Short-Lived Bank-Credit Union Alliance Ends with Field-of-Membership Clash

Banks and credits unions are at each other's throats just a week after working the halls of Congress shoulder to shoulder in an effort to stymie a plan to change how financial institutions reserve for loan losses.

The longtime adversaries are revisiting an historically divisive issue: credit unions' field of membership. Monday was the deadline for a 60-day comment period tied to the National Credit Union Administration's proposed overhaul of field-of-membership rules.

An NCUA spokesman said Tuesday that the agency has received more than 10,500 comment letters, including thousands from bankers and bank lobbyists who offered scathing rebukes of the proposal. The final tally, which more than tripled the NCUA's record for comment letters, might climb higher since the agency is accepting late-arriving letters postmarked by Feb. 8.

Bankers, in sum, argued that the proposed revision, which was unveiled in mid-November, pushes well beyond limits on credit union membership embedded in the Credit Union Membership Access Act. Enacted in 1998, the law limits fields of membership for community charter credit unions to "well defined local community, neighborhood or rural district."

In its current form, the NCUA's proposal continues to limit community charter credit unions' fields of membership to 2.5 million people, but it removes several geographic restrictions, including a provision that constrains credit unions' ability to use core-based statistical areas to define their fields of membership.

Institutions are currently barred from citing core-based statistical areas with more than 2.5 million people. Under the revised rules, community charter credit unions will be allowed to use any "well-defined" portion to define a field of membership, as long as the population doesn't exceed 2.5 million.

The NCUA's field-of-membership overhaul also quadruples the population threshold for rural districts, to a million people, and permits community charter credit unions to cite entire congressional districts as a field of membership.

James Chessen, chief economist at the American Bankers Association, claimed in his comment letter that the changes "would effectively render the concept of a common bond among credit union members meaningless."

"From quadrupling population thresholds to reimagining definitions of plain language statutory terms, this proposal would eviscerate many major limitations placed on credit union field of membership expansion," Chessen wrote.

Some of the comment letters went beyond addressing the NCUA.

Fifty state banking associations directed a letter to the House Ways and Means Committee and the Senate Finance Committee, arguing that the proposed changes "should call into question" whether credit unions still deserve their exemption from federal income taxes. 

Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America, made a similar point in his comment letter. "This proposal is another example of the NCUA attempting to inappropriately and illegally extend the industry's government-subsidized competitive advantage and shows how captive the agency really is to the industry it regulates," he wrote.

"If credit unions want to eliminate the common bond requirement and operate like banks, they should be taxed like them and required to meet the same set of regulatory standards," Cole added. "They can't have it both ways."

Bankers have claimed the credit union industry's tax exemption costs the federal government nearly $27 billion annually, but advocates for credit unions counter that their industry uses the exemption to provide credit union members with financial benefits worth more than $10 billion.

Credit union supporters also point out that Credit Union Membership Access Act empowers the NCUA to set a definition of a "well-defined local community," while contending that the federal charter badly needs an overhaul to remain competitive with state credit union charters.

"The federal charter is falling behind many state charters and thus has become a barrier to the flexibility needed to operate dynamic and efficient cooperative financial institutions," Jim Nussle, president and chief executive of the Credit Union National Association, wrote in his comment letter.

Federal credit unions need changes that go beyond those in the current proposal, Dan Berger, president and chief executive of the National Association of Federal Credit Unions, said in a Friday statement, adding that the NCUA's proposal "is a good first step toward modernization."

The NAFCU wants the 2.5-million-person population threshold increased.

Community bankers see expanded fields of membership as a big competitive threat.

David Lacy, president and CEO of the $402 million-asset Community Bank and Trust in Waco, Texas, wrote in his letter that credit unions in his market are offering loans at 1.9%, which is "beyond what a taxpaying entity can offer."

Scott Beuning, a commercial lending officer at the $740 million-asset United Bankers' Bank in Bloomington, Minn., wrote in his letter that the proposal amounted to little more than a lengthy list of ways for most credit unions to circumvent field-of-membership requirements, resulting in a "broad expansion of the credit union industry's tax subsidy."

Banks have been railing against expanded fields of membership for decades.

In 1998 they successfully argued their point before the Supreme Court, which issued a decision barring credit unions from serving unrelated employer groups. But later that year Congress blunted the impact of the court's ruling, with the Credit Union Membership Access Act allowing credit unions to serve "multiple common bonds."