Credit Union Failures and Red Flags Violations - NCUA Chair Speaks Out

Interview with Deborah Matz on the State of the Nation's Credit Unions
Credit Union Failures and Red Flags Violations - NCUA Chair Speaks Out
In August, Deborah Matz succeeded Michael Fryzel as chair of the board of the National Credit Union Administration (NCUA), the independent federal agency that charters and supervises federal credit unions.

Now, in an exclusive interview with Information Security Media Group, Matz says candidly:

2010's credit union failures may exceed 2009's;
55 credit unions have been found in violation of the ID Theft Red Flags Rule;
50 new examiners are on the job in 2009, and another 57 will be added in 2010.

Prior to her appointment to the NCUA Board by President Barack Obama, Matz served a previous term on the NCUA Board, and she also served as a Deputy Assistant Secretary in the U.S. Department of Agriculture and on the Congressional Joint Economic Committee. Most recently, she was Executive Vice President and COO of Andrews Federal Credit Union in Maryland.

Following is the complete text of the interview with Matz.

Tom Field: Tell us about yourself, please, and your experiences that have led you to the NCUA chairmanship.

Deborah Matz: As you may know, I am the first NCUA Chairman to have the privilege of serving a second term on the NCUA Board. During my first term from 2002-2005, I developed an initiative called Partnering And Leadership Successes. PALS encouraged credit unions to share best practices and reach new markets in an effort to serve everyone in their field of membership.

When I received a call from the White House personnel office in 2009, and the caller told me that the president wanted to know if I'd be interested in going back to NCUA as Chair, I didn't hesitate before saying yes.

More than ever, I believe in that old saying: "It's not the distance you travel, but what you learn along the way." In those intervening years, I had the opportunity to see things from the perspective of a regulated institution, serving as an officer at a credit union.

Field: What do you see as your greatest challenges in this new role?

Matz: Between 2005 and today, the economic landscape in which we operate - and the challenges we face - have changed considerably. So I know that I can't simply pick up where I left off.

As a member of President Obama's NCUA transition team, I learned last fall that it might be necessary to conserve the two largest corporate credit unions. We are still addressing the challenges posed by these corporates' investments in mortgage-backed securities.

While the severe economic downturn which propelled the corporate credit union crisis was not predictable, there are steps that could have been taken which might have mitigated or prevented its effect on those corporates. In 2002, the last time NCUA wrote a corporate regulation, I cast the lone vote against it. I did not believe it adequately addressed the crucial issue of risk concentration. Additionally, I believed that the investment authority being granted was overly broad and permissive, particularly in light of the complexity of the financial instruments that were available to the corporates.

I am applying these principles as NCUA begins a new round of corporate rulemaking to address the current problems. During the rulemaking process, I have committed to consider all viewpoints, insist on thorough analyses of data, and develop a rule that provides both appropriate safeguards and sufficient opportunities for credit unions to thrive.

Field: Given the year we've experienced, what is the state of credit unions today?

Matz: Retail credit unions have their own challenges, independent of the corporates. The good news is that despite the troubled economy, credit union lending has increased by almost 8% since 2007. However, delinquencies and loan losses have also increased, particularly in real estate lending. In 2007 about 0.3% of real estate loans were delinquent. Now the figure stands at 1.62%.

Industry-wide capital, while still strong, has declined from 11.8% in 2007 to 10%. On the one hand, I am encouraged by the fact that 98% of the 7,700 federally insured credit unions are at least adequately capitalized. On the other hand, 21 credit unions have failed so far this year, compared to 18 in all of 2008. That number could well rise in 2010. Most troubling is the increase in credit unions which have been downgraded to CAMEL 4 and 5. Between December 2008 and September 2009, the assets of credit unions in these categories have almost doubled.

Clearly, credit unions have not been spared from the harsh effects of the economic downturn. In tandem with the assessments for corporate losses, this presents a difficult road for credit unions to travel into 2010 and beyond.

Field: Where do credit unions need to strengthen in 2010?

Matz: Credit unions need to be more vigilant across the entire spectrum of lending activities. This means real due diligence; it means board involvement; it means enhanced training for all front-line staff. It also means paying very close attention to risk concentration, risk mitigation and ALM monitoring. NCUA also has reforms and enhancements that I intend to implement in 2010. NCUA has enhanced supervision by shortening the examination cycle from 18 to 12 months; we added 50 examiners in 2009 and anticipate adding 57 more in 2010; and we upgraded our risk management systems to identify and resolve problems more quickly.

Field: After nearly one year of examination for compliance, how are credit unions fairing with ID Theft Red Flags? What works? What needs more work?

Matz: Since January 2008, 59 violations of the IT Theft Red Flags rule have been reported in 55 credit unions. The predominant violation is failure to establish and implement an ID Theft Red Flags program. Total credit unions in violation of the rule represent less than 1% of all federally insured credit unions, indicating that credit unions have overwhelmingly come into compliance. NCUA remains committed to ensuring that those credit unions without proper Red Flag programs come into compliance as soon as possible. Like our Immediate Past Chairman Michael Fryzel, I believe it is important for credit unions to review their Red Flag programs on a regular basis to ensure their

Field: The NCUA has asked credit unions to improve vendor management -- how have they responded? Again, what works/what needs work?

Matz: Credit unions have taken significant steps to implement processes to evaluate new and existing relationships they have with third party providers. NCUA initially provided guidance to credit unions in 2001 in Letter to Credit Unions 01-CU-20: Due Diligence Over Third Party Service Providers. In 2007, NCUA updated the original guidance in

Letter to Credit Unions 07-CU-13: Evaluating Third Party Relationships. NCUA informed credit unions that examiners would be taking a closer look at their vendor management programs during regular examinations.

  • A planning process which assesses the risk in the relationship;
  • A due diligence process which results in the credit union developing an understanding of the third party's organization, business model, and financial health; and
  • A process to measure, monitor and control risk associated with the relationship.

In many instances, credit unions had a due diligence process in place, and they responded to the NCUA guidance in this area to increase their understanding of the third party's organization, business model, and financial health. Many credit unions implemented a risk assessment process which resulted in the vendor management program becoming more risk-based. This resulted in credit unions spending their resources on higher-risk relationships.

Credit unions need to continue to implement and refine the risk assessment process to streamline the vendor management program. In addition, we are seeing more credit unions put processes in place to measure and monitor third party relationships. These processes should result in credit unions revising contract terms, responsibilities, and relationships with vendors.

Field: Chairman Fryzel wanted the NCUA to pay more attention to consumer protection. What is your stance?

Matz: I view consumer protection as a primary mission of NCUA. I endorse the idea of creating a separate Office of Consumer Protection within the agency. If approved by the NCUA Board in the 2010 budget, this new office would enable us to sharpen our focus and enhance our overall ability to enforce and supervise the consumer protection regulatory regime. Regardless of whether Congress acts to create a separate Consumer Financial Protection Agency (CFPA), the NCUA Office of Consumer Protection would serve an essential purpose.

Field: Where do you see the NCUA's role in the regulatory reform discussion?

Matz: NCUA has engaged in ongoing dialogue with the Administration and Capitol Hill regarding the restructuring of the federal financial regulatory regime. We are pleased that initial proposals maintain the separate, independent role for NCUA.

Beyond that, NCUA has also been an active participant in evolving discussions regarding the form and functions of the proposed CFPA, and we are also closely monitoring how NCUA and the credit union industry could be affected by a new systemic risk regulator.

Field: One year from now, what do you hope you will have accomplished?

Matz: The most critical short-term priority is to help the credit union system recover from the current economic shocks.

Over the longer term, during my next six years at NCUA, I hope to achieve six overriding goals for the agency. So during my first year as Chairman, I hope that NCUA will make progress toward all six of these goals:

  1. Be recognized as a fair and effective regulator that sets the highest standards for safety and soundness. This is an essential first priority. I will be vigilant and uncompromising in pursuit of strong, assertive safety and soundness regulations.
  2. Make certain that NCUA is a strong advocate of initiatives to protect members from predatory and unsafe financial products. Recent events in other parts of the financial services industry have shown a pattern of inadequate or indifferent regulation when it comes to even the most basic consumer protections. While I do not view credit union regulation in this light, I do believe that NCUA should devote even more energy and attention to this priority. Under my chairmanship, we will set the bar on protecting consumers.

  3. Help ensure that all people in credit union fields of membership get the services they need. As important as this was during my first term on the NCUA Board, it is even more important today. With the severity of the economic downturn, consumers need access to affordable credit more than ever.

  4. Listen and encourage exchanges of ideas with credit unions, while maintaining NCUA's independence. Proper regulation requires constant balancing - between risk and safety, between innovation and prudence, between philosophy and practicality. I don't believe those needs are mutually exclusive. I believe we can find a balance that works for everyone.

  5. Be an employer of choice and a reliable partner with elected labor representatives, understanding that employees are our most important asset. A diverse workforce enriches the agency, the employees, and the output.

  6. Be a model corporate citizen by implementing environmentally sound practices and procedures wherever and whenever feasible. This isn't just the right thing to do; it's also the smart thing to do. It's not just about saving the environment; it's about saving credit unions and members' money.

About the Author

Tom Field

Tom Field

Senior Vice President, Editorial, ISMG

Field is responsible for all of ISMG's 28 global media properties and its team of journalists. He also helped to develop and lead ISMG's award-winning summit series that has brought together security practitioners and industry influencers from around the world, as well as ISMG's series of exclusive executive roundtables.

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