NCUA BOARD MEMBERS HOOD AND HAUPTMAN ROLL CHAIRMAN HARPER, APPROVING LONG OVERDUE CUSO RULE

The NCUA Board today approved a long overdue CUSO rule that allows CUSOs – that already have the authority for over twenty years to do lending in the credit card, mortgage, student loan and business loan arenas – to also lend in the auto loan and personal loan fields. Basically, it allows CUSOs to make any type of loans that their credit union owners can make.

Makes sense. But it has been a long time coming because of various political dynamics at the NCUA Board level that have made it appear more controversial than it truly ever was.

One of those who has most adamantly opposed this expansion of CUSO authority was Todd Harper, both previously as a NCUA Board Member and now as NCUA Chairman.

Mr. Harper is seldom a proponent of regulatory empowerment and is much more often in favor of more restrictive regulatory approaches. Therefore, he never saw the merit of the argument that, in today’s competitive lending markets, there is a value in the scale and technological advancements that can come from credit unions working together collaboratively through the CUSO model.

He claimed that expanding authority CUSOs already have in the mortgage, credit card, student loan and business loan fields to include auto loans and personal loans would put small credit unions out of business, as if smaller credit unions are not among the primary beneficiaries of having CUSOs available to partner with them when they are otherwise losing out on loans because of their lack of scale.

How many smaller and moderate sized credit unions would have already decided to merge if they did not have CUSO partners like PSCU, Co-Op, CU Student Lending, CU Revest and others to help them compete with much larger financial institutions that can offer products through their scale that the smaller and moderate sized shops could not offer on their own?

The “protecting the small credit union” argument from uncontrollable CUSO growth is based in anti-growth philosophy much more than fact.

If the authority for CUSOs to lend in mortgages, credit cards, student loans, and business loans was going to cost credit union business, why has mortgage lending, credit card lending, student lending, and business lending grown by over 2000% since CUSOs were given that authority over twenty years ago?

CUSOs help credit unions compete. It is not in their DNA to compete with credit unions.

In fact, it should be pointed out that the CU in CUSO stands for Credit Union. A CUSO can only do what its credit union owners allow it to do and find benefit in its doing.

Chairman Harper also put on his consumer protection cloak with which he loves to don himself with his desire to turn NCUA into a mini version of the already existing and powerful CFPB to claim that CUSOs – unlike federal credit unions – are not subject to the NCUA’s usury limitations. Therefore, apparently, this would result in a “wild west” syndrome (to use his words) that would have usurious interest rates charged by CUSOs that credit unions themselves could not charge.

Interestingly, in a typical belief that no one can regulate as effectively as a federal regulator, this viewpoint completely misses the point that CUSOs are businesses chartered in their respective states and are, therefore, subject to the state usury laws enforced in all fifty states and the District of Columbia.

CUSOs will face usury restrictions on a state-by-state basis because they are, legally, businesses incorporated in the various states. This will only be the “wild west” if the states allow it to be – which they have not with any CUSO already offering mortgages, credit cards, student loans and business loans.

These specious arguments, founded much more in an anti-growth and pro-restriction regulatory philosophy than in any reality, were rejected by the two Republican members of the NCUA Board in what was a courageous and largely unprecedented action to roll a sitting NCUA Chairman by putting the CUSO rule on the agenda over his objections and then passing it by a majority vote despite his fierce opposition.

Although still getting his sea legs having only been on the NCUA Board for less than a year, Vice-Chairman Kyle Hauptman proved that his recent votes along with Chairman Harper on risk-based capital and several other issues would not be his default position when an issue of significance and important philosophical difference is at stake.

He proved, at least in this case, that his reputation as a free-market Republican who has written and testified about his belief in deferring to the marketplace over the government as the regulator when there is no compelling reason for government regulation is real.

Hauptman supported this final rule, which had been originally proposed during the chairmanship of his fellow Republican Rodney Hood, even though he was worked hard by Chairman Harper and those that shared his small versus large division promoting, anti-free market views that CUSOs will take over the credit union lending space – rather than be a facilitator of more lending for the credit unions that own them.

He deserves commendation for standing up for what most had felt would be his regulatory philosophy despite some early votes. And it appears that, since he has now cast his lot with the innovation and technology side of the industry that is so well reflected in CUSOs, he is better positioned to push his pet issue of crypto currency and block chain technology because, frankly, it is much more likely that the risk sharing reflected in the collaborative nature of multi-credit union owned CUSOs will be where the first major crypto and block chain push will come in credit union land.

So, Vice-Chairman Hauptman supported a good rule and furthered his own primary cause today. A good day’s work.

The real champion in this action today, however, was Board Member and former NCUA Chairman Rodney Hood.

I stated in an earlier Client Update several years ago when Rodney Hood was named NCUA Chairman by President Trump replacing mid-term Mark McWatters who had a year earlier been named NCUA Chairman by the same President Trump that anyone who underestimated Rodney Hood’s political skills did so at their own peril.

This coup on the CUSO rule is validation of that fact.

Yes, Rodney Hood is one of the nicest guys to ever serve on the NCUA Board. He is cordial and always the most positive guy in any room. No one meets with Rodney Hood and doesn’t come away saying what a great guy he is.

Some, however, confuse cordiality with weakness. That is not the case with Rodney Hood. He is both cordial and strong enough to roll a sitting NCUA Chairman when the issue deserves it.

When he was chairman, Chairman Rodney Hood spearheaded putting the CUSO rule out for proposal and opening the public comment period. He did so once Mr. Hauptman came onto the board in December of last year because former board member Mark McWatters, a Republican, sided with his fellow board member, Democrat Todd Harper, to refuse to move forward on the CUSO rule.

Some felt that McWatters, who had earlier supported the CUSO rule publicly before Hood replaced him as chairman, simply had a personal beef with Hood for the fact that the President replaced McWatters with Hood after McWatters served only about a year (and a tumultuous one with negative media coverage of McWatters expense accounts and a scandal in the NCUA General Counsel’s office during McWatters’ watch).

The inside scoop was that McWatters just didn’t want Hood to get credit for the CUSO rule so he joined with Harper to scuttle it.

For whatever reason, once McWatters was replaced with Kyle Hauptman, Chairman Hood struck in one of his last two board meetings as chairman before President Biden took office and was sure to replace him. He got the CUSO rule, as well as two other very consequential rules on service facilities and mortgage servicing rights, proposed and out for public comment before he left office.

Then, not sitting back and saying he couldn’t do anything further since he was replaced as chairman by Todd Harper once President Biden was sworn in, he continued to push the issue.

With the chairmanship now under the control of Mr. Harper and the control of the NCUA Board agenda in his hands, the only hope Hood had to proceed on the CUSO rule (and the service facility and mortgage servicing rights rules as well) was to either persuade Chairman Harper to give the issue a vote or to get Vice-Chairman Hauptman to go along with him to force the issue onto the agenda over the chairman’s objections.

When Chairman Harper would not compromise to allow a vote on the final CUSO rule, Board Member Hood went to his Republican colleague Hauptman and worked with him to develop a rule they could both live with and would be willing to override the chairman by putting it on the agenda and passing it 2-1 over his objections.

Hood was able to make that happen, with Hauptman’s support. It was a big deal – overriding the agency and board chairman to pass a regulation that he badly didn’t want.

And it was fascinating behind the scenes maneuvering that I’m sure I don’t even have the true story of everything that happened.

But from my sources at the agency, which if I say so myself are still pretty darned good seventeen years after I left as NCUA Chairman in 2004, this was 100% a Hood driven victory with a solid assist from Hauptman.

We have covered above the policy reasons this was a big deal today and the reasons credit unions should be pleased by this NCUA Board action. Credit unions and CUSOs will both benefit from this additional regulatory authorization to help the industry be more competitive in the auto lending and personal loan space as the market becomes more scale and technology driven.

But I’d like to give a couple of observations as a former NCUA Chairman about the political dynamic that this action represents on the NCUA Board and where this may lead in the months to come.

First, there is no question that Chairman Harper is the big loser here. He strongly opposed the CUSO rule but couldn’t stop it with the power of the gavel and the control of the agency staff.

From my days as chairman, I would have never allowed this to happen as it would appear that I have lost control of my own agency and board. I would have compromised as necessary to get the rule in shape where I could support it. The art of compromise is much better than the ugly picture of defeat.

Chairman Harper would not compromise. He preferred to continue to oppose and give a strong speech against the rule. That might score points with a White House that has already nominated him to continue to serve on the board as chairman, but it doesn’t paint a picture of a wise chairman setting the strategic vision for his agency.

In fact, it seems to show that the current NCUA vision for regulatory action is being driven by a former chairman (Hood) and a vice-chair (Hauptman) whose philosophy is much more in tune with the guy Harper replaced than Harper himself.

Harper is going to have to decide, now that his board has proven that they can together make policy over his objections, if he is going to become a mere contrarian on his own board or if he is going to compromise to bring about unanimity on future regulatory issues.

Hood and Hauptman have made their statement. They have staked their positions with today’s action on the CUSO rule. Now Chairman Harper must decide what his chairmanship is going to look like – a leader willing to compromise and bring about consensus or contrarian with a gavel and little else.

I have said before that, having known Todd Harper for over 25 years, I know he has good political instincts and is a seasoned Washington figure from his years on Capitol Hill as a key staffer. Given his experiences, one would think he knows and recognizes the value of compromise, even in this era where compromise sometimes seems to be out of vogue, if the alternative is to appear that you are apt to be viewed somewhat like today’s English monarch that reigns but does not rule.

With two very significant and also timely (if not actually overdue) proposals that Hood and Hauptman have put on the agenda for November and December that would classify shared branches, kiosks, and ITMs as service facilities for SEG expansion purposes and modernize the mortgage servicing rights authority between credit unions, Chairman Harper is going to have to find a way to compromise or he is going to have the hat trick of losses coming over the next two months’ board meetings.

The damage of ending the year 0-3 ineffectively losing on key policy initiatives as a chairman seeking Senate confirmation for another six-year term could be long lasting for Chairman Harper.

For his reputation and the effectiveness of his chairmanship, it is my hope that he moves from voting no and making speeches to actually engaging with his board to put forward good regulation and policy through compromise and consensus.

It can be done. I was a Republican NCUA chairman, but I served my first year in that role with a majority Democrat board. We passed RegFlex and incidental powers regulations, as well as repealed the burdensome Community Action Program (CAP), during that year of a chairman from one party and a board majority from the other.

The differentiating factor was a willingness to compromise and seek compromise. That will be the key to Chairman Harper’s effectiveness as well because, whether he likes it or not, Rodney Hood is on the board until 2023 and Kyle Hauptman until 2025. It’s gonna be a long dry spell for anything he wants to accomplish at the board level if Chairman Harper does not learn to build compromise and consensus.

One final thing from a political perspective that today’s passage of the CUSO rule clearly shows.

While NAFCU and CUNA supported the CUSO rule as did a number of state leagues, the trade association that kept the issue alive for the past three years and drove the narrative that resulted in its final approval today was the National Association of Credit Union Service Organizations (NACUSO).

Today’s action is a validation of the emerging influence of CUSOs and the credit unions that invest in them in general – and of NACUSO, in particular.

Nothing moves a trade association further up the influence ladder than success in getting a key agenda item enacted into law or regulation. NACUSO kept the advocacy train on the track and lined up the solid line of support cars behind them since the proposed CUSO regs first began to be discussed in 2018.

They have become a player in their own right.

Let’s keep our eyes on how this current political dynamic at NCUA plays out over the next two months with the service facility rule and mortgage servicing rule already on the agenda under the initiative of Mr. Hood and Mr. Hauptman.

We will, of course, keep you informed on these two important rules and provide you with our insider’s perspective from experience of what’s taking place behind the scenes to the best of our ability.

Until next time.

Dennis Dollar