Workshops Show Ways To Overcome Big Challenges
This week marks the first anniversary of my Partnering and Leadership Successes (PALS) initiative to help credit unions begin to turn millions of potential members into real members.
In the first year of PALS, credit union leaders have come from all over the nation to PALS workshops to learn about innovative programs that are reaching the people who need credit unions the most.
In my first two years on the NCUA board, I emphasized that these programs are not just the right thing to do; they're good business. This year I believe these programs are even more important to CUs' bottom line-because reaching people from all walks of life is the best defense against taxation.
From my perspective as a regulator, taxation is the number-one threat to credit unions' safety and soundness. But it's not the only threat. I see three major challenges for CUs in 2004, which are outlined below. I believe CUs have the ability and the commitment to overcome these challenges. NCUA can help.
1) Taxation: Taxation would cut into retained earnings. Even credit unions that are healthy today, under that scenario, could face Prompt Corrective Action.
Without any other capital source, if credit unions are taxed, they would probably not have the net worth to offer needed new services or branch out into underserved areas-making them unable to serve the very people who need them the most.
But I also try to look at the tax issue through the eyes of a lawmaker. To make sound public policy, lawmakers weigh any group's tax exemption against the public good. Many lawmakers know that credit unions serve the public good by filling a void left by other institutions.
These lawmakers need to see what CUs are doing to help their constituents.
When CUs reach out to everyone in their field of membership-including new immigrants, students, the military, single mothers, small business owners, seniors, renters, and other people with low-to-moderate incomes-they give lawmakers more reasons to preserve their tax exemption.
There are many ways to reach these diverse groups. Here are just a few examples of programs shared at the first four PALS workshops:
* Partnerships with community-based organizations are reaching the people who most need affordable mortgages-first time-homebuyers-helping them build wealth and loyalty that will last for generations.
Member business loans are providing capital for underserved small businesses, revitalizing communities one micro-enterprise at a time.
* Multicultural outreach programs are attracting new members from different ethnic groups, diversifying membership and strengthening safety & soundness.
* Risk-based lending programs are raising loan approval rates and providing credit to virtually all applicants at prices based on their personal credit histories. PALS workshops will continue to bring credit union leaders together to share successful initiatives that help more Americans achieve financial independence through credit unions-and in so doing, may ultimately help credit unions preserve their tax exemption.
2) Interest-Rate Risk: The second major challenge for credit unions this year is managing interest-rate risk. Already there is a dangerous imbalance on some balance sheets: High concentrations of long-term mortgages with low fixed rates are being funded by short-term deposits with variable rates.
Credit unions have an average of 44% of their loan portfolios in mortgages. If rates rise 200 basis points over the next year-which is not unrealistic-some credit unions could be shut out of the secondary market. If credit unions are holding too many fixed-rate mortgages as rates rise, their earnings will evaporate. Then those credit unions may face a liquidity crisis.
This can be prevented if credit unions act quickly. NCUA's Sept. 24 Letter to Credit Unions contains guidance on what CUs should be looking for-and what examiners are looking for-to safely position portfolios. Since this letter was released, I am repeatedly asked:
* Is there a way to maintain relationships with members whose mortgages are sold? The answer is yes. Credit unions can retain servicing on all mortgages they sell.
* Should credit unions sell off mortgages since they are high-earning assets right now? I assure them that if their credit union has a very high concentration of fixed-rate mortgages, examiners would rather see lower earnings today to avoid higher risks tomorrow.
If they continue to hold large concentrations of mortgages when rates rise, many credit unions may have no other choice but to merge.
3) Small Credit Unions
This brings up the third major challenge. In the past two years, we have lost more than 600 small credit unions. This is a concern for many reasons. Small credit unions tend to serve niche markets, offer exceptional personal service, and in many areas are the only insured financial institutions in their communities. So when some lawmakers hear "credit unions," they visualize small credit unions. To these lawmakers, small credit unions are the icons of the industry -and justification for the tax exemption.
Yet NCUA policies and procedures may unduly, and unintentionally, burden small credit unions. This is why I formed a Small Credit Union Working Group within NCUA. This group is examining whether NCUA can make changes to help small credit unions reach their full potential.
I don't believe we should keep small CUs on life support if they can't meet members' needs. Rather, I believe we should help small credit unions that are thriving so they can continue to serve a unique niche with a personal touch.
Our working group is evaluating thousands of ideas received from credit union leaders, trade association officials, and NCUA staff. We expect to issue recommendations later this year.
These recommendations would focus exclusively on NCUA. But it's clear that small credit unions also depend on other organizations to provide vital support. For example: help with back office tasks and compliance; donations of computers and other equipment; IT expertise; training; mentoring... the list goes on.
In addition to assistance provided by their trade associations, I am encouraged to see small credit unions partnering with larger CUs. For example, in Durham, N.C., where I hosted a PALS workshop on connecting with Latinos, the new Latino Community CU is a thriving center of the Latino community. It's also a well-run, well-capitalized institution, thanks in part to support from the largest credit union in the state (State Employees) and the largest community development credit union (Self Help).
I believe that when credit unions work together, they can overcome virtually any challenge. As long as I serve on the NCUA board, I will work to encourage partnerships that inspire credit unions to diversify their membership, effectively manage their risks, and serve more people with affordable products. Doing so will ensure credit unions' safety, soundness and success.
Debbie Matz is a member of the NCUA board.