NCUA Chairman Todd M. Harper at the NCUA's Headquarters in Alexandria, Virginia.
As Prepared for Delivery on March 22, 2021
Good morning everyone! And, thank you, Todd, for the introduction.
I hope that 2021 is going well for you, your families, and your credit unions, and that you have all safely emerged from a truly unprecedented year. The COVID-19 pandemic has taken a tremendous human toll on many of us, and it continues to pose many challenges for our country and the credit union system. And yet, during this unprecedented time, credit unions have pressed forward as financial first responders, doing their part to support their members and the communities they serve.
Today, the credit union system sits at the intersection of several crossroads, and we each will likely face many difficult days and decisions ahead.
State of the Credit Union Industry
Let me start with the economy. The measures initially taken to combat the spread of COVID-19 all but ground economic activity to a halt, resulting in the loss of more than 22 million jobs and a soaring unemployment rate. But as quickly as the economy shut down, it rebounded as governments lifted restrictions on consumer and business activity and businesses began hiring again. By February, more than half of the jobs lost in March and April had been restored, and the unemployment rate declined from an 80-year high of 14.8 percent, to 6.2 percent, a sizable improvement, but still a high number.
The near-term outlook for the economy has improved a great deal in the last few weeks. The recently enacted $1.9 trillion American Rescue Plan Act will help shore up household finances and is expected to give the economy a substantial boost. The return of warmer weather and rising number of Americans who have been vaccinated will also spur increased economic activity and job creation in the months ahead. Even so, it will take time for the economy to heal completely. Employment in some industries, especially the retail and travel sectors, is unlikely to return to pre-pandemic levels anytime soon.
Until the labor market recovers fully, high unemployment will likely continue to impede loan demand, especially for non-mortgage consumer loans. And, it could affect the credit quality of loans already on the books. Credit unions also face a prolonged period of very low interest rates, and short-term interest rates are expected to remain low for the foreseeable future.
Longer-term interest rates have increased recently and are expected to edge higher, but they will generally remain lower than pre-pandemic levels, suppressing already compressed net interest margins. In the year ahead, your credit union’s ability to manage interest-rate risk will play a crucial role in financial performance. In the final analysis, 2021 is likely to be a very consequential year for the credit union industry, and all of us must be prepared.
The NCUA’s Response to COVID-19
Going forward, the top priorities for the NCUA Board will be ensuring that the credit union system and the Share Insurance Fund are prepared to weather any economic fallout related to the pandemic. To protect the Fund, we are actively monitoring certain segments of the system, including credit unions closely connected to the oil and gas, travel and leisure, and agricultural sectors, among others. We are also focusing on credit unions with elevated risks, such as those with large concentrations of commercial real estate loans relative to assets.
One thing that seems likely is that, as during past recessions, credit union performance will trail any improvement in the unemployment rate by one to two years. Accordingly, your credit union should pay careful attention to capital, asset quality, earnings, and liquidity. You should also heed the age-old advice of a “stitch in time saving nine” by acting quickly to mitigate problems when they develop. And, as the pandemic evolves, the NCUA will continue to adjust its supervision and examination program to address potential risks to the Share Insurance Fund and the broader system.
Consumer Financial Protection
Equally vital to the members of credit unions is consumer financial protection and fair and equitable access to credit.
In 2020, NCUA examiners completed targeted reviews in all risk-focused and small credit union examinations to evaluate compliance with various consumer financial protection laws and regulations. Through quality control checks, we then observed several issues suggesting that some credit unions may not be paying close attention to consumer financial protection.
In some cases, NCUA’s examiners found weaknesses in credit unions’ management systems, which can lead to compliance issues, violations or harm to consumers if not adequately addressed. We also observed notable shortfalls in complying with the Fair Credit Reporting Act, the Electronic Fund Transfer Act, and the Truth in Lending Act.
If left unchecked, these problems could lower consumer credit scores, lead to expensive fees, and increase the cost of credit. To address these and other issues, especially as the industry grows in complexity, the NCUA must create a dedicated program to supervise for compliance with consumer financial protection and fair lending laws.
In doing so, we will better protect consumers’ interests, ensure that the credit union system lives up to its commitment to serve members, and provide a more comparable level of consumer protection oversight as federal bank regulators. The NCUA’s efforts to enhance oversight of consumer financial protection rules will not only protect credit union members, but also all credit unions from the reputational risks resulting from the missteps of others.
Garnishment of Economic Stimulus Payments
Recently, millions of credit union members also began receiving stimulus payments through the American Rescue Plan. Lawmakers intended for consumers to spend these checks on necessities like food, shelter, utilities, and medical care.
However, because the new law lacks needed prohibitions, I am very concerned that some financial institutions may soon make shortsighted decisions to use these stimulus funds to instead pay for overdraft fees, outstanding debts, and other liabilities. Financially stressed American consumers deserve better treatment.
As financial first responders who support their members in times of need, many federally insured credit unions have already voluntarily decided to protect their members’ relief payments from collection, garnishment, and the right of offset. By demonstrating the cooperative philosophy at the heart of the credit union movement, these credit unions are doing the right thing. And, as American consumers — many of whom are disproportionately people of color — struggle through the economic shock inflicted by the COVID-19 crisis, all credit unions should strive to live up to this foundational principle.
But, a small number may chose a different course. Like a pickpocket on the subway, they may grab the stimulus money meant for daily living expenses from their members. Credit unions that do so should fear the reputational risk they will face by failing to accommodate the needs of their members during tough times. Such practices will sacrifice the long-term financial viability of their credit union and create negative publicity for the entire credit union system.
When I spoke about this issue last year after the enactment of the CARES Act, I noted that it is time for all credit unions to heed the lyrics of Bill Withers who sang, “Lean on me, when you’re not strong, and I’ll be your friend. I’ll help you carry on.” Credit unions that follow this wise, timeless advice will serve their members, themselves, the credit union system, and our economy well in the long term.
Economic Equity and Justice
Lastly, I want to focus on economic equity and justice, which are vital to the continued health and success of the credit union system.
By enhancing support for minority depository institutions, enforcing fair lending laws, and advancing initiatives to close the wealth gap, we can address the disparities created by centuries of systemic discrimination and exacerbated by the pandemic. We can also ensure that the cooperative nature of the credit union system lives up to its mission of meeting the credit and savings needs of consumers, including those of modest means.
Research has also shown that there are three primary ways to close the wealth gap. One is to open and regularly fund a retirement account. Another way is to own a home. And the third way is to start a business. Given the cooperative philosophy at the heart of the credit union movement, your credit union has a moral obligation to step up and help communities of color recover and minority-owned businesses start anew in the months ahead.
So, I would like to challenge all of you to deliver more financial products and services – free of discrimination or unfair practices – to people of color and within communities of color. These efforts will be vital to ensuring a more equitable economic recovery and the health of our democracy.
Conclusion
In sum, the COVID-19 pandemic has changed almost everything, from how we live, work, and socialize, to how we think about, and plan for, the future.
It has also changed the way in which many of you provide financial services and products to your members, and it has changed the way in which we conduct examinations and think about risk. But, if we, as a community, work together to smartly and safely navigate through the pandemic-induced economic crisis, we will emerge stronger from it.
Thank you. I look forward to your questions.