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NCUA victory may force banks to beat competition rather than eliminate it

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NCUA victory may force banks to beat competition rather than eliminate it

After the National Credit Union Administration won the most recent legal battle with banking advocates over new credit union regulations, some industry observers believe it might be time for the banks to rethink the war.

The U.S. District Court of the Eastern District of Virginia dismissed the suit filed in September 2016 by the Independent Community Bankers of America against the NCUA regarding its new rule on member business lending. The NCUA board in February 2016 approved the final version of the MBL rule.

Camden Fine, president and CEO of the ICBA, said in a statement that the group was "deeply disappointed" in the decision on the MBL rule. But it remains an open-ended question what step the ICBA might take next. "We are evaluating the decision and our options," Fine said.

The ICBA suit was not the only pending litigation over a new NCUA rule. The American Bankers Association on Dec. 7, 2016, said it filed a lawsuit against the regulator over its field of membership rule.

Charles Wendel, a former banker and now president of Financial Institutions Consulting Inc., said in an interview that the ICBA's argument against expanded credit union commercial lending is far from baseless. Namely, he said, community banks' assertion that credit unions are unfairly capitalizing on their nonprofit tax exemptions to lure away commercial clients from community banks has merit. If banks and credit unions are serving many of the same customers in the same ways, he suggested, it stands to reason they should compete for those clients on a level playing field.

But Wendel said the court's decision indicates community banks and their advocates are not winning with that argument. As such, he said, bankers may prove better off by ramping up their own competitive capabilities instead of fighting to push credit unions out of their business lending territory.

"I think we are at a point that, in trying to eliminate competition, the banks look like they are taking a very defensive stand … and [the court] is saying that's not going to work," Wendel said. "I think the community banks would better serve themselves if they worked to attract more lending talent, if they set out to provide more sophisticated product sets, if they made sure they had the best technology. You know, beat the competition instead of trying to get rid of it."

Thomas Hecht, a partner with Nixon Peabody LLP, said in an interview that the court decision is likely to be appealed, and it is anyone's guess how that could turn out. But he said the decision should give the banking advocates pause in terms of future lawsuits because the path to challenge the NCUA is now clearly more difficult. He pointed in particular to the court's reference to the NCUA's administrative decision making powers, which he said is a very tough argument to overcome. "If any of that holds up it will be difficult to challenge the NCUA in the future," he said. "Not impossible, but this complicates their road."

Former NCUA board member Geoff Bacino said the ruling was no surprise, but the swiftness with which the court decided was. The short period of time the case was debated and the fact that the court dismissed it on procedural grounds while also suggesting it would have been rejected on its merits too indicated the decision was a "slam dunk," he said.

Bacino, a credit union consultant, said there are a shrinking number of banks in the U.S. and the differences between them are disappearing too. Those that are left have found a common enemy in the credit unions, and so the court ruling is unlikely to change the banks' recent legal game plan. He said, in fact, the loss will probably turn out to be nothing more than a "speed bump" in the road the bank advocates are traveling to rein in credit unions because the strategy is a "membership-driven decision."

So will more credit unions take advantage of the opportunity to wade into business lending? Bacino said it's possible, and the decision comes down to whether they have the expertise to do it. "It doesn't matter what size you are," he said. Hecht said if the recent ruling is upheld it will enhance the ability of credit unions to compete in a changing financial services marketplace. He said competition will force even the smallest credit unions to at least consider offering business loans.

The banking industry continues to contend that developments including credit unions buying banks and offering business lending are taking that industry far astray from what it was originally intended to do and making its institutions increasingly bank-like. But Hecht said one way or the other the credit unions in the U.S. are going to be competitive and an increasingly powerful financial player. "I think banks of whatever size are going to have to come to terms with that," he said. "Times change."