Credit Unions Need Red Tape Relief to Aid Small Businesses

While the nation's credit crunch may have begun on Wall Street, it's definitely found its way to Main Street. But for countless small businesses feeling the squeeze, another Main Street institution could be the answer to their financing woes -- federal credit unions.

In this era of global banking, regional money-center banks, and stingy community banks, the nation's unheralded credit unions should be a ready source of capital in the current downturn, except for one problem: While the big banks were deregulated long ago, federal credit unions are still hamstrung by federal red tape that sharply curbs their ability to make business loans. Meanwhile, the commercial banking industry continues to wage an unrelenting lobbying campaign in Washington to keep credit unions bottled up.

Indeed, credit unions occupy a largely overlooked corner of the financial industry. That's because they were created under different statutory authority. They were established by Congress in 1934, largely in response to the collapse of the banking industry leading up to the Great Depression. The goal was to promote "thrift" and provide a source of credit for average working people. Credit unions fill a niche that, to this day, remains outside the banking system.

Unlike banks, for example, credit unions are non-profit, tax-exempt membership organizations. While most are relatively small compared to today's commercial banks, the credit union industry as a whole is still substantial. Today, more than 8,400 credit unions serve more than 90 million "members" and hold more than $650 billion in assets. In contrast, banks insured by the Federal Deposit Insurance Corporation (FDIC) hold more than $10 trillion in assets. The largest federal credit union has about $23 billion in assets, while the nation's largest bank has over $1 trillion in assets.

As non-profit member organizations, credit unions naturally have close ties to their communities, and many provide loans to businesses. What's more, because they are small, credit unions are comfortable making loans that most commercial banks won't touch. The average credit union business loan is about $180,000. More than 50 percent are given to businesses with assets under $100,000, and 45 percent to individuals with household incomes of less than $50,000, according to figures provided by the two main credit union associations.

Credit unions also have an unparalleled record for safety and soundness. Unlike banks and savings and loans, credit unions have never cost the American taxpayer a penny, nor has any credit union ever needed a federal bailout. Board members serve without pay, and credit unions don't issue capital stock. With this kind of track record, why aren't credit unions playing a greater role in the economy? It's not for lack of trying or lack of capital. 

"The chief obstacle for credit unions is the arbitrary statutory lending limits imposed by Congress in 1998 and the burdens associated with many of the SBA lending programs," said Carl Sorgatz, president of Hawthorne Credit Union, in recent testimony before Congress on behalf of the Credit Union National Association, a group that represents both state and federal credit unions.

Under the Credit Union Membership Access Act of 1998, credit union business lending is limited to 12.25 percent of total assets. This law arose after the American Bankers Association (ABA) prevailed before the Supreme Court in a lawsuit to limit the ability of credit unions to admit members outside their founding groups. The law restored that right, but in one of the many compromises to bankers, it also imposed the cap, much to the credit union industry's frustration.

"This arbitrary cap has no basis in either actual credit union business lending, or safety and soundness considerations," said Sorgatz. "It severely restricts the ability of credit unions to provide loans to small businesses at a time when small businesses are finding it increasingly difficult to obtain credit from other types of financial institutions, especially larger banks."

The cap not only restricts the credit unions that are engaging in business lending, it effectively bars entry into the business-lending arena because the startup costs and requirements, including the need to hire staff with business lending experience, exceed the ability of many credit unions with small portfolios to cover these costs. According to Sorgatz, only one in five credit unions today have member business loan programs, and they represent only a fraction of the commercial loan market.

Not surprisingly, fewer than two percent of all credit unions offer Small Business Administration (SBA) loans, and only about 18 percent of larger credit unions with more than $500 million in assets offer the SBA's flagship 7(a) business loans. While the number of credit unions participating in the 7(a) program has increased steadily since 2003, SBA guaranteed loans represented only 2.6 percent of all business lending to credit union members in 2006, said Sorgatz.

The credit union industry is pushing for passage of the Credit Union Regulatory Improvements Act (H.R. 1537), which would raise the cap to 20 percent of assets. The bill contains other provisions that would make more money available for business loans. Another measure, the Credit Union Small Business Lending Act (H.R. 1849), would make it easier for credit unions to participate in SBA loan programs. Among its provisions, it would exclude the federally guaranteed portion of SBA 7(a) loans from counting toward the business loan cap, and it would make more loan money available in underserved communities.

The ABA is obviously lobbying against the measures, and it is trying to undermine credit unions by lobbying Congress to repeal their tax exemption. These turf wars are inevitable in a democracy. But banking interests need to set aside their differences for the sake of the economy. After all, the banking industry is directly responsible for the current crisis because so many commercial banks engaged in the reckless subprime lending that triggered it. The least they can do is let credit unions do they job they were created to do -- rebuild their communities.