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71–779 PDF 2012

S. HRG. 112–176 

CREDIT UNIONS: MEMBER BUSINESS LENDING 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ISSUE OF CREDIT UNION MEMBER BUSINESS 

LENDING 

JUNE 16, 2011 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LYNSEY GRAHAM REA, Senior Counsel 

LAURA SWANSON, Policy Director 

ANDREW OLMEM, Republican Chief Counsel 

BETH ZORC, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

WILLIAM FIELDS, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, JUNE 16, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Prepared statement .......................................................................................... 24 

Opening statements, comments, or prepared statements of: 

Senator Shelby 

Prepared statement ................................................................................... 24 

Senator Schumer 

Prepared statement ................................................................................... 25 

WITNESSES 

Deborah Matz, Chairman, National Credit Union Administration ..................... 2 

Prepared statement .......................................................................................... 26 

Responses to written questions of: 

Senator Merkley ........................................................................................ 95 

Bill Cheney, President and Chief Executive Officer, Credit Union National 

Association ............................................................................................................ 10 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Senator Merkley ........................................................................................ 97 

Noah Wilcox, President and Chief Executive Officer, Grand Rapids State 

Bank, on behalf of Independent Community Bankers of America ................... 12 

Prepared statement .......................................................................................... 81 

Responses to written questions of: 

Senator Merkley ........................................................................................ 97 

Michael Lussier, President and Chief Executive Officer, Webster First Federal 

Credit Union, on behalf of the National Association of Federal Credit 

Unions ................................................................................................................... 14 

Prepared statement .......................................................................................... 84 

Responses to written questions of: 

Senator Merkley ........................................................................................ 98 

Stephen P. Wilson, Chairman and Chief Executive Officer, LCNB National 

Bank, on behalf of the American Bankers Association ..................................... 16 

Prepared statement .......................................................................................... 88 

Responses to written questions of: 

Senator Merkley ........................................................................................ 98 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by Paul Hazen, President and Chief Executive Officer, National Cooperative Business Association ............................................................ 99 

(III)

(1) 

CREDIT UNIONS: MEMBER BUSINESS 

LENDING 

THURSDAY, JUNE 16, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:09 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I want to welcome and 

thank our witnesses for being here today to testify on the issue of 

credit union member business lending. While we wait for the Ranking Member to make his appearance, I will go ahead and start. 

Under the Federal Credit Union Act, credit unions are limited in 

the amount of business lending they are permitted to engage in. 

The aggregate amount of member business loans made by a credit 

union is restricted to the lesser of 1.75 times the credit union’s net 

worth or 12.25 percent of the credit union’s total assets. The member business lending cap was put in place in 1988 with the passage 

by Congress of the Credit Union Membership Access Act. Since 

that time, the credit union industry has advocated for a removal 

of or an increase in the business lending cap. Senator Mark Udall 

has introduced legislation that would raise the cap to 27.5 percent 

of total assets. 

There is a wide range of views on this matter, especially as Congress considers proposals to speed the economic recovery. I think 

that it is important that we take the time to examine this issue 

here in the Committee and provide the opportunity for all sides to 

fully express their views on this subject. I look forward to your testimony, Chairman Matz, to our other witnesses’ testimony, and to 

the question-and-answer period. 

I see there are not any other Members present. 

Debbie Matz has been the Chairman of the National Credit 

Union Administration since August of 2009. Prior to her appointment, she was the executive vice president and chief operating officer of Andrews Federal Credit Union of Suitland, Maryland. Chairman Matz has also served as a board member at NCUA from January 2002 to October 2005. 

Chairman Matz, welcome and please proceed. 

2 

STATEMENT OF THE DEBORAH MATZ, CHAIRMAN, NATIONAL 

CREDIT UNION ADMINISTRATION 

Ms. MATZ. Thank you, Chairman Johnson. I appreciate this opportunity to discuss credit union member business lending legislation, regulation and supervision, and the significance of such lending for small businesses. 

Credit unions have always offered member business loans. In the 

industry’s early days, business loans primarily supported agriculture. But over time, business lending has evolved, changing with 

the needs of entrepreneurs who deserve greater, not fewer, affordable credit options. Today credit unions have more than 167,000 

outstanding loans to businesses. 

As a starting point, I see three tangible benefits provided by 

credit union member business lending: 

First, it allows small businesses to obtain reasonably priced 

loans. Simply put, more competition benefits the entire marketplace and has a positive effect on the cost and availability of credit. 

Second, prudent member business lending strengthens a credit 

union’s balance sheet. It diversifies credit union portfolios and improves the ability to withstand economic cycles. 

Third, member business lending supports communities. It spurs 

job growth and expands consumer access to goods and services. 

As the prudential regulator, NCUA recognizes that member business lending poses a unique set of risks and requires specialized 

rules and oversight. Our experience has shown that, to succeed, 

credit unions making loans to small businesses need to be aware 

of cash-flow, portfolio management and liability issues, to name 

just a few. 

In response, NCUA has tailored rules to emphasize sound underwriting, solid collateral and tested management. These criteria 

form the foundation of prudent lending. NCUA has taken great 

care to ensure that our rules keep pace with the evolving marketplace. 

Like other types of loans, member business loan performance is 

cyclical. Recent member business lending trends reflect the financial stress of the economic downturn. Member business loan delinquencies stood at 53 basis points in 2006, peaked at 3.93 percent 

in 2010, and has since improved to 3.76 percent. 

While member business loan delinquencies and charge-offs increased during the recent economic downturn, those increases primarily resulted from the severe decline in real estate values in the 

five sand States: Arizona, California, Florida, Nevada, and Utah. 

Forty percent of all delinquencies and 49 percent of all charge-offs 

are isolated in these five States. 

Nationwide, more than 2,100 credit unions make member business loans. This figure has risen nearly 10 percent since 2006 despite the economic downturn. While nearly 30 percent of credit 

unions underwrite business loans, these loans comprise just 1 percent of all commercial lending. 

However, these statistics do not capture the fact that credit 

union member business lending serves an important segment of the 

marketplace: small businesses and entrepreneurs. The average 

member business loan is only $223,000. Of course, this average 

represents a wide range of loans for a variety of business purposes. 

3 

On the whole, credit union loans tend to be much smaller than 

other business lenders. For example, credit union loans for commercial and industrial purposes, such as building and equipment, 

averaged just $127,000. By comparison, bank loans for commercial 

and industrial purposes averaged $643,000—more than 5 times 

larger than the credit union average. 

To expand credit union service to the business community, Senator Mark Udall has proposed legislation, S. 509, to increase the 

permissible level of member business lending from 12.25 percent of 

assets to 27.5 percent for credit unions meeting high standards. 

The bill’s tiered approach would allow healthy, well-capitalized 

credit unions to increase business loans in small, manageable increments. 

These credit unions, however, must first meet stringent standards that place a premium on experience and a proven track record 

of successful management. 

Let me assure you, if legislative changes increase the current 

cap, NCUA would promptly revise our regulations to ensure that 

additional capacity in the credit union system would not result in 

unintended safety and soundness concerns. NCUA would also remain vigilant in carrying out its supervisory authorities with respect to such legislative changes. 

The proposed legislation together with a responsible regulatory 

approach would provide credit unions the opportunity to prudently 

grow their business loan portfolios. In so doing, credit unions would 

increase the diversity in their overall loan portfolios, thus reducing 

concentration risk. 

NCUA regulations require any credit union that is less than adequately capitalized to suspend business lending. I am pleased that 

S. 509 would adopt a similar safeguard. 

In sum, S. 509 is a well-conceived, balanced approach to making 

more capital available to small businesses while ensuring that 

these loans are made in a prudent manner, consistent with each 

credit union’s capabilities. 

Entrepreneurs work hard, take risks, and put people to work. To 

fulfill their dreams, they need capital. Credit unions have long met 

the capital needs of small businesses. Credit unions are frequently 

the only lenders willing to make small loans to open a car repair 

shop, expand a boutique, or start a day-care center. The capital 

provided to hard-working Americans enriches lives, provides employment, and reinforces the economic base of communities. 

S. 509 would permit credit unions to empower more enterprising 

individuals and meet the needs of more small businesses that are 

expanding and creating jobs and opportunities for their communities. 

Thank you, and I look forward to your questions. 

Chairman JOHNSON. Thank you, Chairman Matz. 

Members will have 5 minutes for questions. 

Chairman Matz, when you testified before the Committee in December, your written testimony indicated that the levels of delinquent member business loans and charge-offs have increased. You 

also noted an increasing number of large credit unions about which 

the NCUA has supervisory concerns where MBLs are the primary 

or secondary contributing factor with a supervisory concern. 

4 

Given these concerns, why do you believe that it is prudent to 

increase the member business lending done by credit unions? 

Ms. MATZ. Thank you. Member business lending does have higher delinquency and charge-offs than other consumer loans. But, in 

fact, in the last quarter, the delinquencies have started to decline. 

And because delinquencies lead the charge-offs, we are looking forward to a decline in charge-offs, as well. 

But I should point out that if a credit union has delinquent 

loans, that does not necessarily result in a loss. Even the chargeoffs do not necessarily result in a loss if they are well capitalized. 

So they can have delinquencies and charge-offs and still not suffer 

a loss, if the loans were well collateralized. That is part of our supervision to make sure that they are. 

But in terms of actual losses, there are about 2,200 credit unions 

making business loans right now. In 2008 and 2009, we only had 

one credit union failure that was primarily attributable to member 

business lending. So, member business lending is being done prudently, by and large, and we are supervising member business 

lending in those credit unions that engage in business lending very 

carefully to make sure that they have experienced staff and that 

they are underwriting properly. 

Chairman JOHNSON. Chairman Matz, Senator Udall’s legislation 

would require that the NCUA develop a tiered approval process by 

which a credit union gradually increases the amount of member 

business lending it engages in. Have you given any thought as to 

what the tiered process might look like and how you might implement it? 

Ms. MATZ. Yes. The tiered process will be very helpful in terms 

of increasing our supervisory ability and ensuring safety and 

soundness because credit unions will still be able to make loans up 

to 12.25 percent of assets, but to get above that, they will have to 

meet stringent guidelines. They will have to have made business 

loans for at least 5 years. They will have to be well capitalized and 

well managed. And they will have to be at or above 80 percent of 

the cap. 

But we will come behind that with regulations to ensure that 

even above and beyond that, that the credit unions that go above 

the cap do so in a moderate way, that they crawl before they walk. 

So, we will not necessarily let them go up to 30 percent of an increase in 1 year. We will probably have regulations that modify 

that and let them increase more gradually than that. 

Chairman JOHNSON. Witnesses on the second panel suggest that 

credit unions are making loans that banks have previously turned 

down. Is that the case? And if so, are you as a regulator concerned 

about the safety and soundness of such loans? 

Ms. MATZ. Well, from what I hear—and it is anecdotal—credit 

unions sometimes do make loans that banks have turned down. 

But, my understanding is it is based on the size of the loan and 

the use of the loan, because what I am told is that very small businesses that need small loans do not have access—frequently do not 

have access to banks, and so they come to credit unions. A credit union average loan is only $223,000, and that average, 

of course, includes much larger loans. So, in fact, the median is 

closer to $127,000. These are very small loans, so I am not conVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
5 

cerned about the risky nature. As long as the credit unions are prudently underwriting the loans. I am not concerned that they are 

approving loans that banks have turned down, because I do believe 

that by and large it is based on the size of the loan and not the 

risky nature of the loan. 

Chairman JOHNSON. I have an additional question. Member business loans often have higher delinquency rates than other types of 

loans. It, therefore, seems counterintuitive for the potential regulator to support legislation to increase the member business lending cap. Would you provide more details about why you support the 

Udall bill and why you believe that the Committee should not view 

this legislation as a risk? 

Ms. MATZ. Thank you. That is a good question because it does 

seem counterintuitive that a regulator who is extremely concerned 

about safety and soundness—and, in fact, that really is my sole— 

almost exclusively my focus—would support legislation to raise the 

cap. But, in fact, I believe that raising the cap will enhance safety 

and soundness because the low cap at 12.25 percent is artificially 

low. There are a number of credit unions that would like to get into 

business lending but do not because they do not feel that they will 

be able to recover their investment. But, in fact, business lending 

would help diversify their portfolio. 

Now credit unions are probably overconcentrated in mortgage 

loans, and they also have a lot of car loans, and so I view business 

lending as an opportunity to diversify their portfolios and to reduce 

the concentration of risk in their portfolio, and certainly to reduce 

the interest rate risk which they have from long-term mortgages. 

So I view it as a safety and soundness benefit, not as increasing 

the risk. 

Chairman JOHNSON. Chairman Matz, what percentage of credit 

unions are currently at the limit and, therefore, constrained by the 

statutory cap? 

Ms. MATZ. There is a very small number that are at or near the 

limit. It is under 300 credit unions that are at or near the limit. 

Chairman JOHNSON. Out of how many credit unions? 

Ms. MATZ. Out of about 7,300 credit unions. It is a very small 

number, but it is misleading because the cap constrains all credit 

unions. 

There are so many credit unions that are not making business 

loans because of the cap even though they are not near it. They 

just do not want to make the investment, and even some credit 

unions that are making business loans do not really market it. 

They will make business loans to people who walk in the door, 

members who walk in the door and ask for them, but they do not 

market it because they do not want to be in a position to have to 

turn away customers once they get close to the cap. 

Chairman JOHNSON. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you, 

Chairman Matz, for being here. I have got something a little off 

topic and then something on topic. 

Off topic—it is easy for you—is whether you might talk a little 

bit about how our credit unions fared during this economic crisis 

that we just went through and are sort of slowly climbing out of. 

Could you give us a sense of their experience in this period of time? 

6 

Ms. MATZ. Certainly, and I will divide that answer into two 

parts—the corporate credit unions and the retail or the consumer 

credit unions. 

The corporate credit unions had a large concentration of mortgage-backed securities on their books. As a result, when the bond 

market collapsed, the value of those bonds collapsed. We had to 

place five of those corporate credit unions into conservatorship, and 

it has been a significant crisis that we are leading the credit unions 

out of. We have put into place much stronger rules governing corporate credit unions, and at this point the corporate system is stabilized. We are beginning to feel like we have seen the worst of the 

corporate situation. 

Right now credit unions are at the point of deciding whether to 

recapitalize the corporate credit unions, and we will know that by 

September. At that point credit unions will either get their liquidity and their payment processing through corporates or elsewhere. 

September is the deadline. But we are on track, and it has been 

very effective. There has been no interruption of service. Payment 

systems have been effective, and so we are coming out of that. We 

learned a lot of lessons, and as a result we have significantly 

changed the rules governing corporate credit unions. 

The retail or consumer credit unions are also beginning to show 

signs of recovery. The first quarter data for the credit unions 

showed very positive indicators that net worth is up and their assets continue to rise. Their delinquencies have started to trend 

down, and so it has been a difficult time, but through it all credit 

unions have continued to lend. From 2007 to 2010, lending increased 6 percent, so it is modest. It is down from where it was, 

but they are still continuing to lend. So, I am optimistic that the 

problems have bottomed out and that they are starting to recover. 

Senator BENNET. Thank you for that. If Congress did increase 

the cap on member loans—you just testified that only about 300, 

I think, credit unions are close to the cap. How many credit unions 

do you think would take advantage of that? Are there some—you 

have just talked about the distinction between corporate and consumer. Are there certain kinds that you would expect to be in the 

business before others? How do you see this going if we did this? 

Ms. MATZ. Well, I would think that larger credit unions that are 

well capitalized—and by that, I mean credit unions that are probably from 50 million and up, or maybe even 100 million and up— 

would be more likely to start making business loans. There are also 

those that are making business loans that would be inclined to expand it. As I said previously, credit unions tend not to market the 

business loans because of the cap, so if the cap were raised, they 

would be more likely to market it and to make more loans. But 

there are probably about 2,000 credit unions that are over 50 million in assets that would be more likely to take advantage of this 

if the cap were raised. 

Senator BENNET. Thank you, Mr. Chairman. Thank you. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairlady, how are you? 

Ms. MATZ. Good. Good to see you. 

7 

Senator MENENDEZ. Good to see you. You know I have been a 

strong supporter of the credit unions, but I think there are some 

serious questions here. How is it—we will hear from the next 

panel, but I just want to look at a couple of the arguments they 

are presenting and get your sense of it. One is that they will say 

that this legislation would allow a new breed of credit union institutions to more aggressively pursue business customers through 

large commercial and real estate loans. It would also serve as an 

invitation to credit unions that are not near this cap now to focus 

on business lending to the exclusion, or greater limitation—that is 

my add-on—of consumer lending in order to be eligible for an increase in their business lending cap. Are you concerned about that? 

Ms. MATZ. Well, I think that it would be an opportunity for credit unions to expand their business portfolio, but the loan-to-share 

ratio of credit unions is in the high 60s, maybe about 68 percent. 

So, there is still a great deal of capacity for credit unions to expand 

business lending and still meet the needs of consumers. 

Senator MENENDEZ. What about the fact that credit unions by 

their nature are tax exempt and obviously do not live within all of 

the regulatory requirements that banking institutions live under, if 

we expand the nature of their portfolio, the arguments that you 

have an uncompetitive process because they are tax exempt and because they are not subject to all the regulatory requirements that 

a banking institution doing similar transactions would be subject 

to? Is that not a fair criticism? 

Ms. MATZ. Credit unions are more stringently regulated than 

banks as far as business lending. In fact, in 2001, the Treasury Department did a study of credit union member business lending, and 

they said they found no evidence that credit union business lending 

would adversely impact banks. In fact, that study found they would 

increase the competition with small banks and the benefit would 

go to the consumer. So, you know, whether credit unions are tax 

exempt is not something I deal with. I deal with safety and soundness issues. But credit unions are very tightly regulated in terms 

of making business loans or any loans. 

Senator MENENDEZ. But they are certainly not regulated to the 

same extent that banks are. For example, they do not have the 

community reinvestment responsibilities that banks have. 

Ms. MATZ. No, they do not. Credit unions have fields of membership, and so they can only serve people in their field of membership. 

Senator MENENDEZ. Right. So the question is: What would you 

do if we were to pass this law? How would you go about deciding 

whether it is OK for a credit union to increase its member business 

lending? And if you had to approve applications for that, what is 

the criteria you would use? 

Ms. MATZ. Well, we do our exams and they are based on safety 

and soundness. If a credit union has experienced commercial lending staff in place and it is a well-managed credit union and it is 

well capitalized, those are the types of issues that we would look 

at. 

Senator MENENDEZ. But right now they have, what, very little 

commercial—other than, you know, auto loans and maybe real estate? 

8 

Ms. MATZ. There are 2,200 credit unions that make business 

loans. 

Senator MENENDEZ. That make business loans. 

Ms. MATZ. Yes. 

Senator MENENDEZ. OK. So that is the universe that would more 

likely be up for the possibility? 

Ms. MATZ. Well, I think it would be more than that. I think there 

are credit unions that are not making business lending because of 

the cap that likely would start making those loans. Right now, 

credit unions, I am told, are reluctant to get into the business lending business in some cases because they feel that they will not get 

a return on their investment because of the cap. It is a sizable investment in terms of the staff and the infrastructure that needs to 

be put in place. 

Senator MENENDEZ. So then on the two questions, you are saying 

that if we were to do this, you are not concerned about consumer 

lending being squeezed out as a result of the credit unions’ seeking 

more of the business lending, and you are not concerned about 

overall risk as it relates to taking on an expanded portfolio in this 

regard to the credit unions? 

Ms. MATZ. No, I am not. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. Mr. Chairman, I 

was detained earlier. I ask unanimous consent that my opening 

statement, a lengthy one, be made part of the record. 

Chairman JOHNSON. It will be received. 

Senator SHELBY. Thank you, Mr. Chairman. 

Senator SHELBY. Chairman Matz, I am sorry I was not here earlier. 

Ms. MATZ. That is quite OK. 

Senator SHELBY. Congress, as I understand it, originally imposed 

business lending limitations in order to limit excessive risk taking—you may have gotten into this. I am not sure; I was not here— 

by credit unions. Do you believe that a higher cap on business lending would adversely impact the safety and soundness of credit 

unions? And how would increasing the lending limit impact the National Credit Union Share Insurance Fund? 

Ms. MATZ. I do not believe that increasing the cap would adversely impact safety and soundness, and as counterintuitive as it 

might seem, I think it would have a positive—— 

Senator SHELBY. If not, why not? 

Ms. MATZ. I think it would have a positive impact on safety and 

soundness because right now credit unions have a very large book 

of business in mortgages and in auto loans. As we learned from 

this recent economic downturn, concentrations are not good for financial institution portfolios. So, being able to add business 

loans—— 

Senator SHELBY. By concentration, you mean concentrating in 

one product? 

Ms. MATZ. Correct. Being able to add business loans to the portfolio would actually diversify the portfolio, reduce the concentration 

and, in my opinion, enhance the safety and soundness. 

9 

Senator SHELBY. Of the 55 credit unions that failed during 2009 

and 2010, twenty underwrote business loans at the time of their 

failure. What role did business lending play in the failure of these 

credit unions? And how did the amount and nature of the business 

loans made by these failed institutions compare to those made by 

healthy credit unions? I know you have gone back and looked at 

this. 

Ms. MATZ. Yes. In fact, during that period of time that you mentioned, there was only one credit union that failed directly as a result of business lending out of the 2,200 credit unions that make 

business loans. There were 55 failures in that time, and of those, 

20 made business loans, but the business loans—— 

Senator SHELBY. Because there were a lot more failures of banks. 

We know that. 

Ms. MATZ. Yes. 

Senator SHELBY. During that time. 

Ms. MATZ. There were a lot more failures of banks. There were 

only 55 credit union failures in that time. 

Senator SHELBY. OK. In your testimony today, you stated that 70 

percent of all credit unions do not engage in any business lending. 

In addition, you noted that only about 7 percent of credit unions 

are close to the cap on business lending. Of these few credit unions, 

nearly two-thirds have assets of over $500 million, half a billion 

dollars. Which types of credit unions would benefit the most from 

an increase in the cap? In other words, large credit unions or small 

credit unions? Or do you have any evidence that you can share 

with the Committee that increasing the cap would benefit small 

credit unions? We have a lot of small credit unions. 

Ms. MATZ. Well, I would say that the credit unions that would 

benefit the most are probably the ones that are over $50 million. 

The ones that are $50 to $100 million, almost half of them are 

making business loans. For the other categories, $100 million and 

above, it is a majority of the credit unions. So I would say the credit unions most likely to make business loans are over $50 million. 

Senator SHELBY. When testifying before this Committee last 

year, which was just a few months ago, you noted that for those 

credit unions that engaged in business lending then and had poor 

CAMELS rating, often the business loans wee responsible for the 

low ratings, according to what you testified. How can business 

loans get a credit union into trouble? Or how can they avoid trouble, so to speak? And should a credit union be required to have a 

high CAMELS rating before its cap on business lending can be increased? In other words, we are interested in the safety and soundness of all these institutions. 

Ms. MATZ. Answering the second part first, yes, I think that they 

should have—particularly on the management, the ‘‘M’’ in the 

CAMEL, I think that they should have a high CAMEL rating in 

order to go beyond the bottom tier, and—— 

Senator SHELBY. Well, that is just common sense for safety and 

soundness, isn’t it? 

Ms. MATZ. Yes. And if this legislation is passed, we will quickly 

implement a new set of regulations to implement the statute, and 

most likely that will be one of the things that we include in it. 

10 

Senator SHELBY. What is your estimate or your judgment on the 

number of credit unions that are currently not making any business loans but will start to make business loans if the cap is increased? Do you have a number on that, roughly? 

Ms. MATZ. Well, there are about 6,000 credit unions that are not 

exempt from the cap. There are about 1,200 that are exempt from 

the cap for one reason or another. And of the 6,000, probably 4,000 

of them are under $50 million. So, probably 2,000, or 2,200 probably benefit from it if they chose to. 

Senator SHELBY. How much would the business lending cap have 

to increase to basically make it cost-effective for small credit unions 

to engage in business lending? Have you done any work in that 

area? 

Ms. MATZ. No, I do not know the answer to that, but for small 

credit unions, they—there are small credit unions that engage in 

business lending, and frequently it is done through participation in 

a loan or through a credit union service organization rather than 

doing it themselves. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Chairman Matz. 

Now I would like to welcome the witnesses for our second panel. 

Mr. Bill Cheney is president and CEO of the Credit Union National Association, which represents most of the Nation’s nearly 

7,800 credit unions. Mr. Cheney became president and CEO of 

CUNA in July 2010 following nearly a quarter century’s experience 

in the credit union movement. 

Mr. Noah Wilcox is president and CEO of Grand Rapids State 

Bank. He is also a director and member of the executive committee 

of the Independent Community Bankers of America. 

Mr. Michael Lussier is president and CEO of Webster First Federal Credit Union and is also the chairman of the board of the National Association of Federal Credit Unions and has over 25 years 

of banking and credit union experience. 

Mr. Stephen Wilson is chairman and CEO of LCNB National 

Bank. He is also the recently elected chairman of the American 

Bankers Association. 

I thank all of you again for being here today, and I look forward 

to your testimony. I will ask the witnesses to limit your remarks 

to 5 minutes. Your written statements will be submitted for the 

record. 

Mr. Cheney, would you like to begin? 

STATEMENT OF BILL CHENEY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION 

Mr. CHENEY. Yes, Mr. Chairman, Ranking Member Shelby, 

Members of the Committee, thank you very much for calling today’s hearing on credit union member business lending. 

Although credit unions weathered the financial crisis well, the 

economy as a whole is struggling. As everyone agrees, more needs 

to be done to help America’s small businesses create jobs. Credit 

unions can help if Congress enacts S. 509, Senator Mark Udall’s 

Small Business Lending Enhancement Act. This much-needed, 

commonsense legislation would increase the statutory member 

business lending cap from 12.25 percent of a credit union’s assets 

11 

to 27.5 percent and impose statutory and regulatory safeguards on 

the increased lending to protect the Share Insurance Fund from additional risk. These safeguards were designed by Treasury and the 

NCUA. If this legislation is enacted, we estimate that credit unions 

could lend an additional $13 billion to their members who own 

small businesses in the first year, helping them to create $140,000 

new jobs without an outlay of a single taxpayer dollar. 

As my written testimony describes, credit unions have continued 

to lend to their members throughout the financial crisis, increasing 

their business lending portfolio by 38 percent since 2007, while the 

banks’ commercial loan portfolio shrank by 5 percent. Currently 

there are over 330 credit unions near the cap, and they account for 

over half of the business loans subject to the cap. These credit 

unions have been the source of most of the growth of credit union 

business lending. Over the next few years, the growth among these 

credit unions will dry up without an increase in the cap, and that 

would be bad for America’s small businesses. 

The Udall bill establishes a two-tiered structure for credit union 

member business lending. Tier One credit unions would be eligible 

to engage in business lending up to the current limit. Tier Two 

credit unions would have to meet even more statutory and regulatory criteria and be approved by NCUA, and only then would 

they be permitted to engage in additional business lending. The 

Udall bill would permit credit unions to help small businesses in 

need of credit while at the same time ensuring that credit unions 

engaging in additional business lending would do so in a safe and 

sound manner. 

It is hard to believe that the Government is telling credit unions 

they cannot help create jobs in their local communities. There is 

really just one reason why. The banks oppose it. This answer does 

not satisfy the small business owner who has been turned down for 

a loan by multiple banks; it should not satisfy Congress. It should 

satisfy no one. 

There are at least 140,000 reasons to let credit unions do more 

small business lending, and there are no sound public policy reasons not to. Failure to expand the credit union member business 

lending cap would literally leave money on the table that could be 

loaned to small businesses to create jobs. 

The bankers say business lending is not a part of the credit 

union mission, but credit unions have been doing member business 

lending since day one. The bankers say increased business lending 

would undermine credit union safety and soundness, but credit 

unions do this type of lending more safely and soundly than banks. 

The bankers say increasing the cap would only affect a small 

number of credit unions while at the same time claiming that increasing the cap will hurt community banks. It is a contradiction, 

and the bankers are wrong on both counts. Increasing the cap will 

have a profound effect on the hundreds of credit unions that will 

reach the cap in the next few years, but it will not adversely affect 

the banker dominance of the small commercial loan market, currently at 95 percent. In fact, credit union member business lending 

actually helps local communities, including community banks, by 

stabilizing the local economy and creating jobs. 

12 

The bankers say that increased credit union business lending 

will lead to a reduction of other types of credit union lending, but 

most credit unions have plenty of liquidity to fund the increase. 

The bankers say that credit unions should not be granted an expansion of powers because of their tax status. This argument is disingenuous when one-third of all banks are exempt from Federal income tax as Subchapter S corporations. The credit union tax status 

is based on the not-for-profit cooperative structure of credit unions, 

not credit union powers. 

The bankers say that increased business lending calls into question the credit union industry’s commitment to serve the underserved, yet the credit union record of serving the underserved is 

well demonstrated. And when we have attempted to do more to 

serve the underserved, the bankers have brought lawsuits to stop 

us. 

As we recover from the Great Recession, small businesses are underserved, yet the bankers say that small business credit is not in 

short supply. But many small business owners report being turned 

away by their banks. It is a primary reason that Congress gave the 

banks access to 30 billion taxpayer dollars last year. Their lending 

is down. Our lending is up. There must be demand in the market 

if our lending is increasing. 

Credit unions want to meet the demands of their business-owning members. The time is now to set aside the false and misleading 

banker rhetoric. We urge Congress to permit credit unions to do 

what they were established to do—serve their members, including 

those who own small businesses. We have the willingness to help. 

We have the capacity to help. But we need Congress to enact the 

Udall bill as supported by Treasury and the NCUA. 

Mr. Chairman, thank you very much for the opportunity to testify. I look forward to your questions. 

Chairman JOHNSON. Thank you, Mr. Cheney. 

Mr. Wilcox. 

STATEMENT OF NOAH WILCOX, PRESIDENT AND CHIEF EXECUTIVE OFFICER, GRAND RAPIDS STATE BANK, ON BEHALF 

OF INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. WILCOX. Thank you, Chairman Johnson, Ranking Member 

Shelby, and Members of the Committee. I am Noah Wilcox, president and CEO of Grand Rapids State Bank. I am a fourth-generation community banker and a member of the executive committee 

of the Independent Community Bankers of America. Grand Rapids 

State Bank is a State-chartered community bank with $230 million 

in assets located in Grand Rapids, Minnesota. I am pleased to represent community bankers and ICBA’s nearly 5,000 members at 

this important hearing on credit union member business lending. 

ICBA appreciates this opportunity to testify on legislation that 

would expand credit union powers by raising the cap on member 

business loans as a percentage of assets. We strongly oppose the 

Small Business Lending Enhancement Act, S. 509. Congress should 

not expand credit union business lending powers unless it is also 

prepared to tax credit unions and require compliance with the 

Community Reinvestment Act. 

13 

The current tax exemption is directly linked to and can only be 

justified by their original mission of serving individuals of modest 

means. Credit union business lending is an immediate threat to my 

bank. I am happy to compete with other taxpaying lenders, even 

large banks, but the credit union tax exemption creates an unfair 

advantage and distorts the market. 

On countless occasions, I have lost business lending opportunities with established customers to credit unions who underpriced 

my competitive rates. Just last Friday, as I was preparing for this 

hearing, a long-time customer, with both personal and business 

lending relationships, told me they were taking three loans to two 

separate credit unions. One was a loan on real estate for development that the credit union priced 400 basis points below my competitive rate. The second is a small commercial loan, and the third 

is a residential mortgage on which the credit union offered a rate 

in the mid- 3-percent range even though it does not qualify for 

funding in the secondary market. 

S. 509 would allow the NCUA to approve member business loans 

up to 27.5 percent of a credit union’s assets—more than double the 

current cap of 12.25 percent. The cap was not set arbitrarily but 

was intended to ensure that commercial lending would comprise no 

more than a marginal part of a credit union’s lending. 

The credit unions have portrayed S. 509 as an effort to make 

more credit available for small businesses. The truth is that only 

a small number of credit unions are at or near the current member 

business lending cap. We estimate this number to be about half of 

a percent of the approximately 7,400 credit unions. Over 70 percent 

of credit unions report no member business loans at all. Those 

credit unions that are at or near the cap are the largest and most 

complex credit unions, and the business loans they make are multimillion-dollar deals, not small business loans. There is ample capacity for the remaining 99.5 percent to expand their member business lending. What is more, there are numerous exceptions to the 

member business lending cap. 

Some advocates of S. 509 claim that the expanded credit union 

commercial lending would come at no cost to taxpayers. 

The Joint Committee on Taxation, the Office of Management and 

Budget, and the Congressional Budget Office have all identified 

credit union lending as a tax expenditure. This is why the Bipartisan Policy Center’s Debt Reduction Task Force, chaired by former 

Senator Pete Domenici and former OMB Director Alice Rivlin, recommended eliminating the tax exemption, and it would be appropriate for the Senate to hold hearings on the credit union tax exemption. 

What is the cost of the tax subsidy? The most comprehensive and 

sophisticated analysis to date was done by the nonpartisan Tax 

Foundation, which valued the subsidy at $3 billion a year and $32 

billion over a 10-year budget window. The credit union loan I mentioned earlier that was underpriced by 400 basis points was surely 

made possible by this tax subsidy and perhaps also a failure to 

adequately evaluate the risk. The case for repealing the credit 

union tax exemption stands on its own merits as a deficit reduction 

measure. When credit unions seek to expand their business lending 

powers and become the equivalent of banks, linking expanded lendVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
14 

ing powers to the repeal of the tax exemption is a matter of tax 

equity. 

Thank you again for convening this important hearing, Chairman Johnson. As a community banker, I feel the direct impact of 

credit union commercial lending, so I am grateful for the opportunity to provide my perspective. ICBA strongly encourages this 

Committee to reject calls for new powers for tax-subsidized credit 

unions that will not, despite assertions to the contrary, measurably 

expand small business credit or create jobs. 

I look forward to answering your questions. 

Chairman JOHNSON. Thank you, Mr. Wilcox. 

Mr. Lussier. 

STATEMENT OF MICHAEL LUSSIER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WEBSTER FIRST FEDERAL CREDIT 

UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

FEDERAL CREDIT UNIONS 

Mr. LUSSIER. Good morning, Chairman Johnson, Ranking Member Shelby, and Members of the Committee. My name is Mike 

Lussier, and I am testifying today on behalf of the NAFCU where 

I currently serve as chairman of the board of directors. I have 

served as president and CEO of Webster First Federal Credit 

Union, headquartered in Worcester, Massachusetts, since 1990. 

Webster First is a community credit union with over 44,000 

members and more than $570 million in assets. NAFCU and the 

entire credit union community appreciate the opportunity to participate in this discussion regarding member business lending and 

allowing credit unions to further assist in the economic recovery. 

When Congress passed the Credit Union Membership Access Act 

in 1998, it put in place restrictions on the ability of credit unions 

to offer member business loans, but at the same time asked the 

Treasury Department to study the need for such a cap. 

In January 2001, the Treasury Department released its study 

and found the following: that credit unions’ business lending currently has no effect on the viability and profitability of other insured depository institutions. The 1998 Act also established that a 

business loan of $50,000 and above counts toward the cap. This 

number was not indexed and has not been adjusted for inflation in 

nearly 13 years since enactment. 

Some critics claim that only a limited percentage of credit unions 

are actually at the lending cap and, therefore, nothing needs to be 

done. This view fails to see the big picture of how the cap acts as 

a disincentive because credit unions that invest in business lending 

and that are successful will ultimately reach this threshold. 

The banking industry argues that the credit union business lending cap should not be raised due to the credit union Federal tax 

exemption. What the banking industry conveniently forgets to mention is that a large number of banks do not pay corporate Federal 

income taxes themselves because of their Subchapter S status. 

There are nearly 2,400 Subchapter S banks that avoid Federal income taxes today, and the value of their tax break is actually 

greater than the estimated value of the entire credit union tax exemption, as reflected in the Administration’s budget. 

15 

Webster First has been at the business lending cap for over a 

year now. At Webster First we understand that member business 

lending is not about credit unions but about helping small businesses and the jobs they create. It is unfortunate that Webster 

First cannot handle all the requests to help small businesses that 

we receive due to this cap. 

Webster First has made some great inroads into business lending 

and has assisted multiple families and businesses in becoming 

quite successful. For example, we helped an individual purchase an 

older gas station from his parents. He was able to upgrade all his 

fuel pumps, computer services, and revamp his store. It now includes a coffee shop, package store, and a multipump service station. His success allowed him to then upgrade the unused property 

behind the station for storage rental units which quickly became 90 

percent utilized. He recently sold the property for a substantial 

profit and has now acquired other properties to expand his business. And as this Committee knows, business expansion means job 

creation. 

In March, Senator Mark Udall introduced the Small Business 

Lending Enhancement Act. This bipartisan legislation would raise 

the credit union member business lending cap to 27.5 percent of 

total assets, up from 12.25. This would stimulate the Nation’s 

struggling economy by increasing access to credit for small business owners. In order to see its cap increased, a credit union would 

need to meet strict eligibility requirements before gradually increasing its business loan portfolio. This bill is a well-thought-out 

solution that includes important provisions to ensure that safety 

and soundness concerns are addressed. This bill will not only help 

credit unions but, more importantly, it will help America’s small 

businesses. 

NAFCU and its member credit unions ask that the Small Business Lending Enhancement Act be considered by the Banking Committee and on the Senate floor as soon as possible. 

In summary, the credit union member business lending cap established in 1998 is arbitrary and outdated. The need for such a 

cap was questioned by the Treasury Department as far back as 

2001. While NAFCU believes that no statutory cap should be in 

place, a number of credit unions like mine and the millions of 

members we serve would benefit from the enactment of the Small 

Business Lending Enhancement Act. This legislation would provide 

a practical and well-thought-out approach to raising the cap while 

addressing concerns about rapid growth and safety and soundness. 

NAFCU would also support raising the $50,000 definition of a 

member business loan as it has not been increased since its inception. 

In conclusion, many credit unions have capital to lend small 

businesses across the country and are in a position to further assist 

in recovery efforts. However, due to the member business lending 

cap, they are hampered. Raising this cap will make available immediate funding to help small businesses create much-needed jobs. 

I thank you for the time and the opportunity to testify before you 

today, and I welcome any questions as well. Thank you. 

Chairman JOHNSON. Thank you, Mr. Lussier. 

Mr. Wilson. 

16 

STATEMENT OF STEPHEN P. WILSON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, LCNB NATIONAL BANK, ON BEHALF 

OF THE AMERICAN BANKERS ASSOCIATION 

Mr. WILSON. Chairman Johnson, Ranking Member Shelby, my 

name is Steve Wilson. I am chairman and CEO of LCNB Corp. and 

LCNB National Bank in Lebanon, Ohio. I am also the current 

chairman of the American Bankers Association. 

ABA is strongly opposed to the recent efforts by the credit union 

industry to redefine the credit union charter in ways that would effectively turn credit unions into tax-exempt banks. This effort, 

most recently embodied in Senate bill 509, would allow credit 

unions that are within 80 percent of their member business lending 

cap to increase this cap and take on significantly more business 

lending. This would allow a new breed of credit unions to more aggressively pursue business customers through multimillion-dollar 

commercial loans. It would also serve as an invitation to credit 

unions that are currently not near this cap to focus on business 

lending, to the exclusion of consumer lending. 

Under current law, credit unions have an aggregate member 

business lending cap of 12.25 percent of assets. However, business 

loans under $50,000 do not count against this cap, nor do many 

other types business loans—leaving ample room for credit unions 

to serve small businesses. There is a limitation on business lending 

because credit unions are tax exempt, and this tax exemption is 

meant to be targeted at people of small means, not real estate developers. Senate bill 509 would allow the NCUA to increase the 

business lending cap for qualifying credit unions to 27.5 percent of 

assets—more than double the current cap, and a greater business 

lending authority than that of Federal thrifts. 

A credit union that applies and receives the authority to increase 

business lending almost certainly would reduce its non- housing-related consumer loans. However, the bill does not require the credit 

union to notify its members in a clear and conspicuous manner 

that they could see a reduction in consumer loans. And the bill 

does not require the members of a credit union to approve an expansion in business lending, an action that would essentially create 

a tax-exempt bank. In contrast, credit unions that seek mutual savings bank charters must mail such a notice and give such a disclosure and have an affirmative vote. 

Make no mistake about it. Senate bill 509 would allow a credit 

union to look and act just like a bank, without the obligation to pay 

taxes or have bank-like regulatory requirements, such as the Community Reinvestment Act. 

Members of Congress have recognized this fundamental problem 

repeatedly. Senator Kerry himself stated from the Senate floor, 

credit unions ‘‘were never intended to be simply alternative, tax-exempt commercial banks.’’ There is a strong legislative history that 

supports the unique charter of credit unions with very specific restrictions on business lending. These restrictions were put in place 

to protect credit unions from lending that could pose serious 

threats to their safety and soundness. In addition, they were put 

in place to ensure that credit unions remained primarily focused on 

individuals, especially of small means. 

17 

The congressional concern is well founded and echoed by many 

within the credit union industry itself. Business lending is risky 

business and should be limited for all credit unions. 

However, there is an alternative. Credit unions that want to expand business opportunities already have an option available to 

them. They can switch to mutual savings charters. This charter 

provides the flexibility credit unions desire, preserves the mutual 

member focus that is the trademark of the credit union charter. 

Unfortunately, the NCUA has erected obstacles, making it extremely difficult for a credit union to become a mutual savings 

bank. 

I thank you for this opportunity to share ABA’s and my thoughts, 

and I am happy to answer any questions. 

Chairman JOHNSON. Thank you, Mr. Wilson. 

A question for Mr. Wilson and Mr. Wilcox. Over the past several 

years, there have been many versions of legislation to remove or 

raise the cap for member business lending at credit unions. Last 

year Senator Udall made many changes to his legislation to give 

more control to the regulator to determine which credit unions 

should be able to lend above the current cap and to require that 

such a credit union demonstrate a history of sound underwriting of 

business loans. 

What do you think about the changes made by Senator Udall? 

And do they address any of your concerns? Mr. Wilson. 

Mr. WILSON. Thank you very much. I would like to respond to 

one thing as I begin here that was in the testimony, and that is 

that Subchapter S banks do not pay Federal taxes. I am not a Subchapter S bank. I am a $750 million for-profit commercial bank 

that pays taxes. But I pay taxes twice. I pay taxes as the bank 

when we make the money, and then I dividend to my owners, the 

shareholders, and they pay taxes on the same income. 

It is true that Subchapter S banks only pay the taxes that is 

dividended to their owners, but they do pay Federal taxes, and that 

is quite a misnomer to say that they do not. So I wanted to clear 

that up. 

Now, as to your question, no, there is still a great concern on our 

part, and the concern is—I will just use my bank as an example. 

I compete, as a $750 million national bank, against credit unions 

that are much larger than I am—GE Credit Union, Wright Pat 

Credit Union. I look at their ads. I look at their billboards. And the 

first thing they say is if you work, live, worship, in essence breathe 

in my market area, you are their member. So, first of all, this 

whole idea that they have a common bond is not true. So they are 

competing directly with me. 

I am awash in liquidity. My normal loan-to-deposit ratio is between 75 and 80 percent, and that is pretty conservative for a 

bank. I am down to 60 to 65 percent. I want to make loans, and 

I want to make loans bad. I fall all over any small business person 

that comes in my office and wants to have a loan because I need 

those loans. 

Now, there are only two reasons I am going to lose a loan to a 

credit union. Number one, they are going to use their tax-exempt 

status to underprice me. You must realize that when I make a dollar, I only keep 60, 70 percent of that dollar. When they make a 

18 

dollar, they keep 100 percent of it. So they have quite an ability 

and advertise that ability that they can pay more on deposits and 

charge less for loans. So they use that tax-exempt status. They do 

not have the common bond. And so I can lose a loan because they 

can underprice me, or I can lose a commercial loan because I would 

not have made it in the first place, and they are willing to make 

a loan or take more risk than I am willing to take. And I do not 

know that that is in the best interest of the credit union charter. 

You know, I like the credit union charter. ABA is for charter 

choice. It is the foundation, the absolute foundation of the dual 

banking system. But different charters have different restrictions, 

and these business lending caps should stay in place. 

Chairman JOHNSON. Mr. Wilcox. 

Mr. WILCOX. The changes that you inquired about simply do not 

go far enough, first of all, but I, like Mr. Wilson, compete directly 

with credit unions in my market that are in some cases four or five 

times the size of my $230 million bank. They do use their tax-exempt status to very selectively target the loans that they would 

like to take and in a fashion that I simply cannot compete with on 

price. In many cases we do see increased risk in loans that are not 

able to be underwritten in a safe and sound manner taken on in 

some cases in the credit unions, and the restrictions that are in 

place are there for a reason. If they would like to enjoy their taxexempt status and continue to do so, those restrictions should remain in place. 

But, you know, I would be the first to say I would welcome all 

credit unions to make the Subchapter S election to pass those taxes 

on to their members, just like I pass on—I am a Subchapter S community bank, and our shareholders do pay the tax. We do not pay 

tax at the corporate level, but our shareholders pay that State and 

Federal tax, in our case at quite a high rate. So I would encourage 

all credit unions to make that election and go ahead and support 

that tax, and if they want to do that, then engage in commercial 

lending as they see fit. 

Chairman JOHNSON. Thank you, Mr. Wilcox. 

Mr. Cheney and Mr. Lussier, it appears that the levels of delinquent member business loans and charge-offs have increased. Does 

the current economic climate dissuade you from underwriting member business loans? Mr. Cheney. 

Mr. CHENEY. Thank you. It is true that member business lending 

delinquency increased, as did charge-offs, during the economic crisis. But recently we have seen those numbers come down, and interestingly, as is reflected in our written testimony, credit union 

member business loans actually performed much better than bank 

loans. 

I will say that underwriting standards are credit unions, as I am 

sure at all financial institutions, have gotten another look from a 

management perspective because of the crisis. But the credit 

unions have a strong track record of safe and sound business lending. 

Chairman JOHNSON. Mr. Lussier. 

Mr. LUSSIER. Yes, sir, thank you. First of all, I think that when 

you look at the delinquencies on the business loans, we have to 

take into consideration that the real estate loans, consumer loan 

19 

portfolio, credit card portfolios delinquencies have all been increased with the downturn in the economy. One of the things I will 

say is that the delinquent loans that we have had in our portfolio— 

I can only speak for Webster right now, but our delinquencies in 

the commercial loan portfolio are 2 percent. Our losses are nearly 

nil. I believe there has been one substantial loan that we had taken 

a loss on, which represented about $100,000 in loss, of which we 

basically regained some of that loss when the property was resold. 

So speaking on behalf of an institution that writes well-underwritten and secured loans in the business loan portfolio, I find that 

the delinquencies are rare. I think we are OK. We are able to continue writing loans. We are maxed out, like I stated in the beginning, and we are at the cap. And we continue to look for the opportunity to serve the business people in our community regardless of 

the present delinquency status. 

Chairman JOHNSON. Mr. Lussier, how do you manage the risks 

associated with business loans at your institution during these difficult economic times? 

Mr. LUSSIER. Well, first and foremost, a couple comments were 

made about the big multimillion-dollar loans. We have a couple 

loans that are sizable. I think the largest one is probably $3 million. However, a majority of our loans are diversified among small 

business owners who are pretty much looking for the $50,000 to 

the $250,000 loan. I would say that 80 percent to 85 percent of my 

loan portfolio fits within a national average of approximately 

$233,000 on average. We basically diversify among collateralization 

for real estate, equipment, heavy equipment, very few on receivables. We are pretty much conservative on who we underwrite to, 

but we actually look at all the businesses that come in and request 

our lending. We give them all an opportunity today, and we try to 

make sure that if it possible that we can lend them the money to 

enhance their businesses we do so in the best fashion possible. But 

we also make sure that we are not giving away money. 

So we follow the rules and regulations that are set forth by 

NCUA, and they also come in to make sure that we are diversified 

and that we do not have a high concentration in any area. That is 

how we reduce our risk. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Mr. Lussier, in Mr. Wilson’s testimony he argues that increasing 

the business lending cap would allow credit unions to look and act 

just like banks, as you heard, without having to pay taxes or comply with bank-like regulatory requirements. How do you respond to 

those concerns that the playing field is not level because credit 

unions are tax exempt and so forth? 

Mr. LUSSIER. Well, we could talk about this all day, but I will 

say—— 

Senator SHELBY. I think that is an important subject. 

Mr. LUSSIER. Yes, and I agree with you. Thank you for asking 

me. I will say this: There are major differences between a credit 

union and a bank, and without going through the whole platter of 

the differences, I will say that a majority of the difference is that 

we run on volunteerism. Our institutions are run under more reguVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
20 

latory restraints than the banks can be—than the banks are. 

This—— 

Senator SHELBY. Say that again. Are you saying that the credit 

unions are under more regulatory scrutiny than the banks? 

Mr. LUSSIER. We are under more regulatory restraints than the 

banks, and here is an example. We are trying to basically increase 

our limitations on business lending. We have more restrictions on 

what we can offer because we are credit unions. And all we are 

asking here is that we need to be able to increase these limitations 

slightly in order to better enhance our services to the members. 

Senator SHELBY. CAMELS ratings are an important indication of 

the safety and soundness of any financial institution, credit union. 

Would you support requiring a credit union to have a CAMELS rating of 1 or 2 before its business lending cap could be increased? Because that goes to safety and soundness. 

Mr. LUSSIER. Well, there is no doubt. A 1 and 2, it definitely 

shows you that an institution is safe and sound. A CAMEL rating 

3 does not mean an institution is failing and is not safe and sound. 

A CAMEL 3—— 

Senator SHELBY. It does not mean it is failing, but it is an indication it might not be strong. 

Mr. LUSSIER. I would agree with you. 

Senator SHELBY. OK. 

Mr. LUSSIER. I would agree with you. But a CAMEL rating 1 and 

2 institution moving ahead to have the possibility of increasing according to these limitations, I would support 100 percent. 

Senator SHELBY. Mr. Cheney, you argue, as I understand it, that 

the cap on business lending disproportionately hurts small credit 

unions. 

Mr. CHENEY. Yes. 

Senator SHELBY. You have also indicated that raising the cap to 

27.5 percent would—these are your words—change the economics 

significantly, making it possible for credit unions as small as $20 

million to reasonably participate in this market. Those are your 

words. What is the basis for determining that increasing the cap 

to 27.5 will be sufficient for small credit unions to participate in 

business lending? 

Mr. CHENEY. Well, thank you, Senator. The basis for it is that 

it allows more credit unions to be able to justify the investment 

necessary to set up a business lending operation. You have to hire 

people that have experience in the field. You have to set up procedures and systems and safeguards and internal controls, so that is 

really the basis for that statement. 

Senator SHELBY. You also in your testimony, Mr. Cheney, point 

out that nearly 70 percent of credit unions do not engage in any 

business lending currently. Why do so few credit unions currently 

make business loans? And for those credit unions that do business 

lending, what are the most common types of loans that they make? 

Mr. CHENEY. We think that the cap is a reason that so few credit 

unions do business lending because the restriction is so low. And, 

by the way, before 1998, there was no restriction on credit union 

business lending. There was no cap. But the cap, if you are a $20 

million or a $50 million credit union, you cannot justify the expense. So we think raising the cap, as Chairman Matz said, will 

21 

encourage more credit unions to get involved. And in terms of the 

types of lending, the average credit union member business loan is 

less than $250,000. Most are small business loans—not all, but 

most credit unions make loans to small businesses, as Mr. Lussier 

said is the case with his credit union. 

Senator SHELBY. Mr. Wilson, you probably were here earlier 

when Chairman Matz testified. She noted that one way to deal 

with the credit crunch would be to increase the business lending 

cap. She noted also that access to credit remains difficult for many 

small businesses and entrepreneurs that depend on financial institutions for funding. 

Why do you think that many small businesses are facing a credit 

crunch? 

Mr. WILSON. Because of the state of the economy. Their cashflows are down. Their collateral has been diminished. There are a 

number of reasons. There are people that we would have lent to in 

the past that we cannot lend to today, and hopefully we will be 

able to lend to tomorrow. And I think it wise that we do not from 

a safety and soundness standpoint. 

You know, one of the statements that was made that kind of 

mystified me was that credit unions are more tightly regulated 

than banks, and particularly in the commercial lending—— 

Senator SHELBY. It intrigued some of us, too. 

Mr. WILSON. That was an interesting statement. You know, they 

made the statement in testimony that, boy, they do a better job because they have had less charge-offs than we have had as banks. 

And so I was curious about that, and I went to the CUNA site and 

gathered some statistics, and it seems like we are not comparing 

apples to apples here, because I would say that my regulator, the 

Office of the Comptroller of the Currency, is much stricter. I was 

amazed at the reason that they avoid charge-offs, and that is because they allow delinquencies 12 months and beyond. They have 

a great bucket of loans that are delinquent more than 12 months. 

Senator SHELBY. What would you—— 

Mr. WILSON. Banking regulators would have had us write those 

off well before they get to 12 months, so that is not really a fair 

comparison. 

The other thing that is such a misnomer, that even though tax 

exempt and having the requirement to serve people of modest 

means, you probably are aware that GAO did a study on that and, 

in fact, banks service more low- to moderate-income individuals, 

households, than credit unions do. The GAO found that a low- to 

moderate-income service in banks was 41 percent of the households. In credit unions it was 31 percent of the households. Let us 

get rid of this tax exemption. Let us compete head on and let us 

take care of small businesses and let us create jobs. 

Senator SHELBY. Mr. Wilson, has the Dodd-Frank legislation and 

other regulatory burdens had an impact on the ability of banks to 

make loans to small businesses? 

Mr. WILSON. Oh, absolutely. Absolutely. The time we spend on 

regulatory burden, the uncertainty that all of this regulatory environment and the tax environment has created has caused many of 

our good business customers, those that would normally be expanding, buying plant and equipment, creating jobs, not to pull the trigVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
22 

ger on projects. I do not think I have ever had a larger pipeline of 

loans where the individual businesses are not willing to pull the 

trigger because of the uncertainty of taxes and regulation, et cetera. 

Senator SHELBY. Mr. Wilson, I think you went into this a little 

bit earlier, but I want to, for the record, go back into it. Both Mr. 

Cheney and Mr. Lussier note in their testimony that about onethird of all banks or Subchapter S corporations are exempt from 

Federal income tax. They argue that puts many banks on a more 

equal playing field with credit unions. You talked about that earlier. Just again for the record, how does the tax treatment of Subchapter S corporations compare to the taxation of credit unions? I 

thought tax—am I wrong? Credit unions are exempt from tax, period. 

Mr. WILSON. Period. That is correct. 

Senator SHELBY. Whereas, if you are a Subchapter S corporation, 

it passes to the owners and they pay the tax. 

Mr. WILSON. That is correct. 

Senator SHELBY. So the tax is paid one or both ways. Is that 

right? 

Mr. WILSON. That is correct. It is paid—if you are a C corporation, you pay it twice. You pay it when you make it, and your owners pay it when they receive it in the form of dividends. In the case 

of Subchapter S, they only pay it once, but they pay it. They are 

taxpaying entities, and I do not have a problem whatsoever as a 

C corporation competing against a Subchapter S. 

Senator SHELBY. Mr. Wilcox, in your testimony you also noted 

that your bank has lost business lending opportunities with established customers to credit unions. You argue that the credit union 

tax exemption creates an unfair advantage and distorts the market. Just again for the record here, how does the credit union tax 

exemption undermine your ability to offer competitive rates? Is it 

because you are taxed and they are not? 

Mr. WILCOX. That is correct. 

Senator SHELBY. OK. Also, Mr. Wilcox, Mr. Cheney states in his 

testimony that business loan net charge-off rates for credit unions 

have been roughly one-fourth of the average for banks since 1998. 

Accordingly, he argues that credit unions can provide business 

lending in a more safe and sound manner than banks. Why do 

credit unions appear to have lower net charge-off rates for business 

lending than banks? Is there a reason here? Is it the way they are 

regulated? Is it the way they approach it? Or what is it? 

Mr. WILCOX. Well, it could have to do with some of that, and I 

think Mr. Wilson spoke to a few of those facts. Banks are under 

very strict regulatory requirements, especially as it pertains to 

charge-offs. We have hard caps on days delinquent, and then depending on the type of credit that it is, it is demanded to be 

charged off. If not, you do face some pretty severe regulatory scrutiny. All of the Federal regulators as well as the State regulators— 

in my case I see both as a State chartered bank—do look at that 

on a very regular basis, each examination. They are looking from 

a safety and soundness perspective to be certain that the banks are 

not only managing their delinquency but not hiding it. It would be 

inconceivable for me to have a loan that is severely delinquent and 

be able to carry it continuously on my books for 12 months and not 

23 

charged off. I would be criticized and could possibly face enforcement orders or other things of that nature if that was as routine 

practice in a bank. 

Senator SHELBY. Would that be what we call ‘‘toxic assets’’? 

Mr. WILCOX. I would not want them on my books. 

Senator SHELBY. Thank you. 

Mr. CHENEY. Senator, might I comment on that as well? I am 

sorry. In terms of charge-offs versus delinquencies, credit unions’ 

charge-offs are lower than banks’ but credit unions’ delinquency is 

lower than banks’ too. I do not think it is a situation where credit 

unions are hiding delinquency by putting it in charge-offs because 

it has got to be in there somewhere. It is one or the other. 

In terms of loans that are delinquent that have been on the 

books for a long period of time, those are easily discernible, as Mr. 

Wilson did, from credit union call reports and is something that the 

regulators track very closely. If there is a loan that is on there for 

more than 12 months, I can assure you there is a reason for that. 

And if I might also, just while I have the microphone, comment 

on Subchapter S status. When credit unions distribute their earnings to their members in the form of dividends, their members, who 

are the owners of the credit union, pay taxes on those dividends. 

A tax on a credit union is nothing more than a tax on a credit 

union member. 

Mr. WILCOX. If I might, Senator? 

Senator SHELBY. Yes. 

Mr. WILCOX. That does presume that the credit union is paying 

the dividends to the members. I am a Subchapter S bank. I was 

a C corporation before we were allowed to take that election. With 

the election come many restrictions, and we chose to operate within 

those confines. However, whether or not the Subchapter S makes 

a dividend distribution to its shareholders, the tax must be paid, 

period. So even if the holding company or the bank does not make 

that distribution—— 

Senator SHELBY. Tax on earnings, would it not? 

Mr. WILCOX. That is correct. Whether or not the shareholders receive a dividend check from a Subchapter S bank, the shareholders 

pay the tax every quarter. 

Senator SHELBY. If there are some earnings. 

Mr. WILCOX. Right. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. I want to thank the witnesses for this testimony on this issue. As we have seen, the views on these issues are 

varied, and I think today’s hearing yielded some good information 

for us to review as we consider this issue going forward. 

Thanks again to my colleagues and our panelists for being here 

today. This hearing is adjourned. 

[Whereupon, at 11:26 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

24 

PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON 

I want to welcome and thank our witnesses for being here today to testify on the 

issue of credit union member business lending. 

Under the Federal Credit Union Act, credit unions are limited in the amount of 

business lending they are permitted to engage in. The aggregate amount of member 

business loans made by a credit union is restricted to the lesser of 1.75 times the 

credit union’s net worth, or 12.25 percent of the credit union’s total assets. The 

member business lending cap was put in place in 1998 with the passage by Congress of the Credit Union Membership Access Act. 

Since that time, the credit union industry has advocated for a removal of, or increase in, the business lending cap. Senator Mark Udall has introduced legislation 

that would raise the cap to 27.5 percent of total assets. 

There is a wide range of views on this matter, especially as Congress considers 

proposals to speed the economic recovery. 

I think that it is important that we take the time to examine this issue here in 

Committee, and provide the opportunity for all sides to fully express their views on 

the subject. 

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you, Mr. Chairman, historically, credit unions have focused on meeting the 

savings and credit needs of their members, especially people of modest means. In 

recognition of this unique role, credit unions, unlike banks, have been tax-exempt. 

Today, the Committee will examine whether credit unions should be allowed to 

lend to businesses. This is not the first time the issue of business lending by credit 

unions has come before this Committee. 

In 1998, this Committee passed, and Congress eventually enacted, legislation that 

placed significant restrictions on business lending by federally insured credit unions. 

At that time, the number of business loans made by credit unions was quite 

small. In fact, a report of this Committee that accompanied that legislation acknowledged that consumer loans made up nearly 99 percent of all credit union lending. 

Nevertheless, Congress limited business lending in order to prevent excessive 

risk-taking by credit unions. 

A report by the National Credit Union Administration had found that business 

lending caused half of the losses to the National Credit Union Share Insurance 

Fund in the 2 prior years. 

Additionally, in 1991 another report found that failing credit unions had made 

more business loans than other credit unions. 

Now, the ongoing credit crisis has prompted some to propose increasing the business lending limit. 

The credit crunch is a problem of concern to us all. 

As we examine this issue, however, we should first ask why credit is so hard to 

obtain. 

In particular, how has the Dodd-Frank Act affected credit availability? 

Alternatively, is the unprecedented Federal deficit crowding out private sector 

lending? 

If we want to address the problem of credit availability to small businesses, a 

more comprehensive approach may be appropriate. 

In addition, we should ask how changing business lending limits would affect the 

safety and soundness of credit unions. 

Even with the current limitations on business lending, we continue to see credit 

union failures. 

Recently, the NCUA announced the 13th closure or conservatorship of a credit 

union this year. Over the last 2 years, 55 credit unions have failed. 

I hope to learn today whether business lending was a contributing factor in any 

of these failures. 

Changing the business lending limitations can alter the competitive landscape not 

only between banks and credit unions, but also among credit unions. 

Although they are not here today, we will need to hear from the bank regulators 

so that we can fully understand the effect such a change would have on the entire 

industry. 

Ultimately, healthy and strong credit unions are good for our economy and consumers. It is my hope that today’s hearing will shed more light on how we can ensure that credit unions continue to serve their unique and important role in the Nation’s economy. 

Thank you, Mr. Chairman. 

25 

PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER 

Thank you Mr. Chairman. I want to thank you for holding this important hearing, 

on an issue I have cared deeply about for some time now: lifting the artificial restraints we currently place on the ability of credit unions to help small businesses 

access much-needed credit. 

As we heard in testimony from Chairman Matz and Mr. Cheney today, credit 

unions have been engaged in member business lending since their creation. And 

only since 1998 have they been subject to this arbitrary cap on their business lending, which effectively limits each credit union’s business lending to no more than 

12.25 percent of their total assets. 

In the past two Congresses I have introduced bills that would raise or eliminate 

this cap. Last Congress, my good friend from Colorado, Senator Mark Udall, took 

up the cause with a bill to raise the cap to 27.5 percent of total assets as long as 

certain criteria to ensure safety and soundness are met. He has reintroduced his bill 

this Congress, with bipartisan support and a total of 19 cosponsors, including Senators Reed and Brown on the Banking Committee. 

I want to say a few words about the bill and encourage all of my colleagues to 

support this commonsense way to immediately increase the amount of credit available to small businesses—at no cost to the taxpayer. 

We just came through the worst credit crunch any of us have ever seen, and access to credit is still a significant issue for small businesses in NY and all over the 

country. Even through the downturn, credit unions have continued to increase their 

business lending, but they are limited in their ability to do more. Senator Udall’s 

bill will provide a much-needed boost to help small businesses expand and hire. 

In the Fall, Congress passed, and the President signed into law, a bill to help 

small businesses that included a $30 billion fund to help community banks increase 

their lending to small businesses. I strongly supported the creation of that Small 

Business Lending Fund, but Senator Udall and I and others fought to include his 

legislation for credit unions in that bill. We ultimately did not prevail. Well, nearly 

9 months later that $30 billion fund has barely been put to work. 

I hold out hope that the Fund will be put to good use easing the burden on small 

businesses, but credit unions are waiting to fill the gap, and I don’t see why we 

should unnecessarily limit ourselves—credit unions are an important source of credit for individuals and small businesses in this country, and it’s important that we 

ask what they can do to help get our economy grow again. 

When the idea for the Member Business Lending bill was originally proposed, 

some concerns were raised about safety and soundness of the credit unions themselves, their members, and the credit unions’ insurance fund. So my office worked 

with Senator Udall’s staff and the Treasury and NCUA to come up with a plan that 

would address those concerns. 

• First, the cap is only raised for credit unions that meet strict eligibility criteria. 

To qualify, credit unions must be well capitalized, demonstrate sound underwriting and servicing based on historical performance, have strong management 

and policies to manage increased lending, and be approved by their regulator 

for the higher cap. 

• They must also be at or above 80 percent of their current cap, with 5 or more 

years of experience lending to member businesses. This means that only credit 

unions with significant experience lending to small businesses will have their 

cap raised, and it is targeted at those credit unions most likely to expand their 

lending because they are at or near the existing cap. 

• Even if they meet the criteria, credit unions can’t grow their lending by more 

than 30 percent in any 1 year, and their regulator can make them grow even 

slower. That will ensure that credit unions don’t grow their business faster than 

they can handle. 

Based on conservative estimates, this amendment could lead directly to over $12 

billion in new lending and create up to 140,000 new jobs. In my home State of New 

York, it could create over $1 billion in new lending and up to 9,000 new jobs. And 

it does all that at NO COST to the Federal Government. 

Certainly this is not a cure-all for our economy. But with small businesses still 

struggling to get the credit the need, it seems to me that we should be trying everything we can to increase lending. And this amendment does it in a sensible way, 

to ensure safety and soundness are preserved in the system, and, I repeat, without 

costing any taxpayer money. 

In short, this just makes sense and I urge my colleagues to support the legislation 

sponsored by my friend from Colorado. 

26 

PREPARED STATEMENT OF DEBORAH MATZ 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION

JUNE 16, 2011 

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PREPARED STATEMENT OF BILL CHENEY 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION

JUNE 16, 2011 

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PREPARED STATEMENT OF NOAH WILCOX 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, GRAND RAPIDS STATE BANK, ON BEHALF

OF INDEPENDENT COMMUNITY BANKERS OF AMERICA

JUNE 16, 2011 

Opening 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, I 

am Noah Wilcox, fourth generation President and CEO of Grand Rapids State Bank 

and a member of the Executive Committee of the Independent Community Bankers 

of America. Grand Rapids State Bank is a State chartered community bank with 

$236 million in assets located in Grand Rapids, Minnesota. I am pleased to represent community bankers and ICBA’s nearly 5,000 members at this important 

hearing on credit union member business lending. 

ICBA appreciates this opportunity to testify on legislation (S. 509) that would expand credit union powers by raising the cap on member business loans as a percentage of assets. We strongly oppose the Small Business Lending Enhancement Act. 

Congress should not expand credit union business lending powers unless it is also 

prepared to tax credit unions and require them to comply with the Community Reinvestment Act. The credit union tax exemption is directly linked to and can only 

be justified by their original mission of serving individuals of modest means. Any 

expansion of their powers beyond the original mission should result in the loss of 

their tax exemption. 

I want to make clear that community bankers strongly support locally based nonprofit organizations. I have served on a number of nonprofit boards, including the 

Grand Rapids Area Community Foundation and the Itasca County Family YMCA. 

Many of my community bank colleagues perform similar service. These nonprofits 

justify their tax exemption by serving a public mission. Our concern is that credit 

unions, having strayed far from their statutory mission, are abusing their tax exempt status and are seeking to go even farther. 

This topic is not in the least abstract for me. For my bank, credit union business 

lending represents an immediate threat. I’m happy to compete with other tax-paying 

lenders, even large banks, but the credit union tax exemption creates an unfair advantage and distorts the market. I have very aggressive credit unions in my market. 

On countless occasions, I’ve lost business lending opportunities with established customers to credit unions who underpriced my competitive rates. Just last Friday, as 

I was preparing for this hearing, a longtime customer, with both personal and commercial lending relationships, told me they were taking three loans to two different 

credit unions. One of the loans was a loan on real estate for development that the 

credit union priced about 400 basis points less than our rate, which is competitive. 

This rate is even lower than can be accounted for by the tax advantage, suggesting 

that the credit union, inexperienced in business lending, did not appropriately price 

the risk. The second loan is a small commercial loan. And the third loan is a mortgage on the borrower’s residence, on which, though it does not qualify for the secondary market, the credit union, has offered a rate in the mid- 3-percent range. 

S. 509 would allow the NCUA to approve member business loans that raise a 

credit union’s total amount of outstanding loans to 27.5 percent of assets—more 

than double the current cap of 12.25 percent. The current cap was established in 

1998 as part of the Credit Union Membership Access Act, which completely undermined the original ‘‘common bond’’ requirement for credit union customers. The 

1998 law reversed a recent Supreme Court decision and allowed credit unions to 

serve a customer base with multiple common bonds. Because the law made the common bond requirement nearly meaningless, the member business lending cap was 

deemed especially important to maintain a distinction between credit unions and 

banks. The 12.25 percent cap was not chosen arbitrarily but was intended to ensure 

that commercial lending would comprise no more than a marginal part of a credit 

union’s lending. 

The credit unions have portrayed S. 509 as an effort to make more credit available for small businesses. The truth is that only a small number of credit unions 

are at or near the current member business lending cap—we estimate this number 

to be about 0.5 percent of the approximately 7,400 credit unions. Over 70 percent 

of credit unions report no member business loans at all. Those credit unions that 

are at or near the cap are the largest and most complex credit unions, and the business loans they make are often multimillion dollar, speculative, commercial loans— 

not small business loans. There is ample capacity for the remaining 99.5 percent 

of credit unions to expand their member business lending. The fact that only 4.5 

percent of credit union assets are invested in commercial loans—a figure cited by 

advocates of S. 509—does not suggest that the current cap of 12.25 percent is too 

82 

low. What’s more, there are numerous exceptions to the member business lending 

cap, including: 

• Any loan of less than $50,000; 

• Small Business Administration loans, including 7(a) and 504 SBA loans of up 

to $5 million; 

• Nonmember loans and loan participations purchased from other credit unions; 

• Loans made by any credit union grandfathered by the 1998 law because they 

had a history of making business loans or were chartered for the purpose of 

making business loans; 

• Loans made by low income or community development financial institutions; 

and 

• Loans secured by the borrower’s primary residence. 

With regard to this last exception, I note that some of the examples of supposed 

commercial credit union loans cited by advocates of S. 509 are actually loans secured by the borrower’s residential mortgage, which are not subject to the cap. 

These loans are not small business loans based on the lender’s understanding of the 

business’s cash flow, debt coverage, and other factors that go into commercial credit 

underwriting. Rather, they are second mortgages based on the home’s value as collateral should the business fail—a type of lending that is irresponsible at best. 

S. 509 is not driven by the need to bring credit to small businesses. It is driven 

by a small number of credit unions who want to increase their assets and their revenues while still enjoying their tax-exempt status. 

Credit Unions Lack Expertise in Commercial Lending 

What’s more, commercial lending is not for novices. It takes many years of experience and a firm grasp of the commercial environment to properly evaluate a business loan application, to value the collateral, and to understand the risk and price 

accordingly. Credit unions lack the experience and the expertise to safely conduct 

commercial lending, and their regulator, the NCUA, lacks experience in supervising 

commercial lending. I recognize that S. 509 includes provisions that are intended 

to ensure that credit unions have a track record—however limited—in commercial 

lending. These provisions are inadequate and leave too much discretion to the 

NCUA. As we emerge from the financial crisis and economic recession, this is the 

wrong time to jeopardize the safety and soundness of our financial system. 

Credit Unions Not Fulfilling Their Tax-Exempt Mission 

The purpose of the cap on member business loans established by the 1998 law 

was to ensure credit unions would focus on serving members of modest means, not 

commercial lending. Numerous independent studies have concluded that credit 

unions are not fulfilling their core mission. 

A 2005 study by the National Community Reinvestment Coalition determined 

that banks do a better job of fulfilling the credit unions’ mission than the credit 

unions. The study highlighted how banks ‘‘consistently exceed credit unions’ performance in lending to women, minorities, and low and moderate-income borrowers 

and communities.’’ A 2003 Government Accountability Office study found that credit 

unions serve a more affluent clientele than banks. This GAO study concluded that 

‘‘credit unions overall served a lower percentage of households of modest means 

than banks.’’ 

Another study by the Woodstock Institute concluded that credit unions serve a 

higher percentage of middle and upper-income customers than lower-income households. Similarly, a study by the Virginia Commonwealth University concluded that 

credit unions tend to serve a higher proportion of wealthier households in their customer base. 

The recent push by many credit unions into payday lending makes a travesty of 

their original tax-exempt mission. A recent investigation conducted by the Washington Post documents credit union payday lending abuses. While many credit 

unions offer short term, small dollar loans under reasonable terms, some credit 

union products are nearly as predatory as those offered by a store front check 

casher. The Post identified at least 15 credit unions that offer high cost loans closely 

resembling payday loans. In particular, some credit unions earn commissions by acting as fronts for third party lenders with names such as ‘‘QuickCash’’ and ‘‘CU on 

Payday.’’ 

Credit unions’ involvement in a Florida real estate investment scheme, dubbed 

‘‘Millionaire University,’’ illustrates just how far credit unions have strayed from 

their original tax-exempt mandate to serve low and moderate income families and 

into risky business loans. In this scheme a number of credit unions granted speculaVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00086 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
83 

tive out-of-market land development loans to residents from far away States. Borrowers became credit union ‘‘members’’ by paying a $5 dollar membership fee. Three 

of those credit unions failed. What original members were served in their home 

States of Colorado and Michigan when these credit unions made risky loans on Florida real estate? Congress cannot allow tax-exempt credit unions so stray even further into such risky business lending endeavors by increasing the business lending 

cap while remaining subsidized by taxpayers. 

Congress explicitly placed limits on the types of lending tax-exempt credit unions 

can do for a good reason—so credit unions can focus their efforts on serving people 

of modest means that share a common bond. This is not only better for local communities; it is also a much safer form of lending. 

Credit Union Lending Comes at a Significant Cost to Taxpayers 

The neglect of credit unions’ original mission is unfair to the people credit unions 

were intended to serve; it’s unfair to taxpaying community banks, but it’s also unfair to all taxpayers. Some advocates of S. 509 claim that expanded credit union 

commercial lending would come at ‘‘no cost to taxpayers.’’ This is patently false. 

Lending by tax-exempt credit unions displaces lending by taxpaying banks, and 

thereby reduces tax revenue to the Government. In light of the urgent need to reduce the Federal budget deficit, we must consider the cost-benefit analysis of the 

credit union tax exemption. 

The most comprehensive analysis of the credit union’s Federal tax exemption was 

undertaken by the nonpartisan Tax Foundation in 2005. This analysis considered 

not only the cost of the tax subsidy, but what happens to the tax subsidy—i.e., 

whether and to what extent it is passed on to customers—and the effect of the subsidy on the marketplace for financial services. The Tax Foundation found that: 

• The value of the tax subsidy was $2 billion in 2003—and growing to over $3 

billion annually today. This included not only the direct tax expenditure that 

resulted from not taxing the net revenue of credit unions, but the indirect effect 

on tax revenues of a less competitive marketplace for financial services. This 

is a more comprehensive analysis of the tax subsidy than is provided by the 

Joint Committee on Taxation and the Office of Management and Budget, which 

consider only the static tax expenditure and exclude behavioral changes in the 

marketplace. Still, JCT and OMB also confirm the dramatic growth of the tax 

expenditure in recent years. 

• The subsidy would cost the taxpayer over $32 billion over a 10-year budget window. 

• The subsidy boosted the return on assets, for the average credit union, by 50 

basis points. 

• Of those 50 basis points, only a meager 6 basis points are passed onto customers in the form of lower interest rates on loans. There is little to no effect 

on deposit rates. Eleven basis points are absorbed by higher labor costs at a 

credit union than at a comparable bank (due to inefficiencies). 

• The remaining 33 to 44 basis points of subsidy accrue to the credit union owners in the form of higher equity and larger assets they use to expand rapidly. 

In summary, the Tax Foundation study shows that credit unions generally do not 

pass on their subsidy to customers. However, the competitive threat to community 

banks comes from the fact that credit unions have the option to use the subsidy to 

secure business they want. This is what I see repeatedly in my business. The credit 

union loan that I mentioned earlier, that was underpriced by 400 basis points, was 

surely made possible by the tax subsidy, and perhaps a failure to adequately evaluate the risk. Given the projected growth in the Federal budget deficit in the coming 

years and the threat it poses to our national prosperity, we can no longer afford a 

tax subsidy divorced from its original purpose that generates no public benefit and 

poses a threat to tax-paying community banks. This view is also shared by the Debt 

Reduction Task Force of the Bipartisan Policy Center, Chaired by former Senator 

Pete Domenici and former OMB Director Alice Rivlin, whose recent report recommends eliminating the tax exemption for credit unions. In addition, the Congressional Budget Office, in its annual ‘‘Budget Options’’ report, noted the option of taxing large credit unions. Any serious effort to reduce the deficit must consider the 

merits of repealing the credit union tax exemption. While I have focused my comments on the Federal budget, the credit union tax exemption also deprives State 

and local governments, many of which are facing cuts to essential public services 

to remain solvent, of desperately needed revenue. 

The recent bailout of corporate credit unions further demonstrates the fundamental unfairness of the tax exemption. On September 24, 2010, three corporate 

84 

credit unions were taken into conservatorship by the NCUA, bringing the total to 

five over a period of 18 months. Seventy percent of corporate credit unions assets 

were held under conservatorship. The corporate credit unions had invested in $50 

billion of subprime, private label, mortgage-backed securities, a failure of prudent 

lending illustrating that their judgment seems to have been no better than that of 

the Wall Street banks that also had to be bailed out. Had NCUA not intervened 

with the provision of a taxpayer-funded backstop, consumer credit unions would 

have suffered system-wide losses of an estimated $40 billion and as many as 30 percent of Federal credit unions would have failed, according to NCUA estimates. Credit unions benefit from taxpayer resources when times are rough, but they do not 

contribute when they are profitable. This is an affront to taxpayers and to the community banks that sustain their communities and the Nation with hard-earned tax 

dollars. Community banks pay their fair share; credit unions should be held to the 

same standard. 

The case for repealing the exemption stands on its own merits as a deficit reduction measure. When considered in the context of the current effort by credit unions 

to expand their business lending powers and become the equivalent of banks, linking expanded lending powers to repeal of the tax exemption is a matter of fairness 

and free market principle. If credit unions seek to have no distinct business model 

verses commercial banks than Congress must tax them under any equitable tax system. 

Credit Unions Could Convert to Mutual Thrifts 

The implicit reason for expansion of member business lending proposed in S. 509 

appears to be that the current credit union charter is inadequate for the needs of 

some credit unions and their customers. However, ICBA believes that there is a far 

more appropriate alternative for them. If they need bank powers to better serve 

their customers, they should be encouraged to convert to a Federal savings association charter. Over 30 credit unions have taken advantage of this option, despite the 

substantial roadblocks that the National Credit Union Administration has put in 

the way of credit union-to-thrift conversions. 

Conclusion 

Thank you again for convening this important hearing. As a community banker, 

I feel the direct impact of credit union commercial lending, so I’m grateful for the 

opportunity to provide my perspective. 

ICBA strongly urges this Committee to reject calls for new powers for the taxsubsidized credit union industry that will not, despite assertions to the contrary, expand small business credit or create jobs. ICBA adamantly opposes S. 509 as an unjustified and unfair credit union power grab at the expense of taxpaying community 

banks and individuals. Credit unions should be granted no new powers as long as 

they remain tax exempt and are not even meeting their statutory mission to serve 

individuals of modest means. 

Thank you for this opportunity to testify and express the views of the community 

banking sector. 

PREPARED STATEMENT OF MICHAEL LUSSIER 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, WEBSTER FIRST FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

JUNE 16, 2011 

Introduction 

Good morning, Chairman Johnson, Ranking Member Shelby, and Members of the 

Committee. My name is Mike Lussier and I am testifying today on behalf of the 

National Association of Federal Credit Unions (NAFCU) where I currently serve as 

Chairman of the Board of Directors. I appreciate the opportunity to share my views 

with the Committee on credit unions and member business lending. I have served 

as President/CEO of Webster First Federal Credit Union (Webster First), 

headquartered in Worcester, Massachusetts, since 1990. I earned my Bachelor’s of 

Business Administration, majoring in Accounting from Bentley College and my Master’s of Finance from Nichols College. 

Webster First is a community credit union with over 44,000 members and more 

than $570 million in assets. Founded as a Polish-ethnic credit union in January of 

1928, Webster First changed to a community credit union in 1956 and became federally chartered in 1995. 

Throughout my career, I have been active in the credit union community. Prior 

to my chairmanship, I served on the Executive Committee of the NAFCU Board. AdVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00088 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
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ditionally, I have been a member of the Small Business Loan Review Board, was 

a Director for the Credit Union League of Massachusetts Insurance Agency, and 

served as Chairman of the Massachusetts Share Insurance Corporation Board. 

As you may know, NAFCU is the only national organization that exclusively represents the interests of the Nation’s federally chartered credit unions. NAFCU is 

comprised of nearly 800 member owned and operated Federal credit unions. NAFCU 

member credit unions collectively account for approximately 62 percent of the assets 

of federally chartered credit unions. NAFCU and the entire credit union community 

appreciate the opportunity to participate in this discussion regarding member business lending and allowing credit unions to further assist in the economic recovery. 

Historically, credit unions have served a unique function in the delivery of necessary financial services to Americans. Established by an act of Congress in 1934, 

the Federal credit union system was created, and has been recognized, as a way to 

promote thrift and to make financial services available to all Americans, many of 

whom would otherwise have limited access to financial services. Congress established credit unions as an alternative to banks and to fill a precise public need— 

a niche that credit unions fill today for nearly 93 million Americans. 

Every credit union is a cooperative institution organized ‘‘for the purpose of promoting thrift among its members and creating a source of credit for provident or 

productive purposes.’’ (12 USC 1752(1)). While more than 75 years have passed 

since the Federal Credit Union Act (FCUA) was signed into law, two fundamental 

principles regarding the operation of credit unions remain every bit as important 

today as in 1934: 

• Credit unions remain totally committed to providing their members with efficient, low cost, personal service; and 

• Credit unions continue to emphasize traditional cooperative values such as democracy and volunteerism. 

Credit unions are not banks; they are better. The Nation’s approximately 7,200 

federally insured credit unions serve a different purpose and have a fundamentally 

different structure than banks. Credit unions exist solely for the purpose of providing financial services to their members—while banks aim to make a profit for 

a limited number of shareholders. As owners of cooperative financial institutions 

united by a common bond, all credit union members have an equal say in the operation of their credit union—‘‘one member, one vote’’—regardless of the dollar 

amount they have on account. These singular rights extend all the way from making 

basic operating decisions to electing the board of directors—something unheard of 

among for-profit, stock-owned banks. Unlike their counterparts at banks and thrifts, 

Federal credit union directors generally serve without remuneration—a fact epitomizing the true ‘‘volunteer spirit’’ permeating the credit union community. 

Credit unions continue to play a very important role in the lives of millions of 

Americans from all walks of life. As consolidation of the commercial banking sector 

has progressed with the resulting de-personalization in the delivery of financial 

services by banks, the emphasis in consumers’ minds has begun to shift not only 

to services provided but also—and in many cases more importantly—to quality and 

cost. Credit unions are second to none in providing their members with quality personal service at the lowest possible cost. 

Although it is not the subject of this hearing today, I would be remiss if I did 

not personally thank Senators Tester and Corker, and those who supported their 

recent efforts to try to bring needed changes to the Durbin debit interchange pricecontrol provision that was added to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Like member business lending, this issue is of great importance to credit unions and the consumers they serve, as it will have a direct impact 

on the ability of credit unions to meet the needs of their membership. 

Background on Credit Union Member Business Lending and the Arbitrary 

Cap 

When Congress passed the Credit Union Membership Access Act (CUMAA) (P.L. 

105-219) in 1998, they put in place restrictions on the ability of credit unions to 

offer member business loans. Congress codified the definition of a member business 

loan and limited a credit union’s member business lending to the lesser of either 

1.75 times the net worth of a well-capitalized credit union or 12.25 percent of total 

assets. Also, pursuant to section 203 of CUMAA, Congress mandated that the Treasury Department study the issue of credit unions and member business lending. 

In January 2001, the Treasury Department released the study, ‘‘Credit Union 

Member Business Lending’’ and found the following: 

86 

‘‘ . . . credit union’s business lending currently has no effect on the viability 

and profitability of other insured depository institutions.’’ (p. 41). Additionally, when examining the issue of whether modifying the arbitrary cap 

would help increase loans to businesses, the study found that ‘‘ . . . relaxation of membership restrictions in the Act should serve to further increase 

member business lending . . . ’’ (p. 41). 

CUMAA also established, by definition, that a business loan of $50,000 and above 

is a member business loan that counts toward the cap. This number was not indexed and has not been adjusted for inflation in the nearly 13 years since enactment, eroding the de minimis level. Where many vehicle loans or small lines of credit may have been initially exempt from the cap in 1998, many of those that meet 

the needs of small business today, are now included into the cap due to this erosion. 

To put this in perspective relative to inflation since 1998, what cost $50,000 in 1998 

costs $69,000, using the May consumer price index data. That is a 38 percent rate 

of inflation change that is completely ignored by current law and which greatly 

hamstrings a credit union’s ability to meet its members’ needs. 

Many in the banking community who oppose the aid to small business that 

changes to the cap would bring often try to cite safety and soundness issues with 

credit unions and business lending. Perhaps the better question would be whether 

a number of banks should be making commercial business loans. An examination 

of 1st quarter 2011 call report data shows that credit unions with MBL’s have the 

same annualized net charge-off rate for business loans (1.12 percent) as commercial 

lending banks. Furthermore, they are actually better equipped for the charge-offs 

as they have a higher coverage of delinquent loans with their allowance account 

(101.72 percent) than those commercial lending banks (57.85 percent). NAFCU 

would welcome the opportunity to appear before the Committee on a hearing on this 

topic examining the banks. 

The banking industry also argues that the credit union MBL cap should not be 

raised due to the credit union Federal tax exemption. What the banking industry 

conveniently forgets to mention is that a large number of banks do not pay corporate Federal income tax because of their Subchapter S status. There are approximately 2,377 Subchapter S banks that avoid Federal income taxes today. What the 

banking trades don’t want you to know, is that one estimated value of the Subchapter S Federal tax break for banks is $2.05 billion for 2010, which is actually 

greater than the estimated value of the entire credit union tax expenditure ($1.27 

billion) for FY2010 as included in the President’s FY2012 budget message. Perhaps 

the issue the Committee should be holding hearings on is the unfair advantage 

banks have over credit unions due to their Subchapter S Federal tax break. 

The Arbitrary Cap Today 

Credit unions have been critical in helping our country recover from the financial 

crisis, and members of Congress on both sides of aisle recognize that they were not 

the cause of it. Many credit unions have capital to lend small businesses across the 

country and are in a position to further assist in recovery efforts. However, due to 

the outdated and arbitrary member business lending cap, their ability to help stimulate the economy by providing credit to small businesses is hampered. Removing or 

modifying the outdated and arbitrary credit union member business lending cap 

would help provide needed economic stimulus. 

Some short-sighted critics claim that only a limited percentage of credit unions 

are actually at the arbitrary member business lending cap and therefore nothing 

needs to be done. This view fails to see the big picture of how the arbitrary cap acts 

as a deterrent for efforts to increase business lending and create American jobs. 

Successful business lending programs like ours at Webster First often require investment in human and other resources by the institution. Those credit unions that 

have some member business lending but are not near the cap, have an artificial disincentive in the arbitrary cap, because, if they are successful in growing and expanding their business lending program, they will ultimately reach this arbitrary 

barrier forcing them to scale down what they invested in to build up. 

Member Business Lending at Webster First FCU 

Webster First has been at the outdated and arbitrary credit union member business lending cap for almost a year now. On the business lending side, we offer numerous products including real estate loans, lines of credit, small business equipment loans, auto and truck loans, and a few small stores that do floor plans. We 

have a well diversified portfolio with minimal delinquencies. Our commercial losses 

have also been minimal as we have a sincere and devoted membership. 

At Webster First, we understand that member business lending is not about credit unions, but about helping small businesses and the jobs they create. It is unfortuVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00090 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
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nate that we cannot handle all the requests we receive due to the outdated and arbitrary member business lending cap. It is with our liquidity, strong surplus, and experienced staff, that Webster First could continue to help the small businesses in 

our community, many of which feel threatened and treated unfairly by other institutions. 

Webster First has made some great in-roads into business lending and has assisted multiple families and businesses in becoming quite successful. For example, 

we helped an individual purchase an older gas service station from his parents. He 

was able to upgrade all his pumps, computer services, and revamp his store. It now 

includes a coffee shop, package store, and a 10 pump service station. His success 

allowed him to then upgrade the unused property behind the station for storage 

rental units which quickly became 90 percent utilized. He recently sold the property 

for a substantial profit and has now acquired other properties to expand his business. As the Committee knows, business expansion means job creation. 

We have assisted many real estate owners who own multifamily units in refinancing their existing mortgages from other institutions. These institutions refuse 

to allow them to rewrite due to the fear that real estate values have not hit bottom. 

Many of these property owners have plenty of cash, net worth and positive cash 

flow, but the banks they approached for financing declined the entrepreneurs’ requests and would not work with them. We put them through an intensive analysis, 

document their credit and payment history, and have been able to revive the possibility of continued ownership via lesser rates, smaller payments, and continued positive cash flow. 

Recently, Latino radio station owner wanted to expand his radio station ownership to acquire some local radio stations in order to better accommodate the Latino 

market in Worcester. Because of the risk associated with radio stations, many banks 

would not consider his request. We reviewed the contracts, cash flows, equity position, and collateral, and were able to finance his dream. He is now the largest 

Latino radio station owner in all of Massachusetts. We have not only assisted this 

individual, but in working with him, we were also able to increase our marketing 

and business opportunities within the under-banked community. We have since put 

a credit union branch in this underserved area. 

One of the newest areas we have been able to enter is small-town downtown rehabilitation. We recently hired an individual who is well versed in SBA lending. He 

is attempting to assist those within our community who may be better served by 

using our products along with SBA products. As the Committee is aware, guaranteed portions of SBA loans do not count toward the outdated and arbitrary credit 

union member business lending cap. As the arbitrary cap has hamstrung our efforts 

to meet the member business lending needs of our membership, SBA loans have at 

least offered some alternative until the outdated and arbitrary restrictions can be 

changed. 

Credit Union Member Business Lending Legislation in the 112th Congress 

In March 2011, Senator Mark Udall of Colorado introduced bipartisan legislation, 

the Small Business Lending Enhancement Act (S.509), which would raise the arbitrary credit union member business lending cap to 27.5 percent of total assets, up 

from 12.25 percent, and help stimulate the Nation’s struggling economy by increasing access to credit for small business owners. This important legislation has 19 

Senate cosponsors, including Majority Leader Reid. Identical legislation (H.R. 1418) 

has been introduced in the House by Representative Ed Royce of California. 

The Small Business Lending Enhancement Act is a well thought out solution that 

includes important provisions to ensure that safety and soundness concerns are addressed. This bill is not about helping credit unions, it is about helping small businesses. 

In order to see its cap increased, a credit union would need to meet strict eligibility requirements to gradually increase its member business lending portfolio, including: being well capitalized [currently at least a 7 percent net worth ratio]; having at least 5 years of member business lending experience; must be at or above 

80 percent of the current 12.25 percent cap for at least 1 year before applying; and, 

must be able to demonstrate sound underwriting and servicing based on historical 

performance and strong management. The requirements in this legislation mirror 

those sought by Senator Mark Udall last year, when his efforts were endorsed by 

Treasury Secretary Timothy Geithner and NCUA Chairman Debbie Matz. 

As evidenced by the strict eligibility requirements outlined above, the Small Business Lending Enhancement Act was specifically tailored to address concerns that 

raising the current cap could somehow create safety and soundness issues. 

Unlike efforts enacted by Congress to provide $30 billion to promote business 

lending at community banks, it is worth noting that raising the arbitrary and outVerDate Nov 24 2008 08:11 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00091 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-16 CREDIT UNIONS -- MEMBER BUSINESS LENDING\HEARING\6
88 

dated member business lending cap for credit unions only scores at a cost of $77 

million over 5 years according to a 2010 CBO estimate. Furthermore, this cost does 

not take into account added tax revenue that would be gained from the jobs created 

by enacting this legislation. This pales in comparison to the price tag for what Congress did for the community banks in the last Congress when the Small Business 

Jobs Act created a $30 billion ‘‘Small Business Lending Fund’’ (SBLF) with the intention of encouraging community banks to lend to small businesses. To date the 

program has created very few if any jobs, and has done little to spur economic 

growth for its $30 billion price tag. Furthermore, it has been reported that only 

about 30 percent of eligible banks have expressed interest in participating. During 

recent hearings in the Senate Small Business Committee, it came to light that a 

large number of the banks that have applied for the program also received taxpayer 

funds from the Troubled Assets Relief Program (TARP). Clearly this effort to promote business lending at community banks has had a lack of success. 

Credit unions stand ready to do their part in continuing to assist America’s small 

businesses. Failing to consider legislation to raise the arbitrary member business 

lending cap last Congress was a missed opportunity to further assist small business 

and help move the economy in a positive direction. NAFCU and its member credit 

unions ask that the Small Business Lending Enhancement Act be considered by the 

Banking Committee and on the Senate floor as soon as possible. 

Conclusion 

The artificial credit union member business lending cap established in 1998 is arbitrary and outdated. The need for such a cap was questioned by the Treasury Department as far back as 2001. While NAFCU believes that no statutory cap should 

be in place, a number of credit unions like mine, and the millions of members we 

serve, would benefit from the enactment of the Small Business Lending Enhancement Act. This legislation would provide a practical and well-thought out approach 

to raising the arbitrary threshold, while addressing concerns about rapid growth 

and safety and soundness. NAFCU would also support raising the de minimis 

$50,000 definition of a member business loan as it has eroded upon enactment last 

century. 

We thank you for your time and the opportunity to testify before you here today 

on this important issue to credit unions and our Nation’s economy. I would welcome 

any questions that you may have. 

PREPARED STATEMENT OF STEPHEN P. WILSON 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, LCNB NATIONAL BANK, ON BEHALF OF

THE AMERICAN BANKERS ASSOCIATION

JUNE 16, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, the 

American Bankers Association appreciates the opportunity to testify at the Senate 

Banking Committee hearing entitled ‘‘Credit Unions: Member Business Loans.’’ The 

American Bankers Association (ABA) represents banks of all sizes and charters and 

is the voice for the Nation’s $13.4 trillion banking industry and its two million employees. 

ABA is strongly opposed to recent efforts by the credit union industry to redefine 

the credit union charter in ways that would effectively turn credit unions into taxexempt banks. This effort, most recently embodied in S. 509, the ‘‘Small Business 

Lending Enhancement Act of 2011,’’ would allow the NCUA to permit credit unions 

that are within 80 percent of their member business lending (MBL) cap to increase 

this cap and take on significantly more business lending. This would allow a new 

breed of credit union institutions to more aggressively pursue business customers 

through large commercial and real estate loans. It would also serve as an invitation 

to credit unions that are not near this cap now to focus on business lending—to the 

exclusion of consumer lending—in order to be eligible for an increase in their business lending cap. 

Under current law, credit unions have an aggregate MBL cap of 12.25 percent of assets. Business loans under $50,000 do not count against this cap of 12.25 percent, 

nor do many other types business loans—leaving ample room for credit unions to 

carry out their business lending strategy. There is a limitation on business lending, 

because credit unions are tax exempt and this tax exemption is meant to be targeted at people of small means. 

S. 509 would increase the aggregate business loan cap for qualifying credit unions 

to 27.5 percent of assets—more than double the current cap, and greater business 

lending authority than Federal thrifts. Thrifts are currently limited to 20 percent 

89 

1 Congressional Record, July 28, 1998, S 9095. 

2 Congressional Record, July 28, 1998, S 9019. 

3Senate Report 105-193, May 21, 1998, p. 29. 

of total assets, provided that amounts in excess of 10 percent of total assets may 

be used only for small business loans. Credit unions would be allowed to further 

leverage their tax advantage and compete directly with tax-paying banks. 

Furthermore, S. 509 does nothing to protect members’ interests with regard to consumer loans, which would necessarily diminish over time as credit unions add business lending. In other circumstances where a credit union will move its focus away 

from consumer lending, NCUA requires ‘‘a clear and conspicuous disclosure’’ of this 

change. NCUA’s own regulations governing the conversion of a credit union to a mutual savings bank have greater protection of members’ interests regarding consumer 

loans than S. 509. NCUA regulations require: 

a clear and conspicuous disclosure of how the conversion from a credit 

union to a mutual savings bank will affect the institution’s ability to make 

non- housing-related consumer loans because of a mutual savings bank’s 

obligations to satisfy certain lending requirements as a mutual savings 

bank. 

A credit union that applies and receives the authority to increase business lending 

under S. 509 almost certainly would reduce its non- housing-related consumer loans. 

However, the bill does not require the credit union to notify members in a clear and 

conspicuous manner that they could see a reduction in consumer loans. And the bill 

does not require the members of a credit union to approve in the affirmative an expansion in business lending, an action that would essentially create a tax exempt 

bank. Credit unions that seek a mutual savings bank charter must both mail such 

a disclosure to their members and have an affirmative vote. 

Make no mistake about it, S. 509 is nothing less than legislation that would allow 

a credit union to look and act just like a bank, without the obligation to pay taxes 

or have bank-like regulatory requirements, such as the Community Reinvestment Act, 

applied to them. Provisions included in S. 509 that try to safeguard this high-risk 

form of lending are not the issue; rather, the issue is that credit unions have a limited charter, focused on people of small means, for which credit unions have a tax 

exemption. 

Members of Congress have recognized this fundamental problem. As Senator 

Kerry (D–MA) stated from the Senate floor, credit unions ‘‘were never intended to 

be simply alternative, tax-exempt commercial banks.’’ 1 Other senators have 

agreed. 2

Indeed, there is a strong legislative history that supports the unique charter of 

credit unions with very specific restrictions on business lending. These restrictions 

were put in place to protect credit unions from lending that could pose serious 

threats to safety and soundness. In addition, they were put in place to ensure that 

credit unions remained primarily focused on individuals. Even so, the law has always made a place for MBL, although with specific restrictions to keep credit unions 

focused on the task at hand. In the last debate in 1998 over what that level should 

be, Senator Reed (D–RI) expressed reservations about the hole that the exemption 

of loans under $50,000 would create: 

I am concerned that loans under $50,000 would not be counted toward the 

12.25 percent cap. As a result, it is possible that credit unions could engage 

in commercial lending to a much greater extent than the limit imposed in 

the bill. 3 [emphasis added] 

This congressional concern is well founded and echoed by many within the credit 

union industry itself. Business lending is risky business, and should be limited for 

all credit unions. I will address this risk later in my testimony. 

Credit unions with strong business lending opportunities can take advantage of 

these opportunities and reach out with credit in their communities through a method that is already available—by converting to a mutual savings bank charter. This 

charter provides the flexibility credit unions desire and preserves the mutual-member focus that is the trademark of the credit union charter. For example, in 2009, 

Coastway Credit Union in Cranston, RI, converted to a mutual savings bank so that 

it could make more business loans. Viewpoint Bank, formerly Community Credit 

Union in Plano, TX, which converted to a mutual savings bank in 2005, has taken 

advantage of its greater business lending authority—almost 18 percent of its assets 

are in business loans. I will give more detail on this process later in my testimony. 

During this hearing, we will also hear about the loans to very small businesses 

that credit unions want to make but supposedly cannot. While the rhetoric speaks 

90 

4 ‘‘CUs, Banks Put Up Dueling Bills in Oregon’’, American Banker, March 25, 2003. 5Senate Committee on Banking, Housing, and Urban Affairs. ‘‘State of the Credit Union Industry’’, December 9, 2010. 

of serving the small business man or woman, the reality is that some credit unions 

are making large dollar loans to businesses, and now they want to make even larger 

loans. These new-breed credit unions aggressively pursue business customers 

through large commercial and real estate loans. 

Credit unions’ current tax-exempt status and lack of equivalent regulation have 

created huge competitive inequities in the local marketplace. Some aggressive credit 

unions have made business lending a top priority as they seek to rapidly grow the 

institutions—making loans that would be made by taxpaying financial institutions. 

According to NCUA’s own data, today, there are more than 173 credit unions with 

$1 billion or more in assets, and credit unions with more than $500 million in assets 

hold 63 percent of the industry’s assets. In the majority of the States in this country, a credit union would rank among the top ten banks. As a former president of 

a State credit union association said: ‘‘In a lot of places, credit unions are the major 

financial institution.’’ 4 Unfortunately, provisions to expand business lending for 

those credit unions most focused on business lending would further exacerbate these 

competitive inequities. 

There are four key points I would like to make today: 

• Raising the credit union legal business lending cap is not necessary for credit 

unions to meet small business members’ credit needs. 

• Expanding the lending cap is inconsistent with the credit union mission of serving consumers, especially those of modest means. 

• Business lending is riskier and raises serious safety and soundness concerns. 

• There is a better option for credit unions that want to expand business lending—convert to a mutual bank charter. 

I. Raising the credit union legal business lending cap is not necessary for 

credit unions to meet members’ credit needs 

Credit unions argue that greater business lending authority would enable them 

to meet the needs of small businesses seeking credit. Such arguments are simply 

not true. Under current law, business loans under $50,000 do not count against the 

aggregate business loan cap of 12.25 percent of assets. 

Let me state this more clearly. Credit unions can already make all the business loans they want under $50,000. That means that credit unions start at zero when 

they make further business loans over $50,000. 

Moreover, the guaranteed portion of Small Business Administration loans does 

not count against the aggregate business loan limit, nor do loans secured by 1 to 

4 family primary residences. NCUA has aggressively provided additional exclusions 

from the cap by regulatory fiat. For example, in October 2003, NCUA excluded business loans made to nonmembers from the cap, allowing more loans by credit unions 

to circumvent the aggregate business loan cap. As of March 2011, credit unions reported extending almost $6.7 billion in nonmember business loans, which account 

for almost 18 percent of all outstanding credit union business loan balances. This 

represents a three-fold increase in nonmember business loans on the books of credit 

unions in 6 years. The concerns raised by Senator Reed are even more troubling 

today, as there is even more lending under the radar and outside the limits that 

Congress had imposed. 

Clearly, there is considerable opportunity under current law for credit unions to 

meet the needs of small business customers. Furthermore, only a few credit 

unions—96 out of 7,292 credit unions—are within 80 percent of their congressionally 

mandated cap of 12.25 percent of assets, as of year-end 2010, and could be affected 

by S. 509. This was acknowledged by NCUA Chairman Deborah Matz last year in 

a hearing: ‘‘It’s a small number that are at their cap.’’ 5

The minority who are at or near this cap are a new breed of institution that bears 

little resemblance to traditional credit unions. These ‘‘morphed’’ credit unions, which 

seek out large commercial customers, are a far cry from traditional credit unions, 

which have remained true to their credit union mandate to serve people of small 

means. 

II. Business lending is risky and raises serious safety and soundness concerns 

Lifting the business lending cap and allowing more large business loans also 

raises serious safety and soundness concerns. As credit unions have aggressively 

pursued business lending options, business loan delinquencies have risen and some 

91 

6 ‘‘MBL Limits—Be Watchful of What Others Wish For’’, Credit Union Times, February 10, 

2010. 7 ‘‘1 deal down, at least 1 to go for Chartway’’, Inside Business, January 11, 2010. 8 ‘‘Telesis’ Loan Recoup Attempts Go On’’, Credit Union Times, December 15, 2010. 9 Appendix A provides more details about what the Inspector General discovered. 

10 ‘‘The Rise and Fall of Texans Credit Union’’, Dallas Morning News, May 8, 2011, p. D1. 11 ‘‘Credit Unions: Financial Condition Has Improved, but Opportunities Exist To Enhance 

Oversight and Share Insurance Management’’, U.S. General Accounting Office, October 2003 

(GAO-04-91), p. 49. 

credit unions have failed. Even other credit unions are concerned about the impact 

that increased business lending will have on the credit union industry as a whole. 

Dale Kerslake, President and CEO of Cascade Federal Credit Union (Kent, WA) 

wrote: 

Doubling [member business lending (MBL)] limits for natural person credit 

unions is not something a majority of credit unions want or need. Yet, if 

a minority of powerful credit unions and industry trade associations get 

their way, which they usually do, MBL could easily become the next industry crisis . . . The proposed MBL limit increase . . . lacks safeguards for 

the thousands of credit unions that pay into NCUSIF and do not do business lending. 6

Ron Burniske echoed these comments, after his credit union, Chartway Federal 

Credit Union (Virginia Beach, VA), took over a failed Utah credit union: 

We shouldn’t be doing strip centers, corporate buildings and land development. That’s not who we are. That’s the banks’ business. 7

Credit unions have good reasons to be concerned. As of March 2011, 4.22 percent 

of all credit union member business loans were at least 60 days or more past due. 

An additional $2.1 billion in business loans have been modified. As a concrete example, America First FCU (Riverdale, UT) recently reported that 11.4 percent of its 

$450 million of member business loans were 12 months or more past due. If America First were regulated by bank regulators, these loans would have been charged 

off. 

Testifying before the Senate Banking Committee on December 9, 2010, NCUA 

Chairman Debbie Matz stated: ‘‘Presently, 270 of the 633 credit unions which have 

a 3, 4, or 5 CAMEL rating and make member business loans, MBLs are the primary 

or secondary contributing factor for the supervisory concern.’’ This means that approximately 30 percent of all credit unions that make business loans were a supervisory concern. 

Here are some examples of large business loans that have gone bad: 

• Centris FCU (Omaha, NE) held $11 million in bad loans to Great Adventures 

Water Resort. 

• Denali Alaskan FCU filed suit against a prominent real estate developer over 

$17 million in delinquent loans. 

• Telesis Credit Union (Chatsworth, CA) was foreclosing on a $3 million loan on 

a mixed-use office building in Memphis, Tennessee. 8

In fact, on November 23, 2010, the NCUA’s Office of the Inspector General released a report summarizing the 10 costliest natural person credit union failures. 

In 7 of these 10 failures, business lending was a major contributor to the failure. 9

Since the report was issued, NCUA placed $1.6 billion Texans Credit Union into 

conservatorship. The credit union, starting in 2003, grew its commercial real estate 

loan portfolio very rapidly to almost $800 million by 2007. It funded projects hundreds of miles away: a mall project in Illinois, a luxury condo development in Telluride, Colorado, and subdivisions in Mississippi. 10 Eventually, some of these commercial real estate projects failed. This action arose from faulty lending on commercial 

real estate projects—some of which were outside of its market area. 

Moreover, the General Accountability Office in 2003 warned about the danger of 

business lending by credit unions and it was skeptical that NCUA was up to the 

challenge to monitor the expansion of credit union business lending. 11 It should 

come as no surprise that the Inspector General’s Material Loss Review found adequate oversight often missing: business loans were made to nonmembers; credit 

unions exceeded the legal Member Business Loan cap of 12.25 percent; credit unions 

violated the loan-to-one borrower limit; and credit unions made business loans without a Member Business Loan policy. Expanding credit union business lending only 

encourages larger, riskier loans, without any assurance of adequate oversight. 

92 

12 ‘‘NCUA Sells Importance of Increased CUSO Authority To Stay Ahead of Losses’’, Credit 

Union Times, May 4, 2011. 13Senate Report 105-193, May 21, 1998, pp. 9–10. 

In addition, NCUA in 2003 authorized credit union service organizations (CUSOs) 

to originate business loans as a permissible power, even though these third party 

vendors are not subject to NCUA supervision. Today, many credit unions hold business loans that were originated by these credit union service organizations. For example, CU Business Group reported in 2009 that it has underwritten over $2 billion 

in business loans since its inception in 2002. Additionally, Michigan Business Connection, a CUSO supporting more than two dozen credit unions, reported managing 

a portfolio of over $200 million. Cooperative Business Services, LLC, a CUSO owned 

by nine Ohio credit unions, reported on its Web site that it recently provided funding for $3.56 million investment property. 

Unfortunately, loans originated by CUSOs have resulted in credit union failures. 

Credit Union Times quotes NCUA Board Member Gigi Hyland addressing the National Association of Credit Union Service Organizations earlier this year regarding 

losses at Texans CU arising from its business lending CUSO as saying: ‘‘We could 

see things were going wrong but we had to go through the side door and through 

the maze to get there. By the time we got there, it was too late.’’ 12

III. Expanding the business lending cap is inconsistent with the credit 

union mission of serving consumers, especially those of modest means 

The real goal of expanded business lending is for some aggressive credit unions 

to make even more large dollar loans. The truth is that these new-breed credit 

unions have made business lending a top priority as they seek to rapidly grow the 

institution—making loans that any taxpaying financial institution would want to 

make. The fact that a few credit unions are hitting the Congressionally mandated 

limits on business lending is largely because they are making large commercial 

loans—including those to businesses out of their market area. 

A dramatic example of just how far these credit unions have gone is the financing 

of Thumper Pond, a resort development in Minnesota that went bankrupt. This luxury resort featured a golf course, spa, water park, hotels, and a planned condominium community. The resort was financed by a large commercial loan made by 

Spire Federal Credit Union and is clearly counter to the chartered mission of serving people of modest means. Moreover, the resort is located over 200 miles from the 

credit union’s headquarters. Is this the kind of loan that should be tax-subsidized? 

Congress put these current limits in place after considerable debate to ensure 

credit unions remained focused on individuals, especially people of small means. In 

fact, the Senate Report implementing the Credit Union Membership Access Act of 

1998 stated that the limits ‘‘ . . . are intended to ensure that credit unions continue 

to fulfill their specified mission of meeting the credit and savings needs of consumers, especially persons of modest means, through the emphasis on consumer 

rather than business loans.’’ 13

Cases like the Thumper Pond fiasco show that credit unions are leveraging their 

tax-exemption to provide loans to large businesses that already have plenty of credit 

options available through taxpaying banks. This credit union tax expenditure is neither focused nor contained; it takes revenue from banks that compete for these same 

loans—revenue that would be taxed and would help to offset some of the current Federal budget deficit. 

IV. There is a better option for credit unions that want to expand business 

lending—convert to a mutual bank charter 

While credit union rhetoric suggests that without greater business lending authority there are no options for these institutions to grow and better serve their customers, the reality is that a very viable option is available today through switching 

to a mutual savings bank charter—a route that some credit unions have already 

taken. This charter provides greater flexibility, still preserves the mutual-member 

focus that credit unions find desirable, and is accompanied by the effective and experienced supervision of traditional banking regulators. 

The savings bank charter would give credit unions the ability to expand their 

business lending and retain their mutual structure. However, NCUA actively impedes the ability of credit unions to engage in charter choice. Removal of NCUA’s 

obstructionism is a far better alternative to enabling more business lending than a 

wholesale change in powers that will benefit only a small proportion of large credit 

unions. Facilitating conversion to a mutual savings bank charter will benefit those 

credit unions that have outgrown their charter, and will also improve the fiscal position of the United States as these entities pay their fair share of taxes. 

93 

Conclusion 

Increased business lending powers are not necessary to meet the credit needs of 

businesses. Credit unions have ample authority under current law to make all the 

small business loans they want. S. 509 will empower credit unions to make larger 

commercial loans and cause credit unions to stray even further from their mission 

to serve consumers, especially those of modest means. Increasing the business lending cap will raise serious safety and soundness concerns. 

Rather than expanding the business lending authority of credit unions, Congress 

should close the loopholes that are allowing credit unions to make business loans 

to nonmembers to circumvent the aggregate business loan cap. Additionally, Congress should rightfully be concerned about the increasing use of third-party vendors 

by credit unions to originate business loans, as CUSOs are a ticking time bomb 

waiting to explode given the fact that NCUA does not have authority to regulate 

these entities. 

Against a backdrop where nontraditional credit unions forsake the common bond 

in favor of fast growth, and where energies are diverted to favoring the well-off and 

businesses rather than meeting their chartered obligation to serve people of modest 

means, it is no surprise that ABA opposes expansion of credit union powers. To 

allow such expansion will only move the new breed of credit unions further and further away from their mandated mission. 

94 

95 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM DEBORAH MATZ 

Q.1. Supplemental Capital—My staff and I have recently heard 

from a number of Oregon credit unions about the need to increase 

capital at credit unions. Many credit unions—like community 

banks—have seen an influx in deposits recently, and like community banks, face challenges in raising the capital they need to back 

those deposits and the loans that come from them. For community 

banks, as you may know, I worked with a number of my colleagues 

to help put into place the Small Business Lending Fund, so community banks could gain access to the additional capital they need 

to meet the lending needs of small business. I’m wondering whether we need to similarly consider additional capital for credit unions. 

Specifically, as you know, credit unions are only allowed to accumulate capital through retaining earnings year on year (much the 

same way a de novo (newly licensed) bank does in many States, including Oregon). However, this can be a real challenge for credit 

unions in a low interest rate environment. If, like community 

banks, they are taking in many new deposits from members and 

making new loans, they need capital to back those loans and stay 

within their leverage ratios. Clearly, if they cannot bring in new 

capital, then we could potentially face safety and soundness problems. 

What can you share with the Committee, at this preliminary 

stage, about the need for capital in our credit union sector and 

what role can supplemental capital, carefully constructed, play in 

ensuring greater safety and soundness at credit unions? 

A.1. This is a timely question that I appreciate having the opportunity to address. I have previously encouraged Congress to create 

a new opportunity for well-capitalized, qualifying credit unions, as 

determined by the National Credit Union Administration, to issue 

alternative forms of capital to supplement their retained earnings. 

This change would allow credit unions to grow stronger especially 

in difficult economic times and, in turn, lower the risk to the National Credit Union Share Insurance Fund, increasing safety and 

soundness for the credit union industry. 

As you point out in your question, some financially healthy, wellcapitalized credit unions that offer desirable products and services 

are discouraged from marketing them too vigorously out of concern 

that attracting share deposits from new and existing members will 

inflate the credit union’s asset base, thus diluting its net worth for 

purposes of prompt corrective action. In effect, the reward for their 

success in attracting new shares is the risk of a demotion to a 

lower net worth category if accepting those shares drives down the 

credit union’s net worth ratio. 

I believe two legislative remedies would help reverse the disincentive to accept new share deposits—one that addresses the 

total assets denominator of the net worth ratio, and a second that 

addresses the retained earnings numerator. 

With respect to the denominator, I have encouraged Congress to 

consider allowing qualifying credit unions to exclude from the ‘‘total 

assets’’ denominator those assets that have a zero risk-weighting, 

exposing the credit union to virtually no risk of loss. An example 

of such ‘‘no-risk’’ assets is short-term Treasury securities. 

96 

To qualify for exclusion of no-risk assets from its denominator, 

I have proposed that a credit union should be required to meet at 

least two criteria: 

1. Maintain a minimum net worth classification, as determined 

by the NCUA Board, calculated before excluding no-risk assets; and 

2. Show that share growth is the cause of its declining net worth 

ratio, i.e., that the decline is not due to poor management or 

material unsafe or unsound practices. 

Permitting the total assets denominator to exclude no-risk assets 

would moderate the growth of assets due to the inflow of new 

shares, while still imposing prompt corrective action that is appropriate to the circumstances. 

With respect to the numerator of the net worth ratio, I would encourage Congress to consider authorizing qualifying credit unions, 

as determined by the NCUA Board, to issue alternative forms of 

capital to supplement their retained earnings. To ensure the proper 

authority, alternative forms of capital would be subject to necessary regulations addressing safety and soundness criteria, investor protections, and any impact on the cooperative credit union governance model. 

Current law already permits low-income designated credit unions 

to offer uninsured secondary capital accounts to nonmembers (e.g., 

12 USC 1757(6) and 12 CFR 701.34). Modifying the Federal Credit 

Union Act to permit qualifying credit unions to offer uninsured alternative capital instruments subject to regulatory restrictions, and 

expanding the law’s definition of ‘‘net worth’’ to include those instruments, would allow well-managed credit unions to better manage net worth levels under varying economic conditions. Together, 

these legislative remedies would go a long way toward removing an 

obstacle to accepting new shares, thereby enhancing consumers’ access to the benefits of credit union service. 

Q.2. Servicing Rights, Foreclosure, and Member/Customer Relationship—I’ve heard from my Oregon credit unions about the importance of being able to securitize loans while retaining the servicing rights, which is where the member relationship is important. 

In that servicing relationship, credit unions—and community 

banks—who hold servicing rights must have seen some foreclosures 

and other problems. Can you share any insight on the experience 

of credit unions and community banks that do hold servicing rights 

in working out problematic loans? In your experience, are credit 

unions and community banks more willing to follow basic practices 

like having a single point of contact, stopping the dual track of 

modification and foreclosure, and utilizing third-party review for 

modification? Anything you can share will be enlightening as we go 

through an important national debate about what can be done now 

to fix the terrible foreclosure crisis harming our families and dragging our economy down. 

A.2. Because NCVA’s regulatory oversight does not extend to community banks, I will focus on the experience of credit unions. 

In late 2010, NCUA conducted a sweep review of the largest 

credit union residential real estate loan servicers. The focus was 

97 

foreclosure procedures and practices that could be detrimental to 

credit union members. As a result of this sweep review, we reached 

the overall conclusion that the issues reported in non- credit union 

mortgage servicers were not prevalent in credit unions. 

Additionally, NCVA adjusted our examination procedures in 2011 

to require the formal review of credit union loan modification and 

foreclosure procedures during all examinations in 2011. To date, 

NCVA has identified only isolated exceptions or issues raised during the servicing reviews. 

While NCVA does not consider this a system-wide concern for 

credit unions at this time, the ongoing discussions between bank 

regulators, State attorneys general, and the largest servicers have 

the potential to set new standards for mortgage servicing. Any 

agreement would likely create a new set of best practices for all 

servicers, including credit unions, to follow. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM BILL CHENEY 

Q.1. Servicing Rights, Foreclosure, and Member/Customer Relationship—I’ve heard from my Oregon credit unions about the importance of being able to securitize loans while retaining the servicing rights, which is where the member relationship is important. 

In that servicing relationship, credit unions—and community 

banks—who hold servicing rights must have seen some foreclosures 

and other problems. Can you share any insight on the experience 

of credit unions and community banks that do hold servicing rights 

in working out problematic loans? In your experience, are credit 

unions and community banks more willing to follow basic practices 

like having a single point of contact, stopping the dual track of 

modification and foreclosure, and utilizing third-party review for 

modification? Anything you can share will be enlightening as we go 

through an important national debate about what can be done now 

to fix the terrible foreclosure crisis harming our families and dragging our economy down. 

A.1. No response provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM NOAH WILCOX 

Q.1. Servicing Rights, Foreclosure, and Member/Customer Relationship—I’ve heard from my Oregon credit unions about the importance of being able to securitize loans while retaining the servicing rights, which is where the member relationship is important. 

In that servicing relationship, credit unions—and community 

banks—who hold servicing rights must have seen some foreclosures 

and other problems. Can you share any insight on the experience 

of credit unions and community banks that do hold servicing rights 

in working out problematic loans? In your experience, are credit 

unions and community banks more willing to follow basic practices 

like having a single point of contact, stopping the dual track of 

modification and foreclosure, and utilizing third-party review for 

modification? Anything you can share will be enlightening as we go 

through an important national debate about what can be done now 

98 

to fix the terrible foreclosure crisis harming our families and dragging our economy down. 

A.1. No response provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM MICHAEL LUSSIER 

Q.1. Servicing Rights, Foreclosure, and Member/Customer Relationship—I’ve heard from my Oregon credit unions about the importance of being able to securitize loans while retaining the servicing rights, which is where the member relationship is important. 

In that servicing relationship, credit unions—and community 

banks—who hold servicing rights must have seen some foreclosures 

and other problems. Can you share any insight on the experience 

of credit unions and community banks that do hold servicing rights 

in working out problematic loans? In your experience, are credit 

unions and community banks more willing to follow basic practices 

like having a single point of contact, stopping the dual track of 

modification and foreclosure, and utilizing third-party review for 

modification? Anything you can share will be enlightening as we go 

through an important national debate about what can be done now 

to fix the terrible foreclosure crisis harming our families and dragging our economy down. 

A.1. No response provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM STEPHEN P. WILSON 

Q.1. Servicing Rights, Foreclosure, and Member/Customer Relationship—I’ve heard from my Oregon credit unions about the importance of being able to securitize loans while retaining the servicing rights, which is where the member relationship is important. 

In that servicing relationship, credit unions—and community 

banks—who hold servicing rights must have seen some foreclosures 

and other problems. Can you share any insight on the experience 

of credit unions and community banks that do hold servicing rights 

in working out problematic loans? In your experience, are credit 

unions and community banks more willing to follow basic practices 

like having a single point of contact, stopping the dual track of 

modification and foreclosure, and utilizing third-party review for 

modification? Anything you can share will be enlightening as we go 

through an important national debate about what can be done now 

to fix the terrible foreclosure crisis harming our families and dragging our economy down. 

A.1. No response provided. 

99 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY PAUL HAZEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COOPERATIVE BUSINESS ASSOCIATION