Do as Reagan Did, And Free Credit Unions
The Republican party should continue to support free-market solutions by lifting a loan cap.

In the Oval Office, June 1988


John Berlau


Prudent credit-union deregulation also carries on Ronald Reagan’s successful legacy. In fact, lifting or repealing the business-lending cap would help restore the Reagan regulatory reforms that jump-started the 1980s economy. Reagan heaped praise on credit unions in 1984’s Presidential Proclamation 5211, touting both their entrepreneurial and their communitarian values, which are also core aspects of conservatism. He proclaimed:

Credit unions are uniquely democratic economic organizations, founded on the principle that persons of good character and modest means, joining together in cooperative spirit and action, can promote thrift, create a source of credit for productive purposes, and build a better standard of living for themselves. Because credit unions exemplify the traditional American values of thrift, self-help and voluntarism, they have carved a special place for themselves among the Nation’s financial institutions.

By liberating credit unions from decades-old red tape, Reagan helped show the American public the benefits that deregulation can bring to Main Street. The late Edgar Callahan, Reagan’s chairman of the National Credit Union Administration (NCUA), lifted barriers to credit-union modernization, such as allowing mergers of credit unions in different regions of the country and with different fields of memberships.

These moves not only allowed more Americans to choose credit unions; they also strengthened credit unions’ financial solvency by making them less vulnerable to volatility from certain regions and classes of membership. Upon Reagan’s death in 2004, an article on the website stated that “perhaps no aspect of the economy owes more to Reagan’s philosophy of deregulation than the credit union movement” and that “the Reagan legacy means that individuals can choose a cooperative form of financial services in most communities today.”


Unfortunately, since the 1980s, banks have been trying relentlessly to squelch the competition that Reagan unleashed. They have filed lawsuit after lawsuit against the liberalized rules, and they finally succeeded in 1997, when the Supreme Court ruled in a narrow 5–4 decision that Reagan’s liberalized rules technically violated the New Deal–era statute governing credit unions.

By this time, however, millions of Americans had joined credit unions and let Congress know that they didn’t want this option taken away. So in 1998, Congress largely codified in legislation Reagan’s executive-branch deregulation that had been struck down by the Court months before.

But the bank lobby did get one concession: The new law imposed a cap on the amount of business loans credit unions could provide, a cap that exists to this day. That cap, which sharply restricted the business-lending activity credit unions had engaged in going as far back as 1908, is now holding back the small-business engine of the economy.

Even with this limit, many credit unions are doing what they can to fill the gap in small-business credit. Two of the nation’s largest credit unions, Navy Federal Credit Union and Pentagon Federal Credit Union, are helping many veterans start their own businesses.

But the cap prevents these and other credit unions from expanding their business lending even more, hampering small-business and job expansion. Meanwhile, the nation’s top credit-union regulator has said there is no safety-and-soundness reason for keeping credit unions from filling this need.

NCUA chairman Debbie Matz, an Obama appointee, told the House Financial Services Committee last year that business lending “did not have a major impact on the safety and soundness of the vast majority of credit unions” during the downturn. Matz added further that an increase in “business lending is another way in which to prudently manage risk.” Credit unions, after all, face no such cap for home mortgages, and after the financial crisis, it’s difficult to argue that business loans are somehow inherently more risky than mortgages.

Given this bipartisan opposition to the business-lending cap, Republicans should take the lead in easing and ultimately repealing it. They should then use that victory as a stepping stone to liberate banks and credit unions — as well as American consumers and entrepreneurs — from the shackles of Dodd-Frank. This should further please Main Street banks, businesses and customers, if not the Washington-based banking lobby.

— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.


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