Credit Union Member Business Lending

H.R. 1188 are handouts to a few, overly aggressive credit unions that want to take advantage of their tax-exempt status to cherry-pick existing loans from taxpaying community banks.


H.R. 1188 would not create new jobs. The same loan from different lenders doesn't do anything for jobs or the economy.


H.R. 1188 will add to the federal deficit. Each time a credit union steals a loan from a bank, the government loses tax revenue it would have collected and the country's deficit will grow larger.


H.R. 1188 would only disadvantage community banks. Credit unions were never intended to be just tax-exempt banks.

The Facts: Credit Unions and Increased Business Lending Do Not Mix

Once-Silent Majority of Credit Unions Agree

The Result: Failed Credit Unions

The Truth: Questions Answered Without Credit Union Spin

Q. Why are banks opposed to H.R. 1188?

A. This special interest bill allows aggressive credit unions to leverage their tax advantage to steal loans from community banks. Over the last decade, 1,200 community banks disappeared. It's hard enough for community banks to compete without Congress giving special privileges to a direct competitor. The loss of any community bank is a loss to the community. Community banks account for a little more than 10 percent of the banking assets in our country but provide nearly 40 percent of all the small business loans. Congress should not make it harder for taxpaying community banks to survive.

Q. Does increased business lending for credit unions lower federal tax revenue?

A. Yes. Credit unions are a $1 trillion industry that pays no federal income tax. Now credit unions want even more special treatment for “business lending.” With expanded business lending authority, credit unions will take business loans from tax-paying community banks and other financial services sectors that currently pay taxes.

Nearly $2 BILLION annually already doesn’t go into the U.S. Treasury because credit unions do not pay taxes on their profits. Consider the following example: Thrivent, a bank that recently converted to a credit union, paid almost $1.6 million in federal, state, and local income taxes in 2011. Going forward, all levels of government will be deprived of this tax revenue because of the action of Thrivent to change to a credit union charter.

The cost to the Treasury of the credit unions’ tax exemption has been about $20 billion over the past decade.

Enough is enough. Say no to credit union “business lending” expansion.

Q. Will H.R. 1188 enable credit unions to provide billions of dollars in new capital to startups, as the industry claims?

A. Absolutely not. Lenders provide debt financing not equity capital – and there's a huge difference between the two.  Even with loans, credit unions under current law can lend up to $50,000 to any startup without limit since these loans don't count against the business lending cap.  Loans guaranteed by the SBA don't count either.  There's also plenty of flexibility for even larger business loans, which is why so few credit unions are anywhere near the current cap.  The claim by credit unions that more is needed simply is not true.  The chorus of credit unions speaking out against Sen. Mark Udall's expanded credit union member business lending continues to grow from this once-silent majority.

Unity Credit Union, a $48.8 million institution in Michigan, sent the following letter to U.S. Senators last week, saying that expanded business lending could result in the confiscation of the reserves and retained earnings of credit unions that do not participate in business lending or have no interest in exceeding the current cap.  This is "a further risk" that could "spell doom for many credit unions," Unity explained.

Q. Is the core credit union business model centered around business lending?

A. No. The core business model for credit unions is consumer lending – which the National Credit Union Administration recognized when it took over two failed credit unions that had gotten in too deep in business lending. The NCUA stated that it would return A.E.A. Federal Credit Union and Texans Credit Union to "the core credit union business model" as part of their effort to make the credit unions "financially strong."

Both these credit unions dramatically increased their business lending and failed due to bad business loans. Ultimately, NCUA seized the two credit unions and pumped in $80 million in capital assistance to keep the credit unions solvent.

When Congress enacted the current cap on business lending, it did so to be sure that credit unions stuck to their chartered mandate to serve people of small means. NCUA is now confirming the need for a very limited cap by acknowledging that the credit union core model is consumer lending – not business lending.

Congress should not support legislation that clearly moves credit unions even farther away from their chartered mandate. A vote for H.R. 1188 is a vote against your community banks.

Learn more about AEA and Texans.

Q. Do most credit unions have the capacity to monitor member business loans?

A. No, the evidence indicates that most credit unions do not have the resources to effectively monitor the performance of MBLs. Fitch Ratings recently said that "credit unions could face significant challenges should they be allowed to make more small business loans."

This viewpoint is supported by Ed Speed, CEO of Texas Dow Employees Credit Union. In a July 18 guest editorial in Credit Union Times, he wrote: "Here's the reality... Even a 25% cap does not allow for the critical mass required to justify originating, servicing and collecting on MBL... Few credit unions can afford to monitor and service MBL, and even fewer can do it right. Servicing, annual review, analysis and collections are killers."

Read what other credit union CEOs are saying.

Q. Given credit unions' tax exemption, what sort of loans should they be making?

A. Just ask Ron Burniske, President and CEO of Chartway Federal Credit Union, who said: "We shouldn't be doing strip centers, corporate buildings and land development. That's not who we are. That's the banks' business." (Inside Business, January 11, 2010.) Burniske's comments followed Chartway's takeover of a failed credit union.

Q. Are credit unions prohibited from making small business loans?

A. Not at all. Under current law, credit unions can make an unlimited number of small business loans of $50,000 or less. SBA-guaranteed loans don't count toward the cap either. Larger member business loans are subject to an aggregate cap of 12.25 percent of all assets. This leaves substantial room for credit unions to make any type of prudent small business loan.

Credit unions that make multi-million dollar loans to golf resorts, real estate developers, and mega-shopping centers would reach their limit sooner. But these are the very loans that any community bank would fight for, and such loans should not be subsidized by taxpayers through the credit union tax exemption. As Sen. John Kerry said during the debate when the current business lending limits were enacted: "[Credit unions] were never intended to be simply alternative, tax-exempt commercial banks."

Learn more about credit union business lending, including those credit unions opposed to bills like H.R. 1188.

Q. Is the current business lending cap holding back credit unions?

A. No. Less than one-half of one percent of credit unions are near the cap. A vote on this special-interest legislation (H.R. 1188) is a handout to the few overly aggressive credit unions that want to take advantage of their tax-exempt status to steal existing loans from taxpaying community banks. Raising the cap would only disadvantage community banks.

Q. Is the current business lending cap holding back credit unions?

A. No. Less than one-half of one percent of credit unions are near the cap. A vote on this special-interest legislation (H.R. 1188) is a handout to the few overly aggressive credit unions that want to take advantage of their tax-exempt status to steal existing loans from taxpaying community banks. Raising the cap would only disadvantage community banks.

Q. How many credit unions would H.R. 1188 directly benefit?

A. Just 29. That's right. It's a tiny fraction of the more than 7,000 credit unions in this country. More than 5,000 credit unions don't even make business loans. So the truth is that H.R. 1188 are special-interest bills that extends a greater privilege to a select group of tax- avoiding credit unions at the expense of taxpaying community banks

Q. Can credit unions that want to do more business lending switch to bank charters?

A. Yes! That is the right path for credit unions that have outgrown their charter. If a credit union wants to be like a bank it should switch to a mutual bank charter – a route that some credit unions have already taken. A mutual bank charter provides great flexibility and preserves the mutual-member focus that credit unions value.

Make no mistake about it: H.R. 1188 are nothing less than a bill that allows a credit union to look and act just like a bank without the obligation to pay taxes or have bank-like regulatory requirements, such as the Community Reinvestment Act, applied to them. The National Credit Union Administration (NCUA) actively impedes credit union conversions to mutual bank charters. Removing NCUA's obstructionism is a far better alternative than broadening tax-advantaged lending and increasing the deficit in the process.

Q. Why should credit unions be granted greater business lending authority than federal thrifts?

A. They shouldn’t. It’s completely unfair. Federal savings associations pay taxes; credit unions do not. Congress explicitly limited credit union business lending to make sure credit unions focused on lending to people of small means. Congress even excluded any business loan under $50,000 from counting toward the cap.

Federal savings associations’ business loans, on the other hand, are limited to a flat 20 percent of assets without any exclusions like credit unions enjoy. Instead of more than doubling the business loan cap for credit unions, credit unions that want to do more business lending than the current cap should switch to a mutual savings bank – a route that some credit unions have already taken.

Q. Are bills like H.R. 1188 controversial?

A. The Credit Union National Association says no, but Senate Banking Committee Chairman Tim Johnson (D-SD) does not agree. In March 2012, Chairman Johnson said the credit union member business lending proposal “…is a very controversial matter…it is clear there is no consensus…” Even some credit union executives have been vocal in opposing this bill because of the potential risk to the Credit Union insurance fund.

Q. Why do many credit unions oppose an increased business lending limit?

A. Dale Kerslake, President and CEO of Cascade Federal Credit Union, summed it up:  "Doubling [member business lending (MBL)] limits for natural person credit unions is not something a majority of credit unions want or need.  Yet, if a minority of powerful credit unions and industry trade associations get their way...MBL could easily become the next industry crisis… The proposed MBL limit increase...lacks safeguards for the thousands of credit unions that pay into NCUSIF and do not do business lending."  (Credit Union Times, February 10, 2010.) Straight from the mouths of credit unions leaders: say NO to H.R. 1188!

Q. Do all credit unions support H.R. 1188?

A. No!  In fact, only 0.5 percent of credit unions would benefit from this legislation and many don't want it.  Gregg Stockdale, CEO of 1st Valley Credit Union in San Bernardino, Calif., summed up the feeling of many credit unions when he stated:  "What a potential bomb that could be … who is even discussing this openly … I can't see the need for even more of this stuff.  The vast majority of CUs either don't offer MBLs [Member Business Loans] or are nowhere near their limits."

If community banks are opposed and the vast majority of credit unions don't want it, why is Congress pushing this special-interest legislation?

Q. Will extending additional privileges to credit unions (H.R. 1188) increase the deficit?

A. Yes, of course it will.  Credit unions don't pay federal taxes; banks do.  Credit unions will be cherry-picking loans from community banks. Each time that happens, the government will lose tax revenue it would have collected, and the country's deficit will grow larger. 

The Congressional Budget Office said a bill similar to H.R. 1188 would cost $354 million over 10 years.  This may seem like small potatoes in Washington, but the cumulative impact of bills such as these makes it harder to regain control of our fiscal situation.  It makes no sense to hurt taxpaying community banks and make our debt problem worse.

Click here for stats on the credit union tax subsidy and which institutions it benefits.

Q. The Credit Union National Association says that business loans will grow 30 percent if a bill like H.R. 1188 is enacted.  Is that true?

A. How could it, if only 29 credit unions are around the current cap?  Such a claim is ridiculous.  Moreover, the bill's supporters' claim that it would unleash credit union lending makes no sense, since 99.5 percent of credit unions haven't had to restrain their lending. 

More troubling for Congress is the risk: credit unions growing way too fast, making bad loan decisions, mispricing risk, lending to those who can't handle it, and ultimately being seized by the government.  As Dale Kerslake of Cascades Federal Credit Union said in a recent letter, "…if Congress grants the industry trade associations' request, [member business lending] could easily be the next [credit union] industry crisis."

See the impact of four credit unions' rapid business lending growth.

Q. Why did Telesis Community Credit Union fail and why does it matter?

A. Telesis Credit Union (Chatsworth, Calif.) was an aggressive lender that made too many bad loans to businesses, often far outside its market.  These were loans no lender should have made, but unfortunately they weren't unusual. Chetco Federal Credit Union (Brookings, Ore.) and Texans Credit Union (Richardson, Texas) did the same thing and, along with Telesis, are now under government conservatorship – much like Fannie Mae and Freddie Mac.

NCUA's Inspector General found that business loans were a factor in 7 of the 10 costliest credit union failures.  These failures are harbingers of what will occur if H.R. 1188 are enacted:  more credit unions will fail and impose losses on all credit unions – including those that don't want or need any more business lending authority.  It's unfair to increase the potential liability for all credit unions, particularly those that have stayed true to the credit union mission to serve people of small means, just to benefit a few credit unions.

Learn more Telesis details here.

Q. Why did a family of four pay more federal income taxes in 2011 than the entire near-trillion-dollar credit union industry?

A. Because credit unions don't pay federal taxes, despite the fact that many have morphed into full-service financial institutions that compete head-to-head with tax-paying community banks.  Some aggressive credit unions today, in fact, are abusing their tax subsidy by abandoning their chartered mandate to serve people of small means and pursuing big commercial loans.  Talk about not paying one's fair share.

H.R. 1188 would make things worse.  By transferring more business loans to a tax-exempt industry, it would further harm community banks and increase our nation's already dire fiscal deficit.  A vote for H.R. 1188 is a vote against community banks.

Q. Credit unions were created to serve people of modest means. Do they?

A. According to the credit union industry’s own statistics, credit unions typically serve people with higher than average income. Credit union members also have more years of education and a higher likelihood of owning a home than non-credit union members. These credit union customers are not people of modest means.

But even that’s not the full picture. Tax-exempt credit unions serve a larger percentage of high-income customers than tax-paying banks. (See the specifics of credit union service to upper-income customers.)

H.R. 1188 will cause credit unions to stray even further from their mission of meeting the financial needs of people of modest means.

Q. Did NCUA Uses Drought to Sidestep Congress?

Assisting drought-stricken areas is something we can all support, but it should not be used as a pretext for sidestepping Congressional mandates. But that’s exactly what the National Credit Union Administration (NCUA) is trying to do by tying the Low-Income Credit Union designation to an Administration drought- relief package.

The NCUA plan would use the Low-Income Credit Union classification – which is designed to promote loans to people of small means in low-income areas – to allow unlimited business lending for more than 1,000 credit unions, the majority of which are not even in drought-stricken areas.

Circumventing lending restrictions is bad enough, but NCUA is not even requiring credit unions to verify they are actually lending to low- and moderate-income members or providing credit needed as a result of the drought.

The appropriate place to find financial-sector solutions to crises such as the drought is the Financial Stability Oversight Council (FSOC). Congress should insist that the NCUA revoke its Low Income Credit Union designation proposal and direct FSOC to find appropriate solutions that are directed specifically at drought relief.​​​

​Questions? Please contact Brittany Kleinpaste for more information.


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