Call it a one-two punch, courtroom style.
The American Bankers Association announced Wednesday it has
Independent Community Bankers of America, which filed the member business lending suit in September, announced strong support for ABA's litigation, labeling NCUA a "captive regulator."
The field of membership (FOM) rule ABA is challenging represents "the latest example of the captive regulator inappropriately and illegally extending the industry's taxpayer-subsidized competitive advantage over taxpaying community banks," Camden R. Fine, ICBA's president and chief executive officer, said Wednesday in a press release.
An ICBA spokesman said the group is mulling a possible amicus brief backing ABA.
Neither trade group is a stranger to legal tangles with the credit union regulator, which over the past year has emerged as Public Enemy No. 1 to many bankers. However, this is the first time the two banking trades have launched simultaneous suits attacking different regulations, with each backing the other's tort.
Keith Leggett, a retired ABA economist and longtime credit union industry observer, said he could not recall an instance where an agency had been sued twice in such quick succession over separate issues.
But if credit union supporters are sweating over the two-pronged assault, they aren't showing it.
Jim Nussle, president and CEO of the Credit Union National Association, dismissed the ABA's filing as "meritless,' in a brief statement Wednesday.
Likewise, Dan Berger, Nussle's counterpart at the National Association of Federal Credit Unions, said the new field of membership rule falls "well within the agency's legal authority."
In broad terms, the revised ROM rule NCUA enacted Oct. 27 makes it easier for community credit unions to assemble service areas, including situations where they stretch across regional and even state boundaries.
In an act further angering bankers, NCUA on the same day said it would consider a plan to quadruple the population limit on such membership fields from 2.5 million people to 10 million.
The rule and the follow-on proposal are part of an ongoing campaign by NCUA to expand federal credit unions at the expense of banks, Rob Nichols, ABA's president and CEO, said in a press release Wednesday.
ABA has retained the Washington-based law firm Covington and Burling to represent it.
NCUA will be represented by the Justice Department. The agency declined further comment.
While banks have clashed repeatedly with credit unions over field of membership issues for at least 20 years, business lending by credit unions appears to be a relatively manageable irritant for banks in the short term — albeit one that could grow to into an increasingly significant threat over the next two decades.
For a growing number of banks, however, that future seems like it's right around the corner.
Increasingly, their CEOs gripe they are losing deals — lucrative ones — to credit unions. Their frustration and resentment serves as a crucial backstory to the ICBA's
That was especially apparent in documents filed Nov. 16 responding to a
The CEO of a Montana community bank claimed that since 2003, business loans totaling $30 million "that would otherwise have been booked by his company" had gone instead to credit unions.
Likewise, the CEO of a Michigan-based bank said his company had recently lost out on $4 million in commercial-and-industrial and construction deals to credit unions.
A CEO in West Virginia said a consortium of local credit unions recently snapped up a $6 million deal to finance construction of a hotel.
Complaints about participation lending by credit unions illustrate the crux of ICBA's lawsuit against NCUA, which was filed in September in U.S. District Court for the Eastern District of Virginia.
The trade group is objecting to a provision in the new rule that permits credit unions to exclude loans or loan participations made to non-members from counting against the statutory cap on their business lending.
Back in 1999, Congress limited member business lending by individual credit unions to about 12.25% of total assets as part of the Credit Union Membership Access Act. Ever since, credit union trade groups have striven mightily to loosen or mitigate the cap, while bankers have sought to impose as strict an interpretation as possible.
Attorneys for ICBA and NCUA are scheduled to appear in court Dec. 15 to spar over the merits of the agency's motion to dismiss. If Judge James Cacheris rules against NCUA and permits the case to continue, a second hearing on the substance of ICBA's suit is expected. Following that, Cacheris would issue a decision.
The Eastern District of Virginia has a reputation for speedy jurisprudence. Lawyers who practice before its judges refer to it as the "rocket docket." According to one attorney involved in Independent Community Bankers of America v. National Credit Union Administration, if the case is permitted to proceed next week, a final decision could be rendered as early as March.
Citing confidentially requirements, ICBA declined to identify any of the bankers who submitted affidavits supporting its case, but plenty of CEOs are willing to speak publicly. None like the trends they are seeing.
According to NCUA, member business loans stood at $63.9 billion on Sept. 30. That total amounts to just 7.5% of the industry's $847 billion loan portfolio — but it's grown at a compound annual growth rate of 13% since the same period in 2011.
Now, bankers fear a new and bigger wave of competition from credit unions blessed with a tax exemption and emboldened by liberalized rules.
"Most bankers are frustrated with credit unions' tax exemption, whether we face them a little or a lot," Charles "Skip" Hageboeck, president and chief executive officer of $3.9 billion-asset City Holding Co. in Charleston, West Va., said in an interview.
"It is a shocking amount of competitive advantage they get," Hageboeck added. "This isn't a matter of how effectively we serve our clients. If you're a borrower and the bank will lend you money at 4 percent and the credit union will lend at 3 percent because they don't have to pay any tax, I don't care how effectively you tell the story, the customer is taking the three percent rate… When you give someone that significant an advantage, often times they win."
Credit unions, of course, are quick to note that it's not so much the tax exemption that allows them to offer better rates — it's the not-for-profit structure, upon with the tax exemption is based. Not having to worry about making money for shareholders, they argue, allows them to put their members' best interests first, and earns them their tax status.
Still, bankers remain bitter about what they see as an unfair advantage.
Noah Wilcox, president and CEO of $314 million-asset Wilcox Bancshares in Grand Rapids, Minn., said his company recently lost a longtime customer to a credit union that beat the rate his bank was offering "by at least 200 basis points."
"I'd be criticized by the Federal Reserve and the State of Minnesota if I agreed to those terms," Wilcox said in an interview. Credit unions are doing deals "that are so far out-of-the-box from what we can do that customers are going to begin saying `Community banks are too hard on us.'"
Likewise, City Holding "absolutely has lost loans" to credit unions, Hageboeck said. "I could name credits that they've taken from us…If our bank didn't have to pay taxes, we could give all our employees close to a 50% raise, or we could hire close to 50% more people, or we could cut the interest rate on every single loan we make by nearly 20%. Credit unions don't have the second -largest expense our bank faces. After compensation, taxes are the biggest expense we have."
David C. Chinnery, president and CEO at $110 million-asset Adams Dairy Bank in Blue Springs, Mo., said in an interview that credit unions' competitive advantage hit close to home recently when a friend told him he was considering a local credit union for a loan to purchase a certified public accountant practice.
"It's getting ridiculous," Chinnery said. "We clearly lose business to credit unions. Actually they're probably bigger competitors than banks…They're probably No. 1 and No. 2 of the top three competitors of our bank."
Along with lost business, Chinnery said the tax exemption gives credit unions a marketing leg up, as well. "What kind of marketing could I do with $300,000? I could go out and just buy deposits. I could go out and buy loans… I could sponsor [the local] high school football team and the field and the band that just went to the Macy's Thanksgiving Day Parade."
Worse yet, credit unions are doing what Chinnery and his bank can't. He said a local credit union just signed a sponsorship agreement with the Kansas City Chiefs — no small coup in a football-mad town.
"We can't spend the money locally because we're sending it to the federal government," Chinney said.
