The NCUA's proposed rule that would allow it to declare state-charteredfederally insured credit unions in “troubled condition” is thelatest move by the federal regulator that has some state- charteredcredit unions and their regulators crying foul.

The rule, introduced NCUA's July 24 board meeting, would definea state-chartered federally insured natural person or corporatecredit union as troubled if either the state or federal regulatorassigns it a CAMEL or CRIS code of 4 or 5 in either the financial risk orrisk management categories.

NASCUS President/CEO Mary Martha Fortney said her organizationis very concerned about the preemptive nature of the proposed ruleand intends to file formal comments as well as “continue to expressour concerns to the NCUA board.”

“Through successive preemptive rule making, NCUA continues todilute the dual chartering system with little regard for theconsequences and implications on the state credit union system.That NCUA proposes to further diminish the role of state agenciesin the supervision of FISCUs is troublesome from a broadperspective,” Fortney said.

NCUA Chairman Debbie Matz said as stewards of the shareinsurance fund, the regulator needs increased supervision for anycredit unions it feels deserves a CAMEL 4 rating.

Staff Attorney Steve Widerman told the board during the July 24meeting 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 troubledcredit unions.

Fortney, however, disagreed.

“State regulators are the primary regulator for FISCUs, and thisproposal appears to presume that the agency's judgment is superiorto that of its state regulator partners,” she said.

Orla Beth Peck, supervisor of credit unions for the UtahDepartment of Financial institutions, said the proposed troubledcondition rule, when combined with recent NCUA rules on CUSOs andloan participations, have had negative impacts on the dualchartering system.

Peck, who is currently chairs the NASCUS board, said states find value inindividuality, while the NCUA sees more value in conformity. Peckadded that the difference “will probably always be a contentionbetween state regulators and the NCUA.” 

However, the 20-year Utah chief credit union regulator alsoconceded that she realizes federal regulators are under pressurefrom Congress to prevent another financial crisis.

Emotions are still raw in North Carolina after the NCUA overrodethe statutory authority of the North Carolina Credit Union Divisionby conducting separate examinations of all state-chartered creditunions in early 2012. Matz said in February the exams were promptedby the release of state CAMEL ratings by State Employees' CreditUnion through a pilot program run by the North Carolina regulator.Administrator Jerrie Jay violated the Federal Credit Union Act byallowing the release and, in turn, violated the trust the NCUA hadin the state's effective regulation, Matz said.

NCUA Board Member Michael Fryzel, a former Illinois state creditunion regulator, told Credit Union Times that “looking back withthe benefit of 20/20 vision,” the NCUA could have handled thingsdifferently. Fryzel stood by the federal regulator's decision toconduct separate exams but said “because the North Carolinaregulator made a decision that the NCUA felt was contrary tolaw…NCUA had to take certain action to make sure it didn't becomemore widespread.”

Maurice Smith, president/CEO of Local Government Federal CreditUnion in Raleigh, N.C., and chairman of the North Carolina CreditUnion League, said state-chartered credit unions in the Tar Heelstate “feel like pawns in a bigger game” between the NCUA and stateregulators.

“This very much feels like a punitive action, like the NCUA issaying 'we are making a statement here',” Smith said.

Jack Braswell, CEO of the $240 million Members Credit Union inWinston-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 “aback-door attack against SECU and the North Carolina administratordone just for spite.”

Of the 49 state-chartered credit unions subjected to separateexams, four are so large that the remaining 45 represent only $1.5billion in assets, he said.

“Let's bring some reason to this. This is not a safety andsoundness issue,” Braswell said. “I understand [the NCUA] has toprotect the insurance fund but the dotted line here is just toostrong to not connect their actions to retaliation against theNorth Carolina administrator.”

State Employees Credit Union President/CEO Jim Blaine called theCAMEL release as justification for separate exams a red herring andtrumped up charges. He pointed to two accusations the NCUA madeagainst Jay–that she leaked confidential examination documents toSECU and she announced during a meeting with NCUA officials thatthe federal regulator had initiated termination of SECU's federaldeposit insurance. Those accusations were investigated by theagency's Office of Inspector General. The OIG concluded that theNCUA didn't falsely make the accusations, but the OIG didn'tdeclare them to be true, either.

The CAMEL pilot program was only for one year, and both Fryzeland Matz have said the NCUA will not continue separate exams inNorth Carolina if Jay ends the program. Blaine said he does notplan 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'sreaction should be when state's policy runs counter to its policy.”There is no system for reconciling the two conflicting points ofview, and Smith said unless one is created, another state couldsoon find itself in the same situation.

The North Carolina league hasn't given up on bringing the NCUAand North Carolina regulator to the bargaining table, he said, andhas asked again for the two factions to meet.

Additionally, the league is preparing to appeal to the NorthCarolina Credit Union Commission, a panel of seven appointed by thegovernor, asking the group to ratify that what Jay did was withinher legal authority.

“We believe what she did was the correct thing, but we want thecommission to look at it too because we want to make sure we as acredit union community aren't blinding headed down the wrong path,”he said. “We want an objective group to either tell us we werewrong or give us new ideas.”

Smith said the NCUA's actions have created a governance quandaryin which state-chartered credit unions “are trying to figure outwhich master they serve.”

Protecting the dual charter should be important to federallychartered credit unions too, he said.

“My credit union relishes the fact that we have the choice toconvert to a state charter, but today [state charters] arechallenged to the extent that their viability is in question,” hesaid.