the record as favoring full disclosure. Members get both sides.
Jekel: The reason Columbia Credit Union (Vancouver, Wash.) said it wanted to convert was for a wider field of membership. But they already had all the school districts. They said they needed to be able to do more business lending, and we had already approved an expansion for them.
There were a number of issues we had and we asked NCUA to come in and work with us on the exam.
CUJ: What other issues are you examining?
Jekel: One thing we have talked about is that there are more credit unions crossing state lines. It may be time to look again at the interstate branching agreement. We had a credit union acquire another that had an office in South Carolina. There was no other bank in the community and the credit union wanted to expand, but the regulator said no. In crossing state lines we need to talk about how to be effective and whose laws apply.
We also want to look at the issue of corporate governance. When we see a weak credit union we almost always see a weak board. We want to make sure they get training and have the skills to do strategic planning. I think all the regulators would agree on the importance of corporate governance.
The other controversial issue is secondary capital. We recently published a white paper and we used the (North Carolina) State Employees model and the corporate model. We have a tax letter from the IRS.
Fortney: We've distributed that white paper to credit unions and are now looking for feedback.
Jekel: There's going to need to be a lot of education on secondary capital. We're talking about a symposium on secondary capital in early 2006.
CUJ: What about the relationship with NCUA?
Jekel: We have a cooperative relationship with NCUA. We've worked very closely with NCUA on BSA and on the rising rate environment. I still have some concerns when NCUA overreaches on what it thinks it should do to protect the NCUSIF.
For two years we have been cautioning credit unions about interest rates. One of the areas we are really watching is the mortgage market and rising rates there. We are suggesting credit unions sell some of those mortgages.
Fillwock: We've been doing 40-year mortgages. Our real concern is that the rate curve will begin to flatten. Margins are getting squeezed and it's tough.
Jekel: We've seen some credit unions with CDs paying astronomical numbers. We saw one credit union get a lot of hot money and now they have to manage that.
Fillwock: We're losing mortgages to other entities and part of the reason is we want to act in the member's best interest, but the member really wants that (other) mortgage.
Jekel: With the vacancies on the NCUA board, we still think the insurance fund would operate better with the perspective of someone who has a state regulatory perspective.
CUJ: What about issues at your agency, such as with turnover?
Jekel: We have been lucky on turnover. A number of states have raised salaries for examiners; we have twice in the past seven years. But it's difficult to keep them and the federal government pays more and the private sector pays even more than that.
The work pool also isn't as broad as it used to be. We're not getting the experienced pool we had in the past.
Fortney: We've not heard of any states with an inordinate number of vacancies.