WASHINGTON — Capitol Hill's interest in the risk-based capital rule — possibly reaching record levels for NCUA's proposed rulemaking — may lead to greater change to the final rule than what the agency has said is coming, according to several Capitol Hill observers.
One industry insider even predicts that the input from Congress will lead to a second comment period.
More than one-fourth of the Senate (27 members) and three-fourths of the House (332) had weighed in on RBC as of Aug. 11. That accompanies the record number of credit union comment letters of more than 2,000.
"I don't remember any instance of an NCUA proposed rule getting this much attention from Congress," said Dennis Dollar, principal partner at Dollar Associates in Birmingham, Ala., and former NCUA chairman. "But, of course, this is an extremely far-reaching rule that will impact every credit union in the country."
The Capitol Hill focus is "more attention on the actions of a regulator than I have ever seen," said Carrie Hunt, senior vice president of government affairs and general counsel at NAFCU.
"But it speaks to the importance of the issue, coming out of the financial crisis and appropriately addressing the level of risk in the financial system, appropriately addressing risk while allowing financial institutions to continue to do business," she said.
John McKechnie, a former staff member at NCUA and now a partner at Washington-based consulting firm Total Spectrum, said that he doesn't recall "a single instance when so many members of Congress have weighed in with NCUA over a regulatory issue."
Meanwhile, Ryan Donovan, senior vice president of legislative affairs at CUNA, pointed out that the development of the banks' new capital rules drew less Congressional attention.
"The level of Congressional input on [NCUA's RBC proposal] has been unusually high, both with respect to a credit union issue but also with respect to a regulatory issue in general," he said.
"Only 199 members of Congress weighed in on behalf of the banks during the development and implementation of Basel III capital reform," Donovan said. "Many regulatory proposals attract Congressional interest, but it is rare for a proposal to attract so much interest."
Analysts suggest that the level of interest from Capitol Hill on RBC will lead NCUA to make even more substantive changes to the proposal than the "significant" changes that NCUA Chairman Debbie Matz has said are on the way, which could result in a second comment period.
"I fully expect that NCUA will listen and respond to such a strong outpouring of Congressional interest. I don't think NCUA can, nor do I believe they will, ignore or treat lightly this unprecedented level of congressional attention," Dollar said.
"However, I don't think they'll let it knock them off of their belief in the need for a risk-based capital rule," he said. "This level of congressional scrutiny very likely could bring about the possibility of further changes in the rule than that handful of tweaks NCUA has been hinting at recently and could very much mean the political pressure will be too strong to approve a final rule without an additional comment period."
Matz has said several times that a second comment period won't happen.
In the Chicago Listening Session
"And if under the Administrative Procedure Act we determine that we've made significant changes to the intent of the rule, we will offer a second comment," Matz said.
But though she expects that there will be many changes to the rule, she said that she doesn't think that there will be a significant change to the intent of it, and in that case, the law doesn't require NCUA to reissue it for comment.
Donovan sees the congressional feedback giving the agency the room it needs to make changes to its proposal so that the rule can be implemented consistent with the intent of Congress.
"On the risk-based capital proposal, it appears that the message is getting through in many respects because NCUA has indicated a willingness to consider changes in almost every area of concern raised by Congress so far," Donovan said. "But we will not know precisely how NCUA responds to the feedback from Congress until the rule is finalized."
Dollar, and others, say that NCUA isn't taking lightly the ability of Congress to make changes to the agency's final rule.
"Congress has the power to override a regulatory agency's action and could statutorily remove some of the agency's discretion in such matters," he said.
"I don't think that would be healthy for anyone concerned as it would be too much politicizing the rulemaking process. But congressional oversight — even of a technically independent agency — is always a very real possibility when an issue is this far-reaching, and there is so much controversy attached," Dollar said.
Hunt agrees.
"Whenever you have the vast majority of the House of Representatives and a critical mass of senators concerned over a rule, then the question has to be, 'if we don't get this rule right what happens?' Congress can step in and put something into the statute," Hunt said.
Analysts suggested that Congress making statutory changes to correct a final rule could affect how Washington views NCUA and limit some of the agency's flexibility in rule making.
"NCUA should want as much flexibility as possible so they can be more nimble and react to regulatory issues as they arise," Hunt said. "If we end up with a statutory change to correct a rule making, and that could potentially be where this ends up... that would not benefit anyone."
A major area of concern among CUs and their trade organizations has been the proposal's risk weights.
At NAFCU's annual meeting last month, Matz said that NCUA recognizes that all risk weights must be reviewed and some must be lowered, identifying five candidates for revised risk weights, including corporates, credit union service organizations, investments and mortgages.
"I think that if NCUA makes some substantive changes to the rule's trigger and risk weights to make it much more balanced and reasonably comparable to the Basel triggers and risk weights, a second comment period will actually provide NCUA with many more positive responses about the rule in the next round of comments compared with the first round," Dollar said. "This would strengthen the position of the agency to defend the rule if this level of interest generates subsequent congressional hearings or even possible legal action at some point in the future."
McKechnie observed that the number of letters to NCUA from Washington points to the fact that the agency could be under increased scrutiny from Congress now.
"Just the raw number of members of Congress who have weighed in is what is remarkable about this situation," he said.
If Washington perceives that NCUA doesn't get the final rule right a statutory change won't be the first step, McKechnie said.
"I think a Congressional oversight hearing would be much more likely than Congress actually legislating on the issue... There is a saying in the sciences, that observing a phenomenon changes it; I think Congress now is observing this phenomenon more closely than usual," McKechnie said.
