AUSTIN, Texas — NCUA Board Member Mark McWatters said regulators must be willing to listen to the industry it regulates to be effective—but that doesn't necessarily mean regulators will listen to each other.

Speaking before a standing-room-only crowd at the Cornerstone Credit Union League's annual meeting Thursday, McWatters once again called into question the legality of the agency's second draft of its proposed risk-based capital plan.

"The proposed risk-based capital rule is illegal per my reading of the Federal Credit Union Act," McWatters said. "In 2007 there was an NCUA white paper that said there could not be a two-tiered risk-based capital system — in other words, the white paper agreed with me. A few years ago Larry Fazio testified before the NCUA board that there could not be a two-tiered risk-based capital system — in other words, he agreed with me. Magically, this has all changed."

It's a message McWatters has been hammering away at for some time, and while credit union executives are only too happy to hear it, his colleagues on the NCUA Board aren't. In fact, when Credit Union Journal asked how his fellow board members have responded to him, he said they don't.

"They are ignoring me," he said.

After NCUA heard complaints by the credit union trade associations and other parties regarding the legality of its proposed risk-based capital rule, the regulator responded by asking a law firm to give it a review.

McWatters — who has a business degree, an MBA in finance and a law degree, and is a former practicing attorney — detailed the various levels of findings such a review might garner, ranging from the most sure, that a court "will" accept an opinion, which he said translated to 90% or more certain. Next, that a court "should" accept an opinion, which could be thought of as two-thirds to 75% certain. One more step down is a finding that a court "more likely than not" will accept an opinion, which is 51% to 49%. Finally, there is a finding that a court "could" accept an opinion, which he described as a 33% chance.

When the outside law firm reviewed RBC2, it gave it the tepid "could" rating, McWatters noted.

"NCUA paid $150,000 for a 'could' opinion on the regulation," he said. "CUNA hired a law firm that gave an opinion that a court would not agree. This thing is a mess right now."

McWatters said he raised the objection internally, including going to the office of the general counsel. The response: McWatters was told he is misreading the statute. However, NCUA subsequently produced a document with footnotes that referred to the 2007 white paper, which, he noted, says there cannot be a two-tiered risk-based capital system.

"We do not want a regulation that does not comply with the statute," he said.

McWatters urged credit unions to make NCUA aware of any concerns they have regarding RBC2.

"If you have something to say about the second risk-based capital rule, send in a comment letter. Use your own words rather than signing off on someone else's form letter," he advised.

Year Of Regulatory Relief

"2015 is going to be the year of regulatory relief, I hope," McWatters said. "Two things are on the agenda: field of membership and member business lending. No one is walking into my office and asking what I think the rule should be, but when it comes time to review the drafts I do not want hypothetical regulatory relief, I want to actually help credit unions with practical regulatory relief."

McWatters asked attendees to tell him about regulations they would like to see changed.

In response to an audience question regarding member business lending, HR 1151 and CUs chartered for purpose of making business loans, McWatters said a "great thing about being the new guy" is simply reading the law that relates to a subject. Based on his review, he said there is a "hole in the statute" relating to the 12.25% of assets cap.

"Look at the Federal Credit Union Act itself, on both member business lending and field of membership there is a general rule and then exceptions."

According to McWatters, the exceptions to the MBL rule should allow a number of credit unions to continue to make business loans in excess of the cap. When he brought this to the attention of others at the agency he was told those portions have to do with CUs that already were making business loans. However, he pointed out, there is no use of the phrases "grandfather" or "grandfathered," yet such words do appear just a page later on the field of membership exceptions.

"This is the problem, once the bureaucracy makes a decision, there needs to be a more enlightened view to get something changed — which does not happen often in D.C.," he said. "NCUA insists MBL exceptions are a grandfather clause, but that is not what the statute says."

McWatters said the statute sets up the possibility of an "odd" scenario: If someone running a credit union is at the MBL cap, he/she could form a new CU primarily for member business lending, then reverse merge the old credit union into the new one, then the cap would not apply.

"If the goal is to allow more member business lending, people have to think creatively," he assessed.

Someone from a CU in South Dakota wanted McWatters to perform a review of "rural districts" due to sparse population in his home state that limits growth. What CUs need in those cases is to have the opportunity to expand, but existing FOM rules do not allow expansion. A state charter works better than federal charter in these cases, the person said.

McWatters said he "struggles" with the idea of geographic limitations and "seemingly arbitrary" rules about distances.

"In a digital age do we need this? It is not hardwired into the statute, so why do we need this? My two kids want to do everything on their iPhones."

Another audience question concerned the possibility of getting less-frequent examinations if the current exam goes well. McWatters said in his opinion it would be an "incentive" to achieve high CAMEL scores to allow those CUs to be examined 18 months later rather than 12 months later. "It makes no sense to drop those that were given a good score in the same bucket with those that did not."


When Dick Ensweiler, president and CEO of the Cornerstone CU League, introduced McWatters at the start of the breakout session he said McWatters "understands what we are trying to do, and agrees with us that overregulation does not help anybody, especially the consumer."

Indeed, conference attendees were staking out spots in the room in which McWatters was scheduled to speak more than 45 minutes prior to the start of the session. When one person entered and saw several folks already in seats he said, "I thought I would be the first one here." To which another replied, "He's a rock star."

McWatters said getting out and meeting credit union representatives is "one of the most important things" he does as part of his job. He said some people go into government jobs and simply sit in their office.

"That is not part of my personality — I listen to the subject matter experts. I also listen to the people I am purporting to regulate," he said.

In his legal practice McWatters represented the "too-big-to-fail" banks. "I did not represent credit unions, so I have to know what I know and what I don't know. I need hear from you what it is like to try to execute a business model with regulations from NCUA hanging over your heads. I want to try to come up with a reasonable approach to regulation."

If he were to be appointed to the Food and Drug Administration to approve drugs, McWatters said he would have to be "very cautious" because he does not have the expertise. "Some of those appointed to the NCUA board do not have expertise so they are cautious. Some use a shotgun approach to regulations," he said.

NCUA regulations should not be a shotgun, they need to be a rifle," McWatters continued. To do this, "I need to know what my target is. People ask me why my approach is different from the other two board members. I draw back to what mentors taught me when I was a young lawyer — the best idea has to prevail."

During his Senate confirmation last year, McWatters heard the NCUA board had said there would not be a second comment period for risk-based capital.

"That is nonsense," he declared. "It took me 30 seconds to realize after 2,000 comment letters there needed to be a second comment period — that was the best idea. Ideas have to be challenged. The clients I worked for were being charged a fortune for every hour I worked, and if they did not get the best ideas they would not be happy. I don't care if someone is 45 minutes out of law school or 33 years, there needs to be pushback."

When presented with a complex problem, often the simplest solution is the best, said McWatters. He said many have witnessed lawyers make a simple issue look complex, "because that makes them look smart." The best lawyers, he said, make the complex be simple.

"The best ideas must prevail, ideas must be challenged and we have to constantly ask if this is the simplest way to do something. Those three things guide me every time we are reviewing something."

Someone recently asked McWatters if he thought he has made a difference at NCUA. He said he uses the analogy of the "whack-a-mole" game, in which players use a rubber mallet to strike faux rodents as they pop up one after another.

"There are regulations that would have been proposed, and regulations that would have had sharper edges on them, but for my pushback," he said. "That is what I hope to continue to do."

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