A Credit Union Revolt

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Opposing NCUA’s move to skirt Congress on credit union business lending

By James Kendrick

ICBA and community bankers across the nation recently launched a volley of opposition to the tax-exempt credit union industry’s latest attempt to widen its lending authority. While Capitol Hill has repeatedly rejected credit union efforts to expand into commercial lending, the National Credit Union Administration is attempting another end run around the legislative branch on behalf of the industry it regulates.

The NCUA proposal would expand loopholes to the credit union cap on business-lending authority. In comment letters to the agency, ICBA and community bankers laid out a litany of problems with the proposal, including how it would circumvent Congress, jeopardize the safety and soundness of credit unions and place undue risks on U.S. taxpayers.

Community Bankers Sound Off

The National Credit Union Administration’s board of directors, in action that would circumvent the will of Congress, has proposed a regulatory rule to expand the small-business lending capacity of federal tax-exempt credit unions. Hundreds of community bankers across the country have joined ICBA in filing comment letters strongly opposing the proposal for multiple reasons.

“NCUA should not undermine specific limitations by Congress nor expand taxpayer liability. … In 1998, Congress made it clear that credit unions should be focused on consumer lending, not commercial lending.”
—Rick Goedert, 1st State Bank in Saginaw, Mich.

“The NCUA should not grant powers that Congress has regularly rejected.”
—Neal Prokosch, Citizens Alliance Bank in Lake Lillian, Minn.

“I believe NCUA must continue its role as regulator of, and not as a cheerleader for, those it regulates. This proposal creating a loophole for [federal credit unions] on the [member business lending] limit exhibits the latter behavior.”
—Robert Becker, Black River Country Bank in Black River Falls, Wis.

“Extending the reach of credit union commercial activity is a fundamental distortion of the credit union mission and should have no place in the marketplace.”
—Robert Meyerson, Harvest Bank in Kimball, Minn.

“Our bank, and other community banks like ours, are fully capable of addressing the business lending needs of our area businesses, and we do so every day.”
—Jeffery Savage, Franklin Savings Bank in Franklin, N.H.

Read more comment letters on NCUA’s website, www.ncua.gov.

Indecent proposal

The NCUA’s proposed rule would replace strict requirements and limitations on commercial lending by federally insured credit unions with abstract principles that would provide a much more open lending framework. While federal law caps member business lending at 12.25 percent of a credit union’s total assets, the regulator’s proposal would apply additional flexibility to the cap and would even entertain the idea of moving beyond the statutory cap altogether.

Among its provisions, the proposed rule would eliminate a requirement that borrowers personally guarantee loans, remove explicit loan-to-value limits and allow loans to a single borrower to total up to 25 percent of the lender’s net worth. It also would lift limits on construction and development loans and clarify that nonmember loan participations will not count against the cap.

Credit unions would be required to establish a risk-management platform with a rating system and a commercial loan policy that addresses the particulars of how commercial loans would be originated. However, credit unions with total assets of less than $250 million and total commercial loans that do not exceed 15 percent of net worth would not be required to adopt a commercial loan policy. 

Combating mission creep

ICBA and community bankers wrote in formal comment letters that expanding lending credit union authority while relaxing regulatory oversight would defy congressional intent and continue the tax-subsidized industry’s ongoing mission creep into commercial banking. While the 12.25 percent statutory cap should be inflexible, the proposed rule would expand on existing loopholes, which could allow large credit unions to engage in millions or even billions of dollars of business loans outside the cap.

ICBA called on the NCUA to demonstrate a need for these relaxed standards and to retain its personal guarantee requirement for borrowers as well as collateral and security requirements for member business loans. Given its lack of confidence in credit union business lending, ICBA wrote, the NCUA should answer why it proposes weakening critical prudential safeguards.

Bottom line: The NCUA’s continued efforts to lower business lending limits flout Congress and disregard the risks that come with originating commercial loans. Meanwhile, community banks that engage in commercial lending operate under a lending framework that has stood the test of time and is subject to constant regulator and examiner scrutiny. If the credit union industry wants to expand further into commercial lending, it should first build the framework needed to perform high-quality underwriting and management—while also forgoing its broad tax and regulatory exemptions.


James Kendrick (james.kendrick@icba.org) is ICBA vice president of accounting and capital policy.