This week, the nationâ€™s credit unions, member-owned financial services groups, are taking their case to Capitol Hill. On many issues they face, conservatives and libertarians should join lawmakers like Sen. Rand Paul (R-Ky.) in rallying to their cause.
On Tuesday, the Credit Union National Association (CUNA) is launched its â€śDonâ€™t Tax Tuesdayâ€ť in which credit unions and their supporters tweet members of Congress about not double taxing credit union members in the name of â€śtax reform.â€ť Another group, the National Association of Federal Credit Unions (NAFCU), is holding a â€śCongressional Caucusâ€ť this week in which leaders and members of credit unions meet with lawmakers about the impact of current and proposed taxes and regulations.
Much of credit unionâ€™s big government burdenÂ is the same as that as faced by banks through the 2,500 pages of the Dodd-Frank financial â€śreformâ€ť rammed through in 2010 and the unaccountable Consumer Financial Protection Bureau it created. Credit unions have been vocal on howÂ these regulations aimed at targeting Wall Street have been hitting Main Street.
At the NAFCU conference on Monday, Rep. Patrick McHenry (R-N.C) praised the group as being the only trade association to come out unambiguously against the creation of the CFPB during the Dodd-Frank debate. I have written previously on some of the many specific credit union complaints against other parts of Dodd-Frank, such as the Durbin Amendment price controls on what banks and credit unions can charge retailers for debit card interchange processing fees.
Yet credit unions also face current and potential burdens from the efforts of the bank lobby trying to squelch competition through the use of big government. Take lending to business, for example.
Small businesses and start-ups pursue many diverse sources of funding. As traditional sources have dried up, credit unions have stepped in to fill the void. As Rohit Arora, CEO of the Biz2Credit small business loan arranging service,Â explained at FoxBusiness.com, â€śFollowing the mortgage bust, many big banks essentially turned off the spigot to small business lending. Credit unions decided to take advantage of this hole in the marketplace by increasing their small business loan-making.â€ť
But because of government barriers to credit-union business lending that came at the behest of the bank lobby, thousands of entrepreneurial ventures may be unnecessarily deprived of the seed capital credit unions could provide to them. As Arora says, â€śCredit unions are handcuffed by a lending cap of 12.25 percent of their assets imposed by the Credit Union Membership Access Act of 1998. Thus, many of those who became active in small business lending quickly hit their limit.â€ť
Fortunately, has teamed up with Sen. Mark Udall (D-Colo.) on the bipartisan S. 968 to partially fix this regulatory barrier hitting credit unions and entrepreneurs. Udall-Paul and its House companionÂ H.R. 688, sponsored by Rep. Ed Royce (R-Calif.), would raise the cap for business lending to 27.5 percent of a credit unionâ€™s assets.
This modest hike in the lending cap would pay big dividends for entrepreneurs and the economy.Â CUNA estimates this increase in the cap would create 138,000 jobs in the first year, a figure Pepperdine University economist David M. Smith calls â€śconservative and well within the bounds of a reasonable projection.â€ť
The bills donâ€™t go far enough; the cap should be eliminated entirely. Thereâ€™s no â€ślending cap,â€ť for instance, for credit unions in making car loans and home mortgages â€” even though, after the financial crisis, itâ€™s hard to say business loans are any more inherently dangerous than mortgages.
National Credit Union Administration Chairman Debbie Matz, an Obama appointee, told the House Financial Services Committee last year that business lending â€śdid not have a major impact on the safety and soundness of the vast majority of credit unionsâ€ť during the downturn, and that an increase in business lending is â€śanother way in which to prudently manage risk.â€ť
Indeed, the only real opposition to the idea is coming from the powerful bank lobby, both from the big banks and from a trade association that purports to speak for smaller ones â€” the Independent Community Bankers of America (ICBA). But the ICBA has a history of selling out its member banks.
As reported by Robert Kaiser in his new book â€śAct of Congressâ€ť (and in an excerpt that ran recently in the Washington Post), ICBA President Camden Fine entered into a secret-handshake agreement with then-House Financial Services Committee Chairman Barney Frank (D-Mass.) during the financial reform debate in 2010. Fine agreed to â€śstay silentâ€ť on much of Dodd-Frank until it passed. In return, Frank changed the deposit insurance assessment formula in a way that benefits small banks. But by any reasonable estimate, the costs that Dodd-Frank imposed on community banks have swamped any savings from the change to the deposit insurance assessment formula.
Before they jump on the ICBAâ€™s pro-regulation bandwagon, community banks should think long and hard about which is the greatest threat facing them â€” credit unions or Dodd-Frank. The answer should be an easy one. As Ammon Simon wrote in National Review, â€śIn Florida, 96 percent of community banks and credit unions expect to spend considerably more time and money on compliance with new federal regulations over the next three years, while 64 percent expect to hire new compliance staff and reduce their lending.â€ť
As Simon noted, Dodd-Frank is a big anvil weighing down credit unions as well as community banks. But unlike the ICBA, the main credit-union associations such as NAFCU and CUNA have shouted their criticisms of the law from the hilltops. At a recent congressional hearing, Robert D. Burrow, president and CEO of the Bayer Heritage Federal Credit Union in Proctor, W.Va., testified that â€śthe breadth and pace of [Dodd-Frank] rulemaking is troublesome as the unprecedented new compliance burden placed on credit unions has been immense.â€ť
Banking lobbyists also criticize the perceived tax advantage of credit unions, but this benefit is exaggerated and largely irrelevant to whether itâ€™s wise policy to lift restrictions on credit unionsâ€™ ability to make business loans. Credit unions are exempt from some forms of corporate taxation because they are member-owned cooperatives that donâ€™t have the many means of raising money that banks do (such as the issuance of shares of stock). Credit-union members, however, are fully taxed on the dividends on their accounts, and are taxed at the ordinary income-tax rate for interest, rather than the lower rate for dividends.
Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of a single-taxation model.Â And about one-third of U.S. banks areÂ incorporated as subchapter S corporations, a single-taxation structure very similar to that of credit unions. In any case, itâ€™s a bit rich for the nationâ€™s banks â€” big or small â€” to complain about unfair subsidization after they received more than $1 trillion in taxpayer largesse from TARP and other bailouts.
Main Street banks need to realize that the biggest threat they face is not credit unions, but Dodd-Frank and all the other dictates of big government. And conservatives and libertarians need to stand with Rand in his fight to protect credit unions from big governmentâ€™s various assaults.
John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute. CEI Research Associate Michael Mayfield contributed to this post.
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