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NCUA Chairman Rodney E. Hood’s Remarks at the American Institute of Certified Public Accountants Credit Union Conference - “The Future for Credit Unions: The Case for Optimism”

October 2020
NCUA Chairman Rodney E. Hood’s Remarks at the American Institute of Certified Public Accountants Credit Union Conference - “The Future for Credit Unions: The Case for Optimism”
Chairman Rodney E. Hood

NCUA Chairman Rodney E. Hood at the NCUA's Headquarters in Alexandria, Virginia.

As Prepared for Delivery on October 19, 2020

Thank you very much for the kind introduction, and I greatly appreciate the invitation to take part in today’s proceedings.

I regret we weren’t able to gather in person this year, but this is still a great opportunity for everyone to come together, at least virtually, and focus on some important issues for the credit union industry. Many thanks to our hosts at AICPA for making this forum possible.

As I was thinking of what today’s discussion topic should be, I thought not only of the future of credit unions coming out of the pandemic, but also the resiliency of the credit union system and the case for optimism moving forward. So let’s call today’s conversation just that -- “The Future of Credit Unions: The Case for Optimism.” The reality is that I’m extremely optimistic about the future of credit unions, and the future of the financial services industry in general, owing to a number of trends.

When I say I’m optimistic, that’s not to ignore the serious challenges that have arisen in the last year, and that I know your institutions are still working hard to confront.

The COVID-19 pandemic is still very much an issue, and likely will remain an issue for the immediate future. And the economic contraction that accompanied the virus—which has put a serious strain on so many American workers, small business owners, and households—is a serious challenge. As if those weren’t enough, we’ve also seen the widespread protests, which in too many instances, have devolved into civil unrest, placing additional strain on the social fabric.

I can certainly see how someone could look at those challenges and feel anxious or pessimistic. They’re serious challenges, and I’m not going to downplay them or wave them away.

But let’s think back to the beginning of the pandemic, just around seven months ago. We saw a lot of dark predictions about crushingly high mortality rates; about overwhelmed health care systems stretched to the breaking point; and about devastating social and economic damage that would take years or generations to recover from.

We need to recognize that those worst-case scenarios have not come to pass. Again, I’m not trying to paint too rosy a picture, and we still have a long way to go, but these are the facts.

For the most part, Americans have adapted to the demands of the post-pandemic world; the health care system has admirably responded to the immediate need and to develop treatments, which should only improve with time; and the economy, while still struggling, is starting to show promising signs of recovery.

Yes, we’ve faced serious setbacks this year. But we’ve also made impressive progress in responding to, and recovering from, those setbacks, and we should give ourselves credit for that progress.

I believe the best way to look at this particular set of challenges is as a sort of “stress test” for our systems. These last several months have been a real-world test of the strengths and weaknesses in our system, and will determine what lessons can be derived from that test to make those systems stronger and more resilient.

With that in mind, I’d like to focus on some of the lessons we can extract from this stress test, because I believe they illustrate how we can turn this time of crisis into a time of opportunity that will work for the benefit of everyone. Consider these the “lessons in resiliency” that we can use to drive the coming recovery.

Regulatory Reform and Flexibility

I’ve always said that the regulatory system should be effective without being excessive, and so, I’ve made regulatory reform a key theme of my chairmanship at the NCUA. One thing we can do at the regulatory level is focus on ways to reduce outdated and unnecessary regulatory burdens, while always focusing on the safety and soundness of the federally insured credit unions that we oversee.

That is why the NCUA is conducting a comprehensive review of all its guidance letters and legal opinions to determine if they are still relevant in today’s regulatory climate. We can make a significant dent in our regulatory burden by removing outdated or duplicative guidance.

Reducing regulatory burden is especially necessary when it comes to helping credit unions navigate the current environment of economic difficulty. One of the first things our agency did when the pandemic struck, and as the economic stress mounted, was to look for ways to continue providing regulatory relief so credit unions could focus on providing credit and affordable financial services to their members.

The proposed CECL change, for example, has raised serious questions in the credit union industry, as well as among other financial services providers. What I’ve heard repeatedly from industry leaders is that it would entail greater complexity, higher costs and a significantly heavier compliance burden, while bringing little additional benefit to their institutions. I recently spoke with a credit union that is grappling with the arduous impact of CECL implementation. They already purchased a CECL software module. In addition, they had to hire a salaried data analyst to implement the software and ensure data integrity.

Another institution talked to me about how smaller institutions are reaching out to them for advice on CECL implementation as they simply do not have the budget or resources to dedicate to CECL implementation.

In response, I’ve urged an exemption from CECL requirements for credit unions, and the NCUA Board recently approved regulatory amendments to mitigate the adverse consequences of the capital adjustments resulting from CECL. The rule will also exercise the Board’s statutory authority to exempt small credit unions with less than $10 million in assets from GAAP. We’re looking for a middle ground here that will protect credit unions while ensuring that they adhere to all reasonable standards, and I think we’ll get there.

We’ve also urging credit unions to join the Central Liquidity Facility (CLF), a mixed-ownership government corporation that exists within the NCUA and serves as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls. As of September 30, 2020, the CLF’s borrowing capacity currently stood at approximately $30 billion, with 11 Agent members covering 3,765 natural person credit union members and 339 direct Regular members.

Liquidity, like capital, is a pillar of strength upon which our system rests. This is true during any economic or financial disruption, and we know how important it is for credit unions to continuously have unfettered access to contingency funding if and when the need arises. Because the CLF is a proven solution for individual credit unions and for helping to stabilize liquidity throughout the credit union system, I’ve asked Senate Banking Committee to make these changes permanent.

These are just a few of the high points – Owen Cole from NCUA will be speaking this morning as well, and he’ll provide some additional detail on the regulatory front.

The Promise of Technology

Going beyond regulatory reforms, a second critical resiliency lesson is the importance of technology. Certainly, at the NCUA, we’ve seen how technology enabled us to continue executing our regulatory mission effectively during the public health emergency. We were able to shift seamlessly and swiftly to a work-from-home stance for the vast majority of our employees, and our examiners have been able to continue their oversight work without interruption.

Of course, we all understood the importance of technological connectivity prior to the pandemic, but I think it took the crisis response to show us what a wise investment that has been.

I know credit unions have also maximized technology to continue your operations and member services during this difficult time. And I know that your institutions, along with the rest of the financial services industry, are looking very carefully at the possibilities of financial technology solutions to build upon that success. I absolutely encourage that trend.

We’re looking at this carefully on the regulatory side as well. We know that fintech is likely to pose some fresh regulatory and compliance challenges, and we want to be prepared so that we can respond wisely to ensure that these tools are widely available, while providing for the appropriate consumer protections and for the safety and soundness of the industry.

I also encourage you to consider fintech not only as a tool to improve efficiency or customer service, especially as increasing numbers of banking customers enter a digital world, but also as a tool to increase financial inclusion. Fintech tools are a promising avenue to enable us to connect with minority communities, rural communities, and other underserved populations. There are tremendous opportunities here, so let’s continue the great work our industry is doing on that front.

A Commitment to Financial Inclusion

And the final lesson in resiliency we should take from this year is the need for greater financial inclusion. The events of recent months have opened a lot of Americans’ eyes to the inequities in our society.

Obviously, the protests against police abuse are one illustration of that. But we should also consider the fact that the COVID-19 pandemic has had a more serious impact on communities of color, and that minority-owned small businesses have suffered more severely in the economic contraction.

We now understand with greater clarity the need for urgent action and solutions, and finding the right solutions that work for all Americans. In fact, the Business Roundtable, just last week, rolled out its plan to combat racial inequity. More than 200 of America’s largest corporations are joining forces to increase diversity in their senior leadership roles and to promote shared economic prosperity in minority communities.

I’ve been talking a great deal about the need to create conditions where people can gain access to credit and capital; break the cycle of debt and dependency; and achieve financial security and resilience for themselves and their families.

I believe strongly that financial inclusion is the civil rights issue of our time, and I encourage leaders in the financial services industry to take this up as your cause as well.

It’s also something we’re working to advance on the regulatory front. So for example, we’ve taken additional steps to protect minority depository institutions, or MDIs. In light of recent events, we understand with even greater clarity the important role that MDI credit unions play in advancing financial inclusion and the economic well-being of minorities and underserved communities.

As Chairman of the NCUA, I have directed the agency to support the goal of financial inclusion within NCUA and the credit union system. NCUA can report concrete results in this effort. In 2019, NCUA expanded access to safe, small dollar loans following approval of the PALS II rule. NCUA expanded employment opportunities at credit unions for individuals convicted of minor offenses following approval of the Second Chance interpretive rule. In 2020, NCUA provided support to Minority Depository Institutions with a two-day MDI Forum as well as loans and grants through NCUA’s MDI Preservation Program.

That is why I am pleased today to announce a new financial inclusion initiative, ACCESS: Advancing Communities through Credit, Education, Stability & Support. This initiative will bring together leaders across NCUA to develop policies and programs in support of financial inclusion within the agency and the credit union system. ACCESS will build on the earlier successes I mentioned and expand to address the financial services, financial literacy and employment needs of underserved and diverse communities.

Fundamentally, financial inclusion means expanding access to safe and affordable financial services for unbanked and underserved people and communities as well as broadening employment and business opportunities. That’s a vitally important goal for all of us in today’s environment, and something I look forward to working together with you all to achieve.

Conclusion: Turning Difficulty into Opportunity

All of these matters I’ve discussed here – regulatory reform, technology, and financial inclusion—are things I’ve worked on in one way or another throughout my career in financial services. A key lesson of 2020 is that these are the very areas where we need to enhance our focus to ensure that the industry is as strong as it can be for the future, and to ensure that credit unions play a driving role in the recovery that I believe is on the way.

Credit unions can and should play that driving role, because these financial institutions are a great example of an America that works at the community level. They’re centered around local initiative and have a strong emphasis on service to their members and to the surrounding community. Those qualities are captured in the industries historic mantra of “people helping people”—which is exactly the mindset we need to rebuild in the coming recovery.

Finally, I’d like to remind everyone that we’ve been through difficult times before. If you think back to the financial crisis of 2008, that was another time, within recent memory, when we faced tough challenges. I remember it well, as it coincided with my previous service on the NCUA board, before I returned to the agency in 2019, and I’m sure most of you on this call remember it, too.

That was also a time of uncertainty, and there were a lot of dark premonitions about what the future might hold. But we got through that crisis, emerging stronger thanks to our resiliency, and we’ll do the same with this crisis. In fact, I have a strong sense that the most acute phase of the crisis is past us, and even if it’s not easy to see the signs just yet, the recovery is under way.

Albert Einstein said that “In the middle of every difficulty lies opportunity.” Here today, as we near the end of an historically difficult year and look head toward the next, I encourage everyone to turn your focus toward locating that opportunity, and making the most of it.

Thank you very much.

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