Tuesday, July 12, 2011

Credit Unions Want to Lend

Credit unions are expanding their business lending to fill a void left by banks. As USA Today reports: "Over the past year, credit union business lending is up 5%, while bank business lending is down 3% — a decline of about $95 billion, according the Credit Union National Association." So what do banks do? They fight a proposal that would allow credit unions to lend more to small businesses, naturally.

Right now, commercial lending by credit unions is limited to 12.5% of their total assets - a threshold that many credit unions are reaching. Bills in the House and Senate would raise the limit to 27.5% of assets, which credit union officials figure could unleash $13 billion in new small business lending in the first year.

The bankers argue that lifting the ceiling on commercial lending would put credit unions, which are tax-exempt and subject to different regulations, on unfair footing. Well, let's take a closer look.

Credit unions are exempt from federal income tax because they are non-profit cooperatives: owned, controlled by, and managed on behalf of their members. As such, they are governed by elected directors who serve as unpaid volunteers. Like other cooperatives, they distribute excess earnings back to members in the form of better rates and lower fees. Bank profits, in comparison, largely go to fat bonus payouts for execs and dividends to outside shareholders - you can bet Jamie Dimon is not returning it to you, dear customer! Capital standards for credit unions are more strict than banks, one factor that explains why relatively few were affected by the leverage-fueled meltdown of 2008. Credit unions are also constrained in how they can raise money. By law, they are barred from issuing stock, so the only way for credit unions to accumulate capital is through earnings - that is, the old fashioned practice of making good loans.  

If banks think credit unions have it so good, Mark Wolff, a spokesman for the Credit Union National Association,  urges them to go ahead an become a credit union. "You'd have to stop paying your directors, your CEO would have to take a steep pay cut... but hop on board!" Somehow, he told me, "they never seem to take us up on it." 

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