Harper’s Senate Confirmation Hearing:  What will his tenure mean for credit unions?

Probably no prior Senate confirmation hearing for an NCUA Chair has had a candidate with as documented a track record of actions and beliefs about credit unions, agency priorities and the cooperative system’s role versus banks as Todd Harper.

Readers can view the nomination hearing tomorrow, September 30, starting at 10 a.m. on the Senate Banking, Housing, and Urban Affairs Committee’s website at https://www.banking.senate.gov//

Harper’s direct NCUA experience extends from February 2011 through January 2017 when he served as Director of Public and Congressional Affairs and Senior Policy Advisor to both Chairs Debbie Matz and Rick Metsger.  He was nominated by President Trump to serve on the NCUA board in February 2019 and sworn in on April 8, 2019.  President Biden designated him as NCUA chair on January 20, 2021.

The following are excerpts from speeches, writings and events during his time at NCUA as senior policy advisor and NCUA board member.

Harper’s desire to emulate the practices of the FDIC and banking regulators is clear.   He believes credit unions should be on a “level playing field” with banks.

His policy positions show a questionable grasp of cooperative purpose, their institutions and credit union history.

His  leadership priorities are based on dystopian forecasts creating the need for ever expanding governmental regulation  and oversight.

On Confidence in the Credit Union System’s Future

At June 2019 board meeting:   With the recent inversion of the yield curve, we know that a recession is coming, we just don’t know exactly when and how severe.

December 2019 OpEd in CuToday:

We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this rule (RBC) at the start of 2020. 

February 2021 speech to the DCUC after becoming chair:

As the COVID-19 pandemic rages on, we must smartly, pragmatically, and expeditiously address the economic fallout within the credit union system. To that end, when I first became Chairman, I issued my Commander’s Call to the agency.”

August 2021 DCUC speech:

But, I must caution everyone that we are not out of the woods just yet. Credit union performance will continue to be shaped by the fallout from the pandemic and its financial and economic disruptions. With pandemic-relief efforts like supplemental unemployment benefits, foreclosure prevention programs, and eviction moratoriums coming to an end, many households could face financial stress in the coming weeks and months. This could lead to higher delinquency and charge-off rates and potential losses for credit unions — and even failures.

September 2021 Board meeting:  But, nevertheless, we ultimately should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings, and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.

Harper’s modus operandi when presenting the credit union’s system’s outlook is to focus on risk, uncertainty and fear.

His continual dour forecasts remind one of economists who have successfully predicted ten of the past two recessions.

Harper’s view of the system’s resilience to economic change is so overtly negative, it leads one to ask if he has any confidence in credit unions or the agency’s supervision competencies.

Planting a Risk Story with the WSJ

Credit Unions Ramp Up Risk

Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets  By Ryan Tracy June 5, 2014

This article in the Journal was revealed as an NCUA sourced effort by a credit union blogger who obtained a copy of an internal NCUA email celebrating its online publishing.

This PR misinformation effort occurred at the same time NCUA had to withdraw and rethink its first risk-based capital RBC rule proposal.  Over 2,050 comment letters (the most ever on a rule) were submitted, all with substantive criticism.

As a result, the agency backed off and said it would make significant changes in what became the RBC-2 proposal.

Forecasting a future of doom and gloom or hyping a present crisis is unfortunately an all-too-frequent regulatory temptation. Predicting negativity creates an aura of expertise.   It elevates the power of the regulator.  Crises enable overreach of authority.

There is no downside to predictions of future problems  by regulators.  If nothing happens, then the warning worked.  Everything turns our OK and no-harm-no foul for an erroneous judgment.  If there is a down trend, then one can claim prescience and proven expertise about the future.

This regulatory “banging the drum” PR effort with the WSJ was when Harper was in charge of NCUA’s Public and Congressional Affairs office.

On the NCUSIF’s Financial Sufficiency

Harper’s August 2021 letter to Congress recommending legislative changes to the fund’s design included:

• Increase the Share Insurance Fund’s capacity by removing the 1.50 percent statutory ceiling on its capitalization.
• Remove the limitation on assessing premiums when the equity ratio exceeds 1.30 percent, granting the NCUA Board more discretion on the assessment of premiums; and
• Institute a risk-based premium system.

These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund, thus avoiding situations like the one that led to the creation of the Corporate Stabilization Fund during the last financial crisis. Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the FDIC’s Deposit Insurance Fund.

In this June 2019 board meeting exchange with Larry Fazio, Harper conflates FDIC’s premium-based insurance system with the credit union’s 1% cooperative deposit underwriting model.  One doesn’t have to read between the lines to see where Harper would like to go with this 1% deposit asset:

Board Member Harper: Great. What percentage of the Deposit Insurance Fund can banks count as an asset on their books?

Larry Fazio: None.

Board Member Harper: None. So banks don’t count it. They have to write their premiums off as soon as they pay them, correct?

Larry Fazio: Yes.

Board Member Harper: In comparison, are credit unions allowed to consider any part of their assessments as an asset on the books?

Larry Fazio: Assessments, no.

Board Member Harper: How about their Share Insurance Fund?

Larry Fazio: So when they make a contribution to true-up the 1 percent deposit of insured shares, they count that as an asset.

Board Member Harper: But wouldn’t they keep 1 percent on their books and we technically only have 0.38 percent these days?

Larry Fazio: The 1 percent is the deposit and then –

Board Member Harper: So they keep some on their books and don’t have to charge it off, Larry, is the point I’m getting to.

Larry Fazio: Yes, but we don’t call those assessments.

On a Level Playing Field with Banks

In addition to seeking FDIC-like options for the unique NCUSIF, Harper frequently references bank regulation as the basis for similar credit union rules.  When commenting on a proposed combination rule to clarify the process for credit unions buying banks he stated:

The National Credit Union Administration Board recently proposed a rule that would guide credit union purchases of bank assets and liabilities. The proposed combination transaction rule is an important proposal and worthy of consideration. However, it exposes an important gap in the supervision of credit unions — former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union. 

The Federal Deposit Insurance Corporation supervises many of the banks that are part of these deals for consumer compliance. That agency has a consumer compliance program that is more robust than the NCUA’s program.

Harper’s core defense of the agency’s RBC rule is because the banks did it–although they subsequently dropped the requirement.  Here is his plea for a level playing field:

Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field.

The risk-based capital rule brings us under BASEL, and provides comparability with other federal regulators as required by Federal Credit Union Membership Access Act.  And,

If banks didn’t get their RBC rules delayed, I have to ask myself why should credit unions? 

On Small Credit Unions

In December 2013 the NCUA Board passed in a 2 -1 vote a rule that would prohibit credit unions operating from homes.  Harper was Chairman Matz Senior Policy Advisor at this time.

The regulation’s stated goal: “the proposed rule intends to ensure all FCUs operate in a manner consistent with modern-day expectations for insured financial institutions.” The term “modern-day” was not otherwise defined.

Chairman Matz told the Credit Union Times in an April 7, 2014, article: “Times have changed, and financial institutions have changed as well and if you are stuck in the past, that means you are not growing, and you are not serving your members well and they would probably receive better services from a different credit union.”

The rule’s premise was based on inaccurate and misleading facts as noted in this critique: “NCUA asserts home-based credit unions are “stuck in the past,” but the fact these credit unions have an average charter length of 55 years and have survived the Great Depression, World War II, the Vietnam War, and the Great Recession tells a more meaningful story.”

On Transparency and Credit Union Input

Prior to the July 2015  House banking subcommittee hearing on NCUA,  CUNA noted: “it’s been six years since the last time NCUA held a hearing on its budget.”

In questions to the NCUA Chair, a committee member described the agency’s duplicity in providing information to the committee, misuse of FOIA to redact documents and failure to post the agency budget for public review.

Chairman Matz deflects all these “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replied, “it would not be effective.”

Excerpts of the hearing can be seen here with senior policy advisor Harper sitting behind  chairman Matz.

On Exaggerating Past Crises 

People tell stories about the past for the present in order to influence the future.  NCUA is especially good at creating these historical re-interpretations.

In the March 2021 NCUA board meeting staff provided “background context” to the 2008-2009  corporate crisis.  Presenters opened by stating there was a $50 billion difference between the book and market value of corporate investments at one point in the Great Recession. They proclaimed that if the agency had let those corporates fail, then this “loss” would have caused thousands of credit unions to also liquidate.

That possibility was never an option, but a wonderful hypothetical to justify any and all subsequent actions. In fact the agency’s auditor estimated the collective corporate TCCUSF potential deficit at yearend 2009 as $6.9 Bn in the opinion released in early 2010.  That proved to be much too high as well.

By dramatically magnifying risks of prior events, NCUA avoids addressing its mutual supervision and examination responsibility for these situations. By hyping potential prior losses, the need for more regulatory resources and unilateral action  is re-justified.

Harper continued with this fictional recreation in the September 2021 board meeting by making the potential disaster even greater:

As I recall, during the last financial crisis, had Congress not acted to create the Temporary Corporate Credit Union Stabilization Fund, we would have had to immediately write down 69 basis points of the one-percent capital deposit. That write-down could have led to a cascade of losses as credit unions trued up their capital deposits with the Share Insurance Fund only to have other credit unions getting into trouble and another true-up occurring.

Although publicly supported in an open board meeting, the NCUA has done nothing to review the corporate resolution: its actual causes, options considered and actions taken upon their liquidation.   In 2010 NCUA estimated the corporate resolution costs to credit unions between $13-16 billion.  To date over $6.2 billion in surplus has been earned by the five corporate liquidated estates (AME’s).

Rhetorical banging on past and future  “risk drums” is an unfortunately tempting political tactic.  It helps concentrate power in a democracy or in an independent regulatory agency.   When those in authority say things are either bad now or bound to get worse in the future, it legitimizes the exercise of arbitrary power, new authority and assessments for more resources. Due process and public comment is often forgotten.

On Financial Regulators and Climate Change

Todd Harper said “financial regulators, like the NCUA, have a responsibility to foster resiliency to all material risks to financial institutions, including those related to climate change. By measuring, monitoring, and mitigating such risks, the NCUA can fulfill its core obligations of maintaining the safety and soundness of credit unions, protecting consumers, and safeguarding the Share Insurance Fund.”

Temperament and Leadership

Changing one’s opinion when presented with conflicting evidence is one of the most valuable skills of the 21st century.  This is not an attribute demonstrated in Harper’s NCUA roles.

A useful example of Harper’s personal style and argumentative logic is from the June 20, 2019 board meeting when he interrogated NCUA staff about the agency proposal to extend the implementation of the RBC rule until January 1, 2021.

The full 120 minute board meeting can be viewed here.  Harper’s questioning begins at approximately 50 minutes in and lasts almost 70 minutes to the end.

The entire discussion of RBC is very helpful, but more relevant now is seeing Harper’s posturing as a minority board member.   He challenges and is condescending to staff.   He uses all of the bank comparisons referenced above to support his position.   If the answer to a question doesn’t fit his thesis about the urgency and impact of RBC, then he moves on, ignoring the answer.

If this is his approach as a minority board member, what will his manner be as Chair?  Will he compel staff to suborn their professional judgments to present hypothetical future failures or align with  policy views which lack factual foundation?

Two questions highlight this hectoring style. He asked staff if RBC would have lessened the impact of losses to the NCUSIF during the Great Recession, not including the corporate problem.  Fazio replies any impact would have been marginal. Harper ignores the undermining of his position.

A second issue which he brings up repeatedly are the insurance costs from credit unions liquidated due to taxi medallion losses.  Here are just two examples:

Board Member Harper: Great. And how effective was the current risk-based net worth rule in mitigating losses at the taxi medallion credit unions that recently failed?

Larry Fazio: So the answer to that question is that the risk-based net worth requirement, while it would require those institutions to hold more capital than the leverage ratio, those institutions held levels of capital well in excess of that requirement. And even with those high levels of capital still failed.  And again,

Board Member Harper: Sure. Did the current rule, the one that’s in place right now, provide adequate protection against losses at the taxi medallion credit unions?

Larry Fazio: It’s a judgment call. I think that’s a case of they – again, they held – so I mean, let’s put a little context around that. It was a situation where the value of the collateral declined precipitously and in a material way; I think a 90 percent decline in value from the peak. The cash-flows of the revenues that the borrowers could generate was materially affected by changes in the marketplace. And so when you had that confluence of events, even an institution with as much as almost 50 percent capital – net worth – couldn’t survive that. So –

Board Member Harper: You’re essentially describing an asset bubble, correct?

Larry Fazio: An asset bubble combined with a disruption in a market. And so, yeah…

There is much irony in Harper’s repeated use of the taxi losses to argue for immediate RBC implementation.   During the entire period of the taxi medallion disruption, Harper was the senior policy advisor to the two chairman who led the agency as  these credit union portfolios declined in value.

His repeated efforts tying this episode to the RBC discussion could be seen as a way to disassociate from his responsibility at the agency when these failures developed.  Was the wolf at Harper’s door as this $765 million loss developed and he failed to notice?

As a policy priority, Harper’s singular emphasis on capital in this June 2019 inquisition as the sine quo non for credit union soundness is extremely myopic.

There will always be failures.  That’s why there is a regulator and insurance-recapitalization fund. The only way to stop failure with 100% certainty is to make things so restrictive that NCUA regulates players out of existence, which some claim is occurring now.  Credit unions manage risk, not avoid it.  It’s too costly to avoid it 100% of the time.

Harper asserts in the meeting that a handful of outliers (5)  require a policy the masses must adopt.  A policy to address the outliers would be a more effective tool, a point Fazio makes several times.

Moreover, lessons were learned during the Great Recession and credit union underwriting has changed.  History is not repeating itself today. Risk today is more tied to collateral  than concentration.

There is current industry data from over two decades that reinforce why 7% is more than adequate as a minimum standard for well capitalized.  Outliers should be supervised with “outlier expertise;” the overwhelming majority of the industry has shown it can operate at a level that has stood the test of time.

Where Will Harper’s Positions Lead NCUA and Credit Unions?

This 70-minute harangue from the June 2019 board meeting shows Harper’s authoritative, even badgering manner.   His confuses historical facts and shows no recognition of the most basic differences between cooperatives and banks.

For example, credit union equity-capital is only from retained earnings.  Whereas bank capital includes numerous options including various categories of stock, qualifying subordinated debt plus retained earnings.  Even with this differences, Harper asserts the two system’s capital comparisons must be the same.

His confusion about the different financial systems, equating the cooperative credit union model’s  purpose with banking is an analytical and factual failing that leads to policy positions completely at odds with credit union history.   His frequent use of bank/FDIC examples unmoor his regulatory priorities from the world of cooperatives.

One result is that he is completely silent on critical issues confronting the system today.  These include the absence of democratic governance by members, the self-serving mergers of well capitalized credit unions, the hidden terms negotiated when credit unions buy bank assets, the complete absence of new charters, and the lack of any joint agency-industry efforts to develop new approaches for the CLF, to support MDI’s and to respond to new technology.

His focus is solely on the power, resources and authority of the agency.  When over 97% of credit unions are rated CAMEL codes 1 and 2 and capable of providing innovative solutions to strengthen the cooperative system, the agency is absent from this dialogue.

Credit unions have successfully navigated two of the country’ worst economic downturns over the past dozen years. Industry analysis suggests that the system is overcapitalized.

What is missing is regulatory leadership willing to encourage and celebrate the self-help role and financial independence many Americans seek from their member-owned cooperative.