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Udall-Paul Legislation Spreads Freedom for Credit Unions and Entrepreneurs

By definition, if a bill is sponsored by Sens. Mark Udall, D-Colo., and Rand Paul, R-Ky., or any similarly odd ideological couples in the House, it more than meets the definition of bipartisan. For that, it should get a big kumbaya from the Beltway cognoscenti.

Yet the Udall-Paul bill, S. 968, should be cheered not just because of its bipartisanship, but because it actually spreads freedom. Those concerned with government eroding options for entrepreneurs should cheer this legislation, which lifts regulatory barriers to an untapped source of capital for startups: America's credit unions.

Small business and startups pursue many diverse sources of funding. As traditional sources have dried up, many credit unions have stepped up to fill the void. As Rohit Arora, CEO of the Biz2Credit small business loan arranging service,  recently explained at FoxBusiness.com, "Following the mortgage bust, many big banks essentially turned off the spigot to small business lending. Credit unions decided to take advantage of this hole in the marketplace by increasing their small business loan-making."

But because of government barriers to credit union business lending, thousands of entrepreneurial ventures may be unnecessarily deprived of the seed capital credit unions could provide to them. As Arora says,  "Credit unions are handcuffed by a lending cap of 12.25 percent of their assets imposed  by the Credit Union Membership Access Act of 1998. Thus,  many of  those who became active in small business lending quickly hit their limit."

And this regulatory barrier is exactly what Udall-Paul, and its House companion H.R. 688, sponsored by Rep. Ed Royce, R-Calif., would fix. The legislation would raise the cap for business lending to 27.5 percent of a credit union's assets. The modest hike in the lending cap would pay big dividends for entrepreneurs and the economy. The Credit Union National Association estimates this increase in the cap would create 138,000 jobs in the first year, a figure Pepperdine University economist David M. Smith calls “conservative and well within the bounds of a reasonable projection.”

The bills do not go far enough; the cap should be eliminated entirely. There is no "lending cap," for instance, for credit unions in making car loans and home mortgages  -- even though, after the financial crisis, it's hard to say business loans are any more inherently dangerous than mortgages. National Credit Union Administrations Chairman Debbie Matz, an Obama regulatory appointee, told the House Financial Services Committee last year that business lending “did not have a major impact on the safety and soundness of the vast majority of credit unions” during the downturn and an increase in “business lending is another way in which to prudently manage risk.”

Indeed, the only real opposition is coming from the powerful bank lobby, both from the big banks and from a trade association that purports to speak for smaller ones -- the Independent Community Bankers of America. Yet recent Washington Post reporting shows how the ICBA sold out its member banks during the debate over the legislation that would become the Dodd-Frank "financial reform" behemoth in 2010.

As reported by Robert Kaiser in his new book "Act of Congress" (and in an excerpt that ran recently in the Post), ICBA president Camden Fine entered into a secret handshake agreement with then-House Financial Services Committee Chairman Barney Frank, D-Mass.,  and  agreed to "stay silent" on much of Dodd-Frank until it passed. In return, the ICBA received a technical change in the deposit insurance assessment formula in favor of smaller banks. But by any reasonable estimate, the costs Dodd-Frank has imposed to community banks has swamped any savings the law has provided.

Before they jump on the ICBA's pro-regulation bandwagon, community banks should think long and hard about which is the greatest threat facing them -- credit unions or Dodd-Frank. The answer should be an easy one. As Ammon Simon wrote recently in National Review, "In Florida, 96 percent of community banks and credit unions expect to spend considerably more time and money on compliance with new federal regulations over the next three years, while 64 percent expect to hire new compliance staff and reduce their lending."

As Simon noted, Dodd-Frank is a big anvil weighing down credit unions down. But unilke the ICBA, the main credit union associations have shouted their criticisms of the law from the hilltops. See my previous post on a recent hearing on Dodd-Frank's devastating impact on credit unions

I've commented on the supposed tax "break" for credit unions and noted many community banks get a similar exemption from double corporate taxation by being a subchapter S corporation. And as I have also stated previously, "It is a bit rich for the nation’s banks to complain about unfair subsidization after they received more than $1 trillion in taxpayer largess from TARP and other bailouts."

So let's support Sens. Udall and Paul in lifting the foolish barriers to business lending by credit unions, as well as go after barriers to both banks and credit unions that hold back the economy and its entrepreneurs.