Thank you, Fred, for your kind introduction and for your invitation to address NAFCU’s 36th annual conference. It has been a whirlwind since I was with you at this time last year in Seattle. During that time, you and your capable staff, including Bill Donovan and Gwen Baker have been an important resource for me. As NAFCU members, you can rest assured you are well represented.
This last year has been a productive one for the agency. Over the last year, the Board has:
• Approved and issued final rules on Corporate Credit Unions and Prompt Corrective Action;
• Developed a new Field of Membership Chartering Manual;
• Updated a substantive investment rule;
• Deliberated conversions that enhanced member service;
• And, reduced NCUA’s budget, money ultimately generated through credit union membership, with an AIM toward accountability and positive results.
A great deal of my focus over the last several months has been to enhance the Member Business Lending Rule so that credit union members are better served. Credit unions are the perfect ally for assisting small businesses with their credit needs and deposit services. With a focus on members’ small business lending, credit unions can play a pivotal role in sustaining economic growth in America.
With an eye towards enhancing the ability of credit unions to serve small businesses within their field of membership, I called for the development of a working group, within the Agency, to creatively examine ways in which our member business loan rule could be improved. Clearly, given the strength of credit unions, coupled with their mission, you can collaborate with small businesses to provide for their capital requirements while complying with the wishes of Congress and still not compromising safety and soundness.
President Bush has called on Congress to work with him and act on his economic proposals to encourage America’s entrepreneurs, speed up economic growth, and create new jobs. By reducing taxes, encouraging investment, and removing obstacles to growth, I believe the President’s plan will continue to help our great country prosper, and create an even greater environment for Americans to achieve the American Dream whether it’s starting a business, becoming a first-time homeowner, or saving for retirement.
Economic progress requires the growth of small businesses across America. Small business owners represent more than 99 percent of all employers and maintain more than half of the private work force. These entrepreneurs create more than two out of every three new jobs and generate about 50 percent of the nation’s gross domestic product. Nearly 40 percent of small businesses are owned and controlled by women, and nearly 15 percent of America’s small business owners are minorities – the trend of minority ownership is accelerating.
Minority-owned small businesses, in excess of three million, are providing job opportunities for millions of Americans in communities across the country. President Bush is committed to creating an environment where small businesses can flourish. It is not the government’s role to create prosperity; however, government can create the opportunity that makes prosperity possible. I applaud this commitment and carry the President’s mission through the NCUA Board to millions of credit union members across this nation.
Earlier this year, the Small Business Administration made a bold decision to extend access to more Americans needing small business capital. I commend SBA Administrator Hector Baretto’s work and his vision of service to Americans. The SBA’s actions are clearly consistent with the Administration’s emphasis on expanding the pool of SBA lenders and focusing more attention on small borrowers. As of the end of June, the SBA confirmed there were over 100 credit unions that have joined the 7(A) program, with 22 joining so far this year.
What a great collaborative relationship between SBA and credit unions. What a tremendous opportunity to serve your members while at the same time not having to utilize your member business lending limitations on the government guaranteed portion of the loan. As a matter of fact there is more room for collaboration to occur. As of year-end, only 16 percent of all credit unions were engaged in member business lending. This represents an increase of 39 over the year prior. It is also worthy to note that the average member business loan for a credit union in 2002 was approximately $98,000.
Make no mistake about it – member business lending is not appropriate for every single credit union. However, if you believe that member business lending fits within your overall strategic plan to serve your membership, I encourage credit unions’ boards and management to evaluate whether the service is appropriate to your particular institution.
After several months of review, focusing on the regulatory framework, my working group developed a list of enhancements that were included in the proposed rule, which was approved for comment during our March 27 board meeting. The comment period closed on June 3, and we are in the process of analyzing the comments in preparation of a final rule for Board consideration.
Over the last six weeks, our staff has reviewed comment letters intent on taking the public dialogue as a productive factor in improving the final rule. Just to assure you, each comment is individually reviewed and analyzed. That includes comments both productive and some not so productive. But regardless, our system is one of public input and dialogue and one in which we rely in order to ensure we consider all viewpoints. Key provisions of the proposal are as follows:
First, it incorporates changes for loan participations, sold without recourse, and for loan participations purchased. The proposal clarifies that a loan participation sold without recourse will not be included as part of the outstanding member business loan balance. This incorporates a recent NCUA General Counsel opinion in the regulation.
Second, the proposal excludes the purchase of a business loan participation interest from the calculation of a purchasing credit union’s aggregate member business loan limit. In response to the comments we have received, we are considering whether there is a way to strike a balance whereby credit unions will be able to place excess funds in good, solid loans offered by credit unions while alleviating the concern that credit unions will swap loans to avoid the cap.
Using participation as a mechanism within the member business-lending environment seems prudent and reasonable. Obviously, as member-owned and controlled institutions, credit unions will purchase participation interests only after meeting their members’ lending requirements. Safety and soundness is strengthened by credit unions selling participation interests to other financial institutions. The due diligence analysis by the purchasing credit union enhances the overall creditworthiness process in member business lending. Furthermore, these participation interests diversify the risk of member business loans within the credit union system, ultimately making credit unions safer and better able to meet the needs of members, both individually and as small business owners.
Another change being proposed deals with the issue of exempting member business vehicle loans from the 80% loan-to-value requirement. The new proposal will exclude these business vehicle loans from the 80% loan-to-value requirement, allowing the vehicle to be financed up to 100%.
The proposal also addresses the prompt corrective action risk-based net worth component. After reviewing the loss history of member business loans, we recognized that the risk weighting for member business loans escalated prematurely and too dramatically. While the statutory limit for most credit unions on member business lending is twelve and a quarter percent of assets, there are credit unions that have exceptions to this limitation. They include those that have a low-income designation or participate in the Community Development Financial Institutions program. Also exempted are credit unions that were chartered for the purpose of making member business loans, and credit unions that have a history of primarily making member business loans. For those credit unions that are exempt from the cap, we have proposed the creation of a three-tiered system.
The bottom tier, risk weighted at 6 percent, would consist of the amount of member business loans less than or equal to 15 percent of total assets. The middle tier, risk-weighed at 8 percent, would consist of the amount of member business loans greater than 15 percent but less than or equal to 25 percent of total assets. The top tier, risk weighted at 14 percent, would consist of the amount of member business loans in excess of 25 percent of total assets.
Finally, we are proposing changes to the section that details the requirements
of a credit union’s business loan policy. The regulation currently requires
and will continue to require credit unions engaged in member business lending
to develop a business loan policy and to review it annually. Currently, the
rule requires the same documentation for every member business loan regardless
of size and type or loan or the kind of business. Recognizing that the documentation
and underwriting criteria for a member business loan may vary depending on
the type of business and type of loan requested -- this proposal will enable
credit unions to adopt analysis and documentation requirements in its member
business loan policy that are appropriate for the type of loans they intend
to make. This
provides regulatory flexibility without lowering standards or compromising
integrity.
In addition to the changes I’ve highlighted, there are a number of other recommended modifications that I believe credit unions will find beneficial. It is important to point out that while the board is proposing changes to the member business lending regulation, we maintain the high standards of risk management to ensure safety and soundness.
Education has also been a focal point with my internal working group. Director Dave Marquis and his staff from the Office of Examination and Insurance continue to examine business lending educational opportunities for examiners. Qualified lenders require qualified examiners, and it remains our commitment to consumers, credit unions, as well as to our examiners, to provide appropriate training. Additionally, we have identified specialized subject-matter experts in the area of member business lending to provide additional strength to our knowledge base. Finally, we are focusing attention on the culture of our examination team, so that the philosophy and vision of the NCUA Board is expressed throughout the examination process.
The second issue I’d like to discuss today has the potential to become a detrimental macro credit union movement issue. And while this issue may or may not ultimately have impact on the safety and soundness of the movement, it certainly is an issue that is critical to the future of the movement.
I want to reiterate my philosophy on the outset of this discussion; many of you know that I don’t believe it appropriate for regulators to be in the business of credit union management. Management is rightfully the domain of professional and volunteer credit union leadership. The fact remains however, that together, we are stewards of the future of the credit union industry.
The future generations of credit unions will create more opportunities and challenges. And as credit union leaders, it is incumbent upon you to prepare for the transition of credit union volunteer and professional leadership.
NCUA has the same responsibility to plan for long-term management development. Agency statistics indicate that one in three agency supervisors will be eligible for retirement within the next four years. As CEOs and volunteer board members enter retirement age, I encourage you to ask yourselves some questions. The long-lived future of the credit union industry depends on the notion that a safe and sound not-for-profit alternative will be available to people from all walks of life for years to come.
For those CEOs nearing retirement I challenge you – Are you preparing the next generation of leadership to administer the activities of the credit union? Are you educating, mentoring, and investing in the future of your staff? Are you working with your boards of directors to discuss the future potential of the credit union upon your retirement? Are you within retirement age and winding down your career – if so, are you still staying engaged, making challenging management decisions that will keep the credit union a contemporary institution after you leave? If not, could you be placing the credit union at a disadvantage for years to come?
I challenge credit union Boards as well. Are you incorporating succession planning in the strategic plan of your credit union? Are you working with your CEO on a collaborative basis and communicating effectively to understand when transitions will occur and what challenges you must prepare for? Are you aware of the external marketplace to determine how you will utilize the credit union resource when transitioning a CEO? Are you assessing the demands of your membership to determine if your human resource needs, whether professional or volunteer, are being given appropriate consideration? There are a lot of fine credit union leaders out there that provide management support to credit unions as a labor of love – once this labor pool retires, what will be the likelihood of the next generation to provide leadership in the same manner?
Are Board members serving as advocates for the credit unions in their communities to identify future Board members? What a great leadership experience to sit on a volunteer board of a credit union, make significant decisions regarding important financial institutions, and to improve the lives of others. I urge you to aggressively advocate the great and dynamic nature of your credit union, let folks know how credit unions improve lives, and how society is better off because of you. Seek out leaders within your communities, your neighbors, and your friends.
Succession issues can be sensitive, but they must be addressed. Board and management must communicate freely within a framework of trust and shared commitment. Together, board and staff leadership can ensure the continued existence of an institution.
This credit union management business is not easy. However, I believe Boards need to provide additional and thoughtful consideration if:
• Succession seems like too much work and that merging your institution would seem a simpler solution; or if---
• Your compensation has fallen below what the external market would require and you don’t think you can afford the next generation’s workforce; or if ---
• You don’t believe another leader will emerge and therefore a merger would more easily serve the credit union; or if---
• You believe you are unable to identify volunteers to run for your board.
No one ever said this is easy work, but solutions to challenges are there if you work hard enough collectively.
One of my greatest expectations of America’s credit unions is that mergers not occur simply because adequate work was not conducted to ensure a viable future.
Before I complete my remarks, I want to focus for a few minutes on the issue of communication. Good communication is central to all that we do, whether it is in personal and professional relationships, or how a credit union communicates with its members. This morning I want to touch on three specific areas of communication. The first is how the NCUA communicates with credit unions. The second is how you as credit unions communicate with the NCUA, and the third is your communication with your elected officials.
During my tenure at the NCUA, I have looked for ways in which the Agency can improve the timeliness and effectiveness of our communication. At our May Board meeting we approved a provision that will provide advance notice of the regulations the NCUA will review, so that you may review them at the same time we are. I firmly believe that no one has a monopoly on good ideas, and keeping the credit union community informed about our regulatory review process will no doubt lead to better regulations.
Most recently I have been discussing with staff ways we can improve the manner in which we transmit information. Currently, when we have an official letter from NCUA to credit unions, or copies of a new regulation that needs to go to the roughly 10,000 credit unions we regulate and insure, we have not only the printing and postage expense, but for some of you, a significant lag time, depending on how long it takes for the letter to work its way through the postal service, through your mail operations and to your staff.
With constantly changing technology enhancing the manner and speed with which we can communicate, it is vital that the NCUA adapt to keep pace with the institutions we regulate. Our senior staff is currently working on a proposal that will give credit unions the option of receiving most NCUA correspondence electronically.
Under this new proposal, a credit union will be given a pin number in order to access the e-mail system. Once you have entered the NCUA system, you then can include the e-mail addresses of the appropriate staff in your credit union that should receive NCUA correspondence. The pin number enables us to track which credit union has opted to receive their information electronically, rather than through the postal service. It also gives the credit union the opportunity to maintain the e-mail listing to accommodate staff changes.
The NCUA spends roughly $1 million a year on the distribution of information. Even if only 50% of the credit unions elect to receive correspondence electronically, the savings could be substantial.
As important as it is for the NCUA to improve the manner in which we communicate with credit unions, it is equally important that you, the credit union community, take it upon yourselves to communicate with the Agency. I cannot emphasize enough how important substantive comment letters are in the drafting of a final rule. Although form letters can show the broad range of support for a proposal, it is letters that suggest thoughtful changes that most impact our thinking at the Agency.
As a Board member, I especially look to you, as volunteers and management of credit unions, for your thoughts on how a proposal will affect your day-to-day operations. Without your thoughts, a proposal with the best of intentions could have unintended consequences. Many people I talk to do not understand the importance of their comment letters. So please, take the time to share your thoughts and suggestions with us.
And please, let me reiterate the importance of communicating with your elected officials. As a former State Senator, I can attest how credit union members can educate elected officials and help shape public policy.
As President Ronald Reagan said, “good policy makes good politics.” And when credit union policy focuses on economic empowerment, serving families from all walks of life, and fulfilling the “people helping people” philosophy your policy is good politics. You have a great story to tell – What better mission is there than helping people achieve the American Dream?
As always, I am committed to carefully listening to your ideas, thoughts, and concerns during my remaining tenure on the Board. It is good to see you all again, and thank you for your invitation to speak today. I wish you a successful and productive conference.