The Challenges Faced By Credit Unions

WORD ON THE STREET: These difficult economic times have required the National Credit Union Administration (NCUA) to intensify its diligent oversight and rigorous inspection programs. The NCUA's central mission is more crucial than ever: maintaining the credit union system's overall safety and soundness.

At the same time, we aim to help credit unions strengthen their community development work, especially in underserved and low-income areas. We recognize that the challenges faced by credit unions have grown even more intense. That is why we are determined to make sure that our approach to regulation gives you appropriate flexibility.

NCUA has been taking action on several regulatory, interagency and legislative fronts. In June, the NCUA board approved significant changes to our process of approving ‘community charters’ for federal credit unions. The new Field of Membership rule eliminates all guesswork about what constitutes a ‘community.’

Since Congress passed the Credit Union Membership Access Act in 1998, NCUA had struggled to define the precise criteria for community charters. We had to balance the congressional intent of permitting new members against the statutory language requiring a ‘well-defined local community.’ Our old rule contained no clear population limits, no distinctions between urban and rural communities and no clear guidelines for measuring community interaction. That lack of clarity led applicants to pursue a costly and wasteful process that often involved hundreds of pages of needless documentation.

Our new rule streamlines the process by setting objective standards for approving any new community charters. It defines clear criteria for recognizing fields of membership in single political jurisdictions, across multiple jurisdictions and in rural districts.

However, the new rule does not mean that community charter approvals will be granted automatically. Credit unions applying for a community charter will still have to demonstrate their ability to serve the new community by submitting detailed business and marketing plans. Going forward, NCUA will monitor the performance of those credit unions annually for three years, to make sure that they live up to the promises in those plans.

I believe that everyone benefits from this streamlined regulation: credit unions, which will find it easier to convert to a community charter; their prospective members, who need financial services; and their local communities, which will be economically enriched.

Fighting payday loans

We have also been active in designing alternatives to ‘payday loans.’ During the economic downturn, more and more Americans have been driven to use the services of high-fee lenders. The unscrupulous practices of some lenders have inflicted a terrible toll on the most vulnerable members of our society: low-wage workers, who often struggle to make it from paycheck to paycheck. The astronomical interest rates charged by many payday lenders – and their readiness to roll over loans – can deplete the take-home pay on which working families depend.

There is a justifiable role for short-term lending in our economy. Many people desperately need ready access to cash to pay their rent or feed their children as they await their next paycheck. But short-term loans must be made responsibly.

That is why the NCUA board proposed a new rule that would encourage federal credit unions to make affordable short-term loans. Our rule would protect credit union borrowers from the abuses they would suffer at the hands of predatory payday lenders. Under this proposed rule, federal credit unions could make short-term loans in amounts from $200 to $1,000, for up to six months.Â

This would enable borrowers to consolidate high-cost payday loans while keeping their payments manageable. To protect borrowers from accruing larger and larger balances, our rule would prohibit rollovers.

However, we do recognize that there are high costs and elevated risks in providing payday loan alternatives. To protect against potential losses, our proposed rule would allow federal credit unions to charge a reasonable application fee of up to $20 and an annual interest rate of up to 28%.

To ensure that credit unions do not take on too much new volume and too much new risk, NCUA's final rule will likely include a cap on short-term small loans. Given the experience of many credit unions that already provide payday loan alternatives, we will carefully weigh the ideas that were submitted during the public comment period. We plan to move forward with final changes to the new rule later this year.Â

Community development initiatives

A new interagency program is the Community Development Capital Initiative (CDCI). NCUA and the Treasury Department are working closely together to evaluate credit unions that have applied for secondary capital through this program.

The Obama administration created CDCI to channel additional investment into economically disadvantaged areas and to spur job creation. Through the Troubled Asset Relief Program (TARP), the Treasury will make funds available to designated low-income credit unions that are also certified as community development financial institutions – credit unions that target more than 60% of their small business lending and other economic development activities to underserved communities. What is attractive about CDCI funds is that they carry an interest rate of just 2% for eight years.

Because NCUA has been eager to ensure that credit unions take part in this program, we streamlined our secondary capital rule for low-income credit unions. To make sure that eligible credit unions were aware of this opportunity, we have worked hard to spread the news about CDCI, holding conference calls and a webinar to explain the process of preparing and submitting the necessary secondary capital plans.

I am pleased to say that our communications efforts were successful. CDCI has drawn strong interest from credit unions. We received 111 applications for funding, and NCUA staff has been working closely with Treasury staff to obtain as many credit union approvals as possible. Â

I have made a commitment that no credit union application will be denied by NCUA without my personal concurrence. I want to make sure that each application has every opportunity to move forward.

NCUA will also follow through on a new federal initiative that was included in the financial regulatory reform legislation. In the Dodd-Frank Act, an amendment sponsored by Rep. Maxine Waters of California requires that all federal financial regulatory agencies – including NCUA – establish an Office of Minority and Women Inclusion. This office will develop policies that promote equal employment opportunities and advance racial, ethnic and gender diversity. Those policies will be used as a yardstick not just for the federal workforce within the agencies themselves, but also for the contractors and subcontractors who do business with those government agencies.

Moreover, the new law directs all federal financial regulatory agencies to examine the diversity programs and practices of all the entities they regulate. This means that NCUA now has the responsibility to monitor the diversity policies of all federal credit unions. We are not yet sure how this initiative will be implemented, but we are considering how to make this an effective tool for both NCUA and credit unions.

Despite all of these positive initiatives, I know this is still a challenging time for credit unions and for the communities they serve. It certainly will not be easy to overcome the financial aftermath of the past decade's legacy of mistakes and misjudgments. Yet, by staying true to the credit union philosophy – ‘People helping people’ – the credit union community can turn this anxious time of transition into a creative period of renewal.

Debbie Matz is chairwoman of the National Credit Union Administration. This article is adapted from a presentation given before the African-American Credit Union Coalition on Aug. 6 in St. Louis.


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