The Independent Community Bankers of America (ICBA) this week filed a lawsuit against the National Credit Union Administration (NCUA), alleging the credit union regulator overstepped its bounds and violated federal law with a commercial lending rule it issued earlier this year.
“The NCUA is attempting to unilaterally expand loopholes for tax-exempt credit unions by sidestepping Congress and putting consumers at risk,” ICBA President and CEO Camden R. Fine said in a statement announcing the suit. “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.”
At issue is a final rule issued by the NCUA early this year that aimed to move away from a prescriptive approach and toward a “broad, principles-based regulatory approach.” The rule would give credit union loan officers the ability to not require a personal guarantee under some circumstances, lift limits on construction and development loans, and exempt credit unions with assets under $250 million and small commercial loan portfolios from certain requirements. The rule also would replace explicit loan-to-value limits with the principle of appropriate collateral and eliminate the need for a waiver, and it would allow credit unions to exclude non-member business loans from the calculation of its member business loan cap.
“I think when you look at it, it really does look like the whole discussion is going to be centered around the word ‘make,’” said Keith Leggett, an economist and financial industry consultant who runs the blog Credit Union Watch. “When you look at the business loan cap, it is dealing with the making of business loans. Does buying a participation constitute making a business loan? That’s going to be the center point.”
Commercial lending has long been a sore spot in the continuing feud between banks and credit unions. When credit unions have pushed for looser limits on their ability to make business loans, banks have pushed back, often with the refrain that “If you want to act like a bank, pay taxes like a bank.” Banking trade associations have also argued that their beef is not with small credit unions but with what they characterize as larger “bank-like” credit unions that encroach on banks’ turf without paying taxes or submitting to the same level of regulations as the banking industry.
“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.”
The ICBA said in its statement that “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 trade association charges in its lawsuit that the NCUA’s rule contradicts the plain language of the Federal Credit Union Act, which limits the amount of commercial loans and interests in commercial loans that any insured credit union may hold on its balance sheet.
While banking trade associations had warned the NCUA they would sue if the regulator finalized its member business loan rule, Leggett also remarked that the rule won’t go into effect until Jan. 1, 2017 and that could make the case a little difficult for the banking association.
“What is interesting about this is that ICBA has sued before you can show harm, and that’s going to be the hard part in this lawsuit. What judges will look at is ultimately, are you harmed?” he said. “[The ICBA is] asking a judge to speculate what will be the impact of this, as a hypothetical.”
NCUA Spokesman John Fairbanks said the regulator has a policy of not commenting on litigation and told Banker & Tradesman by email that the “NCUA is reviewing the complaint, and the agency will respond.”
