MORE NEWS FROM THE NCUA BOARD’S MAY MEETING

In yesterday’s Client Update we provided some analysis of the May NCUA Board meeting that was held last week. We discussed in depth the inability of Chairman Hood to get a second for his proposal to allow credit unions the flexibility to develop their own policy on charging off unpaid overdrafts and the ramifications of what seems to be a developing 2-1 split on the NCUA Board with Board Members Harper (D) and McWatters (R) teaming up in opposition to Chairman Hood (R) on several recent issues.

Today’s Client Update provides some additional indication of this growing split at the NCUA Board and comes from the closed meeting that followed the open session where the overdraft issue did not get addressed due to the lack of a second the Chairman Hood’s motion to approve it.

Most months the NCUA Board has an open board meeting with its own agenda and follows that with a closed board meeting with a separate agenda.

Normally the closed board meeting deals with personnel issues or severe supervisory actions (cease and desist orders, prohibitions and conservatorship actions). The board actions are announced after the meeting. And, of course, news outlets and other interested parties often put in a Freedom of Information Act (FOIA) request for the transcript of the closed meeting if the action is controversial.

Interestingly, this month’s closed meeting did not deal with any of those types of actions.

Because credit unions talk and we have a lot of sources in credit union land (although this issue did not directly deal with any of our Dollar Associates clients), several credit union sources who had colleagues involved in the issue before the board disclosed that the issue involved an appeal of a field of membership denial in which the agency upheld its prior denial on the same 2-1 vote split as had been witnessed at the open meeting just previously concluded.

While our NCUA sources were naturally tight-lipped because the issue was addressed in a closed session (even though the details are certain to come out through a future FOIA request almost certain to come from those involved in the issue), several credit unions knowledgeable of the issues involved in the appeal have openly told several other credit union colleagues that the denial of the credit union’s appeal on a 2-1 vote (again, according to the credit union sources, with Harper and McWatters voting to oppose the credit union’s appeal and Hood voting in support of the credit union’s position) was quite concerning.

Here’s what we have gleaned from our various sources in credit union land without a lot of inside NCUA information. And, if this information is correct as we believe it is from the knowledgeable credit union sources sharing the information, it is indeed concerning to federal credit unions concerned about their field of membership options under the federal charter.

WHAT WAS THE FOM ISSUE BEING APPEALED TO THE NCUA BOARD?

 A federal credit union, from all accounts, submitted an application well over a year ago to serve an associational SEG. The association, nationwide in nature but with local offices scattered throughout the country, has been previously approved to be included in the field of membership of over seventy credit unions. It had already been approved for the FOM of another federal credit union in the same state that applied to serve the association.

Apparently, the NCUA Office of Credit Union Resources and Expansion (CURE) questioned whether the association had an office within twenty-five miles – or what NCUA, with no regulatory justification, has considered for over twenty years the appropriate distance for “reasonable proximity” for a SEG or association from a credit union brick and mortar branch – of a credit union branch.

When the association opened a shared office within the NCUA’s 25-mile radius of one of the credit union’s branches, we have been told by sources close to the credit union and the association (again, neither of which are our Dollar Associates clients) that the CURE office sent one of its analysts on site to the shared office to determine if it was a sufficient physical location to satisfy CURE’s concerns.

Let’s leave aside that almost no one joins an association by going into an office in this online era. No one joins the Sierra Club by going into their Oakland national office or the AARP by physically coming to its Washington DC headquarters.

For some reason NCUA’s CURE office, which must approve any field of membership expansion, has designated itself the office to determine if any association is “association enough” to be in a credit union’s FOM.   Interestingly, in this case, they decided that an association’s physical location was not sufficient to meet NCUA’s “reasonable proximity” requirements, despite having already been approved numerous times for other credit unions.

Therefore, after a year of going back and forth, the CURE office disapproved the application of the credit union to serve the association.

Frustrated by this inconsistency with the same association having been approved for a large number of other credit unions (including in the same state), the credit union decided to use the formal NCUA appeals process that had been put in place with much fanfare by NCUA Chairman Mark McWatterrs during his year as agency chairman.

We were big fans of the appeals process as there had really never been a fair and unbiased method for credit unions to challenge what they might feel was an inappropriate decision by NCUA in the past.

Many of our credit union clients were not so sure. We heard from a number of you that you would not feel comfortable appealing an NCUA decision through a NCUA-controlled appeals process for fear of it being the judge reviewing the same judge’s decision.   In fact, many of you said you would never appeal until you were convinced the process had some legitimacy and was not just a rubber stamp that always supported the earlier agency position.

Well, based upon this example, many of you were right. And we were, unfortunately, wrong in hoping that the new appeals process Chairman McWatters put into place would be any different than the less formal “the agency always wins” supervisory review process in place previously.

Apparently, by a 2-1 vote with Harper and McWatters supporting the CURE office in its inconsistent overreach into the day to day management of a legitimate association and its refusal to approve the same association for this credit union that it had approved over seventy times for others, NCUA has shown that the new appeals process is little different than the old one in being all sizzle and no steak.

To use a description that might be timely, the NCUA appeals process proved – in this case – to be all dispenser and no disinfectant.

Could the results be different in another case? Certainly. After all, the reports are that Chairman Hood supported the credit union in its appeal. So the decision to support the agency’s position was not unanimous at the NCUA Board level. That is some improvement over what has historically been unanimous votes in favor of the regulator over the regulated.

But, does this raise questions about the efficacy of the new appeals process? Absolutely.

This action reinforces the previously held position by most credit unions that it does no good to challenge NCUA, even when their actions are inconsistent or inappropriate.

Most credit unions feel there is no reason to have a day in court if the judge and jury are of the same mind going in.

And the process was not very transparent either. When I was at the NCUA Board, we dealt with field of membership appeals in open session. (Yes, we did prohibitions, conservatorships, share insurance coverage appeals, personnel matters in closed session – but FOM issues were in public meetings because we felt other credit unions needed to know where NCUA stood on these types of issues.)

After having approved the same association for a large number of credit unions and taken the position that an antiquated 25-mile reasonable proximity for a brick and mortar branch of both the credit union and the association, it is understandable that the NCUA Board would not have wanted to have this case heard in open session.

But it was a missed opportunity to show that the NCUA Board wants the federal charter competitive in the FOM business with states that are approving associations (including this same association) on a regular basis without the extra time, cost and burden of having to appeal year-long denials.

So, in the second 2-1 split of the day, as there was in the earlier one – there are policy ramifications.

We will continue to watch developments at the NCUA Board level. As we stated in yesterday’s Client Update, we have great respect for Messuers Hood, Harper and McWatters.

We may not always agree with each of them, but we are convinced that they believe NCUA has a role to play in helping credit unions be not only more safe and sound – but also more competitive in the marketplace and more relevant to their members.

For whatever reason, the 2-1 split on the NCUA that was on display in the open meeting and obviously continued over into the closed meeting is now very much a topic of discussion among the agency’s stakeholders in credit union land.

With the industry in the midst of the COVID disruption and a Supreme Court decision pending on a four-year old FOM rule that is going to be implemented by the same CURE office that is distrustful of associational SEGs that are obviously legitimate and have been approved for other credit unions over the years, it is not a good look to see a split in the NCUA Board impacting crucial policy decisions.

The overdraft charge-off flexibility issue was one that was tabled as a result of the 2-1 split. The FOM appeal was another in the same month. The NCUA budget was almost not approved last December due to the same 2-1 difference in approach and opinion.

Battling congressional letters with inconsistent legislative recommendations from the Chairman (who is the official spokesperson for the agency) and the two other board members (one of whom verbally outlined his divergent recommendations and another who wrote his own letter to Congress with his legislative agenda) doesn’t do anything to further the credit union advocacy efforts on Capitol Hill.

What will be next? Will subordinated debt and supplemental capital fall for lack of a second? How about expansion of CUSO authorities? Further delay of or changes to risk-based capital?

The NCUA Board does not have to agree all the time. That is why there is a board.

Hopefully, from the board will come divergent opinions and philosophies that will produce better policy. That is healthy.

But there is something about this split that seems a bit more personal and somewhat less policy oriented. Again, that is not a good look for NCUA.

Nor is it in the best interests of the credit unions they regulate and insure.

Honorable men and women work through these types of issues. Messeurs Hood, Harper and McWatters are certainly that – honorable.

Let’s hope they find a way to make this current three-member board dynamic work better for NCUA, the credit unions they regulate and insure and the various publics that are watching.

Tomorrow, we will have part three of the Client Updates coming from the May 2020 board meeting. In this one, there is amazing unanimity and perhaps some hope that the three-member board can come together – even when they are squabbling over other issues – to provide some absolutely necessary regulatory relief in this unprecedent COVID era.

Until next time. Stay safe.