Credit Unions and the Battle to Expand the MBL Cap and Retain Their Tax Exempt Status

By Matthew Urban, Attorney

First there was LBJ’s war on poverty in the 1960’s and then President Reagan’s war on drugs in the 1980’s.  The common thread among all of these “wars” is that for better or worse they all received or are receiving  a great deal of media attention.  However, one war that has not received much attention is the battle credit unions face today in regards to their ability to expand and grow.  Despite the lack of widespread attention, many groups continue to aggressively lobby Congress to limit the ability of credit unions to grow and expand.  Two areas under attack that will be examined here deal with the effort to increase the member business lending cap for credit unions while the other revolves around credit unions’ tax exempt status.  While the attack against increasing the MBL cap has largely been a defensive effort, the effort to remove the tax exempt status has been more aggressively offensive.

Member business lending (MBL) by credit unions has generally increased over the years as they seek to fill the gaps left by banks which have shied away from business loans.  One area in particular that has enabled credit unions to grow their commercial portfolios involves loans covering non-owner occupied one to four unit dwellings where a credit union will fund a member’s purchase of investment property by securing a mortgage against the property along with having the member sign a personal guarantee. Based on current law a loan of this nature counts against a federal credit union’s MBL cap of 12.5% of total assets.  Despite this limitation credit unions have been able to continue to grow their commercial portfolios due to a general lack of business lending in the past.  However, as the market has changed and demand has risen, credit unions have needed to keep MBL growth strategies under close supervision out of fear that they may run afoul of the current caps.

Efforts to increase the MBL cap have been made on several occasions in the past few years.  One particular effort took place in both the United States House of Representative and the Senate in 2013.  In February 2013, at the beginning of the 113th Congress, Reps. Ed Royce (R-CA) and Carolyn McCarthy (D-NY) reintroduced legislation titled the “Credit Union Small Business Jobs Creation Act” (H.R. 688) that would lift the arbitrary member business lending cap from 12.25% to 27.5% of total assets for federal credit unions. Led by Senator Mark Udall (D-CO), a bipartisan group of Senators introduced similar legislation (S.968) in May 2013.  Both pieces of legislation proposed stringent requirements on credit unions to ensure that those who took advantage of the increased limit remained well capitalized and possessed and maintained thorough underwriting requirements.  Despite the common sense nature of the legislation, to date it has not made much headway out of Congress.

As a result of the lack of success with the “Credit Union Small Business Jobs Creation Act”, Rep. Royce and Rep. McCarthy on March 13, 2014 introduced the “Credit Union Residential Loan Parity Act”.  Although not an outright increase to the MBL cap, the “Credit Union Residential Loan Parity Act” seeks to exempt loans for non owner occupied one to four unit dwellings from the MBL cap.  As these types of loans are at the center of most credit unions’ current MBL growth the introduction of this legislation, if it becomes law, should enable credit unions to continue to grow other types of MBL loans if the demand exists.

Although the battle over the continued push to increase the MBL cap has actively taken place within the halls of Congress and outside of the media spotlight, the effort to remove credit unions’ tax exempt status has been more out in the open.  Since the 1930’s credit unions have enjoyed tax exempt status.  This status was granted in large part due to the unique role that credit unions had in the marketplace as being the lender of last resort to many individuals who could not secure loans from traditional banks.  However, as the issue of the MBL cap has generally taken place behind the scenes, the issue of revoking the tax exempt status has received greater attention.

What ultimately rings hollow about the push to end the tax exempt status of credit unions is that while credit unions have adopted modern banking products and expanded their membership into the communities in which they are located, they continue to serve a membership base and not shareholders.  A credit unions’ adoption of a community charter is simply an effort to remain viable for its existing members as the industries which previously formed the basis of credit unions’ membership have gradually been downsized or eliminated altogether.  Additionally, as the economy continues to struggle and traditional banks both large and small continue to turn away those with less than perfect credit, credit unions continue to serve and offer financial services to people that otherwise would be shut out.  From afar the modern credit union may appear to be nothing more than a community based bank attempting to turn a profit, however a closer look reveals that the credit unions of today continue to serve the same groups that originally led to the granting of their tax exempt status.

As with most issues, the devil is in the details and a thoughtful examination of the issues regarding the increase in the credit union MBL cap and their tax exempt status clearly reveals that credit unions continue to operate in a manner consistent with their original founding.  However, in today’s fast paced media driven world the details typically do not matter, rather what matters is that the groups who have the most money or who can yell the loudest have a tendency to drive the debate.  Make no mistake about it these are two of the most pressing challenges that credit unions face today and those who believe in and support the credit union movement must take this opportunity to acknowledge and rally against it or else risk the possibility that credit unions will lose their ability to adapt, grow and continue to serve current and potential future members in need of a financial partner.

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