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A battle that has been raging since at least 1990 has transformed two small-business-friendly financial entities into fierce opponents. At the heart of the war between credit unions and banks (particularly community banks) is the almost $3 billion in small-business loans made each year by credit unions. Another key issue is how expansive credit union membership should be.
Legislation pending at press time could limit the total volume of member business loans by credit unions to approximately 12.25 percent of their total assets and 1.75 times their required minimum net worth. The House approved its version of the bill (H.R. 1151) in March; at press time, the Senate was expected to vote on it in July.
"If this bill passes, it will lock credit unions into lending a smaller percentage of assets to businesses," says Dan Mica, president and CEO of the Credit Union National Association (CUNA). CUNA statistics show the bill would preclude credit unions from making at least 5,400 member business loans per year (27,000 such loans were made last year).
Credit unions chartered specifically to make business loans would be exempt from the law, as would unions that have mostly low-income members or are community development institutions; however, fewer than 100 credit unions nationwide meet these criteria.
The legislation also clarifies the meaning of "common bond," the term under which credit unions recruit members. The law would essentially allow groups with fewer than 3,000 people to be affiliated with an existing credit union. This means groups of more than 3,000 would have to form their own credit unions or get approval from federal regulators to establish an affiliation. This change would only impact new members and groups; current members would be grandfathered.
What do banks hope to achieve with this legislation? "We're targeting the large credit unions that have expanded way outside their occupational common bond," says Ken Guenther, executive vice president of the Independent Bankers Association of America (IBAA). Banks are also concerned that credit unions' nonprofit status gives them an unfair advantage when it comes to commercial lending rates.
The issue is choice, counters Mica. Curtailing commercial lending at credit unions will eliminate options for small-business borrowers.
Community bankers are not opposed to offering more choices, but, says IBAA's Marty Farmer, "The Citicorps and Chases of the world aren't getting knocked off by credit unions. It's the community banks across the street from them that are."