2 THE NAFCU JOURNAL MAY–JUNE 2022
3 THE NAFCU JOURNAL MAY–JUNE 2022 20 12 FEATURES 12 Tackling Appraisal Bias Fannie Mae Offers Tools and Resources to Modernize Processes 20 Back to the Future Why Purpose May Be the Key to Sustainable Growth 28 Preparing for Effects of AMLA of 2020 Education is Best Preparation Until Rulemaking Occurs COLUMNS 5 Conferences 6 From the Chair 8 Washington and Industry Briefs 10 The Bottom Line 34 Inside NAFCU Services 35 Management Insight 36 Executive Spotlight 38 Leadership Download 40 Compliance Central 42 From the President’s Desk 28 MAY–JUNE 2022 • VOLUME 47, NUMBER 3 The NAFCU Journal (ISSN 1043-7789) is published bimonthly every other month. May–June 2022, Volume 47, Number 3. Published by the National Association of Federally-Insured Credit Unions, 3138 10th Street N., Arlington, VA 22201-2149. Periodicals Postage Paid at Arlington, VA, and at additional mailing offices. POSTMASTER: Send address changes to The NAFCU Journal, NAFCU, 3138 10th Street N., Arlington, VA 22201-2149. The opinions and ideas appearing in this magazine are not necessarily representative of policies of NAFCU. Manuscripts and advertisements are welcome, although NAFCU reserves the right to edit manuscripts and refuse advertisements. Contact publisher for advertising information and rates. Appearance of an advertisement does not imply endorsement or guarantee of the advertiser’s claims. For subscription or advertising information, call 800-336-4644 or 703-522-4770. Email: email@example.com; website: www.nafcu.org. ©2022 National Association of Federally-Insured Credit Unions, all rights reserved.
4 THE NAFCU JOURNAL MAY–JUNE 2022
5 THE NAFCU JOURNAL MAY–JUNE 2022 CONFERENCES 2022 Calendar of Events Spring 2022 CEOs and Senior Executives Conference May 11–13, in-person in Key West, FL Summer 2022 State of the Industry (Virtual) June 23 Risk Management Seminar (Virtual) Aug. 16–18 Congressional Caucus Sept. 11–14, in-person in Washington, DC Fall 2022 CFO Summit Sept. 20–22, in-person in Annapolis, MD Regulatory Compliance & BSA Seminar Sept. 27–29, in-person in Louisville, KY Management and Leadership Institute Oct. 17–21, in-person in Annapolis, MD Lending Conference Nov. 8–10, in-person in Greenville, SC For more information about NAFCU’s conferences, go to www.nafcu.org/conferences. Looking for more educational opportunities? NAFCU’s Online Training Center has been redesigned to give credit union professionals easier access to the association’s training programs and library of webinars. For information and the current schedule of upcoming webinars, visit www.nafcu.org/ onlinetraining. Topics and dates subject to change. DIRECTORS Thomas W. DeWitt, Chair State Farm FCU (IL) Gary A. Grinnell, Vice Chair Corning FCU (NY) Brian T. Schools, Treasurer Chartway FCU (VA) Karen Harbin, Secretary Commonwealth CU (KY) Melanie Kennedy Southwest Financial FCU (TX) James A. Kenyon Whitefish CU (MT) Frank Mancini Connex CU (CT) Lonnie Nicholson EECU (TX) Jan N. Roche State Department FCU (VA) Keith Sultemeier Kinecta FCU (CA) EXECUTIVE STAFF B. Dan Berger President/CEO Anthony Demangone Executive Vice President/COO Meghan Burris Vice President of Communications and Media Relations Greg Mesack Senior Vice President of Government Affairs Randy Salser President of NAFCU Services Corporation MAGAZINE STAFF Haley Schmitz Editor LLM Publications Editorial Services and Design ADVERTISING firstname.lastname@example.org www.nafcu.org/advertise
6 THE NAFCU JOURNAL MAY–JUNE 2022 more efficient processes, you’ll naturally better serve your members. Simply put, there is no right or wrong method for supporting your employees, as long as you’re doing just that—supporting them. We’re all coming out of these challenging two years together. As a service focused industry, now more than ever let’s focus on the employee experience—which is truly where the member experience begins. For more on NAFCU’s 2022 Advocacy Priorities, go to www.nafcu.org/priorities. Tom DeWitt is president and CEO of State Farm Federal Credit Union in Bloomington, IL. FROM THE CHAIR EMPLOYEE WELLBEING IS YOUR TOP MEMBER PRIORITY By Tom DeWitt, NAFCU Board Chair As member-owned cooperatives, credit unions implement a business model that is driven by the needs of their members. Providing quality services and solutions to your members rests on the shoulders of your employees. At the true core of the credit union model, the employee experience is where the member experience begins. Because of this, I’m not surprised that accounting and consulting firm Crowe’s 2021 Bank Compensation and Benefits Survey, which compiled data from 437 banks and credit unions, found that organizations within the financial services industry had wisely invested resources into salaries, incentive programs, and benefits before the pandemic hit. Banks and credit unions were also able to successfully pivot when the pandemic struck and provide safe and productive work-from-home accommodations for employees. The survey also found that turnover rates at credit unions were lower than in 2019 in both officer and non-officer positions. We should all be very proud of these findings, but we can’t stop here. We must continue to prioritize the employee experience, understanding their needs as we emerge from the pandemic just as much as we try to predict the needs of our members. Many of our employees weren’t spared the emotional strain and scars sustained as the result of months of quarantine, extreme health and safety fears, and in many cases, tragedies like the death of a loved one. As many of us transition back into the office, it will be critical to maintain our priority of employee wellbeing. Now is the time to listen to our teams and be open to new ideas. Now is the time to encourage employees to take time for themselves and their families. Now is the time to provide opportunities to regain balance both in and outside of the workplace. The beauty of our industry is that every single credit union is unique in how we serve our members and represent our communities. Just as no two credit unions are alike, no two employees are alike. While promoting employee well- being is a goal we all share, by embracing the uniqueness of your credit union you’ll provide better solutions for employees both as individuals and as a team. From addressing their concerns directly to seeking new technologies to promote “We must continue to prioritize the employee experience, understanding their needs as we emerge from the pandemic just as much as we try to predict the needs of our members.”
7 THE NAFCU JOURNAL MAY–JUNE 2022
8 THE NAFCU JOURNAL MAY–JUNE 2022 WASHINGTON AND INDUSTRY BRIEFS As we move toward an increasingly digital world, it is clear that—irrespective of individual opinions about the value, propriety, or legality of cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), and non-fungible tokens (NFTs)—digital assets and related technologies are demanding significant attention from stakeholders across the broader economy, from individuals, institutions, regulators, and legislators. While the Financial Crimes Enforcement Network’s (FinCEN) early guidance and law enforcement work predates the roughly 14-year-old Bitcoin blockchain, most federal regulators began weighing in only a year or two ago. In July 2021, the NCUA issued its Digital Assets and Related Technologies Request for Information (RFI). The RFI encouraged broad comment, but requested respondents pay particular attention to how federally insured credit unions (FICUs) use and may use digital assets and what risks such uses pose to credit unions, the credit union system, and the NCUA. Among other recommendations, NAFCU encouraged the NCUA to confirm that FICUs may, under an exercise of their incidental powers, directly or indirectly host digital asset wallets for members and partner with digital asset service providers that, in turn, enable FICUs’ members to buy, sell, and hold digital assets. The NCUA’s digital assets Letter to Credit Unions, issued in December 2021, delivered on that later ask and described FICUs’ incidental authority to “establish relationships with third-party providers that offer digital asset services to the FICUs’ members” as “already existing.” In the letter, the NCUA clarified that neither the Federal Credit Union Act nor the agency limits the types of services FICUs may introduce to their members through third parties and that the NCUA will evaluate these relationships “in the same manner as all other third-party relationships.” The letter also echoes NCUA Chairman Todd Harper’s comments at NAFCU’s 2021 Congressional Caucus. Given digital assets’ rapid evolution and proliferation, effective regulation demands both nimble regulatory responses and constant, bottom-up dialogue. Put simply, digital assets and related technologies are, in large part, driven by grassroots activity and engagement. So, credit unions must engage their members on digital asset issues and frequently keep the NCUA and other regulators apprised of member demands and concerns. Alongside more exotic digital asset ideas lie CBDCs, digital assets backed by the full faith and credit of an issuing government and designed to maintain a one-toone value with traditional fiat. President Biden’s recent Executive Order is fueling further federal research into a potential digital U.S. dollar. And the Treasury has already made clear its preference that traditional financial institutions play a leading role in any digital U.S. dollar ecosystem—just as they do in the traditional fiat master and retail accounts system. Therefore, all credit unions should, separate from other digital asset discussions, endeavor to understand and evaluate their potential role in intermediating a digital U.S. dollar. Offering members access to third-party brokerage services is a business decision. Intermediating the flow of U.S. dollars that begins with Federal Reserve master accounts is, quite simply, a fact of credit union life. As digital asset developments arise, NAFCU will keep you informed. Prominent NAFCU Services partners Q2, MasterCard, and Wolters Kluwer, among others, are already exploring ways in which they may help credit unions explore and implement digital asset solutions for their members. Readers interested in a more in-depth review of digital assets and related technologies’ early evolution and regulation may read NAFCU’s recently released Digital Assets Issue Brief online. NAFCU has a complimentary, member-only online community exclusively for those responsible for cybersecurity & IT at NAFCU member credit unions. Learn more about the NAFCU Cybersecurity and IT Network at www.nafcu.org/it-network. HOT TOPIC: DIGITAL ASSETS By Dale Baker, NAFCU Regulatory Affairs Counsel References • https://www.nafcu.org/system/files/files/NCUA%20Regulatory%20Alert%20-%20Digital%20Assets%20and%20Related%20Technologies%20 %28Ready%20for%20re-release%20w%20updated%20deadline%29.pdf • https://www.nafcu.org/system/files/files/9.27.21%20Letter%20to%20NCUA%20re%20Digital%20Assets%20and%20Related%20 Technologies%20RFI.pdf • https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/relationships-third-parties-provide-services-related-digital-assets • https://www.ncua.gov/newsroom/speech/2021/ncua-chairman-todd-m-harper-remarks-2021-nafcu-congressional-caucus-washingtondc?utm_medium=email&utm_source=NCUAgovdelivery • https://www.nafcu.org/newsroom/white-house-releases-executive-order-digital-assets • https://www.nafcu.org/system/files/files/Digital%20Assets%20Issue%20Brief%20-%20February%202022.pdf
9 THE NAFCU JOURNAL MAY–JUNE 2022 arch–April 022
10 THE NAFCU JOURNAL MAY–JUNE 2022 THE ELECTRIC VEHICLE REVOLUTION By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE Since the earliest days of the COVID-19 pandemic, economists have been speculating about the ways in which the post-pandemic economy might be permanently altered. Some of those predictions look shaky at best today. The persistence of high inflation has cast doubt on the belief that a strong fiscal response to economic downturns will be the norm going forward. But in other ways, society has made significant changes that look like they’ll stick. The shift to remote work is one example, and one which will have cascading effects throughout the economy. Similarly, the auto industry’s slow migration to electric vehicles (EVs) is accelerating, thanks to recent legislation and a sharp rise in oil prices. The vehicle loan market is a critical one for credit unions, and early returns suggest that more work is needed if they are to maintain market share during the EV transition. Limited charging networks have long been a key factor cited by car buyers who are reluctant to make the jump to EVs. But 2021 saw a clear surge in new charging stations, which now number over 50,000 according to the Alternative Fuels Data Center (see chart 1). The effort to expand charging networks received a boost with the passage of the Bipartisan Infrastructure Law in late 2021. The legislation includes $5 billion in state funding and $2.5 billion for local communities to build out charging networks. The Biden Administration’s stated goal is to quadruple the number of ports to 500,000 by 2030, with a goal for EVs to make up 50% of total new vehicle sales by that time. A second factor which changed the trajectory of EV adoption was rising oil prices. Studies find conflicting evidence on the degree to which consumers factor into their purchase decision a vehicle’s expected fuel costs. But the rise in gas prices in 2021 followed by the spike in 2022 precipitated by the Russian Federation’s invasion of Ukraine closely tracked Google search activity for electric vehicles (see chart 2). The U.S. Energy Information Administration’s Short-Term Energy Outlook forecasts gas prices to remain elevated through at least the rest of 2022. A rapid transition to EVs poses a threat to a key source of lending for credit unions. According to Experian, credit unions financed 14% of total new auto loans made in the fourth quarter of 2021, but just 12% of loans for EVs. While it remains to be seen how EV financing will evolve, it is a critical issue given the importance of vehicle loans to the industry. As of December 31, 2021, new and used car loans made up one-third of the total credit union loans outstanding, and that figure rises to 46% for credit unions with under $100 million in assets. Larger credit unions are more diversified due to greater mortgage and commercial loans, but they tend to be more reliant on indirect lending to generate auto loan volume. Here, too, there may be some Source: Alternative Fuels Data Center. Chart 1: Electric Vehicle Ports & Charging Stations 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Ports Stations 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
11 THE NAFCU JOURNAL MAY–JUNE 2022 vulnerabilities as traditional dealers will need to determine how heavily to invest in EV showrooms and servicing. Tesla famously eschews the traditional dealership franchise network. EV startup Rivian is expected to follow suit and has already partnered with JPMorgan Chase to fund loans to new customers. Credit unions that want to maintain their share of the local auto loan market will need to grapple with not only the transition to electric vehicles, but also new financing channels and an increasingly online sales experience. “Limited charging networks have long been a key factor cited by car buyers who are reluctant to make the jump to EVs. But 2021 saw a clear surge in new charging stations, which now number over 50,000 according to the Alternative Fuels Data Center.” References • The White House. “FACT SHEET: The Biden-Harris Electric Vehicle Charging Action Plan.” December 13, 2021. • U.S. Energy Information Administration. “Short-Term Energy Outlook.” March 8, 2022. • Experian. “State of the Automotive Finance Market Q4 2021.” • Chase Media Center. “Rivian, Chase partner to create an all-digital customer financing experience.” January 14, 2021. Notes: Google search trends on term “electric vehicle;” gas price is per gallon, regular, all formulations; each series reflects three-week moving average; data through March 13. Sources: U.S. Energy Information Administration, Google. Chart 2: Gas Prices vs. Google Search Activity 100 80 60 40 20 0 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 Gas Price Google Searches 2017 2018 2019 2020 2021 2022
THE NAFCU JOURNAL MAY–JUNE 2022 12
14 THE NAFCU JOURNAL MAY–JUNE 2022 firmly committed to doing everything in our power to promote racial equity in housing,” said Jake Williamson, Fannie Mae’s Senior Vice President, Single- Family Collateral Risk Management. “Racial equity includes helping all borrowers receive a fair and impartial appraisal.” “While Fannie Mae’s longstanding policy explicitly prohibits discriminatory appraisal practices, Fannie Mae’s work to understand and combat appraisal bias is part of our ongoing commitment to identify and knock down barriers to homeownership, as well as part of our strategy to address inequalities in the housing finance system,” said Williamson. “NAFCU recognizes that property value is a key determinate of borrower credit risk and an important aspect of the mortgage process,” said Aminah Moore, NAFCU Regulatory Affairs Counsel. “NAFCU supports Fannie Mae’s initiative to address and minimize appraisal bias, and NAFCU further supports modernization of the appraisal process and the continued use of technology to assist in removing bias from the equation.” In 2021, Fannie Mae scanned 14 million appraisals from 2019 and 2020 to determine the extent of appraisers using terms specifically prohibited in Fannie Mae’s Selling Guide. In response to this work, the company took two immediate actions. 1. Fannie Mae’s June 2021 quarterly Appraiser Update newsletter featured tips on avoiding bias—or even a perception of bias—in an appraisal report along with a list of potentially problematic words or phrases that might imply demographics influences an outcome. In addition to research, other efforts to reduce opportunities for bias include enhanced monitoring of appraisal quality, increased industry engagement to gain additional perspectives, and improvement of the valuation process.
15 THE NAFCU JOURNAL MAY–JUNE 2022
16 THE NAFCU JOURNAL MAY–JUNE 2022 2. Using the Appraiser Quality Monitoring process, Fannie Mae sent feedback letters to appraisers who had a high frequency of findings. Fannie Mae has continued this type of monitoring as an additional safeguard against potential bias, and to track progress on reduced findings. Other steps Fannie Mae is taking to combat appraisal bias include: ■ Increasing the use of alternative-scope property valuation approaches, such as desktop appraisals and hybrid appraisals. ■ Building on existing safeguards to detect valuation errors, such as Collateral Underwriter® (CU®), which has a robust set of risk flags and messages for potential overvaluation risk, appraisal quality risk and property eligibility risk. CU routinely undergoes fair lending reviews by Fannie Mae’s Fair Lending team. ■ Fostering diversity in the appraiser workforce through the Appraiser Diversity Initiative (ADI), which is designed to attract new entrants to the residential appraisal field and overcome barriers to entry, such as education, training, and experience requirements. ■ Continuing to modernize the valuation approach for home loans through the use of data, technology, and process design. ■ Enhancing the tools appraisers use to help them more accurately select comparable properties and conduct adjustments, which will strengthen and provide more confidence in the appraisal process and product. Offering Multiple Appraisal Options The traditional appraisal process relies heavily on human observations that can be subject to conscious or unconscious bias. Although humans, and specifically appraisers, are still a vital part of the mortgage origination process, modern appraisal methodology involves significant reliance on objective data and can further assist appraisers in producing a more reliable and reproduceable appraisal. As an example, desktop and hybrid appraisals involve significant reliance on objective data and a more “armslength” process between the appraiser and the homeowner. Social distancing and travel restrictions due to COVID-19 provided an opportunity for a real-world test of alternatives to traditional appraisals. At the onset of the COVID-19 pandemic (2020–2021), Fannie Mae allowed exterior-only and desktop appraisals for certain loan types to maintain liquidity in the market and to help manage collateral. The temporary flexibility allowed appraisers to use information provided by parties to the transaction (borrower, real estate agents, property contact, etc.).
17 THE NAFCU JOURNAL MAY–JUNE 2022
18 THE NAFCU JOURNAL MAY–JUNE 2022 “The test of alternatives sparked increased adoption and development of innovative technologies in the industry, including virtual inspections enabling homeowners and other third parties to use a smart device to obtain interior photos or video augmenting the property data already collected by the appraiser,” said Williamson. “Building on lessons learned during the pandemic, we introduced a refined desktop appraisal option in March 2022, broadly available to lenders for certain transactions that meet the following criteria: one-unit property, principal residence, purchase transaction (including new construction), loan-to-value ratio less than or equal to 90% and Desktop Underwriter® loan casefile that receives an approve/ eligible recommendation,” said Williamson. Desktop appraisals do not require an appraiser to perform a physical inspection of the property, which removes an opportunity for conscious or unconscious bias, he explained. “Instead, the appraiser relies on third-party data sources to understand the characteristics and details of the subject property. In addition, appraisers may rely on floor plans or imagery generated by third-party applications (commonly known as 3D scans) and information obtained by remote viewing through virtual inspection technologies.” In situations where the property is more complex or the appraiser doesn’t have all the necessary information from thirdparty data sources, a physical inspection could be required, which is when a hybrid appraisal can be conducted, said Williamson. “Hybrid appraisals require a physical Index to Advertisers AI Oasis Website: ai-oasis.com......................................... C2 Allied Solutions Website: alliedsolutions.net................................ 7 DefenseStorm Website: defensestorm.com............................... 17 FIS Website: fisglobal.com.........................................19 Franklin Madison Website: franklin-madison.com........................ 27 Gallagher Website: nafcu.org/gallagher........................... 37 SRM Website: srmcorp.com.......................................... 15 SageNet Website: sagenet.com/engaged..................... C4 Securian Financial Website: securian.com........................................ 25 TruStage Website: cunamutual.com/auto......................... 9 Upstart Website: upstart.com/credit-unions................. 4 inspection by a vetted third-party data collector, who then passes the data and information digitally to the appraiser to complete the valuation assessment portion of the appraisal,” he said. “We believe the home valuation process should include a spectrum of options to establish a property’s market value, with the option matching the risk of the collateral and loan transaction. Desktop and hybrid appraisals are two options in that spectrum that range from appraisal waivers to traditional appraisals," he added. “To identify potential issues with appraisals—which could include situations of misvaluation—we provided CU to support our quality control processes and resources, as well as serve as a tool to lenders for their quality control and collateral underwriting processes,” said Williamson. “Created in 2011 for internal quality control purposes and then brought to market in January 2015, CU has a robust set of risk flags and messages, including triggers for potential overvaluation risk, appraisal quality risk and property eligibility risk.” As the use of innovative technology grows, so does Fannie Mae’s commitment to ensure an unbiased appraisal. “To control for risk, we created an additional line of quality control measures to monitor the quality of the appraisal flexibilities,” said Williamson. Although close to 3.5 times the number of appraisal flexibilities were reviewed as traditional appraisals, a similar quality and a similar distribution of risk scores in CU was found, he said. “Feedback from the market on the appraisal flexibilities was generally positive, and the experience was helpful to inform potential enhancements to our standard practices.” Resources • “Appraising the Appraisal” working paper includes results of Fannie Mae evaluation of 1.8 million appraisals. Go to https://bit.ly/ 35oTcb2. • June 2021 Appraiser Update includes tips to avoid the perception of bias. Go to https://singlefamily.fanniemae.com/media/ document/pdf/appraiser-update-june-2021. The traditional appraisal process relies heavily on human observations that can be subject to conscious or unconscious bias. Although humans, and specifically appraisers, are still a vital part of the mortgage origination process, modern appraisal methodology involves significant reliance on objective data and can further assist appraisers in producing a more reliable and reproduceable appraisal.
19 THE NAFCU JOURNAL MAY–JUNE 2022
Back to the Future WHY PURPOSE MAY BE THE KEY TO SUSTAINABLE GROWTH By Jon Jefferys, President and CEO of Callahan & Associates THE NAFCU JOURNAL MAY–JUNE 2022 20
21 THE NAFCU JOURNAL MAY–JUNE 2022
22 THE NAFCU JOURNAL MAY–JUNE 2022 Those early pioneers had a common cause that brought them together for which the formation of a credit union was the solution. In those early days, the reason behind the creation of the credit union was the origination of the organization’s purpose. As we fast forward to 2022, purpose has become a buzz word. The word has the risk of being the new pet rock of business jargon. That said, purpose, when used in the proper context, is a key ingredient and truly the lynchpin of credit unions’ sustainable growth. One of the challenges with purpose being used as a buzz word is that it can quickly become a catch all for all that ails the organization, and therefore appear unauthentic. Research shows that purpose improves your long-term relevancy and ensures your sustainable growth, but only if it is authentic to, and aligned with, the stakeholders you serve. Without authenticity, a hollow purpose will do more harm than good. Purpose is one of those phrases that has different meaning to different people. For some, purpose is the same as mission. But not to me. I believe your mission is what you do, while your purpose is why you do it. The why is foundational and fundamentally imperative. Purpose lies at the intersection of two essential questions: Who are we, and what need do we fulfill in society? Purpose goes well beyond financial performance. Purpose defines why society should want your credit union to succeed and, when done right, purpose makes you indispensable to your members. Pursuing your purpose is a powerful change from “business as usual” and involves taking risks and painting outside the lines. Finally, for your organization’s purpose to elevate your business and be truly impactful to your stakeholders, it must be personal to you. How does purpose tie to sustainable growth? Harvard Business School Professor Michael Porter famously said, “Culture eats strategy for breakfast.” Like most things in organizational performance, employee engagement is one of the keys to success. Employees are the leverage point for whether organizations and leaders can implement and execute strategy. It’s no different with purpose: embedding your purpose and using it as a driver for growth, can only happen with highly engaged employees. Research from a 2021 MIT Sloan study showed that 72% of employees feel it is important to work for an organization that has a purpose they believe in. Yet, only 25% of those respondents believed their organization is as purpose-driven as the leaders think it to be. The difference here is commonly called the purpose gap. As leaders, it is imperative to identify these gaps and remediate them for the organization to remain relevant. Harvard Business Review’s 2019 article “Why Are We Here” showcases the performance impact of purpose, and its significance. For companies that have clearly defined and communicated their I love hearing credit union origin stories. These stories usually involve a small group of people and a shoebox. Yes, almost always a shoebox. “ Having a clearly articulated and inspiring purpose which is fully embedded in your culture is what drives performance because it motivates and empowers employees to do their best work. When employees are aligned with your organization’s purpose and are empowered to live it, they show up differently. ”
23 purpose more than 90% deliver profits and revenue at or above their peers, and these findings are across industries. In these purpose-driven companies, employee engagement is up as well, with 63% of employees report being motivated and 65% report being passionate about their work. Both these are over double the results from non-purpose-driven organizations (31% and 32% respectively). Having a clearly articulated and inspiring purpose which is fully embedded in your culture is what drives performance because it motivates and empowers employees to do their best work. When employees are aligned with your organization’s purpose and are empowered to live it, they show up differently. They show up passionately, and passion is contagious. This passion creates an environment ripe for innovation; and when your innovative minds are centered around how to better serve the unique needs of your members and communities, that is where the magic of purpose comes alive. When an organization has a clear focus on purpose and engages its employees in the purpose, member engagement increases. According to research from Gallup, teams that optimize employee or member engagement perform 70% better than those who don’t. Said differently, they boost financial performance by 70%. However, those organizations that optimize both employee and member engagement, perform exponentially better by 240%! 2.4X is a compelling business case for embedding purpose in your organization and starting it with your employees. It clearly drives the business forward. Stakeholder Impact Empowered Employees Engaged Members Profitable Growth Purpose THE NAFCU JOURNAL MAY–JUNE 2022
24 THE NAFCU JOURNAL MAY–JUNE 2022 When your credit union has profitable, sustainable growth, you can reinvest more of your earnings back into your stakeholders. This could mean success sharing rewards for employees, year-end bonus dividends for members, and more philanthropic activities within your local community. As credit unions reward their three stakeholders, it reinforces the purpose and propels the organization forward. To help credit unions put purpose into action, our team at Callahan & Associates developed a framework which highlights a virtuous cycle that starts and ends with purpose—Callahan’s Sustainable Growth Framework. Strategic Implications In addition to driving employee and member engagement, the focus on purpose helps drive differentiation. Certainly, credit unions need to have fair rates, reasonable fees, and appealing products, but most do not need to be market leaders in these areas. Where credit unions do need to be leaders is on delivering emotional connections. Behavioral science shows that upwards of 70% of consumer decisions are made based on emotion, yet many credit unions choose to compete on rational tactics like rates and fees. Leveraging purpose can help shift the narrative and build an emotional connection. Stakeholders with a strong emotional connection become advocates, internally and externally, for your cooperative. Once employees fully believe your purpose, they need a new way to measure success. How we track our success, the metrics we use, will set the stage for our short- and long-term outcomes. As regulated financial cooperatives, we have an obligation to keep our eye on metrics our boards and regulators watch: ROA, Net Worth, Delinquency, and Concentration Risk to name a few. But when implementing a purpose-driven strategy, non-traditional, impact-based metrics must be included on your scorecard, or you risk not seeing true progress. We have all heard the sayings such as “we measure what we treasure” or “what gets measured, gets done” and this is especially true with purpose. Tracking success in new ways takes two forms: one is new framing, and the other are new attributes. For framing, instead of tracking dollar of first mortgage loans, perhaps report how many families your credit union helped own their home; and report on financial resilience of your members by the percent of members who have $400 in savings. For new attributes, consider reporting how much money your credit union saves members by refinancing loans at lower rates; or how many members were given access to financial services who were historically excluded and therefore shut out from building wealth. Tracking your actions and innovative activities reinforces what is important at your organization and reporting the impact on improving members’ quality of life brings your purpose to life. Mindset for Implementation Leaders who choose a purpose-driven path are committing to a long view. Leading with purpose requires organizations to transform, and transformational journeys take time. In addition to time, transformation takes strong alignment and consistent communication. For CEOs to successfully execute a purpose transformation, it requires concerted and extensive board communication, as well as hyper focus on internal culture and stakeholder communication. To close the “ In addition to driving employee and member engagement, the focus on purpose helps drive differentiation. Certainly, credit unions need to have fair rates, reasonable fees, and appealing products, but most do not need to be market leaders in these areas. Where credit unions need to be leaders is on delivering emotional connections. ”
25 THE NAFCU JOURNAL MAY–JUNE 2022 arch–April 022
26 THE NAFCU JOURNAL MAY–JUNE 2022 “DO GOOD” Solve Social Problems Your Credit Union “DO WELL” Make Money purpose gap, you must have the minds and hearts of all stakeholders, but none more important than your middle management team. Research shows that middle management is key to successfully embed purpose; and executives must commit the time to develop strong feedback loops with leaders in the middle of the organization. Successfully embedding purpose is not a top-down endeavor, and it requires listening to stakeholders around authenticity. If stakeholders’ real-life experiences do not reflect your purpose, employees and members will see your purpose as a fancy tag line that is unauthentic. If this happens, no one wins. You may be familiar with a saying in non-profits, “No Margin, No Mission.” Purpose-driven organizations flip that to “No Mission, No Margin.” Credit union leaders are often fortunate that they do not have to choose between their head and their heart, they can flex both equally in our cooperative model. The credit unions that are intentional about crafting strategy that positions themselves at the intersection of head and heart, are the ones which will remain relevant longterm. Harvard Business School Professor Rebecca Henderson calls this “Doing Well by Doing Good” and she sees it as a business imperative. While purpose is the driver of sustainable growth, it starts with how your purpose motivates and inspires your employees, and therefore how it changes your culture. Leaders need to be aware that this purpose journey may require you to rethink your organizational structure and redesign your org charts. Ensuring you are recruiting and retaining the right talent to propel your purpose forward is essential, and this includes making tough decisions about letting employees go who are not aligned with the new direction of the organization. Purpose is a journey. It takes commitment and persistence. It is easy to get teams excited and gain their buy-in on day one. After all, most people want to leave behind a legacy and make the world a better place. This passion is good, but it needs to be tempered in some realism. Organizational change takes time and requires patience. Progress will be measured in years not quarters. Setting realistic progress milestones is critical so employees don’t become discouraged when outcomes aren’t immediately recognized. Why Now? Credit unions are looking for growth opportunities; and members and communities need the services your credit union provides today more than ever before. While some consumers are experiencing improved personal balance sheets, many are struggling and could use a helping hand. The credit union motto of “Not for Profit, Not for Charity, But for Service” remains highly relevant. It’s a deeply rooted commitment to service, and when infused with your purpose will ensure you’re meeting the critical needs of your current and future members. Providing consumers equal access to fair financial services is just as vital today as in the year credit unions were established . We believe a clear purpose can inspire your employees to do great work, engage your members in ways not dreamt possible and can improve the lives of future members in your communities, giving fuel to your virtuous purpose cycle, and ensuring your credit union’s long-term success. Jon Jeffreys is President and CEO of Callahan & Associates.
27 THE NAFCU JOURNAL MAY–JUNE 2022
29 THE NAFCU JOURNAL MAY–JUNE 2022
30 THE NAFCU JOURNAL MAY–JUNE 2022 While there are no answers to questions about how reporting requirements will change, requests for information from FinCEN highlight potential areas that may affect credit unions’ BSA/AML compliance. “Since 2001, we have not seen any significant regulatory changes besides the inclusion of the beneficial ownership rule, so it will take time to finalize the rules, especially since many of the items require inter-agency coordination between the National Credit Union Administration (NCUA) and the Financial Crimes Enforcement Network (FinCEN),” said Kaley Schafer, director of regulatory compliance for NAFCU. “While there is no need for changes within credit union compliance programs until final rulemaking, it is important to be aware of potential changes.” One way to prepare is to be aware of FinCEN’s National Priorities, suggested Schafer. “FinCEN published its first list of priorities in June of 2021, but we may see proposed rulemaking regarding these priorities by the end of 2022,” she said. FinCEN’s initial priorities, in no particular order of importance, are corruption, cybercrime, foreign and domestic terrorist financing, fraud, transnational criminal organization activity, drug trafficking organization activity, human trafficking and human smuggling, and proliferation financing. While the priorities do not amend BSA requirements, agencies plan to revise BSA regulations to incorporate the priorities into BSA programs. Potential Benefits for Credit Unions The AMLA does include provisions that may help credit unions more easily comply with requirements, said Schafer. “The agencies are evaluating the suspicious activity report (SAR) and the currency transaction report (CTR), which can be streamlined and modernized by increasing the reporting thresholds and removing any redundant or obsolete provisions.” “Streamlining the CTR will make the process more efficient for credit unions,” said Nicole Soto, VP, regulatory compliance, Mission Federal Credit Union. “We use significant resources to complete the form and its many fields accurately. We’re all human, so when you have a complex form, it is easy to mistype a tax identification number or check the wrong box.” The creation of a beneficial ownership database maintained by FinCEN that includes accurate, timely information has the potential to help credit unions streamline compliance with Customer Due Diligence requirements, said Soto. “The database which will leverage state business filing information still needs to be built so there are many unanswered questions about how it will work—including the timeline,” she said. “I am cautiously optimistic that this tool will save credit unions time and will assist with compliance efforts, especially for organizations with small compliance teams.” “ Since 2001, we have not seen any significant regulatory changes besides the inclusion of the beneficial ownership rule, so it will take time to finalize the rules. While there is no need for changes within credit union compliance programs until final rulemaking, it is important to be aware of potential changes. ” KALEY SCHAFER, DIRECTOR OF REGULATORY COMPLIANCE, NAFCU
31 THE NAFCU JOURNAL MAY–JUNE 2022 Soto also views the proposed enhanced feedback on the use of SAR information that FinCEN and the U.S. Department of Justice or local law enforcement find helpful to be promising. “The current trends published by FinCEN are helpful, but people outside the compliance arena might find more detailed information helpful,” she said. The ability to share specific information that law enforcement finds beneficial will enhance front-line team member training by showing how their efforts to identify suspicious activity are about more than just complying with the law, she added. The increasing use of digital assets and convertible virtual currency (CVC) poses a higher potential for suspicious activity. According to NAFCU’s October 2021 Economic & CU Monitor survey, about 48% of respondents reported some degree of scrutiny from an examiner regarding CVC transactions, ranging from a minimal level to moderate level of scrutiny. In a letter to FinCEN regarding the review of BSA regulations and guidance, NAFCU asked for greater transparency regarding the monitoring of cryptocurrency transactions and sufficient guidance so credit unions can incorporate the priority into their risk assessments. The emphasis on virtual currency and blockchain technology will be a challenge for many credit unions, depending on how FinCEN guidance develops, said Stephanie Painter, BSA manager, DuPont Community Credit Union. “I’m 30-years-old and grew up with technology, but there is a steep learning curve
32 THE NAFCU JOURNAL MAY–JUNE 2022 “ It is critical as BSA professionals that we share information with everyone in our organization, but it is important to remember that changes require resources and buy-in from multiple departments. Helping people understand why the change is needed—benefits our members, improves compliance, streamlines processes— creates buy-in. ” STEPHANIE PAINTER, BSA MANAGER, DUPONT COMMUNITY CREDIT UNION as to how blockchain works, and I’m still trying to learn,” she said. Understanding how blockchain works is important because the technology is incorporated into a greater number of technology solutions used by financial institutions. “You have to know how it affects your data and processes because, ultimately, your credit union is responsible for the outcomes.” Painter recommended taking advantage of any learning opportunities related to blockchain and other emerging technologies to be able to identify how new regulations will impact the organization. “Professional associations are a good resource, for compliance officers for all sizes of credit unions,” she said. “If FinCEN puts virtual currency into a list of priorities, they will need to provide experts and resources to guide credit unions’ compliance efforts.” Preparing for Changes “It is critical as BSA professionals that we share information with everyone in our organization, but it is important to remember that changes require resources and buy-in from multiple departments,” said Painter. Communicating potential changes before the need to implement them lessens the anxiety that comes with major changes. “Helping people understand why the change is needed—benefits our members, improves compliance, streamlines processes—creates buy-in,” she said. Changes might include additional wording to disclosure documents, additional training for retail employees or new software to manage reports, but the key to success is letting people know ahead of time that changes might be needed and asking for their input on what might need to be done. “Avoid surprising people—give them time to consider what might be needed and what resources are required,” said Painter. “This gives everyone time to think strategically and avoid knee-jerk reactions that may or may not be helpful.” At this point, Mission Federal is taking a “wait and see” approach, said Soto. “We are closely monitoring public notices, engaging with our industry peers and taking advantage of trade association educational opportunities to learn more about potential changes,” she said. “As we get closer to rulemaking, we will allocate resources to address the impact on our organization.” Soto added, “The best advice I have for others in our industry is to be patient. The rulemaking and implementation process will develop over the next couple of years, and there will be twists and turns along the way.”
33 THE NAFCU JOURNAL MAY–JUNE 2022
34 THE NAFCU JOURNAL MAY–JUNE 2022 INSIDE NAFCU SERVICES If you’ve overlooked the growth in buy now, pay later (BNPL) because it looks like a simple rebranding of retail lay-a-way, or because you’re already comfortable with your member credit portfolio, you may be missing some of the bigger signals from both merchants and consumers. Tarik Camurdes, the Buy Now Pay Later Executive at FIS, joined me on a recent episode of The CU Lab podcast to share this key lesson. He imparted several insights on this trend that credit unions should know about when considering BNPL: 1. Buyers care about BNPL even though financial insiders know it’s an old concept. Traditional card payments are losing market share to the fintechs that have pushed BNPL into consumer consciousness. Fintechs are winning new business with BNPL by presenting it as a convenient option, delivered right at the point of purchase. And they’re making inroads on progressively smaller-ticket items. 2. Not all BNPL offerings are created alike. There are several ways to implement BNPL. In addition to the checkout solutions major merchants and fintechs have made popular, in some markets major card issuers now offer pop-up installment payment offers right at the point-of-sale terminal. Converting card purchases to installment payments is a post-transaction BNPL method, and one FIVE KEY INSIGHTS INTO THE BUY NOW, PAY LATER TREND By Randy Salser, President of NAFCU Services which is also gaining significant traction among major issuers. 3. Consumers value the convenience and credit score-friendly approach and, in many cases, merchants are footing the lion’s share of the bill. Some savvy consumers recognize that BNPL extends their credit options without creating a conventional credit report inquiry. This diverts purchases away from traditional sources of interchange revenue. Meanwhile, in many situations, the overhead of the BNPL programs is largely being paid by merchants. This shift may put upward pressure on retail prices. 4. BNPL’s new entrants are attracting regulatory attention. The new regulatory interest in BNPL is driven in part by the unregulated fintechs in the spotlight. While credit unions may not need to be particularly wary of the immediate potential for regulatory action, it’s important to recognize that the wider range of BNPL programs means that some members may be losing complete visibility into exactly what they owe and where they owe it. This creates an opportunity for credit unions to help members understand the impact of BNPL on their cash flow even while decisions about entering the BNPL market are ongoing. 5. Credit unions are well-positioned to innovate in the BNPL space. Because credit unions have the financial well-being of members to consider, there is an opportunity for credit unions to be a leader in finding mutually beneficial and sustainable solutions as BNPL continues to grow in prominence and volume. To hear my entire conversation with Tarik Camurdes, listen to the complete episode, download The CU Lab on your favorite podcast platform . “If you’ve overlooked the growth in buy now, pay later (BNPL) because it looks like a simple rebranding of retail lay-a-way, or because you’re already comfortable with your member credit portfolio, you may be missing some of the bigger signals from both merchants and consumers.”
35 THE NAFCU JOURNAL MAY–JUNE 2022 REINVESTING GROWTH IN OUR MEMBERS By Mary McDuffie, President & CEO of Navy Federal Credit Union MANAGEMENT INSIGHT Navy Federal Credit Union formed 89 years ago when seven Navy Department employees joined up to help each other reach their financial goals. Fast forward to today—we’ve grown to more than 11 million members, but we still hold on to the same guiding principle that inspired our founders: our members are the mission. Navy Federal’s membership has expanded at a rapid pace over the last few years, gaining around half a million members per year since 2018. We’ve been able to do so for one simple reason: our values are reflective of the military community, veterans, and their families, and they in-turn recognize the value of membership with Navy Federal. We invest heavily in service to our members, as well as in the products and services needed to make their financial goals a reality. Additionally, we’ve continuously re-invested in the tools and resources that allow us to provide a top-notch member experience. In short, we’ve focused on giving our members the best security, digital tools, and in-person services available. Since I began as CEO in early 2019, digital transformation has been key to our success, and security is at the heart of what we do. We constantly add new features and create partnerships to ensure that our members’ accounts are safe. By investing in technologies such as VoiceID, which allows members to use their voice to verify their identity when calling, we provide added levels of security for our members. We also recently formed a partnership with the Cybercrime Support Network (CSN) to bolster safety and offer industry-leading security. Whether through strategic partnerships like with CSN, or product and service updates, we strive to give our members peace of mind when it comes to maintaining their personal information and finances. But there is always room to improve member service, so we’ve worked hard to be at the forefront of digital service. In fact, every month almost two-thirds of our members use at least one digital channel. But we still believe it’s critical to be able to talk to a live person. Even when active duty servicemembers are deployed overseas, our 24/7 live, stateside phone service is there to answer questions or provide needed financial services. We have made it our mission to meet members where they are. Our survey research and everyday interactions tell us that brick-and-mortar branches are critical in that effort. While many large financial institutions have cut back on in-person services, we’ve been adding branches steadily since 2011. With 350 physical locations, many members have both in-person and digital options, providing easier access to financial advice and resources. This is especially helpful for our active-duty members, as 186 of these branches are on or within three miles of a military installation. Membership growth also allows investment in new services. But more importantly for our members’ financial wellness, growth gives us the opportunity to reinvest profits and provide lower fees and more favorable interest rates. We believe member satisfaction and a great member experience drive an organization’s success. Growth is great, but only when it feeds into a cycle of reinvesting profits to boost member satisfaction. It’s part of the credit union difference. When I first started at Navy Federal, I was excited by the opportunity to serve those in uniform and their families. Although much has changed—and grown—since then, the things that make Navy Federal special remain. Throughout our expansion, we’ve stayed true to ourselves and our mission by committing to our members’ needs every single day. That isn’t changing any time soon. Credit unions and their associations can connect with the Network on LinkedIn or by email at email@example.com