DEMOCRATS RETAIN CONTROL OF THE SENATE WITH IMPACT ON NCUA IN 2023

Since my post-election Client Update of last Wednesday, there has been some clarity as to the mid-term election results as they relate to which party will control the United States Senate for the next two years.

The results from Arizona and Nevada, which were pending a final projection as to the winner as of last week, have now resulted in the Democrat winning both senatorial races.  This gives the Democrats fifty senate seats for the upcoming Congress.  With the ability of the Vice-President to break any tie, the control of the Senate will stay with the Democrats for two more years regardless of what happens in the Georgia runoff on December 4.

With the Democrats maintaining control of the Senate, we would like to revisit our earlier conjecture as to what might happen with the NCUA Board in 2023.

Now that the Democrats control the nominating process for NCUA Board Members through the Biden White House and the confirmation process through their majority in the Senate, it is a virtual certainty that a Democrat nominee to the NCUA Board will come in 2023 when current Republican Board Member Rodney Hood’s term expires in August.

And it now becomes equally almost certain that the Democrat controlled US Senate will confirm that nominee.

Therefore, by the end of 2023, credit unions can – barring some totally unexpected political event – expect that current NCUA Chairman Todd Harper will have a like-minded fellow Democrat as a second vote on the NCUA Board for his regulatory agenda.

Likewise, it is just as likely and virtually certain that Republican NCUA Board Vice-Chairman Kyle Hauptman (who was elected to the vice chairmanship with a Republican majority of himself and Mr. Hood shortly before the Hood chairmanship came to an end and Chairman Harper took over in 2021) will no longer be vice-chairman after the new Democrat board member is sworn in.

In order to firmly entrench himself as the NCUA Chairman with total control over the agency’s direction, Chairman Harper will want to reward his second Democrat with the vice-chairmanship as a sign of political unity and a solid two-vote majority in lock step as they control the regulatory process at the agency.

What will be the impact on policy?  I think it is a two-fold answer.  Short term and long term.

Short term.  Throughout 2023, the question will be whether Vice-Chairman Hauptman and Board Member Hood combine their vote to force certain budgetary and regulatory changes at the agency while they still have the majority.

For example, Vice-Chairman Hauptman’s consistent push on both crypto currency and blockchain technology has never had great support from Chairman Harper.  However, he has gone along with some NCUA guidance and communications to satisfy Hauptman and hopefully earn his second vote on issues of importance to Chairman Harper (see the succession planning proposed rule that Mr. Hood opposed but Mr. Hauptman joined Chairman Harper to approve).

With a second Democrat on the board, Chairman Harper will not have to make any concessions on crypto or blockchain in order to get a second vote.  Vice-Chairman Hauptman’s push for any actual agency action in this area of priority for him will be almost certainly put on a back burner when Mr. Hauptman becomes just minority Board Member Hauptman without a second vote.

With Mr. Hood’s departure, Mr. Hauptman will be much more lonely on the NCUA Board.  He and Hood have combined forces for some key wins, including the service facility rule, the updated CUSO rule and the mortgage servicing rule.

The question of whether they join together on other such issues in the last year they are likely to have together in 2023 or whether they merely bide their time until the Democrats take over the NCUA Board is yet to be seen.

Knowing Board Member Hood and his record, it is likely that he will push the envelope on the NCUA Board during his last year.  Vice-Chairman Hauptman is the key as to whether Hood gets anywhere.

If Hauptman (knowing that his days are numbered as a part of the majority and as vice-chairman) teams up with Hood, they could have a powerful and productive 2023.  However, if Hauptman decides to try to partner more with Chairman Harper in what will likely be a futile hope of saving his vice-chairmanship in the name of bipartisanship, Mr. Hood will not have as strong a finish to his tenure on the NCUA Board as he might have hoped.

In the event he cannot get solid support from Hauptman for a 2023 agenda, the possibility of Mr. Hood beginning to look for post-NCUA opportunities that could have him resigning early to take another job and accelerating a Democrat appointment to fill his seat before the term actually expires in August could become much more likely.

This will be the dynamic to watch short term.

Long term, Chairman Harper with a second Democrat NCUA Board Member (almost certainly as Vice-Chairman) will be able to push hard and win on his position in favor of a much-expanded NCUA agency budget.

More hires, particularly in the consumer protection arena, are quite likely as Chairman Harper moves forward on his efforts to make NCUA as activist as the CFPB on consumer related issues such as overdraft fees and disparate impact on lending.

A major climate change agenda, as has been the focus of many of Chairman Harper’s recent public remarks, is also quite certain to move forward.  How it manifests itself and what it requires of the industry is yet to be seen, but it would be very unlikely for Chairman Harper and his Democrat Vice-Chairman not to push something through that would validate their green bona fides to the Biden administration that put them there.

A NCUSIF premium to bring the equity level closer to 1.5% and an operating level near to the same would almost overnight become much more likely.  Despite Chairman Harper’s repeated statements of his belief the NCUA equity level is too low in the 1.25% to 1.3% range, he has not had a vote from either Hood or Hauptman to proceed with a premium.

With a second vote, a NCUSIF premium in 2024 becomes much, much more likely.

Again, the succession planning rule – proposed but not finalized yet – is a virtual lock to become a final rule that puts NCUA squarely in the middle of the credit union executive hiring, pay, benefits and retention process.

This is just a quick overview of what you can expect short term and long term at NCUA from the recent election results that have the Democrats still in control of the US Senate.

Control of the House is still officially up in the air.  The Republicans seem to have a slight upper hand in securing a very close House majority, but that is not a certainty.

If the GOP takes the House, it will be a check and balance on the Democrat controlled Senate as far a major legislation is concerned.  However, a Republican House will have no impact on the composition of the NCUA Board as those nominations are made by the White House and confirmed only by the US Senate.

GOP House control will almost certainly mean that NCUA’s vendor examination push will not pass; however, neither will increasing the MBL cap or expanding FOM into more underserved areas.  Taxation of credit unions and applying the Community Reinvestment Act (CRA) to credit unions will also be pretty much a no-go if the Republicans take the House.

However, if the Democrats are able to eek out a small House majority as well, all bets are off with the Democrats controlling the White House, Senate and House heading into the 2024 presidential election year.

NCUA vendor authority would then become very likely, as would CRA for at least the larger credit unions.  Taxation would still be a tough sell, as would the MBL cap increase or underserved area expansion.

So keep an eye on the House, we will do the same and provide you with our thoughts once those results are final.

But the Senate control was decided this past weekend and we wanted to bring you up to date on our expectations regarding NCUA impact.

Elections matter.  And we’ll continue to track them with an “eye on credit unions” view.

Until next time.

Dennis Dollar