With dueling legal opinions on NCUA's authority to implement a multi-tiered risk-based capital rule, the regulator could be facing a lawsuit.

When the agency released its first proposed risk-based capital rule in January 2014, the subsequent firestorm generated an unprecedented 2,056 comment letters. The regulator's revision, which it made public Jan. 15, has done little to quiet things.

Now, NCUA's board is confronted with the quandary created by two recently publicized legal opinions that reached contradictory conclusions as to its authority to enact a two-tier risk-based capital structure. As if that is not bad enough, the agency must also grapple with the suggestion put forward by one of its own current board members and two former board members (including one who served on the board while the rule was being crafted) that risk-based capital be dropped altogether.

And at least one of the two credit union trade groups — both of whom have long questioned NCUA's legal authority on this issue — refuses to rule out the possibility of taking legal action should the agency finalize RBC.

Given that the revised proposal resulted in a major reduction in the number of credit unions that would be required to raise additional capital, to 19 from an estimated 199, "the obvious follow-on question becomes, do we really need this," said Geoff Bacino, who served on the NCUA board from 2000 to 2001.

Michael E. Fryzel, who served on the board from 2008 through July 2014 when the rule was being promulgated, voiced a similar sentiment in an opinion piece he published in Credit Union Journal last Tuesday. "Having struggled through the new proposal, its accompanying documents and the statements of all three board members, I, like many others, am hard-pressed to grasp its purpose and value," Fryzel wrote.

In a joint statement last week, NAFCU president and chief executive B. Dan Berger along with his counterpart at the CUNA, Jim Nussle, said they "still have serious issues with [risk-based capital] and continue to question the necessity of the proposal."

Indeed, on Tuesday, CUNA added fuel to those doubts, releasing the text of an opinion it had sought from the Washington, D.C.-based law firm Venable. In the opinion, dated Sept. 18, 2014, Venable concluded the implementation of a two-tiered risk-based capital system by NCUA — the central component of the agency's proposed rule — "would be plainly unlawful."

NCUA has proposed implementing two risk-based tiers; 10% in order to be designated as well-capitalized, and 8% for adequately capitalized.

According to the Venable opinion, Congress has only given NCUA the authority to order a single-tier system.

But a separate opinion, requested by NCUA Chairman Debbie Matz and authored by the firm Paul Hastings LLC, concluded that Congress did authorize NCUA to implement a risk-based capital system. "We are of the opinion that under the current principles of applicable law and existing case law, a court of appropriate jurisdiction in a litigated matter or proceeding could conclude that the NCUA's statutory authority…permits the NCUA to establish proposed two-tier risk-based net worth requirement set forth in the proposed rule."

NCUA Board Member J. Mark McWatters, who voted against proceeding with consideration of the revised risk-based capital rule, was quick to note the Paul Hastings opinion was far more qualified than the flat out "plainly unlawful" verdict delivered by Venable. "As a practicing attorney, I have served on the legal opinions committee of large cross-border law firms and note that a 'could' opinion represents a relatively modest standard of assurance," McWatters said at the board's Jan. 15 meeting.

Bacino said Matz did the right thing hiring an outside firm to advise the board, but he added that the Paul Hastings opinion "gave me some pause."

"You really want some more positive word choice," Bacino said. "In this case, I would want an almost ironclad argument. Frankly it's not as ironclad as you'd wish."

Certainly, the existence of dueling legal opinions on a hotly contested issue hints at the possibility of future litigation if all the parties to the controversy cannot be satisfied. And while a final rule is still a long way off — last week's vote merely authorized publication of the revised proposal for a 90-day comment period — a lawsuit is not out of the question. In a recent interview with Credit Union Journal, CUNA's Nussle refused to rule out a legal challenge if his group's objections couldn't be reconciled.

For now, despite the ongoing controversy, NCUA is sticking to its guns. In a webinar Wednesday, officials said a multi-tiered risk-based capital standard is "more forward looking" than the leverage ratio since it does a better job of highlighting what they described as "outlier credit unions that don't hold capital sufficient for the risk on their balance sheets."

One former NCUA chairman supports the concept of risk-based capital-if it's done right. Credit union consultant Dennis Dollar, who has been the CEO of a credit union as well as having served on the NCUA Board, said he's leaving it to the lawyers to determine NCUA's legal purview on the matter, but that any risk-based capital proposal can be beneficial to the credit union industry if it has the proper risk weights and triggers-and if it opens the door to supplemental capital.

"I have long felt that a well-balanced risk-based capital program for credit unions, one that rewarded both lower-risk balance sheets as well as those who have proven their ability to manage the risk on their balance sheets while at the same time requiring some additional capital considerations for those with poorly managed high balance sheet risk, would be good public policy and open the door for much needed supplemental capital," he said.

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