BIG NOVEMBER NEWS REGARDING NCUA BOARD…CHANGES ARE TAKING PLACE

As predicted in last month’s Client Update, it appears that the NCUA Board will look much different in January 2021 than it did in October 2020.

Kyle Hauptman, a Republican and President Trump’s nominee to fill the seat previously held by another Republican Mark McWatters, has now cleared the Senate Banking Committee and is scheduled for a full Senate confirmation vote sometime this week.

Despite the predictions from a number of pundits who had been stating their views that Hauptman was less than 50-50 to ever get on the NCUA Board now that President Trump was not re-elected, it seems clear that the nomination and confirmation of a second Republican board member is virtually a done deal to be completed before Democrat President Joe Biden takes office in January 2021.

With the likelihood but without the assurance that it will maintain the Senate majority after the two Georgia Senate runoffs are decided on January 5, the solid GOP majority in the US Senate is moving to approve as many Republican federal judges and regulatory board nominees as possible.

Kyle Hauptman is, as we called it back in October, going to be a beneficiary of this Republican Senate majority action.

He will most likely be on the NCUA Board by the time of the December NCUA Board meeting – certainly before the Senate breaks for the Christmas holiday.

WHAT HAPPENED WITH BOARD MEMBER MCWATTERS?

 While most credit unions were preparing their Thanksgiving turkey, there was some significant action that took place relative to the NCUA Board seat Kyle Hauptman will be filling in the next few weeks.

Less than 24 hours after he had publicly stated his intentions at the November NCUA Board meeting to remain in his NCUA Board position until the Hauptman confirmation took place, Board Member Mark McWatters resigned his seat on the NCUA Board the Friday before Thanksgiving.  His chief of staff and other support staff followed suit by resigning effective the next business day.

A number of credit union observers were surprised that Board Member McWatters would so abruptly resign when he had so strongly stated his intention to remain just a day earlier.

In actuality, the pending departure of Board Member McWatters – not by resignation but at the request of the White House – had been rumored by many on the inside at NCUA and at the Trump administration for several months.

Based on information we have been able to glean from contacts both inside the White  House and NCUA, it appears that the sudden resignation was an option provided Mr. McWatters in lieu of the President terminating him.

While not often taken, this action is not without precedent at NCUA when holdover board members overstayed their welcome from the White House.  It happened when the Clinton administration asked NCUA Chairman Norman D’Amours to resign at the end of the Clinton second term in December 2000.  It also happened when the Bush administration asked NCUA Board Member Yolanda Wheat to leave the NCUA Board in December 2001.

In reality, the seeds of the McWatters departure were planted over two years earlier during his year as NCUA Chairman.  From our sources both within NCUA and at the Trump White House, the President and his personnel office became less and less enamored with McWatters as NCUA Chairman shortly after President Trump handed him the gavel in early 2017.

First, there were concerns with policy issues as Chairman McWatters departed from his earlier positions previously held as a NCUA Board Member on unlimited NCUA vendor authority, expanded CUSO authorities and budgetary discipline at the agency.  Credit unions began to scratch their heads and those with congressional and White House contacts began to complain that McWatters was not performing as the free market regulator in his chairmanship role that he had taken when he opposed the previous Democrat Chairman Debbie Matz during her tenure as NCUA Chairman.

Having earned his bona fides with Republicans in Congress and at the White House sufficient to be considered by President Trump initially for the then-vacant CFPB directorship or possibly as a member of the Export-Import Bank Board due to his opposition to the Matz era risk-based capital rules, discontinuation of public budget briefings and several other activist regulatory initiatives, McWatters ascended to the NCUA Chairmanship flying high in the new Trump administration.

Then, following the about face on vendor authority, CUSO authorities and the budget issues, Chairman McWatters pushed through a very unpopular (and many believed unnecessary) merger disclosure rule that was much more SEC-like in its approach than credit union-like.  The feedback provided to the White House on the merger disclosure rule was quite unrelenting in its opposition and fostered belief among many in the credit union movement that Chairman McWatters was treating not-for-profit, member-owned financial cooperatives more as publicly-held, for-profit entities when it came to merger disclosures and process.

These policy reversals, although unpopular among Republicans on Capitol Hill and not in line with the Trump administration regulatory philosophy, might not have brought the White House to the point of wanting to replace him as NCUA Chairman were it not for a series of negative publicity articles about Chairman McWatters in the influential Washington Post during 2017.

First, a story about the fact that Chairman McWatters had never relocated to Washington and was trying to run a federal agency the size of NCUA from his home in Dallas did not sit well with the White House.  They had, reportedly, spoken with McWatters when he was designated chairman about his reputation for never being in Washington as a board member.

Even with assurances reportedly being given that he would chair the agency from Washington and not from afar in Dallas, the article on McWatters (which was in all likelihood probably driven by some of those who supported other candidates for the CFPB position that news reports still had McWatters in consideration for) stung the White House personnel team.

The Trump White House considered it an unnecessary black eye that one of their agency heads never came to the agency headquarters except a couple days a month around a board meeting date.

This McWatters chairman-from-afar complaint was very publicly referenced and was a steady drumbeat of criticism throughout NCUA, credit union cirlces and on Capitol hill.  Even though McWatters traveled around the country and overseas on the agency dime quite often as chairman, he was rarely on site to help manage the agency he was charged with running.

While McWatters was undoubtedly a brilliant attorney and generally regarded as more than capable to serve as the head of the agency, he was viewed by many at NCUA (and ultimately at the White House) as a somewhat ineffective chairman because he was almost never on site to lead.

In his defense, as a board member Mark McWatters was able to be one-third of an NCUA Board without the necessity to be on-site at NCUA Headquarters.  The problem came when he became chairman, official spokesperson for the agency, agenda setter for NCUA and direct supervisor over the NCUA staff on behalf of the NCUA Board.

Having served as both an NCUA Board Member and as NCUA Chairman, I can speak from experience that the demands on and the influence of a NCUA Chairman is much greater than that of a NCUA Board Member.  It is essential to be an effective chairman that the head of NCUA be on the ground at agency headquarters to exert maximum influence and to direct the staff on an ongoing basis.

Unfortunately for him, the dissatisfaction at the White House over Mr. McWatters absence from NCUA Headquarters was exacerbated when a follow-up story in the Washington Post appeared a few months later and headlined with several stunning examples of a lack of expense account discipline in the Chairman’s office.  $400 bottles of wine and $6000 first class overseas airline tickets proved too much for the White House from the chairman of a small agency who, in their view, almost never came to work.

These stories combined with growing rumors (eventually disclosed by the NCUA Office of Inspector General shortly after his replacement as Chairman) that the NCUA’s Office of General Counsel had a major scandal brewing about strip clubs and marijuana usage on agency time during the time Chairman McWatters was so seldom in Washington, by early 2018 the Trump White House was reportedly ready for a change at NCUA.

THE MCWATTERS/HOOD FEUD

 Even though he had several months left on his term, reports are that McWatters was on the outs at the White House as of early 2018 when the Rick Metsger seat on the board was up for nomination and confirmation.

The White House were quite high on former NCUA Board Member Rodney Hood as their nominee for one of the NCUA Board slots while Democrat Todd Harper was to be nominated for the remaining slot that had previously been held by Debbie Matz before her resignation in 2016.

Hood carried a great deal of political weight at the White House both because of his background at NCUA and his political chops in his home state of North Carolina.

Interestingly, according to out White House personnel office sources, the Trump personnel team decided they would like to change NCUA Chairmen at the same time they nominated the two new board members.

Reports are that they offered the chairmanship to Rodney Hood who would then become the first African-American to head a federal financial regulatory agency.  Mr. Hood, very interested in the position but not wanting to start out his term by booting a sitting Republican chairman if necessary, honorably said he would be willing to wait, serve on the board in the meantime and become chairman when McWatters term expired in a matter of months.

The White House, reportedly because of both their dissatisfaction with McWatters and their very strong support of Hood, insisted that they were ready to make a change at NCUA at that time and, even though they were high on Hood, if he did not want the position as Chairman, they would have to go out and find someone who did.  They were ready to move on from Chairman McWatters.

Mr. Hood, as would anyone interested in public service when so requested by the President of the United States, stated that he would serve whenever and wherever the President so desired.  That gave the White House what they needed to proceed with a chairmanship change at NCUA.

Within a matter of weeks, Rodney Hood was nominated to the NCUA Board as a Republican at the same time Todd Harper was nominated as a Democrat.  Everyone assumed McWatters would continue as Chairman – everyone except the White House.

In a true surprise, President Trump designated Rodney Hood as NCUA Chairman immediately upon his confirmation to the NCUA Board in 2018.  Todd Harper came on the Board as a Democrat board member, and Mark McWatters returned to a NCUA board slot (a position he had earlier served in before President Trump had designated him as chairman a little over a year earlier).  This was, if you look at the timeline, a significant action by the President of the United States who had earlier made him chairman that could not be viewed as anything other than a rebuke of McWatters and a vote of confidence in Rodney Hood.

This was, as almost all insiders would validate, the beginning of the McWatters-Hood feud.

Rather than blame the President who made the change, over the next few months it began to appear that Board Member McWatters was beginning to harbor considerably resentment toward – not President Trump who replaced him – but toward Chairman Hood for his being replaced.

This is somewhat natural in the political arena because those who get replaced from a position that serves at the “will and pleasure” of the President often want to place their reason for being removed from a position anywhere but at their own feet.

So, instead of self-examination about not being at NCUA Headquarters sufficiently to be an effective chairman and recognizing that the bad publicity surrounding that lack of on-site leadership and the expense report scandal had hurt him with the very Trump administration that had put him in the chairmanship to begin with, Board Member McWatters (other than in a handful of early votes) began to publicly side with his Democrat colleague Todd Harper on a number of issues.

The results of the McWatters-Harper partnership gave a series of high profile losses to Chairman Hood, including several examples where he could not get a second for a motion to move forward with one of his regulatory initiatives.

The McWatters-Harper cooperation at Chairman Hood’s expense became most evident in December 2019 when the agency’s 2020 budget was being debated.

While he ended up reluctantly voting for the budget rather than to leave the agency without one, McWatters was obviously supportive of the larger budget and expanded consumer protection department within that budget proposed by Board Member Harper.

We have it from a very well-placed source at the White House that the personnel office was ready to ask for McWatters resignation at that time in December 2019.  Our understanding is that Chairman Hood intervened and asked the White House to give his fellow Republican McWatters another chance.

That turned out to be, if it indeed was the case, a political error in judgment (however, well intended it may have been) by Chairman Hood as Board Member McWatters and Board Member Harper became closely even more closely aligned on policy issues during the course of 2020.  The two of them practically became a two-vote veto authority over any Hood proposal.  As a result, the agency board was essentially stymied throughout all of 2020 due to the two-to-one dynamic at the NCUA Board.

Hood had to postpone a number of his initiatives because he lacked the two votes he needed to proceed.  McWatters and Harper, although now paired in their opposition to many Hood proposals, could not get their initiatives on the agenda that Chairman Hood controlled.

Covid notwithstanding, 2020 was not a particularly productive year at NCUA.  And it was much more driven by the board dynamic than by the global pandemic.

So, there you go.  That is some of the inside baseball and background behind last week’s action by the White House, now that Kyle Hauptman is only one step away from Senate confirmation, to ask for the resignation of Board Member McWatters.  This time, with a new GOP board member within a few days of confirmation, Chairman Hood apparently did not use his considerable influence with the Trump White House to intervene.

It was time to end the feud.  And President Trump, with the obvious blessing of Chairman Hood who did not intervene on his fellow Republican’s behalf this time, ended it.

NOW WHAT HAPPENS?

 We are going to have an interesting period coming at NCUA beginning in January 2021.

Democrat Todd Harper, whose has less than one year remaining on his term that expires in April 2021, will almost certainly be designated as NCUA Chairman replacing Republican Hood within the first few weeks following the Biden inauguration in January 2020.

Although his term is expiring only a few months later, Chairman Harper will hold the gavel until he is replaced or leaves for another opportunity.  He will have the authority to set the NCUA Board agenda.  He will supervise the senior staff on behalf of the NCUA Board.  He will be the spokesperson for the agency.  The public affairs and congressional staff will be his appointees and no longer Hood appointees.  Clearly this change will have a significant impact in the direction of the agency going forward.

But, Chairman Harper will almost certainly have a Republican NCUA Board majority consisting of Rodney Hood and Kyle Hauptman to deal with.

Without two votes to support his initiatives, having the corner office at NCUA leaves a chairman somewhat like the Queen of England – the ability to reign but not to rule.

Compromise will be required for anything to get done at NCUA.

Without Hood and Hauptman, Chairman Harper will be able to control the agenda but will be unable to prevail on the issues.  However, in his favor is the fact that not too many other Democrats will want to come to NCUA as Chairman with a GOP majority fully in place.

So it is quite possible that Chairman Harper may be chairman for a longer holdover period than normal.  We would not be surprised to see him remain as a holdover Chairman well into 2022.

With his considerable political abilities and standing within the Democrat party resulting from his advocacy positions thus far as a NCUA Board Member, it would be a mistake to assume that Chairman Harper will not have considerable influence at NCUA during his time as chairman.

However, without working with the GOP majority of Hauptman and Hood, Chairman Harper will have a tough time with any major initiatives.

Hood and Hauptman, on the other hand, will have the two votes to pass any regulatory proposals they desire if they can get them on the agenda controlled by Chairman Harper and can prevail upon a staff that reports to Chairman Harper to implement the actions taken.

Compromise will, again, be the name of the game at the NCUA Board level.

If there is no compromise, there will be little action from NCUA in 2021 or 2022.  The board dynamic will assure that.

And this is, incidentally, the worst of nightmares for NCUA executive staff.  Their natural tendency is to play to the NCUA Chairman because he/she manages them, oversees their appraisals, assigns them, promotes them, etc.

Of course, normally the NCUA Chairman has a two-vote majority.  Staff can count to two very easily and tend to become very pro-chairman in their approach.

However, when the chairman has authority over them but does not have two votes to control the direction of his own board, the staff is caught between a chairman they want to support and a two-vote majority that they can count to two and see where the Board as a whole is headed.

As you can see, it is going to be an interesting couple of years upcoming at NCUA.

The Thanksgiving week 2020 changes, which we have now provided you with some insider perspective of how and why they may have came about, have set the stage for some upcoming 2021 NCUA Board meetings that will be worth watching.

We offer this caveat.  While it is possible that some of our sources may have been a little off with some of the background we used in this Client Update, we are confident that this scenario is essentially accurate and based in reality.

And our experience at NCUA during a very similar time of a challenging board dynamic with Chairman D’Amours, Board Member Wheat and myself leads us to believe that our sources are very close to right on the mark – even if they are not perfect in every detail or date.

Bottom line.  A new era has begun at the NCUA Board level.

Board Member and former Chairman Mark McWatters, one of the brightest attorneys to ever serve on the NCUA Board, is no longer a player at NCUA.  We wish him well in his future endeavors, whatever and wherever they might be.

The Hood-McWatters-Harper board feud is now over.

The Hood-Hauptman-Harper dynamic is now today’s and tomorrow’s reality.  It is very likely to impact what, if anything, comes out of the NCUA Board over the next two years.

We’ll be there watching with you and providing our clients with the best and most accurate insider information possible about what to expect as the NCUA Board enters 2021 and beyond.

Until next time.