Legislative Issues

Legislative Affairs	Political Affairs	Compliance	Regulatory Advocacy
Training	Products & Services	Research & Statistics	Strategic Services	Consumer Information

110th CONGRESS, LEGISLATIVE ISSUES A - Z

CURIA: INCREASING CREDIT UNION MEMBER BUSINESS LOAN LIMITS

U.S. credit unions have been making member business loans (MBL) since their inception in the early 1900s. Throughout most of this period there were no limits on the volume of member business loans credit unions could originate or hold. In fact statutory limits on credit unions’ member business lending did not appear until passage of the Credit Union Membership Access Act of 1998 (CUMAA). At that time, limits were imposed and expressed as a 1.75 multiple of net worth (but only net worth up to the amount required to be classified as well capitalized - 7% of assets - could be counted). This effectively limits the dollar amount of total MBL lending to 12.25% of credit union total assets.

Basic problems with the current credit union MBL limits are:

There is no economic rationale for the limit – commercial banks have no such limits and safety and soundness concerns are unfounded - credit union MBL loss rates are lower than those on credit union consumer loans and are a fraction of commercial loan loss rates at commercial banks.
Small businesses are finding it increasingly difficult to obtain credit due to the massive consolidation in the commercial banking arena. Moreover, those who are able to find commercial banks willing to lend often complain that the loan terms are much less attractive than they would be with additional lenders to choose from. Small businesses need more options – not fewer.
The current MBL limits deter new entry into the MBL business. CUMAA imposed substantial additional regulations on credit union MBL activity and the volume of loan business needed to defer these and other start-up costs cannot be obtained with the current limits.

Taken together these problems create an unnecessary impediment that undermines small business formation and growth.

The most glaring problem with the current 12.25% limit on credit union MBL activity is that there is no legitimate economic rationale for its existence. The 12.25% limit clearly is not based on safety and soundness considerations and raising or removing the limits would not cause additional safety and soundness concerns. Indeed, according to a U.S. Treasury Department study, credit union business lending is more regulated than other financial institutions. Additionally, the Treasury’s study showed that delinquencies and charge-offs for credit unions’ MBLs are “much lower” than that for either banks or savings institutions. The Treasury concluded that member business lending “does not pose material risk to the” National Credit Union Share Insurance Fund ¹.

¹ Credit Union Member Business Lending. U.S. Department of the Treasury. January 2001.

The record of safe credit union business lending continues to this day. In 2005, for example, the net chargeoff rate on credit union MBLs was less than one-quarter the rate of losses on bank commercial and industrial (C&I) loans. This relative safety was evident despite the fact that commercial bank net charge offs were near record lows.

Click to enlarge
Additionally, according to NCUA, credit union MBLs have even lower loss rates than other types of credit union lending, which themselves have relatively low loss experience. In 2005, for example, the .06% net chargeoff rate on credit union MBLs was roughly one-eighth the charge-off rate on all credit union loans. Removing credit union MBL limits is thus likely to reduce system risks – not increase those risks.

Even though very few credit unions are approaching the 12.25% MBL ceiling, the very existence of that ceiling discourages credit unions from entering the field of member business lending. Credit unions must meet strict regulatory requirements before implementing an MBL program, including the addition of experienced staff. Many are concerned that the costs of meeting these requirements cannot be recovered with a limit of only 12.25% of assets.

As a result, the number of credit unions offering MBL programs has increased only by about 350 over the past decade. Today, only one in five of the nation’s 8,800 credit unions are engaged in member business lending. Collectively, credit unions hold a total of just $23 billion in member business loans, representing only 4.1% of the total of credit union loans outstanding (5.8% of the total loans outstanding at credit unions that offer MBLs).

Credit union MBLs also tend to be smaller loans. The average size of credit union MBLs granted in the first nine months of 2006 was approximately $180,000. Not surprisingly, the dollar volume of aggregate credit union member business loans represents a fraction of the commercial loan market. According to Federal Reserve Flow of Funds statistics and NCUA FOIA data releases, credit union MBLs now account for roughly one-quarter of one percent (0.26%) of the credit market debt owed by U.S. non-financial businesses.

Credit unions are likewise small players in the narrower market of retail business loans (i.e., excluding non-depository credit like corporate bonds and commercial paper). As of September 2006, the dollar amount of MBLs was less than one percent of the total commercial loans held by U.S. depository institutions. Importantly as shown in the table below, community banks – those with $10 billion or less in total assets – have a 98% share of the community bank/credit union business credit market. Clearly, credit unions do not present any credible threat to bank business lending.

Business Credit Market Share Profile: September 2006 Sources: Federal Reserve, FDIC, NCUA.
Market definition	Credit Union Share	Banking Institution Share
All Providers: Depository and Non-Depository Institutions	0.26%	33.03%
All Depository Institutions	0.78%	99.22%
CUs & Banks < $25 billion	1.58%	98.42%
CUs & Banks < $10 billion	1.87%	98.13%

Increasing the 12.25% MBL limit would likely stimulate additional credit union business lending, but it would not produce a flood of credit union business lending that would cause market share statistics to change dramatically.

Click to enlarge
Raising the MBL limit would also benefit small businesses. The current credit union competitive disadvantage forces credit union members to seek higher-cost loans at other financial institutions and increasingly prevents the formation and growth of small businesses.

This is critically important because small businesses are the backbone and engine of growth of the U.S. economy. The vast majority of employment growth occurs at small businesses. These small businesses are in need of loans of all sizes, including those of less than $100,000, which many have said banks are less willing to make.

Indeed, large banks tend to devote a smaller portion of their assets to loans to small businesses. And the continuing consolidation of the banking industry is leaving fewer smaller banks in many markets. A recent Small Business Administration study concludes that growing consolidation in the banking industry translates into significantly reduced credit access for small businesses.².

² The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks. Hancock et. al. Research Summary No. 254. Small Business Administration. March 2005.

America's Credit Unions: Where people are worth more than money