NCUA Board Member Todd M. Harper's delivers his remarks at the Mountain West Credit Union Association Annual Meeting remotely from his home.
As Prepared for Delivery on April 23, 2020
Thank you for inviting me to speak, and thank you for being America’s financial first responders. Your work on the frontlines of the COVID-19 pandemic is protecting the financial health of tens of millions of Americans.
Consistent with safety and soundness and consumer financial protection, I encourage you to continue to develop products and services aimed at helping families pay for essential needs. By focusing on your members, making responsible loans, accommodating their needs, your members will remember it in the long term.
And remember that in every crisis, there is opportunity. Research has shown that credit unions that lean-in and focus on community development and financial inclusion during difficult economic times often outpace their peers in future financial performance.
I would like to begin my remarks today with an economic overview, and then tell you what the NCUA is working on in response to the pandemic.
Economic Overview
Without question, the recent economic news has been startling. The measures necessary to combat the spread of coronavirus have caused economic activity to plummet and layoffs to surge. In just five weeks, 26.5 million Americans have filed for unemployment. The number of passengers clearing security checkpoints at all U.S. airports is down about 96 percent from one year ago. And, the number of seated diners at restaurants in Open Table’s network have remained 100 percent lower than year-earlier levels for more than a month.
What’s more, oil and gas markets have experienced considerable turbulence in recent days. As you are all too aware, top mining-production states like Wyoming and Colorado will face the double whammy of a national economic contraction and localized economic disruptions.
The length and depth of these economic downturns will depend in large part on how long stay-at-home orders and non-essential business closures remain in effect, but most forecasters think it will be more severe than the Great Recession of 2007–2009. The sharp and rapid deterioration in labor market conditions, lost wages, and heightened uncertainty that is sure to linger even after normal economic activity resumes means the economy may not return to its pre-coronavirus level of output for quite some time.
Credit unions, therefore, are facing a more difficult economic environment than they have in many years, and we should all be prepared if credit union performance deteriorates.
What It Means for Credit Unions
The good news about this pandemic-induced recession, if there is any, is that federally insured credit unions, as a whole, have started in a strong economic position. At the end of 2019, the system had a net worth ratio of 11.37 percent and a delinquency rate of just 71 basis points.
But, we must remain vigilant and be prepared for the economic impact that is coming. In that regard, I would like to highlight a few economic indicators that I am watching. First, the COVID-19 pandemic will likely lead to sizable losses in commercial real estate.
Businesses are going to have difficulty keeping their doors open in the coming months, even after we begin to reopen the economy, and the losses will likely be sizable. As a whole, federally insured credit unions have a small exposure to commercial real estate, just 4.8 percent of industry assets. However, for those credit unions that have concentrated in this market, the NCUA will need to carefully monitor future performance and risk mitigation.
With respect to residential real estate, which comprises 31 percent of credit union assets, we can expect elevated losses due to unemployment. The ultimate outcome will largely depend on what happens to home values, something that is very difficult to predict, as we lack an historical precedent.
While we are already seeing many credit unions stepping up and providing mortgage forbearance relief to their members, delinquencies will likely rise. But, unlike the Great Recession, the borrowing position of homeowners is much stronger as many have more equity in their homes today than a decade ago.
The limited supply of new homes in recent years may also help to cushion a decline in home prices. Nevertheless, with federally insured credit unions holding nearly half-a-trillion-dollars in residential real estate loans, the NCUA must watch this sector closely.
Auto loans have long been the “bread and butter” of credit unions, and the system has broad exposure in this lending segment. In all, credit unions hold $380 billion in auto loans. That amounts to 24 percent of the industry’s assets.
The NCUA’s economists anticipate that in the coming months credit unions will have high to very high delinquencies, but those figures should still remain below the rates of other lenders as the creditworthiness of credit union borrowers is better than average.
Falling prices pose a real risk to credit unions with significant used auto loan portfolios. These credit unions could face unexpectedly higher losses if the borrower defaults and the actual market price of the vehicle is lower than the value of the loan. Additionally, with shrinking sales of new and used vehicles, credit unions will need to seek other revenue streams.
Regarding credit cards, private student loans, and other unsecured products, we anticipate elevated losses. Together, unsecured loans constitute 7.5 percent of the system’s assets, or $118 billion overall. As the stay-at-home and shelter-in-place orders continue, we anticipate that credit card balances will rise. And, delinquencies will begin to hit if people do not return to work within the next three months.
Finally, unlike the last financial crisis when corporate credit unions held low-quality mortgage-backed securities, the system’s investment portfolio is largely high-quality government obligations and deposits in insured financial institutions. These higher quality assets should help the credit union system to better withstand the rough times ahead.
Summary of NCUA’s Priorities
As the COVID-19 pandemic has transpired, the NCUA has pursued 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.
We have now operated on a mandatory telework basis for six weeks, and we will continue to do so until further notice with travel canceled through at least the end of May. During this time, we have coordinated extensively with other government agencies and followed the recommendations of public health experts. We are conducting offsite exams, when appropriate, and supporting the needs of credit unions asking for assistance.
Our second priority is assessing the impact of COVID-19 on credit union members and operations. The NCUA has a dedicated webpage at ncua.gov/coronavirus that provides guidance on dealing with pandemics, answers your frequently asked questions, and offers information on working with members.
We have also conducted an initial assessment of the operational needs and performance of the credit unions the NCUA insures and regulates. Notably, this analysis generally found that federally insured credit unions are open, lending, and serving their members’ needs.
Our third priority is to assess how COVID-19 will affect the financial condition of credit unions going forward so that we can allocate staff resources and protect the Share Insurance Fund, which safeguards the deposits of 120 million Americans.
Central Liquidity Facility
Through my experiences in 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 need to have access to liquidity when other parts of our economy freeze up, in mid-March I called on the NCUA to seek legislation to enhance the capacity and powers of the Central Liquidity Facility, or CLF.
Congress acted quickly to adopt those temporary enhancements as part of the Coronavirus Aid, Relief and Economic Security Act the end of March. The NCUA staff then expeditiously drafted the interim final rule to implement these important reforms, and with my support, the Board approved that rule last week. These changes provide the system with a sustainable source of liquidity during the COVID-19 pandemic and the ensuing economic uncertainty.
The CARES Act temporarily makes it easier for credit unions to join the Central Liquidity Facility, including corporate credit unions to act as agents for consumer credit unions as they once did before the 2008 financial crisis. The law also eased some restrictions around getting a liquidity loan and temporarily increased the capacity of the Central Liquidity Facility from 12 times the CLF’s capital to 16 times its capital through the end of 2020.
We have made additional changes to the CLF regulation to enhance the CARES Act provisions. Some of the specific measures include allowing your credit union to gain access to liquidity advances immediately upon joining the CLF and terminate your membership within six months or by December 31, 2020, whichever comes sooner; and easing the collateral requirements on some assets to make CLF borrowing more aligned with the requirements of the Federal Reserve’s Discount Window.
In our ongoing discussions with the corporate credit unions, they have expressed interest and support for becoming CLF agents and have the potential to cover a large percentage of smaller credit unions that do not currently belong to the CLF.
Ultimately, we have a vital opportunity to significantly bolster the entire credit union system’s access to external liquidity for the remainder of the year, but we need to move quickly to capitalize on our new expanded flexibilities and position ourselves ahead of emerging needs.
For these reasons, I strongly encourage all consumer and corporate credit unions that do not already belong to the Central Liquidity Facility to join as soon as possible, either as regular members or through an agent. 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 Central Liquidity Facility 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 the CLF may help another credit union with significant liquidity needs to survive. To learn more about the CLF and how to join, go to ncua.gov/CLF.
Other NCUA Responses
As the COVID-19 pandemic has unfolded, 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 all, the agency has issued 11 letters to credit unions and risk alerts in just over a month. I would like to summarize a few of them now.
The first of these letters provided assurance that the NCUA’s examiners will not criticize your credit union’s efforts to provide prudent relief for members when such efforts are conducted in a reasonable manner with proper controls and management oversight.
A “people helping people” philosophy is at the core of the credit union movement. Credit unions especially need to achieve that aspiration now when working with borrowers affected by COVID-19. A credit union’s efforts to work with members in communities under stress may contribute to the strength and recovery of these communities.
Two other letters provided you with guidance for identifying essential critical infrastructure workers and outlined the NCUA’s offsite supervisory and examination approach for the duration of the COVID-19 pandemic.
We have also made it easier for federal credit unions to hold annual meetings virtually and provided relief in other ways like temporarily allowing credit unions to defer appraisals and written estimates of market value for up to 120 days after the closing of a loan.
Additionally, technology affords opportunities for working remotely under normal circumstances, as well as in times of emergency. Employees working remotely have a responsibility to address cybersecurity risks for their home networks, personal computing devices, and other internet-connected devices. That’s why the NCUA issued a risk alert highlighting cybersecurity best practices for credit unions that leverage employees’ personal networks and devices.
The last letter that I want to cover concerns the Small Business Administration’s Paycheck Protection Program. The program provides economic relief to small businesses adversely impacted by the pandemic. As part of the initial $349 billion in funding, many federally insured credit unions made loans to support the needs of Main Street.
The Senate recently approved an increase of $310 billion for more lending, including a $30 billion set aside for “community financial institutions, small insured depository institutions and credit unions with assets less than $10 billion.” I am hopeful that the House of Representatives will pass this bill later this week, so that your credit union can do more to assist in the recovery.
Through the Paycheck Protection Program, credit unions are working to save and create jobs. That is why I recently voted for the NCUA Board’s interim final rule to ease regulatory burdens and capital requirements for credit unions making these loans.
Legislative Priorities
Additionally, I have five priorities for congressional action. These changes will better equip the NCUA to contain the pandemic’s economic impact.
First, the temporary changes made to the Central Liquidity Facility are very helpful, but they may be too short in duration. As such, I hope that Congress will make the CLF provisions in the CARES Act permanent or extend their sunset by at least one year to December 31, 2021.
Second, in any future legislative product, it would also be helpful to temporarily allow all member business loans made on or before the start of the covid-19 public health emergency through December 31, 2020, to be exempt from the member business-lending cap. This change would promote access to credit for Main Street small businesses to keep the economy going.
Third, we have seen a strong demand for urgent needs and the covid-19 emergency grants offered under the NCUA’s Community Development Revolving Loan Fund. Accordingly, I recommend that we seek an additional $10 million in appropriations for these emergency grants. The funding would help low-income credit unions to adjust to their operations, preserve capital, and effectively respond to the many stay-at-home and social distancing orders presently in place to fight against the spread of COVID-19.
Fourth, because underserved communities are especially hard hit in this crisis, we should ask Congress to allow all federal charters to add underserved areas to their fields of membership. Currently, only multiple common-bond credit unions may add underserved communities to their fields of membership. This common-sense change would provide more Americans with access to safe financial products and services and affordable credit.
Finally, in responding to the pandemic, credit unions have even less time to conduct due diligence and to respond to problems with their vendors. Consistent with the long-standing recommendations of the Government Accountability Office and the Financial Stability Oversight Council, now is the time to reauthorize the NCUA to supervise credit union third-party vendors. Doing so will close a regulatory blind spot and better protect the credit union system and its members.
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.
In return, we need you to stay focused on serving your members. In the long term, they will remember who supported them during their times of need. In the months ahead, because interest rate drops and compressed interest margins, you also need to watch expenses.
In return, we need you to stay focused on serving your members. In the long term, they will remember who supported them during their times of need. In the months ahead, because interest rate drops and compressed interest margins, you also need to watch expenses.
Thank you again for inviting me. I hope to join you next year in person.