NCUA Board Member Mark McWatters speaking before NACUSO meeting in Las Vegas
LAS VEGAS–NCUA Board Member Mark McWatters said there will essentially be a moratorium on new regulations from NCUA once he’s part of a two-member board after the chairman departs, and further added he doesn’t expect the Senate to move on his nomination to the Export Import Bank.
McWatters also offered his thoughts on vendor oversight, a merger of NCUA into FDIC, examination practices and more at NACUSO’s annual conference here.
In remarks to the conference, McWatters said that after NCUA Chairman Debbie Matz leaves the position at the end of April, leaving him on the board with current Vice Chairman Rick Metsger, his views—which are popular within credit unions—on regulations, state preemption, third-party oversight authority and more will become more influential, since rules require a majority vote by NCUA board members in order for any proposal to become regulation.
McWatters noted that earlier this year at CUNA’s GAC he had called for a moratorium on new regulations, unless there are circumstances demanding a new rule(s). At that time, he said he believed it was time to “hit the pause button and think about where we are today and how we can revise what’s on the books.”
Since that GAC appearance in February, McWatters said there has been a “dramatic change” with Chairman Matz’s announcement that she would be departing at the end of April.
“In order to enact new regulation it requires both members, which this time actually includes me,” said McWatters, the Republican appointee who is often the 1 in 2-1 votes on the board. “So now this idea of a regulatory moratorium has a little more teeth to it, because I will be loath to vote in favor of new regulation absent documented evidence there is a danger to the credit union community. How do we handle this? I would suggest we handle issues that arise through supervision. I like that approach, because it's targeted to the risk presented.”
In response to a question from CUToday.info, McWatters said he does not envision there will be very many 1-1 votes on the two-person board, because before any issue came before the board, Metsger would know of his opposition and would not bring it to a vote.
Here is an overview of other issues touched upon by McWatters at the NACUSO meeting:
Regulation of CUSOs
“The key thing to keep in mind is we can’t live in the past. It’s 2016, not 2008, and not the time of the S&L crisis, not the dot.com crisis,” he said. “There are lessons learned from that, but we have to keep in mind there is not a strong common denominator among those. They were all Black Swanish events that came along and surprised people. So we have to be looking for the next surprise, rather than reliving the past. We also have to keep in mind we’re talking about regulating credit unions, not too-big-to-fail financial institutions. This may come as surprise to some people sitting at 1775 Duke St. (NCUA’s headquarters), but credit unions are not JP Morgan Chase. We need to address the risks that are actually presented by the credit union community and the risks actually presented by CUSOs, to the NCUSIF and the credit union community. If there is something we see coming, let’s make sure those regulations are targeted to that specific risk and the actual threat to the CU community and the share insurance fund.”
Supplemental Capital
“For the life of me I don’t understand why supplemental capital has been languishing around seemingly forever. We are working on a supplemental capital rule, but from my perspective it’s moving too slowly. We don’t need to reinvent the wheel here; there has been lots of heavy thinking on this. It comes down to one simple questions: is more capital better than less capital for credit unions? I think more capital is better. I would like to see this proposal move at the same time as the FOM rule. That may put some motivation into NCUA to put serious attention into a supplemental capital rule.”
Advisory Groups
“I don’t think the agency has done the best job in looking out to the credit union community,” said McWatters. “I think the agency, hopefully, now will do a better job in reaching out to the community with advisory groups that are actually respected, where you sit down with people and ask how this works.”
McWatters said there are two areas he would like to see advisory groups address: supplemental capital and fraud. “Credit unions, particularly low-income credit unions, are using supplemental capital very effectively and there are lessons there that can be transferred over to the regulation. The other area where an advisory group I think would be particularly beneficial is fraud. Over 40% of the losses to the NCUSIF are from fraud. That’s outrageous. There are credit unions, meaning the vast majority, that have fraud protocols in place that work. This is not something NCUA needs to invent in-house.”
Examinations
“There has been some talk as of late about bumping the examination cycle to 18 months, or at least something longer than 12 months (for well-managed CUs). I agree with that. It seems to make sense philosophically. But then the question is what is a well-managed credit union and how will it work. We should start having that discussion inside NCUA, and I’m afraid we’re really not. We’re hearing excuses inside the agency that we have other things going on. It seems to me to be a non sequitur that we can’t do one form of regulatory relief because we’re so bogged down with other forms of regulatory relief. It seems to me be possible to start this sooner rather than later, and by sooner I mean this year.
“I am also troubled that when credit unions or CUSOs are developing business models, business plans, that those plans and models be respected absent something that clearly says to the contrary that there is a danger in those business models or business plans to the credit union community itself or the share insurance fund,” McWatters continued. “It troubles me that examiners within NCUA not respecting the judgment of NCUA executives who have for years run the credit union successfully. It’s also odd to me that NCUA examiners rely upon some amorphous concepts such as best practices. I understand best practices, but in a regulatory sense it needs to be based upon a statutory or regulatory provision.”
Due Process
“Maybe it’s because I’m an attorney, but due process is a concern to me. It’s in our Constitution. It’s a bedrock principle. Due process basically means that if the government has something to say against me, then you need to let me be heard and let me defend myself, and to do so in front of an objective judge or panel.”
McWatters said it also “troubles me greatly” any time he hears allegations of examiner retaliation or retribution. “It’s completely offensive to the U.S. Constitution.”
But McWatters also said that due process is a two-way street, and that any credit union that levels accusations against an examiner needs to be prepared to demonstrate its case. “If an examiner knows that he or she will be challenged in an open forum, then that examiner is less likely to act in a capricious way. But members of the credit union community will also be less likely to act in a capricious manner.”
NCUA Budget
“People get the impression that my dissents on NCUA budget are based on the NCUA budget being too large. I really did not say that. I’m concerned with wasting people’s money, but my concern is over lack of transparency. If NCUA needs to hire additional people with additional expertise and they can convince me that’s important, I will support it. But I would like to have complete transparency. If the budget is going to go up, ‘this is why it’s going up.’ And, by the way, let’s have a public hearing and challenge it.”
Vendor Authority
McWatters reiterated that he does not see a need for NCUA to have vendor oversight authority, although he is sensitive to concerns around cybersecurity.
“Thoughtfully targeted, designed and implemented vendor authority in cybersecurity area, however, appears reasonable and prudent,” he said. “What does that mean? I’ve been through enough briefings on cybersecurity. There is a threat out there; it’s real and it’s legitimate. So I’m sensitive to the need of NCUA to be thoughtful about it. So could NCUA today exercise vendor authority in a competent way? I don’t think so, because I don’t think there is expertise inside the agency."
State’s Rights
“The issue of state’s rights is important to me,” he said. “You can have three or four people in a room at 1775 Duke St. and what they say preempts the entire country. I don’t like that. CUSOs are sort of this laboratory of creative thinking. For NCUA to take a preemptive approach that we have the only fuse here, that what we say is all that matters, that preempts a state from encouraging state charters to be innovative in CUSOs. I find that shocking in its stupidity. Why would you want to do that? This is an area I am keeping a very close eye on. Now, with a two-member board something I’m going to be paying much closer attention to, the preemption by NCUA of states and their authority to allow CUSOs to be innovative.”
Merger of NCUA Into the FDIC
Responding to a recent GAO report that suggested the streamlining of financial regulators, McWatters said, “I read the report, and NCUA actually responded to the report. I had nothing to do with it, I didn’t even know about it, which is how NCUA has been conducting business by not letting the minority board member know about it. I believe NCUA should remain an independent federal regulator. Why? Turf protection? No, my term is up in two or three years, so this is not my long-term career. NCUA is a unique financial regulator. It is really a standalone regulator. It charters FCUs, it insures FCUs and state charters, it regulates credit unions, it provides a liquidity facility, and it regulates corporate CUs that provide more robust liquidity, and it does all this in-house. I think breaking up NCUA creates more inefficiencies, because it would require the FDIC, OCC, Federal Reserve all to understand credit unions, and I think credit unions would get lost in that mix. Personally, I don’t know of much appetite on the Hill for doing this.”
Nomination to the Board of the Export Import Bank of the U.S.
McWatters said that when he was asked by Sen. Mitch McConnell (R-KY) to take a seat on the Ex-Im Bank there was no debate that he should accept. “My name is before the Senate Banking Committee now. As you may know, the Ex-Im is very controversial within my party. My strongest support comes from the Democratic party and half the Republican party. My view is it seems unlikely I’ll be leaving NCUA. It is up to the Senate and I am not aware of any movement on my nomination From what I hear, what I read, I’m not going anywhere and that’s fine with me. I like the credit union community. I like my job.”