NCUA Releases White Paper on CDCUs: Agency Hopes to Help Smaller CUs Remain Open

ALEXANDRIA, Va. – The NCUA has released a white paper that is meant to help both its examiners and mainstream credit unions understand the work and challenges of community development credit unions. The agency developed the paper partially through a series of consultations with the National Federation of Community Development Credit Unions. CDCUs have long complained that NCUA examiners sometimes fail to comprehend their unique challenges and needs stemming from having memberships with a high percentage of lower income members, and some CDCU executives raised their concerns during a roundtable discussion during October 2004′s Financial Literacy Day held in New York City. “Community development credit unions are often the only financial source for residents, especially in underserved neighborhoods,” said NCUA Chairman JoAnn Johnson. “This paper will be a guide for our entire examination team as they consider the challenges of community development credit unions.” The Federation expressed satisfaction with the paper as well and appreciated the agency’s willingness to reach out to CDCUs for their input. “We applaud Chairman Johnson and NCUA for their effort and hope this paper helps bring about better understanding of CDCUs,” said Clifford Rosenthal, the Federation’s executive director. Rosenthal particularly praised the paper’s targeting of certain nettlesome problems that have bothered CDCUs for years, such as non-member deposits and peer comparisons, neither of which NCUA examiners sometimes understood very well from the point of view of CDCUs. The paper noted all the benefits that non-member deposits can bring to a credit union and added that the deposits sometimes came with strings that made them more important than merely being money. “In some cases, non-member deposits help low-income credit unions establish relationships with organizations that can help them obtain grant funding,” the paper observed. “Although, at times, non-member deposits can be a relatively expensive source of funds that negatively impacts earnings, returning the non-member deposit prior to term can sometimes injure this relationship. Before recommending a credit union return the non-member deposit, examiners need to look at the entire picture.” In terms of peer comparisons, the paper urged examiners not to rely too heavily on peer comparisons but to look more deeply at what is going on. For example, if the credit union’s ratio of operating expenses to gross income goes up, examiners should be sure to ask if a program funded with grant income might have caused the expenses to appear high. If expenses associated with a grant-funded program are removed from the equation, would the ratio appear more in line with the industry, the agency paper asked. “Peer ratio data is not specific to low-income credit unions. Therefore, examiners should not focus on the AIRES peer data as a benchmark,” the agency wrote. “A more appropriate industry benchmark when examining CDCUs is to run reports using the Consolidated Balance Sheet program. This program allows examiners to query call report data by charter type, region, and peer group. It also gives examiners the option to select only low-income designated credit unions. The financial ratio page of the produced report may provide more meaningful industry averages,” the agency added. NCUA Board Member Debbie Matz also praised the white paper, noting that it went “hand in hand” with her initiative to restructure NCUA to make the agency more responsive and efficient when working with low-income credit unions and CDCUs. “We anticipate the restructuring to become official on April 1″ Matz said, “and we anticipate that it will help make the sorts of things the white paper recommended easier to accomplish.” Matz noted that one of the benefits of the restructuring program, which changes the way NCUA staff who help low-income credit unions are organized, will be increased communication among staffers about problems in low-income credit unions. That communication, combined with a better understanding of CDCU needs, should enable the agency to help more low-income credit unions avoid mergers or otherwise shutting down. “The bottom line down the line is whether we can help more CDCUs and low-income credit unions remain open and serving their members,” Matz said. -