The banking lobby has opposed member business lending for years, but MBL reform, proposed during the NCUA's June board meeting, fueled the oppositional fire.

In particular, bankers opposed language that would modify the NCUA's calculation of the member business lending cap.

Credit unions are limited to an aggregate MBL limit of the lesser of 1.75 times a credit union's net worth or 12.25% of total assets. In regulatory discussions, the 12.25% of total assets has been commonly used, while the statutory net worth requirement was rarely mentioned.

Currently, well-capitalized credit unions must maintain 7% net worth. However, when the NCUA's risk-based capital rule is finalized, it could complicate MBL cap computation as it relates to the statutory requirement.

"Thus the MBL limit should not be expressed as an absolute percentage but rather as 1.75 times the applicable net worth requirement for a credit union to be categorized as well-capitalized," the NCUA wrote in the MBL proposal. The NCUA added that 1.75 times net worth better incorporates the statutory language in the Federal Credit Union Act than 12.25% of total assets.

The banking lobby seized on the proposed MBL cap change, claiming it defied statutory limits.

"Various NCUA board members and staff personnel have indicated that this inflexible statutory cap can be interpreted more broadly, particularly if the Basel III like capital standards are implemented. Any attempt to circumvent this limitation … that results in a higher concentration of member business lending above this statutory cap defies Congressional intent," ICBA Vice President, Accounting and Capital Policy James Kendrick wrote in the trade association's comment letter.

The American Bankers Association took a similar position, writing in its comment letter that the 12.25% of assets MBL cap was mandated by Congress.

"However, some NCUA board members have claimed that this proposed rule and some creative statutory interpretation would allow some credit unions to increase their MBL caps. (The) ABA believes that this interpretation of statute is incorrect and would call on the NCUA to clarify that the MBL cap will remain at 12.25% for all credit unions as mandated by the FCU Act," Brittany Dengler, senior research manager with the ABA's office of chief economist, wrote in the letter.

NAFCU Senior Vice President of Government Affairs and General Counsel Carrie Hunt fired back, telling CU Times the NCUA's proposal provided no relief from the legislative cap relative to member business lending.

"The rule doesn't change how the statute is written," Hunt said.

CUNA agreed in its comment letter, writing that the proposed calculation change was not an "end around" Congress.

"Some commenters have incorrectly suggested this change would effectively raise the MBL cap from 12.25% of assets to 17.5% of assets (1.75 times 10%). This would only be the case if risk assets equaled total assets. Actually, for the vast majority of credit unions, under the RBC proposal risk assets would amount to less than 70% of total assets, so that the 7% of total assets requirement would exceed 10% of risk assets," CUNA Senior Director of Advocacy and Counsel J. Lance Noggle wrote in the trade's comment letter.

The proposed cap definition would have almost no effect on the aggregate cap, Noggle wrote, providing relief to only 111 credit unions that have risk assets that exceed 70% of total assets. Those credit unions would see their MBL cap exceed 12.25% of total assets if both the MBL and RBC rules were finalized as proposed.

However, the remaining 1,390 credit unions that make business loans would not experience an increase in their MBL caps above 12.25% of total assets, he wrote.

Despite the deluge of comment letters, ICBA Executive Vice President, Congressional Relations and Chief Economist Paul Merksi said his trade did not make plans to recruit members to hike the hill in opposition to the proposed rule during NAFCU's Congressional Caucus Sept. 15-17.

Hunt said this year the trade expects a larger Caucus crowd than usual, more than 350 delegates.

Merksi said ICBA members remain fired up in complete opposition to the NCUA's proposed rule and bills that would raise the MBL cap and exempt loans to veterans from the cap, and will continue to lobby against credit unions over the next few months Congress is in session.

"We'll just have our lobbyists on the Hill making counterpoints," he said of NAFCU's Caucus week. "It's just a continuation of our ongoing opposition."

Banker comment letters also preached the industry's longstanding position that commercial lending presents a safety and soundness risk for credit unions. The ICBA's comment letter cautioned that the NCUA should curtail credit union member business lending, rather than expand it, to protect the U.S. taxpayer in the next economic downturn. The letter quoted the NCUA's proposed rule, which said poorly managed business lending activities contributed to the failure of at least five credit unions since 2010. However, the letter did not specify how losses to the credit union-funded share insurance fund posed a risk to taxpayers.

Douglas Bruins, president of the $660 million Citizens Bank in Mukwonago, Wis., pushed the issue further when he wrote in his comment letter that unsafe business lending has affected credit unions in his state.

"Over (a) five-year period, the number of state-chartered credit unions has decreased from 223 to 160 due to a series of mergers and acquisitions. For the majority of this M&A activity, I believe the principal reason for the activity was to avert credit union failure," he wrote. "In many cases, the principal reason why a credit union was struggling was due to unsafe commercial business lending practices."

In its proposed rule, the NCUA provided delinquency and loss figures that countered those claims.

Over the last 10 years, total business loans at federally insured credit unions grew from $13.4 billion in 2004 to $51.7 billion in 2014, which represents an annualized growth rate of 14%.

Despite an increase in delinquency and charge off rates during the recession, the NCUA also said in the proposed rule that loan quality financials have returned to pre-recession levels. Delinquency and charge off rates in 2014 were 85 basis points and 28 basis points, respectively.

And, the NCUA said, credit unions that engaged in business lending had better CAMEL ratings than those that didn't. At the end of 2014, 81% of credit unions with business loans had overall CAMEL ratings of 1 or 2. Of credit unions that did not offer business loans, only 69% had CAMEL ratings of 1 or 2.

"Generally, credit unions have conducted business lending safely and served their small business members' needs well," the NCUA wrote in the proposed rule.

The regulator did acknowledge, however, that some credit unions failed to adequately manage business lending risks, resulting in roughly $141 million in losses to the share insurance fund since 2010. That represented 25% of total share insurance fund losses during that period, the NCUA wrote.

The ICBA's letter also challenged the need for credit unions to make more member business loans.

"The NCUA has not included an economic analysis that shows a credible need for commercial lending by credit unions to their members," Kendrick wrote. "Before any proposal for commercial lending is introduced, the NCUA should provide supporting evidence that credit union members would benefit above and beyond the risks that are facing the insurance fund and the U.S. taxpayer and that the commercial banking system is not currently meeting the needs of commercial lenders."

NAFCU President/CEO Dan Berger countered claims that questioned the need for credit union member business lending in his comment letter. He wrote that in the trade's ongoing dialogue with the Small Business Administration, NAFCU found that small businesses have been struggling to find access to capital and liquidity from other lenders, and have turned to credit unions for help.

"Credit unions want to provide such funding in a safe and sound manner, but are arbitrarily limited by (the) NCUA's existing regulation," he wrote. "Many banks are not providing small businesses with this funding despite the need and their ability to do so."

Berger referenced a 2011 SBA study that found bank business lending was largely unaffected by increased credit union business lending, and further suggested MBLs could actually help offset declines in bank business lending during a recession.

"The fact remains, during the great recession the banks stopped lending to small business, and the only financial institutions that stepped up to help with their capital needs were credit unions," he told CU Times.