Community bank association sues to block credit union rule change

Yesterday, the Independent Community Bankers of America (ICBA) sued the National Credit Union Administration (NCUA) to block a rule change that would expand credit unions’ ability to make commercial loans. The new rule—known as the “member business loan rule”—allows credit unions to acquire loans from other lenders to businesses that are not credit union members. According to the ICBA, this rule violates the Federal Credit Union Act, which restricts credit unions from making business loans equal to more than 1.75 times their net worth. The ICBA brought suit to prevent the NCUA from implementing the rule, arguing that the rule “exacerbates the unfair competitive harm that tax-exempt credit unions are able to inflict on community banks, which do not benefit from the tax advantages enjoyed by credit unions.”

Banks have fought for years against the tax-exempt status that provides credit unions with a competitive advantage, but the lawsuit marks the first time the fight has been taken to the courts. The ICBA contends that the commercial loan restrictions in the Federal Credit Union Act apply to all business loans held by a credit union, whether made directly by the credit union or acquired from another lender. The NCUA rule, however, excludes acquired loans from the definition of “member business loans,” insulating such loans from the restriction of credit union business lending to 1.75 times a credit union’s net worth. The ICBA explains that the NCUA’s interpretation of the Federal Credit Union Act is wrong for two reasons:

First, in determining whether the total amount of commercial loans held on the books of a credit union has reached or will reach the statutory limit, the Act requires NCUA and the credit union to count all extensions of commercial credit carried on the balance sheet of the credit union, whether or not the credit was extended to a member of the credit union and whether or not the credit union’s interest in the extension of credit was acquired from another lender. The MBL Rule flouts this mandate. Second, subject only to the narrow statutory exceptions granted by Congress, the credit union may not “make” any new extension of commercial credit of any kind if the new loan will cause the statutory limit on commercial lending to be reached or exceeded. While not expressly defined in the statute, the word “make” in section 1757a is plainly meant to include any action that increases the amount of commercial loans or interests in such loans outstanding on the balance sheet of the credit union, whether the additional loan or portion of a loan is originated by the credit union itself or is acquired from another lender. Here again, the MBL Rule is inconsistent with the Act.

The ICBA claims in its lawsuit that community banks are at an unfair competitive advantage in commercial lending because they do not enjoy the tax-exempt status afforded to credit unions. According to the ICBA, the new member business loan rule exacerbates this competitive disadvantage, causing serious harm to “thousands of ICBA’s members in communities from coast to coast.”

In a press release, ICBA President and CEO Camden Fine explained the ICBA’s concerns:

The NCUA is attempting to unilaterally expand loopholes for tax-exempt credit unions by sidestepping Congress and putting consumers at risk. This unlawful rule from the NCUA is the latest example of the agency stretching the law beyond its breaking point to serve as the tax-exempt credit union industry’s regulatory rubber stamp.

I will continue to follow this lawsuit and provide updates as it proceeds through the court system.