Having been on the NCUA Board at the time the first risk-based capital rule (RBC) was proposed, I bear some of the responsibility for having put out for comment a rule that was riddled with mistakes, ambiguities and poor construction. Although I did question some of the risk weights, estimated cost and impact on the industry, I missed what I now believe to be the most significant point, the legal authority of NCUA to issue a two-tiered RBC rule.
When the rule was first proposed, it was put on a fast track without any input from credit unions. My feeling was that NCUA needed to get the industry involved in the rule-making process since credit union officials knew more about the issue than I or anyone on the board. They ran credit unions and therefore had a better handle on how the rule would impact their operations.
Not since the corporate crisis of 2008-2009 did credit unions express themselves with written and verbal comments as they did with the RBC rule. It was encouraging to see the industry respond with a record number of comment letters challenging NCUA's attempt to run their businesses. The interest shown by Congress and the numbers of letters received from them was also unprecedented.
NCUA has had a tremendous amount of time to review all the comments, speak to the stakeholders, hold town hall meetings, develop new drafts and evaluate them internally before deciding to again put them out for comment.
Usually, when you don't get something right the first time you try harder to do it better with your second opportunity. It's unfortunate that, despite the countless hours that have been expended by NCUA in an effort to get it right, it is my personal belief that although substantial changes have been made, it would be best for both NCUA and the industry if the new RBC proposal was put to rest.
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 in making the industry more safe and sound.
To begin with, the legality of NCUA to implement a two-tiered system has not been fully discussed and the authority shown to exist. I have always been troubled whenever a government agency uses tax-payer, or in this case credit union, funds to hire an attorney, pay for a written legal opinion and then fail to disclose its contents to those who paid the bill. It is unfortunate that it took a Freedom of Information request by a news source to get a copy of the opinion letter.
Although I respect the fact that attorneys may differ on the interpretation of a law, I believe the documents cited by Board Member McWatters raise substantial questions about legal authority and those questions deserve answers.
In my opinion, McWatters is on point with the Chevron document and his position is bolstered by the April 2007 NCUA White Paper, the June 2007 testimony of a senior NCUA official, as well as the letter from Speaker Gingrich and Sen. D'Amato's comments regarding Congressional intent. McWatter's view is further supported by the opinion letter, which, although supporting the position that NCUA has two-tiered authority, raises the question of ambiguous language in the statute as well as the law's failure to restrict the action NCUA looks to take. Those are the two areas the opinion drafters see as the strengths to withstand a court challenge. They believe a court "should" uphold any challenge but are not certain that they "will."
If there is disagreement about what a law may or may not say, you need to look at other sources or documents such as court decisions, written opinions, reference papers and the intent of the drafters of that law. If you do that in this instance, it can lead one to draw the conclusion that the NCUA lacks the legal authority to issue two-tiered RBC rules.
If NCUA were able to get beyond the legal question, the value of any rule that would impact a very small segment of the credit union industry must be questioned.
I have always believed that the implementation of a new rule should be the last resort in solving a problem. In this instance enhanced supervision and guidance is a more positive direction to alleviate any regulatory concerns. One must question that if the concern is so great now, why would you wait three years before implementing a rule when it could be handled now with guidance and supervision.
The additional 90 day comment period will help if the rule moves forward. Questions regarding secondary capital, definition of complex credit union and risk weights will be asked and hopefully the concerns raised will be properly addressed with positive changes made.
The cost of implementation has also been questioned. The three-year roll out cost is estimated to be over $3.7 million. Just one comment: like any cost estimate at NCUA, it will be greater.
So now in phase two, RBC redux will continue to be subjected to questions and criticism.
NCUA needs to work a little harder to prove its legal authority, to show that the rule is really needed and to make it the least intrusive and best possible for the credit unions they regulate and insure.
A lot of time and money has been expended and a lot more will be. It will, however, be worth it if the final product is one that balances safety and soundness with common sense and practicality.
Michael E. Fryzel is an attorney and consultant to the financial services industry with offices in Chicago. He is a former NCUA chairman and board member. He can be reached at email@example.com.