Lifting the MBL Cap Presents Opportunity and Potential Problems

Christian Mullins
April 22, 2009 | COMMENTS

In a move that has been praised by both the National Credit Union Administration (NCUA) and Credit Union National Association (CUNA), Senator Charles Schumer (D-NY) recently announced his intention to draft a bill that would lift the member business lending cap (MBL) from the credit union industry. This bill faces a series of hurdles, and Senator Schumer will have a difficult time passing a bill that deregulates credit unions with more restrictive regulations facing the entire financial institution industry. Currently, the maximum amount most credit unions can carry in business loans is 12.25% of their total assets. Like any deregulation, lifting the MBL cap will be beneficial in the short term while potentially problematic in the long term.

Short Term Benefits of Lifting the MBL Cap

With the economy still suffering through a credit crunch, it has been estimated by CUNA that lifting the MBL cap will result in an additional $10 billion in credit union loans to small businesses in its first year. This will allow businesses a better chance of riding out the recession without a significant impact on their daily operations, and the goodwill that will be generated by local newspapers will further the belief that credit unions operate for the benefit of their members, which may result in a small increase in membership. Increased business lending would also generate much needed additional revenue for some credit unions facing a difficult 2009.

One indirect benefit will come if a credit union suggests a conversion to a mutual savings bank.  The reason given more often than any other to convert is a desire to expand their business lending portfolio, and lifting the MBL cap will remove that reason, making it more difficult to convince their membership that they'd benefit from the change.

Possible Long-Term Ramifications

Lifting the MBL cap will allow some credit unions to thrive. They have money to lend and businesses that need the loans. However, without ceilings some credit unions will undoubtedly place too many of their lending eggs in one basket, giving them a much smaller margin for error if their local economy falters.  While many credit unions will keep this fact in mind and lend responsibly, the chances that at least one credit union would sacrifice long term stability for short term growth is real. This bill would include biannual oversight to determine whether or not reinstalling a cap is necessary, though this measure isn't meant to be proactive but an instrument of damage control should the need arise.

From a legal standpoint, as each difference between banks and credit unions fall, the American Banking Association's teams of lawyers will continue to proffer that if it looks like a bank and walks like a bank it should be taxed like a bank. While lifting a cap on existing lending abilities does not a strong case make, they may opt for the quantity over quality approach, hoping that anything sticks.

A Long Road Ahead

Senators and congressmen regularly announce their intention to draft various pieces of legislation. Many of these are actually written, though only a few make it out of committee to an actual vote. With Democrats in control of both branches of the Legislature and the Executive branch, it's reasonable to assume that if this bill makes it to the president's desk it would be signed into law, but it may never make it that far.

The banking trade associations will likely argue that the majority of credit unions do not currently offer business lending, and of those that do, only a few are against the cap, suggesting that this legislation is unnecessary at this point. If that doesn't work, they could tell every legislator supporting the bill that they won't contribute to their reelection campaign or contribute to their opponent, which is equally if not more effective.

Reprinted with permission from CU Potential, a blog written by Christian Mullins, a 14-year-veteran of the credit union industry.