Bank groups claim credit unions are attempting to capitalize on the coronavirus — at the same time as banks ask for special treatment of their own.
Credit unions have pushed for a number of priorities to be included in coronavirus-relief legislation, but the biggest flashpoint has been attempts to get Congress to temporarily lift the cap on member business lending. Banks have been similarly engaged in lobbying to achieve their own policy goals, but they have taken the extra step of complaining about credit union efforts to get the restrictions on MBL eliminated, opening themselves up to allegations of hypocrisy.
“Frankly, everybody is out looking to take care of issues that haven’t been addressed for years, so I think credit unions are just being smart,” said Geoff Bacino, a credit union consultant and former member of the National Credit Union Administration board. “For [banks] to complain when they’re asking for the same thing [as credit unions] is unconscionable.”
A cap limiting credit unions’ commercial lending to no more than 12.25% of total assets has been in place since the late 1990s, though the industry has worked to get it increased or eliminated entirely for a number of years.
Now credit unions are arguing that the cap is affecting their ability to lend to companies that have been hurt by closures of nonessential businesses and reduced consumer spending. Members of the NCUA board have called for the cap to be lifted in recent weeks and lawmakers in the House and Senate have put forward bills to do the same.
“This isn’t about credit unions taking advantage of the crisis to further our longstanding advocacy goals, this is about helping communities and helping small businesses have access to credit when they need it most,” said Ann Kossachev, director of regulatory affairs at the National Association of Federally-Insured Credit Unions.
Ken Clayton, head of the American Bankers Association’s office of legislative council and policy integration, said proposals to temporarily relax the cap are “solely targeted at credit unions and aimed at giving them a pricing advantage over community banks as we all work together to pull communities up during and after the crisis.”
The Independent Community Bankers of America wouldn’t rule out legal action against legislation that permanently expanded MBL powers, though probably wouldn’t take this step over a change that was temporary, said Chris Cole, the group’s senior regulatory counsel.
Bankers griping about expanding lending authority for credit unions is problematic when banks have largely stepped away from making loans to businesses with annual sales of less than $1 million, said Steven Reider, president and CEO of the consultancy Bancography.
Small-business owners have sued several large banks, alleging that these institutions are prioritizing bigger loans made through the Paycheck Protection Program in order to maximize fees. That adds fuel to the notion that there could be customers that credit unions could help weather the pandemic.
"It is to me a little bit hypocritical for banks to say this by their service offering, ‘We don't really want to [service these areas],’ and then tell the regulators, ‘We don't want [credit unions] here either,’ ” Reider said.
Bank groups pushed back at charges of hypocrisy, suggesting their concerns are more about leveling the playing field for both sides.
"I don't think the cap is holding back lending at all for small businesses,” Cole said.
The MBL cap “doesn't significantly affect [them] because there are so few [credit unions] at risk of hitting the cap and the big credit unions seeking relief from the cap — I don't think they're going to use this to make small-business loans,” he added.
Only about 30 credit unions — out of more than 5,000 — are at risk of hitting that limit, according to a
Credit unions that want to keep making small-business loans, Cole said, could use PPP, since these loans don’t count toward the MBL cap.
But that argument ignores the fact that funds for the first round of PPP loans ran out in less than two weeks and the loans were largely dominated by banks. A
Bankers’ outrage also comes as they are seeking their own special treatment under the promise of trying to help consumers hard hit by the pandemic.
In recent weeks, banking lobbyists have pushed for temporary easing of the community bank leverage ratio requirements and a temporary reprieve from the widely unpopular Current
Expected Credit Losses methodology, or CECL.
Community bankers were even successful in their efforts to get the Small Business Administration to restrict access to its portal for submitting applications for PPP loans to lenders with more than $1 billion in assets for eight hours last month.
However, bankers have largely stuck to asking for priorities that credit unions may care less about or even agree with, such as pushing for CECL to be delayed. And they haven’t attempted to touch any third rails during the pandemic — such as the credit union industry’s tax-exempt status — that could provoke a response from the other side.
In contrast with some of the banks’ requests, the MBL cap is a much more controversial topic and any ground ceded in that area could be difficult to take back once the outbreak passes. That could make it worth the risk of looking petty in the middle of a national crisis.
COVID-19 has accelerated the end of cash and pushed digital payments to a new tipping point.
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After dropping for the past two years, reputation scores are once again rising, thanks largely to the goodwill banks have earned by helping customers and employees weather the coronavirus outbreak.
Given the technical nature of these arguments, it’s also unlikely that mainstream media outlets will widely cover the fighting. That could give banks some comfort as well.
But if it was picked up by daily newspapers, then it could “absolutely” make bankers look like they are attempting to prevent credit from getting to small-business owners, Reider said.
An added dimension to the bankers’ complaints is that it’s unclear if efforts to expand member business lending will even succeed. The industry has attempted to loosen those restrictions for years without any luck, and the latest draft of House legislation released this week, the HEROES Act, doesn’t contain any MBL provisions.
The most likely outcome, said Ed Mills, managing director and Washington policy analyst at Raymond James, is that any measures which move forward will be those with a broader impact, such as CECL relief, troubled-debt restructuring or changes to the community bank leverage ratio.
“I think it’s pretty unlikely that we’ll get much regulatory relief overall,” Mills said. “If there was anything, it’s going to be for the smallest banks and credit unions — but I think generally speaking the good thing here is that they're being viewed as helpful through this crisis rather than the cause of the crisis.”
Efforts to eliminate other obstacles to lending that apply equally to both sides, such as CECL or anti-money-laundering concerns, “seem more appropriate” amid the pandemic, the ABA’s Clayton said.
Bankers’ complaints may also be shortsighted given that demand for commercial loans will probably dry up, said Reider.
“In the near term, I think we'll see a decline in overall commercial credit demand so I don't think you're going to see many lenders on either side of the industry coming up against capacity,” he said.
