It is a true honor to be with you today at the NAFCU Congressional Caucus. As I complete my second full year on the NCUA Board, I want you to know that my respect for this outstanding
organization could not be higher, and I would like to express before I go
any further my admiration and appreciation for the leadership provided to
NAFCU and the entire credit union movement over the years by General Ken
Robinson. At his last Congressional Caucus as President and CEO of NAFCU,
I want to take this opportunity to state publicly, Ken, that you will be
greatly missed. It is said that no one is irreplaceable and that when
anyone pulls his arm out of a bucket of water, the water always fills the
space. Well, with some folks it takes more water to fill the space than
others. Ken, you are one of those and I personally will miss your
leadership at NAFCU. I wish you and Marie the best in your retirement and
look forward to still seeing you and working with you in other capacities.
I am asked often what I feel
is the primary role of NCUA as regulator and insurer. Are we the arbiter
of disagreements among credit unions who are part of a cooperative
movement? Are we the evaluator of member service, both its adequacy and
its quality? How about the social conscience of individual credit unions,
are we the compliance officer to determine how deep that social conscience
goes or if the credit union is doing everything it can to fill its own
social contract between the credit union and its member-owners? I would say the answer is
"no" as to whether any of these is the primary role or even a proper role
for a federal regulator. Either credit unions value their cooperative
structure and work together for the good of the overall movement or they
do not. Either they believe in their social mission or they do not. It
cannot be imposed from the outside. And certainly it cannot be government
imposed. I submit that credit unions
do believe in and live by their cooperative structure. I believe the
record clearly indicates that credit unions are committed to your social
mission and are fulfilling it every day, but not because you are mandated
by your regulator or any other government body. You cooperate because you
are cooperatives and your history is one of cooperation. You see the
value, whether it be in successful legislative initiatives like the battle
for HR 1151 or in shared service centers, co-op marketing programs and
active chapters and leagues. You retain your heartbeat for service to
their entire field of membership, folks from all walks of life, because
you believe you should but also because the members demand that you must.
Members are the ultimate regulators of member service. The social conscience of individual credit unions is judged every day by the members who stand in teller lines, sit at loan officers desks, fill out payroll deduction forms, make loan payments, and - in general - trust their hard-earned dollars to the member-owned financial
cooperatives they call "their credit union." Looking at today's historical
highs in credit union membership, especially in new members, as well as
performance in asset and loan categories which can only be described as
extraordinary, it is obvious that credit union member service is being
well evaluated by their member-owners. Capital levels, which are the
safety and soundness result of the extremely positive performance in these
other categories, are, as we say down South, as "strong as garlic." Again,
it is obvious by studying the numbers that member service is being given
very high marks by credit union member-owners. And if a credit union is not
serving its members to the levels the members demand, the unique structure
of a member-owned cooperative allows the members to show up at the annual
membership meeting to let their voice and their votes be heard. Those
members also have the ultimate regulatory tool in the member service arena
inside their shoes - they can vote with their feet by taking their
business elsewhere if their credit union is not adequately serving them.
It is clear that the
cooperative structure is alive and well without governmental regulatory
interference, as is member service and the social contract between credit
unions and their member-owners. Neither need, nor frankly benefit from
governmental intrusion. What then is our proper role
at NCUA? It is the job of NCUA as
regulator to make sure that, when the member makes his or her decision to
open an account at his credit union or, yes, if eligible and he so
chooses, his credit unions (I and my family together have memberships at
four credit unions), any credit union he chooses is safe and sound.
Despite the other
well-intentioned roles that some may wish to say should be ours, the fact
remains that NCUA is responsible for implementing the federal credit union
act to extend credit for provident and productive purposes within the
bounds of safety and soundness. That is our charge and that
should be our focus...the safe and sound extension of credit. Safety and
soundness is clearly our overriding charge...it is our job. As a safety and soundness
regulator, NCUA should itself realize that change is a vital and integral
part of today's competitive financial marketplace. NCUA should also
encourage credit unions to likewise have a commitment to change when
members demand those changes in order to continue to meet their financial
needs. It is impossible to separate
the ability to compete in today's marketplace from safety and soundness.
The inability or unwillingness of credit unions to change as their members
do will ultimately result in a lack of competitive position in that
marketplace and, since members ultimately control the long term viability
of their credit union, safety and soundness concerns could result from a
stagnant refusal to accept the realities of change. That is why NCUA so strongly
emphasizes strategic planning in the credit unions we regulate. "Where
there is no vision, the people perish" is more than a Biblical admonition.
It is stark reality in today's marketplace. But if we are to have an
emphasis on strategic planning in the credit unions we regulate. We must
have the same emphasis as an agency. We must find ways to provide
the regulatory approach which will best facilitate credit unions to catch
a vision for not just this generation of members, but also the next. We
must empower credit unions to aggressively plan for and implement that
vision through innovations that we may not even ourselves always fully
understand, nor can we predict how they will be received by the members,
but which we must be willing to allow if there are no adverse safety and
soundness considerations. We must realize that risk management, not risk
avoidance, is the assignment we give to credit unions. Within the bounds of safety
and soundness, we must embrace change and innovation from those we
regulate. And we must be willing to change and innovate our regulatory
approach as we do. It is this spirit of change
and innovation, both in your credit unions and in our regulatory approach,
that I would like to talk about in the few minutes we have together this
morning. Way back a century and a half
ago in 1829, Martin Van Buren, who was then governor of New York, wrote
the following to President Andrew Jackson: "The canal system of this
country is being threatened by the spread of a new form of transportation
known as railroads. The federal government must preserve the canals for
these reasons: *If canal boats are supplanted by railroads, serious unemployment will result. Captains, cooks, drivers, repairmen and lock tenders will be left without a means of livelihood.
*Canal boats are absolutely
essential to the defense of the United States. In the event of unexpected
trouble with England, the Erie Canal could be the only means by which we
could ever move the supplies so vital to waging war. *And, as you may know,
railroad carriages are pulled at the enormous speed of 15 miles per hour
by engines, which in addition to endangering life and limb of passengers,
roar and snort their way through the countryside. The Almighty certainly never
intended people should travel at such breakneck speed." The constancy of change which Martin Van Buren was futilely fighting in 1829 remains constant today. While some fight it, others recognize it and embrace it.
Thomas Jefferson certainly
never envisioned the Internet and the World Wide Web, but he had the
vision to design a system of government flexible enough to not only allow
it, but to accommodate it, set up web sites and utilize it to better
deliver government services. Filene, Raiffeisen and
Bergengren certainly never envisioned home banking, audio response and
virtual branching, but they had the vision to design a cooperative
ownership structure which put the members in control of their individual
credit unions and the ability to adjust to changing times in their
hands. We sell the vision of Filene,
Raiffeisen and Bergengren short if we live in the past and leave the
future of innovative financial services only to credit union
competitors. As a regulator, NCUA must
create a regulatory environment that allows that vision and innovation to
manifest itself in America's credit unions, large and small. We do not encourage
innovation with unnecessary regulation. In fact, regulatory hurdles have
become the leading stumbling block to innovation in so many fields. We
must not make credit unions run their competitive race on a field which
requires them to clear the high jump of constantly upward moving demands
for more member service, the sprint of today's fast-paced demands for
24-hour convenience, the relay of cooperation with their fellow credit
unions, the competition of other teams who are training constantly and
fighting hard to beat your time - while at the same time clearing hurdles
that are placed by a regulator whose real responsibility is to make sure
they run a proper race and abide by the rules. We must remove the hurdles
that are not applicable to the race of member service, but are there for
only the race of safety and soundness. Leaving the hurdles out for races
where they do not apply is causing the runners to stumble. Yet, some attempt to distort
this role of NCUA as safety and soundness regulator. Recent proposals, for
example, that would require NCUA to put additional regulations on credit
unions to mandate some arbitrary and subjective higher standard of member
service in hopes of putting the pawn shops and check cashers out of
business would be somewhat akin to the FDA deciding to address the dangers
of nicotine in tobacco by choosing to put new reporting requirements on
the folks at Nicorette to make sure they are selling enough gum. Nicorette
is part of the solution, not the problem. If states need to regulate
predatory lending, then they should regulate it. I would support such an
effort. But it is no answer to regulate Nicorette gum when the nicotine is
the problem. And don't put unnecessary regulation on the credit unions who
are out there in the trenches every day trying to provide an alternative
to the check cashers and pawn brokers. Empower the credit unions to become
more innovative, extend their member service further and to more members,
and to improve their competitive position and safety and soundness in the
process. Credit Unions are part of the answer to predatory lending - if we
allow them to be. If more regulation would put
the pawn shops and title loan companies out of business, they would have
disappeared with the passage of CRA in 1977. Obviously, more regulation is
not the answer. Does NCUA have a role in
doing this? You bet. Can we fulfill our role with
inflexible regulatory thinking? No way. But, in defense of NCUA, I do
not believe the agency built its reputation, nor did the credit union
movement build its strong position, through excessive, stifling
regulation. NCUA built its reputation as an effective, rather than an
excessive regulator. Where we have left that approach, we must return.
Same with credit unions, innovation in member service has help fuel the
strong credit union position. Any credit union that allows the day to day
operational issues of the present to divert them from strategic planning
to face the growing expectation demands of tomorrow should also re-examine
its focus. Credit unions should keep
innovation in member service at the forefront of their business planning.
NCUA should more than allow that innovation to blossom, we should
fertilize it through reasonable and flexible regulatory relief, as always,
overlaid with the fabric of safety and soundness. Today, I would like to make
you aware of a proposal that I intend to bring before the NCUA Board for
consideration in the spring of 2000. I hope that you will begin even now
to allow your visionary thinking to evaluate this proposal and perhaps
contribute to it through the comment periods that I hope will be
forthcoming if my Board colleagues agree with me that reasonable and
flexible regulatory relief is a priority and an approach they can
support. Every risk intensive industry
in America today bases its underwriting requirements on the level of risk
involved. From auto insurance which
requires less documentation and even lower rates from those with safe
driving records to life insurance which gives better rates to those are
younger or do not sky-dive, the insurance industry realizes that risk
management is the key component in their evaluation of underwriting
standards. In effect, they allow those with less risk to earn more
empowerment through less regulation. We should take the same
approach. I am calling my proposal:
REG-FLEX It is based upon my belief,
honed in the trenches of the credit union movement as a former credit
union manager and re-enforced through the difficult policy and safety and
soundness issues I have dealt with in my two years on the NCUA Board, that
safe and sound credit unions with solid capital levels and high CAMEL
ratings have earned more regulatory flexibility, hence the name REG-FLEX.
Likewise, we as an agency
would be more effective if we focused more of our resources on those
credit unions who have not attained those solid capital levels and are in
need of more support and assistance from NCUA. We can free those resources
to help the credit unions who need our supervisory assistance if we have
less of our resources used in what could be described as over-extension of
our proper regulatory arm into the day-to-day business decisions of safe,
sound, well-managed credit unions who have, by their performance, proven
their ability to manage risk effectively. I do not intend Reg-Flex to
be another "all sizzle and no steak" regulatory relief proposal. I am not
talking about reviewing our existing regs every few years in the type of
symbolic review process that usually results in no significant relief and
only a regulatory fold and tuck here and there. I want to see Reg-Flex be the
cornerstone of NCUA's regulatory approach in the year 2000 and beyond. I
see it as the flip-side of PCA, the carrot to what is perceived as PCA's
stick. Reg-Flex will allow credit
unions with strong capital positions and solid CAMEL ratings to earn
regulatory relief from specific NCUA regulatory requirements and allow
expanded authority in areas more tightly regulated than they might need to
be for a credit union with a proven track record of effective risk
management. Areas that we will be looking
at to determine if relief can be provided under Reg-Flex will be broad.
Some requirements are statutory and cannot be eased. Others have safety
and soundness components and are therefore cannot be put under Reg-Flex.
However, what about fixed asset limitations, investment authority, CUSO
investments, examination scope or perhaps frequency, and even some aspects
of field of membership expansion authority that are not statutorily
prescribed. Yes, I recognize that field of membership issues are also
regulatory issues. And unnecessary delay and documentation overkill on
field of membership expansion is indeed a regulatory problem in need of
relief. Particularly as it relates to low-income communities and select
employer groups, there is much we can do to extend credit to more people
who need it by making it easier, not harder, to get a charter expansion.
I am convinced that Reg-Flex
can do more to foster innovation in member service and to extend credit to
the underserved than any new regulatory mandate ever could. Why? Because
the emphasis of Reg-Flex is on greater regulatory flexibility, less
paperwork and credit union empowerment. CRA-type regulations provide just
the opposite: less flexibility, more paperwork and restrictive mandates
that quench the innovative spirit. Just as over-regulation can
kill innovation, less regulation can empower innovation. Thousands of credit unions
each year debate innovative programs to extend their services to
underserved members. I know, as I know you do, because I have been there
that one of the most pressing questions they must answer is what will be
NCUA's regulatory response to any new program. Will NCUA write me up because
my delinquency ratio goes up a few basis points as a result of these
higher risk loans? What about my charge-off rate if some of them go
bad? Will that new mobile branch
to serve a low-income SEG raise my expense ratio above the peer average?
What about its impact on my 5% fixed asset cap? Will my earnings component
in CAMEL go down if the program is slow to get started? Will my management
component follow because I approved this program? The overwhelming majority of
credit unions move forward with these innovative programs each year
despite the possibility of a regulatory over-reaction. Unfortunately, some
do not. If NCUA truly wants to see
greater levels of service to the underserved (and I do), we need to model
a flexible regulatory approach that removes some of these questions and
deterrents. Reg-Flex would do so. As an example, the credit
union who considers a new branch to extend its service, a mobile branch to
visit low-income SEGs or a new computer system to enable them to offer new
services that their old system cannot handle will be more likely to move
forward with these services if they are not restricted by a 5% fixed asset
cap. And, if that credit union has 12% capital and a solid CAMEL rating,
why do we believe they cannot manage the risk? Their performance clearly
indicates that they can. But we restrict their innovation through the
fixed asset cap, even though they have proven they can manage the risk.
This approach cries out for regulatory flexibility. Now, should all credit unions
be exempted from the cap? Of course not. So what do we
do? Since everyone should not be exempted, we basically exempt no one.
Well, that "one size fits all" approach is what leaves us with a
inflexible regulations 5% fixed asset cap. Because all credit unions
have not demonstrated the ability to manage fixed assets effectively, our
approach in the past has been to cap them all. Under Reg-Flex, we could
and I believe we should allow credit unions who meet a certain trigger of
capital position and perhaps CAMEL rating to be exempted from that cap.
If credit unions whose
capital falls below PCA levels are subject to possible additional
regulation, why not allow those credit unions whose capital is above
certain levels to earn regulatory relief. Reg-Flex will do so. Of course, as always, safety
and soundness will be the fabric from which Reg-Flex is fashioned. When
necessary, the regulatory relief granted must be pulled back if safety and
soundness issues arise in a particular credit union who has previously
been granted Reg-Flex relief. But why can't NCUA think
outside the box. We encourage credit unions to do so through your
strategic planning process. And then we often restrict your ability to
implement your own vision by our lack of it. I am convinced Reg-Flex can provide a dramatic shift in the regulatory approach of NCUA and the ability of credit unions to approach the competitive marketplace of the new millennium with innovation and vision. There is a great deal of enthusiasm at NCUA about such a proposal as well. Many believe that it can help stem the early tide of charter conversions from federal to state which could, if not addressed, turn into a tidal wave which would hurt the long term viability of the federal charter and, by doing so, hinder the delicate balance which is our valued dual chartering system. Those who do not realize that our tendency to over-regulate can be a very real threat to federal charters and an impetus in the growing move to state charters has their heads in the sand.
A working group at NCUA is
working with me to further develop the Reg-Flex program over the coming
weeks and credit unions are being consulted each step of the way. This
proposal is based upon the realization that Washington doesn't have all of
the answers. Through the development of the proposal to the comment period
which will be a part of its evolution into what I hope will be a thorough,
workable regulatory relief measure approved by the NCUA Board, I encourage
credit union folks like you - the heart and soul of the credit union
movement, the people who are in the trenches of member service every day -
to take your thinking outside the box as well. Work with us on Reg-Flex.
Through your trade organizations such as NAFCU and CUNA, provide us with
ideas for regulatory relief that we may not recognize. Comment on the
proposal during the comment period. Help us put the steak with the sizzle.
Working together, we can
strengthen the credit union heartbeat for member service through less
regulatory blockage and, as we do so, empower safe, sound, growing and
viable credit unions for greater service not only to this generation of
credit union members, but for generations to come. Thanks to you and NAFCU for the opportunity to be with you today. |