Credit Union Connection

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What the NEV?! And other ways Washington is screwing up credit unions

By Sarah Snell Cooke

Living in the DC-metro area, politics are a strong part of the culture. I even majored in poli sci – and accidentally jumped in the Senators Only elevator with Mitchell McConnell when I first started covering Washington for credit unions.

As a reporter – contrary to the current prevailing environment, I always tried to cover all sides and leave my opinions out of things. With the implosion of CNN and rise of digital where anyone – including me – can start a website, my hope is that we at least attempt to follow the underpinnings of the 4th branch of government.

But that’s not my job now.

Read Illogical: The Reality of Some Consumer Protection Efforts

Net Economic Value

NEV, or Net Economic Value, was more of an annoyance in the past. A regulatory requirement with the sole purpose of appeasing the NCUA, which also insures nearly all credit unions. NEV essentially tells a credit union’s market value if it had to be liquidated in that moment. It tracks interest rate risk should a credit union become overly underwater in longer term, low-interest loans in a rising rate environment.

Obviously, that could be of interest to the regulator if a single institution was ever in that situation, but because that slightest chance exists that this scenario could play out for a relative handful, all credit unions have to monitor NEV. You know, because there’s also the even more slightest of chances all credit unions would have to be liquidated at the same time.

Given the skyrocketing inflation and the Fed’s, um, actions to ‘fix’ it, interest rate risk is a huge concern for all financial institutions, and especially credit unions, which are limited in their income streams.

The effect has been that damn-near overnight, around 40% of credit unions that were previously considered moderate risk now find themselves in the Extreme Risk category and another 40% have reached the High category. At these levels credit unions must prepare a plan for returning to the Moderate level. It’s like the ultimate move in self-preservation, while simultaneously killing the credit unions.

Credit unions aren’t the only ones who are high.

CUNA wrote to the NCUA board recently, stating:

Credit unions across the country are experiencing declines in NEV Test ratings, often dropping from low or moderate to extreme risk, despite unchanged balance sheets. What is most concerning regarding this trend is that: (1) an extreme risk categorization results in automatic issuance of a Document of Resolution (DOR), and (2) the radical change in ratings—particularly given the lack of change of the balance sheet of many affected credit unions—raises questions on the accuracy of the NEV Test as an examination tool.

The letter continued:

According to the agency, the extreme risk level category represents an IRR level that is categorically unsafe and unsound. Further, the agency considers an extreme IRR level as unacceptable and requires credit unions receiving such a rating to take de-risking actions. This can also include compelling a credit union to sell certain assets (potentially at a loss), which the credit union may have acquired with the intent to hold long-term.

Of course, any businesses should monitor risk, especially credit unions that are democratically controlled and funded by members’ hard-earned money, but this regulatory theoretical busy work is absurd and will be one more unnecessary contributing factor to credit union leaders, especially those at our boutique credit unions, throwing their hands up and embracing merger talks.

Before you consider that, think about writing the NCUA yourself. You don’t have to be a lawyer or terribly eloquent to tell the NCUA how this is affecting your credit union when consumers need you most. If you want to discuss writing the NCUA on this or any other issue, reach out to me. We should talk.

Bureau of Consumer Financial Protection

Sounds wholesome enough. Americans can generally agree people deserve financial protection, but the CFPB appears to be attempting to wrap consumers in full-body condoms. (The Naked Gun really leans into absurdity, but I’m writing about Washington, so ….)

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The CFPB has requested public comment on “how consumers can assert the right to obtain timely responses to requests for information about their accounts from banks and credit unions with more than $10 billion in assets, as well as from their affiliates.”

Here’s the answer.

It’s a little-known secret in a capitalist democratic society, but I’ll give it to you here: Ask, and if you don’t get a satisfactory answer in a timely manner, change institutions. A somewhat regulated free market has a way of working these things out.

While consumer protection is essential, plenty of regulations already exist to cover most scenarios. Some companies violate them and pay fines and/or lose members or customers to eager-to-please competitors. The comment period has closed, but you may want to get a look at what info the CFPB requested here.

What’s most interesting to me about the request, however, is this line from the CFPB notice, “Relationship banking is an aspirational model of banking that meets its customers’ needs through strong customer service, responsiveness, and care. Relationship banking can play a critical role in helping to foster fair, transparent, and competitive marketplaces.”

Is the CFPB now looking to regulate banks and credit unions’ customer/member service levels?!  

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CFPB, Part Deux

You also may have heard the CFPB is scrutinizing what it calls, “junk fees.”

CUNA and NAFCU signed on to a joint letter with the American Bankers Association and the Consumer Bankers Association, comments ad nauseum, seriously it’s 18 pages, on the different aspects. Essentially, the proposed changes would have a chilling effect on credit, which is the opposite of the CFPB’s stated intention for a more inclusive financial services marketplace. How do regulators not understand that just because your heart is in the right place, it doesn’t justify the impact of your actions in real life? There’s something in the water in Washington.

I get there’s strength in numbers, but I’m not sure this is an area to partner with the bankers’ groups on. Perhaps, if we gathered information from our members – or heck – got our members to rally around us like a grassroots movement, we could work with them to have our backs rather than the banks, which often have high interest rates and numerous fees on their credit cards.

NAFCU also penned a separate letter touting that credit unions’ credit card late fees were well below the ‘safe harbor’ levels, plus credit unions work in other ways to help members avoid fees, such as penalty-free grace periods, no-cost fixed payment arrangements, a number of fee waivers per year or other options to similar effect. You don’t see the big bank issuers offering consumers this kind of empathy and value.

Interchange: Do You Even Math?

According to Deloitte, retail profitability is expected to grow in the U.S. Nearly one-third (32%) are expecting increased profitability and 38% expect it to be stable. Meanwhile, our credit unions’ profitability continues to decline, yet Sen. Dick Durbin has this brilliant idea to shove even more of the fraud responsibility and cost on to credit unions by expanding the interchange cap from debit cards to also include credit cards. But hey, it’s in the name of protecting consumers, right?

Wrong.

As credit unions continue to run on razor thin margins, as not-for profits should, here’s one more thing in which credit unions will be propping up the retailers for allowing them the privilege of taking our members’ money! And now it’s bipartisan as Sen. Marshall of Kansas signed on as a co-sponsor. (BTW, CULAC contributed $10K to Marshall’s campaign in 2020 and none to Dick, NAFCUPAC did not contribute to either.)

PACs and individuals in retail combined contributed nearly $112K to Dick in the last five years. Just sayin’.

Not to mention the intent of interchange is to cover fraud costs, which primarily occur in retail. Only 10% of data breaches have occurred in the financial services sector. How about we pay just 10% of the interchange and let the users of the payments systems pay the rest?