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JUNE 5, 2012

Guest Opinion: Regulatory Modernization is Welcome News

By: J. Kirk Cuevas, May 29, 2012

Recently NCUA Chairman Debbie Matz announced an agency initiative to modernize its rules and regulations for federally insured credit unions. While this initiative has not yet fully materialized, any effort that will enhance the ability of credit unions to meet member’s needs and be more competitive in a rapidly changing financial marketplace is welcomed news. Admittedly, the NCUA’s definition of “regulatory modernization” may not be exactly the same as that of the credit unions it regulates. However, I think we can all agree that a more modern approach to credit union regulation is clearly warranted. To that end, it is encouraging that the agency has indicated a willingness to examine ways to modernize some of its regulations in today’s hyper-regulatory environment. Regulatory balance and flexibility are absolutely essential in today’s financial marketplace given the considerable amount of what many have characterized as “overreaching, never again” type regulations that have been implemented over the past several years as a result of the financial crisis. That is not to say that heightened regulatory standards and increased scrutiny were not warranted in many instances. Indeed, there were specific areas where additional layers of regulation were justified to maintain safety and soundness and restore public confidence. However, regulations of this sort should be properly balanced with a regulatory approach that results in the removal of some unnecessary regulations and a retooling of those that might actually have more negative impact on both job creation and safety and soundness than positive. Too often unnecessary regulations and overly restrictive interpretations result in missed opportunities, diminished member service and increased frustration with the agency.   Without question, our financial system requires an effectively balanced regulatory structure to ensure safety and soundness. However, regulation does not have to be excessive to be effective. In some cases, regulatory interpretations simply no longer make any sense. A perfect example being the requirement for a federal credit union to have a branch within 25 miles of a SEG it wishes to serve. Perhaps this requirement made sense when it was originally implemented but now seems an anachronism given the advances in technology and the enhancements in a credit union’s ability to deliver financial products and services via the internet and other electronic means. Rather than applying a one-size-fits-all reasonable proximity requirement to SEG expansion, a better approach would be to actually consider the credit union’s overall ability to serve the proposed SEG. Other examples of where regulatory modernization would be well-received by credit unions include, but are not limited to, giving the ability of credit unions with a TIP charter to serve SEGs; further expanding the definition of “in danger of insolvency” so that credit unions with unlike fields of membership can merge in a timely fashion and before capital is severely depleted; and making greater use of the agency’s investment pilot program. The examples above are just a few interpretations currently in place of many regulations on the books that merit serious reconsideration for modernization. While the list is fairly long and constantly evolving, the process of regulatory modernization has to begin somewhere…and maybe there is some early indication of possible movement in this regard. The agency’s recent proposal on the treatment of Temporary Debt Restructurings (TDRs) has the potential to be the beginning of a regulatory modernization approach that actually has some teeth to it. Although there was some fear that NCUA tinkering with the current treatment of TDRs might make the already cumbersome and punitive process even more so, the agency proved in this proposal that they actually do listen when credit unions effectively point out that – even more so than hurting the credit unions NCUA regulates and insures – their TDR policy was actually equally harmful to homeowners who would like to restructure their loans and stay in their homes. While not perfect and not going as far as some would like it to, the proposed amendments to the TDR process are significant improvements in the way credit unions will be required to treat TDRs and a clear step in the right direction. If NCUA would be willing to demonstrate this type of commendable flexibility as they evaluate comments on all of its regulatory proposals and interpretations it could indeed be the beginning of what might prove to be a much more positive outlook for credit unions on the regulatory front. Time will tell, but a sincere effort toward true regulatory modernization would be much appreciated in preserving the long-term viability of the credit union charter. Kirk Cuevas is a Partner with Dollar Associates, LLC and previously served as NCUA Chief of Staff and Counsel.

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