By Jeff Bater
Sept. 7 — Community banks are escalating their long-running feud with credit unions over commercial lending limits with a lawsuit that challenges a rule they say stretches the law “beyond its breaking point” ( Indep. Cmty. Bankers of Am. v. Nat'l Credit Union Admin., E.D. Va., No. 1:16-cv-01141, 9/7/16 )
The Independent Community Bankers of America (ICBA) said the National Credit Union Administration's (NCUA) member business loan (MBL) rule runs contrary to the language of the Federal Credit Union Act, as amended in 1998 by the Credit Union Membership Access Act. The statutory authority expressly limits the amount of commercial loans that may be held on credit union balance sheets and clearly defines “member business loan” as any commercial loan, according to the ICBA.
Its lawsuit was filed Sept. 7 in the U.S. District Court of the Eastern District of Virginia. The banking group said in a news release that by allowing a credit union to exclude nonmember commercial loans or participations — that is, loans originated by another credit union to a borrower who is not a member of the credit union purchasing the loan or participation — from its calculation of the MBL cap, the NCUA has provided the credit union industry with “a huge loophole” it can easily exploit to increase commercial lending in violation of the law.
“The NCUA is attempting to unilaterally expand loopholes for tax-exempt credit unions by sidestepping Congress and putting consumers at risk,” ICBA President Camden R. Fine said in a statement. “This unlawful rule from the NCUA is the latest example of the agency stretching the law beyond its breaking point to serve as the tax-exempt credit union industry’s regulatory rubber stamp.”
The regulator finalized the MBL rule in February. It moved from prescriptive limits on credit unions — such as collateral and security requirements, equity requirements and loan limits — to principles-based regulation. The regulation gave credit union loan officers the ability, under certain circumstances, to not require a personal guarantee. It also replaced explicit loan-to-value limits with the principle of appropriate collateral, eliminating the need for a waiver.
John Fairbanks, an NCUA spokesman, said the regulatory agency is reviewing the ICBA complaint and will respond.
Jim Nussle, president of the Credit Union National Association (CUNA), defended the rule in a statement, saying it falls well within its statutory authority to interpret the application of the member business lending cap.
The ICBA lawsuit, however, says the NCUA rule violates the plain terms of the Federal Credit Union Act, as amended. It says the phrase “such loans outstanding” in section 1757a clearly refers to all “member business loans” carried on the books of the credit union. Subject to certain narrow statutory exceptions, and contrary to the exclusions adopted by NCUA, the key term “member business loan” is expressly defined in the statute for purposes of this restriction to include “any loan” used for a “commercial” or other “business” purpose, the suit says.
“Under the plain wording of the Act, the commercial loans subject to the statutory restriction are not limited to loans made to members of the credit union and do not exclude loans or portions of loans the credit union acquires from other lenders,” the lawsuit says. “The Act does not give NCUA any authority to create its own regulatory exceptions to section 1757a’s express limit on commercial lending.”
Credit union industry groups characterized the ICBA suit as “a baseless attack.”
“This lawsuit lacks merit, and is merely a self-serving publicity stunt to distract community bankers from the real issues that should be concerning them, namely the encroachment by large banks into the business of small banks and their resulting loss of market share,” Nussle said.
Dan Berger, president of National Association of Federal Credit Unions (NAFCU), said that during the crisis, banks weren’t complaining about MBL but, instead, avoiding new business loans altogether.
“Credit unions, by contrast, stepped up,” Berger said in a statement. “If the banks had put this much effort and money in policing themselves, maybe they could have helped prevent the financial crisis they caused that harmed consumers and our country's economy. NAFCU will continue to vigorously defend credit unions’ ability to provide member business loans.”
Credit unions have lobbied for years on Capitol Hill for legislation that would increase their lending limit (229 BBD, 11/29/12). Banks have pushed in the opposite direction. When the NCUA rule was approved in February, the ICBA said in a statement the regulator's plan risked the soundness of federally insured credit unions and that expanding loopholes to the 12.25 percent cap on business-lending authority would replace strict commercial lending standards with “abstract principles, weakening loan standards and allowing large credit unions to flout the cap set by Congress.”
The rule removed regulatory provisions not called for by law. After the rule was approved, NAFCU urged leaders of Congress to raise the lending cap under the FCU Act.
In a letter to top lawmakers, NAFCU Executive Vice President of Government Affairs and General Counsel pointed out the rule did not alter the federal statutory cap on credit union member business lending under the law. “Currently, credit unions have a 12.25% asset cap on their member business lending (MBL), with loans of only $50,000 or less exempt from this cap,” she wrote. “Passed in 1998, these arbitrary thresholds are severely outdated and have not increased with inflation.”
The ICBA filed the lawsuit as the NCUA considers a separate field-of-membership proposed rule that the banking group says exemplifies “its lax and questionable approach to credit union oversight.” The proposal would significantly expand the definition of “well-defined local community,” which by law limits the territory a community-based credit union can serve, to include any congressional district, according to the ICBA.
“Only Congress has the authority to set credit union laws, and the NCUA has ignored the debate on Capitol Hill to satisfy large, growth-oriented credit unions that are subsidized by the American taxpayer,” Fine said. “ICBA and the nation’s roughly 6,000 community banks believe that the credit union industry should not be allowed to continue expanding its lending authority as long as it remains exempt from taxation and the federal financial regulations that taxpaying community banks are obligated to meet.”
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