With a legal battle, changes to the National Credit Union Administration board and new growth strategies, it's been a busy year for credit unions.
The National Association of Federally-Insured Credit Unions kicks off its annual Congressional Caucus this week in Washington for the first time since 2017 – last year’s event was canceled at the last minute thanks to Hurricane Florence. A host of government officials will address attendees each morning, after which credit union staffers will embark on “hike the Hill” events to meet with lawmakers from their home districts.
Both chambers of Congress are back in session this week for the first time since late July, but there's a limited period of time for any legislation to move forward. The House and Senate will adjourn for the year on Dec. 13, and both houses will only be in Washington for 10 weeks between now and then (both will be gone the first two weeks of October and the House will be absent for the first week of November as well). And when lawmakers return in 2020, presidential primaries will be just around the corner, shifting the focus and making legislative progress even less likely with a general election looming.
However, only a handful of the biggest issues facing credit unions today relate to Congress while the rest are more likely to be decided by various government agencies. Some in the industry may see that as a good thing, since a small panel like the NCUA board may be more nimble and better able to quickly adapt to a changing financial services market than Congress. If nothing else, it speaks to the increased influence regulators – not just NCUA but the Consumer Financial Protection Bureau, Federal Housing Authority and others – have gained in recent years as a result of legislative gridlock.
Read on for a sampling of some of the biggest issues facing the movement right now and how those in Washington – whether elected or appointed – may deal with them moving forward.
Will Congress act on pot banking?
One of the key areas where lawmakers could have an impact on credit union operations is by providing clarity surrounding banking the legal marijuana industry. The legalization landscape has changed dramatically in the two years since the NAFCU caucus last convened. More than half of all states now permit medicinal or recreational use of the drug, but with marijuana still illegal at the federal level, many financial institutions remain hesitant to bank the industry even where it is legal.
Compounding the issue are two legislative proposals – the STATES Act and the SAFE Banking Act – that would provide clarity on the issue. Lawmakers have held multiple hearings on the topic – including two hearings with testimony from credit union representatives – but legislation will have to pass both houses of Congress. Several key Senate Republicans so far appear unwilling to move the matter forward, in part because of their 2020 election prospects.
With Congress stalled, regulators have stepped in to provide clarity where they can. The National Credit Union Administration recently gave the all-clear for CUs to serve the hemp industry but plenty of questions about serving that market still remain. On top of that, Chairman Rodney Hood last month also said the agency won’t sanction credit unions serving the legal weed industry in states where it has been legalized, though he added those institutions must also comply with guidelines from the Financial Crimes Enforcement Network.
While the number of credit unions offering pot-banking services continues to grow, this summer Alaska-based Credit Union 1 shuttered a pilot program it launched in late 2018. CEO James Wileman said that insurance concerns were the deciding factor in the matter, but many outside observers told Credit Union Journal insurance hasn’t generally been a problem for CUs in this space and this is unlikely to be the start of a wider trend of credit unions exiting the arena.
How will new regs impact CU-bank deals?
The growth of CU-bank purchases has been one of the industry’s dominant trends throughout 2019 and short of broader changes to the economy there are no signs of that changing anytime soon.
With that in mind, NCUA Chairman Rodney Hood told the Wall Street Journal recently the agency is preparing a rule that will provide credit unions with more formal guidance on the matter. An NCUA spokesman told CU Journal there is no current timeline for when a rule might be proposed.
Still, a series of tweets from Hood last week provided a glimpse into his thinking on the matter. Hood emphasized that while he wants the agency to provide clarity, he also envisions a scenario in which NCUA approves these deals in a similar way to the FDIC’s process.
The NCUA must approve these transactions, as does the FDIC for these identical transactions.
And board member Todd Harper may echo that line of thinking. During Hood and Harper’s Senate confirmation hearing in February, Harper emphasized a belief that rules and regulations should be “consistent across regulators.” But Harper has also expressed skepticism about the agency focusing on rulemaking that impacts only a small percentage of CUs. With 13 deals so far this year out of approximately 5,300 credit unions, he may balk at pushing forward another rule without a wide impact.
Regardless of what the agency’s rule looks like, any proposals would still have to go through a public comment period and then be approved by the board, meaning new policies aren’t likely to be in place until 2020.
How will NCUA address capital concerns?
It didn’t take long for newly installed NCUA Chairman Rodney Hood to make a major move at the agency, pushing back implementation of the agency’s controversial risk-based capital rule by two additional years to Jan. 1, 2022. That's a full three years from its original expected implementation date.
The decision wasn’t a unanimous one, however, with new board member Todd Harper strongly dissenting on the grounds that the agency needs to focus its efforts on issues that impact the industry more broadly, rather than RBC which touches just a handful of institutions. While the delay hasn’t been fully approved yet – and was lambasted by Sen. Sherrod Brown, a member of the Senate Banking Committee – there is little reason to expect it won’t move forward, and comment letters to the board indicate the industry is largely in agreement with the measure.
But RBC is hardly the only capital issue facing the industry, even if it has received the most headlines. At the time the board delayed risk-based capital, Hood also pledged to issue a proposal by year end addressing subordinated debt. While that hasn’t been formally presented yet, the agency previously indicated it plans to expand the number of institutions that can use the tool, broadening it beyond just those credit unions with a low-income designation.
The board may also make an attempt at creating a credit union version of the community bank leverage ratio. McWatters is said to support the creation of a credit union leverage ratio as soon as possible, but Harper has objected to wrapping this and other moves in with the broader RBC delay, arguing that further delays could pose risk to the share insurance fund and hamper the agency’s compliance with recommendations from its own Office of the Inspector General, as well as the Government Accountability Office.
This slide was updated at 1:56 P.M. on Sept. 10.
What's next for FOM?
The industry’s long-running field-of-membership fracas may be finally nearing an end. Or not.
A federal appeals court in August reversed a district court’s ruling that struck down two of the four provisions to NCUA’s revised FOM rule. That move left the bulk of the regulation in place but remanded one portion of it back to a lower court, asking the agency to more fully explain why the provision that would enable a credit union not to serve a particular urban core is not redlining – a key component of the American Bankers Association’s argument.
Chairman Rodney Hood added in a press release last week that the agency will soon release guidance on how credit unions can qualify a combined statistical area with under 2.5 million people to be a local community.
"In the near future, the NCUA board will consider a limited proposal that will address another issue raised by the D.C. Circuit regarding the definition of local community that includes portions of core-based statistical areas that do not include the urban core. The format of this proposal will be a notice of proposed rulemaking with public comment,” he said.
Credit unions now face the question of how to proceed on the matter: whether to submit applications for FOM expansion or hold off until any further potential legal challenges are decided. The ABA hasn’t yet indicated whether it will appeal last month’s ruling, but such a move could ultimately bring the issue before the Supreme Court.
In the meantime, NCUA last week announced plans for a “phased approach” to FOM expansions but hasn’t indicated when it will begin approving applications, pledging only to act at an “appropriate time.”
The rule only applies to federally chartered credit unions, a class of institutions whose numbers continue to shrink. According to second-quarter data from the regulator, the number of FCUs declined by 3.2% in the 12 months ending on June 30. Although state-chartered CUs saw a similar decline (3.1%), the dominant trend in charter conversions continues to be away from the federal charter – particularly as more state credit union statutes are updated.
How long will McWatters stay at NCUA?
It’s possible – but probably not likely – that the NCUA board could see further changes before the end of the year. Board member Mark McWatters’ term formally ended on Aug. 2, but with no formal exit date planned and a successor not yet announced, the board is likely to remain in its current configuration for the foreseeable future. And President Trump hasn’t been in a rush to nominate new board members – former chairman Rick Metsger served alongside McWatters on a two-man panel for more than two years beyond the end of his term until Chairman Rodney Hood and board member Todd Harper took their seats earlier this year.
Whenever the president does nominate McWatters’ successor, it’s virtually guaranteed he will pick another Republican, meaning the political make-up of the board won’t change. Various leaders at the agency have long touted its ability to work together in a meaningful bipartisan fashion, so there’s no expectation that any work will stall.
Still, the board has already seen some changes since Hood and Harper came aboard this spring. Chiefly, Harper – the panel’s lone Democrat – has pushed back against various proposals before the board. The most notable of those came when he argued against further delays to the risk-based capital rule. He also argued that the board should be more focused on issues pertaining to safety and soundness than on capital matters, since factors like concentration risk – such as at CUs that had high concentrations of taxi medallion loans – pose the greatest risk to the National Credit Union Share Insurance Fund.
While Harper is outgunned politically on the board, his dissenting voice reflects a change from the McWatters-Metsger era when the board could only make progress on issues where there was already common ground between the two board members.
Community banks that were pushed past key asset limits by the Paycheck Protection Program say they will be unable to shrink their balance sheets back to normal size by the 2022 deadline, especially if there is a new round of rescue aid.
The plan still lacks concrete details about standards banks must meet to earn high ratings, but the agency said the new methodology would end grade inflation and could penalize banks that underperform.