No Limiting Principle



A reader inquired why I wrote about the minor update to corporate rule 704 to illustrate aberrant NCUA policy. The reason is that seemingly small errors compound: they become embedded when no one grasps their implications. Ultimately, these deviant practices recycle and become the basis for consequential erroneous actions.

This 704 rule update is an example of NCUA’s policy process subject to no limiting principles. The critical flaws are numerous.

First, the agency asserted open-ended, unchecked authority from the Federal Credit Union Act. There are no restrictions to what the board might “deem appropriate.”

Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate. [emphasis added]

In law, a limiting principle without limits, does not limit.

Second, the rule provided no statement of general authority or purpose, as the basis for corporate’s buying subordinated debt. Why is this activity appropriate? There is brief reference to lending power for what appears to be activity more akin to investing.

Third, there was no factual, objective information given for any aspect of the rule including the demand for or any known risk related to credit union’s issuance of subordinated debt.

Fourth, the rule has contradictory logic. It authorizes an activity-investing in subordinated debt, but then negates the very action by requiring credit unions to subtract from their capital any such “loans” when complying with required net worth ratios.

Fifth, the required subtraction contradicts generally accepted accounting principles (GAAP).

Sixth, the write-off requirement is not grounded in objective analysis and ignores the fact that every such debt issuance has to be approved by NCUA with a fully documented plan for its use. The Agency effectively admits that it cannot rely on its own supervisory decisions if a corporate chose to invest in an offering they authorized.

Seventh, the rationale that this is equity and therefore at risk, contradicts the way corporates record investments, following GAAP, in other financial institution’s shares including the CLF and Federal Home Loan Bank stocks.

Eighth, the ultimate justification is that this is the way the agency treated similar “investment-loans.” In plain English, this is the way we have always done it.

This is the most troubling of all the logical errors, for it illustrates how bad decisions and rules become embedded in agency practices forever. And a board lacking in historical familiarity just accepts the continuation and cumulation of previous errors.

There are additional flaws in both logic and substance. One agency official defended the action by saying nobody objected to the rule in the comment period. Might the reason be that the corporate input has been ignored or denigrated for so long corporates saw no benefit in pointing out how irrelevant the rule was in the first place?

A 3-0 board vote

In the midst of a full January agenda and the aura that the action somehow represented deregulation, the board unanimously approved this “nothing rule.”

No harm no foul, one might argue. Wrong. The board’s approval sanctioned a very flawed and incoherent policy by staff resulting in regulation with no practical meaning or purpose.

That precedent is now in place. The deficiencies in logic and substance were rubber-stamped. These factual, illogical and legal flaws will reappear in other policies down the road.

With the NCUA board relying on the open-ended authority referenced above there is a real danger to the credit union system when any two members can take unfounded actions that can severely harm credit unions.

The NCUA board’s challenge

Ultimately, a government of laws depends on the judgment and intelligence of those chosen to oversee the authority the people have given. For credit unions, the NCUA board are the three individuals with that responsibility.

At this time there appears to be “no limiting principle” that governs their deliberations and decisions. When one reviews the prior decade’s use of this unconstrained regulatory power, the challenge is real.

The critical question from this rule is what is the limiting principle for the Agency? Is there any? Would board members agree on one?

Shouldn’t a primary discipline be thorough public deliberation that earns the confidence of the 100 million plus credit union members knowing their rights and interests are paramount in all agency decisions?


  • Chip Filson

    A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Chip co-founded Callahan and Associates. Filson has held concurrent positions at the NCUA as president of the Central Liquidity Facility and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.

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