Last fall, NCUA Chairman Debbie Matz announced a Regulatory Modernization Initiative aimed at providing regulatory relief for credit unions. It was initiated in part to support President Obama's Executive Order 13579 urging regulators to revise or repeal outdated or insufficient regulations. Providing smart regulatory relief should be a priority for all regulators, state and federal.
NASCUS is supportive of NCUA's efforts to provide regulatory relief as well as its pronounced support of supplemental capital for credit unions. Among NCUA's regulatory relief efforts, NCUA has extended six of the RegFlex provisions to all federal credit unions. NASCUS applauds this extension; however, state regulators are eager to work with NCUA to identify a forward-looking approach to regulatory relief and to provide specific relief to federally insured state-chartered credit unions (FISCUs).
While the recent recession revealed elevated risk areas and gaps in regulation requiring attention, NASCUS cautions against a "one-size-fits-all" regulatory approach. Though NASCUS and state regulators have long said that you should not regulate to the lowest common denominator, to some degree this is what is happening post-crisis. And at this point, it is uncertain whether layering on regulation is the most effective way to mitigate material risks to the credit union system.
A forward-looking regulatory relief approach would establish risk-focused rules identifying the material risk and requiring that material risk be mitigated. Credit unions would have flexibility to mitigate that risk in a manner that makes sense for their particular business model and specific circumstances. Credit unions with de minimis activities within the identified risk area would have minimal compliance obligations.
Discretion Required
Of course, this approach would require discretion on the part of the regulators. In many respects, this might be the most difficult aspect of true regulatory relief. Credit unions and examiners generally prefer bright-line rules. However, bright-line rules often result in regulation to the lowest common denominator. This mindset must be changed. True regulatory relief will be difficult to achieve without regulatory discretion.
NASCUS believes that there is a place for regulatory discretion, as well as for regulatory diversity, in our new financial institution landscape. Regulators have the un-enviable task of ensuring a safe and sound system through vigorous supervision. Not only in the aftermath of economic turmoil, but also during good times, regulators are tasked with divining unsafe and unsound practices and curtailing them. Against this mandate, regulators must balance their regulatory concerns with the need to provide the industry with a viable operating environment.
Going forward, regulatory discretion combined with a focus on dual state and federal regulatory oversight can relieve regulatory burden and protect against a homogenization of the credit union system.
In addition, NASCUS has long urged NCUA to ease the regulatory burden on FISCUs in particular by changing the format of its rules in Subpart B of Part 741. Unlike Subpart A, Subpart B does not state the text of rules applicable to FISCUs, but merely incorporates by reference the rules outside of Part 741. The complicated nature of NCUA's rules makes it difficult for FISCUs, as well as state and federal examiners and other interested parties, to easily discern which insurance rules, or in some cases which portions of such rules, apply to FISCUs. We strongly recommend that the NCUA incorporate the text of its insurance rules into Part 741, Subpart B in their entirety rather than by reference.
How To Relieve The Burden
NCUA could also relieve the burden on healthy FISCUs of multiple examination contacts in a single year by re-emphasizing the agency's statutory reliance on state examinations. In 2010, NCUA changed its policy to send federal examiners annually to every FISCU with assets in excess of $250 million, regardless of the CAMEL rating or condition of the institution. When NCUA is unable to accompany the state regulator on the scheduled primary examination of the FISCU, the agency schedules a separate federal onsite insurance review. NASCUS believes NCUA should rely on the state examination and spare the FISCU the disruption of a second examination, whenever practicable.
In addition, NASCUS is defending against proposed regulation in areas traditionally and appropriately governed by the states. NCUA's recent proposed rulemakings on loan participations and credit union service organizations (CUSOs) would add regulatory burden for FISCUs, while preempting areas traditionally regulated by the states. NASCUS believes these areas should continue to be regulated by state law for FISCUs.
NASCUS and state regulators share NCUA's commitment to modernizing the credit union regulatory system and providing regulatory relief. By working together, NASCUS is confident we can achieve these goals while maintaining rigorous and effective supervision to ensure the safety and soundness of the movement.
Mary Martha Fortney is the president and CEO of NASCUS (www.nascus.org), and can be contacted by e-mail at marymartha@nascus.org.
