Standing Up to a Reckless Regulator

Every now and then we have the chance to stand up for what’s right against powerful forces. As the legacy of a group of colonists who stared down and defeated the world’s greatest empire, it’s virtually our birthright as Americans. So in some ways ICBA’s federal lawsuit against the National Credit Union Administration for its unlawful lending rule feels like the extension of a longstanding national tradition.

ICBA’s suit challenges the NCUA’s rule allowing tax-exempt credit unions to exceed commercial lending limits set by Congress. In a nutshell, federal law defines credit union “member business loans” to include any and all commercial loans on a credit union’s balance sheet. But the NCUA’s final rule unlawfully allows nonmember commercial loans and purchased loan participations to be excluded from the statutory limits.

Regulatory Rubber Stamp
If this issue sounds familiar, that’s because credit unions have been trying to push it through Congress for more than a decade. But lawmakers have repeatedly declined to expand credit union lending loopholes. What is a tax-exempt industry to do?

Well, if you’re the credit union industry, you simply wait for your captive federal regulator to rewrite the law for you. And that is precisely what the NCUA has done—unilaterally sidestep the legislative branch. You know, the branch of government those scrappy American provincials later enshrined in Article I of the U.S. Constitution.

The only problem for the credit unions is that ICBA was watching. Indeed, we’ve seen more than enough. After years of evolving from a regulatory agency to a cheerleader for its tax-exempt industry, the NCUA has finally gone too far. In attempting to serve as the regulatory rubber stamp for a handful of growth-oriented credit unions seeking to expand at all costs, the NCUA has overstepped its legal bounds.

Bad Faith, Bad Policy
Quite simply, the NCUA’s business-lending rule contradicts federal law, which expressly limits the amount of member business loans that may be held on credit union balance sheets. The NCUA has absolutely no authority to concoct its own exceptions to the “member business loan” definition. Indeed, the agency itself has acknowledged that it “does not have authority to amend the MBL definition through regulation.”

Not only is the NCUA rule unlawful, it’s also bad policy. The agency’s plan places undue risk on U.S. taxpayers, expands government-sponsored advantages for credit unions, and jeopardizes the safety and soundness of these institutions. Our tax dollars should not be used to promote reckless lending practices at these tax-exempt companies.

So here we are—taking a stand. ICBA’s volunteer board of community bankers has elected to confront a heedless federal agency and hold it accountable. We might not be Washington, Jefferson and Adams, but the NCUA isn’t exactly the British Empire, either.

So I encourage community bankers, our allies, and consumers everywhere to go to ICBA’s “Stop the CU Grab” website to learn more about the lawsuit and how to help through the ICBA Credit Union Litigation Fund. After all, we’re taking action not only because the law is on our side, but because it’s the right thing to do.

Let’s Put a Stop to Credit Union End Run Around Congress

The United States has three branches of government to prevent any one from having too much power. The tax-exempt credit union industry apparently skipped this civics lesson because it obviously doesn’t believe it should have to listen to Congress.

The National Credit Union Administration has proposed dramatically revising business-lending rules for these tax-subsidized institutions. Current law allows any credit union to make business loans worth up to 12.25 percent of its total assets. While lawmakers have repeatedly declined to advance controversial legislation to raise this cap, the NCUA has unilaterally done so on behalf of the industry it is supposed to regulate.

It is up to community bankers to call out the NCUA for sidestepping the cap established by Congress and attempting to extend the industry’s government-funded competitive advantage. ICBA offers community bankers a customizable letter to Congress and the NCUA to express opposition to this misguided plan.

The NCUA’s proposal blatantly skirts the statutory cap by exempting more loans from it, removing explicit loan-to-value limits and increasing the population cap for community charters by 400 percent. By piling on additional exemptions, the plan increases risks to the financial system. According to the Capital Policy Analytics Group, credit unions with the highest levels of business loans represent a disproportionate share of credit union failures, showing the risks of blanketing these institutions with new business-lending authorities.

The NCUA wants to assuage public concerns over these risks by requiring credit unions to create credit policies and risk-rate their loans. Rather than offering reassurance, this suggestion is an alarming admission of the weak oversight and regulatory standards now in place for credit unions. Credit policies and risk-rating systems have been standard community bank practices for decades—where have the credit unions been?

The truth is that aggressive and fast-growing credit unions are seeking to leverage their tax-exempt status to siphon top-performing small-business loans away from community banks, which actually pay taxes to their federal, state and local governments. Nearly 99 percent of credit unions below the federally mandated cap can already expand their lending if they choose to do so, with no change to federal law or regulation. And there are already plenty of ways to circumvent the limit because loans under $50,000 and Small Business Administration loans as large as $5.5 million don’t count toward it. Continuing to relax these congressionally mandated restrictions will only serve the interests of the riskiest, growth-oriented credit unions, while putting the broader financial sector at greater peril.

Credit union business-lending caps were established by Congress because these tax-subsidized institutions are designed to serve people of modest means with a common bond. These days, multi-billion-dollar credit unions are allowed to have virtually no common bond among members, yet they continue to operate tax-free. Meanwhile, they remain unique among lenders due to their exemption from regulations such as the Community Reinvestment Act.

Community bankers, tell Congress and the NCUA that the regulator should focus on implementing and enforcing credit union laws as they are written. If credit unions want to operate like banks, they should be taxed and required to meet the same set of regulatory standards. They can’t have it both ways.

Common Sense Prevails on Capitol Hill

Sometimes common sense really can prevail in Washington. It’s been known to happen before, but the latest example was the House’s recent removal of an onerous amendment that would have drastically increased IRS reporting requirements.

This particular amendment would have required banks to send a 1099-INT form to any depositor who earned any amount of interest in a calendar year, removing the current $10 interest-earned threshold. It also would have required banks to report to the IRS information on all non-interest-bearing accounts. So not only would this amendment set off a tidal wave of new 1099s for even the paltriest of savings account earnings, it would even expand reporting for accounts that earn no interest whatsoever.

Not only that, but this paperwork burden appeared out of nowhere in a piece of legislation primarily focused on supporting economic growth in Haiti and sub-Saharan Africa. No one has claimed credit for including it in the Trade Preferences Extension Act (H.R. 1295).

The good news is that following strong opposition from ICBA and others in the financial industry, the House overwhelmingly passed H.R. 1295 without this amendment. Responding in full force just as quickly as this amendment appeared out of thin air, we were able to get the House to leave it on the cutting room floor. I did say common sense prevailed, didn’t I?

Of course, ICBA remains on high alert. This legislation is expected to come before the Senate as it is currently written, without the 1099 provision. But we’ll continue monitoring the bill and working with lawmakers to ensure the provision does not sneak into H.R. 1295 like it did a couple weeks ago.

That said, I’m confident we’ve put out this fire for the time being. Now we can return to actively working to roll back excessive community bank regulation, rather than warding off new regulatory threats as they crop up. It’s clear by this recent success that logic and reason can indeed win out in Washington. So let’s keep the pressure on and see if we can get our nation’s capital to turn this flash of common sense into a trend.

Deal on Tax Extenders Could Offer Holiday Cheer

Bipartisanship can be hard to come by in Washington, but there are encouraging signs that Congress and the administration have heard the voice of reason when it comes to extending important tax measures that are set to expire. Democratic and Republican leaders have announced a tentative compromise that would extend the 2001 and 2003 tax cuts for two years to ensure American small businesses and families do not face a tax increase in the middle of the current economic downturn.

Throughout the debate, the community banking industry has done its part. ICBA and the nation’s community bankers have urged Congress to vote to extend current income tax rates across the board and address the estate tax and other expiring tax measures by the end of the year. In addition to ICBA’s Washington advocacy, countless community bankers have used ICBA’s customizable letter and tax information to make their voices heard in Congress.

While we need to learn more about the deal, the prospect for a compromise that avoids tax hikes offers a little more cheer this holiday season. However, Congress still must debate and act on any final agreement, so ICBA will continue working closely with lawmakers to ensure that the current promise for a deal is not a humbug.