Does NCUA Disdain the Dual System?
The NCUA’s proposed rule that would allow it to declare state-chartered federally insured credit unions in “troubled condition” is the latest move by the federal regulator that has some state- chartered credit unions and their regulators crying foul.
The rule, introduced NCUA’s July 24 board meeting, would define a state-chartered federally insured natural person or corporate credit union as troubled if either the state or federal regulator assigns it a CAMEL or CRIS code of 4 or 5 in either the financial risk or risk management categories.
NASCUS President/CEO Mary Martha Fortney said her organization is very concerned about the preemptive nature of the proposed rule and intends to file formal comments as well as “continue to express our concerns to the NCUA board.”
“Through successive preemptive rule making, NCUA continues to dilute the dual chartering system with little regard for the consequences and implications on the state credit union system. That NCUA proposes to further diminish the role of state agencies in the supervision of FISCUs is troublesome from a broad perspective,” Fortney said.
NCUA Chairman Debbie Matz said as stewards of the share insurance fund, the regulator needs increased supervision for any credit unions it feels deserves a CAMEL 4 rating.
Staff Attorney Steve Widerman told the board during the July 24 meeting that the rule isn’t meant to imply a lack of confidence in ratings assigned by state regulators. Rather, it aims to create a single, uniform definition for troubled credit unions.
Fortney, however, disagreed.
“State regulators are the primary regulator for FISCUs, and this proposal appears to presume that the agency’s judgment is superior to that of its state regulator partners,” she said.
Orla Beth Peck, supervisor of credit unions for the Utah Department of Financial institutions, said the proposed troubled condition rule, when combined with recent NCUA rules on CUSOs and loan participations, have had negative impacts on the dual chartering system.
Peck, who is currently chairs the NASCUS board, said states find value in individuality, while the NCUA sees more value in conformity. Peck added that the difference “will probably always be a contention between state regulators and the NCUA.”
However, the 20-year Utah chief credit union regulator also conceded that she realizes federal regulators are under pressure from Congress to prevent another financial crisis.
Emotions are still raw in North Carolina after the NCUA overrode the statutory authority of the North Carolina Credit Union Division by conducting separate examinations of all state-chartered credit unions in early 2012. Matz said in February the exams were prompted by the release of state CAMEL ratings by State Employees’ Credit Union through a pilot program run by the North Carolina regulator. Administrator Jerrie Jay violated the Federal Credit Union Act by allowing the release and, in turn, violated the trust the NCUA had in the state’s effective regulation, Matz said.
NCUA Board Member Michael Fryzel, a former Illinois state credit union regulator, told Credit Union Times that “looking back with the benefit of 20/20 vision,” the NCUA could have handled things differently. Fryzel stood by the federal regulator’s decision to conduct separate exams but said “because the North Carolina regulator made a decision that the NCUA felt was contrary to law…NCUA had to take certain action to make sure it didn’t become more widespread.”
Maurice Smith, president/CEO of Local Government Federal Credit Union in Raleigh, N.C., and chairman of the North Carolina Credit Union League, said state-chartered credit unions in the Tar Heel state “feel like pawns in a bigger game” between the NCUA and state regulators.
“This very much feels like a punitive action, like the NCUA is saying ‘we are making a statement here’,” Smith said.
Jack Braswell, CEO of the $240 million Members Credit Union in Winston-Salem, N.C. said the NCUA’s action make it seem like “they’re in the business of regulating our regulator.”
The 33-year credit union executive called the separate exams “a back-door attack against SECU and the North Carolina administrator done just for spite.”
Of the 49 state-chartered credit unions subjected to separate exams, four are so large that the remaining 45 represent only $1.5 billion in assets, he said.
“Let’s bring some reason to this. This is not a safety and soundness issue,” Braswell said. “I understand [the NCUA] has to protect the insurance fund but the dotted line here is just too strong to not connect their actions to retaliation against the North Carolina administrator.”
State Employees Credit Union President/CEO Jim Blaine called the CAMEL release as justification for separate exams a red herring and trumped up charges. He pointed to two accusations the NCUA made against Jay–that she leaked confidential examination documents to SECU and she announced during a meeting with NCUA officials that the federal regulator had initiated termination of SECU’s federal deposit insurance. Those accusations were investigated by the agency’s Office of Inspector General. The OIG concluded that the NCUA didn’t falsely make the accusations, but the OIG didn’t declare them to be true, either.
The CAMEL pilot program was only for one year, and both Fryzel and Matz have said the NCUA will not continue separate exams in North Carolina if Jay ends the program. Blaine said he does not plan to publish his CAMEL ratings this year.
However, Smith, who is a licensed attorney, said the fracas is “plowing new legal ground as far as what a federal regulator’s reaction should be when state’s policy runs counter to its policy.” There is no system for reconciling the two conflicting points of view, and Smith said unless one is created, another state could soon find itself in the same situation.
The North Carolina league hasn’t given up on bringing the NCUA and North Carolina regulator to the bargaining table, he said, and has asked again for the two factions to meet.
Additionally, the league is preparing to appeal to the North Carolina Credit Union Commission, a panel of seven appointed by the governor, asking the group to ratify that what Jay did was within her legal authority.
“We believe what she did was the correct thing, but we want the commission to look at it too because we want to make sure we as a credit union community aren’t blinding headed down the wrong path,” he said. “We want an objective group to either tell us we were wrong or give us new ideas.”
Smith said the NCUA’s actions have created a governance quandary in which state-chartered credit unions “are trying to figure out which master they serve.”
Protecting the dual charter should be important to federally chartered credit unions too, he said.
“My credit union relishes the fact that we have the choice to convert to a state charter, but today [state charters] are challenged to the extent that their viability is in question,” he said.