Critics foresee second crisis for credit unions

Insight on the News, July 20, 1998 by Dawn Kopecki

Politicians and bankers predict problems if credit unions expand their commercial loans, although proponents of new legislation label such fears `typical Washington rhetoric.'

When the final numbers came in on that cold winter day in 1990, the picture was as bleak as Rhode Island's rockbound coast: Five of the Ocean State's credit unions were insolvent, eight others were in serious trouble and losses amounted to more than $500 million. In the end, taxpayers bailed out the 13 credit unions. Never again, said officials.

But bankers argue that Congress is setting the country up for a repeat of the debacle by fiddling with provisions of the Federal Credit Union Act. Congressman approved a new bill April 1 after the Supreme Court ruled that credit unions unlawfully had admired millions of new members.

Under the Credit Union Membership Access Act, which is awaiting Senate approval this summer, credit-union membership will be expanded while lending restrictions are revised. While the legislation caps commercial lending, a loophole allows credit unions to surpass it with little oversight.

Opponents say the measure could lead to a crisis of "savings-and-loan" proportions. Supporters counter that 99 percent of all credit-union loans last year went to consumers; the remaining 1 percent went to farmers and small businesses. What's so wrong about that, asks the industry's leading trade group, the Credit Union National Association, or CUNA.

For one thing, credit unions weren't set up to lend to businesses, bankers argue. "Credit unions were supposed to help people of modest means," says Marty Farmer, legislative counsel for the Independent Bankers Association of America. "The credit-union act doesn't say anything about commercial businesses." But when credit unions do lend to businesses, it's mostly to small businesses that commercial banks won't touch. That may be because that group historically has been viewed as a higher credit risk.

In the Rhode Island crisis, the Marquette and Rhode Island Central credit unions each had 90 percent of their total loans in high-risk commercial and residential real-estate investments. Their assets were worth about about 90 cents to the dollar compared with today's credit unions, which have healthy reserves in excess of 11 percent of assets.

"The system in place for federal credit unions is much stricter and stiffer than what was in place for Rhode Island credit unions at the time," says Bill Hampel, CUNA's chief economist. As the legislation now stands, a credit union could not lend more than 12.25 percent of its assets for business purposes. However, loans under $50,000 would be exempt from that cap.

Critics say such loopholes in the legislation will create a credit-union crisis similar to the S&L fiasco, which cost taxpayers $150 billion. "The savings and loans in the 1980s got new kinds of lending authority, and it led to their downfall," says Barry Robinson, spokesman for the Federal Reserve Bank of Kansas City. Credit unions "have to be very careful because the previous class of institutions, S&Ls, got into business lending and weren't prepared for the risks and weren't prepared for the losses."

Already, the top 1,366 credit unions -- each with more than $50 million in assets -- have lost more than $300 million on unpaid business loans in the first three months this year, according to Callahan and Associates, a leading credit-union data-research firm in Washington. Comparatively, credit unions lost about $99 million on the consumer side in credit-card debt during that same time period.

Another big concern: Credit unions don't report small-business loans less than $50,000. "No one has an accurate picture on credit unions because the National Credit Union Administration doesn't count business loans under $50,000," says a staff member for Sen. Chuck Hagel, a Nebraska Republican. Hagel plans to amend the credit-union act to cap commercial lending at 5 percent of total loans.

The reason the administration doesn't require credit unions to report such loans as commercial debt is even more disconcerting, say critics. The costs of expert staff would be prohibitive. "There are questions about whether there's the expertise in credit unions to do business lending and whether there's the expertise with the credit-union regulators to supervise this behavior," says James Chessen, chief economist for the American Bankers Association in Washington.

Attorney Lawrence Connell has intimate experience on both sides of this battlefield -- as the former chairman of the National Credit Union Administration and a former state bank commissioner in Connecticut. He calls the comparisons "typical Washington rhetoric. It's all baloney."

The S&L operations of the 1980s were in trouble before they were given increased lending powers, according to Connell. That's not the case with today's credit unions. "The credit-union industry is very healthy right now, with very high capital ratios, very low delinquency rates and very little interest-rate mismatch," he says.