R Street urges Senate to consider expanding small business credit

WASHINGTON (Dec. 5, 2012) – Legislation to expand credit union member business lending should not be tied to a proposed extension of the Federal Deposit Insurance Corporation’s Transaction Account Guarantee program, the R Street Institute said today, adding that senators should have an opportunity to vote directly on a common sense proposal to boost small business across the country.

Senate Majority Leader Harry Reid, D-Nev., last week introduced S. 3637, which would extend the TAG program beyond its scheduled Dec . 31 expiration.  Expanded at the height of the financial crisis in October 2008, the program currently offers unlimited FDIC insurance coverage to noninterest-bearing transaction accounts. The expanded program was extended by Congress in a modified form in 2010, but is set to expire at the end of 2012.

Some in Congress have suggested pairing TAG extension with S.2231, a bill sponsored by Sen. Mark Udall, D-Colo., that would raise the cap on loans credit unions can make to their small business members from the current 12.25 percent of assets to 27.5 percent of assets. By considering these measures separately, senators will be free to vote on the merits of expanding access to credit for small businesses, a change that R Street estimates would free up to $13 billion in capital and spur creation of as many as 140,000 jobs.

“The TAG program was expanded in a time of crisis, and that crisis has now passed. It’s appropriate that the program expansion be allowed to expire and for the Senate to instead consider member business lending on its own merits,” said R Street Senior Fellow R.J. Lehmann. “Small businesses, who long have been the drivers of economic recovery, are clamoring for more access to credit, and credit unions stand ready to provide it.”

According to National Credit Union Administration data, there are 142 credit unions that currently have MBL ratios of more than 10 percent of their assets, effectively preventing them from making any more loans. Another 161 credit unions with ratios of between 7.5 percent and 10 percent are currently approaching the 12.5 percent cap, while there are 230 credit unions with ratios of between 5 percent and 7.5 percent that are experiencing the initial constraints of the cap.

“Credit unions have offered loans to their small business members since their inception, and many have extensive experience in the area. Because of credit unions’ focused fields of membership, they frequently serve specialized business niches – such as organic farmers and yellow taxi cab companies – where they have close relationships and specialized knowledge that banks often can’t hope to match,” Lehmann said.

“The member business lending cap is an arbitrary rule, first imposed in 1998, that does nothing to enhance the safety or soundness of credit unions, while serving to prevent these community-based nonprofit organizations from providing the services their members need,” he added.

R Street is a non-profit public policy research organization that supports free markets; limited, effective government; and responsible environmental stewardship. It has headquarters in Washington, D.C. and branch offices in Tallahassee, Fla.; Austin,Texas; and Columbus, Ohio. Its website is www.rstreet.org.

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