Credit unions in the United States claim nearly 90 million members, many of whom cite benefits of dealing with a member-owned financial institution versus a commercial bank for routine savings and lending needs.
However, credit unions are making a big push into business lending, the traditional bailiwick of the banks. And the banks are pushing back.
Lending by credit unions to businesses is limited by law to 12.5 percent of total assets, a substantially more restrictive limit than that imposed upon banks.
But credit unions are different than banks in many important ways and benefit from a federal income tax exemption thanks to their membership structure. In recent years, these institutions have ramped up their lending to small businesses and are bumping up against the loan cap in some instances, especially at some of the larger CUs.
Legislation is pending in Congress to expand the limit to 27.5 percent of assets, and the banks are crying "foul." The American Bankers' Association decries the provision as unfair competition, since
banks are shareholder-owned and subject to federal taxation. The battle is currently joined by lobbyists in the hallways of Congress.
The bankers have a point. President Roosevelt signed the Federal Credit Union Act in 1934, authorizing the creation of nonprofit, member-owned cooperatives to abet thrift and credit extension.
Because of their unique structure, credit unions are exempt from federal income tax and from certain banking regulations. Hence they are positioned to compete unfairly for loan business, according to the banks.
Furthermore, bankers note that the majority of credit unions hold few business loans and that the pressure to expand the cap is coming from a small number of aggressive, nontraditional CUs.
However, since they are nonprofit organizations, credit unions argue that the lower tax and regulatory costs are passed through to members in the form of higher rates of return on deposits than banks pay their depositors.
Credit union advocacy groups also note that their member institutions fund a depository insurance fund that is backed by a government guarantee but did not require a government rescue during the financial crisis.
In any event, increasing the limit on business loans hardly represents a significant threat to the banks. The Credit Union National Association estimates that its member institutions hold less than 6 percent of small business loans in the U.S., totaling $40 billion.
By contrast, commercial bank lending to small businesses in 2010 totaled $570 billion according to the U.S. Small Business Administration.
Furthermore, many of these small credit union loans are relationships that the commercial banks are not seeking or already have rejected.
U.S. Census Bureau data show that business enterprises with 50 or fewer employees represent 30 percent of U.S. private employment.
These small enterprises are the sweet spot for credit union lending, according to Fred Becker of the National Association of Federal Credit Unions.
Clearing the legal obstacles to additional small business lending capacity by credit unions is a reasonable step toward increasing job creation at no cost to taxpayers.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at firstname.lastname@example.org.
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