MBL Rule Raises Legality Questions
A concern over states’ rights and a question about the NCUA's legal authority over the member business lending proposal during an NCUA board meeting Feb. 18 prompted a Hail Mary pass by one board member.
The monthly board meeting ended with a contentious board member discussion, as proposed changes to wording in the MBL proposal from Board Member J. Mark McWatters prompted a tense exchange at the end of the meeting.
McWatters asked for changes to the states’ rights portion in section 723.10 of the MBL proposal, which exempts federally insured, state chartered credit unions from complying if a state supervisory authority provides a state commercial and MBL rule for use by federally insured credit unions chartered in that state. The provision said this exemption can occur “provided the state rule at least covers all the provisions in this part and is no less restrictive, upon determination by (the) NCUA.”
During the meeting, McWatters said he raised concerns over the wording of the provision “over a week ago” to the Office of General Counsel and others. Chairman Debbie Matz criticized McWatters for requesting that the changes be made on Wednesday at 6 p.m., the night before the meeting, and not bringing them to the board's attention earlier.
She said that once the proposal has gone to the printers and the schedule is on the docket, “That ship has sailed.”
Further, Vice Chairman Rick Metsger said he never received a copy of the possible rewording of the provision.
“Your office never shared it with me. I never had a chance to look at it,” he said, as all the board members talked over one another.
Matz further criticized McWatters, stating that if he were in the office “more than three days a month,” the staff could have discussions on the matters McWatters brought up.
The proposed changes McWatters offered to the board would reword the provision to: “…provided that all the core risk management principles in this part, in all material, respects and complies with the Federal Credit Union Act.”
NASCUS President/CEO Lucy Ito said in a Feb. 18 statement, “As adopted, the spirit of the rule permits state innovation in adopting their own business lending rules. But the proof is in the pudding – our concern is that the ultimate interpretation of the rule stays consistent with the intention expressed at the table today during the NCUA board's discussion.”
Additionally, McWatters asked if bankers’ concerns over the legal authority of the NCUA to make changes to the MBL rule had been addressed.
Pamela Yu, NCUA Staff Attorney, told McWatters that the OGC had advised the board that the final MBL rule complies with the FCUA.
As approximately 3,100 comment letters – three quarters of them from banks – were received in response to the rule, McWatters said he wanted to make sure there was no cause for concern when it came to the legality of the ruling.
According to NCUA advisors, a legal analysis is forthcoming but will not be part of the public record because it was not available for the board meeting.
McWatters said in his final board meeting concurrence that it is not his intent to criticize the OGC.
“It is, however, challenging for the board to act on the final MBL rule at this time without first considering the legal analysis supporting the final rule,” he said.
During her opening remarks, Matz said the new rule begins a new era for the agency.
“This new era will be defined by principles-based regulation, not by prescriptive limits on credit unions,” she said.
The MBL rule passed by a majority vote, despite concerns raised by McWatters. He added that the regulator's “rigid language creates yet more uncertainty and may raise the regulatory burden of state chartered credit unions. In reality, a rule touted by the NCUA as regulatory relief, may work to the contrary in the day-to-day operations of state chartered credit unions that engage in member business lending.”
The overall MBL rule will go into effect Jan. 1, 2017, but the personal guarantee requirement will be eliminated 60 days after the rule's publication in the Federal Register.
Industry organizations applauded the passage of the MBL rule. CUNA President/CEO Jim Nussle stated, “Expanding credit union member business lending to empower credit unions with greater flexibility and autonomy in offering commercial loans is a major victory for America's small businesses and job creators.”
Ito added, “Now, the emphasis turns to engaging the credit union system about this new, ‘principles-based’ approach to commercial lending. NASCUS will be working with the state system to ensure that state regulators and federally insured, state chartered credit unions are well-prepared to embrace this new approach.”
NAFCU President/CEO Dan Berger applauded removing the waiver process in the MBL proposal. In a statement, he said, “Removing the waiver process not only eases regulatory red tape, but it also provides credit unions the independence to safely and soundly address the needs of their small business members. Today's action ensures that credit unions can better meet the capital and liquidity needs of our nation's small businesses, which are struggling to find such access from other lenders.”
While credit union organizations were quick to applaud the passage, bankers were not as pleased.
ABA President/CEO Rob Nichols said in a statement that the organization is “dismayed that (the) NCUA continues to act as a cheerleader for the industry it's charged with supervising.”
He added, “By changing the way the business lending cap is calculated and providing a means to exponentially expand credit union business lending by selling off slices of loans is not regulatory relief – it is charter enhancement, plain and simple. Enabling a risky loan syndication program that will allow the credit union industry to have a much higher concentration in business loans is a sharp departure from the industry's mission to serve people of modest means.”
The NCUA's action would encourage credit unions to divert their member resources to finance commercial businesses, which will lead to safety and soundness concerns, according to Nichols.
He cited the recent field of membership proposal as “further evolution of credit unions into tax-exempt banks” that has no regard for the common bond.
Nichols said he will be urging lawmakers to take a close look at “what this tax-advantaged industry has become.”
Further, the Independent Community Bankers of America called the proposal “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.”
ICBA Executive Vice President and Senior Regulatory Counsel Christopher Cole said, “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. They can't have it both ways.”
Nichols added that the NCUA “ignores the limits that Congress has placed and pursues changes that cater to credit unions with little regard to the risks posed by their actions or the consequences for taxpayers that must bear the ultimate cost to subsidize this industry.”