LAS VEGAS–Former NCUA Chairman Dennis Dollar, whose firm remains very active in credit unions, offered an audience here his forecast for regulation, CUSOs, what's ahead for NCUA and its board, mergers, Congress and more.
Dollar, who currently leads Birmingham, Ala.-based Dollar Associates, shared his insights with the NACUSO Network meeting here, which drew its largest-ever audience this year.
The former NCUA chair, who said he was not joking when he predicted the day is coming when there are more CUSOs in the U.S. than credit unions, themed his remarks “the joy of regulation,” and he touched on many issues beyond that.
Regulation & Innovation
Dollar said keeping an eye on regulation is absolutely necessary “because frankly, regulation at a time in which innovation is needed so badly can either have a chilling effect or it can allow for the growth of innovation. Now, innovation must be safe and sound and the regulators have a role. But the regulatory role cannot extend so far that it becomes a stumbling block to the necessary innovation that we need.”
Dennis Dollar speaking to NACUSO Network meeting.
Dollar, who left the NCUA board 18 years ago, said he recognizes the challenges for credit unions in being competitive in a high-tech delivery market.
“I think in any industry today you've got to be high tech in order to compete, but you've got to be high touch to have a differentiator from a banking industry that is putting all of its dollars—and they have a lot more than we do-- into high tech,” said Dollar. “So, we've got to find ways to be high tech and high tech, and collaboration and partnership is the key to that.”
One Bank’s Very Big Tech Budget
He pointed out members are demanding digital services from CUs be on par with the Wells Fargos of the world, which has a $28 billion tech budget, a figure larger than the asset size of all but three CUs.
The only way credit unions can effectively respond, according to Dollar, is through CUSOs.
“The cost sharing, the loss mitigation. the risk sharing that comes from (CUSOs) is something that is vitally important for credit unions, particularly when the regulator, the examiner, is going to be coming in and asking what are you doing to manage costs.” Dollar said. “The examiner’s tendency is always to look at areas where expenses need to be controlled, because they tend to be a little bit concerned when you start doing too many things to enhance your revenue. There’s a little bit of risk that comes with that. There's not that much risk in cutting back. But you can't cut you your way to prosperity, you must grow your way to prosperity.”
What the Data Show
Dollar showed the NCUA Summary of Trends chart as of Dec. 31, 2022, which he said speaks to the essentiality of scale. He noted there are 3,000 CUs under $100 million in assets in the U.S.
“In today’s marketplace, how in the world do you compete against Chase and Bank of America with $75 million in assets without some collaboration. That’s a tough challenge,” said Dollar. “(Smaller CUs’) members don’t deserve fewer services than members of a billion-dollar CU or a Wells Fargo.”
The Biggest are Doing the Bestest
Another reason CUs need to turn to CUSOs can be seen in other data, Dollar said, noting that every category that measures the success of a credit union it is only the billion-dollar-plus CUs showing growth in membership and lending, the two key factors in “viability.”
“How do you foster that investment in scale that comes with taking some more risk and offering more products, offering more services, extending your footprint and getting the growth that comes from that, while managing the risk at the same time?” asked Dollar. “We come back again to the collaborative model. Even larger credit unions are collaborating with each other to manage that risk.”
Too Many are Merging
Too many credit unions, according to Dollar, have decided they can’t manage the risk and have decided to simply merge. He shared with his audience a chart showing the number of mergers in credit unions over the last two decades. His own firm is currently working on 41 different mergers, he said
“I would say when our phone rings, probably 50% are seeking guidance on the merger process,” Dollar shared. “How are we going to save some of those credit unions if it's so difficult for them to be able to compete with their limited scale? We're back to collaboration again, and banks don't collaborate like credit unions do, because banks are so afraid of telling another bank what they're doing.”
What’s Ahead in Congress?
Turning his attention to Capitol Hill, Dollar asked the question, “What is going to happen over the next two years in Congress?”, before answering, “Not much.”
“Taxation for credit unions is almost totally off the table,” he said. “The reality is I just can’t believe a Congress that can’t agree on keeping the national parks open is going to make the one thing they do agree on be taxing credit unions and making their 135 million members mad.”
Third Party Vendor Authority
Meanwhile, while all three members of the NCUA board continue to push for authority to oversee third-party vendors, Dollar said he doesn’t see that power being granted anytime soon.
“Frankly, the biggest single deterrent to innovation in a vendor is if they have to worry about the regulator coming in and telling them you can't offer that,” said Dollar. “Where the regulators should come in is to the credit union where they say, “OK, explain to me why you bought that.” And then it's your job Mr. Credit Union, Mr. CUSO, to explain why. It's a legitimate question for the regulator to ask, but it should not be the regulator telling the vendor whether they can offer that product. There’s a proper role for regulation in all this, but it has to be a role that is balanced with the needs to be able to compete in the marketplace.
“I would never tell you to dis the examiners or the regulator, but you cannot allow the regulator to call your plays,” he added.
Bipartisan Support
One area where Democrats and Republicans are coming together, both in Congress and on NCUA board, is on cybersecurity, noted Dollar.
“You should expect more with the cybersecurity rule. There were four pieces of legislation from congress on cybersecurity,” he reminded. “It is going to become the issue that drives examinations and compliance.”
Forecast for NCUA & CFPB
When it comes to the NCUA and CFPB, Dollar forecast:
- The CFPB is going to be extremely active in 2023-24
- The makeup of the NCUA board will shift from a Republican majority with Democrat chairman to Democrat majority likely in 2023
- Possible areas of regulatory revisits will include CUSO lending authority restrictions, succession planning
- The examination and supervision issues that will be the agency focus in 2023-24 will be fair lending, cyber, consumer protection focus in exams, and CUSO reviews
- There will be longer exams, larger exam teams, greater scrutiny, and a very activist supervisory focus.