Strengthening Credit Unions: The Power of Technology Partnerships

[00:00:00] Vince: Welcome everyone to 22 minutes in lending. I’m your host, Vince Passione, and I’m excited to introduce our guest today, Rodney Hood, the 11th chairman and current board member of the National Credit Union Administration. And I got to admit, it’s a huge challenge to try to adequately introduce someone that has their own Wikipedia page.

[00:00:16] Vince: And given that we only have 22 minutes in this podcast, I will summarize by saying that board member Hood has accomplished exceptional work at the highest levels of both the private and public sectors. He’s been nominated by multiple presidents to the board of the NCOA where he continues to serve.

[00:00:31] Vince: And it’s an honor to have him on the podcast today. Well, so without further delays, let’s start these 22 minutes in lending. Board member Hood, welcome. And

[00:00:39] Vince: thank you for coming on the podcast.

[00:00:41] Rodney: Vince, thank you for having me here today. I’m looking forward to a nice, robust conversation. Oh,

[00:00:46] Vince: terrific. So let’s jump right in.

[00:00:49] Vince: So August 1st was a big historic day in credit union history with the NCOA and CUNA announcing their intention to merge. And sort of as we’re waiting for the vote on the merger, I was looking at some of the NCOA, NCOA data about credit unions. And it looks like credit unions have declined by over 50 percent since the turn of the century.

[00:01:09] Vince: So we’re down to about 4, 700 of them. And as I’ve listened to you many times, Rodney, talk about financial inclusion, what can we do to ensure that credit unions are, are always here and that consumers have access to credit unions

[00:01:22] Vince: in the future?

[00:01:24] Rodney: That’s a really good question. And I certainly want to do my level best.

[00:01:27] Vince: To ensure that Americans have a robust and safe credit union system to rely upon. You’re right. We are starting to see a decrease in the number of credit unions and also that’s some bags, so there’s quite naturally, you are going to see mergers and shifts and things of that nature. But at the day, what I want to do is I want to be that thoughtful.

[00:01:47] Vince: Progressive regulator that’s making sure that we at N. C. U. A. are empowering those nearly 4700 credit unions to serve their members. We’re really fortunate we have 137 million members of credit unions today, and I certainly well, I’m proud. I’m proud of that. But I’m proud of the fact assets to date approximate 2.

[00:02:07] Vince: 2 trillion and most importantly loans approximate 1. 7 trillion and you’re thinking why is a regulator so excited about outstanding loan volume and Vince I’m excited because. You mentioned financial inclusion. I believe that financial inclusion is the civil rights issue of our generation. I also believe that credit unions are uniquely positioned to provide access to affordable credit to the nearly third of Americans who use their services every day.

[00:02:34] Vince: So I’m excited about 1. 7 trillion in loan outstandings because credit unions are making the loans that people need to get cars to go to and from work. They’re getting the mortgages that they need for sustainable home ownership. And I also applaud that those small business owners are getting the business capital they need to have growing, thriving, vibrant businesses.

[00:02:56] Vince: So that’s why I’m excited about credit unions being there to serve their members. How do we keep them there? Now, I can’t control whether credit unions wish to merge voluntarily and things of that nature, but what I can control is the regulatory environment that gives them the protocols and the things that they need in place to thrive, to succeed, while also keeping the system safe and sound.

[00:03:19] Vince: I want to make sure that my policies, Vince, you’ve known me for a while. My whole regulatory philosophy is regulation needs to be effective and not excessive. So if a lot of the mergers and things that we’re seeing are out of just credit unions wanting to do that on their own accord, that’s fine. But I certainly hope that we’re not seeing a declining number because they were throwing in the towel and saying that they just want to call it a day.

[00:03:42] Vince: That I don’t want to have happened. And I’m hoping that some of the things that we’ll discuss that are called a day we’ll show you that. Some things that we’re working on and Roddy, to that point,

[00:03:51] Vince: is there, is there a number at which the, the system is no longer viable where, you know, if, if we’re at 4, 700 now, if we get to 200, 2000, is that a point at which, you know, the, the, the prudential regulator, the NCA will step in and say, look, we need to do something or is there anything the NCA

[00:04:10] Rodney: can do at that point?

[00:04:12] Rodney: Well, you know what, Vince? I’m not going to get worried about whether it’s 4, 700 today or 2, 000 next year. My main thing is the safety and soundness of prudential regulators just to ensure that we have strong, well governed, well managed institutions that are able to, again, provide access to capital, but also having a fidelity, a consumer protection, a consumer compliance.

[00:04:37] Rodney: What I don’t want to see is when I travel around the world, as you know, I get a chance to speak at different events, whether it be the world council or the world economic forum, I don’t want us to become like Australia and with six banks or six big credit unions or Canada for that matter, so what having a small number mean that, um, we need to do something to prevent mergers.

[00:05:00] Rodney: I don’t see that happening, but what I would say is we’re only going to have. A couple of dozen banks and credit unions, it would sort of beg the question, do we need an independent, uh, regulator for the credit union system if it’s going to be a small number? So I don’t say that to be alarmist, uh, but the main thing that we want to do now to NCUA is to provide the regulatory clarity, guidance, and transparency such that today’s credit unions can have all the tools that they need to thrive in the 21st century.

[00:05:30] Rodney: Now makes a lot of sense.

[00:05:31] Vince: Absolutely. So we’ve got about 350 clients that are credit unions. And certainly when I go to conferences, it’s been, it’s always consistent. It always has been a credit union site, the regulatory burden, right. As, as a big, big concern that they have. And, and right now, given where capital ratios are, they’re already tight.

[00:05:51] Vince: I was looking at this recent addendum to the interagency policy on, on funding and liquidity risks. What’s the implication of that given what’s happening? Is it being proactive from the NCWA’s perspective? Because I got to imagine it’s keeping a lot of credit union CEOs

[00:06:06] Vince: up at night.

[00:06:07] Rodney: You know, that’s a really good question, Vince.

[00:06:09] Rodney: I have a number of things that are keeping me up at night, but I have to tell you that issue is not one of those, and I’ll tell you why. Capital is probably higher than it’s been in our credit union system for the past three decades. Collectively, the net worth of America’s credit union system is over 11%.

[00:06:26] Rodney: That’s some 400 basis points beyond the statutory requirement of 7%. I applaud credit unions for still in this environment being able to make loans and still to keep really high quality. As evidenced by their most recent networks, you’re mentioning the liquidity piece and the, uh, letter that we all joined the other regulators and sending out recently, you know, that was met as an abundance of caution.

[00:06:52] Rodney: We recognize on the heels of the. Implosion with Silicon Valley bank, signature bank, first Republic. There’s a lot of skittishness out there. There’s a lot of uncertainty. In fact, there was downright apoplexy over individuals wondering, what does this pretend for the future of our economy? I, first of all, tell folks that a lot of what we saw play out with First Republic and Silicon Valley Bank, we’ve not seen any of that contagion in the credit system.

[00:07:19] Rodney: In fact, if anything, we’ve seen folks leave some of those banks and they’re putting their resources in with credit unions. Letter that you’re referring to around the funding and the liquidity pieces, it’s an abundance of caution. I applauded the credit unions early on in that 1. 7 trillion outstandings.

[00:07:35] Rodney: Well, many of our credit unions are having some liquidity pressures. Uh, we’re seeing loan to share ratios of 70 or 80%. And that letter was meant to advise our institutions that, hey. If you are experiencing shortfalls, there are tools that you could, should have in place. So this was meant to let folks know that, Hey, you need to look at some backups.

[00:07:57] Rodney: And that is. Tools such as our central liquidity facility that we have at NCUA, that’s, Vince, as you know, a tool for our smaller credit needs if they have liquidity challenges, and those institutions tend to be at 250 million and under, but for the much larger credit unions, we are encouraging them to work with the federal home loan banks to use their lines of liquidity.

[00:08:18] Rodney: In addition to the Federal Reserve, Vince, we often hear folks use the Federal Reserve discount window, which has been wonderful and it’s been effective, but that’s been largely overnight. I’m really proud of the fact that most recently, Treasury Department and working with the Federal Reserve, they now have a Very nice long term bank term rate product, uh, for liquidity.

[00:08:42] Rodney: It’s longer than overnight, and it carries a really nice attractive interest rate. So there are a plethora of tools in place, uh, for credit units to use in meeting their liquidity demands. And one of the things I just think your credit and your clients should know, we don’t want there to be this perception of a stigma if you’re using a tool.

[00:09:02] Rodney: The tools are meant to be used and we want you to gainfully use them and just make sure that you are documenting and when you’re going to the exam, you’re able to point to how the policy that you have allows borrowings. But again, I want folks to recognize tools are there for a reason. Uh, Vince, as you know, not that far from where you’re headquartered, I had the pleasure of posting a capital market summit, uh, there at the New York Stock Exchange where we, thank you, Vince.

[00:09:30] Rodney: And again, it was a good day for us all. And Vince, I reiterated at that time, use the liquidity tools from the Federal Home Loan Bank, Federal Reserve. And also Vince, we’re seeing credit unions use asset securitizations. Interest rate swaps, derivatives. So there’s a whole toolbox that the credit union system has before them.

[00:09:49] Rodney: And I, again, as a regulator, I want to make sure that I’m giving you all the clarity and guidance and oversight so you can feel free to use them. Look, Rodney, you’re very

[00:09:59] Rodney: proactive in this way. And it’s always, it always amazes me, right, that I’m talking to a regulator, I’m talking to the ex chairman of the National Credit Administration.

[00:10:08] Rodney: As we look, though, field examinations, right, thematically this year, right, we see examiners focusing on credit risk, they’re focusing on liquidity risk, you know, they’re focusing on interest rate risk as they should. How do you see the credit unions reacting

[00:10:23] Rodney: to that in these exams? Well, they’re reacting to it very proactively.

[00:10:29] Rodney: As you know, in January of every year, Vince, we at NCUA, the board members and the senior leadership, we give guidelines to the entities that we regulate around. What are some of the things that we’re going to be looking at this year that could prove to be, uh, risky from a systemic point of view? What are the things that we really need to worry about?

[00:10:47] Rodney: So you mentioned some of the big items such as credit risk, affinity risk, and interest rate risk. By the way, those were issues, Vince, that we had long discussed well before the implosion of, again, I’m not picking on any of the banks that we keep bandying about, but we were mentioning those things as good progressive regulators, so credit unions already need to look at some of those issues, and they’re doing it head on.

[00:11:12] Rodney: Think about it, Vince. Credit unions grew during the depression, so they’re used to surviving in the midst of adversity. I was at the agency 15 years ago when I was vice chair doing the mortgage debacle, so credit unions have been very resilient and agile. I’m proud of the fact that they are listening and following our supervisory priorities.

[00:11:33] Rodney: I would say a few others that you’ve not mentioned. You were asking what keeps me up at night, and it was not the consolidation industry, but it’s cyber security. That is the one thing that when I meet with global regulators is how do we batten down our defense mechanisms so that we can really keep the bad actors away from our regulated entities.

[00:11:51] Rodney: So we’re marshalling a lot of resources with the new head of cyber security. We’re doing a lot of work around multi factor authentication. We’ve also wrote out a new tool called the Automated Cybersecurity Examination Toolkit, helping credit units of all asset sizes determine if they have the most effective cybersecurity program commensurate with their size and complexity.

[00:12:14] Rodney: So we have those tools. So that’s another priority that I would sort of highlight for you. And also another supervisor priority, and this is something that we’re seeing an uptick in, and that is fraud, theft, synthetic identity fraud. So, if our credit unions can really be more proactive when it comes to looking at an internal control and internal audit.

[00:12:37] Rodney: I think credit unions had a best in class program when it came to fraud identification, uh, and prevention before the pandemic. But I dare say that in the midst of the hybrid work environment, uh, there have been some hiccups of sorts. And again, we need to get folks mindful of getting back to the basics, getting back to your due diligence again.

[00:12:57] Rodney: But I would certainly put fraud, uh, on there along with cyber security. And then another supervisory priority while we’re in the middle of the year, and that is CECL, the current expected credit loss model. When I was chairman, I was most vociferous in really trying to get credit units exempted from CECL.

[00:13:16] Rodney: CECL was basically something that I thought made sense for Wall Street banks, but not for our mainstreet credit unions. Um, I think it was a largely a response, uh, for the mortgage backed, mortgage backed securities debacle of yesteryear and folks are thinking, well, now we just make sure that they’re allocating their reserves and loan loss and lease losses appropriately.

[00:13:37] Rodney: Well, Cecil, uh, though I couldn’t get credit unions poorly exempt though credit unions that are 10 million and under are exempted from Cecil because they don’t follow gap accounting. And while the banking regulators were able to roll out Cecil in 2020, we at N C U A were able to provide credit unions for three years to ramp up.

[00:13:55] Rodney: So that means that credit unions did not have to comply with Cecil. And so this January, 2023, And in addition to that, they did not have to put their loan loss and lease reserves on year one. They will have three years to phase those out. So while we couldn’t get them exempt, I think the three years to get ready to ramp up, also, we have developed our own CECL tool, a tool largely meant for the smaller credit units who may not be able to go out and hire consultants.

[00:14:23] Rodney: So it is. A tool that NCA developed and crafted, and it really has been very specific in helping credit unions, um, determine the appropriate level of loan and lease losses, and I’m proud to say that while we designed events for small credit unions, we have multi billion dollar credit unions that are using the tool.

[00:14:42] Rodney: And they have found that it aligns perfectly with some of the fancy models that they created themselves. So while we couldn’t get it again exempt, we’ve given you resources and a greater bit of time for onboarding.

[00:14:53] Vince: No,

[00:14:54] Vince: you certainly fought the fight, uh, in, in, in delaying it and then trying to see if you get them exempt.

[00:14:58] Vince: And we have seen the tool and we certainly see that many of our clients are starting to use it, which is, which is great. And that was something I, we were very concerned about because it’s being able to forecast loss at that rate is, is something that’s, that’s pretty new, um, and, and having the proper tools is really important to do.

[00:15:16] Vince: So you touched on, on a lot and when you become the priorities, when it keeps you up at night, you touched on fraud, you touched on cybersecurity, which brings me to something I hear you talk about all the time, which is unusual to hear from a prudential regulator, which is embracing technology and more importantly, embracing FinTech.

[00:15:34] Vince: And I’m curious, um, when did you come to this conclusion that FinTech is vitally important to the future of credit unions? And why is it so important?

[00:15:44] Rodney: Well, Vince, you’ve packed a lot of that question. Let me try to unpack it. I sort of recognized when I was on Wall Street, as you know, when I left NCUA in 2009, I spent a decade working for a Wall Street firm that really did invest a lot in technology.

[00:16:01] Rodney: They invested a lot in data aggregation and all the things that are so important for 21st century institutions. And then you fast forward to when I took the oath of office in April of 2019. I didn’t see that same rigor applied to the credit unions that I had just taken an oath of office to oversee and serve as the 11th chairman.

[00:16:20] Rodney: So I said, if credit unions are going to remain vibrant, if they’re going to remain reliable, if they’re also going to remain valuable in today’s economy, then credit unions are going to need to embrace platforms that come from FinTech. So that is why recognizing the power of a large company from where I came, if they were seeing the need for it, but then what we’re going to do for those 4, 700 credit unions that we oversee smallest bank, perhaps 300, 000 that works in the basement of a church versus another one.

[00:16:50] Rodney: That’s the largest that’s multi billion no matter what your asset size is as a credit union. I think that FinTech can help credit unions better serve their members. I think it gives them the ability to really exceed in terms of building trust. Uh, credit unions have 137 million members, 6 million of those members came during the pandemic.

[00:17:11] Rodney: If we want to keep those members, if the industry is going to survive and serving them, then they’re going to expect faster payments. They’re going to expect loan decisioning and not several weeks for mortgage, but probably several minutes. So that is why I was able to work with my fellow board members, Ben’s and other members of the agency.

[00:17:29] Rodney: So we at NCUA have the office of financial technology and access. It is a group that is encouraging the development of fintechs and crediting is working together around providing needs and solutions. Uh, we have a FinTech discussion series. Where every week we bring in a different FinTech to discuss what they’re doing in partnership with credit unions.

[00:17:50] Rodney: And Vince, that’s not to micromanage, but it’s so that our examiners and our leaders have an idea of knowing what are the credit unions doing by way of their third party service providers, because. I don’t want there to be a disconnect from my excitement for fintech and then when I call the moment of truth when the credit unit is being examined and that examiner doesn’t understand the role of that fintech, but that’s a huge disconnect.

[00:18:13] Rodney: So that’s why we have the fintech discussion series. We’re looking to do more things around short takes, uh, in my travels across the pond in London. Regulatory body there, the financial conduct authority, they work in text in the regulatory environment to create a sandbox. So I’d like to see if there are things that we can do in that regard.

[00:18:33] Rodney: How do you harness the talent of the FinTech leader, but you give them that controlled environment initially to work out the regulatory impediments. So one of the things that I’ve charged our new director of financial technology, his name is Charles Spice is him being that. Person to bring ideas to the agency, but also to be that person that goes to the industry.

[00:18:53] Rodney: So expect to see him at events. Expect to hear him talking more about what are we doing to make sure that credit unions have the tools to succeed. And this, this is almost selfish when I’m about to say, if we don’t provide credit unions with the 21st century tools that come from FinTech leaders, do I even have a regulatory system to even oversee?

[00:19:14] Rodney: And you were talking about the consolidation. If smaller institutions are not getting these tools to retain members. Attract members and to do it safely and soundly then. We won’t have a system at all. So that’s a little selfish, uh, but at the end of the day, um, it’s just, how do we use the tools? And just as I’m talking about credit unions using the tools, we at NCUA needs to also use FinTech.

[00:19:40] Rodney: So don’t be surprised if we’re doing things such as a, an, uh, an examination tool called Merit, where we’re using a cloud based environment, uh, going to the day’s analog papers up to the ceilings, but now having a very streamlined, sophisticated. Uh, supervisory tool that we’re using. So it’s not just for me to advocate technological advances for the industry.

[00:20:02] Rodney: We need to do so as well. And you’re going to be hearing a lot more from our agency on that. So I’m excited about the office of financial technology and more to come.

[00:20:11] Vince: Now, and

[00:20:11] Vince: so are we, and once again, very forward thinking. So banks have been making investments in FinTech since I was at Citigroup in the, in the, in the mid nineties.

[00:20:21] Vince: And now we see credit unions, making investments in fintechs and as an angel investor, you know, I, I always look and say, this is like movies, right? Investing in movies, right? Maybe one in 10 is a blockbuster, but some of them aren’t going to make it. So how do you feel about, about credit unions, investing in fintechs?

[00:20:41] Vince: How do you feel about, do the members understand that what happens if one fails and they write it off? What’s the

[00:20:48] Vince: opinion there, Rodney?

[00:20:49] Rodney: You know what? If we don’t have a few failures, then I’m wondering what the, what are we learning? Um, again, credit unions are well capitalized. We’re not telling credit unions, I’ll go out and go to Vegas and bet on red or whatever the number is, we’re encouraging them to have an environment where they are able to innovate and to also embrace some of these new technological changes.

[00:21:11] Rodney: Um, credit unions are very fortunate that they have groups like yours that are angel investors. Um, there are a few other venture capital funds that are working specifically with credit unions and they’re able to give them partnership opportunities through these relationships. Um, to your point, not every FinTech investment is going to succeed, but I’m not telling them to go out and bet on a FinTech and then it going public.

[00:21:37] Rodney: I’m telling them to use these. Relationships and partnership opportunities to get faster about identifying credit needs for their members. How do you use the tools, uh, that some of the Fintechs are providing around faster appraisal? So, I’m focusing not on the investment piece as much as I am The credit unions finding partnerships.

[00:21:59] Rodney: Now, this is going to be incumbent upon them best to do their due diligence. So, while I may mention all these incentives that have been meeting with our agency, they may not be right for every credit. Again, we’re, as you look at any 3rd party, look at them to see if they make sense based on your size and complexity.

[00:22:17] Rodney: And we certainly want you to do your due diligence. Um, but again, I’m not getting as a bug down as I would shoot about investments and who’s going to bet and when that would be the wrong, uh, things to advocate. I’m advocating for finding those. Results oriented fintechs that are already serving a niche that already are trying to guard and market share and that they can find opportunities to work with their credit unions.

[00:22:41] Rodney: Vince, one of the things when I meet with fintechs and I traveled around before we hired, um, our new director, I was pretty much assuming that role of meeting with the fintechs and trying to get them, um. Better position to work with our agency, but I tell them, do not look at credit unions as you would banks.

[00:23:00] Rodney: I told them that credit unions are unique. It’s about service. It is about building those trusted relationships. So credit unions are not banks by a different name. And many of them really appreciate that because a lot of the social entrepreneurs, I can’t say all, but they’re very purpose driven. They’re very mission driven.

[00:23:17] Rodney: And they applaud the fact that credit use with that whole ethos of nearly 100 years now, people helping people. So I’m impressed with some of the success that I’ve seen with the partnerships. And I think perhaps a lot of that. Outstanding loan growth that I referenced earlier, 1. 7 trillion. A lot of that I think was catalyzed by a lot of FinTech partnerships.

[00:23:37] Rodney: I know with the 300, 000 PPP loans, the credit unions did during the pandemic. A lot of that was catalyzed through a lot of FinTech investments and partnerships. So more to come on that. Um, But again, I think that if we don’t provide these opportunities for credit unions, um, they’re going to miss out on, uh, things that will keep them, uh, relevant.

[00:24:01] Vince: Well, Rodney, great, great, great way to end the, end the podcast. Always forward thinking. I always enjoy hearing, uh, your views on the industry and certainly. On how you’ve been such a great champion for credit union. So thank you so much. Really do appreciate it. Uh, thanks so much for our listeners for tuning in, uh, make sure to subscribe so you can hear more of this podcast and I’ll make sure we’ll see you back here at the next 22 minutes in lending.

[00:24:26] Vince: Thanks again,

[00:24:27] Vince: Rodney.

[00:24:28] Rodney: Thank you for having me. I’ve enjoyed it.