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John Kolhoff Of The National Association Of Credit Union Supervisors (NASCUS)



Today, I catch up with John Kolhoff SVP of the National Association of State Credit Union Supervisors (NASCUS). We talk about the dual chartering system and its role in maintaining the strength of both state and federal charters. We also discuss the state of the current economy, as well as the challenges and opportunities for credit unions.

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John Kolhoff Of The National Association Of Credit Union Supervisors (NASCUS)


I'm excited to be with John Kolhoff. John, how are you doing?


I'm great, Mark. How are you?


I'm doing well. For those of you who may not know John, he's the Senior Vice President of Policy and Supervision at NASCUS, the National Association of State Credit Union Supervisors. Before that, he was the Commissioner of the Credit Union Department for the State of Texas. He had a few different roles, but his last role in Michigan was as Director of the Office of Credit Unions for the Department of Insurance, Financial Services.


John, that's where we first met way back when I was a Regional Director out of Albany. We had a lot of good interactions there with NCUA and in both of our former roles, you with the state and me with NCUA. We would always see each other occasionally at meetings that we would have relative to that and at the NASCUS meetings back in the day. I'm excited to get a chance to chat with you here.


I am too. Thank you for inviting me to your show. It's a great way to get information out. I do appreciate it. I listen all the time. The dialogue you have and trying to be forward-thinking about what's going on in the industry is awesome.


I appreciate that and having the opportunity for me to pick your brain to hear what's going on state charter-wise or looking to the future on what's going on in credit unions. We were chatting a little bit and talking a little bit about the Dual Charter Resource Initiative that I saw announced in a couple of different places. I saw it on LinkedIn and probably at cutoday.info or CUcollaborate, one of those emails that come up. What's going on with the Dual Charter Resource Initiative that NASCUS announced?


The Dual Charter Resource Initiative was started by NASCUS a few years ago. We're getting into utilizing those funds. We've had some contributors. The purpose of the DCRI is to look forward and try to make sure that we maintain a strong dual charter. That's what makes the United States system work so well. Yes, we have federal and state regulators, but we always have different options and different experimentation going on.


We have different viewpoints looking at institutions. Two sets of eyes on a lot of the stuff, particularly when there's a state charter involved is very important. The Dual Charter Resource Initiative is meant to ensure that we maintain both strong state charters and strong federal charters so, as we move forward, we continue to evolve the credit union industry in total and not just leave one or the other a charter behind.


Along those lines, one of the differentiating points is field membership. There are 47 or 48 states that have state charters. South Dakota and maybe another 1 or 2 don't have state charters. Field membership is one of the broad areas that states have a different approach. In some instances, it may be beneficial for credit unions to have the state charter. In other places, there might be a state law that's been sitting there on the books for whatever reason and hasn't been changed. Any thoughts? When you were in Michigan, there was a big change to broaden the opportunities for credit unions and Michigan State charters. Any thoughts specifically on the field of membership?


Michigan was on the leading edge of that years ago. We did our first big change in 2003. It was when it became implemented, and it did evolve what we thought of as the field of membership in Michigan. It removed the ability to serve. It removed some of the other non-competitive parts of some of the credit union acts that are out there.


We're seeing a huge push for states that are now going through looking at modernization, particularly related to the field of membership. It's all related to the dual charter. We're seeing the Federal Credit Union with the NCUA board moving forward with trying to get more robust fields of membership for their chartered institutions. As that's progressed, now states are doing a lot of the same thing.


Many states have been doing it for years ahead of the curve. Michigan is one of them. Many others are looking at it now. In fact, I'm doing a lot of work for states, talking to them about membership options for their recodification that they're looking at. Brian and I have worked with three states directly. I've even testified in front of the North Carolina Legislature regarding a field of membership adjustment that they were planning on making.


It’s still very controversial within the states. When you look at the grant totality of it all, when you see what the federals can do and you got a state that's fallen behind in their field of membership, you do understand that that's the beauty of this. If those credit unions can't get it from their stateside, then they're going to get it from their federal side. If they can't get it from their federal side, they're going to get it from their state side. As long as it's safe and sound, we're not going to be approving things that are way above outlandish ideas. Unless it's a safety and sound issue, we shouldn't be involved as regulators.


WFC 113  | Dual Chartering System
Dual Chartering System: If Credit Unions can't get field membership from their stateside, they will get it from their Federal side. If they can't get it from their Federal side, they will get it from their stateside.


That's a classic example of the value of the dual chartering system. As states looked at their rules and broadened them, a new NCUA board comes in. They have everybody come in and say, “We need to fix this and this.” The field of membership is always something people kind of push on. There have been lawsuits in the past at NCUA where the American Bankers Association will push back on the opposite side. The fact that the states are able to make some changes keeps NCUA aware of the fact that maybe they need to be taking a look at it. When I was still there, there were some changes along the low-income designations.


The Federal Charter was able to pick up a little bit of value creating some regulations that provided some flexibility, which then put the states to look at it and say, “Now that NCUA has done that, maybe we can learn from that.” That's a classic example of how both systems operate separately but with a little bit of harmony, and we can always learn from the other side.


It speaks, and it's not the dual charter itself because, as you know, I was a bank examiner before I was a credit union examiner in a previous life. I also think that we, in the credit union industry in the United States, still have the ability. We've still maintained a nonhomogeneous environment for our credit unions. The banking side doesn't matter if you're a Wisconsin Federal Charter or a California State Charter. It's all homogenized to such a level because of the insurance. With our work with NCUA, with the state charters as they are, we still have quite a bit of experimentation that could happen at the state level and sometimes at the federal level that allows that. NCUA has still continued to maintain that. There are differences between the state and federal charter.


There are some things federal charters can't do, state charters can't do, and that's okay. There are certain things that they need to do for insurance, and that's all right. We still have this. I rue the day if we become a dual fallow charter where everything is static because that doesn't make any sense. We're not evolving. I also would be concerned if we get to the point where every credit union in every state is going to look pretty much identical because there's limited, whether it's for insurance reasons or charter reasons, to the same products, same services, and the same way of doing things. That is not what we want. It doesn't create a very evolving industry.


It’s very well said. You were a bank examiner, a state examiner for credit unions. I was a credit union examiner for NCUA. NCUA has their federal exam program and then they have the insurance review process for state charters. Before I left, there was the initiative. I can't remember what they called it, but they were evaluating how to evolve that insurance review process. There was a pilot program where some states participated where they alternated.


NCUA’s policy is if you're over $1 billion in assets, NCUA will participate with the state or have their insurance review. They went to a pilot program where they did alternate where NCUA just went solo, and then the next year, the state would go in some states. There are some states where it's a joint all the time, and perhaps the state will issue the report. NCUA will have input into the report. Are any thoughts relative to how that process has evolved or to that joint exam process?


This is an NCUA pilot program that several states were involved in. There were three types of joint exam programs that you could get involved with. You could get involved in alternating where NCUA and then the state would do every other exam. They would alternate who does the exam and who writes the report. The other type was both state and federal examiners would be on site, but you would alternate who was the author of the exam. This time, it would be NCUA. Next time, it would be the state. The way it typically works now in most states is the state is the author of the exam, and NCUA is perfectly capable and can issue their own report if they wish to.


Many times, they're just issuing it with the states, even though we work together on it. You're splitting the workforce on it. The third type of program is both the state and NCUA are onsite and they both sign the exam. It's jointly issued by both local parties that will have the NCUA logo and the state logo on it, signed by the examiners, etc. We experimented. Some states chose different versions of that. NCUA is still rounding up the data collection from the surveys on the credit unions and the examiners on how they thought that went. This is just my personal opinion. I'm just speaking from what I've kind of heard in the background without anybody making any official claim yet.


Some states are already doing this type of activity, which mirrors what's done on the federal side or the banking side over there. Those are the types of exams you have on the banking examination set. You're going to have still some states that are going to say, “No, we're going to continue to do it the way we're doing it, even if they participated in the pilot,” that they want to continue to author the reports. Again, NCUA can issue a letter.


They can issue another report if they wish, or if they don't agree with the contents of the report, or if they're onsite with the state. You're going to have a mix of that. That's good because the one thing we want to make sure of, particularly when we're looking at the potential for economic challenges and the possibilities of recession and regular impact on credit unions from the interest rate risk environment, is you want to make sure that you have enough resources in total to cover this.


WFC 113  | Dual Chartering System
Dual Chartering System: When looking at the potential for economic challenges like possibilities of recession, make sure you have enough resources to cover it.


That's another beauty of the dual charter that we have state regulators that are out doing things and federal regulators that are doing things in that state potentially, but when they have to do something somewhere else, NCUA has to go where, because there's a really bad thing happening somewhere else, they have to pull resources from Tennessee to go somewhere else because there's a big issue going on there. They can pull those resources and still have a strong regulator who's got enough capability to deal with it.


Not to say that it always works that way, where the states are helping NCUA out because there are times when a state, for various reasons, has limited resources. Maybe it's some mass retirement of their folks. There's a whole gambit of reasons. Maybe it's a program that has lost funding from the state government. NCUA then stepped in and made sure that those institutions within that state have had strong examinations and continue to maintain an industry that the membership can be confident in. That's what our job is.


That reminds me of 2008, 2009, and the Great Recession. At the time, I was Regional Director in Albany and we picked up Nevada. That was the issue of the Sand States. Florida, Nevada, California, and Arizona had more challenges than the rest of the country. The resources NCUA had on the West Coast were not enough to deal with the concentration of code 3s, 4s, and 5s that hit the country. We picked up Nevada. We picked up a couple of state-chartered credit unions in California that we supervised out of the East Coast.


NCUA can have an army where they can assist with resources. The flip side of that is the states have some expertise in some areas that NCUA might not, and the split value life, the CUOLI, whatever. The states were educating NCUA relative to that so that NCUA could figure out how they were going to understand that and how that worked on the balance sheets, etc.


On the state side, our examiners or our agencies have been doing banks for over 100 years. They've been doing insurance companies for the entire lifetime of that industry. Securities potentially, depending on the agency, there are different areas that are covered. In our agencies in the states, there's a lot of different expertise that NCUA has in particular areas. I can remember when derivatives first became on the NCUA’s radar screen. There was a lot of legitimate concern and worry about what impact that could have on the insurance fund, and rightly so. A bunch of us sat down and walked through on the state side what we look at in insurance companies and banks. We had some credit unions that were at that time doing some derivative work, and it hadn't caused any major problems. In fact, it was a mitigator for risk.


That's a great point. Derivatives, I've got several clients that have that authority and have utilized it in this environment that we've got going on now. I've done a lot of shows on liquidity with one of my team members, Todd Miller. One of the things I say a lot is liquidity doesn't matter until it matters, and then it's the only thing that matters. I'm seeing that brought up a lot now. I was talking to a credit union whose exam started the day after Silicon Valley Bank failed. Friday, the state of California took them over. By Monday, they were gone. That credit union had an exam starting that Monday, and it was a full-court press.


They had a couple of things that they needed to deal with. A lot of credit unions, everybody, or the whole financial industry is learning about uninsured deposits. It's not new, but you're looking at it in a new light because of how that all came about and the speed of light that you talk about looking forward. Social media played a big role in that where they're able to move the money quicker. They were able to become aware that there was something that might make them want to move their money.


That's something I know the FDIC, OCC, and the Federal Reserve are taking a look at what that might mean for insurance limits, regulations, etc. I imagine at NASCUS, you had a lot of phone calls and maybe different committee meetings and different things. “What does this mean? What does it mean for us? What does it mean for credit unions?” Any thoughts on that whole interesting situation?


As you implied there or stated explicitly, there were some unprecedented aspects of it. The impact of social media and the quickness of the loss of confidence in the community was unprecedented. The speed and ease with which deposits could be withdrawn were unprecedented. For that, those institutions are membership-based, particularly related to what you see in credit unions being almost totally uninsured, which was also an unprecedented or pushing it, I would say. However, you go back to basics. I don't remember when you started, Mark, but I was at the edge of the last big liquidity crunch when I started. They were hounding us. As an examiner, we learned the basics of gap review.

The impact of social media to Credit Unions and the loss of confidence in the community were unprecedented.

Not generally accepted accounting principles, but gap as in short-term liabilities, long-term liabilities, those short-term and long-term assets and matching those up. We've got into these systems with our interest rate risk modeling which is very complex. We're doing this with CECL too. We're creating this very complex modeling that is supposed to give us a better guess at what our credit risk is or our interest rate risk modeling.

That gives us a better guess of what our liquidity thresholds are or interest rate risk threshold is. There are a lot of ways to build what I would call bad assumptions into those models or assumptions that don't reflect. The easiest one to explain is when you talk about an allowance methodology, and someone starts doing business loans, you and I may have this discussion with credit union commercial lenders. They start doing business loans, and guess what? They don't have any losses historically.


For their allowance methodology before CECL, they would just say 0%. We need to figure out what you think your losses are going to be. At least take a guess. It's not going to be zero. It’s the same thing with this. I could hear that conversation after SVB with the examiner and with the interest rate risk modeling person saying, “Our non-maturing deposits are not sensitive to market rate changes because they haven't changed in twenty years.”


Guess what else hasn't changed in twenty years? Rates haven't changed in twenty years. I could see that being pushed, and we've got the data to back this up. How does an examiner, even if they've got 10 or 15 years, go up against modeling data that is supported by real data? On the litmus test, does this make sense? It’s like, “Ninety-five percent of your deposits are uninsured, and you're saying none of them are volatile?” We used to call those volatile funds. Now they're called non-core.


It's interesting times relative to that. NCUA has their net economic value (NEV) test, which provides some value, but it also is a little bit of a rough justice because it doesn't give credit unions credit for other things. I've had a lot of numbers here on the show and with credit unions relative to that.


The SVB issue thing was a good wake-up call for all regulators across the board, state and federal, to remind all of us of the importance and the basic way liquidity works, as you said so appropriately. You don't care about liquidity until it's gone. You're messing around trying to figure out how you're going to make the day's payroll and go back to the, “It's a wonderful life with the $2 that goes in the safe. I'm hoping that they make more.” That is some of the discussions that take place. It's usually not $2. It's usually, “How am I going to get covered in the hole that I've got from my correspondent account tonight?”


It's like all you can think of at that juncture. Once it becomes an issue, it becomes the one and only issue at times. We touched a little bit on state laws and the difference that provides. It creates some opportunities for state charters to have their own set of rules and different things like that. In the joint exam process, you have these joint exams or NCUA goes in separately and there are state laws. It's difficult for NCUA. There are enough rules for NCUA examiners to have to understand relative to the federal rules, and then there are the state rules.


In a joint exam, there are state laws. When NCUA comes in, it's a safety and soundness review. If the state is the regulator, there are state regulations, and the state will deal with that in the joint exam process. Do you have any thoughts relative to how that process works?


We have this issue even on the state side when we're dealing with multi-state credit unions that are operating in various states. As you know, from your work with NCUA, every state has some weird financial services law or a plethora of them, but there's always something weird about insurance or about selling gap products or all those types of things. There's always something strange. Yes, that's an issue for NCUA.


WFC 113  | Dual Chartering System
Dual Chartering System: Every state has some weird financial services law or plethora of them actually depending. However, there's always something weird about insurance or selling gap products, which is an issue for NCUA.


NCUA looks at compliance as much as they can with state law because you want to check that box on the management side to make sure that they're doing what they need to do. As an example, we're working on the interstate activities agreement to make the issue of interstate branching or interstate field of membership of competitive disadvantages for state charters. If you're a Federal Credit Union, you don't ask a state to put a branch in. You just build a branch. You have to ask NCAA for a field of membership, but the field of membership is not restricted to state lines if you're in an MSA or anything like that.


A Federal Credit Union may get, as an example, Las Cruces in New Mexico as well as El Paso in Texas in one field of membership. Dealing with interstate activities and we sign these agreements, we're trying to make sure that states work together for several reasons to consolidate what's going on. There's only one prudential regulator of that institution, but the whole state has an important role to fill, making sure that their laws are being complied with by whatever activities that institution is doing within their state too.


On the banking side, it's been going on for years, but you'll have regulators on the whole state who will be performing part of an exam with the home state and the chartering state.

That home state will lease out those examiners to cover that. They can go in there and see that, “You're operating in Massachusetts. Are you complying with Massachusetts law?”

Massachusetts requires CRA, so they might even look at those types of things. As you know, state law does apply to a state institution, even if it's foreign operating. They can't be preempted as what you normally will see with a federal institution operating in a foreign state

It's a very big thing. Yes, we're working on that. Our interstate activities are now being circulated throughout the country for our state regulators to sign it. We currently have eleven states that have signed onto it to raise their hand to say, “We know that we've got interstate activity. We know that we're going to be involved in it both sides of the transaction as a home state and a host state. Here are some of the basic rules of how we're going to operate in this.”

State law does apply to a state institution, even if it's foreign operating.

It's got to be very basic and centered on three things. How are you going to communicate, who's the primary regulator, and what's the function of the host state? Information-sharing agreements in place are part of this. It is trying to address all those things that are necessary for the base level to make sure that those two states are talking about an institution when they need to be. We don't want to see a case where a credit union from Michigan is operating in Texas and breaking a Texas law unknowingly probably because they were chartered in Michigan. That law does not apply in Michigan.


That's a fantastic point. You talk about the states that are signing on relative to that, and there are probably more that will get added to that as time goes on. I'm guessing that that might be a topic at the NASCUS summit in Nashville, you've got the 58th Annual State System Summit coming up in August 2023. That might be a topic that's on the agenda there, but what's happening in Nashville related to state charters?


The State System Summit is a great opportunity for both the regulators and the credit union industry, both trades and the credit unions to be involved in these conversations about what the future of the industry looks like and what the regulatory footprint has to look like to match up and make sure that it's not in the way of whatever's evolving in the industry. Those conversations, as always, are just instrumental.


Despite the great education that NASCUS brings to the event and the great forward-looking things that they do, that's the primary thing for it. When I was a regulator, it is for me to be able to talk to not just the state's credit unions that I regulate but also other states to get their unbiased and unblemished opinion of what I'm thinking on a certain topic. Some of my best friends are credit union folks, when I was a regulator, would give me a blatant, unfiltered opinion.


What did you think when you wrote this?


Sometimes institutions aren't that comfortable saying, “Mr. Kolhoff, you're full of crap.” Those discussions are the best. We're going to be concentrating a lot on FinTech and blockchain. We've got Becky Reed from Lonestar Credit Union, who is tremendously involved in FinTech and blockchain and all those days, as well as Charles Vice, the new Director of Financial Technology and Access, to talk about those things.


We're going to be talking about the next big idea that's always a big presentation, which is FinTechs that are hitting the market now and are winning what their membership thinks is the best idea for the future. We're going to be talking a lot about some of the regular stuff we talk about every year, what's going on, what's new in fraud, what we see in those areas, how can credit unions protect themselves, and how can regulators make sure that they're helping to assist in that process. It is a very busy schedule. It will be on the 27th and 28th. We will be talking about a lot of things, I'm sure.


You've got Charles Vice from NCUA. I imagine there might be some NCUA staff and/or board members that come in from different places.


There's always at least one board member. I know Chair Harper's already committed to giving a presentation. I don't know if that would be about the time that Hood might or may have been, depending on what's going on. Hood might not be there, but if they're available, my guess is that 1 or 2 of the other board members will be there, even if they're not speaking. Usually, they're attending all of them.


When you talk about hearing from the real world, there's a book called The Wisdom of Crowds that I refer to a lot. It helps the regulators see their blind spots. That's an opportunity for credit unions to participate. If someone's interested in that, they can find out how to participate on your website.



On our website, it's one of our featured events. There's a link there that will outline. We’ll outline how to get your room. Everything else that you need to know is there, or anywhere at NASCUS.org.

I know you do a lot of cybersecurity training at other events and different things. Are there any other events coming up that credit unions should be looking forward to that you want to reference here?


When the cyber event is going on, that's the big one that I'm getting ready for. I know we have the cyber conference. Our S3 State System Summit is the big one I'm working on. We always have our marijuana one too. That one is coming up. I don't know when, but there's always a Cannabis System Summit. That's coming up for those that are interested. It's in Chicago.


John, are there any questions that I should have asked you here that I didn't?


You asked a lot of great questions. You can tell from the dialogue that I've had that my big passion for the credit union industry being a regulator and switching seats. Being a person representing regulators on the national front with Brian, I would remind all of the credit union executives, all the board members, and all the regulators that they are a piece of this puzzle that works together to ensure safe, sound and, most importantly, viable future financial services to their members and the passion to make sure that we continue to make sure that evolves. A lot of our discussion was on FinTech, the blockchain, and what's the future going to look like.


Most prescient regulators and credit unions are thinking about what we look like 1 year, 3 years, and 5 years down the road, and even 10 years down the road. Matching those up again so that we make sure that wherever we're going, the regulations are not in the way. They shouldn't be a hindrance to getting there unless there's a real reason for safety and soundness to be in the way. We shouldn't just be slowing down progress to slow down progress because, as we all know, taxis with Uber and Lyft, restaurants with having onsite seating with DoorDash and Uber Eats, everything moves so fast.


Even with the technology of the banking world, we've seen unprecedented responses or activities that took place that contributed to SVB and even somewhat to the First Republic. All those things that are going on, we got to keep remembering that while we're still walking, this section of the mile, we got to keep our eyes on the future to see that there's anything on our way up there. Your program does that. It's a great way for us to talk about the real things like liquidity that are basic, but we need to be reminded of every once in a while. We talk about the new things that are going to be taking place and gets us thinking about how that could impact the industry and our regulatory environment.


It's a great summary, John. I appreciate you having time to share your thoughts with my readers. Thanks so much.


It was great. Thank you.



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About John Kolhoff

Senior Vice President of NASCUS, former State Credit Union Regulator of Texas and Michigan.

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