The Senate Banking Committee met yesterday to hear testimony on the Small Business Lending Enhancement Act. The legislation contains measures which would allow credit unions to make more business loans. ICBA testified against the legislation, but there are powerful groups that favor it. Below are two press releases I received yesterday. The first is from ICBA; the second is from the Competitive Enterprise Institute. Reading both press releases gives you a good idea about the opposite sides of this issue.
Noah Wilcox, fourth-generation president and CEO of Grand Rapids State Bank, Grand Rapids, Minn., and a member of the Independent Community Bankers of America Executive Committee, today expressed opposition to the Small Business Lending Enhancement Act (S. 509) and told Congress not to expand credit union business lending powers unless it is also prepared to tax credit unions and require them to comply with the Community Reinvestment Act.
“The current credit union tax exemption is directly linked to, and can only be justified by, their original mission of serving individuals of modest means,” Wilcox said in his testimony before the Senate Banking Committee. “Credit union business lending is an immediate threat to my bank. I’m happy to compete with other tax-paying lenders, even large banks, but the credit union tax exemption creates an unfair advantage and distorts the market.”
If enacted, S. 509 would allow the National Credit Union Administration (NCUA) to approve member business loans up to 27.5 percent of a credit union’s assets, which is more than double the current cap of 12.25 percent. The cap was not set arbitrarily and was intended to ensure that commercial lending would not comprise more than a marginal part of a credit union’s lending. “The credit unions have portrayed S. 509 as an effort to make more credit available for small businesses, but the truth is that only a small number of credit unions are at or near the current member business lending cap,” Wilcox said. “We estimate this number to be about 0.5 percent of the approximately 7,400 credit unions.”
Over 70 percent of credit unions report no member business loans at all. Those credit unions that are at or near the cap are the largest and most complex credit unions, and the business loans they make are often multi-million dollar deals, not small business loans. “There is ample capacity for the remaining 99.5 percent of credit unions to expand their member business lending,” Wilcox said. “What’s more, there are numerous exceptions to the member business lending cap.”
Some advocates of S. 509 claim that expanded credit union commercial lending would come at no cost to taxpayers but the Joint Committee on Taxation, the Office of Management and Budget and the Congressional Budget Office have all identified credit union lending as a tax expenditure.
“The case for repealing the credit union tax exemption stands on its own merits as a deficit reduction measure,” Wilcox said. “When credit unions seek to expand their business lending powers and become the equivalent of banks, linking expanded lending powers to repeal of the tax exemption is a matter of tax equity. ICBA strongly urges this committee to reject calls for new powers for tax-subsidized credit unions that will not, despite assertions to the contrary, measurably expand small business credit or create jobs.”
Companion legislation (H.R. 1418) has also been introduced in the House.
While politicians are decrying the lack of lending to small businesses, government red tape is preventing credit unions from coming to the rescue, note leaders of two prominent free-market think tanks.
The Competitive Enterprise Institute’s John Berlau and the Heartland Institute’s Eli Lehrer applaud the Senate Banking Committee for its hearing today “on arbitrary restrictions on business lending.” Berlau and Lehrer noted in a letter to the committee that in light of disappointing statistics on both unemployment and new business growth, “current rules preventing credit unions from lending more than 12.25 percent of their assets to businesses make no sense.”
Berlau and Lehrer praised the bipartisan Small Business Lending Enhancement Act – sponsored as S. 509 by Mark Udall (D-Utah) and H.R. 1418 by Ed Royce (R-Calif.) -as “a step in the right direction.” These bills would lift the credit lending cap to 27.5 percent of assets.
The scholars noted that no taxpayer subsidies would be involved, just a mild deregulatory step. “Unlike TARP, the stimulus and numerous other subsidies to business, this act would have no cost to taxpayers,” they wrote. “It would simply eliminate burdensome regulation that is preventing small business lending from occurring.”
Berlau and Lehrer add that “there is no credible research to show that the 12.25 percent cap is in any way necessary for credit unions’ safety and soundness.” In fact, they add that current rules limiting business lending “may encourage a dangerous concentration in other types of loans such as mortgages, which we know from the financial crisis can often be anything but safe.”