NCUA Chairman Todd M. Harper delivers remarks at the Volunteer Leadership Institute 2024 in Hawaii.
As Prepared for Delivery on January 24, 2024
Aloha and good morning, everyone! And, thank you, Jeff, for the warm welcome and kind introduction. Thanks as well to the Voluntary Leadership Institute for inviting me to join you this week.
Maui Wildfires
Hawaii is often, and rightfully, called the “Paradise of the Pacific.” But, sadly, it’s not immune from heartbreak, as we saw with the terrible wildfires in Maui last summer.
For me, those wildfires hit a little too close to home. Just a few years before that destruction, my partner and I visited Lahaina where we experienced an enchanting Polynesian luau. It’s also where I purchased this lei as a souvenir of that trip. But, in looking at the before-and-after pictures of the wildfire’s damage, I gasped. The place where I had once dined, learned more about the Hawaiian culture, and enjoyed a magical sunset was erased. Only ashes remained.
The tragic loss of life and property and the displacement of so many families from the wildfires left a deep wound from which residents of the Valley Isle, including credit union members, are still trying to heal. Certainly, our hearts and thoughts remain with those grieving and rebuilding their lives. And, Hawaii’s credit unions are helping those families to recover financially from the devastating experience.
Succession Planning
It is during times of crisis that the role of leadership assumes its greatest importance. Leaders must be decisive, prepared, and strategic. They must decide what actions to take today, anticipate where they need to go next, and adopt measures for tomorrow.
I first learned this lesson as a young child when I attended Benjamin Franklin Elementary School. While there, I learned that Franklin said, “If you fail to plan, you plan to fail.” He was right. The continued health of the credit union system requires our foresight as well. We all must think and plan several steps ahead of where we are today.
That includes the NCUA, the Administration, Congress, state regulators and legislatures, and all of you in this room, the credit union directors, board members, and senior executives who serve as the chief stewards for your members’ financial security and prosperity. We know what happens when credit unions fail to plan for their futures; they merge.
It is for that reason that the NCUA Board approved a proposed rule as the start of 2022 that would require the boards of directors at federal credit unions to establish and adhere to processes for succession planning. The agency is currently reviewing the proposed rule and will update the public on further developments in the coming months.
That said, succession planning is not merely a policy issue, it’s a needed ingredient for the continued viability of the credit union industry. Regardless of the economic or regulatory cycle, credit unions have been steadily consolidating for over four decades. There are far fewer credit unions today than there were 10 years ago, or even 3 years ago. While the pandemic initially slowed the pace of consolidation, the number of mergers is now, once again, increasing.
One major reason many mergers are occurring is an absence of succession planning. In fact, it’s cited as one of the top reasons for mergers by consolidating credit unions. Succession planning, therefore, is vital to the long-term success of any institution, especially small credit unions that are fundamental to the industry.
A board’s failure to plan for the transition of its management can easily result in the unanticipated merger of the credit union upon the departure of key personnel. Alternatively, when credit union boards are proactive, thorough, and forward-thinking, they control the longevity and strategic direction of the credit unions in their charge.
It’s no accident that the word “success” is embedded at the beginning of “succession planning.” So, I urge all of you here to make this long-term planning part of your credit union’s strategic discussions every year.
Federal Credit Union Act’s 90th Anniversary
Looking ahead is effective when it builds on prior achievements and lessons learned from the past. And, this year marks an historic anniversary and important opportunity for reflection. Specifically, the Federal Credit Union Act turns 90 years old in June. Signed into law by President Franklin Delano Roosevelt at the height of the Great Depression in 1934, the landmark law established the federal system for credit unions, which previously only existed as state-chartered institutions.
Over the many years that followed, my family played a role in the system’s development. Specifically, my grandfather and father both helped to start federal credit unions at a soap factory in Indiana and a school district in Illinois, respectively. So, my family, like so many others around the country over the last nine decades, has benefited directly from the vision and statutory mission of federal credit unions, to meet the credit and savings needs of members, especially those of modest means.
The act also established a federal agency to oversee credit unions at the national level. The newly created Federal Credit Union Division was initially placed in the Farm Credit Administration but, over time, moved to other agencies until the National Credit Union Administration was created in 1970. The NCUA has evolved considerably since 1970, as the industry has, into what it is today. That includes creating the National Credit Union Share Insurance Fund to protect the share deposits of nearly 139 million Americans.
To commemorate this milestone anniversary, the NCUA will undertake a number of activities throughout the year, including visits to credit unions and other institutions of historical significance, and events highlighting the system’s ongoing efforts to support under-resourced communities and members of modest means.
The passage of the Federal Credit Union Act to create a federal system of cooperative credit was a watershed moment in our nation’s history. But, just as the law was forward-thinking when enacted nearly a century ago, it must also evolve to reflect current realities with an eye to the future.
Legislative Request for Greater Flexibility in Administering the Share Insurance Fund
Accordingly, congressional action to amend the Federal Credit Union Act to provide the NCUA Board with greater flexibility for administering the Share Insurance Fund is one way in which the law should evolve to address a growing and changing credit union industry.
This legislative request includes removing the fund’s current 1.50 percent equity ratio ceiling from the statutory definition of “normal operating level,” which limits the NCUA Board’s ability to establish a higher normal operating level for the Share Insurance Fund. Congress should also remove the statutory limitations on assessing Share Insurance Fund premiums when the equity ratio of the Share Insurance Fund is greater than 1.30 percent and if the premium charged exceeds the amount necessary to restore the equity ratio to 1.30 percent.
The reason for this change is simple. The time to fix the roof is on a sunny day, not during a storm. The current system limits the ability of the NCUA Board to build sufficient reserves in the Share Insurance Fund to prepare for times of economic stress and volatility. As a result, the NCUA must then charge credit unions a Share Insurance Fund premium when they can least afford it — during an economic downturn.
Together, these amendments would bring the NCUA’s statutory authority over the Share Insurance Fund in greater alignment with the FDIC’s authority as it relates to administering the Deposit Insurance Fund. These amendments would also facilitate a counter-cyclical approach to build fund reserves during economic upturns so that sufficient money is available during economic downturns.
Again, preparation is important as the credit union industry evolves, and challenges emerge.
Share Insurance Fund Report and Rising Risks
Indeed, there are some flashing cautionary lights that we should all heed and act upon. Over the last year, the NCUA has identified signs of growing liquidity, interest rate, and credit risks within the credit union system.
In the most recent Share Insurance Fund report, we see that stress firsthand, especially in large, complex credit unions with $500 million or more in assets. In fact, the number of large, complex credit unions with a composite CAMELS code 3 rating increased by nine credit unions to a total of 51 credit unions in the third quarter of 2023. What’s more, assets in the CAMELS code 3 group for credit unions of all sizes also increased to $131.7 billion, a nearly 45 percent jump from the previous quarter.
But, the thing that concerns me most is the rapid rise in total assets for composite CAMELS code 3 billion-dollar-plus credit unions; meaning, larger credit unions are also facing issues. If not addressed quickly by credit union management, these issues could deteriorate into composite CAMELS code 4 and 5 ratings and even failures.
This is noteworthy because it’s the billion-dollar-plus credit unions that pose the greatest risks to the Share Insurance Fund that your credit unions would all pay for should a large credit union fail.
Active Leadership
These economic warning signs call for strong and dynamic leadership for the system of cooperative credit to navigate the choppy waters and reach its full potential.
So, let me be clear on this point: now is the time for active, not passive management, by credit union boards. That starts with rededicating yourselves to advancing your members’ financial well-being and financial security. And, that means keeping members informed, proactively seeking their input, and safeguarding their savings with robust internal fraud controls.
Boardrooms should never become echo chambers. And, boardrooms should never remain silent after management presents an item. Member-owners should have open and direct lines of communication with board members and senior leaders to ask questions, voice concerns, and challenge decisions made on their behalf.
2024 Supervisory Priorities
For our part, the turbulent economic environment will continue to drive the NCUA’s regulatory efforts, and that is reflected in the agency’s 2024–2025 budget approved last month and in this year’s supervisory priorities, which the agency issued on Monday.
The areas of emphasis for the NCUA in 2024 will look familiar as they build on the 2023 priorities, including interest rate risk, liquidity risk, credit risk, cybersecurity, and fair lending and overdraft programs.
Higher interest rates continue to amplify market risk in asset and liability repricing mismatches and the overall management of interest rate risk. With respect to cybersecurity, NCUA examiners will continue to utilize the information security examination procedures to ensure a comprehensive evaluation of cybersecurity measures at credit unions.
And, consumer financial protection will remain a top priority. Examiners will continue an expanded review of credit union overdraft programs, including website advertising, balance calculation methods, and settlement processes. Problematic overdraft programs include those that charge fees that aren’t reasonable and proportional, rely on systems that authorize positive and settle negative, or impose multiple representment or non-sufficient funds fees. Multiple representment fees can be especially onerous as consumers pay the bill for both themselves and merchants, while financial institutions get paid multiple times.
According to a report issued last month by the Consumer Financial Protection Bureau, many consumers are still being impacted by unexpected overdraft and non-sufficient fund fees, even when they have access to less costly forms of credit. Moreover, low-income households are impacted the most, with more than a third of households making less than $65,000 being charged such fees, compared to 1 in 10 of households with over $175,000 in income.1
NCUA’s fair lending examinations will also increase and focus on ensuring policies and practices are fair and not discriminatory. And, examiners will continue to review credit unions’ policies and procedures governing compliance with flood insurance rules.
The NCUA’s other areas of emphasis for 2024 include Bank Secrecy Act compliance and support for small credit unions and minority depository institutions.
Closing
As we approach the 90-year birthday of the Federal Credit Union Act, it’s an appropriate point to consider where we’ve been, where we are now, and where we’re headed.
There’s a widely used management concept, which some trace back to the Iroquois Nation, called the “seven generation stewardship” principle. This approach holds that leaders should look ahead seven generations to determine the impact of their decisions on their descendants. If that choice will lead to a positive outcome and promote overall well-being during that long timeframe, then it’s an action worth pursuing.
As it turns out, that’s what the founders of the U.S. credit union movement foresaw in creating a system of cooperative credit to advance financial stability and support the financial needs all Americans, especially those of modest means.
What began with paper ledgers, volunteers meeting on factory floors, limited hours, and simple appliance loans, has evolved into today’s $2.2 trillion system serving tens of millions of members and employing more than 200,000 professionals.
That modern system also includes 24/7 mobile and online services, automated underwriting, a complex system of third-party vendors, and a full array of financial products and services.
For the credit union system to thrive in the future, we must continue the forward thinking and plan seven generations ahead. Through legislative requests, rulemakings, stakeholder engagement, and the evolution of examination programs, the NCUA is planning for the future. Credit union leaders like you must also do the same.
By working together, regulators and industry can ensure that as the credit union system grows and evolves, it is true to its mission and commitment to serve all members. We can ensure that the system remains safe and sound. And, we can better protect the rights and interests of credit union members. In doing all that, we can best position the credit union system for success for the next seven generations and beyond.
Thank you again for the kind invitation.
I’ll turn it back over to Jeff.