Congress, make the NCUA board do its job

With confirmation hearings tomorrow for two new nominees to the National Credit Union Administration Board — a majority of that three member body — it’s time to recognize that the agency is out of touch and needs a new direction.

A federal judge once called NCUA a "rogue federal agency" that acts like a trade group protecting the industry that it is charged with overseeing. Under current leadership, that has never been truer. While recent headlines have focused on how the agency’s leadership cozies up to industry lobbyists with expensive dinners and fine whisky while the chairman runs the Virginia-based agency from his home in Dallas, lost is that the agency can’t say no.

The NCUA has a long record of doing virtually everything the industry asks, and that has only accelerated under current leadership. Those moves, often inconsistent with the law, call into question how seriously the agency takes its obligation to ensure safe and sound industry operations. Senators should ask the new nominees if they are prepared to call for the agency to hit the reset button and hold credit unions to their intended mission.

Credit unions are, of course, exempt from federal and most state income taxes. In return, they have significant statutory restrictions on their operating environment—rules that do not seem to intimidate the NCUA.

Credit unions must serve limited groups or local communities, but NCUA has chipped away at these requirements so they are functionally irrelevant—a court partially overturned their newest field of membership regulation last year. Credit unions were created to serve those of modest means, but NCUA does not actually require this, and the industry has fought application of the Community Reinvestment Act or other legal requirements that it do so.

Credit unions are instructed by Congress to focus "on consumer rather than business loans," but NCUA recently permitted a significant expansion into complex commercial lending. Credit unions are owned by their depositors and supposed to operate not-for-profit, but NCUA is currently considering whether to allow profit-seeking institutional investors, like mutual funds and hedge funds, to invest.

The agency has become a mini-legislature, providing through regulation the charter enhancements Congress has explicitly rejected, wrapped in the inaccurate narrative of “regulatory relief.”

Some of their requests alter how the marketplace functions. While bank regulators raised exemptions from real estate appraisal requirements from $250,000 to $500,000 last year, NCUA raised its own exemption from $250,000 to $1 million, with no reasonable explanation why. While all financial institutions are subject to the jurisdiction of the Consumer Financial Protection Bureau, NCUA’s chairman has twice sought exemptions from CFPB regulation and supervision for credit unions, simply because they’re credit unions. (In case you’re wondering, yes, the bureau has uncovered anti-consumer practices at credit unions, such as one that made false threats about debt collection to servicemembers).

Credit unions even get the chance to have a voice in the agency’s budget, immodestly noting that recent agency staff reductions have led to “fewer regulatory and supervisory impediments” in the marketplace.

A recent trend is not-for-profit credit unions buying commercial banks. NCUA does not stop these transactions, which permanently remove a taxpaying entity from income tax rolls. That’s like a corporate inversion without moving to Bermuda, and at least 25 acquisitions have been announced since 2012. The deals are now so commonplace there are consulting firms that specialize in credit union/bank M&A.

However, this is a one-way street. NCUA has long made it extraordinarily difficult for credit unions to become banks. In one case, the agency rejected a potential conversion because it didn’t like the direction a piece of paper was folded. You can’t make it up.

It’s time for this to stop.

NCUA is putting its thumb on the scale in the marketplace through its actions, when it is supposed to be focused on ensuring that credit unions operate in a safe and sound manner. NCUA is supposed to call balls and strikes, not be a player in the game. The regulatory environment NCUA creates comes at the expense of community banks, and ultimately the communities they serve. Members of the NCUA board should stop drinking the industry Kool-Aid and focus on the job they’re there to do.