Bankers Claim NCUA Made End Run Around Congress

WASHINGTON — Banking trade groups are furious about a move by the National Credit Union Administration to notify more than 1,000 credit unions that they may not need to comply with a cap on business lending.

The action this week is the latest twist in the ongoing saga over the extent to which credit unions should be allowed to compete with banks on commercial loans.

Banking groups see the agency's move as an end run around Congress, which has discussed but has yet to pass a bill that would raise credit unions' business lending cap.

"It's a credit union regulator gone wild," said Paul Merski, chief economist for the Independent Community Bankers of America.

But the credit union industry is downplaying the action's significance, saying that the NCUA is merely simplifying its process for granting an exemption to the cap on business lending, and that the 1,000 or so affected credit unions would have been eligible to receive an exemption anyway.

At issue is an NCUA decision on Tuesday to notify 1,003 credit unions that they're eligible to be considered low-income credit unions, which are exempt from the statutory cap on loans to member businesses. (Credit unions that are subject to the cap are barred from making business loans in excess of 12.25% of their total assets.)

Those credit unions could join the roughly 1,100 other credit unions serving low-income areas, which are already exempt from the cap. In order to get that label, more than half of an institution's membership must be located in a designated low-income area.

Until recently, it's been up to credit unions to show the NCUA that they meet the criteria, an often arduous process.

But over the last year, the agency has been making those determinations on its own by matching information from federal credit unions with 2010 Census data, according to David Marquis, the NCUA's executive director. The decision on Tuesday is part of an effort to reach out to those institutions.

"The burden of having to show us that they're at the 50% level is a lot easier to do now," he said.

Marquis would not speculate regarding how many of the credit unions notified will opt in to the low-income designation, which requires only a simple reply to the regulator's letter.

"How many of them are going to take us up on this? Anybody's guess. Who knows?" Marquis said.

For federal credit unions, though, there are numerous benefits to being designated as a low-income institution. Such institutions are not only exempt from the small business lending cap, they're also eligible for certain grants and low-interest loans, they're able to accept deposits from non-members, and they're authorized to obtain supplemental capital.

Credit union trade groups noted that no matter the response rate to this week's letters, more than 70% of the approximately 7,200 credit unions nationwide will still be subject to business lending cap. They vowed to keep pushing for legislation that would lift the cap for all credit unions.

They also emphasized that the affected credit unions were already eligible to be classified as low-income institutions.

"I think a lot of credit unions were unaware that they were even eligible for the designation," said Brad Thaler, vice president of legislative affairs at the National Association of Federal Credit Unions, an industry trade group.

Banking groups, however, were livid at what they called an abuse of power by NCUA, saying it has usurped Congress' authority on the issue.

Capitol Hill has long been the site of a lobbying battle between credit unions and banks over the business lending cap, with banks seemingly holding the upper hand, at least in the short term. The NCUA has testified in favor of legislation that would raise the existing cap.

"It's actually an outrageous abuse of regulatory power to overstep what Congress has been debating for over a decade," the ICBA's Merski said.  "I think they intentionally waited for Congress to go out for the month."

James Ballentine, the American Bankers Association's executive vice president of congressional relations and political affairs, suggested that the regulator's action will yield large benefits for credit unions.

"It's no longer an avenue for them. It's a four-lane highway for them to get into more business lending," he said.

There is one point that both sides agree on: the decision was largely unrelated to one of its ostensible purposes, which was to provide relief to states hard hit by the nation's summer drought.

The Obama administration couched the move as a way to help areas affected by the drought. An administration fact sheet stated that nearly half of the eligible credit unions are in severely drought-stricken states.

But the flip side of that statistic is that slightly more than half of the eligible credit unions — 53%, to be exact — are not located in such states.

Mary Dunn, deputy general counsel at the Credit Union National Association, an industry trade group, said that the agency's decision was actually part of an administration-wide effort to reduce regulatory burden on various industries.

"I think the fact that it might have some connection with drought relief is sort of incidental," she said.

But bankers accused the NCUA of being opportunistic.

"To use a weather emergency to take advantage of this opportunity is really an overreach by a regulator that we think has run amok," Ballentine said.