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Letters to Regulators

Opposing the Credit Union Regulatory Improvements Act of 2003 (H.R. 3579)

July 19, 2004

Honorable Spencer Bachus, Chairman
Subcommittee on Financial Institutions and Consumer Credit
Committee on Financial Services
U. S. House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

On behalf of the nearly 5,000 community bank members of the Independent Community Bankers of America (ICBA), I am writing to express strong opposition to H.R. 3579, the Credit Union Regulatory Improvements Act of 2003 (CURIA), which will be the subject of a hearing in your subcommittee this week. I respectfully request that this letter be made part of the permanent hearing record.

The bill substantially increases credit unions' commercial lending powers and makes a number of additional changes that undermine safety and soundness and are inconsistent with credit unions' historic mission and favored tax status.

The bill would substantially expand credit union commercial lending authority, permit credit unions to make investments in securities for their own accounts; increase the maturity date on credit union loans to 15 years, up from 12 under current law, or longer as the NCUA may allow; permit credit unions to offer money transfer instruments, including electronic fund transfers, to anyone eligible for credit union membership, regardless of whether they are actual members; repeal the mandate that regulations for complex credit unions include a risk-based net worth requirement; and increase the aggregate investment limit in CUSOs to 3%, from 1%, of the total paid in and unimpaired capital and surplus.

The ICBA has serious concerns about each of the provisions in this legislation, but will limit our remarks in this letter to the expansion of commercial lending powers under the bill.

Expands Commercial Lending Powers

H.R. 3579 expands commercial lending opportunities for credit unions by raising the cap on "member business loans" to 20% of a credit union's net worth, up from 12.25% under current law; raising the limit on loans exempt from this cap to $100,000, up from $50,000 under current law; repealing the restriction on undercapitalized credit unions from making member business loans, leaving that decision to the discretion of the NCUA; and exempting loans to nonprofit religious organizations from the member business loan cap.

Commercial Lending Should Be Incidental Service

The ICBA has consistently expressed concerns about the rapid entry of credit unions into the commercial lending arena, so long as credit unions remain tax-exempt. Credit unions were created by Congress, and given certain tax and regulatory advantages, for the purpose of serving individuals of modest means. It is doubtful that Congress, in passing the Federal Credit Union Act of 1934, ever envisioned credit unions making commercial loans.

Indeed, H.R. 1151, the Credit Union Membership Access Act ("CUMAA"), which first codified the practice of commercial lending, actually imposed a limit on member business loans. The Senate Banking Committee report on this bill stated clearly that Congress intended that business lending by credit unions be incidental to, and not the main focus of, the services provided to their customers. The reasoning behind this concern was sound - commercial lending is a highly specialized business, and it is questionable whether credit unions have the experience or staff to ensure the safety and soundness of their business lending operations.

Credit Unions Pursuit of Expanded Powers Extends Beyond Congress

The current restrictions on member business loan activity is, in our view, more than sufficient for any credit union to make member business loans as an incidental service. Still, the credit union industry has been relentless in its pursuit of expanded commercial lending powers in circumvention, in our view, of the statutory limitation on commercial lending:

  • They have asked the NCUA to make regulatory changes to facilitate a greater involvement in small business services (the NCUA has historically been open to credit union expansion).
  • They pressed the SBA to open its 7 (a) small business loan program to more credit unions (SBA loans are not covered by the limitation on "member business loans").
  • They are seeking increased access to the Federal Home Loan Bank System (to circumvent statutory limitations on capital).
  • And they have proposed an expansion the types of loans that would be exempt from the "member business loan" cap (effectively raising the cap).

This agenda demonstrates the aggressive nature of the credit union industry's expansion plans. This kind of an agenda is not consistent with credit unions' safe and sound operations, their historic mission, or their favored tax status.

Safety and Soundness Concerns

ICBA questions whether or not the credit union industry has the management expertise and experience to properly and safely underwrite commercial loans. As stated earlier, commercial lending is a highly specialized and risky business. Even the GAO, Congress's investigative arm, recently cited the need for greater risk management because of the growing concentration of industry assets in large credit unions. Credit unions should be reducing their risk portfolio, not increasing it.

Credit Unions Commitment to Statutory Mission Questioned

Indeed, the continued pursuit of expanded commercial lending powers calls into question the credit union industry's commitment and ability to serve the needs of lower income and un-banked populations. The Woodstock Institute, a Chicago-based nonprofit that promotes access to capital and credit, issued a report1 showing that credit unions do not live up to their statutory mission of serving people of small means. Based on surveys of about 3,000 respondents in the Chicago metropolitan area, the report refuted claims by the credit union industry and its regulator, the NCUA, that credit unions had achieved the goal of serving low-income people (the NCUA earlier withdrew a requirement that credit unions document their service to low-income areas, arguing that the industry had already met this goal).

The press release accompanying the report said, "Woodstock's report shows the claim to be false and damaging to the challenge of bringing low-income people into the financial mainstream." The fact is that credit unions get tax benefits, estimated to reach $6 billion by 2003, in part because, "they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means," according to the Federal Credit Union Act.

Indeed, the House Report on H.R. 1151 ("CUMAA") states: "Section 204 reaffirms the continuing and affirmative obligation of insured credit unions to meet the financial services needs of persons of modest means, including those with low- and moderate-incomes, consistent with safe and sound operations."2 We question whether H.R. 3579, expanding the commercial lending powers of credit unions, is consistent with this mandate.

Unfair Competition

It has been clear for some time that there is a strong trend in the credit union industry, routinely enabled by NCUA actions, away from the statutory mandate to serve people of small means and towards direct competition with tax-paying commercial banks for customers in the general population for all product and service lines. For example, some credit unions are now making commercial loans and are involved in electronic bill payment and presentment, trustee and custodial services, finder activities, certification services, marketing activities and financial counseling. Some even offer "smart cards." The legislation to expand the commercial lending opportunities for credit unions promotes that trend.

Adoption of H.R. 3579 would exacerbate the already growing competitive disparity between community banks and credit unions. Credit unions have a decided funding advantage over community banks because of their tax exemption and exclusion from CRA. This may have been justifiable when the scope of credit unions was limited by the obligation to serve people with a "common bond." However, it is difficult to justify today as credit unions have expanded their scope to serve the general population through community charters. This makes their aggressive pursuit of expanded commercial lending opportunities all the more troubling.

Competition in the marketplace is healthy, provided the competition is fair. When one competitor pays taxes and the other does not, that constitutes unfair competition. If credit unions want to maintain their tax-exempt status, they should be required to focus on their statutory mission.


H.R. 3579 will promote the trend of large, multi-bond credit unions to move into commercial activities and raises serious safety and soundness concerns as well as concerns about increasing the risk to the industry's insurance fund.

The ICBA believes that if credit unions want to be the functional equivalent of banks and thrifts and compete with banks and thrifts on these expanded product and service lines in an open market, they should be willing to comply with the same laws and regulations as banks and thrifts, and that includes the obligation to comply with the Community Reinvestment Act (CRA) and pay taxes.

Thank you for this opportunity to express the view of our nation's community bankers.


Camden R. Fine
President and CEO

CC: Members, House Financial Services Committee

1 "Rhetoric and Reality: An Analysis of Mainstream Credit Unions' Record of Serving Low-Income People," Woodstock Institute, Chicago, IL, February 14, 2002.

2 House Report 105-472, page 21

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