Bankers Likely to Challenge Any Subordinated Debt Rule in Federal Court

Even before the National Credit Union Administration decides whether to issue a final rule dealing with subordinated debt, it appears extremely likely that the issue will end up in federal court.

If that happens, it may be years before a subordinated debt rule goes into effect—if it ever does.

In comment letters filed this week, the American Bankers Association built its legal case that the Federal Credit Union Act prohibits credit unions from issuing subordinated debt. Also in the comment letters, the Credit Union National Association presented a defense of the agency’s powers, saying that the law would allow it.

In January, the NCUA board approved a proposed rule that would allow non-low-income credit unions, complex credit unions and new credit unions to issue subordinated debt. Credit unions have sought such a rule for years, while banks contend that credit unions should not be allowed to have alternative types of capital.

While the proponents and opponents filed letters filled with technical arguments for and against the proposed rule, the letters from CUNA and the ABA make it clear that the issue is likely to be tied up in federal court for years.

“Only Congress has the authority to permit subordinated debt to count toward credit union capital requirements,” Justin Underwood, the ABA’s senior director of banking policy wrote, in commenting on the rule. He added that as an independent agency, the NCUA cannot take actions that are “arbitrary and capricious,” contending that any agency rule must be based on an examination of relevant data.

Underwood said that legislation to allow credit unions to issue subordinated debt was introduced in Congress several years ago, but it never was enacted. He said that allowing credit unions to issue subordinated debt calls into question whether the institutions should continue to be tax-exempt.

Luke Martone, CUNA’s senior director of advocacy and counsel said in his letter that credit unions have “broad power” to borrow and enter into contracts. He said that nothing in the Federal Credit Union Act specifically prohibits the NCUA from issuing subordinated debt. As a result, he thinks courts are likely to defer to the agency.

While the issues are quite different, the general legal arguments are similar to the ABA’s challenge of the NCUA’s Field of Membership Rule.

In that case, the ABA argued that federal law did not allow the NCUA to issue rules that would allow credit unions to expand their fields of membership in ways the agency wanted. The NCUA argued that Congress gave the NCUA broad power to define fields of membership. The U.S. Supreme Court last month declined to consider the ABA’s appeal of a lower court decision upholding the Field of Membership rule.

Related:

ABA Comment Letter on NCUA proposed Subordinated Debt Rule

CUNA Comment Letter on NCUA proposed Subordinated Debt Rule

Supreme Court Refuses to Consider Banker Challenge to NCUA Field of Membership Rule

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