WASHINGTON — The bread and butter for some credit union business lending programs are tied to unique offerings such as taxicab medallions, crops and agricultural equipment helping to create a “built-in competitive advantage in making these types of loans and unlocking the wealth contained in certain assets,” according to a new report.

In its report, Taxicab Medallions and Heirloom Tomatoes to the Rescue, the Competitive Enterprise Institute, a public policy organization, found that taxicab medallions secured 64% of the member business loans in the Albany, N.Y. region and in Atlanta; Austin, Texas; Chicago; and other parts of the country, they comprise 85% of non-agricultural real estate loans from credit unions.

“By virtue of their small size and defined fields of membership, credit unions simply have an advantage in discovering ways to lend against unusual kinds of collateral,” the report read. “For certain categories of smaller enterprises in some regions of the country, credit unions serve as repositories of this specialized knowledge and help unlock wealth.”

The report touts an increase of the member business lending limit from 12.50% of assets to 20%, which is contained in the Credit Union Regulatory Improvements Act, would provide a “significant boost to the businesses that already rely the most on credit union loans–especially those that rely on unusual types of assets as collateral.”

“Overall, credit union business lending plays a trivial role in our overall economy,” explains Eli Lehrer, CEI senior fellow and author of the report “It's heavily regulated and will remain so for the foreseeable future.”

In his report, Lehrer finds that credit union business lending does not have a consequence for most other types of business lending. None of it goes to large businesses but, instead, serves as a vital source of credit for certain types of small businesses.

“Nearly half of all credit union business loans are backed by taxicab medallions, crops, and agricultural equipment,” Lehrer explains. “It's difficult to assess the value of these assets and, as a result, it's difficult to lend against them.”

Lehrer said there is a “preponderance of…evidence” that shows credit unions “serve a modest but important role in regulating consumer and small businesses interest rates.” As of July 2007, credit unions charged about 100 basis points less on a typical loan and paid slightly more on savings products, Lehrer said. According to a University of Wisconsin study, he cites, credit unions that convert into banks raise their interest rates on loans. Another study finds that greater credit union membership tends to reduce overall interest rates even for those who do not belong to credit unions, he added.

The banking industry argues that credit unions compete with banks unfairly, especially in business lending. The American Bankers Association, the leading bank trade group, argues that credit unions take advantage of their tax-exempt status to transform themselves into institutions “indistinguishable from community banks”.

“Do the banks have a point?” Lehrer asks. “While they do face direct competition from credit unions in many lines of businesses and the law may give credit unions some advantages in general, credit unions simply do not compete directly with banks for business loans. By necessity, credit unions must focus on small businesses.”

Lehrer said under CURIA, the average credit union could make about $17 million in total business loans rather than the current limit of about $10

million. Multiplied across the nation's credit unions, this would thus make available about $4.25 billion in additional credit, most of which would likely go to small businesses.

“While that number may appears small in the grand scheme of things, the SBA estimates that small businesses took out a total of over $600 billion in loans during 2006,” Lehrer said. “[More] credit will provide a significant boost to the businesses that already rely the most on credit union loans–especially those that rely on unusual types of assets as collateral.”

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