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Friday, June 22, 2012

Credit Union Commercial Business Lending: Key Issues for Legislation in the 112th Congress

Darryl E. Getter
Specialist in Financial Economics

Credit unions currently can make loans only to their members, to other credit unions, and to credit union organizations. In addition, there are restrictions in law on their business lending activities from which the credit union industry has long advocated for relief. Specific restrictions on business lending include an aggregate limit on an individual credit union’s member business loan balances and on the amount that can be loaned to one member. Industry spokesmen have argued that easing the restrictions on member business lending could increase the available pool of credit for small businesses. Community bankers argue that raising the business lending cap would allow credit unions to expand beyond their congressionally mandated mission and possibly pose a threat to financial stability.

Legislation has been introduced in the House and Senate to raise the business lending cap for credit unions: H.R. 1418 and S. 2231, which are both titled the Small Business Lending Enhancement Act of 2011. Currently, the business lending cap for a credit union is 1.75 times of its actual net worth or 12.25% of the total assets of the credit union, whichever is less. The legislation would increase the cap to 27.5% of the total assets. A subcommittee of the House Financial Services Committee has held one day of hearings on H.R. 1418.

Although “small business lending” appears in the bill title, the legislation does not contain firm size or loan size restrictions. The Small Business Administration (SBA) defines small-business loans as either commercial real estate or commercial and industrial (C&I) loans that are under $1 million. It also defines a small business as one with fewer than 500 employees. If the bills were enacted as currently written, credit unions would be able to make all C&I loans—those fitting the SBA definition and, in addition, those greater than $1 million. Hence, the legislation would allow credit unions to become larger competitors in the commercial lending market. It would not limit credit unions to making only small-business loans or to targeting their lending to small firms.

Although the legislation would allow credit unions to possibly become important competitors with community banks, the differences in capital regulatory requirements may not necessarily threaten financial market stability or expose the National Credit Union Share Insurance Fund, which is the federal deposit insurance fund for credit unions, to greater default risk. A comparison of capital requirements presented in this report shows that credit unions may hold less capital relative to banks for loans with maturities of five years or less, but they must hold more capital for loans of longer maturities.

Recent evidence pertaining to the demand for small business credit appears to be mixed. Regardless of the current demand for credit, credit unions are likely to be just as cautious as banks when granting commercial loans given the slow pace of the U.S. economic recovery. Tight lending standards are expected to persist until the macroeconomic outlook grows more favorable.

Date of Report: June 20, 2012
Number of Pages: 14
Order Number: R42574
Price: $29.95

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