Down, Not Out. Failure to Lift MBL Cap Reveals Lessons for Next Round
Did the credit union industry do enough to persuade legislators to include an amendment that would have raised the member business lending cap in a newly signed $30 billion small business lending law?
Depending on who you ask, hindsight seems to always be crystal clear. For Kent Moon, president/CEO of Member Business Lending LLC, credit unions did as much as they could but in the end, may have stalled their efforts by keeping the focus internal.
"We did not have the connections, communications and alliances with various small business groups to gain their support in increasing the cap," said Moon, who heads MBL, a business lending CUSO in Salt Lake City and is a former SBA Utah district director. "Credit unions were missing in action [here]."
On Sept. 27, President Barack Obama signed the Small Business Jobs Act. Small businesses would be eligible for up to $30 billion in incentives. Nearly $12 billion in tax breaks, including several tax cuts that went into effect the day the legislation was signed, aim to create 500,000 new jobs over the next few years, the White House has said. Starting this year, small businesses would be able to write off $500,000 in investments. An amendment sponsored by Sen. Mark Udall (D-Colo.) that would have raised the MBL cap from 12.25% of assets to 27.5%, was not include in the act despite strong lobbying from credit union trade groups and others.
Moon said credit unions play a very critical role within the small business economy. Given that 30% to 50% of firms say they do not have access to adequate capital, he is baffled by the lending restraints.
"The increased cap is absolutely necessary. Small business is 60% of the country's work force. America is small business," Moon said. He is encouraged by the new small business act. However, before then, "it was an enigma to me how government continued to ignore this sector. The legislation was long overdue."
Teresa Halleck recently took the helm as president/CEO of the $5 billion San Diego County Credit Union, which offers business loans. She said hearing more stories from small business owners on how credit unions have helped communities create more jobs would help all consumers better understand the benefits cooperatives bring to the market.
"Small businesses need access to competitive loan funding sources to grow and succeed, and credit unions should be empowered to fulfill this community need," Halleck said."The artificially imposed MBL cap restricts the industry's ability to be a strong community catalyst for economic recovery and jobs growth, and impacts credit union profitability, flexibility and strength."
Taking a look at the impact on credit union long-term health, Halleck said the prolonged consumer pullback in spending has caused loan-to-asset ratios at many credit unions to decline. With prudent investment opportunities offering very low yields at levels insufficient to offset declining loan portfolio income, return on assets suffers, she added.
"During this period when consumers are saving rather than spending, credit unions could strengthen deposit relationships and benefit from increased share of wallet if they could afford to do so," Halleck explained. "Unfortunately, in this interest-rate environment the choice often exists between increasing deposit balances at the expense of ROA or foregoing deposit growth opportunities."
Even though credit unions have plenty of capital stored up that could be lent to small businesses, many active lenders near or at their cap have to either slow down or stop lending to stay within their MBL cap limit, said Larry Middleman, president/CEO of CU Business Group LLC, a business lending and deposit services CUSO in Portland, Ore. This especially hits the roughly 2,000 credit unions in the $100 million or less asset category the hardest.
"I'm not saying go wild but they could make some good loans," Middleman said. He recently spoke with a $100 million credit union in a strong market that has been with CUBG for seven years and hired a veteran commercial banker to oversee the loan program. Still, they're capped at $12 million.
"They're doing everything right. Business lenders say, 'How can they make the [cap] work?' It just cuts off available credit to small businesses," Middleman said.
If ever there were a good time to make a strong case for lifting the cap, this was it, Middleman pointed out. Still, he believes credit unions should continue to prove they have the tools to do sound lending and keep their low charge-offs and delinquency track record going. He is a strong advocate of fine-tooth-comb due diligence.
"I'm a big proponent of credit unions justifying going beyond their cap. We need to do this right in a safe and sound manner."