Talking Credit Unions; CFTC Staff Demand Action on Commissioner's Behavior; Trade Group Merger Sparks Employee Angst
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It was a busy week in Washington financial regulatory circles. The SEC passed tough rules on SPACs — though the once hot investments embraced by the likes of Jay-Z and Donald Trump have mostly dried up. The agency also announced a vote for next week on a much more controversial proposal that could saddle big hedge funds and high frequency trading firms that play in the Treasury market with onerous new oversight. We had a preview of some of the looming issues. At the CFTC, we reported on the growing staff unrest over a commissioner’s allegedly abusive conduct. And on the lobbying front, we took a look at the merger of two powerful trade groups for credit unions. There are a lot of layoffs coming. For our Friday interview, we spoke with a top regulator who has just left the National Credit Union Administration.
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Friday Q and A: Rodney Hood’s departure earlier this month from the National Credit Union Administration marked the end of an era. His tenure – as a board member and chairman – covered the financial crisis, the pandemic and last spring’s regional bank panic. Hood was also the first African American to lead a federal banking regulator.
Nominated to the NCUA by Presidents George W. Bush and Donald Trump, Hood was known for his mantra that regulation “should be effective, not excessive.” He had a great interest in fintech, as well, and championed creating the agency’s office of financial technology and access. But Hood will probably be best remembered for his work on diversity, equity and financial inclusion. He hosted the NCUA’s first DEI summit, and the program has now become an annual event.
We thought an exit interview was definitely in order, and sat down with Hood last week in Washington. It was the day before his (very crowded) farewell reception where he announced that he planned to take some time off to recharge his batteries. But Hood also emphasized that he is looking forward to carrying on his financial inclusion mission in the private sector. Read on to learn his thoughts on helping “the credit invisible” and the policy fights between banks and credit unions. And he recounts his somewhat surprising visit to a cannabis dispensary. What follows is our (lightly edited and condensed) conversation.
Capitol Account: Tell us about credit unions.
Rodney Hood: The credit union system in America has been vibrant since the Great Depression. When you think about the hardworking men and women from the automobile plants, the manufacturing companies, many of them could not receive traditional financing. They wanted to buy cars, they wanted mortgages. And because they were not quote-unquote prime borrowers at that time, what did they do? They followed the models of the Raiffeisen Bank from Germany and Desjardins in Canada, and [built] a system of cooperative finance…Fast forward to a hundred years later, that system has grown to now include 138.8 million people throughout the United States. There are roughly 4,700 credit unions.
CA: And NCUA is their primary regulator.
RH: We administer the National Credit Union Share Insurance Fund in addition to our safety and soundness responsibilities…We are now celebrating 90 years since Franklin Delano Roosevelt signed the enabling legislation to create the National Credit Union Administration.
CA: Banks don’t particularly like credit unions. Why is that?
RH: The banks feel that credit unions are encroaching upon their territory…Credit unions are tax exempt. So that means if you decide to get a mortgage from your local credit union, you're likely to have a mortgage rate of about 4.5 percent when others are going to be charging 6, 7 percent.
CA: One can see why banks might thing that tax advantage isn’t very fair.
RH: That is something that Congress has decided, because credit unions are volunteer-based, because they are member-based…But that does create a lot of apoplectic moments from the banks. Mostly, it's much ado about nothing. Credit unions don't really have the competitive advantage the banks think they do.
CA: Why not?
RH: Credit unions are capped on the amount of business loans that they can make. The banks really don't talk about that. They are tapped out at 12.25 percent of their assets. Credit unions do not get to issue stock. Credit unions also have restrictions on their ability to do loan prepayment penalties. There are a number of things that really do serve as being a deterrent of credit unions being able to reach their full potential.
CA: Why then do we see all these policy fights?
RH: It's largely the bank trade organizations. They use it, notably, as a rallying cry: `What have we done for our members of the bank trade group? We haven't done much, so let's beat up on the credit unions. Let's at least remind people why they're paying us their exorbitant dues.’ So to speak. I actually don’t know if the dues are exorbitant.
CA: How did last spring’s regional bank crisis affect credit unions?
RH: It impacted them very little, in the sense that we did not have any contagion in our system. To date, no member of a credit union has ever lost a penny with an NCUA insured account…With Silicon Valley Bank, over 95 percent of their deposits were uninsured…But over 95 percent of the credit unions’ accounts are fully insured.
CA: Do you think that deposit insurance needs to go up in the wake of SVB’s failure?
RH: There has been a lot of talk – is the $250,000 limit sufficient? And you heard the FDIC and others say, maybe it should be $300,000 or $400,000. But you know what? Those talks have since ceased. We're not hearing that as much now…That would be a congressional decision, and I don't see that.
CA: How did financial inclusion become a top issue for you?
RH: I'm from North Carolina, from a family that's been involved in financial services for quite some period of time. My mom's side of the family, they were a part of creating a bank and an insurance company following emancipation. So in the 1800s, I had family members…creating opportunities for the newly freed and emancipated to have access to financial services. I grew up in a household that talked about these issues.
CA: What’s the best way to bring more people into the banking system?
RH: Teaching individuals. How do they understand the economy? How do they understand budgeting? I often talk about the transaction accounts – teaching people about checking and savings accounts. I have also championed gamification, meaning having games that younger students can use to learn. We still have a number of folks who are using money orders and things like that, which keeps them in a group of 26 million who are credit invisible.
CA: That’s not a small number.
RH: When I talk about this chasm everyone thinks it's the lower-income community. Some of the Ivy League schools that I get to work with – Harvard has a credit union, MIT, there's a whole network – even some of those students with flawless SAT scores still do not understand the difference between a credit card or a debit card…Everyone thinks there's just this one group of people who have that need for financial literacy. No, it’s really more sweeping.
CA: You’ve pointed out that pot banking is an issue of financial inclusion. How so?
RH: I was visiting a Napa Valley cannabis dispensary about two years ago, which put this on my radar. I was thinking it was going to be Cheech and Chong coming out with bongs, greeting me in the lobby. Yet I was met by Stanford MBAs – in blue suits and bow ties, and a dispensary office that looked more like a Four Seasons spa. It was that spectacular.
CA: So people who normally wouldn’t be shunned by the financial system.
RH: The owner, or investor in the dispensary, mentioned that he and his wife had found their dream home and were denied the mortgage. Not because of their debt-to-income ratio, but because the bank had determined, `You didn't tell us that you ran a dispensary – and we don't lend to those kind of people.’ Literally, we don't lend to that kind….That, to me, is almost another vulnerable community. I talk about low income, I talk about marginalized. The cannabis businesses have become vulnerable, marginalized communities – they can't park their deposits, they can't get financing. Many of them are getting loans at usurious rates. That is why I group cannabis under my whole financial inclusion regime…(Friday)
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Staff Unrest: CFTC employees are becoming increasingly agitated over the lack of an official response to accusations that Caroline Pham inappropriately dressed down an enforcement lawyer. In a sign of how seriously many see the matter, a veteran attorney took the microphone at an agency-wide town hall meeting last month and gave a lengthy speech calling out the Republican commissioner’s “highly unprofessional” actions. Attendees said the remarks, which were directed at Chairman Rostin Behnam, received sustained applause. The president of the derivatives regulator’s union also spoke about the controversy during the gathering.
While Behnam didn’t directly respond to all the questions about Pham’s treatment of workers, he surprised some in the crowd by agreeing that it might be a good idea to develop a set of workplace behavior guidelines for commissioners to follow. Sources said his comment, though vague, indicated that the brouhaha may be finally getting more attention from management.
According to several people, Pham wasn’t at the meeting. Though few CFTC workers regularly go into the office, sources said the town hall was packed because it was the same day as the commission’s annual holiday celebration. No surprise, but Pham’s behavior was a main discussion topic at the party as well.
The October incident occurred at a closed enforcement meeting, so it’s difficult to get a full account. Still, some details have come out in a grievance that the union filed against Pham. The complaint reported that the commissioner spent almost 30 minutes questioning the enforcement attorney “as if they were a hostile witness being cross-examined.” It added that Pham repeatedly raised her voice and made “angry facial expressions.”
The union also emphasized that the CFTC has allowed Pham to repeatedly intimidate and abuse employees, a situation that “has created and fostered a hostile work environment.” It demanded that Pham undergo mandatory harassment training and apologize to the entire workforce. “If the CFTC does not act immediately, it will only exacerbate the problem and empower Pham’s continued hostility,” the grievance noted.
Pham’s office didn’t respond to a request for comment. An aide previously told Capitol Account that the union was retaliating against Pham after she had complained about being harassed. A spokesman for Behnam also declined to comment.
Joan Manley, the longtime attorney who raised the issue at the December town hall, is a deputy director of enforcement. She joined the CFTC in 1997, and has worked her way up through the ranks. While speaking at the gathering, sources said, Manley stressed that Pham had been briefed in advance about issues in the case that she was concerned about – implying that the commissioner’s alleged rant was something of a setup. Manley didn’t respond to a request for comment…(Thursday)
Stressful Situation: America’s Credit Unions opened its doors on Jan. 1, promising to give its members “a faster, more responsive, more powerful voice on the national stage.” But those aspirations, employees say, are currently being eclipsed by more pressing internal concerns: looming layoffs and a multi-million dollar revenue shortfall stemming from the combination of Cuna and Nafcu, the two trade associations that became the new entity.
Within days of its launch, ACU mailed out an official letter to employees outlining plans to eliminate 25 percent to 30 percent of its 320-person workforce in Washington, Virginia and Wisconsin. “Selections for layoffs will be made from all job titles,” it said, with “the first wave” of reductions hitting in March and likely continuing through July. The note concluded by encouraging employees to “take the steps necessary to ensure your wellness during this time.”
Some describe the reorganization as a sort of Game of Thrones (or perhaps musical chairs) type situation where a handful of top managers named in December are evaluating all their reports for a much smaller number of jobs. A feeling of uncertainty pervades the association, people said.
Fueling much of the stress is the decision to drag out the firings over so many months. An internal document entitled “Employee Transformation FAQ” explained that the extended period is needed to “give leaders time to consider their organizational design, and make sure they have the right people with the right skill sets in the right roles.” The process, it continued, “also allows leaders to get to know staff from the legacy organizations and avoid making decisions based solely on prior relationships.”
Adding to the anxiety, ACU has said there will be some sort of package for people who don’t make the cut, but details are sparse. “It is important to note that we have never had a severance policy,” the FAQ noted. “However, due to the uniqueness of this situation, we are in the process of outlining what severance might include and will have that in place and communicated before there are position eliminations.”
A spokesperson for ACU said in an email that the recent layoff notice was sent to comply with Wisconsin law. “Aside from our executive leadership team, there have been no personnel decisions made at this time,” the spokesperson added. “The association is committed to treating all employees fairly and with respect, while remaining good stewards of our membership dues, throughout this transformation process.”
When the Credit Union National Association and the National Association of Federally-Insured Credit Unions announced the merger last summer, most saw it as a positive development. The idea was to unify credit unions’ advocacy efforts and make them an even more powerful lobbying force in Washington. Cuna’s president, former Republican Rep. Jim Nussle, was appointed the leader of the combined organization.
Despite the happy talk, most workers knew that financial issues were lurking because the two associations had a significant membership overlap. Those firms would be reducing their dues by not paying into both organizations anymore – meaning that the new group would have to lower its budget. According to the FAQ, ACU is predicting a decline of $8 million to $12 million in gross revenue by 2025…(Wednesday)
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