Illinois independents get glimpse of court-centered future

Northwestern Financial Review, Oct 15-Oct 31, 2005 by Saucedo, Alfred

With a lawsuit against Illinois governor Rod Blagojevich still pending and important legislative and regulatory challenges on the horizon, the dramatic developments of the past year dominated discussion at the 31st annual meeting of the Community Bankers Association of Illinois in Chicago, Sept. 16-17.

Outgoing CBAI Chairman Preston Smith summed up his term of office - which began with the announcement of the lawsuit against Blagojevich - as an "age of attorneys." During his 2004-2005 term, CBAI found itself involved in no fewer than three court cases. Meanwhile, 2005-2006 Chairman David Schroeder noted current challenges to community banking, including Wal-Mart's ILC application and lobbying efforts to secure the advantages of the Communities First Act, are serious enough to warrant greater engagement by CBAI member banks in the coming year.

Smith said he was pleased with overall progress on the five issues he had previously identified as priorities: regulatory burden, deposit growth, bank concentration, credit union competition, and banking and commerce. "We've fired up our grassroots lobbying machine, we've doled out donations, and we've pounded the halls of Capitol Hill," he said.

But he noted that the courts were evolving into a major focal point for the protection of community bankers' interests, and said CBAI's future would have to include action not only in the legislative and regulatory arenas, but in the judicial arena as well.

During the past year, Smith noted, CBAI had entered briefs in two cases and was the lead plaintiffin a third. In the first, which was decided favorably for lenders, bank personnel had been accused of completing mortgage documents and security agreements for borrowers, which is illegal. The second suit, which was entered against a number of Illinois banks in the St. Louis area, contended that the "365 over 360" method of calculating interest on commercial loans misrepresented the true interest rate. That suit is still pending.

It was the third case, however, - CBAFs pending lawsuit against the governor of Illinois over an increase in bank regulatory fees - that Smith viewed as potentially having the most profound consequences for Illinois bankers. CBAI's contention has been that the fee increases (which raised revenue which was then diverted to the state's general fund) amount to a de facto tax on banks and are, therefore, unconstitutional.

While not dismissing the importance of the tax issue, Smith claimed that it pales in significance compared to the impact that the governor's actions could have on the dual banking system.

According to Smith, by increasing state regulatory costs, Illinois' fee increases create a competitive imbalance between state- and nationally-chartered banks. "The CBAI argued to [the governor's] staff that many state banks would convert to national charters. The initial response from the administration was, 'So what?" Smith explained.

Smith criticized this attitude, saying he believes the dual regulatory framework must be preserved, "not just because it has existed for 142 years, or because the Constitution requires it, but because it maintains a healthy dynamic that has resulted in a wider range of products and services, lower regulatory costs and more effective supervision."

As of press time, the case remains pending, although the judge in the case issued a temporary injunction against further funds sweeps. The state attorney general has filed a motion to dismiss the lawsuit, to which the CBAJ responded in late July. CBAI general counsel Jerry Cavanaugh said he is cautiously optimistic about the outcome of the case, noting that recent cases in Illinois courts seem to bode well for thp CBAI's position.

Communities First Act awaits action

Other sessions at the Chicago meeting made it clear that the CBAI's novel focus on the judicial arena has not left traditional legislative programs by the wayside. Dale Leighty, immediate past chairman of the Independent Community Bankers of America, noted the Communities First Act is gaining traction in Congress and offered perhaps the best opportunity in years for community bankers to level the playing field with competitors.

The legislation, which includes provisions that provide tax relief and lighten the regulatory burden for community banks, has been sponsored in both the U.S. House and Senate. It currently has 70 co-sponsors.

CBAI governmental relations director David Manning says that, although the Communities First Act is ambitious, it has a better chance of success than other legislation that seeks to level the playing field by applying taxation to credit unions.

"It's a positive agenda." Manning said. "It's more palatable to legislators-really a chance to play the politics of addition rather than the politics of subtraction. I mean, it would be pretty tough for credit unions to say,'Don't give what we have to them."

Although the Communities First Act is unlikely to be adopted in one piece, Manning said he would be happy to see provisions of the act adopted either as stand-alone legislation or attached piecemeal to larger bills.