NCUA Chairman Todd M. Harper Remarks at the 2021 NAFCU Congressional Caucus, Washington, D.C.

As Prepared for Delivery on September 13, 2021

Thank you, Ann, for that generous introduction, and good morning, everyone. I am pleased to be here and to see all of you, live and in person. 

Joining you in person today demonstrates that we are making progress in the war against the COVID-19 pandemic. And, so far, the credit union system, overall, has weathered the pandemic fairly well and remained well-capitalized. But, I must caution everyone that we are not out of the woods just yet. 

Today, I will discuss the state of the economy and the near-term outlook, with a focus on those most affected by the pandemic. I will also outline the need for credit unions to continue working with their members, and the measures the NCUA Board has taken to support these efforts. I will then focus on the priorities of the Federal Financial Institutions Examination Council and the issue of appraisal bias before discussing the agency’s legislative priorities.

U.S. Economic Situation and Near-Term Outlook

Let me start by noting that 2020 was one of the most challenging years for the U.S. economy in its history. We used to say that hindsight is 20/20. After the year we just had, I don’t want to use that phrase ever again, because in hindsight 2020 was a very bad year.

When the COVID-19 pandemic was declared, economic activity all but ground to a halt. And, the U.S. economy plunged into a deep recession. In the span of two months, roughly 22 million people were laid off, and the unemployment rate spiked to an 80-year high of 14.8 percent. Once initial restrictions were lifted, a swift fiscal response and interventions by the Federal Reserve helped jumpstart the recovery. And later on, in the pandemic, the availability of a COVID-19 vaccine boosted the economy.

A little over a year after the pandemic began, the economy surpassed its pre-pandemic peak in size. More than 17 million jobs have been added back to non-farm payrolls, and the unemployment rate has fallen to 5.2 percent. The near-term outlook for the economy is favorable, and a consensus of forecasters believes the pace of expansion this year will be the strongest in decades. By the end of 2021, the unemployment rate is forecasted to be 4.9 percent. 

While the economic outlook is positive, the pandemic-induced recession hit the poorest households the hardest, and for these households, many of whom are credit union members, the recovery could take longer. Improving labor market conditions have helped many households to make ends meet, but forbearance programs, moratoriums on evictions and foreclosures, and supplemental unemployment insurance payments have also provided critical support. The expiration of these programs will lead to financial stress for many and that stress could lead to rising delinquencies and charge-offs at federally insured credit unions.

Low-income households and communities of color are particularly vulnerable. Research by the Federal Reserve Bank of New York shows that mortgage borrowers lingering in forbearance tend to have lower credit scores and live in lower-income communities.¹ The share of subprime borrowers in forbearance jumped from 26 percent in June 2020 to 39 percent in June 2021. And, mortgages held by borrowers living in the lowest income neighborhoods accounted for 21 percent of mortgages in forbearance at the end of June, but only 16 percent of all outstanding mortgages.

As pandemic-relief programs end, low-income and subprime borrowers will be particularly vulnerable to serious delinquency or foreclosure. Data from the Census Bureau’s Household Pulse Survey shows that 36 percent of adults surveyed in late June and early July of this year reported that they live in households where eviction or foreclosure is either “very” or “somewhat likely” in the next two months.²

Working with Borrowers

With lower-income households likely to come under considerable financial stress in the months ahead, I urge all credit unions to continue to work with their members who have financial difficulties. To support your efforts, NCUA has instructed its examiners to refrain from criticizing a credit union’s efforts to provide prudent relief for members, when conducted in a reasonable manner with proper controls and management oversight. 

Additionally, targeted relief measures, like our recently finalized capitalization of interest rule, give credit unions additional tools to work with their members. At the time the NCUA Board approved this regulatory change, I noted that federally insured credit unions should provide capitalization of interest as only one of several components in any loan modification — such as extending the term of the loan or lowering the interest rate — which are designed to help borrowers resume affordable and sustainable payments. In other words, capitalization of interest is one potential ingredient in the recipe to modify a loan.

For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with consumer financial protection laws and safe-and-sound lending practices, is often a win-win-win for the borrower and the credit union as well as for communities and our economy. As such, the capitalization of interest rule should serve members and our economy well in the long term.

Priorities for the FFIEC

Many of you have heard me say that I believe that successful financial institutions’ regulators need to be:

• fair and forward-looking;
• innovative, inclusive, and independent;
• risk-focused and ready to act expeditiously when problems are identified; and
• engaged appropriately with all stakeholders to develop effective regulation and efficient supervision.

This regulatory philosophy aligns well with the mission and work of the Federal Financial Institutions Examination Council, which the NCUA recently began chairing for a two-year term. The Council brings together the NCUA with the leaders of the Federal Reserve Board, the FDIC, the OCC, the CFPB and state credit union and banking regulators to promote uniformity in the regulation, reporting, and supervision of financial institutions.

During my tenure as FFIEC Chairman, the Council is continuing its work related to ensuring a smooth transition away from LIBOR, strengthening the financial system’s cybersecurity infrastructure, and supporting examiner education. We are also renewing our focus on the appraisal system’s governance and infrastructure, as well as appraisal equity and quality.

Appraisal Bias

In my public remarks, I often note that purchasing a home is one of three ways to build wealth in our country. However, people of color have long been denied equitable access to our housing system, including through the appraisal system. The result of this systemic and institutionalized discrimination is the creation of one of the widest wealth gaps between races in history. 

Examining and addressing the issue of appraisal bias is one way to close the wealth gap. More than a decade ago in the Dodd-Frank Act, Congress enacted reforms aimed at addressing problems in the appraisal industry, and many consumer organizations and civil rights advocates supported those reforms. Among other things, Congress strengthened the powers of the FFIEC’s Appraisal Subcommittee, which supervises state regulatory programs. Those reforms aimed at addressing appraisal independence and appraisal inflation.

Today, we continue to see stresses in the appraisal system, including bias based on race. Indeed, I have read multiple news stories and investigations about this problem, and I am deeply concerned. Existing statutes like the Fair Housing Act, the Equal Credit Opportunity Act, and Title 11 of the Financial Institutions Reform, Recovery, and Enforcement Act aim to address this problem. And, we should use these laws to regulate, supervise, and enforce against appraisal bias .

At the NCUA, we are studying the causes of disparities in appraisal and valuation services to inform our future policymaking. And, as FFIEC Chairman, I will continue this conversation and take action on appraisal bias with my fellow regulators, including working to finalize a joint-agency rule to establish quality control standards for appraisal valuation models.

Creating the Regulatory Foundation for Emerging Technology

Additionally, the financial services marketplace continues to evolve, and it is important that credit unions adapt to that change.

For example, we need to lay the foundation for credit unions to operate in the growing digital asset arena. In just a few short years, cryptocurrency, digital assets, blockchain, and decentralized finance have moved out of Silicon Valley and high finance and into the financial mainstream. While we should recognize and harness the potential opportunities these products and technologies offer, we must also recognize the potential risks they pose and develop appropriate guardrails.

The NCUA is not alone in looking at these issues. Regulators across the financial services sector are examining issues related to the benefits, risks, and regulatory treatment of decentralized finance products and cryptocurrencies. Any action that the NCUA Board ultimately takes in this area should consider those efforts, and where possible, our actions should be coordinated with other regulatory bodies to prevent regulatory arbitrage. 

At the suggestion of Board Member Hauptman, the NCUA Board in July issued a request for information on these matters. This request is an important step in laying the groundwork for federally insured credit unions to operate in this space. However, the NCUA recognizes that arena continues to evolve quickly. Therefore, any policy related to cryptocurrency, digital assets, and other related technologies cannot come solely from the NCUA Board. Any top-down approach could inadvertently miss the mark or stifle innovation and place credit unions at a competitive disadvantage. 

As such, I encourage all stakeholders to review this notice and share their views by September 27. We especially need to understand what limitations could affect your ability to adopt these technologies and what risks they could pose, so that we can adopt appropriate guardrails to protect the financial well-being of members and the safety and soundness of the system.

Vendor Authority and Other Legislative Priorities

I am also deeply concerned about the increased reliance of credit unions on CUSOs and other third parties.

While necessary, the increased dependence of credit unions on these vendors diminishes the ability of the NCUA to accurately assess all the risks present in the credit union system. To address this growing regulatory blind spot, the Government Accountability Office, the Financial Stability Oversight Council, and the NCUA Inspector General have all called on Congress to provide the agency with examination and enforcement authority over third-party vendors.

I very much agree that Congress needs to close this regulatory blind spot and have urged lawmakers to do so. Without this authority, thousands of credit unions, millions of credit union members, and billions of dollars in assets are potentially exposed to unnecessary risks.

Vendor authority is not the only area where congressional action can support the NCUA and the credit union system. For example, making permanent the temporary enhancements made to the Central Liquidity Facility as part of the CARES Act would ensure that the credit union system has ample emergency liquidity should the need arise. 

We know from experience that any time there are economic contractions, we can expect credit unions’ liquidity needs to rise. The NCUA must be ready to provide that emergency liquidity quickly before the lack of liquidity spreads and undermines the strength and stability of the credit union system. Permanence would provide regulatory certainty for federally insured credit unions and bolster the system’s ability to respond to future emergencies.

Additionally, demand for Community Development Revolving Loan Fund grants continues to exceed supply. With more funding, the agency could increase the number of credit unions receiving grants and increase the size of the grants it makes, deepening the program’s impact in communities served by low-income credit unions and minority depository institutions. As such, I have requested that Congress increase appropriations for the Community Development Revolving Loan Fund to $10 million.

Finally, I urge Congress to give the NCUA Board greater flexibility to manage the Share Insurance Fund, so we can build reserves during sunny days and avoid potential premiums during rainy days. During the financial crisis of 2008–2010, the failure of five large corporate credit unions threatened the stability of the credit union system and the viability of the Share Insurance Fund.

In response, Congress approved the creation of the Temporary Corporate Credit Union Stabilization Fund in May 2009, to accrue the losses from the failed corporate credit unions and assess insured credit unions for such losses over time. Without the creation of the Corporate Stabilization Fund, these losses would have been borne by the Share Insurance Fund, depleting its retained earnings and equity, and significantly impairing credit unions’ one percent contributed capital deposit. The waterfall of losses that could have occurred would have resulted in the loss of hundreds of credit unions.

This episode demonstrated that significant failures or other large shocks to the system could quickly deplete the Share Insurance Fund’s equity levels. Therefore, it is essential that the NCUA Board have the ability to build up the fund’s reserves during periods of economic prosperity and financial stability, so that it is more resilient during periods of economic and financial stress.

Conclusion

In closing, the COVID-19 pandemic and its economic fallout have 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 you provide financial services and products to your members. And it has also changed the way in which the NCUA conducts examinations and thinks about risk. But, if the credit union community works together to navigate through the pandemic-induced economic crisis smartly and safely, we will emerge stronger from it.

Thank you again for the kind invitation to be here today. Be Safe. Be Well. Be Kind.