'We’re not sending people to Mars': NCUA moves to overhaul chartering

The National Credit Union Administration is preparing to take steps to modernize and streamline the chartering process for de novos.

Martha Ninichuk, director of the agency’s Office of Credit Union Resources and Expansion, said during the regulator’s monthly open board meeting Thursday that starting in July CURE will roll out a variety of new measures for groups attempting to charter a credit union. Among them, she said, will be pre-developed business plans based on the types of services a CU hopes to offer, an online platform to move them though the process and a capital estimator to determine funding levels.

Those moves come as the number of credit unions is shrinking due to mergers and liquidations far faster than new institutions are being chartered. Hundreds of credit unions disappear every year, with only a few new ones being formed. Some industry economists have previously pointed to data showing that the number of credit unions has consistently declined by about 3.5% every year since the 1980s.

Mark McWatters, an NCUA board member who served as chairman from January 2017 until earlier this year, praised those efforts, noting the chartering process has been “amazingly sluggish” in recent years.

“These are credit unions – we’re not sending people to Mars here,” he said.

But McWatters also pointed out that while the agency can make efforts to ease the chartering process, there is only so much it can do about getting those institutions access to capital. That could open the door for movement on an issue the agency has long been stalled on.

“At the end of the day, chartering credit unions requires money, and historically the way credit unions have been structured is they run on retained earnings, so you have a chicken and egg problem,” McWatters said. “Either you have the philanthropic support or a particular field of membership’s support for a credit union or you don’t, and if you don’t it’s hard to get going. Once your credit union is launched it can run on retained earnings very well, but that speaks to the need to strongly consider a supplemental capital rule” that would better allow de novo institutions access to seed capital.

Alternative capital remains a priority for credit union trade groups, but little progress has been made on a new rule in recent years. In December the board – at the time comprised of then-Chairman McWatters and Board Member Rick Metsger – approved a report calling for action on that issue by the end of this month. The board has not made any moves on the matter since then.

NCUA Chairman Rodney Hood was in Oklahoma recently to celebrate the agency’s first new charter of 2019. Board Member Todd Harper noted NCUA went through three chairmen – Metsger, McWatters and Hood – in the time it took to launch that institution.

In response to that, Ninichuk said capital remains the primary reason for delays in the chartering process.

“What we hope to do through the modernization program is research different ways credit unions can find start-up capital so the process doesn’t take so long,” Ninichuk said.

The online portal is also expected to include more information about the entire chartering process so organizers are better prepared up front.

Non-member deposits

The board on Thursday also approved a proposed rule that would allow federal credit unions to accept non-member deposits for up to 50% of the institution’s unimpaired capital and surplus, and eliminate a current waiver-request process. Under current regulations, credit unions are limited to a maximum of 20% or $3 million, whichever is greater.

Participating CUs would be required to present a detailed plan for how it plans to use non-member shares and borrowings if combined non-member shares and borrowings exceed 70% of paid-in, uninsured capital and surplus.

While the rule would apply to all credit unions and is intended to provide additional flexibility for even the largest shops, Larry Fazio, director of the Office of Examinations and Insurance, said it would likely benefit small credit unions the most, since they are more likely to have higher net worth levels relative to total assets when compared with their larger counterparts.

While the rule gives small credit unions “the opportunity to grow and achieve economies of scale,” it is intended to provide flexibility to CUs of all sizes in terms of optimizing their funding structures, he added.

All three board members approved the proposal, which will be open for comment for 60 days once published in the federal register. Harper emphasized his interest in hearing feedback from credit unions and not just trade associations, along with state-level supervisors in order to better understand the limits in place for state-chartered CUs.

Bankers are already protesting the proposal. The measure goes against the cooperative nature of credit unions where resources for loans come from an institution’s members who share a common bond, Ken Clayton, head of the American Bankers Association’s office of legislative affairs, said in a statement after the meeting.

“This proposal from NCUA is deeply troubling. It would allow credit unions to take even more deposits from outside their traditional membership base, further accelerating their growth at a time when NCUA is already struggling to oversee the industry and putting taxpayers at risk,” Clayton added. “This week’s reporting on NCUA’s supervisory failures in New York’s taxi medallion business only further calls into question why this regulator would now propose to allow credit unions to accept more non-member and municipal deposits.”

Clayton was referring to two stories in the New York Times earlier this week that highlighted abusive practices by credit unions and other lenders in making risky loans to consumers looking to buy taxi medallions in New York City.

NCUSIF update

The board also heard an update on the National Credit Union Share Insurance Fund, which finished the first quarter of 2019 with net income of $16.1 million and a net position of $15.8 billion. Earlier this week the board made a $160.1 million distribution from the share insurance fund, bringing total distributions in the last year to nearly $900 million.

NCUSIF reserves for possible losses rose by $36.1 million during Q1. CBS Employees Federal Credit Union was the only involuntary liquidation of the quarter and cost the share insurance fund $40 million, largely as a result of fraud. The CEO leading that institution at the time of its liquidation recently admitted to embezzlement charges and agreed to a plea deal.