I have a confession to make thatcould end in eggs on my car windshield or a horsehead in myoffice.

After hearing about the NCUA's risk-based capital rule, I wasscratching my head to figure out why credit unions were bellyaching so much. On its face, loans should be weighted according tothe risk they bring to the institution.

I didn't understand why, after spending years griping about thelikes of Telesis and CalState 9 and Texans, that credit unions werenow complaining that the federal regulator was attempting to get abetter read on exactly what was going on inside of creditunions.

My first impression was that credit union executives werewhining because it was all of the other credit unions, and nottheirs, that were a problem. On its face, risk-based capital is abeneficial concept for everyone, particularly in a cooperativeindustry.

Never has the old adage, “Never judge a book by its cover,” heldtruer.

I had started reading the rule when I also began interviewingcredit union experts about why credit union executives were souptight. And without the slightest of spoiler alert, they launchedinto the last few pages of the regulation.

SECU (N.C.) CEO Jim Blaine, in his blog, aptly likened the regulation to acheap, dime store paperback in which one can flip to the lastchapter and find the predictable ending.

Of course the NCUA once questioned the safety and soundness of SECU, so hemight be jaded.

Let's not be so tawdry and get right to the point. Beginning onpage 195 of the 198-page rule is the who-what-when-where-why-how ofthe rule.

That's known as burying the lede in journalism.

Part 727.2006 is entitled Review of order imposing individualminimum capital requirements. (That's IMCR if you're inclined totext it to a colleague, OMG.)

What that mouthful means is that despite all of therisk-weighting and 7% leverage ratio, the NCUA can require whateverthe hell it wants of your credit union's capital—your members'money.

My reading of the section is that it even states that a creditunion that the NCUA intends to subject to the IMCR “must file awritten response…[explaining] why it contends the IMCR is not anappropriate exercise…”

But don't worry: The IMCR-threatened credit union can alwaysappeal the decision to the NCUA-employed ombudsman. Ombudsmen canserve positive purposes internally, but there are obvious conflictsof interest as play in this type of situation. The NCUA cleared anNCUA executive of lying in the situation regarding SECU's safetyand soundness despite recorded evidence.

Aside from the twist ending, there are other details in the planthat will be problematic for credit unions.

The NCUA's proposal takes into account interest rate risk andconcentration risk in addition to credit risk, which is what Basel3 for small banks focuses on, CUNA's Bill Hampel explained.

So, while a business loan for a bank is risk-weighted the same,no matter how many loans it makes, the NCUA's rule ups therisk-weighting ante after a credit union reaches 15% and 25% ofassets in business loans.

Additionally, he pointed out that all real estate loans—not justthe fixed-rate mortgages—carry a hefty risk-weight, and thatweighting is increased at a 25% concentration.

Check out page 9 of the proposed reg for the specifics.

In part, credit unions have brought this on themselves. Creditunion executives have invoked the ghosts of Telesis and Norlarco'spast, providing the agency the legitimacy it needs to bring up aproposal such as this.

The agency is not wrong to make this proposal, despite its manyissues.

Do not leave it up to just CUNA, NAFCU and NASCUS to carry thevoice of credit unions regarding the problems with this proposal.You are the ones on the ground.

Write the NCUA about your concerns and how this proposal willaffect your business, whether it will result in fewer mortgages fortroubled members or less funds for business loans when a newlysingle mother decides it's best if she works out of her home.

Despite the fact only 10 (or 11, according to Tom Glatt, Jr.) credit unions would be extremely detrimentallyaffected by the proposal as is, the problem is much greater thanjust a handful credit unions. It's the disconnect between theregulator and the credit unions.

Hampel said it succinctly: “The NCUA is using capital rules as asubstitute for sophisticated examination.”

One credit union consultant explained that, regardless of whatthe rule is called, the NCUA doesn't see it as risk-basedcapital.

Internally it's understood as prompt corrective action.

The regulatory bent is to never allow anything bad to happen,but risk is inherent and necessary and good (to a degree to bedetermined by the credit union!).

PCA is the hammer for driving nails down where you want themrather than an enabling tool that could be mutually beneficial forboth the regulator and the industry.

The NCUA seems more interested in making their jobs easier thanallowing credit unions to reach their potential.

The proposal only would apply to credit unions over $50 millionin assets, which sends a bad signal. Does that mean the agencydoesn't care as much about more than half of the industry's safetyand soundness?

Very frequently the smaller credit unions have fewerresources—management, financial, human, etc.—than larger creditunions and are riskier.

It also further chisels a bifurcation of the system, which NAFCUPresident/CEO Dan Berger agreed is always a concern.

The ratio used in the calculation of the risk-weighted capitalremoves two key pieces to the equation. First, goodwill is notincluded in the numerator, CUNA's Mary Dunn pointed out, whichcould particularly harm credit unions that have been involved inmergers.

Second, she pointed out, credit unions' 1% deposit into theNCUSIF is eliminated entirely from the equation, devaluing an assetthat has already been called into question by the banking lobby andthe Treasury Department.

And last, but certainly not least, the NCUA developed acalculator for credit unions to be able to easily see the impact itwould have on them.

On its face this is a very useful tool (like a hammer) but itwas a huge mistake to make this calculator—for a regulatoryproposal that may or may not become effective—public. A consumerwho stumbles upon this might get a rude and inaccurate awakeningabout their credit union, and that's a safety and soundnessconcern.