McWatters Offers 21-Point Plan For NCUA Reg Relief

WASHINGTON–NCUA Board Member Mark McWatters outlined a 21-point plan for regulatory relief from an agency he suggested continues to “pummel credit unions.”

Not surprisingly, that message was embraced by an audience at CUNA’s GAC to the point numerous people gave him a standing ovation.

“Regrettably, the day-to-day regulatory burdens of the credit union system appear unprecedented and steadily growing,” said McWatters. “The irony of this statement is not lost on a community that was neither a perpetrator nor an aider and abettor of the recent financial crisis. In fact, given the significant settlement recoveries and lawsuit collections received with respect to the reorganization of the Corporate credit unions, it appears that the community was to a material extent a victim of those who packaged and sold dubiously underwritten mortgage backed and other securities….How odd it seems that the NCUA has continued to pummel a financial services community that stayed on message and continued to operate substantially unimpaired while extending consumer and small business credit to the middle class, the underserved, and the unserved during the darkest days of the financial crisis. The dilemma you face, however, is that the NCUA is the source of both your regulatory burden and any offsetting relief.”

To address that burden, McWatters said he has spent much time listening to credit unions, and while he said CUs have said it isn’t any one single rule but rules collectively that are the burden, he specifically cited the current expected credit loss (CECL) proposal from FASB, the NCUA’s Risk-Based Net Worth (RBC) rule, and the CFPB’s Tila-Respa Integrated Disclosure (TRID) requirements as problematic regulations.

The Plan

Saying he did not originate all the ideas he would present, McWatters then outlined 21 thoughts he said could be combined with others to “achieve a broad based proposal of regulatory relief as it relates to the NCUA.”

The 21 ideas are below, with all of the comments made by McWatters:

1. We must remember that this is 2016 and not 2008, and it is counterproductive to refight the last battle – that is, the financial crisis battles of 2008 and 2009. Instead, we should engage in forward thinking to address new challenges and threats to the NCUSIF and the credit union community. This approach should include corporate, as well as natural person, credit unions. 

2. Absent documented, significant, systemic, supervisory problems, the NCUA should declare a moratorium on the issuance of any new material rules that limit credit union activities or impose new restrictions system wide, at least for a reasonable period of time as we assess the totality of credit unions’ regulatory burdens. In my view, as long as the credit union system continues to perform well, as it is today, the NCUA should – to the greatest extent possible – deal with individual problem issues through the supervisory process and, except as noted, not by imposing new requirements on the remainder of the credit union community. That said – and this is of critical importance – the agency should remain vigilant regarding unanticipated, contrarian, Black Swan threats to the NCUSIF and not hesitate to act in a professional and unequivocal manner to address any such threats. And, of course, as I have noted, any such actions must follow the letter and spirit of the FCUA. 

3. The NCUA should utilize the moratorium period to scrutinize all of its rules, policies, and guidance and remove or improve those that are out of date. The agency should not needlessly draw out this process and should avoid replicating the current review of rules on a three-year cycle that many in the credit union community view as merely pro forma, if not unhelpful. Going forward, the agency should undertake to issue new rules on a targeted basis after thoughtfully considering the actual risks presented by the credit union community to the safety and soundness of the NCUSIF and the community itself. 

4. The NCUA should respect the due process rights of the credit union community by implementing an examination appeals process pursuant to which each party is represented by counsel before an impartial tribunal. The agency’s examination process should allow credit unions to challenge examiner findings and directives in an open and fully accountable manner without fear of retaliation or retribution.
5. The NCUA should establish a credit union advisory group charged with making – in a transparent manner that follows objective governance and reporting standards – recommendations regarding the removal or modification of outdated rules. The advisory group should also offer recommendations regarding regulatory action that could facilitate more effective and efficient credit union operations. The NCUA should also engage more with the credit union system and learn from the community itself regarding matters such as fraud prevention, supplemental capital, the regulatory and economic challenges of small credit unions, and a fair-minded appeals process.
6. The NCUA should conduct onsite examinations as infrequently as prudently possible (for example, every 18 months for certain well-capitalized and well- managed credit unions). The agency should also respect the dual charter system and rely on examinations conducted by state supervisory authorities to the extent it is reasonable to do so. Further, the NCUA should respect the ability of state supervisory authorities to contribute to the regulation of federally insured state chartered credit unions in a meaningful and competent manner. Regulatory wisdom does not reside exclusively within 1775 Duke Street in Alexandria, but should emanate from the collaborative good faith efforts of federal and state regulators. 

7. The NCUA should ensure that examiners conduct their operations in a manifest and accountable manner by avoiding the "because I say so" mentality that seldom works, even with two-year olds. 

8. The NCUA should disclose in writing to credit unions the legal, financial, accounting, and regulatory basis of their examination findings and actions. Likewise, examiners should rely, to the least extent possible, on ‘best practices’ justifications for their actions unless they are clearly supported by statute or regulation and are communicated in an objective and transparent manner to the credit union community on a timely basis. 

9. The NCUA should expand its hotline to the NCUA Inspector General so credit unions may specifically report, on an anonymous basis, instances of intimidation, retaliation, retribution, or inappropriate behavior by examiners, other employees, or independent contractors of the NCUA.
10. While, as previously noted, the NCUA should hold off on new credit union limitations, the agency should publish market-based rules permitting credit unions to access supplemental capital for RBC purposes, because the NCUA should encourage credit unions to maintain and grow their capital.
11. The NCUA should respect the business models and plans of credit unions, except where they fall objectively out-of-bounds.
12. The NCUA should not meddle in the day-to-day operations and internal affairs of credit unions, except as required to address a viable threat.
13. The NCUA should modernize many of the restrictive rules that are oppressing the growth and development of the corporate credit union system today. As noted, the agency should acknowledge that what was appropriate in 2008 and 2009 should not burden a reorganized corporate credit union system in 2016. After all, what may have reasonably registered to many as gross mismanagement by the corporates a few years ago, appears at least somewhat less so today after the stunning inflow of settlement and lawsuit recoveries on the sketchy investment securities sold to the corporates.
14. The NCUA should work to preserve minority- and women-owned credit unions, because it is the right thing to do and these institutions often provide financial services to the underserved and unserved at competitive rates so as to address the troublesome issue of income inequality.
15. The NCUA should disclose, in a transparent manner, the ongoing resolution of the administrative actions taken by the agency during the corporate crisis, the proceeds received from the settlement or other resolution of the corporate crisis related lawsuits (including the amount of legal fees and other expenses paid), and the ongoing changes to the fair market value of the assets securing the agency’s guaranteed note program.
16. The NCUA should disclose, in a transparent manner, the stress test methodology the agency relies upon, particularly when the methodology is challenged by credit union internal or third-party analysis. It is inappropriate to inform a credit union that it is deficient under some metric without also addressing, in an open manner, credit union analysis to the contrary. Reasonable minds may differ on these matters and the agency should welcome the debate.
17. There are issues of fraud that plague a limited number of credit unions, and the NCUA should immediately redouble its efforts to address this problematic and thorny issue. It is distressing that over 40% of the losses to the NCUSIF are attributable to fraudulent activity within credit unions. With enhanced examiner training, the adoption of appropriate internal control and employee intake and supervision protocols, and meaningful input and counsel from members of the credit union community who have developed and implemented successful anti-fraud systems, I remain optimistic that the agency can identify and manage instances of fraud within the credit union system.
18. If necessary and appropriate, the NCUA should work with the FDIC and Comptroller of the Currency to thoughtfully minimize any ill-considered and adverse impact of the FASB’s efforts to change reporting of possible credit losses at credit unions and community banks under the CECL proposal. In my view, it is helpful that the FASB has agreed to consider the comments of credit unions and community banks regarding the potential unintended consequences of the proposed rule.
19. I encourage credit unions promptly to work together in good faith to develop and implement consumer-driven principals that guide programs such as overdraft protection, student lending, debt collection, and other similar issues.
20. Absent economic and regulatory circumstances, the NCUA cannot handle within its current operating budget, the agency should use its best efforts to decrease or, at a minimum, materially reduce the rate of growth in future operating budgets.
21. While the NCUA should without hesitation address cybersecurity threats within the credit union community, the agency should not use cybersecurity issues as a justification in support of a request for broad based vendor authority or the issuance of new rules in non-cybersecurity areas. Thoughtfully targeted, designed, and implemented vendor authority in the cybersecurity area, however, appears reasonable and prudent.

McWatters acknowledged that while it is easy to develop the “ideal or concept” of regulatory relief, the challenging part is to achieve the implementation of actual regulatory relief in the near to intermediate term. To accomplish that he said, is going to require the assistance of Congress, as “I fear business as usual will continue at the NCUA and more rules will follow.”

McWatters urged credit unions that will be hiking the Hill in Washington to take the issue up with members of Congress. “Discussing the deployment of a more positive approach to regulatory relief for well-managed, consumer-oriented institutions is certainly appropriate.”

Before closing, McWatters reminded his audience that he may be leaving the NCUA board, as he has been nominated for a board seat on the Export/Import Bank. But until he leaves, McWatters told credit unions, “I will continue to advocate for regulatory relief and the agency’s proper approach to the supervision of the credit union community. Regulatory relief is not merely useful. It is among the most fundamentally important concerns facing the credit union system today.”