What is Mark McWatters’ legacy at NCUA?

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After six tumultuous years, Mark McWatters is preparing to leave the National Credit Union Administration board.

The question in the aftermath of that is what kind of impact he made and how he’ll be remembered.

McWatters joined the regulator in 2014, so his tenure was bookended by the Great Recession and the onset of a new economic downturn related to the coronavirus. However, much of his time on the board was spent addressing policies that went beyond dealing with the effects of the financial crisis.

President Trump named McWatters acting chairman at the agency shortly after his inauguration and removed the “acting” title five months later. Though the gavel was later handed to Rodney Hood, as a Republican McWatters still has a majority position on the board. More than half of his time at the agency has been spent either in the majority party or as chairman.

“He brought an intellectual rigor to the position that I think was very useful to the agency and to credit unions,” said Mary Dunn, an attorney at CU Counsel, a legal consultancy. “He was very concerned about accountability, very concerned about getting regulations right — not just throwing a regulation at a problem, but let’s rightsize the rule to make sure the solution isn’t worse than the problem.”

McWatters turned to a "Star Wars" metaphor to characterize his regulatory philosophy.

"It's preferable to regulate with a lightsaber than a Death Star," he said in an email. "Although the former requires a certain level of expertise, the latter creates needless collateral damage and unintended consequences."

Though his term ended in August 2019, McWatters pledged to stay on until a successor was confirmed, which is standard practice for many members of the board. Kyle Hauptman’s nomination has cleared the Senate Banking Committee and been passed on to the full Senate. A date for a vote has not yet been set, though he is likely to be confirmed in time for the agency’s Sept. 17 board meeting.

When McWatters arrived at NCUA, the agency was at the height of the risk-based capital debate. NCUA Chair Debbie Matz, who led the panel when McWatters joined, had proposed a controversial risk-based capital rule that set records for the number of comment letters the agency received.

Shortly after taking the oath of office, McWatters pledged to oppose any revision to the RBC rule that did not include a second comment period. Yet six years and several changes later, the agency still has not implemented the rule and the latest delay was intended to give the agency time to rework broader capital standards.

Once Hauptman’s term begins, “you’re going to have another conservative appointed to the board and they will probably be more likely to continue pushing for a delay in the implementation of the [RBC] rule going forward,” said Keith Leggett, a former executive at the American Bankers Association and a frequent commenter on credit union issues. “And you’ll have [Todd Harper, the board’s only Democrat] out there making the argument they need to do it now.”

Others suggested McWatters could have done more to halt — or at a minimum, reduce the impact of — a rule he initially criticized. Instead, he occasionally spoke out on the issue but ultimately voted to move forward with changes rather than making broader attempts to kill the rule.

“He never stood up and took action on what he claimed was an illegal rule when he had the power to do it,” said Chip Filson, a co-founder of the consulting firm Callahan & Associates. “He kicked the can down the road on virtually everything that would have required immediate accountability.”

That view isn’t universally shared, and some in the industry praised McWatters’ willingness to thoroughly examine an issue and change his position over time.

“The board has come to realize the necessity of taking a holistic view" of capital, said Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors. “They’re all connected — risk-based capital, subordinated debt, prompt corrective action — it’s like whack-a-mole. If you deal with one without considering what’s going to happen with others, you create problems. It is something that needs to be addressed globally and not just in a siloed fashion.”

For his part, McWatters said that “sensible systemic capital reform” was the next big item on deck when he left the chairmanship, and that he and board member Rick Metsger invested more than two years into developing a subordinated debt rule that would have included supplemental and secondary capital.

“I’m optimistic that Rick Metsger and I would have finalized these rules by now without creating any safety and soundness issues,” he said.

Capital reform, he added, is “complex and the learning curve is relatively steep, but the benefits are tangible and material. I encourage the NCUA to make appropriate revisions to the proposed subordinated debt rule based upon the public comments and promptly finalize the regulation. I also encourage the agency to propose a credit union leverage ratio rule by no later than the end of the year. It’s long overdue.”

'I was happy at the NCUA'

McWatters’ tenure at the agency was also marked by a series of scandals, first a high-profile feud with Matz, followed by a Washington Post story focused on what some saw as inappropriate expense-reimbursement policies under his watch.

Additional Washington Post coverage noted that McWatters primarily worked from his home in Dallas, only traveling to NCUA’s Alexandria, Va., headquarters for board meetings.

“I don’t care about internecine fights like that and in fact I probably like it because it means … if the regulators are fighting among themselves they’re not hurting the business I love,” said Paul Leavell, a former credit union executive in South Carolina who has held positions at Charlotte Metro and Nusenda Credit Unions.

As he has in the past, McWatters insisted any disputes with Matz were merely based on policy, and he has repeatedly emphasized the collegial and productive relationship he had with Metsger despite being from opposing political parties. Yet he also recently bemoaned a lack of bipartisanship at the agency and suggested the current climate there could make it harder for big ideas to come to fruition.

There were also moments when it seemed McWatters might leave the regulator after his name was floated for leadership positions at other agencies. Then-President Barack Obama nominated him to the board of the Export-Import Bank, but that nomination stalled in the run-up to the 2016 election. Later he was rumored as a candidate for the director of the Consumer Financial Protection Bureau, though that appointment ultimately went to Kathy Kraninger.

The Post stories, Leggett said, were “more directed to block him from becoming director of the CFPB.” McWatters worked for former Rep. Jeb Hensarling before joining NCUA, and Hensarling had worked to limit the CFPB’s authority.

“His name was being floated and just kind of conveniently the Washington Post story came out around that time,” Leggett said. “My opinion is it wasn’t meant to address his role at NCUA but to block the administration from appointing him to another position.”

Filson suggested McWatters would have happily moved on from the agency.

“A name doesn’t come up [for nominations to government posts] unless a person has sounded that out — people don’t just speculate about that type of position with a name like that without that person having approved it," he noted.

McWatters said he “lobbied for neither position. I was happy at the NCUA and, believe it or not, the phone rang unexpectedly on both matters.”

In the end, McWatters stayed on at NCUA, advancing several key issues during his time there, including increasing transparency surrounding the budget, field-of-membership modifications and moves to overhaul chartering new institutions.

“The most significant ‘big idea’ we developed was the merger” of the Temporary Corporate Credit Union Stabilization Fund into the National Credit Union Share Insurance Fund, said McWatters. That not only resulted resulted in nearly $900 million being returned to credit unions, but also helped shore up the NCUSIF with a $1 billion influx of funds, “which is significant today with the economic pressures of the COVID pandemic," he added.

He also helped with a rework of the overhead transfer rate, which determines how much money the agency pulls from the National Credit Union Share Insurance Fund to cover its own costs. Ito praised McWatters for those efforts since “it’s very technical and not the sexiest thing in the world.”

McWatters was the “first board member in 20 years to … look at the overhead transfer rate and try to understand it,” added Ito. “He found it confounding and said … why can’t we come up with a system that’s more transparent and more equitable. That’s a huge thing for the state system that a new methodology was created instead, and instead of just tweaking the [existing] methodology it was a complete overhaul.”

McWatters came to the regulator without any direct credit union experience, something Hauptman was criticized for during his confirmation hearing. The Federal Credit Union Act limits the number of board members who can have recent ties to the industry and stipulates that the president “must give consideration to individuals whose experience in financial services makes them ‘especially qualified’ to serve on the board." But McWatters’ lack of connections to the credit union movement may have hampered his effectiveness, said Filson.

“Ultimately it shows the difficulty any board member has who comes to the job without some experience or knowledge or relationships with credit union people and the cooperative system,” Filson said.

Dunn suggested the issue is less about experience than a board member’s approach to the industry he or she is regulating.

“I don’t think it hurts to have an independent person on the board who may or may not have had longstanding credit union experience, as long as when they get to the job they prioritize what’s best for credit unions and their members,” she said. “If they do that, the dominoes and the cards all fall into place.”