State the Issues - December 2002

State the Issues

by Dennis Flannigan, Bill Martin

Issue: The amount credit unions may lend to commercial borrowers is currently limited to

12 1/4 percent of their assets. Should this limit be raised?

The Limit on Credit Union Member Business Lending Should be Eliminated

 By: Dennis Flannigan

The limit on credit union member business loans should be eliminated. Business lending poses little risk to credit unions, and limits on it are ultimately harmful to local businesses, consumers and the economy in general.

Long before auto and home loans became predominant, credit unions made loans to small business owners to purchase items such as trucks or office equipment. That tradition continues today.

Regardless of the portfolio limit, member business loans are more heavily regulated than bank commercial loans. They can be made only to credit union members, generally require the personal guarantee of the borrower, and usually must be fully collateralized.

Because of these requirements, business lending is safer at credit unions than at banks. According to a U.S. Treasury Department study of member business lending, credit union business loan delinquencies and charge-offs are lower than those at banks and thrifts.

The average member business loan in the United States is about $93,000. These loans represent just 2 percent, and 2.7 percent, respectively, of all outstanding credit union loans in the United States and Nevada. Further diversifying credit union lending through member business loans will make credit unions even stronger.

More than 50 percent of member business loans are made for businesses with assets under $100,000. Business loans of the type credit unions make are generally not made by banks, particularly to small businesses, who frequently will be told by a bank to put the "loan" on a credit card.

Member business loan decisions are made locally by people who know the community, to benefit the community, not to enrich out-of-state stockholders. Credit union business lending helps lower rates for borrowers. Particularly in low- to moderate-income communities, member business loans help build wealth, provide jobs and improve the overall economic health of our members and our state.

MEET THE NEW DUAL BANKING SYSTEM

By Bill Martin

Credit unions are again seeking to expand their business lending powers, which, if successful, means more profits – excuse me – more untaxed profits at federal, state and local levels.

A brief history: credit unions and their tax exemption date to 1917. They were created with the singular purpose of serving natural persons who were of limited means and did not have access to banking services. One provision of the credit union concept was that they had to maintain membership of a "common bond," meaning members had to be associated in a clear and distinct manner. Typically, this meant all employees of a company. Over the years, as the concept became invalid, they expanded their membership to include multiple common bonds, sometimes numbering up to and over 100. A permissive federal regulator allowed them to flaunt this disregard for the law. Court actions were instituted, and their violation of the "single common bond" law was upheld all the way to the U.S. Supreme Court. Following this, the credit union members lobbied Congress for repeal of the law and were successful in having the ancient law re-written in their favor.

Included in their newly won freedom was the right to make loans to businesses, currently restricted to 12.25 percent of assets. They now want to increase this amount and will again lobby heavily to obtain this additional authority.

It is bad enough that the American taxpayer subsidizes credit union activities (over the next five years they will forego $6.7 billion in taxes, according to the Office of Management and Budget) but a deeper intrusion into business lending takes them even farther afield from their avowed mission and charter of serving natural persons of small means. They are now full-service financial institutions, for everyone.

It was never the intent of Congress to have two banking systems: one which is taxed and one which is not. Their case for increased lending authority is just plain wrong, unfair and counter to free enterprise principles.

Dennis Flannigan, Bill Martin
Dennis Flannigan Director, Nevada Credit Union League. Bill Martin is Chairman, President and CEO of Nevada State Bank, is a past president of the Nevada Bankers Association and currently serves on the American Bankers Association\'s Government Relations Council.