After the Berlin Wall came down, Congress decided to cash in the peace dividend and began closing military bases. One of the bases that closed was our primary sponsor, McClellan Air Force Base. We decided to convert to a community field of membership. Unfortunately, our federal charter limited the field of membership to such an extent that we had to switch to a state charter to serve the multicounty Sacramento region. Charter choice is important for many reasons. The NCUA Board recently approved a new rule which permits the NCUA to designate a state-chartered credit union as “in troubled condition.” The rule allows NCUA to override state regulator determined CAMEL codes. This is one more step by the NCUA to threaten the dual chartering system. I am concerned that credit unions that choose a state charter are finding themselves under de facto federal regulation. That erodes the dual chartering system.
I sit on the Department of Financial Institutions advisory committee for California state-chartered credit unions. At our last meeting, the members of the committee, who represent state-chartered credit unions, shared their concerns regarding their recent examinations in which NCUA examiners acted as if they were the regulator instead of the state DFI. The NCUA has used its authority as the share insurer to take over the examination process. In our SAFE Credit Union examination last year, the examiner in charge was assigned to our examination from the East Coast. The NCUA examiner and his recommendations were out of line and inconsistent with those of the DFI examination team. We clearly saw that the NCUA examination team was trying to override the judgment of the state examiners. The NCUA examiner at one point recommended that we stop lending to members.
Clearly, the NCUA does not have confidence in state regulators. In California, that doesn't make sense. In fact, one could more easily have less confidence in the NCUA.
In California, our state regulator is well-funded and in my experience (over 36 years as either a CPA for credit unions or credit union executive) is well-qualified to regulate state-chartered credit unions. On the other hand, there is a large body of evidence that raises the question of whether the NCUA is a competent regulator. The NCUA is the regulator on whose watch occurred one of the largest financial institution failures in the United States, the failure of most of the large corporate credit unions, as well as numerous catastrophic failures of natural person credit unions.
The dual charter system offers credit unions the option to choose the best regulator. At this time for hundreds of California credit unions, the better choice is a state charter. But that choice is meaningless if the NCUA controls the examination process, determines the CAMEL rating and dictates the findings and determines which solutions are acceptable to resolve the findings.
The reason why the dual charter system is under threat is that the NCUA acts as both the regulator and the insurer. We need to change that. In California, credit unions have the option for private share insurance. I consider that a bad option. The best solution for state-chartered credit unions is to have an independent federal insurer. I would recommend that we ask Congress to make the NCUSIF independent from the NCUA or to allow credit unions to be insured by the FDIC or to merge the NCUSIF and the FDIC. All three options would give state-chartered credit unions an independent insurer.
An independent NCUSIF would end the overhead transfer rate. The NCUA determines (who knows how?) an amount each year that is transferred from the insurance fund to pay for regulation of state-chartered credit unions. Without the overhead transfer, the NCUA would be more accountable for its budget.
An independent NCUSIF would not be conflicted when it comes time for prompt corrective action. The NCUA has in my opinion failed to promptly address failed credit unions because failures are negative publicity for the NCUA and raise questions about failed regulatory oversight.
An independent insurer would have more incentive to investigate failed credit unions to determine the causes of failure. The investigation of why credit unions fail would in my opinion lead to better oversight and regulation. The NCUA has every reason to cover up failures that point to their own lapses in examination and oversight. No one at the NCUA was ever held accountable for the lapses in oversight at the corporate credit unions.
An independent insurer would improve problem credit union resolution when failures occur. The NCUA badly bungled the corporate credit union resolution process. It filed suit against board members and management before filing suit against the most culpable party, the investment bankers who created and sold the flawed investments. The NCUA's actions against board members prejudiced their latter claims against the investment bankers. The NCUA cancelled the corporate director's liability coverage and created a systemwide angst that to this day raises the question of whether volunteers who follow the reasonable man rule are safe from the NCUA lawsuits against their personal assets.
Henry Wirz is president/CEO of SAFE Credit Union in North Highlands, Calif.
Contact 916-971-2201 or [email protected]
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