What if you were put in charge of regulating all credit unions? What would you do?
Those are the questions I recently posed in Credit Union Journal in discussing how the CU difference is the cooperative model ("What I Would Do Were I The CU-zar," Aug. 15, 2011).
If that model continues to be under-exploited by credit unions, we risk being marginalized in the marketplace. The key is to establish a regulatory environment that supports collaboration. In this final column, I offer five strategies and additional ideas for doing just that.
Stop. Don't think of operational services CUSOs as vendors and consider the CUSOs as a collaborative extension of the owner credit unions. Services are not out-sourced to a CUSO but co-sourced among the credit unions through the CUSO. As Czar, I would help develop policies for shared due-diligence on cooperative activities. CUSOs would be permitted to act on behalf of their owners within the delegated scope of services. I would revise the due-diligence letter to credit unions to differentiate between the due diligence a credit union performs on third-party vendors versus a CUSO co-owned by the credit union.
Create. I would create an "Office for Collaboration" with a director and a cross-disciplinary collaboration team within the regulatory agency (including legal, examinations and small credit union development) to work with the industry to implement the collaborative model. The team is a signal within the regulatory agency and the industry that it is time to transform to a collaboration model. The purpose of the team is not to dictate what collaborations are initiated, but rather to create a favorable environment for collaborations to develop and flourish safely.
If new business models, new services and innovations are developed that require modification of regulations, the collaboration team will facilitate a prompt review of the proposed modification. The review will determine the effectiveness of the proposed collaboration and how best to manage the risks. The Team would work with the industry to develop education resources on the collaboration model and share information about existing collaborations. The goal is to create an environment where best practices are freely shared.
Develop. I would develop metrics to analyze the effectiveness of collaborations. For example, in operational services: What are the cost savings from operations? What are the costs savings through greater leverage with vendors? What additional expertise is made available to the credit unions? What additional services are made available to credit unions? Did the collaboration improve the quality of the services to the credit union. How were performance issues resolved?
For financial services: How many members are being served? What member complaints exist and how are they resolved? What additional risks does the credit union assume and how are they managed? And, how much net income is earned? The industry can share the metrics and inform each other as to which collaborations are the most effective.
Recommend. I would develop a recommended contract rider that credit unions and CUSOs could use with vendors to cover key issues such as member privacy, brand protection, indemnification, and the ability to unilaterally terminate the agreement on short notice without cause and additional cost. This would put the burden on a vendor to demonstrate why it is justified to deviate from the terms of the recommended rider. The goal is to create a gold standard on how vendors interact with the industry.
Yield. To survive, credit unions have to chase loan yield. Let us acknowledge that and work to make the process as safe and productive as possible. Encourage credit unions to share loan yield through loan participations or other means with effective due-diligence. Loan participations are also a tool to manage lending risks. There are pockets of expertise in mortgage lending and business lending in the credit union industry that produce high-quality loans. Adopt policies and practices that encourage collaborations that leverage that expertise to the advantage of multiple credit unions.
Act Boldly And Timely
Credit unions currently have capital that they can use to create collaborations. This situation will not last forever. More and more credit unions will be using capital to keep their deteriorating business model afloat. We must act now to form collaborations while we still have the time and the resources to make a difference.
Sometimes the safest thing to do is dramatic and contrary to our nature. It takes courage to act boldly. It is my fervent hope that both the regulators and the regulated have the courage to make the necessary changes to re-invigorate credit unions and that credit unions will continue to serve members for many years to come. Unless the credit union regulators are fully engaged in the transformation of the credit union model, the transformation will fail and if the transformation fails, the future of credit unions as we know them is in jeopardy.
Guy A. Messick is an attorney with Messick & Weber PC in Media, Penn., and general counsel to NACUSO. He can be reached at 610-891-9000 or firstname.lastname@example.org