When is a regulation binding on your credit union?

October 26, 2020 at 10:06 am Leave a comment

NCUA has joined with the other financial regulators in support of a statement explaining when a regulation is binding on your credit union. Although this action warms the hearts of those of us who believe that not only is there too much regulation, but that it has become way too easy to impose regulations on institutions big and small, the exact impact on your credit union’s day to day operations remains to be seen. 

Whenever I delve into the role of regulations, I’m always reminded of Justice Potter Stewart, who explained in a 1964 Supreme Court decision that he could not define pornography, but knew what it was when he saw it. Similarly, as participants in the most heavily regulated financial industry in the country, credit unions are bombarded with a host of supervisory guidance, FAQs, opinion letters and enforcement actions, all of which could potentially impact their institution’s compliance practices. On paper, it seems so straightforward. Section 553 of the Administrative Procedures Act provides for the publication of proposed rules and a comment period, during which interested stakeholders can write in their suggested improvements. However, this orderly process doesn’t apply to “interpretive rules or general statements of policy.”

In 2018, the federal banking regulators including the NCUA issued a joint statement answering this question. Now these same regulators are trying to tie the hands of their successors by converting the 2018 statement into a codified rule. The proposed rule reiterates what is already, in theory, binding law. Most importantly for our purposes, the statement explains that “Examiners will not criticize (through the issuance of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, and supervisory recommendations) a supervised financial institution for, and agencies will not issue an enforcement action on the basis of, a ‘violation’ of or ‘non-compliance’ with supervisory guidance.” Supervisory guidance can however be used as examples of best practices. Furthermore, this guidance – oops, I mean rule – will have no impact on interpretive rules, such as the one which allowed the US Department of Labor to classify certain mortgage originators as non-exempt employees. 

All of this is to say that this rule will have little direct impact on your compliance efforts. After all, even if they are not officially binding, supervisory guidance does reflect an agency’s view as to how your credit union should conduct its operations. Nevertheless, clarification of this statement has important consequences. Most importantly, it increases the likelihood that regulators will use the notice in common procedure to impose new requirements on financial institutions as opposed to short-circuiting the regulatory process by simply issuing guidance. Also, it is perfectly acceptable to request that your examiner cite the specific rule or regulation with which your credit is not complying so as to ensure your credit union is actually bound by law to comply. 

Entry filed under: Compliance, Legal Watch, Regulatory. Tags: , , , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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