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NCUA Board Member Todd M. Harper Prepared Remarks on NCUA’s Response to the COVID-19 Pandemic and Economic Equality and Justice - NAFCU Virtual Congressional Caucus

September 2020
NCUA Board Member Todd M. Harper Prepared Remarks on NCUA’s Response to the COVID-19 Pandemic and Economic Equality and Justice - NAFCU Virtual Congressional Caucus

As Prepared for Delivery on September 15, 2020

Thank you, Dan, for inviting me to speak, and Carrie, for your kind introduction. Moreover, thank you to everyone joining this virtual conference. Your work as financial first responders on the COVID-19 pandemic’s frontlines is protecting the financial and economic health of 122 million Americans.

To put the financial fallout of the pandemic in context, I will discuss the state of our economy, highlight some of the NCUA’s new priorities in response to the pandemic, and review emerging risks for federally insured credit unions.

We must also stay sharply focused on matters of diversity, equity and inclusion. The COVID-19 pandemic-induced health and economic crises, the recent killing of George Floyd and others, and the nationwide Black Lives Matter protests have demonstrated once again that communities of color bear many burdens white Americans do not. Credit unions, however, have an important role to play in assisting historically underserved communities to overcome economic barriers. That is why I will close my remarks by outlining how the credit union system can do a better job at addressing matters of economic equality and justice.

Economic Overview

Without question, the economic news during the last six months has been sobering. The precautions necessary to combat the spread of COVID-19 caused economic activity to plummet, and layoffs to surge.

In all, more than 50 million Americans have filed for unemployment since the start of the pandemic. After cresting in May, the national unemployment rate today stands at 8.4 percent, and the rate is even higher for Black and Hispanic workers. What is more, the U6 unemployment rate — which includes the unemployed, the underemployed and workers who have dropped out of the workforce but who still want a job — stood at 14.2 percent in August. That means one in seven workers are without work or working less than they want.

Although the evidence now indicates economic activity may be recovering, there is still a tremendous amount of economic uncertainty. Regardless of when the downturn ends, forecasters predict the economy will not return to its pre-pandemic output level until 2022, and it may take considerably longer for unemployment to recover.

This projection is an important point for credit union leaders to focus on. History has demonstrated that credit union performance is closely correlated to the unemployment rate. With credit unions already confronting a more difficult environment than they have faced in many years, it comes as no surprise that credit union performance has begun to deteriorate.

Overall, the composite net worth ratio for federally insured credit unions has fallen by 81 basis points during the last year. At the end of the second quarter, the industry’s net worth ratio dropped to 10.46 percent. In all, the net worth ratio decreased in 4,770 federally insured credit unions during the second quarter. Put another way, for every federally insured credit union whose net worth increased or remained constant, 12 had a decrease.

A dramatic rise in assets, especially during the last quarter, drove the decrease in the industry’s net worth ratio. For the four quarters ending on June 30, total assets rose by 15.1 percent and total share deposits rose an astounding 16.5 percent within the credit union system. Growth in both measures will likely slow during the second half of 2020, especially as the effects of the federal government’s stimulus wane and share deposit outflows begin.

While much of the economic outlook appears daunting, there is at least one bright spot. The U.S. housing market has held up fairly well. Home sales remain strong. We have also experienced elevated loan demand driven by mortgage refinancing activity in recent months.

Perhaps most importantly, consumers’ equity in their homes is much higher than during the past recession. While not ideal, that equity provides consumers with a safety net if they cannot return to work quickly and must tap into the value of their homes to cover living expenses. In the event of loan defaults, that equity will also protect credit unions from losses on their mortgage portfolios, which now make up half of all loans within the system.

Summary of NCUA’s Priorities

As the COVID-19 pandemic has unfolded, the NCUA has remained focused on three priorities.

Our first priority is to protect the health and safety of NCUA staff and contractors, so that we can maintain our ability to perform the agency’s mission and complete its essential functions.

Our second priority is assessing the impact of COVID-19 on credit union members and operations. The NCUA has a dedicated webpage at that provides guidance on dealing with a pandemic, answers your frequently asked questions, and offers information on working with members. In our ongoing assessments of the operational needs and performance of credit unions, we have generally found that federally insured credit unions are open, lending and serving their members’ needs, albeit with some adjustments in branch access.

Our third priority is to assess how COVID-19 will affect the financial condition of credit unions going forward. Accordingly, we are already actively monitoring certain sectors of the credit union system and focusing on credit unions with elevated risks to protect the Share Insurance Fund from losses. In doing so, we can safeguard member deposits and their financial providers of choice. These actions will also support the employees who work at credit unions.

Risks on the Horizon

When we met last year, I outlined my regulatory philosophy, including my belief that the NCUA must be forward looking to protect members and their credit unions, serve as a steward of the credit union system and safeguard the Share Insurance Fund. As such, I want to outline some of my current observations for the credit union system.

With respect to the Share Insurance Fund, the NCUA is actively modeling the effects of the dramatic rise in assets, falling loan demand, compressed earnings and subdued consumer confidence. While there is great uncertainty about how the economic effects of the pandemic will unfold over the long term, we must all prepare for increased member delinquencies, loan defaults, consumer and business bankruptcies and even credit union failures.

In the short term, the NCUA Board must be prepared to charge a Share Insurance Fund premium, should events warrant it. Although the Federal Credit Union Act requires Board action when the equity ratio falls below 1.2 percent, charging premiums for share insurance during the midst of an economic downturn is less than optimal. Accordingly, I believe the NCUA should work with Congress after this crisis to modify the Share Insurance Fund’s operations. Doing so would create a countercyclical stance to allow for the accumulation of reserves during good times to cover losses in bad times without falling below the minimum statutory equity ratio.

We are also carefully monitoring certain sectors of the system closely tied to sectors more deeply impacted by the current economic headwinds, such as those credit unions connected to the oil and gas industry, the agricultural sector, state and local governmental units, and travel and hospitality companies. Additionally, we are focusing our supervisory efforts on credit unions with higher risk concentrations, such as those with investments in commercial real estate, so that we can proactively take steps to prevent losses to the Share Insurance Fund.

Central Liquidity Facility

Liquidity risk is another issue I am monitoring, especially what may happen after the federal government’s stimulus efforts subside.

Through my experiences working on Capitol Hill during the last financial crisis, I knew disruption in the financial markets could quickly turn into liquidity shortfalls. Because credit unions must have access to liquidity when other parts of our economy freeze up, in mid-March, I called upon the NCUA to seek legislation to enhance the capacity and powers of the Central Liquidity Facility, also known as the CLF.

At the end of March, Congress acted quickly to adopt those temporary enhancements as part of the CARES Act, and the NCUA Board approved a rule to implement these changes in April. The CARES Act and these rules temporarily make it easier for credit unions to join the CLF, including allowing corporate credit unions to again act as agents for consumer credit unions as they did prior to the 2008 financial crisis. The law also eased some restrictions around getting a liquidity loan and temporarily increased the capacity of the facility.

Ultimately, we have a vital opportunity to bolster the entire credit union system’s access to external liquidity for the remainder of the year, and Congress may act to extend these temporary powers into 2021. We must, however, move quickly to capitalize on our newly expanded flexibilities, and position ourselves ahead of emerging needs.

For these reasons, I strongly encourage all consumer credit unions that do not already belong to, or have access to, an agent for the Central Liquidity Facility to join as soon as possible. By joining the CLF, you will be demonstrating the best of the cooperative nature of the credit union movement. That is because every member who joins the CLF will exponentially increase the capacity of the CLF to provide liquidity to others within the system.

Even if your credit union ultimately does not use the CLF in the coming months, your support for it may help another credit union with significant liquidity needs to survive. To learn more about and how to join the CLF, go to

Other NCUA Responses

As the COVID-19 pandemic has progressed, the NCUA has actively worked to protect credit union members, provide regulatory relief, and inform credit unions about potential economic problems and financial sector developments. In just six months, the agency has issued more than two dozen risk alerts and letters to credit unions.

One of these letters provided assurance that the NCUA’s examiners will not penalize your efforts to provide prudent relief for members when a credit union conducts such efforts in a reasonable manner, with proper controls and management oversight.

Another letter outlined the NCUA’s offsite supervisory and examination approach for the duration of the pandemic. We have also made it easier for federal credit unions to hold virtual annual meetings. Additionally, we temporarily allowed credit unions to defer appraisals and written estimates of market value for up to 120 days after the closing of a loan.

Through the Paycheck Protection Program, credit unions are working to save and create jobs. That is why I voted for the NCUA Board’s interim final rule to ease regulatory burdens and capital requirements for credit unions making these loans.

In addition, the NCUA Board in May adopted a rule to amend the prompt corrective action requirements in two ways. The first of these amendments waives the earnings transfer requirement for credit unions that fall from well capitalized to adequately capitalized because of deposit inflows. The second change creates a streamlined net worth restoration plan for credit unions that become undercapitalized because of an inflow of shares. Both the earnings transfer waiver and the net worth restoration plan provisions will expire at the end of 2020.

Economic Equality and Justice

In my remarks last year, I observed that an effective financial institutions regulator must be inclusive. Research has proven that organizations that prioritize the creation of a more diverse and inclusive workplace experience greater staff motivation, improved customer service and higher employee retention, all of which lead to greater efficiencies and better financial performance. By increasing access to the mainstream financial marketplace through the development of targeted products and greater outreach, credit unions can help begin to ease the financial impact of systemic racism on communities of color.

Diversity, equity and inclusion are necessary for the success of the credit union system. They are increasingly vital to strategy, sustainable growth, innovation, talent acquisition, and employee retention. Diversity, equity and inclusion elevate the agency’s ability to better understand and supervise credit unions, as well as a credit union’s ability to add members and create the products its members need.

Within the cooperative system, we have many examples of credit unions working to lift up their members. In all, approximately one in ten federally insured credit unions are minority depository institutions, and more than half of all credit unions are low-income credit unions, meaning a majority of their members earn less than 80 percent of the area median income.

Within the NCUA, I believe that a concrete action plan to advance economic equality and justice at credit unions must have at least four prongs. Accordingly, I am working to:

  • maintain and build diverse and inclusive workforces and supplier chains at the NCUA and throughout the credit union system,
  • enhance support for minority depository institutions,
  • enforce fair lending laws, and
  • advance initiatives aimed at closing the wealth gap.

Your credit union can begin its investment in diversity, equity and inclusion by conducting the diversity self-assessment available at Credit unions have used this tool to establish a baseline for action, such as the commitment to develop new products and services aimed at addressing the needs of communities of color, increasing investment in underserved areas and improving community marketing and outreach.

Ultimately, the NCUA and federally insured credit unions must do all they can to advance economic equality and justice. In doing so, we will demonstrate that Black lives do indeed matter to all of us.

Closing Comments

In closing, the NCUA will continue to focus on protecting credit union members and ensuring the safety and soundness of the credit union system during the COVID-19 pandemic and the subsequent economic fallout.

In return, we need you to stay focused on serving your members. They will remember who supported them during their times of need. That loyalty will lead to better earnings in the future. In the months ahead, you should also watch expenses and maintain access to liquidity. And, if you are experiencing problems, please contact your examiner or field office. A timely call to the NCUA may help your credit union to survive in the long term.

Finally, to address long-standing societal problems of economic equality and justice, we need you to recommit to addressing these issues in each of your communities by finding ways to adapt your products and services. In serving everyone, your credit union, your members and our country will be better for it. Thank you.

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