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H.R. 3745, Putting All of a Credit Union’s Eggs in the Collection Basket

There’s a saying that’s popular among credit unions: “not for profit, not for charity, but for service.” Most people know that credit unions are non-profit organizations that return all their proceeds to members, distinguishing them from banks, institutions whose goal is to extract profit from members as much possible. But credit unions are not supposed to be suicidal, giving up all their members’ money to serve some other organization’s needs. Rather, credit unions are supposed to be safe, non-exploitative repositories for people’s money. That’s their service.

In order to be safe places for people to put people’s money, current federal law requires credit unions to distribute their loans widely so that the failure of one recipient to repay the loan won’t topple the entire credit union. 12 USC Sec. 1757a reads:

Sec. 1757a. Limitation on member business loans

(a) In general
On and after August 7, 1998, no insured credit union may make any member business loan that would result in a total amount of such loans outstanding at that credit union at any one time equal to more than the lesser of –
(1) 1.75 times the actual net worth of the credit union; or
(2) 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of this title for a credit union to be well capitalized.

To put it in vernacular terms, the idea is for the credit union not to put all of its eggs in one basket. But Rep. Corrine Brown, a relatively conservative Democrat from Florida, has introduced a new bill that would make an exception to credit unions’ careful lending practices: an exception for churches. Her bill, H.R. 3745, would insert the phrase “excluding loans made to nonprofit religious organizations” right after the text “total amount of such loans.” The effect: credit loans would be deregulated to allow a large portion of their capital to be loaned to churches.

Why, and to what kind of churches? Corrine Brown explains in her December 20 2011 remarks introducing the bill:

Mr. Speaker, today I introduced the Faith-Based Lending Protection Act of 2011. The bill modifies the Federal Credit Union Act to make it easier for credit unions to lend money to ministries. Specifically, the bill exempts loans to nonprofit religious organizations from the Credit Union Act’s caps on the volume of loans credit unions can make to businesses.

Mr. Speaker, many churches are in crises because they cannot get access to credit. In 2006, only two churches in the United States lost their buildings to foreclosure or short sale. Last year the number grew to 95.

Like many homeowners, they took out loans when times were good, but now their income has dropped and they need to refinance. Some have balloon payments that would be impossible to pay even in the best of times. The trouble is that many lenders do not want to do business with churches. Credit unions are in an excellent position to help. Credit unions get capital from their members and loan it to their members all of whom share a common bond. They know how to keep money in their communities and they want to do more. This bill will let them.

This non-partisan language has passed the House several times–sometimes on a voice vote. Now is the time to make it law. Churches cannot wait.

Rep. Brown wishes to draw a parallel between homeowners taking out loans and churches taking out loans. But unlike homes, churches are not residences; they’re not necessary for shelter. Churches are clubs, voluntary organizations that will have higher income if they have more members making donations to them, and that will have lower income if they have fewer members making donations. So what kind of churches does Corrine Brown want credit unions to do favors for? Unpopular churches.

What else characterizes the churches Corrine Brown wants to protect? They’re churches with bad credit, churches that banks don’t want to lend to because they can’t make their payments, partially because they aren’t getting the member donations they used to get and partially because they made the bad decision of taking out a loan with a balloon payment, letting the church pay small amounts at first and then have to pay a gigantic amount later. These churches can’t pay their current loans because they took out bigger loans than they could afford, and now want to take out more +loans. So what kind of churches does Corrine Brown want credit unions to do favors for by giving them especially big loans? The very churches that are unlikely to pay back the loans they get.

Remember that the law Rep. Brown wants to change is a law enacted to keep credit unions from collapsing from lending out big loans to bad creditors. This is in order to help unpopular churches that don’t have forward-looking leadership and that are more likely to default on those big loans. Rep. Brown’s bill therefore makes credit unions more likely to collapse, wrecking communities she says they’d be serving.

Turning credit unions suicidal to prop up poorly-run churches people don’t like? What makes that a good idea?

4 thoughts on “H.R. 3745, Putting All of a Credit Union’s Eggs in the Collection Basket”

  1. t ball says:

    I would disagree that the churches in question are “unpopular”. When the economy goes bad people are forced to choose how to spend a dwindling amount of money in their wallets, and donations are not ahead of mortgage payments and groceries in that decision. Church attendance didn’t suddenly change, the people in the churches just held onto their money, naturally.

    However, I would agree with everything else you wrote. Just like people in general, those churches that were not prepared for bad times suffered most. All of these churches should be allowed to pursue credit just like any other entity, but I do not see any reason for special treatment, and I most certainly don’t agree with any attempt to change a fundamental law regarding Credit Union practices.

    1. Jim Cook says:

      You have a reasonable point, t ball, but I’d say that choice definitionally makes the churches unpopular. Given the choice about where to send money, people are not electing to send it to a church. It’s not popular as a choice — and I’d note that apparently cable TV still is.

      1. t ball says:

        From the way you worded it above I assumed you were comparing unpopular churches with more popular churches, not with cable tv. And if you stop donating to your church, or lower your pledge no one shuts off your soul…I think it’s more useful to compare churches who put themselves in poor financial condition against other churches, not tv subscriptions. That’s an apples to oranges comparison in many ways.

        But, still, the overall point holds. The better a church/home/business was prepared for tough times the more likely they are to survive. There is simply no reason to aid churches more than any other entity, and no reason to make exception for them in credit union practices.

        1. Jim Cook says:

          Fair ’nuff!

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