Todd Harper, left, and Rodney Hood, nominees to the National Credit Union Administration board, seen here during a Feb. 14, 2019 confirmation hearing before the Senate Banking Committee
Coming soon: A new NCUA board
Following today's vote from the Senate Banking Committee, Todd Harper and Rodney Hood's nominations to the National Credit Union Administration board are headed to a vote in the full Senate. The pair's confirmation hearing earlier this month gave the industry a glimpse at what it could expect should both nominees be confirmed. It would be the first time in nearly three years the board was at full capacity.

Here are eight takeaways industry experts gleaned from the pair's nomination and hearing.
New expense policies?
The first question of the pair’s hearing related to a recent expense scandal involving NCUA Chairman Mark McWatters and his chief of staff, Sarah Vega. Sen. Mike Crapo, R-Idaho, asked whether or not Harper and Hood would reevaluate and consider updating the agency’s current expense-reimbursement policy. Both said they would.

One of the themes that cropped up throughout the testimony was consistency between various federal agencies. Geoff Bacino, a credit union consultant and former NCUA board member, suggested it’s reasonable to assume the next board would try to bring its policies more in line with other regulators. Part of McWatters’ defense in that scandal was that some of his expenses – in particular transportation costs – arose because NCUA doesn’t have the same services other regulators do, such as dedicated drivers, Bacino said.

“That might force NCUA to say, ‘We looked at the other agencies, here’s what the salaries for their drivers are, [so] we’re going to factor that into the budget in terms of Uber and cabs,’” he said. “If you did that, [expenses for cabs and ride shares] would pale in comparison to having an on-staff driver.”

Ryan Donovan, chief advocacy officer at the Credit Union National Association, pointed out that while the scandal made headlines just last month, the NCUA Inspector General issued its report last summer.

“What we’ve seen from the agency since the release of this report is there was some action taken later in the summer to clarify some of the policies and procedures,” he said, adding that while the new board might reexamine those rules, “the report does a pretty good job of laying out pretty fairly what the issues and concerns were.”

Carrie Hunt, executive vice president and general counsel at the National Association of Federally-Insured Credit Unions, noted that while both nominees pledged to examine and update the program, “based on the IG report and other things, it certainly looks like NCUA has already gone ahead and taken care of what they need to take care of. I’d be surprised if any additional changes are needed.”

When news of the scandal broke last month, many in the industry were hesitant to speak out on it. One reason for that may have been a general consensus that overall the industry is happy with McWatters’ actions on the board.

“From a macro perspective, the budget has been heading in the right direction for the last few years,” added Donovan.
NCUA RBC threshold - CUJ 080218.jpeg
RBC all over again?
Perhaps the most controversial issue the agency has faced in the last decade has been its risk-based capital rule. That rule is currently set to go into effect Jan. 1 but there are still some within the industry pushing for further changes before implementation. There also is still a chance Congress could intervene and further delay it.

“We think there is ample opportunity for the board to go back and look at that rule and adjust it so that it has even less of an adverse impact on credit unions,” said CUNA’s Donovan, though he was quick to note it’s too soon to tell whether the next board will have any appetite to revisit that issue.

“There are some areas we think NCUA still needs to address,” said NAFCU’s Hunt, pointing to specific risk rates and the question of whether or not there should be one or two different capital standards for well-capitalized versus adequately capitalized CUs.

"We still believe NCUA was creating a system that is too risk-averse,” she added.

Bacino pointed out that the furor over the RBC rule has gone on for years. While much of the angst died down after former Chairman Debbie Matz left the agency, the rule has also been tweaked to the point that it only impacts a small handful of credit unions. Still, he said, NCUA has already delayed it and Congress appears to have some concerns as well. Lawmakers have put forth a bill to push implementation back to January 2021.

“I wouldn’t be shocked if I saw some type of decision made [by NCUA] to push it further down the road,” he said.
Moving forward on supplemental capital?
One area the current board has seemingly stalled on is alternative or secondary capital – a big request from many in the industry. Credit unions by law can only raise capital through retained earnings.

“NCUA has struggled in the past with how to create an alternative capital regime that is easily implemented by credit unions yet is also something that doesn’t impact safety and soundness, and is also something examiners can understand and look at,” said NAFCU’s Hunt. She added: “The goal is for credit unions that are already well-capitalized and well-run to have another tool for balance sheet management [because] there are times when they see a flood of deposits come in that it becomes more difficult to manage their balance sheet.”

One possible path forward would involve a pilot program on alternative capital, similar to how the agency piloted remote exams. But it remains unclear whether the board is interested in putting forth that sort of program.

While the current board has made some moves toward changes on alternative capital, sources rejected the notion that further movement on this issue was hindered by the potential for loggerheads on the two-person board. But with a full board in place – including two new members – Bacino said it’s more likely that the agency will move ahead on the matter.

“A signal needs to be sent from the board to [examiners in] the field that this is what we find acceptable and this is what you now have to find acceptable,” he said.
CRE appraisal thresholds - CUJ 022219 (1).jpeg
Appraisal rule do-over?
Responding to a question from Sen. Catherine Cortez-Masto on a proposed NCUA rule exempting commercial loans of up to $1 million from appraisals, Harper suggested a willingness to reexamine that rule.

NCUA’s proposed threshold is twice the level of banks’. While both nominees echoed the senator’s concerns about a possible hit to the National Credit Union Share Insurance Fund, Harper said he wanted to examine other regulators’ positions on the issue in order to create consistency across agencies when possible.

But sources say it’s unlikely NCUA will walk the proposal back. For one thing, Harper is a Democrat and any move to do that could be blocked by Hood and McWatters, both of whom are Republicans.

“We certainly would object to that approach if NCUA were to go in that direction,” said NAFCU’s Hunt, adding “there’s a difference between consistency and having rules that are identical. NCUA has rules on its books that have to reflect realities for credit unions.”

NCUA’s original proposal, she added, “provided very strong justification as to why the $1 million threshold was appropriate for credit unions. If a new board were to look at it again I expect they’d have to have a very well-supported reason for wanting a different threshold.”

CUNA’s Donovan, however, indicated that there is concern the agency might sale back the rule.

“In a lot of cases these thresholds can be somewhat arbitrary, so what you’ve got to look at is what makes sense relative to the exposure to the Share Insurance Fund,” he said. “As credit union regulators, we’d hope the NCUA board would recognize that there are fundamental differences between banks and credit unions that might merit different regulatory treatments… There may be cases where it makes sense to have the same threshold as banks, but we’d hope the NCUA board would give more consideration where there might be merit for differentiation rather than simply saying, ‘Whatever the banking regulators are doing is fine with us.’”
Expanding rural access
In response to a question from Sen. Tina Smith, D-Minn., Harper and Hood both pledged to work to increase access to affordable financial services for consumers in rural areas, but there may be only so much they can do.

The agency’s revised field of membership definition was designed in part to expand the ways consumers could qualify for credit union membership by tweaking rules surrounding population centers and core statistical areas. But half of the rule was struck down by a federal judge, and the matter is currently stuck in court with an appeal hearing not scheduled until later this spring.

CUNA’s Donovan said the industry shouldn’t expect much movement regarding field of membership issues until the suit is settled.

“Depending on how the litigation is resolved there may be a need for NCUA to take another look at the rule, there may be a need for Congress to take a look at the statute or it’s possible NCUA’s rule will be upheld fully,” he said.

NAFCU’s Hunt said the trade group supports Congress reexamining the statue so more consumers in underserved areas have access to credit unions. “A lot of time rural areas are considered underserved areas, and that’s another mechanism to ensure those areas have access to financial institutions,” she said.

John McKechnie, a credit union consultant and former NCUA and CUNA staffer, said the current board has done what it can when it comes to field of membership issues and predicted that will continue with the new board.

“There’s an expectation from a lot of members of Congress that credit unions and other financial institutions need to do more to address the issue of unbanked Americans,” he said. "NCUA, to their credit, recognizes the role credit unions play in that, [but] until a court resolution occurs it’s difficult to see NCUA going much beyond where things are.”
Chief Information Security Officer touching CYBERSECURITY on a visual screen. Business process metaphor and information technology concept for network security and protection of information systems.
Cybersecurity status quo
One topic Harper specifically noted as an area of focus was cybersecurity, but many observers said it’s unlikely a changing of the guard at NCUA will lead to much differentiation there – in part because there’s still work lawmakers need to do.

“The cybersecurity debate is one Congress needs to address first,” said CUNA’s Donovan. “There’s a national security component to this because we’ve seen a lot of attacks on our systems that are state-sponsored; there is a data security component to this because the merchants aren’t held to the same data security standards as credit unions and banks that issue cards.”

But, Donovan added, a national standard may come about on its own without Congress doing anything if California’s privacy regulation goes into effect in the absence of a federal standard.

“I think that will be what folks will drive to comply with and that will impact entities that hold personal data from California to Maine, particularly if you hold data on a California resident,” added Donovan. “That combined with the European regulation provides Congress with an impetus to do something.”

But NCUA last fall reiterated its request to Congress for third-party vendor oversight under the guise of cybersecurity. While many sources at the time said the regulator’s request was essentially the same one it had been making since the days of Y2K, cybersecurity threats may have finally evolved enough that Congress might be willing to grant that authority – at least on a limited basis.
Financial education
Rodney Hood told senators during his testimony that financial education would be an area of focus if he was confirmed. Many observers said if the board wanted to move forward on additional consumer-facing financial literacy initiatives those efforts would likely be supported.

But there are also questions about whether or not NCUA would truly be adding anything of value when thousands of credit unions, plus state leagues, the National Credit Union Foundation and more already offer financial education tools.

“When the agency looks at doing that, they need to assess what’s going on in the markets already and whether their efforts would be duplicative or redundant,” said CUNA’s Donovan. “It’s one thing to encourage financial education, but … there’s a lot of work going on in the system and a lot of experience that’s been developed over the last several decade on this topic. They need to look at the market and make sure that to the extent they’re using resources it’s not redundant to things that already exist.”
Full capacity
McWatters and board member Rick Metsger have worked well together and moved issues forward despite being shorthanded. McWatters has even gone so far as to say that they are "a model for bipartisanship."

Still some said there’s still a strong likelihood that having the board back at full capacity will result in a different dynamic.

“I wouldn’t say [the industry] was hamstrung by a short-handed board, but we could’ve had different policies with a full board,” said NAFCU’s Hunt. “It’s designed to have two members of one party and one of the other. With risk-based capital, ultimately there was a compromise to have a one-year delay. If there had been a full-bard that may have been a different result. In the past we’ve been operating in a way the system wasn’t designed to operate.”