Credit Union Regulatory Improvement Act Stirs Up Controversy

WASHINGTON-The introduction of the Credit Union Regulatory Improvement Act (H.R. 3579) at the closing bell of Congress has stirred up a whirlwind of praise and criticism. But the standalone bill, that has been dubbed “part regulatory relief, part financial modernization” by NCUA Chairman Dennis Dollar, is bound to face strong opposition from credit union enemies, namely the banks. ABA Senior Economist Keith Leggett has already gone so far as to say the new legislation could open the door for credit unions to become involved in real estate development. CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn simply said of the impact of bankers’ attacks on the legislation with lawmakers, “The extent of their complaints will be weighed against the support of credit unions.” Chairman Dollar added, “As a former legislator, I always like having more than one vehicle to address a legislative issue.” Kohn admitted the odds for the legislation are not great for next year, particularly with the upcoming elections. Nevertheless, he stated, “We feel confident there will be a hearing on the Hill [next year].” Contrary to some beliefs, he said, “this was not designed as a backstop in case regulatory relief doesn’t pass.” CUNA, as well as NAFCU, had been working with the bill’s sponsors-Financial Services Committee Members Ed Royce (R-Calif.), Paul Kanjorski (D-Pa.), Steven LaTourette (R-Ohio), and Carolyn Maloney (D-N.Y.)-during the legislative drafting process. NAFCU Director of Legislative and Political Affairs Brad Thaler commented, “We’re pleased to see the legislation introduced. We had been working with members of Congress, including Congressman Royce and Congressman Kanjorski, and others in the credit union industry to put some of these issues on the table.” Dollar also praised the bill. “I think overall it is a good vehicle to evaluate the future of credit unions and I think that it will bring about interesting future discussion,” he said. Regarding the risk-based Prompt Corrective Action provision, the chairman explained, “We were asked by Congressman Royce and Congressman Kanjorski to work with them in drafting the language and we provided them with model language.” Dollar had first floated the idea of risk-based PCA in February at CUNA’s last Governmental Affairs Conference. Though Dollar likely will not be on the NCUA Board if the concept becomes a reality, he said he is impressed with the momentum it has gained. “When I raised the issue of risk-based PCA in February, I was under no illusion it would come to fruition during my tenure on the board,” he said, but joked about remaining on the board this far beyond his term that ended in April. He added that he wanted to raise the issue while he was still in a position to help advance the “idea whose time is coming.” Dollar emphasized, “It’s the results that matter.” Of course not everyone is pleased with H.R. 3579 and the proposed PCA amendments. ABA’s Leggett stated, “We’re clearly troubled that this act seems to be gutting prompt corrective action.” He argued that it provides credit unions with greater leverage to grow their assets while, at the same time, raising safety and soundness concerns. One item that is missing from the bill that was raised in preliminary discussions is permitting credit unions to raise alternative capital. Credit union lobbyists have said that the issue is highly controversial even within the credit union industry and that risk-based PCA should solve most credit union capital problems. Additionally, the original Financial Services Regulatory Relief Act (H.R. 1375) had included a provision permitting privately insured credit unions to join the Federal Home Loan Bank System. Between Royce’s concerns over the FHLBs and Kanjorski’s objection to private insurance, that section was scrubbed in this bill. CURIA would, however, take H.R. 1375′s provision exempting loans to faith-based, nonprofits from the member business lending cap a few steps further by raising the 12.25% of assets cap on MBLs to 20%, equal to what the thrifts were provided in the reg relief bill. It also would increase the minimum MBL counted against the cap from $50,000 to $100,000. Finally, the bill would let NCUA decide whether a credit union with less than 6% net worth should be able to make MBLs. While credit unions hailed this as a good first step toward eliminating the cap and broadening their MBL powers, bankers threw out strongly worded objections. Independent Community Bankers of America’s Director of Legislative Affairs Ron Ence said the credit union provisions from H.R. 1375, which ICBA objected to, “pale in comparison to this egregious power grab.” Ence explained that small business lending was community banks’ “bread and butter,” and ICBA Director of Communications Tim Cook added that there is no need for credit unions to be involved in business lending, not to mention that they lack expertise. Ence also pointed out that Section 203 of the bill gives NCUA the authority to determine whether a credit union with less than 6% capital should make member business loans. “With the track record of NCUA, we think it’s pretty clear what that answer is going to be,” he said. “It’s a separate bill that really involves some significant changes of their powers.” ABA Director of Public Relations Charlotte Birch said. “Frankly, what they’re asking for would further blur the line between banks and credit unions.” She added that ABA would actively oppose the bill and that credit unions could be making a mistake by opening themselves up to additional scrutiny by lawmakers. To the contrary, CUNA and NAFCU supported eliminating the MBL cap altogether, but CUNA’s Kohn said they knew it was a “nonstarter.” ABA’s Leggett outlined other provisions of major concern for his organization, including the requirement for 20% approval on a vote to convert to a mutual and credit unions leasing real estate in underserved areas. “We are an advocate of mutuals and individuals should choose the mutual form that serves them best,” he said of the thrift conversion vote provision, which CUNA, NAFCU, and NCUA all support. Additionally, Leggett pointed out the credit union-turned-thrift would become a tax-paying institution, which ABA welcomes. Concerning the leasing of credit union property in underserved areas, an issue raised by Kanjorski when a problem arose in his district Leggett stressed that RegFlex credit unions are not subject to the fixed asset cap and, in the extreme propel credit unions into the real estate development arena. Additionally, credit unions would not be required to intend to take over the property. “Is that really the purpose of the credit union mission?” Leggett asked. ABA was OK with some of the provisions including credit union loan maturity, the interest rate ceiling, and exemption from pre-merger documentation requirements, among a couple others. America’s Community Bankers Spokesperson Jim Eberle said that ACB supported the original, general regulatory relief legislation even though it opposed the credit union provisions. He said ACB had no immediate comment on the new bill. With their work cut for them with CURIA in the future, credit unions have already gotten started. NAFCU’s Thaler said that the timing of the bill’s introduction is good because credit unions will have greater opportunity to meet with their members of Congress on their home turf to urge support and co-sponsorship. CUNA Associate General Counsel Mary Dunn said that CUNA has already briefed Treasury Assistant Secretary for Financial Institutions Wayne Abernathy on H.R. 3579. [email protected]