INCREASED BUSINESS LENDING. The Wrong Road for Credit Unions

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1 INCREASED BUSINESS LENDING The Wrong Road for Credit Unions

2 Expanded Business Lending Blurs Credit Union Mission Credit unions were originally based on the simple concept of bringing together a close-knit group of people to pool their savings and provide small loans to one another. Congress gave them a tax exemption to accomplish this mission. Now, some credit unions have strayed from this mission. Making taxpayer-subsidized, large dollar loans to businesses is not the mission of credit unions. [Credit Unions] were never intended to be simply alternative, tax-exempt commercial banks. Senator John Kerry, during the debate when the current business lending limits were enacted Expanded Business Lending Puts Credit to People of Small Means at Risk Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions. The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure Expanding the business lending authority of credit unions further encourages credit unions to take on riskier loans that don t benefit people of small means. It means fewer consumer loans will be made. This new focus on business lending raises safety and soundness concerns. In fact, in 2010 the NCUA s Office of the Inspector General released a report summarizing the 10 costliest credit union failures. In seven of these 10 failures, business lending was a major contributor to the failure. Expanding credit union commercial lending powers benefits a few aggressive credit unions but puts the whole credit union industry at risk. Keep credit unions focused on their legal purpose and mission: Serving people of modest means.

3 Taxpayer-Subsidized Big Business Loans [T]he Committee has imposed substantial new restrictions on commercial business lending 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 an emphasis on consumer, rather than business lending. Senate Report, when current restrictions were enacted Credit unions have plenty of authority to make loans to members under current federal law. Congress set these rules of the road for a reason to ensure that credit unions would remain focused on their intended purpose of providing credit to consumers of modest means. Credit unions are allowed to make as many business loans as they want under $50,000 without limits. Only loans larger than $50,000 are subject to a cap of percent of assets. Credit Unions have plenty of flexibility to serve small businesses with small loans. Even with these legislative limits, some credit unions are heading the wrong way. Consider the following: The $31 million loan for a condo development in Telluride, CO from Texans Commercial Capital, LLC, a wholly-owned subsidiary of Texans Credit Union of Richardson, TX. The loan for a luxury golf and condominium resort by Spire Federal Credit Union (formerly Twin City Co-ops FCU), Falcon Heights, MN. The $7.1 million credit facility from U.S. Federal Credit Union in Burnsville, MN for Innovex, Inc., a circuit manufacturer. Telesis Community Credit Union, Chatsworth, CA, extended $11.1 million in credit for a shopping center in Florida. Bethpage FCU of Long Island, NY provided $16.5 million in financing for a shopping center in Philadelphia, PA. An expanded focus on lending to businesses distracts from serving people of modest means.

4 Risky Business Lending Drives Credit Union Industry Down a Dangerous Road Allowing credit unions to make risky business loans creates a difficult situation to regulate, especially for credit union regulators not used to managing these kinds of risks. Already there are situations arising that are causing failures, or nearly so. Consider the following: Financing speculative construction loans in Southwestern Florida led to the failures of Norlarco Credit Union, Fort Collins, Colorado and Huron River Area Credit Union, Ann Arbor, Michigan. Centris FCU, Omaha, Nebraska holds the senior lien on a bankrupt property Great Adventures Water Resort almost $11 million in exposure, $6.3 million of it unsecured. Denali Alaskan FCU has filed suit against a prominent real estate developer to recover $17 million in delinquent loans. Failed Eastern Florida Financial Credit Union, Miramar, Florida, made a $30 million loan for a 338-unit luxury condominium project, which went into foreclosure. Congress recognized the risk and acted to limit large business lending. [S]ince member business loans constitute only a small percentage of credit union lending, most NCUA examiners will not have significant experience looking at this type of lending activity. In contrast, banks and thrifts offer these loans to a much greater extent than credit unions and their regulators do have experience in this area. GAO Study: Credit Unions The committee action will prevent significant amounts of credit union resources from being allocated in the future to large commercial loans that may present additional safety and soundness concerns for credit unions. Senate Report, when current restrictions were enacted Expanded business lending takes away a margin of safety on rough roads.

5 Oppose H.R Raising the Business Lending Cap Would Not Benefit 99.5 Percent of All Credit Unions. It Would Directly Affect 29 Non-Traditional Credit Unions That Have Abandoned Their Mission. Credit Unions Already Have Sufficient Authority to Make Small Business Loans. Expanded Business Lending Poses a Safety and Soundness Concern. Increased Business Lending Will Move Credit Unions Away from Their Mission.