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NCUA's Metsger speaks on consolidation, exam schedule flexibility

During his prepared remarksat the NASCUS Summit this week, National Credit Union Administration boardmember J. Mark McWatters said NCUA Chairman Rick Metsger has "changed thetone" within the agency since he took over the chairmanship from DebbieMatz in May. "I think Rick has taken the agency and reversed a lot ofthings much more quickly than I anticipated," he said.

But Metsger's work is farfrom finished. For example, NASCUS, the National Association of State Credit UnionSupervisors, continues to express concerns about how the regulator is handlingthe overhead transfer rate. The Federal Credit Union Act authorizes the NCUAboard to expend money from the share insurance fund for administration andother expenses related to federal share insurance. The percentage of NCUA'sannual operating budget that comes from this transfer is called the overheadtransfer rate, or OTR.

In an interview with S&PGlobal Market Intelligence, Metsger spoke about the OTR and what continuedconsolidation could mean for the credit union industry.

The following is an editedtranscript of that conversation. This is the second in a series.


Rick Metsger
Chairman, NCUA
Source: NCUA

S&P Global MarketIntelligence: Most observers seem to think the NCUA board will remain without athird member until mid-2017. Is that your expectation?

Rick Metsger: Obviously, it's not my call,but it is my expectation. I think everybody who would be able to advancenominations have other things on their minds right now (chuckles).

NASCUS, for one, continues toexpress concerns about the overhead transfer rate, claiming it is givingfederal charters an unfair advantage over state-chartered credit unions. Whatare your thoughts on that?

Thisis another issue that's gone on for a long time. It's kind of NASCUS' issuelike taxation is the bankers' issue. First, if you ask federal credit unions,they feel they're paying too much. The reality is that federal credit unionspay two-thirds of the operating budget. They pay an operating fee and they paya portion of the overhead transfer rate. So they're paying significantly more thanstate charters. [Federally chartered credit unions] feel that in the past, whenthe OTR was basically 50/50, which I would suggest was made as a political moverather than for fairness in terms of where the expenses were, they had to paytoo much for many years. They think the state charters were not paying theirfair share. But the fact of the matter is that it doesn't change the budget. Ithas nothing to do with the budget. So we're agnostic about it. I know that ifit goes one way or the other, the one kind of charter is going to complain, andif it goes the other way the other side is going to complain. We're not goingto be able to please everyone. What we need to do, and what we've worked veryhard to do while we're looking at it again, is to make sure that theallocations are fairly distributed based on the time that our examiners spendon a particular issue with a particular credit union.

NASCUS also says thatcontinually increasing the OTR makes it less likely that credit unions willever see a rebate from the share insurance fund. Do you agree?

Theanswer to that would certainly be no. The share ratio, and that's really whatwe're talking about, has been going down. One big factor in that is increasingshare growth in the industry. And the fact that credit unions make a 1% depositon their shares to the fund. In this low interest rate environment, that ratiois getting closer to the 1% because we're not making any money on it. That'sthe reason the ratio is going down, and it has nothing to do with the OTR.

The NCUA has talked a lotrecently about relaxing on-siteexam schedules. Obviously, the credit unions like the idea, but areyou confident you can maintain the same safety standards without the samenumber of visits?

Yes,because not everybody is going to be eligible for an extended exam cycle. We'regoing to have a very tight set of criteria based on safety and soundness andperformance. In order to have an extended cycle, other factors — like how muchwe can rely on the state to provide assistance in the meantime if the creditunion is state charter — will come into play. About 95% of the problems come in5% of the group. We want to put our assets where the risks are. There are about400 very small state-chartered credit unions that we insure that we have notgone in to do an insurance exam for at least five years. In some, we've neverbeen there because we didn't have the personnel. We keep being asked what weare doing to stop internal fraud. So we have to use our assets where the risksare. That's why we call it exam flexibility as opposed to extended examsbecause some will be extended and some will see us who have never seen usbefore.

We've seen the total numberof credit unions continue to fall due mainly to . Is this healthy for theindustry, or do you worry that we could reach a level where members will not beas well served?

It'sa function of the financial services industry, and it's been going on foryears. You see it in other industries. too. Consumers want so much more now.Not that many years ago, you went to your credit union to get a car loan or tohave a little savings. That was it. Now there is a whole plethora of thingspeople want that is so expensive to provide. And a lot of small credit unionsjust can't afford that. It can get exhausting with the compliance burden, too.It adds up. But my biggest concern is consolidation getting to the point thatit limits consumer choice. We don't want to have just a few mega-credit unionswhere you lose the ability to interact and have personal service. That would bethe worst possible scenario.