WASHINGTON-Following NCUA's March board meeting, some banking trade groups raced to issue statements vilifying the agency's new field of membership regulation and the member business lending proposal. American Bankers Association Executive Vice President Edward Yingling called NCUA's new field of membership policy an expansion of the credit union tax exemption and "not what credit unions' founding fathers had in mind." Yingling said, "Actions that liberalize credit union membership and services increase the American taxpayer's burden. In our opinion, NCUA's expansion of this burden – at a time when state and federal budgets are facing their worst deficits in years – is clearly misguided and illegal." The bankers' group also charged NCUA with trying to do an end-run around the member business lending cap with its member business lending proposal, adding that it presents safety and soundness issues. America's Community Bankers President and CEO Diane Casey Landry also issued a statement, saying, "The National Credit Union Administration once again has overstepped its bounds. The expanded (FOM) regulation issued today is contrary to the Federal Credit Union Act and the Credit Union Membership Access Act. "Allowing credit unions to expand with no regard to the common bond requirements of the laws encourages the continued unbridled growth of large, bank-like credit unions at the expense of small credit unions and tax-paying banks." However, credit union regulators and trade associations alike hailed the regulation as a key diversification tool, particularly the TIP-trade, industry, and profession-provisions. "TIP, as it is called," NCUA Chairman Dennis Dollar explained during the board meeting, "is an important diversification option which, although restricted to the geographic service area of single sponsor credit unions, is totally consistent with both the Credit Union Membership Access Act and good risk management. It can also be a real beneficial option which could perhaps save some of the smaller, single sponsor credit unions that we have unfortunately lost in recent years." Likewise Board Member Deborah Matz said, "TIP is another important aspect of this proposal. It is an innovative idea that will provide an opportunity for a credit union to expand and diversify its field of membership while remaining a single common bond credit union. This could be a lifeline for some small credit unions, and for credit unions whose sponsors are in financial difficulties or are downsizing." Predatory CUs? To the contrary, ABA Economist Keith Leggett said that the regulation merely favors large credit unions that are targeting smaller credit unions' FOMs due to the TIP and the relaxing of the overlap sections. "I think credit unions are becoming more and more predatory," he said, adding that he gets regular calls from small credit unions complaining that their FOMs are being poached. On the bright side, Leggett said he was "surprised and happy" that NCUA did not include a FOM grandfather clause for state chartered credit unions to maintain their select groups following a conversion to a federal charter, except in the case of an emergency addition by the state regulatory body. In addition, he pointed out that the community charter definition is now broader than the pre-1998 rules, which the U.S. Supreme Court overturned. The Credit Union Membership Access Act, which reformed the Federal Credit Union Act, was passed shortly after that. Leggett noted recent applications for two credit unions to adopt Miami-Dade County as their FOMs. The NCUA Board voted against the applications, with Dollar even stating that the areas did not show strong interaction. Under the new rules, Leggett said, the debate would never have even taken place. He accused NCUA of letting the states drive their FOM policy when their primary focus should be safety and soundness. While Leggett admitted diversification is good for safety and soundness, he questioned whether credit unions have sufficient management policies and procedures in place for rapid growth. "While federal law governing field of membership creates certain membership requirements not found in some states, I do believe that this final rule is consistent with both the statute and safety and soundness," NCUA Vice Chair JoAnn Johnson said during the March board meeting. "It also provides federal credit unions the opportunity to diversify their risks, manage their growth, enhance their product offerings, and continue to provide a low-cost financial alternative to more Americans. "As I have said before, I believe an effective dual chartering system requires both a strong federal and state system that provides for innovation by state and federally chartered credit unions. As a regulator of federal credit unions, one of my goals is to ensure that the federal charter continues to be viable and attractive, so that federal credit unions have the ability to compete in a changing marketplace, and I think this final rule on field of membership accomplishes that objective," said Johnson. As has been bankers' practice in the past, Leggett called the agency heads "cheerleaders" for credit unions. In the comment section of the Board Action Memorandum, the bankers' comments are all lumped together at the end of the comment analysis section, separate from the credit union comments. "I feel like we're second-class citizens," he said. It implies that "Really what's important is what credit unions say," Leggett said. "That's an implication of regulatory capture and that NCUA is captured by the industry it regulates." NCUA needs to realize its is an entity of the government, he stated. NCUA Senior Staff Attorney Mike McKenna, chairman of the FOM Taskforce, was unavailable for comment on the bankers' comment. ABA is looking for merits to sue, but Leggett said his group is looking for a more fact-based than theoretical case this time around, as noted in District Court Judge Colleen Kollar-Kotelly's decision in ABA's last legal challenge to NCUA's FOM rules. Thus, the ABA will have to see what comes out of credit unions living under this regulation for a while. Leggett also criticized the agency for making too many changes to quickly with its FOM rule. He noted that this was the most recent of three major overhauls to the rule since CUMAA in 1998. He said the rules needed to be given a chance to work before changes were made because there was no trend to guide decision-making on the updates. Unanimous Decision This is the first one, however, Dollar pointed out, that has been approved unanimously by the NCUA Board. He voted against the last one himself because of the Community Action Plan provision, which was eventually overturned. "I don't think it's too fast," CUNA Associate General Counsel Mary Dunn commented. "I think, quite frankly, NCUA's taken a deliberative approach." She indicated that the agency could have included all of the most recent changes from the start, but instead chose to move forward incrementally and monitor each version of the rule's implementation. Predictably the credit union trade associations praised the liberalization of the rule. "We believe the revised policy is consistent both with the Federal Credit Union Act and the principles of safety and soundness," CUNA President and CEO Dan Mica said. "CUNA's vision, established by our Renaissance Commission, is that all Americans should have the right to improve their financial well being by joining credit unions. NCUA's revised policy means more consumers will have that choice, while more credit unions can expand to meet the financial needs of their members and their communities." While credit unions should be appreciative of the changes NCUA made, Dunn added that there is still more room to expand further in the future. She said she felt the FOM changes serve as a counterbalance to Prompt Corrective Action, which can stifle credit union growth since rapid growth can lower a credit union's net worth. NAFCU Director of Regulatory Affairs Gwen Baker commented, "It looks like a good rule. I think there were a couple provisions that we would have liked to have seen go further, but these are good changes. We look forward to hearing from our members, especially credit unions that look to implement the trade industry and professions provision and see how that works out." CUNA had initially expressed concerns about credit unions' ability to serve a select group solely through an ATM, but after discussions with agency officials, Dunn said the trade association's worries were cleared up. "Credit unions are not going to just set up the ATM and walk away," she reasoned. What MBL Cap? NCUA's member business lending proposed rule is another attempt by credit unions to expand beyond CUMAA, according to Leggett. "The circumventing of the 12.25% cap is really the most troubling of the member business lending rule," he argued. Leggett advocated that Congress made it clear they did not want credit unions getting very involved in business lending by inserting the 12.25% of assets ceiling. He called the provision not requiring a credit union purchasing a participation in a business loan sold without recourse "regulatory alchemy" to circumvent the 12.25% cap. Leggett said ABA was also concerned about the provision allowing credit union service organizations to originate member business loans without the restrictions credit unions are subjected to. Combined with the section of the regulatory relief bill that would not count loans made to nonprofit religious organizations against the cap, this is vast expansion of the member business lending rule, he said. Additionally, Leggett said the relaxing loan to value ratio requirement for member business vehicle loans could be "risky." On the other hand, credit union advocates said the changes would give credit unions a leg up in the business lending scene. "It looks like there are quite a few good provisions in there that make it easier for credit unions that wish to engage in member business lending," NAFCU's Baker said. Mica said, "CUNA believes NCUA's proposed changes to its member business lending regulations will go a long way toward helping credit unions meet a pressing need of small businesses across the country for affordable sources of capital and attentive service.These proposed changes are especially welcome given the critical role of small business in fostering economic growth." CUNA indicated that credit unions typically make smaller business loans than banks, averaging about $88,000. [email protected]