[Senate Hearing 112-176]
[From the U.S. Government Publishing Office]
S. Hrg. 112-176
CREDIT UNIONS: MEMBER BUSINESS LENDING
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
EXAMINING THE ISSUE OF CREDIT UNION MEMBER BUSINESS LENDING
__________
JUNE 16, 2011
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Charles Yi, Chief Counsel
Lynsey Graham Rea, Senior Counsel
Laura Swanson, Policy Director
Andrew Olmem, Republican Chief Counsel
Beth Zorc, Republican Counsel
Dawn Ratliff, Chief Clerk
William Fields, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
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THURSDAY, JUNE 16, 2011
Page
Opening statement of Chairman Johnson............................ 1
Prepared statement........................................... 24
Opening statements, comments, or prepared statements of:
Senator Shelby
Prepared statement....................................... 24
Senator Schumer
Prepared statement....................................... 25
WITNESSES
Deborah Matz, Chairman, National Credit Union Administration..... 2
Prepared statement........................................... 26
Responses to written questions of:
Senator Merkley.......................................... 95
Bill Cheney, President and Chief Executive Officer, Credit Union
National Association........................................... 10
Prepared statement........................................... 47
Responses to written questions of:
Senator Merkley.......................................... 97
Noah Wilcox, President and Chief Executive Officer, Grand Rapids
State Bank, on behalf of Independent Community Bankers of
America........................................................ 12
Prepared statement........................................... 81
Responses to written questions of:
Senator Merkley.......................................... 97
Michael Lussier, President and Chief Executive Officer, Webster
First Federal Credit Union, on behalf of the National
Association of Federal Credit Unions........................... 14
Prepared statement........................................... 84
Responses to written questions of:
Senator Merkley.......................................... 98
Stephen P. Wilson, Chairman and Chief Executive Officer, LCNB
National Bank, on behalf of the American Bankers Association... 16
Prepared statement........................................... 88
Responses to written questions of:
Senator Merkley.......................................... 98
Additional Material Supplied for the Record
Letter submitted by Paul Hazen, President and Chief Executive
Officer, National Cooperative Business Association............. 99
(iii)
CREDIT UNIONS: MEMBER BUSINESS LENDING
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THURSDAY, JUNE 16, 2011
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:09 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I want to welcome and thank
our witnesses for being here today to testify on the issue of
credit union member business lending. While we wait for the
Ranking Member to make his appearance, I will go ahead and
start.
Under the Federal Credit Union Act, credit unions are
limited in the amount of business lending they are permitted to
engage in. The aggregate amount of member business loans made
by a credit union is restricted to the lesser of 1.75 times the
credit union's net worth or 12.25 percent of the credit union's
total assets. The member business lending cap was put in place
in 1988 with the passage by Congress of the Credit Union
Membership Access Act. Since that time, the credit union
industry has advocated for a removal of or an increase in the
business lending cap. Senator Mark Udall has introduced
legislation that would raise the cap to 27.5 percent of total
assets.
There is a wide range of views on this matter, especially
as Congress considers proposals to speed the economic recovery.
I think that it is important that we take the time to examine
this issue here in the Committee and provide the opportunity
for all sides to fully express their views on this subject. I
look forward to your testimony, Chairman Matz, to our other
witnesses' testimony, and to the question-and-answer period.
I see there are not any other Members present.
Debbie Matz has been the Chairman of the National Credit
Union Administration since August of 2009. Prior to her
appointment, she was the executive vice president and chief
operating officer of Andrews Federal Credit Union of Suitland,
Maryland. Chairman Matz has also served as a board member at
NCUA from January 2002 to October 2005.
Chairman Matz, welcome and please proceed.
STATEMENT OF THE DEBORAH MATZ, CHAIRMAN, NATIONAL CREDIT UNION
ADMINISTRATION
Ms. Matz. Thank you, Chairman Johnson. I appreciate this
opportunity to discuss credit union member business lending
legislation, regulation and supervision, and the significance
of such lending for small businesses.
Credit unions have always offered member business loans. In
the industry's early days, business loans primarily supported
agriculture. But over time, business lending has evolved,
changing with the needs of entrepreneurs who deserve greater,
not fewer, affordable credit options. Today credit unions have
more than 167,000 outstanding loans to businesses.
As a starting point, I see three tangible benefits provided
by credit union member business lending:
First, it allows small businesses to obtain reasonably
priced loans. Simply put, more competition benefits the entire
marketplace and has a positive effect on the cost and
availability of credit.
Second, prudent member business lending strengthens a
credit union's balance sheet. It diversifies credit union
portfolios and improves the ability to withstand economic
cycles.
Third, member business lending supports communities. It
spurs job growth and expands consumer access to goods and
services.
As the prudential regulator, NCUA recognizes that member
business lending poses a unique set of risks and requires
specialized rules and oversight. Our experience has shown that,
to succeed, credit unions making loans to small businesses need
to be aware of cash-flow, portfolio management and liability
issues, to name just a few.
In response, NCUA has tailored rules to emphasize sound
underwriting, solid collateral and tested management. These
criteria form the foundation of prudent lending. NCUA has taken
great care to ensure that our rules keep pace with the evolving
marketplace.
Like other types of loans, member business loan performance
is cyclical. Recent member business lending trends reflect the
financial stress of the economic downturn. Member business loan
delinquencies stood at 53 basis points in 2006, peaked at 3.93
percent in 2010, and has since improved to 3.76 percent.
While member business loan delinquencies and charge-offs
increased during the recent economic downturn, those increases
primarily resulted from the severe decline in real estate
values in the five sand States: Arizona, California, Florida,
Nevada, and Utah. Forty percent of all delinquencies and 49
percent of all charge-offs are isolated in these five States.
Nationwide, more than 2,100 credit unions make member
business loans. This figure has risen nearly 10 percent since
2006 despite the economic downturn. While nearly 30 percent of
credit unions underwrite business loans, these loans comprise
just 1 percent of all commercial lending.
However, these statistics do not capture the fact that
credit union member business lending serves an important
segment of the marketplace: small businesses and entrepreneurs.
The average member business loan is only $223,000. Of course,
this average represents a wide range of loans for a variety of
business purposes.
On the whole, credit union loans tend to be much smaller
than other business lenders. For example, credit union loans
for commercial and industrial purposes, such as building and
equipment, averaged just $127,000. By comparison, bank loans
for commercial and industrial purposes averaged $643,000--more
than 5 times larger than the credit union average.
To expand credit union service to the business community,
Senator Mark Udall has proposed legislation, S. 509, to
increase the permissible level of member business lending from
12.25 percent of assets to 27.5 percent for credit unions
meeting high standards. The bill's tiered approach would allow
healthy, well-capitalized credit unions to increase business
loans in small, manageable increments.
These credit unions, however, must first meet stringent
standards that place a premium on experience and a proven track
record of successful management.
Let me assure you, if legislative changes increase the
current cap, NCUA would promptly revise our regulations to
ensure that additional capacity in the credit union system
would not result in unintended safety and soundness concerns.
NCUA would also remain vigilant in carrying out its supervisory
authorities with respect to such legislative changes.
The proposed legislation together with a responsible
regulatory approach would provide credit unions the opportunity
to prudently grow their business loan portfolios. In so doing,
credit unions would increase the diversity in their overall
loan portfolios, thus reducing concentration risk.
NCUA regulations require any credit union that is less than
adequately capitalized to suspend business lending. I am
pleased that S. 509 would adopt a similar safeguard.
In sum, S. 509 is a well-conceived, balanced approach to
making more capital available to small businesses while
ensuring that these loans are made in a prudent manner,
consistent with each credit union's capabilities.
Entrepreneurs work hard, take risks, and put people to
work. To fulfill their dreams, they need capital. Credit unions
have long met the capital needs of small businesses. Credit
unions are frequently the only lenders willing to make small
loans to open a car repair shop, expand a boutique, or start a
day-care center. The capital provided to hard-working Americans
enriches lives, provides employment, and reinforces the
economic base of communities.
S. 509 would permit credit unions to empower more
enterprising individuals and meet the needs of more small
businesses that are expanding and creating jobs and
opportunities for their communities.
Thank you, and I look forward to your questions.
Chairman Johnson. Thank you, Chairman Matz.
Members will have 5 minutes for questions.
Chairman Matz, when you testified before the Committee in
December, your written testimony indicated that the levels of
delinquent member business loans and charge-offs have
increased. You also noted an increasing number of large credit
unions about which the NCUA has supervisory concerns where MBLs
are the primary or secondary contributing factor with a
supervisory concern.
Given these concerns, why do you believe that it is prudent
to increase the member business lending done by credit unions?
Ms. Matz. Thank you. Member business lending does have
higher delinquency and charge-offs than other consumer loans.
But, in fact, in the last quarter, the delinquencies have
started to decline. And because delinquencies lead the charge-
offs, we are looking forward to a decline in charge-offs, as
well.
But I should point out that if a credit union has
delinquent loans, that does not necessarily result in a loss.
Even the charge-offs do not necessarily result in a loss if
they are well capitalized. So they can have delinquencies and
charge-offs and still not suffer a loss, if the loans were well
collateralized. That is part of our supervision to make sure
that they are.
But in terms of actual losses, there are about 2,200 credit
unions making business loans right now. In 2008 and 2009, we
only had one credit union failure that was primarily
attributable to member business lending. So, member business
lending is being done prudently, by and large, and we are
supervising member business lending in those credit unions that
engage in business lending very carefully to make sure that
they have experienced staff and that they are underwriting
properly.
Chairman Johnson. Chairman Matz, Senator Udall's
legislation would require that the NCUA develop a tiered
approval process by which a credit union gradually increases
the amount of member business lending it engages in. Have you
given any thought as to what the tiered process might look like
and how you might implement it?
Ms. Matz. Yes. The tiered process will be very helpful in
terms of increasing our supervisory ability and ensuring safety
and soundness because credit unions will still be able to make
loans up to 12.25 percent of assets, but to get above that,
they will have to meet stringent guidelines. They will have to
have made business loans for at least 5 years. They will have
to be well capitalized and well managed. And they will have to
be at or above 80 percent of the cap.
But we will come behind that with regulations to ensure
that even above and beyond that, that the credit unions that go
above the cap do so in a moderate way, that they crawl before
they walk. So, we will not necessarily let them go up to 30
percent of an increase in 1 year. We will probably have
regulations that modify that and let them increase more
gradually than that.
Chairman Johnson. Witnesses on the second panel suggest
that credit unions are making loans that banks have previously
turned down. Is that the case? And if so, are you as a
regulator concerned about the safety and soundness of such
loans?
Ms. Matz. Well, from what I hear--and it is anecdotal--
credit unions sometimes do make loans that banks have turned
down. But, my understanding is it is based on the size of the
loan and the use of the loan, because what I am told is that
very small businesses that need small loans do not have
access--frequently do not have access to banks, and so they
come to credit unions.
A credit union average loan is only $223,000, and that
average, of course, includes much larger loans. So, in fact,
the median is closer to $127,000. These are very small loans,
so I am not concerned about the risky nature. As long as the
credit unions are prudently underwriting the loans. I am not
concerned that they are approving loans that banks have turned
down, because I do believe that by and large it is based on the
size of the loan and not the risky nature of the loan.
Chairman Johnson. I have an additional question. Member
business loans often have higher delinquency rates than other
types of loans. It, therefore, seems counterintuitive for the
potential regulator to support legislation to increase the
member business lending cap. Would you provide more details
about why you support the Udall bill and why you believe that
the Committee should not view this legislation as a risk?
Ms. Matz. Thank you. That is a good question because it
does seem counterintuitive that a regulator who is extremely
concerned about safety and soundness--and, in fact, that really
is my sole--almost exclusively my focus--would support
legislation to raise the cap. But, in fact, I believe that
raising the cap will enhance safety and soundness because the
low cap at 12.25 percent is artificially low. There are a
number of credit unions that would like to get into business
lending but do not because they do not feel that they will be
able to recover their investment. But, in fact, business
lending would help diversify their portfolio.
Now credit unions are probably overconcentrated in mortgage
loans, and they also have a lot of car loans, and so I view
business lending as an opportunity to diversify their
portfolios and to reduce the concentration of risk in their
portfolio, and certainly to reduce the interest rate risk which
they have from long-term mortgages. So I view it as a safety
and soundness benefit, not as increasing the risk.
Chairman Johnson. Chairman Matz, what percentage of credit
unions are currently at the limit and, therefore, constrained
by the statutory cap?
Ms. Matz. There is a very small number that are at or near
the limit. It is under 300 credit unions that are at or near
the limit.
Chairman Johnson. Out of how many credit unions?
Ms. Matz. Out of about 7,300 credit unions. It is a very
small number, but it is misleading because the cap constrains
all credit unions.
There are so many credit unions that are not making
business loans because of the cap even though they are not near
it. They just do not want to make the investment, and even some
credit unions that are making business loans do not really
market it. They will make business loans to people who walk in
the door, members who walk in the door and ask for them, but
they do not market it because they do not want to be in a
position to have to turn away customers once they get close to
the cap.
Chairman Johnson. Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman, and thank you,
Chairman Matz, for being here. I have got something a little
off topic and then something on topic.
Off topic--it is easy for you--is whether you might talk a
little bit about how our credit unions fared during this
economic crisis that we just went through and are sort of
slowly climbing out of. Could you give us a sense of their
experience in this period of time?
Ms. Matz. Certainly, and I will divide that answer into two
parts--the corporate credit unions and the retail or the
consumer credit unions.
The corporate credit unions had a large concentration of
mortgage-backed securities on their books. As a result, when
the bond market collapsed, the value of those bonds collapsed.
We had to place five of those corporate credit unions into
conservatorship, and it has been a significant crisis that we
are leading the credit unions out of. We have put into place
much stronger rules governing corporate credit unions, and at
this point the corporate system is stabilized. We are beginning
to feel like we have seen the worst of the corporate situation.
Right now credit unions are at the point of deciding
whether to recapitalize the corporate credit unions, and we
will know that by September. At that point credit unions will
either get their liquidity and their payment processing through
corporates or elsewhere. September is the deadline. But we are
on track, and it has been very effective. There has been no
interruption of service. Payment systems have been effective,
and so we are coming out of that. We learned a lot of lessons,
and as a result we have significantly changed the rules
governing corporate credit unions.
The retail or consumer credit unions are also beginning to
show signs of recovery. The first quarter data for the credit
unions showed very positive indicators that net worth is up and
their assets continue to rise. Their delinquencies have started
to trend down, and so it has been a difficult time, but through
it all credit unions have continued to lend. From 2007 to 2010,
lending increased 6 percent, so it is modest. It is down from
where it was, but they are still continuing to lend. So, I am
optimistic that the problems have bottomed out and that they
are starting to recover.
Senator Bennet. Thank you for that. If Congress did
increase the cap on member loans--you just testified that only
about 300, I think, credit unions are close to the cap. How
many credit unions do you think would take advantage of that?
Are there some--you have just talked about the distinction
between corporate and consumer. Are there certain kinds that
you would expect to be in the business before others? How do
you see this going if we did this?
Ms. Matz. Well, I would think that larger credit unions
that are well capitalized--and by that, I mean credit unions
that are probably from 50 million and up, or maybe even 100
million and up--would be more likely to start making business
loans. There are also those that are making business loans that
would be inclined to expand it. As I said previously, credit
unions tend not to market the business loans because of the
cap, so if the cap were raised, they would be more likely to
market it and to make more loans. But there are probably about
2,000 credit unions that are over 50 million in assets that
would be more likely to take advantage of this if the cap were
raised.
Senator Bennet. Thank you, Mr. Chairman. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Chairlady, how are you?
Ms. Matz. Good. Good to see you.
Senator Menendez. Good to see you. You know I have been a
strong supporter of the credit unions, but I think there are
some serious questions here. How is it--we will hear from the
next panel, but I just want to look at a couple of the
arguments they are presenting and get your sense of it. One is
that they will say that this legislation would allow a new
breed of credit union institutions to more aggressively pursue
business customers through large commercial and real estate
loans. It would also serve as an invitation to credit unions
that are not near this cap now to focus on business lending to
the exclusion, or greater limitation--that is my add-on--of
consumer lending in order to be eligible for an increase in
their business lending cap. Are you concerned about that?
Ms. Matz. Well, I think that it would be an opportunity for
credit unions to expand their business portfolio, but the loan-
to-share ratio of credit unions is in the high 60s, maybe about
68 percent. So, there is still a great deal of capacity for
credit unions to expand business lending and still meet the
needs of consumers.
Senator Menendez. What about the fact that credit unions by
their nature are tax exempt and obviously do not live within
all of the regulatory requirements that banking institutions
live under, if we expand the nature of their portfolio, the
arguments that you have an uncompetitive process because they
are tax exempt and because they are not subject to all the
regulatory requirements that a banking institution doing
similar transactions would be subject to? Is that not a fair
criticism?
Ms. Matz. Credit unions are more stringently regulated than
banks as far as business lending. In fact, in 2001, the
Treasury Department did a study of credit union member business
lending, and they said they found no evidence that credit union
business lending would adversely impact banks. In fact, that
study found they would increase the competition with small
banks and the benefit would go to the consumer. So, you know,
whether credit unions are tax exempt is not something I deal
with. I deal with safety and soundness issues. But credit
unions are very tightly regulated in terms of making business
loans or any loans.
Senator Menendez. But they are certainly not regulated to
the same extent that banks are. For example, they do not have
the community reinvestment responsibilities that banks have.
Ms. Matz. No, they do not. Credit unions have fields of
membership, and so they can only serve people in their field of
membership.
Senator Menendez. Right. So the question is: What would you
do if we were to pass this law? How would you go about deciding
whether it is OK for a credit union to increase its member
business lending? And if you had to approve applications for
that, what is the criteria you would use?
Ms. Matz. Well, we do our exams and they are based on
safety and soundness. If a credit union has experienced
commercial lending staff in place and it is a well-managed
credit union and it is well capitalized, those are the types of
issues that we would look at.
Senator Menendez. But right now they have, what, very
little commercial--other than, you know, auto loans and maybe
real estate?
Ms. Matz. There are 2,200 credit unions that make business
loans.
Senator Menendez. That make business loans.
Ms. Matz. Yes.
Senator Menendez. OK. So that is the universe that would
more likely be up for the possibility?
Ms. Matz. Well, I think it would be more than that. I think
there are credit unions that are not making business lending
because of the cap that likely would start making those loans.
Right now, credit unions, I am told, are reluctant to get into
the business lending business in some cases because they feel
that they will not get a return on their investment because of
the cap. It is a sizable investment in terms of the staff and
the infrastructure that needs to be put in place.
Senator Menendez. So then on the two questions, you are
saying that if we were to do this, you are not concerned about
consumer lending being squeezed out as a result of the credit
unions' seeking more of the business lending, and you are not
concerned about overall risk as it relates to taking on an
expanded portfolio in this regard to the credit unions?
Ms. Matz. No, I am not.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman. Mr. Chairman, I
was detained earlier. I ask unanimous consent that my opening
statement, a lengthy one, be made part of the record.
Chairman Johnson. It will be received.
Senator Shelby. Thank you, Mr. Chairman.
Senator Shelby. Chairman Matz, I am sorry I was not here
earlier.
Ms. Matz. That is quite OK.
Senator Shelby. Congress, as I understand it, originally
imposed business lending limitations in order to limit
excessive risk taking--you may have gotten into this. I am not
sure; I was not here--by credit unions. Do you believe that a
higher cap on business lending would adversely impact the
safety and soundness of credit unions? And how would increasing
the lending limit impact the National Credit Union Share
Insurance Fund?
Ms. Matz. I do not believe that increasing the cap would
adversely impact safety and soundness, and as counterintuitive
as it might seem, I think it would have a positive----
Senator Shelby. If not, why not?
Ms. Matz. I think it would have a positive impact on safety
and soundness because right now credit unions have a very large
book of business in mortgages and in auto loans. As we learned
from this recent economic downturn, concentrations are not good
for financial institution portfolios. So, being able to add
business loans----
Senator Shelby. By concentration, you mean concentrating in
one product?
Ms. Matz. Correct. Being able to add business loans to the
portfolio would actually diversify the portfolio, reduce the
concentration and, in my opinion, enhance the safety and
soundness.
Senator Shelby. Of the 55 credit unions that failed during
2009 and 2010, twenty underwrote business loans at the time of
their failure. What role did business lending play in the
failure of these credit unions? And how did the amount and
nature of the business loans made by these failed institutions
compare to those made by healthy credit unions? I know you have
gone back and looked at this.
Ms. Matz. Yes. In fact, during that period of time that you
mentioned, there was only one credit union that failed directly
as a result of business lending out of the 2,200 credit unions
that make business loans. There were 55 failures in that time,
and of those, 20 made business loans, but the business loans--
--
Senator Shelby. Because there were a lot more failures of
banks. We know that.
Ms. Matz. Yes.
Senator Shelby. During that time.
Ms. Matz. There were a lot more failures of banks. There
were only 55 credit union failures in that time.
Senator Shelby. OK. In your testimony today, you stated
that 70 percent of all credit unions do not engage in any
business lending. In addition, you noted that only about 7
percent of credit unions are close to the cap on business
lending. Of these few credit unions, nearly two-thirds have
assets of over $500 million, half a billion dollars. Which
types of credit unions would benefit the most from an increase
in the cap? In other words, large credit unions or small credit
unions? Or do you have any evidence that you can share with the
Committee that increasing the cap would benefit small credit
unions? We have a lot of small credit unions.
Ms. Matz. Well, I would say that the credit unions that
would benefit the most are probably the ones that are over $50
million. The ones that are $50 to $100 million, almost half of
them are making business loans. For the other categories, $100
million and above, it is a majority of the credit unions. So I
would say the credit unions most likely to make business loans
are over $50 million.
Senator Shelby. When testifying before this Committee last
year, which was just a few months ago, you noted that for those
credit unions that engaged in business lending then and had
poor CAMELS rating, often the business loans wee responsible
for the low ratings, according to what you testified. How can
business loans get a credit union into trouble? Or how can they
avoid trouble, so to speak? And should a credit union be
required to have a high CAMELS rating before its cap on
business lending can be increased? In other words, we are
interested in the safety and soundness of all these
institutions.
Ms. Matz. Answering the second part first, yes, I think
that they should have--particularly on the management, the
``M'' in the CAMEL, I think that they should have a high CAMEL
rating in order to go beyond the bottom tier, and----
Senator Shelby. Well, that is just common sense for safety
and soundness, isn't it?
Ms. Matz. Yes. And if this legislation is passed, we will
quickly implement a new set of regulations to implement the
statute, and most likely that will be one of the things that we
include in it.
Senator Shelby. What is your estimate or your judgment on
the number of credit unions that are currently not making any
business loans but will start to make business loans if the cap
is increased? Do you have a number on that, roughly?
Ms. Matz. Well, there are about 6,000 credit unions that
are not exempt from the cap. There are about 1,200 that are
exempt from the cap for one reason or another. And of the
6,000, probably 4,000 of them are under $50 million. So,
probably 2,000, or 2,200 probably benefit from it if they chose
to.
Senator Shelby. How much would the business lending cap
have to increase to basically make it cost-effective for small
credit unions to engage in business lending? Have you done any
work in that area?
Ms. Matz. No, I do not know the answer to that, but for
small credit unions, they--there are small credit unions that
engage in business lending, and frequently it is done through
participation in a loan or through a credit union service
organization rather than doing it themselves.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Chairman Matz.
Now I would like to welcome the witnesses for our second
panel.
Mr. Bill Cheney is president and CEO of the Credit Union
National Association, which represents most of the Nation's
nearly 7,800 credit unions. Mr. Cheney became president and CEO
of CUNA in July 2010 following nearly a quarter century's
experience in the credit union movement.
Mr. Noah Wilcox is president and CEO of Grand Rapids State
Bank. He is also a director and member of the executive
committee of the Independent Community Bankers of America.
Mr. Michael Lussier is president and CEO of Webster First
Federal Credit Union and is also the chairman of the board of
the National Association of Federal Credit Unions and has over
25 years of banking and credit union experience.
Mr. Stephen Wilson is chairman and CEO of LCNB National
Bank. He is also the recently elected chairman of the American
Bankers Association.
I thank all of you again for being here today, and I look
forward to your testimony. I will ask the witnesses to limit
your remarks to 5 minutes. Your written statements will be
submitted for the record.
Mr. Cheney, would you like to begin?
STATEMENT OF BILL CHENEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CREDIT UNION NATIONAL ASSOCIATION
Mr. Cheney. Yes, Mr. Chairman, Ranking Member Shelby,
Members of the Committee, thank you very much for calling
today's hearing on credit union member business lending.
Although credit unions weathered the financial crisis well,
the economy as a whole is struggling. As everyone agrees, more
needs to be done to help America's small businesses create
jobs. Credit unions can help if Congress enacts S. 509, Senator
Mark Udall's Small Business Lending Enhancement Act. This much-
needed, commonsense legislation would increase the statutory
member business lending cap from 12.25 percent of a credit
union's assets to 27.5 percent and impose statutory and
regulatory safeguards on the increased lending to protect the
Share Insurance Fund from additional risk. These safeguards
were designed by Treasury and the NCUA. If this legislation is
enacted, we estimate that credit unions could lend an
additional $13 billion to their members who own small
businesses in the first year, helping them to create $140,000
new jobs without an outlay of a single taxpayer dollar.
As my written testimony describes, credit unions have
continued to lend to their members throughout the financial
crisis, increasing their business lending portfolio by 38
percent since 2007, while the banks' commercial loan portfolio
shrank by 5 percent. Currently there are over 330 credit unions
near the cap, and they account for over half of the business
loans subject to the cap. These credit unions have been the
source of most of the growth of credit union business lending.
Over the next few years, the growth among these credit unions
will dry up without an increase in the cap, and that would be
bad for America's small businesses.
The Udall bill establishes a two-tiered structure for
credit union member business lending. Tier One credit unions
would be eligible to engage in business lending up to the
current limit. Tier Two credit unions would have to meet even
more statutory and regulatory criteria and be approved by NCUA,
and only then would they be permitted to engage in additional
business lending. The Udall bill would permit credit unions to
help small businesses in need of credit while at the same time
ensuring that credit unions engaging in additional business
lending would do so in a safe and sound manner.
It is hard to believe that the Government is telling credit
unions they cannot help create jobs in their local communities.
There is really just one reason why. The banks oppose it. This
answer does not satisfy the small business owner who has been
turned down for a loan by multiple banks; it should not satisfy
Congress. It should satisfy no one.
There are at least 140,000 reasons to let credit unions do
more small business lending, and there are no sound public
policy reasons not to. Failure to expand the credit union
member business lending cap would literally leave money on the
table that could be loaned to small businesses to create jobs.
The bankers say business lending is not a part of the
credit union mission, but credit unions have been doing member
business lending since day one. The bankers say increased
business lending would undermine credit union safety and
soundness, but credit unions do this type of lending more
safely and soundly than banks.
The bankers say increasing the cap would only affect a
small number of credit unions while at the same time claiming
that increasing the cap will hurt community banks. It is a
contradiction, and the bankers are wrong on both counts.
Increasing the cap will have a profound effect on the hundreds
of credit unions that will reach the cap in the next few years,
but it will not adversely affect the banker dominance of the
small commercial loan market, currently at 95 percent. In fact,
credit union member business lending actually helps local
communities, including community banks, by stabilizing the
local economy and creating jobs.
The bankers say that increased credit union business
lending will lead to a reduction of other types of credit union
lending, but most credit unions have plenty of liquidity to
fund the increase.
The bankers say that credit unions should not be granted an
expansion of powers because of their tax status. This argument
is disingenuous when one-third of all banks are exempt from
Federal income tax as Subchapter S corporations. The credit
union tax status is based on the not-for-profit cooperative
structure of credit unions, not credit union powers.
The bankers say that increased business lending calls into
question the credit union industry's commitment to serve the
underserved, yet the credit union record of serving the
underserved is well demonstrated. And when we have attempted to
do more to serve the underserved, the bankers have brought
lawsuits to stop us.
As we recover from the Great Recession, small businesses
are underserved, yet the bankers say that small business credit
is not in short supply. But many small business owners report
being turned away by their banks. It is a primary reason that
Congress gave the banks access to 30 billion taxpayer dollars
last year. Their lending is down. Our lending is up. There must
be demand in the market if our lending is increasing.
Credit unions want to meet the demands of their business-
owning members. The time is now to set aside the false and
misleading banker rhetoric. We urge Congress to permit credit
unions to do what they were established to do--serve their
members, including those who own small businesses. We have the
willingness to help. We have the capacity to help. But we need
Congress to enact the Udall bill as supported by Treasury and
the NCUA.
Mr. Chairman, thank you very much for the opportunity to
testify. I look forward to your questions.
Chairman Johnson. Thank you, Mr. Cheney.
Mr. Wilcox.
STATEMENT OF NOAH WILCOX, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GRAND RAPIDS STATE BANK, ON BEHALF OF INDEPENDENT
COMMUNITY BANKERS OF AMERICA
Mr. Wilcox. Thank you, Chairman Johnson, Ranking Member
Shelby, and Members of the Committee. I am Noah Wilcox,
president and CEO of Grand Rapids State Bank. I am a fourth-
generation community banker and a member of the executive
committee of the Independent Community Bankers of America.
Grand Rapids State Bank is a State-chartered community bank
with $230 million in assets located in Grand Rapids, Minnesota.
I am pleased to represent community bankers and ICBA's nearly
5,000 members at this important hearing on credit union member
business lending.
ICBA appreciates this opportunity to testify on legislation
that would expand credit union powers by raising the cap on
member business loans as a percentage of assets. We strongly
oppose the Small Business Lending Enhancement Act, S. 509.
Congress should not expand credit union business lending powers
unless it is also prepared to tax credit unions and require
compliance with the Community Reinvestment Act.
The current tax exemption is directly linked to and can
only be justified by their original mission of serving
individuals of modest means. Credit union business lending is
an immediate threat to my bank. I am happy to compete with
other taxpaying lenders, even large banks, but the credit union
tax exemption creates an unfair advantage and distorts the
market.
On countless occasions, I have lost business lending
opportunities with established customers to credit unions who
underpriced my competitive rates. Just last Friday, as I was
preparing for this hearing, a long-time customer, with both
personal and business lending relationships, told me they were
taking three loans to two separate credit unions. One was a
loan on real estate for development that the credit union
priced 400 basis points below my competitive rate. The second
is a small commercial loan, and the third is a residential
mortgage on which the credit union offered a rate in the mid-
3-percent range even though it does not qualify for funding in
the secondary market.
S. 509 would allow the NCUA to approve member business
loans up to 27.5 percent of a credit union's assets--more than
double the current cap of 12.25 percent. The cap was not set
arbitrarily but was intended to ensure that commercial lending
would comprise no more than a marginal part of a credit union's
lending.
The credit unions have portrayed S. 509 as an effort to
make more credit available for small businesses. The truth is
that only a small number of credit unions are at or near the
current member business lending cap. We estimate this number to
be about half of a percent of the approximately 7,400 credit
unions. Over 70 percent of credit unions report no member
business loans at all. Those credit unions that are at or near
the cap are the largest and most complex credit unions, and the
business loans they make are multimillion-dollar deals, not
small business loans. There is ample capacity for the remaining
99.5 percent to expand their member business lending. What is
more, there are numerous exceptions to the member business
lending cap.
Some advocates of S. 509 claim that the expanded credit
union commercial lending would come at no cost to taxpayers.
The Joint Committee on Taxation, the Office of Management
and Budget, and the Congressional Budget Office have all
identified credit union lending as a tax expenditure. This is
why the Bipartisan Policy Center's Debt Reduction Task Force,
chaired by former Senator Pete Domenici and former OMB Director
Alice Rivlin, recommended eliminating the tax exemption, and it
would be appropriate for the Senate to hold hearings on the
credit union tax exemption.
What is the cost of the tax subsidy? The most comprehensive
and sophisticated analysis to date was done by the nonpartisan
Tax Foundation, which valued the subsidy at $3 billion a year
and $32 billion over a 10-year budget window. The credit union
loan I mentioned earlier that was underpriced by 400 basis
points was surely made possible by this tax subsidy and perhaps
also a failure to adequately evaluate the risk. The case for
repealing the credit union tax exemption stands on its own
merits as a deficit reduction measure. When credit unions seek
to expand their business lending powers and become the
equivalent of banks, linking expanded lending powers to the
repeal of the tax exemption is a matter of tax equity.
Thank you again for convening this important hearing,
Chairman Johnson. As a community banker, I feel the direct
impact of credit union commercial lending, so I am grateful for
the opportunity to provide my perspective. ICBA strongly
encourages this Committee to reject calls for new powers for
tax-subsidized credit unions that will not, despite assertions
to the contrary, measurably expand small business credit or
create jobs.
I look forward to answering your questions.
Chairman Johnson. Thank you, Mr. Wilcox.
Mr. Lussier.
STATEMENT OF MICHAEL LUSSIER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WEBSTER FIRST FEDERAL CREDIT UNION, ON BEHALF OF THE
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
Mr. Lussier. Good morning, Chairman Johnson, Ranking Member
Shelby, and Members of the Committee. My name is Mike Lussier,
and I am testifying today on behalf of the NAFCU where I
currently serve as chairman of the board of directors. I have
served as president and CEO of Webster First Federal Credit
Union, headquartered in Worcester, Massachusetts, since 1990.
Webster First is a community credit union with over 44,000
members and more than $570 million in assets. NAFCU and the
entire credit union community appreciate the opportunity to
participate in this discussion regarding member business
lending and allowing credit unions to further assist in the
economic recovery.
When Congress passed the Credit Union Membership Access Act
in 1998, it put in place restrictions on the ability of credit
unions to offer member business loans, but at the same time
asked the Treasury Department to study the need for such a cap.
In January 2001, the Treasury Department released its study
and found the following: that credit unions' business lending
currently has no effect on the viability and profitability of
other insured depository institutions. The 1998 Act also
established that a business loan of $50,000 and above counts
toward the cap. This number was not indexed and has not been
adjusted for inflation in nearly 13 years since enactment.
Some critics claim that only a limited percentage of credit
unions are actually at the lending cap and, therefore, nothing
needs to be done. This view fails to see the big picture of how
the cap acts as a disincentive because credit unions that
invest in business lending and that are successful will
ultimately reach this threshold.
The banking industry argues that the credit union business
lending cap should not be raised due to the credit union
Federal tax exemption. What the banking industry conveniently
forgets to mention is that a large number of banks do not pay
corporate Federal income taxes themselves because of their
Subchapter S status. There are nearly 2,400 Subchapter S banks
that avoid Federal income taxes today, and the value of their
tax break is actually greater than the estimated value of the
entire credit union tax exemption, as reflected in the
Administration's budget.
Webster First has been at the business lending cap for over
a year now. At Webster First we understand that member business
lending is not about credit unions but about helping small
businesses and the jobs they create. It is unfortunate that
Webster First cannot handle all the requests to help small
businesses that we receive due to this cap.
Webster First has made some great inroads into business
lending and has assisted multiple families and businesses in
becoming quite successful. For example, we helped an individual
purchase an older gas station from his parents. He was able to
upgrade all his fuel pumps, computer services, and revamp his
store. It now includes a coffee shop, package store, and a
multipump service station. His success allowed him to then
upgrade the unused property behind the station for storage
rental units which quickly became 90 percent utilized. He
recently sold the property for a substantial profit and has now
acquired other properties to expand his business. And as this
Committee knows, business expansion means job creation.
In March, Senator Mark Udall introduced the Small Business
Lending Enhancement Act. This bipartisan legislation would
raise the credit union member business lending cap to 27.5
percent of total assets, up from 12.25. This would stimulate
the Nation's struggling economy by increasing access to credit
for small business owners. In order to see its cap increased, a
credit union would need to meet strict eligibility requirements
before gradually increasing its business loan portfolio. This
bill is a well-thought-out solution that includes important
provisions to ensure that safety and soundness concerns are
addressed. This bill will not only help credit unions but, more
importantly, it will help America's small businesses.
NAFCU and its member credit unions ask that the Small
Business Lending Enhancement Act be considered by the Banking
Committee and on the Senate floor as soon as possible.
In summary, the credit union member business lending cap
established in 1998 is arbitrary and outdated. The need for
such a cap was questioned by the Treasury Department as far
back as 2001. While NAFCU believes that no statutory cap should
be in place, a number of credit unions like mine and the
millions of members we serve would benefit from the enactment
of the Small Business Lending Enhancement Act. This legislation
would provide a practical and well-thought-out approach to
raising the cap while addressing concerns about rapid growth
and safety and soundness. NAFCU would also support raising the
$50,000 definition of a member business loan as it has not been
increased since its inception.
In conclusion, many credit unions have capital to lend
small businesses across the country and are in a position to
further assist in recovery efforts. However, due to the member
business lending cap, they are hampered. Raising this cap will
make available immediate funding to help small businesses
create much-needed jobs.
I thank you for the time and the opportunity to testify
before you today, and I welcome any questions as well. Thank
you.
Chairman Johnson. Thank you, Mr. Lussier.
Mr. Wilson.
STATEMENT OF STEPHEN P. WILSON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, LCNB NATIONAL BANK, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION
Mr. Wilson. Chairman Johnson, Ranking Member Shelby, my
name is Steve Wilson. I am chairman and CEO of LCNB Corp. and
LCNB National Bank in Lebanon, Ohio. I am also the current
chairman of the American Bankers Association.
ABA is strongly opposed to the recent efforts by the credit
union industry to redefine the credit union charter in ways
that would effectively turn credit unions into tax-exempt
banks. This effort, most recently embodied in Senate bill 509,
would allow credit unions that are within 80 percent of their
member business lending cap to increase this cap and take on
significantly more business lending. This would allow a new
breed of credit unions to more aggressively pursue business
customers through multimillion-dollar commercial loans. It
would also serve as an invitation to credit unions that are
currently not near this cap to focus on business lending, to
the exclusion of consumer lending.
Under current law, credit unions have an aggregate member
business lending cap of 12.25 percent of assets. However,
business loans under $50,000 do not count against this cap, nor
do many other types business loans--leaving ample room for
credit unions to serve small businesses. There is a limitation
on business lending because credit unions are tax exempt, and
this tax exemption is meant to be targeted at people of small
means, not real estate developers. Senate bill 509 would allow
the NCUA to increase the business lending cap for qualifying
credit unions to 27.5 percent of assets--more than double the
current cap, and a greater business lending authority than that
of Federal thrifts.
A credit union that applies and receives the authority to
increase business lending almost certainly would reduce its
non- housing-related consumer loans. However, the bill does not
require the credit union to notify its members in a clear and
conspicuous manner that they could see a reduction in consumer
loans. And the bill does not require the members of a credit
union to approve an expansion in business lending, an action
that would essentially create a tax-exempt bank. In contrast,
credit unions that seek mutual savings bank charters must mail
such a notice and give such a disclosure and have an
affirmative vote.
Make no mistake about it. Senate bill 509 would allow a
credit union to look and act just like a bank, without the
obligation to pay taxes or have bank-like regulatory
requirements, such as the Community Reinvestment Act.
Members of Congress have recognized this fundamental
problem repeatedly. Senator Kerry himself stated from the
Senate floor, credit unions ``were never intended to be simply
alternative, tax-exempt commercial banks.'' There is a strong
legislative history that supports the unique charter of credit
unions with very specific restrictions on business lending.
These restrictions were put in place to protect credit unions
from lending that could pose serious threats to their safety
and soundness. In addition, they were put in place to ensure
that credit unions remained primarily focused on individuals,
especially of small means.
The congressional concern is well founded and echoed by
many within the credit union industry itself. Business lending
is risky business and should be limited for all credit unions.
However, there is an alternative. Credit unions that want
to expand business opportunities already have an option
available to them. They can switch to mutual savings charters.
This charter provides the flexibility credit unions desire,
preserves the mutual member focus that is the trademark of the
credit union charter. Unfortunately, the NCUA has erected
obstacles, making it extremely difficult for a credit union to
become a mutual savings bank.
I thank you for this opportunity to share ABA's and my
thoughts, and I am happy to answer any questions.
Chairman Johnson. Thank you, Mr. Wilson.
A question for Mr. Wilson and Mr. Wilcox. Over the past
several years, there have been many versions of legislation to
remove or raise the cap for member business lending at credit
unions. Last year Senator Udall made many changes to his
legislation to give more control to the regulator to determine
which credit unions should be able to lend above the current
cap and to require that such a credit union demonstrate a
history of sound underwriting of business loans.
What do you think about the changes made by Senator Udall?
And do they address any of your concerns? Mr. Wilson.
Mr. Wilson. Thank you very much. I would like to respond to
one thing as I begin here that was in the testimony, and that
is that Subchapter S banks do not pay Federal taxes. I am not a
Subchapter S bank. I am a $750 million for-profit commercial
bank that pays taxes. But I pay taxes twice. I pay taxes as the
bank when we make the money, and then I dividend to my owners,
the shareholders, and they pay taxes on the same income.
It is true that Subchapter S banks only pay the taxes that
is dividended to their owners, but they do pay Federal taxes,
and that is quite a misnomer to say that they do not. So I
wanted to clear that up.
Now, as to your question, no, there is still a great
concern on our part, and the concern is--I will just use my
bank as an example. I compete, as a $750 million national bank,
against credit unions that are much larger than I am--GE Credit
Union, Wright Pat Credit Union. I look at their ads. I look at
their billboards. And the first thing they say is if you work,
live, worship, in essence breathe in my market area, you are
their member. So, first of all, this whole idea that they have
a common bond is not true. So they are competing directly with
me.
I am awash in liquidity. My normal loan-to-deposit ratio is
between 75 and 80 percent, and that is pretty conservative for
a bank. I am down to 60 to 65 percent. I want to make loans,
and I want to make loans bad. I fall all over any small
business person that comes in my office and wants to have a
loan because I need those loans.
Now, there are only two reasons I am going to lose a loan
to a credit union. Number one, they are going to use their tax-
exempt status to underprice me. You must realize that when I
make a dollar, I only keep 60, 70 percent of that dollar. When
they make a dollar, they keep 100 percent of it. So they have
quite an ability and advertise that ability that they can pay
more on deposits and charge less for loans. So they use that
tax-exempt status. They do not have the common bond. And so I
can lose a loan because they can underprice me, or I can lose a
commercial loan because I would not have made it in the first
place, and they are willing to make a loan or take more risk
than I am willing to take. And I do not know that that is in
the best interest of the credit union charter.
You know, I like the credit union charter. ABA is for
charter choice. It is the foundation, the absolute foundation
of the dual banking system. But different charters have
different restrictions, and these business lending caps should
stay in place.
Chairman Johnson. Mr. Wilcox.
Mr. Wilcox. The changes that you inquired about simply do
not go far enough, first of all, but I, like Mr. Wilson,
compete directly with credit unions in my market that are in
some cases four or five times the size of my $230 million bank.
They do use their tax-exempt status to very selectively target
the loans that they would like to take and in a fashion that I
simply cannot compete with on price. In many cases we do see
increased risk in loans that are not able to be underwritten in
a safe and sound manner taken on in some cases in the credit
unions, and the restrictions that are in place are there for a
reason. If they would like to enjoy their tax-exempt status and
continue to do so, those restrictions should remain in place.
But, you know, I would be the first to say I would welcome
all credit unions to make the Subchapter S election to pass
those taxes on to their members, just like I pass on--I am a
Subchapter S community bank, and our shareholders do pay the
tax. We do not pay tax at the corporate level, but our
shareholders pay that State and Federal tax, in our case at
quite a high rate. So I would encourage all credit unions to
make that election and go ahead and support that tax, and if
they want to do that, then engage in commercial lending as they
see fit.
Chairman Johnson. Thank you, Mr. Wilcox.
Mr. Cheney and Mr. Lussier, it appears that the levels of
delinquent member business loans and charge-offs have
increased. Does the current economic climate dissuade you from
underwriting member business loans? Mr. Cheney.
Mr. Cheney. Thank you. It is true that member business
lending delinquency increased, as did charge-offs, during the
economic crisis. But recently we have seen those numbers come
down, and interestingly, as is reflected in our written
testimony, credit union member business loans actually
performed much better than bank loans.
I will say that underwriting standards are credit unions,
as I am sure at all financial institutions, have gotten another
look from a management perspective because of the crisis. But
the credit unions have a strong track record of safe and sound
business lending.
Chairman Johnson. Mr. Lussier.
Mr. Lussier. Yes, sir, thank you. First of all, I think
that when you look at the delinquencies on the business loans,
we have to take into consideration that the real estate loans,
consumer loan portfolio, credit card portfolios delinquencies
have all been increased with the downturn in the economy. One
of the things I will say is that the delinquent loans that we
have had in our portfolio--I can only speak for Webster right
now, but our delinquencies in the commercial loan portfolio are
2 percent. Our losses are nearly nil. I believe there has been
one substantial loan that we had taken a loss on, which
represented about $100,000 in loss, of which we basically
regained some of that loss when the property was resold.
So speaking on behalf of an institution that writes well-
underwritten and secured loans in the business loan portfolio,
I find that the delinquencies are rare. I think we are OK. We
are able to continue writing loans. We are maxed out, like I
stated in the beginning, and we are at the cap. And we continue
to look for the opportunity to serve the business people in our
community regardless of the present delinquency status.
Chairman Johnson. Mr. Lussier, how do you manage the risks
associated with business loans at your institution during these
difficult economic times?
Mr. Lussier. Well, first and foremost, a couple comments
were made about the big multimillion-dollar loans. We have a
couple loans that are sizable. I think the largest one is
probably $3 million. However, a majority of our loans are
diversified among small business owners who are pretty much
looking for the $50,000 to the $250,000 loan. I would say that
80 percent to 85 percent of my loan portfolio fits within a
national average of approximately $233,000 on average. We
basically diversify among collateralization for real estate,
equipment, heavy equipment, very few on receivables. We are
pretty much conservative on who we underwrite to, but we
actually look at all the businesses that come in and request
our lending. We give them all an opportunity today, and we try
to make sure that if it possible that we can lend them the
money to enhance their businesses we do so in the best fashion
possible. But we also make sure that we are not giving away
money.
So we follow the rules and regulations that are set forth
by NCUA, and they also come in to make sure that we are
diversified and that we do not have a high concentration in any
area. That is how we reduce our risk.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Mr. Lussier, in Mr. Wilson's testimony he argues that
increasing the business lending cap would allow credit unions
to look and act just like banks, as you heard, without having
to pay taxes or comply with bank-like regulatory requirements.
How do you respond to those concerns that the playing field is
not level because credit unions are tax exempt and so forth?
Mr. Lussier. Well, we could talk about this all day, but I
will say----
Senator Shelby. I think that is an important subject.
Mr. Lussier. Yes, and I agree with you. Thank you for
asking me. I will say this: There are major differences between
a credit union and a bank, and without going through the whole
platter of the differences, I will say that a majority of the
difference is that we run on volunteerism. Our institutions are
run under more regulatory restraints than the banks can be--
than the banks are. This----
Senator Shelby. Say that again. Are you saying that the
credit unions are under more regulatory scrutiny than the
banks?
Mr. Lussier. We are under more regulatory restraints than
the banks, and here is an example. We are trying to basically
increase our limitations on business lending. We have more
restrictions on what we can offer because we are credit unions.
And all we are asking here is that we need to be able to
increase these limitations slightly in order to better enhance
our services to the members.
Senator Shelby. CAMELS ratings are an important indication
of the safety and soundness of any financial institution,
credit union. Would you support requiring a credit union to
have a CAMELS rating of 1 or 2 before its business lending cap
could be increased? Because that goes to safety and soundness.
Mr. Lussier. Well, there is no doubt. A 1 and 2, it
definitely shows you that an institution is safe and sound. A
CAMEL rating 3 does not mean an institution is failing and is
not safe and sound. A CAMEL 3----
Senator Shelby. It does not mean it is failing, but it is
an indication it might not be strong.
Mr. Lussier. I would agree with you.
Senator Shelby. OK.
Mr. Lussier. I would agree with you. But a CAMEL rating 1
and 2 institution moving ahead to have the possibility of
increasing according to these limitations, I would support 100
percent.
Senator Shelby. Mr. Cheney, you argue, as I understand it,
that the cap on business lending disproportionately hurts small
credit unions.
Mr. Cheney. Yes.
Senator Shelby. You have also indicated that raising the
cap to 27.5 percent would--these are your words--change the
economics significantly, making it possible for credit unions
as small as $20 million to reasonably participate in this
market. Those are your words. What is the basis for determining
that increasing the cap to 27.5 will be sufficient for small
credit unions to participate in business lending?
Mr. Cheney. Well, thank you, Senator. The basis for it is
that it allows more credit unions to be able to justify the
investment necessary to set up a business lending operation.
You have to hire people that have experience in the field. You
have to set up procedures and systems and safeguards and
internal controls, so that is really the basis for that
statement.
Senator Shelby. You also in your testimony, Mr. Cheney,
point out that nearly 70 percent of credit unions do not engage
in any business lending currently. Why do so few credit unions
currently make business loans? And for those credit unions that
do business lending, what are the most common types of loans
that they make?
Mr. Cheney. We think that the cap is a reason that so few
credit unions do business lending because the restriction is so
low. And, by the way, before 1998, there was no restriction on
credit union business lending. There was no cap. But the cap,
if you are a $20 million or a $50 million credit union, you
cannot justify the expense. So we think raising the cap, as
Chairman Matz said, will encourage more credit unions to get
involved. And in terms of the types of lending, the average
credit union member business loan is less than $250,000. Most
are small business loans--not all, but most credit unions make
loans to small businesses, as Mr. Lussier said is the case with
his credit union.
Senator Shelby. Mr. Wilson, you probably were here earlier
when Chairman Matz testified. She noted that one way to deal
with the credit crunch would be to increase the business
lending cap. She noted also that access to credit remains
difficult for many small businesses and entrepreneurs that
depend on financial institutions for funding.
Why do you think that many small businesses are facing a
credit crunch?
Mr. Wilson. Because of the state of the economy. Their
cash-flows are down. Their collateral has been diminished.
There are a number of reasons. There are people that we would
have lent to in the past that we cannot lend to today, and
hopefully we will be able to lend to tomorrow. And I think it
wise that we do not from a safety and soundness standpoint.
You know, one of the statements that was made that kind of
mystified me was that credit unions are more tightly regulated
than banks, and particularly in the commercial lending----
Senator Shelby. It intrigued some of us, too.
Mr. Wilson. That was an interesting statement. You know,
they made the statement in testimony that, boy, they do a
better job because they have had less charge-offs than we have
had as banks. And so I was curious about that, and I went to
the CUNA site and gathered some statistics, and it seems like
we are not comparing apples to apples here, because I would say
that my regulator, the Office of the Comptroller of the
Currency, is much stricter. I was amazed at the reason that
they avoid charge-offs, and that is because they allow
delinquencies 12 months and beyond. They have a great bucket of
loans that are delinquent more than 12 months.
Senator Shelby. What would you----
Mr. Wilson. Banking regulators would have had us write
those off well before they get to 12 months, so that is not
really a fair comparison.
The other thing that is such a misnomer, that even though
tax exempt and having the requirement to serve people of modest
means, you probably are aware that GAO did a study on that and,
in fact, banks service more low- to moderate-income
individuals, households, than credit unions do. The GAO found
that a low- to moderate-income service in banks was 41 percent
of the households. In credit unions it was 31 percent of the
households. Let us get rid of this tax exemption. Let us
compete head on and let us take care of small businesses and
let us create jobs.
Senator Shelby. Mr. Wilson, has the Dodd-Frank legislation
and other regulatory burdens had an impact on the ability of
banks to make loans to small businesses?
Mr. Wilson. Oh, absolutely. Absolutely. The time we spend
on regulatory burden, the uncertainty that all of this
regulatory environment and the tax environment has created has
caused many of our good business customers, those that would
normally be expanding, buying plant and equipment, creating
jobs, not to pull the trigger on projects. I do not think I
have ever had a larger pipeline of loans where the individual
businesses are not willing to pull the trigger because of the
uncertainty of taxes and regulation, et cetera.
Senator Shelby. Mr. Wilson, I think you went into this a
little bit earlier, but I want to, for the record, go back into
it. Both Mr. Cheney and Mr. Lussier note in their testimony
that about one-third of all banks or Subchapter S corporations
are exempt from Federal income tax. They argue that puts many
banks on a more equal playing field with credit unions. You
talked about that earlier. Just again for the record, how does
the tax treatment of Subchapter S corporations compare to the
taxation of credit unions? I thought tax--am I wrong? Credit
unions are exempt from tax, period.
Mr. Wilson. Period. That is correct.
Senator Shelby. Whereas, if you are a Subchapter S
corporation, it passes to the owners and they pay the tax.
Mr. Wilson. That is correct.
Senator Shelby. So the tax is paid one or both ways. Is
that right?
Mr. Wilson. That is correct. It is paid--if you are a C
corporation, you pay it twice. You pay it when you make it, and
your owners pay it when they receive it in the form of
dividends. In the case of Subchapter S, they only pay it once,
but they pay it. They are taxpaying entities, and I do not have
a problem whatsoever as a C corporation competing against a
Subchapter S.
Senator Shelby. Mr. Wilcox, in your testimony you also
noted that your bank has lost business lending opportunities
with established customers to credit unions. You argue that the
credit union tax exemption creates an unfair advantage and
distorts the market. Just again for the record here, how does
the credit union tax exemption undermine your ability to offer
competitive rates? Is it because you are taxed and they are
not?
Mr. Wilcox. That is correct.
Senator Shelby. OK. Also, Mr. Wilcox, Mr. Cheney states in
his testimony that business loan net charge-off rates for
credit unions have been roughly one-fourth of the average for
banks since 1998. Accordingly, he argues that credit unions can
provide business lending in a more safe and sound manner than
banks. Why do credit unions appear to have lower net charge-off
rates for business lending than banks? Is there a reason here?
Is it the way they are regulated? Is it the way they approach
it? Or what is it?
Mr. Wilcox. Well, it could have to do with some of that,
and I think Mr. Wilson spoke to a few of those facts. Banks are
under very strict regulatory requirements, especially as it
pertains to charge-offs. We have hard caps on days delinquent,
and then depending on the type of credit that it is, it is
demanded to be charged off. If not, you do face some pretty
severe regulatory scrutiny. All of the Federal regulators as
well as the State regulators--in my case I see both as a State
chartered bank--do look at that on a very regular basis, each
examination. They are looking from a safety and soundness
perspective to be certain that the banks are not only managing
their delinquency but not hiding it. It would be inconceivable
for me to have a loan that is severely delinquent and be able
to carry it continuously on my books for 12 months and not
charged off. I would be criticized and could possibly face
enforcement orders or other things of that nature if that was
as routine practice in a bank.
Senator Shelby. Would that be what we call ``toxic
assets''?
Mr. Wilcox. I would not want them on my books.
Senator Shelby. Thank you.
Mr. Cheney. Senator, might I comment on that as well? I am
sorry. In terms of charge-offs versus delinquencies, credit
unions' charge-offs are lower than banks' but credit unions'
delinquency is lower than banks' too. I do not think it is a
situation where credit unions are hiding delinquency by putting
it in charge-offs because it has got to be in there somewhere.
It is one or the other.
In terms of loans that are delinquent that have been on the
books for a long period of time, those are easily discernible,
as Mr. Wilson did, from credit union call reports and is
something that the regulators track very closely. If there is a
loan that is on there for more than 12 months, I can assure you
there is a reason for that.
And if I might also, just while I have the microphone,
comment on Subchapter S status. When credit unions distribute
their earnings to their members in the form of dividends, their
members, who are the owners of the credit union, pay taxes on
those dividends. A tax on a credit union is nothing more than a
tax on a credit union member.
Mr. Wilcox. If I might, Senator?
Senator Shelby. Yes.
Mr. Wilcox. That does presume that the credit union is
paying the dividends to the members. I am a Subchapter S bank.
I was a C corporation before we were allowed to take that
election. With the election come many restrictions, and we
chose to operate within those confines. However, whether or not
the Subchapter S makes a dividend distribution to its
shareholders, the tax must be paid, period. So even if the
holding company or the bank does not make that distribution----
Senator Shelby. Tax on earnings, would it not?
Mr. Wilcox. That is correct. Whether or not the
shareholders receive a dividend check from a Subchapter S bank,
the shareholders pay the tax every quarter.
Senator Shelby. If there are some earnings.
Mr. Wilcox. Right.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Johnson. I want to thank the witnesses for this
testimony on this issue. As we have seen, the views on these
issues are varied, and I think today's hearing yielded some
good information for us to review as we consider this issue
going forward.
Thanks again to my colleagues and our panelists for being
here today. This hearing is adjourned.
[Whereupon, at 11:26 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
I want to welcome and thank our witnesses for being here today to
testify on the issue of credit union member business lending.
Under the Federal Credit Union Act, credit unions are limited in
the amount of business lending they are permitted to engage in. The
aggregate amount of member business loans made by a credit union is
restricted to the lesser of 1.75 times the credit union's net worth, or
12.25 percent of the credit union's total assets. The member business
lending cap was put in place in 1998 with the passage by Congress of
the Credit Union Membership Access Act.
Since that time, the credit union industry has advocated for a
removal of, or increase in, the business lending cap. Senator Mark
Udall has introduced legislation that would raise the cap to 27.5
percent of total assets.
There is a wide range of views on this matter, especially as
Congress considers proposals to speed the economic recovery.
I think that it is important that we take the time to examine this
issue here in Committee, and provide the opportunity for all sides to
fully express their views on the subject.
______
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Thank you, Mr. Chairman, historically, credit unions have focused
on meeting the savings and credit needs of their members, especially
people of modest means. In recognition of this unique role, credit
unions, unlike banks, have been tax-exempt.
Today, the Committee will examine whether credit unions should be
allowed to lend to businesses. This is not the first time the issue of
business lending by credit unions has come before this Committee.
In 1998, this Committee passed, and Congress eventually enacted,
legislation that placed significant restrictions on business lending by
federally insured credit unions.
At that time, the number of business loans made by credit unions
was quite small. In fact, a report of this Committee that accompanied
that legislation acknowledged that consumer loans made up nearly 99
percent of all credit union lending.
Nevertheless, Congress limited business lending in order to prevent
excessive risk-taking by credit unions.
A report by the National Credit Union Administration had found that
business lending caused half of the losses to the National Credit Union
Share Insurance Fund in the 2 prior years.
Additionally, in 1991 another report found that failing credit
unions had made more business loans than other credit unions.
Now, the ongoing credit crisis has prompted some to propose
increasing the business lending limit.
The credit crunch is a problem of concern to us all.
As we examine this issue, however, we should first ask why credit
is so hard to obtain.
In particular, how has the Dodd-Frank Act affected credit
availability?
Alternatively, is the unprecedented Federal deficit crowding out
private sector lending?
If we want to address the problem of credit availability to small
businesses, a more comprehensive approach may be appropriate.
In addition, we should ask how changing business lending limits
would affect the safety and soundness of credit unions.
Even with the current limitations on business lending, we continue
to see credit union failures.
Recently, the NCUA announced the 13th closure or conservatorship of
a credit union this year. Over the last 2 years, 55 credit unions have
failed.
I hope to learn today whether business lending was a contributing
factor in any of these failures.
Changing the business lending limitations can alter the competitive
landscape not only between banks and credit unions, but also among
credit unions.
Although they are not here today, we will need to hear from the
bank regulators so that we can fully understand the effect such a
change would have on the entire industry.
Ultimately, healthy and strong credit unions are good for our
economy and consumers. It is my hope that today's hearing will shed
more light on how we can ensure that credit unions continue to serve
their unique and important role in the Nation's economy.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
Thank you Mr. Chairman. I want to thank you for holding this
important hearing, on an issue I have cared deeply about for some time
now: lifting the artificial restraints we currently place on the
ability of credit unions to help small businesses access much-needed
credit.
As we heard in testimony from Chairman Matz and Mr. Cheney today,
credit unions have been engaged in member business lending since their
creation. And only since 1998 have they been subject to this arbitrary
cap on their business lending, which effectively limits each credit
union's business lending to no more than 12.25 percent of their total
assets.
In the past two Congresses I have introduced bills that would raise
or eliminate this cap. Last Congress, my good friend from Colorado,
Senator Mark Udall, took up the cause with a bill to raise the cap to
27.5 percent of total assets as long as certain criteria to ensure
safety and soundness are met. He has reintroduced his bill this
Congress, with bipartisan support and a total of 19 cosponsors,
including Senators Reed and Brown on the Banking Committee.
I want to say a few words about the bill and encourage all of my
colleagues to support this commonsense way to immediately increase the
amount of credit available to small businesses--at no cost to the
taxpayer.
We just came through the worst credit crunch any of us have ever
seen, and access to credit is still a significant issue for small
businesses in NY and all over the country. Even through the downturn,
credit unions have continued to increase their business lending, but
they are limited in their ability to do more. Senator Udall's bill will
provide a much-needed boost to help small businesses expand and hire.
In the Fall, Congress passed, and the President signed into law, a
bill to help small businesses that included a $30 billion fund to help
community banks increase their lending to small businesses. I strongly
supported the creation of that Small Business Lending Fund, but Senator
Udall and I and others fought to include his legislation for credit
unions in that bill. We ultimately did not prevail. Well, nearly 9
months later that $30 billion fund has barely been put to work.
I hold out hope that the Fund will be put to good use easing the
burden on small businesses, but credit unions are waiting to fill the
gap, and I don't see why we should unnecessarily limit ourselves--
credit unions are an important source of credit for individuals and
small businesses in this country, and it's important that we ask what
they can do to help get our economy grow again.
When the idea for the Member Business Lending bill was originally
proposed, some concerns were raised about safety and soundness of the
credit unions themselves, their members, and the credit unions'
insurance fund. So my office worked with Senator Udall's staff and the
Treasury and NCUA to come up with a plan that would address those
concerns.
First, the cap is only raised for credit unions that meet
strict eligibility criteria. To qualify, credit unions must be
well capitalized, demonstrate sound underwriting and servicing
based on historical performance, have strong management and
policies to manage increased lending, and be approved by their
regulator for the higher cap.
They must also be at or above 80 percent of their current
cap, with 5 or more years of experience lending to member
businesses. This means that only credit unions with significant
experience lending to small businesses will have their cap
raised, and it is targeted at those credit unions most likely
to expand their lending because they are at or near the
existing cap.
Even if they meet the criteria, credit unions can't grow
their lending by more than 30 percent in any 1 year, and their
regulator can make them grow even slower. That will ensure that
credit unions don't grow their business faster than they can
handle.
Based on conservative estimates, this amendment could lead directly
to over $12 billion in new lending and create up to 140,000 new jobs.
In my home State of New York, it could create over $1 billion in new
lending and up to 9,000 new jobs. And it does all that at NO COST to
the Federal Government.
Certainly this is not a cure-all for our economy. But with small
businesses still struggling to get the credit the need, it seems to me
that we should be trying everything we can to increase lending. And
this amendment does it in a sensible way, to ensure safety and
soundness are preserved in the system, and, I repeat, without costing
any taxpayer money.
In short, this just makes sense and I urge my colleagues to support
the legislation sponsored by my friend from Colorado.
PREPARED STATEMENT OF DEBORAH MATZ
Chairman, National Credit Union Administration
June 16, 2011
PREPARED STATEMENT OF BILL CHENEY
President and Chief Executive Officer, Credit Union National
Association
June 16, 2011
PREPARED STATEMENT OF NOAH WILCOX
President and Chief Executive Officer, Grand Rapids State Bank, on
behalf of Independent Community Bankers of America
June 16, 2011
Opening
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, I am Noah Wilcox, fourth generation President and CEO of
Grand Rapids State Bank and a member of the Executive Committee of the
Independent Community Bankers of America. Grand Rapids State Bank is a
State chartered community bank with $236 million in assets located in
Grand Rapids, Minnesota. I am pleased to represent community bankers
and ICBA's nearly 5,000 members at this important hearing on credit
union member business lending.
ICBA appreciates this opportunity to testify on legislation (S.
509) that would expand credit union powers by raising the cap on member
business loans as a percentage of assets. We strongly oppose the Small
Business Lending Enhancement Act. Congress should not expand credit
union business lending powers unless it is also prepared to tax credit
unions and require them to comply with the Community Reinvestment Act.
The credit union tax exemption is directly linked to and can only be
justified by their original mission of serving individuals of modest
means. Any expansion of their powers beyond the original mission should
result in the loss of their tax exemption.
I want to make clear that community bankers strongly support
locally based nonprofit organizations. I have served on a number of
nonprofit boards, including the Grand Rapids Area Community Foundation
and the Itasca County Family YMCA. Many of my community bank colleagues
perform similar service. These nonprofits justify their tax exemption
by serving a public mission. Our concern is that credit unions, having
strayed far from their statutory mission, are abusing their tax exempt
status and are seeking to go even farther.
This topic is not in the least abstract for me. For my bank, credit
union business lending represents an immediate threat. I'm happy to
compete with other tax-paying lenders, even large banks, but the credit
union tax exemption creates an unfair advantage and distorts the
market. I have very aggressive credit unions in my market. On countless
occasions, I've lost business lending opportunities with established
customers to credit unions who underpriced my competitive rates. Just
last Friday, as I was preparing for this hearing, a longtime customer,
with both personal and commercial lending relationships, told me they
were taking three loans to two different credit unions. One of the
loans was a loan on real estate for development that the credit union
priced about 400 basis points less than our rate, which is competitive.
This rate is even lower than can be accounted for by the tax advantage,
suggesting that the credit union, inexperienced in business lending,
did not appropriately price the risk. The second loan is a small
commercial loan. And the third loan is a mortgage on the borrower's
residence, on which, though it does not qualify for the secondary
market, the credit union, has offered a rate in the mid- 3-percent
range.
S. 509 would allow the NCUA to approve member business loans that
raise a credit union's total amount of outstanding loans to 27.5
percent of assets--more than double the current cap of 12.25 percent.
The current cap was established in 1998 as part of the Credit Union
Membership Access Act, which completely undermined the original
``common bond'' requirement for credit union customers. The 1998 law
reversed a recent Supreme Court decision and allowed credit unions to
serve a customer base with multiple common bonds. Because the law made
the common bond requirement nearly meaningless, the member business
lending cap was deemed especially important to maintain a distinction
between credit unions and banks. The 12.25 percent cap was not chosen
arbitrarily but was intended to ensure that commercial lending would
comprise no more than a marginal part of a credit union's lending.
The credit unions have portrayed S. 509 as an effort to make more
credit available for small businesses. The truth is that only a small
number of credit unions are at or near the current member business
lending cap--we estimate this number to be about 0.5 percent of the
approximately 7,400 credit unions. Over 70 percent of credit unions
report no member business loans at all. Those credit unions that are at
or near the cap are the largest and most complex credit unions, and the
business loans they make are often multimillion dollar, speculative,
commercial loans--not small business loans. There is ample capacity for
the remaining 99.5 percent of credit unions to expand their member
business lending. The fact that only 4.5 percent of credit union assets
are invested in commercial loans--a figure cited by advocates of S.
509--does not suggest that the current cap of 12.25 percent is too low.
What's more, there are numerous exceptions to the member business
lending cap, including:
Any loan of less than $50,000;
Small Business Administration loans, including 7(a) and 504
SBA loans of up to $5 million;
Nonmember loans and loan participations purchased from
other credit unions;
Loans made by any credit union grandfathered by the 1998
law because they had a history of making business loans or were
chartered for the purpose of making business loans;
Loans made by low income or community development financial
institutions; and
Loans secured by the borrower's primary residence.
With regard to this last exception, I note that some of the
examples of supposed commercial credit union loans cited by advocates
of S. 509 are actually loans secured by the borrower's residential
mortgage, which are not subject to the cap. These loans are not small
business loans based on the lender's understanding of the business's
cash flow, debt coverage, and other factors that go into commercial
credit underwriting. Rather, they are second mortgages based on the
home's value as collateral should the business fail--a type of lending
that is irresponsible at best.
S. 509 is not driven by the need to bring credit to small
businesses. It is driven by a small number of credit unions who want to
increase their assets and their revenues while still enjoying their
tax-exempt status.
Credit Unions Lack Expertise in Commercial Lending
What's more, commercial lending is not for novices. It takes many
years of experience and a firm grasp of the commercial environment to
properly evaluate a business loan application, to value the collateral,
and to understand the risk and price accordingly. Credit unions lack
the experience and the expertise to safely conduct commercial lending,
and their regulator, the NCUA, lacks experience in supervising
commercial lending. I recognize that S. 509 includes provisions that
are intended to ensure that credit unions have a track record--however
limited--in commercial lending. These provisions are inadequate and
leave too much discretion to the NCUA. As we emerge from the financial
crisis and economic recession, this is the wrong time to jeopardize the
safety and soundness of our financial system.
Credit Unions Not Fulfilling Their Tax-Exempt Mission
The purpose of the cap on member business loans established by the
1998 law was to ensure credit unions would focus on serving members of
modest means, not commercial lending. Numerous independent studies have
concluded that credit unions are not fulfilling their core mission.
A 2005 study by the National Community Reinvestment Coalition
determined that banks do a better job of fulfilling the credit unions'
mission than the credit unions. The study highlighted how banks
``consistently exceed credit unions' performance in lending to women,
minorities, and low and moderate-income borrowers and communities.'' A
2003 Government Accountability Office study found that credit unions
serve a more affluent clientele than banks. This GAO study concluded
that ``credit unions overall served a lower percentage of households of
modest means than banks.''
Another study by the Woodstock Institute concluded that credit
unions serve a higher percentage of middle and upper-income customers
than lower-income households. Similarly, a study by the Virginia
Commonwealth University concluded that credit unions tend to serve a
higher proportion of wealthier households in their customer base.
The recent push by many credit unions into payday lending makes a
travesty of their original tax-exempt mission. A recent investigation
conducted by the Washington Post documents credit union payday lending
abuses. While many credit unions offer short term, small dollar loans
under reasonable terms, some credit union products are nearly as
predatory as those offered by a store front check casher. The Post
identified at least 15 credit unions that offer high cost loans closely
resembling payday loans. In particular, some credit unions earn
commissions by acting as fronts for third party lenders with names such
as ``QuickCash'' and ``CU on Payday.''
Credit unions' involvement in a Florida real estate investment
scheme, dubbed ``Millionaire University,'' illustrates just how far
credit unions have strayed from their original tax-exempt mandate to
serve low and moderate income families and into risky business loans.
In this scheme a number of credit unions granted speculative out-of-
market land development loans to residents from far away States.
Borrowers became credit union ``members'' by paying a $5 dollar
membership fee. Three of those credit unions failed. What original
members were served in their home States of Colorado and Michigan when
these credit unions made risky loans on Florida real estate? Congress
cannot allow tax-exempt credit unions so stray even further into such
risky business lending endeavors by increasing the business lending cap
while remaining subsidized by taxpayers.
Congress explicitly placed limits on the types of lending tax-
exempt credit unions can do for a good reason--so credit unions can
focus their efforts on serving people of modest means that share a
common bond. This is not only better for local communities; it is also
a much safer form of lending.
Credit Union Lending Comes at a Significant Cost to Taxpayers
The neglect of credit unions' original mission is unfair to the
people credit unions were intended to serve; it's unfair to taxpaying
community banks, but it's also unfair to all taxpayers. Some advocates
of S. 509 claim that expanded credit union commercial lending would
come at ``no cost to taxpayers.'' This is patently false. Lending by
tax-exempt credit unions displaces lending by taxpaying banks, and
thereby reduces tax revenue to the Government. In light of the urgent
need to reduce the Federal budget deficit, we must consider the cost-
benefit analysis of the credit union tax exemption.
The most comprehensive analysis of the credit union's Federal tax
exemption was undertaken by the nonpartisan Tax Foundation in 2005.
This analysis considered not only the cost of the tax subsidy, but what
happens to the tax subsidy--i.e., whether and to what extent it is
passed on to customers--and the effect of the subsidy on the
marketplace for financial services. The Tax Foundation found that:
The value of the tax subsidy was $2 billion in 2003--and
growing to over $3 billion annually today. This included not
only the direct tax expenditure that resulted from not taxing
the net revenue of credit unions, but the indirect effect on
tax revenues of a less competitive marketplace for financial
services. This is a more comprehensive analysis of the tax
subsidy than is provided by the Joint Committee on Taxation and
the Office of Management and Budget, which consider only the
static tax expenditure and exclude behavioral changes in the
marketplace. Still, JCT and OMB also confirm the dramatic
growth of the tax expenditure in recent years.
The subsidy would cost the taxpayer over $32 billion over a
10-year budget window.
The subsidy boosted the return on assets, for the average
credit union, by 50 basis points.
Of those 50 basis points, only a meager 6 basis points are
passed onto customers in the form of lower interest rates on
loans. There is little to no effect on deposit rates. Eleven
basis points are absorbed by higher labor costs at a credit
union than at a comparable bank (due to inefficiencies).
The remaining 33 to 44 basis points of subsidy accrue to
the credit union owners in the form of higher equity and larger
assets they use to expand rapidly.
In summary, the Tax Foundation study shows that credit unions
generally do not pass on their subsidy to customers. However, the
competitive threat to community banks comes from the fact that credit
unions have the option to use the subsidy to secure business they want.
This is what I see repeatedly in my business. The credit union loan
that I mentioned earlier, that was underpriced by 400 basis points, was
surely made possible by the tax subsidy, and perhaps a failure to
adequately evaluate the risk. Given the projected growth in the Federal
budget deficit in the coming years and the threat it poses to our
national prosperity, we can no longer afford a tax subsidy divorced
from its original purpose that generates no public benefit and poses a
threat to tax-paying community banks. This view is also shared by the
Debt Reduction Task Force of the Bipartisan Policy Center, Chaired by
former Senator Pete Domenici and former OMB Director Alice Rivlin,
whose recent report recommends eliminating the tax exemption for credit
unions. In addition, the Congressional Budget Office, in its annual
``Budget Options'' report, noted the option of taxing large credit
unions. Any serious effort to reduce the deficit must consider the
merits of repealing the credit union tax exemption. While I have
focused my comments on the Federal budget, the credit union tax
exemption also deprives State and local governments, many of which are
facing cuts to essential public services to remain solvent, of
desperately needed revenue.
The recent bailout of corporate credit unions further demonstrates
the fundamental unfairness of the tax exemption. On September 24, 2010,
three corporate credit unions were taken into conservatorship by the
NCUA, bringing the total to five over a period of 18 months. Seventy
percent of corporate credit unions assets were held under
conservatorship. The corporate credit unions had invested in $50
billion of subprime, private label, mortgage-backed securities, a
failure of prudent lending illustrating that their judgment seems to
have been no better than that of the Wall Street banks that also had to
be bailed out. Had NCUA not intervened with the provision of a
taxpayer-funded backstop, consumer credit unions would have suffered
system-wide losses of an estimated $40 billion and as many as 30
percent of Federal credit unions would have failed, according to NCUA
estimates. Credit unions benefit from taxpayer resources when times are
rough, but they do not contribute when they are profitable. This is an
affront to taxpayers and to the community banks that sustain their
communities and the Nation with hard-earned tax dollars. Community
banks pay their fair share; credit unions should be held to the same
standard.
The case for repealing the exemption stands on its own merits as a
deficit reduction measure. When considered in the context of the
current effort by credit unions to expand their business lending powers
and become the equivalent of banks, linking expanded lending powers to
repeal of the tax exemption is a matter of fairness and free market
principle. If credit unions seek to have no distinct business model
verses commercial banks than Congress must tax them under any equitable
tax system.
Credit Unions Could Convert to Mutual Thrifts
The implicit reason for expansion of member business lending
proposed in S. 509 appears to be that the current credit union charter
is inadequate for the needs of some credit unions and their customers.
However, ICBA believes that there is a far more appropriate alternative
for them. If they need bank powers to better serve their customers,
they should be encouraged to convert to a Federal savings association
charter. Over 30 credit unions have taken advantage of this option,
despite the substantial roadblocks that the National Credit Union
Administration has put in the way of credit union-to-thrift
conversions.
Conclusion
Thank you again for convening this important hearing. As a
community banker, I feel the direct impact of credit union commercial
lending, so I'm grateful for the opportunity to provide my perspective.
ICBA strongly urges this Committee to reject calls for new powers
for the tax-subsidized credit union industry that will not, despite
assertions to the contrary, expand small business credit or create
jobs. ICBA adamantly opposes S. 509 as an unjustified and unfair credit
union power grab at the expense of taxpaying community banks and
individuals. Credit unions should be granted no new powers as long as
they remain tax exempt and are not even meeting their statutory mission
to serve individuals of modest means.
Thank you for this opportunity to testify and express the views of
the community banking sector.
______
PREPARED STATEMENT OF MICHAEL LUSSIER
President and Chief Executive Officer, Webster First Federal Credit
Union, on behalf of the National Association of Federal Credit Unions
June 16, 2011
Introduction
Good morning, Chairman Johnson, Ranking Member Shelby, and Members
of the Committee. My name is Mike Lussier and I am testifying today on
behalf of the National Association of Federal Credit Unions (NAFCU)
where I currently serve as Chairman of the Board of Directors. I
appreciate the opportunity to share my views with the Committee on
credit unions and member business lending. I have served as President/
CEO of Webster First Federal Credit Union (Webster First),
headquartered in Worcester, Massachusetts, since 1990. I earned my
Bachelor's of Business Administration, majoring in Accounting from
Bentley College and my Master's of Finance from Nichols College.
Webster First is a community credit union with over 44,000 members
and more than $570 million in assets. Founded as a Polish-ethnic credit
union in January of 1928, Webster First changed to a community credit
union in 1956 and became federally chartered in 1995.
Throughout my career, I have been active in the credit union
community. Prior to my chairmanship, I served on the Executive
Committee of the NAFCU Board. Additionally, I have been a member of the
Small Business Loan Review Board, was a Director for the Credit Union
League of Massachusetts Insurance Agency, and served as Chairman of the
Massachusetts Share Insurance Corporation Board.
As you may know, NAFCU is the only national organization that
exclusively represents the interests of the Nation's federally
chartered credit unions. NAFCU is comprised of nearly 800 member owned
and operated Federal credit unions. NAFCU member credit unions
collectively account for approximately 62 percent of the assets of
federally chartered credit unions. NAFCU and the entire credit union
community appreciate the opportunity to participate in this discussion
regarding member business lending and allowing credit unions to further
assist in the economic recovery.
Historically, credit unions have served a unique function in the
delivery of necessary financial services to Americans. Established by
an act of Congress in 1934, the Federal credit union system was
created, and has been recognized, as a way to promote thrift and to
make financial services available to all Americans, many of whom would
otherwise have limited access to financial services. Congress
established credit unions as an alternative to banks and to fill a
precise public need--a niche that credit unions fill today for nearly
93 million Americans.
Every credit union is a cooperative institution organized ``for the
purpose of promoting thrift among its members and creating a source of
credit for provident or productive purposes.'' (12 USC 1752(1)). While
more than 75 years have passed since the Federal Credit Union Act
(FCUA) was signed into law, two fundamental principles regarding the
operation of credit unions remain every bit as important today as in
1934:
Credit unions remain totally committed to providing their
members with efficient, low cost, personal service; and
Credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism.
Credit unions are not banks; they are better. The Nation's
approximately 7,200 federally insured credit unions serve a different
purpose and have a fundamentally different structure than banks. Credit
unions exist solely for the purpose of providing financial services to
their members--while banks aim to make a profit for a limited number of
shareholders. As owners of cooperative financial institutions united by
a common bond, all credit union members have an equal say in the
operation of their credit union--``one member, one vote''--regardless
of the dollar amount they have on account. These singular rights extend
all the way from making basic operating decisions to electing the board
of directors--something unheard of among for-profit, stock-owned banks.
Unlike their counterparts at banks and thrifts, Federal credit union
directors generally serve without remuneration--a fact epitomizing the
true ``volunteer spirit'' permeating the credit union community.
Credit unions continue to play a very important role in the lives
of millions of Americans from all walks of life. As consolidation of
the commercial banking sector has progressed with the resulting de-
personalization in the delivery of financial services by banks, the
emphasis in consumers' minds has begun to shift not only to services
provided but also--and in many cases more importantly--to quality and
cost. Credit unions are second to none in providing their members with
quality personal service at the lowest possible cost.
Although it is not the subject of this hearing today, I would be
remiss if I did not personally thank Senators Tester and Corker, and
those who supported their recent efforts to try to bring needed changes
to the Durbin debit interchange price-control provision that was added
to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Like
member business lending, this issue is of great importance to credit
unions and the consumers they serve, as it will have a direct impact on
the ability of credit unions to meet the needs of their membership.
Background on Credit Union Member Business Lending and the Arbitrary
Cap
When Congress passed the Credit Union Membership Access Act (CUMAA)
(P.L. 105-219) in 1998, they put in place restrictions on the ability
of credit unions to offer member business loans. Congress codified the
definition of a member business loan and limited a credit union's
member business lending to the lesser of either 1.75 times the net
worth of a well-capitalized credit union or 12.25 percent of total
assets. Also, pursuant to section 203 of CUMAA, Congress mandated that
the Treasury Department study the issue of credit unions and member
business lending.
In January 2001, the Treasury Department released the study,
``Credit Union Member Business Lending'' and found the following:
`` . . . credit union's business lending currently has no
effect on the viability and profitability of other insured
depository institutions.'' (p. 41). Additionally, when
examining the issue of whether modifying the arbitrary cap
would help increase loans to businesses, the study found that
`` . . . relaxation of membership restrictions in the Act
should serve to further increase member business lending . . .
'' (p. 41).
CUMAA also established, by definition, that a business loan of
$50,000 and above is a member business loan that counts toward the cap.
This number was not indexed and has not been adjusted for inflation in
the nearly 13 years since enactment, eroding the de minimis level.
Where many vehicle loans or small lines of credit may have been
initially exempt from the cap in 1998, many of those that meet the
needs of small business today, are now included into the cap due to
this erosion. To put this in perspective relative to inflation since
1998, what cost $50,000 in 1998 costs $69,000, using the May consumer
price index data. That is a 38 percent rate of inflation change that is
completely ignored by current law and which greatly hamstrings a credit
union's ability to meet its members' needs.
Many in the banking community who oppose the aid to small business
that changes to the cap would bring often try to cite safety and
soundness issues with credit unions and business lending. Perhaps the
better question would be whether a number of banks should be making
commercial business loans. An examination of 1st quarter 2011 call
report data shows that credit unions with MBL's have the same
annualized net charge-off rate for business loans (1.12 percent) as
commercial lending banks. Furthermore, they are actually better
equipped for the charge-offs as they have a higher coverage of
delinquent loans with their allowance account (101.72 percent) than
those commercial lending banks (57.85 percent). NAFCU would welcome the
opportunity to appear before the Committee on a hearing on this topic
examining the banks.
The banking industry also argues that the credit union MBL cap
should not be raised due to the credit union Federal tax exemption.
What the banking industry conveniently forgets to mention is that a
large number of banks do not pay corporate Federal income tax because
of their Subchapter S status. There are approximately 2,377 Subchapter
S banks that avoid Federal income taxes today. What the banking trades
don't want you to know, is that one estimated value of the Subchapter S
Federal tax break for banks is $2.05 billion for 2010, which is
actually greater than the estimated value of the entire credit union
tax expenditure ($1.27 billion) for FY2010 as included in the
President's FY2012 budget message. Perhaps the issue the Committee
should be holding hearings on is the unfair advantage banks have over
credit unions due to their Subchapter S Federal tax break.
The Arbitrary Cap Today
Credit unions have been critical in helping our country recover
from the financial crisis, and members of Congress on both sides of
aisle recognize that they were not the cause of it. Many credit unions
have capital to lend small businesses across the country and are in a
position to further assist in recovery efforts. However, due to the
outdated and arbitrary member business lending cap, their ability to
help stimulate the economy by providing credit to small businesses is
hampered. Removing or modifying the outdated and arbitrary credit union
member business lending cap would help provide needed economic
stimulus.
Some short-sighted critics claim that only a limited percentage of
credit unions are actually at the arbitrary member business lending cap
and therefore nothing needs to be done. This view fails to see the big
picture of how the arbitrary cap acts as a deterrent for efforts to
increase business lending and create American jobs. Successful business
lending programs like ours at Webster First often require investment in
human and other resources by the institution. Those credit unions that
have some member business lending but are not near the cap, have an
artificial disincentive in the arbitrary cap, because, if they are
successful in growing and expanding their business lending program,
they will ultimately reach this arbitrary barrier forcing them to scale
down what they invested in to build up.
Member Business Lending at Webster First FCU
Webster First has been at the outdated and arbitrary credit union
member business lending cap for almost a year now. On the business
lending side, we offer numerous products including real estate loans,
lines of credit, small business equipment loans, auto and truck loans,
and a few small stores that do floor plans. We have a well diversified
portfolio with minimal delinquencies. Our commercial losses have also
been minimal as we have a sincere and devoted membership.
At Webster First, we understand that member business lending is not
about credit unions, but about helping small businesses and the jobs
they create. It is unfortunate that we cannot handle all the requests
we receive due to the outdated and arbitrary member business lending
cap. It is with our liquidity, strong surplus, and experienced staff,
that Webster First could continue to help the small businesses in our
community, many of which feel threatened and treated unfairly by other
institutions.
Webster First has made some great in-roads into business lending
and has assisted multiple families and businesses in becoming quite
successful. For example, we helped an individual purchase an older gas
service station from his parents. He was able to upgrade all his pumps,
computer services, and revamp his store. It now includes a coffee shop,
package store, and a 10 pump service station. His success allowed him
to then upgrade the unused property behind the station for storage
rental units which quickly became 90 percent utilized. He recently sold
the property for a substantial profit and has now acquired other
properties to expand his business. As the Committee knows, business
expansion means job creation.
We have assisted many real estate owners who own multifamily units
in refinancing their existing mortgages from other institutions. These
institutions refuse to allow them to rewrite due to the fear that real
estate values have not hit bottom. Many of these property owners have
plenty of cash, net worth and positive cash flow, but the banks they
approached for financing declined the entrepreneurs' requests and would
not work with them. We put them through an intensive analysis, document
their credit and payment history, and have been able to revive the
possibility of continued ownership via lesser rates, smaller payments,
and continued positive cash flow.
Recently, Latino radio station owner wanted to expand his radio
station ownership to acquire some local radio stations in order to
better accommodate the Latino market in Worcester. Because of the risk
associated with radio stations, many banks would not consider his
request. We reviewed the contracts, cash flows, equity position, and
collateral, and were able to finance his dream. He is now the largest
Latino radio station owner in all of Massachusetts. We have not only
assisted this individual, but in working with him, we were also able to
increase our marketing and business opportunities within the under-
banked community. We have since put a credit union branch in this
underserved area.
One of the newest areas we have been able to enter is small-town
downtown rehabilitation. We recently hired an individual who is well
versed in SBA lending. He is attempting to assist those within our
community who may be better served by using our products along with SBA
products. As the Committee is aware, guaranteed portions of SBA loans
do not count toward the outdated and arbitrary credit union member
business lending cap. As the arbitrary cap has hamstrung our efforts to
meet the member business lending needs of our membership, SBA loans
have at least offered some alternative until the outdated and arbitrary
restrictions can be changed.
Credit Union Member Business Lending Legislation in the 112th Congress
In March 2011, Senator Mark Udall of Colorado introduced bipartisan
legislation, the Small Business Lending Enhancement Act (S.509), which
would raise the arbitrary credit union member business lending cap to
27.5 percent of total assets, up from 12.25 percent, and help stimulate
the Nation's struggling economy by increasing access to credit for
small business owners. This important legislation has 19 Senate
cosponsors, including Majority Leader Reid. Identical legislation (H.R.
1418) has been introduced in the House by Representative Ed Royce of
California.
The Small Business Lending Enhancement Act is a well thought out
solution that includes important provisions to ensure that safety and
soundness concerns are addressed. This bill is not about helping credit
unions, it is about helping small businesses.
In order to see its cap increased, a credit union would need to
meet strict eligibility requirements to gradually increase its member
business lending portfolio, including: being well capitalized
[currently at least a 7 percent net worth ratio]; having at least 5
years of member business lending experience; must be at or above 80
percent of the current 12.25 percent cap for at least 1 year before
applying; and, must be able to demonstrate sound underwriting and
servicing based on historical performance and strong management. The
requirements in this legislation mirror those sought by Senator Mark
Udall last year, when his efforts were endorsed by Treasury Secretary
Timothy Geithner and NCUA Chairman Debbie Matz.
As evidenced by the strict eligibility requirements outlined above,
the Small Business Lending Enhancement Act was specifically tailored to
address concerns that raising the current cap could somehow create
safety and soundness issues.
Unlike efforts enacted by Congress to provide $30 billion to
promote business lending at community banks, it is worth noting that
raising the arbitrary and outdated member business lending cap for
credit unions only scores at a cost of $77 million over 5 years
according to a 2010 CBO estimate. Furthermore, this cost does not take
into account added tax revenue that would be gained from the jobs
created by enacting this legislation. This pales in comparison to the
price tag for what Congress did for the community banks in the last
Congress when the Small Business Jobs Act created a $30 billion ``Small
Business Lending Fund'' (SBLF) with the intention of encouraging
community banks to lend to small businesses. To date the program has
created very few if any jobs, and has done little to spur economic
growth for its $30 billion price tag. Furthermore, it has been reported
that only about 30 percent of eligible banks have expressed interest in
participating. During recent hearings in the Senate Small Business
Committee, it came to light that a large number of the banks that have
applied for the program also received taxpayer funds from the Troubled
Assets Relief Program (TARP). Clearly this effort to promote business
lending at community banks has had a lack of success.
Credit unions stand ready to do their part in continuing to assist
America's small businesses. Failing to consider legislation to raise
the arbitrary member business lending cap last Congress was a missed
opportunity to further assist small business and help move the economy
in a positive direction. NAFCU and its member credit unions ask that
the Small Business Lending Enhancement Act be considered by the Banking
Committee and on the Senate floor as soon as possible.
Conclusion
The artificial credit union member business lending cap established
in 1998 is arbitrary and outdated. The need for such a cap was
questioned by the Treasury Department as far back as 2001. While NAFCU
believes that no statutory cap should be in place, a number of credit
unions like mine, and the millions of members we serve, would benefit
from the enactment of the Small Business Lending Enhancement Act. This
legislation would provide a practical and well-thought out approach to
raising the arbitrary threshold, while addressing concerns about rapid
growth and safety and soundness. NAFCU would also support raising the
de minimis $50,000 definition of a member business loan as it has
eroded upon enactment last century.
We thank you for your time and the opportunity to testify before
you here today on this important issue to credit unions and our
Nation's economy. I would welcome any questions that you may have.
______
PREPARED STATEMENT OF STEPHEN P. WILSON
Chairman and Chief Executive Officer, LCNB National Bank, on behalf of
the American Bankers Association
June 16, 2011
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, the American Bankers Association appreciates the opportunity
to testify at the Senate Banking Committee hearing entitled ``Credit
Unions: Member Business Loans.'' The American Bankers Association (ABA)
represents banks of all sizes and charters and is the voice for the
Nation's $13.4 trillion banking industry and its two million employees.
ABA is strongly opposed to recent efforts by the credit union
industry to redefine the credit union charter in ways that would
effectively turn credit unions into tax-exempt banks. This effort, most
recently embodied in S. 509, the ``Small Business Lending Enhancement
Act of 2011,'' would allow the NCUA to permit credit unions that are
within 80 percent of their member business lending (MBL) cap to
increase this cap and take on significantly more business lending. This
would allow a new breed of credit union institutions to more
aggressively pursue business customers through large commercial and
real estate loans. It would also serve as an invitation to credit
unions that are not near this cap now to focus on business lending--to
the exclusion of consumer lending--in order to be eligible for an
increase in their business lending cap.
Under current law, credit unions have an aggregate MBL cap of 12.25
percent of assets. Business loans under $50,000 do not count against
this cap of 12.25 percent, nor do many other types business loans--
leaving ample room for credit unions to carry out their business
lending strategy. There is a limitation on business lending, because
credit unions are tax exempt and this tax exemption is meant to be
targeted at people of small means.
S. 509 would increase the aggregate business loan cap for
qualifying credit unions to 27.5 percent of assets--more than double
the current cap, and greater business lending authority than Federal
thrifts. Thrifts are currently limited to 20 percent of total assets,
provided that amounts in excess of 10 percent of total assets may be
used only for small business loans. Credit unions would be allowed to
further leverage their tax advantage and compete directly with tax-
paying banks.
Furthermore, S. 509 does nothing to protect members' interests with
regard to consumer loans, which would necessarily diminish over time as
credit unions add business lending. In other circumstances where a
credit union will move its focus away from consumer lending, NCUA
requires ``a clear and conspicuous disclosure'' of this change. NCUA's
own regulations governing the conversion of a credit union to a mutual
savings bank have greater protection of members' interests regarding
consumer loans than S. 509. NCUA regulations require:
a clear and conspicuous disclosure of how the conversion from a
credit union to a mutual savings bank will affect the
institution's ability to make non- housing-related consumer
loans because of a mutual savings bank's obligations to satisfy
certain lending requirements as a mutual savings bank.
A credit union that applies and receives the authority to increase
business lending under S. 509 almost certainly would reduce its non-
housing-related consumer loans. However, the bill does not require the
credit union to notify members in a clear and conspicuous manner that
they could see a reduction in consumer loans. And the bill does not
require the members of a credit union to approve in the affirmative an
expansion in business lending, an action that would essentially create
a tax exempt bank. Credit unions that seek a mutual savings bank
charter must both mail such a disclosure to their members and have an
affirmative vote.
Make no mistake about it, S. 509 is nothing less than legislation
that would allow a credit union to look and act just like a bank,
without the obligation to pay taxes or have bank-like regulatory
requirements, such as the Community Reinvestment Act, applied to them.
Provisions included in S. 509 that try to safeguard this high-risk form
of lending are not the issue; rather, the issue is that credit unions
have a limited charter, focused on people of small means, for which
credit unions have a tax exemption.
Members of Congress have recognized this fundamental problem. As
Senator Kerry (D-MA) stated from the Senate floor, credit unions ``were
never intended to be simply alternative, tax-exempt commercial banks.''
\1\ Other senators have agreed. \2\
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\1\ Congressional Record, July 28, 1998, S 9095.
\2\ Congressional Record, July 28, 1998, S 9019.
---------------------------------------------------------------------------
Indeed, there is a strong legislative history that supports the
unique charter of credit unions with very specific restrictions on
business lending. These restrictions were put in place to protect
credit unions from lending that could pose serious threats to safety
and soundness. In addition, they were put in place to ensure that
credit unions remained primarily focused on individuals. Even so, the
law has always made a place for MBL, although with specific
restrictions to keep credit unions focused on the task at hand. In the
last debate in 1998 over what that level should be, Senator Reed (D-RI)
expressed reservations about the hole that the exemption of loans under
$50,000 would create:
I am concerned that loans under $50,000 would not be counted
toward the 12.25 percent cap. As a result, it is possible that
credit unions could engage in commercial lending to a much
greater extent than the limit imposed in the bill. \3\
[emphasis added]
---------------------------------------------------------------------------
\3\ Senate Report 105-193, May 21, 1998, p. 29.
This congressional concern is well founded and echoed by many
within the credit union industry itself. Business lending is risky
business, and should be limited for all credit unions. I will address
this risk later in my testimony.
Credit unions with strong business lending opportunities can take
advantage of these opportunities and reach out with credit in their
communities through a method that is already available--by converting
to a mutual savings bank charter. This charter provides the flexibility
credit unions desire and preserves the mutual-member focus that is the
trademark of the credit union charter. For example, in 2009, Coastway
Credit Union in Cranston, RI, converted to a mutual savings bank so
that it could make more business loans. Viewpoint Bank, formerly
Community Credit Union in Plano, TX, which converted to a mutual
savings bank in 2005, has taken advantage of its greater business
lending authority--almost 18 percent of its assets are in business
loans. I will give more detail on this process later in my testimony.
During this hearing, we will also hear about the loans to very
small businesses that credit unions want to make but supposedly cannot.
While the rhetoric speaks of serving the small business man or woman,
the reality is that some credit unions are making large dollar loans to
businesses, and now they want to make even larger loans. These new-
breed credit unions aggressively pursue business customers through
large commercial and real estate loans.
Credit unions' current tax-exempt status and lack of equivalent
regulation have created huge competitive inequities in the local
marketplace. Some aggressive credit unions have made business lending a
top priority as they seek to rapidly grow the institutions--making
loans that would be made by taxpaying financial institutions. According
to NCUA's own data, today, there are more than 173 credit unions with
$1 billion or more in assets, and credit unions with more than $500
million in assets hold 63 percent of the industry's assets. In the
majority of the States in this country, a credit union would rank among
the top ten banks. As a former president of a State credit union
association said: ``In a lot of places, credit unions are the major
financial institution.'' \4\ Unfortunately, provisions to expand
business lending for those credit unions most focused on business
lending would further exacerbate these competitive inequities.
---------------------------------------------------------------------------
\4\ ``CUs, Banks Put Up Dueling Bills in Oregon'', American
Banker, March 25, 2003.
---------------------------------------------------------------------------
There are four key points I would like to make today:
Raising the credit union legal business lending cap is not
necessary for credit unions to meet small business members'
credit needs.
Expanding the lending cap is inconsistent with the credit
union mission of serving consumers, especially those of modest
means.
Business lending is riskier and raises serious safety and
soundness concerns.
There is a better option for credit unions that want to
expand business lending--convert to a mutual bank charter.
I. Raising the credit union legal business lending cap is not necessary
for credit unions to meet members' credit needs
Credit unions argue that greater business lending authority would
enable them to meet the needs of small businesses seeking credit. Such
arguments are simply not true. Under current law, business loans under
$50,000 do not count against the aggregate business loan cap of 12.25
percent of assets.
Let me state this more clearly. Credit unions can already make all
the business loans they want under $50,000. That means that credit
unions start at zero when they make further business loans over
$50,000.
Moreover, the guaranteed portion of Small Business Administration
loans does not count against the aggregate business loan limit, nor do
loans secured by 1 to 4 family primary residences. NCUA has
aggressively provided additional exclusions from the cap by regulatory
fiat. For example, in October 2003, NCUA excluded business loans made
to nonmembers from the cap, allowing more loans by credit unions to
circumvent the aggregate business loan cap. As of March 2011, credit
unions reported extending almost $6.7 billion in nonmember business
loans, which account for almost 18 percent of all outstanding credit
union business loan balances. This represents a three-fold increase in
nonmember business loans on the books of credit unions in 6 years. The
concerns raised by Senator Reed are even more troubling today, as there
is even more lending under the radar and outside the limits that
Congress had imposed.
Clearly, there is considerable opportunity under current law for
credit unions to meet the needs of small business customers.
Furthermore, only a few credit unions--96 out of 7,292 credit unions--
are within 80 percent of their congressionally mandated cap of 12.25
percent of assets, as of year-end 2010, and could be affected by S.
509. This was acknowledged by NCUA Chairman Deborah Matz last year in a
hearing: ``It's a small number that are at their cap.'' \5\
---------------------------------------------------------------------------
\5\ Senate Committee on Banking, Housing, and Urban Affairs.
``State of the Credit Union Industry'', December 9, 2010.
---------------------------------------------------------------------------
The minority who are at or near this cap are a new breed of
institution that bears little resemblance to traditional credit unions.
These ``morphed'' credit unions, which seek out large commercial
customers, are a far cry from traditional credit unions, which have
remained true to their credit union mandate to serve people of small
means.
II. Business lending is risky and raises serious safety and soundness
concerns
Lifting the business lending cap and allowing more large business
loans also raises serious safety and soundness concerns. As credit
unions have aggressively pursued business lending options, business
loan delinquencies have risen and some credit unions have failed. Even
other credit unions are concerned about the impact that increased
business lending will have on the credit union industry as a whole.
Dale Kerslake, President and CEO of Cascade Federal Credit Union (Kent,
WA) wrote:
Doubling [member business lending (MBL)] limits for natural
person credit unions is not something a majority of credit
unions want or need. Yet, if a minority of powerful credit
unions and industry trade associations get their way, which
they usually do, MBL could easily become the next industry
crisis . . . The proposed MBL limit increase . . . lacks
safeguards for the thousands of credit unions that pay into
NCUSIF and do not do business lending. \6\
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\6\ ``MBL Limits--Be Watchful of What Others Wish For'', Credit
Union Times, February 10, 2010.
Ron Burniske echoed these comments, after his credit union,
Chartway Federal Credit Union (Virginia Beach, VA), took over a failed
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Utah credit union:
We shouldn't be doing strip centers, corporate buildings and
land development. That's not who we are. That's the banks'
business. \7\
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\7\ ``1 deal down, at least 1 to go for Chartway'', Inside
Business, January 11, 2010.
Credit unions have good reasons to be concerned. As of March 2011,
4.22 percent of all credit union member business loans were at least 60
days or more past due. An additional $2.1 billion in business loans
have been modified. As a concrete example, America First FCU
(Riverdale, UT) recently reported that 11.4 percent of its $450 million
of member business loans were 12 months or more past due. If America
First were regulated by bank regulators, these loans would have been
charged off.
Testifying before the Senate Banking Committee on December 9, 2010,
NCUA Chairman Debbie Matz stated: ``Presently, 270 of the 633 credit
unions which have a 3, 4, or 5 CAMEL rating and make member business
loans, MBLs are the primary or secondary contributing factor for the
supervisory concern.'' This means that approximately 30 percent of all
credit unions that make business loans were a supervisory concern.
Here are some examples of large business loans that have gone bad:
Centris FCU (Omaha, NE) held $11 million in bad loans to
Great Adventures Water Resort.
Denali Alaskan FCU filed suit against a prominent real
estate developer over $17 million in delinquent loans.
Telesis Credit Union (Chatsworth, CA) was foreclosing on a
$3 million loan on a mixed-use office building in Memphis,
Tennessee. \8\
---------------------------------------------------------------------------
\8\ ``Telesis' Loan Recoup Attempts Go On'', Credit Union Times,
December 15, 2010.
In fact, on November 23, 2010, the NCUA's Office of the Inspector
General released a report summarizing the 10 costliest natural person
credit union failures. In 7 of these 10 failures, business lending was
a major contributor to the failure. \9\
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\9\ Appendix A provides more details about what the Inspector
General discovered.
---------------------------------------------------------------------------
Since the report was issued, NCUA placed $1.6 billion Texans Credit
Union into conservatorship. The credit union, starting in 2003, grew
its commercial real estate loan portfolio very rapidly to almost $800
million by 2007. It funded projects hundreds of miles away: a mall
project in Illinois, a luxury condo development in Telluride, Colorado,
and subdivisions in Mississippi. \10\ Eventually, some of these
commercial real estate projects failed. This action arose from faulty
lending on commercial real estate projects--some of which were outside
of its market area.
---------------------------------------------------------------------------
\10\ ``The Rise and Fall of Texans Credit Union'', Dallas Morning
News, May 8, 2011, p. D1.
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Moreover, the General Accountability Office in 2003 warned about
the danger of business lending by credit unions and it was skeptical
that NCUA was up to the challenge to monitor the expansion of credit
union business lending. \11\ It should come as no surprise that the
Inspector General's Material Loss Review found adequate oversight often
missing: business loans were made to nonmembers; credit unions exceeded
the legal Member Business Loan cap of 12.25 percent; credit unions
violated the loan-to-one borrower limit; and credit unions made
business loans without a Member Business Loan policy. Expanding credit
union business lending only encourages larger, riskier loans, without
any assurance of adequate oversight.
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\11\ ``Credit Unions: Financial Condition Has Improved, but
Opportunities Exist To Enhance Oversight and Share Insurance
Management'', U.S. General Accounting Office, October 2003 (GAO-04-91),
p. 49.
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In addition, NCUA in 2003 authorized credit union service
organizations (CUSOs) to originate business loans as a permissible
power, even though these third party vendors are not subject to NCUA
supervision. Today, many credit unions hold business loans that were
originated by these credit union service organizations. For example, CU
Business Group reported in 2009 that it has underwritten over $2
billion in business loans since its inception in 2002. Additionally,
Michigan Business Connection, a CUSO supporting more than two dozen
credit unions, reported managing a portfolio of over $200 million.
Cooperative Business Services, LLC, a CUSO owned by nine Ohio credit
unions, reported on its Web site that it recently provided funding for
$3.56 million investment property.
Unfortunately, loans originated by CUSOs have resulted in credit
union failures. Credit Union Times quotes NCUA Board Member Gigi Hyland
addressing the National Association of Credit Union Service
Organizations earlier this year regarding losses at Texans CU arising
from its business lending CUSO as saying: ``We could see things were
going wrong but we had to go through the side door and through the maze
to get there. By the time we got there, it was too late.'' \12\
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\12\ ``NCUA Sells Importance of Increased CUSO Authority To Stay
Ahead of Losses'', Credit Union Times, May 4, 2011.
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III. Expanding the business lending cap is inconsistent with the credit
union mission of serving consumers, especially those of modest
means
The real goal of expanded business lending is for some aggressive
credit unions to make even more large dollar loans. The truth is that
these new-breed credit unions have made business lending a top priority
as they seek to rapidly grow the institution--making loans that any
taxpaying financial institution would want to make. The fact that a few
credit unions are hitting the Congressionally mandated limits on
business lending is largely because they are making large commercial
loans--including those to businesses out of their market area.
A dramatic example of just how far these credit unions have gone is
the financing of Thumper Pond, a resort development in Minnesota that
went bankrupt. This luxury resort featured a golf course, spa, water
park, hotels, and a planned condominium community. The resort was
financed by a large commercial loan made by Spire Federal Credit Union
and is clearly counter to the chartered mission of serving people of
modest means. Moreover, the resort is located over 200 miles from the
credit union's headquarters. Is this the kind of loan that should be
tax-subsidized?
Congress put these current limits in place after considerable
debate to ensure credit unions remained focused on individuals,
especially people of small means. In fact, the Senate Report
implementing the Credit Union Membership Access Act of 1998 stated that
the limits `` . . . are intended to ensure that credit unions continue
to fulfill their specified mission of meeting the credit and savings
needs of consumers, especially persons of modest means, through the
emphasis on consumer rather than business loans.'' \13\
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\13\ Senate Report 105-193, May 21, 1998, pp. 9-10.
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Cases like the Thumper Pond fiasco show that credit unions are
leveraging their tax-exemption to provide loans to large businesses
that already have plenty of credit options available through taxpaying
banks. This credit union tax expenditure is neither focused nor
contained; it takes revenue from banks that compete for these same
loans--revenue that would be taxed and would help to offset some of the
current Federal budget deficit.
IV. There is a better option for credit unions that want to expand
business lending--convert to a mutual bank charter
While credit union rhetoric suggests that without greater business
lending authority there are no options for these institutions to grow
and better serve their customers, the reality is that a very viable
option is available today through switching to a mutual savings bank
charter--a route that some credit unions have already taken. This
charter provides greater flexibility, still preserves the mutual-member
focus that credit unions find desirable, and is accompanied by the
effective and experienced supervision of traditional banking
regulators.
The savings bank charter would give credit unions the ability to
expand their business lending and retain their mutual structure.
However, NCUA actively impedes the ability of credit unions to engage
in charter choice. Removal of NCUA's obstructionism is a far better
alternative to enabling more business lending than a wholesale change
in powers that will benefit only a small proportion of large credit
unions. Facilitating conversion to a mutual savings bank charter will
benefit those credit unions that have outgrown their charter, and will
also improve the fiscal position of the United States as these entities
pay their fair share of taxes.
Conclusion
Increased business lending powers are not necessary to meet the
credit needs of businesses. Credit unions have ample authority under
current law to make all the small business loans they want. S. 509 will
empower credit unions to make larger commercial loans and cause credit
unions to stray even further from their mission to serve consumers,
especially those of modest means. Increasing the business lending cap
will raise serious safety and soundness concerns.
Rather than expanding the business lending authority of credit
unions, Congress should close the loopholes that are allowing credit
unions to make business loans to nonmembers to circumvent the aggregate
business loan cap. Additionally, Congress should rightfully be
concerned about the increasing use of third-party vendors by credit
unions to originate business loans, as CUSOs are a ticking time bomb
waiting to explode given the fact that NCUA does not have authority to
regulate these entities.
Against a backdrop where nontraditional credit unions forsake the
common bond in favor of fast growth, and where energies are diverted to
favoring the well-off and businesses rather than meeting their
chartered obligation to serve people of modest means, it is no surprise
that ABA opposes expansion of credit union powers. To allow such
expansion will only move the new breed of credit unions further and
further away from their mandated mission.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM DEBORAH MATZ
Q.1. Supplemental Capital--My staff and I have recently heard
from a number of Oregon credit unions about the need to
increase capital at credit unions. Many credit unions--like
community banks--have seen an influx in deposits recently, and
like community banks, face challenges in raising the capital
they need to back those deposits and the loans that come from
them. For community banks, as you may know, I worked with a
number of my colleagues to help put into place the Small
Business Lending Fund, so community banks could gain access to
the additional capital they need to meet the lending needs of
small business. I'm wondering whether we need to similarly
consider additional capital for credit unions.
Specifically, as you know, credit unions are only allowed
to accumulate capital through retaining earnings year on year
(much the same way a de novo (newly licensed) bank does in many
States, including Oregon). However, this can be a real
challenge for credit unions in a low interest rate environment.
If, like community banks, they are taking in many new deposits
from members and making new loans, they need capital to back
those loans and stay within their leverage ratios. Clearly, if
they cannot bring in new capital, then we could potentially
face safety and soundness problems.
What can you share with the Committee, at this preliminary
stage, about the need for capital in our credit union sector
and what role can supplemental capital, carefully constructed,
play in ensuring greater safety and soundness at credit unions?
A.1. This is a timely question that I appreciate having the
opportunity to address. I have previously encouraged Congress
to create a new opportunity for well-capitalized, qualifying
credit unions, as determined by the National Credit Union
Administration, to issue alternative forms of capital to
supplement their retained earnings. This change would allow
credit unions to grow stronger especially in difficult economic
times and, in turn, lower the risk to the National Credit Union
Share Insurance Fund, increasing safety and soundness for the
credit union industry.
As you point out in your question, some financially
healthy, well-capitalized credit unions that offer desirable
products and services are discouraged from marketing them too
vigorously out of concern that attracting share deposits from
new and existing members will inflate the credit union's asset
base, thus diluting its net worth for purposes of prompt
corrective action. In effect, the reward for their success in
attracting new shares is the risk of a demotion to a lower net
worth category if accepting those shares drives down the credit
union's net worth ratio.
I believe two legislative remedies would help reverse the
disincentive to accept new share deposits--one that addresses
the total assets denominator of the net worth ratio, and a
second that addresses the retained earnings numerator.
With respect to the denominator, I have encouraged Congress
to consider allowing qualifying credit unions to exclude from
the ``total assets'' denominator those assets that have a zero
risk-weighting, exposing the credit union to virtually no risk
of loss. An example of such ``no-risk'' assets is short-term
Treasury securities.
To qualify for exclusion of no-risk assets from its
denominator, I have proposed that a credit union should be
required to meet at least two criteria:
1. Maintain a minimum net worth classification, as
determined by the NCUA Board, calculated before
excluding no-risk assets; and
2. Show that share growth is the cause of its declining net
worth ratio, i.e., that the decline is not due to poor
management or material unsafe or unsound practices.
Permitting the total assets denominator to exclude no-risk
assets would moderate the growth of assets due to the inflow of
new shares, while still imposing prompt corrective action that
is appropriate to the circumstances.
With respect to the numerator of the net worth ratio, I
would encourage Congress to consider authorizing qualifying
credit unions, as determined by the NCUA Board, to issue
alternative forms of capital to supplement their retained
earnings. To ensure the proper authority, alternative forms of
capital would be subject to necessary regulations addressing
safety and soundness criteria, investor protections, and any
impact on the cooperative credit union governance model.
Current law already permits low-income designated credit
unions to offer uninsured secondary capital accounts to
nonmembers (e.g., 12 USC 1757(6) and 12 CFR 701.34). Modifying
the Federal Credit Union Act to permit qualifying credit unions
to offer uninsured alternative capital instruments subject to
regulatory restrictions, and expanding the law's definition of
``net worth'' to include those instruments, would allow well-
managed credit unions to better manage net worth levels under
varying economic conditions. Together, these legislative
remedies would go a long way toward removing an obstacle to
accepting new shares, thereby enhancing consumers' access to
the benefits of credit union service.
Q.2. Servicing Rights, Foreclosure, and Member/Customer
Relationship--I've heard from my Oregon credit unions about the
importance of being able to securitize loans while retaining
the servicing rights, which is where the member relationship is
important. In that servicing relationship, credit unions--and
community banks--who hold servicing rights must have seen some
foreclosures and other problems. Can you share any insight on
the experience of credit unions and community banks that do
hold servicing rights in working out problematic loans? In your
experience, are credit unions and community banks more willing
to follow basic practices like having a single point of
contact, stopping the dual track of modification and
foreclosure, and utilizing third-party review for modification?
Anything you can share will be enlightening as we go through an
important national debate about what can be done now to fix the
terrible foreclosure crisis harming our families and dragging
our economy down.
A.2. Because NCVA's regulatory oversight does not extend to
community banks, I will focus on the experience of credit
unions.
In late 2010, NCUA conducted a sweep review of the largest
credit union residential real estate loan servicers. The focus
was foreclosure procedures and practices that could be
detrimental to credit union members. As a result of this sweep
review, we reached the overall conclusion that the issues
reported in non- credit union mortgage servicers were not
prevalent in credit unions.
Additionally, NCVA adjusted our examination procedures in
2011 to require the formal review of credit union loan
modification and foreclosure procedures during all examinations
in 2011. To date, NCVA has identified only isolated exceptions
or issues raised during the servicing reviews.
While NCVA does not consider this a system-wide concern for
credit unions at this time, the ongoing discussions between
bank regulators, State attorneys general, and the largest
servicers have the potential to set new standards for mortgage
servicing. Any agreement would likely create a new set of best
practices for all servicers, including credit unions, to
follow.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM BILL CHENEY
Q.1. Servicing Rights, Foreclosure, and Member/Customer
Relationship--I've heard from my Oregon credit unions about the
importance of being able to securitize loans while retaining
the servicing rights, which is where the member relationship is
important. In that servicing relationship, credit unions--and
community banks--who hold servicing rights must have seen some
foreclosures and other problems. Can you share any insight on
the experience of credit unions and community banks that do
hold servicing rights in working out problematic loans? In your
experience, are credit unions and community banks more willing
to follow basic practices like having a single point of
contact, stopping the dual track of modification and
foreclosure, and utilizing third-party review for modification?
Anything you can share will be enlightening as we go through an
important national debate about what can be done now to fix the
terrible foreclosure crisis harming our families and dragging
our economy down.
A.1. No response provided.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM NOAH WILCOX
Q.1. Servicing Rights, Foreclosure, and Member/Customer
Relationship--I've heard from my Oregon credit unions about the
importance of being able to securitize loans while retaining
the servicing rights, which is where the member relationship is
important. In that servicing relationship, credit unions--and
community banks--who hold servicing rights must have seen some
foreclosures and other problems. Can you share any insight on
the experience of credit unions and community banks that do
hold servicing rights in working out problematic loans? In your
experience, are credit unions and community banks more willing
to follow basic practices like having a single point of
contact, stopping the dual track of modification and
foreclosure, and utilizing third-party review for modification?
Anything you can share will be enlightening as we go through an
important national debate about what can be done now to fix the
terrible foreclosure crisis harming our families and dragging
our economy down.
A.1. No response provided.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM MICHAEL LUSSIER
Q.1. Servicing Rights, Foreclosure, and Member/Customer
Relationship--I've heard from my Oregon credit unions about the
importance of being able to securitize loans while retaining
the servicing rights, which is where the member relationship is
important. In that servicing relationship, credit unions--and
community banks--who hold servicing rights must have seen some
foreclosures and other problems. Can you share any insight on
the experience of credit unions and community banks that do
hold servicing rights in working out problematic loans? In your
experience, are credit unions and community banks more willing
to follow basic practices like having a single point of
contact, stopping the dual track of modification and
foreclosure, and utilizing third-party review for modification?
Anything you can share will be enlightening as we go through an
important national debate about what can be done now to fix the
terrible foreclosure crisis harming our families and dragging
our economy down.
A.1. No response provided.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM STEPHEN P. WILSON
Q.1. Servicing Rights, Foreclosure, and Member/Customer
Relationship--I've heard from my Oregon credit unions about the
importance of being able to securitize loans while retaining
the servicing rights, which is where the member relationship is
important. In that servicing relationship, credit unions--and
community banks--who hold servicing rights must have seen some
foreclosures and other problems. Can you share any insight on
the experience of credit unions and community banks that do
hold servicing rights in working out problematic loans? In your
experience, are credit unions and community banks more willing
to follow basic practices like having a single point of
contact, stopping the dual track of modification and
foreclosure, and utilizing third-party review for modification?
Anything you can share will be enlightening as we go through an
important national debate about what can be done now to fix the
terrible foreclosure crisis harming our families and dragging
our economy down.
A.1. No response provided.
Additional Material Supplied for the Record
LETTER SUBMITTED BY PAUL HAZEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL COOPERATIVE BUSINESS ASSOCIATION