Independent Bankers Sue NCUA Over Pending MBL Regs.; Plus My Top-Secret Plan For CU Growth
Today was going to be a real special blog post. I was not only going to reveal my top-secret plan for defeating ISIS, but, as an added bonus, my top-secret plan guaranteeing the credit union industry grows and prospers without a single merger for the next 50 years. But I’ve decided that I will only reveal these plans after you elect me President.
In the meantime, I will content myself with telling you that the Independent Community Bankers filed a lawsuit in Northern Virginia yesterday alleging that NCUA abused its discretion when it promulgated regulations revising Member Business Loan regulations. Strip away all of its hyperbole, and the complaint comes down to an assertion that NCUA doesn’t have the authority to exclude loan participation interests from the calculation of the credit union MBL loan cap. The bankers are seeking to block the regulations from taking effect in January.
With apologies to those of you for whom this is as basic as the arithmetic my second grader will be learning this year, since 1998 the Federal Credit Union Act has limited the aggregate amount of member business loans a federally insured credit union can make at any time to the lesser of 1.75 times the actual net worth of a credit union; or 1.75 times the minimum net worth required for a credit union to be well capitalized. (12 USCA 1757A). Under existing regulations participation interests in member business loans and member business loans purchased from other lenders count against a credit union’s aggregate limit on net member business loan balances. CUs can purchase participation interests that put them over the MBL cap but only with NCUA’s permission. 12 CFR 723.16(b).
So, what has our banking counterparts so fired up? The regulations that start to take effect in January stipulate that participation interests in business loans held by credit unions will be classified as commercial loans as opposed to MBL loans and will no longer be counted against the cap. The change only applies to loans that a credit union does not originate.
According to the independent bankers, this regulatory change amounts to a violation of the Administrative Procedures Act which prohibits regulators from promulgating rules “not in accordance with the law.” They argue that based on NCUA’s previous interpretation a cu holding a participation interest should be counted against the cap.
The problem is that the Supreme Court recently reaffirmed that regulators have the right to change their regulatory interpretations even without going through a formal comment and review process. Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1210, 191 L. Ed. 2d 186 (2015). In addition, NCUA’s new regulation is consistent with the English language. According to Merriam Webster online Making is defined as “the action or process of producing or making something.” A cu that originates a loan is making a loan; a cu that purchases a portion of that loan isn’t producing anything.
And the Independents won’t even get to the merits of their case unless they can show how their members have been harmed in very specific ways. This is a tough one: There is plenty of evidence to suggest that small businesses are having a tough time finding banks willing to make them loans. Are bankers really being squeezed out of the market because some credit unions purchase participation interests? Whaat?
Pure speculation on my part but I suspectt that the Independents are laying the groundwork for a further legal assault on the NCUA if and when it finalizes FOM regulations. Plus, even if they lose this lawsuit they will use it as another example to Congress of how the NCUA helps credit unions too much. I guess they have forgotten about the imposition of sophisticated risk based capital requirements on larger credit unions.
For credit unions it’s important not to overreact to this latest banker provocation. It’s just the latest example of the banking industry seeking to limit the choices of Main Street America so that it can maximize its own profits.