Banks Open Second Front in Assault on NCUA

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Call it a one-two punch, courtroom style.

The American Bankers Association announced Wednesday that it has filed a lawsuit challenging the legality of the National Credit Union Administration's recently revised field-of-membership regulation. The ABA also disclosed that it is drafting what it termed "a detailed amicus brief" supporting a pending lawsuit aimed at invalidating changes the NCUA made to its member-business-lending regulation earlier this year.

The Independent Community Bankers of America, which filed the member-business-lending lawsuit in September, announced strong support for the ABA's litigation, labeling the NCUA as a "captive regulator."

The field-of-membership rule that the ABA is challenging is "the latest example of the captive regulator inappropriately and illegally extending the industry's taxpayer-subsidized competitive advantage over taxpaying community banks," Camden Fine, the ICBA's president and CEO, said in a press release Wednesday.

An ICBA spokesman said the group is mulling a possible amicus brief backing the 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 associations have launched simultaneous lawsuits 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.

In a brief statement issued Wednesday, Jim Nussle, president and CEO of the Credit Union National Association, called the ABA's filing "meritless."

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 field-of-membership rule the NCUA enacted on 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, the 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 a campaign by the NCUA to expand federal credit unions at the expense of banks, Rob Nichols, the ABA's president and CEO, said in a press release Wednesday.

The ABA has retained the Washington law firm Covington & Burling to represent it. The NCUA, which will be represented by the Justice Department, 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 — but one that could grow into an increasingly significant threat over the next two decades.

For a growing number of banks, however, that future seems to be right around the corner.

Increasingly, bank CEOs gripe that they are losing lucrative deals to credit unions. Their frustration and resentment serves as a crucial backstory to the ICBA's legal challenge to the NCUA's recently revised member-business-lending regulation.

That was especially apparent in documents filed Nov. 16 responding to a motion by the NCUA to dismiss the ICBA's lawsuit. As part of the package, the ICBA provided accounts by several unnamed community bankers who claimed competing credit unions had inflicted serious, material setbacks on their institutions.

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 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 the construction of a hotel.

Complaints about participation lending by credit unions illustrate the crux of the ICBA's lawsuit against the NCUA, which was filed in September in the 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.

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 fought hard to loosen or mitigate the cap, while bankers have sought to impose as strict an interpretation as possible.

Lawyers for the ICBA and the NCUA are set to appear in court Dec. 15 to spar over the merits of the agency's motion to dismiss. If Judge James Cacheris rules against the NCUA and allows the case to continue, a second hearing on the substance of the ICBA's lawsuit is expected. After 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 lawyer involved in the ICBA lawsuit, a final decision could be rendered as early as March.

Citing confidentially requirements, the 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 the NCUA, member business loans stood at $63.9 billion at Sept. 30. While that total amounts to just 7.5% of the industry's $847 billion loan portfolio, it has grown at a compound annual 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," Skip Hageboeck, president and CEO of the $3.9 billion-asset City Holding in Charleston, W.Va., said in an interview.

"It is a shocking amount of competitive advantage they get," Hageboeck said. "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% and the credit union will lend at 3% because they don't have to pay any tax, I don't care how effectively you tell the story, the customer is taking the 3% rate. … When you give someone that significant an advantage, oftentimes they win."

Credit unions, of course, are quick to note that it's not so much the tax exemption that lets them 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 the $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. 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 Chinnery, president and CEO of the $110 million-asset Adams Dairy Bank in Blue Springs, Mo., said 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 buy 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 also gives credit unions a marketing leg up.

"What kind of marketing could I do with $300,000?" Chinnery said. "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," Chinnery said.

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