News from the Division of Financial Institutions
Welcome to the July edition of Credit Union News. In today’s financial industry, there is huge wave of change sweeping through with new technologies, innovations, risks, and marketing capabilities. Keeping up in today’s digital world requires greater board education, director involvement, and strategic planning to help enable boards of directors to sufficiently meet these challenges. Directors should be knowledgeable about all areas of credit union management, including cybersecurity and technology. Board members, as well as leadership, should be able to discuss everything from risk governance and disaster recovery to digital technology and information security.

Through innovation, financial institutions can develop new lines of business and greatly enhance the customer experience. But being innovative might require a culture change that encourages employees to try new concepts, take risks, and a chance that some new ideas, while they could result in failure, can be used as learning opportunities. By working together with their regulators, credit unions can implement new ideas while also limiting potential negative impacts.

How can your current management and board of directors handle this new technology within your credit union? Do new skills need to be acquired to survive in this digital age or do leaders go back to the essentials, not letting change distract or disrupt an organization on a managerial level? Perhaps it is both; core leadership skills serve as the foundation needed, but new skills are needed to address the digital changes.

Leadership needs a “transformative” vision that can anticipate market trends, make sound business decisions, and solve tough problems in turbulent times. This includes understanding technology. Without a level of “digital literacy,” leadership will struggle to understand the impact, risks, and opportunities of digital transformation. Leadership throughout the organization should be open minded and accepting of change.

Technology should be a factor of consideration in every step of the strategic planning process and included in the institution’s vision for the future. In addition to understanding the current state of the industry and financial environments, the board needs to understand technology challenges and infrastructure, financial performance, and market competitiveness.
Board makeup is also becoming increasingly important. Credit unions should seek out directors with skillsets that will significantly contribute to oversight and management of the organization. Matters such as cyber security, digital transformation, and social media are all complex issues facing financial institutions today.

I hope you will reach out to your board members and involve them in opportunities to increase their digital literacy. And be sure to have them join us on Oct. 3 at the State Library of Ohio in Columbus as we present another session on directors’ responsibilities and their role in providing oversight to your institution.

As always, if you have any questions on these or any other topics, please feel free to contact me directly at or (614) 728-2631. 
Robert Rutkowski, Deputy Superintendent

“Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop.” Lewis Carroll, Alice in Wonderland .

When the landmark House Bill 489 was signed into law and became effective in March of 2019, Ohio Credit Union law changed in some very fundamental ways. Chief among them is that Ohio state-chartered credit unions may now compensate their directors. This article shall explore some ways in which this may be accomplished in order to comport with the new statute.

Let us begin at the beginning with the statute itself. Revised Code §1733.22(B)(1) states:

B) A credit union may provide any of the following to its directors and supervisory audit committee members: (1) Reasonable compensation for their service as directors or supervisory audit committee members

The key word here of course is “reasonable” (a word that delights the lawyer and frustrates everyone else). What, then, is reasonable? The answer to this, obviously, is: it depends. What is reasonable for a $4 billion financial institution might not be reasonable for a $10 million one. Thus, our first point to make in determining what is reasonable ought to be something general: director compensation must not have a materially negative effect upon the credit union’s balance sheet. 

We can’t end there, however. In preparing to write this article, it was suggested to me that I might find out what other states are doing and frankly, in the world of credit union State Supervisory Authorities (SSAs for short), there is no better resource than NASCUS [1] It turns out that “[a]t 145 credit unions in 12 states, directors earn somewhere between $60 and $37,597 annually [2] .” 

So a credit union board ought to pick a number to pay itself? That doesn’t sound entirely kosher, does it? One author makes an excellent suggestion: 

While there is no requirement as to how the board determines director compensation, it is typical for the board to assign this task to either the compensation committee or the nominating/governance committee. If the task is assigned to a committee, any significant decision regarding director compensation should always be reviewed and approved by the full board before becoming final [3] .

That committee or the board can look at factors such as the credit union’s asset size and financial condition [4] As part of its review process, the committee ought to generate a report that discusses the methodology it uses to come to its conclusions. For example, things the committee might do include: reviewing the credit union’s balance sheet, analyzing research material concerning director compensation and identifying the goals the credit union has in terms of setting reasonable compensation. It is important for a credit union to identify why it is deciding to pay its directors. As one commentator puts it, directors’ compensation should be paid: “to a level that will attract high-quality candidates to the board, but not in such forms or amounts as to impair director independence or raise questions of self-dealing [5] .” 

Many credit unions, in deciding to compensate directors, also set new standards for director competence and performance as part of the compensation deal. It only makes sense. Directors are getting more from the credit union for the job that they perform, the credit union ought to get more from the directors in turn. Introducing new concepts such as term limits and enforcing attendance rules are a start and commentators have identified other concepts such as: assessing the effectiveness of the board and directors on an ongoing basis, creating and maintaining a board skills matrix and monitoring the credit unions performance [6] A committee considering such things ought to document them as part of its review process. 

So what would the Ohio Division of Financial Institutions be looking for, then, from a credit union that it seeking to pay its directors? A credit union should be prepared to demonstrate to its examiner the metrics it used to develop its director compensation program. Like anything else, a program with thought and documentation behind it will stand up to scrutiny better than one that appears to be arbitrary. Board compensation must not materially affect the credit union’s balance sheet in a negative way. Setting and enforcing new metrics in conjunction with compensation helps to justify the compensation program and ideally will also allow board members to improve performance and help raise the credit union to new levels of success. Documentation of the process and putting policies in place after looking at concepts discussed here will go a long way in getting the credit union in the realm of what is reasonable in terms of director compensation. 

[1] Which stands for National Association of State Credit Union Supervisors. I contacted their general counsel Brian Knight and he immediately referred me to 2 excellent resources which I suggest you take a look at if your credit union plans to compensate its directors: Dealing with Director Compensation. David A. Katz, Harvard Law School Forum on Corporate Governance and Financial Regulation (May 22, 2015) and Should Credit Unions Pay Their Directors. Matt Fullbrook, Filene Research Institute. The Katz article is not credit union specific and mentions such arcane concepts as using equity as compensation which would be impossible for a credit union but otherwise the article is very relevant.
[2] See Fullbrook p. 4. 
[3] See Katz p. 4. 
[4] If the credit union does not have an existing committee, the board can create one. The board can then task the committee to meet over a period of time to do its research and draft its written recommendations to the board. The time period involved here is largely dependent upon the urgency of the project but it would probably range between 1 to 3 months. 
[5] See Katz, p. 1.
[6] See Fullbrook, generally, p. 24.  
Determining Examination Hot Topics
Ida Neely, Chief Examiner for Credit Unions

As you might have guessed, determining the examination hot topics is primarily based on current industry events and/or trends. Topics can be repetitive; for instance, the review of all areas of the Bank Secrecy Act will undoubtedly remain on the list for several years to come.

Once examination hot topics have been identified, the next step is to determine if the individual credit union that is being examined fits into any or all the topics. It is important to note; each credit union is unique and is not a “one size fits all” when it comes to the examination process. So from here, what topics need to be in the forefront of the examination scope and what examination team member will be assigned the review of these topics?  

While the list below has been identified as the 2019 Examination Hot Topics , remember your examiner in charge is familiar with your credit union and what may or may not apply to you.

Examination Hot Topics
  • Continued examination of compliance to the Bank Secrecy Act and in-depth review of Customer Due Diligence and Beneficial Ownership compliance

  • Review of policies/procedures of the credit union’s participation/non-participation in Marijuana Related Business relationships
  • Review of any action plan the credit union has implemented for compliance to CECL

  • Compliance to the revisions to the Ohio Revised Code and Ohio Administrative Code 

  • Large concentrations of loan products and concentration that relate to specific risk characteristics, e.g. indirect loans

  • Review of Consumer Compliance areas, e.g. HMDA and Military Lending

  • Increased number of credit unions that will receive deeper IT examination from the Division’s IT Examination Team 

  • Off-site monitoring will continue with the review of quarterly call report filings with an area of focus to include Liquidity and Interest Rate Risk 

Location: TBD

Location: TBD