WASHINGTON—CUNA has released to its member credit unions a legal opinion it commissioned that raises questions over whether NCUA has the authority to issue its two-tiered risk-based capital proposal.
The letter states that NCUA’s proposal to establish a minimum risk-based net worth requirement for a complex credit union to be classified as well capitalized violates the express language of the Credit Union Membership Access Act.
The letter follows NCUA’s release of its opinion letter on its authority to establish a two-tiered risk-based capital plan. That letter was first published by CUToday.info following a Freedom of Information Act request with NCUA.
CUNA’s letter, written prior to the release of NCUA’s new risk-based capital proposal, states that the agency’s rationale for its approach to constructing its risk-based rule, set forth in letters to members of Congress, is unlawful because it violates the explicit language of that statute.
"Our fervent efforts, this strong legal opinion included, led to significant changes in NCUA's proposal," said Jim Nussle, CUNA president/CEO. "Many associations, including CUNA, have used legal opinions like this to help alter proposed regulations regardless of any intent to challenge a proposal in the courts. In this case, CUNA's legal opinion allowed us to shape the revised proposed risk-based capital rule with the agency, most notably in the reduction of the initial 10.5% for well-capitalized credit unions and changes to risk weights."
Nussle added that the opinion is used as a tool to push for changes in the proposal, and not a prelude of any sort of legal action. "It is rare that opinions like this result in successful legal challenges in the courts. The fact is that courts are reluctant to reverse the authority of regulators," Nussle said.
Literal Language
CUNA’s opinion letter, dated Sept. 18, 2014, and developed by the Washington firm of Venable, LLP, states that the “literal language of Section 301 of the Credit Union Membership Access Act (CUMAA), Pub. L. No. 105-219, 12 U.S.C. § 1790d, and its supporting legislative history demonstrate that Congress granted NCUA authority only to establish a single risk-based net worth requirement for complex credit unions – the standard that a credit union must meet to be classified as ‘adequately capitalized’ – and did not grant the agency the power to promulgate a separate risk-based standard for a credit union to be classified as ‘well capitalized.’ To the contrary, the express language of Section 1790d provides that the identical risk-based net worth requirement that is applicable in determining whether a complex credit union is ‘adequately capitalized’ also must be applied in determining whether that institution satisfies the criteria for classification as ‘well capitalized.’”
The letter continues stating, “A key provision to understanding the limits on NCUA’s authority to establish risk-based capital is 12 U.S.C. § 1790d(d)(2), which Congress in drafting CUMAA intentionally and appropriately labeled 'Standard.' By including a 'standard' for the agency to follow, Congress intended not only that NCUA develop its risk-based capital system consistent with this provision but also that it refrain from developing a risk-based capital system that did not reflect this language.”
NCUA Opinion
In NCUA’s letter from Paul Hasting LLP, the law firm asserts that the Federal Credit Union Act language regarding NCUA’s authority to establish a two-tier risk-based capital standard is “at best, ambiguous . . . as the language can be interpreted in multiple ways…”
The letter concluded that “we are of the opinion that, under current principles of applicable law and existing case law, a court of appropriate jurisdiction, in a litigated matter or proceeding, could conclude that NCUA’s statutory authority pursuant to Section 216 of the FCUA permits the NCUA to establish the proposed two-tier RBNW requirement set forth in the proposed rule.”
To arrive at its opinion, Paul Hastings said it examined the proposed rule, NCUA’s statutory authority to implement the rule as provided in Section 216 of the Federal Credit Union Act and Section 201 of 1998’s Credit Union Membership Access Act, and legal precedent established by the 1984 case Chevron, USA v. NRDC, Inc., which led to what is now known as the Chevron Standard or Chevron doctrine.
In the opinion letter reviewed by CUToday.info, Paul Hastings states, “NCUA’s proposed two-tier RBNW requirement under the Proposed Rule constitutes a permissible construction of the statute and, as such, should be upheld by a court under the Chevron doctrine. By providing sufficient explanation of its reasons for imposing a higher and more conservative RBNW requirement for complex credit unions to be deemed well capitalized, it is our view that the NCUA’s implementation of a two-tiered RBNW requirement would withstand a court challenge alleging the agency’s approach is arbitrary, capricious, or manifestly contrary to the statutory language of Section 216 of the FCUA.”
For a copy of NCUA's letter, click here.
However, CUNA’s opinion letter states, “Congress left no ambiguity regarding its intentions; the plain language of the standard it established in 12 U.S.C. § 1790d(d)(2) directs NCUA to: design the risk-based net worth requirement to take account of any material risks against which the net worth ratio for an insured credit union to be adequately capitalized may not provide adequate protection.
“The words themselves could not be clearer in setting the course for NCUA to follow. The language leaves no doubt that Congress meant for NCUA to develop a risk-based capital standard for complex credit unions using a model that synchronizes risk-based capital with net worth requirements for adequately capitalized credit unions, and not set a higher risk-based capital threshold for well capitalized credit unions.”
Letter Cites NCUA "Error"
CUNA’s letter points to a key “error” by NCUA.
“The fatal error in NCUA’s argument is apparent. Its entire rationale rests on the claim that inclusion of the general phrase 'comparable to' in Paragraph (1)(A)(ii) allows it to ignore any provision of Section 1790d with which it disagrees and to import into the PCA system for credit unions any provision in the system for banks that it believes is preferable. Under standard dictionary definitions, the word 'comparable' connotes a system that is 'like or equivalent' to the system for banks, but not one that is identical in every respect. The word 'comparable' cannot bear the extraordinary weight that would be necessary for NCUA’s approach to be valid – to serve as a trump card that would allow NCUA to modify or disregard any part of Section 1790d that Congress actually adopted and grant itself authority to exercise any provision that Congress enacted in the PCA system for banks but excluded from the system for credit unions.
“NCUA’s construction therefore is illegal because it would read the provisions Congress actually enacted out of the law. Its approach also would violate two established canons of construction – that where there is not a clear expression of Congressional intent otherwise, a specific statute will not be controlled or nullified by a general one; and that a statute should not be interpreted in a way that would render other provisions of the same act superfluous or unnecessary."
CUNA stated in a memo that is has not challenged NCUA's authority to issue an RBC rule, but firmly believes that the proposal isn't necessary.
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