A bill that has been introduced in the both the U.S. Senate and House of Representatives could have a major impact on credit unions’ lending abilities.
The bill would amend the Federal Credit Union Act, which currently limits credit unions’ small business lending at 12.25 percent of assets, to allow lending up to 27.5 percent of assets to small businesses.
The Credit Union National Association claims the legislation would free up $13 billion for small business lending and create 140,000 jobs nationwide.
In Wisconsin, the amendment would create more than $400 million in credit and 4,400 new jobs in the first year, according to Brett Thompson, president and chief executive officer of the Pewaukee-based Wisconsin Credit Union League. The additional lending would come at no cost to taxpayers, he said.
“There is no government money being used to do this,” Thompson said. “This is something credit unions would be able to do simply through their own resources.”
However, the banking industry has not taken kindly to the proposed amendment, saying it gives credit unions an unfair lending advantage.
“We are in opposition to the bill and don’t believe it’s good public policy,” said Rose Oswald Poels, president of the Madison-based Wisconsin Bankers Association.
Since credit unions are nonprofit, member-owned organizations, they are exempt from federal and most state taxes. They pay only payroll, property and sales taxes.
The intent of credit unions is to serve people of low and modest means, which is why the Federal Credit Union Act implemented a cap on lending to small businesses in the first place, Oswald Poels said.
“Should taxpayers be subsidizing corporate loans?” she asked.
However, credit unions’ earnings are passed on to members, who pay tax on interest earnings, Thompson said.
There are about 200 credit unions in Wisconsin, and 40 would be directly impacted by the raised lending cap because they are already operating at the top of the existing limit, Thompson said.
But as it stands, the 12.25 percent limit impedes most credit unions from entering the lending business to begin with, he said.
“About 70 percent of our credit unions can’t even make these loans because they can’t earn enough money to justify the cost,” Thompson said.
He also argued that credit unions’ tax exemption has never been based on the services they provide to their members, so making more business loans should not be an issue.
“We do have a number of institutions who are nearing that cap who are turning businesses away,” Thompson said.
There is not an overwhelming loan demand from small businesses, or banks would be lending to them, Oswald Poels said. At the moment, banks are flush with cash they are waiting to lend, she said.
“Business demand right now, because of economic uncertainty, is actually low,” she said. “This is not overnight going to suddenly create a lot more loans and a lot more jobs.”
In Wisconsin, credit unions would likely be taking existing small business loans away from small community banks, Oswald Poels said.
“The cap is not standing in the way of an overwhelming majority of credit unions to make business loans,” she said. “Any loan that a credit union makes for any purpose that is smaller in dollar amount than $50,000 does not count toward the cap.”
Only about 29 very large credit unions nationwide would benefit from the bill, Oswald Poels said.
“It really again is focused at the special interest credit unions that are really no longer mission driven,” she said. “They will be able to do a lot more business lending without having to pay taxes for that.”
If the bill becomes law, the National Credit Union Administration and the state Department of Financial Institutions would decide whether an individual credit union should increase business lending.
“Only well-capitalized credit unions could exceed the current cap and they could only move up with that cap if they have been able to show they’re an experienced business lender,” Thompson said.
The average business loan in Wisconsin is $178,000, which is lower than most banks are looking to lend, so there’s a need for more credit union lending, he said.
While CUNA has been lobbying to increase the small business lending cap for years, analysts note an anti-bank sentiment in Congress in the wake of the financial crisis could make the current bill more likely to pass.
The bill was placed on the Senate calendar on March 26 and a vote is expected soon. If it passes, the bill will move on to the House.
