Credit Union Exam Solutions Presents With Flying Colors

Markoverdub: Hey everyone, this
is Mark Treichel with another

episode of With Flying Colors.

This morning I'm with Ryan
Donovan, the CEO of the Council

of Federal Home Loan Banks.

Ryan, how are you doing today?

Doing great, Mark.

How are you?

I'm doing great.

My, my listeners may recall that you
formerly were the number two at CUNA.

And I know that we did an earlier
podcast when you transitioned over to

your new role and you, you picked an
interesting time to go do that with the

FHFA 100 year report on federal home
loan banks, which, I know you, you had

a lot of listening sessions and things
tied to that but the report's out, right?

The big reveal of the report
was I think just last week.

And so I reached out, I was very
happy that you could get on and share

your takeaways from this report.

At first blush, I'm sure
you've read it a few times.

I read it at least once and
scanned it before the call here.

But so the report's out and from
where you sit what's your take?

Ryan: Listen, the FHFA went through,
and first of all, Mark, thanks

for having me back on the show.

I have a repeat guest.

I'm honored.

I, when we think about the report, I
think it's important to take a step

back and remember the process that FHFA.

Went through to develop the report.

They heard from about 800 stakeholders
over the course of 6 or 7 months.

They had their listening sessions 3
days at the beginning of the process.

3 days at the end of the process.

They held 19 regional.

Or virtual roundtables focused on
different aspects of the report,

and they had to comment periods.

I believe both of which I know
they were both more than 30 days.

I think that they were
both 45 day comment period.

So they took in a considerable
amount of feedback from stakeholders.

And I think that is more or
less reflected in the report.

Thank you.

Most of what they heard.

In fact, I'd say in excess of 80 percent
of what they heard during that process

was positive and supportive of the role
that the home loan banks play in providing

liquidity for their members and the role
that they play in supporting affordable

housing and community development.

In fact, if you were going to have
a, if you were going to try to draw a

theme From the stakeholder feedback,
it's that stakeholders want more

from the home loan bank system.

And I think that's a
good position to be in.

And when you consider that feedback,
and then you look at the report,

there, it certainly plots a a path
provides a direction of travel to a

place where In some respects, the home
loan bank system could do more but,

the devil's always in the details.

What we have at this moment is
we have a report coming at the

conclusion of a very long process.

It provides about 50 recommendations
and in total, the thing that

I would tell credit unions.

As we've told other groups is none of
the recommendations are inevitable.

In fact, most of the
recommendations are quite big.

There's a lot of clarity.

That is yet to come.

But we will be engaging in the
rulemaking process because there's

a number of potential new rules
coming out of this will, of course,

be engaged in a legislative process.

If that develops, there were
statutory recommendations in this.

And of course, the agency telegraphs in.

In its report areas where they will use
the supervisory process to change policy

and try to achieve their their objectives.

So we've got to stay
engaged in all of this.

But I, but.

At a very high level, I think
the report is largely additive

to the system with however, the
potential to limit or disrupt.

Access to reliable liquidity.

Markoverdub: Got it.

Got it.

So you framed up the three.

So there's legislative,
there's rulemaking, and there's

the supervisory process.

So putting my old NCOA hat on.

Legislative would be for the corollary
for credit unions would be a change

to the federal credit union act.

That's a heavy lift.

That's a long lift.

That's a lift that might
never quite frankly happen.

Because you want to change
doesn't mean it necessarily will.

So that's the what 5, 10 year.

Ryan: Yeah, and I'd say, when you look
at the things that are the statutory

requirements in this report they recommend
they're going to recommend to Congress to

increase the affordable housing program.

Minimum contribution.

It's currently 10 percent of net earnings.

They want to take it up to 20%.

The homeown bank system is already
moving in that direction, right?

During this process, responding
to the feedback that we heard,

each of the banks agreed to go to
15 percent of net earnings, and

they're working to implement it.

That right now, so we're
moving in that direction.

Yeah, a statutory change is a heavy
lift, but I think a benefit of the

review was that we're already moving
towards, towards more to HP and to

voluntary programs, another statutory
recommendation that I think was

reflective of feedback that they heard.

Had to do with expanding the community
financial institution definition,

and this is something that will be
important to credit unions because

right now, that definition doesn't
include credit unions, but the agency

and its report is recommending.

To expand that definition.

And what that means for credit unions
is that if Congress makes that change,

they will be able to pledge as collateral
small business loans, agriculture loans.

It just expands the option of
collateral for credit unions.

Then there were some other.

Recommendations for statutory change that,
frankly, weren't reflective of things

that they heard in in the process, like
giving the FHFA more power to consolidate

home loan banks or giving them more
powers around executive compensation.

This wasn't reflective of the
feedback that stakeholders gave.

And it's hard to see Congress having much
of an appetite for that in the near term.

Got it.

Got it.

Markoverdub: Yeah, I remember last
time we chatted that, the low housing

initiatives and how great of a job
that the federal home loan banks did.

I wasn't aware at that juncture because
again, from where I've sat in my

history has been on liquidity side.

But

Ryan: Yeah, and the really the untold
story is that the home loan bank system is

the largest private sector contributor to
affordable housing efforts in the country.

It's a, Okay.

Our contributions are a
function of our earnings.

And so when we have high earning years,
like we are in right now, and as we were

last year we're contributing even more.

So we're contributing a lot.

And we've committed to doing more
as a function of our earnings.

And I think that, the thing that I
would take away is not only do we have a

commitment to do more, but we heard what
stakeholders were saying in this process.

And even before FHFA put out their report,
we were out there making changes to

address the needs of our stakeholders.

Right,

Markoverdub: and what 15 percent is
roughly one out of every 6 and 20 percent

would be roughly one out of every 5.

So if you take that extra dollar out
of the, you give that extra dollar

out of that equation, it's good for.

The housing needs, but it also then
the other side of that is as you're

trying to make the federal home loan
bank safe and sound, that's something

they can't put into their reserves.

So it's a balancing act.

It's good if you can give it,
but if, but become statutory,

it's not a, you can, it's, you

Ryan: must.

That's right.

And I think the balance and credit
unions know this well, is making

sure that you maintain the value
proposition of the cooperative, right?

Home loan banks are cooperative financial
institutions, just like credit unions.

And so it is a constant balance of how do
you make sure that there is incentive for

participation in the cooperative, while
also making sure that you're meeting.

This important aspect of the dual
mission of the home loan bank system.

So it's, we've got a part of our
mission is to provide a reliable

source of liquidity for our members.

Another part is to support affordable
housing and community development.

It very much is a balancing act.

Markoverdub: Got it.

Got it.

And then so below the legislative
level, the rulemaking level what

type of recommendations, yeah,
got on your radar relative to that.

Ryan: This is probably the.

The biggest area of recommendations
if you're bucketing them into

these 3 categories and, what.

I think the agency has made clear through
this process and certainly in the report

is that mission is very important.

Clarification of the home loan bank's
mission is very important and I think

they do a relatively good job of
emphasizing the, the important role

that we play on the liquidity side
for our members and as well as the

affordable housing role that we have.

But if you ask me, what are
they going to try to tackle?

1st?

I wouldn't be surprised
if out of the gate.

They issued a proposed rule that clarifies
their regulatory mission statement.

And that will that, I think, will
provide some opportunity for additional

feedback to the agency and perhaps
some direction in that regard.

Another issue that.

They, I hope will try to tackle
early on is simplification of

the affordable housing program.

So we've been talking about how we're
putting more resources into, but 1 of

the things that we heard during the
process was, it's really complicated.

To get AHP dollars that there's
a lot of regulatory burden.

There's duplicative requirements.

And so I and the agencies
acknowledge this.

They in their report they indicate that
they're gonna work on simplifying that

program, and I think that will help make
those dollars have a greater impact.

When they're when they're given out.

So that's another area of rulemaking
that we're paying attention to.

There is there are some things I
think to be concerned with, though,

from from the report, the agency
has indicated that they're going to

pursue rulemaking that would provide
a Ongoing mortgage asset test.

So Mark, you are probably aware in order
to join the home loan bank system, a

member has to have 10 percent of their
assets and mortgage related assets.

What they have said in the report is
that they want to have some sort of

ongoing mortgage asset test for members.

I think that what this does.

Along with some of the other changes
that they're proposing is it really

starts to add questions about whether
or not the home loan bank will be

there when a member needs liquidity.

If I, if you're a home loan bank member,
you've got to check to see if you're, if

you've got enough mortgage assets before
a loan if you're the home loan bank, you

may have to set up a process where you're
checking on that before you give the loan.

If.

Nothing else.

It slows down that process.

Another concern that we've got
is the recommendation around.

Changing the definition of a long
term advance right now, if you

take an advance out that's longer
than five years in duration that is

considered a long term advance, and
those proceeds of the advance have to

go for additional mortgage activity.

The report contemplates
reducing that to one year.

What impact will that have on our members?

How they use the home loan bank.

Whether they see us as a, a strong
value proposition remains to be seen.

We will be, we would be, we'll be
concerned about that rulemaking and

we'll be doing some analysis on the
potential impact on it, on that.

There's a whole host
of regulatory changes.

Now, the thing about it is, as
Mark, the regulatory process.

Takes a great deal of time
from the proposal of an A.

M.

P.

R.

to the effective date of a final rule.

That can be years.

And so there will be opportunity
for stakeholders to weigh in

through the comment process.

I anticipate that there will
be some congressional interest.

In some of these some of these rules.

And so we're gonna need credit
unions and other home loan

bank members to be engaged.

And we're working closely with una
and Nafq America's credit unions,

America's credit unions to exactly to
and the state leagues, of course, to

make sure that we've got information
for credit unions and when the time

comes, they'll be ready to engage.

Markoverdub: Yeah, as you're talking
through that creating additional

regulatory burden where you're slowing
down the institution, having to

check a bucket a and bucket B before
they can get the funds in your.

And you're slowing down the federal,
the individual federal home loan bank,

where they having to do X, Y, and Z.

It reminded me of one of my favorite
books, which is atomic habits.

And one of the things about having
good, one of the concepts in the books

is friction creating, your good habits,
you want to remove friction and your

bad habits, you want to create friction.

The.

It's counter, it's counter to the
philosophies of that book from the

perspective of if you're creating friction
on the most important, or one of the most

important elements of what an institution
gets out of it and you're making it

harder You're putting a burden in there
that might lessen the ability to assist.

And going back to Signature
Bank and SVB and all that.

The ability to move quickly is one of
the biggest strengths of the system.

Ryan: Absolutely.

And, first of all Atomic Habits,
great book, highly endorse it.

I don't know what it says about
me that multiple people have

given me that book as a gift.

But I've given it to my kids.

So it's a really, it's a really good book.

But to your point, Mark, when we
think about March, 2023, a lot of

the focus is on SVB and Signature
and First Republic and Silvergate.

And certainly they were members
of the home loan bank system.

There was activity, but in March,
2023, the most important thing that

the home loan banks did was the
access to liquidity they provided

to the 6,500 members of the system.

So that there was, they were a stabilizing
force during a time of turmoil.

And that's lost in a lot of
the, a lot of the reporting,

but it shouldn't be because.

For us to be there, our members
have to have confidence that we'll

be able to meet their needs, right?

So that anything that.

Is put into place, whether it's through
the regulatory process or the supervisory

process that undermines their confidence
in us, undermines their ability to

receive that on demand liquidity really
creates that friction that will, I think,

create some instability in the future.

Yeah,

Markoverdub: And that's going
to be, that's going to be.

Really, as you're getting your members
thoughts and CUNA and NAFCU, America's

Credit Unions are getting those member
thoughts, it's going to be very important

for the stakeholders to make the FHFA
and Congress aware of that as you, it's

almost like you're entering the playoffs
now, the report coming out it's great

it's out, but but now you've got to
double down on the efforts to make sure

that the recommendations are handled

appropriately.

Ryan: That, no, you're exactly right.

I'm going to put a timeline out there.

It's just more of a big long number.

But this report probably creates
about a decade's worth of work, right?

If the agency was going to go
through and try to get everything

done, it probably take 10 years.

Now the thing about it is not
everything's going to be done.

Not, you can't have 50 priorities.

So they're going to focus on.

The ones they think are most impactful,
and I think stakeholders are going to come

to the table with their thoughts on FHFA's
proposed rules or the statutory changes.

And there, there is, there's still
a lot of process ahead of us.

Markoverdub: That's right.

That's right.

Yeah, if everything's a
priority, nothing's a priority.

So that's right.

Great point.

That leaves the supervisory process.

There's things that may
fall down to that level.

I'm guessing there's things that the
that you and the federal home loan

banks might prefer that if you're
going to do it, you should regulate

it because we can get more comment.

But if that process plays out
well, and, again, putting my head

on a letter to credit unions.

That doesn't go through the public
process can put burdens on the credit

unions and then NCUA always dovetails
into the, the safety and soundness

arena to try and give it a little
bit of a hook to quasi enforce it.

Is there, are there similar
issues and concerns as it relates

to how this might play out?

Ryan: Yeah, there's a lot of commentary
in the report about the efforts

that they're going to undertake to
strengthen member risk management

to limit large debt issuances.

The the definition of a stressed member
the process for, handing members off to

the Fed when they're troubled, a lot of
things that the terms, are vague enough

that they probably deserve more sunlight
on them as the policies are developed.

And you're going through, you're up HFA,
you're going through this huge process.

You're trying to get it right for the
centennial of the system in 9 years.

It just seems like it makes a
lot of sense to keep as much

out in the sunlight as possible.

Particularly when the
changes could have an impact.

On the members, the value proposition and
the impact of the home loan bank system.

As Mark, the supervisory processes is
really there's really a cloak over it.

But when you're making policy through the
supervisory process, there shouldn't be.

And we're going to, I think, encourage
the agency to do as much out in the open.

As possible so that our members know
what to expect when they come to

the home loan bank for liquidity.

Markoverdub: Now, that all makes sense.

That all makes sense.

This I know a lot more about the
report now that we've chatted about it.

Is there anything Ryan that
else you'd like to say about it?

Or is there a question?

I should have asked you here
this morning that I didn't.

Ryan: tHe one thing that I would
just emphasize for credit unions

and frankly, for all home loan bank
members is that nothing's changed

because of this report, right?

Today, while we're talking,
these are just recommendations.

They're in a nice, glossy document.

There hasn't been a proposed rule issued.

There hasn't been a bill written.

Credit unions that are members of their
home loan bank should Thank Approach

their home loan bank just like they would
for liquidity and should expect to get

the service that they've always that
they've always received and enjoyed.

We are going to enter a policymaking
process now, and it's going to be

critical just like when credit unions
engage on interchange, on a tax

status, all of the credit union issues
that I worked on for so many years.

It's going to be critical for
them to engage on this because

they're stakeholders in this.

They are, they're members of.

This financial cooperative.

And as I told credit unions for years, if
the folks that are most invested in the

cooperative aren't speaking up for the
cooperative, who will we need members to

engage and we'll be working with America's
credit unions and the state credit

union leagues to ensure that they've
got the information that they need in

order to be engaged in these processes.

Markoverdub: Well said.

Yeah, that's a good rap.

They don't, if they enjoy what the federal
home loan banks are doing for them and

they want to keep it, they need to stay
engaged and they need to be available.

And give a little bit of time to the
system and make their thoughts known.

So that's fabulous, Brian.

So if someone listening wants to do
that, and obviously you can do it

through the leagues, through QNUC
through NAVQ, is there, if there's

something here that they, that triggered
their mind that they'd like to reach

out to you or your organization,
what would be the best way for them,

Ryan: To do that?

Let me offer a couple of suggestions.

One, I am very active on LinkedIn.

And the council is as well.

So seek me out on LinkedIn.

I will I'll connect with you and
follow you or whatever the term is

on LinkedIn, but that's a really good
way of reach me as, Mark, because

that's how you reached out to me.

The council also has a a LinkedIn
page too, that is good to follow.

And then my email address
is our Donovan at C F H L B.

org.

So that's also a good way to reach

Markoverdub: me.

Okay, great.

And I'll put in the show notes, your
link to your LinkedIn and a LinkedIn

to the council's LinkedIn page.

So if someone pulls it up, they can
connect with you via the podcast.

Notes.

So Ryan, thanks so much.

I know you're real busy right now
with this just having coming out.

I really appreciate you giving me
some time this morning to highlight.

No,

Ryan: happy to anytime,

Markoverdub: Mark.

Thanks.

You got it.

All right.

Thanks so much.

And listeners, I want to
thank you for listening.

Hope you'll listen again soon.

This is Mark Treichel signing off.

With flying colors