Ongoing litigation regarding the interpretation of the statutory limitations on credit unions’ ability to purchase or participate in commercial loans made to borrowers who are NOT members of the credit union

A litigation filed in the United States District Court for the Eastern District of Virginia by the Independent Community Bankers Association (ICBA) challenges the legality of a final rule promulgated by the National Credit Union Administration (NCUA) that becomes effective January 1, 2017 and will arguably expand the ability of credit unions to purchase or participate in commercial loans originated by other lenders. The Federal Credit Union Act and regulations of the NCUA authorize credit unions to purchase interests in loans made to borrowers by other lenders. 12 U.S.C. § 1757(5)(E); 12 C.F.R. 701.22. The Federal Credit Union Act separately 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. 12 U.S.C. § 1757a(a).

According to the ICBA’s Complaint, the rule at issue “purports to free credit unions from a core statutory restriction that Congress placed on their commercial lending activities by allowing all federal and state credit unions insured by NCUA to acquire, essentially without limit, (a) entire commercial loans extended by other lenders, including other credit unions, to borrowers who are not members of the credit union (what NCUA refers to as “non-member commercial loans”), and (b) portions of such commercial loans originated by other lenders (what NCUA refers to as “non-member participation interests in commercial loans”).” The rule which is known as the “member business rule” (“MBL Rule”) allows credit unions to purchase non-member commercial loans or participate in non-member participation interests in commercial loans without those loans or participations counting towards the statutory limit on “member business loans” set forth in the Federal Credit Union Act. 12 U.S.C. § 1757a(a). The ICBA contends that the “rule violates the plain terms of the Federal Credit Union Act, as amended, 12 U.S.C. § 1751 et seq., which strictly limits the amount of commercial loans and interests in such loans of any kind that an insured credit union may hold on its balance sheet.” The ICBA Complaint alleges that “the MBL Rule exacerbates the unfair competitive harm that tax-exempt credit unions are able to inflict on community banks, which do not benefit from the tax advantages enjoyed by credit unions.”

The NCUA has moved to dismiss the Complaint on the grounds that the ICBA lacks standing to bring the claims. This argument is based on the lack of any actual impact on ICBA members as the MBL Rule at issue has not yet taken effect and, therefore, could not have caused any harm. Further, NCUA argues that the ICBA’s claims are barred by the applicable six year statute of limitations because the interpretation of the Federal Credit Union Act section 1757a(a) that is directly at issue in the present litigation was included in the rule issued by the NCUA in 2003. 68 Fed. Reg. 56,537, 56,544-45 (Oct. 1, 2003). Finally, the NCUA contends the Complaint should be dismissed because NCUA’s interpretation of section 1757a(a) is consistent with the language of that statutory provision. NCUA argues, “Section 1757a(a) states that ‘no insured credit union may make any member business loan that would result in a total amount of such loans’ to exceed the statutory cap on member business loans. 12 U.S.C. § 1757a(a) (emphasis added). By its plain language, this provision requires a credit union to include only loans extended to its members in calculating its aggregate member business loan limit.” The NCUA asserts that its interpretation is a “permissible construction” of the statute warranting deference from the Court under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

If the complaint can withstand the statute of limitations challenge, the arguments regarding the standing of the ICBA and the interpretation of the member business loan section of the Federal Credit Union Act seem to blend into one another. If the Court sides with the ICBA in its interpretation of section 1757a(a) requiring credit unions to include loans purchases or participations of any kind, and from any source in its calculation of the limitation on commercial loans, then it stands to reason that ICBA members are financially harmed by having to compete in the commercial loan market against tax-exempt federally insured credit unions. If, on the other hand, the Court sides with the NCUA and determines that the non-member business loans and non-member participation interests are not subject to the statutory cap then there is no claim and, therefore, no harm to support standing to bring the case.

Whatever the result, the MBL Rule and this litigation will impact the competitive landscape involving community banks and credit unions nationwide.