Idaho credit unions are increasing their commercial lending rates faster than Idaho banks are. The outcome of a lawsuit against the National Credit Union Administration could ensure that trend continues.
NCUA is the federal regulator for credit unions. In February, it created a rule that allows credit unions to lend more money through commercial loans.
Credit unions are considered nonprofit organizations and don’t pay income tax, but are allowed to do a certain amount of commercial lending in order to raise capital. Federal law allows credit unions to make loans worth up to 12.25 percent of the union’s total assets.
The new rule allows credit unions to make commercial loans to non-member businesses without counting that money against the cap. Bankers say this adds to the existing advantage credit unions enjoy in not paying income tax.
“So if a business goes to a credit union for a commercial loan and they are not a member of that credit union they are exempt from the cap,” said Trent Wright, president of the Idaho Bankers Association. “It is very concerning because credit unions are free to lend within their risk tolerance in areas that are traditionally bank lending areas.”
The new rule also lifts limits on construction and development loans, and makes credit unions with less than $250 million in assets exempt from certain commercial lending requirements. The NCUA said the new rules create a more modernized regulatory system that “will provide federally insured credit unions making business loans with greater flexibility and more autonomy, shifting the rule’s focus from the current prescriptive approach to a more principles-based methodology.”
“This cap originated in Congress in response to credit unions being allowed to have multiple common bond fields of membership (HR 1151),” said Will Hall, vice president of the Idaho Credit Union League. “This decision was not made for economical, safety or soundness reasons, but was a concession to the banking industry.”
Congress’ law, HR 1151, created a confusing system as many credit unions were routinely granted waivers to the commercial lending cap limit or were allowed to be exempt from various regulations, Hall said.
The NCUA has granted cap limit exemptions to about half of all credit unions, according to the American Bankers Association.
The new rule is intended to standardize the regulation of these credit unions.
“With the experience (NCUA) has gained the last 20 years, they are now in a position to look at the rule and reduce the amount of red tape they have been operating with,” Hall said.
Banks don’t like credit unions competing for commercial loans and fear the new rule allows credit unions to increase commercial lending – something already happening at a rapid rate, Wright said.
Idaho credit union assets increased by 13.1 percent during the first three quarters of 2016 over the first three quarters of 2015. This increase was mostly through increased lending, said Gavin Gee, director of the Idaho Department of Finance.
“Most of their growth is from loans,” Gee said. “Both banks and credit unions saw good loan growth as a function of our economy. Construction and development lending are up.”
Idaho bank assets increased 4.8 percent during the same time period, but many bankers say they are losing commercial loans to credit unions because credit unions can afford to be more aggressive in underwriting loans because of the money they save on income tax.
“Credit unions are getting into commercial lending in a big way and have, to an extent, touched off a race to the bottom in terms of underwriting and pricing,” said one banker in a survey conducted by the Idaho Department of Finance in preparation for a state bank supervisor conference. “Commercial loans are underwritten like consumer loans and mortgages with low interest rates, long-term fixed rates and aggressive terms.”
“This is kind of the whole picture looking at the commercial lending aspect,” Wright said. “Idaho banks paid a total of $13.9 million in taxes last year and Idaho credit unions paid zero.”
The Idaho Department of Finance doesn’t keep records on financial institutions that are based outside of Idaho, so Gee said he doesn’t know how much is the proportion of commercial lending in Idaho that is carried out by banks.
But Idaho-based banks have lost ground compared to Idaho-based credit unions. In 2010, Idaho banks managed about $1.1 billion dollars in commercial loans, while credit unions managed about $80 million, or 5 percent of the market between the two types of organization. By June, the commercial lending of Idaho banks had increased to $1.6 billion and credit union commercial lending increased to $311 million, or 16 percent of the market, according to the Idaho Department of Finance.
“Let’s just look at the biggest credit union in Idaho – Idaho Central Credit Union,” Wright said. “They have $2.4 billion in assets so they are allowed a giant amount of lending under that 12.25 percent cap. Idaho Central Credit Union is larger in asset size than any state bank (in Idaho).”
Independent Community Bankers of America sued the NCUA over the new rule Sept. 7 in federal court in Virginia.
The ICBA argues that the rule will harm banks while moving away from the original mission of credit unions – to serve those of modest means.
Hall argues that credit unions rely on loans because they can only raise money raised through products and services and don’t have as many options as banks to raise money externally in order to grow.
“It is one of the primary ways they earn and retain capital,” Hall said.
But Wright said the NCUA should keep the focus of credit unions and loan products on members.
“It really flies in the face of the original charters and why they were formed,” Wright said. “If you can give commercial loans to businesses that are non-members then what is the point? If you are essentially acting like a bank, you should be held to the same standards.”