A legal battle set to play out this week between community banks and the National Credit Union Administration will determine whether the agency may continue sidestepping the legislative branch to the benefit of the tax-exempt industry it is charged with regulating.
My organization, the Independent Community Bankers of America, recently sued the NCUA over its rule dramatically expanding credit union business lending limits, which were set by Congress. A judge was set to hear arguments Thursday on the NCUA's motion to dismiss the case.
Our lawsuit challenges the NCUA rule issued earlier this year allowing credit unions to exclude purchased commercial loans and commercial loan participations from the 12.25% member business lending cap — as long as the borrower is not a member of the purchasing credit union. This significantly alters the NCUA's approach to commercial lending by allowing credit unions to circumvent the cap by simply purchasing loans and participations from other credit unions.
Not only does the NCUA's rule expand government-sponsored advantages for credit unions and introduce new risks to the financial system, it is simply illegal based on existing law. The plain language of the Federal Credit Union Act, as amended by the Credit Union Membership Access Act, expressly limits the amount of member business loans that may be held on credit union balance sheets. The law also defines a member business loan as any commercial loan on the credit union's balance sheet, regardless of whether it was originated or purchased by the credit union.
The NCUA has not offered any rational explanation for this radical policy change. In fact, the agency even acknowledges in its final rule that it does not have authority to amend the "member business loan" definition. Only Congress has that authority, and lawmakers have repeatedly declined to raise the commercial lending cap despite continuous efforts by the credit union industry to raise it for more than a decade.
In addition to the NCUA's flawed legal rationale, the rule itself is poor public policy. All commercial loans, whether originated or purchased by a credit union, affect safety and soundness. Congress has noted that credit union commercial lending restrictions are intended to prevent risks at these financial institutions and to ensure credit unions continue to fulfill their specified mission of meeting the needs of consumers by emphasizing consumer, not business, lending.
Further, only the largest, growth-oriented credit unions would benefit from the policy change, not the church-basement institutions originally recognized by Congress that do little or no business lending in the first place. No wonder several traditional credit unions have publicly opposed raising the business lending limit.
The NCUA's decision to sidestep congressionally mandated restrictions on credit union commercial lending raises suspicions about the agency's motives. In fact, as the credit union industry and the institutions comprising it have grown in asset size over the years, the NCUA has increasingly acted as a rubber stamp to advance the tax-exempt industry's regulatory wish list.
For instance, a separate lawsuit recently filed by the American Bankers Association takes on an NCUA field-of-membership rule that does not pass the smell test. This plan would significantly expand the ability of community credit unions to serve large regions spanning multiple states, despite Congress' explicit requirement that these institutions serve only a well-defined local community. The NCUA has also doubled down on its expansive approach to membership rules, proposing to quadruple the population limit for most community credit unions to 10 million, which is greater than the population of 41 states and the District of Columbia. That's local?
Unsurprisingly, the credit union industry's largest trade groups have rushed to the agency's defense. But the collective actions of the industry's regulatory cheerleader have stretched the Federal Credit Union Act beyond its breaking point. And it has done so on behalf of an industry that already enjoys a tax subsidy estimated by the nonpartisan Tax Foundation at $31.3 billion over 10 years. The agency needs to be held accountable to the law, which is all that ICBA is asking in its lawsuit.
Enough is enough. Our federal agencies should work in accordance with the law toward the common good — not on behalf of taxpayer-subsidized special interests.
Camden R. Fine is president and CEO of the Independent Community Bankers of America.