SOME DRAMA AND POLITICAL INTRIGUE WORTH WATCHING TOOK PLACE AT THE NCUA BOARD MEETING IN MAY

Last Thursday morning the NCUA Board met virtually for its May 2020 monthly meeting. The results generated some headlines and head scratching as to what the drama that played out at the meeting means and how this may impact credit unions going forward.

There is no doubt, as we have reported over the past several months, that there is some political intrigue taking place within the three-member NCUA Board. Republican Board Member Mark McWatters has been teaming up with Democrat Board Member Todd Harper on several issues, including the support for a consumer protection division to be established within NCUA that both spoke in favor of at the 2020 budget vote and a joint list of legislative proposals that they outlined for congressional consideration as an add-on to the official NCUA legislative request letter sent on behalf of the agency by its Chairman earlier this month.

Now, at the May board meeting, the new political alignment became outwardly visible on a policy proposal when Chairman Hood was unable to get a second to move forward an interim final rule to allow credit unions to have the flexibility to establish their own policies on when to charge off an unpaid overdraft protection amount.

The present NCUA regulation requires a 45-day charge off of any “un-cured” overdraft. In other words, if an overdraft that was covered under an overdraft protection program with the credit union that the member opted into in writing is not paid in full in 45 days, the full amount of the overdraft must be charged off.

With the COVID concerns stemming from 20% unemployment rates and thousands of credit union members being forced to get extensions on their loans, Chairman Hood – supported by NCUA staff – recommended what most would consider a very reasonable and timely interim final rule (meaning that it would become effective now and have a comment period for 30 or 60 days while the rule is being implemented) that would give credit unions the opportunity to establish their own charge-off policy for overdrafts.

The policy would have to be in writing and approved by the credit union board; however, it would give some flexibility to the credit union to extend overdraft charge-offs in order to give members more time to “cure” them. The rule, although brought to a head by the COVID crisis, was proposed to be a permanent rule.

It was, frankly, good policy. And NCUA would be able to review any policy that a credit union put in place beyond 45 days at the next examination to ensure that it is reasonable and financially justifiable from a safety and soundness perspective.

But, when Chairman Hood made a motion to approve the interim final rule after the staff made its presentation, there was total silence.

No second to the motion. And none came.

Board Member Harper stated that he would like to see the rule expanded further and overdraft fees themselves limited by regulation – something that has never been done by Congress or any other federal financial regulatory agency.

While it could lead to many credit unions dropping their overdraft programs that members have opted into because of the additional risk those programs entail if the amount of an overdraft fee were to be limited to $5 or $10 as was mentioned, the reality is that Mr. Harper has championed himself as a “consumer protector” on quite a few issues during his tenure.

His position on this issue, while not consistent with a desire to keep struggling members using their credit union checking account with an overdraft feature rather than beginning to use a payday lender or check casher when they ran out of money before they ran out of month, is not all that surprising and consistent with his very obvious activist regulatory philosophy on consumer protection issues.

The real surprise to many was when Board Member McWatters did not second the Chairman’s motion.

While Mr. McWatters was a vehement and vocal defender of a reasoned free market philosophy during his years as a board member during the Matz chairmanship and during his year as President Trump’s first NCUA Chairman before the President replaced him with Chairman Hood in 2018, his refusal to second the motion had a number of observers scratching their heads.

The proposal was very consistent with a non-prescriptive and more marketplace-oriented regulatory approach on charging off overdrafts. And it was certainly timely with thousands of credit union members out of work and needing more time to “cure” an overdraft in this COVID era.

So, why did he choose to not second the motion and allow the proposal to go down in flames?

Board Member McWatters himself stated his reason with a form-over-function defense that he felt the rule should – despite the urgency during the COVID era – be put out for a 30 or 60 day comment period before it was finalized. Even though he did not state whether or not he would support it if it went through the normal comment period channels, he hung his opposition on the process rather than the actual merits of the proposal.

While it can be argued that during normal times the official comment period process which typically adds up to four months to any regulatory action is a good approach to rulemaking by a federal agency because it provides the opportunity for stakeholders and opponents to offer their views on the proposal, in actuality the number of regulations that have bypassed the comment period during this time of national emergency is literally in the hundreds.

From FDA drug approvals to SBA regulations for the PPP program to changes in the unemployment regulations, there has been a move toward a more efficient and less process-stymied federal agency response to issues needing to be addressed during the COVID era.

So, to believe that a simple overdraft charge-off extension that examiners will be able to evaluate for appropriateness and soundness deserved to be stopped in its tracks because an advanced 30 or 60 day comment period was being bypassed before implementation of the rule caused many NCUA observers to begin to wonder if something else was afoot here.

WHAT DOES THIS INDICATE ABOUT THE CURRENT NCUA BOARD DYNAMIC?

For whatever reason, there is a definite split between the two Republican board members at this time.

And, when the two Republicans (McWatters and Hood) are split, it gives greater influence to the minority Democrat board member, Mr. Harper.

When the consumer protection division was debated and both Harper and McWatters were on the same page, the Hood proposed budget did not include the new division and McWatters reluctantly voted for the 2020 NCUA budget even though he had publicly lined up with Harper on the consumer protection issue.

When the two joined together to issue a statement at a public board meeting about their joint legislative priorities, Mr. McWatters did not put his proposals in writing as did Mr. Harper.

Therefore, on these two initial indicators that there was a NCUA Board split in the works, the divide was not as obvious as it was when a chairman makes a motion on a policy issue and neither of the other two board members second the motion.

That is newsworthy. And it got a lot of trade press.

Credit unions began to ring each other (and their consultants with NCUA experience) wondering what it means for the direction of NCUA in the months ahead.

It is a legitimate question.

Whereas Chairman Hood has almost followed the free market and less activist regulatory philosophy of the Trump administration on every issue, the loss of his second vote from a Republican colleague will undoubtedly make him less likely to propose far-reaching proposals to lessen regulation or provide more earned flexibility within the regulatory process.

So, this shift in the majority alignment has the potential to impact policy.

If Chairman Hood gets nervous that he may not have a second vote to move forward with some key regulatory flexibility actions in the next few months (supplemental capital, subordinated debt, further delay or re-structuring of risk based capital), those actions could be postponed.

In fact, they could be postponed past the election. And the 2020 election will determine whether you have a Chairman Hood or a Chairman Harper in 2021.

So, if the new board alignment puts regulatory relief or flexibility in jeopardy for the remainder of 2020, it is possible that this new political dynamic could close a door for some regulatory relief actions that might not come back until 2025 or later.

WHY WOULD CHAIRMAN HOOD HAVE SCHEDULED A VOTE ON A PROPOSAL IF HE DID NOT HAVE A SECOND?

This is really the question of the day. As a former NCUA Chairman, I will tell you that – since I as chairman controlled what goes on the NCUA board meeting agenda – I never scheduled a vote on an issue unless I knew I had a second vote and therefore a majority to pass the issue.

There are only two reasons why a chairman would put an issue on the agenda and not have a second when the motion is made.

First possibility, the chairman could have been blindsided. If the chairman had been told or led to believe that another board member was going to second the motion when the agenda was published, then it is conceivable that a last minute change in position could leave the chairman hanging without a second.

This would not be a sign of a healthy relationship between board members if another board member (particularly one of the chairman’s own party) left him or her out to dry. But it could be one of the ways that such a scenario could have happened.

Second possibility, the chairman could have known that the motion would not be able to secure a second – yet he or she still might want to get his two colleagues on the record as opposing what the chairman felt was a worthwhile proposal. In bringing light to the strange bedfellows collaboration of a Democrat and a Republican colleague on a lesser issue like the overdraft rule, the chairman might hope that he could help generate a return to the normal philosophical alliance on future issues such as subordinated debt or risk-based capital.

That is a risk because the failure of a chairman to get a second on one of his proposals can be viewed as a sign that a chair is losing control of his or her board.

But this has happened in the past.

When I served as the lone Republican on the NCUA Board with Chairman D’Amours and Board Member Yolanda Wheat (both Democrats), Chairman D’Amours was voted down a number of times by Ms. Wheat and myself voting together.

He failed quite a few times to even get a second for some of his proposals.

However, Chairman D’Amours was not afraid to use the power of the gavel. He felt he was right and that it would help his position if he tried to show that Ms. Wheat was voting too much, in his view, with her Republican colleague.

Therefore, in the D’Amours era there were quite a few 2-1 votes, unseconded motions and the chairman getting outvoted. But he pushed forward nonetheless.

Do I know which of the two reasons accounted for Chairman Hood’s no second on the overdraft proposal? No, I don’t.

He could have been blindsided with a last minute loss of his second too late to take the issue off of the agenda. Or he could have known that McWatters and Harper were teaming up to defeat this proposal and wanted to put them on the record as obstructionists on this issue. Or it could be the first, followed by the second option when he realized he was not going to be able to move forward without a second vote.

Regardless, it is an interesting dynamic and one that credit unions should continue to watch.

I have respect for all three board members, even though I differ on policy at times with each of them. But there is certainly a shifting majority on the NCUA board right now with the chairman having the gavel, the authority and the agenda under his control – but not a board majority he can count on supporting him when push comes to shove.

Many have predicted that McWatters, who was replaced as chairman by Hood by the same President Trump who put McWatters in the chair to begin with, would eventually turn on the man who replaced him. Those observers say that it is natural that someone bumped back to the board slot he came from by the same president who appointed him to chair the agency would carry some bitterness and let it out eventually.

Up until recent months, I did not think that would happen as McWatters has been the solid second and a good team player with his fellow Republican Hood. His free market philosophy was consistent with Hood’s, and they seemed to get along well.

But something has definitely changed in the political dynamic at the NCUA Board.

And, if it continues, there will almost certainly be impact on policy. It will be worth watching for credit unions.

In the next few days, we will provide you in subsequent Client Updates with some background on two more issues from the May board meeting that are also worth analyzing a bit more in-depth.  It was a news making board meeting.

Until next time. Stay safe.

Dennis Dollar