The NCUA Board held its annual public budget briefing on Wednesday and is scheduled to vote on the agency’s 2022 budget at next week’s NCUA Board meeting.

The fast turnaround in making the proposed budget public and the scheduled action by the NCUA Board on the budget was highlighted by comments from NCUA Board Member Rodney Hood as not providing enough time for either the Board or stakeholders to adequately review the budget.

Historically, the NCUA budget briefing – which we began during my administration as NCUA Chairman and has stayed a part of the NCUA “transparency to the stakeholders that fund the agency” process since 2001 other than during the seven-year tenure of former NCUA Chair Debbie Matz who cancelled the briefings during her time as chair – takes place in early November in order to provide a longer period of time for both the board and stakeholders to review the budget.

The biggest problems with the proposed budget came from both Vice-Chairman Kyle Hauptman and Board Member Hood as both questioned the size of the budget increase and the dramatic increase in agency staff proposed for 2022.

The proposed NCUA operating budget is $326.6 million – a 3.6% increase from the 2021 operating budget.   Of course, NCUA did not spend all of the 2021 budget so the increase in the proposed 2022 budget is actually going to be considerably higher (probably in the vicinity of 8% or more as there is a projected $23 million underspend from the 2021 budget) once the final spending numbers from 2021 are made available after the end of the year.

The majority of the increase is in the request for 48 new NCUA staff to be hired in 2022, mostly in new examiners – including a priority of increasing the examiner presence in the arenas of consumer protection, fair lending and cyber security.

The agency currently has 34 unfilled vacancies.  Therefore, as was pointed out by both Hauptman and Hood, there is projected to be 82 new staff hired at NCUA in 2022 when the number of federally-insured credit unions has now fallen to an all-time low of just below 5000.

Chairman Todd Harper is pushing the budget increase, as well as the hiring numbers to be at an all-time high.  He made the point that, although this budget is a “starting point” which means it could go either up or down, he sees the need for a much stronger agency presence in the aforementioned fields of consumer protection, fair lending, and cyber security.

From the comments of Hauptman (“no correlation” between the staffing increases and the diminution of credit unions to supervise) and Hood (the budget is a “non-starter” in which he is “disappointed” in its “exponential” growth), it appears that there will be a behind-the scenes battle over the next week as to whether the budget will be revised and, if so, how much in order to get a majority vote.

The main reason credit unions should watch the budget battles at NCUA each year is that the budget allocations are a precursor of where the agency is intending to go in their supervisory (examination) approach in the coming year.

While Chairman Harper is to be commended for keeping the public budget briefings and not following his mentor as chair Debbie Matz who suspended them for seven years, his effort to squeeze the board into a tight timetable of little over a week between the budget briefing and the scheduled board vote on the budget could well backfire.

If neither Hauptman nor Hood get on board, NCUA might have to start 2022 with a continuing resolution (similar to what Congress does when it cannot agree on a federal budget) that leaves the 2021 budget in place for the new year until a budget is agreed to.

Since the 48 new staff that Chairman Harper is pushing are not funded in the 2021 budget, a continuing resolution would cost him his budget and staffing increases.

For that reason, expect to see some type of compromise between the chairman and his two board members with strong reservations about the proposed 2022 budget.  If not, the agency will go into 2022 with the same budget as 2021.

Compromise is essential when a chairman from one party and regulatory philosophy is facing a board majority from the other party and regulatory philosophy.  Nowhere does that divide become more obvious than at budget time.

Hopefully, Chairman Harper shows the leadership to compromise on the budget as he did on the recently enacted in November service facility rule that was amended and approved 3-0 – rather than as he went down in a 2-1 defeat as he did on the October action on the new CUSO rule.

If so, a fairly even budget for 2022 will be approved with the existing vacancies being filled but any new staff being postponed for reconsideration at mid-year budget review or perhaps in 2023 – or something similar with much fewer staffing increases.

Credit unions should be watching the final action on the budget to determine if the Harper approach or the Hauptman/Hood approach prevails.  The results will let credit unions know what type of exams to expect in 2022, either the standard safety and soundness exams that have resulted in a strong and robust capital position for credit unions nationwide or a more expanded exam with more consumer protection, fair lending exams for disparate impact, and cyber security demands.

While cyber security rightfully remains a top priority and any compromise in the staffing arena by Hauptman and Hood could come in this area, the case for more consumer protection and fair lending examiners seems to be based upon consumer complaints and disparate lending impact concerns that have not been evidenced in recent years.

Without evidence of the need for more examiners in these areas that will still be on the agency payroll ten years from now when the number of credit unions is down below 4000, the foundation upon which much of the budget and staffing increase outlined at this week’s NCUA budget briefing is somewhat shaky.

Until next time.

Dennis Dollar