The National Credit Union Administration is poised to broaden its rules governing member business lending despite more than 1,000 sharply worded protest letters from bankers.
Banks' effort to block or at least water down the member-business-lending overhaul has fallen short, and the version that the NCUA board is expected to OK on Thursday is substantially similar to the draft issued last summer, sources close to the board said.
"I expect that the final rule will very closely mirror the proposed rule," Dennis Dollar, a former NCUA chairman, wrote in an email to American Banker on Tuesday. "I don't expect [the board] to roll over for the bankers, nor frankly are they likely to follow the credit union desire to expand their interpretations of what they can do in the [member-business-loan] arena very much further than where they were in the proposed rule."
Board members "may tinker around some edges, but it's not going to change dramatically one way or the other," Geoff Bacino, who served on the board from 2000 to 2001, said in an interview Tuesday. "The final product is going to look very close to what was put out to comment."
The NCUA released its draft in June. A 60-day comment period began following its publication in Federal Register on July 1 during which the agency received more than 3,000 comment letters, the majority signed by angry bankers.
A subsequent proposal revamping field-of-membership rules drew an even stronger reaction. The NCUA received more than 10,000 letters about that plan, which is still under consideration.
The Credit Union Membership Access Act of 1998 capped member business lending by credit unions at 1.75 times an institution's net worth, which equals approximately 12.25% of total assets. The NCUA lacks the authority to adjust that threshold, but its final rule is expected to include several provisions that would simplify small-business lending.
The 101-page draft regulation would eliminate the limit on construction-and-development-loan portfolios; it is currently 15% of a credit union's net worth. It also would do away with a requirement that institutions obtain a personal guarantee for every small-business loan.
Additionally, the draft document would raise the cap on loans per borrower to as much as 25% of net worth from 15%. It also would exclude commercial loans and participations that involve nonmember borrowers from the 12.25% cap.
Though credit union business lending is a tiny fraction of banks' total, it is on the rise. According to the most recent NCUA statistics, credit unions had $56 billion of member business loans on the books at Sept. 30 – an increase of nearly 22% since the end of 2013.
Bankers argue credit unions' exemption from federal income tax already tilts the playing field in their direction, and they fear the proposed rule changes would widen that competitive advantage even more.
"For our community bank, our bread and butter is small business and middle-market lending," John S. Poole, chief executive of the $610 million-asset Carolina Alliance Bank in Spartanburg, S.C., said in an interview Tuesday. "We built our bank on a commercial model. … If this proposal goes through, it will be hard for us to compete."
Echoing Poole's bread-and-butter comment, Keith Leggett, a retired American Bankers Association senior economist and a frequent blogger on bank-credit union issues, said a surge in member business lending spurred by the proposed rule "could significantly erode the value" of bank franchises.
Leggett also questioned the wisdom of proceeding with an overhaul that promises to stimulate member business lending at a time when many observers see signs of deterioration in credit quality.
"We're beginning to see an increase of risk in portfolios and an increase in delinquencies," Leggett said. "Credit unions may be stepping into a market they don't have the skill set to navigate."
Dollar and Bacino said NCUA officials read every comment letter and take bankers' concerns seriously, but they added the agency's job is to ensure the safety and soundness of credit unions.
"The NCUA board is going to do what they think makes credit unions more safe, sound and diversified in their lending programs," Dollar wrote. "When we were at NCUA, we certainly gave serious evaluation to all comment letters — both those from credit unions and bankers. However, we recognized that our congressional mandate was to implement regulations within the law that would help credit unions be more safe and sound."
Bacino said NCUA officials welcome comment letters, particularly "when they have a purpose and provide an alternative way to do something." Bankers' letters rarely go beyond raising objections to the measures that the NCUA proposes, he said.
"Some of the letters they're getting from the bankers … don't add anything," Bacino said. "When I talk to clients about comment letters I tell them, if you've got a problem, you've got to have an alternative, too."
For bankers, however, most credit union issues, including member business lending, boil down to questions of fairness.
"Make them pay taxes and with a level playing field, we will gladly compete," Poole said. "Let's just be fair about this."