Bankers Protest Plan to Relax Business Lending for Credit Unions

The National Credit Union Administration's plan to liberalize its rule governing member business lending has touched a raw nerve inside the community banking industry.

Bankers have mounted a furious letter-writing campaign against the proposed changes, unveiled in June at a meeting of the NCUA's board.

Through Friday the agency had posted more than 250 letters on its website. Bankers appeared to make up a significant majority of the commenters. They had little positive to say.

NCUA is "willingly ignoring lessons from its history and encouraging credit unions to divert funds from consumer to commercial lending," Thomas B. Bass, president of the $156.5 million-asset Wyoming Bank and Trust in Cheyenne, wrote in a July 21 letter. "Consider … the impact of allowing an ill-prepared lender into a new market and what could occur in an economic downturn if these loans are not properly underwritten."

Ted H. Williams, president and chief executive at the $233.3 million-asset Tristar Bank in Dickson, Tenn., warned the regulator was putting the credit union industry on the same path savings and loans followed more than two decades ago. "Credit Unions were designed to serve the needs of a small group of individuals with a common bond," Williams wrote July 27. "The savings and loan industry is now extinct because of their reach into commercial lending without proper preparation."

For decades, commercial lending stood as a virtually unchallenged preserve for the banking industry. Over the past few years, however, banks have seen a sharp increase in the level of competition from online alternative lenders, and now from credit unions.

Indeed, member business lending by credit unions has increased 28% since the end of 2012, totaling $22.9 billion as of March 31.

"America's community banks don't mind competition -- in fact they thrive on it -- but entering the ring with one arm tied behind their backs … while tax-exempt credit unions are allowed to flail away unfettered with both arms is a modern-day disgrace," Jeb Clarkson, senior vice president at the $607.7 million-asset Pioneer Bank and Trust in Belle Fourche, S.D., wrote on July 27.

NCUA's proposed rewrite of the member business lending rule would be the regulation's first major revision since 2003. Business lending by most credit unions is limited to 12.25% of total assets by the Credit Union Membership Access Act of 1998. The new rule does not alter the congressionally mandated cap, but it would eliminate a number of other significant restrictions. Among other things, the draft would undo a requirement that borrowers pledge their personal assets (in addition to business assets) as collateral for the loans, as well as a provision that would impose an 80% loan-to-value requirement.

It would also abolish conditions limiting both construction-and-development lending and loans to one borrower to 15% of a credit union's net worth.

Ken L. Burgess, chairman of the $977 million-asset FirstCapital Bank of Texas in Midland, said he was "astounded" by some of the proposed rule changes. "You also propose eliminating the requirements for personal guarantees, normal loan-to-value limitations and normal collateral requirements. These are basic commercial loan underwriting musts," Burgess wrote in his July 24 letter.

Bad blood between banks and credit unions is nothing new. The two industries have traded barbs for years, with much of the banks' discontent aimed at credit unions' exemption from paying federal income taxes and the perceived competitive advantage that affords them.

Given that strained history, and the unsparingly negative tone of most of the letters, it is an open question whether they will have any persuasive effect on the three NCUA board members, Debbie Matz, Rick Metsger and Mark McWatters. All of them have made statements supporting increased member business lending to ensure credit unions stay competitive and diversify their assets as much as possible.

Dennis Dollar, a former chairman of the NCUA board who works now as a consultant, said the letters would probably be read with a healthy dose of skepticism. "The banking lobby is going to automatically oppose any expansion of credit union authority, whether it is by legislation or regulation," Dollar wrote Friday in an email to American Banker.

"The member business lending proposal by NCUA is well within the confines of the statute," he wrote. "They should not back down from their commitment to credit union competitiveness in the business lending arena solely because some bankers ... are concerned that their profits may fall below their record status a few basis points."

Bankers are aware of that, and their letters may be aimed at a broader audience than credit union regulators, said Keith Leggett, a retired American Bankers Association economist who writes a blog about credit union issues. "Clearly this is an issue bankers feel passionate about," Leggett said in an interview Friday. "I think they're trying to attract the attention of policymakers and key influence shapers."

If that is the aim, the effort has already paid a small dividend. The Washington Times published an editorial criticizing the proposed member business loan rule changes on July 26.

According to Dollar, it is unlikely the letters will sway many lawmakers. "Congress realizes that the bankers are just trying to protect their competitive turf," he wrote.

The NCUA will continue accepting letters for three more weeks, so the total, including the number from bankers, is likely to increase. At the current pace, it is doubtful to set a record, though. The agency received more than 2,000 letters in response to both drafts of its proposed risk-based capital regulation.

The agency's board is expected to vote on the member business lending rule this fall.