ALEXANDRIA, Va. — NCUA Board Chairman Debbie Matz said she solicited 11 law firms around the nation to review the legality of establishing a two-tier risk-based net worth standard for the credit union industry.
Matz said the NCUA's authority to implement the new capital requirements in the original proposal was raised during the first comment period.
"I solicited the independent legal opinion in order to perform my own due diligence. I ultimately chose the Global Banking and Payment Systems practice of Paul Hastings, based in Washington, D.C. Paul Hastings' partners have years of experience on legal issues related to [prompt corrective action], from the perspectives of financial institutions as well as from the perspective of a federal agency," she said at the NCUA's monthly board meeting Thursday.
"In preparing the scope of work, I made it clear that I wanted their unbiased legal opinion on the issue, and that NCUA would not influence or pre-determine the legal opinion in any way. If the opinion found that NCUA did not have legal authority to propose different risk-based thresholds to be well-capitalized and adequately capitalized, then we would have redrafted the proposed rule accordingly," she added.
Matz said the firm researched every legal issue in the proposal over several months, while outside counsel reviewed the 2,056 comment letters the NCUA had received. A team from the firm presented an oral legal opinion on the risk-based capital proposal to the NCUA Board in November.
"The oral legal opinion maintained that while certain parts of the Federal Credit Union Act are arguably ambiguous, it did support our proceeding with a two-tier risk-based capital framework comparable to the banking agencies – with one threshold to be adequately capitalized and a second threshold to be well-capitalized," Matz said.
NCUA Board Member Mark McWatters said the firm's opinion to the Board stated a court could conclude the NCUA has the legal authority to establish a two-tier risk-based net worth standard under the Chevron doctrine.
"As a practicing attorney, I have served on the legal opinions committee of large cross-border law firms and note that a 'could' opinion represents a relatively modest standard of assurance. In the obscure, arcane and highly technical and nuanced world of legal opinions, key words such as 'could,' 'would,' 'should,' and 'more likely than not' truly matter," McWatters said at the NCUA meeting Thursday, before casting a no vote on the revised RBC proposal.
"The recipient of a legal opinion prefers to know that a court 'will' or 'should' or, at a minimum, 'more likely than not will' uphold the legal actions of the recipient. An opinion letter merely noting that a court 'could' uphold the actions of the recipient, although not entirely unhelpful, offers limited comfort to the recipient," he explained.
NCUA Board Vice Chairman Rick Metsger argued that the NCUA has the authority and a statutory obligation to issue the rule.
"We would not be doing our job as regulators if we did not issue an RBC rule that protects the safety and soundness of the NCUSIF, as well as the roughly one trillion dollars American consumers have on deposit at federally-insured credit unions. We have a duty to protect against 'any material risks' and to design a system which is 'comparable to' the FDIC's RBC system," Metsger said.
"A number of people have attempted to take one clause of the Credit Union Membership Access Act out of context, to ignore other language in the Act, and to misapply the courts' rulings in Chevron and related cases to contend that the NCUA does not have the authority to issue separate capital requirements for well and adequately capitalized credit unions," Metsger added.
The second risk-based capital proposal was approved in a 2-1 vote. The proposed rule has a 90-day comment period.
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