By Thomas Renz
NCUA Chairman Debbie Matz is suggesting that the new risk-based capital proposal is legal and that she asked for unbiased legal opinion regarding the new RBC proposal.
(CUToday.info has obtained a copy of that legal opinion letter.)
At issue is the specific question she asked and that the attorneys answered. She sites the Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (Known as “Chevron”) ruling as precedent, and seems to be choosing her words very carefully, as Board Member J. Mark McWatters has noted.
First, let me explain Chevron in non-legal terms. Essentially the Chevron case is a means by which we can determine whether an administrative agency’s actions (in this case the NCUA creating the new two-tiered RBC rule) is legal or beyond the scope of what Congress intended for the agency to be able to do.
Two-Part Test
In that case there is basically a two-part test set up to answer that question. The first is whether an action is specifically addressed in the words of the law. If it is, then the words of the law always supersede an agency’s authority to do something.
The second part of the test is related to what the agency can do if the text of the law is ambiguous. If it is, then the agency may create a rule based on its interpretation of the text as long as that rule “is based on a permissible [reasonable] construction of the statute.” The courts have given administrative agencies a lot of room for interpretation as long as that interpretation is reasonably related to the statute.
In the RBC proposal the relevant statute states that a CU is well capitalized if:
- It has a net worth ratio of not less than 7%.
- It meets any applicable risk-based net worth requirement under subsection (d) of this section.
Subsection (d) then discusses the risk-based net worth requirements for complex credit unions, which are generally defined by the NCUA board.
Chairman Matz’s interpretation is based on the fact that the NCUA is able to define standards for complex CUs to be considered well-capitalized. The problem with Chairman Matz’s interpretation is that under Chevron the plain text of the law rules, and it plainly states that the net worth requirement for a CU to be well capitalized is 7%. While the board may be able to set additional requirements for complex CUs, the overall 7% net worth requirement is plainly stated in the law and so it seems to me to be a stretch to suggest that the intent of the law was to only apply the 7% rule to CUs that are not complex.
The same arguments and interpretations would apply for the adequately capitalized category, since the language of the law is identical.
Ignores Statute Language
Chairman Matz notes that the legal opinion only supports proceeding with a two-tiered RBC comparable to banks, but stops there. Without more, that statement is quite clearly an oversight or simply misleading. The two-tiered system is created by statute, but the statute defines the tiers. I would be very interested to hear the reasoning behind a legal interpretation suggesting that the NCUA is authorized to ignore the plain language of the statute as appears to be happening here.
Further, the NCUA is not just bumping up the definition of well-capitalized by a few basis points, it is increasing the net worth requirements by a huge percentage. Even if we are to buy the Chevron deference argument for complex CUs, this much of an increase would seem to suggest that the 7% number included in the statute is completely meaningless.
Our industry needs to understand that what is happening with the RBC proposal is not only bad for credit unions, but probably also illegal. This second proposal is terrible, and only looks decent because of how bad the first was. The fact is, however, that just being a bit better than the first does not change the fact that it is still illegal and we must continue fighting this.
Thomas Renz is president of Commodore Perry FCU in Oak Harbor, Ohio.