The original concept of a credit union was of a cooperative organization formed for the purpose of promoting thrift among its members and providing them with a source of low-cost credit. During the past couple of decades, technology, competition, and economic conditions have brought many changes to the financial services marketplace, which have affected all types of depository financial institutions. The credit union industry has evolved with marketplace changes so that many of the financial services that credit unions provide are similar to those offered by banks and savings associations. Credit unions nevertheless remain distinguishable because of their cooperative framework and unique charter requirements. Credit unions are nonprofit, member-owned financial institutions and are subject to specific restrictions not placed on other depository financial institutions. Given that credit unions are considered financial cooperatives, the institutions are exempt from federal income tax. Individual members are taxed on their dividends. Credit union charters are granted by federal or state governments on the basis of a "common bond." This requirement determines the "field of membership," and it is unique among depository financial institutions. There are three types of charters: (1) a single common bond (occupation or association based); (2) multiple common bond (more than one group each having a common bond of occupation or association); and (3) a community-based (geographically defined) common bond. Individual credit unions are owned by their membership. The members of a credit union elect a board of directors from their institution's membership (one member, one vote). Members' savings are referred to as "shares" and earn dividends instead of interest. Credit union loan and investment powers are more restricted than those of commercial banks. Credit unions can only make loans to their members, to other credit unions, and to credit union organizations. The investment authority of federal credit unions is limited by statute to loans, government securities, deposits in other financial institutions, and certain other limited investments. The National Credit Union Administration (NCUA), an independent federal agency, is the federal regulator for credit unions. The National Credit Union Share Insurance Fund (NCUSIF) is the federal deposit insurance fund for credit unions. The NCUA manages the NCUSIF for the credit union industry. As of December 31, 2011, there were 7,094 federally insured credit unions; these federally insured institutions held assets totaling $961.8 billion. There was no commercial lending cap on the amount of member business loans that credit unions could make until 1998. In response to a Supreme Court decision, Congress passed the Credit Union Membership Access Act of 1998 (CUMAA; P.L. 105-219 ), which among other provisions, established a commercial lending cap. First, the CUMAA codified the definition of a credit union member business loan (MBL). An MBL is any loan, line of credit, or letter of credit used for an agricultural purpose or for a commercial, corporate, or other business investment property or venture. Second, the aggregate amount of outstanding business loans to one member or group of associated members was limited to a maximum of 15% of the credit union's net worth or $100,000, whichever is greater. Third, CUMAA limited the aggregate amount of MBLs made by a credit union to the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets. Finally, three exceptions to the credit union aggregate MBL limit were authorized for (1) credit unions that have low-income designation or participate in the Community Development Financial Institutions program; (2) credit unions chartered for the purpose of making business loans (as determined by the NCUA); and (3) credit unions with a history of primarily making such loans (as determined by the NCUA). At the time of CUMAA, some Members of Congress were still concerned that commercial lending, which is considered riskier than consumer lending, would increase the risk profile of the credit union system. In deliberations over the CUMAA, Members expressed concern that a 12.25% cap was too high if small loans (under $50,000) were not counted toward the cap, and were also concerned that such an exemption could open up a regulatory arbitrage opportunity enabling chartered credit unions to assume more financial risk and circumvent the cap limitation in the legislation. Hence, the 12.25% lending cap arguably represented a compromise. The volume of credit union member business lending has increased over time, but MBLs continue to account for a small share of total credit union lending. The number of credit unions reporting an increase in member business lending increased from 5% of all credit unions in 1986 to 30% in 2010. According to the NCUA, approximately 30% of credit unions that were subject to the commercial lending cap provided MBLs as of June 30, 2011. The credit unions collectively provided a total of $28.47 billion of MBLs, which equaled 3.2% of total credit union assets of $881.33 billion as of June 30, 2011. The NCUA also reported that the median of the average MBL size is $126,316, compared with the average size of bank C&I loans, which was approximately $675,000. The NCUA reported that 82% of MBLs were secured by real estate, with some credit unions heavily concentrated in agricultural loans. The majority (84%) of credit union failures over the 2009 and 2010 periods were unrelated to MBL defaults. Legislation has been introduced in the 112 th Congress to allow credit unions to expand their member business lending activities. H.R. 1418 , the Small Business Lending Enhancement Act of 2011, was introduced by Representative Edward Royce and referred to the House Committee on Financial Services on April 7, 2011. The Subcommittee on Financial Institutions and Consumer Credit held a hearing on the bill on October 12, 2011. S. 2231 was introduced by Senator Mark Udall on March 22, 2012, and placed on the Senate Calendar on March 26, 2012. H.R. 1418 and S. 2231 would amend the Federal Credit Union Act (particularly 12 U.S.C. 1757) to increase the current business lending cap to 27.5% of the total assets of the credit union from the current 1.75 times of the actual net worth or 12.25% of the total assets, whichever is less. The bills would also require credit unions that make business member loans to be well-capitalized , which means a credit union's net worth must be equal to or greater than 7% of total (risk-weighted) assets. In addition, a credit union would need to demonstrate a minimum of five years' experience of sound underwriting and servicing of member business loans. This next section presents some policy issues related to legislation in the 112 th Congress. The legislation would increase the lending authority of credit unions, but it does not require MBLs to meet the definitions of a small business-loan or of a small business. An informal analysis presented in this report asks whether the differences in regulatory requirements for credit unions relative to community banks could translate into greater risks to the stability of the financial system after passage of the legislation. Finally, recent studies pertaining to the current supply relative to demand for small business credit are reviewed to assess whether credit shortages exist. Although "small business lending" appears in the bills' titles, the legislation does not contain any firm or loan size restrictions. The Small Business Administration (SBA) often uses the Federal Deposit Insurance Corporation's (FDIC) definition of a small business loan as either a commercial real estate (CRE) or commercial and industrial (C&I) loan of $1 million or less. The SBA also defines a small business on an industry-by-industry basis, with most manufacturing and mining firms deemed small if they have fewer than 500 employees. The Federal Reserve defines a small firm as one having total annual sales of less than $50 million. If the legislation is enacted as currently written, credit unions would be able to make loans (to their members) that meet these definitions. They could also make loans that exceed $1 million to any size firm as long as their loan portfolios are in compliance with the statutory lending cap. Hence, enactment of this legislation would allow credit unions to increase their presence in the commercial lending market. The NCUA reports that approximately 30% of credit unions subject to the statutory commercial lending cap currently make MBLs. The remaining credit unions may not currently engage in commercial lending because the existing statutory cap may have reduced the cost effectiveness of investing in the necessary underwriting systems. Increasing the lending cap, however, could incentivize more credit unions to incur the implementation costs that might be offset by the revenues generated from a potentially larger volume of MBL originations. Credit unions, therefore, could possibly become important competitors with community banks in the commercial lending market. In light of passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act, P.L. 111-203 ) to "promote financial stability," it may be useful to consider whether increasing the lending cap would create a regulatory arbitrage opportunity for credit unions. Regulatory arbitrage in this instance refers to the ability to conduct more commercial lending while meeting fewer regulatory requirements relative to banks, which could then translate into a competitive advantage and possibly introduce new risks to the financial system. Given that credit unions face different safety and soundness (capital adequacy) as well as fair lending requirements than those applicable to community banks, these issues are defined and discussed in more detail in this section. Community banks, which are commonly defined as financial institutions that hold assets below $1 billion, share some similarities to credit unions with respect to their business structures. For example, community banks and credit unions engage in "relationship banking," which involves developing close familiarity with their respective customer bases. Community banks typically provide financial services within a circumscribed geographical area.