Legal Briefs: The Great Credit Union Capers

By Dawn Causey, Thomas Pinder and Andrew Doersam

There they go again! 
In the famous words of former President Reagan, the National Credit Union Administration is once again reprising its cheerleading role for the credit union industry and ignoring the tenets of the Federal Credit Union Act that justify the credit union tax exemption.

And, once again, ABA has filed suit challenging the NCUA action.

Immediately after the NCUA published its field of membership rule on Dec. 7, 2016, ABA filed to overturn it. At the heart of the rule is the regulator’s lax and questionable approach to credit union oversight, which unlawfully expands the fields of membership for credit unions beyond the statutory constraints to a “meaningful affinity and bond among members.”

More substantively, the FOM rule incorporates larger regions that can include millions of residents and communities across multiple states. ABA asserted that adding regions and excluding specific neighborhoods at will violates the statutory requirement that credit unions are limited to a well-defined, local community. The FOM rule also quadruples the population limit of a rural district from 250,000 to 1 million. Certainly, this goes way beyond the statutory locality requirement and is an overreach by NCUA at the expense of taxpayers.

Historically, banks and credit unions have been battling for decades. In fact, ABA has successfully sued NCUA three times on past occasions in which the agency exceeded its congressional authority.

In one instance in 1998, the U.S. Supreme Court ruled favorably in a lawsuit brought by ABA and held that credit unions could only have a single common bond. Before the Supreme Court’s decision, the NCUA allowed credit unions to link common bonds in ever-increasing numbers. Congress responded by enacting the Credit Union Membership Access Act, which allowed credit unions to have more than a single common bond. For the first time, meaningful rules were imposed on credit unions, notably on capital and business lending.

Recently, the NCUA also finalized a rule that significantly loosens the limits on member business lending by credit unions. This rule exempts participations in loans to non-members from the statutory 12.25 percent member business lending cap. What’s more, the MBL rule eliminates the loan-to-value requirements, aggregate limits on construction and development loans, and the requirement of a personal guarantee.

ABA filed a comment letter in August 2015 asserting that the rule would allow credit unions to circumvent caps on business lending imposed by Congress, and in effect, weaken the safety and soundness of credit unions.

Likewise, ABA said that by allowing an aggressive expansion of business lending among credit unions, NCUA would elevate the risk of failures and share insurance fund losses.

In a separate lawsuit, the Independent Community Bankers of America sued NCUA to block the MBL rule. The complaint alleges the rule would harm community banks because it will allow credit unions to blow past their commercial lending limits established by the Federal Credit Union Act, and consequently allow credit unions to exclude commercial loans they purchase from other credit unions from their cap on member business loans. The NCUA contended that ICBA does not have standing to sue, and the complaint is speculative as to whether the rule would harm banks. ABA has petitioned the court for permission to file an amicus brief supporting ICBA’s lawsuit, in which a motion to dismiss by NCUA was pending at press time.

The necessity of both lawsuits underscores that NCUA has no interest in being a regulator that upholds the requirements of the law, but finds more ways to extend the tax exemption beyond the original intent of Congress. And once again, it is up to the banking industry to remind NCUA that it has an obligation to follow the law. Here we go again.

Dawn Causey is general counsel at ABA, where Thomas Pinder is SVP for litigation and Andrew Doersam is a paralegal.