What Lobbyists on Both Sides Don't Want You to Know About the Credit Union Debate
In a letter to Senate leaders, the head of a Glendale, Calif., credit union broke with the rest of the industry on legislation that would allow credit unions to make more commercial loans.April 12
Banks and credit unions are engaged in a fierce lobbying battle over legislation that would allow credit unions to expand their commercial lending.April 11
WASHINGTON — In the high-stakes lobbying war over a credit union lending bill, truth has often been a casualty, as both sides of the debate offer a number of exaggerations and outright deceptions in an attempt to push their agendas.
Under the legislation, which the Senate is expected to vote on soon, credit unions would be allowed to make business loans worth up to 27.5% of their assets — more than double the current lending cap.
Credit union trade groups argue the bill will create jobs and benefit many of their members, while banking trade groups argue it will add risk to the credit union industry and help only a few, larger institutions.
We offer a breakdown of what's right — and what's not — in arguments from both sides:
Credit Union Claim #1: The bill would create as many as 140,000 jobs in the first year alone.
This is perhaps the most audacious claim of the current debate.
The Credit Union National Association has been arguing that the legislation will create 140,000 new jobs in year one. But the claim appears wildly optimistic and is not supported by available evidence.
The 140,000 figure relies on an assumption that the legislation will lead to a $12.9 billion increase in business lending by credit unions.
But that $12.9 billion figure is far larger than the estimate made by the National Credit Union Administration, the industry's regulator, which also supports the member business lending, or MBL, legislation.
"If each credit union most likely to qualify immediately for higher MBL limits under the bill increased member business lending by 30%, more than $2 billion in credit would be extended," Debbie Matz, NCUA's chairman, testified on Capitol Hill in June 2011. "In addition, some credit unions that are not presently near the cap, including some that do not make MBLs, are likely to increase their MBL activity because they could achieve appropriate economies over the long term with the higher cap. How quickly and to what degree credit unions would respond remains uncertain. Using conservative assumptions, over the next few years, it is possible that an additional $2 billion to $3 billion in credit could be made available through these channels."
Applying those estimates to the Credit Union National Association's other assumptions would reduce the trade group's first-year job creation number to perhaps 30,000-40,000.
There's also the question of how much credit union lending would be new, and how much of it would displace existing loans made by other financial institutions.
In calculating 140,000 new jobs, the Credit Union National Association assumes that all of the credit union loans would be new loans — a wholly unwarranted assumption.
As the Congressional Budget Office concluded in 2010, when it was evaluating the impact of a previous version of the legislation on the federal budget deficit, "some assets would be shifted from taxable financial institutions to credit unions."
Credit Union Claim #2: Congress didn't put a limit on CU business lending until 1998
This credit union talking point is true, but also misleading, since it suggests that the credit union industry is merely seeking to return to the old status quo.
The cap on lending to member businesses was part of a larger 1998 law that expanded the eligibility criteria for joining a credit union. The overall bill was a big win for the credit union industry, although banks also won a few concessions, including the cap on commercial lending.
North Carolina Sen. Jesse Helms, an opponent of the 1998 law, said the following about the legislation prior to its passage: "Congress is setting the stage for the expansion and growth of the credit union industry into thousands of new markets well into the 21st century."
The 1998 law, in turn, reversed a Supreme Court decision requiring that credit union members share a single, common bond. That court decision was a win for the American Bankers Association, which mounted an eight-year legal challenge against broader eligibility rules.
In other words, while it's true that Congress didn't institute limits on credit union business lending until 1998, the law that enacted it dramatically increased the number of potential customers for credit unions — changing the entire shape of the industry involved.
The current legislative push is not an attempt to re-establish the old rules, but simply the latest skirmish in the ongoing battle over the size of the credit union industry.
Banking Industry Claim #1: The legislation will make the credit union industry riskier
The banking industry, and some observers, argue that most credit unions are not well-equipped to make commercial loans, and that if they try to do so, they will be putting taxpayers at risk.
What the banking trade groups ignore, however, is that the legislation includes safeguards designed to guard against this scenario.
In 2010, Treasury Secretary Timothy Geithner wrote a letter to Rep. Barney Frank, then the chairman of the House Financial Services Committee, listing a number of taxpayer protections that would have to be included before the Treasury Department would support an increase in business lending by credit unions.
That letter largely forms the basis for the bill that is now under consideration by Congress.
Under the bill, in order for a credit union to exceed the existing 12.25% cap on business lending, it would have to be well capitalized. Furthermore, there are several provisions meant to guard against a rapid expansion of business lending by inexperienced credit unions.
A credit union would need to demonstrate at least five years of experience in sound underwriting and servicing of business loans. It would not be allowed to increase its business lending by more than 30% in a year, and it would also have to be near the current 12.25% cap for an entire year before it would be allowed to exceed that cap.
On top of those protections, the legislation would instruct the National Credit Union Administration to develop a tiered approval process that would allow credit unions to gradually increase their business lending in a way that does not undermine their financial strength.
Whether these safeguards are enough, and whether the regulators would do a good job of implementing them, are open questions.
But the legislation clearly includes numerous provisions designed to protect U.S. taxpayers.
Banking Industry Claim #2: The legislation would benefit only a small number of large credit unions
The banking industry has consistently argued that the bill would help only a few, large credit unions. While it's true there are relatively few credit unions close to the cap, many of those are smaller institutions, not large ones.
For many years now, banking trade groups have recognized that credit unions are generally popular with the public, and surmised that their lobbying will be more effective if they target the largest credit unions. They have used that tactic again in the current debate over commercial lending.
In a March 15 letter to Senate leaders, the American Bankers Association and the Independent Community Bankers of America argued that "growth obsessed, complex credit unions" would be the beneficiaries of the pending legislation.
"Despite credit unions' claims that this legislation would help small credit unions, nothing could be further from the truth," ABA President Frank Keating and ICBA President Camden Fine wrote. "The amendment would benefit a select few credit unions while starving community banks of the loans they use to build revenue to support greater lending efforts locally."
According to data provided by the National Credit Union Administration, there are 109 credit unions nationwide that are both subject to the cap and within 80% of the limit. That's less than 2% of all federally insured credit unions.
But 80 of those 109 credit unions have less than $500 million in assets, and 38 of them have less than $100 million in assets. Those are hardly large institutions.
Furthermore, out of 105 federally insured credit unions that have more than $3 billion in assets, only three of those institutions are within 80% of the business lending cap.
So it's highly misleading to say that the legislation would benefit "a handful of large credit unions," as the American Bankers Association asserted in a recent post on its website.
The bill would indeed benefit a handful of large credit unions, but it would also help at least 100 smaller ones.