WASHINGTON — The bread and butter for some credit union businesslending programs are tied to unique offerings such as taxicabmedallions, crops and agricultural equipment helping to create a“built-in competitive advantage in making these types of loans andunlocking the wealth contained in certain assets,” according to anew report.

In its report, Taxicab Medallions and Heirloom Tomatoes to theRescue, the Competitive Enterprise Institute, a public policyorganization, found that taxicab medallions secured 64% of themember business loans in the Albany, N.Y. region and in Atlanta;Austin, Texas; Chicago; and other parts of the country, theycomprise 85% of non-agricultural real estate loans from creditunions.

“By virtue of their small size and defined fields of membership,credit unions simply have an advantage in discovering ways to lendagainst unusual kinds of collateral,” the report read. “For certaincategories of smaller enterprises in some regions of the country,credit unions serve as repositories of this specialized knowledgeand help unlock wealth.”

The report touts an increase of the member business lendinglimit from 12.50% of assets to 20%, which is contained in theCredit Union Regulatory Improvements Act, would provide a“significant boost to the businesses that already rely the most oncredit union loans–especially those that rely on unusual types ofassets as collateral.”

“Overall, credit union business lending plays a trivial role inour overall economy,” explains Eli Lehrer, CEI senior fellow andauthor of the report “It's heavily regulated and will remain so forthe foreseeable future.”

In his report, Lehrer finds that credit union business lendingdoes not have a consequence for most other types of businesslending. None of it goes to large businesses but, instead, servesas a vital source of credit for certain types of smallbusinesses.

“Nearly half of all credit union business loans are backed bytaxicab medallions, crops, and agricultural equipment,” Lehrerexplains. “It's difficult to assess the value of these assets and,as a result, it's difficult to lend against them.”

Lehrer said there is a “preponderance of…evidence” that showscredit unions “serve a modest but important role in regulatingconsumer and small businesses interest rates.” As of July 2007,credit unions charged about 100 basis points less on a typical loanand paid slightly more on savings products, Lehrer said. Accordingto a University of Wisconsin study, he cites, credit unions thatconvert into banks raise their interest rates on loans. Anotherstudy finds that greater credit union membership tends to reduceoverall interest rates even for those who do not belong to creditunions, he added.

The banking industry argues that credit unions compete withbanks unfairly, especially in business lending. The AmericanBankers Association, the leading bank trade group, argues thatcredit unions take advantage of their tax-exempt status totransform themselves into institutions “indistinguishable fromcommunity banks”.

“Do the banks have a point?” Lehrer asks. “While they do facedirect competition from credit unions in many lines of businessesand the law may give credit unions some advantages in general,credit unions simply do not compete directly with banks forbusiness loans. By necessity, credit unions must focus on smallbusinesses.”

Lehrer said under CURIA, the average credit union could makeabout $17 million in total business loans rather than the currentlimit of about $10

million. Multiplied across the nation's credit unions, thiswould thus make available about $4.25 billion in additional credit,most of which would likely go to small businesses.

“While that number may appears small in the grand scheme ofthings, the SBA estimates that small businesses took out a total ofover $600 billion in loans during 2006,” Lehrer said. “[More]credit will provide a significant boost to the businesses thatalready rely the most on credit union loans–especially those thatrely on unusual types of assets as collateral.”

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