Access to credit is an essential component of a market system, and the tightening of credit markets in the course of the economic downturn has businesses and entrepreneurs struggling to sustain themselves and grow. Small businesses have suffered the most. Small- and medium-sized businesses are a key engine of the economy, creating between 60% and 80% of new jobs. The lack of credit for small businesses slows economic recovery, so efforts need to be made to get credit flowing where it is needed and best utilized.
New sources of lending outside the traditional banking sector may present a new source of money for these businesses. While banks have waffled about whether to lend to small businesses clamoring for credit nationwide, the government has cut off via regulation a portion of the financial industry that is willing and able to provide these loans: credit unions.
Credit unions are nonprofit, cooperative financial institutions owned and controlled by their members. They offer credit services, including small business loans, for their member businesses. Since 1998, however, credit unions have faced a legal cap on the amount of member business loans they may write. New legislation now being considered would change, but not eliminate, these caps.
In an op-ed piece published in Fox and Hounds, a California business and political blog, Eli Lehrer, vice president at The Heartland Institute, discusses the new piece of legislation, the “Small Business Lending Enhancement Act,” which lifts the cap on the percentage of assets credit unions may lend to businesses from 12.25 percent to 27.5.
The bill in question is called the “Small Business Lending Enhancement Act,” and by the standards of a body that seems to enjoy passing indecipherable 500-page monstrosities, it’s a surprisingly succinct and lucid piece of legislation. In a few short sentences, the bill lifts the cap on the percentage of assets credit unions may lend to businesses from 12.25% to 27.5%. This is wonky stuff, but it’s important. Credit unions, democratically run, member-oriented financial cooperatives, often extend credit to groups having a difficult time getting it from banks. Right now, they are sitting on millions of dollars they could lend to job creators if only Congress would repeal the regulations stopping them from doing it.
Opponents of expansion argue credit unions should not be allowed to operate like banks. The American Bankers Association and other groups claim the expanded range of products credit unions offer are closer to the mutual savings bank model and should be regulated so that credit unions don’t gain an unfair competitive advantage.
Eli argues in the Fox and Hounds piece that the only reason Congress has said “no” to bills like this in the past is due to pressure from the big banks that don’t want more competition. But, given that those banks control about 95% of the depository institution services market already, it seems pretty obvious they aren’t going to sustain a mortal wound if a burdensome regulation on their competition gets lifted.
Thus, big banks, small ones, and their trade organizations have managed to prevail over credit unions’ efforts to get the cap lifted in the past. All this creates jobs for lobbyists and preserves profits for some banks, but it doesn’t do much good for the country or the small businesses that need loans.
Supporters of the expansion of member business say raising the cap on credit union member business loans would open up new avenues of credit to small business where traditional banks have been unwilling to invest. The Credit Union National Association estimates the proposed loosening of restrictions on member business lending could spur creation of more than 108,000 new jobs.
And there’s no doubt the current restrictions on lending have real consequences. A recent study from Malibu’s Pepperdine University shows that nearly 60% of small business owners who applied for bank loans during a one year period got turned down. Data from the Small Business Administration, likewise, shows credit unions often lend to types of business that can’t get bank loans. If just a small fraction of the businesses got credit and started creating jobs, California’s still-too-high unemployment rate could start coming down. Keeping dated regulations in place makes sure that the number of businesses facing credit problems won’t go down soon. Repealing such regulations should be a commonsense move so obvious even liberals should support it.
Indeed, here in California that has happened as members of Congress on both sides of the aisle have flocked to support it. In the House of Representatives, conservative Republican Ed Royce…is the lead sponsor of the bill in the Senate and both of California’s Democratic Senators have joined 19 of their colleagues—three Republicans and 16 other Democrats—in supporting the bill.
