A lawsuit challenging the National Credit Union Administration's regulation of member business lending has already generated a ripple effect.
Washington's Department of Financial Institutions has suspended a pending revision of its state rule on the issue until a judgment is rendered in the case against the NCUA.
The department's delay may be extended.
The Independent Community Bankers of America filed a lawsuit on Sept. 7 in the U.S. District Court for the Eastern District of Virginia, arguing that the NCUA's member business lending rule authorizes credit unions to buy commercial loans and loan participations in contravention of the Federal Credit Union and Administrative Procedures Acts.
While it has been assigned to Judge James Cacheris, no time frame for a disposition of the case has been announced.
An NCUA spokesman said the agency does not possess independent litigation authority in this matter. Antonia Konkoly, a lawyer in the office of Dana Boente, U.S. Attorney for the Eastern District of Virginia, is set to represent the NCUA, while Thomas Vartanian, a lawyer at Dechert, is leading the ICBA's legal team.
Regulators in Washington planned to amend the state's rules to bring them in line with those of the NCUA. They opted to freeze the process on Sept. 18, cancelling four scheduled public hearings. According to Linda Jekel, the department's director of credit unions, the state last revised its member business lending rule in 2001.
Under the NCUA's current rule, nationwide member business lending has grown at a steady clip, even during the financial crisis, expanding at a nearly 11% compound annual growth rate since 2007. At mid-2016, member business loans on credit union books topped $57 billion, according to the NCUA.
Bank groups might see the state regulator's decision in Washington as a victory of sorts, but the main event, the ICBA's complaint, still faces significant hurdles, said Keith Leggett, a retired American Bankers Association economist who blogs regularly about banking and credit union issues.
One key point may center on the fact that most of the NCUA's revised member business lending regulation, which was approved Feb. 18 by the agency's governing board, does not take effect until January.
"You have to have a party that's been harmed," Leggett said. "Right now, you're asking a federal judge to rule on hypotheticals."
Leggett has experience in lawsuits against the NCUA. He was with the American Bankers Association in the late 1990s, when it joined several community banks that sued the agency over changes to its field-of-membership policies.
In that instance, the Supreme Court handed the banking industry a signal victory, ruling that credit unions must share a single common bond. The ruling was undone a few months later when Congress enacted the Credit Union Membership Access Act, allowing multiple common bonds and communitywide charters.
The Credit Union Membership Access Act also capped the amount of business lending that individual credit unions could do – much to the annoyance of the credit union industry.
Echoing Leggett, Debbie Matz, who chaired the NCUA's board when it approved the member business lending rule, said she was surprised the ICBA filed its litigation before the rule took full effect. Issues of timing aside, Matz, who stepped down from the NCUA in April after 11 years of service, said she believes the measure will pass legal muster.
"I don't anticipate a reversal," said Matz, who last month joined the board of Mutual of Omaha Bank in Nebraska. "My instructions to staff [when the rule was being drafted] were to stay well within the bounds of the statute. If you read the language, I think we did that."
Bank groups see things differently.
"To me the issue is very clear," said Chris Cole, the ICBA's senior regulatory counsel. "It's so clear I don't see how you can render an interpretation the way the NCUA does. … Based on a plain reading of the law, we think we'll prevail."
The two largest credit union trade groups – the Credit Union National Association and the National Association of Federal Credit Unions – announced last week that they would join forces to mount an independent defense of the NCUA's member business lending rule.
The trade associations said in a press release Thursday that they had hired the law firm Williams & Connolly to file an amicus brief supporting the member business lending rule.
"Our trade associations support the NCUA's member business lending rule, which is consistent with the law and allows small businesses more access to the capital they need," Jim Nussle, CUNA's president and chief executive, and Dan Berger, NAFCU's president and CEO, said in a statement.
While CUNA and NAFCU advocate on similar – and often identical – issues, they often run on parallel tracks. The partnership regarding the ICBA's lawsuit is believed to be their first formal alliance since the late 1990s.
The crux of the ICBA's challenge revolves around purchased loans and loan participations. Before Feb. 18, they counted against the statutory cap, which limits the size of credit unions' member business lending to 1.75 times their net worth or roughly 12.25% of their total assets. Under the revised rule, purchased commercial loans and loan participations made to nonmembers will not be counted against the cap.
The ICBA views the provision as a massive loophole enabling credit unions to expand commercial lending in violation of the Federal Credit Union Act. The association is arguing that the NCUA has no authority to exclude purchased commercial loans and participations from counting against the cap, and that doing so would illegally expand the credit risk on balance sheets and extend the tax subsidy credit unions enjoy to big commercial borrowers, a turn of events that Congress never contemplated.
"It means taxpayer-subsidized lending is extended more and more toward larger businesses," Cole said. "Banks are very upset with this rule. Our board and members are 100% behind us."
Cole reiterated ICBA President and CEO Camden Fine's warning that the trade group was also prepared to sue the NCUA over a pending revision to credit union field-of-membership rules – another reason for the recent CUNA-NAFCU partnership, some industry observers said.
Banking supporters claim the proposed field-of-membership rule, which is awaiting a vote by the NCUA's board, relaxes restrictions to the point where "it seems like there's no restraint; like the rules don't even exist," Cole said. "It makes a mockery of fields of membership."