In a statement published last week, National Credit Union Administration Chairman Kyle S. Hauptman called regulation-by-enforcement “unethical” and as such would not be allowed in his NCUA.
Regulation-by-enforcement is the practice by regulatory agencies to penalize actions that were not previously considered illegal, but through enforcement and penalization establish the rule. For example, if a credit union were to engage in a new and unregulated tech space that the NCUA considered risky or unethical, regulation-by-enforcement would be the NCUA penalizing that credit union despite no rule existing, creating a new de facto rule.
In January, upon being raised to the position of NCUA Board Chair by President Trump, Hauptman announced his priorities, including, “Codifying our procedures to protect Americans from regulation-by-enforcement. For example, no enforcement action should ever set―or even clarify― policy. In America and other free societies, the sequence is: set speed limits, then give speeding tickets (no one has any obligation to be aware of someone else’s ticket).”
Hauptman clarified that he feels the NCUA’s track record is fairly clean in this particular area, and the statement was not issued as a result of any recent grievance in his opinion. Rather, Hauptman wished to be open and clear about NCUA policy, raising the standards for clarifying rules and enforcement.
The policy statement specifies:
- Enforcement actions shall only occur in the case of clear and significant violations of law or regulation;
- Enforcement will not be timing motivated to the benefit of the NCUA;
- Seek first to remedy, penalize second; “we don’t set ‘speed traps’ to increase enforcement totals;”
- Avoid double-standards by not extending due process to the regulated.
To wrap up the policy, “If NCUA finds a harmful practice that threatens our mission or is otherwise injurious or abusive, and it is not currently addressed by law or regulation, then our next step is to consider rulemaking or other remedy. As is the norm in America, the sequence of events at NCUA is: 1) publish rules, 2) then (and only then) enforce them.”
The statement follows on the heels of NCUA’s elimination of reputation risk as a supervisory concern in accordance with Presidential Executive Order 14331, Guaranteeing Fair Banking for All Americans. Hauptman did clarify in that statement that the NCUA would “continue to include key review areas historically classified under reputation risk, like financial liability associated with active litigation and insider abuse, as part of an examination as necessary.”
