NCUA Chairman Todd M. Harper Remarks at the Indiana Credit Union League

As Prepared for Delivery on May 19, 2023

Good morning, everyone. And, thank you, John, for that kind introduction. It's always wonderful to be back home again in Indiana, but it's even more special when you get home for your birthday. So, I'm very pleased to join you today at Afena's new headquarters.

Thank you, Karen, for opening your doors to us and for opening doors to financial wellness in your community.

Credit Union System Safety and Soundness

Without question, the issue of financial stability at depository institutions has dominated recent months. We don't have to look further than the recent failures of Silicon Valley, Signature, and First Republic banks that have made headlines to see the importance of rapid and decisive regulatory action to stem the tide of fear when consumers' hard-earned savings hang in the balance.

Naturally, this has led to questions about the impact these events will have on the NCUA, credit unions, and their members, as well as the overall financial system. The recent turmoil in the banking system is a reminder of the need to manage capital, interest rate risk, liquidity risk, and credit risk. That is why they were all highlighted as areas of focus in the NCUA's supervisory priorities for the last several years. In concentrating on these issues when examining institutions, the NCUA must be forward looking, risk focused and ready to act expeditiously to resolve problems, even more so now when we recently saw other regulators fall short of this goal.

To that end, we recently updated our guidance on how examiners work with credit unions exposed to the market risk of rising interest rates. By increasing clarity and flexibility, these changes to the supervisory framework for interest rate risk are a win for both examiners and credit unions. However, managers and boards of directors must remain diligent in managing the potential risks on their balance sheets and continue to monitor economic conditions and the interest rate environment.

The good news is that the credit union system overall remains well positioned at this time to handle any economic disruptions and market uncertainty. In fact, 9 out of every 10 dollars in share deposits are insured. That has contributed to stability in the credit union sector in recent months and demonstrates the value of the cooperative credit model.

What's more, the NCUA is well positioned through the supervisory process to address any issues that may arise from broader market concerns about liquidity in the financial services sector. We will also continue to monitor credit union performance through the examination process, offsite monitoring, and tailored supervision. In addition, the agency is coordinating with other federal financial institution regulators to ensure the overall resiliency and stability of our nation's financial services system.

Interest Rate Risk, Liquidity Risk, and the Central Liquidity Facility

Changes in inflation, the interest rate environment, and broader economic conditions over the last year call for extra vigilance. A credit union's ability to manage interest rate risk will remain a crucial factor in its performance going forward.

The current economic environment also underscores the value of the NCUA's Central Liquidity Facility. The CLF functions as an emergency liquidity backstop for the industry, similar to the Federal Reserve's discount window. And, while the CLF is an effective mechanism for managing liquidity risk, legislative enhancements would provide the NCUA with greater flexibility to respond to future liquidity events.

"What's more, the NCUA is well positioned through the supervisory process to address any issues that may arise from broader market concerns about liquidity in the financial services sector. We will also continue to monitor credit union performance through the examination process, offsite monitoring, and tailored supervision. In addition, the agency is coordinating with other federal financial institution regulators to ensure the overall resiliency and stability of our nation's financial services system."

At the start of the COVID-19 pandemic, Congress allowed corporate credit unions to become a CLF agent for a subset of their members. However, when that temporary authority expired at the end of last year, more than 3,300 credit unions lost access to the CLF. Without this provision, most small credit unions with less than $250 million in assets no longer have access to a federally backed liquidity resource. And, the CLF's liquidity capacity contracted by nearly $10 billion.

Now is not the time to cut a liquidity lifeline. That's why the NCUA Board is fully united in its legislative request to restore the CLF's agent-member flexibility. That's why I asked Congress this week to restore this authority in testimony before the House Financial Services and the Senate Banking committees. And, that's why the agency will continue to engage with Congress on this legislative priority.

What's more, in these turbulent economic times, the NCUA remains deeply committed to protecting credit union members and the safety and soundness of the credit union system. No one has ever lost a single penny of insured share deposits within the credit union system. And, maintaining your members' confidence applies to both protecting their savings and ensuring their safe, fair, and affordable access to financial products and services.

Consumer Financial Protection

Earlier this year, I heard a podcast with former NCUA leaders and examiners talking about the agency's supervisory priorities for 2023. They went through the priorities listed in the January letter to credit unions one-by-one, with each item generating some strong opinions and lively discussion. However, when they arrived at the topic of consumer financial protection, the conversation ground to a halt. Just crickets.

To recover from this awkward silence, the podcast host recounted a story from when he was a problem case officer at the NCUA. He described a meeting in which his director of special actions at the time addressed the team about consumer financial protection, saying, "I don't give a [BLEEP] about that; are they making money?"

That attitude has unfortunately permeated the NCUA's work for more than three decades, but it is wrong. Let me be perfectly clear on this point: safety and soundness and consumer compliance do not compete with one another. It is not a zero-sum game where gains by one means instant and commensurate losses for the other. Across the banking and credit union systems, the two - safety and soundness and consumer financial protection - actually go together, just like Frank Sinatra's song about love and marriage. In fact, you can't have one without the other.

And, consumer compliance is not just a good principle, it is good business. De-emphasizing consumer financial protection in credit unions and at the NCUA carries real consequences, such as serious harm to consumers, who could end up paying more for financial products and services, being denied a mortgage to buy a home, and being blocked from wealth building; as well as potential litigation costs and reputation risk for the credit unions.

We need to think of these concepts as two sides of the same coin. In fact, the NCUA's vision statement - unanimously approved by the NCUA Board last year - is a clear confirmation of that relationship to, quote, "Strengthen communities and protect consumers by ensuring equitable financial inclusion through a robust, safe, sound, and evolving credit union system." The connection couldn't be more clear.

Cybersecurity Risk

Many of you might have also previously heard me say that the single biggest credit union issue that keeps me up at night is cybersecurity. Ransomware, social engineering, and phishing are but a few of the known examples of the cyber threats we all face. But, what worries me more are the countless threats we do not know about. And, these risks are likely to continue and accelerate in the foreseeable future. Therefore, all of us must improve our cybersecurity practices.

"And, consumer compliance is not just a good principle, it is good business. De-emphasizing consumer financial protection in credit unions and at the NCUA carries real consequences, such as serious harm to consumers, who could end up paying more for financial products and services, being denied a mortgage to buy a home, and being blocked from wealth building; as well as potential litigation costs and reputation risk for the credit unions."

To that end, we are implementing the new Information Security Examination procedures for credit unions to prepare for, withstand, and recover from cybersecurity attacks. And, while the NCUA is an independent agency, there are some things that take a whole-of-government approach - including protecting our nation's critical infrastructure - of which credit unions are a vital part. The White House issued its National Cybersecurity Strategy in March, which prioritizes the protection of critical infrastructure, including the financial services sector, through targeted grants, legislative action, and private sector engagement.

For the NCUA's part, the Community Development Revolving Loan Fund includes grants to support Digital Services and Cybersecurity. The application period for the 2023 grants opened at the start of May, and I strongly encourage all eligible credit unions to apply. For this iteration, we urged Congress to increase funding for these grants, because demand has consistently surpassed available funds. In 2022, the NCUA received 220 grant applications for $4.7 million, and ultimately, awarded only 90 grants for $1.5 million.

Thankfully, Congress more than doubled the grant funding to approximately $3.5 million for this year. As a result, the NCUA can award more grants and bigger grants. We also have two more new grant initiatives for 2023. The first is the Impact through Innovation pilot with a maximum award of $100,000, which is squarely targeted to under-resourced communities by focusing on banking deserts, affordable housing, credit invisibles, and fintechs. And, the second new initiative is the Small Credit Union Partnership pilot with a maximum award of $50,000, that will assist small credit unions in pooling resources to realize economies of scale and achieve their growth objectives.

Both grant initiatives will help institutions that support under-resourced communities innovate and negotiate the challenges of an uncertain economic future. Additional information on these three grants and several other initiatives is available online at NCUA.gov. For interested credit unions, the 2023 NCUA grant application period ends on June 30. I encourage all eligible credit unions to apply so that we can maximize the impact of these funds.

Cyber Incident Notification Rule and Legislative Priorities

And, in September the cyber incident notification rule goes into effect. By setting parameters for a reportable incident and the minimum notification requirements, these notifications allow us to work more efficiently with other agencies and the private sector to respond to cyberattacks before they become systemic.

Additionally, the NCUA continues to ask for legislative and policy changes to reinforce consumer confidence in the system and give the agency the proper tools to respond to any challenge. We are working to restore third-party vendor authority to close the growing regulatory loophole that prevents us from seeing the full picture of the risks CUSOs and third-party service providers may pose within the credit union system.

And, as I mentioned earlier, we also are engaging with Congress to make permanent the legislative enhancements made to the Central Liquidity Facility by the CARES Act, so we can better respond to future liquidity events.

Evolving System

In short, the credit union system is rapidly changing, and the NCUA must change with it. This is not your grandparent's or even your parent's credit union system. I can say that because both my father and grandfather were involved in chartering credit unions. My grandpa started a credit union at a soap factory in Northwest Indiana in the 1930s. And, my dad started a teachers credit union in Illinois in the 1960s.

"With the recent growth in the number of billion-dollar-plus credit unions, cybersecurity threats, and economic uncertainty, we see much greater risks for which the NCUA must prepare. And, the potential impact risks within the credit union system can have on the broader financial services sector and the economy have grown as well."

Back then, credit unions were extremely small, focused intently on serving members' needs, and posed limited risks to the broader financial system. Today, the credit union system is far more dynamic and larger with more than 400 credit unions with a $1 billion or more in in assets. At the end of 2022, federally insured credit unions had 135 million members and $2.2 trillion in assets.

With the recent growth in the number of billion-dollar-plus credit unions, cybersecurity threats, and economic uncertainty, we see much greater risks for which the NCUA must prepare. And, the potential impact risks within the credit union system can have on the broader financial services sector and the economy have grown as well.

Going forward, our focus will remain on the strength of the system, the needs of credit union members, and the NCUA's preparedness to respond to evolving economic conditions. As such, the NCUA will continue to be fair and forward looking; innovative, inclusive, and independent; risk focused and ready to act when needed; and engaged appropriately with stakeholders to develop effective regulation and efficient supervision.

In doing so, we will prioritize capital and liquidity, cybersecurity, consumer financial protection, and inclusion. And, by inclusion, I mean both diversity, equity, and inclusion within our agency and across the credit union system. And, to keep pace with the changing competitive and technological landscape, the NCUA will continue to foster innovation within the agency and credit unions, while balancing consumer financial protection and financial stability.

If we all do our jobs right, we will be successful in fulfilling the credit union system's statutory mission of promoting access to affordable credit, especially for people of modest means, for generations to come.

Overdraft Protection

That brings me to my last point, and an issue on which the Indiana Credit Union League has recently written to the NCUA Board. Over the last two years, the NCUA has made overdraft protection programs a supervisory priority. In doing so, our focus is not on well-crafted overdraft programs. I recognize the need for this product.

Instead, our focus is on unfair, abusive, and deceptive acts and practices when it comes to overdraft programs. As mentioned earlier, a robust consumer financial protection examination program at the NCUA is in the long-term best interest of the system, its members, and the Share Insurance Fund. Such a program will ensure that as the industry grows and evolves, it remains true to its mission and its commitment to serve members.

And, as part of that mission and commitment, many credit unions are now considering how to restructure their overdraft programs to increase fairness or even drop overdraft fees entirely. These decisions will require adjustments to revenue expectations, especially as overdraft fees make up a sizable proportion of non-interest income at some credit unions and as credit unions adapt to a changing competitive marketplace where other financial institutions are already adjusting fees downward.

In my view, overdraft fee programs that allow for authorizing positive and settling negative, permit the charging of multiple representment fees, and incorporate repeated NSF fees are antithetical to the purpose of credit unions, detrimental to members, and inconsistent with the credit union system's statutory mission of meeting the credit and savings needs of consumers, especially those of modest means.

The Consumer Financial Protection Bureau reports that the overdraft and related fees of credit unions took $2.4 billion from the pockets of members in 2019. To put that into perspective, that was one-fourth of all fee income for federally insured credit unions during that year. And, according to a recent CFPB study published in February, overdraft and NSF fee revenue has declined significantly for banks compared to pre-pandemic levels. Even though revenue made a small rebound immediately after pandemic stimulus checks wound down, it has now continued its downward trend through the third quarter of 2022.¹ The CFPB attributes this pattern to changes in bank policies and an increasingly competitive financial services landscape.

In response to this changing marketplace, many credit unions are changing how and when to charge overdraft fees. In fact, a growing number of credit unions and banks have eliminated or greatly decreased their overdraft fees during the last few years. I recognize, however, that not all credit unions are ready to make this change. If your credit union is going to maintain an overdraft program, you should work to ensure that it is well crafted.

"In my view, overdraft fee programs that allow for authorizing positive and settling negative, permit the charging of multiple representment fees, and incorporate repeated NSF fees are antithetical to the purpose of credit unions, detrimental to members, and inconsistent with the credit union system's statutory mission of meeting the credit and savings needs of consumers, especially those of modest means."

I also encourage you to consider incorporating features like linking to savings accounts; offering affordable lines of credit or short-term, small-dollar loans; and helping your members to build savings. Additionally, as more and more institutions dramatically decrease overdraft fees or drop them altogether, consumers will begin to expect your credit union to follow suit.

So, it may be time to rethink your overdraft program. The good news is that credit unions and banks that have already made the switch have created new revenue streams. You, too, can diversify your revenue streams in creative ways. For starters, build your member base and originate more safe, fair, and affordable mortgages and other loans. Once you make those loans, service them. And, offer other products your members need. For example, I know that Afena Federal Credit Union has created a creative and successful holiday bucks loan program. These are just a few ideas, and I am certain there are others.

John, as you rightly pointed out in your March 31 email to the NCUA Board, financial literacy is also critical to helping members help themselves in an uncertain economic environment. So, it is encouraging to hear your credit unions make educational resources available to consumers enrolled in your courtesy pay programs.

But, the reality is that punitive overdraft fees can harm consumers, and households hit by frequent fees often have their checking accounts closed. In addition, Black and Hispanic consumers are more likely to be charged these fees and to have their accounts closed, creating an inequitable environment of financial exclusion for people of color, instead of a better system of financial inclusion.

The dependence of some credit unions on these fees is clearly a safety-and-soundness concern as well, especially as consumer expectations are changing, and overdraft fees are falling. So, in 2022, NCUA examiners requested information about a credit union's policies and procedures governing its overdraft programs. In 2023, examiners have expanded the review of credit unions' overdraft programs, including website advertising, balance calculation methods, and settlement processes. The NCUA will also evaluate any adjustments credit unions have made to their overdraft programs to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees.

And, this year, during examination at federal credit unions with more than $500 million in assets, we are digging into authorize positive/settle negative transactions, as well as some other problematic fees. Credit unions below this threshold should expect us to look at these issues next year and plan accordingly. Our supervisory efforts here are aimed at creating a more equitable financial system that enables financial security for all.

Closing

In closing, if we all do our jobs right, we will be successful in fulfilling the credit union system's statutory mission of promoting access to affordable credit, especially for people of modest means, for generations to come. Thank you again for inviting me to be with you today. John, I look forward to our conversation.

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