Let Credit Unions Lend to Small Businesses

Full Letter Available in Word


Today’s difficult economic situation stems, in large part, from a shortage of credit. Banks, thrifts and other financial firms are not lending at the same levels they did in years past. The result is that private capital for investment remains in woefully short supply. It is important to consider every measure that would increase the availability of credit.

That’s why we believe that H.R. 3380—the “Promoting Lending to America’s Small Businesses Act”—is worthy of your careful consideration. The bill would cut red tape that restricts credit union lending to member businesses.

Here’s some background: since 1998, credit unions have not been allowed to lend more than 12.25 percent of their assets to businesses. Most credit unions are small institutions that do not make businesses loans at all. Most businesses loans from credit unions, furthermore, are very small loans of less than $50,000. Nonetheless, America’s roughly 8,000 credit unions do, together, lend almost $25 billion to businesses around the country.

Because the average credit union is small by lending institution standards and often rather narrowly focused, most of this credit goes to smaller businesses that wish to use difficult-to-value assets. These are exactly the types of businesses that often have a difficult time getting credit anywhere else. Expanding the availability of credit to these businesses by raising the cap from 12.5 to 25 percent of assets would likely free up at least $25 billion in capital for investment.

Other changes would make it easier for credit unions to lend to non-profit organizations, make some necessary to the threshold for de minimus loans not counted against the threshold, expand credit union lending in underserved areas, and lift all restrictions on credit union lending to non-profit institutions.

This makes sense. It will expand credit where it is needed most. And, given that credit unions currently have significantly lower charge off rates than banks and thrifts, expanding their lending would presumably increase the level of prudential care taken with regard to credit-worthiness standards.

Finally, if banks and thrifts believe that the lessening of restrictions somehow places them at an unfair disadvantage—it’s difficult to see how this would be true—then the correct solution would be to look for places that one could “level the playing field” through efforts to reduce needless restrictions on their own business.

All that said, we feel that the bill does not go far enough. We look forward to the introduction of legislation that would eliminate all restrictions on credit union business lending. Nonetheless, the proposed legislation is a good start and deserves your careful consideration.