Arguing that small companies and jobs would grow if credit unions could do more commercial lending, credit unions think they have their best chance ever of persuading Congress to raise the cap on loans they can make to businesses.
Credit unions, which are like banks in many ways but are not-for-profit cooperatives owned by their members, contend that the federal law that limits their business loans to 12.25% of assets is hindering their ability to lend to small-business owners. They want to raise the limit to 27.5% of assets.
"I think it's needed to help lift up many of the small businesses in Wisconsin," said Brett Thompson, chief executive of the Wisconsin Credit Union League. "Many of those businesses have found their lines of credit and their credit sources eliminated from their banking relationships, and more and more are seeking to get credit from Wisconsin credit unions."
Thompson, who was in Washington, D.C., lobbying lawmakers last week, said passage of legislation raising the cap on credit union lending would create almost 5,000 jobs in Wisconsin in the first year. He's hoping the bill will be voted on before the lame-duck Congress ends its term Jan. 3.
"It's a way of helping small businesses and to turn our economy around at absolutely no cost to taxpayers," Thompson said.
Not so fast, say bankers, who are the main rivals of credit unions.
Banks contend that because credit unions' are exempt from income tax, additional lending by credit unions will cut into profits by banks that do pay corporate income tax.
"We feel strongly the public needs to know that the government is going to lose revenue by letting these tax-subsidized credit unions have even more expanded powers," said Rose Oswald Poels, chief executive of the Wisconsin Bankers Association.
P. Michael Mahoney, chairman and chief executive of Park Bank in Milwaukee, said there is not much growth in small-business lending right now because of uncertainty about the economy and a lack of demand by businesses. He said allowing more business lending to credit unions would reduce loans by income-tax-paying banks.
"When the community banks have reduced volume, they are going to have reduced income and they are going to pay less taxes. And if that volume goes to somebody who doesn't pay taxes, that means a reduction in tax revenue for governments," Mahoney said. "The last I heard, the government was trying to increase revenue."
Thompson said the tax issue raised by bankers is faulty because many community banks are Subchapter S corporations, which means profits earned by the bank are taxed at the individual shareholder level, not at the corporate level. Thompson also said credit unions have increased lending much more than banks since the recession.
Bankers have long been bothered by the income tax exemption enjoyed by credit unions. They see it as an unfair advantage that allows credit unions to pay higher interest on savings and offer lower rates on loans.
Banks assert that more credit unions are growing into large financial institutions -- much larger than many community banks -- with the aid of their tax exemption, which was affirmed by Congress during the Great Depression when they were viewed as an alternative for consumers to banks.
Credit unions say the tax exemption is based on their structure as not-for-profit cooperatives operated by and for their members.
Banks challenge move
Banks, however, say credit unions have strayed from their original mission of providing financial services to people of "modest means."
Wisconsin now has seven credit unions with assets of $1 billion or more.
Oswald Poels said banks are in the business of lending money, and if good companies need loans, banks will make them. She said the effort to allow more business lending "is really being driven by a small group of very large credit unions that are no different than banks and should be taxed like banks."
"I think it is an exaggeration to say there is all this demand out there that is not being met," she said.
She said business borrowers generally don't want to take on more debt today because they don't know which direction the economy is headed.
If the cap is raised, credit unions definitely will do more commercial lending, said banking analyst David L. Donihue. But because many banks have solid relationships with their borrowers, a lot of customers will be reluctant to switch, he said.
"The banks are going to lose some business, but I don't think you're going to see a mad rush," said Donihue, managing director of Maximizing Shareholder Value & Co. in Leesburg, Fla. "It's a relationship. I want to make sure my loan officer knows who I am."
Thompson said most of the business loans that credit unions are making are too small for banks to be interested.
"The average size of credit union business loans in Wisconsin is $176,000, so we are not talking about huge, huge loans here to compete with many of the banks," Thompson said. "We are talking about very small loans. To be frank, a very high number of members who come in looking for loans have been turned down at their bank because the bank does not want to deal with such small credit."
Thompson said banks would remain by far the biggest business lenders in the state.
Nationwide, credit unions estimate that raising the cap would generate an additional $13 billion for small businesses and help create more than 140,000 jobs.
Thompson noted the legislation, which is in committee in Congress, would need to be considered by both the Senate and House.
The proposal has the support of organizations such as the National Association of Realtors. Its co-sponsors in the House are bipartisan, including U.S. Rep. Thomas Petri, a Fond du Lac Republican, and Madison's Democratic U.S. Senator-elect Tammy Baldwin.
Both sides are mobilizing their constituencies to contact their congressmen about the bills -- H.R. 1418 in the House and S. 2231 in the Senate -- as the credit unions make a major effort to pass the legislation before the 112th Congress ends its term.
"We've been working on this issue for close to 15 years and we have very high hopes that something can happen," Thompson said.
Said Oswald Poels: "I think there's this looming threat of it being brought up for a floor vote, and the threat seems a little more real now than it did before."
(c)2012 the Milwaukee Journal Sentinel
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OCTOBER 31, 2014
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