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Community banks call on Congress to rein in credit union regulator

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Bankers are stepping up their fight over the National Credit Union Administration’s change to how it calculates the low-income designation for credit unions.

Last week the credit union regulator said it would include members who serve in the military when determining an institution’s low-income status. A credit union can be designated as low income if its membership meets certain criteria, and the status comes with some advantages, such as being exempt from the member business lending cap.

Bankers have slammed the move, arguing that it's part of a broader pattern of credit unions and their regulator using the coronavirus as cover to overreach on regulatory changes.

“A pandemic and economic crisis should not be an opportunity for credit union powers expansion that does nothing to alleviate the crisis,” Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America, wrote in a letter to members of the Senate Banking Committee.

Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America
Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America

Quickly linking the decision on service members to the wider MBL issue, Rainey claimed in the May 11 letter that weakening current restrictions on credit union business lending “would exclusively benefit the largest, growth-obsessed credit unions.”

More commercial lending by big credit unions would serve to increase the industry’s risk profile to the detriment of smaller, more traditional institutions, she wrote, adding, “It warrants mentioning that these very credit unions were shut out of the comment process by their own regulator.”

Bankers are objecting more strenuously to the way the NCUA arrived at its decision. Aaron Stetter, the ICBA’s executive vice president of policy and political operations, labeled the decision “executive fiat” in an interview Monday. He wouldn’t rule out possible litigation over the change, though the group is waiting to see how Congress reacts first.

The NCUA “made an administrative decision benefitting their largest member without any public input,” Stetter said. Bankers weren’t given a say, to be sure, but the agency “silenced its own industry, as well,” Stetter said. “Other credit unions weren’t allowed to weigh in on this.”

According to Stetter, counting service members as low-income individuals for the purposes the low-income designation makes it inevitable that the $126 billion-asset Navy Federal Credit Union will soon qualify.

“What better example of being a captive regulator than to pave the way for Navy Federal to go out and do this,” Stetter said.

Navy Federal and the NCUA both declined to comment.

A ‘technical correction’?

Besides unrestricted member business lending, low-income designated credit unions have the ability to accept nonmember deposits and the authority to issue subordinated debt. About half of all credit unions had a low-income designation at the end of 2019, according to NCUA data. The number has more than doubled over the last decade.

Defense Credit Union Council President and CEO Anthony Hernandez said the change amounts to a “technical correction,” adding it was within NCUA’s discretion to make.

According to Hernandez, the regulation already allows college students to be counted toward the low-income designation. Adding more military members, who frequently fall below the 80% median-income threshold, is hardly a stretch, Hernandez said.

A credit union qualifies for low-income designation if a majority of its members earn 80% or less than the applicable median-family-income or total-median-income.

Specifically, the rule allows all service members to be counted in low-income designation calculations. Previously, only those with physical street addresses could be counted.

“I don’t think anything untoward was done,” Hernandez said. “Frankly, I’m surprised the rule didn’t already address this issue.”

Stetter suggested that the NCUA’s service-member decision is part of a wider trend of the credit union industry and its regulator using the coronavirus pandemic to dismantle the longstanding congressionally mandated restrictions that limit member business lending by credit unions.

Board members J. Mark McWatters and Todd Harper have called for either increasing or eliminating outright the 12.25% cap on member business lending that applies to non-low-income-designated credit unions. Credit union allies in Congress recently introduced bills that would suspend the cap for a year or raise to 20%.

Michael Emancipator, the community banker group’s vice president and regulatory counsel, accused the NCUA of bypassing the Administrative Procedure Act when it announced its service member decision.

“In the past, at least they’ve paid lip service to the facial requirements of the APA,” Emancipator said.

The American Bankers Association, too, promised to fight any bid to weaken limits on credit union member business lending. James Ballentine, the ABA’s executive vice president for congressional relations and political affairs, said there’s little evidence credit unions need more authority to lend to businesses.

“They have plenty of capacity now,” Ballentine argued in a recent interview. “There are only 30 that are near the cap. Using this crisis to expand their business powers doesn’t make sense.”

“We’ll actively oppose any effort to increase the member business loan cap,” Ballentine added.

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