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Credit Union Compromise Reached With Chairman Frank


In late April bankers rallied to block a credit union “end-run” around the legislative process of considering their proposal to expand their commercial lending authority.  Since that happened, House Financial Services Committee Chairman Barney Frank (D-MA) has tried to come up with a “compromise” that gives credit unions some authority to expand into “underserved” areas and, at the same time, provides some red tape relief for banks.


The goal has been to force an agreement between the two warring sides and use that compromise to advance the ball on behalf of both bankers and credit union advocates.  On Friday, June 20th a deal was announced, and it's scheduled to be considered on the House floor as early as Monday, June 23rd. 


The original credit union bill, the Credit Union Regulatory Relief Act (H.R. 5519), would have allowed any federal credit union to branch into entire cities and counties – more than 700 of them nation-wide – by claiming those areas were “underserved” as that term has been defined by the National Credit Union Administration (NCUA). Current law allows only multiple-common-bond credit unions to expand into "underserved" areas. When the National Credit Union Administration illegally extended that authority to other credit unions, ABA, the Utah Bankers Association and Utah banks successfully sued.


 In this proposal, underserved areas are defined more tightly.  Credit unions can only serve people who live IN such areas, and businesses that are located IN such areas.   More importantly, the loans to those businesses have to be used IN the “underserved” area.   


The beauty of this particular compromise now is to see each side reacts.  If the credit unions walk away because it is too limited, they are revealed as using the underserved as an excuse for expansion.  If bankers walk away and say no, in the eyes of the Chairman of the Committee it makes bankers look like they are what credit union advocates say they are:  greedy obstructionists who don't really care about the poor. 


Chairman Frank has made substantive changes to the bill that respond to the specific concerns banker groups had identified with the original bill.  Among other things, the bill, would:


  • Narrow the definition of "underserved area" to census tracts that meet a low-income test and in which fewer than 50 percent of the families earn more than $75,000 annually.
  • Eliminate grandfathering of areas currently deemed underserved by the NCUA.
  • Require the NCUA to publish meaningful annual reports assessing how well credit unions are meeting the needs of those in their underserved areas. Such reporting requirements have been a long-time goal for ABA.
  • Limit the kinds of underserved business loans that can be excluded from credit unions' business lending cap.
  • Limit the ability to offer short-term payday loans and prevent the use of this section to expand consumer lending.


Many of the bill's provisions go further than current law to ensure credit unions focus on people of modest means, a significant change from today's competitive reality.  The real problem may be the extent to which NCUA actually abides by the language contained in the new proposal, and about that particular issue there is no clear-cut answer. 


The American Bankers Association and, apparently, the Independent Community Bankers of America have both agreed to “stand down” and neither national trade organization will object to the legislative proposal.  But while Chairman Frank's support for the bill virtually ensures its passage by the House, the prospects in the Senate, where no companion bill exists, are much less certain.


Meanwhile, what's in the deal for bankers? 


H.R. 5841, introduced by Rep. Dennis Moore (D-KS), would provide exceptions to annual privacy notice requirements under the Gramm-Leach-Bliley-Act (GLBA) for financial institutions that do not share information with affiliates or that have not changed their privacy policies, and would authorize banks to offer interest bearing transaction accounts for all businesses. 


The bill would also remove limits on small business and auto loans for savings associations, and would increase the ability of savings associations to invest in small business investment companies and make commercial real estate loans.


These provisions have been combined with the credit union provisions noted above and are likely to be considered on the Suspension Calendar this week.  The new bill – H.R. 6312 – is the newly combined bill and includes the following banker-friendly provisions:


·         Privacy Notice Exception.  Financial institutions that have not changed their privacy policies and do not share consumer information that would trigger an opt-out notice under either the GLBA or the Fair Credit Reporting Act (FCRA) would not have to provide annual privacy notices.   

·         Business Checking.  Allows up to 24 transfers per month on business deposit accounts, and repeals the prohibition on the payment of interest on demand deposits two years after enactment.  Industrial loan companies (ILCs) will not receive interest-paying authority, since under current law they do not have the authority to offer business checking accounts. 

·         Business Lending.  Eliminates the percentage of assets limitation for small business loans by federal savings associations.  Raises the 10 percent of total assets limit on business lending by federal savings associations to 20 percent of total assets.  

·          Commercial Real Estate.  Raises limits on commercial real estate loans by federal savings institutions from 400 percent to 500 percent of the institution's capital.

·          Vehicle Loans.  Permits a federal savings association to invest in, sell, or otherwise deal in motor vehicle loans and leases for personal, family, or household purposes without a percentage of assets limitation.  The current limit is 35 percent of total assets. 

·          Clarifies that federal savings associations are authorized to invest in small business investment companies.  However, investments cannot exceed five percent of the amount of its capital and surplus. 

·          Repeals the qualified thrift lender requirement with respect to out-of-state branches.  Current law requires thrifts to meet the qualified thrift lender (QTL) test both regionally (and nationally) and in each state where it has a branch.  This provision eliminates the state-by-state requirement.

·         Current law prohibits an S&L holding company from owning a credit card savings association and still be exempt from the activity restrictions imposed by the Competitive Equality Banking Act (CEBA) on holding companies that control multiple thrifts.  This provision permits an S&L holding company to charter a credit card savings association and still be exempt from the activity restrictions imposed on multiple S&L holding companies. 

·          Requires the Federal Reserve Board to survey biennially and report biennially to Congress on bank fees and certain services.


This measure will result in a significant reduction in the amount of time financial institutions spend filling out paperwork and free up additional resources for community bank lending.


This deal isn't perfect, not by a long shot.  Is it the best that bankers could get?  At this point, probably.  Will it become law?  Doubtful in this Congress.  Does it show banker good faith?  Yes, it does.  Is it worth the “inside-the-Beltway-gamesmanship” that's involved?  Hard to know, given the circumstances. 


Stay tuned.

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