WASHINGTON (Feb. 14, 2013) -– The R Street Institute welcomed today’s introduction of federal legislation making it easier for small businesses to gain access to credit through the nation’s credit union system.

Co-sponsored by Rep. Ed Royce, R-Calif., and Rep. Rep. Carolyn McCarthy, D-N.Y., the Credit Union Small Business Jobs Creation Act, H.R. 688, 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. In a 2012 report, R Street estimated that this change alone would free up to $13 billion in capital and spur creation of as many as 140,000 jobs.

First instituted in 1998 following extensive lobbying by the banking industry, the member business lending cap serves to limit the services community-based, non-profit credit unions can offer to their members, noted R Street Senior Fellow R.J. Lehmann.

“Credit unions have been offering loans to small business members since the dawn of the credit union movement in the United States at the turn of the 20th Century,” noted R Street Senior Fellow R.J. Lehmann. “Many credit unions have extensive experience in small business lending, particularly in serving niche industries like organic farmers and yellow taxi cab companies, where they have close relationships and specialized knowledge that banks often can’t hope to match.”

“The member business lending cap is not, and has never been, about the safety and soundness of credit unions. That’s what capital adequacy regulation is for. It is, instead, a largely arbitrary rule that serves primarily to curtail competition and leave many small businesses underserved,” Lehmann added.

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.

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