Preserving the environment for member business lending

At first glance, credit unions and business lending may not seem to be a good match. Most credit union loans are provided for such items as cars, education and homes. But member business loans have been part of the credit union movement since the inception of credit unions in the United States more than 90 years ago, and are an indispensable element of the purpose of credit unions. The unique role of credit unions has always included providing people a source of credit they cannot affordably get elsewhere, to improve their lives and their communities. Making loans to members so that they can start, improve or expand a business is perhaps the most direct way in which credit unions, regardless of field of membership, can benefit an entire community. New businesses mean new jobs, new incomes and a broader tax base, all of which spread prosperity throughout a community. Credit unions - particularly community development and faith-based credit unions - make loans to small start-up businesses, homeless shelters, battered women's shelters, private schools and minority self-help housing projects, for maintenance of equipment such as fishing boats, tractor trailers and agricultural machinery, and for church construction. We make these loans now for the same reason we did 90 years ago: we are a resource for organizations and fledgling entrepreneurs that banks choose not to lend to. Today, there is another reason for credit unions to meet the business needs of their members. Mergers between big and medium-sized banks reached an unprecedented level in the last decade. These megabanks often bought up smaller, local banks. The result is that in many cases loan decisions are not made at the local level, where aspects of the borrower's character can carry as much weight as statistical data. Banks want to curb credit union member business lending for two reasons: to limit competition, and an erroneous belief that credit unions' mission does not include member business loans. Banks may also incorrectly suggest that credit unions don't understand the risks associated with these loans. Member business loans do present unique risks, but credit unions have demonstrated that they are adept at managing them. In fact, during debate over H.R. 1151, the Treasury Department indicated that member business loans do not constitute a safety and soundness problem. According to NCUA, as of year-end 1999, approximately 14% of federally insured credit unions offered member business loans. In all, federally insured credit unions had $3.9 billion in member business loans outstanding at the end of 1999. These loans made up only 1.27% of all federally insured credit unions' outstanding loans - hardly a threat to banks or to credit union safety and soundness. Unfortunately, the ability of federally insured credit unions to make member business loans has been sharply curtailed due to the first-ever cap on such loans, which was included in the language of H.R. 1151. Credit unions are now more strictly regulated in making business loans than any other loan-making institutions in the financial services sector. The banking industry, not credit unions, sought the loan cap of 12.25 percent of assets. The credit union movement and its advocates in Congress vigorously opposed a cap of any kind as unnecessary and damaging. Still, it is important to remember that a House of Representatives committee nearly passed an amendment that would have eliminated member business lending altogether. Credit unions were forced into the unwanted and undesirable position of either accepting restrictions on member business lending or losing H.R. 1151, a necessary legislative fix to a specific threat to the movement at that time. But expedient compromise does not mean forever accepting an undesirable situation. That is why California Congressman Ed Royce (R) recently introduced H.R. 4701, the Faith-Based Lending Protection Act. This bill, co-sponsored by 11 House members and supported by the California and Nevada Credit Union Leagues, would exempt from the 12.25% cap loans that credit unions make to faith-based, non-profit organizations. Many faith-based credit unions are exempt from the cap, but loan participations by other credit unions often make these faith-based loans possible. H.R. 4701 allows other credit unions to participate in these loans without moving closer to the cap. The Royce bill, and its companion bill in the Senate, is a much-needed modification to restrictions on member business lending. It will ensure that there is a source of capital for worthy projects that cannot obtain funding from other financial institutions. It is a beginning, and a good one. Business lending is part of credit union history, is consistent with credit union philosophy, and fills a growing need. We must and will continue to find additional ways of making the regulations governing member business lending more flexible.