Last Updated May 27, 2010 5:52 PM EDT
"Credit unions are being more aggressive in their lending," says Ed Yingling, president of the American Bankers Association, a Washington-based lobbying group. "It raises questions about safety and soundness," he adds, saying that "Congress should drill down there before they willy-nilly increase the cap."Yes, that buzzing sound you hear is the head of America's most powerful financial lobbying group whingeing about lenders, uh, you know, lending. What's the catch? As far as the ABA is concerned, credit unions are the enemy, since they're not banks, not-for-profit and not run by bonus babies. Instead, they're owned by subversive types like company employees, labor unions and faith-based organizations.
The cap Yingling refers to limits credit unions to lending out no more than 12.25 percent of their total assets. Two pending congressional bills -- the "Small Business Lending Enhancement Act of 2009" in the Senate and the "Promoting Lending to America's Small Businesses Act" in the House -- would lift that ceiling to 25 percent. Rep. Barney Frank, D-Mass., and senior Treasury Department officials have also recently made noises about raising the cap.
Since credit unions lend primarily to small businesses (and individuals), that sounds like rather a good idea. Not because these institutions are inherently virtuous, but because they're doing something most other banks aren't -- handing out loans. And lending, fueled by strengthening consumer demand, leads to jobs. The Credit Union National Association estimates that increasing the lending limit for its member institutions would let them lend an additional $10 billion to small businesses within a year, generating more than 100,000 jobs.
It's not like Wall Street will pick up the slack for smaller employers. Although big banks upped their lending to such companies over the last decade, they pulled back during the financial crisis, cutting their small-business loan portfolios by nine percent in 2008-09. Meanwhile, many other traditional lenders to modest borrowers -- community banks -- are saddled with bad commercial real estate loans and other debts.
By contrast, credit union lending to small businesses during the crunch has risen roughly 10 percent (click chart to expand). And despite Yingling's scaremongering, these are good loans. Since 1997, the loss rate on credit unions' "member business loans" has averaged 0.15 percent, versus 0.82 percent for banks. As the credit markets were crumbling in 2009, credit unions also charged off business loans at one-fourth the rates of banks.
So what has commercial bankers' knickers in such a twist? Competition (who needs it, right?). Thing is, credit unions have less than 5 percent of the market for small business loans. Even doubling their lending limit still leaves most of the pie to banks. Organizations like the ABA also contend that boosting the cap raises the national debt because credit unions get federal tax benefits. Very marginally. The government estimates the value of credit unions' tax exemption at a measly $650 million, compared with a projected national budget deficit this year of $1.5 trillion.
Here's another consideration -- small businesses need money. While loan demand is down, lots of companies that need capital can't get it. Of the small-business owners who tried to take out a loan last year, only 40 percent had all of their credit needs met. That's less than half of the companies that were able to get the loans they needed shortly before the crash.
The ABA is right about thing -- credit unions are lending more aggressively. Let's keep it that way.
Image from Wikimedia Commons, LGPL