CUT: Why did you decide to join the board?

McWatters: I was teaching at SMU law school and had been doing that for a little over two years and I received a phone call from Sen. Mitch McConnell's (R-Ky.) office asking me if I would be interested in doing this. It caught me by surprise. I reflected on it for a while and asked questions. I decided to submit myself for vetting because it's something I had not done before. I've worked in a lot of different areas of law and most of it was in the private sector. I've done various public sector gigs and held academic positions but going to a Senate confirmation hearing to serve in a capacity like a member of the NCUA board is something I had not done before, so I was intrigued by the challenge. I welcomed it and I have not been disappointed.

CUT: What made you stand out among other possible candidates for the position?

McWatters: Sen. McConnell and his appointments people were well aware that the TARP congressional oversight panel work was pretty prodigious. We were required to report to Congress every month. The reports were usually about 100 to 150 pages long. The longest report was on AIG and it was around 350 pages. We worked well together as a board. I was on the panel during the time that Sen. Elizabeth Warren (D-Mass.) was the chair and I worked very well with her. We worked in a very bipartisan manner and I think that was certainly appealing to Sen. McConnell.

CUT: Did you get to work with Sen. McConnell?

McWatters: It was essentially his staff.

CUT: How has your work on the TARP panel helped you in your current position?

McWatters: In the TARP congressional oversight panel, we investigated the Treasury Department's implementation of the TARP program and how the $700 billion of TARP money was deployed. But in doing that, we also investigated the fundamental causes of the financial crisis – who was at fault and why. One thing that I learned was credit unions are not too big to fail individually. The entire credit union community as a whole is not too big to fail and credit unions did not cause the financial crisis. So, regulating credit unions as if they could threaten the U.S. economy or that they were too big to fail was simply the wrong approach to take.

CUT: Your swearing-in ceremony was held at Rep. Jeb Hensarling's office in Dallas. What made you choose that location?

McWatters: I've known Congressman Hensarling since 1979. We were law school classmates together. I met him probably on the first or second day of law school. We've been close friends over these past 35 years and it just seemed like the natural place where I wanted to be sworn in. I knew him for about 20 years before he got to the House of Representatives.

CUT: Do you think there should be some NCUA-related hearings in the House Financial Services Committee? Would you like to see more congressional hearings?

McWatters: That's Chairman Hensarling's call. I cannot predict what Congressman Hensarling is going to do. He has a very important job with a full mandate that includes a lot of different portfolios other than the NCUA, so if he deems it important or necessary or prudent to have a hearing concerning the NCUA then I think that would be great. I anticipate that there will be a hearing similar to what just occurred at the Senate Banking Committee on regulatory relief but beyond that, it's his call.

CUT: Some in the industry have said they are surprised the NCUA's proposed risk-based capital rule has not been the subject of a hearing yet in the Senate or the House. Do you agree?

McWatters: I suspect that if there is a demonstrative pushback on the revised risk-based capital proposal, there could very well be a hearing, but I'm not sure there will be that kind of pushback on this rule.

CUT: You voted against the revised risk-based capital proposal. What would have to change in the proposal for you to ultimately support it?

McWatters: If the proposal goes to final and there's a two-tier structure in there, as there is today, than I will not support the rule. I will not support a rule that based upon 30 years of legal experience, including experience reading a lot of statutes and regulations while serving on the legal opinion committees of large national law firms assigning a lot of legal opinions myself, violates the Federal Credit Union Act. It's absolutely clear that the NCUA as recently as 2007 was emphatic that the NCUA Board could not adopt a two-tier risk-based net worth standard. The NCUA and its general counsel agreed with me but there was a change of mind. No one has fully articulated to me why there was change of mind. It's also very clear that CUNA retained the services of Venable law firm – a very fine law firm – that rendered a very strong opinion agreeing with my analysis. It's also true that the NCUA retained the services of Paul Hastings and paid the law firm $150,000 to render, in my view as a former member of legal opinions of large law firms, a very weak opinion.

If the NCUA is going to increase the capital requirements of credit unions, it seems like the NCUA should incorporate a way for credit unions to raise supplemental capital into the final rule. Supplemental capital is prohibited from enhancing the leverage ratio other than for low-income credit unions but for risk-based capital purposes – from my reading of the statute and most people's reading of the statute – there's no limitation. The NCUA board can adopt supplemental capital for risk-based capital purposes and it seems to me that it's imperative. It would be a great benefit to the credit union community to work that into the rule as soon as possible.

CUT: NCUA Board Chairman Debbie Matz said vendor authority is the agency's top legislative priority. She connected the issue to cybersecurity. Do you think the agency needs authority over third-party vendors?

McWatters: This is an issue I continue to analyze but my instincts tell me we don't need it. There are protocols already in place with respect to due diligence when a credit union retains a vendor. It seems to me to be pretty thorough and pretty robust. I've asked the question, does the NCUA have the expertise to actually deal with this issue? I'm not at all convinced that the NCUA would be able to retain the services of third parties that would add much value to the process.