WASHINGTON — Same arguments, different venue.
While the topic was ostensibly a bill to raise the cap on credit union member business lending, credit unions and banks sparred over a range of subjects at an Oct. 12 House subcommittee hearing.
Credit union representatives argued that raising the cap would enable them to create thousands of new jobs and better serve their members.
“Raising the cap is something that is necessary and pro-growth," said Gary Grinnell president/CEO of Corning FCU on behalf of NAFCU. His Corning, N.Y.-based CU has $636 million in assets.
But ABA Chairman-Elect Albert Kelly said any increase would “shift loans from taxpaying banks to tax-exempt credit unions.” He added that credit unions wanting to make more business loans should convert to banks or give up their tax-exempt status.
Some lawmakers discussed those possible tradeoffs during their questioning.
Rep. Ruben Hinojosa (D-Texas) asked NCUA Chairman Debbie Matz about removing the tax exemption in exchange for raising the cap on member business loans from 12.25% of assets to 27.5%, as proposed in the legislation.
Matz, who endorsed the MBL hike, said taxing credit unions would “have a negative impact on the safety and soundness of credit unions.” She explained that it would cause them to spend more of their limited funds on taxes, rather than to help members. She noted that credit unions are limited to retained earnings and, unlike banks, can’t raise supplemental capital.
Rep. James Renacci (R-Ohio) asked Grinnell and Coasthills FCU President/CEO Jeff York, who testified on behalf of CUNA, why they didn’t convert to banks so they could make all the business loans they wanted to.
“We like being a credit union and want to serve our members as we are structured,” Grinnell said.
York also said his credit union was pleased with its current structure. He added that they want to make more business loans because “there are a shrinking number of community banks in our area.” His Lompoc, Calif.-based credit union has assets of $630million.
Earlier, both Renacci and Rep. David Scott (D-Ga.) asked Matz how much demand for commercial loans was being unmet by banks and how much of that gap could be filled by credit unions. Renacci followed up by asking why the current cap is preventing credit unions from making more loans.
In separate responses to both lawmakers, Matz replied that based on her conversations with credit union CEOs, there is definitely an unmet demand for more business loans. She didn’t state a specific number and said the agency doesn’t track such data.
In response to Renacci, she said that there are 1,829 credit unions that are subject to the cap that make business loans. Of those, 403 have made loans totaling 50% or more of the cap.
But she added that the existence of a 12.25% cap deters some credit unions that might otherwise expand their business lending or start making business loans.
In her opening statement, Matz said raising the cap would allow credit unions to diversify their investments and mitigate risks. However, the bankers and some of their allies on the committee said the additional lending would jeopardize safety and soundness because commercial loans are riskier.
Scott asked York how CUNA came up with its estimate that raising the cap would create 140,000 new jobs.
York replied that this is a “conservative estimate based on the capacity of credit unions that make business loans to make more of them.”
Some of the strongest questioning of credit unions came from Rep. Blaine Luetkemeyer (R-Mo.), a former community bank loan officer and longtime credit union critic.
He asked Grinnell how his credit union, which was originally formed to serve employees of one company, could do an effective job serving its growing and more diverse field of membership. And the lawmaker read some of the businesses whose employees are eligible to join the credit union, ranging from a Fortune 500 company to a local pizzeria.
Grinnell replied that the credit union served its members well and its members were happy with the services they received.
Luetkemeyer, who is sponsoring legislation that would ease the regulatory burden on banks as a way to encourage them to make more business loans, asked York why credit unions don’t make more loans by participating in loans with other credit unions.
York said it was a time-consuming process that didn’t yield many benefits for his credit union.
Luetkemeyer was an opponent of credit unions when he chaired the Missouri House Financial Services Committee. As a result, when he ran for an open congressional seat in 2008, CUNA’s PAC spent $184,021 on advertisements and brochures on behalf of his Democratic opponent, state Rep. Judith W. Baker.
Financial institutions and consumer credit subcommittee Chairman Shelley Moore Capito (R-W.Va.), who hasn’t taken a position on raising the MBL cap, asked Massachusetts Credit Union Share Insurance Corp. President/CEO Mike Hanson what impact raising the cap would have on the health of the NCUSIF.
Hanson said the impact would be minimal because the NCUA has done a good job of regulating member business lending. “I don’t think that allowing more lending poses additional risks,” he said.
Capito also asked Grinnell if allowing credit unions to make more business loans would cause them to make fewer auto loans and mortgages. “Absolutely not,” he replied.
The hearing on the legislation, sponsored by Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.), was the second one on the subject this year. The Senate Banking Committee held a hearing on companion legislation in June.
Lobbyists for CUNA and NAFCU said they are looking for bills to which they can attach the legislation.
The Royce-McCarthy bill has 86 co-sponsors. Sen. Mark Udall (D-Colo.) has sponsored companion legislation in the Senate and it has 21 co-sponsors.
Both bills require that credit unions must be well-capitalized, be at or above 80% of the current cap, have five or more years of member business lending experience and be able to demonstrate sound underwriting and servicing. If a credit union’s net worth ratio falls below the well-capitalized requirement (currently 7%), it would have to stop making new business loans.