The first decade of the new millennium is winding down.  Now that we’re on the verge of moving into the teens, it’s worthwhile to investigate the possibility that your credit union may have a few outdated, dusty accounts and services that no longer serve your membership as well as they once did.  In most cases better alternatives already exist, though the ultimate question of whether they’re modified, toned down, or retired is up to you, and more importantly, your members.

Touch Tone Teller

This is not a reference to mobile or text banking, but it’s 1980′s era predecessor.  There was a time, before widespread use of the internet, that members called a phone number, entered their member number and PIN, and listened to their last few deposits, withdrawals, checks cleared, and balances.  Online banking dealt a severe blow to its popularity 10-12 years ago, but it endured, thanks in part to those that didn’t own a computer or have access to the internet.  Today, mobile banking is increasingly commonplace, online banking continues to grow across all demographics, and a growing percentage of credit unions have discontinued the service.  It’s time to bid a fond farewell to the rotary phone of credit union account access.

Fixed Term Certificates

Most credit unions offer, at a minimum, 6, 12, and 24 month certificates.  Some financial institutions, realizing lost investments because an individual’s needs don’t match the certificate’s term, are starting to offer certificate ranges, allowing the investor to select the maturity date, with the Annual Percentage Yield remaining fixed for any period within the prescribed range.  Greater flexibility, even at the same rate, adds perceived value, and since most if not all software systems allow the operator to enter the maturity date, this modification is a no-brainer.

Travelers Checks

There was a time when they were a necessity for any vacation, but that day has come and gone.  They may still provide a sense of security for some travelers, but today’s vacationer brings an assortment of cash and plastic, and unless traveling alone, their companion(s) likely have their own means of payment as well.  As a result, travelers checks aren’t the security blanket they once were.  If they’re being sold regularly at your credit union then by all means accommodate your membership, but if an audit is the only time the checks see the light of day, it’s time to scale back if not discontinue them completely.

Wire Transfers

Now we’re moving into the “let’s watch how this plays out” department.  Most credit unions charge a $15-20 outgoing wire fee.  There are other faster options available, but none of them, including shared branching (small population penetration), cashiers checks (snail mail), and Western Union (expensive) are ideal alternatives in most situations.  However, WalMart is starting to advertise inexpensive transfer rates and a 10 minute turnaround time to almost any WalMart (or MoneyGram) location.   Undercutting local pricing to gain market share is a WalMart tradition, but there’s no reason why your member shouldn’t take advantage of that opportunity.  In many cases, the member would be better served with a wire transfer, but a call to WalMart may save your member a few dollars and build some goodwill at the same time.

Health Savings Accounts (HSAs)

We’re straying into the political here, but our stay will be brief and, hopefully, not political.  There are some who believe that if the Health Care Reform Bill (.pdf) is passed as written it will negate the need for HSAs.  If your credit union already offers HSAs, there’s no need to do anything but watch and wait, but if you’re planning an HSA program, you may best serve your members by watching and waiting as well.  Congressional bills rarely look the same when passed as they did when they were introduced, and there’s no guarantee that this bill will be passed at all.  The discontinuation of HSAs is only speculation at this point, but any overhaul of the health care system will likely extend to supplemental products and services, and HSAs fall into that definition.

Every credit union has a unique membership with unique needs.  What may be obsolete at one credit union is essential at another, making a standardized set of accounts and services unrealistic.  Striving to offer the best package of accounts and services, whether it’s modifying an account or shaving one service to provide another will add benefit to your membership while remaining competitive in the marketplace.

Today I was perusing the credit union blogs and came across a post that Currency Marketing President Tim McAlpine wrote for CUES Skybox titled Are You Beating Down Your Next-Gen Leaders? I read the article and came away with the sense that many younger employees (20-35 was the age group cited) feel that their ideas are not being listened to, are being dismissed prematurely, or are ramming unnecessary into roadblocks.  In some cases this is undoubtedly true; in others, however, they’re being dismissed because someone has decided that, for one reason or another, they aren’t very good.

A few weeks shy from being unceremoniously dumped (or am I graduating?) from the above age demographic, I’ve found myself in a position to pitch, and be pitched, a large number of ideas and have come away with one surefire conclusion: at least 75% of all can’t miss ideas are pure garbage. Of the remaining 25%, about half need some serious polishing and the remaining proposals have a few applicable flakes (not even nuggets) that can be harvested.  This is not to say that only the best ideas are implemented.  Many good ideas never see the light of day, far too many ill conceived ones are enacted, and many times we have the right idea at the wrong time, or vice versa.

Managers may be dismissive because they don’t want to shatter a young talent’s confidence; they see potential and want them to keep contributing ideas… just not that one. No one wants to be told that the idea they’ve poured their creative efforts into is a dead end proposition, so management may choose to glaze over their concerns by being dismissive.

If you feel you can honestly accept constructive criticism, pursue the matter further. Ask to sit down with someone that can tell you exactly what portions of your idea are worthwhile and which aren’t. Remember that this isn’t a last ditch effort to salvage your project off the scrap heap, it’s a learning opportunity to better understand your credit union’s structure, culture, and leadership, to learn from those that have been where you are so your next idea will be better than the last.

When it comes to interdepartmental blow back, you may need to invest in some person to person networking, or office politics if you prefer. Unfortunately, when having difficulty dealing with an entire department, the problem may be you, or at least your methods, and not them. In the planning stages of your project, did you contact that department, including them from the first planning stages so they are both on board and fully aware of the time commitment? If not, you may have found the root cause of your blow back.

Every day, ideas and projects of all shapes, sizes, and quality are proposed. If your idea is rejected for any reason, take the time to find out why. It will leave you better prepared to objectively analyze your proposal even before you write it down, decreasing your ‘garbage’ percentage to a more reasonable level. Everyone has their fair share of bad ideas, and no one on the organizational chart is immune. What the most successful employees have been able to do, however, is learn to better differentiate high quality ideas from their lesser quality counterparts.  This is a learned skill, and it’s up to you to decide your learning curve.

It’s been awhile since I’ve written on this blog. In fact, it’s been awhile since I’ve even logged into this blog, let alone done much in the way of writing, talking, or even thinking about credit unions. This period marks my longest absence from the credit union industry since I first became involved with it in 1995.

While it felt a bit odd, it was wonderfully refreshing to clear my mind and approach the industry objectively. When I did so, I found that credit unions remain the best banking option for almost every individual, outperforming the competition in many measurables, as well as a few intangibles. But in the never ending race for market share, credit unions have also taken paths that are not only against the best interest of their members, but not really in the best interest of anyone at all.

This blog will not devolve into “Ten Things I Hate About Credit Unions”, but anyone that comes here looking for a CU love fest will be sorely disappointed (ummm, for the record, no one has ever accused this blog of being soft and cuddly). We’ll tackle difficult issues, challenge assumptions, and hopefully, in our own small way, leave the industry a little better than we found it.

Credit Union: TxDOT – Wichita Falls

Location: Wichita Falls, Texas

Employee Name/Position: Joanna Lynn McGee, President

Convicted Of: Embezzlement of funds through approximately 130 fraudulent loans over seven years.

Amount In Question: At least $850,000 and as much as $1,900,000.

How she did it:

From 2001 until May 2008, McGee originated 129 fraudulent loans totaling $3.1 million using mainly dormant and decedent accounts.  Some of the disbursed funds were used to make payments on existing fraudulent loans, while the rest was kept for personal use.

How she was caught:

None of the resources used to compile this report included that information.

Status:

On April 3, 2009, Joanna McGee was sentenced to 71 months in prison and ordered to pay restitution of over $2.5 million.  The credit union was declared insolvent and taken over by Postel Family Credit Union, also in Wichita Falls.

Moving Forward:

Something I’ve written before bears repeating: Regular, thorough audits build trust, not mistrust.

This happened at a credit union with just over 500 members and $5 million in assets.  While direct blame lies with Joanna McGee, indirect blame lies with whoever was responsible for the internal audit of the lending documents.  If that duty was unclear in any way, blame falls squarely on the Board of Directors.

The loan auditor, presumably from the Supervisory Committee, should have requested access to the member account software, personally printed a list of loans generated since the last audit, and mailed confirmation letters to random loans on the list.  With names and addresses changed, not to mention using the names and accounts of deceased members, it wouldn’t be long before irregularities were discovered.

While it isn’t customary for Supervisory Committee members to utilize confirmation letters, extra diligence is required whenever a large amount of responsibility is concentrated with one individual. If such a policy had been in place, Joanna McGee wouldn’t have been able to take advantage of the lack of safeguards and a 55 year old credit union wouldn’t have had to pay the ultimate price.

With the world in a recession, savings has become the new spending.  Personal finance is no longer counted amongst politics and religion as casual subjects better left untouched.  People that had previously discussed vacations or their latest big item buy now talk about how much they lost when the stock market crashed.  It’s at the forefront of everyone’s thoughts, from rich to poor, and we all share a strange comfort in knowing that everyone around us is in the same boat.  There aren’t any quick fixes, but most people are beginning to understand the need for a solid savings foundation beyond the stock market.

The problem credit unions face in fully realizing the potential long term gains of this current mindset is that very few spenders successfully transform into savers.  The spender-members know they should save, and it is within the ability for most of them to do so even in a recession, but as credit unions we have largely failed in developing a set of mechanisms for these members to successfully save over the long term.  As soon as the economy rebounds, savings built through the fear of the unknown will ebb or even decline for many of these spender-members.

Financial seminars, youth savings accounts and a myriad of certificate offerings are a start but they’re only pieces of what should be a comprehensive and easily identifiable savings program.  Every credit union should have a plan in place to assist any member that wants to increase their savings from $A to $B, and the credit union’s involvement should extend beyond handing out savings pamphlets or budget charts.

A fully developed long term savings plan requires time, thought, and planning, and it’s unlikely to significantly ‘bump up’ your deposits, but that’s where any downside ends.  It’s a public relations marketing tool, both in direct and word of mouth advertising and, more importantly, it will improve the lives of a few members that have tried, and failed, to save with your credit union’s current products and services.

On March 6 the House of Representatives passed HR1106, titled the Helping Families Save Their Home Act, but affectionately known in the financial world as the Cramdown Bill.  This legislation would give bankruptcy judges the ability to adjust an individual’s mortgage loan, including extending the term, adjusting the mortgage’s APR, and reducing the principal balance.

Democratic leaders, whose party sponsored the bill, have been seeking financial institution support for the proposed legislation, but with the exception of Citigroup there is little to be found.  Senator Charles Schumer (D-NY), who recently indicated he would draft legislation to lift the 12.25% Member Business Lending (MBL) cap on credit unions, has entertained the idea of including his proposal as a provision in the Senate version of the bill to gain support from the credit union industry.  Dan Mica, President of Credit Union National Association (CUNA), has said that lifting the MBL cap is not enough to earn their support, believing that the bill should be restricted to subprime mortgages only, a restriction that Sen. Schumer has stated is inadequate. The American Bankers Association (ABA) found a provision in the bill that would force judges to invalidate a lender’s bankruptcy claim if minor clerical errors were committed, and does not support the bill.

The bill’s opponents, which include some moderate Democrats as well as most Republicans, contend that this will lead to an increase in bankruptcy filings.  The legislation, as currently written, only allows mortgage loans originated before the effective date of the Act to be adjusted, so it is not a permanent provision and, if passed, manageable for most credit unions within several years after Adjustable Rate Mortgages (ARMs) and Balloon Payment Mortgages are refinanced.

Without delving too deeply into politics, this bill is not in the best interest of the overwhelming majority of homeowners.  The Cramdown Bill serves to alleviate a symptom of the mortgage crisis rather than address the issue of declining property values that are contributing to a stagnation of the market.  Whether it’s justifiable or not, punishing financial institutions by allowing judges to subjectively rewrite mortgage loans will neither encourage new mortgage lending nor end the mortgage crisis.   Applied to the structure of credit unions, a principal adjustment is nothing more than sanctioned theft from their membership and cannot be endorsed.

Currently, it appears the Senate will not address this bill before the April recess, leaving its fate to the summer session of Congress.

In a move that has been praised by both the National Credit Union Administration (NCUA) and Credit Union National Association (CUNA), Senator Charles Schumer (D-NY) announced his intention to draft a bill that would lift the member business lending cap (MBL) from the credit union industry.  This bill faces a series of hurdles, and Senator Schumer will have a difficult time passing a bill that deregulates credit unions with more restrictive regulations facing the entire financial institution industry.  Currently, the maximum amount most credit unions can carry in business loans is 12.25% of their total assets.  Like any deregulation, lifting the MBL cap will be beneficial in the short term while potentially problematic in the long term.

Short Term benefits of lifting the MBL cap

With the economy still suffering through a credit crunch, it has been estimated by CUNA that lifting the MBL cap will result in an additional $10 billion in credit union loans to small businesses in its first year.  This will allow businesses a better chance of riding out the recession without a significant impact on their daily operations, and the goodwill that will be generated by local newspapers will further the belief that credit unions operate for the benefit of their members, which may result in a small increase in membership.  Increased business lending would also generate much needed additional revenue for some credit unions facing a difficult 2009.

One indirect benefit will come if a credit union suggests a conversion to a mutual savings bank.  The reason given more often than any other to convert is a desire to expand their business lending portfolio, and lifting the MBL cap will remove that reason, making it more difficult to convince their membership that they’d benefit from the change.

Possible long term ramifications

Lifting the MBL cap will allow some credit unions to thrive.  They have money to lend and businesses that need the loans.  However, without ceilings some credit unions will undoubtedly place too many of their lending eggs in one basket, giving them a much smaller margin for error if their local economy falters.   While many credit unions will keep this fact in mind and lend responsibly, the chances that at least one credit union would sacrifice long term stability for short term growth is real.  This bill would include biannual oversight to determine whether or not reinstalling a cap is necessary, though this measure isn’t meant to be proactive but an instrument of damage control should the need arise.

From a legal standpoint, as each difference between banks and credit unions fall, the American Banking Association’s teams of lawyers will continue to proffer that if it looks like a bank and walks like a bank it should be taxed like a bank.  While lifting a cap on existing lending abilities does not a strong case make, they may opt for the quantity over quality approach, hoping that anything sticks.

A long road ahead

Senators and Congressmen regularly announce their intention to draft various pieces of legislation.  Many of these are actually written, though only a few make it out of committee to an actual vote.  With Democrats in control of both branches of the Legislature and the Executive branch, it’s reasonable to assume that if this bill makes it to the President’s desk it would be signed into law, but it may never make it that far.

The banking trade associations will likely argue that the majority of credit unions do not currently offer business lending, and of those that do, only a small minority of them are against the cap, suggesting that this legislation is unnecessary at this point.  If that doesn’t work, they could tell every Legislator supporting the bill that they won’t contribute to their reelection campaign or contribute to their opponent, which is equally if not more effective.

Credit Unions have been promoting thrift since their inception, educating their members to save not only for retirement, but for difficult times.  Fortunately for us, they’ve been doing the same thing.

The National Credit Union Administration (NCUA) has released the 2008 4th quarter statistics for the credit union industry, and while there is a mountain of data to sift through, one number has popped out: the Net Worth Ratio (NWR) for all credit unions has dipped to 10.94%, its lowest percentage since June 2004 (10.72%).  The NWR is calculated by dividing Total Assets into Net Worth, and is used to help gauge the health of individual credit unions.  The NCUA considers a credit union with a percentage greater than 7.00% to be Well Capitalized.

The table below has biannual information on the NWR dating from June 2004 through December 2008.  For the year, it dropped from 11.44% to 10.94%, though the majority of the damage was done from January through June.

While these numbers indicate a downward trend, it should also demonstrates the strength of America’s Credit Unions, with a Net Worth Ratio 56% above the Well Capitalized benchmark.  It was a challenging 2008 for financial institutions overall, but the CU industry successfully navigated a tough year while retaining sufficient capital to weather any storm coming their way.

Late last year, amid a declining economy, a Presidential transition, and discussion over how much money should be spent on bailing out, well, everyone, rules governing a little covered (outside of gambling publications) law, the Unlawful Internet Gambling Enforcement Act (UIGEA) were finalized.  Part of the SAFE Port Act, it essentially makes it illegal for Americans to spend money on online gambling websites.  Financial institutions will be responsible for monitoring and reporting any violations, and while no mechanism to effectively implement the law is in place, the deadline for compliance is December 1.

Fortunately for credit unions, UIGEA compliance may be much ado about nothing.  Massachusetts Congressman Barney Frank has indicated that he will introduce legislation to repeal UIGEA as early as next month.  Frank had previously introduced H.R. 2046, the Internet Gambling Regulation and Enforcement Act, in 2007 which would have regulated (taxed) internet gambling, but the bill never made it to Committee.

While the government is likely to follow through with their repeal efforts, this is far from a slam dunk piece of legislation.  The perception that the United States will allow unfettered access to internet gambling to anyone with a debit card will not be popular, and the Republican party will certainly use the repeal attempts to make a moral judgment on the state of affairs in Washington D.C., furthering their attempts to retake the House or Senate in 2010.

The argument over the morality of gambling can be found at other locations, but UIGEA does represent additional regulations, and costs, to America’s financial institutions.  The Treasury Department could alleviate some of that cost as well as confusion by developing and maintaining a list of unacceptable online gambling payees, much like the OFAC list for new accounts.  Until then, both CUNA and NAFCU, each of which has spoken out against UIGEA before, should continue to remind Congress that the law, potentially subjecting credit unions to fines for each successful online gambling purchase, is unacceptable in its current form.

Coming soon to a Friday night near you is an ABC News ‘gotcha’ piece on the perceived excesses of the credit union industry.  Presumably posing as vacationers on the island of St. Kitts, the ABC crew observed credit union executives engaging in Caribbean-type activities.  First disclosed by Jeffry Pilcher, the segment is expected to air on 20/20 as early as tonight.  By all appearances, it’s a smear campaign designed to infuriate America’s credit union members while giving banks a little company in the ranks of the vilified.  Since credit unions know what’s coming, the question is how they react to it, if at all.  The four reactions below do not necessarily represent what’s best for your credit union, rather they represent general lines of thought that should be modified to best suit your credit union’s circumstances.

1. We weren’t there. If your credit union did not attend the conference, say so.  After the 20/20 piece airs, write a short paragraph on your homepage stating that your credit union did not have a representative at the conference in question.  Additionally, if your opinion regarding TARP will allow it, include a sentence stating that your credit union has not and has no intentions of seeking TARP assistance.  Furthermore, state that your CU does not endorse any credit unions, trade associations, or regulatory bodies seeking to procure access to TARP for themselves or on your behalf.  For in-branch members, a small leaflet should be made available to any members that mention the report.  Be sure that you don’t throw any other credit unions under the bus; simply say that you haven’t been a part of anything 20/20 reported.

2. Ignorance is Bliss. Sometimes, a ‘proactive’ campaign quickly becomes an unnecessary campaign.  If there isn’t any outcry, there’s no need to stir the pot.  This may amount to wishful thinking, but if 20/20 overreaches in their report or the timing coincides with more important events, such as the lowest Dow Jones Industrial Average in six years, it may fizzle before it begins.   Credit Unions with weekend hours can gauge the interest (or outrage) of their membership on Saturday, with staff instructed to tell members that either a CU representative will contact them or they should check the CU homepage Monday.  The initial reaction by members may dictate how, or if, your credit union responds.

3. Take an offensive approach. I don’t recommend this tactic, because it will likely backfire and amplify any ill will towards the CU industry, however, in fairness to being thorough, any interested credit union could simply write: ABC has long sought to boost their declining news ratings by trafficking in human misery, preferring to enrage its viewers by cherry picking specific instances that will show their target, in this case credit unions, negatively.  We understand that if ABC News had investigated the credit union industry as a whole rather than a specific conference, they would have been obligated to report a positive story that doesn’t coincide with their show’s format.  While we wish the report hadn’t aired, we do not begrudge ABC for their actions as they have long since abandoned reliable and responsible reporting on a consistent basis.  This statement could be written for any news outlet, from Fox to MSNBC and all points in between, as long as the same cherry picking technique is used.  Again, this suggestion is purely academic and I don’t recommend it at all.

4. Contrition. If your credit union did attend the conference in St. Kitts, and has publicly stated that credit unions should seek access to TARP, you are in a difficult spot, because fair or not, this report was filed with you in mind. Explain that while your budget allowed for the expense and that the conference, not the location, was of primary importance to your credit union, you realize that some people, including some in your membership, may be understandably upset.  Assure anyone who asks that these decisions will be made more responsibly in the future for the benefit of both the credit union and its members.

While everyone that has ever hosted a conference understands that location is the key to attendance, most American’s have rarely, if ever, traveled for business purposes.  It’s difficult to understand why a winter conference in Youngstown, OH (sorry Youngstown) is any different than a conference in Las Vegas or Orlando, or why a conference 2,000 miles away should be attended at all.  After the 20/20 report airs, some people will lose their faith in credit unions.  That’s just the reality of the situation, though I have a feeling (again, this may be wishful thinking) that this report will rile those in the credit union industry far more than the credit union membership.