Move to Reduce Restrictions on Credit Union Lending Praised

Published June 20, 2011

John Berlau of the Competitive Enterprise Institute and Eli Lehrer of The Heartland Institute recently sent this joint letter praising a move to reduce restrictions on credit-union lending to Senators Tim Johnson, chairman of the Committee on Banking, Housing and Urban Affairs, and Richard C. Shelby, ranking member.

June 16, 2011

Dear Senators Johnson and Shelby,

As free-market advocates interested in lessening the burden of regulation, we applaud the Senate Banking Committee hearing today on arbitrary restrictions on business lending by credit unions. At a time of alarming statistics that show a slowing of both job and new business growth and of concern about the lack of lending to small businesses, current rules preventing credit unions from lending more than 12.25 percent of their assets to businesses make no sense.

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, this arbitrary cap actually creates lending risk for these institutions. The cap puts limits on business lending that don’t exist for other types of lending, such as mortgages and car loans. There is nothing inherently safer about these types of loans over business lending. This rule not only discourages beneficial lending to small business; it 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.

We believe that the bipartisan Small Business Lending Enhancement Act—sponsored as S. 509 by Mark Udall (D-UT) and H.R. 1418 by Ed Royce (R-CA)—lifting the lending cap to 27.5 percent of assets would be a step in the right direction. Unlike TARP, the stimulus and numerous other subsidies to business, this act would have no cost to taxpayers. It would simply eliminate burdensome regulation that is preventing small business lending from occurring. The Credit Union National Association has estimated that this measure would create billions in new loans and more than 100,000 jobs in its first year of enactment.

In short, this legislation would get rid of a government barrier holding back lending to entrepreneurs. As such, it deserves serious consideration from Congress.