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Wake-Up Call
The economic mess puts a new spin on old challenges for credit unions as a new administration and Congress take charge.

By Dave Windsheimer

Editor's note: The following first appeared in the March 2009 issue of Credit Union Management.

While 2009 brings a new administration and Congress to Washington, some credit union officials and experts expect the industry will continue to face some of the same political challenges as in the past. Among them: the struggling national economy and the possible steps the federal government could take to help pull the country out of the current recession.

According to former NCUA board member Debbie Matz, the current fiscal crisis is the top political concern for credit unions. "If unemployment continues to increase and consumers can't pay their bills, they're not going to be able to pay their credit union debt either. Credit unions will have to be mindful about the outstanding debt they have and then whether or not people will be inclined to borrow. But I think credit unions are in a good position because they're so competitive. Their interest rates are always good. People know they can always get a fair shake with a credit union."

Wary of Washington?
Dennis Dollar, a former NCUA chairman, says the federal government, with a new administration and Congress, will want to enact more regulations to control financial institutions so that the nation doesn't see a repeat of the current fiscal mess. Still, he worries that new regulations are not always the best solution, especially for credit unions.

"I believe 2009 will be the year where you will see many hearings and much proposed legislation to strengthen the regulatory regime to avoid another financial debacle," says Dollar, now principal partner in Dollar Associates, a consulting firm in Birmingham, Ala. "The tendency of government is always to regulate and legislate to the last crisis.

"So, with the immediate crisis being the financial crisis, all of the legislative and regulatory attention will be focused on avoiding having this happen again," he says. "There will likely be quite a few hearings held and pieces of legislation proposed to increase regulation and oversight. Some of that could be healthy; some of that could be counterproductive. Effective regulation is needed, but excessive regulation could thwart the ability of financial institutions to get back into lending, which is what the economy needs right now."

But according to Joseph Yerkes, long-time chairman of $347 million, 53,000-member Freedom Credit Union, Warminster, Pa., credit unions should not be penalized because the banking industry ran wild. Congress and the federal government "should be looking at the banking industry. They're the ones who had no [regulations], no strings attached. We did. The NCUA controlled the credit union industry and did very well. In fact, [NCUA] was looking into less regulation so that [credit unions] could get into the small market business loans and help people who couldn't get help from the banking industry."

Amy Kramer, VP/governmental affairs with the New York State Credit Union League, agrees that Congress shouldn't lump credit unions and banks together. "We need to have an independent credit union regulator like NCUA. Credit unions are a lot of 'what went right' during the economic crisis and (this) speaks to our unique structure. We're not like the for-profit financial services sector and we think it would it be extremely detrimental if credit unions, as we know them, went away."

Dollar predicts the new Congress could enact legislation to protect consumers from abusive practices by credit card companies and banks.

Cardholders Bill of Rights
One proposed piece of consumer-friendly legislation is the "Credit Cardholders' Bill of Rights" (H.R. 5244), which was introduced by U.S. Rep. Caroline Maloney (D-N.Y.) in the 110th Congress.

Among the provisions of H.R. 5244 are requirements that credit card issuers give consumers 45 days notice before any interest rate increase and allow cardholders to determine their own fixed credit limit. H.R. 5244 was approved by the House of Representatives by a vote of 312 to 112, but did not come up for a vote in the U.S. Senate in the last session.

On her Web site, Maloney promises that she hasn't given up on H.R. 5244. "I plan on reintroducing the Credit Cardholders Bill of Rights in the 111th Congress because I believe that consumers and the market need this issue addressed in a comprehensive and lasting way that only legislation can provide," the congresswoman (who represents portions of the New York City boroughs of Manhattan and Queens) writes.

Dollar worries that legislation created by well-meaning politicians often ends up having unexpected and negative consequences for those affected by the new laws. "You may see more emphasis on consumer-type legislation in this Congress than in the last. That's because Congress will have a Democratic president who is more likely to sign stronger consumer legislation. Because consumer legislation has a spill-over effect in the cost to financial institutions, I think that's an area of some focus. The credit unions will have to join their banking competitors and ally with them some to make sure that any consumer legislation is not over-reaching in its approach," he explains.

"It is very possible for consumer legislation to have a counter-productive effect if it is not balanced properly," Dollar continues. "For example, strict usury caps can result in the non-availability of credit to persons with less-than-stellar credit records. Many times, Congress thinks that they are doing those people a favor by having a tight usury cap and actually costing them excess credit. Take a 17.9 percent (interest rate) on an unsecured personal loan that a credit union might offer to a member with challenged credit. If the usury ceiling is lowered to 15 percent, the credit union might not be willing to take the risk for a 14.9 percent loan. The business aspect and the consumer aspect has to be balanced," maintains Dollar.

Reason for Optimism
But Yerkes and Kramer are optimistic that any new consumer-protection legislation won't negatively affect credit unions. "I don't think it would hurt us a bit because [the credit union industry] didn't need it in the first place," says Yerkes. "We're out to help people. The credit unions are regulated to help people."

Kramer says politicians can differentiate between credit unions and banks. "The good news is that our lawmakers understand the uniqueness of credit unions and so, when they are crafting this, it's not going to be harmful or overly burdensome to credit unions," she says.

Dollar hopes the federal government will give CUs more flexibility regarding capital modernization, should more regulations be enacted.

"If credit unions are going to see increased regulation, they will very likely want to see capital modernization take place as well," he explains. "If not, [credit unions] will face only the downside costs of additional regulatory burden without getting the upside flexibility in their capital structure to be able to continue to invest in their members.

"Capital modernization will be in the form of two issues: one being risk-based capital and the other being secondary capital. The two are potentially intertwined," Dollar adds.

In a November letter to Congress, the National Association of State Credit Union Supervisors urged legislators to allow CUs to gain access to supplementary capital: "Unlike other financial institutions, credit union access to capital is limited to reserves and retained earnings from net income. Since net income is not easily increased in a fast-changing environment, regulators recommend additional capital-raising capabilities for credit unions," the letter, in part, said.

In a December press release, NCUA board member Gigi Hyland (who is also NCUA's liaison to NASCUS) wrote that she favors a fast resolution of the supplemental capital issue: "Permitting credit unions to accept supplemental capital requires Congressional action, so the sooner we get started on this effort, the better. I am committed to working with the state supervisors to expeditiously resolve if and how supplemental capital can be correctly structured and serve as an appropriate safety and soundness tool for the NCUA and state supervisory authorities in regulating U.S. credit unions."

This summer Hyland will host a symposium in Washington, D.C., as part of the 75th anniversary celebration of the National Credit Union Act. In her December letter, Hyland wrote that she expects supplemental capital to be one of the hot agenda topics.

Dollar calls the capital issue "the most important generational issue at this time."

"If we cannot have a more modernized capital structure that better recognizes risk and enables credit unions to build sufficient capital to invest back into their communities, we will have difficulty competing long term," he says. "Capital is the fundamental buffer against losses at financial institutions. So, calculating that properly, based on risk and giving access to alternative capital options, if necessary, is certainly timely to be discussed in Congress."

Some in the industry claimed a victory on Jan. 22, when the U.S. House of Representatives, by a vote of 260 to 166, approved H.R. 384, a bill to amend the federal Troubled Relief Assets Program to allow credit unions access to TARP funds. According to a press release from NASCUS, the bill makes changes to the definition of "net worth" in regard to credit unions so CUs can accept government funds. It also permanently increases the amount of member deposits covered under federal insurance to $250,000.

No similar bill is under consideration in the Senate at this time, according to NASCUS.

High Hopes
Matz is hopeful that President Barack Obama will be sympathetic to the needs of credit unions and their members. "I think Obama is all about helping middle-income people and that's what credit unions are about. The goals that credit unions have are in sync with the goals of the Obama administration, which is working to help lower- and middle-income people improve their economic life," she says. "I'm hopeful the Obama administration will understand the important role that credit unions play in the financial services community and will be supportive of maintaining the tax exemptions."

According to Yerkes, "I think we have a pretty good grassroots program with our legislators. I think they'll back us on the tax (exemption) issue. I wish [the federal government] could see their way a little bit more on the field of membership. It should be everybody's right to make a choice."

Because the credit union industry has friends in both political parties, Dollar says, "I don't think the new Congress will be any more or less friendly to credit unions. Credit unions have good support on both sides of the aisle. Democrats have always supported credit unions because of their focus on the 'little guy.' Republicans have always supported credit unions because of their philosophy of self-sufficiency rather than turning to the government for an answer.

"It's going to be an interesting Congressional session over the next two years as you have both Congress and the White House controlled by the same party with a financial crisis," adds Dollar.

Airing the Message in Public
Some credit union board officials have been airing their concerns in the media regarding the troubled economy and its effect on the industry.

In a December letter to The Intelligencer, a daily newspaper in suburban Philadelphia, Joseph Yerkes wrote that bankers have been using some of the federal bailout money they've received to continue their battle with credit unions.

Yerkes, the long-time chairman of Freedom Credit Union, maintained that "bankers are still spending millions of dollars on lawsuits designed to limit freedom of choice for people who might wish to join a credit union. Credit unions are forced to spend millions of dollars to defend the right to choose.

"All of this money could be better used to lower interest rates on loans and raise dividends on savings. Bankers control 95 percent of the nation's lending and saving business, but still feel the need to eliminate credit union 'competition.'

"Credit unions have never cost taxpayers one dime, nor have they received bailout money," Yerkes wrote.

In an October letter to The Seattle Post-Intelligencer, Tulip Co-Op Credit Union Director Eric Bowman decried the banking industry's total focus on profits. "Businesses behave in fundamentally different ways based on who owns them and why. Investor-owned institutions focus on return on investment, at any cost to those around it. Managers in those firms are at risk of focusing on their résumés and seeking short-term gains with disregard to long-term sustainability. Unlike investor-owned institutions, credit unions' main purpose is to provide access to a needed service and to safeguard member assets."

Dave Windsheimer is a free-lance writer based in upstate New York.

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