FOM, Banker Lawsuits & Some Historical Perspective

Posted: October 13, 2016

Birmingham, AL - October 13, 2016 - Originally Appearing in CU Today

The percentage of the nation’s deposit marketplace for community banks has gone down dramatically from 53.3% in 1992 to 18.2% in 2015. 

It is in light of this stunning marketplace loss that I read with incredulity the bluster of the Independent Community Bankers Association (ICBA) as they focus their effort to stay relevant by blaming the credit unions whose deposit share went from 5.6% to 7.0% in the same period rather than the deposit share of the largest 100 banks which went from 41.1% to 74.8%. 

Even though their market loss has been almost exclusively to their larger banking brethren, it must be better politics for the ICBA to blame credit unions rather than the top 100 banks that so many of the community banks hope to eventually sell out to at a great profit.

Hence the threats of ICBA to sue NCUA over the very modest field of membership rule that was proposed earlier in 2016 and should be acted upon by the NCUA Board in the next several months.

With some historical perspective, my thoughts are that they know where the courthouse is.

It is at the same place where the bankers filed suit in 1999 over rules that went considerably further than the 2016 proposed rule that they are now so apoplectic about.  I was on the NCUA Board at that time.  We defended the rules aggressively. 

NCUA won decisively in court.  The bankers lost that suit completely.  The courts ruled that NCUA was well within the Credit Union Membership Access Act (CUMAA) with those much further reaching 1999 rules.

It is at the same place where the bankers elected not to file suit in 2003 when FOM rules were approved that went even further than the 1999 rules.  I was Chairman of the NCUA Board at that time and we stated our intention to defend the rules aggressively.

Because NCUA had won in court so decisively the 1999 banker lawsuit, the banker trade groups did not even choose to bring suit against the 2003 FOM rules.

So, here’s the legal score.  NCUA 2, Bankers 0.

Now let’s look at how this historical precedent will impact the ICBA’s threatened legal action against the 2016 FOM rule that are far more restrictive than the 1999 or 2003 rules. 

Neither the 1999 nor the 2003 FOM rules had any population cap on a federal community chartered credit union.   The 2016 proposed FOM rule has a population cap of 2.5 million for metropolitan communities and 1 million for rural communities.

Neither the 1999 nor the 2003 FOM rules limited community charters to a single metropolitan statistical area (MSA) or combined statistical area (CSA).  The 2016 proposed FOM rules will not allow a federal community charter application to be considered if the proposed community is outside a MSA or a CSA.

Neither the 1999 nor the 2003 FOM rules required a concentration of facilities test to be conducted before a federal credit union could expand into an underserved area.  The 2016 proposed FOM rule includes this very burdensome and restrictive requirement.

Neither the 1999 nor the 2003 FOM rules prevented a federal community chartered credit union from expanding into an underserved area outside of its community.  The 2016 proposed FOM rule includes this incredibly tight and unnecessarily punitive provision to residents of lower income neighborhoods.

In other words, the bankers lost when they sued NCUA for going beyond the 1998 Credit Union Membership Access Act with a FOM rule in 1999 that was much more far reaching than this proposal.  They punted rather than facing an almost certain repeat loss in 2003 by choosing not to file suit against a FOM rule that even went beyond the 1999 provisions.

Only a severe tightening of FOM rules that was approved by the NCUA Board in 2010 could make these proposed 2016 rules into an improvement. 

There are community chartered credit unions approved between 1999 and 2010 that could not even get their current community borders approved today if they applied under the current 2010 rules.

So the 2016 update is indeed needed, although the “back to the future” comparisons are almost comical when the bankers complain NCUA is plowing new ground.  They are simply re-plowing some of the ground laying fallow since 2010 – and not close to all of it.

NCUA Chairman Richard Metsger and NCUA Board Member Mark McWatters should be commended for at least trying to bring FOM back partly to the status of the federal rules before 2010.  And they should be encouraged to support the rules as proposed, hopefully even strengthening them further to at least the standards of 1999 or 2003.  And they should aggressively defend them if challenged.

But, on the way to courthouse, perhaps the ICBA should look a bit closer at the history of FOM rules since Congress passed CUMAA in 1998 and their dismal record in bringing litigation against NCUA on FOM rules.

When Congress passed CUMAA, they did not delegate the authority to establish FOM rules consistent with the law to the ICBA or the ABA.  Nor did they delegate that authority, in all fairness, to CUNA or NAFCU.

Congress delegated the authority to establish FOM regulations for federal credit unions within the authority of the statute to the presidentially appointed and Senate confirmed NCUA Board.

The courts have upheld previous NCUA Boards on rules that go much further than these proposed rules.

The ICBA might better focus its resources on protecting its diminishing market share from its mega-bank brethren than trying to visit the courthouse for relief from FOM rules that, while needed and certainly an improvement over the restrictive 2010 re-write, are merely giving consumers another choice for lower cost financial services.

Or maybe that is what they do not want to see.

Dennis Dollar was NCUA Chairman from 2001-2004 and served on the NCUA Board from 1997-2004.  He currently is Principal Partner of Dollar Associates LLC, a credit union consulting firm headquartered in Birmingham, AL.