ICBA v. NCUA: The legality of relaxed restrictions on non-member business lending

December 09, 2016

Author(s): F. Thomas Hecht, Tina B. Solis, Seth A. Horvath

Non-member business lending and investment, a major issue for the credit-union industry nationwide, is now the subject of a case pending in federal district court in Virginia. In IndependentCommunity Bankers of America v. National Credit Union Administration, the ICBA, the principal trade association for the community-banking industry, has challenged the NCUA’s proposed Rule on non-member loans (2016 Member-Business-Lending (MBL) Rule), scheduled to take effect on January 1, 2017. The new Rule validates, with modifications, a 2003 Rule (2003 MBL Rule) that lifted restrictions on purchasing participations in non-member loans. The ICBA argues that both the 2016 MBL Rule and the 2003 MBL Rule violate Section 1757a of the Federal Credit Union Act (FCU Act or Act).

The challenge has significant consequences for the power of credit unions to lend and invest.


Section 1757a of the FCU Act caps the amount of “member business loan[s]” that a federally insured credit union may hold on its balance sheet. The Act provides that a federally insured credit union may not “make any member business loan that would result in a total amount of such loans” exceeding the lesser of 1.75 times the credit union’s net worth or 12.25% of the credit union’s total assets. It defines a “member business loan” as “any loan, line of credit, or letter of credit, the proceeds of which will be used for a commercial, corporate or other business investment property or venture, or agricultural purpose.”

In 2003, the NCUA issued the 2003 MBL Rule, providing that a federally insured credit union’s purchase of participation interests in loans to non-member borrowers would not count toward the Section 1757a limits. The NCUA determined that, for purposes of the Section 1757a limits, purchasing participations in non-member loans was not equivalent to making loans to members. As part of its supervisory authority, however, the NCUA required federally insured credit unions to obtain agency approval for any purchase of non-member business loans or participations exceeding the limits of Section 1757a.

The 2016 MBL Rule, issued in March 2016, takes the principles of the 2003 MBL Rule a step further: it removes the requirement that credit unions must seek agency approval for purchasing non-member business loans that exceed the statutory cap. Instead, under a more flexible approach, the NCUA has imposed a set of prudential considerations to assist in moderating the risk of such investments. These include making sure there is sufficient collateral to cover the risk of loss and, if such investments are unsecured, making sure there are adequate risk-mitigating factors to warrant undertaking the investment. It is a reasoned approach to the risks that new financial opportunities present, but it does place the burden on officers and directors to underwrite and document these transactions carefully. It also increases the need for effective regulatory oversight.

The lawsuit

In its lawsuit against the NCUA, the ICBA argues that if the NCUA’s rule-making efforts are permitted to stand, community banks will suffer a serious competitive disadvantage. The complaint alleges that the exclusion of non-member participation interests from the statutory limits on lending to members is unauthorized and that separating the function of “making” a loan to members from purchasing participations of non-member loans—the distinction at the core of both Rules—is unwarranted. The ICBA argues that the NCUA acted “arbitrarily and capriciously and without reasoned decision making” in promulgating both the 2003 and 2016 Rules. The ICBA claims that the Rules “[are] the latest example of NCUA’s demonstrated tendency to stretch the bounds of the FCU Act to help tax-exempt credit unions expand their business activities and field of membership in ways Congress never intended, all at the expense of community banks.”

These are not easy lawsuits to win. Federal courts are, by law, deferential to administrative rulemaking—particularly where, as here, there was significant deliberation before promulgating both the 2003 and 2006 Rules. And, importantly, when statutory language is ambiguous—as one could argue the phrase “mak[ing] any member business loan” is—courts generally defer to the agency’s interpretation. This deference bodes well for the NCUA. But, of course, courts and judges are unpredictable.

Motion to dismiss

On November 2, 2016, the NCUA filed a motion to dismiss the ICBA’s complaint. The motion addresses a series of purported weaknesses in the complaint. The motion argues:

  • The changes introduced by the 2016 MBL Rule are too marginal to cause any injury to the ICBA’s members and cannot support the lawsuit. Any potential loss results from factors other than the Rule.
  • The case is premature because the 2016 MBL Rule has not yet taken effect; how the Rule impacts investment is too speculative.
  • The lawsuit is time-barred. The complaint actually pertains to changes in the law that occurred when the 2003 MBL Rule was adopted. The statute of limitations for challenges to that rule expired on October 1, 2009.
  • The NCUA’s interpretation of Section 1757a is consistent with the text of that provision and is entitled to substantial judicial deference. Moreover, the promulgation of the 2016 MBL Rule was the result of a deliberate and well-considered process with commentary and hearings.

The motion to dismiss has been fully briefed and is scheduled to be heard on December 15, 2016. It is important to understand that motions to dismiss are decided on a standard that is very favorable to plaintiffs. Such motions simply test the legal sufficiency of the allegations in a complaint, and courts are bound to assume the truth of the factual allegations. Thus, a motion to dismiss can be denied in the early stages of litigation even if the underlying claims are weak.

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