By Ray Birch
ARLINGTON, Va.—Consensus among credit union experts is that a legal challenge to NCUA’s authority to establish a two-tier risk-based capital rule won’t occur—yet there are those not ruling out the possibility.
NCUA Board Member Mark McWatters—an attorney—in voting against NCUA’s RBC proposal, stated that the agency’s legal opinion regarding its authority to establish a two-tier RBC is, at best, a weak basis for NCUA’s actions. NCUA Chairman Debbie Matz has countered, saying that the agency is standing on solid legal ground. (http://www.cutoday.info/THE-feature/CUToday.info-Obtains-Copy-Of-Opinion-Letter-On-Two-Tiered-RBC)
NAFCU’s SVP/General Counsel Carrie Hunt told CUToday.info, when asked if a lawsuit might be filed at some point, that it’s “too early to tell. Certainly NAFCU believes there are some serious legal issues. We do not support NCUA putting forth this rule if they lack authority to do so. And that is one reason NAFCU has strongly supported legislative changes to risk-based capital even prior to NCUA issuing this rulemaking.”
Legal Action Draws Congressional Action?
While some have debated the actual value of a lawsuit—in that winning is likely difficult and in the end how much will be truly gained by credit unions—legal action might draw action from Capitol Hill.
But Hunt said that would be waiting too long for Washington’s intervention.
“If there were to be a lawsuit, I think it would happen after NCUA had finalized the rule,” said Hunt. “Certainly we hope that we would see some legislative changes and some additional legislative discussion prior to that point.”
Dennis Dollar
Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., sets the chance at a lawsuit happening at less than 50-50.
“Whether there will eventually be a lawsuit over the final rule is yet to be seen,” said the former NCUA chairman. “Let's face it; the regulated do not take suing their regulator lightly. However, if the necessity and legality arguments start to get some traction in the political arena that RBC may be unnecessary—or worse yet, legally unsupportable—the likelihood of congressional hearings on the final rule are certainly better than 50-50.”
Bill Hampel, CUNA’s chief economist and chief policy officer, sets the odds of a lawsuit well under 50-50.
“This has to be put into context, given the cost of a lawsuit and the uncertainty of the outcome, and the fact that there are really significant improvements in risk-based capital II over risk-based capital I,” he explained. “We believe it is pretty unlikely that anyone will bring a lawsuit at this point.”
But, Hampel added, CUNA also has significant concerns over whether NCUA has the legal authority to introduce a two-tier risk-based rule, and that the trade association has a strong legal opinion that addresses the issue. (http://www.cutoday.info/Fresh-Today/CUNA-s-Opinion-Letter-Challenges-NCUA-s-Authority-on-RBC)
Hampel noted that the odds of a lawsuit happening would be much greater had not the second version of RBC been a marked improvement over its predecessor.
“Had risk-based capital two been as flawed as the first proposal, then a lawsuit would have been much more likely,” said Hampel. “The second rule is more sound because the agency listened to what was said in the more than 2,000 comment letters they received.”
CUNA Deputy General Counsel Mary Dunn noted that in order to win such a suit, the plaintiff has to show harm—the level of damage the rule would impart. “These new rules impart much less harm. The agency, however, does have the authority to write a risk-based capital rule. No one is disputing that.”
Dunn noted that credit unions will make the call.
Mark McWatters, NCUA
“We take our orders from our members,” she reminded. “Our members will tell us if this new rule is improved enough and whether or not they want us to contemplate a lawsuit.”
Big Litigation Check
McWatters, during an interview with CUToday.info, looked closely at what could be gained from a lawsuit.
“What if we take the rules back to a single-tier structure—is that something that really truly matters here? And, then, what is the cost of the litigation? Go through the federal and district courts here and you are talking about a huge check you will have to write for the litigation.”
McWatters said his instincts tell him that battle won’t be fought. “You don’t want to fight that battle, because do you believe that the risk-based net worth rules, at the end of the day, are going to be rules credit unions can’t live with? Credit unions may not love the rule, they may not like idea of two-tier, but they can live with the rule. And whoever files the lawsuit can live without having to go through all the litigation and writing a big check.”
Peter Duffy, managing director at Sandler O'Neill, New York, said that whether or not Congress gets involved, a decision needs to be made so CUs can focus more clearly on their strategic plans.
“Someone needs to decide something, because credit unions just endured a year-and-a-half of spending time and money understanding and debating a proposal that with many CUs materially impacted their decisiveness in acting upon on their strategic plans and use of capital and liquidity,” said Duffy.