Excluding Faith-based Business Loans from the Aggregate Business Loan Cap

Should loans to nonprofit religious organizations be excluded from the member business loan cap of 12.25 percent of assets?

Legislation (H.R. 3380) was introduced in the current Congress that would have done just that and will probably be re-introduced in the next Congress.

While these loans would still be subject to NCUA’s Member Business Loan Rules and Regulations, credit unions would be able to expand their business lending portfolio beyond 12.25 percent of assets by assuming more exposure to such faith-based loans.

However, HR 3380 does not define a nonprofit religious organization. So, if the bill ever becomes law, it will be up to National Credit Union Administration to define what a nonprofit religious organization is and that scares me.

Consider a private university or a radio station affiliated with a religious group, or simply a large religious institution. Any of these might be considered “nonprofit religious organizations.” Lending for projects at institutions such as these could be just as risky as lending to a private organization.

In fact, NCUA has repeatedly stated that business loans are riskier than consumer loans. By excluding faith-based loans from the aggregate business loan cap, this could potentially cause an increase concentration in business loans and thus could pose a safety and soundness concern.

While data on church loan delinquencies are difficult to come by, research by Thomson Reuters found that more than 100 churches nationwide have filed for bankruptcy since early 2009, while the foreclosure rate has tripled in the past three years.

For example, Evangelical Christian Credit Union in Brea, California has foreclosed on more than 20 churches over the past three years. The credit union reported that 8.18 percent of its loans were at least 60 days or more past due as of June 2010.

But a bigger question is why should a certain class of business loans be excluded from the aggregate business loan cap? Is there something socially desirable about faith-based loans, so that we want to promote these loans over other form of business loans?

What’s next, excluding loans to green energy?

I personally believe that policymakers should not be making Swiss cheese of the aggregate business loan cap to advance some social engineering objectives.