More than 600 credit unions have taken advantage of a new regulatory policy that exempts them from caps on business lending, but new data suggests that banks' fears of increased competition for business loans were overblown.
In August, the National Credit Union Administration notified more than 1,000 credit unions that they were eligible to become low-income credit unions. That designation exempts the institutions from a statutory 12.25% cap on business lending, along with other benefits. Banking trade groups decried the regulators' move as an end run around Congress, which has been considering legislation, fiercely opposed by the banking industry, to raise the cap.
But new data show that out of 615 credit unions that initially accepted the NCUA's offer, only a tiny percentage are anywhere near the existing cap.
Just six of the credit unions were within 20% of it and only 14 of them were halfway there. Roughly 70% of the credit unions were doing no business lending at all.
Spokespeople for credit union trade groups said that even before the regulators acted, the 1,000 non-profits were eligible for the low-income designation, although some were not aware of their eligibility. About six in 10 took the regulators up on their offer, bypassing what had been a lengthy application process.
"I think this is a tempest in a teapot," said Mary Dunn, deputy general counsel at the Credit Union National Association, referring to banking opposition to the regulatory change. "I think it's a manufactured issue."
For credit unions, the low-income designation does carry potential benefits beyond exempting them from the limit on business lending. It makes them eligible for certain grants and low-interest loans, expands their access to deposits from non-members, and authorizes them to obtain supplemental capital.
Banking industry officials said that the newfound ability to raise capital could accelerate the growth of the credit unions at the expense of banks. Currently, credit unions are barred from raising capital other than through retained earnings.
Keith Leggett, vice president and senior economist at the Association, likened the supplemental capital to subordinated debt issued by bank holding companies.
"And so having the ability to go out there and raise secondary capital will facilitate rapid growth," he said, referring to the credit union industry. "That'll allow them to even more aggressively price their products, because they won't need to retain their earnings going forward."
The ABA obtained the list of 615 credit unions from the National Credit Union Administration, and later provided it to American Banker. The NCUA said Tuesday that its latest tally includes 623 credit unions.
The six credit unions closest to the business lending cap are Ukranian National Federal Credit Union in New York, Park View Federal Credit Union in Virginia, Utah State University Charter Credit Union, Fresno Grangers Federal Credit Union in California, Purdue Federal Credit Union in Indiana, and Mobiloil Federal Credit Union in Texas.
The data show that roughly two-thirds of the 615 credit unions have under $50 million in total assets.
Twelve institutions have assets of more than $1 billion, including Michigan State University Federal Credit Union and Keesler Federal Credit Union in Mississippi, both of which top the $2 billion mark.
The 615 federal credit unions approved as low-income credit unions within the last two months are in addition to roughly 1,100 institutions that already had the designation. That's out of roughly 7,500 credit unions nationwide.
Furthermore, federal credit union regulators are now in talks with their state-level counterparts about making it easier for state-chartered institutions to obtain the low-income designation, according to representatives from credit union trade groups.
To be eligible for the low-income label, more than half of an institution's membership must be located in a designated low-income area.
Until August, it was up to credit unions to show that they met the criteria. But then National Credit Union Administration began making those determinations independently by matching information from credit unions with Census data.
Fred Becker, president of the National Association of Federal Credit Unions, said that his organization recently fielded calls from credit unions that were seeking advice on whether to opt in to the low-income designation.
The only downside to the designation, he said, is that some might try to attach a stigma to institutions for serving a low-income area. At the same time, the designation provides additional flexibility to credit unions.
"I don't think there was anything subversive here," Becker said, referring to the new regulatory policy. "It made them aware of who was eligible."