On Compliance: What the Supreme Court’s ‘Administrative State’ Decision Means for Credit Unions

gavel on a court desk with flag
Michael S. Edwards Photo

5 minutes

NCUA’s approach to regulation protects it from the uncertainty many agencies now face following the Environmental Protection Agency ruling.

The U.S. Supreme Court’s recent administrative law decision in West Virginia v. Environmental Protection Agency may have sent shockwaves throughout the Washington, D.C. regulatory state; however, it is unlikely to disrupt policymaking at the National Credit Union Administration, and not just because NCUA headquarters is across the Potomac River in Alexandria, Virginia.

Unlike the Environmental Protection Agency, it would be out-of-character for NCUA to overstep its congressional authority by regulating on a “major question” without clear authority from Congress. For example, NCUA’s approach of seeking third-party vendor examination authority from Congress instead of reinterpreting existing Federal Credit Union Act provisions to create it by regulation, illustrates why NCUA is not EPA and also curiously involves the Y2K bug. (More on this later in this article.)

Details of the Recent EPA Decision

In West Virginia v. EPA, the Supreme Court nixed a 2015 EPA effort to reinterpret the Clean Air Act to regulate carbon dioxide. The EPA had tried to force power companies to shift away from coal-powered electricity generation toward more-favored natural gas and renewable energy using a type of “cap-and-trade” system. In a cap-and-trade system, regulatory credits are provided to less-polluting power plants, which operate below a specified pollution baseline. Those cleaner plants can sell their credits to plants that pollute above that baseline, allowing the dirtier plants to continue to operate, albeit at an increased cost that could prove prohibitively expensive based on market conditions.  

The statutory authority for this cap-and-trade system was based on a phrase in the Clean Air Act giving EPA authority to establish the “best system of emission reduction…that has been adequately demonstrated,” language that Congress adopted in 1970. Before 2015, EPA had only issued rules to for physical “systems”—i.e. groups of technological devices like emissions scrubbers—to make existing power plants cleaner, such as to remove mercury emissions. The move from regulating emission systems like scrubbers to establishing a cap-and-trade “system” represented a major shift in government policy even though both definitions of “system” fit the dictionary definition of the word.

Regardless of one’s views about pollution or global warming, the Supreme Court’s ruling makes sense. The type of system that Congress was referring to in 1970 was a physical system of technological devices, like emissions scrubbers, and not a cap-and-trade system. EPA had also interpreted the term “system” to mean a group of technological devices for over 40 years before changing its interpretation of “system” to mean an “organized set of rules” in 2015.

The Supreme Court held that the EPA’s efforts to shift its definition of the word “system” was a “major question” that required “clear congressional authorization” because it changed things from “one scheme of regulation…to another.” Even though both definitions of “system” fit the dictionary definition of the word, shifting the definition of the “system” from one sub-definition to another had a big practical impact on industry that was different from what Congress had intended. EPA had also hoped to phase out coal power by shifting the definition of “system,” when previously the agency had focused on making powerplants relatively cleaner.

Applying the EPA Decision to NCUA

In terms of what this means for credit unions, NCUA is already the type of circumspect regulatory agency that the Supreme Court is telling the EPA to be. NCUA’s efforts to obtain statutory third-party vendor examination authority proves this, even though it involves the Y2K bug from the 1990s. As individuals who remember those heady times no doubt recall, many computer programs of that bygone era only used two digits to represent the year, such as “99” instead of “1999.” Computer engineers and Washington policymakers alike feared that, on Jan. 1, 2000, all computers would suddenly realize that it was the year “00” and the result would be a technological Armageddon not seen since Terminator 2: Judgment Day.

The U.S. Congress fortunately averted such an apocalypse by adopting the Examination Parity and Year 2000 Readiness for Financial Institutions Act in 1998. The impact of this law on credit union land was that it established Section 206A of the Federal Credit Union Act. Section 206A temporarily gave NCUA examination authority over credit union service organizations as well as credit unions until Dec. 31, 2001, when the work to prepare for the turn of the century—and any fallout from the Y2K bug—would no doubt have been resolved, one way or another. Section 206A did in fact expire as scheduled on Dec. 31, 2001.

Since that time, NCUA has lobbied Congress without success for authority to examine CUSOs and other third-party vendors. NCUA says that this lack of authority is a “growing regulatory blind spot [that] has the potential to trigger cascading consequences throughout the credit union industry and the financial services sector that may result in significant losses” to the share insurance fund and impact national security. Instead of deferring to Congress, NCUA could have reinterpreted its Federal Credit Union Act Section 204 examination authority to cover examination of CUSOs and other vendors the way the EPA reinterpreted the Clean Air Act. NCUA has never tried to do that because the fact that Congress gave the agency statutory CUSO examination authority temporarily under Section 206A, by implication, means that Section 204 cannot be interpreted to allow examination of CUSOs or other third-party vendors.

NCUA also typically acts consistently with its policy directives from Congress even when Y2K-bug-related policy is not a factor. Much like the United States’ very first regulatory agency, the U.S. Steamboat Inspection Service—a federal agency created in 1871 that was composed entirely of steamboat engineers who focused on preventing boiler explosions and sinkings, as well as licensing steamship officers—NCUA is a model regulatory agency with astute leadership whose only interest is serving the public good by promoting safe and sound credit unions. While many other industries may be experiencing significant regulatory uncertainty in the wake of the Supreme Court’s West Virginia v. EPA decision, credit union regulation is likely just to keep steaming along at the federal level smooth and steady, like usual.

Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.

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