The American Bankers Association (ABA) has sued the National Credit Union Administration (NCUA), challenging a new rule that expands credit unions’ field of membership to large geographic areas. The ABA’s lawsuit comes just three months after the Independent Community Bankers of America (ICBA) sued the NCUA to block a rule change that would expand credit unions’ ability to make commercial loans. The ABA’s lawsuit seeks to prevent the NCUA from implementing its new membership rule and “expanding credit union operations well beyond the limits established by Congress.”
The NUCA adopted its new field of membership rule on December 7, 2016. The rule sets new standards for community credit unions (one of three types of permissible credit unions, the other two consisting of smaller occupational or associational groups). Community credit unions are authorized by Congress to serve more than a small occupational or associational group, but they still must be limited to “the boundaries of a well-defined local community, neighborhood, or rural district” under the Federal Credit Union Act. The NCUA’s new rule defines local communities expansively, consisting of up to 2.5 million people in a “combined statistical area” or a “core-based statistical area.” The rule also permits a community credit union to serve rural districts consisting of up to one million people that span entire states or even multi-state regions.
According to the ABA, this expansive definition “fails to adhere to the limitations on federal credit unions established by Congress” and “upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.” The ABA points to prior litigation with the NCUA, in which courts criticized the NCUA for making decisions based on “determinism, not documentation” and cautioned that the NCUA “cannot act as a rubber stamp or cheerleader.” The ABA concludes in its lawsuit that the NCUA’s new rule is “contrary to the Federal Credit Union Act” and is “arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law.”
While this case is just beginning, the case between the ICBA and NCUA over commercial loan rules is heating up. The NCUA filed a motion to dismiss the ICBA’s lawsuit, arguing that the ICBA does not have standing to challenge the proposed commercial lending rule because it cannot show any harm caused by the rule. The ICBA countered:
Most, if not all, of ICBA’s members are financially harmed from having to compete in providing commercial loans against tax-exempt federally insured credit unions, which have a significant cost advantage in the terms they can profitably offer to borrowers. . . . [The proposed rule] has already negatively affected the profit potential, and therefore the value, of community banks, including ICBA’s members. This diminished business value means that it is now more difficult for ICBA’s members to attract investors and to obtain additional capital on reasonable terms.
Both the ABA case and the ICBA case show that banks are willing to go on the attack to deal with the competitive difficulties and perceived unfairness of credit unions. I will continue to follow both cases and provide updates as they progress through the court system.