As Prepared for Delivery on December 18, 2020
Thank you, Mr. Chairman. And, thank you, Eugene and the rest of your team in the Office of the Chief Financial Officer, for your considerable efforts in preparing the NCUA budgets for 2021 and 2022.
In my view, preserving the safety and soundness of the credit union system, protecting consumers, and preparing the NCUA for the economic fallout caused by the COVID-19 pandemic are nonpartisan issues. And, from my perspective, there are a number of good things in this proposal, including:
- Devoting new resources to address financial technology, innovation and access issues,
- Providing funding to stand up a new Office of the Chief Ethics Counsel,
- Completing the development and implementation of the Modern Examination and Risk Identification Tool otherwise known as MERIT,
- Beginning work on a data collection and sharing solution, and
- Dedicating funding for state examiner training.
I also appreciate the hard work that went into balancing the requests of all three Board offices.
A budget, however, is a forward-looking document that establishes priorities. And, while there are some positive aspects of this proposal, for me, this budget unfortunately falls short on several fronts. I will, therefore, oppose it.
Exam Preparedness
In light of the pandemic’s economic effects, I have said that we should plan for the worst and hope for the best when budgeting for 2021. Once the effects of the economic stimulus fade and the congressionally imposed forbearance programs expire, we will have a fuller picture of the true state of the credit union system. And, the agency needs to prepare for that reality.
The responsibility falls on the NCUA Board to take a broad view of the state of the credit union system and adjust to the economic reality, including by modifying the policy governing examination scheduling when necessary. During prior economic downturns, like the 2008 financial crisis, the NCUA returned to a 12-month examination cycle. We also increased our field resources to handle safety and soundness problems at federally insured credit unions. Our sister agencies did the same.
Based on discussions with staff, I have concluded that we do not yet need to examine all federal credit unions on an annual basis. That is why I proposed a surgical approach to modifying our examination program as part of the budget negotiations. Specifically, we have identified a number of high-risk institutions for which we currently have no plans to examine in 2021. We know the risks are there, so we should plan to check in with these credit unions next year.
Additionally, I called for the agency to examine all federally insured credit unions with $500 million or more in assets, regardless of charter type. When a federally insured credit union fails, the historical loss to the Share Insurance Fund is about 20 percent. So, a credit union with assets above $500 million would have the potential to cost the Share Insurance Fund $100 million or more. That is a sizable amount of money for the fund and surviving credit unions to absorb. In my view, it would be better to invest the resources to stay on top of any issues that come up at these credit unions.
Under the surgical approach that I proposed, we would need 36 additional examiners in 2021. The 36 FTE figure represents conducting annual exams at those credit unions with $500 million or more in assets and annual exams for credit unions identified as high risk for which there is currently not an exam scheduled in 2021. These exam program changes would provide the agency with the resources needed to be well prepared for what lies ahead.
Earlier this week, the Federal Deposit Insurance Corporation approved its budget for 2021. That budget increased by 12.9 percent, a figure considerably higher than the NCUA’s proposed budget. And, they increased examiner and resolution staff to handle the problems ahead.
We have a duty to credit union members and taxpayers to protect the Share Insurance Fund and the credit union system. We have a duty to prepare for any economic fallout. We need to modify our examination program, and we need to increase our examiner ranks, at least on a temporary basis, to work through the anticipated problems.
Regrettably, the budget before us falls short. It makes no changes to the exam scheduling policy. And, authorizing the agency to fill as many of the 30 re-employed annuitant positions is only an illusion. I am told that many of the potential rehires will not sign up for another term of service at the NCUA. And, while I appreciate the efforts to try and address this shortfall during the midsession budget adjustments, we should be doing more much sooner.
If we cannot find enough re-employed annuitants to join our examiner ranks, we can find contractors to help us fill out specialized roles on a short-term basis. That is an appropriate solution, but we are waiting too long to proceed with that option.
Ultimately, I believe investing resources to stay on top of any issues that come up in the credit unions with a high-risk profile and in credit unions with more than $500 million in assets, which each have the potential to cause $100 million or more in losses to the Share Insurance Fund, should be a priority and should be in place at the start of the year. This budget fails on that front.
Consumer Financial Protection
Additionally, we know that the NCUA falls short when it comes to the agency’s oversight of consumer financial protection laws. Consumers, regardless of their financial provider of choice, deserve to have the same level of financial protection, yet we do not adequately assess consumer compliance management systems or even basic compliance with consumer financial protection laws in most credit unions.
We also do not assign a separate consumer compliance rating in the way that other federal banking regulators — and even some state credit union supervisors — do. What is more, the credit union system has continued to grow and become more complex. We have 45 additional consumer credit unions holding in excess of $1 billion in assets than we did just one year ago.
To build an effective consumer compliance supervisory program, the agency needs to do more than what the 2021 budget lays out. Adding just one term employee and a detailee for one year is simply not a strong enough commitment. The budget also authorizes a report that is due on October 15, 2021, which is an arbitrary and short amount of time to produce a document that will ostensibly “provide options regarding the enhanced procedures and the cohort of credit unions that would be subject to them.”
The report would include associated considerations and cost estimates for each option identified, a summary of results from any pilot testing of examination procedures, and a recommendation for the options identified in the report from the directors of several NCUA offices and each of the regions. Notably, staff will also seek the views of the state supervisory authorities in developing the recommendations. This is too much work for just one employee and one detailee to accomplish.
To better safeguard consumers’ interests and ensure that the credit union system lives up to its commitment to serving members, it has been my longstanding position that we need to provide at least three permanent FTEs in the Office of Consumer Financial Protection to begin the development of a dedicated, standalone federal consumer financial protection compliance examination program for large, complex credit unions. Anything short of that is a disservice to credit union members.
Financial Innovation and Central Liquidity Facility
On another note, I very much understand the need to house expertise within the agency related to financial innovation, technology, and access. My original concern was the creation of another standalone office, so I was pleased when we instead decided to house the small group as a division within the Office of the Executive Director. But, I do not support moving the virtual exam program to this division. That function is best kept with the Office of Examination and Insurance.
The budget we are considering today also moves the Central Liquidity Facility from the Office of Examination and Insurance. From my perspective, housing the facility within the Office of Examination and Insurance has worked well, and I do not believe that it needs to be moved. I am also not sold on the idea of having a standalone office. We need further study about where the Central Liquidity Facility would best fit and ensure that our resources are efficiently used.
Economic Equality and Justice
Like the Chairman, I am deeply committed to doing what is right for credit union members, the agency and its employees, the Share Insurance Fund and the credit union system.
I also know that if we take the time and work together we can identify a mutually agreeable initiative that addresses the concerns of everyone, including advancing economic equality and justice, which is broader than the ACCESS initiative.
We must act to close the wealth gap, support minority depository institutions and ensure compliance with fair lending laws so that people of all colors can buy a home, purchase a car or finance college without being subject to discriminatory terms. In doing so, we will lift all boats and live up to the cooperative philosophy at the heart of the credit union movement.
Although we are passing this budget today without having taking the steps needed to build out a more comprehensive program, I am hopeful that we can work to find common ground in the next year.
Exam Survey
Finally, funding in the amount of $300,000 has been added to this budget to develop and implement an examination survey mechanism to get feedback from credit unions on their interactions with the agency. The NCUA has previously had an exam feedback program, but that program received few responses and was ultimately ended because it was cost inefficient. I look forward to seeing whether this time around we can develop and deliver a better product.
Ultimately, given my concerns about exam preparedness, consumer financial protection and other items, I cannot support the 2021 budget as presented. Again, I appreciate the hard work of staff and efforts to improve the original draft, but in the end this budget falls short of my expectations.
Thank you, Mr. Chairman. I have no further comments at this time.