Bank Lawyer's Blog

Camden Fine Fires Off A Fine Salvo

In  recent opinion piece for Bloomberg News, ICBA CEO Camden Fine was in fine fettle, ranting about his favorite topic: new regulatory burdens are strangling community while the largest banks are doing just fine, thank you very much. Among his salient points are the following:

The megabanks are benefiting from what Bloomberg View calculated is an $83 billion annual taxpayer subsidy, the value of implicit guarantees by the U.S. Treasury. Bloomberg View was correct to characterize the too-big-to-fail subsidy as “a major driver of the largest banks’ profits.”

Perversely, Federal Deposit Insurance Corp. data show that large banks have both the lowest credit quality and the lowest cost of funds in the industry. Community banks rank the highest in both categories even though they have had to compete for years against the megabanks’ access to cheaper money in pricing loans. In addition, community banks must compete against the big lenders’ lower comparative costs in handling regulatory paperwork.

While Cam complains that this is "morally wrong," I suspect that in a nation overrun with Pontius Pilates who sneer in the throes of their born-again relativism "What is 'truth'?," appealing to "morality" as a behavior influencer will have as much impact on Congress as a stern talking to by Pope Francis would have on Charlie Sheen. More effective on the morally challenged is likely to be his economic arguments.

Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many of their precious human resources on onerous paperwork and time-consuming compliance measures.

Community banks are the source of almost 60 percent of all small-business loans of less than $1 million, as well as mortgage and consumer loans tailored to the needs of their local communities. Large banking organizations with more than $50 billion in assets hold almost 40 percent of outstanding small loans to businesses, according to the Federal Reserve, but loans to small businesses aren’t a significant portion of large-bank lending. Small-business loans represent less than 5 percent of the large banks’ total domestic lending.

Cam outlines five specific steps Congress and the federal regulators could take to help community banks (and credit unions, for that matter, although Cam would choke on his own tongue before admitting it). They include:

• Easing up on some of the more onerous residential mortgage lending and servicing rules.
• Eliminating the requirement that community banks report on every new small business loan application.
• Requiring a cost-benefit analysis for all new regulations and prohibiting the issuance of any regulation where the cost exceeds the benefit.
• Raising the threshold to $350 million in assets for the requirement for an audit of a bank's internal controls.
• Eliminating the annual requirement for sending no-change privacy policies.

These are all helpful suggestions, but  I'm frankly surprised that he didn't also call for the carpet bombing of CFPB's D.C. headquarters and insist that Jamie Dimon's king-size bed be short-sheeted. Oh well, the year is not even half over. There's still time to get down to the really important stuff.

The CU-Bank War Is Getting Ugly

Crying "The Time Is Right To Tax," commercial bankers are upping the thermostat on state and federal regulators to "level the playing field" by eliminating the tax exempt status of credit unions. According to the ABA Banking Journal, in a recent panel discussion at the American Bankers Association's 2013 Government Relations Summit, bankers of all stripes, including a CEO of a bank that was once a credit union, took the position that in this time when Congress and just about every state legislature is looking for ways to raise revenues without raising tax rates, the opportunity exists to convince legislators that tax exempt status for the credit union industry is an idea whose time has passed.

Panel member Ken Kies, managing director of the Federal Policy Group lobbying consultancy, spent years in Washington tax-writing roles, and believes banks could pursue a change.

"Frankly," said Kies, who's working with ABA, "I'm not sure that the environment has ever been better than it is today."

Kies indicated that no one should think that "not taxed" means "never to be taxed." History has not only seen many attempts to subject tax-exempt organizations to federal tax, but success in those attempts. Today's congressional urge towards tax reform, even on a revenue-neutral basis, could be the factor that pushes credit union taxation into reality.

In 1986, tax legislation pulled Blue Cross and Blue Shield organizations under the tax umbrella, reflected Kies. And a year later, the TIAA/CREF benefits organization likewise got shifted. And savings institutions lost their tax-favored status decades ago, and remain a viable part of the financial services business.

Mr. Kies also mentions the fact that there's a trillion dollar federal deficit that makes this the best time to press the case. However, he does not mention by how much that deficit would be reduced by taxing credit unions, which ought to show up somewhere in the argument if it's to survive counter attacks. 

Meanwhile, In Illinois, the hate-fest between banks and credit unions rages on.

Linda Koch, CEO of the Illinois Bankers Association, wrote an op-ed piece for The State-Journal Register in that state's capitol city, in which she sang the same tune as the ABA panelists.

She took the additional step of citing the CBO to the effect that CU tax exemption costs the federal government $2 billion a year in "lost revenue" and the state of Illinois $25 million. I don 't know what the state of Illinois's budget deficit is, but I do know that $2 billion in additional tax revenue is a drop from an eye dropper in a Pacific ocean of federal spending that, according to the Heritage Foundation, reached $3.6 trillion in 2012 and is expected to reach $5.5 trillion by 2022. To me, contributing such relatively small amounts to the black hole of government spending is an argument that lacks weight. I'd prefer that banks stick to the fact that if credit unions want to be "more like banks" (in other words, make commercial loans), they can pay the same freight that goes with that business model, including income taxes. You want to waddle, quack, and fly like a duck, but be pampered like a golden goose. Sorry, leveling the playing field on the powers side ought to come with a leveling of the playing field on the taxation side. Otherwise, you really are gaining an unfair competitive advantage.

The CEO of the Illinois Credit Union League, Dan Plauda, responded to Ms. Koch with the argument that tax revenues from credit unions in Illinois won't solve Illinois' revenue shortfalls. That's most likely very true. However, he also alleges that taxing credit unions will hurt their members, who rely on deposit rates that are much higher than banks pay and consumer loan rates that are much lower than those charged by banks. To me, that makes the banks' case, that tax exemption gives credit unions an unfair competitive advantage on the same deposits and loans that banks fight for. It seems to weaken the case for credit unions to intrude further into the commercial banks' sacred ground of commercial lending.

Mr. Plauda talks about how credit unions are member owned, "democratically controlled," and manned by volunteers. He also alleges that all "excess revenues" are plowed back into the credit union. By "excess revenues, he means what would otherwise be deemed "profits." I started out my career as a bank lawyer in-house for a large mutual savings bank. The only practical difference between a stock-owned commercial bank and a member-owned mutual is that, by soliciting proxies from members who don't give a rip about anything other than services and rates, management of a mutual is, in many cases, able to "rest easy" from all those pesky shareholders who demand the distribution of "profits" either in the form of higher stock prices, dividends, or both. At the same time, there's not exactly a lot of oversight on salaries and cash bonuses that are deducted from gross revenues before the "excess revenues" are calculated.

Mr. Plauda finished his piece with a flourish.

This “people helping people” approach to financial services helps explain why credit unions have become so popular in recent years. As new bank fees have proliferated, for instance, Americans have moved to credit unions in droves. Last year alone, credit unions nationwide added more than 2 million net new members — the biggest annual net member growth in 15 years.

Today, more than 96 million people belong to credit unions.

If anyone seriously thinks that folks flocked to credit unions because credit union members feel like they are part of a movement of "people helping people," as opposed to the financial incentives of lower loan rates and higher deposit rates, both possible because of CU's tax exempt status, that person needs a reality transplant. It just seems to me that responding to banks' call for the end of credit union tax exempt status by taunting banks with the line "we're stealing your customers by the boxcar-load" is going to make even the densest legislator wake up and smell the coffee, eventually.

Both sides of this debate need to sharpen their arguments. If they're able to do so, that is.

Thanks to a loyal reader from Illinois for links to the Illinois op-ed pieces

The Real Deal? Not...

From time to time on this blog, I express the wish that banks and credit unions would stop sticking forks in each other's faces long enough to cooperate on issues of common concern. Credit unions in Missouri have obviously been reading my blog posts, taken them to heart, and decided to tell me to stick my feel-good bloviations where the moon don't shine.

The gist of their advertising campaign appears to be that all commercial banks are tied directly to Wall Street and all credit unions are tethered tightly to The Cosmic Muffin. I guess all residential mortgage loans that are made by credit unions remain in portfolio and none ever end up in a mortgage backed security that's prepared, packaged, rated, bought, or sold by a Wall Street firm. That's certainly believable.

I also love the "real" customer quote on the "How To Switch" page about how banks have "all these different policies." I guess credit unions have only one policy that deals with everything, is that correct? Credit union compliance officers, let me hear from ya' on that aspect. As for being quick-on-the-draw regarding decisions and actions, my wife's recent attempt to set up a simple traditional IRA jumbo CD account at a credit union down the street ran aground on the shoals of the credit union's complete befuddlement with the concept of a trustee-to-trustee transfer. It took them a long time to screw that up and an even longer time to unscrew it up.

In fairness to credit unions generally, the community bank across the street from that credit union understood the quick-decision concept quite well, but then fatally enraged your trusty correspondent, who was also trying to set up a checking account, by insisting that Texas law required a legal professional who practiced under his or her own name to file an assumed named affidavit (Texas law does not require this). It was bad enough that the legally-challenged bank officer repeatedly argued with your favorite bloviator on this point of law, but then pulled out the account application of a woman who had set up a sole proprietorship under an assumed name and showed me reams of personal information about this woman. I told him that I could never do business with a bank whose deposit account officers routinely violated not only bank privacy policies, but state and federal privacy laws. His shocked expression was quickly succeeded by a look that conveyed his dawning realization that he had stepped in something squishy and foul-smelling, which, in turn, was succeeded by the vision of the swiftly moving bodies of my spousal unit and myself exiting the bank's premises.

The Bozo Factor: it's an equal opportunity affliction. It strikes credit unions and community banks with a distinct lack of partiality. I know as many banks that can make quick decisions for customers as credit unions that couldn't make a correct decision quickly if their pants were on fire and a quick, correct decision would enable them to jump into a barrel of pleasantly cool river water. And vice versa.

Thus, if you want to harp on legitimate distinctions between banks and credit unions, be my guest. For example, the advertisements do state that credit unions generally offer better rates, which is true, but fail to note that this is due to the fact that they don't pay income taxes. Yet, they yearn to be not only just like banks, but better banks than banks, only better banks that shirk their patriotic duty to fund state and federal government raping and pillaging of taxpayers like their for-profit commercial banking brethren and...oh yeah...credit union members must do. That might make for a fascinating fact-focused ad campaign, don't you think?

At least these ad campaigns give us all something to do in between wondering whether the washed up actor, the washed up comedian, or the washed up athlete will be the next bad dancer booted off "Dancing With The Stars." For that, we can be grateful.

The Not-So-Secret Facts of Life

The LA Times obtained a bunch of documents from the FDIC pursuant to a FOIA request and uncovered some startling news: the FDIC is settling lawsuits against those it alleges caused banks to fail. Worse than that, the FDIC is agreeing not to issue press releases regarding many of the settlements. This earth-shattering news is labeled a "major policy shift" from the way the FDIC handled failed bank litigation that arose out of the last big bank meltdown, "when the FDIC trumpeted punitive actions against banks as a deterrent to others."

Before I address that last point, let's listen to some more suspicious minds support the Times theme that all of this "secret settlement" skulduggery smacks of some kind of plot to let evil-doers escape the lynch mobs that surely would have strung them up if only the FDIC had set public outrage en fuego by  trumpeting these settlements from the top of the Rocky Mountains.

Critics fault the government for going easy on banks in the aftermath of the financial crisis. At a Feb. 14 hearing, Sen. Elizabeth Warren (D-Mass.), founder of the Consumer Financial Protection Bureau, criticized FDIC Chairman Martin J. Gruenberg along with other bank regulators for their reluctance to make examples of Wall Street firms by taking them to trial.

Quoting "The Founder" is a go-to proposition for the Times, and one that lacks the punch that soundbites from other less usual suspects bring to the table. In addition, the Times' accusations range far beyond Wall Street banks. It's mostly (if not entirely) the little guys that are being pursued. God forbid they should get a break today from anyone other than MacDonalds.

Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.

Critics describe the FDIC's current practice of low-profile deal-making as a major departure from the S&L crisis.

"In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared."

Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for."

The FDIC should disclose as much as it can, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. "Transparency is always better, and serves as a deterrent to future misconduct."

Yes, let's deter the future conduct of owning, managing, and directing a community bank that concentrates on loan products that the regulators find are being originated and managed within the parameters of safety and soundness guidelines until, within a few months, the world falls apart in the greatest economic collapse since the Great Depression. Thereafter, although we feel compelled to go after many failed bank officials, directors, and third parties because we've got an obligation to recover whatever losses to the fund we are able whenever we can do so without being laughed out of court, we understand, in our heart-of-hearts, notwithstanding the posturing we might do for political or litigation purposes, that these times are different than late 1980s.

This is what neither the Times nor its talking heads understand (or, if they do understand, will admit): the facts are different this time. In the 1980s, there were a number of outright crooks involved in the banking and, especially, the thrift business in certain parts of the country, some wearing stetsons and cowboy boots, others clad in three-piece Armani suits. There were fraudulent appraisals, my-dead-cow-for-your-dead-horse swaps, 100 percent loan-to-value ADC loans on raw dirt, rapid multiple flips that would have taxed Shawn Johnson, and similar shenanigans. The damages were also limited to certain regions of the country where real estate bubbles were exploited (or partially created) by financial institutions who engaged in outright speculation until those bubbles burst. Also, many of the worst players were (relatively) smaller players.

In the latest debacle, the causes of losses are more complicated and the resulting economic consequences much more devastating and widespread. Many of the hundreds of banks that failed collapsed because they were steamrolled by the swiftness of the onset, and the depth, of the economic collapse triggered, in large part, by subprime residential mortgage loans, the complex web of securities they spawned, and the resulting residential real estate inflation. Commercial real estate wasn't the primary cause of the collapse this time, it was a casualty of the collapse. You can argue until you're blue in the face about the nuances of fiduciary duties and CRE concentrations, but in all but the low hanging fruit cases, the FDIC doesn't have smoking guns laying in plain sight to use to extract huge settlements or litigation awards out of either defendants or, more importantly, their insurance companies, who are fighting back.

As to the lack of a "deterrent" to future potential wrongdoers that allegedly results from not making settlements public, I wouldn't be concerned that "silent settlements" are encouraging prospective bank officers and directors to do anything. Those who haven't said "screw it" and opted to sip mai-tais in Cabo until they need their livers "Rolfed," or are seriously considering an alternative exit strategy, aren't chomping at the bit to jump feet-first back into subprime anything or to make CRE or any other product or service their concentration-of-choice, and their primary regulatory supervisors wouldn't let them go there even if they yearned to do so. "Other bankers" are plenty scared Mr. Newsome, without the need to read about FDIC settlements. At least, that's the story with the vast number of smaller banks in this country.

I suppose there might be some deterrent effect if the FDIC announced settlements against the officers and directors of the large Wall Street banks that helped create the mess we're in and which then failed, so that future Wall Street bankers would...oops...none of them failed. That's right: they were bailed out. My bad!

Buried in the story is the rationale for keeping mum (until FOIA forces disclosure) about settlements.

Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation. The no-press-release arrangements help close those deals.

Those are valid reasons, and they make sense for both parties.

Let's hope the Times drills a little deeper next time and strikes oil instead of gas.

The Rocky Mountain Lowdown: Loan Collateral Up In Smoke

I asked Steve Mulligan, a partner in the Denver office of the law firm that suffers my presence in their Texas office, to write a guest post for the blog on an issue of concern to lenders in Colorado (and, perhaps, other states) where, after the most recent state and national elections, lighting up a fat boy in public, or growing smokable hemp in  your basement, no longer puts you on the wrong side of local law enforcement. As Steve points out, that's not the end of the story for lenders whose collateral may be a place where some mellow cats are toking up a Rocky Mountain high.

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Bankers & Lenders, Your Real Property Collateral May Be At Risk if Your Borrower Violates Federal Drug Laws

By Steven T. Mulligan, Bieging Shapiro & Barber LLP

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of the U.S. Bankruptcy Court in Colorado, had recent occasion to considersuch a situation.  In In re Rent-Rite Super Kegs West Ltd., the Chapter 11 debtor owned a warehouse in Denver and some of its tenants were in the business of growing marijuana.  While this may be a legal activity under Colorado law, it is not under the federal Controlled Substance Act (the “CSA”) unless one receives a certificate of registration from the Drug Enforcement Agency (“DEA”). 

Judge Tallman looked to § 856 of the CSA, known as the “crack house statute,” which provides that it is a federal crime to use real property or allow real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance.  Marijuana is a Schedule I controlled substance under the CSA. 

The Judge then looked to the criminal penalties for violating the CSA which includes a potential prison term of not more than twenty years.  As a result, the federal forfeiture statute comes into play.  That statute provides that real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment is subject to forfeiture.

Consequently, Judge Tallman found that the debtor’s illegal activity put the lender’s collateral at risk because of the federal forfeiture statute.  Moreover, since the automatic stay provisions of the Bankruptcy Code do not prevent the U.S. from seizing property under the forfeiture statute, the risk continued every day that the debtor remained in bankruptcy.  The matter was before the court on the secured creditor’s motion to dismiss the debtor’s bankruptcy case. 

In re Rent-Rite highlights the need for lenders to gather important information when underwriting and administering a commercial real estate loan.  Such information should include current rent rolls, copies of any leases, and research on any tenant; it may be that the name is a good indication as to what the tenant’s business is.  If possible, you may want to visit the property to see if any potentially illegal activity is taking place.  An affirmative covenant from the borrower that no activity in violation of state or federal law may also be beneficial.

Additionally, consider requiring the borrower to provide periodic updates and immediate notification if it enters into any new leases or changes its own business to include growing marijuana.  Finally, think about reviewing your default provisions; if the borrower engages in activities that are in violation of the CSA or allows such activities to occur, you may be able to declare a default under the loan documents.

Oh Georgia, No Peace, No Peace I Find

It was bad enough when Georgia reached the top of the heap (or bottom, depending on your view) of states in the number of FDIC civil lawsuits against former officers and directors of failed banks. Now, it appears that Georgia may be leading in a race to become the state with the most former bank officers and directors who've been indicted.

The former president and six other officers of First National Bank of Savannah on Friday were indicted by a federal grand jury in Savannah, accused of defrauding First National Bank and other banks out of millions of dollars.

[...]

The indictment comes on the heels of the 2011 prosecution of Savannah real estate developer Richard Guerard for scheming with First National Bank officials and employees to defraud the bank and others to cover loan shortfalls for two of his companies.

He pleaded guilty in May 2011 and was sentenced to 52 months in federal prison in August 2011.

The First National Bank indictments arise out of an alleged scheme by the defendants to hide losses from shareholders, directors, and the regulators that the bank suffered from soured commercial real estate loans through an alleged witches brew of straw borrowers, side deals, "hidden promises," "recruiting other banks to fund non-performing loans based on fraudulent misrepresentations about the quality of the loans," and falsifying and fabricating bank records and other documents. Other than that, everything appears to have been upfront and above-board.

There's a sense of "deja vu" to the allegations, in that other community banks that have failed due to CRE loans that went bad have been alleged by the FDIC to have gone to some lengths to conceal the nature of the losses by the use of similar techniques. Not many of those allegations have resulted in criminal indictments, but these indictments may signal that more of those are on the way.

Of course, indictments present only the government's side of the case. We haven't heard yet from defense counsel. I'm sure their response will paint a different picture.

Nevertheless, lawyers who represent banks that are "in distress" some times find it necessary to point out to bank officers, and occasionally to bank directors, as well, that attempting to mask losses can subject responsible officers and directors to allegations that, among other things, they have filed false financial records, including their quarterly CALL Reports. These types of indictments are a lesson. I hope those who might benefit from such a lesson are paying attention. For some, the time for paying attention has passed. For them, the best approach at this time might be fervent prayer.

The Worst Is Yet To Come

Former banker and bank regulator, and current bank consultant, Mark Olson, had a lot of things to say at a recent ABA Directors Forum. However, perhaps the most disconcerting prediction he made is that when it comes to Dodd-Frank, the pain for financial institutions is only going to get worse.

Dodd-Frank, related crisis-era legislation and regulation, and a gearshift in the regulatory mindset promise a much rougher road ahead, predicted banking expert Mark Olson in a presentation to ABA's Director's Forum, held in early October in conjunction with ABA's Annual Convention.

Due to Dodd-Frank and the other fallout, "banking is going to be more expensive," predicted Olson, but he added, "I can't find that yet in the industry's numbers." He noted that banking's efficiency ratios continue to be favorable, which he believes means that the increased costs of compliance have yet to really bite.

Olson cited recent research by Standard & Poor's that indicates that 25,000 jobs are being created in the course of handling Dodd-Frank, even as many regulations remain unwritten or still in proposed form.

How nice for banks to know that Dodd-Frank compliance will continue to be a growth industry. Of course, that's a growth industry that saps the bottom line rather than enhances it.

Olson was also spot-on, if depressingly so, in his observations about the trends in regulatory supervision.

"The regulators are still very defensive--very, very defensive," said Olson, "and they are very risk averse." They don't wish to be embarrassed again, and as a consequence, bankers will have to make their case to regulators when they want to do anything out of the ordinary.

"If I were in the regulators' position," said Olson, "I would see that there is zero upside for my being flexible."

[...]

"There is a trend toward enforcement over supervision," Olson explained. Where agencies may have nudged, shepherded, and jawboned beforehand, now they are likely to smack.

Activities and policies that banks have engaged in and maintained for many years are now considered suspect, Olson said.

I keep waiting for the pendulum to swing back, because at some point, if it doesn't, the regulators will continue to impede the recovery in the banking business, and perhaps the larger economy served by bank lending, by clamping down too hard on risk taking. "No risk, no reward."

I hope the pendulum swings back while I'm still young enough to enjoy it. The odds are growing slimmer with each passing month.

Moving Right Along

This is the last post I intend to make (for the time being) on the subject of the NCUA's use of the "low income" credit union designation to permit credit unions who qualify for the designation to make business loans in excess of the 12.25% of assets cap. In my last post, I offered any representative of a credit union trade association the opportunity to respond to the comments of Dr. Keith Leggett of the ABA that were featured in that post. While a trade association official did not respond, a couple of credit union attorneys did, and I've arbitrarily chosen the comments of Hal Scoggins of Farleigh Wada & Witt in Portland, Oregon, to post. Here they are:

It's a bit odd that while Dr. Leggett is fierce in his desire to see credit unions strictly adhere to the 12.25% MBL limit prescribed by the Federal Credit Union Act, he is less keen on following the plain language of the Act when it says that the determination of "serves predominantly low-income members" is "as defined by the Board."  I don't disagree that the NCUA seems to want to give credit unions every opportunity to obtain the low-income designation.  But if a credit union is predominantly serving members with median household incomes of about $40k or less (the national median family household income as of December 2011 was about $51k), it would seem that the ABA should be happy that the credit union is serving the niche that the ABA always says credit unions should stick to. 

 And it's not like low income designated credit unions are free to make MBLs without limit.  A review of the NCUA's concentration risk policy requirements should make that evident.  Further, no matter what the regulations may officially permit, credit union examiners are prone to throw up roadblocks to huge member business loan concentrations in any credit union, because anything that actually earns income for the credit union is obviously much too risky and should be avoided (or severely restricted) at all cost. 

Finally, no matter how many credit unions (including some "big" ones) get low income designations, the fact is that credit unions are still just a small cupfull of water in the financial institution bucket.  As of 12/31/11, total CU assets in the US were just over $1 trillion.  Wells Fargo by itself has more assets than that.  Is the magnitude of the credit union "threat" really that great for banks?

I don't intend to make this blog a continuing forum for the debate about this particular issue, but I wanted to honor my commitment to post a response from someone connected to the credit union industry. Having done so, I'll feel free to move on to other areas on which to focus my snark. After all, I've wasted almost four days without commenting on everyone's Crazy Uncle Joe's maniacal performance in last Thursday's vice presidential debate, and such snark fodder usually surfaces only when Maxine Waters or Barney Frank opens a pie hole to emit gaseous effluvia. I need to pick such low hanging fruit before it over-ripens, which usually means before Saturday Night Live gets a chance to lampoon it, which it did in fine fashion last night.

If credit union and commercial bank representatives want to carry on the war, they'll have to change battlefields. This one is played out.

Speaking of Saturday Night Live...

Another Prespective On Low Income Credit Unions

Last night's post concerning the circumvention of the 12.25% business lending cap by some credit unions who qualify for a "low income" designation, generated some interesting responses. I opined that I wasn't really concerned about this "loophole," given the fact that there were only 12 credit unions of $1 billion or more in the group and that having a bunch of small credit unions making business loans in low income areas might be beneficial to those areas.

Although I thought my treatment of the NCUA, and credit unions generally, was fairly gentle, given my customary slash-and-burn-in-a-bonfire-of-snark approach to blogging, some credit union subscribers cancelled their subscriptions to the blog. I assume that they were with the same tribe of credit union natives who become enraged with my constant occasional bashing of the CFPB. I'm not sure where the love for the CFPB may originate in the minds of the regulated, but perhaps its akin to suffering from the Stockholm syndrome.

On the other hand, Dr. Keith Leggett, Vice President and Senior Economist at the American Bankers Association, who was quoted in my post, sent a thoughtful comment my way via email. Since it's not long, I'll post it in its entirety.

While NCUA just approved 12, there are already other credit unions that are near or above $1 billion in assets that already have the low-income designation --  Black Hills FCU (SD), Whitefish Credit Union (MT), GECU (TX), Navy Army (TX), Selco Community (OR).

Also, Security Service In San Antonio is eligible for this designation.  They had not opted in at the time I did the FOIA.

The other issue is that NCUA tends to grade on a curve with regard to low-income.  Low-income designation includes people of moderate income.  In addition, the agency rigs the process in favor of getting a low-income designation.

Here is the agency’s regulation.

“Low-income members are those members whose family income is 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater, or those members who earn 80% or less than the total median earnings for individuals for the metropolitan area where they live or national metropolitan area, whichever is greater. NCUA will use the statewide or national, non-metropolitan area median family income instead of the metropolitan area or national metropolitan area median family income for members living outside a metropolitan area. Member earnings will be estimated based on data reported by the U.S. Census Bureau for the geographic area where the member lives. The term “low-income members” also includes those members enrolled as students in a college, university, high school, or vocational school.”

So if you are above 80 percent for the local metro area, NCUA substitutes the national average to see if the census tract falls beneath the threshold.

OK, I get it. Dr. Leggett is concerned that the NCUA is actively assisting every credit union it possibly can to do an end run around the cap on business lending because Congress won't raise the cap by legislative action. I still think it's too early to tell whether this is a real threat or not; however, at the risk of offending even more credit union employees, I understand why the ABA is concerned. After all, I, too, make my living serving the dark side of the Force (i.e., commercial banks) as a running dog lackey of capitalist imperialism, a bourgeois traitor to the proletariat, a lickspittle idler, a kulak parasite, a Bonapartist pig, a Trotskyite fascist hyena, a revanchist, a class traitor, a Hyena soiling revoluntionary raiments, an exploiter of the working class, and, overall, simply an enemy of the people. Therefore, I, too, must be ever alert when voluntary associations that seek to serve a nonprofit purpose and, thereby, avoid tax-paying, also seek to encroach upon Lord Sauron's hegemony in financial services. Such mission creep must be nipped in the bud.

If a credit union trade association flak apologist spokesperson would care to send me a response that does not threaten physical harm to my pets or my person, I would be pleased to post it in the same manner as I've posted Dr. Leggett's. That manner includes a severe risk of encountering sarcasm, irony, self-parody, and, perhaps, actual humor, so consider yourself warned.

Low Income "Threat" Overblown?

One of the things that "disturbs" commercial banks about credit unions is their consistent push for greater commercial lending authority. One push came this past summer with a bill that Harry Ried and others tried (not very successfully) to move through Congress that would have raised the cap on business loans from 12.25% of assets to 27.5%. Another push came in August from the NCUA, which notified more than 1,000 credit unions that they were eligible to be classified as "low income credit unions," and, thereby, to be exempt from the cap. Predictably, many bank trade groups howled about that action, although it seemed to me that the number of institutions was relatively small, and that the impact on commercial banks was unlikely to be substantial.

In today's edition of the American Banker (paid subscription required), reporter Kevin Wack asserts "that banks' fears of increased competition for business loans were overblown."

In August, the National Credit Union Administration notified more than 1,000 credit unions that they were eligible to become low-income credit unions. That designation exempts the institutions from a statutory 12.25% cap on business lending, along with other benefits. Banking trade groups decried the regulators' move as an end run around Congress, which has been considering legislation, fiercely opposed by the banking industry, to raise the cap.

But new data show that out of 615 credit unions that initially accepted the NCUA's offer, only a tiny percentage are anywhere near the existing cap.

Just six of the credit unions were within 20% of it and only 14 of them were halfway there. Roughly 70% of the credit unions were doing no business lending at all.

The American Bankers Association is not as sanguine about this turn of events, due to the fact that the "low income" designation gives the credit unions the ability to raise supplemental capital. As most observers of the industry understand, the inability to raise capital by tapping capital markets is one of the major impediments to growth by credit unions.

Banking industry officials said that the newfound ability to raise capital could accelerate the growth of the credit unions at the expense of banks. Currently, credit unions are barred from raising capital other than through retained earnings.

Keith Leggett, vice president and senior economist at the Association, likened the supplemental capital to subordinated debt issued by bank holding companies.

"And so having the ability to go out there and raise secondary capital will facilitate rapid growth," he said, referring to the credit union industry. "That'll allow them to even more aggressively price their products, because they won't need to retain their earnings going forward."

Only twelve of the institutions have assets over $1 billion and two-thirds have assets under $50 million. I don't know if twelve credit unions ought to scare the bejesus out of commercial banks. Moreover, to retain their low income designation, the credit unions must have more than half their members located in low income areas. Are banks concerned that these low income CUs will sop up all the good business loan credits in low income areas? Are banks rushing to serve the same areas and worried that CUs are being given an unfair advantage in being the first pigs to the trough? Seriously?

What if, instead of hurting commercial banks, the increased business lending authority of low income credit unions actually increases the availability of small dollar amount business loans to small businesses in low income areas? I don't know if that will be the result, but if two thirds of the low income CUs have assets under $50 million, I'm not sure that they're going to be pilfering credits that commercial banks crave.

I understand why commercial banks oppose legislation to increase the 12.25% business lending cap for all credit un ions. I also understand why folks like Keith Leggett are concerned that the "low income" designation might be abused. On the other hand, I think it's just as likely that this action by the NCUA will not have much of an impact on most commercial banks.

I guess we'll just have to wait and see, because, while the commercial banking lobbyist should be able to thwart any general raising of the cap through federal legislation, I don't see the banks being able to launch a successful legislative effort to roll back the NCUA's efforts to encourage eligible banks to take advantage of the low income designation. We'll all simply have to stand by and watch this potential "danger" play out.