Another Fight Brews Over Member Business Lending
Might this time finally be the charm for member business lending?
After years of lobbying and cajoling, credit unions will finally get their wish on June 16 when the Senate Banking Committee holds a hearing on Sen. Mark Udall’s (D-Colo.) legislation to raise the cap on member business loans.
With the economy still struggling and the unemployment rate at 9.1%, the credit union industry’s message about being able to create as many as 100,000 new jobs might finally break through.
"I am not sure if there has been a shift in thinking on Capitol Hill," said ABA Vice President and Chief Economist Keith Leggett. "But anyone who talks about something that will create jobs will get some attention."
Leggett, who conceded that banks are worried about losing market share to credit unions, said the biggest obstacle to businesses creating jobs isn’t the lack of capital but uncertainty about the level of regulation and taxes.
CUNA President/CEO Bill Cheney said he hoped that the sluggish economy and credit unions’ track record will cause lawmakers to pass the bill.
"Credit unions have proven the ability to do small business lending safely and soundly, demonstrating remarkably lower charge-off and delinquency rates than banks making business loans," he said in an interview.
Credit unions will also point out that since Congress last year created a fund to make capital available to community banks to use for business lending, they should help credit unions do the same. And the Udall bill won’t require any taxpayer money, they note.
NCUA Chairman Debbie Matz, who is scheduled to testify at the hearing, has supported raising the cap and has promised her agency will beef up its oversight of business lending practices.
Last year in a letter to lawmakers she called it a "zero-dollar stimulus" and noted that credit unions "are well-positioned to provide small business with an important source of lending. However, credit unions are currently restricted in the overall amount of lending they can provide to members for business purposes."
But the problems that some credit unions have had with their business loans might cause some lawmakers to be reluctant to give credit unions more lending ability.
When the NCUA conserved the $1.6 billion Texans Credit Union earlier this year, it was determined that the problems were mostly triggered by losses in its business loan portfolio.
According to NCUA Call Report data, the Richardson, Texas-based credit union suffered a net income loss of $20.7 million through its wholly owned commercial lending CUSO, Credit Union Liquidity Services Inc., as of December 2010. More than $15 million in business loans were charged off last year. Another $22 million in participation loans met the same fate. At the end of 2010, the NCUA deemed the credit union "significantly undercapitalized" with a net worth ratio of 2.75%.
In addition, the NCUA’s Office of Inspector General’s reports on several large credit union failures cited problems in their business loan portfolio.
Banks also note that because of their tax-exempt status, credit unions shouldn’t have the same rights as other financial institutions that pay taxes. It’s a point that Federal Reserve Chairman Ben Bernanke made during congressional testimony in February 2010.
Under the Udall bill, eligible credit unions will be able to increase their small business lending to 27.5% of total assets, at a rate of growth not to exceed 30% a year. Credit unions must be well-capitalized, be at or above 80% of the current cap, have five or more years of member business lending experience and be able to demonstrate sound underwriting and servicing. If a credit union’s net worth ratio falls below the well-capitalized requirement (currently 7%), it would have to stop making new business loans.
Currently, business loans of $50,000 or more count toward the cap. CUNA and NAFCU have tried to raise that to $250,000, but that is not part of Udall’s bill or a companion bill that has been introduced in the House.
A companion House bill, sponsored by Rep. Ed Royce (R-Calif.) and Rep. Carolyn McCarthy (D-N.Y.), has 33 co-sponsors.