Making The Case For A Third Option In CU Charters
For a while in credit unions, especially during the late 1990s, the word "charter" brought to mind the War Between the States, with one interesting caveat: You were either for one side (federal) or the other (state) with no neutral territory—but you could switch sides in the middle of the battle.
The fight was always over which was better, mostly in terms of regulations and fees, and which facilitated growth. Today, so many CUs are busy fighting to stay above water that the color of the life vest just doesn't seem all that important anymore. In politics, effective politicians have often found a middle ground, yet until recently there has not been a "third way" in the CU charter debate. One person is hoping to change that.
Bucky Sebastian is the new executive director of the National Credit Union Foundation, but he has spent most of his life as either a regulator (with NCUA) or with the regulated (most recently as CEO of GTE FCU in Tampa). Sebastian will be the first to tell you his career ended with a bump at GTE, which struggled with ongoing losses in Florida's slumping economy.
Sebastian proposed a third type of charter option while at GTE FCU, and he is using his new soapbox for a proposal that would "reinvigorate the credit union system," although he admits, "Some will like it and some will not."
"I think for some CDUs the credit union charter is obsolete. So I have suggested for the past year and a half and additional option: I call it a federal financial services cooperative. In many ways in the core business it would remain very much like a credit union. But for the CU that feels it could and should do more and in exchange or accepting a little more responsibility, I think we could have a charter that would bring the credit union to full fruition."
Sounds Pretty Good, But Wait
Sebastian's FFSC charter would still be a not-for-profit cooperative with a volunteer board elected by the members. The CU, not any regulator, would decide FOM. I can already hear CEOs across the U.S. saying this sounds pretty good. But hang on. "Remember a year ago there was a lot of heat in Washington over how obscene it was on that Wall Street made so much money? A provision in what I am proposing is that the CEO cannot make more than 20 times what the average employee's salary is. If the CEO wants to make more, he or she needs to bring everyone's salaries up. I don't think that's unfair . I think not-for-profit co-ops ought to have some limits on salaries of CEOs and senior management."
For those who are thinking, 'I could live with that,' Sebastian then adds, "The CEO and senior management would have their salaries published in the annual report every year. I think it would be an issue once, and then it goes away. (Form) 990s already require it in many states."
Among Sebastian's other proposals for the FFSC charter, which he offered up to the recent CUES Annual Meeting:
• The CEO would be treasurer of the board. "I've been in business a long time. I think it's a mistake for any corporation not to have the CEO on the board, for a lot of reasons, including accountability. I think you want the CEO on the record on every vote taken."
• The CU could be any type of lender it wanted—totally into mortgages, MBLs, etc., with no limits imposed by a regulator. "To the degree the third party tells you what to do, in my opinion that third party needs to be held accountable for the outcome; the organization."
• The FFSC would be allowed to own and acquire additional, supplemental, alternate capital. "There should be, in my opinion, the availability to go to the equity markets to raise some capital. You don't have to do it."
Assets That Are Not Assets
That last point is one Sebastian feels pretty close to. "I ran a credit union for 20 years. For the last two years the credit union did not make money. We were at the epicenter of the real estate demise in central Florida. It was not pretty. But we had assets on our books that did not show up as assets. I didn't want to sell our $200 million credit card portfolio; it was our best-performing asset and we could have sold it at a premium. I didn't want to sell it because we would have been selling our members down the drain."
Instead, Sebastian notes GTE FCU owned 30 of its 39 branches, carrying many on its books at a $1 value. He noted one branch GTEFCU had written down to zero was sold for $750,000. "We have real assets that are there, but not on our books. We were servicing a $1-billion RE portfolio; the servicing rights would have been worth millions of dollars had we sold it."
Sebastian said he believes GTE FCU could have "sold itself" and raised "significant equity capital" from the venture capital markets were it permitted.
"I do know there are some accounting nuances; as co-ops, technically we don't have capital. But you have organizations and individuals who see the value of the organization. We had capital at 6.9% and the regulator was hyper. I think the credit union ought to be able to go out and raise some venture capital that the regulatory agency would treat as capital so you could go on with your business. The worst dilemma at GTE is you do need money to make money. We weren't able to do a lot of things we could have done if the regulator weren't on our back. I also think the reserves should be risk rated. That's an old issue. But it would change the balance sheet and the regulatory view of a lot of credit unions. A credit union that is 100% loaned out to its members has a certain risk profile. Yet we reserve the same for each of those. That is a limitation we should not have to live with. If you were to look at the reserves of CUs in the U.S., the actual reserve-to-assets ratio is probably closer to 20%.
Sebastian, who believes reserves should be risk-rated, has another proposal that he acknowledges will make his FFS charter hard for many to swallow: in exchange for the expanded authorities, an FFS charter would not be tax-exempt. But Sebastian adds he only wants to be "thrown into that briar patch" under the following conditions:
• Operating expenses, dividends and statutorily required reserves (he proposes 12%) would be exempt from taxation. "After you have paid your expenses and dividends and reserves you would pay taxes at ordinary tax rate. I don't think anyone would pay taxes under those conditions. I know if I were running a credit union, once we were to 12.01%, we would declare a extraordinary dividend. Every dollar we pay to members is taxed. Lets do away with this issue."
• FFSCs would be subject to CRA. "I don't want to get into a big argument with anyone. They been doing it for 20 years in Massachusetts; it's not a big deal. We all say we are doing all of the things we would have to do if we were in CRA. We claim we only give it back to the people who gave it to us. Filling out another form might not be the most desirable thing in the world; but we could get this monkey off our back."
• FFSCs would offer Member Capital Shares. That $5 to $25 most CUs require for membership and which is returned when the member leaves, would no longer be returned. "Think Sam's Club or Costco. You pay to become a member. And when you no longer pay that membership dues, you no longer have the right to shop in that warehouse. We had 225,000 members when I left. But we had probably gone through another half-million members during the life of credit union. I also think it could be a great teaching tool. Would you pay the same to join your CU? If not, why not? Hopefully you are getting the same value out of your credit un ion membership that you do out of your Sam's Club membership."
Sebastian is a passionate credit unionist, which will serve him well at the Foundation. He's been a long-time critic of CUs that have converted to banks and among the planks in his FFSC charter is a requirement that any conversion will occur only when all reserves are liquidated and other assets are paid out to members. And if you're unsure where he stands on the issue, he adds, "I think it's unethical and immoral and a violation of the CU's board of directors fiduciary duty. I think the people who have done it belong in Business Prison and when their lives are over the Good Lord would not welcome them."
Sebastian, who would change the name of NCUA to the National Cooperatives Association, believes many people don't know what a "credit union" is, but they would understand a "financial services cooperative."
But that passion isn't so strong that he isn't projecting challenges ahead for the movement. Indeed, he said, without an evolving charter, " I think we are in danger of quietly going out of business."
Frank J. Diekmann is publisher of Credit Union Journal and can be reached at firstname.lastname@example.org.