Field-of-Membership Clash Takes Nasty Turn with Legal Threat

Another heaping helping of banker-credit union conflict, anyone?

The industries were already at dagger points over plans to expand credit unions' member business lending authority. Now, the National Credit Union Administration's proposed revision to field-of-membership rules has generated nearly four dozen comment letters and threats of a lawsuit.

"There's a good chance we may litigate if NCUA doesn't back off," Camden Fine, president and chief executive of the Independent Community Bankers of America, said in an interview Friday, adding that his trade association has been in talks with outside lawyers.

The proposed rule, from Fine's perspective, waters down the field-of-membership regulation to the point where the limitations Congress intended are next to meaningless.

"Why not just say all credit unions can serve all people anywhere," Fine said. "Why have this fiction of a field of membership? People just ought to stop the pretense."

The field-of-membership regulation has also been sharply criticized by Rob Nichols, president and chief executive of the American Bankers Association.

NCUA officials may have limited room to defuse a threat of litigation because comprehensive field-of-membership reform is an important and long-sought-after goal for many credit unions, which back the changes that are making bankers see red.

"It's an issue we've been working on for several years and something our members feel is very important," Ryan Donovan, the Credit Union National Association's chief advocacy officer, said in an interview Monday. "It's a significant issue."

The NCUA's field-of-membership rules govern the nation's nearly 3,900 federally chartered credit unions. Many supporters say an overhaul is needed to keep the federal charter competitive with state charters. Since the end of 2012, more than two dozen federal credit unions have switched to state charters, while only eight have made the opposite move, according to the NCUA.

Those numbers seemed to weigh on officials' minds as they crafted the field-of-membership draft.

"With this proposed rule, we would expand consumer choice, increase access to affordable financial services and provide regulatory relief to a wide range of federal credit unions," NCUA Chairman Debbie Matz said in a statement last week. "At the same time, we will keep the federal charter competitive with state charters that allow more permissive field-of-membership rules."

J. Mark McWatters, a member of NCUA's three-member board, said the agency must tread carefully around the issue and make sure its proposal rests on a rock-solid legal foundation. While McWatters, a lawyer, did not cite any specific provisions of the draft document that needed amending, he made it clear he would not vote for the rule unless it complied with the Federal Credit Union Act. He also called on the NCUA to publish its legal analysis of the field of membership regulation in the Federal Register.

"In a nutshell, the NCUA should only advocate for rules that comply with the FCUA and the agency should disclose its legal analysis in a fully transparent manner," McWatters wrote Monday in an email.

Bankers' resistance to expanded fields of membership has long been a sensitive issue for credit unions.

A previous legal challenge made it to the U.S. Supreme Court, nearly resulting in a catastrophe for credit unions. Five justices agreed in 1998 that banks had standing to challenge the NCUA's field-of-membership decisions and invalidated the agency's policy permitting charters comprised of multiple common bonds.

Six month later, Congress reversed part of the decision arrived at in NCUA vs. First National Bank and Trust Co. when it enacted the Credit Union Membership Access Act of 1998, which permitted multiple common bond arrangements.

Credit union advocates claim the NCUA's latest field-of-membership overhaul lies well within its authority as a financial regulator.

The proposal is "squarely within NCUA's authority in the Federal Credit Union Act," Brad Thaler, vice president of legislative affairs at the National Association of Federal Credit Unions, wrote in an email to lawmakers Friday. The "NCUA's proposal retains population caps on community charters and rural areas, thereby fulfilling the agency's mandate to ensure that credit unions' fields of membership are `well-defined' and 'local.' "

The NCUA's proposal, which took an in-house task force 11 months to formulate, offers credit unions several new options to frame their fields of membership. For the first time, it lets credit unions use combined statistical areas with populations of up to 2.5 million people, or entire congressional districts, as fields of membership.

The proposal also lets credit unions designate a portion core-based statistical area with a population of up to 2.5 million as a field of membership. Under current rules, credit unions can only serve portions of a core-based statistical area if the area as a whole is home to less than 2.5 million people.

Combined statistical areas are defined by the Census Bureau as adjacent metropolitan or micropolitan areas that can demonstrate economic or social linkage. The Office of Management and Budget defines core-based statistical areas as one or more counties or county equivalents including an urban core of at least 10,000 people.

The ICBA's Fine characterized the changes as a "last straw," adding that they have left bankers "apoplectic." Such sentiment seems to explain the scathing criticism leveled by banking trade groups.

"The NCUA proposal would discard any common bond and would allow credit unions to serve just about all air-breathing mammals," Fine said in a statement Friday.

"When credit unions are allowed to have so-called common bonds like 'lives in Montana,' or advertise that 'anyone can join,' the common bond ceases to be a meaningful requirement," Nichols added in a statement Thursday.

Fine said he fully expects the NCUA to eventually jettison population caps limiting fields of membership based on core-based and combined statistical areas to 2.5 million people when the rule is finalized early next year.

"They're going to raise it," he said.

That remains to be seen, but NCUA officials did make a point of asking for comment on the 2.5 million-person population threshold in the draft rule.

Officials at CUNA, moreover, said they might back an increase.

"We intend to make constructive solutions for improving the draft," Donovan said. "We're still reviewing it, so it's too early to say what they will be, but in general I think we have supported and would support increasing the cap."

With battle lines over member business lending and fields of membership already drawn, and further conflict over the issue of secondary capital looming, Fine said he cannot remember a time in his four decades in banking when relations between banks and credit unions have been more strained.

"I've never seen it like this," Fine said. "This is beyond anything in history. The NCUA is trying to make credit unions the functional equivalents of banks, except banks pay taxes."

For their part, credit union advocates say Fine is being melodramatic.

"Any person can walk into a bank and receive services. That is not the case, nor does this rule make it the case with credit unions," Donovan said. "We certainly disagree about field of membership, but on 90% of the public policy issues we deal with, banks and credit unions tend to agree."