Lockdowns Have Crushed Small Businesses. Credit Unions Can Provide Aid—If We Let Them

Lifting the MBL cap would help small businesses and low-income families disproportionately impacted by the lockdowns.

With the country solidly in a recession and Congress in fiscal gridlock, it is sensible to allow private banking institutions to maximize their services to small businesses. There are billions of dollars in untapped resources across the nation that can help businesses survive and even develop through this period. Lawmakers would only have to lift member business lending caps on credit unions.

Unlike traditional banks, credit unions can only lend 12.25 percent the worth of their assets to businesses. It wasn’t always this way. Credit unions had no limit on member business lending (MBL) until 1998, when Congress passed the Credit Union Membership Access Act. Traditional banks have devoted well above that threshold for years.

A credit union also reaches that 12.25 percent mark faster than a traditional bank would. Because credit unions do not distinguish corporate and individual members, more kinds of loans count toward the cap, which means the disparity between how many traditional banks can choose to lend and how much credit unions are allowed to lend is even greater.

The cap leaves billions of dollars of potential loans to businesses off the table. In an analysis of FDIC and National Credit Union Administration call data, the Credit Union National Association estimates that, if the MBL cap were lifted, credit unions would lend an additional $5 billion “in capital to small and informal business ventures” over the next year. Another $5 billion to small businesses and entrepreneurs could translate to 50,000 jobs created over the same period.

There are two critical factors in those numbers. First, those loans are not stolen from traditional banks; rather, they are, for the most part, economic opportunities unique to credit unions. A US Small Business Administration report found that only 19 percent of credit union business loans substitute for traditional bank loans. In other words, 81 percent of business loans given by credit unions would not have been given by traditional banks. If we assume each dollar loaned creates the same number of jobs, then with their extra $5 billion unconstricted, credit unions can offer over 40,000 new jobs that traditional banks cannot.

Second, a disproportionately high number of recipients would likely be underserved populations. As nonprofit, mostly community-based institutions, credit unions often offer more personalized services than traditional banks. There is not the same need to find profitable loans, which means the loans can be as small as the person or business needs––or can afford.

Consequently, many customers unable to receive services from banks turn to credit unions. During a crisis that is disproportionately harming low-income Americans, it is as crucial as ever to expand opportunities for everyone to help their business in a pinch, or to offer some innovation in a rapidly-changing time.

Lifting the cap also may expand the geographic area where people of lesser means may be able to receive a business loan. A low statutory limit stunts the efficiency—and therefore sustainability—of MBL. There are certain resources a credit union needs to offer business lending regardless of how many entrepreneurs it serves. But, each loan made is money back without having to pay those fixed resources again––the program is more cost-effective the more people it serves. For smaller credit unions in low-income or sparsely-populated areas, however, the 12.25 percent cap sometimes doesn’t allow enough loans to make MBL sustainable. As a result, many credit unions aren’t offering MBL at all. Lifting the cap would allow more credit unions to run sustainable MBL programs, which would be a boon to small town America.

There is no statutory reason for a cap. The MBL cap was originally instituted to ensure credit unions didn’t focus too much on pursuing profit through risky business lending and ignoring their mission of serving community needs. But small business lending is a way credit unions can and have provided opportunities for people of lesser means. Holding credit unions to an arbitrary limit so significantly less than their traditional counterparts doesn’t protect the community; it stifles it.

While Washington lawmakers removing the cap would have the most substantial impact on business lending, states also have a role to play. Credit unions may be federally chartered or state-chartered; states have flexibility in how they govern them.

Illinois, for instance, specifies that it places the same cap on MBL for state-chartered unions that federally chartered unions have under the Federal Credit Union Act. As 192 of Illinois’ 241 credit unions are state-chartered, Springfield has the authority to raise or lift the MBL cap for most credit unions in the state.

America needs all hands on deck to overcome this economic downturn, but we’re handicapping ourselves by keeping the arbitrary member business lending cap. Main Street can aid us through the recession if we let it.

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