Regulatory Reform Begins with this Critical First Step

Chairman's Corner - NCUA Board Chairman J. Mark McWatters

The need to provide measurable regulatory relief is important to the credit union community. As a result, working collaboratively with Board Member Metsger, I have made it one of our priorities to identify rules that can be scaled back, improved or eliminated. As I have previously indicated, the need for a forward-looking regulatory structure that offers meaningful relief without undermining safety and soundness is quite clear.

Under this ethos, the NCUA Board published a proposed Regulatory Reform Agenda in the Federal Register on Aug. 22. The recommendations contained in the report lay out a plan for achieving meaningful regulatory relief. However, given there are great ideas and deep expertise in the credit union community as to what works, we are seeking your comments on the changes we flagged, as well as your own recommendations for relief. The comment period closed Nov. 20.

A key catalyst for the development of our agenda was Executive Order 13777, issued this past February. This order directs executive branch agencies to set up a Regulatory Reform Task Force and appoint a Regulatory Reform Officer to head the task force. Among other objectives, the task force is directed to identify rules that:

  • Eliminate jobs or inhibit job creation;
  • Are outdated, unnecessary or ineffective;
  • Impose costs that exceed benefits; or
  • Create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies.

As an independent regulatory agency, the NCUA is not strictly bound by such an order. But, in general, the agency has sought to comply with similar orders in the past. In the case of Executive Order 13777, its priorities aligned with my own objectives to address the regulatory burden in a meaningful way, and the agency has fully embraced the order’s principles.

As a result, in March, I named our General Counsel, Mike McKenna, as Regulatory Reform Officer and appointed to the task force:

  • Larry Fazio, Director, Office of Examination and Insurance;
  • Ralph Monaco, Chief Economist;
  • Scott Hunt, Director, Office of National Examinations and Supervision;
  • Eugene Schied, Deputy Chief Financial Officer;
  • Ross Kendall, Special Counsel to the General Counsel; and
  • Tom Zells, Staff Attorney, Office of General Counsel.

I commend Mike and the entire group for their diligence on this project, which required them to review all of NCUA’s rules over a period of less than two months and develop regulatory relief recommendations for the Board to consider.

Their review was all-inclusive, rigorous and detailed. The chief product was a report and set of recommendations designed to provide a much broader scale of regulatory relief than was the intent of, or result from, the NCUA in the past. The report is summarized in the Federal Register notice.

To develop its recommendations, the task force utilized a matrix that evaluated the degree of effort to make and implement a particular change compared to the degree of impact the change would actually make if adopted by the Board. This process, described more fully in the notice, allowed the group to identify rule changes that could have the greatest effects on the credit union system with the smallest amount of effort. These are important considerations because often changing or eliminating a rule creates costly burdens for regulated entities and their agencies because compliance infrastructures have already been established.

The matrix also facilitated the development of a general, systematic schedule of rule changes for the Board’s consideration. While the Board must approve all such changes, the recommendations are presented in three timeline tiers:

  • Changes to be reviewed by the Board in the first two years after it adopts a final agenda;
  • Changes to be considered in year three after the agenda is approved; and
  • Changes to be taken up in year four or after.

In some cases, the Board is already moving ahead or has already addressed some of the recommended changes this year. For example, the Tier I recommendations included a review of the authority for federal credit unions to securitize their own loans. A legal opinion from the NCUA to that effect was issued in June and the agency will provide credit unions additional guidance in the near future.

Also, a proposal to provide some flexibility for federally insured credit unions in advertising insured accounts was issued for comment in September, as recommended by the task force. Comments on this proposal are due to the NCUA by Dec. 4.

Other recommendations from the task force are already being advanced through previously issued proposals that are no longer open for comment, including those on the agency’s appeals process, corporate credit unions, emergency mergers, and the NCUA’s Supervisory Review Committee. Comments on all current regulatory proposals can be viewed on our Proposed Regulations webpage.

Other possible Tier I changes within two years under consideration include revising loan maturities and extending the January 2019 compliance date for the risk-based capital rule. Further changes to the risk-based capital rule to reduce its coverage, along with a review of alternative and secondary capital authority and borrowed funds from natural-person members would occur under Tier II.

Based on the agenda, the range of additional issues to be considered in years three, four and beyond, include investments, loan participations, credit union service organizations, third party due diligence, federal preemption, low-income designation, and others.

In short, the regulatory review we are undertaking is intended to be as complete as possible, in recognition of the considerable regulatory load credit unions must operate under despite the generally low-risk profile most credit unions present. We also want to be mindful of the array of rules that fall or will fall on credit unions from other sources, including the Financial Accounting Standards Board’s Current Expected Credit Loss (or CECL) directive, and the production and modification of rules from the Consumer Financial Protection Bureau.

I am committed to achieving significant relief in a fully transparent and accountable manner. While the NCUA does not have all of the answers, we have rolled up our sleeves and made a dedicated, comprehensive effort to develop a set of relief recommendations that will be significant to credit unions without sacrificing safety and soundness.