Several weeks ago we provided some “inside baseball” analysis about NCUA Board Members Mark McWatters, a Republican, and Todd Harper, a Democrat, having teamed up to submit their own list of recommendations for statutory changes that would benefit credit unions and their members during the COVID-19 era to Senate Banking Committee Chairman Mike Crapo (R-ID). This is in response to Chairman Crapo’s request for such recommendations from each of the federal financial regulatory agencies – NCUA, FDIC, OCC, Federal Reserve.

At that time we indicated that these public recommendations from the two board members was virtually unprecedented in that the law clearly establishes the NCUA Chairman as the official spokesperson for the agency. Two board members, even though they might represent a majority on the board, may elect to speak for themselves. They can even choose to speak in tandem. But they cannot speak for the agency.

That “spokesman for the agency” role clearly belongs to the NCUA Chairman.

Our take was, and remains, that the McWatters-Harper recommendations were a way to either try to pressure Chairman Hood to include their issues in his letter for the agency or – perhaps just as likely – a statement to him that they were teaming up on certain issues and that he should take notice.

It was not an artful approach to something that, frankly, should have been worked out behind the scenes. That protocol breach notwithstanding, there is no question but that the last few NCUA Board meetings have shown an increasing chasm on the three-member board.

Rather than being the solid second vote McWatters was in the early days of the Hood chairmanship in which his Republican free market principles were well on display (as was his display of not seeming upset that the President had replaced him as NCUA Chairman by Mr. Hood), Board Member McWatters seems to be siding more and more on some issues with the Democrat Board Member Harper.

Harper, as he has consistently done throughout his tenure on the NCUA Board, has been a steady and unwavering proponent of a more activist approach to agency regulation. He was often a single vote against a number of regulatory actions supported by Hood and McWatters that were less activist and more flexible in nature.

But with McWatters becoming more supportive of the Harper position as he was in the Crapo recommendations and had been on the Harper proposal for a new consumer protection division at NCUA during the 2020 budget debate, the Harper influence appears to be on the NCUA Board.

It was for this reason that Chairman Hood’s official letter to Chairman Crapo on behalf of NCUA with the agency’s recommendations for statutory changes to benefit credit unions and their members during the COVID-19 era has been so anticipated.

And, as was the right thing to do, Chairman Hood did not allow the McWatters-Harper recommendations a few weeks ago to force him to prematurely put forth the agency’s official position without giving it appropriate time and study before crafting his letter to Chairman Crapo.

Even though he took an additional ten days to release the agency’s official letter, the Hood letter from NCUA is still the first such letter we have learned about having been submitted to Chairman Crapo in response to his request for recommended statutory changes.

We have included below a link to Chairman Hood’s letter on behalf of NCUA to Senate Banking Committee Chairman Mike Crapo. As you will see, it has a great deal of substance in its list of recommendations.

https://www.banking.senate.gov/imo/media/doc/NCUA%20Response%20to%20Crapo%204.8.20%20Letter.pdf

While it can be argued by purists that any increase in the 12.25% member business loan cap should be permanent rather than temporary and that any reference to the additional regulatory burden on small business that NCUA vendor authority would impose at a time when small business in America needs less restrictions and not more, on the whole the list of statutory suggestions by Chairman Hood on behalf of the agency was really quite positive.

They were not so expansive as to be immediately viewed as being too pro-industry. Yet, they were far reaching enough – and, yet, reasonable – that the Senate Banking Committee could actually give them serious consideration if legislation is indeed forthcoming to try to help various sectors of the financial services industry during the COVID-19 era and immediately thereafter.

A couple of the recommendations are particularly beneficial, yet are quite reasonable to be considered with the facts on the ground as they are today with COVID-19 impacting the market so dramatically.

For example, we have been long working with a number of our credit union clients to get NCUA to lend its support to legislation that would permanently increase the federal credit union loan maturity limit from 15 years to 30 years on loans other than first mortgages.

With so many renters being able to postpone payments under various local, state and federal provisions against eviction during the COVID era, it would be particularly beneficial if credit union members with non-owner occupied properties were able to refinance their previously maximum 15 year loans into 30 year loans.

That would truly be a positive outcome to result from the disruption of the COIVD era. And it would be justifiable, reasonable and, frankly, overdue.

Likewise, NCUA has officially requested that all types of federal chartered credit unions should be able to expand permanently into underserved areas and extend services there.

Presently, only SEG-based multiple common bond federal charters can adopt underserved areas and extend services. At this time when many of those underserved communities have only become more underserved from the negative impact of the pandemic on both the residents and the businesses there, there should be an openness by the Senate committee to making it possible for the residents of these communities to have more – not less – financial service options at this time.

The Hood letter also made a very reasoned request that any credit union located in a federally designated opportunity zone should be able to apply to serve any resident of that geographic area regardless of their charter type. This would probably be a “no brainer” if the opportunity zone concept had not been put in place by the Trump administration, thus making it more controversial than it really should be since most opportunity zones would also qualify as underserved areas under existing NCUA regulation.

The advantage would be for any credit union of any charter type, including community chartered federal credit unions, to be able to serve an opportunity zone outside their existing community if they had a physical presence there. And some opportunity zones have a more clearly delineated set of boundaries than the census-tract drive underserved areas under NCUA regulation. This would be a nice win.

And, in what is the first time the agency has ever officially taken a position that is about twenty years overdue (but entirely justifiable) in this era in which branches are shut down and more remote transactions are being conducted than ever before, Chairman Hood put the agency squarely on record in favor of trying to change the longstanding “reasonable proximity” limits (that the agency still considers to be 25 miles from a credit union branch for a new SEG or association to affiliate with the credit union) and to define a service facility much more broadly than brick and mortar.

Most of us carry our credit union service facility around in our pocket. This is 2020 and, frankly, it should not have taken the shutdown associated with a national pandemic to convince policy makers that 25 miles from a branch that cannot be open is not a reasonable definition of “service facility” or “reasonable” access to a member’s credit union.

While we remain convinced that much of the application of what the law calls “reasonable proximity” is determined by definitions that are under the control of NCUA (such as the 25-miles from a branch limit that is merely a longstanding agency interpretation not written anywhere in law or NCUA regulation), it is great to see the agency taking the official position in writing that this outdated statutory provision needs to be addressed.

If Congress comes along and helps with a more updated definition of “reasonable proximity,” great. If they don’t, at least having the agency on record in support of some modernization here can perhaps contribute to their going back and looking at their own 1980s definition of “service facility” and 1970s version of “reasonable proximity.” Only good can come out of such a prioritization of this issue.

In addition, the Hood letter rightly sought to make permanent the recent temporary increases in the capacity of the Central Liquidity Facility and the ability to waive the limits on lending to other credit unions that were included in the CARES Act.

And, in a concession to reality that NCUA is going to have to address in the months to come or else it will be taking corrective actions against countless credit unions whose members were negatively impacted by the pandemic national emergency, the ability to grant temporary reductions in minimum capital standards, waivers from net worth restoration plans and flexibility in the agency’s ability to deal with problem capital level

cases that are obviously temporary in nature.

In conclusion, despite the board politics involved in two sets of recommendations being presented to Chairman Crapo, the reality is that the letter from Chairman Hood is the official position of NCUA. Any other recommendations will get little or no consideration as they reflect individual board member positions, rather than that of the statutorily created agency.

The real question is whether any bill to provide financial institution regulators and those they regulate will actually make it out of committee in a presidential and senatorial election year in which – despite the impact of a worldwide pandemic with over a million American cases – the Democrats and Republicans are still engaged in political jockeying at a level consistent with (and maybe even greater than) before.

Some observers have said the likelihood of a bill coming out of Chairman Crapo’s committee are no better than 30% unless there is a major financial crisis that forces Congress to act. I would say that, short of the afore referenced financial crisis, the 30% figure is somewhat high.

I would say that there is less than a 10% chance of a regulatory reform bill coming out of the Senate Banking Committee this year, even with the COVID-19 crisis as the motivator.

Still, there is value in raising issues such as those included in the Hood letter.

First, as mentioned earlier, some of these issues can be impacted by agency policy makers even if Congress doesn’t act. Having the agency leadership publicly on the record on some of these issues such a reasonable proximity, service facility and capital standard waivers gives them the opportunity to find other ways to skin the cat if Congress doesn’t do it for them.

Secondly, putting these requests on the record leaves them on the record for when the COVID-19 crisis has settled a bit and Congress begins to look at ways to be in a position to prepare for and respond to the next such crisis. It is always good to have a list of recommendations such as this already established and in the committee’s files.

We will keep you abreast if any of these recommendations begin to gain traction on Capitol Hill. Or, if not, we’ll be watching to see if NCUA backs up its own recommendations with the actions that it can take within the current law to improve the situations it has identified as needing attention in the COVID era and beyond.

PPP ANXIETY HAS BEEN PALPABLE

 While the majority of our credit union clients have participated as lenders in the PPP program and have some good numbers to show for their participation, to say that almost every credit union we have heard from has experienced some true frustrations with the program would be an understatement.

There has not been a single credit union client participating in PPP that has not said they could have made hundreds more PPP loans and helped save thousands of small business jobs if the SBA portal had been more responsive and the mechanics of submission to SBA had been less rejection-oriented when it was up – and totally non-responsive when it was so often down.

A couple of our credit union clients have shared via email their experience. I give you a couple of highlights below just to let you know that you are not alone in the anxiety that your participation in PPP has caused you, your staff and your business members.

One credit union CEO wrote earlier this week: “Good morning. Just wanted to give you some firsthand PPP horror stories. We have about 50 loans to input. We have had to input and reinput the loan information 514 times to get just 14…yes 14…onto their system. Those other times the system shut down or kicked us out. Horrific.”

Another CEO emailed the same day to say: “I am so very frustrated with this PPP experience. The first weekend we received about 300 requests. I stopped giving access to the application portal to our members that Tuesday because I was afraid our small staff of business services professionals wouldn’t be able to process what we had on our plate (this turned out to be a pretty good decision).

 We endured nearly two weeks of constant questions and what I have to honestly call crappy service to our members because our CUSO partner was building a system for these loans on the fly. Finally the day before funds ran out, we had access to the status of our loans and had gotten about 55 approved. Then we found out that using an on-line portal without eyeballs looking at these has it’s own joy. We were able to fund 52 of our approved loans, many for less than originally requested because their support didn’t verify the loan request.

 So, we approached the remainder of our applicants, requested documents as necessary and set about verifying applications for the next round. After a week of hard work, we had 60 verified and ready to fund. Day one, ZERO success. Now the SBA says our CUSO can’t use RPA to automate submission to the e-tran portal. We are DOA for now. Our average loan for the 112 we have verified is well under $60,000. We are helping REAL small businesses, the one’s this law was intended to help.

 If I knew then what I know now, I would have declined participation. I’m proud of the 52 we helped but in reality, it was a very small drop in the bucket. All our loans put together don’t add up to the loan that the LA Lakers received yet, we are shut out at every turn.”

I offer these direct quotes not that I have an answer. Unfortunately, I don’t.

While I recognize that SBA had a program multiple times larger than anything they had ever administered before dropped in their laps with less than five business days to get ready to take applications and can identify with their challenge, the reality is that the PPP program will be referred back to many times in the years to come as an idea whose time came before the reality of its administration was appropriately thought out.

So, if for nothing more than therapeutic reasons, I wanted to let all of you who have reached out with your PPP frustrations to know that you are not alone. Your anxiety for the business members you may have missed serving is shared by countless of your credit union colleagues.

Hang in there. You are in it now. The demand of your members has not diminished. Come through for as many as you can within the imperfections of the system.

You can take your meds later.

OUTSTANDING PARTICIPATION IN OUR BALANCE SHEET AND DEPOSIT MANAGEMENT WEBINAR YESTERDAY

 I want the thank the experts at Reich and Tang for appearing as guest experts on our webinar yesterday about balance sheet and deposit management issues.

With the impact of incoming flight to safety deposits, the uncertainty of growth plus margin compression impacting capital ratios and Durbin-CFPB looming at a $10 billion asset level that will come sooner than many of us expect, the strategic discussion about balance sheet management is timely.

The idea of deposit participations (kind of the deposit side version of loan participations) was discussed in-depth as a tactic to consider in furtherance of the strategy of capital and growth management within a credit union’s balance sheet.

For those that did not get to participate, we encourage you to take a few minutes and view the webinar “on demand” as they say.

Below is a link to the entire video and audio of the webinar. We feel it is timely and hopefully beneficial – at least for the strategic thinking it is intended to generate at your credit union.

Deposit and Balance Sheet Management in the Era of the CFPB, the Durbin Amendment and a Pandemic Flight to Safety

Please let us know if you have any questions from the webinar. Or I’m sure the Reich and Tang folks would be glad to take a follow up question or two. Just let them know you participated in the Dollar Associates webinar.

 

Until next time. Stay safe.