PALM DESERT, Calif. — Mark McWatters has been a member of the NCUA board for one year now, and he says some of the ways the regulator operates still strike him as "odd."
For example, McWatters told an audience at the California and Nevada Credit Union Leagues' Annual Meeting and Convention here Thursday, there was the recent move by NCUA to raise the asset size to define a credit union as "small" from $50 million to $100 million. While that means some regulatory relief for a good number of CUs, McWatters would have liked to have seen the threshold raised to $550 million, as the FDIC uses to define a "small" bank.
"I do not see why a small credit union is not the same size as a small bank," he began. "I was told that would mean cutting back regulation on virtually every credit union, and I said, 'Yes, that is the idea.'"
To put it another way, McWatters said he does not believe a credit union with $1 more than $100 million should be subject to the same rules and oversight as Navy Federal. "It doesn't make sense at all," he declared.
According to McWatters, NCUA needs a "second gear" that is part of a three-pronged approach. He said there should be a bridge between $100 million and $550 million. This "mid-tier" group of CUs would be subject to rules that are "more appropriate" to their asset size, he said.
"NCUA then can take those resources to take care of and address the real problem for smaller credit unions, which is internal fraud. Most of the losses to the share insurance fund from small credit unions is from fraud. I don't see a problem with NCUA doing this, but it needs the will to do this."
Fact-Based Mindset
The day before McWatters spoke at the CCUL/NCUL AMC, Credit Union Journal published his op/ed
"When I arrived at NCUA, being a lawyer I was used to a fact-based mindset," he said. "I saw the examination process being substantially devoid of due process. It seemed like something out of North Korea rather than the American version of due process. Credit union CEOs feel they cannot appeal due to fear of retribution, and that is not right."
As evidence, McWatters noted there were only six credit union complaints about exams per year from 2007 to 2011. "That does not seem possible," he said. "Something is not working here. There is a bill to allow appeals to the FFIEC, but NCUA opposes this bill. Why should we be so arrogant to believe we should be judge, jury and prosecutor? The bill probably will not go anywhere, so we need to develop a more fair process within NCUA."
In addition to wanting to see an impartial appeal process, McWatters said NCUA needs to have better training of examiners, including teaching "people skills, tolerance and respect."
RBC2 Still Panned
NCUA also needs an advisory council, McWatters said, adding such a body would help avoid situations such as the issued and then revised risk-based capital rule, which "now has taken two years and has been a distraction of NCUA resources."
"RBC 2 passed, 2-1. I voted 'no' because I think it violates the Federal CU Act," he said. "Who knows what will happen with this rule."
One part of RBC2 that continues to "trouble" McWatters is the definition of "complex." He asserted NCUA "ignored what Congress told it and looked only" at gross assets.
"There are credit unions out there that basically only do auto lending. The assets may be $1 billion, but the business model is not 'complex.' I want a rule that is transparent and easy to understand.
"And not adding a mechanism for supplemental capital makes no sense to me," he added.
NCUA will be coming out with a rule on the Overhead Transfer Rate in January, and McWatters said he has issues with the way the process has been handled, specifically, "NCUA is relying on non-lawyers — accountants — for legal advice."
According to McWatters, the accounting firm PriceWaterhouseCoopers gave some "good advice" to the regulator about not communicating clearly, and NCUA's response was to redact it. "This is a huge mistake the agency made. This is poor PR. Someone from Congress found out about it and now it is back."
As for the debate about a return to an 18-month examination cycle, McWatters noted the FDIC is talking about an 18-month examination cycle for banks of $1 billion or less.
"One billion dollars or less," he repeated for emphasis. "If we can better orchestrate our examinations with those of the state regulator, it would cause less stress. Just work together. Seventy-percent to 80% of NCUA's budget is examinations. Cutting back on examinations would save money."
The new Member Business Lending rule is out and the comment period has passed. McWatters said he would like to see it on the books and operational sooner rather than later.
"Small business lending is critically important and you guys do a fantastic job of it," he told the audience.
