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Increasing the MBL Cap: The ABA's Argument Against It

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Recently, the American Banks Association (ABA) distributed an email to bank executives urging them to oppose an increase in the credit union business lending cap. The email reads:

ABA Urges Bankers to Oppose CU Biz-Lending Increase

WASHINGTONABA is urging all bankers to use its automated system to send customized letters to their senators, asking them to oppose including a proposal in the upcoming jobs creation bill that would raise the credit union business-lending cap from 12.25 percent of a credit union’s total assets to 25 percent. The proposal, which is being pushed by a small, aggressive group of nontraditional credit unions, would affect only 37 of the nearly 7,600 credit unions — or about one-half of 1 percent — that are at or near their congressionally mandated 12.25 percent lending cap. Raising the business-lending cap would substantially increase credit unions’ risk exposure and cause them to stray further from their traditional mission of serving consumers — especially those of modest means. Please send a letter.

Clicking “Please send a letter” takes the recipient to an ABA-hosted site where the visitors are prompted to input their zip code and encouraged to customize an email to their senators. This email is sent by the site and the default text reads:

A proposal to increase the business lending limits for a small, aggressive group of nontraditional credit unions is being proposed by credit union industry groups. It is my understanding that they are asking Senators to support the inclusion of this proposal in the jobs creation bill the Senate will consider in the near future.


I respectfully request that you oppose any effort that would permanently or temporarily increase the credit unions’ congressionally mandated business lending cap.


While the credit union industry argues that expansion of business lending will immediately impact all credit unions, this is not true. Only 37 of the nearly 7,600 credit unions are at or near their congressionally mandated 12.25 percent lending cap.


In other words, only ½ of one percent of the 7,600 credit unions would be directly impacted by an increase in the business lending cap. The primary beneficiaries of this expanded authority are large, aggressive, growth-oriented credit unions that have abandoned their mission of serving people of modest means.


In addition, increasing commercial lending authority is inconsistent with the historic mission of credit unions. Credit unions were created to serve low- and moderate- income individuals who did not have access to financial services. For that reason they were given an exemption from federal and state income taxes.


However, several studies, including one by the Government Accountability Office (GAO), have shown that banks are doing a better job of serving low- and moderate- income individuals than credit unions are, despite the credit unions’ tax exemption. The new authority these aggressive credit unions are asking for will only take them further from their congressionally mandated mission to serve people of modest means.


Again, I ask that you oppose any proposal that increases the mandated business lending cap on credits unions. Thank you for considering my comments.

There are several important things to note regarding the content of this letter.

First, the justification for opposing the lifting of the Member Business Lending (MBL) cap is contradictory. On one hand, the ABA claims only 37 credit unions are at or near the cap, but it is uncertain exactly how they are defining “close.” By its own account, raising the cap would have an effect on a very small number of credit unions. On the other hand, the ABA claims raising the cap would “substantially increase credit unions’ risk exposure.” If less than one percent of the industry would be affected, it is unclear from where substantial risk would come.

Second, past performance suggests risk exposure from MBL is overstated. Below is a comparison of the net-charge off rates of business loans at credit unions versus FDIC-insured institutions. As of third quarter of 2009, the annualized net charge-off rate for MBL at credit unions was 0.44%, compared to an average bank business loan net charge-off rate of 2.28%.Credit unions have historically maintained sound underwriting standards when making business loans, and it is unclear why expanding lending authority would substantially alter these standards.

Credit Union vs. Bank: Business Loan Charge-Off Rates

Source: Callahan’s Peer to Peer Software, CUNA, FDIC *2009 charge-off rate is annualized as of September 30, 2009

Third, the ABA claims increasing the MBL cap will encourage credit unions to stray further from their original purpose of serving individuals of modest means. However, credit unions can serve multiple, non-exclusive purposes.Further, small business lending was one of the original functions of credit unions.For example, St. Mary’s Bank ($699M, Manchester, NH), the first credit union in the United States, has made member business lending a central component of its offered services since its origin in 1908. St. Mary’s Director of Marketing Elizabeth Stodolski explains, “Providing credit to small businesses was one of the vital services we provided during the Great Depression.It wasn’t easy for individuals or businesses, and we would actively lend to businesses during that time of difficulty.”As the Federal Credit Union Act was being passed in 1934, St. Mary’s was already providing credit to lumber yards, retail stores, and a host of other struggling neighborhood businesses neglected by other lenders.

Fourth, serving members of modest means is a derivative of a more commonly cited credit union purpose: serving the underserved. Expanded business lending authority is consistent with this mission. As Frank Amantia, the Vice President of Commercial and Mortgage Lending at Mid-Atlantic Federal Credit Union ($240M, Germantown, MD), told the Washington Post on February 9, “Credit unions by their nature are designed to serve the underserved.[Banks] have not stepped up to the plate and filled that need [of local businesses seeking loans].” The percentage of banks tightening their standards on loans to small businesses confirms Amantia’s claim.Chip Filson extends Amantia’s argument in his featured article in the February Callahan Report, “Public purpose and cooperative structure have a single goal: to serve members in critical times and in ways the private firms cannot. This public policy covenant is why credit unions are exempt from taxation.”

Pecentage of Banks Tightening Standards on Loans to Small Firms

Source: October Senior Loan Officer Opinion Survey: Federal Reserve Board

Finally, the ABA claims, “several studies…have shown that banks are doing a better job of serving low- and moderate-income individuals than credit unions are, despite the credit unions’ tax exemption.”Not only is this claim unrelated to the issue of small business lending, but it is unsubstantiated.Conversely, credit unions have a history of providing superior value to members.CUNA’s Ratedex is one modern example; Credit Unions vs Banks: A Competition of Value is another (feel free to link to other examples in the comments section).

There is real momentum for the MBL cap increase. In the above referenced Washington Post article, Treasury Spokesman Andrew Williams says, “We work very closely with credit unions and we have put forward a number of initiatives to help small business, but we are always willing to explore new ideas.”Even if credit unions do not see cooperation from the Treasury, there is also remarkable support in the Senate for increasing the MBL cap. However, there are individuals in your state lobbying against expanding lending authority. If credit unions want to see change, they must continue to push this issue. They must work through any and all avenues they have at their disposal, the least of which includes making sure that their Senators are getting the full picture of credit union business lending.

Most importantly, make sure that your members and potential members are hearing the right story.Take this as an opportunity not only to respond to critics, but to frame the conversation and increase awareness of the business services that your credit union might offer.


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