CUNA Comment Letter
CUNA Opposes Aspects of NCUA's Proposed Budget
November 7, 2008
The Honorable Michael Fryzel
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314-3428
Dear Chairman Fryzel:
On behalf of the Credit Union National Association, I appreciate the opportunity to supplement the excellent comments made on our behalf by Mr. Thomas Gaines, President and CEO of the Tennessee Credit Union League and Chairman of CUNA's Examination and Eurovision Subcommittee, last week during NCUA's budget review. Following the agency's briefing, that subcommittee and CUNA's Federal Credit Union Subcommittee were briefed by NCUA Executive Director Len Skiles and Public and Congressional Affairs Director John McKechnie, and we appreciate their explanations. This letter reflects the concerns of those Subcommittees as well as communications we have received from other credit unions and leagues. By way of background, CUNA is the nation's largest trade organization representing the country's approximately 90 percent of the country's 8,200 state and federal credit unions, which serve more than 90 million members.
Summary of our Comments
- NCUA is proposing a 15% budget increase that would encompass 84 new full time equivalent positions and result in 160 new employees for the agency, according to NCUA staff.
- CUNA does not oppose all of the proposed increases in NCUA's 2009 budget but we seriously question the manner in which NCUA would expand its available resources.
- As we understand your process, it takes many months to hire and train examiners. By the time NCUA has obtained all of these individuals, the crisis may well be winding down.
- We urge NCUA to consider meeting its resource needs differently. For example, NCUA should:
- Look at whether some examiners could be moved from regions that are not as hard hit to regions experiencing the most problems;
- Rely much more heavily on part-time and contract workers instead of adding so many full-time-equivalent positions; and
- Rather than focusing on adding generalists, focus on the specialists that you need.
- The proposed 12-month exam cycle will have a tremendous impact on the agency's budget.
- Given the economic crisis and the need for NCUA to be able to continue reporting to Congress it is handling problems well, CUNA is not opposing this change. However, we strongly support a reasonable phase-in period that focuses on problems and risk first.
- We know that CAMEL 3, 4, and 5 credit unions are already on an abbreviated exam schedule. In imposing the shorter schedule on other credit unions, we urge NCUA to concentrate first on those credit unions that have declining net worth or other indications of concern before phasing-in the shortened cycle for all federal credit unions.
- NCUA staff has indicated that the agency intends to strongly encourage the state regulators to move to a 12-month exam cycle as well. If a state is unable or unwilling to perform exams on this cycle, NCUA plans to conduct the exams itself.
- We find this draconian and believe there is a more cooperative way in which NCUA and the state regulators can discuss this issue and develop a mutually acceptable approach that does not undermine the states' authority.
- NCUA is projecting a benchmark of over 6% for pay increases and relocation costs for staff. While top performers should be rewarded, we believe NCUA should approach its budget with a sense of austerity in troubled times. We question setting this level for across-the-board increases, since a number of federal credit unions that will fund those increases could not afford them for their own employees.
- We also question the need for a $300,000 expenditure over two years for the 75th Anniversary of the Federal Credit Union Act. We doubt NCUA would condone such relatively sizeable celebration expenditures for a credit union when safety and soundness concerns required funds to be allocated elsewhere.
- CUNA continues to urge NCUA to develop assistance for credit unions in the form of troubled asset purchases and capital infusions as needed so that credit unions may first work with NCUA before having to go to the Treasury for assistance under the Troubled Assets Relief Program.
- CUNA also continues to urge NCUA to provide full share insurance coverage for noninterest bearing transaction accounts, as FDIC as provided for the institutions it insures.
- Other CUNA comments are:
- NCUA should make the process for providing input more meaningful. For instance, NCUA should allow stakeholders to review summaries of the proposed budget changes prior to the public review; and
- NCUA should ensure Board members' views that support credit union flexibility on ROA benchmarks, the ability to make loan modifications, and other issues are implemented by examiners.
Discussion of our Views
Before turning to specific aspects of NCUA's proposed budget, I would like to make a few general comments about the agency's process. From all accounts, the briefing held last week was excellent from the standpoint of providing detailed information about the proposal being presented to the Board for the allocation of its resources in 2009.
While we will strongly support the continuation of these briefings, we again urge NCUA to enhance the process by permitting input from CUNA, credit unions, and others to be more meaningful by providing summaries of proposed budget changes in advance of the briefing.
NCUA's 2009 Proposed Budget Changes
CUNA will always urge the agency to achieve efficiencies and minimize costs, but never at the risk of jeopardizing the integrity of one of its core functions - the ability to supervise the safety and soundness of federally insured credit unions adequately. In fact, CUNA has a long standing policy of supporting sufficient resources for NCUA. In our view, the entire union system benefits when the agency is able to perform its job well, thereby facilitating the safety and soundness of federally insured credit unions.
Nonetheless, CUNA does have several major concerns regarding the 2009 budget changes the NCUA Board will consider on November 20. CUNA does not oppose all of the increases, but we seriously question the manner in which NCUA is proposing to expand its available resources.
CUNA Has Serious Concerns about Adding So Many New Positions
More specifically, NCUA is proposing a 15% budget increase that would encompass 84 new full time equivalent positions and result in 160 new employees for the agency, according to NCUA staff. As we understand NCUA's process, it takes many months to hire and train acceptable examiners. By the time NCUA has all of the proposed individuals in place, the crisis may well be abated if not over.
There are a number of ways that organizations may meet their resource needs. In light of that, we urge NCUA to consider conserving resources and to approach its budget expansion in a more measured way.
In that connection, we are strongly recommending that NCUA consider the following.
- While there may not be many positions that can be shifted from region to region, we encourage NCUA to look at whether some examiners could be moved from regions that are not as hard hit to regions experiencing the most problems.
- We also urge NCUA to consider how it can rely more heavily on part-time and contract workers instead of adding so many full time equivalent positions.
- We also urge NCUA to focus on addressing weaknesses it has in its examiner force and rather than adding scores of generalists, NCUA should concentrate on obtaining the specialists that it needs.
Proposed 12-Month Exam Cycle Must Be Phased-In
The proposed 12-month examination cycle will have a tremendous impact on the agency's budget. To some credit unions, this change signals the agency's view that the risk-focused examination process is not working.
However, given the economic crisis and the need for NCUA to be able to continue reporting to Congress that it is handling problems well, CUNA is not opposing this change. Even so, we strongly support a reasonable phase-in period that focuses on problems and risk first.
We know that CAMEL 3, 4, and 5 credit unions are already on an abbreviated exam schedule. In imposing the shorter schedule on other credit unions, we support a transition in which NCUA concentrates first on those credit unions that have declining net worth or other indications of concern before phasing in the shortened cycle for all federal credit unions.
NCUA Must Recognize the Rights of the States to Determine Their Own Exam Cycles
We also have real concerns about the impact of NCUA's proposed shorter exam cycle on state regulators and state credit unions. NCUA staff has indicated that the agency intends to encourage strongly the state regulators to move to a 12-month exam cycle. If a state is unable or unwilling to perform exams on this cycle, NCUA plans to conduct the exams itself.
We find this approach very objectionable as it does not reflect the cooperative sprit that is the hallmark of the credit union system. Surely, NCUA and the state regulators can discuss this issue and develop a mutually acceptable approach that does not undermine the states' authority to determine what is the appropriate examination cycle for the institutions they supervise.
The Proposed Level for Pay Inreases and Celebratory Expenses Are Questionable
NCUA is projecting a benchmark of over 6% for pay and relocation costs for staff. While top performers should be rewarded, we question this level for across-the- board increases, since a number of federal credit unions that will fund those increases could not afford them for their own employees.
We also question the need for a $300,000 expenditure over two years for the 75th Anniversary of the Federal Credit Union Act. We doubt NCUA would condone a credit union spending such a relatively sizeable amount on a celebration when safety and soundness concerns required funds to be allocated elsewhere.
Other Key Issues That Have Budget Implications
Assistance for Credit Unions That Need It
While credit unions have generally sought to avoid the kinds of subprime mortgage lending that helped inflame the current economic meltdown, credit unions do not operate separately from the financial markets and thus, will not totally escape problems in the broader economy.
At this point in time, a widespread need for such capital within the credit union system does not appear likely, given the fact that overall credit union net worth is about 11%. However, a small number of credit unions have suffered collateral damage to the collapse of housing prices in some markets. Therefore, should any credit unions need assistance, we believe they should be eligible to seek it.
Because we believe the total potential capital deficiency in credit unions is modest, we want to work with NCUA to determine if NCUA can develop TARP-like programs that would allow any federally insured credit union that needs to sell troubled assets, apply for additional capital, or obtain asset guarantees, that will enable them to find a credit union-funded solution first without having to call upon taxpayer dollars for help.
CUNA also continues to support the inclusion of credit unions among the institutions eligible to seek assistance, as needed, under all aspects of the U.S. Department of Treasury's Temporary Assets Relief Program (TARP).
Our support for credit unions having access to the resources they need includes natural person as well as corporate credit unions. We are aware that the corporate system has been under the supervisory microscope in the last several weeks and that NCUA continues to monitor corporates' liquidity carefully. Corporate credit unions provide a range of important services to credit unions, and we urge the NCUA Board to continue to be mindful of the significance of the corporates as well as of the fact that they are owned by the credit unions they serve. We support and appreciate NCUA's recent decision to provide a loan guarantee program for the corporates.
Full Deposit Insurance Coverage for Noninterest Bearing Transaction Accounts
We would also like to take this opportunity to reiterate that we appreciate NCUA's communication to Treasury regarding full insurance coverage for noninterest bearing transaction accounts at credit unions. CUNA strongly concurs that these accounts at credit unions should have full insurance coverage on parity with Federal Deposit Insurance Corporation-insured institutions and that the National Credit Union Share Insurance Fund has authority to provide the coverage.
Possible Insurance Premium
Credit unions are concerned about the possibility of an NCUSIF premium, with the NCUSIF operating level anticipated to be at 1.28% at year end. In the current economic and financial environment, we believe that a premium is more likely in the next year or two than has recently been the case. Chairman Fryzel indicated at the last Board meeting that the Board will closely monitor the performance of the Fund, which CUNA encourages. We also encourage NCUA to provide credit unions as much advance notice as possible if a premium is in the offing.
Overhead Transfer Rate
For several years now, negative reactions to the agency's handling of the overhead transfer rate issue have decreased. That is due in large part to the steps the agency has taken to improve its processes for establishing the appropriate levels for both the operating reserves and for the OTR.
Nonetheless, it remains unclear to credit unions how the agency determines what is an "insurance related" cost. How such costs are defined is a very important issue because it determines how the agency allocates costs between insurance activities that impact all federally insured credit unions and supervisory ones that only affect federal credit unions. NCUA should not give up on its efforts to clarify this term for credit unions as it is essential to a thorough understanding of how the agency's funding process actually works.
The proposed budget calls for an increase in the OTR in 2009 to 55% to cover additional insurance work. CUNA will continue to monitor this very carefully.
Other Issues for 2009
There are a number of issues facing the credit union system as 2008 winds down and we prepare for 2009. Some of these issues have been around for some time and they include the lack of overall growth in the credit union system, current and increasing regulatory burdens which not only impact credit unions but also NCUA, and troubling economic indicators.
CUNA is in the process of completing an examination survey that went to about 2,000 credit unions nationwide, and we will share the results of the survey with NCUA and NASCUS in the coming weeks, after the CUNA Examination and Supervision Subcommittee has reviewed them.
Already we are aware of some concerns that credit unions are raising, which include examiners pushing for higher ROAs and little flexibility for loan modifications. As we have said before, examiner training on the range of regulatory issues is essential, but it is also important that examiners receive ongoing training on communicating and working with credit unions in the least burdensome manner. Also, ensuring that examiners actions are consistent with Board members views and that the agency provides as much guidance to credit unions as possible regarding what examiners will be checking for in key areas is very important. Credit unions continue to tell us that more guidance on the Bank Secrecy Act would be useful.
Next year will be a difficult year for credit unions, and we understand the agency must operate in that environment. Our concerns should not be read as support for a weakened supervisory system. However, because of the budget and economic pressures on the credit union system, we urge NCUA to make every effort to provide good stewardship for credit unions' funds.
The agency's budget decisions, as we go into 2009, will be critical. We urge you to consider our concerns fully and modify the agency's final budget and program recommendations to ensure safety and soundness objectives will be met in the most cost effective way.
Thank you again for the opportunity to express our views on NCUA's proposed budget changes.
Daniel A. Mica
CUNA President and CEO
Cc: NCUA Executive Director Len Skiles
NCUA Director of Public and Congressional Affairs John McKechnie
Mr. Tom Gaines, Prsdient and CEO, TN Credit Union League
Mr. Marcus Schaefer, President and CEO, Truliant FCU
Mr. Brad Miller, Executive Director, Association of Corporate Credit Unions