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The Debate Over Small Business Lending at Credit Unions

Aug. 15, 2012
Small Business
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The Issue at Hand

Currently, credit unions are limited to lending only 12.25% of their assets.  This cap was implemented through the Credit Union Membership Access Act of 1998, signed into law on August 17, 1998.

Although credit unions are limited by this cap, they are active in making small loans.  Credit unions have increased their business lending by 45% since the financial crisis, while banks reduced their business lending by 15% during this same time period.

On November 26, CUNA announced that this legislation will come to a vote in the upcoming week.

Proposed Legislation

Introduced in March 2011, the Small Business Lending Enhancement Act is a bipartisan proposal, introduced by Congressmen Mark Udall (D-CO) and Ed Royce (R-CA).   The act (S.2231 in the Senate and H.R. 1418 in the House of Representatives) proposes to increase the credit union small business lending cap from 12.25% of the credit union’s assets to 27.5%.  If passed, the legislation requires that credit unions that are granted an increase in their lending cap fit the several criteria.  Credit unions must be:

  1. Well-capitalized (currently 7% net worth ratio)
  2. Experienced, with 5 years of member business lending experience
  3. At or above 80% of current 12.25% cap for at least 1 year prior to applying
  4. Able to demonstrate sound underwriting and servicing based on historical performance and strong leadership management

This proposed legislation has been endorsed by both liberal and conservative groups, including President Obama, the Consumer Federation of America, and the Americans for Tax Reform.  The legislation has been opposed by the Independent Community Bankers of America and the American Bankers Association.

The Small Business Lending Enhancement Act seeks to increase the member business lending cap for all credit unions, and although it was expected to come to a vote in the Senate, that vote has not occurred yet.  Congresspeople now say it will probably come to vote in early 2013.

Recent events

On August 7, 2012, President Obama announced a drought relief program as a response to the recent destruction of crops, caused by lack of rain and record-setting temperatures across the Midwest.  This relief program included a new mandate by the NCUA that allowed 1,003 credit unions a chance to opt-in to designation as a low-income credit union.  This designation allows these particular credit unions to disregard the 12.25% member business lending cap, freeing somewhere between $250 million and $500 million in loans for small businesses.  The NCUA stated that these 1,003 credit unions had always been eligible; the mandate only simplified the system by which they could become designated low-income credit unions.  Some bankers reacted with outrage, asserting that the NCUA had overstepped its boundaries.

On August 22, 2012, the Michigan Commissioner of Financial and Insurance Regulation issued a mandate that allows state-chartered credit unions to invest in  credit union organizations (CUSO) that provide products and services to credit unions or their members, usually administering investments and loans to businesses.  Although no more than 10% of the credit union’s assets can be invested in CUSO, this 10% limit is excluded from the 12.25% cap.

Small Business Majority found that 90% of small business owners believe that the lack of availability of credit is a problem; libertarian think tank R Street calculated that if this proposed legislation were to pass, it would free up $13 billion in small business capital and create 140,000 jobs.

What effect would a member business lending (MBL) cap increase have on the economy?

While no one can say for sure how this legislation could affect small businesses and the economy, there has been ample speculation.

Arguments Opposing Raising the Member Business Lending Cap

  • Unfair advantage for tax-exempt credit unions:  Banks pay taxes, credit unions do not.
  • Increased cap will decrease bank lending: While credit unions believe they will provide more loans for more people, some believe that the same loans will be provided to the same people, just be different lenders (in this case, to the community bank’s detriment)
  • Improvement of economy is not guaranteed: The American Bankers Association argues that the proposed legislation will not create new jobs and will steal revenue from community banks, and in turn, the federal government through lost tax revenues.
  • Potential risk posed to the financial system:  Some think that credit unions don’t have the infrastructure to handle a higher lending cap, and in times of economic uncertainty, an increased cap would lead to reckless lending and the possible closure of some credit unions

Arguments Supporting Raising the Member Business Lending Cap

  • Increased access to capital to more small businesses:
    • Some believe that an increase in the lending cap would be beneficial for small businesses, who often do not qualify for loans from banks—they believe that the argument that banks should be doing this lending rather than credit unions is invalid because banks are less willing to lend to small businesses than credit unions
    • Some small business owners say their small business loan applications are rejected by several banks, then finally accepted by a credit union
  • The financial crisis led to increased demand for loans; credit unions are responding to this need
    • Harry Reid, the Senate Majority Leader, stated, “During this economic meltdown…credit unions have been a lifeblood for small businesses and individuals.”
    • Credit unions have increased their lending since the financial crisis while banks have decreased their lending, and many believe that a lending cap increase is necessary so that credit unions may continue to help small businesses that banks are unwilling to support

Expert Opinions

“The cap on member business lending is preventing well-capitalized credit unions from providing much-needed loans to small businesses. This narrow restriction was needlessly tacked on to broader credit union legislation in 1998, and at that time the Clinton administration questioned its inclusion. Today the cap is increasingly preventing small businesses from accessing capital and lines of credit that are critical for growth and job creation in a struggling economy.

This should be a no-brainer: credit unions are healthy and have money to lend, and small businesses are having difficulty accessing capital. The legislation is endorsed by the National Credit Union Administration – the
federal regulatory agency for credit unions – as well as the U.S. Department of Treasury.

This is about jobs and the economy. Those standing in the way are denying American small businesses opportunities for growth. Other financial institutions have received two forms of bailouts—and yet they refuse to lend. This legislation allows healthy credit unions, with permission of their regulator, to issue new business loans without costing the taxpayer a dime. Congress should act immediately to vote its approval.”

“Credit unions were given a very generous tax-exempt status to serve people of modest means.  However, instead of supporting typical consumers with this tax exemption, a handful of credit unions want to keep their tax-subsidy but expand full-blown into commercial business lending.  S. 2231 would more than double congressionally imposed limits on credit union business lending authority, permitting a few growth-obsessed credit unions to use their tax subsidies to cherry-pick loans that taxpaying community banks make in their communities. This would only reduce federal, state and local revenues by favoring tax-subsidized credit unions over taxpaying community banks. Expanding the business-lending authority of tax-exempt credit unions also would increase risks to the financial system. The Government Accountability Office reported in January that failed credit unions had more member business loans as a percentage of assets than others in the industry.

The legislation is counterproductive and controversial even among credit unions. In April, several credit union executives voiced their opposition to this legislation. They wrote that the failure of several large credit unions was due to excess business lending, that the industry is unprepared for expanded business-lending authority and that a silent majority of credit unions neither wants nor needs S. 2231. The legislation would only be useful to a select few credit unions while harming taxpaying community banks.

Community-based banks are prolific small business lenders and have stood by their customers throughout these difficult economic times. They are helping to expand small business credit as the recovery strengthens and demand returns, and unlike credit unions, they pay federal, state, and local taxes to support their communities.”