You Say You Want a Devolution...

by Rick Metsger, Vice Chairman

With apologies to the Beatles, one year ago I announced my commitment to devolution—modernizing a number of NCUA's key rules and procedures to provide credit union unions flexibility to meet their members' needs and chart their own futures.

Our risk-based capital rule, our fixed-assets rule, and revisions to our association common-bond rule were all efforts to devolve authority to credit union boards and management in a prudent way. Our recently completed member business lending rule is another major step forward in this direction.

As detailed elsewhere in this issue, the new rule replaces a prescriptive system which frequently required agency waivers—that were often not provided in a timely fashion— with a rules-based system that requires credit unions to adopt policies and procedures and hire competent staff. In short, the agency will stop micro-managing every loan and start looking at the big picture.

What surprised me the most about the proposed rule was the suggestion made by bank lobbyists that we lacked the authority to issue the proposed rule. They also suggested that the sky would fall if it was adopted and that credit unions are not supposed to make member business loans.

This claim rewrites American history because credit unions have been making member business loans since they were first created. In fact, the very first credit union chartered in the United States, in 1909, La Caisse Popularie St. Marie, now known as St. Mary's Bank Credit Union, had "to establish neighborhood businesses," as its primary lending focus.

As the Credit Union Membership Access Act acknowledged, many credit unions were specifically chartered for the purpose of making member business loans or had a history of primarily making them.

There was no percentage cap on member business loans until 1998, even during the depths of the Great Depression. It is just not true that credit unions are unfamiliar with member business loans or that they pose a threat to the safety and soundness of the system or the Share Insurance Fund.

We also know that small businesses are our nation's greatest job creators and are critical to the lifeblood of communities across our country, particularly in rural areas and underserved communities.

Almost all credit union member business loans are made to small businesses. The SBA's analysis of commercial lending by banks and credit unions found that, while banks tend to reduce lending during economic stress, credit unions continue to lend to small businesses.

During the most recent recession, for example, a report commissioned by the SBA found that between 2007–2010 commercial loans at banks decreased by 13 percent. Member business loans at credit unions, however, picked up the slack and increased by 41 percent, including a 63 percent increase in SBA loans.

Even though credit union business lending is only 1.4 percent of total business lending done by financial institutions—hardly a threat to other financial intermediaries—it is an important source of credit for America's small businesses.

According to the SBA's report, "every dollar of new member business lending by credit unions generates 81 cents of an entirely new credit source for small businesses." In other words, the majority of credit union lending is new lending that would not have occurred otherwise.

Thus, member business lending by credit unions has created millions of jobs and has helped our nation and its small businesses when they needed help the most—when our nation was in recession and other lenders were closing their doors to small businesses.

We all know that the real reason a cap was imposed on member business lending in 1998 had nothing to do with safety and soundness. If it were a really a safety and soundness issue, a similar cap would have been imposed on other types of federally insured depository institutions that have much higher levels of commercial loans on their books.

Commercial loans make-up more than half of banks' portfolios, but only 7 percent of credit unions' portfolios.

With their larger portfolios and greater experience, you would think that bank commercial lending performance would be better than credit unions. However, an analysis of loans at credit unions and similar-sized banks shows no statistically significant difference in delinquency rates and charge-offs between banks and credit unions, even during the Great Recession.

We also observed that credit unions that engage in member business lending outperform their peers. They have higher CAMEL ratings and higher returns on assets than their peers do.

A properly managed member business loan program can help a credit union diversify its portfolio, increase its overall yield and, thus, reduce risk.

As a result, the rule's goal is to help credit unions that choose to make member business loans to do so prudently and efficiently. We are not, as some have suggested, repealing or amending the MBL cap. That's action only Congress can take.

In fact, we are making our rule and regulation more closely follow the exact words of the statute. We are also clarifying that the cap only applies to the types of loans specifically delineated in the statute. Nothing could be more faithful to the principle of strict constructionism than making the rule match the exact wording of the statute.

The final rule also preserves and protects the dual-chartering system that is a force for innovation. It allows states to administer their own rules and exempts state-chartered credit unions from our rule, as long as the state rule covers all the provisions in the federal rule and is no less restrictive. It also grandfathers the seven states that have already adopted their own rules.

In summary, this rule will enable credit unions to better meet the needs of their members, particularly small business members. It will provide regulatory relief, while simultaneously helping to create new jobs. It is fully consistent with the Federal Credit Union Act and the principles of safety and soundness. It will help us all become better at our jobs.