Editor’s Note: William Brooks was brought in three years ago to help oversee a turnaround at the then struggling Mid-Atlantic FCU in Maryland. Brooks’ experience in working with NCUA has he sought to right the ship led him to send the following letter to NCUA Chairman Rodney Hood and members of the NCUA board about how he believes the agency has been as much a hindrance as a help as he has led that turnaround. The letter has been edited here for length.
By William A Brooks
I have been called back to service in the credit union industry to work with a seriously troubled credit union. Over the last three years the credit union has gone from being on life support to matching and exceeding peer performance. The recovery was due to the direct and dedicated actions of a committed staff. We are now considered “Well-Capitalized!” The purpose of this letter is to provide the NCUA Board with an honest assessment of the value of the NCUA guidance during the recovery process. My commitment to the credit union industry is well documented through years of service. The goal of this letter is to improve the regulatory and examination processes.
My involvement started a little over three years ago. The credit union had just crossed into Prompt Corrective Action (PCA). While the credit union was going down fast, the Special Actions Examiner and I agreed that there was an outside chance the credit union could be saved. An aggressive plan was developed and a team was put together to address the serious issues faced by the credit union. During the last three years there have been numerous discussions with the field examiners. All have been open and sometimes contentious. Most of the contention seems to be around the field examiners being hamstrung into supporting positions mandated from above and inconsistent with the facts at hand.
Concerns and Recommendations
The biggest issue with NCUA's participation in the recovery of MAFCU, and the handling of any credit union that doesn't fit their predetermined mold, is concern that they are becoming more of the problem than the solution. It is impossible to have a responsible dialogue about credit union problems and solutions with a field examiner when the examiners are being controlled by people far removed from the debate. On numerous issues and problems we had with the NCUA reports, when presented to the field and supervisory examiner, we received the response, "That was written from above," or "It has to be this way to get the examination report approved and issued." Here is the first major problem.
A major problem occurs when legitimate objections are raised about the report narrative and the response is that if you don't accept it, there will be worse administrative remediates. Our concern stems from NCUA reporting relatively minor issues which were easily remedied as material areas of concern. The NCUA report narrative was incorrect in multiple areas, and could be construed as regulatory bloviating. The narrative was also inconsistent with the discussions and agreements with field staff.
It is totally unacceptable when a request to correct the administrative record is made, but ignored by the agency. The Examiner's Guide gives specific guidelines concerning disagreements with the report. My understanding of the Guide is that the objection to a recommendation should be documented. If the examiners believe they are correct, their position should be documented.
Our most recent examination report, as written, contains a lot of overblown issues or plain examiner CYA. Many are issues that should not have caused concern beyond a discussion. Much of NCUA's report focused on things that are not strategically important or imminent.
I believe that part of the current reporting problem could be the result of the change from the CAMEL Matrix based examination to the Risk Focused Examination (RFE). While the CAMEL Matrix system had problems, it defined thresholds that provided for only limited examiner subjectivity. The RFE offered improvements in some ways, but it provides too much regulatory subjectivity. This has the potential to lead to inappropriate ratings due to the ability of the regulator to consider an issue as risky, without the need to recognize a standard for the measurement of the risk.
A football game cannot be played without a clearly defined field, and you cannot have a successful examination without clearly defined parameters.
Bigger Problems Ahead?
The NCUA acceptance of the RFE approach leads to greater issues for the industry and could lead to greater systemic issues if and when the economy has an eventual downturn. Because people far removed from the subject have input into the report, a one-size-fits-all reporting structure is created. This potentially leads to a dangeroussituation.
If NCUA continues in this manner we will see fewer credit unions as the frustrations will cause surrender. It would also call into question the NCUA requirement for strategic planning. It would be simpler for a credit union to take their marching order from the central planners in the Washington office.
Members lose because credit unions are not aligned with what they were originally designed to be, the subprime lender. There is nothing functionally wrong with subprime lending, as long as the risk is being compensated for. Current Regulatory activity is forcing credit unions to focus on A and B credits. Where are the underserved to go? Close to 50% of the citizens of the United States are underserved financially. This is the definition of failure of the Federal Credit Union Act!
Ineffective Appeals
The Appeal Right is ineffective and contrary to public interest. The current setup to appeal an issue a credit upon might have with the NCUA is tantamount to a battered spouse appealing to the batterer for understanding and change. The experience of credit unions that have used Appeal Rights portrays an expensive and timely process followed by retaliation by NCUA.
I personally have never experienced this retaliation I have sued NCUA and still have a good relationship with former NCUA General Counsel Robert Fenner. Any examiner who has had the experience of examining a credit union that I have led will report that I am aggressive in defending positions that I consider to be important to the credit union and to the industry.
I play within the rules. If there are problems that need addressing,. they are addressed in a timely and complete fashion. I don't know if the current Appeal Rights system is workable. I will not use it because it is bogus. We need an independent appeal process and probations on retaliation.
A Bill of Rights
NCUA and credit unions should consider developing some sort of Bill of Rights. America is based on reducing the power of the Government. Presently, because of regulatory actions coming out of the S&L crisis of the 1980's, Congress has given excessive powers to financial institution regulators. It is my belief that these powers are causing a decline in the options of Americans for alternatives to meet their financial needs.
Time For Self-Assessment (By Everyone)
I sincerely support the mission of the National Credit Union Administration. I have had a long and colorful career in the credit union industry. I have had wonderful experiences, and only hope that by bringing these issues to your attention a conversation can be started in order to improve the future of the industry. I have serious concerns that NCUA has been misguided with the concentration of the examination function into a potential one-size-fits-all approach. What they are developing is one-size-fails-all!
The increasing number of low- and moderate-income people who are being ignored by the financial services industry is appalling. I am a hardcore conservative! I firmly believe credit unions were a conservative solution for people to build wealth in 1934. It was self-help and self-determination. The present regulatory structure is only truly successful in creating pseudo-banks.
Credit unions were originally simple structures, easy to operate, self-help cooperatives. We have successfully made them so complex that only large, heavily capitalized credit union can survive. With technological advancements, we should be expanding member availability and services. It seems that NCUA's attempt to control the industry from Washington is only denying access and not empowering citizens.
Time For Estes Park II?
It would be easy to blame NCUA for all the problems in the industry. This is not my intent. It is a call for NCUA, along with the trades, press and industry leaders to do some self-assessments and critical thinking about how we expand financial access to those who are being closed out. It seems most credit unions are focused on competing with banks instead of expanding services to those who need it.
NCUA has the ability to bring industry leaders together for an honest dialogue about what is working and what is not. What can credit unions do to expand services to the abundant number of people desperately in need of reasonable financial services? Is it time for an Estes Park II?
Accepting the status quo will only continue the slide of credit unions into bank like financial institutions whose leaders care more about salaries and perks than service.