Coalition Defends Reform of Credit Union Lending Rules

A favorite joke of President Ronald Reagan, ever the optimist, was the one about a little boy being put in a room filled floor to ceiling with horse manure. Without hesitation, the boy started eagerly digging through the manure. When asked why, he replied simply, “With all this manure, there must be a pony in here somewhere!”

In the flood of rules issued by federal agencies in the past year, and particularly since Donald Trump was elected president, there has been a lot of “manure” emitted. As my Competitive Enterprise Institute colleague Wayne Crews has documented, the Obama administration promulgated a record-setting 97,110 pages of regulations in the Federal Register. Sam Batkins and Dan Goldbeck of the American Action forum have identified 48 recent “economically significant” regulations with total regulatory costs of more than $42 billion and 53 million hours of paperwork.

Yet there is at least one – and maybe only one – pony in this morass of rules. This is a deregulatory rule unanimously approved by the National Credit Union Administration that loosens an arbitrary cap put in place by the Clinton administration on the number of small business loans credit unions can make.

Yet in the rush – fully justified – to undo all the bad rules from the Obama administration, this rule may be vulnerable. Especially since special interests have already been trying to kill it. That’s why a dozen conservative and free-market groups have signed onto a coalition letter put together by the Competitive Enterprise Institute – with input from Americans for Tax Reform and the R Street Institute – urging President-elect Donald Trump to preserve this deregulatory rule.

As the letter notes, “In 1998, then-President Bill Clinton signed legislation that unwisely capped the amount of business loans credit may make to members to 12.25 percent of the credit unions’ assets.” Many conservatives and liberals soon realized that this regulation made no sense from a safety and soundness perspective, and in fact was counterproductive. Business loans are not inherently safer or riskier than mortgages or consumer loans, as the all-too-recent financial crisis has proved. Discouraging business lending by credit unions, something credit unions have done since their inception in 1908, may leave them in worse financial shape because they can’t diversify their lending.

This cap also hurts entrepreneurs as it deprives them of access to capital from credit unions. According to Pepperdine University economist David M. Smith, credit unions grant a greater percentage of business loans to small business owners than banks do. Yet Smith finds in his study that credit unions have overall success and failure rates for their business loans that are virtually the same as those of banks.

For years, many center-right groups, as well lawmakers such as Sen. Rand Paul (R-KY) and Reps. Darrell Issa (R-CA) and Bill Posey (R-FL), have supported bipartisan efforts in Congress to loosen these arbitrary limits on business lending by credit unions. These efforts should continue in the next Congress, as many are pushing to get a loosening or repeal of the cap included in House Financial Services Committee Chairman Jeb Hensarling’s comprehensive regulatory relief bill, the Financial Choice Act, which is soon to be introduced.

Meanwhile, in reviewing the statutes, many began to notice that Clinton’s 1998 regulations went beyond what the law requires. The regs, for instance, limit the loans credit unions may make to non-member businesses as well those of their members, even though nothing in the law requires this prohibition.

So in March 2016, the NCUA, with unanimous support from members of both parties, relaxed this rule so that the cap no longer applied to business loans outside credit unions’ membership. The new rule also reduces many burdensome paperwork requirements.

But some bank lobbyists are pushing to rescind this rule, because they don’t want their credit union competitors to be free of this red tape. As the letter’s signatories state: “We recognize that America’s banks face enormous burdens from the Dodd-Frank mandates, burdens that harm credit unions as well. But with regard to the NCUA rule, we urge you to reject the bank lobby’s overtures, and stand with the Center-Right coalition and American small business in supporting this deregulatory rule.”

The letter also calls for legislation to further deregulate credit union business lending as well as give regulatory relief to both banks and credit unions.

The full text of the letter and the list of signatories is here.