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Credit unions vs. banks: Another David & Goliath challenge?

For some time we’ve believed our nation’s credit unions could be an untapped source of funds for small businesses like boat dealerships. Apparently they do, too. Although it hasn’t made headlines, credit unions are currently conducting a campaign to lift a cap that restricts their ability to lend to small businesses.

Bills have been introduced in the House and Senate by lawmakers who support doubling the business-lending capacity of credit unions. Since increasing small business lending is a major part of the Obama administration’s latest economic offensive, it seems fitting that credit unions point out that raising the cap would instantly increase loan availability at no cost to taxpayers.

As Binyamin Applebaum reported this week in the Washington Post: “Credit unions, historically focused on consumer lending, increasingly are making loans to businesses, too. But the industry's potential role in fueling an economic recovery, and its opportunity to seize market share from struggling banks, is limited by federal limits on the share of a credit union's resources that can be devoted to business lending.”

There’s an estimated 86 million members in credit unions today. By law, credit unions focus mostly on consumer lending and cannot make business loans equaling more than 12.25 percent of assets. That limit was largely hypothetical, reported Applebaum, until regulators lifted a number of other limitations in 2003 that increased small business lending from less than $10 billion to more than $35 billion.

Any further growth, which could be helpful to a recovering economy, will be obstructed, as 180 credit unions are already at the federal cap.

Sen. Mark Udall (D-Colo.) has introduced legislation to raise the cap to 25 percent. The Credit Union National Association says that if the cap is raised it could trigger an additional $10 billion in business loans in the first year.

With today’s crying need for small business loans, this proposal makes great sense. You’d think everyone would favor it, right?


Banks are voicing strong opposition, claiming credit unions should remain focused on making loans to consumers. “It's not needed,” said Ed Yingling, president of the American Bankers Association. “And history has shown that they are not just limited to the classic small business. They make these loans for huge condo projects, for hotels, for strip malls.”

“Should those kinds of institutions be getting taxpayer-subsidized loans?” he asks, referring to credit unions’ tax-exempt status.

Not true, say the credit unions. They claim most of their loans are to small businesses neglected by the banks. One thing’s for sure: Bank lending to small business has been non-existent for some time, and amid increased need.

There is no good reason for not raising the cap on business lending by credit unions, particularly in this economic climate. The White House and small businesses everywhere should be supporting this legislation.


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