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Policy Issues Related to Credit Union Lending
Darryl E. Getter
Specialist in Financial Economics
October 28, 2015
Congressional Research Service
7-5700
www.crs.gov
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Policy Issues Related to Credit Union Lending
Summary
Credit unions make loans to their members, to other credit unions, and to corporate credit unions
that provide financial services to individual credit unions. There are statutory restrictions on their
business lending activities, which the credit union industry has long advocated should be lifted.
Specific restrictions on business lending include an aggregate limit on an individual credit union’s
member business loan balances and on the amount that can be loaned to one member. Industry
spokespersons have argued that easing the restrictions on member business lending could increase
the available pool of credit for small businesses. Credit unions also lack sources of capital beyond
retained earnings, and alternative supplemental capital sources would allow them to increase their
lending while remaining in compliance with safety and soundness regulatory requirements.
Community bankers, who often compete with credit unions, argue that policies such as raising the
business lending cap would allow credit unions to expand beyond their congressionally mandated
mission and could pose a threat to financial stability.
Members of the 114th Congress have introduced legislation that would allow credit unions to
expand their lending activities. H.R. 989, the Capital Access for Small Business and Jobs Act,
was introduced and referred to the House Committee on Financial Services on February 13, 2015.
H.R. 989 would redefine net worth for credit unions to include additional sources of supplemental
capital. In addition, H.R. 1188 and its companion bill, S. 2028, the Credit Union Small Business
Jobs Creation Act, would raise the current member business lending cap.
Small memberships limit the range of financial services that small credit unions can offer as well
as their ability to accumulate enough retained earnings (capital) to substantially increase their
commercial lending activities. Thus, the benefits to credit unions from legislative actions to
enhance their lending ability may be greater for larger institutions. Larger credit unions, with the
resources to offer a wide array of financial services to members, would also be expected to
become more significant competitors with community banks operating in similar lending markets.
Competition between credit unions and commercial banks, particularly those with over $1 billion
in assets, would be expected to intensify.
Although total assets in the credit union industry have risen over the past decade, the total number
of credit unions has declined. The industry’s assets are not evenly distributed. Some differences in
credit union and bank regulation are unlikely to account for the competitive advantages that large
credit unions enjoy relative to their smaller counterparts. These observations mirror the
consolidation trends observed in the depository banking industry and are discussed in greater
detail in the Appendix.
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Contents
Introduction ..................................................................................................................................... 1
Enhanced Capitalization Requirements ........................................................................................... 2
Increasing the MBL Cap: Implications and Optional Policy Tools ................................................. 6
The Importance of Asset Size and Market Purview .................................................................. 7
Insolvency Risks to the NCUSIF .............................................................................................. 8
Updates to MBL Rules and Definition ...................................................................................... 9
Alternative Tools and Policy Options ....................................................................................... 9
Other Proposed Lending Enhancements ....................................................................................... 10
Supplemental Capital .............................................................................................................. 10
Federal Home Loan Bank Membership ................................................................................... 11
Figures
Figure 1. Federally Insured Credit Unions and Community Banks and Assets ............................ 16
Appendixes
Appendix. Credit Unions, Community Banks, and Competition .................................................. 13
Contacts
Author Contact Information .......................................................................................................... 18
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Introduction
Credit unions engage in financial intermediation, or facilitating transfers of funds back and forth
between savers (via accepting deposits) and borrowers (via loans). Although other institutions
(e.g., depository banks, insurance companies, pension funds, hedge funds) also engage in the
financial intermediation matching process, this report focuses on issues facing the credit union
industry.1
The original concept of a credit union was of a cooperative organization formed for the purpose
of promoting thrift among its members and providing them with a low-cost source of credit.
Congress passed the Federal Credit Union Act of 1934 (FCU Act; 48 Stat. 1216) to create a class
of federally chartered financial institutions for the purpose of “promoting thrift among its
members and creating a source of credit for provident or productive purposes.”2 Given the
numerous bank failures and runs that occurred during the Great Depression, Congress wanted to
enhance the ability of these cooperative organizations to meet the credit needs of their
memberships, who were unable to obtain bank credit.3 The credit union industry has evolved with
marketplace changes so that many of the financial services that credit unions provide are similar
to those offered by banks and savings associations.
Credit union charters are granted by federal or state governments on the basis of a “common
bond.” There are three types of charters: (1) a single common bond (occupation or association
based); (2) multiple common bonds (more than one group each having a common bond of
occupation or association); and (3) a community-based (geographically defined) common bond.4
Individual credit unions are owned by their memberships. The members of a credit union elect a
board of directors from their institution’s membership (one member, one vote). Given that credit
unions are financial cooperatives that return profits to their memberships, members’ savings are
referred to as “shares” that earn “dividends” instead of interest. Credit union loan and investment
powers are more restricted than those of commercial banks. Credit unions can only make loans to
their members, to other credit unions, and to credit union organizations. The investment authority
of federal credit unions is limited by statute to loans, government securities, deposits in other
financial institutions, and certain other limited investments.
The National Credit Union Administration (NCUA), an independent federal agency, is the federal
regulator for credit unions.5 Typically, the Office of the Comptroller of the Currency (OCC)
charters and supervises national depository (commercial) banks; the Federal Deposit Insurance
Corporation (FDIC) provides deposit insurance and liquidates failed banks; and the Federal
Reserve provides lender-of-last-resort liquidity to solvent banks via its discount window. The
1 For more information about depository banks, see CRS Report R43002, Financial Condition of Depository Banks, by
Darryl E. Getter.
2 See “NCUA: The Federal Credit Union Act,” http://www.ncua.gov/Legal/Documents/fcu_act.pdf.
3 William R. Emmons and Frank A. Schmid, “Credit Unions Make Friends—But Not with Bankers,” Federal Reserve
Bank of St. Louis, The Regional Economist, St. Louis, MO, October 2003, at http://www.stlouisfed.org/publications/re/
articles/?id=406.
4 The National Credit Union Administration (NCUA) updated the framework used to determine the field of
membership in federal credit unions, allowing automatic qualification of 12 associational groups as valid associations.
See NCUA, Associational Common Bond Updates, Supervisory Letter SL No. 15-02, July 6, 2015, at
http://www.ncua.gov/Resources/Documents/LTCU2015-03Enclosure2.pdf; and NCUA, “Chartering and Field of
Membership Manual Final Rule,” 80 Federal Register 87, May 6, 2015.
5 NCUA was created by the Federal Credit Union Act of 1934 (48 Stat. 1216). P.L. 91-468, 84 Stat. 994 made the
NCUA an independent agency, which is governed by a three-member board.
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NCUA, by comparison, serves all three functions for federally regulated credit unions. The
NCUA also manages the National Credit Union Share Insurance Fund (NCUSIF), which is the
federal deposit insurance fund for credit unions.6
Numerous financial entities experienced distress during the 2007-2009 recession, including the
credit union system. In response, the NCUA has adopted enhanced capital requirements for credit
unions, which is intended to increase the resiliency of the credit union system to insolvency
(failure) risk and to minimize possible losses to the NCUSIF and ultimately taxpayers. Some
credit unions may need to curtail lending until they fully adjust to the increased requirements. In
addition, Congress is considering legislation (e.g., H.R. 1188 and S. 2028, the Credit Union Small
Business Jobs Creation Act; H.R. 989, the Capital Access for Small Business and Jobs Act) to
enhance the lending ability of the credit union industry as part of its efforts to spur economic
growth, which is discussed in this report along with additional policy options to consider. The
balance sheet terminology defined in the box below will be used throughout this discussion.
Credit Union Balance Sheet Terminology
Credit union assets include consumer (e.g., automobile, credit card, installment) and mortgage loans as well as
cash and other financial securities that are held in their portfolios. Commercial member business loans, which
are discussed in more detail below, are also assets for credit unions. Assets generate earnings (revenues) or
losses, depending upon whether share deposit members repay or default on their loans. Federally insured
credit union loans are generally restricted to maturities of 15 years or less with the exception of primary
mortgages and other designated loans.
Credit union liabilities include the funds that they borrow (for shorter periods of time). When customers
(share depositors) make savings or checking share deposits into a credit union, the credit union is essentially
borrowing those funds short-term in order to lend them out for longer periods of time. Liabilities are,
therefore, the costs incurred by the credit unions to obtain the funds necessary to originate loans to members.
Credit union net worth is the difference between assets and liabilities, which is analogous to bank capital. Net
worth consists of retained earnings, or the allotment of profits not paid to members in the form of dividends.
Given that the share deposits are federally insured, credit unions are required to maintain sufficient net worth
to absorb loan defaults by their shareholders. Asset (loan) defaults are less likely to result in failure of a credit
union to repay its shorter-term obligations if sufficient net worth is maintained to absorb the losses. If,
however, a credit union’s net worth falls below minimum regulatory threshold levels, it would be considered
undercapitalized and faces the prospect of being shut down by the NCUA, which also serves as the receiver of
the insolvent institution. Consequently, compliance with regulatory capital requirements means that asset
(lending) portfolios can only grow if net worth grows proportionately.
Enhanced Capitalization Requirements
The credit union system, which largely facilitates residential and consumer lending, inherently
faces financial risks, some of which were realized in the recent financial crisis. For example, the
NCUA reported that the corporate credit unions faced liquidity pressures and placed five of them
into conservatorship in 2008.7 Corporate credit unions operate as wholesale credit unions,
6 For more information on the NCUSIF status, see CRS Report R41718, Federal Deposit Insurance for Banks and
Credit Unions, by Darryl E. Getter.
7 See Statement of Deborah Matz, chairman, National Credit Union Administration, “The State of the Credit Union
Industry,” p. 3, at http://www.ncua.gov/News/Documents/SP20101209Matz.pdf, which was given in U.S. Congress,
Senate Committee on Banking, Housing, and Urban Affairs, 111th Cong., 2nd sess., December 9, 2010. A significant
portion of mortgage-backed securities held by corporate credit unions had lost value and were downgraded below
investment grade due to deterioration of the underlying collateral. In March 2009, the NCUA placed two corporate
credit unions, the U.S. Central Federal Credit Union and the Western Corporate Federal Credit Union, into
conservatorship. In September 2010, Constitution Corporate Federal Credit Union, Members United Corporate Federal
(continued...)
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meaning that they provide financing, investment, and clearing services for natural person (retail)
credit unions, which interface directly with customers. The corporates accept deposits from, as
well as provide liquidity and correspondent lending services to, retail credit unions. This reduces
the costs that smaller institutions would bear individually to perform various financial
transactions for members.8 Given that retail credit unions are cooperative owners of corporate
credit unions, they are also federally insured by the NCUA. The NCUA chairman reported that
the five corporates under conservatorship had represented approximately 70% of the entire
corporate system’s assets and 98.6% of the investment losses within the system at that time. A
Temporary Corporate Credit Union Stabilization Fund (TCCUSF) was established in May 2009
to accrue and recover losses from the corporate credit unions. The TCCUSF borrowed from
Treasury to help cover the costs of conservatorship, and the NCUA also raised assessments on all
federally insured credit unions, including those that did not avail themselves of corporate credit
union services.9
Credit unions, like all financial institutions, are susceptible to the usual risks associated with
lending or the financial intermediation process.10 Safety and soundness regulation includes the
requirement to hold sufficient capital reserves, which is intended to reduce the insolvency
(failure) risk of financial institutions. Although higher capital requirements may not prevent
adverse financial risk events from occurring, more capital enhances the ability of financial firms
to absorb greater losses associated with potential loan defaults. The enhanced absorption capacity
may strengthen public confidence in the soundness of these financial institutions and increase
their ability to function during periods of financial stress.
In May 2012, the NCUA issued a Supervisory Letter regarding large concentrations of 30-year
traditional fixed rate mortgage loans held in portfolio by some credit unions, which could develop
into an adverse financial event in the future.11 Credit unions that made large amounts of mortgage
loans during the current low interest rate environment could find themselves receiving lower
amounts of revenue relative to what may be necessary to pay share depositors if interest rates
increase in the future. Furthermore, the interest rate risk may grow into a systemically important
crisis or “too many to fail” event if numerous credit unions simultaneously became insolvent.12
(...continued)
Credit Union, and Southwest Corporate Federal Credit Union were also placed into conservatorship.
The U.S. Central Federal Credit Union, which is one of the 28 corporate credit unions, functions as a wholesale
corporate and provides services to the other 27 corporates.
8 See “How Many Corporate Credit Unions Will Be Standing by Year End?,” at http://www.cutimes.com/2011/03/02/
how-many-corporate-credit-unions-will-be-standing?page=3.
9 In January 2011, the authority to assess premiums on the credit union system to repay Temporary Corporate Credit
Union Stabilization Fund (TCCUSF) advances was clarified by P.L. 111-382, the National Credit Union Authority
Clarification Act. See “NCUA 2013 Financial Statement Audits for Temporary Corporate Credit Union Stabilization
Fund,” at http://www.ncua.gov/about/Leadership/CO/OIG/Documents/2013-FSA(OIG-14-05)-TCCUSF.pdf and
“NCUA Board Gets TCCUSF Report, OKs Joing Agency Appraisal Rule,” at http://www.nafcu.org/News/2014_News/
March/NCUA_Board_gets_TCCUSF_report__OKs_joint_agency_appraisal_rule/.
10 See CRS Report R40417, Macroprudential Oversight: Monitoring Systemic Risk in the Financial System, by Darryl
E. Getter
11 See National Credit Union Association, “Interest Rate Risk Policy and Program Requirements,” Letter No.: 12-CU-
05, May 2012, footnote 4, at http://www.ncua.gov/Resources/Documents/LCU2012-05.pdf and NCUA, “Supervisory
Letter on Concentration Risk,” at http://www.ncua.gov/Resources/Documents/LCU2010-03Encl.pdf.
12 The Savings & Loan (S&L) crisis of the 1980s is an example of a “too many to fail” event. S&L institutions are
nonprofit, member-owned financial institutions specializing in taking savings deposits to facilitate residential home
mortgage lending. During the early 1980s, hundreds of S&Ls, which were holding portfolios consisting primarily of
traditional fixed-rate mortgages, failed after the short-term interest rates paid to depositors rose to historic levels.
(continued...)
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The NCUA guidance requires vulnerable credit unions to submit plans outlining the measures that
will be taken to reduce or manage interest rate risks.13
On January 23, 2014, the NCUA announced increases in capital requirements for a subset of
natural person credit unions that will be designated as complex.14 A complex credit union was
initially defined by NCUA to have at least $50 million in assets.15 On January 27, 2015, the
NCUA revised the initial proposed rule, amending the definition of a complex credit union as
having at least $100 million in assets.16 Some of the specific requirements of the rule include the
following:
A proposed risk-based capital measure is introduced and will be narrower than
the existing definition of net worth. The new definition is designed to provide a
more accurate measure of equity and reserves available to cover losses for non-
performing assets. The risk-based capital measure will be computed by
subtracting the institution’s NCUSIF capitalization deposit, goodwill, and other
(...continued)
Regulation Q interest rate ceilings, which stem from the Banking Acts of 1933 and 1935, imposed interest rate ceilings
on time and savings deposits. Depositors were subsequently incentivized to withdraw funds from accounts with interest
rate restrictions and deposit them in unregulated accounts such as money market mutual funds. Many S&Ls that were
unable to maintain enough depositors to fund loans when deposit rates soared with rising inflation became insolvent.
See Alane Moysich, “Chapter 4: The Savings and Loan Crisis and Its Relationship to Banking,” Federal Deposit
Insurance Corporation, History of the 80s: An Examination of the Banking Crises of the 1980s and Early 1990s,
Washington, DC, December 1997, at http://www.fdic.gov/bank/historical/history/167_188.pdf. A chronology and
bibliography of the S&L crisis is provided at http://www.fdic.gov/bank/historical/s&l/; Paul Calem, “The New Bank
Deposit Markets: Goodbye to Regulation Q,” Business Review, Federal Reserve Bank of Philadelphia, Philadelphia,
PA, November/December 1985, at http://www.philadelphiafed.org/research-and-data/publications/business-review/
1985/brnd85pc.pdf; Alton Gilbert, “Will the Removal of Regulation Q Raise Mortgage Interest Rates?” Federal
Reserve Bank of St. Louis Review, St. Louis, MO, December 1981, at http://research.stlouisfed.org/publications/review/
81/12/Removal_Dec1981.pdf; Charlotte E. Ruebling, “The Administration of Regulation Q,” Federal Reserve Bank of
St. Louis Review, St. Louis, MO, February 1970, at http://research.stlouisfed.org/publications/review/70/02/
Administration_Feb1970.pdf.
13 The issue of credit union industry concentrations in mortgages is analogous to community bank concentrations in
commercial loans. Federal bank regulators expressed concern about the risk management practices of smaller, regional
banking institutions after observing rapid increases in commercial real estate loan concentrations on their balance
sheets. See Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System;
and the Federal Deposit Insurance Corporation, “Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices,” 71 Federal Register 74580-74588, December 12, 2006, at http://www.gpo.gov/fdsys/pkg/FR-
2006-12-12/pdf/06-9630.pdf. Addressing these risks may result in community banks entering into more participation
loans agreements with larger banks to further diversify their portfolios. See Rachel Witkowski, “Small Banks Slowly
Reconsidering Loan Participations,” American Banker, March 14, 2012. Similar to the NCUA, the FDIC issued more
guidance for bank purchases of participation loans to mitigate risks to the deposit insurance fund for banks, which can
be found in its Financial Institution Letters, FIL-38-2012, at http://www.fdic.gov/news/news/financial/2012/
fil12038.html.
14 See “NCUA Board Advances Greater Protection and Modern Regulation,” at http://www.ncua.gov/about/Pages/
Board%20Actions/BAB20140123.aspx.
15 The Credit Union Membership Access Act of 1998 (CUMAA; P.L. 105-219) required the NCUA to develop the
definition of a “complex” credit union. The Regulatory Flexibility Act (RFA; P.L. 96-354) requires federal agencies to
consider the impact of their proposed and final rules on small entities. Consequently, the NCUA currently defines a
complex credit union as a natural person credit union with at least $50 million in assets. This definition became
effective on February 19, 2013, reflecting an increase from the 2003 definition that used the asset threshold of at least
$10 million. See National Credit Union Administration, “Prompt Corrective Action, Requirements for Insurance, and
Promulgation of NCUA Rules and Regulations,” 78 Federal Register 4032-4038, January 18, 2013.
16 See National Credit Union Administration, “Part II: Risk-Based Capital; Proposed Rule,” 80 Federal Register 17,
January 27, 2015.
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intangible assets from its net worth, thereby leaving retained earnings and
reserves as the primary definition of capital.
A new asset risk-weighting system is introduced and would apply to all (complex
and non-complex) credit unions, and it will be more consistent with the
methodology used for U.S. federally insured banking institutions.17
A new risk-based capital ratio (defined using the narrower risk-based capital
measure in the numerator and total risk-weighted assets, which are computed
using the new risk-weighting system, in the denominator) is introduced. The risk-
based capital ratio is designed to be more consistent with the capital adequacy
requirements commonly applied to depository (banking) institutions worldwide.18
Complex credit unions must comply with the risk-based capital ratio
requirements as well as the existing (less narrow) net worth ratio to avoid NCUA
supervisory enforcement actions.
Complex credit unions are expected to have fully adjusted to the requirements of
the rule by January 1, 2019.
The proposed revisions would result in the application of risk-based capital requirements for
complex credit unions that are more consistent with those for corporate credit unions and other
federally insured depository institutions. Meanwhile, credit unions that are not complex (or have
less than $100 million in assets) must continue to comply with the existing net-worth asset
ratios.19 As previously stated, the assets of these institutions would also be subject to the new risk-
weighting system, and the risk-weighted assets would subsequently be used in the computation of
the net worth ratio requirements. Some industry representatives, however, are concerned that
harmonizing capital adequacy requirements for credit unions with those for banks would put the
credit union industry at a competitive disadvantage to the banking industry.20 According to the
NCUA, 1,455 credit unions reported having at least $100 million in total assets as of December
13, 2013, and 119 of those institutions would need to raise capital to avoid being
undercapitalized. Higher capital adequacy requirements would arguably constrain the ability of
affected credit unions to lend until capital buffers have been increased.
17 The system for risk-weighting assets was adopted by the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency on July 2, 2013; the Federal Deposit Insurance Corporation adopted it on
July 9, 2013. See “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy,
Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline
and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule,” at
http://www.federalreserve.gov/bcreg20130702a.pdf.
18 See CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by Darryl E. Getter
19 The statutory net worth requirements for credit unions may be found at Illustration 17-A—Statutory Net Worth
Category Classification on the NCUA website, at http://www.ncua.gov/Legal/GuidesEtc/ExaminerGuide/
chapter17.pdf. For RBNW rules, see National Credit Union Administration Regulations, March 2010, Part 74 702.108,
“Table 5(b) Alternative Components for Standard Calculation,” at http://www.ncua.gov/Legal/Documents/
NCUARegulationsManual.pdf.
20 See Letter from B. Dan Berger, President and CEO, National Association of Federal Credit Unions, to Gerard
Poliquin, Secretary of the Board, National Credit Union Administration, May 27, 2014.
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Increasing the MBL Cap: Implications and Optional
Policy Tools
There was no commercial lending cap on the amount of member business loans that credit unions
could make until 1998. In response to a Supreme Court decision, Congress passed the Credit
Union Membership Access Act of 1998 (CUMAA; P.L. 105-219), which among other provisions,
established a commercial lending cap.21
First, the CUMAA codified the definition of a credit union member business loan (MBL). An
MBL is any loan, line of credit, or letter of credit used for an agricultural purpose or for a
commercial, corporate, or other business investment property or venture. Second, the CUMAA
limited the aggregate amount of outstanding business loans to one member or group of associated
members to a maximum of 15% of the credit union’s net worth or $100,000, whichever is greater.
Third, the CUMAA limited the aggregate amount of MBLs made by a credit union to the lesser of
1.75 times the credit union’s net worth or 12.25% of the credit union’s total assets.22 Finally, three
exceptions to the credit union aggregate MBL limit were authorized for (1) credit unions that
have low-income designations or participate in the Community Development Financial
Institutions program;23 (2) credit unions chartered for the purpose of making business loans (as
determined by the NCUA); and (3) credit unions with a history of primarily making such loans
(as determined by the NCUA).
Legislation has been introduced in the 114th Congress that would allow credit unions to enhance
their member business lending activities. H.R. 1188, the Credit Union Small Business Jobs
Creation Act, was introduced on March 2, 2015; the companion bill, S. 2028, was introduced on
September 10, 2015.24 H.R. 1188 and S. 2028, would amend the Federal Credit Union Act
(particularly 12 U.S.C. 1757) to increase the current business lending cap to 27.5% of the total
assets of the credit union from the current 1.75 times of the actual net worth or 12.25% of the
total assets, whichever is less. The bills would also require credit unions that make MBLs to have
net worth and risk-based capital ratios that satisfy the requirements to be well capitalized. In
addition, a credit union would need to demonstrate a minimum of five years of experience of
sound underwriting and servicing of member business loans.
21 For a discussion of the Supreme Court decision and congressional response to it that resulted in P.L. 105-219, see
National Credit Union Administration, Petitioner, v. First National Bank & Trust Co., et al.; AT&T Family Federal
Credit Union, et al., Petitioners, v. First National Bank and Trust Co., et al., 118 S. Ct. 927 96-843, 96-847 (1998). See
also William R. Emmons and Frank A. Schmid, “Credit Unions and the Common Bond,” Federal Reserve Bank of St.
Louis Review, September/October 1999, at http://research.stlouisfed.org/publications/review/99/09/9909we.pdf.
22 At the time of CUMAA, some Members of Congress were still concerned that commercial lending, which is
considered riskier than consumer lending, would increase the risk profile of the credit union system. In deliberations
over the CUMAA, Members expressed concern that a 12.25% cap was too high if small loans (under $50,000) were not
counted toward the cap, and were also concerned that such an exemption could open up a regulatory arbitrage
opportunity enabling chartered credit unions to assume more financial risk and circumvent the cap limitation in the
legislation. Hence, the 12.25% lending cap arguably represented a compromise. See additional discussions in U.S.
Congress, Senate Committee on Banking, Housing, and Urban Affairs, Credit Union Membership Access Act, report to
accompany H.R. 1151, 105th Cong., 2nd sess., May 21, 1998, S.Rept. 105-193.
23 A designated Community Development Financial Institution (CDFI) works in financial market niches that are
underserved by traditional financial institutions. For more information, see the CDFI website at
http://www.cdfifund.gov/what_we_do/programs_id.asp?programid=9.
24 Related bills were introduced in past Congresses. See CRS Report R42574, Credit Union Commercial Business
Lending: Key Issues for Legislation in the 112th Congress, by Darryl E. Getter and CRS Report R40793, Credit Union
Member Business Loans, by Pauline Smale.
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Although the volume of credit union member business lending has increased over time, member
business loans continue to account for a small share of lending in the credit union system. In other
words, the total amount of MBLs provided by the credit union system may be constrained by the
current cap. Credit unions collectively provided a total of $43.42 billion of MBLs in 2013, which
equaled 4.08% of total credit union assets; approximately 85% of MBLs were secured by real
estate, with some credit unions heavily concentrated in agricultural loans.25
The Importance of Asset Size and Market Purview
If the MBL cap were raised, smaller credit unions attempting to originate and increase their
holdings of MBLs in portfolio would have to increase their net worth holdings substantially,
which arguably would be challenging if the membership base is small. Small credit unions
typically offer a limited range of services, such as a few savings products and specialized
consumer lending products such as (subprime) personal and automobile loans.26 These credit
unions would be unlikely to increase their presence in the commercial lending market
substantially because it would not be cost effective for them to invest in the necessary
underwriting systems for the volume of commercial lending that they would feasibly be able to
do.27 Hence, credit unions with assets under $10 million would be less likely to become more
substantial providers of MBLs.
By contrast, increasing the MBL cap would benefit credit unions that already enjoy a presence in
the commercial lending market or a sufficiently large asset base. Lifting the MBL cap would
allow credit unions already operating close to the current statutory limit to increase their presence
in the commercial lending market. These credit unions may also already have the capacity to offer
a broader range of consumer financial products and services. Some of the larger credit unions,
therefore, could become more important competitors with small community banks as well as
some midsize and regional banks.28
25 See NCUA, “Overall Trends,” December 31, 2013, at http://www.ncua.gov/legal/documents/reports/ft20131231.pdf.
For the sake of comparison, credit unions collectively provided a total of $39.58 billion of MBLs, which equaled 3.87%
of credit union assets in December 2012; approximately 84% of MBLs were secured by real estate. (See
http://www.ncua.gov/legal/documents/reports/ft20121231.pdf.) Credit unions with assets of $10 million or less
collectively made 458 of the MBLs originated by the credit union system in 2012; the median of the average size for
this group was approximately $60,000. Credit unions having more than $10 million in assets made the remaining
175,514 or 99.7% of the MBLs in 2012. Credit unions with over $1 billion in assets made 68,088 or 38.7% of the
MBLs in 2012. The median of the average MBL size in 2012 was $99,228 for credit unions with $10 million to $100
million in assets; $159,396 for credit unions with $100 million to $500 million in assets; $242,079 for credit unions
with $500 million to $1 billion in assets; and $303,958 for credit unions with over $1 billion in assets. These data were
provided to CRS by the NCUA.
26 Church or faith-based organizations that are open for very limited hours during the week, perhaps after church
services, with an all-volunteer management and staff are likely to fall into this small asset size category.
27 MBLs are perhaps the most complex lending activity for credit unions and would require significant resources that
many smaller credit unions would find cost prohibitive. See the testimony of the Honorable Debbie Matz, Chairman of
the NCUA in U.S. Congress, House Committee on Financial Services, Subcommittee on Financial Institutions and
Consumer Credit, H.R. 1418: The Small Business Lending Enhancement Act of 2011, 112th Cong., 1st sess., October 12,
2011, pp. 11-12, at http://financialservices.house.gov/UploadedFiles/101211matz.pdf.
28 According to the Federal Reserve’s Survey of Lending Terms, the average commercial and industrial loan size for all
domestic commercial banks (excluding U.S. branches and agencies of foreign banks) by the end of 2012 was
approximately $374,000; the average loan size at small domestic banks was approximately $119,000; the average loan
size at large domestic banks was approximately $457,000. See Board of Governors of the Federal Reserve System, E.2
Survey of Lending Terms, February 4-8, 2013, at http://www.federalreserve.gov/releases/e2/current/default.htm.
Although large banks originate larger loans relative to the large credit unions, larger credit unions are originating loans
larger relative to most banks with assets less than $1 billion. Hence, raising the MBL cap would allow credit unions
(continued...)
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Although the ability to originate and keep large loans in portfolio until fully repaid is highly
dependent upon the size of a credit union, the credit union system as a whole can support
increased member business lending by increasing its use of participation (syndicated) loans.
Loan participations are used by financial institutions to provide credit jointly. A loan originator,
who often structures the loan participation arrangement, typically retains the largest share of the
loan and sells smaller portions to other institutions.29 This practice allows the originator to
maintain control of the customer relationship (including the loan servicing) and overcome
funding limitations. In addition, all of the institutions involved in the participation loan use their
individual portions of the loan to diversify their asset (loan) portfolios, which can be a cost-
effective financial risk management tool.
Since 2007, the number of credit unions purchasing loan participations increased 15%, and the
dollar value of loan participations on credit unions’ balance sheets grew by more than 40%.30 If
the MBL cap is raised, then both small and large institutions may purchase portions of these loans
and distribute the risk throughout the system, similar in practice to how the banking industry
distributes its risks. The credit union system could, therefore, become a more prominent
competitor with the banking system in commercial lending markets.
Insolvency Risks to the NCUSIF
Proceeds from the National Credit Union Share Insurance Fund are used to pay share depositors
if member institutions fail. In the event of many simultaneous credit union failures, the risk of
insolvency of the NCUSIF increases and may require congressional action to replenish the fund.
Credit unions can be particularly vulnerable to failure, given that their membership affiliations are
restricted to a particular industry or geographical area that could be disproportionately affected by
an adverse economic event. For example, an increase in unemployment that is concentrated in a
particular industry or geographical location may trigger numerous loan defaults if such an event
adversely affects the majority of a credit union’s membership.
Increasing the lending cap arguably may allow the credit union system to increase its MBL
holdings, possibly resulting in more diversification. If, however, participation lending were to
become a more customary practice used to finance MBLs, then losses on loan participations
could also pose a “too many (small institutions) to fail” risk to the NCUSIF, given that multiple
credit unions are involved in the lending arrangements. The NCUA also reported that
participation loan charge-offs increased by more than 160% over the same period that credit
unions increased their purchases of participation loans.31 The NCUA has subsequently provided
more rules for participation loans to mitigate risks to the NCUSIF while still attempting to
maintain the viability of this diversification tool for individual credit unions.
(...continued)
with $10 million or more in assets to increase their competition with small banks and those with over $1 billion in asset
to increase their competition with the larger banks. See Richard G. Anderson and Yang Liu, Banks and Credit Unions:
Competition Not Going Away, Federal Reserve Bank of St. Louis, The Regional Economist, St. Louis, MO, April 2013,
pp. 4-9, at http://www.stlouisfed.org/publications/pub_assets/pdf/re/2013/b/Banks_CreditUnions.pdf.
29 Although credit unions often enter into participations together (and banks often enter into participations together),
loan originators can sell loan portions to any financial entity. This activity should not be confused with a securitization
given that the loan portions are sold directly to specific entities rather than restructured into new public offerings.
30 See “NCUA Board Approves New Rule for Loan Participations,” Board Action Bulletin, June 20, 2013, at
http://www.ncua.gov/about/Documents/Agenda%20Items/BAB20130620.pdf.
31 See “NCUA Board Approves New Rule for Loan Participations,” Board Action Bulletin, June 20, 2013, at
http://www.ncua.gov/about/Documents/Agenda%20Items/BAB20130620.pdf.
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Updates to MBL Rules and Definition
On July 1, 2015, the NCUA proposed updates to the MBL rules to remove “prescriptive”
requirements and adopt “principles” based approach.32 The prescriptive approach required credit
unions that wanted to originate MBLs to submit waivers to NCUA for approval, among other
requirements. The NCUA reported that the prescriptive approach took significant time and
resources from both credit unions and NCUA, resulting in delays in processing MBL
applications.33 The principles approach, by contrast, is intended to streamline the MBL
underwriting process by granting credit unions more flexibility and individual autonomy. Credit
unions are still expected to comply with prudential underwriting practices and commensurate net
worth requirements. Furthermore, credit unions with a concentration in commercial lending in
access of 50% of their total assets will be required to hold higher amounts of net worth to abate
the higher levels of concentration risk.34
In light of the greater autonomy associated with the principles based approach, the NCUA also
provided more detailed guidance for distinguishing between commercial loans and MBLs to help
credit unions better determine which loans to count toward the MBL cap.35 Despite the
distinguishing features, the net worth requirements for both commercial and MBLs would still be
identical. H.R. 1422 and S. 1440, the Credit Union Residential Credit Union Loan Parity Act,
would amend the FCU Act to revise the statutory definition of MBLs, further enhancing the
capacity of credit unions (satisfying the net worth capitalization requirements) to make more
MBLs and commercial loans.36
Alternative Tools and Policy Options
The MBL cap is not the only policy tool that can be used to influence the lending ability of the
credit union industry. From an economics perspective, a lending cap imposes an arbitrary limit
that may be too high for some credit unions and too low for others, thus resulting in MBL
shortages in the latter situations. For those credit unions that provide very few or no MBLs, a cap
is irrelevant. Those credit unions facing an active MBL market must abruptly cease this type of
lending when the volume of activity reaches the cap, which some may argue is set “too low,”
given that they can no longer satisfy the financial needs of their memberships. Hence, a lending
cap is arguably a blunt instrument to the extent that it imposes the same requirement on all
institutions without taking into account differences in asset size and market purview.
32 See National Credit Union Administration, “Member Business Loans; Commercial Lending,” 80 Federal Register
126, July 1, 2015.
33 NCUA reported approving 115 MBLs of the more than 1,000 waivers submitted in 2014.
34 A risk weight of 150% will be applied to commercial loans should the total amount exceed 50% of total assets. For
more information on NCUA risk weights, see “Risk-Based Capital Proposal Comparison: 2015 Revised Proposal
Changes Compared to 2014 Original Proposal,” at http://www.ncua.gov/Legal/Documents/RBC/RBC-Proposal-
Comparison.pdf.
35 See “Table—Comparison of Member Business Loans and Commercial Loan Definitions” for distinguishing
characteristics in the proposed rule, p. 37909.
36 The current statutory definition of MBL includes a loan to purchase a 1-4 unit non-owner occupied residential
dwelling as a business loan subject to the MBL cap. H.R. 1422 and S. 1440 would exclude from the MBL cap member
loans for the purchase of 1-4 unit rental properties, thus increasing the capacity to make more commercial loans
without having to reduce the amount of non-owner occupied residential loans.
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Policy tools with a greater focus on the costs to originate MBLs would still impose restraints on
credit unions without directly capping their lending ability.37 For example, increasing the asset
risk weights for MBLs imposes costs without resulting in an abrupt discontinuation of this
activity for those credit unions approaching the cap. As previously discussed, the NCUA has
narrowed the definition of net worth and introduced a risk-weighting system, which is more
consistent with the capital adequacy requirements used by the banking system. Another policy
tool having a similar effect would subject the net income derived from member business lending
activities (particularly for credit unions over a certain asset size) to unrelated business income tax
(UBIT) for tax-exempt organizations.38 In short, policy tools that operate through cost
disincentives instead of quantity restrictions (at a fixed level) may still allow those credit unions
with a presence in this market to increase their member business lending activity.
Other Proposed Lending Enhancements
In addition to revising policies associated with member business lending, other legislative actions
have been introduced in the 114th Congress to facilitate credit union lending, discussed below.
Supplemental Capital
Because credit unions do not issue common stock equity, they do not have access to capital
sources beyond retained earnings. Hence, if alternative sources of capital, referred to as
supplemental capital, can be used in addition to retained earnings (net worth), then credit unions
would be able to increase their lending while remaining in compliance with their safety and
soundness net worth requirements.
An NCUA working group has developed three general sources of supplemental capital, all of
which would be repaid in the event of the liquidation of an insolvent credit union and after
reimbursement of the NCUSIF.39 Credit unions could raise
voluntary patronage capital (VPC) if (non-institutional) members of a credit
union were to purchase “equity shares” in the organization.40 VPC equity shares
would pay dividends; however, a VPC investor would not obtain any additional
37 Using market based incentives to affect the costs of MBLs and, thus, determining the optimal distribution is
analogous to the use of environmental (e.g., carbon) taxes to manage pollution emissions. For examples, see CRS
Report RL33799, Climate Change: Design Approaches for a Greenhouse Gas Reduction Program, by Larry Parker;
and John Norregaard and Valerie Reppelin-Hill, Taxes and Tradable Permits as Instruments for Controlling Pollution:
Theory and Practice, International Monetary Fund, WP/00/13, Washington, DC, January 2000, at http://www.imf.org/
external/pubs/ft/wp/2000/wp0013.pdf.
38 See “Statement for the Record on behalf of the American Bankers Association before the Oversight Subcommittee of
the Committee on Ways and Means, United States House of Representatives, July 25, 2012,” at http://www.aba.com/
Advocacy/Testimonies/Documents/72512StatementUBITCU.pdf. The Appendix discusses the circumstances in which
some credit unions pay UBIT.
39 NCUSIF is the federal deposit insurance fund for credit unions. See National Association of State Credit Union
Supervisors, “Q&A on Supplemental Captial for Credit Unions,” press release, http://www.nascus.org/Regulatory/1-
09-Q&A-Supplemental-Capital.php; and the Executive Summary “NCUA Supplemental Capital White Paper prepared
by the Supplemental Capital Working Group,” April, 12, 2010, at
http://www.ncua.gov/Legal/GuidesEtc/Documents/Publications/20100412SupCapital.pdf.
40 Credit union members hold shares because credit unions are not banks. If they were banks, shares would be called
deposits. In discussions of supplemental capital, the term equity shares is used to help distinguish from the way the
term shares is generally used in discussions about credit unions.
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voting rights, and no investment would be allowed to exceed 5% of a credit
union’s net worth.
mandatory membership capital (MMC) if a member pays what may be
conceptually analogous to a membership fee. MMC capital would still be
considered equity for the credit union but, unlike VPC, it would not accrue any
dividends.
subordinate debt (SD) from external and institutional investors. SD investors
would have no voting rights or involvement in the management affairs of a credit
union. SD would function as a hybrid debt-equity instrument, meaning that the
investor would simply be a creditor with no equity share in the credit union while
it is solvent and would not be repaid principal or interest should the credit union
become insolvent. SD investors must make a minimum five-year investment with
no option for early redemption.
Net worth for credit unions is defined in statute; therefore, Congress would need to take
legislative action to permit other forms of supplemental capital to count toward their net worth
requirements. H.R. 989, the Capital Access for Small Business and Jobs Act, referred to the
House Committee on Financial Services on February 13, 2015, would redefine net worth for
credit unions to include additional sources of supplemental capital in a manner consistent with the
three forms discussed in the NCUA white paper. H.R. 989 may arguably complement bills H.R.
1188 and S. 2028, but these bills are not dependent upon concurrent enactment. H.R. 989 would
allow credit unions to increase all types of lending (including MBLs) as long as overall net worth,
which would then be able to include supplemental capital, grows proportionately.
Federal Home Loan Bank Membership
The Federal Home Loan Bank (FHLB) System provides secured loans to banks, credit unions,
and insurance companies engaged in housing finance as well as in agricultural and small business
lending.41 Membership in the FLHB System generally requires institutions to hold at least 10% of
their total assets in mortgage-related assets. Community financial institutions, however, are
exempt from this eligibility requirement. According to the Federal Home Loan Bank Act (FHLB
Act; P.L. 72-304, 47 Stat.128), community financial institutions are defined as having less than $1
billion in assets and deposits insured by the Federal Deposit Insurance Corporation (FDIC). This
definition allows for some small banks, particularly those designated by the U.S. Treasury as
Community Development Financial Institutions (CDFI), to qualify for the exemption; but it
excludes NCUA-insured credit unions.42
H.R. 2642 and its companion, S. 1491, the Community Lender Regulatory Relief and Consumer
Protection Act of 2015, would amend the FHLB Act to require the treatment of a state-chartered
credit unions as insured depository institutions, among other things; thus making it possible to
harmonize FHLB membership requirements for small banks and credit unions. In addition, H.R.
41 For more information about the Federal Home Loan Bank (FHLB) System, see CRS Report RL32815, Federal
Home Loan Bank System: Policy Issues, by Edward V. Murphy. The FHLB System provided liquidity for mortgage
lenders that retained mortgages in portfolio; Fannie Mae and Freddie Mac, which are also government-sponsored
enterprises were established to facilitate secondary mortgage markets for originators that wanted to sell their mortgage
loans.
42 See Community Development Financial Institutions (CDFI) Fund, U.S. Department of the Treasury, at
https://www.cdfifund.gov/Pages/default.aspx.
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2473, Preserving Capital Access and Mortgage Liquidity Act of 2015, would redefine community
financial institution to include either a federal or state credit union.
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Appendix. Credit Unions, Community Banks, and
Competition
Community banks, which are commonly defined as financial institutions that hold less than $1
billion in assets, are arguably similar to credit unions with respect to their business models.43 For
example, community banks and credit unions engage in “relationship banking,” which involves
developing close familiarity with their respective customer bases. Community banks typically
provide financial services within a circumscribed geographical area. The development of close
relationships helps community banks understand idiosyncratic lending risks in their local areas
that may not be easily understood using a computerized underwriting methodology.44 Similarly,
credit unions provide financial services to their restricted memberships. The development of close
relationships helps credit unions tailor product offerings to their unique memberships. Both credit
unions and community banks also rely primarily upon deposits to fund their assets (loans). In
other words, community banks and credit unions borrow primarily from their depositors to obtain
the funds necessary to provide customer loans rather than from the short-term financial markets
that the larger banking institutions access more frequently.
This section discusses some similarities among and differences between credit unions and
community banks. Both industries serve similar types of consumer markets, and larger
institutions appear to enjoy some advantages relative to their smaller counterparts. There are
some regulatory differences in fair lending and taxation between credit unions and banks. These
differences may be less important for small credit unions and small banks that operate in very
narrowly defined markets, as discussed below. By contrast, both the credit union and banking
industries are experiencing similar consolidation trends. Membership size and the ability to offer
a full range of financial services may ultimately explain any comparative advantages that large
credit unions (and large banks) enjoy relative to small credit unions and small banks. These issues
are examined below.
Differences in Fair Lending Requirements
Congress enacted the Community Reinvestment Act of 1977 (CRA; P.L. 95-128) in reaction to
perceptions that banks were not sufficiently addressing the credit needs of low- and moderate-
income (LMI) neighborhoods.45 The CRA requires that federal banking regulatory agencies
evaluate how regulated institutions meet the credit needs of their entire communities. No
statutorily set rules are imposed; banking institutions, however, typically receive CRA credits
after providing LMI loans (subject to existing federal prudential regulations for safety and
soundness) or other financial retail services in their communities. CRA credits become important
when a bank seeks permission from its regulator to move offices or to merge with another
financial institution.
43An alternative and more extensive definition of a community bank is associated with its functions as opposed to its
asset size. See Federal Deposit Insurance Corporation, FDIC Community Banking Study, Washington, DC, December
2012, at http://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.
44 Large financial institutions perform “transactional banking” or high-volume lending that relies heavily upon
automated underwriting. For more information on automated underwriting, see Wayne Passmore and Roger Sparks,
The Effect of Automated Underwriting on the Profitability of Mortgage Securitization, Federal Reserve Board, Finance
and Discussion Series 1997-19, Washington, DC, 1997, at http://www.federalreserve.gov/pubs/feds/1997/199719/
199719abs.html.
45 See CRS Report R43661, The Effectiveness of the Community Reinvestment Act, by Darryl E. Getter.
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Credit unions are not subject to the CRA. Given that banks may accept deposits from all
individuals in a community, CRA provides them with a reciprocal obligation to meet credit needs,
as much as possible, of their communities at large. CRA credits are useful to banks when they
apply for charters, branches, mergers, acquisitions, and other applications that require approval
from their regulators. By contrast, credit unions are not awarded credits that would allow them to
expand beyond the common bonds defined in their membership charters. Instead, a credit union
may add an underserved area in its field of membership and provide financial services in that
designated area.46
If, however, the CRA did apply to credit unions, some of them may enjoy a competitive
advantage in terms of achieving its policy goals, particularly if their membership consists
predominately of minority groups and the credit unions’ financial services can be tailored to these
groups. Not-for-profit institutions generally may enjoy a cost advantage providing higher risk,
unsecured loans at lower rates and fees relative to for-profit banks. In other words, credit unions
seek to make enough money to continue operating their organizations, but they are not
necessarily incentivized to make a return for equity investors. For example, a credit union
affiliated with a faith-based organization that specializes in small-dollar lending may find it less
costly (relative to banks or larger credit unions) to devote resources to monitor the repayment
patterns of a small group of borrowers that might otherwise remain unbanked or underbanked.47
Low-cost payday lending to individuals and micro-business lending, which is the granting of
small loans between $500 and $35,000 to small businesses with 5 or fewer employees, have been
viable businesses for some credit unions.48 Thus, smaller financial institutions generally may
enjoy cost advantages to provide services to riskier consumer markets, and such advantages may
be even greater for small not-for-profit credit unions.49 As of 2012, there were 180 banking
institutions with minority ownership; 150 of them would be considered community banks with
assets less than $1 billion.50 In contrast, there were 809 credit unions with over 50% minority
membership as of 2012.51
Differences in Tax Treatment
Given that credit unions are not-for-profit financial cooperatives, the institutions are exempt from
federal income tax. Share deposit holders pay taxes at individual tax rates when they receive
46 See National Credit Union Administration, “Underserved Area Expansions,” Letter No.: 01-FCU-02, April 2001, at
http://www.crs.gov/pdfloader/R41398.
47 For more information on the credit union industry’s role in providing financial services for disadvantaged
communities, see the Office of Small Credit Union Initiatives at http://www.ncua.gov/Resources/OSCUI/Pages/
default.aspx and remarks made by U.S. Congress, House Committee on Appropriations, Subcommittee on Financial
Services and General Government, Financial Services for Disadvantaged Communities, Statement, JoAnn M. Johnson,
Chairman, National Credit Union Administration, 110th Cong., 1st sess., March 1, 2007, at http://www.ncua.gov/News/
Press/CT20070301Johnson.pdf.
48 See “CUNA Council White Papers Explore Business and Microlending,” Credit Union Times, May 14, 2008, at
http://www.cutimes.com/2008/05/14/cuna-council-white-papers-explore-business-and-microlending; and Dave Grace,
Microloan Feasibility Study: Can Small Business Lending Become Big Business for Credit Unions?, Finlene Research
Institute, September 6, 2013, https://filene.org/assets/pdf-reports/305_Grace_Microlending.pdf.
49 See Credit Union National Association, “Equifax: Sub-prime Borrowers Grew Across Lending Sectors,” press
release, March 29, 2012, at http://news.cuna.org/articles/Equifax:_Sub-prime_borrowers_grew_across_lending_sectors.
50 See the FDIC’s Minority Depository Institutions Program fourth quarter 2012 report, at http://www.fdic.gov/
regulations/resources/minority/MDI.html.
51 See Minority Institution Report, which can be found at the NCUA’s Office of Minority and Women Inclusion, at
http://www.ncua.gov/about/leadership/pages/page_mwi.aspx.
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interest (referred to as “dividends”) on their share deposits, as do bank equity shareholders; but
the credit union does not pay taxes at the corporate level. Some credit unions, however, may still
pay unrelated business income tax (UBIT) for tax-exempt organizations.52 For example, if a credit
union were to provide financial services (e.g., check-cashing) to non-members, any revenue
generated from those activities would be subject to UBIT.
Community banks are for-profit financial institutions that may accept deposits and provide
lending services without any restrictions on their customer base. Community banks generally are
publicly owned and issue common equity shares, so their depositors do not necessarily have to be
equity shareholders. Community banks generally pay taxes at the corporate level and the
shareholders pay taxes on their equity dividends at the individual tax rates; thus, the corporate
profits are taxed twice. In 1997, however, small banks meeting eligibility requirements were
allowed to become “S corporations,” meaning that their income is taxed only once (at the
individual income tax rates).53 As of 2013, the FDIC reported that 2,210 insured banking
institutions were organized as S corporations; thus, these institutions are taxed in a manner
similar to credit unions.54 Small banks organized as S corporations would not experience a tax
disadvantage relative to credit unions. The difficulty of converting to an S corporation increases
for larger banks if much of their equity is held in Individual Retirement Accounts, which are not
allowed to hold equity in S corporations.55
The difference in tax treatments of credit unions and banks that are not organized as S
corporations would need to be determined on a case-by-case basis. As previously noted, a
necessary first step would be to determine the nature of competition. For example, the difference
in the tax treatment of a faith-based credit union offering a very limited range of financial
services is likely to have a negligible impact on the activities of a nearby community bank. A
large credit union able to offer a full range of financial services to a regional or national market,
however, may arguably benefit from the difference in tax treatment relative to banking
institutions of similar sizes that serve similar markets. The nature of competition in terms of size
and market, therefore, determines whether a cost advantage exists.56
52 See Internal Revenue Service, “Chapter 76. Exempt Organizations Examination Guidelines, Section 22. Credit
unions—IRC 501(c)(14),” at http://www.irs.gov/irm/part4/irm_04-076-022.html; “Statement for the Record on behalf
of the American Bankers Association before the Oversight Subcommittee of the Committee on Ways and Means,
United States House of Representatives, July 25, 2012”, at http://www.aba.com/Advocacy/Testimonies/Documents/
72512StatementUBITCU.pdf; Kevin E. Fincher, “Unrelated Business Income Tax: A CU’s Guide to UBIT Rules &
Exceptions, Executive Summary,” http://www.cues.org/data/wppc-nonmembers/35_UBITexecsummary.pdf; and
Claude R. Marx, “Bellco Credit Union Wins a Clean Sweep on UBIT,” Credit Union Times, April 14, 2010, at
http://www.cutimes.com/2010/04/14/bellco-credit-union-wins-a-clean-sweep-on-ubit.
53 P.L. 104-188, Small Business Job Protection Act of 1996. For more information about S corporations that pass
income through individual tax rates as opposed to C corporations that pay taxes at both the corporate and individual
levels, see CRS Report R42359, Who Earns Pass-Through Business Income? An Analysis of Individual Tax Return
Data, by Mark P. Keightley.
54 See FDIC Statistics on Depository Institutions, at http://www2.fdic.gov/sdi/index.asp.
55 See U.S. Congress, House Committee on Ways and Means, Subcommittee on Select Revenue Measures, Testimony
of Independent Community Bankers of America, “S Corporation Reforms”, 108th Cong., 1st sess., June 19, 2003, at
http://www.icba.org/advocacy/testimonydetail.cfm?itemnumber=542&pf=1. To compute the number of community
banks that are subchapter S corporation banks (by state), see http://www.fdic.gov/bank/analytical/stateprofile/.
56 A study was conducted to see if there is a profitability advantage for commercial banks operating as S Corporations
compared with those operating as C Corporations. Ken B. Cyree, Scott E. Hein, and Timothy W. Koch, The Impact of
Taxes and Ownership on the Performance and Capital Structure of S Corporation Banks, May 2010, at
http://finance.ba.ttu.edu/hein/Research%20Papers/
Impact_of_Taxes_and_Ownership_onCapital_Structure_S_Corp_Banks%20May2010%20to%20JFI.pdf.
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Similarities in Consolidation Trends
Using data from the NCUA, Figure 1 illustrates the total number and total asset holdings of U.S.
credit unions over the 2003 to 2012 period. Total credit union assets have risen while the total
number of credit unions has been shrinking over time. Credit union assets increased from $610.1
billion in 2003 to $1,021.7 billion by 2012. The total number of credit unions, however, declined
from 9,369 to 6,819 over the same period. Furthermore, industry assets are not evenly distributed.
The largest 197 credit unions with over $1 billion in assets held 51.2% of total industry assets in
2012 compared with the 29.4% share held in 2003. Loan and membership growth rates were
positive for credit unions with assets exceeding $100 million; the highest growth rates were
observed for institutions with $500 million or more in assets.57 By contrast, institutions with $100
million or less in assets saw negative loan growth; institutions with less than $10 million in assets
also saw negative membership growth. These trends are similar to the consolidation trends
observed in the depository banking system.58
Figure 1. Federally Insured Credit Unions and Community Banks and Assets
2003-2012
10000
1800000.00
9000
1545943.86
1600000.00
1479968.47 1490678.97
1448464.09
1463669.93
1467779.16
1411286.43
1418647.64
1386163.63
1403337.67
8000
1400000.00
s)
s
ar
7000
oll
1200000.00
tion
of d
titu 6000
1021727.44
s
n
961697.37
1000000.00
914340.88
884607.88
of Ins 5000
r
811046.79
millio
e
754986.21
800000.00
711148.88
(in
678978.71
mb 4000
646969.15
610124.73
Nu
523527.68
600000.00
al
Assets
3000
473118.65
430340.18
Tot
al
400171.60
354555.45
400000.00
308158.42
Tot
2000
268898.07
238643.53
212779.12
179880.26
200000.00
1000
9369
8600
9014
8379
8695
8203
8362
8031
8101
7864
7806
7630
7554
7340
7339
6992
7094
6699
6819
6421
0
0.00
Dec 2003
Dec 2004
Dec 2005
Dec 2006
Dec 2007
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Total Number Credit Unions (Left Bar)
Total Number Community Banks (Right Bar)
Credit Union Assets ($1 Billion or More)
ALL Credit Union Assets (in millions of dollars)
Community Bank Assets ($1 Billion or Less)
Source: NCUA and the Federal Deposit Insurance Corporation (FDIC).
57 For summary statistics, including information on average assets by various credit unions sizes, see NCUA “Overall
Trends,” December 31, 2012, at http://www.ncua.gov/Legal/Documents/Reports/FT20121231.pdf.
58 For more information on the consolidation trends in the federal depository banking industry, see CRS Report
R43002, Financial Condition of Depository Banks, by Darryl E. Getter
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For the sake of comparison, Figure 1 also includes the total number and assets of community
banks. As of 2012, there were approximately the same number of community banks and credit
unions, 6,421 and 6,819, respectively. The community banks, however, collectively had
approximately $400 billion or 37.3% more in assets than the credit union industry. When
compared with credit unions of similar size (less than $1 billion in total assets), community banks
collectively have approximately $904 billion or 181.7% more in assets. Hence, the assets of most
credit unions are on average much less than the assets of most community banks.
Although community banks collectively have more aggregate assets relative to the entire credit
union industry, total credit union assets in Figure 1 appear to have slightly greater trend growth
relative to the total assets of community banks. This trend is driven by growth of the large credit
unions, which are holding a greater share of industry assets over time. On November 5, 2011,
which became known as Bank Transfer Day, thousands of consumers moved their (deposit)
accounts to credit unions due to their frustration with large bank fees.59 Based upon the trends in
asset and membership growth, the migration of customers from (large) banks appears to have
benefitted larger credit unions able to offer more financial services relative to small credit unions
or small banks (with less than $1 billion in assets).
Regulatory differences that are unrelated to safety and soundness may also present comparative
advantages, particularly for smaller institutions. For example, recent restrictions placed on the
amount of debit interchange fees that can be collected by large banks and credit unions may
reduce revenues that could be used to cross subsidize some of the costs associated with providing
other financial services, thus creating a competitive advantage for institutions not covered by the
regulation.60 Differences in the reporting requirements related to consumer protection regulations
may create cost advantages for smaller financial institutions, especially those that provide
services to financially riskier customers.61 By contrast, compliance with various or a multitude of
regulations may place a higher cost burden on small institutions relative to those with size and
transaction volume advantages, which generate substantial fee revenue for larger institutions.62
Hence, regulations that provide cost advantages for one set of financial firms may be offset by
cost advantages generated by other regulations that favor another set of financial institutions.
59 See Claude R. Marx, “CUNA Revises to 210,000, Not 650,000, New Members in Bank Transfer Day Runup,”
December 5, 2011, at http://www.cutimes.com/2011/12/05/cuna-revises-to-210000-not-650000-new-members-in-b.
60 See CRS Report R41913, Regulation of Debit Interchange Fees, by Darryl E. Getter.
61 The consumer financial protection supervision of financial institutions with $10 billion or less in assets will remain
with their prudential regulators rather than with the Consumer Financial Protection Board. See CRS Report R41338,
The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title X, The Consumer Financial Protection
Bureau, by David H. Carpenter. Thus, various financial practices provided on a smaller scale by small institutions may
not receive the same scrutiny as those conducted by large institutions that will be examined by the Consumer Financial
Protection Board.
62 See Thomas J. Curry, “Remarks Before the Florida Bankers Association,” Office of the Comptroller of the Currency,
Miami, FL, October 23, 2012, at http://www.occ.gov/news-issuances/speeches/2012/pub-speech-2012-151.pdf; and
Louise Bennetts, “Thanks to Dodd-Frank, Community Banks Are Too Small to Survive,” American Banker, November
9, 2012.
Congressional Research Service
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Policy Issues Related to Credit Union Lending
Author Contact Information
Darryl E. Getter
Specialist in Financial Economics
dgetter@crs.loc.gov, 7-2834
Congressional Research Service
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