The Return Of The Prodigal Fund

The headline seemed straight-forward: CU Failures Cost Share insurance Fund $785 Million In 2018.

Except that’s not what happened. Here’s what it should have said: NCUA Failures Cost Credit Union Members $1.2 Billion.

That’s because the NCUA is blaming the victim for its self-serving cash outlays that cost the movement long-serving charters while stranding thousands of credit union borrowers.

The Largest Loss Ever For Natural Person Credit Unions

To understand the latest National Credit Union Share Insurance Fund debacle, it’s useful to look at the fund’s reported results from 2008 through 2018. Just last year, the NCUA spent almost $1.2 billion in cash outlays, an amount equal to 73% of the entire total spent during the prior 10 years, which includes the Great Recession.

This is the NCUSIF’s largest insurance loss expense ever. And it comes during the longest era of positive economic expansion in the country’s history.

Blaming The Victims

The NCUA has published no detailed explanations but has made no secret that it wants to pin much of the blame on two taxi medallion credit unions. The regulator conservedMelrose Credit Union and LOMTO Federal Credit Unionin early 2017 and liquidated them in the third quarter of 2018.

The NCUA recorded a $743 million reduction in the loss reserve account but otherwise gave no details of this largest-ever one-time expense beyond blaming credit unions the agency itself failed to help.

The trouble with blaming credit unions is that:

1. The NCUA’s conservators managing the two credit unions reported that as of June 30, 2018, the combined capital deficits for the two were only $155 million, not $743 million.
2. The NCUA’s own Mission and Values Statement says it’s the regulator’s responsibility to oversee problem institutions to provide … a sound credit union system which promotes confidence in the national system of cooperative credit (by) protecting the consumers who own them through effective supervision, regulation, and insurance.

The NCUA’s Dereliction Of Duty

Board member Rick Metsger documents his own agency’s failure. A press release from a Dec. 8, 2017, speech to the Oregon Credit Union League includes Metsger’s recognition that the agency issued a letter to credit unions in 2010 warning of concentration riskand issued a more specific letter on taxi medallion lending in 2014.

So, the NCUA recognizes it knew about the problem for three years before conserving and liquidating Melrose and LOMTO.

To resolve this longstanding potential risk first identified in 2010, the NCUA funded the largest cash liquidation ever. If this is effective supervision, regulation, and insurance, then why do credit unions have a regulator or insurer at all?

Deserting The Member-Borrowers

A $1.2 billion cash outlay and the only solution was to hold a fire sale and send taxi loans to a third-party servicer? Call Report data suggests there could be as many as 8,000 member loans secured by taxi medallions in cities throughout the United States.

These liquidations prevent the members who borrowed from these two credit unions from restructuring to help them navigate the disruption in the industry.

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Cash-only fire sales also reduce the market value for all other medallion owners as well. One newspaper story reported this impact on values in November 2017: Hedge Fund Buys Taxi Mogul’s Foreclosed Medallions At 1990s Prices.

Instead of helping vulnerable members with options for working through the cycle of value changes, the NCUA just walked away.

That’s what banks do. Credit unions are supposed to walk toward their members in times of uncertainty. Especially so when that uncertaintyis imposed by external forces. The NCUA sold out members at the very time they needed their credit unions the most. This is the exact opposite of the agency’s mission and values statement.

And the NCUA stuck every other credit union member in the process. With 100 million members, the cost works out to more than $10 per member for the $1.2 billion cash outlay.

The NCUA’s Failures Cost Every Credit Union

The ineffectiveness of NCUA isn’t merely money. However, this measure most easily documents serious leadership and management shortcomings. The NCUA has long had the reputation of being at the shallow end of the regulatory pool in Washington, DC.

But even there, the NCUA appears out of its depth. The board and management have shown no grasp of cooperative design or cooperative options. The NCUA’s only solution for every situation is to spend more.

A common human tendency is to mourn the past and plan the future. But that’s not how credit unions succeed. They work best by focusing on the present. And there is a crisis of regulatory leadership that took root in 2008 and continues to this day in the NCUA’s stewardship of its responsibilities.

The agency has shown repeatedly that it cannot learn from itself. Transparency and accountability are just press release words. Here’s what every CEO and board member who care about the cooperative financial services movement need to grasp: The time is now to raise a collective voice and seek to transform a regulator that consistently fails those in its charge while feathering its own bed.

Chip Filson co-founded Callahan & Associates in 1985 after serving the NCUA as president of the Central Liquidity Fund and director of the Office of Programs, which included the NCUSIF and examination process. He is a Rhodes Scholar with degrees from Harvard, Oxford, and Northwestern universities.