Small CUs: A member’s lifeline

Small CUs: A member’s lifeline

Regulatory burden is making it difficult for small CUs to do what they do best—serve members.

March 28, 2017

Beth Krahn began working at County-City Credit Union in Jefferson, Wis., when she was 15 years old. Not yet old enough to drive, her mom would take her to work, where her first duties included landscaping and cleaning up the parking lot.

She’s made a career at the credit union. Krahn earned undergraduate and master’s degrees at nearby University of Wisconsin-Whitewater, and today she serves as president/CEO for the $25 million asset credit union.

Jefferson is a community of about 8,500 residents. County-City opened in 1963 to serve the employees and families of the city of Jefferson and of Jefferson County.

It has since opened its membership to the community, and has about 3,300 members.

“The people we serve are our neighbors, the people we sit next to in church,” Krahn says. “Our kids go to school together. Do we want to see them succeed? Absolutely. We want to provide them with loans and savings accounts that will help them lead better lives. We want our community to thrive.”

As with every small credit union CEO, Krahn wears a lot of hats. She serves as her credit union’s de facto human resource (HR), marketing, and information technology (IT) departments. Having grown up at County-City, she understands her multifaceted role.

“When you have to do things because there’s no one else to do them, you learn fast,” she says.

But Krahn says the substantial resources required for regulatory compliance are hampering the ability of small credit unions like hers to serve members.

Since the implementation of the Dodd-Frank Act and the Truth in Lending Act/ Real Estate Settlement Procedures Act following the financial meltdown in 2008, Krahn and her staff have spent far too many hours buried in piles of paperwork.

“These regulations can be 300 pages long,” Krahn says. “We don’t have enough time in our day to read and implement them. We have thousands of dollars going out the door each year just to keep our forms up to date and compliant. Then you still have to conduct internal training because if the forms have mistakes as a result of employee error, we’re on the hook for it.”

Krahn says small financial institutions are being held to the same compliance standards as big banks such as Bank of America and JP Morgan Chase, who meet their requirements with virtual armies of compliance experts.

The time and resources Krahn and her employees dedicate to compliance ultimately comes out of members’ pockets, she says.

“The resources we could be using to offer better rates on loans and deposits and more services are being devoted to compliance,” she says.

Krahn’s concerns are a common refrain among small credit union leaders. Credit unions have had to contend with 190 regulatory changes from at least 15 federal agencies since the start of the financial crisis, resulting in more than 6,000 Federal Register pages to review and implement, according to CUNA’s Regulatory Burden Financial Impact Study.

And while growing regulatory burden affects all credit unions—to the tune of $7.2 billion in 2014, CUNA reports—small credit unions have been affected disproportionately.

Since 2010, regulatory costs have grown 43% for small credit unions (those with assets of $35 million or less), compared with 40% for midsize credit unions, and 28% for large credit unions, the CUNA study reports.

Plus, compliance costs amount to 1.12% of average assets for credit unions with assets of less than $100 million, compared with 0.33% among credit unions with assets of more than $1 billion.

It’s no wonder the credit union movement is losing roughly one credit union every business day—taking with them hundreds of credit union evangelists, says Mike Schenk, vice president of CUNA’s economics and statistics department and staff liaison to the CUNA Small Credit Union Committee.

Beyond the sheer volume of regulations, these rules “are marked by incredible detail,” Schenk says, and they’re not static. “So any time there’s a small change, it can affect many processes. There’s a huge volume of details that must be changed with very limited resources. I don’t know how small credit unions do it.”

NEXT: Key challenges

Key challenges

Regulatory burden isn’t the only challenge hitting small credit unions harder than others. Schenk cites two others:

1. Succession planning. This challenge is more nuanced than a simple lack of planning.

“It’s not that small credit unions lack succession plans,” Schenk says. “It’s that, frequently, the plans that are in place aren’t workable. That’s because, in the real world, it’s very difficult to find the talent to replace a retiring small-credit union CEO.

“Leading a highly-regulated, operationally complex financial institution requires an astonishing amount of know-how and grit,” he continues. “And people who have the breadth and depth of knowledge required for these jobs—assuming you can find them—often aren’t willing to work so many long hours for modest pay.”

For many, merger becomes the only option, Schenk says. Many of these stalwarts are nearing retirement age.

“So you have this big demographic that is close to retirement, and they have no succession plan,” he says. “It’s hard to find a replacement who’s willing to put in that amount of time and who also knows regulations, lending, and the subtleties of operating a financial institution. For many, a merger presents the best option going forward for all parties.”

2. Lack of scale. Small credit unions don’t benefit from the economies of scale their larger credit union counterparts enjoy.

Larger credit unions have substantially larger asset bases over which they spread fixed costs associated with HR, accounting, and IT. That difference is clear in credit union operating expense ratios.

In the first nine months of 2016, credit unions with assets of $100 million or less had average operating expenses of 3.62% of average assets vs. 2.77% for those with more than $1 billion in assets, according to CUNA’s economics and statistics department.

That 0.85% difference gives larger institutions more pricing flexibility and the ability to offer more products and services, which means greater membership and asset growth.

“Small credit union managers increasingly recognize that a key to overcoming this challenge is engaging in partnerships that allow them to spend more time running their business and less time doing those tasks for which they have less expertise, such as HR and accounting,” Schenk says. “But collaboration can be messy. It takes time. And there are often out-of-pocket costs involved. It’s not a cure-all.

“CUNA’s primary focus is advocacy but we also provide a broad portfolio of no-cost or low-cost services to help small credit unions meet challenges head-on,” Schenk explains.

He cites the roll out of an online Small Credit Union Community during CUNA’s Governmental Affairs Conference (GAC).

The community, Schenk says, “will make interactions more common, richer, and more frequent because the audience will be larger and more interactive. And the hope is that it will foster more ambitious collaboration efforts as well.”

NEXT: A member lifeline

A member lifeline

Changes to the regulatory environment and other issues have made life difficult for many small credit unions. But one $2.5 million asset church-based credit union is thriving nonetheless.

The 422-member Queen of Peace Arlington (Va.) Federal Credit Union is celebrating its 53rd year of existence. While its mission and members have changed some over the years, the benefits it provides members remain the same.

Queen of Peace, which serves a small Catholic parish, opened its doors in 1964 to help its primarily African-American membership obtain credit.

It started in a small corner of what’s known as the Matthew 25 building, with a concrete floor and a room that was freezing in the winter and sweltering in the summer.

The credit union’s sole employee, part-timer Dan Morrissey, serves as CEO, treasurer, compliance officer, and more.

“Change has been a double-edged sword,” he says. “When there’s not as much going on [in Washington] it’s easier for us to get noticed, while expanded fields of membership can make it hard for people to know we’re here. But we’ve also seen asset growth that is unusual for a credit union this size.”

Queen of Peace has long operated with a net income ratio higher than many credit unions 20 times its size. In December 2007, that ratio was 1.57%, compared with 0.42% for credit unions in its peer group (less than $2 million in assets) and 0.64% for credit unions with assets of $10 million to $50 million.

Although the financial crisis hurt credit unions of all sizes, Queen of Peace has managed to keep its net income ratio above industry averages from December 2008 until now.

“A large part of our asset growth has been members bringing in large deposits, which in turn helps us lend more,” Morrissey says. “Our membership is made up of people committed to helping others, and the more they support the credit union, the more of their fellow members we can support.”

John Lynch, a member for three years, says he joined the credit union to save money and to help the institution offer competitive products members need.

“My aunt was the president of a church-based credit union in Wichita, Kan., and she visited us once a year while in town for the CUNA GAC,” Lynch says. “She would ask if I’d joined my church’s credit union. So I did, and it’s been a good decision. I probably don’t make deposits as much as I should, but it’s good to save some money and support this church and the credit union in its mission.”

While Queen of Peace doesn’t have an official mission statement, the phrase, “Not for profit, not for charity, but for service” adorns its monthly newsletter and other communications, and it’s repeated often by board members.

It’s a mantra it puts into action with its member interactions despite occasional resistance from regulators.

NCUA examiners, for example, don’t like to see loans to members with low credit scores.

“But that’s something we push back on,” Morrissey says. “In fact, we just completed a loan to a member with a 475 credit score. If we can’t give these members loans, they’re going to go elsewhere—probably to a place that won’t treat them as well as we do.”

This attitude toward lending has served the credit union well, says Jim Libera, board member.

“The effectiveness of our approach speaks for itself, as we have very low delinquency,” he says. “It’s because we know the people, and that’s an extra element of due diligence that works. It’s a testament to how special the credit union/member relationship is.”

Board Chairman C.C. Jenkins says he’s seen time and again how predatory other lenders can be, and how Queen of Peace takes a much more consumer-friendly approach.

“Predatory lending has hit our members hard, particularly those in the Hispanic community,” Jenkins says. “People often just don’t know how bad their loans are. We had a member come to us recently, with a decent credit score, who was paying 22% interest on a car loan.”

Morrissey says the credit union does its best to look at all the facts and members’ circumstances.

“We deny a few loans outright,” he says. “But there are times we’ll have to work with a lower amount or different terms than the member is seeking.”

He points to a recent example of when a disabled member wanted to get a loan to buy an accessible van, but the only option from other financial institutions was for the member to make a 50% down payment.

“When he came to us, we did our research, looked into those kind of vehicles, and put our heads together to work something out,” Morrissey says. “We ended up financing 90% of the loan.”

Queen of Peace has several ways to boost members’ financial literacy, from a free credit review service to encouraging automatic deposits to increase savings. It also encourages young members to open and maintain savings accounts.

Morrissey credits the commitment and diverse backgrounds of its board members as one of the key ways the credit union continues its work.

Jenkins also serves on the board of $860 million Wright-Patman Congressional Federal Credit Union in Washington, D.C., and Libera had a long career in investment banking.

One board member is the granddaughter of a longtime former director. Others have been Ph.Ds, CPAs, and IT professionals.

“Our diversity as a board has been a real strength throughout the years and has helped us weather the tough times,” Libera says. “It’s something all small credit unions should look to.”

NEXT: Member loyalty

Member loyalty

Likewise, County-City isn’t letting today’s challenges keep it from serving members.

Jefferson County, for example, has a growing Hispanic population, and Krahn prides herself on the credit union’s inclusiveness, led by a bilingual staff and community outreach. But regulatory burden is making it difficult, if not impossible, to give members what they need.

“Lending to undocumented individuals is a compliance nightmare,” Krahn says. “So here we are, a credit union that wants to do good in the community and wants to offer new services that will help people coming into our community. But compliance is stopping us from being able to what credit unions were designed to do. That’s so frustrating.”

And even though County-City is just 10 miles from the University of Wisconsin-Whitewater and 30 miles from the University of Wisconsin-Madison, “we got out of student loans because of all the regulations. That’s something our younger members really need,” she says.

The hit compliance makes on earnings also affects the credit union’s ability to roll out new products and services.

“I would love to have remote deposit capture and more services for our younger members,” Krahn says.

What’s more, she says, regulations that were designed to check the bad actors that created the financial crisis are instead undermining financial institutions that help small communities thrive.

“The regulations that are in place weren’t even needed here,” Krahn says. “We already had those safeguards in place for our members and the financial health of the credit union. We wouldn’t do a loan unless it was in the best interest of the member and they had the ability to repay.”

Krahn fears the loss of community-based financial institutions as more small credit unions seek mergers due to regulatory burden.

“Even though there are other places to get loans and savings accounts, [other providers] don’t offer them the same way we do,” she says. “We will do loans for people who are in dire need. We’ve made loans for people who need money for groceries. We’ve had people who come in because their glasses are broken—people who literally can’t see to do their jobs.

“Those loans don’t make us money,” Krahn continues. “But I can’t see those same people going to a bank and getting a loan for groceries or glasses. We know our members so well, we know they’re going to pay us back. They’re loyal to us, just as we’re loyal to them.”