Now is the time to get the following type of message out to your members, the media and your elected representatives. Please help.   

 

Now is the time for consumers to look at credit unions for financial services.  Unlike banks, credit unions do not have the pressures of meeting quarterly profits goals.  Credit unions can use their earnings to offset the cost of their services to their members.  Banks complain that credit unions have an unfair advantage because they are not taxed.  Credit unions are not taxed but that is because credit unions are organized on a non-profit cooperative basis.  Unlike banks, most credit union directors are not paid and credit union staff salaries are typically below those of bank staff. Credit unions do not have stock ownership, so credit union officers and directors do not have a financial incentive to maximize profits.  Bank management has to answer to shareholders.  Credit union management answers only to the credit union members.  That is the real reason why credit unions have more favorable pricing.

 

In these troubling times when the banking industry is receiving billions and billions of dollars to bail them out of bad debt, not a dime is going to bail out credit unions which remain as the most well capitalized financial institution sector, even without the bail out money.  Many credit unions provide a wide range of lending products, including mortgage loans and small business loans.  The deposits in credit unions are insured by a federal agency, the National Credit Union Administration, at the same level and upon the same terms as the FDIC insures bank deposits (currently at $250,000). 

 

We now see that having a robust non-profit cooperative financial institution sector alternative is a very valuable hedge to the market excesses that seem to periodically infect the for-profit bank sector.  There is a place for both profit and non-profit financial institutions and the consumer benefits by having a choice.

 

 

 

 

 

Seize the day.   Now is the time for credit unions to step into the void caused by the bank meltdowns and provide loans to consumers and small businesses.  We know that over regulation is coming in response to the economic crisis, the type of regulation called for the recent Treasury Report where there are super regulators of all sorts of financial institutions; from banks, to broker/dealers to credit unions.  Credit unions run the risk of being swept up in the currents and their identities lost.  If credit unions can be seen as the one type of financial institution that continued to perform without government bailout, the value of the non-profit cooperative financial sector will be a shield against being lost in a regulatory avalanche.   We have to make a case that credit unions are worthy to be preserved as a separate and distinct financial institution alternative.  The lack of quarterly earning pressures and stock earnings insulates credit unions from the greed factor.  If we don’t make the case now for the value of credit unions, we never will.

I just recently heard about the National Mortgage Licensing System (NMLS) and cannot believe that state regulators are finally taking a step in the right direction.  NMLS started in January 2008 with seven states and has since added seven more.  The idea is to streamline mortgage broker and lender licensing through one clearinghouse application process.  In an ideal world, a person/business wishing to make or broker mortgage loans would be able to file one application and get a license in all fifty states.  But, we have often laughed at this prospect because this would require state regulators to cede some power to a federal type authority.  Here, the regulators themselves, through their association, decided they did not want to give up any power to a federal authority and just create a uniform application process.  The states will still have complete regulatory authority, but this system will allow a licensee to get licensed in multiple states at one time. 

While thinking about this great step for mortgage lending, I am reminded of a similar licensing situation that can cause incredible headaches for a start up.  That is selling insurance.  So often a person/business, which wants to sell insurance to clients in several states, spends so much time getting the proper license from each state.  The funny thing is that in this situation most states grant reciprocity to insurance agents from other states.  But, to get to that point you have to weave your way through the maze that is state beauracracy.  Maybe its time for the insurance regulators to step up and work together to create a national licensing system.  If they don’t, the feds might just put them out of a job.

I am not saying that a federal authority would necessarily be better.  I think a locally based regulator, in the mortgage situation, may be more in touch with borrowers and be better equipt to protect them.  You can see how the feds handled mortgage lenders that they already regulate…or don’t regulate as the case may be. However I also think it seems silly that a person trying to broker loans in say Pennsylvania, New Jersey and Delaware must follow potentially different regulations to do virtually the same thing.  I think the same is true for insurance brokers.

NCUA General Counsel’s Office in a recent letter opinion to James Forney, Superintendent of the Iowa Credit Union Division of the Department of Commerce dated May 1, 2008 (08-0302), stated:

 

“Generally, there is not an inherent conflict of interest where a credit union uses a CUSO to meet its MBL direct experience requirement, provided the CUSO is independent as to each transaction….Your letter indicates the CUSO “does not participate in any of the funding of the MBL loans or have any interest in the collateral securitizing any of the loans.”  12 C.F.R. §723.5(a), (b).  Also, it “is not selling a loan, does not participate in funding the loan, and does not have a security interest in the loan collateral.”  Generally, the presence of these factors would enable credit unions to still use a CUSO to meet its direct experience requirement.  We noted, however, the CUSO appears to be compensated on a fee basis, collecting fees in connection with origination, servicing, participations, referral and document preparation.  Under this fee structure, the CUSO appears to be paid only or primarily when a loan is funded.  This situation creates an inherent conflict of interest as the CUSO has a direct interest in recommending a loan be funded and not denied.  We recommend you address any questions or concerns regarding the nature of this arrangement or specific transactions with the appropriate regional director. “

 

This letter has caused consternation among Business Lending CUSOs that charge the majority of their fees only when the loans close, i.e. origination fees and servicing fees.  First you have nothing to worry about if your credit union owns a “controlling financial interest in the CUSO as determined under Generally Accepted Accounting Principles.” 723.5(b)(3).  NCUA assumes the CUSO would not do its owners wrong.  A controlling financial interest could be 20% or even less under some circumstances. 

I spoke to the author of the letter and the letter may be more strict then intended.  Many CUSOs charge some non-transactional fees but the typical model charges a majority of its fees when the loans are funded and performing.  Does this mean that a credit union that does not have a controlling interest in a CUSO can be the victim of a designing CUSO that approves loans just to suck fees from credit unions?  Well maybe but that is pretty far fetched in the real world.  We are talking about CUSOs here…credit union owners serving credit unions. Are CUSOs being told to approve good loans for the owner credit unions but stick it to the non-owner credit unions?  How long does that fairy tale last in the real world?  Should it make a difference that the owner credit unions take a loan participation interest in the loan funded by a non-owner credit union?  Does that remove the taint of a possible conflict/conspiracy? 

An alternative is that the non-owner credit unions have to obtain a second opinion from a qualified credit union staff person or another CUSO whose fee is not dependent on approval of the loan.  The economics of the CUSO arrangement can quickly erode.  Another alternative is to have the CUSO charge an underwritng fee regardless if the loan is approved.  Can this model work?

What do you think? Is this a tempest in a teapot or is this a real concern that the CUSOs could have a conflict of interest in advising non-owner credit unions?    

 

The credit union industry is going through a radical structural shift.  Have you noticed? 

 

The examination of long past historical events permits one to have a sweeping perspective. The big changes can be seen as being influenced and propelled by a collection of small events. People who live during historical changes may or may not be able to connect the dots and understand the significance of the small events at the time.  They are so rooted in their past experiences that they are blind to the major shift that is taking place right in front of them.

 

For example, naval battles in World War I were dominated by battleships.  All the major naval battles involved these mighty fortresses squaring off against each other. After World War I Billy Mitchell, a colonel in the newly formed US Army Air Corps, had the temerity to say that a properly armed aircraft had the power to sink a battleship and the Navy should invest in air power and aircraft carriers. Mitchell was ridiculed for this paradigm breaking notion, even after he proved it in a live demonstration.  The introduction of the aircraft as the most important strategic weapon in naval battles was so foreign to the past experience of the admirals that they were in a state of denial.  As everyone knows, Mitchell was correct and the naval battles of World War II were dominated by aircrafts flown from aircraft carriers. Fortunately there were some admirals that also saw the new age of air power and the United States was able to prepare itself to defeat its enemies.

 

For the first fifty years, there was not much change in the credit union economic model.  They grew but the original model of taking in shares, paying dividends and living on the spread did not change.  Credit unions helped each other with operational questions but they remained independent of each other. 

 

Market and financial pressures no longer permit a credit union the luxury of operating independently. Credit unions that do not have a significant number of third party service relationships will not survive in the 21^st Century.  Extensive credit union collaboration through CUSOs is an essential lifeline to credit unions struggling to stay economically viable in today’s world and avoid the merger and conversion path.

 

Credit unions of all sizes are outsourcing selected operational functions to CUSOs or non-CUSO service providers to keep operating costs down and increase service and expertise. A billion dollar credit union just did an inventory of its third party relationships and found it had over 200.  Four billion dollar credit unions are sharing internal IT support services and planning to expand to other operational services so they can continue to combine back office operations. CUSOs have been formed to provide services across the operations spectrum. 

 

We are losing credit unions to mergers and conversions at the rate of about 300 per year.  No one knows for sure how many CUSOs there are but it is clear that the number is increasing and the rate of growth is increasing.  While small credit unions may not have any CUSO investment, the large credit unions often have several CUSO relationships.  The day is not far off when the number of CUSOs will exceed the number of credit unions. 

 

CUSO professionals hate to be called vendors.  Typically, the people who run CUSOs have worked in credit unions and the CUSO’s entire client and ownership base is credit unions.  CUSOs are operational extensions of the credit unions and just an alternative means by which credit unions are providing operational services to themselves.  With a nod to the cartoonist Walt Kelly, “We have met the vendor and it is us.”

 

When CUSO professionals sign up for a credit union trade association event, they are treated as vendors.  If the CUSO professionals want to have a booth that is fine but if they just want to participate in the educational and networking opportunities like any other credit union industry professional, they must pay the vendor attendance rates.  This is wrong. It is time for our industry to understand that a CUSO professional is a credit union industry professional and should be treated as such. 

 

Let’s recognize today that the CUSOs are not vendors but rather CUSOs are operational extensions of the credit unions they serve.  Let’s recognize today that a credit union industry professional can work either at a credit union or a CUSO.  Let’s recognize today that CUSOs are an essential part of the credit union industry and there has been a major shift in how the credit union industry is structured.  Let’s renounce our denial and embrace this new reality so we can build a stronger industry to serve our members. 

 

If you are like the World War I era admiral and can only see the way the industry was structured when you were young, step back and see things as they are, not as they were.   We better have our airplanes ready to go because the world has changed. 

As I stated before under Guy’s username (“A New Year”), Messick & Weber have entered the blogosphere.  You can expect frequent posts from the likes of me…oh, and the important voices of Katherine and Guy.  Of course, you can expect posts from Guy.  We will not always be so provocative and we will not usually call people names (see “We have met the enemy and it is us”). 

Provocation aside, I think the importance of this venue is evident.  This arena is a place where we can share information quickly and we can get feedback on ideas that affect the industry on both a macro and micro scale.  That said, the RSS feed is accessible in the left side-bar.  You can use this feed link in conjunction with a feed reader, like the one from Google, to get notices of updates to this page. This is a nice current awareness feature to keep you up-to-date without taking much of your time.

Too, let’s not forget the comments section for each posting.  You should see a link below each post where you can enter the comments section.  This area of the site provides a forum for you the user to interact with us and the content.  We feel this space is a great way to give and get feedback on a particular topic.  We even may highlight a good comment here and there to continue the conversation.

Thanks for paying attention and we hope this venue is a long lasting and thought provoking experience.

 A few years back I wrote an article called “We have met the enemy and it is us.” The article is on the CUSOLaw.com website. www.cusolaw.com The premise is that credit unions have the knowledge and tools to adapt to the competition and challenges in the marketplace. Credit unions can use the power of collaboration and collectively find solutions to keep operational costs in check and deliver high value financial services. There are credit unions that are proving this point every day but they are in the minority. If credit unions disappear from the fact of the earth, it is our fault and our shame that we did not use the tools available to us to preserve credit unions in the 21st Century. People who run credit unions tend to be risk adverse and slow to change their ways. Working collaboratively requires a change in the way we think about and execute our roles at the credit union. It is change and change can be hard but we have no choice. We are losing a credit union a day. People do not choose to collaborate because they are too busy trying to run the credit union’s day-to-day business, afraid of the unknown or too lazy or stubborn to want to learn a new way of doing things.

I intentionally use provocative words to get a reaction from someone. After my article was published, I received complements for being bold enough to state that the emperor has no clothes. All the people that commented agreed with me. Did my comments evoke any change? I doubt it. The people that are reticent to change are not easily moved and certainly not by a lawyer. Some reaction is better than silence. For those who are do not collaborate because they do not know about the benefits of collaboration, have been too busy running their credit union or afraid of the unknown, NACUSO can teach you how to reap the benefits of collaboration and how time spent setting up or joining a collaboration is time well spent.  There are people of great imagination and energy doing great things to take credit unions to a new level of performance. For those who are too set in your ways or stubborn to even consider using the tools of collaboration, please retire soon and make way for people with energy and vision to preserve your credit union.

I think I will stop there before I really get in real trouble. Can I get an “Amen” or a nasty comment about know-it-all lawyers? Something please….

How much is your credit union membership worth?  It used to be an abstract question until the Wings – Continental matter where Wings offered the Continental members $200 or so in a dividend if Continental merged with Wings.  Apparently, the Continental members did not want to sell out for $200.  Well that begs the question, what would they have sold out for? 

Suppose you have a credit union or bank making an offer of twenty-five cents on each dollar of deposit. If members had $10,000 in the credit union, they would walk away with $2500.  Would that be enough to have them give up their membership?  For many, the answer would be heck yeah.  They can get $2500 for free and if they are not happy with the new owners, the members can change to another credit union down the street, at least until an offer is made to their members.  Community charters make it easy to move around between credit unions.  

Unlike shareholders in banks, the value of membership is not just on the amount of money you can put in your pocket from a deal.  Credit union membership is about the value of the service relationship too.  Does the credit union offer value on share and loan rates, convenience of branch locations, convenience of home banking and bill paying, a wide variety of valuable financial services and do the tellers smile?  What does the credit union offer in service value?  Before we all start the CU wave around the stadium and say we are the champs in service, have you actually measured the value in your credit union?  Is your credit union really that much better than the competition?  If your credit union comes out on top, great, don’t hide that fact.  Use it in your member communications and marketing.  The time to highlight the value of membership is long before a hostile offer is made not in the heat of battle.  

Some credit union industry folks say that the one member one vote cooperative model has value.  My response is there is very little evidence that this is true for the vast majority of members.  Most members do not even bother to vote for directors.  Most members have no idea of the organizational differences between a bank and a credit union and do not care as long as they get the service they expect. 

So my admonition is for each credit union to measure the actual and perceived value of membership in your credit union.  Review the service offerings of other financial institutions and take surveys of your members to see what they perceive to be valuable about their membership.  What is important to them and how does your credit union measure up?  You cannot combat an offer to “buy” your members without knowing the value of membership in your credit union.    

When you do your research and surveys, be prepared for surprises.  If your credit union is not measuring up, the time to fix that is now, not when the pressure of an offering is breathing down your necks.

The dawning of 2008 brings with it new changes at Messick & Weber. For one, we are blogging and hope to be blogging over the next year in an attempt to better serve our clients.  We plan to post important and interesting information on this page.  We believe this method of conveying the information will be timely and easy to use.  Here’s to success in the year to come.