Another National Credit Union Administration rule is under fire.

Three bank and thrift trade groups blasted the NCUA's business lending rule, arguing that loopholes would let credit unions evade congressionally imposed caps.

Credit unions that are inexperienced with business lending need more guidance than the NCUA's rule provides, the groups warned in separate comment letters.

In the past, wrote William L. McQuillan, president of the Independent Bankers Association of America, "the NCUA has had to take action to protect credit unions from their own folly in making business loans." Yet now the NCUA board is "proposing to make it easier for credit unions" to make such loans.

The credit union law enacted in August imposes first-time restrictions on the aggregate amount of business loans a credit union may make to its members.

Under the statute, a well-capitalized credit union may not make business loans totaling more than 12.25% of its assets. But lawmakers grandfathered credit unions that make primarily business loans, and they instructed the NCUA to define "primarily."

The NCUA issued an "interim final" rule that would let the limits and exemptions take effect Sept. 29 rather than after a public comment period. The deadline for input was Jan. 29, and a final rule is expected in mid- March.

Bank and thrift trade groups argued that the NCUA's rule stretches the meaning of "primarily" beyond credulity.

Taking its cue from the Federal Reserve's definition of when a bank is engaged primarily in the securities business, the NCUA rule exempts any credit union whose business loans exceeded 25% of its total loan volume in any quarter since 1995.

The NCUA also exempted credit unions that did not meet the 25% threshold, so long as their business loans totaled more than any other loan category. The agency predicted that only about 70 of the nation's 11,125 federally insured credit unions would qualify for either exemption.

Letters from credit unions generally praised the NCUA's rule. If anything, some wrote, it is too restrictive.

The Credit Union National Association said the NCUA should lower the 25% threshold, exempt church-based credit unions from the 12.25% lending cap, and exempt credit unions at which with business lending makes up the second-largest loan category.

But IBAA, America's Community Bankers, and the American Bankers Association all demanded that the 25% threshold be raised to 51% or more.

Edward L. Yingling, the ABA's deputy executive vice president, ridiculed the fact that a single quarter of strong business lending could exempt a credit union. "This is not a 'history'" of business lending, he wrote. "It is a point in time."

Bank and thrift trade groups also took aim at the exemption for credit unions whose biggest loan category was business lending. The loophole, they wrote, was created out of thin air and is ripe for manipulation.

According to the ABA, the NCUA could let credit unions divide new auto loans and credit card loans - both of which are considered consumer loans - into separate categories, making it easier for a credit union's business lending to appear relatively large.

Furthermore, the groups contend, the NCUA's rule does not clarify whether business loans under $50,000 are counted toward the 25% threshold for exemptions.

Such loans should not be counted, the groups wrote. They noted that the new credit union law prohibits loans under $50,000 from being counted toward the 12.25% lending cap.

An NCUA official said the issue will be addressed in the agency's final rule.

ACB took the argument one step further. Charlotte M. Bahin, the group's regulatory counsel, argued that the NCUA ought to - and has the power to - reduce to $10,000, from $50,000, the maximum loan size that does not count toward the 12.25% loan limit.

The trade groups also accused the NCUA of relaxing safety-and-soundness standards. For example, they said the agency's rule would not require credit unions to review the financial statements of members seeking business loans.

The rule would also relax experience requirements for credit unions that make business loans.

Until now, a credit union making business loans had to employ someone with at least two years experience making business loans. Under the rule, a credit union can make do with a consultant or other outside party.

Finally, the ABA criticized the NCUA for making its rule effective before receiving public comments, calling the decision a violation of the Administrative Procedures Act and an attempt to avoid "comments which conflict with its own position."

The ABA has sued the NCUA over a separate rule governing credit union membership (see article on page 1). An ABA official said the group would probably wait until the NCUA issues a final version of the member business regulation before deciding whether to sue.

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