The opposite of progress is Congress.
Political science professors have been known to tell this joke to their first-year students.
Recently, Congress has done an excellent job of living up to the spirit of that joke.
Last year saw very little legislative progress on any issues, as Congress bogged itself down in political posturing. The legislative environment isn’t expected to change much in 2012. In fact, the gridlock could become even worse. Several weighty issues face Congress, however, and many of these will have a direct impact on credit unions and their members.
Even if these issues aren’t resolved this year, Congress will resolve them eventually. Credit unions can influence the outcome by remaining engaged in the legislative process.
Congress continues to struggle with deficit reduction, posing a potential threat to the credit union tax status. And housing finance reform and cyber security improvements sit near the top of the Congressional agenda.
And credit unions have their own agenda: increasing the member business lending cap, allowing for supplemental forms of capital, and pursuing legislation to lighten their regulatory burden.
There’s no hiding the fact that the federal government faces a significant budget crisis. In 2011, Congress appointed a “supercommittee” to recommend legislation to reduce the deficit by $1.2 trillion over 10 years.
As with previous deficit reduction efforts, policy makers started by putting every policy option on the table, including eliminating tax expenditures like the credit union tax status. Ultimately, Congress wasn’t able to agree on deficit reduction legislation. The failure of the supercommittee, however, didn’t eliminate the threat to the tax status posed by deficit reduction efforts.
Conventional wisdom suggests that Congress will attempt comprehensive tax reform after the 2012 election, though some think Congress will tackle it earlier. Whenever Congress turns to this issue, it will be critical for credit unions to defend their tax status by reminding Congress and the public of the value credit unions bring to consumers by virtue of the tax exemption.
Government estimates suggest that the credit union tax exemption cost the government approximately $600 million in revenue in 2010. But we need to remind everyone that credit unions leveraged the tax exemption and provided direct financial benefits to members—better rates, and fewer and lower fees—totaling $6.3 billion.
Consumers who aren’t credit union members also benefit from the credit union tax status to the tune of $3.4 billion, because having credit unions in the marketplace puts pressure on banks to adopt more consumer-friendly pricing.
Simply put: A $600 million tax expenditure provides $10 billion in benefits to consumers. Indeed, the credit union tax status is one of the best investments the government makes on behalf of consumers. But taxing credit unions would put these consumer benefits at risk.
Eliminating credit unions’ tax-exempt status would eliminate credit unions—it’s that simple. And given what our economy has just been through, that would be a tragedy for consumers.
Credit unions are the best choice for consumers to conduct their financial services. Taxing credit unions takes that option away from them, and would drive up the cost of financial services for all. Any assault on credit unions’ tax exemption is completely unacceptable.
Next: Data security legislation
Data security legislation
With merchant data breaches increasing and the threat of a pending terrorist cyber-attack increasing, the desire to enact legislation that would improve data security standards has substantially increased in recent months.
Several congressional committees have acted to improve payment card, data security policies. More than a dozen bills on this topic have been considered and, throughout the process, CUNA has focused lobbying efforts on a handful of overarching goals:
- Avoiding increased regulatory burden on credit unions;
- Providing consumer notice of data breaches; and
- Making sure merchants are held liable for the breaches they create.
Credit unions already are subject to the strong data security requirements of the Gramm-Leach-Bliley Act (GLBA). Some of the new bills that were under consideration would have imposed duplicative requirements on credit unions. CUNA has worked on Capitol Hill to secure exemptions for institutions subject to GLBA requirements.
CUNA also favors a national standard for data security safeguards and notification requirements. As Congress considers this legislation, CUNA continues to highlight the importance of how consumers are notified of data breaches. Credit unions must be the first entity to notify their members of a merchant data breach because they know better than merchants how to contact affected cardholders. But CUNA feels strongly that credit unions must be able to disclose the source of a breach to avoid “reputation risk.”
CUNA also has urged Congress to assign liability for data breaches to the entities that experience the breaches, and to give credit unions the ability to recoup all costs incurred as a result of any breaches. CUNA also supports efforts to require merchants to comply with existing regulation on payment card data destruction.
These issues aren’t new to Congress. Some committees considering data security legislation have had these bills under consideration for several years. Nothing moves, because so many different committees have a piece of jurisdiction.
But there’s potential for movement in 2012 because of the prospect of a significant cyber-attack on the U.S. If Congress views data security standards through this lens, it’s much more likely a comprehensive data security bill will be enacted this year.
Housing finance reform
Housing finance reform might have the most significant long-term legislative effect on credit unions. The questions before Congress are how the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac, which have operated under conservatorship since 2008—will be resolved, and what the secondary housing market will look like going forward.
In 2011, Congress held nearly two dozen hearings on housing finance, and introduced legislation to move to a completely privatized housing finance system. CUNA testified before the Senate Banking Committee and outlined a series of principles and concerns credit unions would like to see addressed in the legislative process.
While formal action on housing finance reform legislation isn’t expected to be completed in 2012, this issue will continue to receive significant consideration throughout the year. This could set up the possibility that comprehensive legislation might be enacted after the new Congress convenes in 2013.
As Congress moves forward, CUNA will continue to press for a system that:
- Gives credit unions equal access to the secondary market;
- Gives consumers continued access to mortgage products that have predictable and affordable payments; and
- Facilitates an orderly resolution and transition from the current GSE system.
CUNA also will push to make sure that whatever legislation passes Congress provides for strong oversight and supervision of secondary-market participants, and that it’s durable enough to withstand future financial crises.
Next: Supplemental capital
The biggest lesson we learned during the most recent financial crisis was that capital is king for financial institutions.
Credit unions stand out as the only U.S. depository institutions without the ability to issue some form of capital instruments to augment retained earnings to build capital. All other U.S. depository institutions, and most credit unions in other countries, are permitted various forms of alternate or supplemental capital. The severely limited statutory definition of credit union capital makes maintaining and building capital more challenging for credit unions than for other financial institutions.
While the credit union movement, as a whole, remains very well capitalized, some credit unions are close to or past the prompt corrective action (PCA) triggers as a result of the recession. As credit unions battered by the financial crisis recover in the coming years, rebuilding capital will be paramount. Without access to supplemental capital, and with earnings power facing headwinds, credit unions and their members will face a protracted period of reduced member service, disadvantageous member pricing, and slow growth.
Net interest income—essentially the difference between what credit unions earn in interest on loans and investments and what they pay in interest and dividends on savings—has been on a long-term downward trend caused by intense competition on both sides of the balance sheet. This pressure is unlikely to abate significantly going forward.
Not all credit unions have an immediate need for access to supplemental capital. Some might never need it. But many do now, and millions of members will suffer in the absence of this reform.
CUNA estimates 3,000 credit unions might have interest in access to supplemental capital. This includes credit unions with net worth below 9% of assets, and those with capital between 9% and 12% that have experienced a minimum two percentage point decline in their net worth ratio since year-end 2007. These credit unions serve 46 million members—nearly half of all credit union members.
Even credit unions that never use supplemental capital can benefit from increased protection for the share insurance fund as other credit unions build their capital. Supplemental capital will reinforce and strengthen the regulatory incentive for credit unions to remain exceptionally safe and sound, and will allow credit unions to do even more to serve their members.
Enactment of supplemental capital legislation would be a significant enhancement to the credit union charter. As a first step in the process of enacting this legislation, last month Representatives Peter King, R-N.Y., and Brad Sherman, D-Calif., introduced H.R. 3993, the Capital Access for Small Business and Jobs Act. This will start the conversation with Congress about the importance of enhancing credit union capital options.
Member business lending
Banks have reduced credit availability, while credit unions have continued to lend to small businesses throughout the financial crisis. To encourage banks to lend more to small businesses, Congress gave them $30 billion of tax-payer money, but banks claimed only $4 billion, and used $2.2 billion of that to repay Troubled Asset Relief Program obligations. But Congress still hasn’t enacted legislation to permit credit unions to lend more to their members for small-business purposes.
There’s no question that credit unions are more than willing to help small businesses. But the credit unions with the most business lending experience are approaching the arbitrary cap on credit union business lending. Their ability to serve new business borrowers is significantly reduced.
The cap also discourages credit unions that might like to start offering business loans from doing so. The costs of establishing and maintaining a safe and sound business lending program can outweigh the benefits of providing the service when the cap limits potential growth.
Legislation to increase the credit union member business lending cap from 12.25% of assets to 27.5% of assets has been introduced in both the Senate and the House, attracting a substantial number of co-sponsors in both chambers. Hearings occurred in the Senate Banking Committee and the House Financial Services Committee. The next step is to move the bills through committee and on to the floor, or to attach them to other legislation moving through Congress.
CUNA conservatively estimates credit unions would make an additional $13 billion in member business loans in the first year after lifting the cap and create 140,000 new jobs. It’s a no-brainer: a big economic boost with zero cost to taxpayers. Letting credit unions do more lending will put money into local communities and might give banks an incentive to do more lending themselves.
Community banks have been the only opponents to this legislation. They advocate for legislation that would reduce their regulatory requirements and permit them to put more capital toward small-business lending.
In 2011, we were successful in blocking the passage of some of their legislation, and we’ll continue to insist that their legislation not move forward until, and unless, the credit union member business lending legislation is advanced.
RYAN DONOVAN is CUNA’s senior vice president of legislative affairs. Contact him at 202-508-6750.