Easing of Credit Union Restrictions Could Create 100,000 Jobs

Published November 30, 2009

A legislative proposal to ease restrictions on credit union lending to small businesses could create more than 100,000 jobs at no cost to taxpayers, according to industry organizations.

The legislation—the Promoting Lending for America’s Small Business Act—would rearrange but not eliminate caps on lending that credit unions have faced since 1998. Credit unions are nonprofit, member-owned cooperatives that provide a product lineup almost identical to those of banks. However, they do not pay corporate income taxes, and they face many more regulations than banks.

The legislation pending before Congress seeks to ease some of those regulations and increase the flow of capital to small businesses.

The Credit Union National Association (CUNA) and other credit union groups estimate such easing would create 108,000 new jobs by increasing credit union lending. CUNA based its estimates on data from the Council of Economic advisors and assumed 40 percent of the total increase in lending would take place in the first year after the restrictions were eased.

Credit Unions Still Lending
“For the past few years, while other lenders have had to withdraw from the business loan market, credit unions have continued to lend,” notes Bill Hempel, chief economist for CUNA and one of the lead researchers on the study. “In fact, for the past two years, small business lending has been the fastest-growing component of credit union lending.

“Unfortunately, this growth will not be able to continue much longer because of the current legislated cap on credit union member business lending,” he added.

Although credit unions make business loans for virtually all purposes, an enormous share of their business lending serves businesses in segments such as taxicab operations and organic farms where “insider” knowledge is needed to determine the value of loan collateral.

Banks Oppose Easing
The legislation, offered by Reps. Paul Kanjorksi (D-PA) and Ed Royce (R-CA), would increase from 12.25 to 25 percent the amount credit unions could use to back loans to member businesses and would ease restrictions on “de minimus” loans not counted against the cap.

Banking groups oppose the easing of restrictions on credit union business lending because it would increase competition with banks. The American Bankers Association (ABA) argues Small Business Administration loan guarantees enable most small businesses that want to qualify for credit union loans to get very favorable terms for loans that meet the needs of most truly small companies.

In addition, the ABA remains committed to “blocking the credit union industry’s legislative goal of greater—and riskier—lending authority,” according to the organization’s official policy statement.

Eli Lehrer ([email protected]) is director of The Heartland Institute’s Center on Risk, Regulation, and Markets.