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THE LEADERSHIP ISSUE FEBRUARY 2015 VOLUME 10 ISSUE 2 NEW The Law Deciding to Serve the Marijuana Industry Analyzing Risk and Contradiction BRAD R. BERGMOOSER NEW View from the Crow s Nest Interviews with CU Movers & Shakers Navigating the Opportunities on the Horizon for Lenders JULI ANNE CALLIS NEW CEO Velocity Interviews with Top CEOs Formula for Success What Financial Services CEOs Can Learn From PenFed Credit Union CEO James Schenck SCOTT MCCLYMONDS Experience the Power of Plus. Let Advisors Plus give your credit union superpowers... minus the cape. Can t lift a bus with superhuman strength can optimize your debit portfolio. Can t leap a building in a single bound can integrate product delivery. Can t see through walls with X-ray vision can enhance your profitability. Our delighted clients turn to our team of superhero consultants to solve their business problems and power their growth. Business Strategy Marketing Strategy Marketing Growth Campaigns Predictive Analytics Credit Card Portfolio Analysis Debit Card Portfolio Analysis Personal & Small Business Checking Strategy Credit Card Start-up Programs Contact Center Optimization Operations Optimization Credit Card Risk & Collections Analysis Branch Sales Training Make Advisors Plus YOUR secret weapon. Call 727.299.2535 or visit us today at TABLE OF CONTENTS V O L U M E 10 I S S TAB 2 UE Credit Union BUSINESS 4 6 8 12 15 20 PUBLISHER S POV The Team Builder Tim O Hara CU COMMENT 25 27 29 32 36 COMPLIANCE UPDATE 3 Totally Doable Compliance Projects for 2015 Cindy Williams CFO CURRENCY Why We Should Think About Our Members FICO Scores James Collins THE LAW Investment Total Return Emily Hollis CU CONTENT Deciding to Serve the Marijuana Industry Analyzing Risk and Contradiction Brad R. Bergmooser TECHNICALLY SPEAKING Growing Through Giving A Case Study of St. Anne s Credit Union Laura Enock VIEW FROM THE CROW S NEST The Next Step in Consumer Empowerment Vince Passione LENDING SOLUTIONS Bob Schroeder DIGITAL SECURITY Navigating the Opportunities on the Horizon for Lenders Juli Anne Callis CEO VELOCITY Understanding Credit Scoring Models Formula for Success [Part One] What Financial Services CEOs Can Learn From PenFed Credit Union CEO James Schenck Scott McClymonds Best Practices for Credit Unions That Outsource Technology David Katz 41 VIRTUAL CORPS Creates New Business Alliance for 2015 Amy Rapp 1 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M ABOUT US TAB PUBLISHING TEAM Tim O Hara Editor & Publisher tim Iliana Nord Operations Manager iliana Patti Manzone Designer Ashok Kumar Circulation Director NEW The Law THE LEADERSHIP ISSUE FEBRUARY 2015 VOLUME 10 ISSUE 2 PUBLISHER S POV Deciding to Serve the Marijuana Industry Analyzing Risk and Contradiction BRAD R. BERGMOOSER Tim O Hara CU COMMENT NEW View from the Crow s Nest Interviews with CU Movers & Shakers James Collins THE LAW Navigating the Opportunities on the Horizon for Lenders JULI ANNE CALLIS Brad R. Bergmooser TECHNICALLY SPEAKING NEW CEO Velocity Interviews with Top CEOs Formula for Success What Financial Services CEOs Can Learn From PenFed Credit Union CEO James Schenck SCOTT MCCLYMONDS Vince Passione LENDING SOLUTIONS Bob Schroeder DIGITAL SECURITY David Katz COMPLIANCE UPDATE SUBSCRIPTIONS Cindy Williams CFO CURRENCY Emily Hollis CFA CU CONTENT Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr x 3 ( 225). An online membership form is available at register. SALES AND ADVERTISING Laura Enock VIEW FROM THE CROW S NEST Tim O Hara Publisher tim or 561-282-6015 1 CONTACT INFORMATION Juli Anne Callis VELOCITY CEO Scott McClymonds VIRTUAL CORPS Amy Rapp Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim 2 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M erest 0% Int nths Mo for 60 0 Of f 0 or 6 0 il Reta ite d Ti Lim ite d Ti me O f f er Lim me O f f er PUBLISHERS TAB POV BY TIM O HARA The Team Builder W e designed Credit Union BUSINESS (CUB) magazine just over 10 years ago with the aim of giving you valuable information to help you run your credit union. The inspiration came directly from former CU CEO Edward Speed who told me I m disappointed in the state of the credit union publications. I don t want to read about bank robberies because it s my job to prevent them. I don t want to read about bake sales or golf tournaments or industry politics. I want to read a Fortune or a Forbes magazine for credit unions that will help me run my BUSINESS. Bingo My plan was to offer up helpful information specifically for each member of the executive team CEO CFO and CIO as well as Lending Marketing Legal and Compliance heads. Mission Accomplished In this our second all-digital issue we have established monthly CUB columns to serve every department head in the C-level offices. And in it we ve included several new columns to join our CUB All-Stars of experts writing for experts. Velocity s CEO Scott McClymonds kicks off his CEO interviews with PenFed CU s James Schenck. Juli Anne Callis begins her series A View from the Crow s Nest and attorney Brad Bermooser tackles some hard questions regarding the newly legal marijuana industry along with the legal considerations for you to consider in taking on such business members. I am very proud to suggest that 10 years of mostly seven-day work weeks appears to be paying off in serious information for serious readers. Two More Weeks of Fires Due to popular demand we have decided to keep our offer of a free Kindle Fire. In return for a three-year digital CUB subscription (a 45 percent ROI) we will continue this offer for two more weeks. You pay 245 for all-access to CUB and our website ( and it s three years worth of archives on all things concerning the credit union business and in return we ll send you a 110 Kindle Fire mini tablet computer. We ve delivered hundreds of these machines over the past several months. Go to to check it out Thanks for reading Tim 4 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M CU TAB COMMENT BY JAMES COLLINS Why We Should Think About Our Members Fico Scores H er voice was perky as I sat down. Welcome to the Bank of Colossus. My name is Mary. How can I help you Well I m interested in a loan.... Her voice rose as she leaped into her spiel. Oh wonderful We have great loans. BIG loans. SMALL loans. LOANS in every shape and size. What kind of loan will it be today She handed me a document that said Authorization to Check Credit and ripped it out of my hand the second I signed it. She was typing faster than a teenager texting a breakup message to her boyfriend. You will just love being one of our truly valued patrons at Colossus. I m sure you ll qualify for our lowest rates. Can I get you coffee Espresso Water with lemon With a flourish she pressed enter and ... waited. Suddenly her computer beeped. We have five levels or rates our awesome rate our exceptional rate our preferred rate and our... A deep frown spoiled her happy face just as deep frowns tend to do. She stared intently at the screen momentarily her expression impassive. You re a 610. A what A 610. I could tell she was troubled. Deeply troubled. Morbidly troubled. The I d rather be trying to explain a dead body in the trunk to the police kind of troubled. My mouth became dry. Could I have that water now She looked at me coldly. There is some in the bathroom. The PUBLIC bathroom. With lemon I ve heard the hand rinse is lemon scented. Being a 610 I surmised is not a good thing at the Bank of Colossus. What exactly is a 610 You are she admonished. It s your FICO score. This score tells me how good of a borrower you are. But I ve always paid my bills on time. She glared. Everyone who gets a loan gets their FICO number and yours she said with deep disdain is not very good. I m afraid you don t qualify for our excellent member rates. Which rate do I get Exceptional Good Preferred I asked. No our Classic rate. And that is On our website. She started packing up for lunch. Angry now I scolded Perhaps I need to find a new bank She smiled a devilish smirk. I m sorry to hear that sir but can I give you directions According to the Federal Reserve 25 percent of credit reports have at least one error that will lower a score. While many think this is a consumer problem (after all aren t consumers supposed to check their reports annually ) in reality it is something most people never ever think about. But they should. But WE should. Having a correct score does two things. First it protects the member to ensure he or she is not paying too high of a rate. Secondly it protects the lender to make sure it is not paying too low. So when that member comes into Tiny CU the scenario should go something like this Hello I d like to get a loan. Sure says Mary. Let s pull your credit and make sure everything is correct before we get too far. Perfect. James Collins is CEO of O Bee Credit Union based in Tumwater Washington 6 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M THE TAB LAW BY BRAD R. BERGMOOSER Deciding to Serve the Marijuana Industry Analyzing Risk and Contradiction In states where such operations have been legalized businesses engaged in marijuana-related activities could prove profitable partnerships for credit unions. To mitigate the risks involved in such alliances it is necessary to consider all the legal ramifications both state and federal. A Senior Counsel weighs in on the uncertain issue. Current Legal and Enforcement Treatment The Department of Justice (DOJ) and the Department of Treasury s Financial Crimes Enforcement Network (FinCEN) have attempted to reconcile federal law with the more than 20 states allowing for certain marijuana activity. In February 2014 the DOJ through its Deputy Attorney General James Cole provided direction (following an August 2013 memorandum on the issue) on how it viewed prosecuting offenders under the federal Controlled Substances Act (the Cole Memo). On the same day FinCEN released guidance to assist in compliance with the Bank Secrecy Act (BSA) if financial institutions hold marijuana accounts. The Cole Memo provides guidance to DOJ attorneys and federal law enforcement on prosecuting violations of the Controlled Substances Act (CSA). (A full copy can be found here.) Important for credit unions to know is that the Cole Memo is not binding authorization to open and transact business on marijuana accounts. It explicitly states that it remains a criminal offense to engage in certain financial and monetary transactions with the proceeds of a specified unlawful activity including proceeds from marijuana related violations of the CSA. The purpose of the memo which may benefit credit unions is to lay out the DOJ s plan to use its limited investigative and prosecutorial resources to focus on particular conduct which does not include a financial institution providing services O ver 20 states have legalized the practice of selling and producing marijuana in some fashion activities that remain illegal under federal law. Because of this inconsistency financial institutions are left battling the question of whether or not to open accounts and serve companies engaged in marijuanarelated businesses. Unfortunately there is no clear answer to that question. So what can a credit union do if it is considering holding business accounts for members who grow or sell marijuana Management and the board must take into account the credit union s needs and have detailed knowledge of all the relevant factors including the following Statutes rarely occupy an area of law all by themselves. The credit union must understand and evaluate all supplemental materials on the issue in order to adequately determine its potential risks. Do the potential member s financial needs coupled with increased credit union fee income coincide with the credit union s current and projected economic situation What should be included in developing new policies procedures and account agreements for businesses engaged in the production or sale of marijuana in order to mitigate the regulatory and legal risks 8 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M THE LAW to a marijuana-related business acting in compliance with state law. How does the Cole Memo help in evaluating the offering of marijuana accounts The devil is in the details. The clear message is that marijuana activities that are legal under state law (including related financial transactions) are still federal crimes but they may not be among the eight areas of conduct the DOJ will focus on prosecuting. What the Cole Memo alludes to and what is essential for credit unions is the level of due diligence that must be in place to avoid prosecution should any actions from a member implicate one of the priority violations. The Cole Memo offers no less than three different standards ranging from knowingly working with a member who is engaged in one of the eight priority violations to simply being in a state that does not have sound regulatory guidance in place. With such a broad spectrum the Cole Memo is advising that regardless of the steps taken to protect itself a credit union could be prosecuted or face civil liability for violating a host of federal laws (including money laundering and the Bank Secrecy Act) should a member s conduct trigger one of the eight priority violations. Complementing the Cole Memo FinCEN put out BSA Expectations Regarding Marijuana-Related Businesses (a full copy here). FinCEN s guidance creates separate marijuanarelated filings within existing BSA standards. Because the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity FinCEN was forced to address the issue. And the result is three new types of Suspicious Activity Reporting (SAR) filings. A Marijuana Limited SAR is filed when the credit union reasonably believes the member is not violating one of the Cole Memo priority violations. A Marijuana Priority SAR is filed if the credit union reasonably believes one of the priority violations is implicated and a Marijuana Termination SAR must be filed should the credit union close the member s account. Like the Cole Memo while the FinCEN guidance is helpful for credit unions in evaluating the risks of serving members in the marijuana industry it does not shield against prosecution or liability. Conducting a financial transaction with monies derived from the sale or production of marijuana violates federal law. Without action by Congress no guidance issued by a federal agency or law enacted by a state legislature will change that. C R E D I T U N I O N B U S I N E S S Do Marijuana Business Accounts Fit with the Credit Union s Financial Position Businesses involved in state-legalized marijuana activities have a need to form relationships with financial institutions. Without a traditional depository account these businesses and their customers can use only cash resulting in many potential problems from physical security to executing employee payroll. Depending on economic needs and risk analysis the demand of the marijuana industry could result in opportunity for credit unions. This necessity of financial institution involvement for example could allow credit unions to develop a more aggressive rate and fee structure for these accounts. Credit unions should evaluate their economic needs with those of the potential business members. Companies involved in legal marijuana businesses may be well capitalized and not in the market to debt-finance any large portion of their operations. If that s the case a credit union considering opening an account needs to determine if a large influx of deposits is economically feasible and beneficial. Alternatively a credit union s business lending experience may need to be supplemented when considering a lien on inventory in a business loan to a marijuana grower or dispensary. Significant compliance and monitoring burden comes with holding marijuana accounts which means added operational costs. But despite those expenditures and depending on its current and projected financial needs a marijuana business account could become a profitable partnership for a credit union. Creating a Marijuana Account System Assessing legal risks and economic impact is the first step. An equally important process involves forming policies drafting new account agreements and completing other due diligence measures necessary for a credit union to account for those factors and offer marijuana-related business accounts. Satisfying BSA s Customer Identification Program protocol is only a small portion of the course of action a credit union must take when opening marijuana-related accounts. In addition to verifying who the business is existing business account 9 F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M THE LAW policies must be amended so the credit union can understand how it operates who its customers are and what its compliance with applicable state-specific licensing structures is. The due diligence standards in the Cole Memo and FinCEN guidance are vague but they create the idea that a credit union needs to be more of a business partner than a depository institution. Current member business account agreements offer a good platform since marijuana-related businesses will have common corporate structures (corporations LLCs or partnerships) but they must be changed to give the credit union additional protections. With so much uncertainty surrounding the underlying business of growing and selling marijuana a credit union should preserve the contractual ability to close the account because of legal or regulatory changes. Account agreements should also contain auditing provisions similar to those in many vendor agreements. Under the Cole Memo and FinCEN guidance bolstering account-opening procedures and member agreements needs to be accompanied by ongoing account monitoring. If a business member moves from operating legally under state law to engaging in one of the priority violations the credit union s ignorance won t help. A credit union holding marijuana accounts will need to document its efforts in regularly verifying those businesses are validly licensed are not subject to any adverse proceedings and are operating within the scope of the business plans the credit union reviewed at account opening. Remember there is no due diligence safe harbor. Law and regulatory guidance have created a situation where a credit union must weigh technical legality with practical enforcement making it necessary for marijuana-related business accounts to be treated with more scrutiny than any other account or product offered from opening to the end of the account relationship. In November Colorado regulators approved a charter for a credit union to serve marijuana businesses as its field of membership (NCUA s insurance approval is still outstanding) and the U.S. Treasury Department stated that over 100 financial institutions were providing services to the industry. Around that same time however an NCUA examiner threatened to issue a Letter of Understanding to a New Mexico credit union if it didn t close its marijuana accounts. And in December the states of Oklahoma and Nebraska filed suit in the U.S. Supreme Court seeking a declaration that Colorado s marijuana laws violate the U.S. Constitution. Ultimately Should a credit union open marijuana accounts is not the right question to ask. The appropriate question should be If it is economically beneficial has the credit union taken all necessary steps to mitigate the existing risk in offering marijuana accounts And the best way to reach an answer is for the board and management to work closely with retained professionals who understand their business and the inherent risks in the ever-developing body of law on the issue. Ongoing Inconsistency Mitigating Risk The legalization of marijuana is not a new concept with California allowing it for medical purposes in 1996. In the intervening 19 years over 20 other states have followed suit two of which have passed legislation for the recreational use of the drug. Unfortunately while laws and regulations have been created to govern marijuana s production and sale no authority has definitively put forth logical direction for financial institutions. 10 C R E D I T U N I O N B U S I N E S S Brad R. Bergmooser is Senior Counsel at Freeborn & Peters LLP and a former Assistant General Counsel for Illinois Credit System. He is a member of the firm s Corporate Practice Group and Credit Union Industry Team and concentrates his practice on matters involving credit unions and other financial institutions. He can be reached at bbergmooser F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M TECHNICALLY SPEAKING BY VINCE PASSIONE The Next Step in Consumer Empowerment Is it time for your credit union to take the next step when it comes to online lending One lending expert thinks so. Learn why it may be in your CU s best interest to ride the lending wave and discover why online lending platforms may be the vehicle to keep you there. M any of us are old enough to remember when a trip to the gas station meant that attendants pumped our gas cleaned our windshields and checked our oil all in the time it took to fill our tanks. Those days of course have passed. Today we fill our own tanks at self-serve pumps clean our own windows check our own oil and pay with a debit card that interacts directly with its issuing financial institution before we re allowed to pump even a drop. The attendant is only there to answer questions (maybe) and sell newspapers snack foods and other consumables. At the time this transformation was taking place gas stations were the vanguard of a rapidly expanding self-service movement. When the migration first began decades ago consumers saw it as a way for companies to maximize profits while minimizing labor expense. But over time those views have changed. Today busy consumers know it s faster to fill their own tanks slide their debit cards through the mag stripe readers and be on their way. It takes only a fraction of the time it would have taken to interact with an attendant. Lately we ve also learned how to check out our own groceries call in our own medical prescriptions to automated systems that use our touchtone input to fill our orders and book our own airline tickets online in all cases with little or no human interaction. Financial service providers including credit unions have been part of the self-service evolution for some time. When it comes to online lending it s time for many of those credit unions to take the next step. A New Age of Empowerment The 21st century will be known as the age of consumer empowerment through which technology will enable all of us to maximize our own time one of our most important resources. Concurrently we ll be gaining greater product knowledge and technical expertise that will helps us be smarter consumers and better personal financial managers. Credit unions entered the age of consumer empowerment a decade or so ago. Online banking and a growing cluster of institutional apps allow credit unions of virtually all sizes to maximize resources improve member services and gain a 11 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M TAB TECHNICALLY SPEAKING competitive edge in an ever-expanding marketplace. In the cyber world an institution s size is secondary to how effectively it can serve members and even the small ones can stand tall with the competition provided they have the right technological tools. It s a virtual world and up until now the perceived cost of entry has created hurdles for some credit unions stagnating income levels and building roadblocks to growth. This tendency has been especially true with lending a formerly labor-intensive process that is credit unions financial lifeline. Now sitting at or the near the top of the economic pyramid credit unions and their loan programs are thriving amid the rabid demand for everything from new and used car loans to mortgages to private student loans. All of those loan products are now available online to increasingly more sophisticated members who are anxious to have a greater hand in determining their own financial futures. will enable them to get the fastest service and the best rates without taking a chance with an untried entity. In today s market consumer trust offers a huge advantage and no financial institutions fare better in this category than credit unions. Capitalizing on a New Marketplace Uncertainties about working with an online lending platform can create concerns for some credit unions. They may see cost continuity and capability as barriers to entry. Credit unions that use service bureaus for their data processing may have legitimate issues with the bureau s capabilities to interact with online lending systems. More advanced service bureaus will find an effective way to talk with an online lending system for less sophisticated bureaus continued incompatibility may be only the first of many red flags to their future as a credit union business partner. Existing IT departments may have the capability to manage online lending but they may lack the opportunity because critical resources must be devoted to increasing regulatory compliance and other operational issues. An online lending interface can help these institutions bolster their customerfacing initiatives like lending that add to increased profitability without sacrificing other must-do obligations. Even those credit unions with online lending apps already on their websites may find increased advantage in a platform relationship. Many such website apps are static one-size-fits-all devices that can do little more than collect data for staff review. Riding the Lending Wave Currently the numbers are enormous. Credit unions have enjoyed double-digit lending growth over the past year and we anticipate a consumer loan market that will soon top 3.2 trillion. Within the next decade a full one-third of that amount will be enabled by online lending platforms such as Lending Club and OnDeck which mounted initial public offerings in December 2014 that gave them market capitalization of more than 8 billion and 1 billion respectively. Both firms joining of the fray promises to be a fierce competition for borrowers gaining comfort in online transactions. But there is a very big role for credit unions to play in this changing marketplace. Credit unions are among the most member-centric among lenders. They deserve a place at the table when it comes to making consumer loans and credit unions of all sizes can benefit from involvement. Online lending platforms such as the one we have created at LendKey can enable credit unions to cost effectively enter the online lending market. They can also arm them with the ability to compete with the likes of Lending Club and OnDeck. Best of all members will find that they have not only a trusted source of information but also access to new lending technologies through their credit unions. These availabilities 12 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M TECHNICALLY SPEAKING Today s consumers expect instant decisions from lending institutions to the point where they will sacrifice a few percentage points in favor of faster turnaround. True online platforms include algorithms that provide quick and accurate responses to borrowing application information thereby assuring more competitive market positioning and better member service. Increasing Your Approach to Market Credit unions can increase their competitive edge improve member service and minimize overhead expenses through partnerships with online lending platform providers. Some of the country s largest credit unions have worked with LendKey specifically because our platform s flexibility and speed have enabled institutions to get new loan products to market more quickly and with greater ease. The platform interface data processing department and lending function devote less time and incur less expense by not having to build out those capabilities in-house. Credit unions succeed largely by managing their resources. Online lending platforms are one more way to help them manage those resources more effectively. The automated system leads to fewer errors thus fewer costs and the instant response is very attractive to members who pass the criteria and qualify for the loan. Anecdotal research has shown that consumers who know they will be accepted instantly are less likely to shop around for better rates thankful that automation has made one more process in their lives easier. We ve come a long way from gas station attendants to technologysavvy consumers who are capable of managing key aspects of their own financial futures. Consumer lending s future is brighter than it has been in decades but the competition is unbelievably tough. Online lending platforms coupled with traditional member-centric relationships will give credit unions the advantage they need and deserve. Your members want faster and better lending services and your credit union will benefit in the process. Vince Passione is chief executive officer and founder of LendKey driving the vision and strategy for the company while overseeing the executive management team. Vince has extensive experience in running successful financial services and high-tech companies nationwide. Before founding LendKey Vince was the COO of DealerTrack which built the nation s first and largest credit portal connecting automotive dealerships to banks and credit unions. DealerTrack had a successful public offering in 2005 and today processes over 35 percent of all auto finance loan applications in the U.S. Previously Vince was president of Ameritrade s Institutional Client Division and was the CEO of an online personal financial management website. Vince has also held senior-level positions at Citigroup including CTO of their U.S. Consumer Bank and COO of Citi Financial Interactive. He began his career at IBM and has a Bachelor of Science degree in computer science from Polytechnic University. Best-Kept Secrets Credit unions are in the business of serving members but to do so effectively risk must also be managed so the maximum number of members can be safely and effectively served. That is one of the advantages of online lending platforms. In an online lending world everything is measurable from the customer data to risk equations to the cycle time of various loan processing steps. The measurability of online lending will allow credit unions to develop more efficient processes will lower lending overhead and quite often will provide better interest rates for members. Online systems create a borrower credit profile on which all decisions are made. The credit box as it s called may seem cold and objective but its objectivity means efficiency. And that translates to higher-quality credit decisions over time. It also leads to the instant decisions the yes or no answers consumers have come to expect which in their minds means greater ease of application. 13 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING TAB SOLUTIONS BY BOB SCHROEDER TAB Understanding Credit Scoring Models Not all FICO scores are created equally. And what about FAKO and Vantage scores A 700 score may be excellent according to one model and merely average according to another. What s worse even A-rated scorers may be on the verge of bankruptcy. A lending expert helps navigate the murky waters. s I travel around credit union land I find members and credit union staff confused about credit scores. A member who purchased his credit score online is told he has a 900 credit score while the highest score the credit union has ever seen is 850. The member is quite disappointed to find out the credit score used by the credit union is 823. When I was asked to write an article I thought a discussion to clarify the different types of credit scoring models available to lenders and consumers would be beneficial. Knowledge is the first step to clearing the confusion. Due to space constraints I will not be able to address all the models in this article. My hope however is that after reading this article credit union staff members will have a better understanding of credit scoring models and that they will feel confident in discussing such models with their members. The Fair Isaac Corporation (FICO) first introduced credit scores in 1989. Today there are many credit scoring models available from several providers. The same scoring model may produce different results with each of the credit reporting agencies (CRAs) because the information contained in the credit file may be different. Different input data will result in a different output. FICO scoring models are marketed by each of the three CRAs using names such as Beacon and Empirica. All of this can be quite confusing for members and credit union staff. The purpose of the FICO score is to measure the chance of a 90-day delinquency in the next 24 months. FICO scores are by far the most widely used by lenders and the FICO Classic scoring model is the most widely used FICO score. It is estimated that FICO has a 90 percent market share of the lender s business. A FICO offers a number of different scoring models including Classic Personal Finance Installment Loan Auto Loan Bank Card Mortgage and Next Generation. In addition FICO provides bankruptcy scores and credit scores for other industries such as the insurance energy and broadband industries. As mentioned earlier each FICO score may yield different results based on the information in the credit file. With many different FICO scoring models and three CRAs your member will have over 50 different FICO scores. Add in other providers and the number of credit scores increases. Specific formulas on how the FICO scores are determined are kept secret however we do know the five categories and their weights 1. Payment history 35 percent of the score 2. Amount owed 30 percent of the score 3. Length of credit history 15 percent of the score 4. New credit 10 percent of the score 5. Types of credit used 10 percent of the score 14 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS A summary of Classic FICO scores (the most widely used scoring model) Name FICO 95 Classic FICO 98 Classic FICO 4 Classic FICO 8 Classic FICO 9 Classic Year 1995 1998 2004 2008 2014 Range 403 834 336 843 309 839 341 850 300 850 FICO 8 was released in 2008. Changes include less score impact on a moderate level of inquiries. Higher credit card balances will have a larger negative Comments impact. Loopholes were Predicts the No longer in use addresses on authorized chance of a user accounts and less Also marketed as 90-day Equifax Beacon score impact on collection delinquency accounts under 100. in the next 24 months FICO 9 was released in 2014. Changes include bypassing paid collection accounts and less emphasis on medical collections. As a result the median FICO 9 score will increase 25 points over FICO 8. This new model also addresses thin files or those with little credit history and provides scores that are more consistent across the three CRAs. Before using the new FICO 9 model make sure you conduct a financial impact study on the potential lost revenue because of higher FICO scores. As you see above there are five Classic FICO scores four of which are still in use. Lenders subscribe to a particular scoring model. When new models are available they are not automatically updated on the lender s credit reports. Lenders need to subscribe to the new model. Therefore credit unions today are using FICO 98 FICO 4 FICO 8 and FICO 9 not to mention other models such as Vantage or FICO Auto Enhanced. The last two FICO Classic revisions were FICO 8 and FICO 9. Let s take a look at the changes 15 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS FICO scores for personal finance installment loans mortgage insurance energy and auto loans put more emphasis on the specific loan category. For example the FICO score for auto loans focuses on how the member performed on auto loans in the past. These industry option credit scores have a range of 250 to 900. The score itself does not mean much because the range of credit scores will vary depending on the model. FICO 98 has a score range of 309 to 839 as compared to a FICO 8 range of 341 to 850. The FICO Auto Loan model has a score range of 250 to 900. Next Generation scores range from 150 to 950. Vantage score versions 1.0 and 2.0 have a range spanning 501 to 990. If the high score of the range is 839 a 700 score is much better than it is where the high score in the range is 990. Make sure you know the specifications on the model you are reviewing before making judgments on the score. Common criticisms of FICO credit scores and credit scores in general are that the scores can be easily manipulated and that they are not a good predictor of risk. Lending Solutions Consulting Inc. (LSCI) agrees on both counts. When reviewing files we have seen many 700-plus FICO scorers who never missed a payment file bankruptcy within a year of the loan date. Some of these bankruptcies may have been caused by an event however our experience indicates most were the result of a change in spending habits and were highly predictable. Credit cards get maxed out and new cards are opened up. This tendency we feel is the Model Year biggest weakness of the Vantage 1.0 2006 FICO scoring models. The Advanced Risk Score (Experian) and FICO Risk Score NextGen (TransUnion). Credit scoring models issued by companies other than FICO are frequently referred to as FAKO scores. Again this simply means that the scoring model was not developed by FICO. The Vantage Score was created in 2006 by the three CRAs TransUnion Equifax and Experian to compete with the FICO score. It appears Vantage agrees with LSCI on the FICO weaknesses. Note that Vantage puts much more emphasis on recent credit compared to FICO. The following are the six categories and weights on how the Vantage score is determined 1. 2. 3. 4. 5. 6. Payment History 28 percent Credit Utilization 23 percent Credit Balances 9 percent Depth of Credit 9 percent Recent Credit 30 percent Available Credit 1 percent The first two versions Vantage 1.0 and Vantage 2.0 have a score range of 501 to 990. Vantage 3.0 released in 2014 changed the score range to 300 850. In so doing it appears from an outsider s perspective that they are trying to align their scores with FICO. The following is a summary of the Vantage scoring models Vantage 2.0 2010 member has an A credit score and yet s he will soon Vantage 3.0 2013 be filing for bankruptcy. LSCI developed a High Yield Lending Strategy (HYLS) scoring model to address this weakness. When the model is used properly it will warn you of high FICO scores that may soon become a problem. It will also show you when low FICO scores are great lending opportunities. FICO s Next Generation credit score came out in 2001 and was revised in 2003. It has score ranges of 150 to 950. The Next Generation scores are marketed as Pinnacle (Equifax) 16 C R E D I T U N I O N B U S I N E S S Range 501 990 501 990 300 850 Comments Measures No longer in use chance of 90Also marketed as day delinquency Equifax Beacon in the next 24 months F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS Consumers purchase credit scores in at least two ways. They can buy them when obtaining a credit report from a CRA or other providers or they can receive them as part of a credit monitoring service. If a consumer buys a score it is highly unlikely it will be the same as those used by the lender. TransUnion listed 39 different versions of 16 credit scoring models in its 2010 publication titled TransUnion Models Overview. Many of those models were FICO or Vantage scores that had been renamed or rebranded. In addition to traditional credit scoring models they offer income estimators debt-toincome estimators recovery and bankruptcy models to name a few. Consumers purchase credit scores in at least two ways. They can buy them when obtaining a credit report from a CRA or other providers or they can receive them as part of a credit monitoring service. If a consumer buys a score it is highly unlikely it will be the same as those used by the lender. Credit scores available to consumers are somewhat limited. FICO sells only the Classic score directly to the consumer. A consumer can t purchase his or her FICO Auto Enhanced credit score or other scores because they are available only to lenders. The three CRAs offer consumers the following Equifax Credit Score with a 280 850 range Experian Plus Score with a 330 830 range TransUnion TransRisk New Account Score with a 300 850 range The scores offered by the three CRAs were originally developed for lenders however currently they are primarily being sold directly to the consumer for educational purposes. Consumers may also purchase their Vantage score at a number of providers. The Consumer Financial Protection Bureau (CFPB) completed a study on the difference between the credit scores purchased by the consumer and the scores purchased by lenders. Approximately 80 percent of the consumer-purchased scores were in the same credit category as those purchased by the lender. Less than three percent moved two credit categories and the remainder were only one credit category different. Bankruptcy scoring models are also plentiful. I personally am not a fan of bankruptcy predictors based on credit report information because the available data for analysis is too limited. For example a member has 20 000 in credit cards. Is he a bankruptcy threat The answer changes with the income level. Yes he is a bankruptcy threat if the household income is less than 50 000. He is a possible bankruptcy threat with income between 50 000 and 80 000. You have a very small bankruptcy threat if the household income is above 80 000. LSCI recommends you calculate the unsecured credit balances 17 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS TAB in relation to annual gross income to measure the risk of bankruptcy. Income however is not available to those using data from the credit report. Our HYLS model reviews the unsecured to annual gross income and a number of other bankruptcy indicators and forces your loan staff to be aware of bankruptcy risk. Our model costs less and is more effective. Over the past year I have worked on a spreadsheet to provide details on the scoring models I have come across. While this is in no way a complete listing it does include models used by most credit unions and many other models used by other providers of credit scores. FICO 95 Classic FICO 98 Classic FICO 4 Classic FICO 8 Classic FICO 9 Classic FICO Mortgage FICO Credit Card FICO Auto FICO Next Generation FICO Next Generation 2001 2003 1995 1998 2004 2008 2013 403-834 336-843 309-839 341-850 300-850 250-900 250-900 250-900 150-950 150-950 While a credit score may be an effective tool for lenders LSCI feels it should not be used to eliminate lending opportunities. I cringe when I see a loan policy that does not allow loans to members with credit scores below a certain level. Some of the best lending opportunities are to those who have a good payment history and who have recently filed bankruptcy. Their FICO score will be in the mid to low 500s. They were just relieved from the burden of their unsecured debt and they need a car because they surrendered the car that they were upsidedown on. These are great loans at close to 18 percent. Measures the chance of a 90 day delinquency in the next 24 months No longer in use Also marketed as Equifax Beacon Marketed as Experian Advanced Equifax Pinnacle and Trans Union Next Generation previously Empirica Predicts the chance of Bankruptcy in the next 18 months. Measures chance of 90 day delinquency in the next 24 months FICO Bankruptcy 03 FICO Bankruptcy 97 Vantage 1.0 Vantage 2.0 Vantage 3.0 CE Score Credit Optics Score Equifax Credit Score Experian Bankruptcy Experian Credit Score Experian National Equivalency Score Experian Plus Experian Scorex Plus Trans Union TransRisk 18 C R E D I T U N I O N 1998 1995 2006 2010 2013 228-901 338-870 501-990 501-990 300-850 350-850 1-999 280-850 108-1200 330-830 360-840 330-830 300-900 300-850 For education use only B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS We feel the trend of the score is more important than the score itself. If the score is moving up you approve the loan with declining risk. A great investment If the score is moving down you approve a loan with little yield and increasing risk. We feel the trend of the score is more important than the score itself. If the score is moving up you approve the loan with declining risk. A great investment If the score is moving down you approve a loan with little yield and increasing risk. Be cautious on these loans LSCI provides training to help your team of lenders identify credit score trends and bankruptcy indicators. With investment yields of less than one percent you should do all you can to increase your loan portfolio. Many of you reading this will feel you have a well-trained loan staff and do not need additional training. Do yourself a favor and ask your lenders two questions 1. What indicators do you use to determine if the member is a bankruptcy threat 2. How can you tell if the credit score is moving up or down How did they respond Contact me and I will be glad to tell you how some of the best-trained lenders will respond. In summary we recommend you Know your credit scoring model strengths and weaknesses. Be aware of the differences in the credit scoring models. Know the range of scores of the credit scoring models. Determine the trend of the score is risk increasing or decreasing Use HYLS as opposed to CRA Bankruptcy models. Remove restrictions to lending based on credit scores (only after appropriate training). Provide training to your loan staff to identify bankruptcy indicators based on the credit report data. Make 2015 a great lending year Bob Schroeder vice president consultant of Lending Solutions Consulting Inc. (LSCI) began his thirty-plusyear credit union career in collections before moving on to lending. He has 11 years experience with two of the largest credit unions in the country rising to the level of vice president of credit before moving on to serve as CEO of a community credit union. During his 21-year tenure as CEO the credit union experienced a period of rapid growth and strong earnings. Bob can be reached at 815-761-0135 or bschroeder Resources used for this article include information from websites for CFPB CoreLogic Credco Equifax Experian FICO TransUnion and Wikipedia. 19 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M 250 000 Credit Union Employees 92 Million Members 100 Million Miracles Since 1996 Credit Unions for Kids has raised more than 100 million for Children s Miracle Network Hospitals giving hope and healing to kids in your local community. YOUR FUNDRAISING DOLLARS IN ACTION MILLION 10 2 1 iMRI machine and surgical suite 1 Cardiac X-ray machine 1 Ultrasound machine 1 Bone marrow transplant 1 Fully-equipped Giraffe OmiBed incubator MILLION THOUSAND 270 THOUSAND 250 THOUSAND 100 DIGITAL TAB SECURITY BY DAVID KATZ TAB Best Practices for Credit Unions That Outsource Technology A Primer on the Federal Financial Institutions Examination Council s IT Examination Handbook Given the recent glut of cybersecurity attacks making headlines outsourcing technology services can be a risky proposition for credit unions. A data security and risk management expert weighs in with some best practices on how to mitigate such risk. When reviewing cybersecurity risks a major consideration for credit unions is managing outsourcing technology relationships in accordance with the guidance provided by the FFIEC. In short credit unions are wise to dust off the published guidance and take stock of their risk tolerances in the face of unprecedented cybersecurity risk. Below is a summary of the guidance provided by the FFIEC for outsourcing technology services. An outline of some of the guidance provided by the FFIEC with respect to credit unions responsibility for managing third-party service providers is also provided. T hroughout 2014 cybersecurity has been at the forefront of national headlines as well as on the radar of the Consumer Financial Protection Bureau (CFPB). Together with the National Credit Union Administration (NCUA) and other regulatory agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of Currency (OCC) the CFPB has sought to raise financial institutions awareness about the importance of vigilance in cybersecurity. On June 24 2014 the Federal Financial Institutions Examination Council (FFIEC) launched a website that consolidated a number of existing resources addressing cybersecurity risks. In addition to highlighting cybersecurity risks the site is intended to create a repository of prior FFIEC cybersecurity documents and guidance issued over the last 10 years on such matters. While guidance for financial institutions has been published by the FFIEC over the course of the last 25 years for the first time in the summer of 2014 the FFIEC members piloted a cybersecurity examination work program (Cybersecurity Assessment). Initiated at more than 500 community financial institutions the purpose of this program is to evaluate such institutions preparedness to mitigate cyber risks. Introduction As financial service offerings have evolved over the past several years through technological advances credit unions increasingly have been able to provide consumers with new products and services. With the exponential increase in the availability of outsourced service providers financial institutions have more frequently elected to outsource operations for these new products. This includes utilizing outsourced vendors to gain operational efficiencies directing resources to core operations rather than to technology development or support gaining technical advantages through the utilization of specific technical 21 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M DIGITAL SECURITY TAB expertise otherwise not available through traditional means and increasing the availability of products and services demanded by the marketplace. A careful review of the Outsourcing Technology Services Information Technology Examination Handbook and corresponding gap assessment is an important consideration because credit unions are increasingly vulnerable to cyber attacks. Given the direct involvement in the selection of thirdparty service providers this is one area where credit unions can exercise some direct control of the risk. Governance The FFIEC has been clear that proper oversight of the outsourced relationship is owned by the financial institution s board of directors and members of senior management. Given IT s relationship to the overall health of the organization technology outsourcing has evolved into an enterprise risk rather than just a technology risk. The guidance further provides that institutions should carefully and methodically create a compliance infrastructure that can be effectively utilized to sustain an end-to-end perspective. This aim can be achieved by establishing service requirements and procurement strategies conducting due diligence on the provider and negotiating the agreement monitoring changing and termination of the relationship. Establishing senior management and board awareness of the risk associated with outsourcing agreements in order to ensure effective risk management practices Ensuring that an outsourcing arrangement is prudent from a risk perspective and consistent with the business objectives of the institution Systematically assessing needs while establishing riskbased requirements Implementing effective controls to address identified risks Performing ongoing monitoring to identify and evaluate changes in risks from the initial assessment and Documenting procedures roles and responsibilities and reporting mechanisms. The risk assessment process is further broken down into focus on four distinct areas Defining the risk assessment and requirements definition and process Determining the Risk The risk of data loss is present whether the credit union chooses to outsource technology services or maintains those data assets internally. Establishing a process to identify measure monitor and control risk is a crucial element in establishing a defensible program of risk evaluation. Every outsourced relationship is unique and there may be varying degrees of complexity associated with not only each vendor relationship but also the specific needs of the credit union. The guidance indicates that the time and resources devoted to managing the outsourcing relationship should be based upon the risk the relationship presents to the institution. The FFIEC provides guidance on establishing an effective risk management process by suggesting six key factors 22 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M TAB DIGITAL SECURITY Conducting due diligence in the selection of a service provider Negotiating the agreement and Ongoing monitoring. Risk Assessment Process and Determining the Nature of the Risk Management must first assess the risk of outsourcing and involve the various stakeholders in setting risk tolerances to adopt written policies and controls governing the outsourcing process. Such adoption should serve as the primary guidance for the continued management of the vendor engagement and contracting process. Once the risk is properly assessed the credit union must determine the quantity of risk. Some of these risks include the sensitivity of data accessed protected or controlled by the service provider the volume of transactions and how critical this information is to the credit union s business. Additionally management must consider the risks pertaining to the service provider such as the strength of its financial condition the likely turnover of management the ability to maintain business continuity the ability to provide accurate and relevant data experience in outsourcing and location if cross-border data transfers are contemplated. The risk pertaining to technology also must be considered as should whether the technology used is reliable is secure and can be adequately scaled as the credit union grows in size. Determining the ability to perform the service Establishing the minimum acceptable service provider characteristics such as industry experience management experience technology and system architecture process controls and financial condition and reputation including references Setting a process for monitoring and reporting Setting transition requirements for data migration Establishing contract duration termination and assessment and Establishing contractual protections against liability. Selection of the Service Provider The credit union must conduct due diligence on the service provider by evaluating the corporate history qualifications and background of the company principles. This should include background checks and evaluation of references. Additionally the credit union should consider conducting an assessment of the service provider s financial status. This should include a review of the audited financials an understanding of the internal control environment security history and audit coverage an inquiry into whether there have been any legal or regulatory compliance complaints and an understanding of the scope and nature of insurance coverage. Again the depth and formality of the due diligence may vary according to the risk of the outsourced relationship the institution s familiarity with the respective service provider and the state of the provider selection process. Defining the Risk The FFIEC recommends that a detailed document be created to outline the credit union s expectations relative to the outsourced service. The guidance provides a high-level description of the nature of the components for a basic requirements document including Describing the scope and nature of the outsourced service required Describing the desired services Describing the desired technology Establishing the nature of customer support provided to the credit union for the service provided Establishing the standards and service-level expectations 23 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M DIGITAL SECURITY TAB Negotiating the Service Provider Agreement and Outlining Potential Contractual Issues In advance of signing the contract management should ensure the contract does the following things Clearly defines the rights and responsibilities of the parties Contains adequate and measurable service Ensures that contracts with affiliates contain appropriate provisions for arm s-length relationships and that cost and services are at least as favorable to the credit union as those available from a non-affiliated provider Ensures the contract does not contain provisions or inducements that may have an adverse effect on the institution Engages legal counsel to review the agreement and Determines if foreign-based third-party service providers require specific compliance provisions. Some of the key contract provisions that need to be negotiated include Performance standards under the agreement Security and confidentiality of the credit union s resources Controls that address compliance records management and access to the credit union s data Notification requirements for material changes to services systems controls key personnel and service locations Provisions outlining audit rights specifying frequency and responsibility for expenses related to such audits Outlining the frequency and type of reporting the credit union will receive with respect to performance control audits security and financial statements Business continuity and disaster recovery requirements Ensuring accountability for third-party subcontractors and establishing primary responsibility for the services as outlined in the agreement with the primary service provider Consideration of provisions specifically addressing the duration of the agreement and renewals Dispute resolution Indemnification Limitation on liability Termination Assignment Provisions to address unique risks presented by use of foreign-based service providers and Provisions to ensure regulatory compliance and language that requires the service provider to provide accurate and timely information to the appropriate regulatory agencies based upon the type and nature of the services being provided to the credit union. Ongoing Monitoring of the Relationship Finally the credit union must ensure regular monitoring of performance by the service provider and also monitor potential changes in institutional requirements through the life of the agreement. The FFIEC suggests that monitoring be accomplished in the following ways Negotiating key service level agreements (SLAs) along with maintaining a formal policy that establishes the SLA requirements Considering the establishment of recourse for nonperformance by the service provider Establishing an escalation process and a dispute resolution process Conducting regular reviews of the financial condition of the service provider and Determining whether regular reporting of audit results and other internal control reviews is practical and available. Conclusion Outsourcing technology services requires careful planning from a risk management perspective thoughtful due diligence and consistent monitoring of the service provider. The FFIEC has provided guidance to financial institutions regarding these 24 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M DIGITAL SECURITY TAB matters for many years but given the recent cybersecurity threats to credit unions managing outsourced service providers should be the subject of serious attention by boards of directors and senior management. Fortunately the FFIEC has provided detailed guidance in these areas and credit unions only need to review this guidance to manage the risk that is potentially created by outsourcing technology services. If credit unions can create an infrastructure that incorporates these recommended best practices they may exercise some measure of assurance and control of cybersecurity risk. David Katz is a partner with Nelson Mullins Riley & Scarborough LLP (Atlanta Ga.). His practice focuses on regulatory compliance consumer privacy and data security compliance information governance ethics corporate governance and enterprise risk management. He may be reached at (404) 322-6122 or by email at david.katz may also follow him on Twitter KatzFDavid. Advertiser Ad 250.5 x 175 25 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE TAB UPDATE BY CINDY WILLIAMS TAB 3 Totally Doable Compliance Projects for 2015 Is your credit union compliance staff approaching your compliance efforts robotically If so the time is ripe to return to the compliance basics. These three absolutely achievable projects will have your team taking on 2015 s anticipated intensity with confidence. s compliance managers rightly focused their efforts on lending over the last several years it s understandable for more than one area of the compliance effort to have shifted into autopilot. Now that these credit union professionals have had a year or so to settle into the new mortgage rules 2015 presents a terrific opportunity to get back to the basics of compliance. And the Consumer Financial Protection Bureau (CFPB) may just cooperate at least for the first quarter. Although there may be minor tweaks to mortgage servicing rules early in the year proposals on debt collection are not expected until at least April. Rules on payday lending are expected in February however very few of these regulations are likely to have a dramatic impact on the lending policies of credit unions. So what can back to the basics mean for credit union compliance staff Here are three simple absolutely achievable projects that will give your staff the confidence to face what is shaping up to be an intense 2015. A Mortgage Disclosure Act (HMDA) filings. Just because the year has already started does not mean it s too late to build your 2015 calendar. Establish the habit now and it will remain with your team for years to come. (Perhaps the first activity you schedule out is the building of your 2016 calendar ) Get a (Compliant) Hold of Member Complaints Regulation E is one of those areas that may have been running on autopilot in recent years. Importantly the CFPB specifically called out the error resolution mandated by Regulation E in its latest supervisory publication. The agency reported that it had found some financial institutions were requiring their Build a Calendar for a Sense of Control Creating a calendar with month-by-month activities has always been a lifesaver for me. It has given me and my teams the sense that we had some albeit small control over what the year ahead would look like. It s a great way to map out the year ahead and to make sure surprises from regulators don t throw your compliance effort completely off kilter. Actions you may want to schedule out include risk assessments board reports training events annual reports and compliance due dates such as Home 26 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE TAB customers to complete a written claim before they investigated an error. This type of policy is not allowed under Reg E. In fact the clock starts ticking the minute a member communicates an error even if s he does it verbally. A quick audit or even just a few internal conversations can be a great start to determining how staff are actually operating. It s one thing to have a compliant policy on the books it s quite another to ensure that policy is being followed. Make Friends With the Operations Team Throughout my career I ve found that getting chummy with the operations folks is truly the best way to understand how things are working within the organization. This can be a great time of year to order a pizza get together offsite or plan a social activity to lay the groundwork for an enjoyable working relationship. When that all-important trust has been established and you feel the time is right get back together and ask your operations team to bring a list of compliance-related pain points. You may be surprised to learn how many unnecessary tasks are being undertaken in the name of compliance. This low-hanging fruit is an easy way to improve efficiency (and to make friends while you re at it). In the world of regulatory compliance this is about as close as we re ever going to get to downtime. Make the most of it so that when those proposed rules begin to fly your team is focused buttoned up and most importantly supported by the rest of the credit union leaders. Cindy Williams is vice president of regulatory compliance for PolicyWorks an Iowa-based firm that provides regulatory compliance solutions to credit unions. She can be reached at cindyw Rest easy your compliance is covered. If compliance concerns are keeping you awake at night let PolicyWorks help you rest easy. Our compliance professionals will review your compliance systems and recommend customized programs that help you get and stay in compliance. Call today. We ll make compliance easy for you. The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 27 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M CFO TAB CURRENCY BY EMILY HOLLIS TAB Investment Total Return Modern portfolio theory relies on total return but in what situations is total return relevant and appropriate for your credit union The answer depends on your portfolio your assessment preference and the knowledge you wish to obtain concerning your investments. A financial advisor clears up some of the confusion. odern portfolio theory dictates that regardless of a portfolio s strategy whether it s buy-andhold indexed leveraged actively managed or another method the total return and its variability are the holy grail of performance measurement. Total return is also the basis for calculations like the information ratio and value at risk (VAR) which are tools to value portfolio returns and the risk of loss. Total return is not a portfolio strategy rather it is a long-run performance measurement that captures all reinvested cash flow and the opportunity costs of being in or out of different asset classes. Although total return tends to be used for available-forsale portfolios it also can be useful if credit unions designate securities as held-to-maturity. This decision depends on whether or not the credit union wants to assess a true return on investment or a method to calculate performance of a set investment portfolio. If a credit union never plans to sell or if it uses investments to support the loan portfolio total return may not be relevant. Similarly if the investor merely wants to know if one investment was a better choice than another total return may or may not be appropriate. Total return is based on the coupon received a horizon date and a projected market value. It can be calculated on the basis of subjected forecasts of the reinvestment rate and required yield at the end of the investment horizon. Alternatively investors can use scenario analysis by specifying different possible values for the reinvestment rate and the required yield at the end of a given investment horizon. Then the investor calculates the total return associated with each scenario. When computing total returns based on scenario analyses investors should be aware C R E D I T U N I O N B U S I N E S S M that total return estimates will reflect only expected investment returns. In other words projected total return is based on the market s or investor s expectations and comes to fruition only if end-of-period yields turn out to be correct. In the interim the investor might see swings in total return as interest rates move. So what might be a negative return one month as the market backs up could reverse into a positive return the next month if the market rallies. These market value fluctuations can be very confusing to buyand-hold investors. The confusion grows if market values are reflective of a dysfunctional market. As an example remember the demise of super-senior commercial mortgage-backed securities (CMBSs) or prime high-quality non-conforming mortgage-backed securities (MBSs) During the credit crisis 2 0 1 5 C U B U S I N E S S . C O M 28 F E B R U A R Y CFO CURRENCY TAB cFO cUrrENcy cUrrENcy cFO Exhibit 4 The outputs are calculated figures not assumptions. The these securities lost as much as 20 percent of their value due inputs allow the user to model cash flows with an end maturity to a lack of demand. By 2012 the markets had recovered and and decay rates that are similar to amortizations. some who lost such a high amount traded above par. The grossly Dividend and discount rates allow for the present value negative total returns were never realized and were ignored by calculations (premiums) in each modeled interest rate scenario. informed investors. (Of course value investors who invested in effective duration calculations can then mathematically be these securities in 2008 saw their returns soar ) compared to that of the institution s assets. in this case effective Active investment management strategies such as swapping duration is calculated by merely backing into the without total into various fixed-income sectors can be utilized price change formula.measures. Mostiffinancial institutions isolate is 100trades return For example the liability present value these in the base 101 in the up 100 basis point scenario and 99 in the down using yield to maturities to quantify the economic advantage 100 basiseach individual execution. prior to point scenario the effective duration is one percent (i.e. (101-99)maturities (YTMs) are limited because they are Yield to 200). estimated at the point of sale and are based on Thereinvestment the second competencies to meet the sensitivity Analysisthefinal requirements.requirements part of interestapplicationat submitted when all The return canare be and final payments is calculated YTM. The regulator strongly suggests sensitivity analyses as and vice a means overstated if reinvestments are lower than the YTM completed including dealer contracts. toversa. Conversely a true of changing assumptions. most buyquantify the effects YTM is perhaps enough for sensitivity setting up a line at a dealer is similar to becoming a analyses are essential because the an investor who purchases core may and-holdof the FHLB--itexamplelaborious share evaluation deal member investors. An can be is and takes a good have significant implication on the ALM conclusion. The an MBS with a high premium. The security might performto be of time. Credit will need well assumptions used should be changed in progressive intervals the first year but then deterioratereviewed and authorized and as it approaches maturity if and the output should be recalculated to determine the impact prepayments increase. The question is what is the yield over the this can take weeks. of a different assumption. life of the security This YTM should be calculated and compared if you are uncertain as to with alternative investment choices tomany requirements the the determine value or of Conclusion lack of it. applying and using derivatives non-maturing deposits can be viewed as a franchise value Total return is the backbone of modern portfolio theory. It consider engaging an external or benefits performance of investable funds over time when measures thegenerated from loyalty of the membership and it service provider to help you deposits are retained when dividend rates are low in a higher contains information that is valuable in portfolio management through the steps. market environment. And vice versa unions generally use and construction. However credit A financial derivatives Properly used institution that offers a non-maturity dividend rate higher than market investments to support their loancan offset interest rate risk portfolios for overall higher to attract hot money taking any investment lossesvaluemight ROAs and shy away fromwill decrease the economic within ofthe that is inherent that its liabilities. it is imperative This is vital because as competition result in long-term gain. The accounts for a more credit union industryeconomicmodel thesesubsequent buy-andaccurate depiction of allow unions hold derivatives these creditrate unions to compete more growsmentally for can interestcreditrisk. would naturally result in less emphasis on investment total return and other risk effectively. Emily Mor calculations. measurementHollis CFA is a partner with ALM First Financial Advisors LLC. Emily Hollis CFA is a partner with ALM First Financial Emily Hollis Advisors LLC.CFA is a partner with ALM First Advisors LLC. 29 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M March 2014 January 2014 credit Union BUSINESS credit Union BUSINESS 17 13 CU CONTENT BY LAURA ENOCK Growing Through Giving A Case Study of St. Anne s Credit Union If giving back to the community is a focus at your credit union St. Anne s CU offers some novel ways to take your efforts to the next level. Read on for ideas on how to shift your community-mindedness into high gear. O ne of the many differences between a credit union and a bank is in the community focus. Credit unions are concerned with strengthening their communities and improving the lives of their members. Typically marketers think about this community-mindedness in terms of education efforts and membership outreach but one credit union takes its community orientation much further. St. Anne s Credit Union in Fall River Mass. has eight branch locations 60 000 members and a whole lot of heart. Kelly Baldwin marketing and CRA officer for St. Anne s found a great way to stand out against larger local banks giving back to the CU s community. Animal shelter broken into We did a jeans day to raise funds. Local spike in overdoses We donated our billboards to a local drug-free not-for-profit. St. Anne s has seriously raised its profile with its local charity work. Every credit union gives but St. Anne s takes it to the next level. The CU makes charity and community involvement a part of its DNA. It s an important part of the credit union s marketing strategy because it s who the CU is at its core. In January Fall River experienced a seasonal cold snap. St. Anne s responded with a Warm Hands and Hearts initiative to help the homeless with the worst of the winter. Employees donated coats hats and gloves throughout the town. These clothing items have tags that read I m not lost please take me with you to keep warm. One employee Judy Mazza donated 40 handmade knitted blankets. This is just the most recent example of the fantastic work St. Anne s does in the community. The program doesn t have a name it s just the way St. Anne s does business. The credit union s tagline is Making a Difference and everyone from the board of directors to the MSRs lives that mantra every day. Using employee donations matched by the CEO St. Anne s has become a local leader in charity. Its community recognizes it too. The CU has tripled its Facebook followers but the most rewarding part of it is the feedback. Everyone thanks us for what we do for our community. This is what sets us apart from others. We go above and beyond in our efforts. We go out and find need instead of waiting for it to come to us said Baldwin. So rather than spending thousands on billboard ads St. Anne s spends its money on homeless shelters school field trips and disaster relief supplies. Such endeavors have done wonders for the credit union s reputation locally. 30 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M CU CONTENT TAB One of the advantages of this approach is the ease of publicity. News outlets love to tell St. Anne s story. Baldwin writes press releases which go out on the credit union s website and into its newsletter. The stories are widely shared. They re feel-good stories. Everyone loves to tell them Baldwin said. We ve cut down on our other marketing. We keep the same budget but we reach more people this way. A newspaper ad is only read by people who read the newspaper but these stories spread like wildfire. A quick flip through the CU s news archive shows the kind of stories Baldwin is referring to. Every week and sometimes twice a week St. Anne s sends out a press release about the good works its employees are doing. The credit union names the organization the amount and the employees involved. Each release also has a picture for quick sharing. These releases show up in newsletters in emails and on the credit union s Facebook page. The content is engineered for sharing. Even though giving back is good for marketing it s never been about the bottom line for Baldwin. Giving back is about a responsibility to do good with the money the CU has. It s also great for morale because everyone at St. Anne s gets to share in the great feeling that comes from giving back. Other credit unions wishing to emulate St. Anne s success should take note of a few very effective programs. Several of the most successful programs are funded with jeans days. Employees donate a certain amount and they then get to wear jeans on Wednesdays. This is the most consistent of the credit union s fundraisers regularly bringing in 200 a week for local organizations. St. Anne s has also seen success in recognizing employees for their outstanding contributions in volunteering. Each year the CU selects a Volunteer of the Year to reward employees who attend the most events. This part of the program fosters a sense of friendly competition that drives participation and employee buy-in. The other advice Baldwin offers is to stay local. Find an organization in your community and ask them what they need. Even little efforts can raise your profile. For a food pantry or a homeless shelter 200 might be a night s worth of meals or a week s laundry. These organizations are the ones that will most appreciate your efforts. In the face of national tragedies partner with local organizations to coordinate aid. For example after Hurricane Sandy St. Anne s employees packed two vans full of supplies and sent them to those who needed them. If your credit union is looking for a great way to raise your profile in the community while lifting spirits and warming hearts it s as easy as looking around. Find problems in your community and help to fix them. The benefits will follow. Laura Enock is Founder and Publisher of a credit union-specific content service. Join hundreds of credit unions getting FREE monthly content Email her at laura or visit Advertiser Ad 250.5 x 175 31 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM THE TAB CROW S NEST BY JULI ANNE CALLIS TAB Navigating the Opportunities on the Horizon for Lenders It s been rough waters for the financial services industry in recent years but turnaround strategies have paved the way to calmer seas. Take a seat in the CU s prime lookout point for an up-close and personal glimpse into some viable techniques that are leading to smoother sailing. T he financial services industry experienced smooth sailing when the economy was doing so well that the expansion of credit unions and community banks was a matter of simply navigating new markets with new innovative technologies and lending programs. By 2008 however financial institutions around the world were forced to quickly increase their lending standards due to the choppy seas and stormy economic outlook for lenders. In the search for a route that would accurately anticipate both the risks and rewards of the future those at the helm forged new partnerships and developed adaptive strategies. The turnaround strategies of many financial institutions provide lenders with an excellent view from the crow s nest. John Tippets is a recognized industry leader having served at the helm of American Airlines Credit as well as skillfully bringing North Island Credit Union through a season of high seas. He shares this tactical advice for directors and management Many CUs have done a very fine job in capturing small business loans and then reaching out to serve their employees sort of a combination SBA SEG strategy. The special variation on that which I ve seen and thought a good one is a targeted approach to the Hispanic markets in the CU community. Focusing on those local Hispanic business and property owners (and the employees or associated customers) who may not be getting great service from traditional big banks or from the country club community bankers is one of his techniques for calming the waves. 32 C R E D I T U N I O N B U S I N E S S Other strategies for consideration Church congregations (their places of worship and church schools) are real centers of many communities and in many cases those congregations are effectively a community in themselves. Financing church chapels and buildings is an opportunity that some credit unions have found as a great way to serve both members and the community to really fulfill the mission and purpose of a credit union. Those loans do require specialized underwriting skills careful consideration of appraisals (focus on alternative uses) situation-specific covenants and constant monitoring but when F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM THE CROW S NEST done right and smart they are a real fit to the CU model. It wasn t a church but the North Island CU financing of a Ronald McDonald House in San Diego was a similar right thing. A number of credit unions have recognized the match of their balance sheets between an Chris Oldag age 55-plus demographic and the interest rate environment of recent years. In response they are target-marketing five- seven- 10- or 12-year fully amortizing mortgages. That segment of homeowners likely having been in their homes 10 or 20 years tend to have significant equity in their homes and want a low rate. Chris Oldag has worked to build healthy loan portfolios as a Chief Lending Officer of both basic and partnering lending programs. He concurs that there are open seas to build healthy portfolios now. The value proposition for members to save by moving their existing obligations to their CUs has never been better. As we re facing generationally low lending rates our members are often resolved believing they have the best deal there is regardless of the ongoing cost with the exception of their home loans. Many are shell shocked still from home value fluctuation and are intent on becoming debt free as quickly as possible. One of our most successful products in the past several years has been a loan with a seven-year term which is used to pay off their home loans. We offered this product with no cost to the member have offered rates under three percent with no surprises and usually under 10-day funding start to finish. Our team likes to say Docs in days we promise We asked our contributors What is your view and experience with initiatives that are reaching across the traditional divides of credit unions and banks to build cooperative business models Controlled growth through partnering with a banking entity assists financial institutions to stay the course and meet their service and profitability goals. Rick Soukoulis President of Silicon Valley based Western Bancorp and member of the Fannie Advisory Board has a long track record of sustainable and organic growth by putting his users at the helm quickly and profitably. Building out a competitive mortgage platform is expensive and time consuming. Technology costs and implementation times have created a wall to entry. We have created a platform to allow financial institutions of modest and moderate size [to] enter the loan acquisition market with no new infrastructure or cost of broker fee. Today for most CUs Joe Oricoli the choice is to build or buy loan production. We have created a process that blends these choices into one technology-enabled process. Why If you build you re stuck with the fixed costs if you buy a broker investment banker fee 25 bps or more is added to the cost of each loan. Over the past 10 years this program has landed one Silicon Valley based CU with over 400 million in prime loans over 1 000 new members and default rates that are a fraction of the industry average. This model lets our partners add new members with prime loans [and] with no capital expenditures quickly. They control the flow into their portfolios in advance and move in and out of the mortgage business without the huge challenge of scaling up and down with the market. In the current environment we are adding financial institutions as quickly as we can book the training. Oldag has navigated well these days with little if any wind in the lending sails for credit unions. For CUs that want to add quality loans to their balance sheet but don t have the demand or resources to develop the increased relationships with their membership there are opportunities. Participations took a 34 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M her VIEW FROM THE CROW S NEST Oldag has navigated well these days with little if any wind in the lending sails for credit unions. For CUs that want to add quality loans to their balance sheet but don t have the demand or resources to develop the increased relationships with their membership there are opportunities. bruising on the member-business loan front based on one or two very bad outcomes in the 2006 to 2009 timeframe. A welldefined participation strategy includes buying participation interests only in portfolios you would have made through your loan channel with identical underwriting and risk tolerances. This view is strongly supported by a seasoned leader in this field. Joseph Oricoli Managing Director LPC Services reflected on recent successes from the credit union industry. The synergies between credit unions and banks have been converging [more] in recent years than [they have] in previous decades and this has created opportunities for the two industries to collaborate more in managing their loan portfolios. This collegiality between the industries developed for a myriad of reasons. Most notably the more stringent lending practices of credit unions following the subprime crisis in 2008 made credit union-originated loans more attractive to banks. Banks had historically been suspect of loans originated by credit unions because of what they felt was an inferior screening process. In turn credit unions were resistant to engage banks. As credit unions embraced a more risk-based pricing standard during the recent recession a considerable barrier was removed. This has been evident in recent years by an increased flow of loan pools between the industries. A notable example of this trend is the recent LPC-arranged sale of 10 million of trouble debt restructurings (TDRs) from a credit union to a bank-affiliated entity. This was the first TDR transaction we have seen between a bank and a credit union since the recovery began in 2009. We have also seen an increase of non-accrual non-performing loan sales at more aggressive price levels during this period. In recent years credit unions found themselves in a position of needing to move member business loans off their books as service retained to other institutions including whole loans to banks. This partnered transaction renders banks a particularly attractive partner for these deals because they provide an outlet to credit unions that may be approaching MBL caps. Juli Anne Callis is a nationally recognized industry leader with a substantial track record as a pragmatic innovator. She has served in numerous executive roles in both the credit union and banking industries. From her early days Citibank working in market segmentation to Langley FCU in Virginia and over a decade in Silicon Valley at AEACu KeyPoint Callis has led in the development of new technologies and business models which landed numerous awards in the financial services industry. She was also an original founder of the CUNA Councils. 35 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY BY SCOTT MCCLYMONDS Formula for Success What Financial Services CEOs Can Learn From PenFed Credit Union CEO James Schenck How is your credit union weathering the changing face of the financial services industry The new business model that pits CUs again both major institutions and non-banks demands skillful balance. See how one CEO is taking on the challenge brilliantly. eadership and strategy are two of my favorite topics and I have been both amazed and encouraged by the leaders I have met with recently in the financial services industry particularly as they adapt their strategies to the digital era. As I meet with CEOs of small to mid-sized financial institutions regarding their leadership style and the challenges they face I am especially interested in how they are leading their teams into the new financial services business model where they are competing against huge institutions as well as non-banks such as Walmart. The financial services industry has indeed changed and CEOs have to be more skillful than ever as they balance the new business model regulations and risk management. One CEO who is doing this brilliantly is James Schenck CEO of PenFed Credit Union the third largest credit union in the United States with about 18 billion in assets and 1.3 million members. Not long ago James and I had a phone conversation where we discussed topics such as leadership strategy creating a great member experience cyber security digital loan and deposit capture and creating the right mix of technology investments. You will be able to read all the details of those dimensions of our discussion later in this article. To get right to the point I was thoroughly impressed with James and believe he exemplifies what a leader should be...humble intelligent strategic wide-field of view people developer servant steward. C R E D I T U N I O N B U S I N E S S L PenFed Credit Union CEO James Schenck As James and I discussed his approach to leading PenFed I couldn t help reflecting on my own experiences as a senior leader in the financial services industry. I didn t always find the excellence in C-Suite leadership practiced by James but when someone like him was in that role employees followed enthusiastically customers were delighted and financial results were stellar. In particular I found these five unique and refreshing attributes about James 1) His emphasis on developing a clear strategy and ensuring its continuous communication and measurement throughout PenFed 2 0 1 5 C U B U S I N E S S . C O M 36 F E B R U A R Y CEO VELOCITY TAB 2) His assessment of leaders according to their people skills conceptual thinking and technical abilities 3) His approach to being a steward to the stakeholders of the organization while still being aggressive assertive and forwardthinking 4) His commitment to developing leaders in different ways at each level of PenFed 5) His ability to say no to projects or initiatives outside the scope of his strategy. Let me dissect these five attributes a bit for you and then proceed to the details of our discussion. commitments to employees his board and external partners are always top of mind for James. In contrast to the mindset of some modern management gurus who seem to believe leaders should take on a bit of a subservient role James sees no incongruity between his stewardship responsibilities and his need to be an aggressive assertive leader who challenges employees to perform at their best. Tiered Leadership Development PenFed develops leaders at all levels of the organization but applies distinct techniques at each leadership level. This is an approach used in the military as leaders are promoted to different ranks. This strategy certainly puts PenFed in a minority among American companies many of which do not view leadership development as a profitable way to lead their enterprises into a promising future. The prevailing attitude toward leadership development in many companies can be summarized in a quote from one of my former managers I don t know why you re always studying leadership Scott. If you re like me you already know everything you re ever going to know about it. Refreshingly the PenFed way of leadership development exemplifies foresight and will ensure they have excellent leadership for years to come. Develop and Follow a Clear Strategy James sees staying on course with a clear strategy as essential for success. His four keys for building and executing a solid strategy are 1. Focusing on creating a great experience for PenFed s members without being bleeding edge 2. Hiring talented team members who are passionate about the organization s mission 3. Communicating the strategy up and down the organization on a continuous basis 4. Measuring the strategy s key metrics down to the individual. Three-Part Leadership Assessment A key element of James success is his ability to choose diverse and talented individuals as team members. He said he is continually assessing managers on their people skills conceptual thinking and technical abilities. He looks for self-starters who can motivate and inspire other employees perform their jobs with excellence and look ahead five to 10 years in order to drive PenFed toward a bright future. Tuning Out the Noise James told me the ability of a CEO to say no is critical even when what you re saying no to is a good thing. He believes it is a mistake to try to be all things to all people and prefers to amass resources on a few things that bend the needle . PenFed focuses on high ROI projects that will create an excellent member experience and avoids being distracted by bleeding-edge technology that hasn t yet proven itself in the marketplace. While this is a balancing act the CU s disciplined approach to strategic projects lets it focus and achieve from five to 10 needle bending initiatives every 12 to 14 months. This approach was another breath of fresh air and sanity to me as my experience in large organizations was of C-level leaders taking on so many initiatives during the course of the year that very few were actually accomplished. To punctuate this point at a recent strategic planning workshop I attended the leader of a large manufacturer used 37 2 0 1 5 C U B U S I N E S S . C O M Assertive Challenging Servant Leadership As PenFed s CEO James is primarily driven by the trust his stakeholders have placed with him and the responsibilities that come with it. The fiduciary responsibility to PenFed s members maintaining the safety and soundness of the credit union C R E D I T U N I O N B U S I N E S S F E B R U A R Y CEO VELOCITY CEO VELOCITY TAB the following rule of thumb to show the benefits of choosing only a few key initiatives and the folly of trying to do too much If you have five initiatives you will accomplish five If you have 10 initiatives you will accomplish eight 15 initiatives and you will accomplish seven 20 initiatives and you will only accomplish two. Details of My Discussion With James Schenck CEO of PenFed CU Scott James what have been the biggest factors in your career success James I ve found that constant communication with coworkers has been absolutely critical in my ability to create a vision align resources and focus on the execution of a strategy that will propel PenFed forward. Scott Do you have a particular communication routine or regimen that is most effective for you and keeps you intentional about communicating with your co-workers James I try to communicate to all our employees via email each week. I have an open door policy and do lots of listening. I make a point of listening to many employees every day. Three times a year I do a town hall meeting at each of our locations. It s an open forum where employees can bring up anything that s on their minds. I also strive to build really diverse and talented teams. I surround myself with professionals who are logically visually and emotionally intelligent with a passion for our mission and the members we serve. They are self-starters with positive attitudes who are intuitive and have the ability to motivate and inspire those they lead. Scott What has enabled you to choose such great people Do you have certain front-end interview practices that are particularly helpful for choosing people who fit well Many Challenge Questions to You Before we get deeper into my discussion with James I d like you to stop right now and ponder the following questions based on James five leadership attributes already discussed 1. What is your strategy a. Is it designed around creating an amazing customer experience b. If so what is that optimal experience c. Does everyone in your institution know what it is d. How successful has it been e. How do you measure it 2. How do you assess your leaders a. Does your assessment go beyond today s results and measure how well they develop their people and conceptualize the future of your company 3. What ways can you improve your servant leadership while aggressively focusing your organization on your vision and strategy 4. Describe your leadership development program. a. Looking at it objectively how effective is it and what needs to change 5. What do you need to eliminate or say no to that is good but outside the scope of your strategy for the next 12 to 18 months Now that you ve carefully thought through those all-important questions let s proceed with the rest of the discussion. Keep the following diagram in mind as you put together the pieces of how James leads PenFed in formulating strategy The PenFed Formula for Strategy Development and Execution Assess Member Needs Deene A Great Member Experience Create Strategy Execute Strategy Continuous Communication Leadership Development Continuous Measurement & Evaluation Take on a Limited Number of High ROI Tech Projects Say No to Initiatives Outside Strategy Proetability and Member Loyalty 38 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY TAB CEOs and managers have difficulty here so if you have some ideas you can share I m sure they ll benefit. James I assess everyone I meet with on their human conceptual technical skills. First their human qualities... are they a leader and team player who will drive the organization forward Second can they think conceptually Can they look five5 or 10 years down the road over the hill beyond today I need conceptual thinkers. Third are they technically sound Do they have the academics the professional competence and expertise Are they good at their current job description Scott What has surprised you most about being a CEO James The fact that so many people want to assist in helping me succeed in this role has been humbling. There is genuine interest and support throughout the employee base and among our external partners. The sage wisdom and heartfelt advice from so many since I have made the transition to CEO has touched me deeply. Scott Without knowing you personally your answer here makes me think you maintain a sense of humility and gratitude. How can leaders who run large organizations like PenFed maintain those two attributes James Being part of a credit union and understanding that a CEO is a fiduciary to membership first a steward to the organization to preserving it s safety and soundness. It s the responsibility of taking care of employees being a servant to the board our members employees and external partners. A CEO s role is to set strategy in concert with the board of directors to get buy-in between the CEO s vision and the board s governance and to communicate those to all employees. Being a servant doesn t mean subservience or not being aggressive but understanding who I work for. I want to serve our field of membership better than anyone else. You can still be very aggressive and forward thinking but grounded as a steward to serve employees members and vendors. It s also important to take the lead and provide leadership through partnership and collaboration. It s similar to a military leader who puts the troops ahead of himself. Officers eat last and I have to put members needs above all others. I ve got to guide the ship safely in their best interests while preserving the integrity of the unit. I find the military ethos of putting soldiers ahead of myself to be very helpful. Scott What are the main obstacles and challenges you are still working on James I don t feel as if we can innovate fast enough. We re investing heavily in mobile technology upgrades and we re overhauling our member-facing systems. It takes a great deal of time and money. We were fortunate enough to have taken a disciplined approach toward prioritizing so now it s a matter of scheduling the rollouts of the new systems and applications. Scott Many financial services firms feel the same way. Having just come from the Small Business Banking Conference where more than a few CUs attended I m sure many industry peers are feeling the same as you. Scott McClymonds helps financial services CEOs increase profits efficiency and customer loyalty. With 25 years of financial services leadership he has been called a pragmatic visionary and one of the most creative strategists in the industry . Scott s firm CEO Velocity is at To be continued in March Credit Union Business... 39 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M VIRTUAL TAB CORPS BY AMY RAPP TAB Creates New Business Alliance for 2015 has successfully finished its first year in business. Run from the Big Sky state of Montana the new S Corporation is the product of one industry talent s reinvention from the Corporate CU WesCorp and its subsequent closure. Amy Rapp is the founder and CEO of the creative business endeavor that is an aggregation of many experts from across the credit union space. offers a diverse menu of solutions that are generally not found at the traditional corporate national CU industry provider or association. has seized the opportunity to pull together diverse talent from across the national CU space under one organization. Today working remotely or providing services through webinars and virtual extension of staff consulting is becoming more mainstream. Rapp s prior experience was as the Senior Manager and creator of the Small-Mid Markets Group SimpliCD Sales Director and the creator host and producer of the nationally recognized CU Essentials Monthly WebCast Show at Western Corporate Federal Credit Union. During her eight years at WesCorp Rapp successfully created a national brand serving the small and mid-sized credit union market sector by creating very detailed and highly effective programs to assist credit unions in thriving. Her experience in many areas of working with hundreds of CU CEOs and CFOs of all asset sizes combined with her educational program development public speaking webcast producing and hosting and specialized experience in international development gives her a unique and hands-on perspective to offer exceptional quality programming that highlights critical and bottom-line-affecting solutions to the credit union community. 38 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M V She also has experience facilitating national webinar series with organizations such as CUNA and the Federation of Community Development Credit Unions with key guests such as the NCUA and the CDFI fund. In early 2013 she engaged in the Farmer to Farmer National Cooperative Business Association CLUSA International development program in Senegal Africa. There she taught capacity building strategic planning organizational development identification of additional sources of fee income production through partnership and relationship development and more. Rapp is a C.U.D.E and obtained her I-C.U.D.E in 2011. Solutions Webinars Workshops Speaking Engagements and Consulting The new S Corporation that Rapp started doesn t require capital from CUs. Credit unions just need to have a desire to discover new solutions that can affect their bottom line or help with member loyalty. In that case all they need to do is grab the telephone or shoot off an email to find out if these solutions would assist their CU. VirtualCorps experts all run their own companies and possess a desire to be nationally TAB VIRTUAL CORPS connected outside of their own regions in the CU space. They have been aggregated under one Virtual Corporation to offer unique solutions that help to fill in the gap of what credit unions need from main providers. Available through the VirtualCorps of experts is critical and understandable director education as well as mid- and executive-level staff development solutions. Many other solutions are also available to the CU marketplace through a series of this year s second annually scheduled webinars. Marketing partnerships mirroring other education providers webinar outreach is something that is successfully accomplishing. Some of the topics on the 2015 webinar schedule include Negotiating Your Executive Compensation Package Strategic Planning Techniques How to Comply with Federal Regulation on Liquidity Requirements Risk-Based Lending Why a PayDay Alternative Loan May Be Helpful for CU Members Understanding Locating and Evaluating Auto Loan Participations Opportunities for CUs Originating from the Affordable Care Act Flat Fee vs. Dealer Reserve Where Is the Sales and Financing Process Headed with Auto Lending How to Avoid a Department of Labor Audit and Fines Functional Compliance Management Programs There are over 80 webinar topics listed on the website all of which address CU issues. There are also a variety of package program solutions the VirtualCorps team of experts offers as well BSA compliance for small and mid-sized CUs fee income programs for CUs seeking to help members obtain college tuition assistance retirement and long-term care solutions for small and mid-sized CUs and more. Additional areas offered are organic lending and alternative lending strategies microenterprise understanding the Millennial generation executive coaching stochastic modeling credit migration analysis community development secondary capital and grant funding social media applications and marketing. The corporation s consultants are all available as an extension of staff to help credit unions where expertise may not be available at the CU level. In addition they can be contracted for speaking engagements for conferences and special workshops and are always willing to take phone calls to answer questions. There is also a strong focus on solutions for small and midsized credit unions hosted on the SM CU resource tab. One key program is the growth and profitability workshop a full eighthour program that teaches CUs solutions based on the individual credit union call report. CUs will know how each solution affects their call report upon completion of the rigorous and compliant workshop. Credit Union BUSINESS Magazine Alliance This year will be creating a new strategic alliance with Credit Union BUSINESS magazine to help get the webinar series out to a broader CU reach. Through an online webinar store located on the electronic version of Credit Union BUSINESS CUs will be able to successfully register for each of the webinars through the magazine portal. The webinars are hosted and produced on the live webcam WebEx platform that can host up to five presenters. The PowerPoints are detailed during these one-hour programs. All webinars are recorded as well. This is a very exciting opportunity to create a new marketing reach for the corps as well as add value to the current Credit Union BUSINESS magazine community. Currently VirtualCorps. com s marketing reach has successfully been managed through the New Jersey Credit Union League the first league to sponsor s annual 2014 webinar rollout. Rapp concludes We are excited about the continued interest and support of the CU community and are especially interested in the new platform that CU BUSINESS magazine will afford us. The corps is still a new business model that many CU folks have yet to experience. It is my hope that the CU movement will start to gravitate to the corps when posed with unique challenges at the CU level. We offer a wide range of unique talent under this umbrella and want to become a place that CUs migrate to for finding answers to difficult solutions. For more information please email arapp virtualcorps. com or visit the VirtualCorps website Amy Rapp is the founder and CEO of 41 C R E D I T U N I O N B U S I N E S S F E B R U A R Y 2 0 1 5 C U B U S I N E S S . C O M Ready for more value from your ATM provider Open your doors to a new ATM provider For decades Cummins Allison has helped you make the most of your branch resources. Now we re excited to offer a complete line of highly reliable secure full-function ATMs to fit any branch configuration from drive-up to walk-up. And best of all our ATMs are backed by the responsive dependable local service you need and have come to expect. So open your doors and give us a try. When you re ready to replace add to or expand your ATM network let s talk. Visit letstalk 2014 Cummins Allison Inc. All rights reserved.